<PAGE> 1
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 MARCH 31, 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 May 8, 1996 was 7,311,036 shares.
<PAGE> 2
GLIATECH INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets - 1
December 31, 1995 and March 31, 1996
Consolidated Statements of Operations -
for the three months ended March 31, 1995 and 1996
and for the period from inception of operations
(August 31, 1988) through March 31, 1996 2
Consolidated Statements of Cash Flows -
for the three months ended March 31, 1995 and 1996
and for the period from inception of operations
(August 31, 1988) through March 31, 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, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $20,780,360 $20,696,208
Short-term investments 2,242,941 28,165
Accounts receivable 138,428 177,290
Government grants receivable 74,060 44,758
Inventory at cost 417,659 396,456
Prepaid expenses and other 272,340 438,396
----------- -----------
Total current assets 23,925,788 21,781,273
Property and equipment, net 566,961 656,961
Other assets, net 853,187 873,060
----------- -----------
TOTAL ASSETS $25,345,936 $23,311,294
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Demand note from bank $400,000 $0
Accounts payable and other accrued expenses 1,045,785 700,806
Accrued compensation 252,053 24,999
Accrued clinical trial costs 186,558 442,114
Deferred research contract revenue 279,095 58,900
----------- -----------
Total current liabilities 2,163,491 1,226,819
Stockholders' equity:
Convertible Preferred Stock 0 0
Convertible Class A Common Stock 0 0
Common stock 72,978 73,107
Additional paid-in capital 50,886,788 50,959,970
Deferred compensation (23,111) (17,280)
Deficit accumulated during the development stage (27,754,210) (28,931,322)
----------- -----------
Total stockholders' equity 23,182,445 22,084,475
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $25,345,936 $23,311,294
=========== ===========
</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 (AUGUST 31, 1988)
MARCH 31 THROUGH
----------------------------- MARCH 31,
1995 1996 1996
-------- --------- --------------------
<S> <C> <C> <C>
Government grants $47,989 $38,319 $ 1,006,518
Reasearch contracts and licensing fees 481,251 714,435 3,848,794
Product sales 0 76,346 344,919
----------- ----------- ------------
Total revenues 529,240 829,100 5,200,231
Research and development 1,187,321 1,500,634 22,610,567
Selling, general and administrative 518,161 778,896 10,887,818
Depreciation and amortization 47,139 31,684 1,307,105
----------- ----------- ------------
Total operating cost and expenses 1,752,621 2,311,214 34,805,490
----------- ----------- ------------
Loss from operations (1,223,381) (1,482,114) (29,605,259)
Interest Income, net 38,332 305,002 1,612,959
----------- ----------- ------------
Net loss ($1,185,049) ($1,177,112) ($27,992,300)
=========== =========== ============
Net loss per common share (pro forma for 1995) ($0.24) ($0.16)
=========== ===========
Shares used for purposes of computing
net loss per common share 4,928,755 7,305,441
=========== ===========
</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>
PERIOD FROM
INCEPTION OF
OPERATIONS
(AUGUST 31, 1988)
THREE MONTHS ENDED THROUGH
-------------------------- MARCH 31,
1995 1996 1996
------------ ----------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,185,049) ($1,177,112) ($27,992,300)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 47,139 31,684 1,310,062
Loss on disposal of equipment 0 0 102,000
Compensation from issuance of stock and stock options 7,401 5,831 269,329
Changes in operating assets and liabilities:
Accounts receivable 0 (38,862) (177,290)
Inventory (33,575) 21,203 (396,456)
Government grants receivable and other assets 18,941 (136,754) (338,968)
Accounts payable and other accrued expenses (412,367) (520,284) 514,806
Deferred contract research revenue (481,250) (220,195) 58,900
Other liabilities (185,972) 255,556 1,049,049
----------- ----------- -----------
Net cash used in operating activities (2,224,732) (1,778,933) (25,600,868)
INVESTING ACTIVITIES
(Purchase) sale of investments, net 3,948,670 2,214,776 (28,165)
Payment for patent rights and trademarks (30,049) (22,867) (1,066,983)
Payment of organization costs 0 0 (139,779)
Purchase of property and equipment (35,967) (118,690) (1,384,537)
----------- ----------- -----------
Net cash (used in) provided by investing activities 3,882,654 2,073,219 (2,619,464)
FINANCING ACTIVITIES
Proceeds from demand note from bank 0 (400,000) 0
Principal payments on capital lease obligations (16,421) 0 (565,601)
Proceeds from sale and leaseback 0 0 75,131
Proceeds from issuance of Preferred Stock, net 0 0 28,976,554
Proceeds from issuance of Common Stock, net 1,627 0 19,839,234
Proceeds from exercise of stock options 21,562 91,221
Proceeds from exercise of warrants 0 0 500,001
----------- ----------- -----------
Net cash (used in) provided by financing activities (14,794) (378,438) 48,916,540
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,643,128 (84,152) 20,696,208
Cash and cash equivalents at beginning of year/period 719,666 20,780,360 0
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD $2,362,794 $20,696,208 $20,696,208
=========== =========== ===========
</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 three-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 months ended March 31, 1996, is 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 months ended March 31, 1995,
is 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 recently obtained regulatory clearance to affix CE Marking on
ADCON-L and ADCON-T/N, thereby allowing ADCON-L and ADC ON-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 Austria,
Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland and the
United Kingdom. For ADCON-T/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 Austria, Belgium, Italy,
The Netherlands and Switzerland. Since inception, the Company's revenues have
been derived primarily from contract research payments from a research contract
with 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 Company has also received revenues from various
government grants which have been awarded to the Company.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
REVENUES
Total revenues increased 57% from $529,240 in the first quarter of 1995 to
$829,100 in the first quarter of 1996. The increase is primarily a result of
contract research revenues of $714,435 for the first quarter of 1996 compared to
$481,251 in the first quarter 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 Agreement added approximately $219,000 to
research contract revenues in the first quarter of 1996. Under the terms of the
expanded agreement, Janssen increased its research funding and milestone
payments by 50% beginning in September 1995. The Company's government-funded
research grant revenues decreased from $47,989 in the first quarter of 1995 to
$38,319 in the first quarter of 1996.
5
<PAGE> 8
The Company recognized $76,346 in product sales for the first quarter of 1996
resulting primarily from sales of its ADCON-L product in Europe. There were no
products sales for the first quarter of 1995 because the Company did not have
regulatory approval to market the ADCON products during the first quarter of
1995.
EXPENSES
Expenses for research and development increased 26% from $1,187,321 for the
first quarter of 1995 to $1,500,634 for the first quarter of 1996. The increase
of $313,313 for this period is 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 late 1995 and early 1996.
Additionally, in the first quarter 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 increased 50% from $518,161 for the
first quarter of 1995 to $778,896 for the first quarter of 1996. This increase
was due primarily to (i) an increase in sales and marketing expenses as the
Company continued to increase its sales and marketing efforts for its ADCON(R)-L
and ADCON(R)-T/N products in the European markets and (ii) expenses incurred as
a result of the Company becoming a publicly traded company.
INTEREST INCOME
Net interest income increased from $38,332 in the first quarter of 1995 to
$305,002 in the first quarter of 1996. This increase was 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 as discussed below. In
addition, interest expense decreased as the Company paid down its line of credit
and the Company's capital lease was fully repaid.
NET LOSS
The Company's net loss decreased 1% from $1,185,049 for the first quarter of
1995 to $1,177,112 for the first quarter of 1996. The slight decrease in the
net loss for the first quarter of 1996 was a result of increased revenues and
interest income offset by increased operating costs and expenses as discussed
above.
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
6
<PAGE> 9
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 $49,315,789 in net proceeds from equity financings. In addition, from
its inception through March 31, 1996, the Company has recognized revenue of
$3,848,794 from its research collaboration agreement with Janssen and $1,006,518
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 March 31, 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
March 31, 1996 and December 31, 1995, the Company's cash and cash equivalents
and short-term investments totaled $20,724,373 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 futher development of these agents; however, there is no assurance that such
additional funding will be obtained.
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.
7
<PAGE> 10
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 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 hat 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 March 31, 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: May 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
STATEMENT REGARDING COMPUTATION OF PER-SHARE NET LOSS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1995 1996
-----------------------------
(PRO FORMA)
<S> <C> <C>
AVERAGE SHARES OUTSTANDING 4,055,567 (A) 7,305,441
NET EFFECT OF ANTI-DILUTIVE STOCK AND STOCK
OPTIONS AND WARRANTS (B) 873,188 0
-----------------------------
TOTAL 4,928,755 7,305,441
=============================
NET LOSS ($1,185,049) ($1,177,112)
=============================
PER-SHARE AMOUNT ($0.24) ($0.16)
=============================
<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 MARCH 31, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,724
<SECURITIES> 0
<RECEIVABLES> 183
<ALLOWANCES> 6
<INVENTORY> 396
<CURRENT-ASSETS> 21,781
<PP&E> 1,735
<DEPRECIATION> 1,078
<TOTAL-ASSETS> 23,311
<CURRENT-LIABILITIES> 1,227
<BONDS> 0
<COMMON> 73
0
0
<OTHER-SE> 22,011
<TOTAL-LIABILITY-AND-EQUITY> 23,311
<SALES> 76
<TOTAL-REVENUES> 829
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,310
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,177)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
