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, 2000, 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 offices) (Zip code)
(734) 930-5555
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(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 33,843,388
(Class) Outstanding at February 9, 2001
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
December 31, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Consolidated Condensed Balance Sheets as of June 30, 2000 and December 31, 2000 3
b) Consolidated Condensed Statements of Operations for the three and six months ended December 31, 4
1999 and 2000 and for the period from March 24, 1989 (Inception) to December 31, 2000
c) Consolidated Condensed Statements of Cash Flows for the six months ended December 31, 1999 and 5
2000 and for the period from March 24, 1989 (Inception) to December 31, 2000
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2000 2000
------------ ------------
Assets (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,064,000 $ 2,926,000
Short-term investments 10,681,000 6,998,000
Receivables 242,000 172,000
Prepaid expenses and other 158,000 977,000
------------ ------------
Total current assets 13,145,000 11,073,000
PROPERTY, NET 292,000 213,000
------------ ------------
Total assets 13,437,000 $ 11,286,000
------------ ------------
Liabilities and Shareholders' Equity
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 837,000 $ 685,000
Accrued employee expenses 165,000 109,000
------------- ------------
Total current liabilities 1,002,000 794,000
------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value; shares
authorized - 60,000,000; shares issued
and outstanding - 33,607,659 and
33,843,388, respectively 92,367,000 92,726,000
Deficit accumulated during the development stage (79,932,000) (82,254,000)
Accumulated other comprehensive income - 20,000
------------- ------------
Total shareholders' equity 12,435,000 10,492,000
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Total liabilities and shareholders' equity $ 13,437,000 $ 11,286,000
============= ============
The accompanying notes are an integral part of these financial statements.
3
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
March 24, 1989
Three months ended Six months ended (Inception) to
December 31, December 31, December 31,
------------------------- --------------------------
1999 2000 1999 2000 2000
----------- ----------- ----------- ----------- -----------
REVENUES:
Product sales and rentals $ 55,000 $ 85,000 $ 169,000 85,000 $ 288,000
Grants 349,000 210,000 620,000 377,000 4,594,000
Research and development agreements - - - - 2,020,000
----------- ----------- ----------- ----------- -----------
Total revenues 404,000 295,000 789,000 462,000 6,902,000
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of product sales and rentals 21,000 13,000 1,251,000 13,000 1,270,000
Research and development 1,869,000 965,000 3,479,000 1,985,000 73,075,000
Selling, general and administrative 698,000 411,000 1,859,000 1,173,000 19,273,000
----------- ----------- ----------- ----------- -----------
Total costs and expenses 2,588,000 1,389,000 6,589,000 3,171,000 93,618,000
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,184,000) (1,094,000) (5,800,000) (2,709,000) (86,716,000)
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income - - - - 1,237,000
Interest income 58,000 178,000 139,000 387,000 4,460,000
Interest expense - - - - (267,000)
----------- ----------- ----------- ----------- -----------
Other income 58,000 178,000 139,000 387,000 5,430,000
----------- ----------- ----------- ----------- -----------
NET LOSS $(2,126,000) $ (916,000) $(5,661,000) $(2,322,000) $(81,286,000)
=========== =========== =========== =========== ============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss $(2,126,000) $ (916,000) $(5,661,000) $(2,322,000)
Dividends and yields on preferred stock (92,000) - (188,000) -
------------ ----------- ----------- -----------
Net loss applicable to common shares $(2,218,000) $ (916,000) $(5,849,000) $(2,322,000)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE (Basic
and Diluted) $ (.12) $ (.03) $ (.34) $ (.07)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 17,782,000 33,843,000 17,383,000 33,759,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
March 24, 1989
Six months ended (Inception) to
December 31, December 31,
----------------------------
1999 2000 2000
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss $(5,661,000) $(2,322,000) $(81,286,000)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 245,000 101,000 3,131,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on investments - (47,000) (521,000)
Stock compensation expense 5,000 120,000 664,000
Write down of inventory - - 1,027,000
Stock issue pursuant to license agreement - - 3,300,000
Changes in assets and liabilities:
Receivables (27,000) 70,000 (196,000)
Inventory 1,103,000 - (1,027,000)
Prepaid expenses (65,000) (819,000) (977,000)
Accounts payable and accrued expenses 299,000 (152,000) 685,000
Accrued employee expenses 231,000 (56,000) 109,000
----------- ----------- ------------
Net cash used for operating activities (3,870,000) (3,105,000) (74,981,000)
----------- ----------- ------------
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments - (1,500,000) (56,624,000)
Maturities of short-term investments - 5,250,000 50,167,000
Capital purchases (127,000) (22,000) (2,607,000)
Proceeds from sale of property held for resale - - 400,000
----------- ----------- ------------
Net cash provided by (used for) investing activities (127,000) 3,728,000 (8,737,000)
----------- ----------- ------------
FINANCING ACTIVITIES:
Issuance of preferred stock - - 51,647,000
Issuance of common stock 19,000 239,000 32,689,000
Repurchase of common stock - - (49,000)
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations - - (1,174,000)
----------- ----------- ------------
Net cash provided by financing activities 19,000 239,000 86,644,000
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,978,000) 862,000 2,926,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,528,000 2,064,000 -
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,550,000 $ 2,926,000 $ 2,926,000
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
5
AASTROM BIOSCIENCES, INC.
(A development stage company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989
(Inception), began employee-based operations in 1991, and is in the
development stage. We operate our business in one reportable segment -
research and product development, conducted both on our own behalf and in
connection with various collaborative research and development agreements
with others, involving the development and sale of processes and products for
the ex vivo production of human cells for use in cell and ex vivo gene
therapy.
Successful future operations are subject to several technical and business
risks, including our ability to obtain future funding, satisfactory product
development, obtaining regulatory approval and market acceptance for our
products.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by us 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 in the United States have been
omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all 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, 2000, are not necessarily indicative of the results to be
expected for the full year or for any other period.
The consolidated financial statements include the accounts of Aastrom and its
wholly-owned subsidiary, Zellera AG ("Zellera"), which is located in Berlin,
Germany (collectively, the "Company"). All significant inter-company
transactions and accounts have been eliminated in consolidation. As of
December 31, 2000, Zellera has only limited operations and is not a
significant component of the consolidated financial statements.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in our Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission.
3. Shareholders Equity
Accumulated Other Comprehensive Income in the accompanying consolidated
condensed balance sheets consist of unrealized gains on securities that are
available for sale. For the six-month period ended December 31, 2000, other
comprehensive income was $20,000.
6
Research and Development Expense for the six months ended December 31, 2000
include non-cash charges totaling $120,000 relating to certain stock options
awarded in December 1999 that are accounted for as variable stock options.
The resulting charges, or credits, to expense are based on the market price
of our common stock at the end of each quarter. Research and Development and
Selling, General and Administrative Expenses for the quarter ended December
31, 2000 include a non-cash credit totaling $228,000 relating to these stock
options.
4. Net Loss Per Common Share
Net loss per common share is computed using the weighted-average number of
common 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. The computations of net loss per common share for the
periods ended December 31, 1999 reflect dividends and yields on outstanding
preferred stock which affect only the computation of net loss per common
share and are not included in the computation of net loss for the period.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview of Aastrom
- -------------------
We are developing proprietary process technologies and devices intended for
a broad range of cell therapy applications. Our lead product under development
is the AastromReplicell(TM) System, which consists of a clinical cell culture
system that operates single-use therapy kits tailored for patient therapy in the
emerging cell therapy market. We are currently developing our SC-I Therapy Kit,
CB-I Therapy Kit and CB-II Therapy Kit for use in stem cell therapy to restore
blood and immune system function to cancer patients following chemotherapy or
radiation therapy. We believe that the AastromReplicell(TM) System may offer
significant advantages over traditional stem cell collection methods in settings
where it is difficult to obtain the desired quantity of cells for transplant.
We are developing the DC-I Therapy Kit for the clinical-scale production of
dendritic cells. Dendritic cells are a type of blood cell that have the ability
to stimulate an immune response against specific targets, and are being widely
pursued as a new potential treatment for cancer and viral diseases. We intend
to make the DC-I Therapy Kit available to clinical researchers and centers that
are developing dendritic cell-based vaccines designed to treat cancer and other
disorders. We have also recently initiated a development program for an
AastromReplicell(TM) System therapy kit for the production of bone-forming
cells. The new OC-I Therapy Kit is intended for the treatment of patients with
degenerative bone diseases such as osteoporosis. Recently, we initiated our
first Phase I/II-Pilot clinical study for the OC-I Therapy Kit in patients with
severe osteoporosis.
Our Product Pipeline
- --------------------
Our business model builds on two components: (i) proprietary procedures and
devices to enable certain types of stem cells and other types of human cells to
be produced with superior biological capabilities as compared with standard cell
culture approaches, and (ii) the AastromReplicell(TM) System clinical platform
that is designed to standardize and enable an effective commercialization
pathway for bringing therapeutic cell production to medical practice. The
product configuration of the AastromReplicell(TM) System consists of an
instrumentation platform, to be integrated within the hospital or other
centralized facility, that can operate a variety of single-use therapy kits that
are specific to the desired medical application. This is intended to provide a
product pathway for each cell therapy that is similar to a pharmaceutical
product including regulatory approval, reimbursement, marketing and pricing. We
believe that the product design of the AastromReplicell(TM) System will allow us
to develop additional cell therapy kits to provide product standardization for a
number of emerging cell therapies being developed by other researchers.
Although we may not market the AastromReplicell(TM) System in the United States
for stem cell therapy unless and until approval is obtained from the U.S. Food
and Drug Administration (FDA), production-level versions of the
AastromReplicell(TM) System have been completed and we
8
have obtained permission to affix the CE Mark to such versions. CE Mark approval
allows for marketing of the product in Europe. We may also market the
AastromReplicell(TM) System in the U.S. for research and investigational use and
we are developing our marketing plan to establish relationships with leading
sites, initially in Europe, to build a customer foundation for the
AastromReplicell(TM) System.
Since our inception, we have been in the development stage and engaged in
research and product development, conducted principally on our own behalf, but
also in connection with various collaborative research and development
agreements with others. We commenced our initial European pilot-scale product
launch of the AastromReplicell(TM) System in April 1999, but subsequently had to
suspend those activities in October 1999 pending the receipt of additional
financing. We do not expect to generate positive cash flows until more
significant product sales commence, which could take several years. Until that
time, we expect that our revenues will be limited to grant revenue and research
funding, 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 our 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. A portion of our revenues from product sales will be subject to
our obligation to make aggregate royalty payments of up to 2% to certain
licensors of our technology. Research and development expenses may fluctuate
due to the timing of expenditures for the varying stages of our research,
product development and clinical development programs and the availability of
resources. Generally, product development expenses have decreased as we have
transitioned from prototype-versions to production-level versions of the
AastromReplicell(TM) System. Operating expenses have also decreased over the
past year as a result of cost reduction efforts that we have implemented.
Clinical development costs are expected to increase as we conduct our U.S.
clinical trials, successful completion of which are necessary to submit for
regulatory approvals to market our products in the U.S. and research and
development costs are expect to increase in support of expanded product
development activities. Similarly, marketing and other general and
administrative expenses are expected to increase in support of European
marketing activities as they resume. Under our license agreement with Immunex,
the $1,000,000 annual renewal fees due in March 1998, 1999 and 2000 were each
paid through the issuance of $1,100,000 of our common stock. As a result of
these and other factors, our 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.
The scope and size of our operations has been tied to the availability of
capital and other resources. For example, in October 1999, we were forced to
implement significant cost reduction measures while we pursued corporate
partnering activities, including merger or acquisition transactions, and sought
additional capital. We completed the sale of equity securities in February 2000
and June 2000, providing aggregate net proceeds of $11,800,000 that allowed us
to resume certain activities. With this funding, we have recommenced our U.S.
clinical development program, and we are restoring production manufacturing
capabilities and pilot-scale
9
marketing activities in Europe with targeted medical centers. We need to obtain
additional financing and we continue to pursue our financing options.
In order for us to resume more expanded operations, we will need to hire more
personnel to address requirements in the areas of product and customer support,
research, clinical and regulatory affairs, quality systems, sales and marketing
and administration. Our operating expenses are expected to increase as a result.
At least until such time as we enter into arrangements providing research and
development funding or achieve significantly larger levels of product sales, we
will continue to incur net operating losses. As a development-stage company,
we have never been profitable and we do not anticipate having net income unless
and until significant product sales commence, which is unlikely to occur until
we obtain significant additional funding. Through December 31, 2000, our
accumulated losses total $81.3 million. There can be no assurance that we will
be able to achieve profitability on a sustained basis, if at all, obtain the
required funding, or complete a corporate partnering or acquisition transaction.
RESULTS OF OPERATIONS
Revenues for the quarter and six-month period ended December 31, 2000 were
$295,000 and $462,000, respectively, compared to $404,000 and $789,000 for the
same periods in 1999. Revenues consist primarily of grant funding and decreased
to $210,000 and $377,000 for the quarter and six months ended December 31, 2000,
from $349,000 and $620,000 for the same periods in 1999. The decreases in grant
revenues reflect decreases in overall costs and expenses for the periods ended
December 31, 2000, including grant funded activities, as a result of cost
reduction measures that had been implemented in late 1999.
Costs and expenses for the quarter ended December 31, 2000 decreased to
$1,389,000, compared to $2,588,000 in 1999. This decrease includes a reduction
in research and development expense to $965,000 for the quarter ended December
31, 2000, from $1,869,000 for the same period in 1999, and a reduction in
selling, general and administrative expenses to $411,000 from $698,000. Costs
and expenses for the six months ended December 31, 2000 decreased to $3,171,000,
compared to $6,589,000 in 1999. This decrease includes a reduction in research
and development expense to $1,985,000 for the six months ended December 31,
2000, from $3,479,000 for the same period in 1999, and a reduction in selling,
general and administrative expenses to $1,173,000 from $1,859,000. These planned
decreases were the result of general expense reductions previously implemented
to control expenditures, and included reductions in research activities, as well
as European sales and marketing activities, while additional funding was being
obtained. With the completion of additional funding during calendar year 2000,
and the potential additional funding being pursued, we expect to increase the
scope of our marketing activities, particularly with respect to Europe. Cost of
product sales and rentals for the six months ended December 31, 1999 included a
charge of $1,142,000 relating to the write down of AastromReplicell(TM) System
inventory. Expenses for the six months ended December 31, 2000 include non-cash
charges totaling $120,000 relating to certain stock options awarded in December
1999 that are accounted for as variable stock options. These stock options
require charges, or credits, to expense based on the market price of our common
stock at the end of each
10
quarter. Expenses for the quarter ended December 31, 2000 include a non-cash
credit of $228,000 relating to these stock options.
Interest income was $139,000 and $387,000 for the quarter and six months ended
December 31, 2000, respectively, compared to $58,000 and $178,000 for the same
periods in 1999. These increases correspond to increased levels of invested
cash and cash equivalents following the completion of equity financings in
February and June of 2000.
The net loss for the quarter ended December 31, 2000 was $916,000, or $.03 per
common share, compared to a net loss of $2,126,000, or $.12 per common share for
the same period in 1999. The net loss for the six months ended December 31,
2000 was $2,322,000, or $.07 per common share compared to $5,661,000, or $.34
per common share in 1999. These decreases are primarily the result of decreased
costs and expenses and increased interest income in 2000 and an increase in the
weighted average number of common shares outstanding that resulted from the
conversion of previously outstanding convertible preferred stock. The
computations of net loss per common share for the periods ended December 31,
1999 include adjustment for dividends and yields on outstanding preferred stock.
These adjustments affect only the computation of net loss per common share and
are not included in the net loss for the period.
11
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through public and
private sales of equity securities, which, from inception through December 31,
2000, have totaled approximately $93 million and, to a lesser degree, through
grant funding, payments received under research agreements and collaborations
and interest earned on cash, cash equivalents, and short-term investments.
Our combined cash, cash equivalents and short-term investments totaled
$9,924,000 at December 31, 2000, a decrease of $2,821,000 from June 30, 2000.
The primary uses of cash, cash equivalents and short-term investments during the
six months ended December 31, 2000 included $3,058,000 to finance our operations
and working capital requirements. The primary sources of cash, cash equivalents
and short-term investments was from the exercise of stock options that totaled
$239,000 during the period.
Our future cash requirements will depend on many factors, including continued
scientific progress in our 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. We do not expect to generate a positive cash flow until more
significant product sales commence, which could take several years. We intend
to seek additional funding through research and development, or distribution and
marketing, agreements with suitable corporate collaborators, grants and through
public or private financing transactions. Successful future operations are
subject to several technical and business risks, including our continued ability
to obtain future funding, satisfactory product development, obtaining regulatory
approval and market acceptance for our products. Based on current funding and
anticipated operating activities, we expect that our available cash will be
sufficient to finance currently planned activities through the end of fiscal
year 2001. This estimate is a forward-looking statement based on certain
assumptions which could be negatively impacted by the matters discussed under
this heading and under the caption "Business Risks" in our Annual Report on Form
10-K. We are pursuing additional sources of financing. If we cannot obtain
additional funding prior to our current cash reserves being depleted, we will be
forced to make substantial reductions in the scope and size of our operations,
and may be forced to curtail activities. In order to grow and expand our
business, and to develop and introduce our product candidates into the
marketplace, we will need to raise additional funds. We will also need
additional funds or a collaborative partner, or both, to finance the research
and development activities of our product candidates for the expansion of
additional cell types. We expect that our primary sources of capital for the
foreseeable future will be through collaborative arrangements and through the
public or private sale of our 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 our ability to raise additional funding,
including, but not limited to, market volatility of our common stock and
economic conditions affecting the public markets generally or some portion or
all of the technology sector. If adequate funds are not available, we may be
required to delay, reduce the scope of, or eliminate one or more of our research
and development programs, which may have a material
12
adverse effect on our business. See "Business Risks" and Notes to Consolidated
Financial Statements in our 2000 Annual Report on Form 10-K and Notes to
Consolidated Financial Statements included herein.
13
Certain Business Considerations
History of Operating Losses/Need for Additional Capital
We will require substantial capital resources in order to conduct our operations
and develop our products. In October 1999, we were forced to reduce operations
based on our declining level of capital resources and our limited financing
alternatives available at that time. Although we have resumed certain operating
activities, the previous reduction in our operating activities has negatively
affected our ability to manufacture and develop our products and has delayed our
product development programs. Based on current funding and anticipated
operating activities, we expect that our available cash and expected interest
income will be sufficient to finance our current activities through the end of
fiscal year 2001. This is a forward-looking statement and could be negatively
affected by funding limitations, the implementation of additional research and
development programs and other factors discussed under this heading. We are
currently pursuing additional sources of financing. If we cannot obtain
additional funding prior to that time, we will be forced to make substantial
reductions in the scope and size of our operations, and may be forced to curtail
activities. In order to grow and expand our business, and to develop and
introduce our product candidates into the marketplace, we will need to raise
additional funds. We will also need additional funds or a collaborative partner,
or both, to finance the research and development activities of our new product
candidates for the production of additional cell types.
Product Development Setbacks Would Hurt Our Ability to Raise Needed Capital
Commercialization in the U.S. of our lead product candidate, the
AastromReplicell(TM) System, will require additional research and development as
well as substantial clinical trials. While we have commenced initial marketing
on a limited pilot-scale basis of the AastromReplicell(TM) System in Europe, we
believe that the U.S. will be the principal market for our current products. We
may not be able to successfully complete development of the AastromReplicell(TM)
System or our other product candidates, or successfully market our technologies
or product candidates. We, and any of our potential collaborators, may
encounter problems and delays relating to research and development, regulatory
approval and intellectual property rights of our technologies and product
candidates. Our research and development programs may not be successful, and
our cell culture technologies and product candidates may not facilitate the ex
vivo production of cells with the expected biological activities in humans. Our
technologies and product candidates may not prove to be safe and efficacious in
clinical trials, and we may not obtain the intended regulatory approvals for our
technologies or product candidates and the cells produced in such products. If
any of these events occur, we may not have adequate resources to continue
operations for the period required to resolve the issue delaying
commercialization and we may not be able to raise additional capital to finance
our continued operations during the period required for resolution of that
issue. We cannot be certain that we will be able to raise the required capital
to conduct our operations and develop our products.
14
Uncertainties of Clinical Trials
To be able to market products in the U.S. beyond research and investigational
uses, we must demonstrate, through extensive pre-clinical studies and clinical
trials, the safety and efficacy of our processes and product candidates,
together with the cells produced by such processes in such products, for
application in the treatment of humans. We are currently conducting clinical
trials to demonstrate the safety and biological activity of patient-derived
cells produced in the AastromReplicell(TM) System. Depending on the availability
of resources, we intend to commence at least one additional clinical trial to
demonstrate the safety and biological activity of umbilical cord blood cells
produced in the AastromReplicell(TM) System. If our clinical trials are not
successful, our products may not be marketable.
Our ability to complete our clinical trials in a timely manner depends on many
factors, including the rate of patient enrollment. Patient enrollment can vary
with the size of the patient population, the proximity of suitable patients to
clinical sites, perceptions of the utility of the therapy for the treatment of
certain diseases and the eligibility criteria for the study. We have
experienced delays in patient accruals in our previous and current clinical
trials. If we experience future delays in patient accruals, we could experience
increased costs and delays associated with clinical trials that would impair our
product development programs and our ability to market our products.
Furthermore, the U.S. Food and Drug Administration (FDA) monitors the progress
of clinical trials and it may suspend or terminate clinical trials at any time
due to patient safety or other considerations.
Uncertainty of Regulatory Approval
Except for research and investigational uses, we must obtain the approval of the
FDA before commercial sales of our product candidates may commence in the U.S.,
which we believe will be the principal market for our products. We may also be
required to obtain additional approvals from foreign regulatory authorities to
continue or increase our sales activities in those jurisdictions. If we cannot
demonstrate the safety, reliability and efficacy of our product candidates, or
of the cells produced in such products, we may not be able to obtain required
regulatory approvals. Many of the patients enrolled in our stem cell therapy
clinical trials will have previously undergone extensive treatment which will
have substantially weakened the patients and may have irreparably damaged the
ability of their blood and immune system to recover. Some patients undergoing
the transplant recovery process have died, from causes that were, according to
the physicians involved, unrelated to the AastromReplicell(TM) System procedure,
and it is possible that other patients may die or suffer severe complications
during the course of either the current or future clinical trials. In addition,
patients receiving cells produced with our technologies and product candidates
may not demonstrate long-term engraftment in a manner comparable to cells
obtained from current stem cell therapy procedures. If we cannot demonstrate the
safety or efficacy of our technologies and product candidates, including long-
term sustained engraftment, or if one or more patients die or suffer severe
complications, the FDA or other regulatory authorities could delay or withhold
regulatory approval of our product candidates.
15
Finally, even if we obtain regulatory approval of a product, that approval may
be subject to limitations on the indicated uses for which it may be marketed.
Even after granting regulatory approval, the FDA, other regulatory agencies, and
governments in other countries continue to review and inspect marketed products,
manufacturers and manufacturing facilities. Later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including a withdrawal of the
product from the market. Further, governmental regulatory agencies may establish
additional regulations which could prevent or delay regulatory approval of our
products.
Uncertainty of Market Acceptance of Product Candidates
Our product development efforts are primarily directed toward obtaining
regulatory approval to market the AastromReplicell(TM) System as an alternative
to, or as an improvement for, the bone marrow harvest and peripheral blood
progenitor cell stem cell collection methods. These stem cell collection methods
have been widely practiced for a number of years, and our technologies or
product candidates may not be accepted by the marketplace as readily as these or
other competing processes and methodologies. Additionally, our technologies or
product candidates may not be employed in all potential applications being
investigated, and any limited applications would limit the market acceptance of
our technologies and product candidates and our potential revenues. As a result,
even if we obtain all required regulatory approvals, we cannot be certain that
our products and processes will be adopted at a level that would allow us to
operate profitably.
Dependence on Third Parties for Materials
We rely solely on third parties to manufacture our product candidates and their
component parts. We also rely solely on third party suppliers to provide
necessary key mechanical components, as well as growth factors and other
materials used in the cell expansion process. We would not be able to obtain
alternate sources of supply for many of these items on a short-term basis. In
October 1999, we suspended manufacturing of our products. Although we have
resumed certain operating activities, the previous reduction in our operating
activities has negatively affected our ability to manufacture and develop our
products. Further, if any of our key manufacturers or suppliers fails to
perform their respective obligations, or if our supply of growth factors,
components or other materials is limited or interrupted, we would not be able to
conduct clinical trials or market our product candidates on a timely and cost-
competitive basis, if at all.
Furthermore, some of the compounds used by us in our current stem cell expansion
processes involve the use of animal-derived products. Suppliers or regulatory
authorities may limit or restrict the availability of such compounds for
clinical and commercial use. Any restrictions on these compounds would impose a
potential competitive disadvantage for our products. If we were not able to
develop or obtain alternative compounds, our product development and
commercialization efforts would be harmed.
Finally, we may not be able to continue our present arrangements with our
suppliers, supplement existing relationships, establish new relationships or be
able to identify and obtain the ancillary
16
materials that are necessary to develop our product candidates in the future.
Our dependence upon third parties for the supply and manufacture of these items
could adversely affect our ability to develop and deliver commercially feasible
products on a timely and competitive basis.
Limited Internal Sales and Marketing Capabilities
While we have commenced initial marketing on a limited basis of the
AastromReplicell(TM) System in Europe, we have only limited internal sales,
marketing and distribution capabilities. We intend to market our products
through collaborative relationships with companies for sales, marketing and
distribution capabilities. If we cannot develop and maintain those
relationships, we would have only a limited ability to market, sell and
distribute our products. Even if we are able to enter into such relationships,
they may not succeed or be sustained on a long-term basis, and termination would
require us to develop alternate arrangements at a time when we need sales,
marketing or distribution capabilities to meet existing demand. For example, in
November 1998 Aastrom and COBE BCT terminated a strategic alliance for the
worldwide distribution of the AastromReplicell(TM) System for stem cell therapy
and related uses. We are now seeking to enter into other arrangements relating
to the development and marketing of our product candidates.
Volatility of Our Stock Price May Limit our Ability to Raise Capital
The market price of shares of our common stock has been volatile. The price of
our common stock may continue to fluctuate in response to a number of events and
factors, any of which may cause the price of our shares to fall, and may
adversely affect our business and financing opportunities. In addition, the
stock market in general and the market prices for biotechnology companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance or financial conditions of such companies. These
broad market and industry fluctuations may adversely affect the trading price of
our stock, regardless of our operating performance or prospects.
The exercise price of the warrants that we issued in February 2000 is subject to
reduction in the event the price of our common stock goes down at specified
times in the future or if we issue additional securities at less than the
warrant exercise price. The warrants are currently exercisable for 1,382,816
shares of common stock, at a price of approximately $3.02 per share. This
number of shares could increase to 2,614,386 shares of common stock and the
exercise price could be reduced to as low as $1.60 per share. In connection
with a financing completed in June 2000, we issued a warrant to purchase up to
3,348,915 shares of our common stock at $0.01 per share as a means of providing
the investor with a limited price adjustment in June 2001 if the price of our
common stock decreases. If all shares of common stock issuable under these
warrants are issued, then holders of common stock could experience significant
dilution of their investment.
In addition, sales, or the possibility of sales, of substantial numbers of
shares of common stock in the public market could adversely affect prevailing
market prices of shares of common stock.
17
Our employees hold a significant number of options to purchase shares, many of
which are presently exercisable. Employees may exercise their options and sell
shares shortly after such options become exercisable, particularly if they need
to raise funds to pay for the exercise price of such options or to satisfy tax
liabilities that they may incur in connection with exercising their options.
Additionally, beginning January 1, 2001, COBE BCT will be able to sell all of
its approximately 2.4 million shares of our common stock without restriction.
Nasdaq Listing Requirements
We are required to meet certain financial tests (including, but not limited to,
a minimum bid price of our common stock of $1.00 and $4 million in tangible net
worth) to maintain the listing of our common stock on the Nasdaq National
Market. Within the last year, our common stock price has fallen below the
minimum level for some periods and during other periods our tangible net worth
has been below the amount required. In the future, our stock price or tangible
net worth may fall below the Nasdaq requirements, or we may not comply with
other listing requirements, with the result being that our common stock might be
delisted. If that happened the market price and liquidity of our common stock
would be impaired.
Forward-looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. These forward-looking statements include statements regarding potential
strategic collaborations, future capital needs and funding requirements, product
development plans, clinical trials and market assessments. These statements are
subject to risks and uncertainties, including those set forth in this section,
and actual results could differ materially from those expressed or implied in
these statements. These business considerations, and others, are discussed in
more detail and should be read in conjunction with the Business Risks discussed
in our 2000 Annual Report on Form 10-K. We assume no obligation to update any
such forward-looking statement or reason why actual results might differ.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe that the interest rate risk related to our accounts receivable is not
significant. We manage the risk associated with these accounts through periodic
reviews of the carrying value for non-collectability and establishment of
appropriate allowances in connection with our internal controls and policies. We
do not enter into hedging or derivative instruments.
We are also exposed to interest rate changes principally affecting our
investments in interest rate sensitive instruments. An analysis of the impact
on our interest rate sensitive financial instruments of a hypothetical 10%
change in short-term interest rates compared to interest rates at December 31,
2000 indicates that it would not have a significant impact on expected fiscal
year 2001 earnings.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we receive threats or may be subject to litigation
matters incidental to our business. However, we are not currently a
party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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 15, 2000.
(b) At the 2000 Annual Meeting of Shareholders, votes were cast on
matters submitted to the shareholders, as follows:
The election of two directors whose terms expire at the 2002 Annual
Meeting of Shareholders.
NOMINEE FOR WITHHELD
------- --- --------
Joseph A Taylor 29,839,260 524,295
R. Douglas Armstrong, Ph.D. 29,879,477 484,078
In addition to the election of the above referenced directors, the
following individuals continue as directors; Alan M. Wright and
Fabrizio Bonanni, as Class I Directors, whose terms expire at the
2001 Annual Meeting of Shareholders and Mary L. Campbell and Arthur
F. Staubitz as Class II Directors, whose terms expire at the 2002
Annual Meeting of Shareholders.
Approval of the amendment of the 1992 Incentive and Non-Qualified
Stock Option Plan to increase the maximum aggregate number of shares
reserved for issuance thereunder by 1,400,000.
FOR AGAINST ABSTAIN
--- ------- -------
29,282,433 1,040,245 40,877
20
Approval of the amendment of the 1996 Outside Directors Stock Option
Plan to (i) increase by 150,000 the maximum number of shares of
Aastrom's common stock that may be issued thereunder; and (ii) to
increase the size of the Initial Option Grant and Annual Option
granted after the date of the 2000 Annual Meeting of Shareholders
from 5,000 to 10,000 shares.
FOR AGAINST ABSTAIN
--- ------- -------
29,237,539 1,063,090 62,926
The vote to approve the selection of PricewaterhouseCoopers LLP as
the Company's independent public accountants for the year ending
June 30, 2001.
FOR AGAINST ABSTAIN
--- ------- -------
30,114,952 212,588 36,015
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
The Company filed a Report on Form 8-K dated November 14, 2000.
21
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 13, 2001 /s/ R. Douglas Armstrong
-------------------------------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2001 /s/ Todd E. Simpson
-------------------------------------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 * Restated Articles of Incorporation of the Company
3.2 ** Bylaws of the Company
____________________
* Incorporated by reference to the Company's Quarterly 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 (No. 333-15415), declared effective on February 3, 1997.
23