UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 April 30, 1998 was 39,323,373.
<PAGE>
EXPLANATORY STATEMENT
The undersigned registrant hereby amends Part I, Item 1 and Part II, Item 2
of its Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
In Part I, Item 1, the Consolidated Balance Sheet as of March 31, 1998 and
Consolidated Statement of Cash Flows for the three months ended March 31,
1998 have been restated to correct the classification of investment
securities between short-term investments and cash equivalents. Part II,
Item 2 has been added to the Form 10-Q with respect to the sale of
unregistered shares of the Company's Common Stock.
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, 1997.
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.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,159 $ 15,086
Short-term investments 5,972 2,000
Receivables from related parties 2,120 332
Inventory 3,806 4,643
Other current assets 1,514 1,063
----------- ----------
Total current assets 33,571 23,124
Property - net 23,648 23,190
Patent costs - net 1,631 1,608
Other assets 2,010 2,538
----------- ----------
Total assets $ 60,860 $ 50,460
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 2,838 $ 1,939
Accounts payable 1,069 958
Accrued expenses 5,608 7,011
----------- ----------
Total current liabilities 9,515 9,908
Long-term debt and capital lease obligations 26,913 26,157
Other long-term liabilities 323 245
Minority interest in consolidated subsidiary 254 184
----------- ----------
Total liabilities 37,005 36,494
----------- ----------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common Stock, $.01 par value; 100,000,000
shares authorized; issued and outstanding,
39,323,373 shares at March 31, 1998 and
37,673,983 shares at December 31, 1997 393 377
Additional paid-in capital 210,507 189,679
Accumulated deficit (186,126) (175,171)
----------- ----------
24,774 14,885
Less note received in connection with
sale of Common Stock (919) (919)
----------- ----------
Total stockholders' equity 23,855 13,966
----------- ----------
Total liabilities and stockholders'
equity $ 60,860 $ 50,460
=========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1998 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Revenues:
Product sales -
Related parties $ 2,415 $ --
Others 227 --
Contracts and fees -
Related parties 2,539 2,639
Others 125 10
----------- ------------
Total revenues 5,306 2,649
----------- ------------
Costs and expenses:
Research and development 3,854 4,968
Selling, general and administrative 3,612 3,120
Professional and consulting 328 674
Cost of goods sold 3,928 --
----------- ------------
Total costs and expenses 11,722 8,762
----------- ------------
Loss from operations before equity in
losses of joint ventures (6,416) (6,113)
Equity in losses of joint ventures (4,252) (1,707)
----------- ------------
Loss from operations (10,668) (7,820)
Other income (expense):
Interest income and other 269 293
Interest expense (556) (5)
----------- ------------
Net loss $ (10,955) $ (7,532)
=========== ============
Basic and diluted loss per share $ (.28) $ (.20)
=========== ============
Weighted average number of common
shares used in computation of basic
and diluted loss per share 38,930 37,488
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (10,955) $ (7,532)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 1,147 510
Equity in losses of joint ventures 4,252 1,707
Other adjustments to net loss 115 56
Change in assets and liabilities:
Receivables from related parties (1,788) (1,606)
Inventory 837 (789)
Other current assets (451) 645
Accounts payable 111 363
Accrued expenses (1,403) (676)
----------- ----------
Net cash used in operating
activities (8,135) (7,322)
----------- ----------
Investing activities:
Purchases of short-term investments (3,972) --
Maturities and sales of short-term
investments -- 998
Acquisition of property (1,639) (3,012)
Investment in joint ventures (4,350) (1,905)
Patent application costs (34) (90)
Other long-term assets 626 (561)
----------- ----------
Net cash used in investing
activities (9,369) (4,570)
----------- ----------
Financing activities:
Proceeds from borrowings 1,705 10,000
Payments of borrowings (50) (5)
Net proceeds from sale of equity 20,000 --
Options exercised 844 301
Other long-term obligations 78 --
----------- ----------
Net cash provided by financing
activities 22,577 10,296
----------- ----------
Net increase (decrease) in cash and cash
equivalents 5,073 (1,596)
Cash and cash equivalents at beginning
of period 15,086 27,907
----------- ----------
Cash and cash equivalents at end of period $ 20,159 $ 26,311
=========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Stock Paid-In Accumulated Note holders'
------------------
Shares Amount Capital Deficit Receivable Equity
-------- -------- ---------- ----------- ---------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 37,674 $ 377 $ 189,679 $ (175,171) $ (919) $ 13,966
Sale of Common Stock 1,533 15 19,985 20,000
Options exercised 116 1 843 844
Net loss (10,955) (10,955)
------ ------- --------- ---------- --------- ---------
Balance, March 31, 1998 39,323 $ 393 $ 210,507 $ (186,126) $ (919) $ 23,855
====== ======= ========= ========== ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
-5-
<PAGE>
ADVANCED TISSUE SCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Organization - Advanced Tissue Sciences, Inc. (the "Company") is a tissue
engineering company utilizing its proprietary technology to develop and
manufacture human-based tissue products for tissue repair and 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 temporary covering of severe and
partial-thickness burns, approved for marketing in the United States by the
U.S. Food and Drug Administration (the "FDA"), and for the treatment of
diabetic foot ulcers, for which the Company has filed an application with the
FDA for marketing approval in the United States.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company, its wholly owned subsidiaries and DermEquip,
L.L.C. ("DermEquip"), a limited liability company owned jointly with Smith &
Nephew plc ("Smith & Nephew"). All intercompany accounts and transactions
have been eliminated. The Company's other interests in joint ventures with
Smith & Nephew are accounted for under the equity method (see Note 2).
Reclassification - Certain reclassifications have been made to prior year
amounts to conform to the presentation for the three months ended
March 31, 1998.
NOTE 2 - STRATEGIC ALLIANCES
In April 1996, the Company entered into an agreement with Smith & Nephew to
form a fifty-fifty joint venture for the worldwide commercialization of
Dermagraft(R), the Company's tissue engineered dermal skin replacement, for
the treatment of diabetic foot ulcers (the "Dermagraft Joint Venture"). Smith
& Nephew is a worldwide healthcare 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. In January 1998, the Company and Smith & Nephew expanded the
Dermagraft Joint Venture to include venous ulcers, pressure ulcers, burns and
other skin tissue wounds. The Company retained the exclusive right to market
Dermagraft-TC(R), a temporary covering for full and partial-thickness burns,
in the United States, while the Dermagraft Joint Venture has the right to
market Dermagraft-TC for other skin wounds in the United States.
As consideration for entering into the Dermagraft Joint Venture, Advanced
Tissue Sciences received a $10 million up front fee in 1996. In addition, as
a part of the agreement to expand the joint venture, Smith & Nephew purchased
$20 million, or 1,533,115 newly-issued shares, of the Company's Common Stock
at approximately $13.05 per share in January 1998. The Company will also
receive an additional $15 million, directly or through the Dermagraft Joint
Venture, upon the earlier of (i) FDA approval for the marketing of Dermagraft
in the treatment of diabetic foot ulcers or (ii) January 4, 1999, and could
receive, subject to the achievement of certain milestones related to
regulatory approvals, reimbursement and sales levels, further payments of up
to $136 million.
In the expanded joint venture, the Company and Smith & Nephew will continue to
share equally in the expenses and revenues of the Dermagraft Joint Venture,
except the Company will fund the first $6 million of expenses for conducting
clinical trials and for regulatory support of Dermagraft and Dermagraft-TC in
the treatment of venous and pressure ulcers. The Company will continue to
manufacture and Smith & Nephew will continue to market and sell the joint
venture's products. During the three months ended March 31, 1998 and 1997,
the Company recognized $1,710,000 and $1,695,000, respectively, in contract
revenues for research and development activities performed for the Dermagraft
Joint Venture. In addition, during the quarter ended March 31, 1998, the
Company sold the Dermagraft Joint Venture $2,415,000 of Dermagraft and
Dermagraft-TC product, which was equal to the Company's cost of goods sold for
such products.
-6-
<PAGE>
In 1994, Smith & Nephew and the Company entered into 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 contributed the first $10 million in funding and the Company
contributed certain technology licenses. The Cartilage Joint Venture's total
funding since inception reached $10 million in January 1997 and, as provided
in the joint venture agreement, the Company and Smith & Nephew are sharing
equally in Cartilage Joint Venture revenues and expenditures. During the
three months ended March 31, 1998, the Company recognized $829,000 in contract
revenues for research and development activities performed for the Cartilage
Joint Venture compared with $944,000 for the corresponding period of 1997.
The results of operations of the joint ventures for the three months ended
March 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Dermagraft Joint Venture Cartilage Joint Venture
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 75 $ -- $ -- $ --
Cost of goods sold 2,582 -- -- --
Other costs and expenses 4,529 2,109 1,475 1,863
Net loss 7,036 2,109 1,475 1,863
</TABLE>
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost, principally standard costs which
approximate actual costs on a first-in, first-out basis, or market and consist
of the following components as of March 31, 1998 and December 31, 1997 (in
thousands):
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(Unaudited)
Raw materials and supplies $ 3,135 $ 3,295
Work-in-process 532 347
Finished goods 139 1,001
--------- ---------
$ 3,806 $ 4,643
========= =========
NOTE 4 - LONG-TERM DEBT
In March 1998, DermEquip borrowed an additional $1.4 million under the term
loan agreement with The Chase Manhattan Bank (the "Chase Loan") bringing
borrowings under the Chase Loan to $16 million, the total amount available
under the facility. During 1997, the Company borrowed $3.4 million from Smith
& Nephew pursuant to a commitment as a part of the agreement to form the
Cartilage Joint Venture (see Note 2). Under the terms of that joint venture
agreement, the Company may borrow up to a total of $10 million of which $3.4
million had been drawn as of March 31, 1998. Debt and other long-term
obligations as of March 31, 1998 and December 31, 1997 were as follows (in
thousands):
MARCH 31, DECEMBER 31,
1998 1997
------------- ------------
Chase Loan $ 16,000 $ 14,600
Smith & Nephew notes:
Dermagraft Joint Venture 10,000 10,000
Cartilage Joint Venture 3,400 3,400
Capital leases and other 351 96
Less current portion (2,838) (1,939)
---------- ----------
$ 26,913 $ 26,157
========== ==========
-7-
<PAGE>
NOTE 5 - BASIC AND DILUTED LOSS PER SHARE
As required, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share," ("FAS No. 128") for the year ended
December 31, 1997. FAS No. 128 changes the method used to calculate earnings
per share and requires the restatement of all prior periods reported. Under
FAS No. 128, the Company is required to present basic and diluted earnings per
share if applicable. Basic earnings per share are determined based on the
weighted average number of shares outstanding during the period. Diluted
earnings per share include the weighted average number of shares outstanding
and give effect to potentially dilutive common shares such as options and
warrants outstanding.
Both the basic and diluted loss per share for the three months ended March 31,
1998 and 1997 are based on the weighted average number of shares of Common
Stock outstanding during the periods. Potentially dilutive securities include
options and warrants outstanding and debt convertible into Common Stock;
however, such securities have not been included in the calculation of the
diluted loss per share as their effect is antidilutive. Since such securities
are antidilutive, there is no difference between basic and diluted loss per
share for the two periods presented and there was no change in the loss per
share for the quarter ended March 31, 1997.
NOTE 6 - EQUITY LINE EXTENSION
In February 1998, the Company extended an Investment Agreement (the
"Investment Agreement") under which the Company may access up to $50 million
through an equity line until February 1999. In connection with the extension,
the Company granted the investment group a warrant to purchase 50,000 shares
of Common Stock at an exercise price of $14.00 per share. The Company
originally entered into the Investment Agreement for a two-year period in
February 1996. 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 its Common Stock to the investment
group. 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.
NOTE 7 - STOCK OPTIONS
The following table summarizes activity under the Company's 1997 Stock
Incentive Plan (the "1997 Plan") and for other options and warrants for Common
Stock for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
1997 Plan Other Options and Warrants
------------------------- --------------------------
Weighted Weighted
Number Average Price Number Average Price
of Shares Per Share of Shares Per Share
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1997 4,115,150 $10.26 1,459,640 $7.21
Granted 187,285 $13.08 50,000 $14.00
Exercised (116,275) $7.27 -- --
Canceled (57,808) $14.64 -- --
--------- ---------
Outstanding, March 31, 1998 4,128,352 $10.41 1,509,640 $7.44
========= =========
</TABLE>
-8-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGES IN SECURITIES
In January 1998, the Company issued and sold 1,533,115 shares of the
Company's Common Stock, resulting in $20 million in proceeds to the
Company. These shares were sold pursuant to the exemption from registration
provided under Section 4(2) of the Securities Act of 1933.
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 27, 1998 /s/ Arthur J. Benvenuto
--------------- -------------------------------
Arthur J. Benvenuto
Chairman of the Board and
Chief Executive Officer
Date: August 27, 1998 /s/ Michael V. Swanson
--------------- -------------------------------
Michael V. Swanson
Vice President, Finance and
Administration
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the quarter ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,159
<SECURITIES> 5,972
<RECEIVABLES> 2,316
<ALLOWANCES> 196
<INVENTORY> 3,806
<CURRENT-ASSETS> 33,571
<PP&E> 32,877
<DEPRECIATION> 9,229
<TOTAL-ASSETS> 60,860
<CURRENT-LIABILITIES> 9,515
<BONDS> 26,913
0
0
<COMMON> 393
<OTHER-SE> 23,462
<TOTAL-LIABILITY-AND-EQUITY> 60,860
<SALES> 2,642
<TOTAL-REVENUES> 5,306
<CGS> 3,928
<TOTAL-COSTS> 3,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (556)
<INCOME-PRETAX> (10,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,955)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
