<PAGE>
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 AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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 (I.R.S. Employer
of 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 file 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 / /
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at August 1, 1995 was 33,816,440
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A Development Stage Company)
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995
<TABLE>
INDEX
-----
<CAPTION>
Part I - Financial Information Page
- - ------------------------------ ----
<S>
Item 1 - Financial Statements
<C> <C>
Introduction to the Financial Statements 1
Consolidated Balance Sheet -
June 30, 1995 and December 31, 1994 2
Consolidated Statement of Operations -
Three and Six Months Ended June 30, 1995
and 1994 and Cumulative January 21, 1986
(inception) to June 30, 1995 3
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1995 and 1994
and Cumulative January 21, 1986
(inception) to June 30, 1995 4
Consolidated Statement of Changes in Stockholders'
Equity - Six Months Ended June 30, 1995 5
Notes to 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 4 - Submission of Matters to a Vote of Security
Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - Financial Statements
INTRODUCTION TO THE FINANCIAL STATEMENTS
The 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 Report on Form 10-Q for the three
months ended March 31, 1995.
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>
<TABLE>
ADVANCED TISSUE SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
Dollars in Thousands
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 8) $ 20,073 $ 12,417
Short-term investments -- 9,616
Prepaid expenses 754 861
Other current assets 1,097 1,183
--------- ---------
Total current assets 21,924 24,077
Property - net 8,401 8,374
Patent costs - net 1,015 824
Other assets 251 151
--------- ---------
Total assets $ 31,591 $ 33,426
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under
capital leases $ 10 $ 10
Accounts payable 862 1,850
Accrued expenses 4,007 3,180
--------- ---------
Total current liabilities 4,879 5,040
--------- ---------
Obligations under capital lease 31 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, 32,643,653
at June 30, 1995 and 30,568,713
shares at December 31, 1994 326 306
Additional paid-in capital 132,135 121,600
Deficit accumulated during development
stage (104,861) (93,556)
--------- ---------
27,600 28,350
Less note received in connection with the
sale of common stock (Note 6) (919) --
--------- ---------
Total stockholders' equity 26,681 28,350
--------- ---------
Total liabilities and stockholders'
equity $ 31,591 $ 33,426
========= =========
See the accompanying notes to the consolidated financial statements.
</TABLE>
-2-
<PAGE>
<TABLE>
ADVANCED TISSUE SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
In Thousands, Except Per Share Amounts
(Unaudited)
<CAPTION>
Cumulative
January 21,
1986
(inception) to
Three Months Ended June 30, Six Months Ended June 30, June 30,
--------------------------- -------------------------
1995 1994 1995 1994 1995
----------- ------------ ----------- ----------- -----------
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $ 290 $ 271 $ 551 $ 634 $ 4,250
Contract and fees 600 -- 1,161 30 5,783
Interest and other 207 342 490 608 6,088
--------- ---------- --------- --------- -----------
Total revenues 1,097 613 2,202 1,272 16,121
--------- ---------- --------- --------- -----------
Costs and expenses:
Research and
development 4,591 3,963 8,997 7,762 55,459
Selling, general and
administrative 1,486 1,700 2,947 3,299 28,610
Professional and
consulting 399 538 867 941 9,244
Cost of goods sold 348 354 693 730 5,297
Interest 1 2 3 4 546
In-process technology
and other -- -- -- -- 21,826
--------- ---------- --------- --------- -----------
Total costs and
expenses 6,825 6,557 13,507 12,736 120,982
--------- ---------- --------- --------- -----------
Net loss $ (5,728) $ (5,944) $ (11,305) $ (11,464) $(104,861)
========== ========== ========== ========== ===========
Net loss per share $ (.19) $ (.19) $ (.37) $ (.38)
========== =========== ========== ==========
Weighted average
number of common
shares used in
computation of net
loss per share 30,859 30,588 30,715 29,931
========== =========== ========== ==========
See the accompanying notes to the consolidated financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
ADVANCED TISSUE SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars In Thousands
(Unaudited)
<CAPTION>
Cumulative
January 21,
1986
Six Months Ended June 30, (inceptin) to
---------------------------- June 30,
1995 1994 1995
------------ ----------- --------------
Operating activities:
<S> <C> <C> <C>
Net loss $ (11,305) $ (11,464) $ (104,861)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 577 541 4,097
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 15 18 299
Change in assets and liabilities:
Prepaid expenses and other current assets 193 179 (1,851)
Other assets (100) 199 (64)
Accounts payable (988) (602) 862
Accrued expenses 827 (686) 4,007
----------- ---------- --------------
Net cash used in operating activities (10,781) (11,815) (75,018)
----------- ---------- --------------
Investing activities:
Purchases of short-term investments (788) (19,825) (119,829)
Sales of short-term investments 10,404 13,487 119,829
Acquisition of property (594) (2,607) (10,297)
Patent application costs (203) (96) (1,194)
---------- ---------- --------------
Net cash provided by (used in)
investing activities 8,819 (9,041) (11,491)
---------- ---------- --------------
Financing activities:
Proceeds from borrowings -- -- 529
Payments of borrowings (5) (4) (2,902)
Loans received from officers -- -- 1,132
Payment of loan to shareholders -- -- (50)
Net proceeds from sale of equity 9,493 26,197 100,687
Options exercised 130 30 7,457
Purchase of options and other -- -- (271)
---------- ---------- --------------
Net cash provided by financing activities 9,618 26,223 106,582
----------- ---------- --------------
Net increase (decrease) in cash and
cash equivalents 7,656 5,367 20,073
Cash and cash equivalents at the
beginning of period 12,417 18,308 --
----------- ---------- --------------
Cash and cash equivalents at the end
of period $ 20,073 $ 23,675 $ 20,073
=========== ========== ==============
See accompanying notes to the consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
ADVANCED TISSUE SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
In Thousands, Except Per Share Amounts
(Unaudited)
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional During Stock-
---------------- Paid-in Development Note holder's
Shares Amount Capital Stage Receivable Equity
------- ------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 30,569 $ 306 $ 121,600 $ (93,556) $ 28,350
Sales of Common Stock for
cash less expenses of
$797 (see Note 2) 1,500 15 9,478 -- 9,493
<C>
Options exercised (at $1.67 575 5 1,057 -- $ (919) 143
to $9.00 per share) and
Other
Net loss -- -- -- (11,305) -- (11,305)
-------- ------- ---------- ---------- --------- ---------
Balance June 30, 1995 32,644 $ 326 $ 132,135 $ (104,861) $ (919) $ 26,681
======== ======= ========== ========== ========= =========
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 STATEMENT
(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 has established three units 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.
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
On June 26, 1995, the Company completed the private placement of 1,500,000
shares of its common stock (the "Shares") pursuant to Regulation D under the
Securities Act of 1933, yielding the Company gross proceeds of approximately
$10.3 million and net proceeds of $9.5 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 during a period 90 to 135 calendar days subsequent to the close
of the transaction (September 24, 1995 to November 8, 1995).
To the extent 88.5% of such average price 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 and the 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 88.5% of the average price or 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 the 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).
In connection with the offering, the Company has agreed to register the
Shares within 105 days of the close of the transaction (October 9, 1995).
See Note 8 regarding the completion of a series of similar transactions
subsequent to the end of the second quarter.
NOTE 3 - 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 ("IVLT") business. To date, Stratum Laboratories
has not been successful in securing sufficient funding to complete the
transaction. As a result, the Company has begun to actively explore
alternatives for focusing additional resources on the business.
-6-
<PAGE>
NOTE 3 - IN VITRO LABORATORY TESTING BUSINESS (CONTINUED)
As of June 30, 1995, the net book value of the assets and liabilities to be
acquired under the agreement was $138,656. Costs associated with the IVLT
business were $706,000 and $856,000 in the three months ended June 30, 1995
and 1994, respectively, and $1,467,000 and $1,725,000 in the six months
ended June 30, 1995 and 1994, respectively.
NOTE 4 - DEVELOPMENT AGREEMENT
The Company is in active negotiations with a leading biopharmaceutical
company related to the development and licensing of a stem cell proliferation
factor ("SCPF") for commercialization in the United States and Europe.
However, under a collaborative research agreement and license option with
Kirin Brewery Company, Limited ("Kirin") for the development and
commercialization of SCPF in certain Asian countries, the Company is
prohibited from entering into a collaboration with any other commercial
entity prior to the achievement of certain milestones. In April 1995, in the
interest of advancing the research and development of SCPF, the Company and
Kirin mutually agreed and are in the process of terminating their
collaborative research agreement, although Kirin has expressed a continuing
interest in possibly obtaining Asian rights in the future. The Company
cannot predict with any certainty that (i) it will be able to enter into any
additional collaboration or license agreement on acceptable terms, (ii) any
such collaboration will be successful, or (iii) it will receive any
additional funding related to SCPF.
NOTE 5 - NET LOSS PER SHARE
The net loss per share for the three and six-month periods ended June 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 6 - 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 six months ended June 30, 1995:
<TABLE>
<CAPTION>
1992 Plan Other Options
------------------------ ---------------------------
Number Price Per Number Price Per
of Shares Share of Shares Share
----------- ----------- ------------ ------------
Outstanding
<S> <C> <C> <C> <C>
December 31, 1994 2,296,348 $1.69 - 16.88 1,898,334 $1.47 - 10.13
Granted 163,000 $5.75 - 8.94 135,000 $6.86
Exercised (14,940) $3.38 - 9.00 (560,000) $1.67 - 3.13
Canceled (86,970) $3.38 - 13.13 (83,334) $6.00
---------- ----------
Outstanding
June 30, 1995 2,357,438 $1.69 - 16.88 1,390,000 $1.47- 10.13
========= =========
</TABLE>
In May 1995, the Company's Chairman, President 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.
-7-
<PAGE>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 1995 noncash financing activities
consisted of the payment for the exercise of a employee stock option with a
note. See Note 6 above. Net cash from operating activities reflects cash
payments for interest expense of $3,000 and $4,000 in the six-month periods
ended June 30, 1995 and 1994, respectively. Cash payments for interest
expense for the period January 26, 1986 (inception) to June 30, 1995 have
totaled $597,000.
NOTE 8 - SUBSEQUENT EVENTS
Private Placements - In July 1995, the Company completed a series of private
placements issuing a total 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 and net proceeds of $7.1 million. As
these placements were not completed prior to the end of the second quarter,
the proceeds from these placements are not reflected in the accompanying
balance sheet. Through these placements (including the placement in Note 2
above) the Company has issued 2,614,432 shares of common stock, raising total
gross proceeds of $17.9 million and net proceeds of $16.6 million.
The July 1995 private placements were completed on substantially the same
terms as the June 1995 placement described in Note 2; however, the periods
over which the initial purchase price will be adjusted differ and 385,569 of
the shares are to be registered within 160 calendar days of June 26, 1995
(by December 3, 1995). In the July placements, the average price for 728,863
shares will be determined during the period 115 to 160 calendar days after
June 26, 1995 (October 19, 1995 to December 3, 1995) and for 385,569 shares
during the period 160 to 205 calendar days after June 26, 1995 (December 3,
1995 to January 17, 1996).
-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 manufacture 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 "Trademark" 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 is
funding the development of tissue engineered heart valves.
Results of Operations
- - ---------------------
Revenues increased $484,000 to $1,097,000 and $930,000 to $2,202,000,
respectively, in the three and six-month periods ended June 30, 1995 as
compared to the corresponding periods of 1994. During the three and six-
month periods ended June 30, 1995, the Company recognized contract revenues
of $590,000 and $1,151,000, 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. No such
revenues were earned in the 1994 periods. This increase in contract revenues
was partially offset by lower product sales and interest income as described
below.
Sales of the Company's Skin2 "Registered" laboratory testing kits
increased slightly in the three-month period, from $271,000 to $290,000,
resulting in product sales of $551,000 in the six-month period ended June 30,
1995 as compared to sales of $634,000 in the corresponding period of 1994.
Fluctuations in product sales are primarily due to the timing of validation
studies. Product sales include revenues received under validation studies
of $139,000 and $176,000, respectively, in the three and six-month periods
ended June 30, 1995. Sales under validation studies totaled $43,000 and
$219,000 in the three and six months ended June 30, 1994, respectively. The
second quarter of 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. In addition, sales in the second quarter of
1994 were limited by product availability due to manufacturing issues. Lower
average invested funds partially offset by higher rates of return resulted in
a decline in interest income in the second quarter and for the first six
months of 1995 as compared to the corresponding periods of 1994.
Research and development expenditures have increased significantly in
both the three and six-month periods ended June 30, 1995 as compared to the
corresponding periods of 1994. Research and development expenditures
increased $628,000 to $4,591,000 in the quarter ended June 30, 1995 and
$1,235,000 to $8,997,000 during the first half of 1995 as compared to the same
periods in 1994. The increase in research and development costs reflects
higher costs associated with the production of Dermagraft products for
clinical trials and the validation of components of the Company's commercial
manufacturing facility. 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. These increases 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. Specifically, the increased costs are
principally reflected in higher costs for materials and supplies, and overhead.
Selling, general and administrative costs were $1,486,000 and $2,947,000
for the three and six-month periods ended June 30, 1995, respectively, as
compared to $1,700,000 and $3,299,000 in the corresponding periods of the
prior year. The decrease in selling, general and administrative expenses
primarily reflects a reduction in headcount, lower costs for marketing and a
decrease in associated overhead costs.
-9-
<PAGE>
Professional and consulting costs for legal, accounting and other
consulting services were $399,000 and $867,000 in the three and six months
ended June 30, 1995, respectively, as compared to $538,000 and $941,000 in
the corresponding periods in 1994. Both the three and six-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 clinical 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. Cost of goods sold for the three and six-month periods
ended June 30, 1995 decreased as compared to the same periods in 1994 as
fewer kits were produced in the 1995 periods.
Liquidity and Capital Resources
- - -------------------------------
In June 1995, the Company sold 1,500,000 shares of common stock and,
subsequent to the end of the second quarter, in July 1995, sold an additional
1,114,432 shares 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 a 45-day valuation period. 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 Notes 2 and 8 to the
consolidated financial statements for a more detailed description of the
private placements.
As of June 30, 1995, the Company had available working capital of
$17,045,000 (exclusive of net proceeds of $7,072,000 received from the
July 1995 private placements discussed above), a decrease of $1,992,000 from
December 31, 1994. The decrease principally reflects funds used for
operations and capital expenditures offset by the net proceeds from the sale
of common stock. Capital expenditures were $594,000 in the first half 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. Inclusive of the net proceeds from the July private placements,
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 a 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. Under the agreement, the Company could receive up to $5
million, $1.4 million on the close of the transaction and $3.6 million in
license fees and milestone payments. The license and sale of the in vitro
laboratory business could reduce the Company's use of working capital $1
million to $2 million annually, depending on the Company's ability to reduce
fixed and semi-variable costs associated with the business. To date, Stratum
Laboratories has not been successful in securing sufficient funding and the
Company cannot predict with any certainty whether any transaction will be
completed. As a result, the Company has begun to explore other alternatives
to focus additional resources on the business. However, exclusive of a
transaction with Stratum Laboratories, the Company does not expect any short-
term changes in the resources being utilized in support of the in vitro
laboratory business. See Note 3 to the consolidated financial statements.
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, among others. 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 June 30, 1995 have
decreased slightly from December 31, 1994 as funds used in operations were
substantially offset by the net proceeds from the private placement completed
in June. Accounts payable has decreased significantly from December 31, 1994
to June 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 clinical trials.
-11-
<PAGE>
PART II - OTHER INFORMATION
- - ---------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 25, 1995.
During the Annual Meeting, the stockholders elected the following nominees to
the Company's Board of Directors to serve for the term of one year or until
their successors have been elected and qualified. The votes of the
stockholders for each of the director nominees was as follows:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------------------------ ------------- -----------
<S> <C> <C>
Arthur J. Benvenuto 27,710,996 691,017
Dr. Gail K. Naughton 27,776,471 625,542
Jerome E. Groopman, M.D. 27,756,661 645,352
Jack L. Heckel 27,760,396 641,617
David S. Tappan, Jr. 27,747,247 654,766
William B. Walsh, M.D. 27,755,582 646,431
Dr. Gail R. Wilensky 27,762,131 639,882
</TABLE>
There were 2,900 broker non-votes with respect to the election of the
directors. At the Annual Meeting, the stockholders also approved the
appointment of Ernst & Young as independent auditors of the Company for the
fiscal year ending December 31, 1996 with 27,689,118 shares in favor of the
proposal, 577,675 shares opposed, and 138,120 shares abstaining.
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 June 26, 1995 under
Item 5 reporting that it completed the private placement of 1,500,000 shares
of its Common Stock under Regulation D to the Securities Act of 1933,
yielding the Company gross proceeds of approximately $10.3 million.
-12-
<PAGE>
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.
ADVANCED TISSUE SCIENCES, INC.
Date: August 9, 1995 /s/ Arthur J. Benvenuto
------------------------------------
Arthur J. Benvenuto
Chairman of the Board, President and
Chief Executive Officer
Date: August 9, 1995 /s/ Michael V. Swanson
------------------------------------
Michael V. Swanson
Vice President, Finance and Administration
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000829549
<NAME> ADVANCED TISSUE SCIENCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 20,073
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,924
<PP&E> 12,273
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<BONDS> 31
<COMMON> 326
0
0
<OTHER-SE> 26,355
<TOTAL-LIABILITY-AND-EQUITY> 31,591
<SALES> 551
<TOTAL-REVENUES> 2,202
<CGS> 693
<TOTAL-COSTS> 693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (11,305)
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<EPS-PRIMARY> (.37)
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