SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, OR
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
Commission file number 0-22025
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AASTROM BIOSCIENCES, INC.
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(Exact name of registrant as specified in its charter)
Michigan 94-3096597
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(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
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(Address of principal executive offices) (Zip code)
(734) 930-5555
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] - Yes [_] - No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 33,843,388
(Class) Outstanding at November 8, 2000
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
September 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
a) Consolidated Condensed Balance Sheets as of June 30, 2000 and
September 30, 2000 3
b) Consolidated Condensed Statements of Operations for the three months
ended September 30, 1999 and 2000 and for the period from March 24,
1989 (Inception) to September 30, 2000 4
c) Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1999 and 2000 and for the period from March 24,
1989 (Inception) to September 30, 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 18
SIGNATURES 19
EXHIBIT INDEX 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, September 30,
2000 2000
------------ ------------
Assets (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,064,000 $ 3,764,000
Short-term investments 10,681,000 7,969,000
Receivables 242,000 193,000
Prepaid expenses and other 158,000 338,000
----------- ------------
Total current assets 13,145,000 12,264,000
PROPERTY, NET 292,000 242,000
----------- ------------
Total assets $13,437,000 $ 12,506,000
=========== ============
Liabilities and Shareholders' Equity
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 837,000 $ 793,000
Accrued employee expenses 165,000 87,000
------------ ------------
Total current liabilities 1,002,000 880,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value; shares
authorized - 60,000,000; shares issued
and outstanding - 33,607,659 and
33,842,388, respectively 92,367,000 92,954,000
Deficit accumulated during the development stage (79,932,000) (81,338,000)
Unrealized gain on investments - 10,000
------------ ------------
Total shareholders' equity 12,435,000 11,626,000
------------ ------------
Total liabilities and shareholders' equity $ 13,437,000 $ 12,506,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
March 24, 1989
Three months ended (Inception) to
September 30, September 30,
--------------------------- -------------
1999 2000 2000
----------- ------------ -------------
REVENUES:
Product sales and rentals $ 114,000 $ - $ 203,000
Grants 271,000 167,000 4,384,000
Research and development agreements - - 2,020,000
----------- ----------- ------------
Total revenues 385,000 167,000 6,607,000
----------- ----------- ------------
COSTS AND EXPENSES:
Cost of product sales and rentals 1,230,000 - 1,257,000
Research and development 1,610,000 1,020,000 72,110,000
Selling, general and administrative 1,161,000 762,000 18,862,000
------------ ----------- ------------
Total costs and expenses 4,001,000 1,782,000 92,229,000
------------ ----------- ------------
LOSS FROM OPERATIONS (3,616,000) (1,615,000) (85,622,000)
------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 81,000 209,000 4,282,000
Interest expense - - (267,000)
Other income - - 1,237,000
----------- ----------- -------------
Total other income 81,000 209,000 5,252,000
----------- ----------- -------------
NET LOSS $(3,535,000) $(1,406,000) $ (80,370,000)
=========== =========== =============
COMPUTATION OF NET LOSS APPLICABLE TO COMMON SHARES:
Net loss $(3,535,000) $(1,406,000)
Dividends and yields on preferred stock (96,000) -
----------- -----------
Net loss applicable to common shares $(3,631,000) $(1,406,000)
=========== ===========
NET LOSS PER COMMON SHARE (Basic and Diluted) $ (.21) $ (.04)
=========== ===========
Weighted average number of common shares outstanding 16,985,000 33,674,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
March 24, 1989
Three months ended (Inception) to
September 30, September 30,
----------------------------
1999 2000 2000
----------- ------------- ------------
OPERATING ACTIVITIES:
Net loss $(3,535,000) $(1,406,000) $(80,370,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 181,000 50,000 3,080,000
Loss on property held for resale - - 110,000
Amortization of discounts and premiums on investments - (28,000) (502,000)
Stock compensation expense 5,000 348,000 892,000
Write down of inventory - - 1,027,000
Stock issue pursuant to license agreement - - 3,300,000
Changes in assets and liabilities:
Receivables (80,000) 49,000 (217,000)
Inventory 1,074,000 - (1,027,000)
Prepaid expenses (275,000) (180,000) (338,000)
Accounts payable and accrued expenses 221,000 (44,000) 793,000
Accrued employee expenses 4,000 (78,000) 87,000
----------- ----------- -----------
Net cash used for operating activities (2,405,000) (1,289,000) (73,165,000)
----------- ----------- -----------
INVESTING ACTIVITIES:
Organizational costs - - (73,000)
Purchase of short-term investments - (1,500,000) (56,624,000)
Maturities of short-term investments - 4,250,000 49,167,000
Capital purchases (127,000) - (2,585,000)
Proceeds from sale of property held for resale - - 400,000
----------- ----------- -----------
Net cash provided by (used for) investing activities (127,000) 2,750,000 (9,715,000)
----------- ----------- -----------
FINANCING ACTIVITIES:
Issuance of preferred stock - - 51,647,000
Issuance of common stock 19,000 239,000 32,689,000
Repurchase of common stock - - (49,000)
Payments received for stock purchase rights - - 3,500,000
Payments received under shareholder notes - - 31,000
Principal payments under capital lease obligations - - (1,174,000)
----------- ----------- -----------
Net cash provided by financing activities 19,000 239,000 86,644,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,513,000) 1,700,000 3,764,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,528,000 2,064,000 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,015,000 $ 3,764,000 $ 3,764,000
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
5
AASTROM BIOSCIENCES, INC.
(A development stage company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989
(Inception), began employee-based operations in 1991, and is in the
development stage. Aastrom 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 Aastrom's ability to
obtain future funding.
2. Basis of Presentation
The condensed consolidated 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 months ended
September 30, 2000, are not necessarily indicative of the results to be
expected for the full year or for any other period.
The consolidated financial statements include the accounts of Aastrom and
its wholly-owned subsidiary, Zellera AG ("Zellera"), which is located in
Berlin, Germany (collectively, the "Company"). All significant inter-
company transactions and accounts have been eliminated in consolidation. As
of September 30, 2000, Zellera has only limited operations and is not a
significant component of the consolidated financial statements.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Aastrom'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 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 for the quarter ended September 30, 1999 reflects dividends
6
and yields on outstanding preferred stock which affect only the computation
of net loss per common share and are not included in the computation of net
loss for the period.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception, Aastrom 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. Aastrom commenced its initial European pilot-scale
product launch of the AastromReplicell(TM) System in April 1999, but
subsequently suspended those activities in October 1999 pending the receipt of
additional financing. Aastrom does not expect to generate positive cash flows
from operations for at least the next several years and then only if more
significant product sales commence. Until that time, Aastrom expects that its
revenue sources will be limited to grant revenue and research funding, and
milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and revenues,
if any, will be subject to significant fluctuations, based in part on the
success of our research activities, the receipt of necessary regulatory
approvals, the timing of the achievement of certain other milestones and the
extent to which associated costs are reimbursed under grant or other
arrangements. A portion of our revenues from product sales will be subject to
our obligation to make aggregate royalty payments of up to 2% to certain
licensors of our technology. Research and development expenses may fluctuate
due to the timing of expenditures for the varying stages of our research,
product development and clinical development programs and the availability of
resources. Generally, product development expenses have decreased as we have
transitioned from prototype-versions to production-level versions of the
AastromReplicell(TM) System. Operating expenses have also decreased over the
past year as a result of cost reduction efforts that we have implemented.
Clinical development costs are expected to increase as we conduct our U.S.
clinical trials, successful completion of which are necessary to submit for
regulatory approvals to market our products in the U.S. Similarly, marketing
and other general and administrative expenses are expected to increase in
support of European marketing activities as they resume. Under our license
agreement with Immunex, the $1,000,000 annual renewal fees due in March 1998,
1999 and 2000 were each paid through the issuance of $1,100,000 of our common
stock. As a result of these and other factors, our results of operations have
fluctuated and are expected to continue to fluctuate significantly from year to
year and from quarter to quarter and therefore may not be comparable to or
indicative of the results of operations for any future periods.
The scope and size of Aastrom's operations is typically tied to the availability
of capital and other resources. For example, in October 1999, we were forced to
implement significant cost reduction measures while we pursued corporate
partnering, including merger or acquisition transactions, and sought additional
capital. We completed the sale of equity securities in February 2000 and June
2000, providing aggregate net proceeds of $11,800,000 that allowed us to resume
certain activities. With this funding, we have recommenced our U.S. clinical
development program, and we are resuming production manufacturing capabilities
and pilot-scale marketing activities in Europe with targeted medical centers.
We need to obtain additional financing and we continue to pursue our financing
options.
8
In order for us to resume more expanded operations, we will need to hire more
personnel to address requirements in the areas of product and customer support,
research, clinical and regulatory affairs, quality systems, sales and marketing
and administration. Our operating expenses are expected to increase as a result.
At least until such time as Aastrom enters into arrangements providing research
and development funding or achieves product sales, we will continue to incur net
operating losses. As a development-stage company, Aastrom has never been
profitable and does not anticipate having net income unless and until
significant product sales commence, which is unlikely to occur until we obtain
significant additional funding. Through September 30, 2000, our accumulated
losses total $80.4 million. There can be no assurance that we will be able to
achieve profitability on a sustained basis, if at all, obtain the required
funding, or complete a corporate partnering or acquisition transaction.
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2000 were $167,000 and consisted of
grant revenue compared to total revenues $385,000 in 1999. Grant revenues and
product sales decreased in 2000 in response to general expense reductions
previously implemented, including reducing activities under grant-funded
programs as well as European sales and marketing activities, while additional
funding was obtained.
Costs and expenses for the quarter ended September 30, 2000 decreased to
$1,782,000, compared to $4,001,000 in 1999. Decreases in costs and expenses
include a decrease in research and development expense to $1,020,000 for the
quarter ended September 30, 2000, from $1,610,000 for the same period in 1999,
and a reduction in selling, general and administrative expenses to $762,000 from
$1,161,000. Expenses for the quarter ended September 30, 2000 include non-cash
charges of $348,000 relating to certain stock options awarded in December 1999.
Cost of product sales and rentals for the quarter ended September 30, 1999
included a charge of $1,142,000 relating to the write down of
AastromReplicell(TM) System inventory.
Interest income was $209,000 for the quarter ended September 30, 2000 compared
to $81,000 in 1999. This increase corresponds to an increase in the level of
cash, cash equivalents and short-term investments during 2000.
Aastrom's net loss was $1,406,000, or $.04 per common share for the quarter
ended September 30, 2000 compared to $3,535,000, or $.21 per common share in
1999. This decrease is primarily the result of decreased costs and expenses and
increased interest income in 2000 and an increase in the weighted average number
of common shares outstanding that resulted from the conversion of previously
outstanding convertible preferred stock. The computation of net loss per common
share for the quarter ended September 30, 1999 includes adjustment for dividends
and yields on outstanding preferred stock. These adjustments affect only the
computation of net loss per common share and are not included in the net loss
for the period.
9
LIQUIDITY AND CAPITAL RESOURCES
Aastrom has financed its operations since inception primarily through public and
private sales of its equity securities, which, from inception through September
30, 2000, have totaled approximately $93.0 million and, to a lesser degree,
through grant funding, payments received under research agreements and
collaborations and interest earned on cash, cash equivalents, and short-term
investments. These financing sources have historically allowed us to maintain
adequate levels of cash and other liquid investments.
Our combined cash, cash equivalents and short-term investments totaled
$11,733,000 at September 30, 2000, a decrease of $1,012,000 from June 30, 2000.
The primary uses of cash, cash equivalents and short-term investments during the
quarter ended September 30, 2000 included $1,261,000 to finance our operations
and working capital requirements. The primary sources of cash, cash equivalents
and short-term investments was from the exercise of stock options that totaled
$239,000 during the period.
Our future cash requirements will depend on many factors, including continued
scientific progress in our research and development programs, the scope and
results of clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patents,
competing technological and market developments and the cost of product
commercialization. Aastrom 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 and the cost of commercializing its product
candidates. Aastrom 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.
Successful future operations are subject to several technical and business
risks, including our continued ability to obtain future funding, satisfactory
product development, obtaining regulatory approval and market acceptance for our
products. Based on current funding and anticipated operating activities, Aastrom
expects that its available cash will be sufficient to finance currently planned
activities through the end of fiscal year 2001. This estimate is a forward-
looking statement based on certain assumptions which could be negatively
impacted by the matters discussed under this heading and under the caption
"Business Risks" in our Annual Report on Form 10-K. Aastrom is pursuing
additional sources of financing. If it cannot obtain additional funding prior to
its current cash reserves being depleted, we will be forced to make substantial
reductions in the scope and size of our operations, and may be forced to curtail
activities currently planned to be resumed. In order to grow and expand our
business, and to introduce our product candidates into the marketplace, we will
need to raise additional funds. We will also need additional funds or a
collaborative partner, or both, to finance the research and development
activities of our product candidates for the expansion of additional cell types.
We expect that our primary sources of capital for the foreseeable future will be
through collaborative arrangements and through the public or private sale of 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
our ability to raise additional funding, including, but not limited to, market
volatility of our common stock and economic conditions affecting the public
markets generally or some portion or all of the
10
technology sector. If adequate funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of its research and
development programs, which may have a material adverse effect on our business.
See "Business Risks" and Notes to Consolidated Financial Statements in Aastrom's
2000 Annual Report on Form 10-K and Notes to Consolidated Financial Statements
included herein.
11
Certain Business Considerations
History of Operating Losses/Need for Additional Capital
Commercialization in the U.S. of our lead product candidate, the
AastromReplicell(TM) System, will require additional research and development as
well as substantial clinical trials. While we have commenced initial marketing
on a limited pilot-scale basis of the AastromReplicell(TM) System in Europe, we
believe that the U.S. will be the principal market for our current products. We
may not be able to successfully complete development of the AastromReplicell(TM)
System or our other product candidates, or successfully market our technologies
or product candidates. We, and any of our potential collaborators, may
encounter problems and delays relating to research and development, regulatory
approval and intellectual property rights of our technologies and product
candidates. Our research and development programs may not be successful, and
our cell culture technologies and product candidates may not facilitate the ex
vivo production of cells with the expected biological activities in humans. Our
technologies and product candidates may not prove to be safe and efficacious in
clinical trials, and we may not obtain the intended regulatory approvals for our
technologies or product candidates and the cells produced in such products. If
any of these events occur, we may not have adequate resources to continue
operations for the period required to resolve the issue delaying
commercialization and we may not be able to raise capital to finance our
continued operations during the period required for resolution of that issue.
We cannot be certain that we will be able to raise the required capital to
conduct our operations and develop our products.
We will require substantial capital resources in order to conduct our operations
and develop our products. In October 1999, we were forced to reduce operations
based on our declining level of capital resources and its limited financing
alternatives available at that time. Although we have started to resume certain
operating activities, the previous reduction in our operating activities has
negatively affected our ability to manufacture and develop our products and has
delayed our product development programs. Based on current funding and
anticipated operating activities, we expect that our available cash and expected
interest income will be sufficient to finance our current activities through the
end of fiscal year 2001. This is a forward-looking statement and could be
negatively affected by funding limitations, the implementation of additional
research and development programs and other factors discussed under this
heading. We are currently pursuing additional sources of financing. If we
cannot obtain additional funding prior to that time, we will be forced to make
substantial reductions in the scope and size of our operations, and may be
forced to curtail activities that we currently plan to resume. In order to grow
and expand our business, and to introduce our product candidates into the
marketplace, we will need to raise additional funds. We will also need
additional funds or a collaborative partner, or both, to finance the research
and development activities of our new product candidates for the production of
additional cell types.
12
Uncertainties of Clinical Trials
To be able to market products in the U.S. beyond research and investigational
uses, we must demonstrate, through extensive pre-clinical studies and clinical
trials, the safety and efficacy of our processes and product candidates,
together with the cells produced by such processes in such products, for
application in the treatment of humans. We are currently conducting clinical
trials to demonstrate the safety and biological activity of patient-derived
cells produced in the AastromReplicell(TM) System. Depending on the availability
of resources, we intend to commence at least one additional clinical trial to
demonstrate the safety and biological activity of umbilical cord blood cells
produced in the AastromReplicell(TM) System. If our clinical trials are not
successful, our products may not be marketable.
Our ability to complete our clinical trials in a timely manner depends on many
factors, including the rate of patient enrollment. Patient enrollment can vary
with the size of the patient population, the proximity of suitable patients to
clinical sites, perceptions of the utility of the therapy for the treatment of
certain diseases and the eligibility criteria for the study. We have
experienced delays in patient accruals in our previous and current clinical
trials. If we experience future delays in patient accruals, we could experience
increased costs and delays associated with clinical trials that would impair our
product development programs and our ability to market our products.
Furthermore, the U.S. Food and Drug Administration (FDA) monitors the progress
of clinical trials and it may suspend or terminate clinical trials at any time
due to patient safety or other considerations.
Uncertainty of Regulatory Approval
Except for research and investigational uses, we must obtain the approval of the
FDA before commercial sales of our product candidates may commence in the U.S.,
which we believe will be the principal market for our products. We may also be
required to obtain additional approvals from foreign regulatory authorities to
continue or increase our sales activities in those jurisdictions. If we cannot
demonstrate the safety, reliability and efficacy of our product candidates, or
of the cells produced in such products, we may not be able to obtain required
regulatory approvals. Many of the patients enrolled in our stem cell therapy
clinical trials will have previously undergone extensive treatment which will
have substantially weakened the patients and may have irreparably damaged the
ability of their blood and immune system to recover. Some patients undergoing
the transplant recovery process have died, from causes that were, according to
the physicians involved, unrelated to the AastromReplicell(TM) System procedure,
and it is possible that other patients may die or suffer severe complications
during the course of either the current or future clinical trials. In addition,
patients receiving cells produced with our technologies and product candidates
may not demonstrate long-term engraftment in a manner comparable to cells
obtained from current stem cell therapy procedures. If we cannot demonstrate the
safety or efficacy of our technologies and product candidates, including long-
term sustained engraftment, or if one or more patients die or suffer severe
complications, the FDA or other regulatory authorities could delay or withhold
regulatory approval of our product candidates.
13
Finally, even if we obtain regulatory approval of a product, that approval may
be subject to limitations on the indicated uses for which it may be marketed.
Even after granting regulatory approval, the FDA, other regulatory agencies, and
governments in other countries continue to review and inspect marketed products,
manufacturers and manufacturing facilities. Later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including a withdrawal of the
product from the market. Further, governmental regulatory agencies may establish
additional regulations which could prevent or delay regulatory approval of our
products.
Uncertainty of Market Acceptance of Product Candidates
Our product development efforts are primarily directed toward obtaining
regulatory approval to market the AastromReplicell(TM) System as an alternative
to, or as an improvement for, the bone marrow harvest and peripheral blood
progenitor cell stem cell collection methods. These stem cell collection methods
have been widely practiced for a number of years, and our technologies or
product candidates may not be accepted by the marketplace as readily as these or
other competing processes and methodologies. Additionally, our technologies or
product candidates may not be employed in all potential applications being
investigated, and any limited applications would limit the market acceptance of
our technologies and product candidates and our potential revenues. As a result,
even if we obtain all required regulatory approvals, we cannot be certain that
our products and processes will be adopted at a level that would allow us to
operate profitably.
Dependence on Third Parties for Materials
We rely solely on third parties to manufacture our product candidates and their
component parts. We also rely solely on third party suppliers to provide
necessary key mechanical components, as well as growth factors and other
materials used in the cell expansion process. We would not be able to obtain
alternate sources of supply for many of these items on a short-term basis. In
October 1999, we suspended manufacturing of our products. While we are in the
process of reestablishing our product manufacturing capabilities, we have not
yet completed those activities and resumed production of certain components of
our product line. Further, if any of our key manufacturers or suppliers fails
to perform their respective obligations, or if our supply of growth factors,
components or other materials is limited or interrupted, we would not be able to
conduct clinical trials or market our product candidates on a timely and cost-
competitive basis, if at all.
Furthermore, some of the compounds used by us in our current stem cell expansion
processes involve the use of animal-derived products. Suppliers or regulatory
authorities may limit or restrict the availability of such compounds for
clinical and commercial use. Any restrictions on these compounds would impose a
potential competitive disadvantage for our products. If we were not able to
develop or obtain alternative compounds, our product development and
commercialization efforts would be harmed.
14
Finally, we may not be able to continue our present arrangements with our
suppliers, supplement existing relationships, establish new relationships or be
able to identify and obtain the ancillary materials that are necessary to
develop our product candidates in the future. Our dependence upon third parties
for the supply and manufacture of these items could adversely affect our ability
to develop and deliver commercially feasible products on a timely and
competitive basis.
Limited Internal Sales and Marketing Capabilities
While we have commenced initial marketing on a limited basis of the
AastromReplicell(TM) System in Europe, we have only limited internal sales,
marketing and distribution capabilities. We intend to market our products
through collaborative relationships with companies for sales, marketing and
distribution capabilities. If we cannot develop and maintain those
relationships, we would have only a limited ability to market, sell and
distribute our products. Even if we are able to enter into such relationships,
they may not succeed or be sustained on a long-term basis, and termination would
require us to develop alternate arrangements at a time when we need sales,
marketing or distribution capabilities to meet existing demand. For example, in
November 1998 Aastrom and COBE BCT terminated a strategic alliance for the
worldwide distribution of the AastromReplicell(TM) System for stem cell therapy
and related uses. We are now seeking to enter into other arrangements relating
to the development and marketing of our product candidates.
Volatility of Our Stock Price May Limit our Ability to Raise Capital
The market price of shares of our common stock has been volatile. The price of
our common stock may continue to fluctuate in response to a number of events and
factors, any of which may cause the price of our shares to fall, and may
adversely affect our business and financing opportunities. In addition, the
stock market in general and the market prices for biotechnology companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance or financial conditions of such companies. These
broad market and industry fluctuations may adversely affect the trading price of
our stock, regardless of our operating performance or prospects.
The exercise price of the warrants that we issued in February 2000 is subject to
certain reduction in the event the price of our common stock goes down at
specified times in the future or if we issue additional securities at less than
the warrant exercise price. The warrants are currently exercisable for
1,382,816 shares of common stock, at a price of approximately $3.02 per share.
This number of shares could increase to 2,614,386 shares of common stock and the
exercise price could be reduced to as low as $1.60 per share. In June 2000, we
issued warrants to purchase up to 3,348,915 shares of our common stock at $0.01
per share as a means of providing the investor with a limited price adjustment
in June 2001 if the price of our common stock decreases. If all shares of
common stock issuable under these warrants are issued, then holders of common
stock could experience significant dilution of their investment.
15
In addition, sales, or the possibility of sales, of substantial numbers of
shares of common stock in the public market could adversely affect prevailing
market prices of shares of common stock. Our employees hold a significant
number of options to purchase shares, many of which are presently exercisable.
Employees may exercise their options and sell shares shortly after such options
become exercisable, particularly if they need to raise funds to pay for the
exercise price of such options or to satisfy tax liabilities that they may incur
in connection with exercising their options. Additionally, beginning January 1,
2001, COBE BCT will be able to sell all of its approximately 2.4 million shares
of our common stock without restriction.
Potential Delisting from Nasdaq
We are required to meet certain financial tests (including, but not limited to,
a minimum bid price of our common stock of $1.00 and $4 million in tangible net
worth) to maintain the listing of our common stock on the Nasdaq National
Market. Within the last year, our common stock price has fallen below the
minimum level for some periods and during other periods our tangible net worth
has been below the amount required. In the future, our stock price or tangible
net worth may fall below the Nasdaq requirements, or we may not comply with
other listing requirements, with the result being that our common stock might be
delisted. If that happened the market price and liquidity of our common stock
would be impaired.
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
2000 Annual Report of Form 10-K.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Aastrom believes that the interest rate risk related to its accounts receiveable
is not significant. Aastrom manages the risk associated with these accounts
through periodic reviews of the carrying value for non-collectability and
establishment of appropriate allowances in connection with our internal controls
and policies. Aastrom does not enter into hedging or derivative instruments.
Aastrom is also exposed to interest rate changes principally affecting its
investments in interest rate sensitive instruments. An analysis of the impact
on Aastrom's interest rate sensitive financial instruments of a hypothetical 10%
change in short-term interest rates compared to interest rates at September 30,
2000 indicates that it would not have a significant impact on expected fiscal
year 2001 earnings.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time Aastrom receives threats or may be subject to
litigation matters incidental to its business. However, Aastrom is not
currently a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
See Exhibit Index.
(b) Reports on Form 8-K
-------------------
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AASTROM BIOSCIENCES, INC.
Date: November 10, 2000 /s/ R. Douglas Armstrong
------------------------
R. Douglas Armstrong, Ph.D.
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2000 /s/ Todd E. Simpson
-------------------
Todd E. Simpson
Vice President, Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 * Restated Articles of Incorporation of the Company
3.2 ** Bylaws of the Company
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.
20
5
3-MOS
JUN-30-2001
JUL-01-2000
SEP-30-2000
3,764,000
7,969,000
0
0
0
12,264,000
3,111,000
2,869,000
12,506,000
880,000
0
0
0
92,954,000
(81,328,000)
12,506,000
0
167,000
0
1,782,000
0
0
0
(1,406,000)
0
(1,406,000)
0
0
0
(1,406,000)
(0.04)
(0.04)
