SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997, 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 0-22025
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AASTROM BIOSCIENCES, INC.
- -----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 94-3096597
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
24 Frank Lloyd Wright Dr.
P.O. Box 376
Ann Arbor, Michigan 48106
- ------------------------------- --------------------------------
(Address of principal executive (Zip code)
offices)
(734) 930-5555
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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.
[X] - Yes [ ] - No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 13,278,983
(Class) Outstanding at February 1, 1998
Page 1
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
December 31, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Condensed Balance Sheets as of June 30, 1997 and
December 31, 1997 3
b) Condensed Statements of Operations for the three
and six months ended December 31, 1996 and 1997
and for the period from March 24, 1989 (Inception)
to December 31, 1997 4
c) Condensed Statements of Cash Flows for the six
months ended December 31, 1996 and 1997 and for
the period from March 24, 1989 (Inception) to
December 31, 1997 5
d) Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk *
PART II - OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
EXHIBIT INDEX 19
* No information is provided due to inapplicability of the item.
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
June 30, December 31,
1997 1997
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,943,000 $ 1,270,000
Short-term investments 15,064,000 18,511,000
Receivables 229,000 244,000
Prepaid expenses 126,000 53,000
----------- -----------
Total current assets 17,362,000 20,078,000
PROPERTY, NET 1,048,000 834,000
----------- -----------
Total assets $18,410,000 $20,912,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,508,000 $1,899,000
Accrued employee expenses 130,000 98,000
Current portion of capital lease obligations 124,000 71,000
---------- ----------
Total current liabilities 1,762,000 2,068,000
CAPITAL LEASE OBLIGATIONS 65,000 30,000
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares
authorized - 5,000,000; 2,200,000 issued
and outstanding at December 31, 1997 - 9,930,000
Common Stock, no par value; shares
authorized - 40,000,000; shares issued
and outstanding - 13,275,208
and 13,278,983, respectively 58,073,000 57,992,000
Deficit accumulated during the
development stage (41,313,000) (49,394,000)
Stock purchase warrants - 284,000
Shareholder notes receivable (167,000) -
Unrealized gains (losses) on investments (10,000) 2,000
---------- ----------
Total shareholders' equity 16,583,000 18,814,000
---------- ----------
Total liabilities and shareholders'
equity $18,410,000 $20,912,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 3
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
March 24, 1989
Three months ended Six months ended (Inception) to
December 31, December 31, December 31,
---------------------- --------------------- ----------------
1996 1997 1996 1997 1997
--------- -------- --------- -------- ------------
REVENUES:
Research and development agreements $ - $ - $ 195,000 $ 3,000 $ 2,020,000
Grants 29,000 49,000 58,000 62,000 2,205,000
--------- --------- --------- -------- -----------
Total revenues 29,000 49,000 253,000 65,000 4,225,000
========= ========= ========= ======== ===========
COSTS AND EXPENSES:
Research and development 2,550,000 3,788,000 5,710,000 7,031,000 45,463,000
General and administrative 439,000 883,000 891,000 1,496,000 10,538,000
--------- --------- --------- --------- ----------
Total costs and expenses 2,989,000 4,671,000 6,601,000 8,527,000 56,001,000
--------- --------- --------- --------- ----------
LOSS FROM OPERATIONS (2,960,000) (4,622,000) (6,348,000) (8,462,000) (51,776,000)
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 79,000 216,000 205,000 436,000 2,688,000
Interest expense (8,000) (2,000) (19,000) (7,000) (258,000)
---------- ---------- --------- ---------- ----------
Other income 71,000 214,000 186,000 429,000 2,430,000
---------- ---------- --------- ---------- ----------
NET LOSS $(2,889,000) $(4,408,000) $(6,162,000) $(8,033,000) $(49,346,000)
============ =========== ============ =========== ============
COMPUTATION OF NET LOSS
APPLICABLE TO COMMON SHARES:
Net loss $(2,889,000) $(4,408,000) $(6,162,000) $ (8,033,000)
Dividends on Preferred Stock - (47,000) - (47,000)
Charge related to issuance of
Preferred Stock - (3,439,000) - (3,439,000)
------------ ---------- ---------- ----------
Net loss applicable to Common Shares $(2,889,000) $(7,894,000) $(6,162,000) $(11,519,000)
=========== =========== =========== =============
NET LOSS PER COMMON SHARE (Basic
and Diluted) $ (.29) $ (.59) $ (.61) $ (.87)
=========== =========== =========== ============
Weighted average number of common
and common equivalent shares
outstanding 10,109,000 13,268,000 10,108,000 13,273,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Page 4
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended March 24, 1989
December 31, (Inception) to
------------------------ December 31,
1996 1997 1997
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss $(6,162,000) $(8,033,000) $(49,346,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 274,000 303,000 2,134,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on investments - (82,000) (285,000)
Stock compensation expense 66,000 320,000 450,000
Changes in assets and liabilities:
Receivables 7,000 (39,000) (268,000)
Prepaid expenses (300,000) 73,000 (53,000)
Accounts payable and accrued expenses (214,000) 391,000 1,899,000
Accrued employee expenses (8,000) (32,000) 98,000
Deferred revenue (122,000) - -
----------- ----------- ------------
Net cash used for operating activities (6,459,000) (7,099,000) (45,261,000)
----------- ----------- ------------
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments - (10,353,000) (41,491,000)
Maturities of short-term investments - 7,000,000 23,267,000
Capital purchases (284,000) (89,000) (2,231,000)
Proceeds from sale of property held for resale - - 400,000
----------- ----------- ------------
Net cash used for investing activities (284,000) (3,442,000) (20,128,000)
----------- ----------- ------------
FINANCING ACTIVITIES:
Issuance of Preferred Stock - 9,930,000 44,148,000
Issuance of Common Stock 6,000 26,000 20,053,000
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations (141,000) (88,000) (1,073,000)
----------- ----------- ------------
Net cash provided by (used for) financing activities (135,000) 9,868,000 66,659,000
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,878,000) (673,000) 1,270,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,967,000 1,943,000 -
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,089,000 $1,270,000 $1,270,000
---------- ----------- ------------
---------- ----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 19,000 $ 7,000 $ 258,000
Additions to capital lease obligations - - 1,174,000
The accompanying notes are an integral part of these financial statements.
Page 5
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Aastrom Biosciences, Inc. (the "Company") was incorporated in March 1989
("Inception") under the name Ann Arbor Stromal, Inc. The Company changed its
name in 1991 concurrent with the commencement of employee-based operations.
The Company is in the development stage with its principal business
activities being research and product development, conducted principally on
its own behalf, but also in connection with various collaborative research
and development agreements with other companies, involving the development of
processes and instrumentation for the ex vivo production of human stem cells
and their progeny, and hematopoietic and other tissues. Successful future
operations are subject to several technical and business risks, including
satisfactory product development and obtaining regulatory approval and market
acceptance of its products.
2. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company without audit, according 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 omitted pursuant to
such rules and regulations. The financial statements reflect, in the opinion
of management, all adjustments (which consist solely of normal recurring
adjustments) necessary to present fairly the financial position and results
of operations as of and for the periods indicated. The results of operations
for the three and six months ended December 31, 1997, are not necessarily
indicative of the results to be expected for the full year or for any other
period.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K, as amended and filed with the Securities and Exchange
Commission.
3. SALE OF PREFERRED STOCK
On December 2, 1997, the Company completed a directed placement of 2,200,000
shares of its 5.5% Convertible Preferred Stock ("Preferred Stock") at a price
of $5.00 per share. Proceeds from the offering, net of placement agent
commissions and expenses, were approximately $9,930,000. Each share of
Preferred Stock is convertible into one share of Common Stock, subject to
certain anti-dilution adjustments, and is convertible at the option of the
holder at any time. The Preferred Stock will automatically convert into
Common Stock if at any time after December 2, 1999, the price of the
Company's Common Stock is greater than $10 per share for 20 consecutive
trading days, or upon the occurrence of certain other events. The Preferred
Page 6
Stock accrues a dividend at an annual rate of 5.5%, which is declared and
paid by the Company on a quarterly basis, and has a liquidation preference of
$5 per share, plus accrued but unpaid dividends. The Company has the option
to pay dividends on the Preferred Stock in the form of a cash payment or by
the issuance of shares of Common Stock. If the Company elects to pay the
dividend in Common Stock, such shares are valued at an average daily trading
price of the Common Stock prior to the quarterly record date. In December
1997, the Company elected to issue 7,103 shares of Common Stock valued at
approximately $47,000 in payment of this dividend. Such shares are reflected
as outstanding as of December 31, 1997 in the accompanying financial
statements.
4. NET LOSS PER COMMON SHARE
Net loss per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares are not included in the per share calculation where the effect of
their inclusion would be anti-dilutive. However, common and common
equivalent shares issued during the twelve-month period preceding the filing
of the registration statement for the Company's initial public offering,
which was completed in February 1997 (the "IPO"), at a price below the
expected offering price are considered to be cheap stock and are included in
the calculation for periods prior to the IPO, as if they were outstanding for
all periods using the treasury stock method, as applicable, even though their
inclusion is anti-dilutive. Due to the automatic conversion of all previously
outstanding preferred stock into Common Stock upon the completion of the IPO,
such preferred stock is assumed to have been converted into Common Stock at
the time of issuance, except for those shares considered to be cheap stock
which are treated as outstanding for all periods presented.
The computations of net loss per common share for the three and six-month
periods ended December 31, 1997 include an adjustment for dividends paid on
the Preferred Stock and reflect a one-time charge of $3,439,000 related to
the sale of the Preferred Stock in December 1997. The one-time charge and
dividends affect only the computation of net loss per common share and are
not included in the computation of net loss for the periods.
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which amended the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15"). SFAS 128, which was adopted by the Company for the periods
ending December 31, 1997, did not have a material effect on the computation
of the Company's historical net loss per common share amounts.
5. RECENT PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which sets forth additional requirements for companies to
report in the financial statements Comprehensive Income in addition to Net
Income. Upon adoption of SFAS 130, the Company
Page 7
will present comprehensive income in its financial statements for earlier
periods. The Company currently expects that adopting SFAS 130 for its
previously issued financial statements will primarily affect the treatment of
dividends and the one-time charge associated with the sale of the Preferred
Stock. The Company will adopt SFAS 130 during its fiscal year ending June 30,
1999 and has not yet determined the manner in which comprehensive income will
be presented.
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since its inception, the Company has been in the development stage and engaged
in research and product development, conducted principally on its own behalf,
but also in connection with various collaborative research and development
agreements with other entities. The Company does not expect to generate positive
cash flows from operations for at least the next several years and, until
product sales commence, the Company expects that its revenue sources will
continue to be limited to grant revenue, research funding and milestone payments
and licensing fees from potential future corporate collaborators. The timing and
amount of such future cash payments and revenues, if any, will be subject to
significant fluctuations, based in part on the success of the Company's research
activities, the receipt of necessary regulatory approvals, the timing of the
achievement of certain other milestones and the extent to which associated costs
are reimbursed under grant or other arrangements. Substantially all of the
Company's revenues from product sales, if any, will be subject to the Company's
obligation to make aggregate royalty payments of up to 5% to certain licensors
of its technology. Further, under the Company's Distribution Agreement with Cobe
BCT, Inc. (collectively with Cobe Laboratories, Inc., "Cobe"), Cobe will perform
marketing and distribution activities and in exchange will receive approximately
38% to 42% of the Company's product sales in the area of stem cell therapy,
subject to negotiated discounts and volume-based adjustments. Research and
development expenses may fluctuate due to the timing of expenditures for the
varying stages of the Company's research and clinical development programs.
Research and development expenses will increase as product development programs
and applications of the Company's products progress through research and
development stages and the Company expects these expenses to continue to
increase until these programs are completed. Under the Company's License
Agreement with Immunex, annual renewal fees of $1,000,000 are payable in March
of each of the next three years. Under the Company's Distribution Agreement with
Cobe, regulatory approval activities for the Company's products for stem cell
therapies outside of the United States will be conducted, and paid for, by Cobe.
As a result of these and other factors, the Company's results of operations have
fluctuated and are expected to continue to fluctuate significantly from year to
year and from quarter to quarter and therefore may not be comparable to or
indicative of the results of operations for any future periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In the
near term, the Company plans additional moderate growth in employee headcount
necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs, quality systems and
administration. Assuming capital is available to finance such growth, the
Company's operating expenses will continue to increase as a result. At least
until such time as the Company enters into arrangements providing research and
development funding or initiates product sales, the net loss will continue to
increase as well. The Company has never been profitable and does not anticipate
having net income for at least the next several years. Through December 31,
1997, the Company had an
Page 9
accumulated deficit of $49,394,000. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis, if at all.
This report contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under this caption, as well as those discussed under the caption
"Certain Business Considerations" and in the Company's Annual Report on Form 10-
K, as amended.
RESULTS OF OPERATIONS
Three and six months ended December 31, 1997 and 1996
Revenues for the quarter ended December 31, 1997, consisting primarily of grant
funding, increased to $49,000 from $29,000 for the same period in 1996.
Revenues for the six months ended December 31, 1997 decreased to $65,000
compared to $253,000 for the same period in 1996, reflecting the completion of a
research collaboration in September 1996. Grant revenues increased in 1997,
reflecting the timing of grant awards and related research activities, to the
extent that such associated costs are reimbursed under the grants.
Costs and expenses increased to $4,671,000 for the quarter ended December 31,
1997 from $2,989,000 for the same period in 1996, and increased to $8,527,000
for the six months ended December 31, 1997 compared to $6,601,000 for the same
period in 1996. The increases in costs and expenses in 1997 were principally
the result of an increase in research and development expense to $3,788,000 and
$7,031,000 for the quarter and six months ended December 31, 1997, respectively,
from $2,550,000 and $5,710,000 for the same periods in 1996. These increases
relate primarily to increased development activities for the Aastrom Cell
Production System (CPS) during 1997. General and administrative expenses
increased to $883,000 and $1,496,000 for the quarter and six months ended
December 31, 1997, respectively, from $439,000 and $891,000 for the same periods
in 1996, reflecting increased activities associated with the Company's efforts
to develop additional business opportunities for the Aastrom CPS in other
emerging cell therapies.
Interest income was $216,000 for the quarter ended December 31, 1997, compared
to $79,000 for the same period in 1996, and was $436,000 for the six months
ended December 31, 1997, compared to $205,000 for the same period in 1996.
These changes primarily reflect a fluctuation in the levels of cash, cash
equivalents and short-term investments during the periods.
The net loss for the quarter ended December 31, 1997 was $4,408,000, or $.59 per
common share, compared to a net loss of $2,889,000, or $.29 per common share,
for the same period in 1996. The net loss for the six months ended December 31,
1997 was $8,033,000, or $.87 per common share compared, to $6,162,000, or $.61
per common share, for the same period in 1996. The computations of net loss per
common share in 1997 include an adjustment for dividends paid on the Preferred
Stock and reflect a one-time charge of $3,439,000 related to the sale of the
Preferred Stock. The one-time charge and dividends affect only the computation
of net loss per common share and are not included in the net loss for the
periods.
Page 10
Liquidity and capital resources
The Company has financed its operations since Inception primarily through public
and private sales of its equity securities, which from Inception through
December 31, 1997, have totaled approximately $67,922,000 and, to a lesser
degree, through grant funding, payments received under research agreements and
collaborations, interest earned on cash, cash equivalents, and short-term
investments, and funding under equipment leasing agreements. These financing
sources have historically allowed the Company to maintain adequate levels of
cash and other liquid investments.
The Company's combined cash, cash equivalents and short-term investments totaled
$19,781,000 at December 31, 1997, an increase of $2,774,000 from June 30, 1997.
In December 1997, the Company completed the sale of 2,200,000 shares of 5.5%
Convertible Preferred Stock that generated net proceeds to the Company of
approximately $9,930,000. The primary uses of cash, cash equivalents and short-
term investments during the six months ended December 31, 1997, included
$7,017,000 to finance the Company's operations and working capital requirements,
$89,000 in capital equipment additions and $88,000 in scheduled debt payments.
The Company plans to continue its policy of investing excess funds in short-
term, investment-grade, interest-bearing instruments.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments and the cost of product
commercialization. The Company does not expect to generate a positive cash flow
from operations for at least the next several years, due to the expected
increase in spending for research and development programs and the expected cost
of commercializing its product candidates. The Company intends to seek
additional funding through research and development agreements with suitable
corporate collaborators, grants and through public or private financing
transactions. The Company expects that its primary sources of capital for the
foreseeable future will be through collaborative arrangements and through the
public or private sale of its debt or equity securities. There can be no
assurance that such collaborative arrangements, or any public or private
financing, will be available on acceptable terms, if at all, or can be
sustained. Several factors will affect the Company's ability to raise additional
funding, including, but not limited to, market volatility of the Company's stock
and economic conditions affecting the public markets generally or some portion,
or all, of the technology sector. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its research and development programs, which may have a material adverse
effect on the Company's business, financial condition and results of operations.
Page 11
CERTAIN BUSINESS CONSIDERATIONS
Commercialization of the Company's technology and product candidates, including
its lead product candidate, the Aastrom/tm/ CPS, will require substantial
additional research and development by the Company as well as substantial
clinical trials. There can be no assurance that the Company will successfully
complete development of the Aastrom/tm/ CPS or its other product candidates, or
successfully market its technologies or product candidates, which lack of
success would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company or its collaborators
may encounter problems or delays relating to research and development, market
development, clinical trials, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. The Company's
product development efforts are primarily directed toward obtaining regulatory
approval to market the Aastrom/tm/ CPS as an alternative to currently used stem
cell collection methods. These existing stem cell collection methods have been
widely practiced for a number of years, and there can be no assurance that any
of the Company's technologies or product candidates will be accepted by the
marketplace as readily as these or other competing processes and methodologies,
or at all.
The approval of the United States Food and Drug Administration ("FDA") will be
required before any commercial sales of the Company's product candidates for
stem cell therapy may commence in the United States, and approvals from foreign
regulatory authorities will be required before international sales may commence.
The Company is currently conducting pre-pivotal clinical trials to demonstrate
the safety and biological activity of patient-derived cells or umbilical cord
blood cells produced in the Aastrom/tm/ CPS in a limited number of patients. If
the results from these pre-pivotal trials are successful, the Company intends to
seek clearance from the FDA to commence one or more pivotal clinical trials. The
patients enrolled in these pre-pivotal trials and future trials will have
undergone extensive chemotherapy or radiation therapy treatments prior to
infusion of cells produced in the Aastrom/tm/ CPS. Such treatments will have
substantially weakened these patients and may have irreparably damaged their
hematopoietic systems. Due to these and other factors, it is possible that these
patients may die or suffer severe complications during the course of the current
pre-pivotal trials or future trials. For example, in the trials to date,
patients who have been in the transplant recovery process have died from
complications related to the patient's clinical condition that, according to the
physicians involved, were unrelated to the Aastrom/TM/ CPS procedure. The
Company may experience delays in patient accruals in its current pre-pivotal
clinical trials or in future clinical trials, which could result in increased
costs associated with the clinical trials or delays in receiving regulatory
approvals and commercialization, if any. The results of preclinical studies and
early clinical trials of the Company's product candidates may not necessarily be
indicative of results that will be obtained from subsequent or more extensive
clinical trials. Further, there can be no assurance that pre-pivotal or pivotal
clinical trials of any of the Company's product candidates will demonstrate the
safety, reliability and efficacy of such products, or of the cells produced in
such products, to the extent necessary to obtain required regulatory approvals
or market acceptance. There can be no assurance that, even after the
expenditures of substantial time and financial resources, regulatory approval
will be obtained for any products developed by the Company.
Page 12
The Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so for the foreseeable future. There can
be no assurance that the Company's supply of such key cytokines, components and
other materials will not become limited, be interrupted or become restricted to
certain geographic regions. There can also be no assurance that the Company
will be able to obtain alternative components and materials from other
manufacturers of acceptable quality, or on terms or in quantities acceptable to
the Company, if at all. Additionally, there can be no assurance that the
Company will not require additional cytokines, components and other materials to
manufacture, use or market its product candidates, or that necessary key
components will be available for use by the Company in the markets where it
intends to sell its products. In the event that any of the Company's key
manufacturers or suppliers fail to perform their respective obligations or the
Company's supply of such cytokines, components or other materials becomes
limited or interrupted, the Company would not be able to market its product
candidates on a timely and cost-competitive basis, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Certain of the compounds used by the Company in its
current stem cell expansion process involve the use of animal derived products.
The availability of these compounds for clinical and commercial use may become
limited by suppliers or restricted by regulatory authorities, which may impose a
potential competitive disadvantage for the Company's products compared to
competing products and procedures. There can be no assurance that the Company
will not experience delays or disadvantages related to the future availability
of such materials. In order for the Company to market its products in Europe,
it must obtain a CE Mark from a Notified Body to certify that the Company and
its operations comply with certain minimum quality standards and compliance
procedures, or, alternatively, that its manufactured products meet a more
limited set of requirements. There can be no assurance that the Company and its
suppliers will be able to meet these minimum requirements, or, if met, that the
Company and its suppliers will be able to maintain such compliance, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is a development stage company and there can be no assurance that
its product candidates for cell therapy will be successful. The Company has not
yet completed the development and clinical trials of any of its product
candidates and, accordingly, has not yet begun to generate revenues from the
commercialization of any of its product candidates. The Company expects to
incur significant and increasing operating losses for at least the next several
years, primarily owing to the expansion of its research and development
programs, including preclinical studies and clinical trials. The development of
the Company's products will require the Company to raise substantial additional
funds or to seek collaborative partners, or both, to finance related research
and development activities. Because of the Company's potential long-term
funding requirements, it may attempt to access the public or private equity
markets if and whenever conditions are favorable, even if it does not have an
immediate need for additional capital at that time. There can be no assurance
that any such additional funding will be available to the Company on reasonable
terms, or at all. Several factors will affect the Company's ability to raise
necessary additional funding, including market volatility of the Company's stock
and economic conditions affecting the public markets generally or some portion
or all of the technology sector. If adequate funds are not available, the
Company may be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities.
Page 13
The Company has established a strategic alliance with Cobe for the worldwide
distribution of the Aastrom/tm/ CPS for stem cell therapy. Cobe has the right to
terminate its Distribution Agreement with the Company upon twelve months' notice
if Cobe determines that commercialization of the Aastrom/tm/ CPS for stem cell
therapy on or prior to December 31, 1998 is unlikely, or upon a change of
control of the Company, other than to Cobe. There can be no assurance that Cobe
will pursue the marketing and distribution of the Company's products, continue
to perform its obligations under its agreements with the Company or that the
Company's strategic alliance with Cobe will result in the successful
commercialization and distribution of the Company's technologies and product
candidates. There can also be no assurance that Cobe will be successful in its
efforts to market and distribute the Company's products for stem cell therapy.
These business considerations, and others, are discussed in more detail and
should be read in conjunction with the Business Risks and Risk Factors discussed
in the Company's Annual Report on Form 10-K, as amended, and the Company's
Registration Statement on Form S-1 (File No. 333-37439) declared effective in
November 1997.
Page 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(b) On December 2, 1997, the Company issued 2,200,000 shares of its 5.5%
Convertible Preferred Stock ("Preferred Stock") in a registered direct
placement at a price of $5.00 per share.
Dividends on the Preferred Stock are cumulative, accrue on a quarterly
basis (on the last day of March, June, September and December of each year)
at an annual rate of $.275 per share and are payable within 30 days of each
accrual date. The payment of such dividends shall be senior in priority to
dividends on the Common Stock and shall be on at least a pari passu basis
with any other series of preferred stock of the Company. At the Company's
option, the Company may pay dividends in either cash or shares of Common
Stock, valued on the basis of the then current market price of such shares.
In December 1997, the Company elected to issue 7,103 shares of Common Stock
valued at approximately $47,000 in payment of this dividend. Such shares
have not been issued pursuant to a registration statement.
The Preferred Stock is convertible into Common Stock at the option of the
holder, and each share of Preferred Stock will automatically convert into
Common Stock if, at any time after December 2, 1999, the closing bid price
of the Common Stock exceeds $10.00 per share for twenty consecutive trading
days. The Preferred Stock will also automatically convert into Common Stock
in the event that less than 500,000 shares of Preferred Stock remain
outstanding or upon a merger in which the Company or its shareholders
receive consideration of at least $10.00 per share and either the Company
is not the surviving entity or the holders of the Company's voting
securities before the transaction own less than 50% of the voting
securities of the combined entity. Each share of Preferred Stock is
convertible into one share of Common Stock, subject to adjustment for stock
splits, dividends, reclassifications and similar events. In addition, with
certain exceptions relating to issuances of securities under stock option
or employee stock purchase plans, pursuant to existing contractual
obligations, in connection with acquisitions of other companies or in
connection with strategic alliances, the conversion price of the Preferred
Stock is subject to adjustment, pursuant to a weighted average anti-
dilution formula, in the event that the Company shall issue shares of
Common Stock, or securities convertible into or exchangeable or exercisable
for shares of Common Stock, or rights to acquire shares of Common Stock,
for consideration of less than $5.00 per share of Common Stock. The holders
of the Preferred Stock are entitled to a liquidation preference of $5.00
per share, plus accrued but unpaid dividends. The payment of such
liquidation preference shall be senior in priority to any payment with
respect to the Common Stock and shall be on at least a pari passu basis
with any other series of preferred stock of the Company. There are no
redemption or sinking fund provisions applicable to the Preferred Stock.
The Preferred Stock is voted together with the Common Stock at any annual
or special meeting of the shareholders of the Company, and each share of
Preferred Stock has voting rights equal to the voting rights of that number
of shares of Common Stock into which such share of Preferred Stock is then
convertible. Except as required by law or in connection with any amendment
to
Page 15
the liquidation preference or other rights of the Preferred Stock, the
shares of Preferred Stock shall not vote as a separate class on any matter
submitted for shareholder approval.
The Board of Directors of the Company is authorized, without further
shareholder approval, to issue up to an additional 2,800,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted or imposed upon any unissued shares of
preferred stock and to fix the number of shares constituting any series and
the designations of such series. The issuance of preferred stock may have
the effect of delaying or preventing a change in control of the Company.
The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the
holders of the Common Stock. In certain circumstances, such issuance could
have the effect of decreasing the market price of the Common Stock. The
Company currently has no plans to issue any additional shares of preferred
stock.
(d) The Company completed its initial public offering of securities pursuant to
a Registration Statement (File No. 333-15415) that was declared effective
on February 3, 1997. Through December 31, 1997, the net offering proceeds
have been applied in the following approximate amounts to the following
categories.
Amount of direct
or indirect
payments
to directors,
officers,
general partners
or ten percent Amount of
shareholders or payments to
affiliates others
------------------ --------------
Construction of plant, buildings
and facilities $ - $ -
Purchase and installation of
machinery and equipment - -
Purchase of real estate - -
Acquisition of other business(es) - -
Repayment of indebtedness - 155,000
Working capital and general
corporate uses 91,000 2,330,000
Temporary investment - -
Product/clinical development - 10,329,000
Research and development - 3,267,000
--------------- ------------
Total $ 91,000 $ 16,081,000
=============== ============
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of Aastrom Biosciences, Inc. was
held on November 12, 1997.
Page 16
(c) At the 1997 Annual Meeting of Shareholders, votes were cast on matters
submitted to the shareholders, as follows:
In the election of two Class III Directors with three-year terms
ending at the 2000 Annual Meeting of Shareholders.
NOMINEE IN FAVOR WITHHELD
-------------------- ---------- --------
R. Douglas Armstrong 12,290,979 17,405
Horst R. Witzel 12,290,404 17,980
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the period.
Page 17
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.
AASTROM BIOSCIENCES, INC.
Date: February 5, 1998 /s/ R. Douglas Armstrong
------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 1998 /s/ Todd E. Simpson
-------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18
EXHIBIT INDEX
Exhibit No. Description of Document
- -------------- --------------------------------------------------------
3.1* Restated Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
3.3*** Certificate of Designation of 5.5% Convertible Preferred
Stock.
4.1** Amended and Restated Investors' Rights Agreement dated
April 7, 1992.
4.2*** Amendment to Amended and Restated Investors' Rights
Agreement, dated April 22, 1997.
10.1*** Strategic Planning Consulting Services and Collaboration
Agreement, dated October 7, 1997, between the Company
and Burrill & Company, LLC.
10.2*** Employment Agreement, dated October 24, 1997, between
the Company and Bruce W. Husel.
10.3 5.5% Convertible Preferred Stock Purchase Agreement,
dated November 25, 1997, between the Company and the
purchasers set forth therein.
27.1 Financial Data Schedule.
- --------------
* Incorporated by reference to the Coimpany's Report on
Form 10-Q for the quarter ended December 31, 1996, as
filed on March 7, 1997.
** Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-15415), declared
effective on February 3, 1997.
*** Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-37439), declared
effective on November 25, 1997.