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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d 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 30,784,769
(Class) Outstanding at May 9, 2000
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AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements ----
<S> <C> <C>
a) Consolidated Condensed Balance Sheets as of June 30, 1999 and March
31, 2000 3
b) Consolidated Condensed Statements of Operations for the three and
nine months ended March 31, 1999 and 2000 and for the period from
March 24, 1989 (Inception) to March 31, 2000 4
c) Consolidated Condensed Statements of Cash Flows for the nine months
ended March 31, 1999 and 2000 and for the period from March 24, 1989
(Inception) to March 31, 2000 5
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 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................... $ 7,528,000 $ 3,805,000
Short term investments ...................... -- 5,215,000
Receivables ................................. 113,000 169,000
Inventory ................................... 1,144,000 --
Prepaid expenses and other .................. 253,000 231,000
------------ ------------
Total current assets ..................... 9,038,000 9,420,000
PROPERTY, NET ................................... 502,000 339,000
------------ ------------
Total assets ......................... $ 9,540,000 $ 9,759,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ....... $ 836,000 $ 1,196,000
Accrued employee expenses ................... 193,000 701,000
------------ ------------
Total current liabilities ................ 1,029,000 1,897,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares
authorized - 5,000,000; shares
issued and outstanding - 7,000 at
June 30, 1999 ............................... 6,588,000 --
Common stock, no par value; shares
authorized - 40,000,000; shares
issued and outstanding - 16,980,161
and 30,774,519, respectively ................ 72,257,000 86,446,000
Deficit accumulated during the development stage (70,334,000) (78,584,000)
------------ ------------
Total shareholders' equity .................. 8,511,000 7,862,000
------------ ------------
Total liabilities and shareholders' equity $ 9,540,000 $ 9,759,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended March 24, 1989
March 31, March 31, (Inception) to
---------------------------- ---------------------------- March 31,
1999 2000 1999 2000 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Product sales and rentals ............... $ -- $ -- $ -- $ 169,000 $ 203,000
Grants .................................. 251,000 212,000 621,000 832,000 4,068,000
Research and development agreements ..... -- -- -- -- 2,020,000
------------ ------------ ------------ ------------ ------------
Total revenues ....................... 251,000 212,000 621,000 1,001,000 6,291,000
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales and rentals ....... -- -- -- 1,251,000 1,257,000
Research and development ................ 3,005,000 1,936,000 9,263,000 5,415,000 70,216,000
Selling, general and administrative ..... 669,000 737,000 2,016,000 2,596,000 17,332,000
------------ ------------ ------------ ------------ ------------
Total costs and expenses ............. 3,674,000 2,673,000 11,279,000 9,262,000 88,805,000
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ........................ (3,423,000) (2,461,000) (10,658,000) (8,261,000) (82,514,000)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income ............................ -- -- 1,237,000 -- 1,237,000
Interest income ......................... 117,000 80,000 480,000 219,000 3,928,000
Interest expense ........................ (1,000) -- (4,000) -- (267,000)
------------ ------------ ------------ ------------ ------------
Other income ......................... 116,000 80,000 1,713,000 219,000 4,898,000
------------ ------------ ------------ ------------ ------------
NET LOSS .................................... $ (3,307,000) $ (2,381,000) $ (8,945,000) $ (8,042,000) $(77,616,000)
============ ============ ============ ============ ============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss ................................ $ (3,307,000) $ (2,381,000) $ (8,945,000) $ (8,042,000)
Dividends and yields on preferred stock . (55,000) (20,000) (338,000) (208,000)
------------ ------------ ------------ ------------
Net loss applicable to Common Shares .... $ (3,362,000) $ (2,401,000) $ (9,283,000) $ (8,250,000)
NET LOSS PER COMMON SHARE (Basic and Diluted) $ (.20) $ (.09) $ (.63) $ (.40)
============ ============ ============ ============
Weighted average number of common
shares outstanding ...................... 16,505,000 26,964,000 14,808,000 20,553,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended March 24, 1989
March 31, (Inception) to
---------------------------- March 31,
1999 2000 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ..................................... $ (8,945,000) $ (8,042,000) $(77,616,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization .......... 236,000 295,000 2,979,000
Loss on property held for resale ....... -- -- 110,000
Amortization of discounts and premiums
on investments ....................... (70,000) (5,000) (458,000)
Stock compensation expense ............. 10,000 5,000 544,000
Stock issued pursuant to license
agreement .......................... 1,100,000 1,100,000 3,300,000
Write down of inventory ................ -- 1,027,000 1,027,000
Changes in assets and liabilities:
Receivables ........................ 10,000 (56,000) (193,000)
Inventory .......................... (592,000) 117,000 (1,027,000)
Prepaid expenses ................... 78,000 22,000 (231,000)
Accounts payable and accrued
expenses ......................... (349,000) 360,000 1,196,000
Accrued employee expenses .......... 29,000 508,000 701,000
------------ ------------ ------------
Net cash used for operating activities ....... (8,493,000) (4,669,000) (69,668,000)
------------ ------------ ------------
INVESTING ACTIVITIES:
Organizational costs ......................... -- -- (73,000)
Purchase of short-term investments ........... (1,000,000) (5,210,000) (49,674,000)
Maturities of short-term investments ......... 9,200,000 -- 44,917,000
Capital purchases ............................ (73,000) (132,000) (2,581,000)
Proceeds from sale of property held for resale -- -- 400,000
------------ ------------ ------------
Net cash provided by (used for) investing
activities ................................. 8,127,000 (5,342,000) (7,011,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of preferred stock .................. 4,689,000 -- 51,647,000
Issuance of Common Stock ..................... 87,000 6,288,000 26,529,000
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 ............................... (53,000) -- (1,174,000)
------------ ------------ ------------
Net cash provided by financing activities .... 4,723,000 6,288,000 80,484,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................ 4,357,000 (3,723,000) 3,805,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . 2,078,000 7,528,000 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....... $ 6,435,000 $ 3,805,000 $ 3,805,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................. $ 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
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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) and is in the development stage. The Company operates its
business in one reportable segment - 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 and sale of processes and products for the ex vivo
production of human cells for use in cell and ex vivo gene therapy.
Successful future operations are subject to several technical and business
risks, including satisfactory product development, obtaining regulatory
approval and market acceptance for its products and the Company's ability
to obtain future funding.
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 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, 2000, are not necessarily indicative of the results to be
expected for the full year or for any other period.
The consolidated financial statements include the accounts of Aastrom and
its wholly-owned subsidiary, Zellera AG ("Zellera"), which is located in
Berlin, Germany (collectively, the "Company"). All significant
inter-company transactions and accounts have been eliminated in
consolidation.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K, as amended on Form 8-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 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 computation of net loss per common
share reflects dividends and yields on outstanding preferred stock
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which affect only the computation of net loss per common share and are not
included in the computation of net loss for the period.
4. EQUITY SECURITIES
In July 1998 the Company sold 5,000 shares of Series I Preferred Stock for
net proceeds of $4,540,000. In May 1999 the Company sold 3,000 shares of
Series III Preferred Stock for net proceeds of $2,720,000. The shares of
Series I Preferred Stock and Series III Preferred Stock were convertible,
at the option of the holder, into shares of the Company's common stock at a
price based on the market price of the Company's common stock prior to
conversion. During the quarter ended March 31, 2000, the Company issued
7,954,647 shares of common stock, upon the conversion of all remaining
4,000 shares of Series I Preferred Stock and all remaining 1,550 shares of
Series III Preferred Stock.
In February 2000, the Company completed the sale of 2,264,151 units, each
of which consists of one share of common stock and a three-year warrant to
purchase one-half of one share of common stock at a per share exercise
price of approximately $3.70, subject to adjustment, for net proceeds of
approximately $5,900,000. Assuming full exercise of the stock purchase
warrants, the Company could receive up to an additional $4,183,000.
7
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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 others. Due to funding limitations, the Company has suspended
the initial product launch in Europe of the AastromReplicell(TM) System.
Accordingly, the Company does not expect to generate positive cash flows from
operations for at least the next several years, and even then, only if funding
is obtained and marketing activities can be resumed and such marketing efforts
can be successful. Unless more significant 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 ability to enter into agreements with
corporate collaborators, the timing of the achievement of certain other
milestones and the extent to which associated costs are reimbursed under grants
or other arrangements. Additionally, the previous reductions in the Company's
operations, have reduced the potential for revenues from these sources. A
portion of the Company's revenues from product sales 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 has progressed into the general production phase. The Company has
recommenced a portion of the clinical development activities that had been
reduced in response to funding limitations. If additional funding becomes
available the Company may increase the scope of its clinical development
activities and related costs to complete U.S. pivotal clinical trials.
Similarly, if the Company resumes marketing activities, related expenses are
expected to increase in support of those activities. Under the Company's 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 the Company's
common stock. 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. The
Company completed the sale of equity securities in February 2000, providing net
proceeds of $5,900,000. The Company needs to obtain additional financing and
continues to pursue its financing options. Until such time as additional
financing can be obtained, the Company has suspended its European marketing
8
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activities of the AastromReplicell(TM) System and is conducting only limited
U.S. clinical trial and other research activities.
If the Company resumes expanded operations, it 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. 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 achieves greater 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 significant product sales
commence, which is unlikely to occur until the Company obtains significant
additional funding. Through March 31, 2000, the Company has accumulated losses
of $77,616,000. There can be no assurance that the Company 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 ended March 31, 2000, consisting of grant revenues,
were $212,000, compared to $251,000 in 1999. Revenues for the nine months ended
March 31, 2000 were $1,001,000, compared to $621,000 in 1999. Revenues for the
nine months ended March 31, 2000 include product sales of $169,000 relating to
sales of AastromReplicell(TM) System equipment, therapy kits and equipment
rentals. Marketing activities for these products were suspended in September
1999, however, as part of reductions in operations pending completion of
necessary financing. As a result, the Company does not expect any significant
sales unless and until marketing activities resume. Grant revenues increased to
$832,000 for the nine months ended March 31, 2000, from $621,000 in 1999,
reflecting increased activities under grant funded programs, but decreased for
the quarter ended March 31, 2000, reflecting an overall decrease in research
activities during the quarter.
Costs and expenses for the quarter ended March 31, 2000 decreased to $2,673,000,
compared to $3,674,000 in 1999 and decreased to $9,262,000 for the nine months
ended March 31, 2000 from $11,279,000 in 1999. The overall decreases in costs
and expenses during 1999 reflect decreases in research and development expense
to $1,936,000 and $5,415,000 for the quarter and nine months ended March 31,
2000, respectively, from $3,005,000 and $9,263,000 for the same periods in 1999.
These decreased expenses reflect a decline in research and development expense
for the AastromReplicell(TM) System as the product line reached the European
marketplace and expense reduction activities implemented by the Company.
Research and development expense for the periods ended March 31, 1999 and 2000,
include charges of $1,100,000 related to annual renewal fees payable under the
Company's supply agreement with Immunex Corporation. These fees were paid
through the issuance of common stock. Cost of product sales and rentals for the
nine months ended March 31, 2000 was $1,251,000, consisting principally of
AastromReplicell(TM) System inventory that was written down with the suspension
of marketing activities in September 1999.
9
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Interest income was $80,000 and $219,000 for the quarter and nine months ended
March 31, 2000, respectively, compared to $117,000 and $480,000 for the same
periods in 1999. These decreases correspond to decreases in the level of
invested cash and cash equivalents during 2000.
The net loss for the quarter ended March 31, 2000 was $2,381,000, or $.09 per
common share, compared to a net loss of $3,307,000, or $.20 per common share for
the same period in 1999. The net loss for the nine months ended March 31, 2000
was $8,042,000, or $.40 per common share compared to $8,945,000, or $.63 per
common share in 1999. These decreases are principally the result of decreases in
the level of research and development expenses during the periods ended March
31, 2000. The net loss for the nine months ended March 31, 1999 includes other
income of $1,237,000 representing a one-time payment received by the Company in
December 1998. The computations of net loss per common share include adjustments
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.
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, 2000, have totaled approximately $86,446,000 and, to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest income, and funding under equipment leasing agreements.
The Company's combined cash and cash equivalents totaled $9,020,000 at March 31,
2000, an increase of $1,492,000 from June 30, 1999. The primary uses of cash and
cash equivalents during the nine months ended March 31, 2000 included $4,664,000
to finance the Company's operations and working capital requirements and
$132,000 in capital equipment additions. The primary sources of cash, cash
equivalents and short-term investment was from the sale of equity securities
which totaled $6,288,000 during the period. Successful future operations are
subject to several technical and business risks, including the Company's
continued ability to obtain future funding, satisfactory product development,
obtaining regulatory approval and market acceptance for its products. Based on
current funding and anticipated operating activities, the Company expects that
its available cash and expected interest income will be sufficient to finance
currently planned activities through the end of calendar year 2000. This is a
forward-looking statement and could be negatively affected by funding
limitations and other factors discussed under this heading as well as the
Business Considerations addressed below. The Company is pursuing additional
sources of financing. If it cannot obtain additional funding prior to that time,
the Company will be forced to make substantial reductions in the scope and size
of its operations, and may be forced to curtail activities currently planned to
be resumed. In order to grow and expand its business, and to introduce its
product candidates into the marketplace, the Company will need to raise
additional funds. The Company will also need additional funds or a collaborative
partner, or both, to finance the research and development activities of its
product candidates for the expansion of additional cell types.
10
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The Company's future cash requirements will depend on many factors, including
the outcome of strategic partnering and corporate alliance discussions, the
availability of resources, continued scientific progress in its research and
development programs, the scope and results of clinical trials, the time and
costs involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for at least the next
several years due to the expected spending for research and development
programs, the cost of commercializing its product candidates, and the suspension
of marketing activities as a result of limited resources. The Company intends 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. The Company is attempting to obtain
such additional funding. If such additional funding cannot be obtained in the
near future, the Company will be forced to substantially reduce the scope and
size of its operations.
The Company has only a limited amount of capital to sustain its operations, even
at a reduced scale. This is a forward-looking statement which could be
negatively impacted by funding limitations, uncertainties inherent in the
capital raising process and other factors discussed under this heading and
below, and under the caption "Business Risks" in the Company's Annual Report on
Form 10-K, as amended. The Company expects that its primary sources of capital
for the foreseeable future will be through potential 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 that
such collaborative agreements could 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, including the biotechnology 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, curtail capital
expenditures and further reduce or terminate other operating activities, 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
1999 Annual Report on Form 10-K, as amended on Form 8-K, and Notes to Financial
Statements included herein.
11
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CERTAIN BUSINESS CONSIDERATIONS
History of Operating Losses/Need for Additional Capital
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 significant revenues
from the commercialization of any of its product candidates in planned principal
markets. 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. The Company has a need for
additional funding, and there can be no assurance that any such additional
funding will be available to the Company on reasonable terms, or at all. The
Company is actively seeking funding which, if obtained, is expected to come
through the sale of its equity securities and may include rights for the
investor to purchase additional stock. Several factors will affect the Company's
ability to raise necessary additional funding, including 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, including
biotechnology. If adequate funds are not available, the Company will be required
to further delay or terminate research and development programs, curtail capital
expenditures, and reduce or terminate business development and other operating
activities any of which would have a material adverse effect on the Company's
business. The Company has the authority, without shareholder approval, to issue
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions of these shares without any further vote or action by the
shareholders. This authority, together with certain provisions of the Company's
charter documents, may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. This effect could occur even if the shareholders
consider the change in control to be in their best interest. The Company may be
required to issue shares of preferred stock to raise additional capital. These
shares would likely have rights that provide for preferential payment to the
holder of the preferred shares before payments are made to holders of the common
stock. Thus, in the event of a business combination, the holders of the
preferred stock may receive a disproportionate percentage of the total
consideration received.
While the Company is operating with limited cash resources, it is attempting to
balance the benefits of increasing spending to accelerate the pace of activities
focused on commercializing the AastromReplicell(TM) System against the concerns
of preserving available capital to support basic activities until additional
financing can be obtained. If the Company reduces operations too far, it will
further delay its commercialization activities and will jeopardize the Company's
ability to retain necessary personnel. On the other hand, if the Company does
not reduce operations to a sufficient degree and at appropriate times, it runs
the risk of depleting its available funds before additional financing can be
obtained, thereby requiring more substantial
12
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reductions in operations or a termination of operations. Either outcome would
adversely effect the Company's business, financial condition and results of
operations. Additionally, the process of increasing and reducing the level of
operational activities and the number of employees creates significant
inefficiencies and retention issues that will adversely affect the Company, its
business, financial condition and results of operations.
Potential Strategic Partnerships
The AastromReplicell(TM) System consists of an automated clinical system
designed to enable hospitals, cell production sites or other companies 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 for distribution and support of
the AastromReplicell(TM) System will benefit from one or more strategic
alliances, and the Company has been seeking strategic partners with strengths in
these areas. The structures for such a strategic alliance may include a business
combination or merger, in which the Company may, or may not, be the surviving or
governing entity. There can be no assurance that the Company will be able to
enter into a new marketing and distribution relationship on acceptable terms, if
at all, or that if such a marketing and distribution partnership is achieved,
that 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 further delays in the planning or implementation of
distribution or marketing activities while a partnership or additional funding
is sought, will have a material adverse effect on commercialization of the
AastromReplicell(TM) System and he Company's business, financial condition and
results of operations.
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 principal 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 potential 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,
13
<PAGE>
if established, will successfully lead to commercial applications of the
AastromReplicell(TM) System.
Uncertainties of Clinical Trials
The approval of the U.S. Food and Drug Administration ("FDA") will be required
before commercial sales of the Company's product candidates may commence in the
U.S. As a result of funding limitations, the Company has reduced or suspended
significant portions of its clinical trial activities which were designed to
demonstrate the safety and biological activity of cells produced in the
AastromReplicell(TM) System in a limited number of patients. If these trials are
resumed and the results are successful, the Company intends to use these results
to seek approval from the FDA to commence commercial sales in the U.S. for
approved indications. Additionally, the results from completed clinical studies
and ongoing and future clinical studies, if positive, are intended to support
future marketing activities 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 has
experienced, and may continue to 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. Further, there can be no assurance that even if the Company
successfully completes its clinical trials and receives approval from the FDA to
begin commercialization of its products in the U.S., that such marketing
activities will be successful.
European Regulatory Matters
The AastromReplicell(TM) System components, are currently being regulated in
Europe as Class I Sterile, Class IIb, or Class III 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. The CE Mark certifies that the Company and its operations comply with
certain minimum quality standards and compliance procedures, or, alternatively,
that its
14
<PAGE>
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 production of certain 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 ongoing
minimum requirements necessary to maintain such compliance. The inability to
maintain production-level manufacturing or supply of the AastromReplicell(TM)
System components or non-compliance with the ongoing regulatory requirements to
permit commercialization would have a material adverse effect on the Company's
business, strategic partnering activities, 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.
Potential Delisting from Nasdaq
The Company is 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 its common stock on the Nasdaq
National Market. Within the last six months, the Company's common stock price
has fallen below the minimum level for some periods and during other periods its
tangible net worth has been below the amount required. While the Company's
common stock has not been delisted as a result of failures to comply with the
minimum listing requirements, there can be no assurance that the stock price or
tangible net worth may not fall below the Nasdaq requirements, or that the
Company may not be able to comply with other listing requirements, and its
common stock might be delisted. If that happened the market price and liquidity
of the Company's common stock would be impaired.
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
15
<PAGE>
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.
Dependence on Key Personnel
The Company's success depends in large part upon its ability to attract and
retain highly qualified scientific, management and other personnel. The Company
faces competition for such personnel from other companies, research and academic
institutions and other entities. For example, since the Company's initial public
offering in February 1997, three of the six executive officers that were at the
Company at that time have since left the Company for positions with other
organizations and the Company has hired two new executive officers to resume
their responsibilities, one of which has subsequently left the Company.
Significant increases and reductions in the scope and size of operations also
adversely affects employee relations and the rate of progress on development
plans. As a result of these and other factors, we may not be successful in
hiring or retaining key personnel.
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, as amended.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company receives threats or may be subject
to litigation matters incidental to its business. However, the
Company is not currently a party to any material pending legal
proceedings.
Item 2. Changes in Securities and Use of Proceeds
In July 1998 the Company sold 5,000 shares of Series I Preferred
Stock for net proceeds of $4,540,000. In May 1999 the Company
sold 3,000 shares of Series III Preferred Stock for net proceeds
of $2,720,000. The shares of Series I Preferred Stock and Series
III Preferred Stock were convertible, at the option of the
holder, into shares of the Company's common stock at a price
based on the market price of the Company's common stock prior to
conversion. During the quarter ended March 31, 2000, the Company
issued 7,954,647 shares of common stock, upon the conversion of
all remaining 4,000 shares of Series I Preferred Stock and all
remaining 1,550 shares of Series III Preferred Stock. The shares
of common stock issued upon conversion were issued in a
transaction exempt from the registration requirements of the
Securities Act of 1933 by reason of Section 3(a)(9) thereof.
These shares were issued to existing security holders upon
conversion of outstanding securities of the Company in a
transaction where no commission or other remuneration was paid
directly or indirectly in connection with such exchange.
On February 29, 2000, the Company sold 2,264,151 units, each of
which consists of one share of common stock and a three-year
warrant to purchase one-half of one share of common stock at a
per share exercise price of approximately $3.70 (subject to
adjustment) for net proceeds of approximately $5,900,000. These
shares were sold to one accredited, institutional investor in a
private placement exempt from the registration requirements of
the Securities Act by reason of Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
The Company filed Reports on Form 8-K dated January 19,
2000 and March 3, 2000.
19
<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 12, 2000 /s/ R. Douglas Armstrong
------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2000 /s/ Todd E. Simpson
-------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 * Restated Articles of Incorporation of the Company
3.2 ** Bylaws of the Company
10.57 *** Securities Purchase Agreement, dated February 28, 2000,
by and between the Company and RGC International Investors,
LDC ("RGC")
10.58 *** Registration Rights Agreement dated February 28, 2000,
by and between the Company and RGC
10.59 *** Stock Purchase Warrant dated February 29, 2000.
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 Report on Form 8-K
filed on March 3, 2000.
21
<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,
2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,805,000
<SECURITIES> 5,215,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,420,000
<PP&E> 3,109,000
<DEPRECIATION> 2,770,000
<TOTAL-ASSETS> 9,759,000
<CURRENT-LIABILITIES> 1,897,000
<BONDS> 0
0
0
<COMMON> 86,446,000
<OTHER-SE> (78,584,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,759,000
<SALES> 0
<TOTAL-REVENUES> 212,000
<CGS> 0
<TOTAL-COSTS> 2,673,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,381,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,381,000)
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<NET-INCOME> (2,381,000)
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