<PAGE>
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 March 31, 1997
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 April 30, 1997, 13,225,295 shares of the registrant's Common
Stock were outstanding.
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2
<TABLE>
Diacrin, Inc.
Index
<CAPTION>
Page
PART I. - FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of
December 31, 1996 and March 31, 1997..................... 3
Statements of Operations for the Three Month
Periods Ended March 31, 1996 and 1997.................... 4
Statements of Cash Flows for the Three Month Periods
Ended March 31, 1996 and 1997............................ 5
Notes to Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
PART II. - OTHER INFORMATION
Item 2. Changes in Securities..................................... 10
SIGNATURES.................................................................. 11
</TABLE>
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3
<TABLE>
DIACRIN, INC.
BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,308,710 $3,117,674
Short-term investments 6,255,507 7,729,132
Prepaid expenses and other current assets 316,107 486,553
------------ ------------
Total current assets 13,880,324 11,333,359
------------ ------------
Property and equipment, at cost:
Equipment under capital leases 675,262 675,262
Furniture and office equipment 224,920 232,346
Laboratory equipment 101,738 133,996
Leasehold improvements 51,424 51,424
------------ ------------
1,053,344 1,093,028
Less- Accumulated depreciation
and amortization 576,725 630,262
------------ ------------
476,619 462,766
------------ ------------
Long-term investments 9,917,875 11,970,517
------------ ------------
$24,274,818 $23,766,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $162,058 $234,469
Accrued expenses 506,949 623,884
Deferred revenue 618,844 470,107
Current obligations under capital leases 179,452 186,013
------------ ------------
Total current liabilities 1,467,303 1,514,473
------------ ------------
Long-term obligation under capital leases 370,431 321,393
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, Authorized--
5,000,000 shares at December 31, 1996 and
at March 31, 1997; none issued and outstanding - -
Common stock, $.01 par value; Authorized-- 30,000,000
shares; issued and outstanding -- 13,189,559 shares
and 13,198,670 shares at December 31, 1996
and March 31, 1997, respectively 131,896 131,987
Additional paid-in capital 54,613,512 54,625,986
Accumulated deficit (32,308,324) (32,827,197)
------------ ------------
Total stockholders' equity 22,437,084 21,930,776
------------ ------------
$24,274,818 $23,766,642
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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4
DIACRIN, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1997
---- ----
<S> <C> <C>
REVENUES:
Research and development $ - $ 1,191,326
Interest income 163,370 331,396
---------- ----------
Total revenues 163,370 1,522,722
---------- ----------
OPERATING EXPENSES:
Research and development 1,224,379 1,611,269
General and administrative 326,809 411,480
Interest expense 92,732 18,846
---------- ----------
Total operating expenses 1,643,920 2,041,595
---------- ----------
NET LOSS $(1,480,550) $ (518,873)
=========== ===========
NET LOSS PER COMMON SHARE $ (.13) $ (.04)
=========== ===========
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 11,411,472 13,192,471
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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5
<TABLE>
DIACRIN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months
Ended March 31,
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,480,550) $ (518,873)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 56,243 53,537
Changes in assets and liabilities-
Prepaid expenses and other current assets (106,124) (170,446)
Accounts payable (47,585) 72,411
Accrued expenses (46,278) 116,935
Deferred revenue - (148,737)
----------- -----------
Net cash used in operating activities (1,624,294) (595,173)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments - (1,473,625)
Purchases of property and equipment, net (5,873) (39,684)
Increase in long-term investments - (2,052,642)
----------- -----------
Net cash used in investing activities (5,873) (3,565,951)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 20,914,301 12,565
Principal payments under capital leases (37,799) (42,477)
Decrease in deferred financing costs 215,684 -
----------- -----------
Net cash provided by (used in) financing activities 21,092,186 (29,912)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 19,462,019 (4,191,036)
CASH AND CASH EQUIVALENTS, beginning of period 4,114,820 7,308,710
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $23,576,839 $ 3,117,674
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Conversion of notes and accrued interest
into common stock, net of financing costs $ 7,296,308 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 24,034 $ 18,846
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
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6
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 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 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. These financial statements
should 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) Net Loss per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding. For 1996, the weighted average number of common shares
outstanding assumed 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 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.
3. New Accounting Standard
- --------------------------------
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997 and early adoption is
not permitted. When adopted, this statement will require restatement of prior
years' earnings per share. The Company will adopt this statement for its fiscal
year ended December 31, 1997. In addition, the Company believes that the
adoption of SFAS 128 will not have a material effect on its financial
statements.
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7
DIACRIN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. Cash Equivalents and Investments
- -----------------------------------------
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
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, 1996 and March 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
---------- -----------
<S> <C> <C>
Cash and cash equivalents-
Cash .......................................................... $ 421 $ 463
Money market mutual fund ...................................... 1,898,920 2,642,211
Commercial paper .............................................. 2,292,335 475,000
Corporate notes ............................................... 3,117,034 --
---------- ----------
$7,308,710 $3,117,674
========== ==========
Short-term investments-
Commercial paper (wtd. avg. maturity of 4 months) ............. $ 984,710 998,135
Corporate notes (wtd. avg. mat. of 8 and 10 mos., respectively) 5,270,797 6,730,997
---------- ----------
$6,255,507 $7,729,132
---------- ----------
Long-term investments-
Corporate notes (wtd. avg. maturity of 14 months) ............... $9,917,875 $11,970,517
========== ===========
</TABLE>
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<PAGE>
8
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. In addition, commencing October 1, 1996, the Company
has received funding from its Joint Venture with Genzyme Corporation in support
of the NeuroCell(TM)-PD and NeuroCell(TM)-HD product development programs (the
"Joint Venture"). The Company has not received any revenues from the sale of
products to date and does not expect to generate product 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 March 31,
1997, the Company had an accumulated deficit of $32.8 million.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------------------------------------------------
Research and development revenues were approximately $1.2 million for the
three months ended March 31, 1997. There were no research and development
revenues earned during the three months ended March 31, 1996. The revenues
recognized during the three months ended March 31, 1997 were earned in
connection with the Joint Venture.
Interest income was $331,000 for the three months ended March 31, 1997
versus $163,000 for the three months ended March 31, 1996. The increase was
primarily due to additional interest income realized on substantially higher
cash balances available for investment as a result of the Company's initial
public offering in February 1996.
Research and development expenses were $1.6 million for the three months
ended March 31, 1997, which includes expenses incurred on behalf of and
reimbursed by the Joint Venture, versus $1.2 million for the three months ended
March 31, 1996. The 32% increase was primarily due to an increase in the
external costs of ongoing Phase 1 human clinical trials of the Joint Venture's
NeuroCell(TM)-PD and NeuroCell(TM)-HD product candidates and the additional
clinical affairs staffing necessary to support these trials.
General and administrative expenses were $411,000 for the three months
ended March 31, 1997 versus $327,000 for the three months ended March 31, 1996.
The 26% increase was primarily due to increased professional fees and insurance
expense since the Company completed its initial public offering and an increase
in administrative personnel.
Interest expense was $19,000 for the three months ended March 31, 1997
versus $93,000 for the three months ended March 31, 1996. The decrease was
primarily attributable to the recognition of interest expense during the three
months ended March 31, 1996 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.
The Company incurred a net loss of approximately $519,000 for the three
months ended March 31, 1997 versus approximately $1.5 million for the three
months ended March 31, 1996.
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9
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; with the issuance of $7.0 million of convertible
notes payable; with the net proceeds of $20.9 million from the Company's initial
public offering; with the net proceeds of approximately $3.1 million from the
exercise of warrants originally issued in 1991 in connection with a private sale
of preferred stock; and with interest earned thereon. In addition, the Company
has recorded approximately $2.2 million in revenue from its Joint Venture since
it commenced October 1, 1996. At March 31, 1997, the Company had cash and cash
equivalents, short-term investments and long-term investments aggregating
approximately $22.8 million.
The Company purchased approximately $1.5 million of capital equipment
through March 31, 1997. In December 1994, approximately $805,000 of capital
equipment was sold for proceeds of $600,000 and subsequently leased back over a
four-year term. In addition, approximately $227,000 of capital equipment was
sold in 1995 for its original cost and subsequently leased back over a four-year
term. The Company had no material commitments for capital expenditures as of
March 31, 1997.
Under the joint venture agreement with Genzyme, the Company's two lead
product development programs, NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease, are
being funded by the Joint Venture. Both Genzyme and Diacrin are responsible for
funding the Joint Venture. Genzyme is responsible for funding 100% of the first
$10 million, 75% of the next $40 million and 50% of all remaining development
and commercialization costs in excess of $50 million from October 1, 1996 until
such products achieve commercialization. After Genzyme funds the first $10
million, the Company is responsible for funding 25% of the next $40 million and
50% of all development and commercialization costs in excess of $50 million. The
Company believes that its obligation to fund 25% of the program costs will not
commence until late 1997.
The Company believes that its existing funds, together with projected
future funding from the Joint Venture, will be sufficient to fund its operating
expenses and capital requirements as currently planned through at least early
1999. 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, any termination of the Joint
Venture, 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, 1996 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.
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10
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended March 31, 1997, the Company issued 375 shares of
Common Stock for an aggregate consideration of $468.75 to one person upon the
exercise of a stock option in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act. No underwriters were engaged in
connection with such issuance. The Company did not sell any other equity
securities during the quarter ended March 31, 1997 that were not registered
under the Securities Act.
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<PAGE>
11
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.
May 14, 1997 /s/ Thomas H. Fraser
--------------------
Thomas H. Fraser
President and Chief
Executive Officer
/s/ Mark J. Fitzpatrick
-----------------------
Mark J. Fitzpatrick
Vice President of Finance and
Administration; CFO & Treasurer
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,117,674
<SECURITIES> 7,729,132
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,333,359
<PP&E> 1,093,028
<DEPRECIATION> 630,262
<TOTAL-ASSETS> 23,766,642
<CURRENT-LIABILITIES> 1,514,473
<BONDS> 321,393
<COMMON> 131,987
0
0
<OTHER-SE> 21,798,789
<TOTAL-LIABILITY-AND-EQUITY> 23,766,642
<SALES> 0
<TOTAL-REVENUES> 1,191,326
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,611,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,846
<INCOME-PRETAX> (518,873)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (518,873)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
