<PAGE>
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 SEPTEMBER 30, 1998, OR
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
Commission file number 0-22025
---------------------------------------------------------
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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] - Yes [ ] - No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 13,771,556
(Class) Outstanding at November 1, 1998
Page 1
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AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
September 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<C> <S> <C>
Item 1. Financial Statements Page
----
a) Condensed Balance Sheets as of June 30, 1998 and September 30, 1998 3
b) Condensed Statements of Operations for the three months
ended September 30, 1997 and 1998 and for the period from
March 24, 1989 (Inception) to September 30, 1998 4
c) Condensed Statements of Cash Flows for the three months
ended September 30, 1997 and 1998 and for the period from
March 24, 1989 (Inception) to September 30, 1998 5
d) Notes to 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 *
PART II - OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
*No information is provided due to inapplicability of the item.
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
----------- -------------
Assets (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,078,000 $ 6,121,000
Short-term investments 9,134,000 6,565,000
Receivables 167,000 183,000
Prepaid expenses 270,000 192,000
----------- -----------
Total current assets 11,649,000 13,061,000
PROPERTY, NET 725,000 682,000
----------- -----------
Total assets $12,374,000 $13,743,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,313,000 $ 1,350,000
Accrued employee expenses 150,000 150,000
Current portion of capital lease obligations 65,000 48,000
----------- -----------
Total current liabilities 1,528,000 1,548,000
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares
authorized 5,000,000; shares issued
and outstanding 2,200,000 and
2,205,000, respectively 9,930,000 14,539,000
Common Stock, no par value; shares
authorized 40,000,000; shares issued
and outstanding 13,639,817 and
13,771,098, respectively 59,474,000 59,812,000
Deficit accumulated during the development stage (58,897,000) (62,479,000)
Stock purchase warrants 335,000 335,000
Unrealized gains (losses) on investments 4,000 (12,000)
Total shareholders' equity 10,846,000 12,195,000
----------- -----------
Total liabilities and shareholders' equity $12,374,000 $13,743,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 24, 1989
Three months ended (Inception) to
September 30, September 30,
----------------------------
1997 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES:
Grants $ 13,000 $ 163,000 $ 2,183,000
Research and development agreements 3,000 - 2,389,000
----------- ----------- -------------
Total revenues 16,000 163,000 4,572,000
----------- ----------- -------------
COSTS AND EXPENSES:
Research and development 3,243,000 3,093,000 57,023,000
General and administrative 613,000 651,000 12,551,000
----------- ----------- ------------
Total costs and expenses 3,856,000 3,744,000 69,574,000
----------- ----------- ------------
LOSS FROM OPERATIONS (3,840,000) (3,581,000) (65,002,000)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 220,000 221,000 3,359,000
Interest expense (5,000) (2,000) (265,000)
----------- ----------- ------------
Other income 215,000 219,000 3,094,000
----------- ----------- ------------
NET LOSS $(3,625,000) $(3,362,000) $(61,908,000)
=========== =========== ============
COMPUTATION OF NET LOSS APPLICABLE
TO COMMON SHARES:
Net loss $(3,625,000) $(3,362,000)
Dividends and yields on Preferred Stock - (220,000)
----------- -----------
Net loss applicable to Common Shares $(3,625,000) $(3,582,000)
=========== ===========
NET LOSS PER COMMON SHARE (Basic and
Diluted) $ (.27) $ (.27)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 13,279,000 13,384,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 24, 1989
September 30, (Inception) to
------------------------------ September 30,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,625,000) $(3,362,000) $(61,908,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 151,000 87,000 2,475,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on
investments (50,000) (47,000) (430,000)
Stock compensation expense 25,000 4,000 1,632,000
Changes in assets and liabilities:
Receivables 2,000 (16,000) (207,000)
Prepaid expenses 33,000 78,000 (192,000)
Accounts payable and accrued expenses 98,000 37,000 1,350,000
Accrued employee expenses (15,000) - 150,000
----------- ----------- ------------
Net cash used for operating activities (3,381,000) (3,219,000) (57,020,000)
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments (500,000) (1,000,000) (44,464,000)
Maturities of short-term investments 3,500,000 3,600,000 38,317,000
Capital purchases (44,000) (44,000) (2,420,000)
Proceeds from sale of property held for resale - - 400,000
----------- ----------- ------------
Net cash provided by (used for) investing activities 2,956,000 2,556,000 (8,240,000)
FINANCING ACTIVITIES:
Issuance of Preferred Stock - 4,689,000 48,837,000
Issuance of Common Stock 29,000 34,000 20,139,000
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations (42,000) (17,000) (1,126,000)
----------- ----------- ------------
Net cash provided by (used for) financing activities (13,000) 4,706,000 71,381,000
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (438,000) 4,043,000 6,121,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,943,000 2,078,000 -
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,505,000 $ 6,121,000 $ 6,121,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,000 $ 2,000 $ 265,000
Additions to capital lease obligations - - 1,174,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Aastrom Biosciences, Inc. (the Company) was incorporated in March 1989
(Inception) under the name Ann Arbor Stromal, Inc. The Company changed its
name in 1991 concurrent with the commencement of employee-based operations.
The Company is in the development stage with its principal business
activities being research and product development, conducted both on its own
behalf and in connection with various collaborative research and development
agreements with other companies, involving the development of processes and
products for the ex vivo production of human cells for use in cell and ex
vivo gene therapy.
2. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company without audit, according to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The financial statements reflect, in the opinion
of management, all adjustments (which consist solely of normal recurring
adjustments) necessary to present fairly the financial position and results
of operations as of and for the periods indicated. The results of operations
for the three months ended September 30, 1998, are not necessarily indicative
of the results to be expected for the full year or for any other period.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission.
3. NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are not included in the per share calculation where the
effect of their inclusion would be anti-dilutive. Due to the automatic
conversion of all previously outstanding preferred stock into Common Stock
upon the completion of the initial public offering, such preferred stock is
assumed to have been converted into Common Stock at the time of issuance.
The computation of net loss per common share for the period ended September
30, 1998 reflects dividends and yields on the Company's outstanding shares of
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.
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4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which sets forth additional requirements for companies to report
in the financial statements Comprehensive Income in addition to Net Income.
The Company adopted SFAS 130 as of July 1, 1998 which did not have a
material effect on the accompanying financial statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since its inception, the Company has been in the development stage and engaged
in research and product development, conducted principally on its own behalf but
also in connection with various collaborative research and development
agreements with other entities. The Company does not expect to generate positive
cash flows from operations for at least the next several years and until product
sales commence. Until product sales commence, the Company expects that its
revenue sources will continue to be limited to grant revenue, research funding
and milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and revenues,
if any, will be subject to significant fluctuations, based in part on the
success of the Company's research activities, the receipt of necessary
regulatory approvals, the timing of the achievement of certain other milestones
and the extent to which associated costs are reimbursed under grant or other
arrangements. Substantially all of the Company's revenues from product sales, if
any, will be subject to the Company's obligation to make aggregate royalty
payments of up to 2% to certain licensors of its technology. Research and
development expenses may fluctuate due to the timing of expenditures for the
varying stages of the Company's research, product development and clinical
development programs. Generally, product development expenses for the
AastromReplicell/TM/ System are expected to decrease as the product approaches
market launch and clinical development costs are expected to increase as the
Company begins its U.S. pivotal clinical trials. In November 1998, the Company
implemented a reduction in work force, affecting 19 staff positions and certain
other contract positions, reducing overall operating expenses by approximately
15%. The reduction in headcount generally affected staff and operations that
were not required for product manufacturing and support or to support the
Company's clinical development programs. Under the Company's License Agreement
with Immunex, annual renewal fees of $1,000,000 are payable in March 1999 and
March 2000. As a result of these and other factors, the Company's results of
operations have fluctuated and are expected to continue to fluctuate
significantly from year to year and from quarter to quarter and therefore may
not be comparable to or indicative of the result of operations for any future
periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations.
Although the Company reduced its workforce in November 1998, a future growth in
employee headcount may become necessary to address increasing requirements in
the areas of product and customer support, research, clinical and regulatory
affairs, quality systems and administration. Assuming capital is available to
finance such growth, the Company's operating expenses will increase as a result.
At least until such time as the Company enters into arrangements providing
research and development funding or initiates product sales, the Company will
continue to incur net operating losses. The Company has never been profitable
and does not anticipate having net income unless and until product sales
commence.
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<PAGE>
Through September 30, 1998, the Company has accumulated losses of $61,908,000.
There can be no assurance that the Company will be able to achieve profitability
on a sustained basis, if at all.
RESULTS OF OPERATIONS
Three months ended September 30, 1998 and 1997
Total Revenues for the quarter increased to $163,000 in 1998 from $16,000 in
1997, reflecting activities under new research grants awarded to the Company.
Costs and expenses decreased to $3,744,000 in 1998 from $3,856,000 in 1997. The
decrease in costs and expenses for the quarter reflects a decrease in research
and development expense to $3,093,000 from $3,243,000 in 1997. The decrease in
research and development expense is the result of a decline in product
development activities for the AastromReplicell(TM) Cell Production System
(System) as it approaches product completion and European market introduction,
however, grant-related research expenses increased during 1998 reflecting
activities under newly awarded grants. General and administrative expenses
increased slightly to $651,000 from $613,000 in 1997, primarily as a result of
activities directed towards development of new business opportunities for the
AastromReplicell(TM) System.
The Company's net loss decreased to $3,362,000 for the three months ended
September 30, 1998, from $3,625,000 for the same period in 1997 reflecting a
decrease in expenses and an increase in revenues in 1998.
Liquidity and capital resources
The Company has financed its operations since Inception primarily through public
and private sales of its equity securities, which from Inception through
September 30, 1998, have totaled approximately $74,351,000, and, to a lesser
degree, through grant funding, payments received under research agreements and
collaborations, interest earned on cash, cash equivalents, and short-term
investments, and funding under equipment leasing agreements. These financing
sources have historically allowed the Company to maintain adequate levels of
cash and other liquid investments.
The Company's combined cash, cash equivalents and short-term investments totaled
$12,686,000 at September 30, 1998, an increase of $1,474,000 from June 30, 1998.
The primary uses of cash, cash equivalents and short-term investments during the
three months ended September 30, 1998, included $3,172,000 to finance the
Company's operations and working capital requirements and $44,000 in capital
equipment additions. The Company plans to continue its policy of investing
excess funds in short-term, investment-grade, interest-bearing instruments.
In July 1998, the Company completed the sale of $5,000,000 of its 1998 Series I
Convertible Preferred Stock, yielding 5.5% per annum (1998 Preferred Stock). The
conversion price of the 1998 Preferred Stock is based on the market price of the
Company's common stock during a pricing period preceding conversion, up to a
maximum conversion price of $4.81 per share and automatically converts in July
2001 or earlier upon certain events. With limited exceptions, during
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the nine-month period ending in April 1999, the 1998 Preferred Stock is
convertible only after the market price of the Company's common stock equals or
exceeds $4.81 per share. Additionally, the Company and the investor have agreed
to a second closing for an additional $3,000,000, under similar terms, if
certain requirements are met, including trading volume of the Company's Common
Stock at a price above $6.00 per share.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments, the cost of product
commercialization and the degree of market acceptance of the Company's products.
The Company does not expect to generate a positive cash flow from operations for
at least the next several years due to continuing expenses for its research and
development programs and the expected cost of commercializing its product
candidates. The Company intends to seek additional funding through research and
development agreements with suitable corporate collaborators, grants and through
public or private financing transactions. The Company anticipates that its
available cash resources and expected interest income thereon, will be
sufficient to finance the development and manufacture of the
AastromReplicell(TM) System for use in clinical trials, expanded clinical
trials, other research and development and working capital and other corporate
requirements through mid-1999. This estimate is based on certain assumptions
which could be negatively impacted by the matters discussed under this heading
and under the caption "Business Risks" in the Company's Annual Report on Form
10-K. The Company expects that its primary sources of capital for the
foreseeable future will be through collaborative arrangements and through the
public or private sale of its debt or equity securities. There can be no
assurance that such collaborative arrangements, or any public or private
financing, will be available on acceptable terms, if at all, or can be
sustained. Several factors will affect the Company's ability to raise additional
funding, including, but not limited to, market volatility of the Company's
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, the Company may be required to further delay, reduce the scope of, or
eliminate one or more of its research and development programs, which may have a
material adverse effect on the Company's business. See "Business Risks--Future
Capital Needs; Uncertainty of Additional Funding" in the Company's 1998 Annual
Report on Form 10-K and Notes to Financial Statements included therein.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which sets forth additional requirements for companies to report in the
financial statements Comprehensive Income in addition to Net Income. The
Company adopted SFAS 130 as of July 1, 1998 which did not have a material effect
on the accompanying financial statements.
CERTAIN BUSINESS CONSIDERATIONS
Commercialization of the Company's technology and product candidates, including
its lead product candidate, the AastromReplicell(TM) System, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the AastromReplicell(TM) System or its
other product candidates, or successfully market its technologies or product
candidates, which lack of success would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
or its collaborators may encounter problems or delays relating to research and
development, market development, clinical trials, regulatory approval and
intellectual property rights of the Company's technologies and product
candidates. The Company's initial product development efforts are primarily
directed toward obtaining regulatory approval to market the AastromReplicell(TM)
System as an alternative to currently used stem cell collection methods. These
existing stem cell collection methods have been widely practiced for a number of
years, and there can be no assurance that any of the Company's technologies or
product candidates will be accepted by the marketplace as readily as these or
other competing processes and methodologies, or at all. The Company also plans
to pursue through strategic relationships, clinical applications of the
AastromReplicell(TM) System into emerging cell therapies being developed by
others. There can be no assurance that such strategic relationships, if
established, will successfully lead to commercial applications of the
AastromReplicell(TM) System.
In 1993 the Company entered into a product Distribution Agreement (the
"Distribution Agreement") with Cobe BCT Inc. ("Cobe"). The Distribution
Agreement provided Cobe with worldwide marketing and distribution rights for the
AastromReplicell(TM) System and related therapy kits for use in the field of
stem cell therapy. The Company is preparing for the initial market introduction
of the AastromReplicell(TM) System and related therapy kits for the production
of either bone marrow derived cells or the expansion of umbilical cord blood
cells used in stem cell therapy. The Company believes that upon completion of
the AastromReplicell(TM) System for stem cell therapy, additional therapy kits
can be pursued for a number of emerging cell therapies being developed by
others. Such other cell therapy applications are outside of the scope of the
Distribution Agreement and outside of Cobe's current area of focus.
Accordingly, the Company and Cobe have terminated the Distribution Agreement
effective, November 16, 1998 and agreed to a transition process to support the
initial European launch of the AastromReplicell(TM) System and related stem cell
therapy kits where Cobe will provide import/export distribution and service
support to the Company which will lead the customer marketing effort. The
Company believes that this action, which brings rights to all fields of use to
the Company, will allow a consolidated marketing plan to be implemented for the
AastromReplicell(TM) System product line. The AastromReplicell(TM) System
consists of an automated clinical system designed to enable hospitals to produce
patient-specific cells for use in the treatment of a broad range of diseases.
The Company believes that with diverse fields of use, the overall market
development and customer interface plans will benefit from the consolidation of
the product line under disease-specific programs. There can be no assurance
that the Company will be able to enter into a new marketing and distribution
relationship on acceptable terms with another partner, if at all, or that if
such a marketing and distribution partnership is achieved, it will result in the
successful commercialization and distribution of the Company's technologies and
product candidates. Failure to enter into such a new relationship, and any
delay in the planning or implementation of distribution or marketing activities
while a new partnership is sought, will have a material adverse effect on the
Company's business, financial condition and results of operations.
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The approval of the United States Food and Drug Administration (the "FDA") will
be required before any commercial sales of the Company's product candidates may
commence in the United States. The Company is currently conducting pre-pivotal
clinical trials to demonstrate the safety and biological activity of patient-
derived cells or umbilical cord blood cells produced in the AastromReplicell(TM)
System in a limited number of patients. If the results from these pre-pivotal
trials are successful, the Company intends to use these results to support a
limited market introduction of the AastromReplicell(TM) System in Europe and to
seek clearance from the FDA to commence one or more pivotal clinical trials.
The patients enrolled in these pre-pivotal trials and future trials will have
undergone extensive chemotherapy or radiation therapy treatments prior to
infusion of cells produced in the AastromReplicell(TM) System. Such treatments
will have substantially weakened these patients and may have irreparably damaged
their hematopoietic systems. Due to these and other factors, it is possible
that these patients may die or suffer severe complications during the course of
the current pre-pivotal trials or future trials. For example, in the trials to
date, patients who have been in the transplant recovery process have died from
complications related to the patient's clinical condition that, according to the
physicians involved, were unrelated to the AastromReplicell(TM) System
procedure. The Company may experience delays in patient accruals in its current
pre-pivotal clinical trials or in future clinical trials, which could result in
increased costs associated with the clinical trials or delays in receiving
regulatory approvals and commercialization, if any. The results of preclinical
studies and early clinical trials of the Company's product candidates may not
necessarily be indicative of results that will be obtained from subsequent or
more extensive clinical trials. Further, there can be no assurance that pre-
pivotal or pivotal clinical trials of any of the Company's product candidates
will demonstrate the safety, reliability and efficacy of such products, or of
the cells produced in such products, to the extent necessary to obtain required
regulatory approvals or market acceptance. There can be no assurance that, even
after the expenditures of substantial time and financial resources, regulatory
approval will be obtained for any products developed by the Company.
The AastromReplicell(TM) System components, are currently being regulated in
Europe as a Class I Sterile or Class IIb medical device, under the authority of
the new Medical Device Directives ("MDD") being implemented by European Union
("EU") member countries. In order for the Company to market its products in
Europe, it must obtain permission from a Notified Body to affix the CE Mark
which certifies that the Company and its operations comply with certain minimum
quality standards and compliance procedures, or, alternatively, that its
manufactured products meet a more limited set of requirements. Additionally, the
Company may be required to comply with certain
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country-specific regulations in order to market its products. The Company has
received approval to affix the CE Mark to the AastromReplicell(TM) System
instrumentation platform and approvals are pending for the first two therapy
kits to be used with the AastromReplicell(TM) instrumentation platform for the
production of either bone marrow derived cells and the expansion of umbilical
cord blood cells. There can be no assurance that the Company and its suppliers
will be able to obtain such pending approvals or to meet the minimum
requirements necessary to maintain such compliance. Upon the completion of
production-level manufacturing, the CE Mark will permit market introduction of
the AastromReplicell(TM) System. The inability to complete the transition to
production-level manufacturing of the AastromReplicell(TM) System or non-
compliance with the ongoing regulatory requirements to permit commercialization
would have a material adverse effect on the Company's business, financial
condition and results of operations. Further, there can be no assurance that the
AastromReplicell(TM) System will continue to be regulated in Europe under its
current status. If the AastromReplicell(TM) is not so regulated, the Company
could be forced to obtain additional regulatory approvals and could be subject
to additional regulatory requirements and uncertainty, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so for the foreseeable future. There can
be no assurance that the Company's supply of such key cytokines, components,
product candidates and other materials will not become limited, be interrupted
or become restricted to certain geographic regions. There can also be no
assurance that the Company will be able to obtain alternative components and
materials from other manufacturers of acceptable quality, or on terms or in
quantities acceptable to the Company, if at all. Additionally, there can be no
assurance that the Company will not require additional cytokines, components and
other materials to manufacture, use or market its product candidates, or that
necessary key components will be available for use by the Company in the markets
where it intends to sell its products. In the event that any of the Company's
key manufacturers or suppliers fail to perform their respective obligations or
the Company's supply of such cytokines, components or other materials becomes
limited or interrupted, the Company would not be able to market its product
candidates on a timely and cost-competitive basis, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Certain of the compounds used by the Company in its
current stem cell expansion process involve the use of animal derived products.
The availability of these compounds for clinical and commercial use may become
limited by suppliers or restricted by regulatory authorities, which may impose a
potential competitive disadvantage for the Company's products compared to
competing products and procedures. There can be no assurance that the Company
will not experience delays or disadvantages related to the future availability
of such materials which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is a development stage company and there can be no assurance that
its product candidates for cell therapy will be successful. The Company has not
yet completed the development and clinical trials of any of its product
candidates and, accordingly, has not yet begun to generate revenues from the
commercialization of any of its product candidates. The Company expects to
incur significant operating losses until commercialization of its product
candidates, primarily owing
Page 13
<PAGE>
to its research and development programs, including pre-clinical studies and
clinical trials. The development of the Company's products will require the
Company to raise substantial additional funds or to seek collaborative partners,
or both, to finance related research and development activities. Because of the
Company's potential long-term funding requirements, it may attempt to access the
public or private equity markets if and whenever conditions are favorable, even
if it does not have an immediate need for additional capital at that time. There
can be no assurance that any such additional funding will be available to the
Company on reasonable terms, or at all. Several factors will affect the
Company's ability to raise necessary additional funding, including market
volatility of the Company's stock and economic conditions affecting the public
markets generally or some portion or all of the technology sector. If adequate
funds are not available, the Company may again be required to delay or terminate
research and development programs, curtail capital expenditures, and reduce
business development and other operating activities.
In July 1998 the Registrant sold 5,000 shares of its newly created 1998 Series I
Convertible Preferred Stock (the "Series I Preferred") to one investor for an
aggregate purchase price of $5 million. The shares of Series I Preferred are
convertible, at the option of the holder, into shares of the Registrant's Common
Stock at the lower of (i) $4.81, or (ii) a price based on the market price of
the Registrant's Common Stock prior to conversion. With limited exceptions,
the shares of Series I Preferred are not convertible into Common Stock until
April 1999 and, subject to extension under certain circumstances, will
automatically convert into Common Stock on July 2, 2001, unless sooner
converted. In general, the Registrant may require the holders to convert the
Series I Preferred if the average closing bid price of the Registrant's Common
Stock exceeds $9.62 for specified periods beginning in July 1999. In connection
with the sales of Series I Preferred, the investor agreed to purchase an
additional $3 million of a new series of Preferred Stock (to be designated 1998
Series II Convertible Preferred Stock) if the Common Stock of the Registrant
trades at a price greater than $6.00 for a specified duration during the period
ending in August, 1999.
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result, in
less than two years, computer systems and/or software used by many companies in
a very wide variety of applications will experience operating difficulties
unless they are modified or upgraded to adequately process information
involving, related to or dependent upon the century change. Significant
uncertainty exists in the software and information services industries
concerning the scope and magnitude of problems associated with the century
change. In light of the potentially broad effects of the year 2000 on a wide
range of business systems, the Company may be affected.
The Company utilizes and is dependent upon data processing computer hardware and
software to conduct its business. The Company has completed its assessment of
its own computer systems and based upon this assessment, the Company believes
its computer systems are substantially "Year 2000 compliant;" this is, capable
of adequately distinguishing 21st century dates from 20th century dates.
However, there can be no assurance that the Company has timely identified or
will timely identify and remediate all significant Year 2000 problems in its own
computer systems, that remedial efforts subsequently made will not involve
significant time and expense, or that such problems will not have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company has yet to determine the extent of or completed activities to
minimize the risk that the computer systems of the Company's suppliers and
manufactures are not Year 2000 compliant, or will not become compliant on a
timely basis. The Company expects that the process of making inquiries with
these suppliers will be ongoing through the end of 1999. If Year 2000 problems
prevent any of the Company's suppliers from timely delivery of products or
services required by the Company, the Company's operating results could be
materially adversely affected. The Company currently estimates that its costs
to address the Year 2000 issue relating to its suppliers will not be material,
and that these costs will be funded from its operating cash flows. To the
extent practical, the Company intends to identify alternative suppliers and
manufactures in the event its preferred suppliers become incapable of timely
delivering products or services required by the Company. The Company's
estimates of Year 2000 costs relating to its suppliers and manufactures are
management's best estimates, which were derived from numerous assumptions of
future events, including the continued availability of certain resources, third
party remediation plans with regard to Year 2000 issues, and other factors.
There can be no assurance that these estimates are correct and actual results
could differ materially from these estimates.
These business considerations, and others, are discussed in more detail and
should be read in conjunction with the Business Risks discussed in the Company's
Annual Report of Form 10-K.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
(c) In December 1997, the Company issued 2,200,000 shares of its 5.5%
Convertible Preferred Stock ("Preferred Stock") in a registered direct
placement at a price of $5.00 per share.
Dividends on the Preferred Stock are cumulative, accrue on a quarterly
basis (on the last day of March, June, September and December of each year)
at an annual rate of $.275 per share and are payable within 30 days of each
accrual date. The payment of such dividends is senior in priority to
dividends on the Common Stock and must be on at least a pari passu basis
with any other series of preferred stock of the Company. At the Company's
option, the Company may pay dividends in either cash or shares of Common
Stock, valued on the basis of the then current market price of such shares.
In September 1998, the Company issued 75,628 shares of Common Stock valued
at approximately $151,000 in payment of the quarterly dividend declared as
of September 30, 1998. Such shares were issued to the holders of the
Preferred Stock pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) thereof.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
The Company filed a Form 8-K on July 15, 1998.
Page 15
<PAGE>
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: November 16, 1998 /s/ R. Douglas Armstrong
-------------------------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 /s/ Todd E. Simpson
-------------------------------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1* Restated Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
4.1** Amended and Restated Investors' Rights Agreement, dated April 7,
1992.
4.2*** Certificate of Designations Preferences and Rights of 1998 Series I
Preferred Stock
4.3*** Securities Purchase Agreement, dated July 2, 1998, by and between
the Company and RGC International Investors, LDC ("RGC")
4.4*** Registration Rights Agreement dated July 2, 1998, by and between
the Company and RGC
19.1**** Annual Report to Shareholders.
22.1***** Definitive Proxy Statement.
27.1 Financial Data Schedule.
________________________
* 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.
*** Incorporated by reference to the Company's Form 8-K filed on July 15,
1998.
**** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 .
***** Filed with the Commission on October 13, 1998.
Page 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,121,000
<SECURITIES> 6,565,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,061,000
<PP&E> 3,041,000
<DEPRECIATION> 2,359,000
<TOTAL-ASSETS> 13,743,000
<CURRENT-LIABILITIES> 1,546,000
<BONDS> 0
0
14,539,000
<COMMON> 59,812,000
<OTHER-SE> (62,156,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,743,000
<SALES> 0
<TOTAL-REVENUES> 163,000
<CGS> 0
<TOTAL-COSTS> 3,744,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> (3,362,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,362,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,362,000)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
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