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, 2000
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, 2000, 17,908,659 shares of the registrant's Common
Stock were outstanding.
<PAGE>
Diacrin, Inc.
Index
Page
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 1999 and March 31, 2000............................. 3
Statements of Operations for each of the three month
periods ended March 31, 1999 and 2000............................. 4
Statements of Cash Flows for each of the three month periods
ended March 31, 1999 and 2000..................................... 5
Notes to Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk....................................................... 12
PART II.- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 13
SIGNATURES................................................................. 14
- 2 -
<PAGE>
Diacrin, Inc.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,194,001 $ 46,089,047
Short-term investments 16,582,252 11,338,983
Interest receivable and other current assets 329,365 360,813
------------------ ------------------
Total current assets 19,105,618 57,788,843
---------------- ----------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 893,962 914,357
Equipment under capital lease 675,262 675,262
Furniture and office equipment 303,436 314,896
Leasehold improvements 77,529 77,529
------------------- -------------------
1,950,189 1,982,044
Less- Accumulated depreciation and amortization 1,437,649 1,489,203
---------------- -----------------
512,540 492,841
----------------- ------------------
Long-term investments 2,644,084 -
Investment in joint venture 103,730 -
----------------- -----------------
2,747,814 -
---------------- -----------------
$ 22,365,972 $ 58,281,684
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 138,768 $ 151,881
Accrued expenses 1,251,410 1,382,811
Deferred revenue 438,727 383,932
Current portion of long-term debt 143,350 137,200
------------------ ------------------
Total current liabilities 1,972,255 2,055,824
----------------- -----------------
Long-term debt 249,167 216,667
----------------- ------------------
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--14,386,183 shares
and 17,898,659 shares at December 31, 1999
and March 31, 2000, respectively 143,862 178,987
Additional paid-in capital 64,250,741 101,329,237
Accumulated deficit (44,250,053) (45,499,031)
---------------- ----------------
Total stockholders' equity 20,144,550 56,009,193
---------------- ----------------
$ 22,365,972 $ 58,281,684
================ ===============
See Accompanying Notes to Financial Statements
</TABLE>
- 3 -
<PAGE>
Diacrin, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
---------- ---------
<S> <C> <C>
REVENUES:
Research and development $ 798,016 $ 536,039
Interest income 358,226 326,777
---------- ----------
Total revenues 1,156,242 862,816
---------- ----------
OPERATING EXPENSES:
Research and development 1,616,616 1,382,593
General and administrative 322,030 366,473
Interest expense 15,496 8,542
---------- ----------
Total operating expenses 1,954,142 1,757,608
---------- ----------
EQUITY IN OPERATIONS OF JOINT VENTURE (467,008) (354,186)
---------- ----------
NET LOSS $ (1,264,908) $ (1,248,978)
=============== ================
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ (.09) $ (.09)
============== ==============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE 14,350,539 14,543,177
========== ==========
See Accompanying Notes to Financial Statements
</TABLE>
- 4 -
<PAGE>
Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,264,908) $ (1,248,978)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 64,788 51,554
Equity in operations of joint venture 467,008 354,186
Changes in assets and liabilities-
Interest receivable and other current assets (132,639) (31,448)
Accounts payable (93,753) 13,113
Accrued expenses (185,317) 91,259
Deferred revenue 21,978 (54,795)
----------- -----------
Net cash used in operating activities (1,122,843) (825,109)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (1,162,714) 5,243,269
Purchases of property and equipment, net (17,981) (31,855)
Decrease in long-term investments 573,530 2,644,084
Investment in joint venture (749,501) (399,735)
Return of capital for services provided on behalf of joint venture 266,005 189,421
----------- -----------
Net cash (used in) provided by investing activities (1,090,661) 7,645,184
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 28,701 37,113,621
Principal payments on long-term debt (90,622) (38,650)
----------- -----------
Net cash (used in) provided by financing activities (61,921) 37,074,971
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,275,425) 43,895,046
CASH AND CASH EQUIVALENTS, beginning of period 4,995,054 2,194,001
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,719,629 $ 46,089,047
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 15,496 $ 8,542
=============== =============
See Accompanying Notes to Financial Statements
</TABLE>
- 5 -
<PAGE>
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 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 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
In September 1996, the Company and Genzyme Corporation ("Genzyme")
formed a joint venture (the "Joint Venture") to develop and commercialize
NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's
disease (the "Joint Venture Products"). The Joint Venture is funded by Genzyme
and the Company in accordance with the terms of the joint venture agreement.
Collaborative revenue under the joint venture agreement with Genzyme is
recognized as revenue to the extent that the Company's research and development
costs are funded by Genzyme through the Joint Venture. The Company receives
non-refundable monthly advances from the Joint Venture. Deferred revenue
represents amounts received prior to recognition of revenue. Research and
development costs are expensed as incurred.
(b) Net Loss per Common Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, basic and diluted net loss per share is
calculated by dividing the net loss by the weighted average number of common
shares outstanding for all periods presented. Diluted weighted average shares
outstanding for all periods presented exclude the potential common shares from
stock options and warrants of 3,967,213 and 4,043,247 at March 31, 1999 and
2000, respectively, because to include such shares would be antidilutive.
- 6 -
<PAGE>
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
(c) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for the year
ended December 31, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The Company does not expect adoption of this statement to
have a material impact on the Company's financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" an Interpretation of APB
Opinion No. 25. The interpretation clarifies the application of APB Opinion No.
25 in certain situations, as defined. The Interpretation is effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 15, 1998, but before July
1, 2000, the effects of applying this interpretation would be recognized on a
prospective basis from the effective date. Accordingly, upon initial application
of the final interpretation, (a) no adjustments would be made to the financial
statements for periods before the effective date and (b) no expense would be
recognized for any additional compensation cost measured that is attributable to
periods before the effective date. We expect that the adoption of this
interpretation will not have a material impact on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 is effective for the second quarter of all fiscal
periods beginning after December 15, 1999. Adoption of SAB No. 101, as amended
by SAB No. 101 (a) is not expected to have a material impact on the Company's
financial position or results of operations.
3. Stock Offering
In March 2000, the Company completed a stock offering of 3,450,000
shares of its common stock for $11.50 per share for net proceeds of
approximately $37 million.
- 7 -
<PAGE>
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 equivalents, short-term investments and long-term
investments at December 31, 1999 and March 31, 2000 consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------------- -------------------
<S> <C> <C>
Cash and cash equivalents-
Cash 738 725
Money market mutual fund 2,193,263 16,544,852
Commercial paper - 29,543,470
-------------------- -------------------
$ 2,194,001 $ 46,089,047
==================== ===================
Short-term investments-
Corporate notes (remaining avg. mat. of 7 mos. at March 31, 2000) $ 16,582,252 $ 11,338,983
==================== ===================
Long-term investments-
Corporate notes $ 2,644,084 $ -
==================== ===================
</TABLE>
- 8 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since our inception, we have principally focused our efforts and
resources on research and development of cell transplantation technology for
treating human diseases that are characterized by cell dysfunction or cell death
and for which current therapies are either inadequate or nonexistent. Our
primary source of working capital to fund those activities has been proceeds
from the sale of equity and debt securities. In addition, commencing October 1,
1996, we have received funding from our joint venture with Genzyme in support of
the NeuroCell-PD and NeuroCell-HD product development programs. We have not
received any revenues from the sale of products to date and do not expect to
generate product revenues for the next several years. We have experienced
fluctuating operating losses since inception and expect that the additional
activities required to develop and commercialize our products will result in
increasing operating losses for the next several years. At March 31, 2000, we
had an accumulated deficit of $45.5 million.
In September 1996, we formed a joint venture with Genzyme to develop
and commercialize NeuroCell-PD and NeuroCell-HD. Under the joint venture
agreement Genzyme agreed to fund 100% of the first $10 million of development
and commercialization costs incurred after October 1, 1996, 75% of the next $40
million and 50% of all development and commercialization costs in excess of $50
million. After Genzyme funds the first $10 million, we are responsible for
funding 25% of the next $40 million and 50% of all development and
commercialization costs in excess of $50 million.
Through December 31, 1997, Genzyme made 100% of the total cash
contributions to the joint venture. During the first quarter of 1998, we began
making cash contributions to the joint venture equal to 25% of the joint
venture's funding requirements. As of March 31, 2000, approximately $24.9
million had been contributed to the joint venture by Genzyme and approximately
$5.0 million had been contributed by us. We expect that the joint venture's 2000
product development plans, together with our continued funding of the joint
venture, will significantly increase our net loss and cash and investments used
in 2000 as compared with 1999.
We record as research and development expense all costs related to
NeuroCell-PD and NeuroCell-HD incurred by us on behalf of the joint venture. We
then recognize research and development revenue equal to the amount of
reimbursement received by us from the joint venture out of funds contributed by
Genzyme. We do not recognize research and development revenue for amounts we
received from the joint venture out of funds contributed by us. As Genzyme
incurs costs on behalf of the joint venture that we are obligated to fund, we
recognize an expense in our statement of operations captioned "Equity in
operations of joint venture."
Results of Operations
Three Months Ended March 31, 2000 Versus Three Months Ended March 31, 1999
Research and development revenues of approximately $536,000
for the three months ended March 31, 2000 and $798,000 for the three months
ended March 31, 1999 were derived exclusively from the Joint Venture. The
decrease in revenues was primarily a result of a decrease in clinical production
activity related to the Joint Venture products as the Joint Venture completed
accruing patients into its Phase 2/3 clinical trial in 1999.
- 9 -
<PAGE>
Interest income of $327,000 and $358,000 for the three month period
ended March 31, 2000 and 1999, respectively, remained relatively unchanged.
Research and development expenses were $1.4 million for the three
months ended March 31, 2000 versus $1.6 million for the three months ended March
31, 1999. This 14% decrease was primarily due to a reduction in clinical
production activity as the Company's Joint Venture completed accruing patients
into its Phase 2/3 clinical trial of NeuroCell(TM)-PD in 1999 and a reduction in
preclinical related research as most of the Company's product candidates move
toward clinical testing.
General and administrative expenses of $366,000 and $322,000 for the
three months ended March 31, 2000 and 1999, respectively, remained relatively
unchanged between the periods.
For the three months ended March 31, 2000 and 1999, the Company
recorded an expense of $354,000 and $467,000, respectively, related to its
equity in operations of the joint venture. This expense was due to funds
contributed by the Company to the Joint Venture that were used to fund expenses
incurred by Genzyme on behalf of the Joint Venture.
The Company incurred a net loss of approximately $1.2 million for the
three months ended March 31, 2000 versus approximately $1.3 million for the
three months ended March 31, 1999.
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from
the sale of equity and debt securities aggregating $101 million and with the
interest earned thereon. In addition, we have recorded approximately $12.9
million in revenue from our joint venture since it commenced on October 1, 1996.
At March 31, 2000, we had cash and cash equivalents, short-term investments and
long-term investments aggregating approximately $57.4 million.
In February 1996, we issued redeemable warrants in connection with our
initial public offering. The warrants are exercisable for an aggregate of
2,875,000 shares of common stock at an exercise price of $16.00 per share. The
warrants expire on the earlier of redemption of the warrants by us or December
31, 2000. We may redeem the warrants, upon 30 days given notice, if the average
closing price of the common stock for any 20-consecutive-day trading period
exceeds 150% of the exercise price of the warrants. The redemption price is
$0.01 per warrants. At March 31, 2000 there were 2,872,800 warrants outstanding.
We have purchased approximately $2.3 million of capital equipment since
inception. In November 1997, we borrowed $650,000 at the prime rate plus 0.5%
(9.50% at March 31, 2000) under an unsecured five-year term loan with a bank to
finance our biomedical animal facility acquired during 1997. We had no material
commitments for capital expenditures as of March 31, 2000.
In accordance with the joint venture agreement, Genzyme agreed to make
financing available to us from and after the date that Genzyme provides the
initial $10 million of funding to the joint venture. Genzyme agreed to make
available an unsecured, subordinated line of credit of up to an aggregate amount
of $10 million. We may draw on this facility only in the event that our cash and
cash equivalents are insufficient to fund our budgeted operations for a
specified period of time, and we may use the funds only to fund capital
contributions to the joint venture. The facility will be available through the
date five years after the date we first draw on the facility, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest-bearing, evidenced by a promissory note and subject to
other customary conditions. The aggregate amount of draws under the facility in
any calendar year may not exceed $5 million. We have not made any draws on the
facility as of March 31, 2000, and do not anticipate drawing on the facility for
the foreseeable future.
- 10 -
<PAGE>
We believe that our existing funds, together with expected future
funding under the joint venture agreement with Genzyme, will be sufficient to
fund our operating expenses and capital requirements as currently planned for
the foreseeable future. However, our 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 future strategic partners, changes in the focus and
direction of our research and development programs, competitive and
technological advances, the FDA's regulatory process, the market acceptance of
any approved products and other factors.
We expect to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, expanding our cell production capabilities and the expansion of
our laboratory and administrative activities. Therefore, in order to achieve
commercialization or our potential products, we may need substantial additional
funds. We cannot assure you that we will be able to obtain the additional
funding that we may require on acceptable terms, if at all.
- 11 -
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until we are required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of decline in interest rates.
Our investment portfolio includes investment grade debt instruments.
These bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
these instruments, we do not believe that we have a material exposure to
interest rate risk.
- 12 -
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) The Company did not sell any equity securities during the quarter
ended March 31, 2000 that were not registered under the Securities Act.
(d) The following information updates and supplements the information
regarding use of proceeds originally filed by Diacrin on Form SR for the period
ended May 12, 1996, as amended to date and relates to securities sold by the
Company pursuant to the Registration Statement on Form S-2 (Registration No:
33-80773) which was declared effective on February 12, 1996: Through March 31,
2000, the Company has used approximately $15,000,000 of the total net proceeds
from its initial public offering of $20,911,755. Of the $15,000,000 used,
approximately $323,000 was used for the purchase of machinery and equipment;
approximately $900,000 was used for repayment of indebtedness; and approximately
$13,777,000 was used for working capital. The unused proceeds of approximately
$5,912,000 are in temporary investments consisting of corporate notes,
commercial paper and a money market mutual fund. All proceeds used or invested
were direct or indirect payments to others.
- 13 -
<PAGE>
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 11, 2000 /s/ Thomas H. Fraser
--------------------------
Thomas H. Fraser
President and Chief
Executive Officer
/s/ Kevin Kerrigan
---------------------------
Kevin Kerrigan
Controller
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 46,089,047
<SECURITIES> 11,338,983
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,788,843
<PP&E> 1,982,044
<DEPRECIATION> 1,489,203
<TOTAL-ASSETS> 58,281,684
<CURRENT-LIABILITIES> 2,055,824
<BONDS> 216,667
<COMMON> 178,986
0
0
<OTHER-SE> 55,830,207
<TOTAL-LIABILITY-AND-EQUITY> 58,281,684
<SALES> 0
<TOTAL-REVENUES> 536,039
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,382,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,542
<INCOME-PRETAX> (1,248,978)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,248,978)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
