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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 Commission file number 0-22025
 AASTROM BIOSCIENCES, INC.
 
 Michigan
    
    94-3096597(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)24 Frank Lloyd Wright Dr.P.O. Box 376Ann Arbor, Michigan
    
    48106(Address of principal executive offices)
    
    (Zip code)
  
 
 þ o
 o o
  Large accelerated filer  o
Accelerated filer  þ
Non-accelerated filer  o(Do not check if a smaller reporting company)
Smaller reporting company  þ o þ
  COMMON STOCK, NO PAR VALUE
    
    28,251,787(Class)
    
    Outstanding at October 31, 2010




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##### 



AASTROM BIOSCIENCES, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited):Consolidated Condensed Balance Sheets as of June 30, 2010 and September 30, 2010
    
    
    3Consolidated Condensed Statements of Operations for the quarters ended September 30,
2009 and 2010 and for the period from March 24, 1989 (Inception) to September 30,
2010
    
    
    4Consolidated Condensed Statements of Cash Flows for the quarters ended September 30,
2009 and 2010 and for the period from March 24, 1989 (Inception) to September 30,
2010
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    17Item 1A.
    
    Risk Factors
    
    
    17Item 6.
    
    Exhibits
    
    
    17Signature
    
    
    
    
    18Exhibit
Index
    
    
    
    
    19Glossary
    
    
    
    
    20EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited, amounts in thousands)
 June 30,
    
    
    September 30,2010
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,119
    
    
    $
    14,466Short-term investments
    
    
    5,000
    
    
    
    Receivables, net
    
    
    16
    
    
    
    17Other current assets
    
    
    383
    
    
    
    505Total current assets
    
    
    19,518
    
    
    
    14,988Property and equipment, net
    
    
    1,013
    
    
    
    982Total assets
    
    $
    20,531
    
    
    $
    15,970LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    1,749
    
    
    $
    2,739Accrued employee benefits
    
    
    686
    
    
    
    508Current portion of long-term debt
    
    
    226
    
    
    
    240Total current liabilities
    
    
    2,661
    
    
    
    3,487Long-term debt
    
    
    79
    
    
    
    40Total liabilities
    
    
    2,740
    
    
    
    3,527Shareholders equity:Common stock, no par value; shares authorized 
62,500; shares issued and outstanding 
28,256 and 28,252, respectively
    
    
    231,343
    
    
    
    231,828Deficit accumulated during the development stage
    
    
    (213,552
    )
    
    
    (219,385
    )Total shareholders equity
    
    
    17,791
    
    
    
    12,443Total liabilities and shareholders equity
    
    $
    20,531
    
    
    $
    15,970
  3




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AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands except per share amounts)
 March 24, 1989Quarter ended
    
    
    (Inception) toSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2010Revenues:Product sales and rentals
    
    $
    73
    
    
    $
    
    
    
    $
    1,850Research and development agreements
    
    
    
    
    
    
    
    
    
    
    2,105Grants
    
    
    
    
    
    
    
    
    
    
    9,657Total revenues
    
    
    73
    
    
    
    
    
    
    
    13,612Costs and expenses:Cost of product sales and rentals
    
    
    32
    
    
    
    
    
    
    
    3,035Research and development
    
    
    2,911
    
    
    
    4,167
    
    
    
    164,933Selling, general and administrative
    
    
    946
    
    
    
    1,686
    
    
    
    75,545Total costs and expenses
    
    
    3,889
    
    
    
    5,853
    
    
    
    243,513Loss from operations
    
    
    (3,816
    )
    
    
    (5,853
    )
    
    
    (229,901
    )Other income (expense):Other income
    
    
    
    
    
    
    
    
    
    
    1,249Interest income
    
    
    28
    
    
    
    25
    
    
    
    10,704Interest expense
    
    
    (13
    )
    
    
    (5
    )
    
    
    (469
    )Total other income
    
    
    15
    
    
    
    20
    
    
    
    11,484Net loss
    
    $
    (3,801
    )
    
    $
    (5,833
    )
    
    $
    (218,417
    )Net loss per share (Basic and Diluted)
    
    $
    (0.18
    )
    
    $
    (0.21
    )Weighted average number of common shares
outstanding (Basic and Diluted)
    
    
    20,679
    
    
    
    28,255
  4




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AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands )
 March 24, 1989Quarter ended
    
    
    (Inception) toSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2010Operating activities:Net loss
    
    $
    (3,801
    )
    
    $
    (5,833
    )
    
    $
    (218,417
    )Adjustments to reconcile net loss to net cash used for
operating activities:Depreciation and amortization
    
    
    151
    
    
    
    129
    
    
    
    6,722Loss on property held for resale
    
    
    
    
    
    
    
    
    
    
    110Amortization of discounts and premiums on investments
    
    
    
    
    
    
    
    
    
    
    (1,704
    )Stock compensation expense
    
    
    47
    
    
    
    485
    
    
    
    9,584Inventory write downs and reserves
    
    
    
    
    
    
    
    
    
    
    2,239Stock issued pursuant to license agreement
    
    
    
    
    
    
    
    
    
    
    3,300Provision for losses on accounts receivable
    
    
    
    
    
    
    
    
    
    
    204Changes in operating assets and liabilities:Receivables
    
    
    (461
    )
    
    
    (1
    )
    
    
    (266
    )Inventories
    
    
    1
    
    
    
    
    
    
    
    (2,335
    )Other current assets
    
    
    (238
    )
    
    
    (122
    )
    
    
    (485
    )Accounts payable and accrued expenses
    
    
    482
    
    
    
    990
    
    
    
    2,682Accrued employee benefits
    
    
    (21
    )
    
    
    (178
    )
    
    
    508Net cash used for operating activities
    
    
    (3,840
    )
    
    
    (4,530
    )
    
    
    (197,858
    )Investing activities:Organizational costs
    
    
    
    
    
    
    
    
    
    
    (73
    )Purchase of short-term investments
    
    
    
    
    
    
    
    
    
    
    (217,041
    )Maturities of short-term investments
    
    
    
    
    
    
    5,000
    
    
    
    218,745Property and equipment purchases
    
    
    (54
    )
    
    
    (68
    )
    
    
    (5,949
    )Proceeds from sale of property held for resale
    
    
    
    
    
    
    
    
    
    
    400Net cash provided by (used for) investing activities
    
    
    (54
    )
    
    
    4,932
    
    
    
    (3,918
    )Financing activities:Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    51,647Net proceeds from issuance of common stock and warrants
    
    
    4,300
    
    
    
    
    
    
    
    162,871Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (49
    )Payments received for stock purchase rights
    
    
    
    
    
    
    
    
    
    
    3,500Payments received under shareholder notes
    
    
    
    
    
    
    
    
    
    
    31Restricted cash used as compensating balance
    
    
    68
    
    
    
    
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    751Principal payments under long-term debt obligations
    
    
    (117
    )
    
    
    (55
    )
    
    
    (2,509
    )Net cash provided by (used for) financing activities
    
    
    4,251
    
    
    
    (55
    )
    
    
    216,242Net increase in cash and cash equivalents
    
    
    357
    
    
    
    347
    
    
    
    14,466Cash and cash equivalents at beginning of period
    
    
    17,000
    
    
    
    14,119
    
    
    
    Cash and cash equivalents at end of period
    
    $
    17,357
    
    
    $
    14,466
    
    
    $
    14,466
  5




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AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
 1. Organization and Summary of Significant Accounting Policies
    2. Basis of Presentation
    6




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AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
  3. Fair Value Measurements
  
    
    Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
    
    Level 2 inputs: Inputs, other than quoted prices included in Level 1 that are observable either
directly or indirectly; and
    
    Level 3 inputs: Unobservable inputs for which there is little or no market data, which require
the reporting entity to develop its own assumptions.
   4. Stock-Based Compensation
  Service-Based Stock Options
   7




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AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
  Quarter ended September 30,Service-Based Stock Options
    
    2009
    
    2010Expected dividend rate
    
    
    0%
    
    
    
    0%Expected stock price volatility
    
    
    72.3% - 72.8%
    
    
    
    70.6% - 71.4%Risk free interest rate
    
    
    2.8% - 3.0%
    
    
    
    1.7% - 2.1%Estimated forfeiture rate (per annum)
    
    
    10%
    
    
    
    10%Expected life (years)
    
    
    6.3
    
    
    
    6.0 - 6.3
  Weighted
    
    
    Weighted Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicService-Based Stock Options
    
    Options
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at June 30, 2010
    
    
    3,283,180
    
    
    $
    3.40
    
    
    
    8.6
    
    
    $
    2,750Granted
    
    
    1,453,000
    
    
    $
    1.49Forfeited or expired
    
    
    (411,849
    )
    
    $
    5.44Outstanding at September 30, 2010
    
    
    4,324,331
    
    
    $
    2.56
    
    
    
    9.0
    
    
    $
    114,050Exercisable at September 30, 2010
    
    
    768,914
    
    
    $
    6.06
    
    
    
    6.5
    
    
    $
    
  Performance-Based Stock Options
    Weighted
    
    
    Weighted Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicPerformance-Based Stock Options
    
    Options
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at June 30, 2010
    
    
    40,164
    
    
    $
    12.17
    
    
    
    6.4
    
    
    $
    0Forfeited or expired
    
    
    (2,083
    )
    
    $
    12.24Outstanding at September 30, 2010
    
    
    38,081
    
    
    $
    12.17
    
    
    
    6.1
    
    
    $
    0
 8




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##### Table of Contents



AASTROM BIOSCIENCES, INC.
(a clinical development stage company)
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
  5. Net Loss Per Common Share
  9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Safe
 Autologous
 Expanded
 A mixed population of cells
 Minimally invasive
    10




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Critical Limb Ischemia
     Dilated Cardiomyopathy
  11




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Heart
Failure: A Combined Medical and Surgical Approach
     Results of Operations
    12




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Liquidity and Capital Resources
     13




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Off-Balance Sheet Arrangements
  14




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Forward-Looking Statements
   
    
    potential strategic collaborations with others;
    
    future capital needs and financing sources;
    
    adequacy of existing capital to support operations for a specified time;
    
    product development and marketing plan;
    
    clinical trial plans and anticipated results;
    
    anticipation of future losses;
    
    commercialization plans; and
    
    revenue expectations and operating results.
 15




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  16




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  17




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SIGNATURE
   AASTROM BIOSCIENCES, INC./s/Timothy M. MaylebenTimothy M. MaylebenPresident and Chief Executive Officer
(Principal Executive Officer) 18




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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Form of indemnification agreement entered into between the Company and each of its
directors, including Timothy M. Mayleben, a director and the Companys President and Chief
Executive Officer, attached as Exhibit 10.1 to Aastroms Current Report on Form 8-K filed on
August 31, 2010, incorporated herein by reference.31.1
    
    Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934 (furnished herewith).31.2
    
    Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934 (furnished herewith).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
 19




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GLOSSARY
 TERM
    
    DEFINITIONAdverse Event
    
    Any adverse change in health or
side-effect that occurs in a
person participating in a
clinical trial, from the time
they consent to joining the
trial until a pre-specified
period of time after their
treatment has been completed.Autologous
    
    Originating from the patient
receiving treatment. (Aastrom
uses only autologous cells)BLA  Biologics License Application
    
    An application containing
product safety, efficacy and
manufacturing information
required by the FDA to market
biologics products in the U.S.Catheter-DCM
    
    Aastroms U.S. Phase 2 clinical
trial investigating
catheter-based delivery of our
product in the treatment of
dilated cardiomyopathy.CLI  Critical Limb Ischemia
    
    A vascular disease
characterized by insufficient
blood flow in the lower
extremities that causes severe
pain, tissue loss or both.Controlled Clinical Trial
    
    A clinical study that compares
patients receiving a specific
treatment to patients receiving
an alternate treatment for the
condition of interest. The
alternate treatment may be
another active treatment,
standard of care for the
condition and/or a placebo
(inactive) treatment.DCM  Dilated Cardiomyopathy
    
    A chronic cardiac disease where
expansion of the patients
heart reduces the pumping
function to a point that the
normal circulation of blood
cannot be maintained.Double-Blind Clinical Trial
    
    Clinical trials in which
neither the patient nor the
physician know if the patient
received the experimental
treatment or a control/placebo.FDA  Food & Drug Administration
    
    The U.S. FDA ensures that
medicines, medical devices, and
radiation-emitting consumer
products are safe and
effective. Authorized by
Congress to enforce the Federal
Food, Drug, and Cosmetic Act
and several other public health
laws, the agency monitors the
manufacture, import, transport,
storage, and sale of $1
trillion worth of goods
annually.GMP  Good Manufacturing Practice
    
    GMP regulations require that
manufacturers, processors, and
packagers of drugs, medical
devices, some food, and blood
take proactive steps to ensure
that their products are safe,
pure, and effective. GMP
regulations require a quality
approach to manufacturing,
enabling companies to minimize
or eliminate instances of
contamination, mix-ups, and
errors.IMPACT-DCM
    
    Aastroms U.S. Phase 2 clinical
trial investigating surgical
delivery of our product in the
treatment of dilated
cardiomyopathy.IND  Investigational New Drug
    
    An application submitted to the
FDA for a new drug or biologic
that, if allowed, will be used
in a clinical trial.Ischemia
    
    A shortage or inadequate flow
of blood to a body part
(commonly an organ or tissue)
caused by a constriction or
obstruction of the blood
vessels supplying it.
 20




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TERM
    
    DEFINITIONLVEF  Left Ventricular Ejection Fraction
    
    The fraction of blood pumped
out of the left ventricle with
each heart beat.Open-label Clinical Trial
    
    A trial in which both the
treating physician and the
patient know whether they are
receiving the experimental
treatment or control/placebo
treatment.Orphan Drug Designation
    
    Orphan drug refers to a drug
or biologic that is intended
for use in the treatment of a
rare disease or condition.
Orphan drug designation from
the U.S. Food and Drug
Association (FDA) qualifies the
sponsor to receive certain
benefits from the Government in
exchange for developing the
drug for a rare disease or
condition. The drug must then
go through the FDA marketing
approval process like any other
drug or biologic which
evaluates for safety and
efficacy. Usually a sponsor
receives a quicker review time
and lower application fees for
an orphan product.Phase 1 Clinical Trial
    
    A Phase 1 trial represents an
initial study in a small group
of patients to test for safety
and other relevant factors.Phase 2 Clinical Trial
    
    A Phase 2 trial represents a
study in a moderate number of
patients to assess the safety
and efficacy of a product.Phase 2b Clinical Trial
    
    A Phase 2b trial is a
moderately-sized Phase 2 trial
that is more specifically
designed assess the efficacy of
a product than a Phase 2a
trial.Phase 3 Clinical Trial
    
    Phase 3 studies are initiated
to establish safety and
efficacy in an expanded patient
population at multiple clinical
trial sites and are generally
larger than trials in earlier
phases of development.Progenitor Cells
    
    A parent cell that gives rise
to a distinct cell lineage by a
series of cell divisions.Prospective Clinical Trial
    
    A clinical trial in which
participants are identified and
then followed throughout the
study going forward in time.Randomized Clinical Trial
    
    A clinical trial in which the
participants are assigned
randomly to different treatment
groups.SPP  Single-Pass Perfusion
    
    SPP is Aastroms proprietary
technology that controls gas
and cell culture media exchange
to enable the replication of
early-stage stem and progenitor
cells while preventing their
differentiation into mature
cells.Stem Cell
    
    Unspecialized
(undifferentiated) cells that
retain the ability to divide
throughout a lifetime and give
rise to more specialized
(differentiated) cells which
take the place of cells that
die or are lost.In culture, these
undifferentiated cells possess
the ability to divide for
indefinite periods in culture
and may give rise to highly
specialized cells.
 21