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, 1996
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 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 July 31, 1996 was 37,405,333.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
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Page
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Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheet -
June 30, 1996 and December 31, 1995 2
Consolidated Statement of Operations -
Three and Six Months Ended June 30, 1996 and 1995
and Cumulative January 21, 1986 (inception) to
June 30, 1996 3
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1996 and 1995 and
Cumulative January 21, 1986 (inception) to
June 30, 1996 4
Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1996 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 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
<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, 1995 and Quarterly Report on Form 10-Q for the three months ended
March 31, 1996.
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>
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
<S>
<C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,925 $ 18,929
Short-term investments 21,707 --
Prepaid expenses 647 820
Other current assets 2,900 1,214
---------- -----------
Total current assets 59,179 20,963
Property - net 8,596 8,332
Patent costs - net 1,129 1,032
Other assets 1,791 814
---------- -----------
Total assets $ 70,695 $ 31,141
========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under
capital leases $ 12 $ 11
Accounts payable 859 1,183
Accrued expenses 4,700 4,022
---------- -----------
Total current liabilities 5,571 5,216
---------- -----------
Obligations under capital leases 19 25
---------- -----------
Stockholders' equity:
Preferred Stock, 1,000,000 authorized
shares; none issued -- --
Common Stock, $.01 par value; 50,000,000
authorized shares; issued and
outstanding, 37,404,933 shares at
June 30, 1996 and 33,885,928 shares
at December 31, 1995 374 339
Additional paid-in capital 187,480 143,161
Deficit accumulated during development stage (121,830) (116,681)
---------- -----------
66,024 26,819
Less note received in connection
with the sale of Common Stock (919) (919)
----------- -----------
Total stockholders' equity 65,105 25,900
----------- -----------
Total liabilities and stockholders'
equity $ 70,695 $ 31,141
=========== ===========
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 OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
January 21,
1986
Three Months Six Months (inception) to
Ended June 30, Ended June 30,
---------------------- --------------------- June 30,
1996 1995 1996 1995 1996
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 353 $ 290 $ 655 $ 551 $ 5,531
Contracts and fees 10,747 600 11,405 1,161 18,415
Interest and other 759 207 1,026 490 7,809
-------- ------- -------- -------- ----------
Total revenues 11,859 1,097 13,086 2,202 31,755
-------- ------- -------- -------- ----------
Costs and expenses:
Research and development 6,064 4,591 11,293 8,997 76,253
Selling, general and
administrative 2,326 1,486 4,248 2,947 36,026
Professional and
consulting 1,167 399 1,795 867 12,069
Cost of goods sold 418 348 896 693 6,859
Interest 2 1 3 3 552
In-process technology
and other -- -- -- -- 21,826
-------- ------- -------- -------- ----------
Total costs and
expenses 9,977 6,825 18,235 13,507 153,585
-------- ------- -------- -------- ----------
Net income (loss) $ 1,882 $(5,728) $ (5,149) $(11,305) $ (121,830)
======== ======= ======== ======== ==========
Net income (loss)
per share $ .05 $ (.19) $ (.14) $ (.37)
======== ======= ======== ========
Weighted average number of
common shares used in
computation of net
income (loss) per share 39,686 30,859 35,667 30,715
======== ======= ======== ========
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
Six Months Ended June 30,
----------------------------- June 30,
1996 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (5,149) $ (11,305) $ (121,830)
Adjustments to reconcile net
loss to cash used in operating
activities:
Depreciation and amortization 840 577 5,781
Write-off of acquired in-process
technology -- -- 21,000
Compensation for services paid in
stock, stock options or warrants 320 -- 1,868
Other adjustments to net loss 52 15 548
Change in assets and liabilities:
Prepaid expenses and other
current assets (1,138) 193 (3,172)
Other assets (211) (100) (838)
Accounts payable (324) (988) 859
Accrued expenses 678 827 4,700
---------- ---------- -----------
Net cash used in operating
activities (4,932) (10,781) (91,084)
---------- ---------- ------------
Investing activities:
Purchases of short-term investments (21,707) (788) (146,111)
Maturities and sales of short-term
investments -- 10,404 124,404
Acquisition of property (1,096) (594) (12,275)
Patent application costs (157) (203) (1,471)
---------- ---------- ------------
Net cash provided by (used in)
investing activities (22,960) 8,819 (35,453)
---------- ---------- ------------
Financing activities:
Proceeds from borrowings -- -- 529
Payments of borrowings (5) (5) (2,912)
Net proceeds from sale of equity 40,253 9,493 150,962
Options and warrants exercised 2,640 130 11,072
Purchase of options and other -- -- 811
---------- --------- -----------
Net cash provided by
financing activities 42,888 9,618 160,462
---------- --------- -----------
Net increase in cash and
cash equivalents 14,996 7,656 33,925
Cash and cash equivalents at
the beginning of period 18,929 12,417 --
---------- --------- -----------
Cash and cash equivalents at
the end of period $ 33,925 $ 20,073 $ 33,925
========== ========= ===========
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 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, 1995 33,886 $ 339 $ 143,161 $(116,681) $ (919) $ 25,900
Sale of Common Stock
for cash, less
expenses of $2,902
(at $13.25 per share)
(see Note 4) 3,224 32 39,595 39,627
Warrant issued as
commitment fee
under equity line
(at $10.50 per share)
(see Note 4) 875 875
Valuation adjustment of
Common Stock issued in
private placement less
expenses of $51 (see
Note 4) 626 626
Warrant issued for
services (at $10.50
per share) (see
Note 3) 500 500
Options and warrants
exercised (at $3.38 to
$13.13 per share) 295 3 2,723 2,726
Net loss (5,149) (5,149)
-------- ------- ---------- -------- --------- ---------
Balance,
June 30, 1996 37,405 $ 374 $ 187,480 $(121,830) $ (919) $ 65,105
======== ======= ========== ========= ========= =========
See the accompanying notes to the consolidated financial statements.
</TABLE>
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<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. (the "Company")is a development
stage, tissue engineering company engaged in the growth of human tissues and
organs for therapeutic applications. Using its proprietary three-dimensional
culture system, the Company has successfully replicated a variety of human
tissues, including skin, cartilage, bone marrow and liver. The Company's
leading therapeutic products are tissue engineered skin products for the
treatment of severe burns, for which the Company has filed an application for
marketing approval in the United States with the Food and Drug Administra-
tion, and for diabetic foot ulcers, which is 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
for the development of tissue engineered cartilage for orthopedic applications
is accounted for under the equity method (see Note 2). All intercompany
accounts and transactions have been eliminated.
NOTE 2 - STRATEGIC ALLIANCES
In April 1996, the Company entered into an agreement with Smith & Nephew plc
("Smith & Nephew") to form a fifty-fifty joint venture for the worldwide
commercialization of Dermagraft (R), the Company's tissue engineered dermal
replacement, for the treatment of diabetic foot ulcers (the "Dermagraft Joint
Venture"). Upon signing, Smith & Nephew paid an up front fee of $10 million
and agreed to pay the Company up to an additional $60 million on the achieve-
ment of certain milestones. Smith & Nephew is a worldwide health care
company with extensive sales and distribution capabilities. It manufactures
a wide range of tissue repair products, principally addressing the areas of
bone, joints, skin and other soft tissue. Under the agreement, the
Dermagraft Joint Venture will be responsible for the further development,
manufacturing, marketing and sales of Dermagraft for diabetic foot ulcers
and will have a right of first refusal to develop Dermagraft for several
other indications. The Company has retained rights to develop Dermagraft
for burns and for plastic and reconstructive surgery. The companies have
agreed to complete definitive agreements and to share equally in the
expenses and revenues of the Dermagraft Joint Venture beginning January 1,
1997. As part of the agreement, Smith & Nephew has also agreed to loan the
Company up to $10 million during 1997.
St. Jude Medical, Inc. ("St. Jude Medical") and the Company entered into a
joint development agreement under which the parties conducted a series of
feasibility studies to evaluate applications of the Company's tissue
engineering technology to create or improve heart valve replacements in
February 1994 and, in January 1995, the agreement was extended to December 31,
1995. The Company recognized $212,000 and $415,000, respectively, in funding
from St. Jude Medical in the three and six months ended June 30, 1995. As
provided in the joint development agreement, in early 1996, St. Jude Medical
elected not to enter into a licensing agreement with the Company for tissue
engineered heart valves. As a result, the Company is in discussions with
other companies for a broader strategic alliance with respect to its
cardiovascular products. The Company is unable to predict with any
certainty whether it will be able to enter into any such alliance.
In 1994, Smith & Nephew and the Company began a separate joint venture for the
development of tissue engineered cartilage for orthopedic applications (the
"Cartilage Joint Venture"). Under the Cartilage Joint Venture, Smith & Nephew
is contributing the first $10 million in funding. The Cartilage Joint Venture
incurred net losses of $1,624,000 and $2,430,000 in the three and six months
ended June 30, 1996, bringing total expenditures of the joint venture funded
by Smith & Nephew to $5,787,000 from inception to June 30, 1996. Cartilage
Joint Venture revenues and expenditures in excess of $10 million will be
shared equally by the partners. During the three and six months ended June
30, 1996 and 1995, the Company recognized $747,000 and $1,395,000,
respectively, in contract revenue for research and development activities
performed for the Cartilage Joint Venture compared with $378,000 and $736,000
for the corresponding periods of 1995.
-6-
<PAGE>
NOTE 3 - IN VITRO LABORATORY TESTING BUSINESS
In March 1996, the Company entered into a consulting agreement with J.P.
Morgan Capital Corporation ("Morgan") whereby Morgan is assisting the Company
with respect to various strategic, business and financial alternatives for
the its In Vitro Laboratory Testing ("IVLT") business. With Morgan's
assistance, the Company is exploring alternatives for the IVLT business
which may include the possible sale of the business. As of June 30, 1996,
the net book value of the assets and liabilities associated with the IVLT
business was $131,000. Costs associated with the IVLT business were $804,000
and $706,000 in the three months ended June 30, 1996 and 1995, respectively,
and $1,669,000 and $1,467,000 in the six months ended June 30, 1996 and 1995,
respectively.
As a fee for these consulting services, the Company issued a warrant to Morgan
exercisable for 100,000 shares of Common Stock at an exercise price of $10.50
per share. In July 1996, the Company filed a registration statement to
register the warrant shares under the Securities Act of 1933.
NOTE 4 - CAPITAL STOCK
Public Offering - In March 1996, the Company sold 3,000,000 shares of Common
Stock at $13.25 per share in an underwritten public offering. In addition, in
April 1996, the underwriters partially exercised the over-allotment option
related to the offering and purchased an additional 223,800 shares of Common
Stock at $13.25 per share. In total, the Company received net proceeds of
approximately $40.0 million from the offering.
Equity Line - In February 1996, the Company entered into an investment
agreement (the "Investment Agreement") with a newly formed investment group
for an equity line which allows the Company to access up to $50 million
through sales of its Common Stock. The equity line will remain available for
a period of two years. The decision to draw any funds under the Investment
Agreement and the timing of any such draw are solely at the Company's
discretion.
The Investment Agreement provides that the Company can obtain up to $15
million at any one time through the sale of Common Stock. Any sales against
the equity line will be at a five percent discount to the average low sales
prices of the Company's Common Stock over a specified period of time as
determined by market volume at the time of the draw. The Company's ability to
draw under the Investment Agreement is subject to certain conditions
including, but not limited to, registration of the shares, a minimum trading
price of $2.00 per share, and certain limitations on the number of shares of
Common Stock held by the investment group at any point in time.
As a commitment fee for keeping the equity line available for the two-year
period, the Company issued a warrant to the investment group exercisable for
175,000 shares of Common Stock at an exercise price of $10.50 per share.
As provided under the Investment Agreement and the warrant, a registration
statement pertaining to the warrant shares was filed in July 1996.
Private Placement - In July 1995, the Company completed a series of private
placements. 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, as provided in the placements, the
initial purchase price was adjusted to result in a 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 final valuation period for 385,569 of the
shares purchased in the private placement ended in January 1996, resulting in
a final purchase price of $8.62 per share and additional net proceeds of
$626,000 to the Company.
NOTE 5 - NET INCOME/(LOSS) PER SHARE
Net income (loss) per share for the three and the six-month periods ended
June 30, 1996 and 1995 are based on the weighted average number of shares
of Common Stock outstanding during the periods. Shares to be issued under
options have not been included in the calculation of the net loss per share
as their effect is antidilutive. Net income per share for the three-month
period ended June 30, 1996 is based on the weighted average number of shares
of Common Stock and dilutive common stock equivalents outstanding during the
period. Common stock equivalents include outstanding options and warrants
to purchase shares of the Company's Common Stock.
-7-
<PAGE>
NOTE 6 - CASH FLOW INFORMATION
Non-cash activity during the six months ended June 30, 1996 included the
issuance of warrants exercisable for Common Stock as a commitment fee and
for consulting services. The commitment fee of 1.75% of the equity line, or
$875,000, was negotiated between the Company and the investment group
providing the equity line and represents the estimated fair market value of
the warrant (see Note 4). The warrant granted for consulting services has
been valued at an estimated fair market of $500,000 representing the
estimated fair market value of the services to be provided as negotiated
between the parties (see Note 3). The value of the warrants is being
amortized to expense over the commitment period and over the period the
services are being provided. During the six months ended June 30, 1995,
non-cash financing activities consisted of the delivery of a promissory note
as payment for the exercise of an employee stock option in the amount of
$918,500.
Net cash from operating activities reflects cash payments for interest expense
of approximately $3,000 in both the six-month periods ended June 30,
1996 and 1995. Cash payments for interest expense for the period January
26, 1986 (inception) to June 30, 1996 have totaled $603,000.
NOTE 7 - 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 exercisable for Common Stock during the six months ended June 30,
1996:
<TABLE>
<CAPTION>
1992 Plan Other Options and Warrants
------------------------- --------------------------
Number Price Per Number Price Per
of Shares Share of Shares Share
--------- ------------- --------- -------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 2,317,515 $1.69 - 16.88 1,460,299 $1.47 - 10.13
Granted 1,385,100 $7.63 - 17.50 275,000 $10.50
Exercised (66,200) $3.38 - 13.13 (229,005) $8.11 - 10.13
Canceled (22,480) $7.00 - 15.38 --
--------- ------------- --------- -------------
Outstanding, June 30, 1996 3,613,935 $1.69 - 17.50 1,506,294 $1.47 - 10.50
========= ============= ========= =============
</TABLE>
NOTE 8 - SUBSEQUENT EVENT
In July 1996, the Company entered into an operating lease for additional
research and office space. The following summarizes the Company's operating
lease commitments as of June 30, 1996 (in thousands):
Six Months Ending December 31, 1996 $ 1,544
Year Ending December 31:
1997 3,167
1998 2,425
1999 1,686
2000 1,302
Thereafter --
--------
Future minimum rental payments $ 10,124
========
These lease commitments include the minimum annual consumer price index
adjustments required under the various leases, which range from a minimum of
3% to a maximum of 7%. The lease commitments generally include certain
utility and service costs.
-8-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advanced Tissue Sciences, Inc. (the "Company") is a development stage
company engaged in the development and manufacture of living human tissue
products for therapeutic applications. The Company has incurred, and
expects to continue to incur, substantial and increasing expenditures in
support of the development and clinical trials of its Dermagraft (R)
products for burn and skin ulcer applications, in developing manufacturing
systems and facilities for the production and commercialization of
Dermagraft, in building its sales and marketing capabilities, and in
advancing other applications of the Company's core technology. In addition to
its Dermagraft skin products, the Company is focusing its resources on the
development of tissue engineered cartilage and cardiovascular products.
These activities have been supported by a variety of strategic
relationships over the past several years. In May 1994, the Company entered
into a joint venture (the "Cartilage Joint Venture") with Smith & Nephew plc
("Smith & Nephew") for the worldwide development, manufacture and marketing of
human tissue engineered cartilage for orthopedic applications. In April
1996, the Company entered into a second agreement with Smith & Nephew to form
a fifty-fifty joint venture (the "Dermagraft Joint Venture") for the worldwide
commercialization of Dermagraft in the treatment of diabetic foot ulcers.
Over the prior two years, the Company worked with St. Jude Medical, Inc.
("St. Jude Medical") on the development of tissue engineered heart valves.
In early 1996, St. Jude Medical elected not to enter into a licensing agree-
ment and, accordingly, the Company is currently funding all of its cardio-
vascular research and development activities internally. See Note 2 to the
consolidated financial statements. Since September 1992, the Company has
sponsored early stage research programs at the Massachusetts Institute of
Technology ("MIT") and Children's Hospital in Boston ("Children's Hospital")
directed toward the tissue engineering of cartilage, liver and numerous other
tissues as well as several polymer technologies.
Results of Operations
- ---------------------
Revenues increased $10,762,000 and $10,884,000 to $11,859,000 and
$13,086,000, respectively, in the three and six-month periods ended June 30,
1996 as compared to the corresponding periods of 1995 primarily as a result
of the $10 million up front fee the Company received from Smith & Nephew upon
signing the agreement to enter into the Dermagraft Joint Venture in April
1996. During the three and six months ended June 30, 1996, the Company
recognized contract revenues of $747,000 and $1,395,000 respectively, for
research and development of orthopedic applications of tissue engineered
cartilage performed for the Cartilage Joint Venture, as compared to $378,000
and $736,000 in the corresponding periods of 1995. Contract revenues from the
Cartilage Joint Venture are expected to continue to exceed 1995 levels
throughout the balance of the year. The three and six-month periods ended
June 30, 1995 also included contract revenues of $212,000 and $415,000,
respectively, related to research performed under the development agreement
with St. Jude Medical.
Sales of the Company's Skin2 (R) laboratory testing kits increased
$63,000 and $104,000 to $353,000 and $655,000, respectively, in the three
and six months ended June 30, 1996 as compared to the corresponding periods
in 1995. Product sales generally fluctuate based on the number and timing
of validation studies initiated either by the Company or third parties.
Product sales include revenues received under validation studies of $102,000
and $139,000 in the three-month and $139,000 and $176,000 in the six-month
periods ended June 30, 1996 and 1995, respectively.
Interest income also increased by $551,000 and $543,000 to $757,000 and
$1,021,000, respectively, in the three and six months ended June 30, 1996 as
compared to the corresponding periods in 1995. The increases primarily
reflect higher cash balances due to funds raised in a March 1996 public
offering and from the up front fee discussed above.
Research and development expenditures increased $1,473,000 and $2,296,000
to $6,064,000 and $11,293,000, respectively, in the three and six-month
periods ended June 30, 1996 as compared to the corresponding periods in 1995.
The increase in research and development costs primarily reflects higher costs
associated with the operation and maintenance of the Company's manufacturing
facility, expenditures in support of the scale up of Dermagraft manufacturing
processes, and increased levels of research and development in support of the
Cartilage Joint Venture as previously discussed. Increased costs for the
-9-
<PAGE>
operation of the manufacturing facility reflect that the facility was not
completed and clinical production did not begin in the facility until
mid-1995. Costs have increased in support of the Cartilage Joint Venture
primarily with respect to accelerating process development activities and
preclinical studies. Specifically, the increased research and development
costs are principally reflected in higher costs for engineering services,
operating costs of and depreciation associated with the manufacturing
facility, and additional personnel. Expenditures for research and
development are expected to continue to be incurred at levels higher than
in 1995 throughout the balance of 1996.
Selling, general and administrative costs were $2,326,000 and $4,248,000,
respectively, for the three month and six-month periods ended June 30, 1996,
as compared to $1,486,000 and $2,947,000 in the corresponding periods of the
prior year. The increase in selling, general and administrative expenses
primarily reflects higher salaries and relocation costs and amortization of
the commitment fee associated with the equity line established in February
1996 (see Note 4 to the consolidated financial statements). Selling, general
and administrative costs are expected to continue to increase as the Company
is building its sales and marketing capabilities in anticipation of marketing
approval of Dermagraft-TC (TM), a tissue engineered covering for severe
burns. There can be no assurance, however that the Food and Drug
Administration will approve or that the Company will be able to successfully
market the product.
Professional and consulting costs for legal, accounting and other
consulting services incurred in the three and six months ended June 30, 1996
were $1,167,000 and $1,795,000, respectively, as compared to $399,000 and
$867,000 for the comparable periods of 1995. The increase in professional
and consulting fees in the three and six months ended June 30, 1996
principally reflects fees paid to financial advisors related to the
Dermagraft Joint Venture and the Company's In Vitro Laborabory Testing
business. See Notes 2 and 3 to the consolidated financial statements.
Professional and consulting costs for 1996 also included higher fees for
legal services related to the equity line, strategic alliances and
intellectual property, for regulatory and marketing consultants and for the
recruitment of personnel.
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 March 1996, the Company sold 3,000,000 shares of Common Stock at
$13.25 in an underwritten public offering. In addition, in April 1996, the
underwriters partially exercised the over-allotment option related to the
offering and purchased an additional 223,800 shares of Common Stock at $13.25
per share. In total, the Company received net proceeds of approximately
$40.0 million from the offering. See Note 4 to the consolidated financial
statements.
As of June 30, 1996, the Company had available working capital of
$53,608,000, an increase of $37,861,000 from December 31, 1995. The increase
principally reflects the proceeds from the sale of the Company's Common Stock
and a $10 million fee from Smith & Nephew (see Note 2 to the consolidated
financial statements), net of funds used in operations and for capital
expenditures. Capital expenditures were $1,096,000 in the first six months
of 1996. The Company expects to use working capital at an accelerated rate
during 1996 as it continues 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
(including increased expenditures for manufacturing equipment) and patents.
In addition to available working capital, the Company has entered into a
two-year equity line which could provide up to $50 million in funding. See
Note 4 to the consolidated financial statements. Any decision to draw any
funds under the equity line and the timing of any such draw are solely at the
Company's discretion. The Company has agreed it will not draw on the equity
line during the six-month period following the close of the March public
offering. The Company currently believes it has sufficient funds to support
its operations into 1997.
-10-
<PAGE>
The Company 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.
To the extent necessary, further sources of funds may include existing or
future strategic alliances or other joint venture arrangements which provide
funding to the Company, and additional public or private offerings of debt or
equity securities, among others. The Company is also continuing to explore
various strategic, business and financial alternatives for obtaining
resources for its In Vitro Laboratory Testing business. 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.
Financial Condition
- -------------------
Cash and cash equivalents, short-term investments and stockholders'
equity as of June 30, 1996 have increased from December 31, 1995 reflecting
net proceeds received from the sale of the Company's Common Stock in the March
1996 public offering and the fund received from Smith & Nephew as discussed
above, which was partially offset by funds used in operations and for capital
expenditures. Other current assets and other assets have increased over the
same period reflecting the prepayment of the commitment and consulting fees
through the issuance of warrants (see Notes 3 and 4 to the consolidated
financial statements), amounts receivable from the Cartilage Jont Venture for
research and development activities and advance payments under a sponsored
research program. Accrued expenses have increased from December 31, 1995
to June 30, 1996 primarily reflecting higher accruals for engineering
services and sponsored research.
* * * * * *
The discussion in this Quarterly Report on Form 10-Q, particularly
those relating to strategic alliances, expected contract revenues from the
Company's existing joint ventures, the accelerated use of working capital and
increases in expenses (principally increased research and development, and
general and administrative expenses), the sufficiency of funds to support
operations and commercialization of the Company's products, are forward-
looking statements involving risks and uncertainties. No assurance can be
given that the Company will successfully complete clinical trials, obtain
Food and Drug Administration approval, scale up manufacturing processes,
successfully market such products, achieve the milestones required to
receive additional funding, or enter into new strategic alliances. These
and other risks are detailed in publicly available filings with the
Securities and Exchange Commission such as the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 and Registration Statement
on Form S-3 (File No. 333-01185). The forward-looking statements are
qualified in their entirety by reference to the risks and risk factors
described in such reports and Registration Statement.
-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 22, 1996.
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:
Nominee In Favor Withheld
---------------------- ------------ ------------
Arthur J. Benvenuto 34,304,734 112,588
Dr. Gail K. Naughton 34,308,034 109,288
Jerome E. Groopman, M.D. 34,056,334 360,988
Jack L. Heckel 34,298,855 118,467
David S. Tappan, Jr. 34,216,155 201,167
William B. Walsh, M.D. 34,070,205 347,117
Dr. Gail R. Wilensky 34,306,696 110,626
The stockholders also approved the appointment of Ernst & Young as independent
auditors of the Company for the fiscal year ending December 31, 1996 with
33,932,047 shares in favor of the proposal, 49,630 shares opposed, and 435,645
shares abstaining. There were no broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Title Method of Filing
------- ---------------------- -------------------
27 Financial Data Statement Filed Herewith
(b) Reports on Form 8-K - None
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 1, 1996 /s/ Arthur J. Benvenuto
------------------ ------------------------------
Arthur J. Benvenuto
Chairman of the Board and Chief
Executive Officer
Date: August 1, 1996 /s/ Michael V. Swanson
------------------ -------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-12-
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