<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 MARCH 31, 1999, 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 (Zip code)
offices)
(734) 930-5555
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] - Yes [_] - No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 16,930,167
(Class) Outstanding at May 11, 1999
<PAGE>
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
March 31, 1999
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets as of June 30, 1998 and March 31, 1999 3
b) Condensed Statements of Operations for the three and nine months
ended March 31, 1998 and 1999 and for the period from March 24, 1989
(Inception) to March 31, 1999 4
c) Condensed Statements of Cash Flows for the nine months ended March
31, 1998 and 1999 and for the period from March 24, 1989 (Inception)
to March 31, 1999 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 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
<PAGE>
PART I - FINANCILA INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,078,000 $ 6,435,000
Short-term investments 9,134,000 1,000,000
Receivables 167,000 157,000
Inventory - 592,000
Prepaid expenses 270,000 192,000
-------------- --------------
Total current assets 11,649,000 8,376,000
PROPERTY, NET 725,000 562,000
-------------- --------------
Total assets $ 12,374,000 $ 8,938,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,313,000 $ 964,000
Accrued employee expenses 150,000 179,000
Current portion of capital lease obligations 65,000 12,000
-------------- --------------
Total current liabilities 1,528,000 1,155,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares
authorized - 5,000,000; shares
issued and outstanding 2,200,000
and 4,000, respectively 9,930,000 3,797,000
Common stock, no par value; shares
authorized - 40,000,000; shares
issued and outstanding - 13,639,817
and 16,928,500, respectively 59,474,000 72,166,000
Deficit accumulated during the development stage (58,897,000) (68,180,000)
Stock purchase warrants 335,000 -
Unrealized gains on investments 4,000 -
-------------- --------------
Total shareholders' equity 10,846,000 7,783,000
-------------- --------------
Total liabilities and shareholders' equity $ 12,374,000 $ 8,938,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 24, 1989
Three months ended Nine months ended (Inception) to
March 31, March 31, March 31,
------------------------- -------------------------
1998 1999 1998 1999 1999
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Grants $ 80,000 $ 251,000 $ 142,000 $ 621,000 $ 2,641,000
Research and development
agreements - - 3,000 - 2,389,000
----------- ----------- ------------ ------------ ------------
Total revenues 80,000 251,000 145,000 621,000 5,030,000
----------- ----------- ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 4,966,000 3,005,000 11,997,000 9,263,000 63,193,000
General and administrative 722,000 669,000 2,218,000 2,016,000 13,916,000
----------- ----------- ------------ ------------ ------------
Total costs and expenses 5,688,000 3,674,000 14,215,000 11,279,000 77,109,000
----------- ----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (5,608,000) (3,423,000) (14,070,000) (10,658,000) (72,079,000)
----------- ----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income - - - 1,237,000 1,237,000
Interest income 256,000 117,000 692,000 480,000 3,618,000
Interest expense (3,000) (1,000) (10,000) (4,000) (267,000)
----------- ----------- ------------ ------------ ------------
Other income 253,000 116,000 682,000 1,713,000 4,588,000
----------- ----------- ------------ ------------ ------------
NET LOSS $(5,355,000) $(3,307,000) $(13,388,000) $(8,945,000) $(67,491,000)
=========== =========== ============ ============ ============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss $(5,355,000) $(3,307,000) $(13,388,000) $(8,945,000)
Dividends and yields on preferred
stock (152,000) (55,000) (199,000) (338,000)
Charge related to issuance of
preferred stock - - (3,439,000) -
----------- ----------- ------------ -----------
Net loss applicable to Common Shares $(5,507,000) $(3,362,000) $(17,026,000) $(9,283,000)
=========== =========== ============ ===========
NET LOSS PER COMMON SHARE (Basic and
Diluted) $ (.41) $ (.20) $ (1.28) $ (.63)
=========== =========== ============ ===========
Weighted average number of common
and common equivalent shares
outstanding 13,306,000 16,505,000 13,284,000 14,808,000
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
March 24, 1989
Nine months ended (Inception) to
March 31, March 31,
-----------------------------
1998 1999 1999
-------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,388,000) $(8,945,000) $(67,491,000)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 434,000 236,000 2,624,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on investments (132,000) (70,000) (453,000)
Expense related to stock and stock options granted 372,000 1,110,000 2,738,000
Changes in assets and liabilities:
Receivables (30,000) 10,000 (181,000)
Inventory - (592,000) (592,000)
Prepaid expenses (64,000) 78,000 (192,000)
Accounts payable and accrued expenses 1,295,000 (349,000) 964,000
Accrued employee expenses 27,000 29,000 179,000
-------------- ------------ -------------
Net cash used for operating activities (11,486,000) (8,493,000) (62,294,000)
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments (10,353,000) (1,000,000) (44,464,000)
Maturities of short-term investments 12,800,000 9,200,000 43,917,000
Capital purchases (184,000) (73,000) (2,449,000)
Proceeds from sale of property held for resale - - 400,000
-------------- ------------ -------------
Net cash provided by (used for) investing activities 2,263,000 8,127,000 (2,669,000)
FINANCING ACTIVITIES:
Issuance of preferred stock 9,930,000 4,689,000 48,837,000
Issuance of common stock 126,000 87,000 20,192,000
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations (105,000) (53,000) (1,162,000)
-------------- ------------ -------------
Net cash provided by financing activities 9,951,000 4,723,000 71,398,000
-------------- ------------ -------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 728,000 4,357,000 6,435,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,943,000 2,078,000 -
-------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,671,000 $ 6,435,000 $ 6,435,000
============== ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 10,000 $ 4,000 $ 267,000
Additions to capital lease obligations - - 1,174,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
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 and
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 others, 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 and nine months ended March 31, 1999, 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. Upon the completion of the
Company's initial public offering, all outstanding shares of preferred stock
at that time were automatically converted into common stock. Accordingly,
such shares of preferred stock are assumed to have been converted into common
stock at the time of issuance.
The computation of net loss per common share reflects dividends, yields and
other adjustments relating to Company's 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.
6
<PAGE>
4. LICENSE AND SUPPLY AGREEMENT
In February 1999 the Company and Immunex Corporation ("Immunex"), amended the
License and Supply Agreement (the "Agreement"), entered into in March 1996,
to provide for the issuance of $1,100,000 in common stock by the Company to
Immunex as payment for the $1,000,000 renewal fee due in March 1999 under the
Agreement. The accompanying financial statements reflect a charge to research
and development expense of $1,100,000 relating to a total of 425,071 shares
of common stock issued to Immunex in fulfillment of this payment.
7
<PAGE>
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 has commenced its initial product
launch in Europe of the AastromReplicell(TM) Cell Production System (System),
but does not expect to generate positive cash flows from operations for at least
the next several years. Until product sales commence, the Company expects that
its revenue sources will continue to 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 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. A portion 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 have decreased as the product progresses into market launch and clinical
development costs are expected to increase as the Company begins its U.S.
pivotal clinical trials. Additionally, marketing and general and administrative
expenses are expected to increase in support of European marketing activities.
Under the Company's license agreement with Immunex, the $1,000,000 annual
renewal fee that was due in March 1999 was paid through the issuance of
$1,100,000 of the Company's common stock. An additional $1,000,000 renewal fee
is due in 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. Through March 31, 1999, the Company has accumulated losses of
$67,491,000. There can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all.
8
<PAGE>
RESULTS OF OPERATIONS
Three and nine months ended March 31, 1999 and 1998
Total revenues for the quarter and nine-month periods ended March 31, 1999
consisted of grant funding and increased to $251,000 and $621,000, respectively,
from $80,000 and $145,000, compared to the same periods in 1998. The increases
in revenues for the periods ended March 31, 1999 are the result of an in
increase in research activities under research grants received by the Company.
Costs and expenses decreased to $3,674,000 for the quarter ended March 31, 1999
from $5,688,000 for the same period in 1998, and decreased to $11,279,000 for
the nine-month period ended March 31, 1999 compared to $14,215,000 in 1998. The
decreases in costs and expenses were principally the result of decreases in
research and development expense to $3,005,000 and $9,263,000 for the quarter
and nine months ended March 31, 1999, respectively, from $4,966,000 and
$11,997,000 for the same periods in 1998. General and administrative expenses
also decreased to $669,000 and $2,016,000 for the quarter and nine months ended
March 31, 1999, from $722,000 and $2,218,000, for the same periods in 1998,
primarily as a result of certain non-cash charges incurred in 1998.
Interest income was $117,000 for the quarter ended March 31, 1999, compared to
$256,000 for the same period in 1998, and was $480,000 for the nine months ended
March 31, 1999, compared to $692,000 for the same period ending in 1998. These
decreases primarily reflect an overall decrease in the levels of cash, cash
equivalents and short-term investments during the periods.
Net loss for the quarter ended March 31, 1999 was $3,307,000, or $.20 per common
share, compared to a net loss of $5,355,000, or $.41 per common share for the
same period in 1998. Net loss for the nine months ended March 31, 1999 was
$8,945,000, or $.63 per common share compared to $13,388,000, or $1.28 per
common share in 1998. The net loss for the nine-month period ended March 31,
1999 includes other income of $1,237,000 representing a one-time payment
received from Cobe in connection with the termination of the Company's marketing
and distribution agreement with Cobe in November 1998. The computation of net
loss per common share for the nine months ended March 31, 1998, reflects a one-
time charge of $3,439,000 related to the sale of preferred stock by the Company
in December 1997. The computations of net loss per common share for all periods
presented reflect an adjustment for dividends and yields on the Company's
outstanding preferred stock. The one-time charge and dividends and yields on
preferred stock affect only the computation of net loss per common share and are
not included in the net loss for the periods.
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 March
31, 1999, have totaled
9
<PAGE>
approximately $75,963,000, 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
$7,435,000 at March 31, 1999, a decrease of $3,777,000 from June 30, 1998. The
primary uses of cash, cash equivalents and short-term investments during the
nine months ended March 31, 1999, included $8,423,000 to finance the Company's
operations and working capital requirements, $73,000 in capital equipment
additions and $53,000 in scheduled debt payments. The Company plans to continue
its policy of investing excess funds in short-term, investment-grade, interest-
bearing instruments.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments, 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, public or
private financing transactions and other means that may be available to the
Company. Unless additional funding is obtained, or the Company reduces the
scope of its operating objectives, 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 and initial product launch, expand its clinical trials,
and to fund other research and development and working capital and other
corporate requirements into late-1999. 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
the Company's Annual Report on Form 10-K. The Company is in active business
discussions intended to obtain additional funding during this period. 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 will be
required to further delay, reduce the scope of, or eliminate one or more of its
research and development programs, or curtail some or all or its operations,
which would 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.
10
<PAGE>
CERTAIN BUSINESS CONSIDERATIONS
Product Development Uncertainties
Commercialization of the Company's technology and product candidates, including
its lead product candidate, the AastromReplicell(TM) System, will require
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 for its planned principle markets, 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, or improvement, 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.
Relationship with Cobe BCT, Inc.
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 implementing the initial European 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 AastromReplicell(TM) System and European market introduction for
stem cell therapy, development of additional therapy kits can be pursued for a
number of emerging cell therapies being developed by others. Such other cell
therapy applications were outside of the scope of the Distribution Agreement and
outside of Cobe's area of focus. Accordingly, the Company and Cobe terminated
the Distribution Agreement, effective November 16, 1998. Cobe currently owns
approximately 2.4 million shares of the Company's common stock, and as part of
the termination agreement, Cobe has agreed not to sell any such shares until at
least January 1, 2001. Thereafter, sale of the shares into the market could
effect the price of the Company's common stock. The Company believes that
termination of the Distribution Agreement, which brings rights to all fields of
use to the Company, will better allow for a consolidated marketing plan to be
implemented for the AastromReplicell(TM) System product line. The
AastromReplicell(TM) System consists of an
11
<PAGE>
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 and the Company is seeking such a marketing
partner. 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.
Uncertainties of Clinical Trials
The approval of the U.S. Food and Drug Administration (the "FDA") will be
required before any commercial sales of the Company's product candidates may
commence in the U.S. The Company is currently conducting clinical trials to
demonstrate the safety and biological activity of cells produced in the
AastromReplicell(TM) System in a limited number of patients. If the results
from these trials are successful, the Company intends to use these results to
seek clearance from the FDA to commence additional pivotal clinical trials in
the U.S., the first of which began in December 1998 with additional trials
expected. Additionally, the results from completed clinical studies and ongoing
and future clinical studies, if positive, are intended to support the limited
market introduction of the AastromReplicell(TM) System in Europe. The patients
enrolled in these 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 blood and immune 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 trials or future
trials. For example, in the trials to date, some of the 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 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 pre-clinical 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.
12
<PAGE>
European Regulatory Matters
The AastromReplicell(TM) System components, are currently being regulated in
Europe as Class I Sterile or Class IIb Medical Devices, 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, permission to affix the CE Mark from a Notified Body is required 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. The Company may
also be required to comply with certain 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 the various
components of the SC-I Therapy Kit for the production of bone marrow derived
cells and the CB-I Therapy Kit used for expansion of umbilical cord blood cells.
While initial approvals have been obtained, there can be no assurance that the
Company and its suppliers will be able to meet the minimum requirements
necessary to maintain such compliance. The inability to maintain 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) System 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.
Dependence on Third Parties for Materials
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
13
<PAGE>
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.
History of Operating Losses/Future Capital Needs
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 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
will be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce or terminate business development and
other operating activities.
Year 2000 Issues
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 one year, computer systems and/or software used by many companies in a
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;" that is, its computer systems are 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 the 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
14
<PAGE>
business, operating results and financial condition. The Company has yet to
determine the extent, 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 delivering products or services required
by the Company on a timely basis. 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.
Private Equity Financing
In July 1998 the Company 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 Company's common
stock at the lower of (i) $4.81, or (ii) a price based on the market price of
the Company's common stock prior to conversion. Conversion of the Series I
Preferred is subject to limited exceptions until July 1999 and will
automatically convert into common stock on July 2, 2001, unless sooner
converted. As of March 31, 1999, 4,000 shares of Series I Preferred remain
outstanding. In general, the Company may require the holders to convert the
Series I Preferred if the average closing bid price of the Company's common
stock exceeds $9.62 for specified periods beginning in July 1999. In connection
with the sale of the 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 Company trades
at a price greater than $6.00 for a specified duration during the period ending
in August 1999.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(c) In March 1999, the Company issued 425,071 shares of its common
stock to Immunex Corporation in connection with a renewal payment
due under its License and Supply Agreement with Immunex. These
shares were issued without registration pursuant to the exemption
provided by Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the period.
16
<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: May 14, 1999 /s/ R. Douglas Armstrong
------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 /s/ Todd E. Simpson
-------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 * Restated Articles of Incorporation of the Company.
3.2 ** Bylaws of the Company.
4.1 *** Certificate of Designations Preferences and Rights of 1998 Series
I Preferred Stock.
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.
18
<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 MARCH 31,
1999, 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,435,000
<SECURITIES> 1,000,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,376,000
<PP&E> 3,070,000
<DEPRECIATION> 2,508,000
<TOTAL-ASSETS> 8,938,000
<CURRENT-LIABILITIES> 1,155,000
<BONDS> 0
0
3,797,000
<COMMON> 72,166,000
<OTHER-SE> (68,180,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,938,000
<SALES> 0
<TOTAL-REVENUES> 251,000
<CGS> 0
<TOTAL-COSTS> 3,674,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (3,307,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,307,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,307,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
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