SECURITIES AND EXCHANGE COMMISSION
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, 2003, OR | ||
| o | 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.
| Michigan | 94-3096597 | |
|
|
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer 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
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 o - 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 (Class) |
56,749,879 Outstanding at May 7, 2003 |
1
AASTROM BIOSCIENCES, INC.
Quarterly Report on Form 10-Q
March 31, 2003
TABLE OF CONTENTS
| Page | ||||
| PART I - FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements - Unaudited | |||
| a) | Consolidated Condensed Balance Sheets as of June 30, 2002 and March 31, 2003 | 3 | ||
| b) | Consolidated Condensed Statements of Operations for the three and nine months ended March 31, 2002 and 2003 and for the period from March 24, 1989 (Inception) to March 31, 2003 | 4 | ||
| c) | Consolidated Condensed Statements of Cash Flows for the nine months ended March 31, 2002 and 2003 and for the period from March 24, 1989 (Inception) to March 31, 2003 | 5 | ||
| d) | Notes to Consolidated Condensed Financial Statements | 6 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
| Item 4. | Controls and Procedures | 27 | ||
| PART II - OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 28 | ||
| Item 2. | Changes in Securities and Use of Proceeds | 28 | ||
| Item 3. | Defaults Upon Senior Securities | 28 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 28 | ||
| Item 5. | Other Information | 28 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 28 | ||
| SIGNATURES | 29 | |||
| CERTIFICATIONS | 30 | |||
| EXHIBIT INDEX | 32 | |||
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
| June 30, | March 31, | |||||||||
| 2002 | 2003 | |||||||||
Assets |
||||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 8,605,000 | $ | 5,064,000 | ||||||
Short-term investments |
1,000,000 | — | ||||||||
Receivables, net |
120,000 | 320,000 | ||||||||
Inventory, net |
1,397,000 | 1,132,000 | ||||||||
Other current assets |
225,000 | 454,000 | ||||||||
Total current assets |
11,347,000 | 6,970,000 | ||||||||
PROPERTY, NET |
206,000 | 322,000 | ||||||||
Total assets |
$ | 11,553,000 | $ | 7,292,000 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable and accrued expenses |
$ | 589,000 | $ | 391,000 | ||||||
Accrued employee expenses |
161,000 | 167,000 | ||||||||
Total current liabilities |
750,000 | 558,000 | ||||||||
SHAREHOLDERS’ EQUITY: |
||||||||||
Common stock, no par value; shares
authorized – 100,000,000; shares issued and
outstanding – 43,726,557 and 52,052,761, respectively |
104,600,000 | 107,372,000 | ||||||||
Deficit accumulated during the development stage |
(93,797,000 | ) | (100,638,000 | ) | ||||||
Total shareholders’ equity |
10,803,000 | 6,734,000 | ||||||||
Total liabilities and shareholders’ equity |
$ | 11,553,000 | $ | 7,292,000 | ||||||
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)
| Three months ended | Nine months ended | March 24, 1989 | ||||||||||||||||||||
| March 31, | March 31, | (Inception) to | ||||||||||||||||||||
| March 31, | ||||||||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | 2003 | ||||||||||||||||||
REVENUES: |
||||||||||||||||||||||
Product sales and rentals |
$ | — | $ | 130,000 | $ | 80,000 | $ | 298,000 | $ | 666,000 | ||||||||||||
Grants |
232,000 | 150,000 | 570,000 | 361,000 | 6,189,000 | |||||||||||||||||
Research and development agreements |
— | — | — | 10,000 | 2,030,000 | |||||||||||||||||
Total revenues |
232,000 | 280,000 | 650,000 | 669,000 | 8,885,000 | |||||||||||||||||
COSTS AND EXPENSES: |
||||||||||||||||||||||
Cost of product sales and rentals |
— | 21,000 | — | 132,000 | 173,000 | |||||||||||||||||
Cost of product sales and
rentals - provision
for obsolete and excess inventory |
40,000 | 186,000 | 146,000 | 445,000 | 1,876,000 | |||||||||||||||||
Research and development |
1,439,000 | 1,351,000 | 4,042,000 | 4,168,000 | 85,669,000 | |||||||||||||||||
Selling, general and administrative |
886,000 | 854,000 | 2,736,000 | 2,869,000 | 26,979,000 | |||||||||||||||||
Total costs and expenses |
2,365,000 | 2,412,000 | 6,924,000 | 7,614,000 | 114,697,000 | |||||||||||||||||
LOSS FROM OPERATIONS |
(2,133,000 | ) | (2,132,000 | ) | (6,274,000 | ) | (6,945,000 | ) | (105,812,000 | ) | ||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||||||
Other income |
— | — | — | — | 1,237,000 | |||||||||||||||||
Interest income |
61,000 | 30,000 | 289,000 | 104,000 | 5,172,000 | |||||||||||||||||
Interest expense |
— | — | — | — | (267,000 | ) | ||||||||||||||||
Other income |
61,000 | 30,000 | 289,000 | 104,000 | 6,142,000 | |||||||||||||||||
NET LOSS |
$ | (2,072,000 | ) | $ | (2,102,000 | ) | $ | (5,985,000 | ) | $ | (6,841,000 | ) | $ | (99,670,000 | ) | |||||||
NET LOSS PER SHARE
(Basic and Diluted) |
$ | (.05 | ) | $ | (.04 | ) | $ | (.14 | ) | $ | (.14 | ) | ||||||||||
Weighted average number of
shares outstanding |
42,506,000 | 51,656,000 | 41,588,000 | 48,340,000 | ||||||||||||||||||
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)
| Nine months ended | March 24, 1989 | ||||||||||||||
| March 31, | (Inception) to | ||||||||||||||
| March 31, | |||||||||||||||
| 2002 | 2003 | 2003 | |||||||||||||
OPERATING ACTIVITIES: |
|||||||||||||||
Net loss |
$ | (5,985,000 | ) | $ | (6,841,000 | ) | $ | (99,670,000 | ) | ||||||
Adjustments to reconcile net loss to net cash used
for operating activities: |
|||||||||||||||
Depreciation and amortization |
94,000 | 90,000 | 3,417,000 | ||||||||||||
Loss on property held for resale |
— | — | 110,000 | ||||||||||||
Amortization of discounts and premiums on investments |
— | — | (543,000 | ) | |||||||||||
Stock compensation expense |
— | 159,000 | 823,000 | ||||||||||||
Inventory reserves and write-offs |
146,000 | 445,000 | 1,674,000 | ||||||||||||
Stock issued pursuant to license agreement |
— | — | 3,300,000 | ||||||||||||
Changes in assets and liabilities: |
|||||||||||||||
Receivables |
(16,000 | ) | (200,000 | ) | (344,000 | ) | |||||||||
Inventory |
(415,000 | ) | (277,000 | ) | (2,903,000 | ) | |||||||||
Other current assets |
(137,000 | ) | 4,000 | (221,000 | ) | ||||||||||
Accounts payable and accrued expenses |
(115,000 | ) | (198,000 | ) | 391,000 | ||||||||||
Accrued employee expenses |
21,000 | 6,000 | 167,000 | ||||||||||||
Net cash used for operating activities |
(6,407,000 | ) | (6,812,000 | ) | (93,799,000 | ) | |||||||||
INVESTING ACTIVITIES: |
|||||||||||||||
Organizational costs |
— | — | (73,000 | ) | |||||||||||
Purchase of short-term investments |
(5,500,000 | ) | — | (62,124,000 | ) | ||||||||||
Maturities of short-term investments |
4,500,000 | 1,000,000 | 62,667,000 | ||||||||||||
Capital purchases |
(148,000 | ) | (109,000 | ) | (2,905,000 | ) | |||||||||
Proceeds from sale of property held for resale |
— | — | 400,000 | ||||||||||||
Net cash (used for) provided by investing activities |
(1,148,000 | ) | 891,000 | (2,035,000 | ) | ||||||||||
FINANCING ACTIVITIES: |
|||||||||||||||
Issuance of preferred stock |
— | — | 51,647,000 | ||||||||||||
Issuance of common stock |
7,849,000 | 2,380,000 | 46,943,000 | ||||||||||||
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 |
7,849,000 | 2,380,000 | 100,898,000 | ||||||||||||
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS |
294,000 | (3,541,000 | ) | 5,064,000 | |||||||||||
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD |
10,659,000 | 8,605,000 | — | ||||||||||||
CASH AND CASH EQUIVALENTS AT
END OF PERIOD |
$ | 10,953,000 | $ | 5,064,000 | $ | 5,064,000 | |||||||||
The accompanying notes are an integral part of these financial statements.
5
AASTROM BIOSCIENCES, INC.
(A development stage company)
1. Organization
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989 (Inception), began employee-based operations in 1991, and is in the development stage. We currently operate our business in one reportable segment – research and product development, conducted both on our own behalf and in connection with various collaborative research and development agreements with others, involving the development and sale of processes and products for the ex vivo production of human cells for use in cell therapy.
Successful future operations are subject to several technical and business risks, including satisfactory product development, obtaining regulatory approval and market acceptance for our products and our continued ability to obtain future funding.
The Company is subject to certain risks related to the operation of its business and development of its products and product candidates. While available cash and committed financing are expected to fund currently planned activities through the first quarter (ending September 30, 2003) of fiscal year 2004, the Company will need to raise additional funds in order to complete its product development programs and commercialize its new products and product candidates. The Company cannot be certain that such funding will be available on favorable terms, if at all. Some of the factors that will impact the Company’s ability to raise additional capital and its overall success include, the rate and degree of progress for its product development programs, the liquidity and volatility of its equity securities, economic conditions affecting the public markets generally or some portion or all of the technology sector, regulatory and manufacturing requirements and uncertainties, technological developments by competitors and other factors. If the Company cannot raise such funds, it may not be able to develop or enhance products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which would negatively impact its business, financial condition and results of operations.
The Company is currently pursuing additional sources of financing. If the Company cannot obtain significant additional funding prior to or during the first quarter of the fiscal year beginning July 2003, it will likely make substantial reductions in the scope and size of its operations, and may curtail activities, in order to conserve cash until such funding is obtained.
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2. Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by us without audit according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three and nine months ended March 31, 2003, 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 our 2002 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
Certain previously reported statement of operations amounts have been reclassified to conform to the current period presentation. During the three months ended, March 31, 2003, the Company began segregating cost of product sales relating to the obsolescence of inventory. These costs previously included in the “Cost of product sales and rentals.” These reclassifications had no impact on previously reported net loss, shareholders’ equity or cash flows.
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3. Stock-Based Compensation
At March 31, 2003 we have various stock-based employee compensation plans, which are described more fully in our 2002 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. We have elected to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for our employee and directors’ stock compensation plans
The summary of significant accounting policies should be read in conjunction with our
| For Nine Months Ended March 31, | |||||||||||
| 2002 | 2003 | ||||||||||
Reported net loss |
$ | (5,985,000 | ) | $ | (6,841,000 | ) | |||||
| Add: | Stock-based employee compensation expense
included in reported net loss, net of
related tax effects |
— | — | ||||||||
| Deduct: | Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
(1,181,000 | ) | (773,000 | ) | ||||||
Pro forma net loss |
$ | (7,166,000 | ) | $ | (7,614,000 | ) | |||||
Net loss per common share: |
|||||||||||
As reported |
$ | (0.14 | ) | $ | (0.14 | ) | |||||
Pro forma |
$ | (0.17 | ) | $ | (0.16 | ) | |||||
consolidated financial statements and related notes and this discussion of our results of operations.
4. Shareholders’ Equity
We obtained additional equity of $2,601,000 during the nine months ended March 31, 2003 and issued 8,326,000 common shares in these transactions. These equity financings were transacted under our previously registered shelf offerings and our Employee Stock Purchase Plan. Total offering costs were $221,000.
5. Net Loss Per Common Share
Net loss per common share is computed using the weighted-average number of common shares outstanding during the period. Common equivalent shares are not included in the per share calculation where the effect of their inclusion would be anti-dilutive. The aggregate number of common equivalent shares that have been excluded from the computations of net loss per common share for the three and nine months ended March 31, 2002 and 2003 is approximately 6,475,000 and 3,869,000, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of Aastrom
We are a late-stage development company focused on human cell-based therapies. We have identified multiple paths to revenue based on our proprietary ex vivo cell production technology, including the near-term Cell Production Products business, and an active Prescription Cell Product pipeline for stem cell tissue repair and cancer and infectious disease treatments.
Our core technology is based on the Company’s proprietary AastromReplicell™ System, an integrated system of instrumentation and single-use consumable kits that implements our patented Single-Pass Perfusion process in a fully automated closed-loop culturing system to optimize cell growth and viability. This system provides nutrients to cells by mimicking the natural cell-growth environment, and enabling cells to grow effectively while retaining high biological function, without various cloning approaches. Our programs currently use bone marrow, cord blood and blood cells as starting sources of cells. As such, federal support or other factors relating to embryonal stem cell research have no direct impact on our current product programs. In addition, this system provides GMP-compliant manufacturing and automated process control for the commercial-scale production of human cells. We do not believe that any other comparable system currently exists.
Our Cell Production Products operation has created a path to near-term revenue. The AastromReplicell™ System and DC-I (dendritic cells for fusion and transfection), DCV-I (complex antigen-loaded dendritic cells) and, once CE mark approval is obtained, DCV-II (peptide-loaded dendritic cells) cell production kits are being sold to academic researchers and companies that are developing cancer vaccines. The recent commercialization of our automated cell production instruments and cell-specific production kits is expected to generate revenues although we are not yet able to project the market size and growth for the products.
In addition, we are leveraging our ex vivo cell production technology for a growing Prescription Cell Product pipeline focused on two areas: Tissue Repair Cells (TRCs) for stem cell-derived tissue repair and regeneration, and Therapeutic Cells (TCs) for immune system-directed attacks on certain cancers and other infectious diseases.
Using the AastromReplicell™ System, TRCs are grown from a small sample of a patient’s bone marrow and, once administered back to the patient, are intended to generate normal tissue. The primary TRC application being evaluated is our OCG-I cells for bone grafting (fusions, fractures or dental defects). We are currently planning and preparing for OCG-I clinical trials in both the United States and Europe. We also have in development OC-I cells for osteoporosis, and SC-I cells for autologous bone marrow transplants in lymphoma patients. The SC-I product has been CE-Marked in Europe and is currently being used by a limited number of centers in Europe to evaluate its use. In the United States, the SC-I therapy reached Phase III trials, although these trials have halted due to a shift in medical practice that reduced patient need and
9
availability. The OC-I therapy is currently in a Phase I/II clinical trial. We also believe that the stem cell components of our TRCs may be useful for other medical indications, including the regeneration of cardiac and vascular tissues. Our CB-I clinical trials have been closed out. We have no plans to continue this product development activity at this time, unless entirely funded by grants, due to the limited size of the potential market.
We are led by a seasoned management team, which is advised by a well-respected Technology Review Board, comprised of senior medical, financial and marketing executives with extensive knowledge of our technology and industry. Management is in the process of leading a transition from our genesis as a medical device manufacturer to a contributor and developer in the broader and more potentially lucrative therapeutic sector.
We are developing TC products using human cells to cause the patient’s immune system to attack certain cancers and other infectious diseases. Blood-derived dendritic cells, which are the body’s crucial mobilizers of the immune T-Cells response, are cultured in the AastromReplicell™ System to produce our proprietary Dendricell™. After being exposed to a particular biological signal, or antigen, the Dendricell™ may act to trigger a cell-mediated immune response in a patient against the cancer cells or viri. The first Dendricell™ clinical trials are planned at Stanford University for a multiple myeloma cancer vaccine and at Duke University for a colorectal cancer vaccine. In ad