<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 NO. 000-20139
DIACRIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BUILDING 96 13TH STREET, CHARLESTOWN NAVY YARD, CHARLESTOWN, MA 02129
(Address of principal executive offices, including zip code)
(617) 242-9100
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of July 31, 1996, 12,761,368 shares of the registrant's Common Stock,
including 2,875,000 shares of Common Stock included in the Units, each
consisting of one share of Common Stock and one Common Stock Purchase
Warrant, sold by the Company in its initial public offering, were
outstanding.
<PAGE> 2
DIACRIN, INC.
INDEX
Page
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 1995 and June 30, 1996.......................... 3
Statements of Operations for the Three and Six Month
Periods Ended June 30, 1995 and 1996 and for the
period from October 10, 1989 (inception) to June 30, 1996.... 5
Statements of Cash Flows for the Six Month Periods
Ended June 30, 1995 and 1996 and for the period
from October 10, 1989 (inception) to June 30, 1996........... 6
Notes to Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 11
SIGNATURES................................................................. 12
-2-
<PAGE> 3
DIACRIN, INC.
<TABLE>
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
ASSETS
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,114,820 $4,623,821
Short-term investments - 12,641,081
Prepaid expenses and other current assets 112,007 360,796
---------- ----------
Total current assets 4,226,827 17,625,698
---------- ----------
Property and equipment, at cost:
Laboratory equipment 70,501 88,524
Equipment under capital leases 675,262 675,262
Furniture and office equipment 195,363 208,370
Leasehold improvements 51,424 51,424
---------- ----------
992,550 1,023,580
Less- Accumulated depreciation
and amortization 358,823 467,301
---------- ----------
633,727 556,279
---------- ----------
Long-term investments - 4,634,413
Deferred financing cost, net 299,730 -
---------- ----------
$5,160,284 $22,816,390
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE> 4
DIACRIN, INC.
<TABLE>
BALANCE SHEETS
(UNAUDITED)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 191,014 $ 197,994
Accrued expenses 1,126,477 648,163
Current obligations under capital leases 156,448 167,016
------------ -------------
Total current liabilities 1,473,939 1,013,173
------------ -------------
Long-term debt:
Long-term obligation under capital leases 549,883 463,377
Convertible notes payable 7,000,000 -
------------ -------------
Total long-term debt 7,549,883 463,377
------------ -------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, Authorized--
2,990,119 shares at December 31, 1995 and
5,000,000 shares at June 30, 1996; none issued
and outstanding - -
Convertible preferred stock, $.01 par value,
Series A- Authorized, issued and
outstanding-- 6,484,331 shares at December
31, 1995 and none at June 30, 1996 64,843 -
Series B- Authorized-- 3,833,503 shares at
December 31, 1995 and none at June 30, 1996;
issued and outstanding-- 2,446,917 shares at
December 31, 1995 and none at June 30, 1996 24,469 -
Series C- Authorized, issued and
outstanding-- 4,455,000 shares at December
31, 1995 and none at June 30, 1996 44,550 -
Series D- Authorized-- 2,009,881 shares at
December 31, 1995 and none at June 30, 1996;
none issued and outstanding - -
Common stock, $.01 par value; Authorized-- 30,000,000
shares; issued and outstanding, 381,852 shares
and 12,757,118 shares at December 31, 1995
and June 30, 1996, respectively 3,819 127,571
Additional paid-in capital 23,322,306 51,547,414
Deficit accumulated in the development stage (27,323,525) (30,335,145)
------------ -------------
Total stockholders' equity (deficit) (3,863,538) 21,339,840
------------ -------------
$ 5,160,284 $ 22,816,390
============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE> 5
DIACRIN, INC.
<TABLE>
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30, October 10, 1989
-------------- -------------- (inception)
1995 1996 1995 1996 to June 30. 1996
---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ 1,109,606 $ 1,517,901 $ 2,197,125 $ 2,742,280 $ 26,204,703
General and administrative 280,921 328,895 565,834 655,704 6,023,463
----------- ----------- ----------- ----------- ------------
Total operating expenses 1,390,527 1,846,796 2,762,959 3,397,984 32,228,166
INTEREST AND OTHER INCOME 47,839 338,962 121,991 502,332 2,497,712
INTEREST EXPENSE (64,366) (23,236) (86,527) (115,968) (604,691)
----------- ----------- ----------- ----------- ------------
Net loss $(1,407,054) $(1,531,070) $(2,727,495) $(3,011,620) $(30,335,145)
=========== =========== =========== =========== ============
PRO FORMA NET LOSS
PER COMMON SHARE $ (.14) $ (.12) $ (.27) $ (.25)
=========== =========== =========== ===========
SHARES USED IN COMPUTING
PRO FORMA NET LOSS
PER COMMON SHARE 10,054,815 12,755,282 10,051,001 12,083,377
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE> 6
DIACRIN, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months
Ended June 30, October 10, 1989
-------------- (inception)
1995 1996 to June 30, 1996
---- ---- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,727,495) $ (3,011,620) $(30,335,145)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 102,946 110,947 1,106,745
Expense related to grant of stock options - - 860,396
Changes in assets and liabilities-
Prepaid expenses and other current assets 80,226 (248,789) (360,796)
Accounts payable (105,354) 6,980 197,994
Accrued expenses (177,697) (100,429) 1,026,048
----------- ------------ ------------
Net cash used in operating activities (2,827,374) (3,242,911) (27,504,758)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments - (12,641,081) (12,641,081)
Purchases of property and equipment, net (34,081) (31,030) (1,391,208)
Increase in long-term investments - (4,634,413) (4,634,413)
Decrease in note receivable from officer 37,500 - -
----------- ------------ ------------
Net cash provided by (used in) investing
activities 3,419 (17,306,524) (18,666,702)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock - - 22,567,640
Net proceeds from sale of common stock and warrants 6,146 20,918,690 20,954,962
Principal payments under capital leases (86,883) (75,938) (454,748)
Proceeds from sale/leaseback of equipment 142,318 - 826,895
Proceeds from sale of 7.5% convertible notes 7,000,000 - 7,000,000
(Increase) decrease in deferred financing costs (93,424) 215,684 (95,147)
Repurchase of common stock - - (4,321)
----------- ------------ ------------
Net cash provided by financing activities 6,968,157 21,058,436 50,795,281
----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,144,202 509,001 4,623,821
CASH AND CASH EQUIVALENTS, beginning of period 2,752,193 4,114,820 -
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 6,896,395 $ 4,623,821 $ 4,623,821
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Increase in equipment under capital leases $ (142,318) $ - $ (1,085,141)
Increase in capital lease obligations $ 142,318 $ - $ 1,085,141
Conversion of notes and accrued interest
into common stock, net of financing costs $ - $ 7,296,308 $ 7,296,308
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 42,777 $ 47,270 $ 222,256
=========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE> 7
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Operations and Basis of Presentation
- ------------------------------------------
Diacrin, Inc. (the Company) was incorporated on October 10, 1989 and is
developing transplantable porcine (pig) cells for the treatment of human
diseases which are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent.
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development and raising capital. The
Company is subject to a number of risks similar to those of other development
stage companies, including dependence on key individuals, the development of
commercially usable products, competition from substitute products and larger
companies, and the ability to obtain adequate additional financing necessary to
fund product development. The Company has incurred losses of $30,335,145 since
inception and has funded those losses primarily through the issuance of equity
and debt securities.
The unaudited financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of management,
all adjustments, consisting of normal, recurring adjustments, necessary for a
fair presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year. It is suggested that these
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
- ------------------------------------------------
(a) Principles of Consolidation
The accompanying consolidated balance sheet as of December 31, 1995 and
consolidated statements of operations and cash flows include the accounts of the
Company and its wholly owned subsidiary, Diacrin Securities Corporation. All
material intercompany accounts and transactions have been eliminated in
consolidation. This subsidiary was dissolved on June 13, 1996.
(b) Pro Forma Net Loss per Common Share
Pro forma net loss per common share is based on the weighted average
number of common shares outstanding assuming the automatic conversion of all
outstanding shares of Series A, B and C convertible preferred stock into
6,693,121 shares of common stock and the automatic conversion of the outstanding
$7,000,000 convertible notes payable into 2,799,999 shares of common stock, both
of which occurred upon the closing of the Company's initial public offering on
February 16, 1996. Common stock issued after December 1, 1994 and common stock
issuable pursuant to stock options or warrants granted after December 1, 1994
have been reflected as outstanding for the three and six months ended June 30,
1995 and for the period from January 1, 1996 through the effective date of the
Company's initial public offering using the treasury stock method as required by
the Securities and Exchange Commission. Other shares of stock issuable pursuant
to stock options and warrants have not been included as their effect would be
antidilutive.
-7-
<PAGE> 8
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. Cash Equivalents
- ----------------------
<TABLE>
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
original maturities of less than three months, less than one year and greater
than one year, respectively. Cash and cash equivalents, short-term investments
and long-term investments at December 31, 1995 and June 30, 1996 consisted of
the following:
<CAPTION>
December 31, June, 30
1995 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents-
Cash $ - $ 16,384
Money market mutual fund - 2,328,615
Commercial paper 4,114,820 2,278,822
---------- -----------
$4,114,820 $ 4,623,821
========== ===========
Short-term investments-
Corporate notes (wtd. avg. maturity of 7 months) $ - $12,641,081
========== ===========
Long-term investments-
Corporate notes (wtd. avg. maturity of 14 months) $ - $ 4,634,413
========== ===========
</TABLE>
4. Initial Public Offering
- -----------------------------
On February 12, 1996, the Company completed an initial public offering of
2,500,000 units at $8.00 per unit, each unit consisting of one share of common
stock and one redeemable warrant to purchase one share of common stock for
$16.00 per share, for net proceeds of approximately $18.1 million. In addition,
all outstanding shares of Series A, B and C convertible preferred stock were
automatically converted into 6,693,121 shares of common stock and the
outstanding $7,000,000 of convertible notes payable were automatically converted
into 2,799,999 shares of common stock upon the closing of the initial public
offering. On March 7, 1996, the underwriters of the offering exercised their
over-allotment option to purchase an additional 375,000 units resulting in
additional net proceeds of approximately $2.8 million to the Company.
-8-
<PAGE> 9
DIACRIN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Since its inception, the Company has principally focused its efforts and
resources on research and development of cell transplantation products to treat
neurodegenerative and other human diseases. The Company's primary source of
working capital to fund such activities has been proceeds from the sale of
equity and debt securities. The Company has not received any revenues from the
sale of products to date and does not expect to generate such revenues for at
least the next several years. The Company has experienced fluctuating operating
losses since its inception and expects that the additional activities required
to develop and commercialize the Company's products will result in further
fluctuating operating losses for at least the next several years. At June 30,
1996, the Company had an accumulated deficit of $30.3 million.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995
------------------------------------------------------------------------
Research and development expenses were $1.5 million for the three months
ended June 30, 1996 versus $1.1 million for the three months ended June 30,
1995. The 37% increase was primarily due to an increase in the external costs of
conducting Phase 1 human clinical trials of the Company's
NeuroCell[Trademark]-PD and NeuroCell[Trademark]-HD product candidates and the
additional internal quality control and clinical affairs staffing necessary
to support these trials.
General and administrative expenses were $329,000 for the three months
ended June 30, 1996 versus $281,000 for the three months ended June 30, 1995.
The 17% increase was primarily due to the increased costs of shareholder
relations, professional fees and insurance expense as a result of the Company's
completed initial public offering in February 1996.
Interest and other income was $339,000 for the three months ended June 30,
1996 versus $48,000 for the three months ended June 30, 1995. The increase was
primarily due to additional interest income realized on substantially higher
cash balances available for investment as a result of the initial public
offering.
Interest expense was $23,000 for the three months ended June 30, 1996
versus $64,000 for the three months ended June 30, 1995. The decrease was
primarily attributable to the recognition of interest expense during the 1995
period on the Company's $7.0 million of Convertible Notes which were issued in
May 1995 and converted to common stock upon the closing of the Company's initial
public offering in February 1996.
The Company incurred a net loss of approximately $1.5 million for the
three months ended June 30, 1996 versus a net loss of approximately $1.4 million
for the three months ended June 30, 1995.
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
- --------------------------------------------------------------------
Research and development expenses were $2.7 million for the six months
ended June 30, 1996 versus $2.2 million for the six months ended June 30, 1995.
The 25% increase was primarily due to an increase in the external costs of
conducting Phase 1 human clinical trials of the Company's
NeuroCell[Trademark]-PD and NeuroCell[Trademark]-HD product candidates and the
additional internal quality control and clinical affairs staffing necessary
to support these trials.
General and administrative expenses were $656,000 for the six months ended
June 30, 1996 versus $566,000 for the six months ended June 30, 1995. The 16%
increase was primarily
-9-
<PAGE> 10
due to the increased costs of shareholder relations, professional fees and
insurance expense as a result of the Company's completed initial public offering
in February 1996.
Interest and other income was $502,000 for the six months ended June 30,
1996 versus $122,000 for the six months ended June 30, 1995. The increase was
primarily due to additional interest income realized on substantially higher
cash balances available for investment as a result of the initial public
offering.
Interest expense was $116,000 for the six months ended June 30, 1996
versus $86,000 for the six months ended June 30, 1995. The 35% increase was
primarily attributable to greater interest expense recognized during the 1996
period on the Company's $7.0 million of Convertible Notes which were issued in
May 1995 and converted to common stock upon the closing of the Company's initial
public offering in February 1996.
The Company incurred a net loss of approximately $3.0 million for the six
months ended June 30, 1996 versus a net loss of approximately $2.7 million for
the six months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed its activities primarily with the net proceeds
from private sales of preferred stock, which in the aggregate have totaled
approximately $22.6 million, and from the issuance of $7.0 million of
convertible notes payable. In addition, in February 1996, the Company completed
an initial public offering of units resulting in aggregate net proceeds to the
Company of approximately $20.9 million. At June 30, 1996, the Company had cash
and cash equivalents, short-term investments and long-term investments
aggregating approximately $21.9 million and working capital of approximately
$16.6 million.
The Company purchased approximately $1.4 million of capital equipment
through June 30, 1996. Of the $1.4 million of purchased capital equipment,
approximately $805,000 was sold in December 1994 for proceeds of $600,000 and
subsequently leased back over a four-year term. In addition, approximately
$142,000 and $85,000 was sold in June 1995 and December 1995, respectively, for
its original cost and subsequently leased back over a four-year term. The
Company had no material commitments for capital expenditures as of June 30,
1996.
The Company believes that its existing funds will be sufficient to fund
its operating expenses and capital requirements as currently planned through
mid-1998. However, the Company's cash requirements may vary materially from
those now planned because of results of research and development, the scope and
results of preclinical and clinical testing, potential relationships with
strategic partners, changes in the focus and direction of the Company's research
and development programs, competitive and technological advances, the FDA's
regulatory process, the market acceptance of any approved Company products and
other factors. For a more detailed discussion of these and other factors that
may affect the Company's future operating results, see the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 as filed with the
Securities and Exchange Commission.
The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, establishing pig production capabilities and the expansion of
its laboratory and administrative activities. Therefore, in order to achieve
commercialization of its potential products, the Company will need substantial
additional funds. There can be no assurance that the Company will be able to
obtain the additional funding that it will require on acceptable terms, if at
all.
-10-
<PAGE> 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
<TABLE>
At the Company's Annual Meeting of Stockholders held on June 18, 1996, the
following proposals were adopted by the vote specified below:
<CAPTION>
Proposal For Withheld
-------- --- --------
<S> <C> <C>
1. Election of Directors:
Thomas H. Fraser 10,886,175 3,905
Zola P. Horovitz 10,886,175 3,905
John W. Littlechild 10,886,175 3,905
Stelios Papadopoulos 10,886,175 3,905
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
--- ------- ------- --------
<S> <C> <C> <C> <C>
2. To ratify the selection of Arthur
Andersen LLP, as the Corporation's
independent auditors for fiscal 1996: 10,882,980 2,600 4,500 0
</TABLE>
-11-
<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.
DIACRIN, INC.
August 12, 1996
----------------------------
Thomas H. Fraser
President and Chief
Executive Officer
----------------------------
Mark J. Fitzpatrick
Director of Finance and
Administration & Treasurer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,623,821
<SECURITIES> 12,641,081
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,625,698
<PP&E> 1,023,580
<DEPRECIATION> 467,301
<TOTAL-ASSETS> 22,816,390
<CURRENT-LIABILITIES> 1,013,173
<BONDS> 463,377
<COMMON> 127,571
0
0
<OTHER-SE> 21,212,269
<TOTAL-LIABILITY-AND-EQUITY> 22,816,390
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,742,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,968
<INCOME-PRETAX> (3,011,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,011,620)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
