UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
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: 0-016607
ADVANCED TISSUE SCIENCES, INC.
(Exact name of registrant as specified in charter)
----------------
Delaware 14-1701513
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10933 North Torrey Pines Road, La Jolla, California 92037
--------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 450-5730
Indicate by check mark 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 sub-ject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at November 1, 1995 was 33,850,668.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995
INDEX
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Page
----
Part I - Financial Information
------------------------------
Item 1 - Financial Statements
Introduction to the Consolidated Financial Statements 1
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994 2
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 1995
and 1994 and Cumulative January 21, 1986
(inception) to September 30, 1995 3
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1995 and 1994
and Cumulative January 21, 1986 (inception)
to September 30, 1995 4
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1995 5
Notes to the Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Part II - Other Information
----------------------------
Item 6 - Exhibits and Reports on Form 8-K 12
Signature 12
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared by Advanced
Tissue Sciences, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes that the disclosures are adequate to make the information presented
not misleading when read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and Quarterly Reports on Form 10-Q for the three
and six-month periods ended March 31, 1995 and June 30, 1995, respectively.
The financial information presented in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The results for the interim
periods are not necessarily indicative of results to be expected for the full
year.
-1-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,948 $ 12,417
Short-term investments 4,575 9,616
Prepaid expenses 619 861
Other current assets 1,117 1,183
---------- ----------
Total current assets 24,259 24,077
Property - net 8,413 8,374
Patent costs - net 1,017 824
Other assets 551 151
---------- ----------
Total assets $ 34,240 $ 33,426
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under
capital leases $ 11 $ 10
Accounts payable 1,115 1,850
Accrued expenses 4,226 3,180
---------- ----------
Total current liabilities 5,352 5,040
---------- ----------
Obligations under capital leases 28 36
---------- ----------
Stockholders' equity:
Preferred Stock, 1,000,000 authorized
shares; none issued -- --
Common Stock, $.01 par value; 50,000,000
authorized shares; issued and
outstanding, 33,840,468 shares at
September 30, 1995 and 30,568,713
shares at December 31, 1994 338 306
Additional paid-in capital 139,733 121,600
Deficit accumulated during development
stage (110,292) (93,556)
--------- --------
29,779 28,350
Less note received in connection with
the sale of common stock (Note 4) (919) --
--------- --------
Total stockholders' equity 28,860 28,350
--------- --------
Total liabilities and
stockholders' equity $ 34,240 $ 33,426
========= ========
</TABLE>
See the accompanying notes to the consolidated financial statements.
-2-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
January 21,
1986
Three Months Nine Months (inception) to
Ended September 30, Ended September 30, September 30,
------------------------- -------------------------
1995 1994 1995 1994 1995
------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 254 $ 153 $ 805 $ 787 $ 4,504
Contracts and fees 613 486 1,774 516 6,396
Interest and other 376 339 866 947 6,464
----------- ---------- ----------- ---------- -----------
Total revenues 1,243 978 3,445 2,250 17,364
----------- ---------- ----------- ---------- -----------
Costs and expenses:
Research and development 4,666 4,623 13,663 12,385 60,125
Selling, general and
administrative 1,329 1,611 4,276 4,910 29,939
Professional and
consulting 413 456 1,280 1,397 9,657
Cost of goods sold 264 282 957 1,012 5,561
Interest 2 2 5 6 548
In-process technology
and other -- -- -- -- 21,826
----------- ---------- ---------- --------- -----------
Total costs and
expenses 6,674 6,974 20,181 19,710 127,656
----------- ---------- ---------- --------- -----------
Net loss $ (5,431) $ (5,996) $ (16,736) $ (17,460) $ (110,292)
=========== ========== ========== ========= ===========
Net loss per share $ (.16) $ (.20) $ (.53) $ (.58)
=========== ========== ========== =========
Weighted average number
of Common shares used
in computation of net
loss per share 33,737 30,561 31,730 30,143
=========== ========== ========== =========
See the accompanying notes to the consolidated financial statements.
</TABLE>
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<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
DOLLARS IN THOUSANDS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
January 21,
1986
(inception) to
Nine Months Ended September 30, September 30,
---------------------------------
1995 1994 1995
-------------- --------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (16,736) $ (17,460) $ (110,292)
Adjustments to reconcile net loss
to cash used in operating
activities:
Depreciation and amortization 997 816 4,517
Write-off of acquired in-process
technology -- -- 21,000
Compensation for services paid in
stock or stock options -- -- 1,493
Other adjustments to net loss 69 23 353
Change in assets and liabilities:
Prepaid expenses and other current
assets 308 (253) (1,736)
Other assets (400) 199 (364)
Accounts payable (735) (278) 1,115
Accrued expenses 1,046 (892) 4,226
--------- ---------- ----------
Net cash used in operating
activities (15,451) (17,845) (79,688)
--------- ---------- ----------
Investing activities:
Purchase of short-term investments (5,363) (29,738) (124,404)
Maturities and sales of short-term
investments 10,404 23,210 119,829
Acquisition of property (1,033) (2,935) (10,736)
Patent application costs (253) (125) (1,244)
--------- ---------- ----------
Net cash provided by
(used in) investing activities 3,755 (9,588) (16,555)
--------- ---------- ----------
Financing activities:
Proceeds from borrowings -- -- 529
Payments of borrowings (7) (6) (2,904)
Loans received from officers -- -- 1,132
Payment of loan to shareholders -- -- (50)
Net proceeds from sale of equity 16,448 26,197 107,642
Options exercised 786 40 8,113
Purchase of options and other -- -- (271)
---------- ---------- ----------
Net cash provided by
financing activities 17,227 26,231 114,191
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 5,531 (1,202) 17,948
Cash and cash equivalents at
the beginning of period 12,417 18,308 --
---------- ---------- ----------
Cash and cash equivalents at the
end of period $ 17,948 $ 17,106 $ 17,948
========== ========== ==========
See the accompanying notes to the consolidated financial statements.
</TABLE>
-4-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During Stock-
Common Stock Paid-In Development Note holders'
------------------
Shares Amount Capital Stage Receivable Equity
--------- -------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 30,569 $ 306 $ 121,600 $ (93,556) $ 28,350
Sale of Common Stock for
cash, less expenses of
$1,487 (see Note 2) 2,614 26 16,422 16,448
Options exercised (at
$1.67 to $12.13 per
share) and other (see
Note 4) 657 6 1,711 $ (919) 798
Net loss (16,736) (16,736)
------- ------ --------- ---------- --------- ---------
Balance September 30, 1995 33,840 $ 338 $ 139,733 $ (110,292) $ (919) $ 28,860
======= ====== ========= ========== ========= =========
======
See the accompanying notes to the consolidated financial statements.
</TABLE>
-5-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Organization - Advanced Tissue Sciences, Inc. is a development stage, tissue
engineering company utilizing its proprietary technology to develop and
manufacture completely human tissue products for transplantation. The Company
is focusing on the worldwide commercialization of skin, cartilage and
cardiovascular products. The Company's first therapeutic products, tissue
engineered skin products for the treatment of severe burns and chronic skin
ulcers, are in multi-site human clinical trials in the United States and
France.
Liquidity and Capital Resources - As of September 30, 1995, the Company had
available working capital of $18.9 million. The Company believes this is
sufficient working capital to fund its operations at current levels into the
third quarter of 1996. Accordingly, the Company will require additional funds
to support its operations prior to the commercial introduction of its
therapeutic products. Should the Company be unsuccessful in raising such
funds, it will be required to adjust the number and extent of the projects
being pursued. These adjustments would be expected to include reductions in
development programs, personnel, and leased space, deferrals or reductions in
executive compensation, and the sale or closure of certain technology or
divisions. If these steps are not sufficient to allow the Company to obtain
additional sources of financing, the Company would then be forced to delay or
reduce the number of clinical trials or products being pursued.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company's wholly owned subsidiaries. The Company's fifty
percent interest in the Advanced Tissue Sciences-Smith & Nephew joint venture
is accounted for under the equity method. All intercompany accounts and
transactions have been eliminated.
NOTE 2 - PRIVATE PLACEMENT
In June and July 1995, the Company completed a series of private placements
issuing a total of 2,614,432 shares of its common stock (the "Shares")
pursuant to Regulation D under the Securities Act of 1933, yielding the
Company gross proceeds of approximately $17.9 million and net proceeds of
$16.6 million. The initial purchase price for the Shares was $6.86 per share,
representing an 11.5% discount to the closing bid price of the Company's
common stock on June 7, 1995. However, the initial purchase price will be
adjusted to result in a purchase price per share to the investors equal to
88.5% of the average closing price of the common stock over agreed-upon
valuation periods. The valuation periods are from September 24, 1995 to
November 8, 1995 with respect to 1,500,000 of the shares, October 19, 1995 to
December 3, 1995 with respect to 728,863 of the shares and December 3, 1995 to
January 17, 1996 with respect to 385,569 shares.
To the extent 88.5% of the average closing prices during each valuation period
exceeds the initial purchase price of $6.86, the investors will provide
additional proceeds such that the total proceeds to the Company from the
investors equals the product of the 88.5% of the average price times the
applicable number of Shares. However, if 88.5% of the average price is below
the initial purchase price of $6.86, additional shares will be issued to the
investors such that the purchase price per share to the investors equals the
lower of (i) 88.5% of the average price or (ii) the price per share the
Company issues or sells any shares of its Common Stock or any of its
securities which are convertible into or exchangeable for its common stock or
any warrants, options or other rights to subscribe for or purchase common
stock within 135 calendar days of the close of each transaction (exclusive of
shares or options issued pursuant to the Company's option plans or shares
issued upon the exercise of options, warrants or rights outstanding on the
closing date of the transaction).
-6-
<PAGE>
NOTE 3 - NET LOSS PER SHARE
The net loss per share for the three and nine-month periods ended September
30, 1995 and 1994 is based on the weighted average number of shares of common
stock outstanding during the period. Shares to be issued under options have
not been included in the calculation of the net loss per share in any period
as their effect is antidilutive.
NOTE 4 - STOCK OPTIONS
The following table summarizes activity under the Company's 1992 Stock
Option/Stock Issuance Plan (the "1992 Plan") and for other options and
warrants for common stock during the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
1992 Plan Other Options
--------------------- -----------------------
Number Price Per Number Price Per
of Shares Share of Shares Share
--------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding
December 31, 1994 2,296,348 $1.69 - 16.88 1,898,334 $1.47 - 10.13
Granted 216,725 $5.56 - 12.38 235,299 $6.86
Exercised (77,323) $3.38 - 12.13 (580,000) $1.67 - 8.13
Canceled (152,275) $3.38 - 13.13 (83,334) $6.00
--------- ---------
Outstanding
September 30, 1995 2,283,475 $1.69 - 16.88 1,470,299 $1.47 - 10.13
========= =========
</TABLE>
In May 1995, the Company's Chairman and Chief Executive Officer exercised an
employee stock option for 550,000 shares of common stock at an exercise price
of $1.67 per share. The purchase price of $918,500 was paid with a promissory
note bearing interest at 6.75% per annum with principal and interest due in
May 1998. The note receivable is reflected as an offset to stockholders'
equity in the accompanying balance sheet.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1995 noncash financing activities
consisted of the payment for the exercise of an employee stock option with a
note (see Note 4 above). Net cash from operating activities reflects cash
payments for interest expense of $5,000 and $6,000 in the nine-month periods
ended September 30, 1995 and 1994, respectively. Cash payments for interest
expense for the period January 26, 1986 (inception) to September 30, 1995 have
totaled $599,000.
NOTE 6 - IN VITRO LABORATORY TESTING BUSINESS
In March 1995, the Company entered into an agreement whereby Stratum
Laboratories International ("Stratum Laboratories") would license the
technology and purchase certain net assets associated with the Company's in
vitro laboratory testing business. Stratum Laboratories was not successful in
securing sufficient funding to complete the transaction and, accordingly, the
agreement has terminated. As a result, the Company is actively exploring
alternatives for focusing additional resources on the business.
NOTE 7 - DEVELOPMENT AGREEMENT
Subsequent to the end of the quarter, in October 1995, the Company entered
into an Evaluation and Option Agreement granting Genentech, Inc. ("Genentech")
an option to license rights to a Stem Cell Proliferation Factor ("SCPF").
Under the terms of the agreement, Genentech has obtained a one year option to
exclusively license rights for in vivo application of SCPF outside Asia. In
exchange, Genentech will conduct all further sequencing, cloning and
expression of the factor. If the option is exercised, the Company could
receive up to $50 million in future equity and milestone payments, and
royalties on any product sales. The Company will retain rights to all ex vivo
uses of SCPF in Asia, subject to a right of first refusal by
-7-
<PAGE>
NOTE 7 - DEVELOPMENT AGREEMENT (continued)
Genentech. In addition, the Company retains worldwide rights to use SCPF in
ex vivo tissue engineering applications such as for bone marrow expansion and
gene therapy, subject to certain co-exclusive rights with Genentech outside of
Asia.
In conjunction with entering into the agreement with Genentech, the Company
terminated a license option with Kirin Brewery Company, Limited for the
development and commercialization of SCPF in certain Asian countries. The
Company licensed exclusive rights to SCPF from the University of Florida
Research Foundation, Inc. in December 1992. The Company cannot predict with
any certainty whether Genentech will exercise its license option or that it
will receive any equity or milestone payments, or royalties related to SCPF.
-8-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advanced Tissue Sciences, Inc. is a development stage company engaged in
the development and manu-facture of living human tissue products for
therapeutic and laboratory applications. The Company has incurred, and
expects to continue to incur, substantial expenses in support of the
development and clinical trials of its Dermagraft (TM) products for burn and
skin ulcer applications, in developing manufacturing systems and facilities
for the production of Dermagraft and in advancing other applications of the
Company's core technology.
In addition to Dermagraft, the Company is focusing its activities on the
development of tissue engineered cartilage and cardiovascular products. In
May 1994, the Company entered into a fifty-fifty joint venture with Smith &
Nephew plc ("Smith & Nephew") for the worldwide development, manufacture and
marketing of human tissue engineered cartilage for orthopedic applications.
The Company has also entered into a research and development agreement with
St. Jude Medical, Inc. ("St. Jude Medical") under which St. Jude Medical has
agreed to fund the development of tissue engineered heart valves during 1995.
Results of Operations
- ---------------------
Revenues increased $265,000 to $1,243,000 and $1,195,000 to $3,445,000,
respectively, in the three and nine-month periods ended September 30, 1995 as
compared to the corresponding periods of 1994. During the three and
nine-month periods ended September 30, 1995, the Company recognized contract
revenues of $613,000 and $1,764,000, respectively, from its joint venture with
Smith & Nephew and from St. Jude Medical for research performed related to
orthopedic applications of cartilage tissue and tissue engineered heart
valves, an increase of $127,000 and $1,278,000, respectively, as compared to
the same periods in 1994.
In addition, sales of the Company's Skin2 (R) laboratory testing kits
increased $101,000 in the third quarter of 1995 and $18,000 for the nine-
month period as compared to 1994. Sales were limited by product
availability due to manufacturing issues in the second and third quarter of
1994. Fluctuations in product sales are primarily due to the timing of
validation studies. Product sales include revenues received under validation
studies of $48,000 and $224,000, respectively, in the three and nine-month
periods ended September 30, 1995. Sales under validation studies totaled
$18,000 and $237,000 in the three and nine-month periods ended September 30,
1994, respectively. The nine-month period ended September 30, 1994 also
includes approximately $51,000 in deferred sales which were recognized upon
regulatory approval of the Skin2 kits for use in classifying corrosive
materials.
Revenues for the nine months ended September 30, 1995 also reflect a
$90,000 decrease in interest income as higher rates earned on invested funds
were more than offset by lower average invested balances. However, during the
third quarter of 1995 higher rates more than offset lower invested balances as
additional funds were raised in a series of private placements (see Note 2 to
the consolidated financial statements), resulting in a $37,000 increase over
1994.
Research and development expenditures have increased significantly in the
nine months ended September 30, 1995 as compared to the corresponding period
in 1994, from $12,385,000 to $13,663,000. The increase in research and
development costs reflects higher costs associated with the operation and
validation of the Company's commercial manufacturing facility, the production
of Dermagraft products for clinical trials and the scale-up of the Dermagraft
manufacturing processes. In addition, the Company incurred higher costs in
support of the development of orthopedic cartilage and cardiovascular products
for the Smith & Nephew joint venture and St. Jude Medical research programs
discussed above. The increased costs in 1995 are principally reflected in
higher costs for materials and supplies, and overhead. On a year-to date
basis, and more significantly in the third quarter of 1995, the increases in
research and development costs were partially offset by lower costs for
preclinical studies of Dermagraft and of liver tissues, and for research
related to a stem cell growth factor. In addition to the above, the third
quarter of 1995 reflects lower costs due to decreased production of Dermagraft
in support of the Company's pivotal clinical trials.
-9-
<PAGE>
Selling, general and administrative costs were $1,329,000 and $4,276,000
for the three and nine-month periods ended September 30, 1995, respectively,
as compared to $1,611,000 and $4,910,000 in the corre-sponding periods of the
prior year. The decreases in selling, general and administrative expenses
primarily reflect a reduction in headcount, lower costs for marketing and a
decrease in associated overhead costs.
Professional and consulting costs for legal, accounting and other
consulting services were $413,000 and $1,280,000 in the three and nine months
ended September 30, 1995, respectively, as compared to $456,000 and $1,397,000
in the corresponding periods in 1994. Both the three and nine-month periods
of 1995 included higher fees for consultants in support of corporate
development activities, while the 1994 periods included higher fees for legal
matters, primarily the agreements with Smith & Nephew and St. Jude Medical as
discussed above, and for technical and regulatory consultants.
Cost of goods sold represents direct and indirect costs of manufacturing
the Company's Skin2 laboratory testing kits. Cost of goods sold is net of the
costs of products transferred to research and development for use in
developing additional applications of the Company's testing kits. The cost of
such products is included in research and development expenses based upon
estimated direct and indirect production costs assuming planned production
capacity.
Liquidity and Capital Resources
- -------------------------------
In June and July 1995, the Company sold 2,614,432 shares of common stock
in a series of private placements pursuant to Regulation D under the
Securities Act of 1933. In total the Company received gross proceeds of
$17,935,000. All of the placements were completed on substantially the same
terms. The initial purchase price for the shares was $6.86 per share.
However, the initial purchase price will be adjusted to result in a purchase
price per share to the investors equal to 88.5% of the average closing price
of the common stock over 45-day valuation periods. In general, if the
adjusted price exceeds $6.86 per share the Company will receive additional
proceeds from the investors or, should the adjusted price be below $6.86 per
share, the Company will issue additional shares to the investors, such that in
either case the average purchase price to the investors will equal the
adjusted price. See Note 2 to the consolidated financial statements.
As of September 30, 1995, the Company had available working capital of
$18,907,000, a decrease of $130,000 from December 31, 1994. The decrease
principally reflects funds used for operations and capital expenditures which
was almost entirely offset by the net proceeds from the sale of common stock.
Capital expenditures were $1,033,000 in the first nine months of 1995, a
significant portion of which was related to the validation of the Company's
manufacturing facility.
The Company expects to continue to incur substantial research and
development expenses (including costs associated with clinical trials and the
development of manufacturing processes), growing costs in anticipation of
product commercialization, and additional expenditures for capital equipment
and patents. The Company believes it presently has sufficient working capital
to fund its operations at current levels into the third quarter of 1996.
However, based on the timing of regulatory reviews and approvals, the Company
could use working capital at an accelerated rate for such activities as
validation of the Company's manufacturing facility and to establish necessary
sales, marketing and distribution capabilities.
In any event, the Company will require additional funds to support the
commercial introduction and further development of its transplantation
products. The recently completed private placements have been structured to
provide additional funds should the adjusted price over the valuation periods
exceed $6.86 as described above. Other sources of funds may include existing
or future strategic alliances or other joint venture arrangements which
provide funding to the Company, and public or additional private offerings of
debt or equity securities, among others. There can be no assurance, however,
that any additional funds will be available when needed or on terms favorable
to the Company, or that the Company will be successful in entering into any
other strategic alliances or joint ventures.
-10-
<PAGE>
As part of its effort to focus additional resources on the business, in
March 1995 the Company entered into an agreement whereby Stratum Laboratories
International ("Stratum Laboratories") would license the technology and
purchase certain net assets associated with the Company's in vitro laboratory
testing business. Stratum Laboratories was not successful in securing
sufficient funding and, accordingly, the agreement with Stratum has
terminated. As a result, the Company is continuing to explore other
alternatives to focus additional resources on the in vitro laboratory testing
business. The Company does not anticipate any short-term changes in the
resources currently being utilized in support of this business.
Should the Company be unsuccessful in raising funds it will be required
to adjust the number and extent of the projects being pursued. These
adjustments would be expected to include reductions in development programs,
personnel, and leased space, deferrals or reductions in executive
compensation, and the sale or closure of certain technology or divisions. If
these steps are not sufficient to allow the Company to obtain additional
sources of financing, the Company would then be forced to delay or reduce the
number of clinical trials being pursued.
The Company also continually reviews its product development activities
in an effort to allocate its resources to those products the Company believes
have the greatest commercial potential. Factors considered by the Company in
determining the products to pursue include projected markets and need,
potential for regulatory approval and reimbursement under the existing health
care system as well as anticipated health care reforms, technical feasibility,
expected and known product attributes and estimated costs to bring the product
to market. Based on these and other factors which the Company considers
relevant, the Company may from time to time reallocate its resources among its
product development activities. Additions to products under development or
changes in products being pursued can substantially and rapidly change the
Company's funding requirements.
Financial Condition
- -------------------
Cash, cash equivalents and short-term investments as of September 30, 1995
have not changed significantly from December 31, 1994 as funds used in
operations were substantially offset by the net proceeds from the private
placements discussed above. Accounts payable has decreased significantly from
December 31, 1994 to September 30, 1995 primarily reflecting payments related
to costs associated with the annual renewal of the Company's liability
insurance, for clinical trials, for sponsored research and rent. Accrued
expenses have increased over the same period principally due to accruals for
salaries and benefits, sponsored research and process development.
-11-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 7, 1995 under
Item 5 reporting that it completed the private placements of 1,114,432 shares
of its Common Stock under Regulation D to the Securities Act of 1933, yielding
the Company gross proceeds of approximately $7.6 million.
SIGNATURE
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.
ADVANCED TISSUE SCIENCES, INC.
Date: November 7, 1995 /s/ Arthur J. Benvenuto
------------------ --------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
Date: November 7, 1995 /s/ Michael V. Swanson
------------------ ---------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-12-
<TABLE> <S> <C>
<ARTICLE> 5
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