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 MARCH 31, 2001, OR
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[_] 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)
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(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 34,158,013
(Class) Outstanding at May 8, 2001
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
March 31, 2001
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Consolidated Condensed Balance Sheets as of June 30, 2000 and March 31, 2001 3
b) Consolidated Condensed Statements of Operations for the three and nine months ended March 31, 4
2000 and 2001 and for the period from March 24, 1989 (Inception) to March 31, 2001
c) Consolidated Condensed Statements of Cash Flows for the nine months ended March 31, 2000 and 5
2001 and for the period from March 24, 1989 (Inception) to March 31, 2001
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 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, March 31,
2000 2001
----------- ----------
Assets (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,064,000 $ 4,052,000
Short-term investments 10,681,000 4,509,000
Receivables 242,000 155,000
Prepaid expenses and other 158,000 931,000
------------ ------------
Total current assets 13,145,000 9,647,000
PROPERTY, NET 292,000 183,000
------------ ------------
Total assets $ 13,437,000 $ 9,830,000
============ ============
Liabilities and Shareholders' Equity
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 837,000 $ 920,000
Accrued employee expenses 165,000 126,000
------------ ------------
Total current liabilities 1,002,000 1,046,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value; shares authorized -
60,000,000; shares issued and outstanding
- 33,607,659 and 33,852,259, respectively 92,367,000 92,734,000
Deficit accumulated during the development stage (79,932,000) (83,969,000)
Accumulated other comprehensive income - 19,000
------------ ------------
Total shareholders' equity 12,435,000 8,784,000
------------ ------------
Total liabilities and shareholders' equity $ 13,437,000 $ 9,830,000
============ ============
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 Nine months ended (Inception) to
March 31, March 31, March 31,
------------------------- -------------------------
2000 2001 2000 2001 2001
---------- ---------- ---------- ---------- ------------
REVENUES:
Product sales and rentals $ - $ - $ 169,000 85,000 $ 288,000
Grants 212,000 191,000 832,000 568,000 4,785,000
Research and development agreements - - - - 2,020,000
----------- ----------- ----------- ----------- ------------
Total revenues 212,000 191,000 1,001,000 653,000 7,093,000
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES:
Cost of product sales and rentals - - 1,251,000 13,000 1,270,000
Research and development 1,936,000 1,455,000 5,415,000 3,440,000 74,530,000
Selling, general and administrative 737,000 599,000 2,596,000 1,772,000 19,872,000
----------- ----------- ----------- ----------- ------------
Total costs and expenses 2,673,000 2,054,000 9,262,000 5,225,000 95,672,000
----------- ----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (2,461,000) (1,863,000) (8,261,000) (4,572,000) (88,579,000)
----------- ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Other income - - - - 1,237,000
Interest income 80,000 148,000 219,000 535,000 4,608,000
Interest expense - - - - (267,000)
----------- ----------- ----------- ----------- ------------
Other income 80,000 148,000 219,000 535,000 5,578,000
----------- ----------- ----------- ----------- ------------
NET LOSS $(2,381,000) $(1,715,000) $(8,042,000) $(4,037,000) $(83,001,000)
=========== =========== =========== =========== ============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss $(2,381,000) $(1,715,000) $(8,042,000) $(4,037,000)
Dividends and yields on preferred stock (20,000) - (208,000) -
----------- ----------- ----------- -----------
Net loss applicable to common shares $(2,401,000) $(1,715,000) $(8,250,000) $(4,037,000)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE (Basic
and Diluted) $ (.09) $ (.05) $ (.40) $ (.12)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding (Basic and Diluted) 26,964,000 33,846,000 20,553,000 33,788,000
=========== =========== =========== ===========
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
Nine months ended (Inception) to
March 31, March 31,
--------------------------
2000 2001 2001
------------ ------------ -------------
OPERATING ACTIVITIES:
Net loss $(8,042,000) $(4,037,000) $(83,001,000)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 295,000 135,000 3,165,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on investments (5,000) (59,000) (533,000)
Stock compensation expense 5,000 120,000 664,000
Stock issued pursuant to license agreement 1,100,000 - 3,300,000
Write down of inventory 1,027,000 - 1,027,000
Changes in assets and liabilities:
Receivables (56,000) 87,000 (179,000)
Inventory 117,000 - (1,027,000)
Prepaid expenses 22,000 (773,000) (931,000)
Accounts payable and accrued expenses 360,000 83,000 920,000
Accrued employee expenses 508,000 (39,000) 126,000
------------ ------------ -------------
Net cash used for operating activities (4,669,000) (4,483,000) (76,359,000)
------------ ------------ -------------
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments (5,210,000) (1,500,000) (56,624,000)
Maturities of short-term investments - 7,750,000 52,667,000
Capital purchases (132,000) (26,000) (2,611,000)
Proceeds from sale of property held for resale - - 400,000
------------ ------------ -------------
Net cash provided by (used for) investing activities (5,342,000) 6,224,000 (6,241,000)
------------ ------------ -------------
FINANCING ACTIVITIES:
Issuance of preferred stock - - 51,647,000
Issuance of common stock 6,288,000 247,000 32,697,000
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 6,288,000 247,000 86,652,000
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,723,000) 1,988,000 4,052,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,528,000 2,064,000 -
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,805,000 $ 4,052,000 $ 4,052,000
============ ============ =============
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 of cellular therapeutics and sale
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 nine months
ended March 31, 2001, 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 March
31, 2001, Zellera had only limited operations and is currently 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 2000 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 sheet consists of unrealized gains on securities that are
available for sale. For the
6
three and nine-month periods ended March 31, 2001, the comprehensive loss was
$1,716,000 and $4,018,000, respectively.
Research and Development Expense for the nine months ended March 31, 2001
includes a non-cash charge 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 relating to these
options are based on the market price of our common stock at the end of each
quarter. There was no expense recorded during the quarter ended March 31,
2001 relating to these stock options.
Approximately 2.4 million shares of our common stock held by Gambro BCT
(formerly Cobe BCT) and subject to a trading restriction until January 1,
2001 were sold during the period from January 1, 2001 through March 15, 2001.
During this time, the market price of our common stock ranged from a high of
$1.94 to a low of $.75 on reported trading volume of approximately 18 million
shares. These shares of common stock had been acquired in connection with a
1993 marketing and distribution agreement that we had with Cobe BCT relating
to the AastromReplicell/TM/ System for stem cell therapy applications. This
relationship was terminated in November 1998 as a result of a mutual decision
to allow us to seek broader marketing relationships for its products across
multiple applications that were beyond the scope of the distribution
agreement with Cobe and its strategic business focus. Without the Aastrom
relationship, new management at Gambro BCT elected to liquidate this stock
once the trading restriction expired.
A stock purchase warrant issued to RGC International Investors, LDC relating
to a $6 million common stock financing completed in February 2000 has been
adjusted to reflect approximately 2.6 million shares of common stock at an
exercise price of $1.60 per share. This adjustment, which is in accordance
with the original terms of the warrant, was based upon prevailing market
prices of Aastrom's common stock on February 28, 2001 and is no longer
subject to further adjustment based on the market price of Aastrom's common
stock.
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 aggregate number of common equivalent shares that
have been excluded from the computations of net loss per common share for the
periods ended March 31, 2000 and 2001 is approximately 2,306,000 and
4,567,000, respectively. The computations of net loss per common share for
the periods ended March 31, 2000 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 cell therapeutic products based on our
patented process and device capabilities for a broad range of medical
applications. Our lead cell therapeutic products under development include our
SC-I bone marrow product and the CB-I and CB-II cord blood products, all for use
in stem cell therapy to restore blood and immune system function to cancer
patients following chemotherapy or radiation therapy.
We are also developing the DC-I cell product 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 investigated as a potential new treatment for cancer and viral
diseases. We intend to make the DC-I cell product available to clinical
researchers and centers that are developing dendritic cell-based vaccines
designed to treat cancer and other disorders. During the quarter ended March
31, 2001, we initiated our external site testing of the AastromReplicell(TM)
System and the DC-I cell product with leading cancer centers in the U.S. Once
the DC-I dendritic cell product receives validation from external evaluations,
we intend to apply for CE Mark approval necessary for European marketing. We
also plan to market the DC-I cell product to U.S. clinical and research groups
that are developing dendritic cell-based cancer vaccines and to develop our own
proprietary vaccines pending additional funding or strategic partnerships.
Additionally, we have recently initiated a development program for the
production of bone-forming cells in the AastromReplicell(TM) System. The new
OC-I cell product is intended for the treatment of patients with degenerative
bone diseases such as osteoporosis. We recently initiated our first Phase I/II-
Pilot clinical study for the OC-I cell product in patients with severe
osteoporosis.
We intend to enable these, and other cell-based therapies, to become
integrated into standard medical practice through our AastromReplicell(TM)
System, which combines our two technology platforms: patented "single-pass
perfusion" processes for the production of human cells and patented Good
Manufacturing Practices (GMP)-compliant cell production system capabilities. We
are developing these technologies to uniquely standardize and automate the
processes involved in producing high quality therapeutic cells. Through this
combination of capabilities, we intend to improve the availability and
effectiveness of cell therapies and enable a diverse commercialization pathway
to efficiently bring cell therapies to medical practice.
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.
8
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. Through this product configuration, we intend to either directly
provide cells for therapeutic use, or enable customers or potential
collaborators with the capability to produce cells for therapeutic applications
through sale of the AastromReplicell(TM) System product line and cell therapy
products. 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
products to provide 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 have obtained permission
to affix the CE Mark to such versions of the AastromReplicell(TM) System
instrumentation and the components that comprise the SC-I and CB-I therapy
products. 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. Our European marketing activities are now being resumed, although 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 expected to
9
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. 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. We
recently extended this agreement for an additional two-year term, subject to
further extension, and we are no longer required to make similar annual renewal
payments. 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, restored production manufacturing capabilities and
resumed pilot-scale 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 March 31, 2001, our
accumulated losses total approximately $83 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 nine-month period ended March 31, 2001 were
$191,000 and $653,000, respectively, compared to $212,000 and $1,001,000 for the
same periods in 2000. Revenues consist primarily of grant funding which
decreased to $191,000 and $568,000 for the quarter and nine months ended March
31, 2001, from $212,000 and $832,000 for the same periods in 2000. The decreases
in grant revenues reflect decreases in overall costs and expenses for the
periods ended March 31, 2001, 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 March 31, 2001 decreased to $2,054,000,
compared to $2,673,000 in 2000. This decrease includes a reduction in research
and development expense to
10
$1,455,000 for the quarter ended March 31, 2001, from $1,936,000 for the same
period in 2000, and a reduction in selling, general and administrative expenses
to $599,000 from $737,000. Costs and expenses for the nine months ended March
31, 2001 decreased to $5,225,000, compared to $9,262,000 in 2000. This decrease
includes a reduction in research and development expense to $3,440,000 for the
nine months ended March 31, 2001, from $5,415,000 for the same period in 2000,
and a reduction in selling, general and administrative expenses to $1,772,000
from $2,596,000. 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 nine months ended March 31, 2000 included a charge of $1,142,000
relating to the write down of AastromReplicell(TM) System inventory and
depreciation charges taken on equipment under lease.
Interest income was $148,000 and $535,000 for the quarter and nine months ended
March 31, 2001, respectively, compared to $80,000 and $219,000 for the same
periods in 2000. These increases correspond to increased levels of invested
cash, cash equivalents and short-term investments.
The net loss for the quarter ended March 31, 2001 was $1,715,000, or $.05 per
common share, compared to a net loss of $2,381,000, or $.09 per common share for
the same period in 2000. The net loss for the nine months ended March 31, 2001
was $4,037,000, or $.12 per common share compared to $8,042,000, or $.40 per
common share in 2000. These decreases are primarily the result of decreased
costs and expenses and increased interest income in 2001 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 March 31, 2000
include an 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 March 31,
2001, 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
$8,561,000 at March 31, 2001, a decrease of $4,184,000 from June 30, 2000. The
primary uses of cash, cash equivalents and short-term investments during the
nine months ended March 31, 2001 included $4,424,000 to finance our operations
and working capital requirements. The primary source of cash, cash equivalents
and short-term investments was from the exercise of stock options that totaled
$247,000 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 from
operations for at least the next several years due to our expected spending for
research and development programs and the cost of commercializing our product
candidates. 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 2000 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
or defer certain activities. In order to grow and expand our business, and to
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 adverse effect on our business. See "Business Risks" and Notes to
Consolidated Financial Statements in Aastrom's 2000 Annual Report on Form 10-K
and Notes to Consolidated Condensed Financial Statements included herein.
12
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. We are currently pursuing additional sources of
financing. If we cannot obtain additional funding, 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. We cannot be
certain that we will be able to raise the required capital to conduct our
operations and develop our products.
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. Our stock price has been above and below this minimum bid price in the
recent past. Additionally, during other periods our tangible net worth has been
below the amount required. There can be no assurance that we will regain or
maintain compliance with the minimum bid price requirement, or if we do, that we
will able to maintain compliance with the other Nasdaq 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 and our ability to raise
necessary capital would be impaired.
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
13
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.
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. 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-
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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.
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 for our stem cell therapy product candidates 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. Further, 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. 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. Further, we would not be able to
obtain alternate sources of supply for many of these items on a short-term
basis.
Some of the compounds used by us 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.
15
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 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.
A warrant to purchase 2,614,386 shares of common stock at an exercise price of
$1.60 per share is outstanding and is exercisable at the holder's option until
February 2003. In June 2000, we issued warrants 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. 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.
16
Forward-looking statement
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.
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-collectibility 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 March 31, 2001
indicates that it would not have a significant impact on expected fiscal year
2001 net loss.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we receive threats or may be subject to litigation
matters incidental to its 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
None
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
-------------------
We filed a Report on Form 8-K dated March 21, 2001.
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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: May 11, 2001 /s/ R. Douglas Armstrong
------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 11, 2001 /s/ Todd E. Simpson
-------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
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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.
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