<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, 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 July 31, 1997, 13,252,881 shares of the registrant's Common Stock
were outstanding.
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2
Diacrin, Inc.
Index
Page
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 1996 and June 30, 1997.......................... 3
Statements of Operations for the Three and Six Month
Periods Ended June 30, 1996 and 1997......................... 4
Statements of Cash Flows for the Six Month Periods
Ended June 30, 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........................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Item 6. Exhibits and Reports on Form 8-K............................. 11
SIGNATURES............................................................... 12
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3
<TABLE>
Diacrin, Inc.
Balance Sheets
(Unaudited)
<CAPTION>
December 31, June 30,
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,308,710 $ 4,573,011
Short-term investments 6,255,507 7,738,464
Interest receivable and other current assets 316,107 494,696
------------ ------------
Total current assets 13,880,324 12,806,171
------------ ------------
Property and equipment, at cost:
Equipment under capital leases 675,262 675,262
Furniture and office equipment 224,920 256,643
Laboratory equipment 101,738 135,414
Leasehold improvements 51,424 55,557
------------ ------------
1,053,344 1,122,876
Less- Accumulated depreciation
and amortization 576,725 684,365
------------ ------------
476,619 438,511
------------ ------------
Long-term investments 9,917,875 10,291,499
------------ ------------
$ 24,274,818 $ 23,536,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162,058 $ 189,178
Accrued expenses 506,949 756,398
Deferred revenue 618,844 647,330
Current obligations under capital leases 179,452 192,814
------------ ------------
Total current liabilities 1,467,303 1,785,720
Long-term obligation under capital leases 370,431 270,563
Stockholders' equity:
Preferred stock, $.01 par value, Authorized--
5,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value; Authorized-- 30,000,000
shares; issued and outstanding-- 13,189,559 shares
and 13,247,881 shares at December 31, 1996
and June 30, 1997, respectively 131,896 132,479
Additional paid-in capital 54,613,512 54,692,978
Accumulated deficit (32,308,324) (33,345,559)
------------ ------------
Total stockholders' equity 22,437,084 21,479,898
------------ ------------
$ 24,274,818 $ 23,536,181
============ ============
See Accompanying Notes to Financial Statements
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</TABLE>
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4
Diacrin, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
REVENUES:
Research and development $ 22,367 $ 1,255,760 $ 22,367 $ 2,447,086
Interest income 316,595 330,261 479,965 661,657
----------- ----------- ----------- -----------
Total revenues 338,962 1,586,021 502,332 3,108,743
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development 1,517,901 1,692,223 2,742,280 3,303,492
General and administrative 328,895 394,886 655,704 806,367
Interest expense 23,236 17,274 115,968 36,119
----------- ----------- ----------- -----------
Total operating expenses 1,870,032 2,104,383 3,513,952 4,145,978
----------- ----------- ----------- -----------
NET LOSS $(1,531,070) $ (518,362) $(3,011,620) $(1,037,235)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (.12) $ (.04) $ (.25) $ (.08)
=========== =========== =========== ===========
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 12,755,282 13,233,258 12,083,377 13,212,977
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
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5
Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,011,620) $(1,037,235)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 110,947 107,640
Changes in assets and liabilities-
Interest receivable and other current assets (248,789) (178,589)
Accounts payable 6,980 27,120
Accrued expenses (100,429) 249,449
Deferred revenue - 28,486
----------- -----------
Net cash used in operating activities (3,242,911) (803,129)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (12,641,081) (1,482,957)
Purchases of property and equipment, net (31,030) (69,532)
Increase in long-term investments (4,634,413) (373,624)
----------- -----------
Net cash used in investing activities (17,306,524) (1,926,113)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 20,918,690 80,049
Principal payments under capital leases (75,938) (86,506)
Decrease in deferred financing costs 215,684 -
----------- -----------
Net cash provided by (used in) financing activities 21,058,436 (6,457)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 509,001 (2,735,699)
CASH AND CASH EQUIVALENTS, beginning of period 4,114,820 7,308,710
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,623,821 $ 4,573,011
=========== ===========
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 $ 47,270 $ 36,119
=========== ===========
See Accompanying Notes to Financial Statements
</TABLE>
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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) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme
Corporation and revenues from research grants are recognized as work is
performed and costs are incurred. Deferred revenue represents amounts received
prior to recognition of revenue. Research and development costs are expensed as
incurred.
(b) Net Loss per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. For the six months ended June 30, 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. The Company believes that the adoption
of SFAS 128 will not have a material effect on its previously reported net loss
per common share.
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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 June 30, 1997 consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents-
Cash $ 421 $ 555
Money market mutual fund 1,898,920 4,310,696
Commercial paper 2,292,335 261,760
Corporate notes 3,117,034 -
----------- -----------
$ 7,308,710 $ 4,573,011
=========== ===========
Short-term investments-
Commercial paper (wtd. avg. maturity of 4 months) $ 984,710 -
Corporate notes (wtd. avg. mat. of 8 and 9 mos., respectively) 5,270,797 5,738,464
U.S. government agency obligation (maturity of 12 months) - 2,000,000
----------- -----------
$ 6,255,507 $ 7,738,464
=========== ===========
Long-term investments-
Corporate notes (wtd. avg. maturity of 14 months) $ 9,917,875 $10,291,499
=========== ===========
</TABLE>
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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 June 30,
1997, the Company had an accumulated deficit of $33.3 million.
Results of Operations
- ---------------------
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996
- ------------------------------------------------------------------------
Research and development revenues were approximately $1.3 million for
the three months ended June 30, 1997 versus $22,000 for the three months ended
June 30, 1996. The significant increase in revenues during the three months
ended June 30, 1997 was due to revenues received from the Joint Venture.
Interest income of $330,000 and $317,000 for the three month periods
ended June 30, 1997 and 1996, respectively, was relatively unchanged as a result
of similar cash balances available for investment during each period.
Research and development expenses were $1.7 million for the three
months ended June 30, 1997, which includes expenses of approximately $1.3
million incurred on behalf of and reimbursed by the Joint Venture, versus $1.5
million for the three months ended June 30, 1996. The 11% increase was primarily
due to an increase in clinical affairs staffing necessary to support the fully
enrolled Phase 1 clinical trials of the Joint Venture product candidates and an
increase in quality control/assurance staffing to support expanded clinical
production facilities completed by the Joint Venture in the current year period.
General and administrative expenses were $395,000 for the three months
ended June 30, 1997 versus $329,000 for the three months ended June 30, 1996.
The 20% increase was primarily due to an increase in administrative personnel.
Interest expense of $17,000 and $23,000 for the three months ended June
30, 1997 and 1996, respectively, was relatively unchanged between periods.
The Company incurred a net loss of approximately $518,000 for the three
months ended June 30, 1997 versus approximately $1.5 million for the three
months ended June 30, 1996.
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9
Six Months Ended June 30, 1997 Versus Six Months Ended June 30, 1996
- --------------------------------------------------------------------
Research and development revenues were approximately $2.4 million for
the six months ended June 30, 1997 versus $22,000 for the six months ended June
30, 1996. The significant increase in revenues during the six months ended June
30, 1997 was due to revenues received from the Joint Venture.
Interest income was $662,000 for the six months ended June 30, 1997
versus $480,000 for the six months ended June 30, 1996. The 38% 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 $3.3 million for the six months
ended June 30, 1997 versus $2.7 million for the six months ended June 30, 1996.
The 20% increase was primarily due to an increase in clinical affairs staffing
necessary to support the Phase 1 clinical trials of the Joint Venture product
candidates and an increase in quality control/assurance staffing to support
expanded clinical production facilities completed by the Joint Venture in the
current year period. Furthermore, additional costs were incurred in the current
year to validate the Joint Venture production facilities.
General and administrative expenses were $806,000 for the six months
ended June 30, 1997 versus $656,000 for the six months ended June 30, 1996. The
23% increase was primarily due to an increase in administrative personnel as
well as increased costs of shareholder relations.
Interest expense was $36,000 for the six months ended June 30, 1997
versus $116,000 for the six months ended June 30, 1996. The decrease was
primarily attributable to 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.
The Company incurred a net loss of approximately $1.0 million for the
six months ended June 30, 1997 versus a net loss of approximately $3.0 million
for the six months ended June 30, 1996.
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<PAGE>
10
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 $3.5 million in revenue from the Joint Venture since
it commenced October 1, 1996. At June 30, 1997, the Company had cash and cash
equivalents, short-term investments and long-term investments aggregating
approximately $22.6 million.
The Company purchased approximately $1.5 million of capital equipment
through June 30, 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
June 30, 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. As
of June 30, 1997, Genzyme has contributed approximately $6.0 million to the
Joint Venture. The Company believes that its obligation to fund 25% of the
program costs will not commence until the beginning of 1998.
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 mid
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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11
PART II. OTHER INFORMATION
Item 2. Changes in Securities
The Company did not sell any equity securities during the quarter ended
June 30, 1997 that were not registered under the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 17, 1997,
the following proposals were adopted by the vote specified below:
Proposal For Withheld
-------- --- --------
1. Election of Directors:
Thomas H. Fraser 12,558,399 8,900
Zola P. Horovitz 12,561,899 5,400
John W. Littlechild 12,560,899 6,400
Stelios Papadopoulos 12,561,824 5,475
Henri A. Termeer 12,560,299 7,000
Christopher T. Walsh 12,552,574 14,725
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
--- ------- ------- --------
<S> <C> <C> <C> <C>
2. To approve the 1997
Stock Option Plan: 7,931,964 1,158,698 17,918 3,458,719
3. To ratify the selection
of Arthur Andersen LLP,
as the Company's independent
auditors for fiscal 1997: 12,553,449 9,975 3,875 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed on the Exhibit Index filed as
a part of this Quarterly Report on Form 10-Q are incorporated
herein by reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
the Company during the quarter for which this report is filed.
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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 8, 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
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13
Exhibit Index
-------------
Diacrin, Inc.
Exhibit No. Title Page
----------- ----- ----
10.20 1997 Stock Option Plan (1)
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's definitive Proxy Statement for its 1997
Annual Meeting of Stockholders (File No. 0-20139) filed on April 30, 1997, and
incorporated herein by reference.
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,573,011
<SECURITIES> 7,738,464
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,806,171
<PP&E> 1,122,876
<DEPRECIATION> 684,365
<TOTAL-ASSETS> 23,536,181
<CURRENT-LIABILITIES> 1,785,720
<BONDS> 270,563
<COMMON> 132,479
0
0
<OTHER-SE> 21,347,419
<TOTAL-LIABILITY-AND-EQUITY> 23,536,181
<SALES> 0
<TOTAL-REVENUES> 2,447,086
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,303,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,119
<INCOME-PRETAX> (1,037,235)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,037,235)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
