<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 000-23267
DEPOMED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3229046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
366 LAKESIDE DRIVE
FOSTER CITY, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 513-0990
(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
requirements for the past 90 days.
YES [X] NO [_]
The number of issued and outstanding shares of the Registrant's Common
Stock, no par value, as of April 28, 1999, was 6,475,077.
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DEPOMED, INC.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Unaudited Balance Sheet at March 31, 1999.................................................... 3
Unaudited Statements of Operations for the three month periods ended
March 31, 1999 and 1998 and the period from inception (August 7, 1995)
to March 31, 1999........................................................................ 4
Unaudited Statements of Cash Flows for the three month periods ended
March 31, 1999 and 1998 and the period from inception (August 7, 1995) to
March 31, 1999........................................................................... 5
Notes to Unaudited Financial Statements...................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 7
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................................. 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 18
Signature...................................................................................... 19
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPOMED, INC.
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
March 31, 1999
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents................................................ $ 2,515,272
Marketable securities.................................................... 5,105,700
Accounts receivable...................................................... 237,004
Prepaid and other current assets......................................... 233,796
-------------------
Total current assets............................................. 8,091,772
Property and equipment, net.................................................... 960,990
Other assets................................................................... 70,933
$ 9,123,695
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 82,786
Accrued compensation..................................................... 159,796
Other accrued liabilities................................................ 10,000
Capital lease obligation, current portion................................ 53,161
Long-term debt, current portion.......................................... 93,806
-------------------
Total current liabilities........................................ 399,549
Capital lease obligation, non-current portion.................................. 87,264
Long-term debt, non-current portion............................................ 362,394
Commitments
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized, none issued and outstanding
Common stock, no par value, 25,000,000 shares
authorized; 6,474,444 shares issued and outstanding.................. 14,797,072
Deferred compensation.................................................... (442,165)
Deficit accumulated during the development stage......................... (6,097,353)
Accumulated other comprehensive income................................... 16,934
-------------------
Total shareholders' equity....................................... 8,274,488
-------------------
$ 9,123,695
===================
</TABLE>
See accompanying notes to Unaudited Financial Statements.
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DEPOMED, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
Three Months Ended March 31, (August 7, 1995) to
-------------------------------------------
1999 1998 March 31, 1999
------------------- ------------------- --------------------
<S> <C> <C> <C>
Product development revenue.................... $ 115,327 $ 109,500 $ 1,801,312
Operating expenses:
Research and development................. 729,192 397,307 4,173,611
General and administrative............... 488,191 301,245 3,963,541
Purchase of in-process
research and development.............. -- -- 298,154
------------------- ------------------- --------------------
Total operating expenses....................... 1,217,383 698,552 8,435,306
Loss from operations........................... (1,102,056) (589,052) (6,633,994)
Interest income, net........................... 94,319 95,733 536,641
------------------- ------------------- --------------------
Net loss....................................... $(1,007,737) $ (493,319) $(6,097,353)
=================== =================== ====================
Basic and diluted net loss per share........... $(0.16) $(0.08)
=================== ===================
Shares used in computing basic
and diluted net loss per share........... 6,472,970 5,874,549
=================== ===================
</TABLE>
See accompanying notes to Unaudited Financial Statements.
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DEPOMED, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
Three Months Ended March 31, (August 7, 1995)
-------------------------------------- to
1999 1998 March 31, 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
Operating Activities
Net loss.................................................... $(1,007,737) $ (493,319) $(6,097,353)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 106,375 22,789 405,358
Accrued interest expense on shareholder notes........... -- -- 13,618
Amortization of deferred compensation................... 68,167 43,191 505,085
Value of stock options issued for services.............. -- -- 26,050
Purchase of in-process research and development......... -- -- 298,154
Changes in assets and liabilities:
Accounts receivable................................. 69,144 35,387 (237,004)
Other current assets................................ (46,772) (2,157) (233,796)
Other assets........................................ 16,999 27,860 (71,091)
Accounts payable and other accrued liabilities...... (164,641) (207,650) 92,786
Accrued compensation................................ (11,199) 27,725 92,320
Other current liabilities........................... -- (31,497) --
----------------- ----------------- ------------------
Net cash used in operating activities....... (969,664) (577,671) (5,205,873)
----------------- ----------------- ------------------
Investing Activities
Expenditures for property and equipment..................... (44,135) (44,425) (1,035,744)
Purchases of marketable securities.......................... (1,576,830) -- (6,280,587)
Maturities of marketable securities......................... 1,094,978 -- 1,174,560
----------------- ----------------- ------------------
Net cash used in investing activities....... (525,987) (44,425) (6,141,771)
----------------- ----------------- ------------------
Financing Activities
Payments on capital lease obligations....................... (14,858) (8,151) (172,818)
Proceeds from equipment loan................................ -- -- 494,133
Payments on equipment loan.................................. (37,933) -- (37,933)
Proceeds from issuance of notes............................. -- -- 1,050,000
Payments of notes........................................... -- -- (1,000,000)
Payment of shareholder loans................................ -- -- (294,238)
Proceeds on issuance of common stock........................ 4,998 7,493,267 13,823,772
----------------- ----------------- ------------------
Net cash (used in) provided by financing (47,793) 7,485,116 13,862,916
activities.................................
----------------- ----------------- ------------------
Net increase (decrease) in cash and cash equivalents........ (1,543,444) 6,863,020 2,515,272
Cash and cash equivalents at beginning of period............ 4,058,716 4,129,545 --
----------------- ----------------- ------------------
Cash and cash equivalents at end of period.................. $ 2,515,272 $10,992,565 $ 2,515,272
================= ================= ==================
</TABLE>
See accompanying notes to Unaudited Financial Statements.
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DEPOMED, INC.
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited condensed financial statements and the related
footnote information of DepoMed, Inc. (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). 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. In the opinion of the Company's management, the accompanying
interim unaudited condensed financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented. The results for the
interim period ended March 31, 1999 are not necessarily indicative of results to
be expected for the entire year ending December 31, 1999 or future operating
periods.
2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash on deposit with banks, and money
market instruments with maturities of 90 days or less. Marketable securities
consist of debt securities with original maturities between 90 days and 2 years.
The debt securities are all classified as available-for-sale.
3. NET LOSS PER SHARE
Basic and Diluted Net Loss Per Share (Historical)
------------------------------------------------
Net loss per share is computed using the weighted-average number of shares
of common stock outstanding. Common stock equivalent shares from outstanding
stock options and warrants are not included as the effect is antidilutive.
4. COMPREHENSIVE INCOME
For the three months ended March 31, 1999, comprehensive income
approximated net loss.
5. SUBSEQUENT EVENT
On April 20, 1999, the Company was notified by Bristol-Myers Squibb ("BMS")
that BMS will not exercise its license and development option to use the
Company's Gastric Retention System for an undisclosed pharmaceutical product.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included with the company's Annual Report on Form 10-KSB for the year
ended December 31, 1998 and the company's Financial Statements and related notes
thereto appearing elsewhere in this quarterly report. Statements made in this
quarterly report that are not statements of historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). A number of risks and uncertainties,
including those discussed under the caption "FACTORS THAT MAY AFFECT FUTURE
RESULTS" below and elsewhere in this quarterly report on Form 10-QSB could
affect such forward-looking statements and could cause actual results to differ
materially from the statements made. The company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any changes in the
company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statements are based.
ABOUT THE COMPANY
We are a development stage company engaged in the development of new and
proprietary oral drug delivery technologies. We have developed two types of
oral drug delivery systems, the Gastric Retention System (the "GR System") and
the Reduced Irritation System (the "RI System" and together, the "DepoMed
Systems"). The GR System is designed to be retained in the stomach for an
extended period of time while it delivers the incorporated drug or drugs, and
the RI System is designed to reduce the gastrointestinal irritation that is a
side effect of many orally administered drugs. In addition, the DepoMed Systems
are designed to provide continuous, controlled delivery of an incorporated drug.
In this "Management's Discussion and Analysis of Financial Condition and
Results of Operations", the "company," "DepoMed," "we," "us," and "our," refer
to DepoMed, Inc.
Since the company's inception in August 1995, we have devoted substantially
all our efforts to research and development conducted on our own behalf and
through collaborations with pharmaceutical partners in connection with the
DepoMed Systems. Our primary activities since inception (August 7, 1995) have
been, in addition to research and development, establishing our offices and
research facilities, recruiting personnel, filing patent applications,
developing a business strategy and raising capital. We have also been involved
in revenue generating research and development projects for clients including
R.W. Johnson Pharmaceutical Research Institute ("PRI"). To date, we have
received only limited revenue, all of which has been from these collaborative
research and feasibility arrangements. At the inception of the company in 1995,
we acquired $298,154 of in-process research and development technology. This
amount was recognized as operating expense in 1995. There was no such expense in
subsequent years. DepoMed has generated a cumulative net loss of approximately
$6,097,000 for the period from inception through March 31, 1999.
We intend to continue investing in the further development of our drug
delivery technologies and the DepoMed Systems. We also intend to internally
develop and find partners to commercialize products based on generic and over-
the-counter compounds, such as a reduced irritation aspirin product and an
enhanced absorption calcium supplement product. Depending upon a variety of
factors, including collaborative arrangements, available personnel and financial
resources, we will conduct or fund clinical trials on such products and will
undertake the associated regulatory activities. We will need to make
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additional capital investments in laboratories and related facilities. As
additional personnel are hired in 1999 and beyond, expenses can be expected to
increase from their 1998 levels.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Revenues for the three months ended March 31, 1999 and 1998 were
approximately $115,000 and $110,000, respectively. In 1999, these revenues
consisted of amounts earned under the feasibility arrangement with PRI. In
1998, revenues consisted primarily of amounts earned under the research and
development arrangement with BMS which was completed in March 1998. The
feasibility study with PRI is ongoing and additional product development
revenues are expected in 1999.
Research and development expenses for the three months ended March 31, 1999
were approximately $729,000 compared to approximately $397,000 during the three
months ended March 31, 1998. The increase was due to the hiring of additional
employees and related expenses, increased laboratory supplies and services, and
increased depreciation and amortization expense of equipment and facilities
improvements. The research and development allocation of occupancy expense also
increased due to the company's sublease of larger facilities in March 1998.
General and administrative expenses for the three months ended March 31,
1999 were approximately $488,000 compared to approximately $301,000 during the
three months ended March 31, 1998. The increase was due to the additional
expense incurred as a result of expanded investor relations activities, the
increased occupancy expense of our subleased facility, increased depreciation
and amortization expense of equipment and facilities improvements, and increased
salaries.
We granted options to purchase approximately 80,000 shares of common stock
in December 1998 that were not reserved for issuance under the 1995 Stock Option
Plan (the "Plan"). The Board of Directors authorized an increase in the number
of shares reserved under the Plan by 800,000; however, these shares are not duly
authorized and available for grant unless the shareholders approve the increase
at the Annual Meeting of Shareholders in June 1999. For accounting purposes,
the company must recognize compensation expense for the difference between the
fair market value on the measurement date (date of shareholder approval) and the
exercise price. The stock options granted have exercise prices of $7.63 and
$7.75, which represent the fair market value of the company's common stock on
the respective dates of grant. However, as the options granted will not be
authorized for grant until the shareholders have approved the increase in the
number of shares authorized under the Plan, the measurement date will not be
established until such approval is obtained. If the fair market value of the
underlying common stock is higher than the exercise price at that time, the
company will be required to recognize the difference as compensation expense.
If the stock price is significantly higher on this date compared to the exercise
price, the company's results could be materially impacted in the second quarter
of 1999.
Liquidity and Capital Resources
Cash used in operations in the three months ended March 31, 1999 was
approximately $970,000 compared to approximately $578,000 for the three months
ended March 31, 1998. During the three months ended March 31, 1999 the change in
cash used in operations was due primarily to the increase in net loss. During
the three months ended March 31, 1998, the change was also primarily due to the
net loss.
Cash used in investing activities in the three months ended March 31, 1999
totaled approximately $526,000 and consisted of a net increase of approximately
$482,000 of marketable securities as well as purchases of laboratory equipment,
fixtures and office equipment. Net cash used in investing activities in the
three months ended March 31, 1998 totaled approximately $44,000 and
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consisted of purchases of laboratory equipment, fixtures and office equipment.
We expect that future capital expenditures may include additional product
development and quality control laboratory equipment as we work towards
implementation of current Good Manufacturing Practices ("cGMP") in our
laboratories.
Cash used in financing activities in the three months ended March 31, 1999
was approximately $48,000, which primarily consisted of payments on capital
lease obligations and on a credit facility. Cash provided by financing
activities in the three months ended March 31, 1998 was approximately $7,485,000
which consisted primarily of the net proceeds of $7,492,000 from a private
placement in February 1998.
We anticipate that our existing capital resources will permit us to meet
our capital and operational requirements through at least the end of 1999.
However, we base this expectation on our current operating plan which may change
as a result of many factors. Accordingly, we could require additional funding
sooner than anticipated. Our cash needs may also vary materially from our
current expectations because of numerous factors, including:
. results of research and development;
. relationships with current and potential collaborative partners;
. changes in the focus and direction of our research and development
programs;
. technological advances; and
. results of clinical testing, requirements of the FDA and comparable
foreign regulatory agencies.
We will need substantial funds of our own or from third parties to:
. conduct research and development programs;
. conduct preclinical and clinical testing; and
. manufacture (or have manufactured) and market (or have marketed)
potential products using the DepoMed Systems.
Our existing capital resources may not be sufficient to fund our operations
until such time as we may be able to generate sufficient revenues to support our
operations. We have limited credit facilities and no other committed source of
capital. To the extent that our capital resources are insufficient to meet our
future capital requirements, we will have to raise additional funds to continue
our development programs. We may not be able to raise such additional capital
on favorable terms, or at all. If the company raises additional capital by
selling its equity or convertible debt securities, the issuance of such
securities could result in dilution of our shareholders' equity positions. If
adequate funds are not available the company may have to:
. curtail operations significantly; or
. obtain funds through entering into collaboration agreements on
unattractive terms.
The inability to raise capital would have a material adverse effect on the
company.
Year 2000
Year 2000 ("Y2K") exposure is the result of computer programs using two
instead of four digits to represent the year. These computer programs may
erroneously interpret dates beyond the year 1999, which could cause system
failures or other computer errors, leading to disruptions in operations.
We have developed a three-phase program to limit or eliminate Y2K
exposures. Phase I is to identify those systems, applications and third-party
relationships from which we have exposure to Y2K
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disruptions in operations. Phase II is the development and implementation of
action plans to achieve Y2K compliance in all areas prior to the end of 1999.
Also included in Phase II is the development of contingency plans which would be
implemented should Y2K compliance not be achieved in order to minimize
disruptions in operations. Phase III is the final testing or equivalent
certification of testing of each major area of exposure to ensure compliance. We
intend to complete all phases before the end of 1999.
We have identified three major areas determined to be critical for
successful Y2K compliance: Area 1, which includes financial, research and
development and administrative informational systems applications reliant on
system software; Area 2, which includes research, development and quality
applications reliant on computer programs embedded in microprocessors; and Area
3, which includes third-party relationships which may be affected by Area 1 and
2 exposures which exist in other companies.
We have completed Phase I of our Y2K program with respect to all three of
the major areas. We believe that we rely on systems, applications and third-
party relationships which, if not Y2K compliant prior to the end of 1999, could
have a material adverse impact on our operations.
We have developed and implemented action plans toward the completion of
Phase II of Y2K compliance in all three Areas. With respect to Area 1 and Area
2, we have reviewed all internal software and hardware to determine our Y2K
exposure. With respect to Area 3, we have evaluated our reliance on third
parties in order to determine whether their Y2K compliance will affect our
operations. We have confirmed the Y2K compliance of some of our suppliers and
we continue to monitor the progress toward compliance of those suppliers who
currently are not. Because we have not yet completed Phase II contingency
planning, we can not describe what action we would take in any of the areas
should Y2K compliance not be achievable in time. We expect to complete Y2K
contingency planning by June 30, 1999 at which time we expect to be able to
identify our most reasonably likely worst case Y2K scenario.
Costs related to replacement or remediation and testing of our Area 1 and
Area 2 computer information systems are estimated at $30,000, as determined by
an independent consultant. We expect to complete Phase III of our Y2K
compliance program in Area 1 and Area 2 by June 30, 1999. The funds for
compliance will be part of our cash flow from operations and capital
expenditures. We expect Phase III, in Area 3, to be completed before the end of
1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Early Stage of Development; Limited Revenues
We are at an early stage of development. Accordingly, our business is
subject to all of the business risks associated with a new enterprise,
including:
. uncertainties regarding product development;
. lack of collaborative partnering relationships;
. lack of revenue and uncertainty regarding future revenues;
. limited financial and personnel resources; and
. lack of established credit facilities.
As we expand our research and development efforts, we anticipate that we
will continue to incur substantial operating losses for at least the next
several years. Therefore, we expect our cumulative losses to increase. To
date, we have had no revenues from product sales and only minimal revenues from
our collaborative research and development arrangements and feasibility studies.
Our success will depend on commercial sales of products that generate
significant revenues for us. We cannot predict whether we will be able to
achieve commercial sales of any revenue-generating products.
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No Assurance of Successful Product Development
Our research and development programs are at an early stage. In order for
us to incorporate a pharmaceutical product into a DepoMed System, we need to
complete substantial additional research and development on the collaborative
partner's drug. Even if we are successful, the collaborative partner's drug
incorporated in the DepoMed System:
. may not be offered for commercial sale; or
. may prove to have undesirable or unintended side effects that prevent or
limit its commercial use.
Before we or others make commercial sales of products using the DepoMed
Systems, we or our collaborative partners must:
. conduct clinical tests showing that these products are safe and
effective; and
. obtain regulatory approval.
This process involves substantial financial investment. Successful
commercial sales of any of these products require:
. market acceptance;
. cost-effective commercial scale production; and
. reimbursement under private or governmental health plans.
We will have to curtail, redirect or eliminate our product development
programs if we or our collaborative partners find that:
. the DepoMed Systems prove to have unintended or undesirable side
effects; or
. products which appear promising in preclinical studies do not
demonstrate efficacy in larger scale clinical trials.
These events could have a material adverse effect on the company.
Need for Substantial Additional Funds
We anticipate that our existing capital resources will permit us to meet
our capital and operational requirements through at least the end of 1999.
However, we base this expectation on our current operating plan which may change
as a result of many factors. Accordingly, we could require additional funding
sooner than anticipated. Our cash needs may also vary materially from our
current expectations because of numerous factors, including:
. results of research and development;
. relationships with current and potential collaborative partners;
. changes in the focus and direction of our research and development
programs;
. technological advances; and
. results of clinical testing, requirements of the FDA and comparable
foreign regulatory agencies.
We will need substantial funds of our own or from third parties to:
. conduct research and development programs;
. conduct preclinical and clinical testing; and
. manufacture (or have manufactured) and market (or have marketed)
potential products using the DepoMed Systems.
Our existing capital resources may not be sufficient to fund our operations
until such time as we may be able to generate sufficient revenues to support our
operations. We have limited credit facilities and no other committed source of
capital. To the extent that our capital resources are insufficient to meet
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our future capital requirements, we will have to raise additional funds to
continue our development programs. We may not be able to raise such additional
capital on favorable terms, or at all. If the company raises additional capital
by selling its equity or convertible debt securities, the issuance of such
securities could result in dilution to our shareholders. If adequate funds are
not available the company may have to:
. curtail operations significantly; or
. obtain funds through entering into collaboration agreements on
unattractive terms.
The inability to raise capital would have a material adverse effect on the
company.
Dependence on and Need for Collaborative Partners
We have generated all of our revenues through collaborative arrangements
with pharmaceutical and biotechnology companies. Our strategy to continue the
research, development, clinical testing, manufacturing and commercial sale of
products using the DepoMed Systems requires that we maintain our current
collaborative arrangements and enter into additional collaborative arrangements.
The success of collaborative arrangements requires that the company's present
and future collaborative partners:
. perform their obligations as expected; and
. devote sufficient resources to the development, clinical testing and
marketing of products developed under collaborations.
The company's collaborative partners may not continue to:
. fund their particular projects;
. perform their agreed-to obligations; or
. choose to develop and make commercial sales of products using the
DepoMed Systems.
For example, in April 1999, BMS informed the company of its decision not to
exercise its option under a 1996 agreement to license the DepoMed Gastric
Retention System for a product.
Further, the company may not be able to enter into future collaborative
arrangements on acceptable terms. The following events could have a material
adverse effect on the company:
. any parallel development by a collaborative partner of competitive
technologies or products;
. arrangements with collaborative partners that limit or preclude the
company from developing products or technologies;
. premature termination of an agreement; or
. failure by a collaborative partner to devote sufficient resources to the
development; and commercial sales of products using the DepoMed Systems.
Collaborative agreements are generally complex and may contain provisions
which give rise to disputes regarding the relative rights and obligations of the
parties. Any such dispute could delay collaborative research, development or
commercialization of potential products, or could lead to lengthy, expensive
litigation or arbitration.
Competition
Competition in pharmaceutical products and drug delivery systems is
intense. We expect competition to increase. Competing technologies or products
developed in the future may prove superior either generally or in particular
market segments to the DepoMed Systems or products using the DepoMed Systems.
These developments would make the DepoMed Systems or products using them
noncompetitive or obsolete.
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All of our principal competitors have substantially greater financial,
marketing, personnel and research and development resources than us. In
addition, many of our potential collaborative partners have devoted, and
continue to devote, significant resources to the development of their own drug
delivery systems and technologies.
Government Regulation
Numerous governmental authorities in the United States and other countries
regulate our research and development activities and those of our collaborative
partners. Governmental approval is required of all potential pharmaceutical
products using the DepoMed Systems and the manufacture and marketing of products
using the DepoMed Systems prior to the commercial use of those products. The
regulatory process will take several years and require substantial funds. If
products using the DepoMed Systems do not receive the required regulatory
approvals or if such approvals are delayed, the company's business would be
materially adversely affected. There can be no assurance that the requisite
regulatory approvals will be obtained without lengthy delays, if at all.
In the United States, the United States Food and Drug Administration (the
"FDA") rigorously regulates pharmaceutical products, including any drugs using
the DepoMed Systems. If a company fails to comply with applicable requirements,
the FDA or the courts may impose sanctions. These sanctions may include civil
penalties, criminal prosecution of the company or its officers and employees,
injunctions, product seizure or detention, product recalls, total or partial
suspension of production. The FDA may withdraw approved applications or refuse
to approve pending new drug applications, premarket approval applications, or
supplements to approved applications.
The company generally must conduct preclinical testing on laboratory
animals of new pharmaceutical products prior to commencement of clinical studies
involving human beings. These studies evaluate the potential efficacy and
safety of the product. The company then submits the results of these studies to
the FDA as part of an Investigational New Drug application ("IND"), which must
become effective before beginning clinical testing in humans.
Typically, human clinical evaluation involves a time-consuming and costly
three-phase process:
. In Phase I, the company conducts clinical trials with a small number of
subjects to determine a drug's early safety profile and its
pharmacokinetic pattern.
. In Phase II, the company conducts clinical trials with groups of
patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and further evidence of safety.
. In Phase III, the company conducts large-scale, multi-center,
comparative trials with patients afflicted with a target disease in
order to provide enough data to demonstrate the efficacy and safety
required by the FDA prior to commercialization.
The FDA closely monitors the progress of each phase of clinical testing.
The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing
based upon the data accumulated to that point and the FDA's assessment of the
risk/benefit ratio to patients.
The results of the preclinical and clinical testing are submitted to the
FDA in the form of a new drug application (an "NDA") for approval prior to
commercialization. In responding to an NDA, the FDA may grant marketing
approval, request additional information or deny the application. Failure to
receive approval for any products using the DepoMed Systems would have a
material adverse effect on the company.
Various FDA regulations apply to over-the-counter products that comply with
monographs issued by the FDA. These regulations include:
. cGMP requirements;
. general and specific over-the-counter labeling requirements (including
warning statements);
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. advertising restrictions; and
. requirements regarding the safety and suitability of inactive
ingredients.
In addition, the FDA may inspect over-the-counter products and
manufacturing facilities. A failure to comply with applicable regulatory
requirements may lead to administrative or judicially imposed penalties. If an
over-the-counter product differs from the terms of a monograph, it will, in most
cases, require FDA approval of an NDA for the product to be marketed.
Foreign regulatory approval of a product must also be obtained prior to
marketing the product internationally. Foreign approval procedures vary from
country to country. The time required for approval may delay or prevent
marketing in certain countries. In certain instances the company or its
collaborative partners may seek approval to market and sell certain products
outside of the United States before submitting an application for United States
approval to the FDA. The clinical testing requirements and the time required to
obtain foreign regulatory approvals may differ from that required for FDA
approval. Although there is now a centralized European Union ("EU") approval
mechanism in place, each EU country may nonetheless impose its own procedures
and requirements. Many of these procedures and requirements are time-consuming
and expensive. Some EU countries require price approval as part of the
regulatory process. These constraints can cause substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed, and approval in any single country may not
meaningfully indicate that another country will approve the product.
Manufacturing, Marketing and Sales
We do not have and do not intend to establish in the foreseeable future
internal manufacturing, marketing or sales capabilities. Rather, we intend to
use the facilities of our collaborative partners or those of contract
manufacturers to manufacture products using the DepoMed Systems. Our dependence
on third parties for the manufacture of products using the DepoMed Systems may
adversely affect our ability to develop and deliver such products on a timely
and competitive basis. There may not be sufficient manufacturing capacity
available to the company when, if ever, it is ready to seek commercial sales of
products using the DepoMed Systems. In addition, we expect to rely on our
collaborative partners or to develop distributor arrangements to market and sell
products using the DepoMed Systems. The company may not be able to enter into
manufacturing, marketing or sales agreements on reasonable commercial terms, or
at all, with third parties. Failure to do so would have a material adverse
effect on the company.
Applicable cGMP requirements and other rules and regulations prescribed by
foreign regulatory authorities will apply to the manufacture of products using
the DepoMed Systems. The company will depend on the manufacturers of products
using the DepoMed Systems to comply with cGMP and applicable foreign standards.
Any failure by a manufacturer of products using the DepoMed Systems to maintain
cGMP or comply with applicable foreign standards could delay or prevent their
commercial sale. This could have a material adverse effect on the company.
Patents and Proprietary Rights
Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies and to preserve our trade secrets. Our
policy is to file patent applications in the United States and foreign
jurisdictions. We currently hold two issued United States and two pending United
States patent applications. We have applied for patents in numerous foreign
countries. Some of those countries have granted our applications and other
applications are still pending. No assurance can be given that our patent
applications will be approved, or that any issued patents will provide
competitive advantages for the DepoMed Systems or our technologies.
With respect to already issued patents and any patents which may issue from
our applications, there can be no assurance that claims allowed will be
sufficient to protect our technologies. The United States maintains patent
applications in secrecy until a patent issues. As a result, the company cannot
be
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certain that others have not filed patent applications for technology covered
by our pending applications or that the company was the first to file patent
applications for such technology. Competitors may have filed applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes that may block our patent rights or
permit the competitors to compete without infringing the patent rights of the
company. In addition, there can be no assurance that:
. any patents issued to the company will not be challenged, invalidated or
circumvented; or
. the rights granted under the patents issued to the company will provide
proprietary protection or commercial advantage to the company.
We also rely on trade secrets and proprietary know-how. We seek to protect
that information, in part, through entering into confidentiality agreements with
employees, consultants, collaborative partners and others before such persons or
entities have access to our proprietary trade secrets and know-how. These
confidentiality agreements may not be effective in certain cases, due to, among
other things, the lack of an adequate remedy for breach of an agreement or a
finding that an agreement is unenforceable. In addition, our trade secrets may
otherwise become known or be independently developed by competitors.
Our ability to develop our technologies and to make commercial sales of
products using our technologies also depends on not infringing others' patents.
We are not aware of any claim of patent infringement against us. However, if
claims concerning patents and proprietary technologies arise and are determined
adversely to the company, the claims could have a material adverse effect on the
company. Extensive litigation regarding patent and other intellectual property
rights is common in the pharmaceutical industry. We may need to engage in
litigation to enforce any patents issued or licensed to the company or to
determine the scope and validity of third-party proprietary rights. There can
be no assurance that our issued or licensed patents would be held valid by a
court of competent jurisdiction. Whether or not the outcome of litigation is
favorable to the company, the diversion of our financial and managerial
resources to such litigation could have a material adverse effect on the
company. We may also be required to participate in interference proceedings
declared by the United States Patent and Trademark Office for the purpose of
determining the priority of inventions in connection with the patent
applications of the company or other parties. Adverse determinations in
litigation or interference proceedings could require the company to seek
licenses (which may not be available on commercially reasonable terms) or
subject the company to significant liabilities to third parties. These events
could have a material adverse effect on the company.
Fluctuations in Operating Results
The following factors will affect our quarterly operating results and may
result in a material adverse effect on the company:
. variations in revenues obtained from collaborative agreements, including
milestone payments, royalties, license fees and other contract revenues;
. success or failure of the company in entering into further collaborative
relationships;
. decisions by collaborative partners to proceed or not to proceed with
subsequent phases of the relationship or program;
. the timing of any future product introductions by us or our
collaborative partners;
. market acceptance of the DepoMed Systems;
. regulatory actions;
. adoption of new technologies;
. the introduction of new products by our competitors;
. manufacturing costs and capabilities;
. changes in government funding; and
. third-party reimbursement policies.
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Relationships of Advisors with other Entities
Two groups (the Policy Advisory Board and Development Advisory Board)
advise the company on business and scientific issues and future opportunities.
Certain members of our Policy Advisory Board and Development Advisory Board work
full-time for academic or research institutions. Others act as consultants to
other companies. In addition, except for work performed specifically for and at
the direction of the company, any inventions or processes discovered by such
persons will be their own intellectual property or that of their institutions or
other companies. Further, invention assignment agreements signed by such
persons in connection with their relationships with the company may be subject
to the rights of their primary employers or other third parties with whom they
have consulting relationships. If the company desires access to inventions
which are not its property, the company will have to obtain licenses to such
inventions from these institutions or companies. The company may not be able to
obtain these licenses on commercially reasonable terms.
Healthcare Reform; Uncertain Availability of Healthcare Reimbursement
The healthcare industry is changing rapidly as the public, government,
medical professionals, third-party payors and the pharmaceutical industry
examine ways to contain or reduce the cost of health care. Changes in the
healthcare industry could impact our business, particularly to the extent that
the company develops the DepoMed Systems for use in prescription drug
applications.
Certain foreign governments regulate pricing or profitability of
prescription pharmaceuticals sold in their countries. There have been a number
of federal and state proposals to implement similar government control in the
United States, particularly with respect to Medicare payments. The company
expects that these proposals will continue to be advanced. In addition,
downward pressure on pharmaceutical pricing in the United States has increased
due to an enhanced emphasis on managed care. The company expects this pressure
to continue to increase. The company cannot predict whether any such
legislative or regulatory proposals will be adopted or the effect such proposals
or managed care efforts may have on its business. However, the announcement of
such proposals or efforts could have a material adverse effect on the company's
ability to raise capital. Further, the adoption of such proposals or efforts
would have a material adverse effect on the company and any prospective
collaborative partners.
Sales of products using the DepoMed Systems in domestic and foreign markets
will depend in part on the availability of reimbursement from third-party
payors, such as government health administration authorities and private health
insurers. Third-party payors are increasingly challenging the price and cost-
effectiveness of prescription pharmaceutical products. Significant uncertainty
exists as to the reimbursement status of newly approved healthcare products.
Accordingly, products using the DepoMed Systems may not be eligible for third-
party reimbursement at price levels sufficient for us or our collaborative
partners to realize appropriate returns on our investments in the DepoMed
Systems.
Product Liability
Our business involves exposure to potential product liability risks that are
inherent in the production and manufacture of pharmaceutical products. Any such
claims could have a material adverse effect on the company. We do not currently
have any product liability insurance. Although the company will apply for
product liability insurance when it deems it appropriate, there can be no
assurance that:
. the company will be able to obtain or maintain product liability
insurance on acceptable terms;
. the company will be able to secure increased coverage as the
commercialization of the DepoMed Systems proceeds; or
. any insurance will provide adequate protection against potential
liabilities.
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Year 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to process accurately. We have
developed a three-phase program to limit or eliminate Y2K exposures. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Year 2000".
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM REGISTERED SECURITIES
On November 4, 1997, a Registration Statement on Form SB-2 (No. 333-25445) was
declared effective by the SEC pursuant to which the Company issued 1,200,000
units (the "Units") consisting of one share of Common Stock and one Common Stock
Purchase Warrant (the "Warrants"). The Units were sold for the account of the
Company at a price of $6.10 per Unit, generating $7,320,000 in gross proceeds to
the Company. On December 1, 1997, the Common Stock and Warrants commenced
trading separately, and on December 8, 1997, the Units ceased trading. The
initial public offering was managed by National Securities Corporation.
From the effective date of the Registration Statement to September 30, 1998,
the Company incurred approximately $586,000 in underwriting discounts and
commissions, approximately $281,000 of expenses paid to or for the underwriters,
and approximately $1,097,000 in other related expenses. The net proceeds of the
offering, after deducting the foregoing expenses, were approximately $5,356,000.
Approximately $1,650,000 of the proceeds of the initial public offering were
used to repay indebtedness of the Company, including repayment of indebtedness
of approximately $308,000 to certain related parties. In addition, upon
consummation of the Initial Public Offering, the Company paid Dr. John Fara, the
Company's Chief Executive Officer, an incentive bonus of $100,000.
From the effective date of the Registration Statement to March 31, 1999, the
Company has used approximately $3,811,000 to fund ongoing operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 29, 1999 DEPOMED, INC.
By /s/ John F. Hamilton
-----------------------
John F. Hamilton
Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Accounting
and Financial Officer)
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