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 SEPTEMBER 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) dentification 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 October 31, 1996 was 37,469,237.
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
-----
Page
----
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995 2
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 1996 and
1995 and Cumulative January 21, 1986 (inception)
to September 30, 1996 3
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 and
Cumulative January 21, 1986 (inception) to
September 30, 1996 4
Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 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 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 Reports on Form 10-Q for the three and six
months ended March 31, 1996 and June 30, 1996, 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,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,945 $ 18,929
Short-term investments 11,708 --
Prepaid expenses 656 820
Other current assets 2,489 1,214
--------- ---------
Total current assets 51,798 20,963
Property - net 8,683 8,332
Patent costs - net 1,165 1,032
Other assets 2,065 814
--------- ---------
Total assets $ 63,711 $ 31,141
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under
capital leases $ 13 $ 11
Accounts payable 1,959 1,183
Accrued expenses 5,519 4,022
--------- ---------
Total current liabilities 7,491 5,216
--------- ---------
Obligations under capital leases 16 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, 37,423,933 shares at
September 30, 1996 and 33,885,928
shares at December 31, 1995 374 339
Additional paid-in capital 187,646 143,161
Deficit accumulated during development
stage (130,897) (116,681)
--------- ---------
57,123 26,819
Less note received in connection
with the sale of Common Stock (919) (919)
--------- ---------
Total stockholders' equity 56,204 25,900
--------- ---------
Total liabilities and stockholders'
equity $ 63,711 $ 31,141
========= =========
See the accompanying notes to the consolidated financial statements.
</TABLE>
-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,
------------------- -------------------
1996 1995 1996 1995 1996
--------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Produce Sales $ 237 $ 254 $ 892 $ 805 $ 5,768
Contracts and fees 1,127 613 12,532 1,774 19,542
Interest and other 732 376 1,758 866 8,541
-------- -------- -------- -------- ----------
Total revenues 2,096 1,243 15,182 3,445 33,851
-------- -------- -------- -------- ----------
Costs and expenses:
Research and development 6,426 4,666 17,719 13,663 82,679
Selling, general and
administrative 3,387 1,329 7,635 4,276 39,413
Professional and
consulting 976 413 2,771 1,280 13,045
Cost of goods sold 373 264 1,269 957 7,232
Interest 1 2 4 5 553
In-process technology
and other -- -- -- -- 21,826
-------- -------- -------- -------- ----------
Total costs and
expenses 11,163 6,674 29,398 20,181 164,748
-------- -------- -------- -------- ----------
Net loss $ (9,067) $ (5,431) $(14,216) $(16,736) $ (130,897)
======== ======== ======== ======== ==========
Net loss per share $ (.24) $ (.16) $ (.39) $ (.53)
======== ======== ======== ========
Weighted average number of
common shares used in
computation of net loss
per share 37,407 33,737 36,252 31,730
======== ======== ======== ========
See the accompanying notes to the consolidated financial statements.
</TABLE>
-3-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
DOLLARS IN THOUSANDS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
January 21,
1986
Nine Months Ended (inception) to
September 30, September 30,
-------------------
1996 1995 1996
--------- -------- --------------
<S> <C> <C> <C>
Operating activities:
Net loss $(14,216) $(16,736) $ (130,897)
Adjustments to reconcile net
loss to cash used in operating
activities:
Depreciation and amortization 1,291 997 6,232
Write-off of acquired in-process
technology -- -- 21,000
Compensation for services paid in
stock, stock options or warrants 867 -- 2,415
Other adjustments to net loss 54 69 550
Change in assets and liabilities:
Prepaid expenses and other
current assets (1,111) 308 (3,145)
Other assets (657) (400) (1,284)
Accounts payable 776 (735) 1,959
Accrued expenses 1,497 1,046 5,519
-------- -------- -----------
Net cash used in operating
activities (11,499) (15,451) (97,651)
-------- -------- -----------
Investing activities:
Purchases of short-term investments (21,707) (5,363) (146,111)
Maturities and sales of short-term
investments 9,999 10,404 134,403
Acquisition of property (1,627) (1,033) (12,806)
Patent application costs (202) (253) (1,516)
-------- -------- -----------
Net cash provided by (used in)
investing activities (13,537) 3,755 (26,030)
-------- -------- -----------
Financing activities:
Proceeds from borrowings -- -- 529
Payments of borrowings (7) (7) (2,914)
Net proceeds from sale of equity 40,253 16,448 150,962
Options and warrants exercised 2,806 786 11,238
Purchase of options and other -- -- 811
-------- -------- -----------
Net cash provided by
financing activities 43,052 17,227 160,626
-------- -------- -----------
Net increase in cash
and cash equivalents 18,016 5,531 36,945
Cash and cash equivalents at
the beginning of period 18,929 12,417 --
-------- -------- -----------
Cash and cash equivalents at
the end of period $ 36,945 $ 17,948 $ 36,945
======== ======== ===========
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, 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
Notes 4, 7 and 8) 875 875
Valuation adjustment of
Common Stock issued in
private placement less
expenses of $51 (see
Note 4) 626 626
Warrant issued as services
(at $10.50 per share) (see
Notes 3, 7 and 8) 500 500
Options and Warrants
exercised (at $3.38
to $13.13 per share) 314 3 2,889 2,892
Net loss (14,216) (14,216)
------- ------- ---------- ---------- -------- --------
Balance,
September 30, 1996 37,424 $ 374 $ 187,646 $ (130,897) $ (919) $ 56,204
======= ======= ========== ========== ======== ========
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. (the "Company") 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 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 Administration, and for diabetic foot ulcers,
which is in multi-site human clinical trials.
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
achievement 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 $207,000 and $622,000, respectively, in funding
from St. Jude Medical in the three and nine months ended September 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 currently funding
all of its cardiovascular research and development activities internally and
is exploring opportunities 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 $1,920,000 and $4,350,000 in the three and nine months
ended September 30, 1996, bringing total expenditures of the joint venture
funded by Smith & Nephew to $7,707,000 from inception to September 30, 1996.
Cartilage Joint Venture revenues and expenditures in excess of $10 million
will be shared equally by the partners. During the three and nine months
ended September 30, 1996, the Company recognized $1,127,000 and $2,522,000,
respectively, in contract revenue for research and development activities
performed for the Cartilage Joint Venture compared with $406,000 and
$1,142,000 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 assisted the Company with
respect to various strategic, business and financial alternatives for its In
Vitro Laboratory Testing ("IVLT") business. With Morgan's assistance, the
Company explored various alternatives for the IVLT business, including the
possible sale of the business. However, in September 1996, the Company
announced that it was closing its IVLT business and would focus all of its
resources on its therapeutic programs. Although the Company was a leader in
the in vitro testing business and continuously broadened applications of its
products, the market for in vitro laboratory testing products was evolving
too slowly for the Company to continue to devote its resources to this
business.
The statement of operations for the three and nine months ended September 30,
1996 includes charges of approximately $1.0 million for costs associated with
the closure of the IVLT business (substantially all of which are reflected in
selling, general and administrative expenses). Exclusive of these charges,
costs associated with operations of the IVLT business were $740,000 and
$631,000 in the three months ended September 30, 1996 and 1995, respectively,
and $2,409,000 and $2,099,000 in the nine months ended September 1996 and
1995, respectively.
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.
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 loss per share for the three and the nine-month periods ended September
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 and
warrants have not been included in the calculation of the net loss per share
as their effect is antidilutive.
-7-
<PAGE>
NOTE 6 - LEASE COMMITMENTS
In July and August 1996, the Company entered into operating leases for
additional manufacturing, research and office space. The following summarizes
the Company's operating lease commitments as of September 30, 1996 (in
thousands):
Three Months Ending December 31, 1996 $ 938
Year Ending December 31:
1997 3,506
1998 2,660
1999 1,991
2000 1,538
Thereafter --
-------
Future minimum rental payments $10,633
=======
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.
NOTE 7 - CASH FLOW INFORMATION
Non-cash activity during the nine months ended September 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 (see
Notes 4 and 8), 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. 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 Notes 3 and 8). The value of the warrants is being amortized to
expense over the commitment period and over the period the services are
provided. During the nine months ended September 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 $4,000 and $5,000 in the nine-month periods ended September
30, 1996 and 1995, respectively. Cash payments for interest expense for the
period January 26, 1986 (inception) to September 30, 1996 have totaled
$603,000.
NOTE 8 - 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 nine months ended September
30, 1996:
1992 Plan Other Options and Warrants
------------------------ --------------------------
Number Price Per Number Price Per
of Shares Share of Shares Share
--------- ------------- ----------- -------------
Outstanding,
December 31, 1995 2,317,515 $1.69 - 16.88 1,460,299 $1.47 - 10.13
Granted 1,573,700 $7.63 - 18.50 275,000 $10.50
Exercised (85,200) $3.38 - 13.13 (229,005) $8.11 - 10.13
Canceled (45,040) $7.00 - 15.38 --
--------- ---------
Outstanding,
September 30, 1996 3,760,975 $1.69 - 18.50 1,506,294 $1.47 - 10.50
========= =========
Included in other options and warrants granted is a warrant issued to an
investment group exercisable for 175,000 shares of Common Stock at an exercise
price of $10.50 per share as a commitment fee for keeping the equity line
available for a two-year period (see Note 4). In addition, as a fee for
consulting services (see Note 3), the Company also issued a warrant to Morgan
exercisable for 100,000 shares of Common Stock at an exercise price of $10.50
per share.
-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 agreement and,
accordingly, the Company is currently funding all of its cardiovascular
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 $853,000 and $11,737,000, to $2,096,000 and
$15,182,000, respectively, in the three and nine-month periods ended September
30, 1996 as compared to the corresponding periods of 1995. The increase for
the nine months ended September 30, 1996 primarily reflects a $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 nine months ended September 30, 1996, the Company recognized contract
revenues of $1,127,000 and $2,522,000, respectively, for research and
development of orthopedic applications of tissue engineered cartilage
performed for the Cartilage Joint Venture, as compared to $406,000 and
$1,142,000 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 nine-month periods ended
September 30, 1995 also included contract revenues of $207,000 and $622,000,
respectively, related to research performed under the development agreement
with St. Jude Medical.
Sales of the Company's Skin2 (R) laboratory testing kits decreased
$17,000 in the three months ended September 30, 1996 and increased $87,000 in
the nine months ended September 30, 1996 as compared to the corresponding
periods in 1995. In September 1996, the Company announced that it was
discontinuing the sale of its Skin2 products. See Note 3 to the consolidated
financial statements.
Interest income also increased by $355,000 and $898,000, to $729,000 and
$1,750,000, respectively, in the three and nine months ended September 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 $1,760,000 and $4,056,000
to $6,426,000 and $17,719,000, respectively, in the three and nine-month
periods ended September 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
-9-
<PAGE>
Joint Venture as previously discussed. Increased costs for the 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, rent and supplies. Expenditures for research and development are
expected to continue to increase for at least the next twelve months.
Selling, general and administrative costs were $3,387,000 and 7,635,000,
respectively, for the three month and nine-month periods ended September 30,
1996, as compared to $1,329,000 and $4,276,000 in the corresponding periods of
the prior year. The three and nine-month periods ended September 30, 1996
include charges of approximately $1 million associated with the closing of the
Company's In Vitro Laboratory Testing ("IVLT") business (see Note 3 to the
consolidated financial statements). The increase in selling, general and
administrative expenses also reflects (i) costs related to building sales and
marketing capabilities in anticipation of marketing approval of Dermagraft-TC
(TM), a tissue engineered covering for severe burns, and of Dermagraft, a
dermal replacement product for the treatment of diabetic foot ulcers; (ii)
amortization of the commitment fee associated with the equity line established
in February 1996 (see Note 4 to the consolidated financial statements); (iii)
increased salaries and personnel; and (iv) higher relocation costs.
Professional and consulting costs for legal, accounting and other
consulting services incurred in the three and nine months ended September 30,
1996 were $976,000 and $2,771,000, respectively, as compared to $413,000 and
$1,280,000 for the comparable periods in 1995. The increase in professional
and consulting fees in the three and nine months ended September 30, 1996
principally reflects fees paid to financial advisors and consultants related
to forming the Dermagraft Joint Venture and evaluating alternatives for the
Company's In Vitro Laboratory 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. As noted above, the Company is discontinuing its IVLT business.
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 September 30, 1996, the Company had available working capital of
$44,307,000, an increase of $28,560,000 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 $1,627,000 in the first nine months
of 1996. The Company expects to use working capital at an accelerated rate
over the next twelve months as it continues to incur substantial research and
development expenses (including costs associated with clinical trials and the
development of manufacturing processes), increasing selling, general and
administrative costs in anticipation of product commercialization, and
additional expenditures for capital equipment (including increased
expenditures for manufacturing equipment) and patents. These increases are
only expected to be partially offset by revenues from the cartilage and
Dermagraft joint ventures with Smith & Nephew. The closure of the IVLT
business is not expected to materially change the use of working capital as
substantially all of its resources are being redeployed into the Company's
therapeutic programs.
-10-
<PAGE>
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 currently believes it has sufficient funds,
including those available under the equity line and from borrowings available
under its joint venture arrangements, to support its operations through 1997.
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. 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.
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.
Financial Condition
- -------------------
Cash and cash equivalents, short-term investments and stockholders'
equity as of September 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 funds received from Smith & Nephew
as discussed above, which were 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 a commitment fees
through the issuance of warrants (see Note 7 to the consolidated financial
statements), amounts receivable from the Cartilage Joint Venture for research
and development activities, and advance payments under a sponsored research
program. Accounts payable and accrued expenses have increased from December
31, 1995 to September 30, 1996 primarily reflecting higher accruals for
salaries and benefits, clinical studies 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, commercialization of the Company's products, the
accelerated use of working capital and increases in expenses (principally
increased research and development costs, selling, general and administrative
expenses and capital expenditures), and the sufficiency of funds to support
operations, 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, including 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 filings and Registration Statement.
-11-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(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: November 6, 1996 /s/ Arthur J. Benvenuto
------------------------- -------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
Date: November 6, 1996 /s/ Michael V. Swanson
------------------------ ------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-12-
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This schedule contains summary financial information extracted from the
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