<PAGE> 1
UNITED STATES
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 June 30, 1996
OR
[ ] 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 0-20096
GLIATECH INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1587242
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
23420 Commerce Park Road
Cleveland, Ohio 44122
(Address of principal executive offices) (Zip Code)
(216) 831-3200
(Registrant's telephone number, including area code)
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.
YES X NO
----- ------
The number of shares outstanding of the registrant's Common Stock, $0.01 par
value per share, as of August 9, 1996 was 7,313,686 shares.
<PAGE> 2
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
<S> <C> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets - 1
December 31, 1995 and June 30, 1996
Consolidated Statements of Operations - for the three months and six
months ended June 30, 1995 and 1996 and for the period from
inception of operations (August 31, 1988)
through June 30, 1996 2
Consolidated Statements of Cash Flows - for the six months ended
June 30, 1995 and 1996 and for the period from inception of
operations (August 31, 1988) through
June 30, 1996 3
Notes to Consolidated Financial Statments 4
Item 2 Management's Discussion and Analysis of Financial Condition 5-8
and Results of Operations
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 9
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,780,360 $ 18,244,869
Short-term investments 2,242,941 1,209,226
Accounts receivable 138,428 180,359
Government grants receivable 74,060 41,929
Inventory at cost 417,659 414,688
Prepaid expenses and other 272,340 392,876
------------ ------------
Total current assets 23,925,788 20,483,947
Property and equipment, net 566,961 855,581
Other assets, net 853,187 898,167
------------ ------------
Total assets $ 25,345,936 $ 22,237,695
============ ============
Liabilities and stockholders' equity
Current Liabilities:
Demand note from bank $ 400,000 $ 0
Accounts payable and other accrued expenses 1,045,785 1,030,424
Accrued compensation 252,053 49,999
Accrued clinical trial costs 186,558 780,427
Deferred research contract revenue 279,095 67,874
------------ ------------
Total current liabilities 2,163,491 1,928,724
Stockholders' equity:
Convertible Preferred Stock 0 0
Convertible Class A Common Stock 0 0
Common stock 72,978 73,135
Additional paid-in capital 50,886,788 50,958,614
Deferred compensation (23,111) (11,449)
Deficit accumulated during the development stage (27,754,210) (30,711,329)
------------ ------------
Total stockholders' equity 23,182,445 20,308,971
------------ ------------
Total liabilities and stockholders equity $ 25,345,936 $ 22,237,695
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE> 4
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Inception of
Operations
Three Months Ended Six Months Ended (August 31, 1988)
June 30 June 30 through
-------------------------- ------------------------- June 30,
1995 1996 1995 1996 1996
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Government grants $ 46,005 $ 41,928 $ 93,994 $ 80,247 $ 1,048,446
Reasearch contracts and licensing fees 482,033 714,435 963,283 1,428,870 4,563,229
Product sales 205,850 282,196 550,769
----------- ----------- ----------- ----------- ------------
Total revenues 528,038 962,213 1,057,277 1,791,313 6,162,444
Research and development 1,150,136 1,523,111 2,337,457 3,023,745 24,133,678
Selling, general and administrative 764,650 1,466,487 1,282,814 2,244,758 12,353,680
Depreciation and amortization 42,934 28,037 90,073 60,346 1,335,767
----------- ----------- ----------- ----------- ------------
Total operating cost and expenses 1,957,720 3,017,635 3,710,341 5,328,849 37,823,125
----------- ----------- ----------- ----------- ------------
Loss from operations (1,429,682) (2,055,422) (2,653,064) (3,537,536) (31,660,681)
Interest Income, net 14,299 275,415 52,631 580,417 1,888,374
=========== =========== =========== =========== ============
Net loss ($1,415,383) ($1,780,007) ($2,600,436) ($2,957,119) ($29,772,307)
=========== =========== =========== =========== ============
Net loss per common share (pro forma for 1995) ($0.29) ($0.24) ($0.53) ($0.40)
=========== =========== =========== ===========
Shares used for purposes of computing
net loss per common share 4,928,755 7,311,724 4,928,755 7,308,268
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Peroid from
Inception of
Operations
(August 31, 1988)
Six Months Ended through
--------------------------- June 30,
1995 1996 1996
----------- ------------ ---------------
<S> <C> <C> <C>
Operating activities
Net loss ($2,600,436) ($ 2,957,119) ($29,772,307)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 90,073 60,346 1,338,724
Loss on disposal of equipment 0 0 102,000
Compensation from issuance of stock and stock options 14,802 11,662 275,160
Changes in operating assets and liabilities:
Accounts receivable 0 (41,931) (180,359)
Inventory (3,373) 2,971 (414,688)
Government grants receivable and other assets 128,513 (88,406) (290,620)
Accounts payable and other accrued expenses (194,677) (165,666) 869,424
Deferred contract research revenue (962,500) (211,221) 67,874
Other liabilities (262,797) 593,869 1,387,362
----------- ------------ ------------
Net cash used in operating activities (3,790,395) (2,795,495) (26,617,430)
Investing activities
(Purchase) sale of investments, net 3,948,670 1,033,715 (1,209,226)
Payment for patent rights and trademarks (46,672) (50,969) (1,095,085)
Payment of organization costs 0 0 (139,779)
Purchase of property and equipment (83,761) (342,978) (1,608,825)
----------- ------------ ------------
Net cash (used in) provided by investing activities 3,818,237 639,768 (4,052,915)
Financing activities
Proceeds from demand note from bank 0 (400,000) 0
Principal payments on capital lease obligations (27,135) 0 (565,601)
Proceeds from sale and leaseback 0 0 75,131
Proceeds from issuance of Preferred Stock, net 4,680,292 0 28,976,554
Proceeds from issuance of Common Stock, net 2,513 (21,954) 19,817,280
Proceeds from exercise of stock options 42,190 111,849
Proceeds from exercise of warrants 0 0 500,001
----------- ------------ ------------
Net cash (used in) provided by financing activities 4,655,670 (379,764) 48,915,214
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents 4,683,512 (2,580,249) 18,244,869
Cash and cash equivalents at beginning of year/period 719,666 20,780,360 0
----------- ------------ ------------
Cash and cash equivalents at end of year/period $ 5,403,178 $ 18,244,869 $ 18,244,869
=========== ============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 6
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. These financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Annual Report on Form 10-K of Gliatech Inc. for the fiscal year ended December
31, 1995 filed with the Securities and Exchange Commission.
Note 2. Net Loss Per Share
Net Loss Per Share
- ------------------
Net loss per common share, for the three and six months ended June 30, 1996, are
based on the weighted average number of common shares outstanding. Common
equivalent shares relating to stock options and warrants are excluded as their
effect is anti-dilutive.
Pro Forma Net Loss Per Share
- ----------------------------
Pro forma net loss per common share, for the three and six months ended June 30,
1995, are computed using the pro forma weighted average number of shares of
common stock outstanding and pursuant to SEC Staff Accounting Bulletin 83,
common and common equivalent shares including preferred shares (all of which
converted, according to their terms, upon the consummation of the initial public
offering which was consummated on October 24, 1995) issued by the Company and
stock options and warrants granted during the twelve month period immediately
preceding the filing of the initial public offering have been included in the
calculation of the shares used in computing pro forma net loss per common share
as if they were outstanding for all periods presented. In addition, common
equivalent shares from preferred shares (all of which converted, according to
their terms, upon the consummation of the initial public offering) issued prior
to the twelve-month period immediately preceding the filing of the initial
public offering are included in the computation of pro forma net loss per common
share as if they had been converted on the original date of issuance.
4
<PAGE> 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since commencing operations in 1988, the Company has been a development stage
company. The Company is developing and commercializing the ADCON family of
products to inhibit excessive scarring and adhesions after surgery. Based on
European pivotal clinical studies and other compliance efforts and submission of
data, the Company obtained regulatory clearance to affix CE Marking on
ADCON-L and ADCON-T/N, thereby allowing ADCON-L and ADCON-T/N to be marketed in
the 15 European Union countries for lumbar disc surgery and tendon and
peripheral nerve surgeries, respectively. The Company has entered into
distribution agreements with independent distributors for ADCON-L in Australia,
Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland
and the United Kingdom. For ADCONT/N, the Company intends initially to pursue
only a limited distribution in the 15 European Union countries during 1996 and
currently has entered into distribution agreements in Australia, Austria,
Belgium, Italy, The Netherlands, Spain and Switzerland. Since inception, the
Company's revenues have been derived primarily from contract research payments
from a research contract with Janssen Pharmaceutica, N.V. of Belgium
("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, to collaborate on
the discovery and development of compounds to slow the progression of
Alzheimer's disease (the "Janssen Agreement"). The Company has also received
revenues from various government grants which have been awarded to the Company.
RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
REVENUES
Total revenues increased 82% from $528,038 in the second quarter of 1995 to
$962,213 in the second quarter of 1996, and 69% from $1,057,277 in the first six
months of 1995 to $1,791,313 in the corresponding period of 1996. The increases
are primarily a result of contract research revenues of $714,435 for the second
quarter of 1996 compared to $482,033 in the second quarter of 1995, and
$1,428,870 for the first six months of 1996 compared to $963,283 for the first
six months of 1995 from the Company's research contract with Janssen. In
September 1995, the Company entered into an addendum to the Janssen Agreement in
order to expand the scope of the collaboration with Janssen on Alzheimer's
disease to include research relating to inhibitors of complement activation.
This addendum to the Janssen Agreement added approximately $438,000 to
research contract revenues in the first six months of 1996. Under the terms of
the expanded agreement, Janssen increased its research funding and milestone
payments by 50% beginning in September 1995.
5
<PAGE> 8
For the second quarter of 1996, the Company recognized $205,850 and $282,196
for the first six months of 1996 in product sales, primarily from sales of its
ADCON-L product in Europe. There were no products sales for the first six
months of 1995 because the Company did not have regulatory approval to market
the ADCON products at that time.
The Company's government-funded research grant revenues decreased slightly from
$46,005 in the second quarter of 1995 to $41,928 in the second quarter of 1996,
and from $93,994 in the first six months of 1995 to $80,247 in the first six
months of 1996.
EXPENSES
Expenses for research and development increased 32% from $1,150,136 for the
second quarter of 1995 to $1,523,111 for the second quarter of 1996, and 29%
from $2,337,457 for the first six months of 1995 to $3,023,745 for the
comparable period of 1996. The increases are due primarily to increased staffing
and clinical contract expenses as a result of the initiation of pivotal clinical
trials in the U.S. for both ADCON(R)-L and ADCON(R)-T/N during the fourth
quarter of 1995 and early 1996. Additionally, in the first six months of 1996,
the Company increased its research activities relating to its Alzheimer's
disease and Cognition Modulation programs which required increases in staffing
and laboratory supplies and services. Increased expenses associated with the
Company's Alzheimer's program are funded under the Company's agreement with
Janssen.
Selling, general and administrative expenses were $1,466,487 for the second
quarter of 1996, compared to $764,650 in the same quarter of 1995, and
$2,244,758 for the first half of 1996 compared to $1,282,814 for the first half
of 1995. The increases are due primarily to $500,000 of expenses associated with
the filing of a registration statement with the U.S. Securities and Exchange
Commission (SEC) on Form S-1 for an offering of Gliatech's Common Stock.
Gliatech subsequently withdrew the registration statement due to unfavorable
market conditions. To a lesser extent, sales and marketing expenses increased as
the Company continued to expand its sales and marketing efforts for its
ADCON(R)-L and ADCON(R)-T/N products in the European markets.
INTEREST INCOME
Net interest income increased from $14,299 in the second quarter of 1995 to
$275,415 in the second quarter of 1996, and from $52,631 in the first six months
of 1995 to $580,417 in the comparable period of 1996. The increases are due to
the interest earned on the cash received in the June 1995 private placement of
equity securities and the October 1995 initial public offering of Common Stock.
In addition, interest expense decreased as the Company paid down its line of
credit and fully repaid its capital lease.
6
<PAGE> 9
NET LOSS
The Company's net loss increased by 26% to $1,780,007 for the second quarter of
1996 compared to $1,415,383 for the second quarter of 1995 and by 14% to
$2,957,119 for the first half of 1996 compared with $2,600,436 the first half of
1995. The increase in net loss for both periods is a result of increased
revenues and interest income offset by increased operating costs and expenses as
discussed above. The net loss per share decreased to $0.24 for the second
quarter of 1996 from $0.29 for the second quarter of 1995, and to $0.40 for the
first half of 1996 from $0.53 for the first half of 1995. The reduction in net
loss was due to an increase in the number of shares outstanding, primarily due
to the sale of 2,300,000 shares of Common Stock in the Company's initial public
offering in October of 1995.
LIQUIDITY AND CAPITAL RESOURCES
In October 1995, the Company received net proceeds, after expenses of the
offering, of approximately $19,669,000 from its initial public offering in which
the Company sold 2,300,000 shares of Common Stock at an initial public offering
price of $9.50 per share. Prior to the public offering, the Company had financed
its operations primarily through the private placement of its equity securities
and to a lesser extent through federally sponsored research grants and research
contract and licensing fees. In June 1995, the Company received net proceeds of
approximately $4,653,000 through a private placement of equity securities. Since
its inception, the Company has received $49,293,835 in net proceeds from equity
financings. In addition, from its inception through June 30, 1996, the Company
has recognized revenue of $4,563,229 from its research collaboration agreement
with Janssen and $1,048,446 from several federally sponsored research grants.
Janssen is expected to pay the Company approximately $2,800,000 during fiscal
1996. The Company also has established a $1,000,000 line of credit with a bank,
secured by certain assets of the Company. As of June 30, 1996, the Company had
no borrowings against the line of credit.
In order to preserve principal and maintain liquidity, the Company's funds are
invested in U.S. Treasury obligations and other short-term investments. As of
June 30, 1996 and December 31, 1995, the Company's cash and cash equivalents and
short-term investments totaled $19,454,095 and $23,023,301, respectively.
Also, during 1995, the Company received two $100,000 Phase I Small Business
Innovation Research (SBIR) grants from the National Institute of Neurological
Disorders and Stroke (NINDS) division of the National Institute of Health (NIH)
to develop histamine H3 receptor agents. If the Company is successful in its
Phase I research, Phase II awards for additional funding could be sought to aid
in further development of these agents; however, there is no assurance that such
additional funding will be obtained.
7
<PAGE> 10
The Company anticipates that a substantial portion of the proceeds of its
initial public offering will be used to fund clinical trials of ADCON(R)-L and
ADCON(R)-T/N in the U.S. and the marketing efforts for sales of the ADCON(R)
products in Europe. In addition, the Company anticipates that the remaining
proceeds will be used to fund continued development of additional ADCON(R)
products, for the research and development of products relating to its Cognition
Modulation program and for working capital and general corporate purposes. The
Company's future liquidity and capital requirements will depend on many factors,
including, but not limited to, the commercial potential of its ADCON(R) family
of products, the timing of regulatory approvals, the timing and results of
preclinical testing and clinical studies, the progress of the Company's research
and development programs and the ability of the Company to establish and
maintain collaborative arrangements with others for the purpose of funding
certain research and development programs. The Company believes that its current
cash position and other financial resources will enable it to conduct its
current and planned operations through at least fiscal 1997.
The Company anticipates that it will augment its cash balance through financing
transactions and further corporate alliances. No assurances can be given that
adequate levels of additional funding can be obtained on favorable terms, if at
all.
The Company is a party to a license agreement and a related sponsored research
agreement with Case Western Reserve University ("Case Western") pursuant to
which Case Western granted the Company an exclusive worldwide license at a
royalty of up to five percent of the revenues generated from the sale of
products which are within the nerve regeneration/repair scope of the agreements.
A dispute has arisen between Case Western and the Company regarding inventorship
of the ADCON products. Case Western has informed the Company that it believes
one of its employees is a co-inventor of the ADCON family of products and that
the Company is therefore obligated to pay royalties to Case Western on the sale
of ADCON products. Case Western has threatened litigation regarding this matter.
The Company believes that no Case Western employee is an inventor of the ADCON
family of products and thus that the ADCON family of products is not within the
nerve regeneration/repair scope of these sponsored research and license
agreements with Case Western. In the event that Case Western elects to pursue
this matter, there can be no assurance that the Company will not be required to
pay such royalties or that the cost of defending against any such proceeding
will not have an adverse material effect on the Company.
8
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement regarding computation of per-share
net loss
27.1 Financial data schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended June 30, 1996.
9
<PAGE> 12
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.
Date: August 14, 1996 GLIATECH INC.
By: /s/ Rodney E. Dausch
------------------------------
Rodney E. Dausch
Vice President, Chief Financial Officer
and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
10
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page Number
- ----------- ---------------------- -----------
<S> <C> <C>
11.1 Statement Regarding Computation of Per-Share Net Loss 12
27.1 Financial Data Schedule 13
</TABLE>
11
<PAGE> 1
Exhibit 11.1
<TABLE>
<CAPTION>
Statement Regarding Computation of Per-Share Net Loss
Three Months Ended June 30, Six Months Ended June 30,
1995 1996 1995 1996
-------------------------- --------------------------
(Pro forma) (Pro forma)
<S> <C> <C> <C> <C>
Average shares outstanding 4,055,567 (A) 7,311,724 4,055,567 (A) 7,308,268
Net effect of anti-dilutive stock and stock
options and warrants (B) 873,188 0 873,188 0
-------------------------- --------------------------
Total 4,928,755 7,311,724 4,928,755 7,308,268
========================== ==========================
Net Loss ($1,415,383) ($1,780,007) ($2,600,436) ($2,957,119)
========================== ==========================
Per-share amount ($0.29) ($0.24) ($0.53) ($0.40)
========================== ==========================
<FN>
(A) Assumes conversion of Preferred Stock into shares of Common Stock as if
they had been converted on the original date of issuance, except for
Preferred Stock issued within the twelve-month period preceding the filing
of the Company's initial public offering, which is treated as outstanding
for all periods prior to June 30, 1995, the latest period presented in the
initial public offering. See (B).
(B) Stock and stock options and warrants issued or granted within a
twelve-month period preceding the filing of the Company's initial public
offering are treated as outstanding for all periods prior to June 30, 1995.
Subsequent to June 30, stock options and warrants are excluded as their
effect is anti-dilutive.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GLIATECH
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,454
<SECURITIES> 0
<RECEIVABLES> 188
<ALLOWANCES> 8
<INVENTORY> 415
<CURRENT-ASSETS> 20,484
<PP&E> 1,960
<DEPRECIATION> 1,104
<TOTAL-ASSETS> 22,238
<CURRENT-LIABILITIES> 1,929
<BONDS> 0
<COMMON> 73
0
0
<OTHER-SE> 20,236
<TOTAL-LIABILITY-AND-EQUITY> 22,238
<SALES> 282
<TOTAL-REVENUES> 1,791
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,326
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (2,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,957)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,957)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
