Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The filing identifies the registrant as Aastrom Biosciences, Inc., not Vericel Corp. Aastrom was a clinical development-stage biotechnology company developing patient-specific cell therapies, principally ixmyelocel-T, for critical limb ischemia (CLI) and dilated cardiomyopathy (DCM).
As of October 31, 2011, 38.6 million common shares were outstanding. The company reported one operating segment focused on research and product development.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $9 thousand | $0 | $18 thousand | $0 |
| Research and development | $5.750 million | $4.167 million | $15.426 million | $10.631 million |
| SG&A | $1.696 million | $1.686 million | $5.794 million | $4.625 million |
| Loss from operations | $(7.439) million | $(5.853) million | $(21.206) million | $(15.256) million |
| Net loss | $(1.934) million | $(5.932) million | $(16.879) million | $(12.378) million |
| Net loss per share | $(0.05) | $(0.21) | $(0.44) | $(0.45) |
| Net cash used in operations | Not separately provided | Not separately provided | $(18.348) million | $(12.409) million |
Q3 2011 gross margin is not meaningful because revenue was only $9 thousand and cost of product sales and rentals was $2 thousand. The company had no material recurring commercial revenue and had accumulated development-stage losses of approximately $238.091 million through September 30, 2011.
Balance Sheet, Liquidity and Debt
| Balance-sheet item | December 31, 2010 | September 30, 2011 |
|---|---|---|
| Cash and cash equivalents | $31.248 million | $11.947 million |
| Total assets | $32.827 million | $14.072 million |
| Warrant liabilities | $25.954 million | $21.668 million |
| Total debt | $0.255 million | $0.100 million |
| Shareholders’ equity/(deficit) | $2.922 million | $(11.158) million |
Cash declined by $19.301 million during the first nine months, primarily because of $18.348 million used in operations and $803 thousand of capital expenditures. Cash included $10.618 million invested in money-market funds. The company had no off-balance-sheet arrangements and no material pending legal proceedings.
Material Changes Versus the Prior Comparable Period
- Q3 research and development expense increased 38% to $5.750 million, reflecting preparation for the planned Phase 3 CLI program, including employee, clinical-site and regulatory costs.
- Nine-month research and development expense increased 45% to $15.426 million. CLI spending increased to $11.067 million from $4.632 million, while DCM spending declined to $4.328 million from $5.931 million.
- Q3 net loss improved to $1.934 million from $5.932 million, principally because the company recorded $5.496 million of non-cash income from a decrease in warrant fair value, compared with a $99 thousand non-cash expense in Q3 2010.
- Nine-month net loss increased to $16.879 million from $12.378 million because of higher research and development and SG&A expenses, partly offset by the $4.286 million non-cash warrant fair-value gain.
- Nine-month SG&A increased 25% to $5.794 million, driven by costs related to the restatement of historical financial statements, higher stock-based compensation and consulting costs.
- Stock-based compensation increased to $2.767 million for the first nine months from $845 thousand in the prior-year period.
- Shares outstanding increased only modestly to 38.635 million from 38.616 million at year-end, while the prior December 2010 financing materially increased the weighted-average share count used in per-share comparisons.
Guidance, Outlook, Risks and Unusual Items
Clinical and Operating Outlook
- The company completed its Phase 2b RESTORE-CLI trial and reported that the 12-month results met the primary safety and efficacy endpoints. Full data were scheduled for presentation in November 2011.
- The FDA agreed in July 2011 to a Special Protocol Assessment for the No-Option CLI Phase 3 program, called REVIVE. The planned trial included 594 patients at approximately 80 sites, with enrollment expected to begin in the fourth quarter of 2011.
- The DCM program remained in Phase 2. Twelve-month IMPACT-DCM results were reported as consistent with prior interim data, and 12-month Catheter-DCM results were expected in the first half of 2012.
- Management did not expect positive operating cash flow for at least several years and did not expect profitability absent significant product sales and regulatory approvals.
Liquidity and Going-Concern Risk
- Management stated that cash on hand was expected to fund operations only through December 31, 2011.
- The company estimated that it would need additional capital by early to mid-2012 to fund the Phase 3 CLI trial, complete development and clinical programs, and pursue commercialization.
- A June 2011 at-the-market agreement authorized sales of up to approximately $20.3 million of common stock, but no shares had been sold under the agreement through September 30, 2011. Trading volume and share price could limit near-term proceeds.
- The filing states that uncertainty over obtaining additional financing raises substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the potential outcome of that uncertainty.
Other Significant Items and Risks
- Warrant liabilities were valued using models incorporating significant Level 3 assumptions. Future stock-price and volatility changes could create material non-cash income or expense.
- At September 30, 2011, outstanding warrants covered approximately 15.3 million common shares, creating substantial potential dilution and contractual complexity.
- On August 11, 2011, the company adopted a shareholder rights plan triggered generally by acquisition of 15% or more of the common stock; the plan could discourage or complicate a change in control.
- Principal risks included clinical-trial failure, regulatory delays or denial, manufacturing requirements, market acceptance, competition, inability to raise capital and inability to commercialize products.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Aastrom Biosciences, Inc., whereas the request metadata names Vericel Corp.
- Verify subsequent financing activity, including sales under the $20.3 million ATM facility and any other equity or debt offerings.
- Track cash burn and whether liquidity extended beyond December 31, 2011.
- Review the final RESTORE-CLI data, FDA interactions and actual initiation and enrollment of the REVIVE Phase 3 trial.
- Assess the valuation and dilution impact of the approximately $21.668 million warrant liability and outstanding warrants.
- Confirm whether the company resolved the stated going-concern uncertainty and whether it obtained regulatory approvals or generated meaningful product revenue.