<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(732) 494-0444
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check x whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[x] NO[ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE - 9,427,562 SHARES OUTSTANDING
AT AUGUST 13, 1999
<PAGE> 2
LIFE MEDICAL SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the three and 3
six month periods ended June 30, 1998 and 1999
Condensed Balance Sheets as of December 31, 1998 4
and June 30, 1999 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six month periods ended June 30, 1998 and 1999
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data) (In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------------- -----------------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue
Product sales $ 515 $ 246 $ 515 $ 1,048
Royalties 4 4 17 17
------- ------- ------- -------
Revenue 519 250 532 1,065
Cost of goods sold 226 89 226 372
------- ------- ------- -------
Gross profit 293 161 306 693
Operating expenses:
Research and development 1,052 230 2,269 421
Sales and marketing 1,379 123 1,554 258
General and administrative 528 477 907 840
------- ------- ------- -------
Operating expenses 2,959 830 4,730 1,519
------- ------- ------- -------
(Loss) from operations (2,666) (669) (4,424) (826)
Interest income 20 6 116 9
Interest expense (1) (1) (2) (1)
Other income 432
------- ------- ------- -------
Net (loss) (2,647) (664) (4,310) (386)
======= ======= ======= =======
Net (loss) per share - basic and diluted $ (0.33) $ (0.08) $ (0.54) $ (0.05)
======= ======= ======= =======
Weighted average shares outstanding 7,923 8,053 7,923 7,988
</TABLE>
3
<PAGE> 4
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share data)
December 31, June 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 485 $ 700
Inventory 264 154
Accounts receivable 120 132
Prepaid expenses and advances 33
-------- --------
Total current assets 902 986
Furniture and equipment-at cost
(less depreciation of $91 and $107) 85 85
Other assets 47 45
-------- --------
TOTAL $ 1,034 $ 1,116
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligation $ 8 $ 9
Accounts payable 710 603
Accrued expenses 991 670
Other liabilities 199 211
-------- --------
Total current liabilities 1,908 1,493
Capital lease obligation 18 14
Deferred royalty income 386 369
-------- --------
Total liabilities 2,312 1,876
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value;
shares authorized - 5,000;
none issued
Common stock, $.001 par value; shares authorized - 23,750;
issued and outstanding - 7,923 and 9,428 8 9
Additional paid-in capital 34,147 35,050
Accumulated deficit (35,433) (35,819)
-------- --------
Total stockholders' equity (1,278) (760)
-------- --------
TOTAL $ 1,034 $ 1,116
======== ========
</TABLE>
4
<PAGE> 5
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(4,310) $ (386)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 16 16
Deferred royalty income (17) (17)
Fair value of options issued as compensation 154
Changes in operating assets and liabilities:
(Increase)/decrease in inventory (261) 110
(Increase) in accounts receivable (206) (12)
(Increase) /decrease in prepaid expenses and advances (828) 33
(Increase)/decrease in other assets (34) 2
Increase/(decrease) in accounts payable and accrued liabilities 529 (428)
(Decrease)/increase in other liabilities (172) 12
------- -------
Net cash (used in) operating activities (5,283) (516)
------- -------
Cash flows from investing activities:
Purchase of equipment (30) (16)
Proceeds from maturity of investment securities 2,820
------- -------
Net cash provided by/(used in) investing activities 2,790 (16)
------- -------
Cash flows from financing activities:
Proceeds from issue of common stock,including paid in capital 750
Payments on capitalized lease (4) (3)
------- -------
Net cash (used in)/provided by financing activities (4) 747
------- -------
Net (Decrease)/increase in cash and cash equivalents (2,497) 215
Cash and cash equivalents at beginning of period 2,733 485
------- -------
Cash and cash equivalents at end of period $ 236 $ 700
======= =======
</TABLE>
5
<PAGE> 6
LIFE MEDICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying condensed financial statements do not include
all of the information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but in the opinion of management, contain all
adjustments (which consist of only normal recurring adjustments)
necessary for a fair presentation of such financial information.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years. These
condensed financial statements have been presented on an ongoing
concern basis and do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
These condensed financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December
31, 1998 included in the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission.
B) OTHER INCOME
The Company recorded other income of $432,000 for the
six-month period ended June 30, 1999. This other income is attributable
to reduction of debt in exchange for certain equipment, the cost of
which had previously been charged to research and development expense.
C) NET (LOSS) PER SHARE
Basic and diluted net (loss) per share is computed using the
weighted average number of shares outstanding during each period, which
excludes outstanding options and warrants since their inclusion would
reduce the loss per share.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Life Medical Sciences, Inc. is a biomaterials company engaged in the
development and commercialization of innovative and cost-effective medical
devices for therapeutic applications. The Company is focused on the advancement
and expansion of product development programs based on its proprietary
bioresorbable polymer technology. The Company intends to apply its platform
technology to the development of multiple products that address unmet
therapeutic needs or offer improved, cost-effective alternatives to current
methods of treatment. Products currently under development focus on preventing
or reducing post-operative adhesions subsequent to a broad range of surgical
procedures and are in various stages of clinical trials and pre-clinical
studies. In January 1999, the Company initiated a pilot clinical trial for its
REPEL-CV(TM) bioresorbable adhesion barrier film, the firsT surgical device
approved by the FDA for human evaluation in the prevention of adhesions after
open-heart surgical procedures. The Company has also developed a line of novel
silicone gel-filled cushions intended for the prevention and management of
hypertrophic and keloid scars. The Company launched this line under the
CLINICEL(R) name in April 1998 through a consumer media campaign, expanded
distribution through drug stores, supermarket pharmacies and mass merchandise
store pharmacies and achieved cumulative sales through June 30,1999 of
$2,763,000.
The Company's bioresorbable polymer technology is based on a
proprietary group of polymers. The Company believes that these polymers display
desirable properties, which enable them to be tailored to a wide variety of
applications. These properties include bioresorbability, flexibility, strength
and biocompatibility. Potential applications for products derived from these
polymers are in medical areas such as the prevention of post-operative
adhesions, sutures, stents, implantable device coatings and drug delivery. The
Company is currently developing bioresorbable adhesion barrier films for the
prevention or reduction of post-operative surgical adhesions in cardio-vascular
surgery (REPEL-CV(TM)), gynecological and general surgical procedures
(REPEL(TM)), as well as in bioresorbable adhesion barrier coatings (viscous
solutions) for the prevention or reduction of post-operative surgical adhesions
in gynecological and general abdominal surgical procedures (RESOLVE(TM)) and
orthopedic and spinal surgical procedures (RELIEVE(TM)).
Certain statements in this Report on Form 10-Q (the "Report") under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements and the
ability of the Company to raise capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: delays in product development; problems or delays
with clinical trials; failure to receive or delays in receiving regulatory
approval; lack of enforceability of patents and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; competition; material costs and
availability; the loss of any significant customers; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and other factors referenced in this Report. When used
in the Report, statements that are not statements of material facts may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "anticipates", "plans", "intends", "expects" and similar expressions are
intended to identify such forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
7
<PAGE> 8
RESULTS OF OPERATIONS
The Company launched a direct-to-consumer advertising campaign in
conjunction with the introduction of CLINICEL in April 1998 and achieved sales
of $1,715,000 during 1998. Revenue for the three and six month periods ended
June 30, 1999 of $250,000 and $1,065,000, respectively consists primarily of
$246,000 and $1,048,000, respectively, of sales of CLINICEL products and $4,000
and $13,000 in the three and six month periods respectively, attributable to
royalties from product sales of the Sure-Closure System(TM). These revenue
figures compare to $519,000 and $532,000 for the three and six month periods
ended June 30, 1998, respectively, which, for both periods, consist primarily of
$515,000 of sales of CLINICEL products. The reduction in revenue for the three
months ended June 30, 1999 compared to prior year is attributed to lower
CLINICEL sales associated with reduced consumer advertising.
Cost of goods sold of $89,000 and $372,000 for the three and six month
periods ended June 30, 1999, respectively, reflects the cost to produce, package
and ship CLINICEL to the Company's consumer and trade customers. Cost of goods
sold was $226,000 for each of the comparable prior year periods. The variations
in the cost of goods sold amounts are largely attributed to changes in sales
volume.
The Company incurred research and development expenses of $230,000 and
$421,000 for the three and six month periods ended June 30, 1999, respectively,
compared to $1,052,000 and $2,269,000 for the comparable prior year periods. The
reduction in expenditures compared to the prior year is primarily attributed to
reduced spending on the development of bioresorbable adhesion prevention
products and reduced spending for pre-clinical studies and clinical trials.
Research and development spending in 1999 has been primarily to conduct the
pilot clinical trial for REPEL-CV(TM), the first product to receive an IDE from
the FDA for clinical testing to determine safety for use as aN anti-adhesion
barrier in cardiovascular surgery.
Sales and marketing expenses of $123,000 and $258,000 for the three and
six month periods ending June 30, 1999, respectively, were exclusively
associated with CLINICEL and consist primarily of promotional costs, selling
expenses and contract customer service expense. The comparable prior year
periods costs were $1,379,000 and $1,554,000. The reduction in expense is
primarily attributable to reduced advertising.
General and administrative expenses of $477,000 and $840,000 for the
three and six month periods ended June 30, 1999, respectively, compared to
$528,000 and $907,000 for the comparable prior year periods, consisted primarily
of management compensation, legal fees for patent protection on the Company's
products, and other general and administrative costs.
Interest income was $6,000 and $9,000 for the three and six month
periods ending June 30, 1999, respectively, and $20,000 and $116,000 for the
comparable prior year periods. The reduction in interest income is directly
attributable to lower balances of cash and cash equivalents.
Interest expense represents interest on capital leases for certain
office equipment.
The Company recorded other income of $432,000 for the six month period
ended June 30, 1999. This other income is attributable to a reduction in accrued
expenses in exchange for certain equipment, the cost of which had previously
been charged to research and development expense. There was no comparable other
income in the prior year.
The Company's net loss was $664,000 and $386,000 for the three and six
months ended June 30, 1999, respectively, compared to $2,647,000 and $4,310,000
for the comparable prior year periods. The decreases in the net loss compared to
the prior year periods are primarily attributable to reductions in sales and
marketing as well as research and development spending in addition to the
recognition of other income explained above. The Company expects to incur losses
in future periods.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $485,000 and $700,000 at December 31,
1998 and June 30, 1999, respectively. The increase is primarily attributable to
a $750,000 private placement of common stock, offset by operating activities.
At June 30, 1999, the Company had a working capital deficit of
$507,000. The current cash and cash equivalents balance as of June 30, 1999 may
not be sufficient to meet its cash requirements through the remainder of 1999.
The Company will be required to raise substantial additional funds to continue
the clinical development and commercialization of its proposed products and to
fund the growth that is expected to occur if any of its current and proposed
products are approved for marketing. There can be no assurance that such
arrangements or financings will be available as needed or on terms acceptable to
the Company. The Company plans to seek such additional funding through
collaborative arrangements with strategic partners, licensing arrangements for
certain of its proposed products and equity financings. The Company completed a
$750,000 private placement of common stock recently and will continue to
evaluate, and possibly consummate, additional equity financings. Any additional
financings may be dilutive to existing stockholders. The Company is also
pursuing other initiatives, including state tax benefit transfers and
licensing/marketing agreements intended to improve its financial condition. The
Company has reduced spending on certain programs as a means of preserving its
cash resources and is currently in discussions with third parties regarding the
licensing of certain technologies which it might otherwise seek to commercialize
itself.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 28, 1999, the Company completed a Private Placement in which
1,505,003 shares of common stock were issued in exchange for cash proceeds of
$750,000. The proceeds will be used to fund the ongoing U. S. Pilot Clinical
Trial for REPEL-CV and support the CLINICEL sales activities.
The securities issued in the Private Placement were exempted from
registration under Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder in that the offering was restricted to "accredited
investors" as defined in Rule 501 of Regulation D.
ITEM 5. OTHER INFORMATION
The Company uses a number of computer programs across its operations.
The Company has not completed its assessment of the year 2000 issue but believes
that costs of addressing this issue will not have a material adverse impact on
the Company's financial position.
The Company uses a number of third party vendors to support its
operations. The Company has not completed its assessment of the year 2000 issue
with these third parties. If these parties are unable to address this issue in a
timely manner, and the Company is unable to instead conduct operations with
other third party vendors that have addressed this issue, it could result in a
material financial risk to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LIFE MEDICAL SCIENCES, INC.
(REGISTRANT)
DATE: AUGUST 13, 1999 /S/ DREW KARAZIN
----------------------------
DREW KARAZIN
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Duly Authorized Officer &
Principal Financial Officer)
DATE: AUGUST 13, 1999 /S/ ROBERT P. HICKEY
--------------------------
ROBERT P. HICKEY
CHAIRMAN, PRESIDENT AND CEO
(Principal Executive Officer)
11
<PAGE> 12
EXHIBIT INDEX
27. Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 700
<SECURITIES> 0
<RECEIVABLES> 151
<ALLOWANCES> 19
<INVENTORY> 154
<CURRENT-ASSETS> 986
<PP&E> 192
<DEPRECIATION> 107
<TOTAL-ASSETS> 1,116
<CURRENT-LIABILITIES> 1,493
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> (769)
<TOTAL-LIABILITY-AND-EQUITY> 1,116
<SALES> 1,048
<TOTAL-REVENUES> 1,065
<CGS> 372
<TOTAL-COSTS> 372
<OTHER-EXPENSES> 1,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (386)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
