<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 JUNE 30, 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 August 9, 1999, was 6,475,077.
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DEPOMED, INC.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
PAGE
----
<S> <C>
Unaudited Balance Sheet at June 30, 1999.................................................. 3
Unaudited Statements of Operations for the three month periods ended
June 30, 1999 and 1998 and the six month periods ended June 30, 1999
and 1998 and the period from inception (August 7, 1995) to June 30, 1999................ 4
Unaudited Statements of Cash Flows for the six month periods ended
June 30, 1999 and 1998 and the period from inception (August 7, 1995) to
June 30, 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.............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
Signature...................................................................................... 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPOMED, INC.
(A Development Stage Company)
BALANCE SHEET
(Unaudited)
June 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 2,978,774
Marketable securities.................................................... 4,099,245
Prepaid and other current assets......................................... 153,664
---------------
Total current assets............................................. 7,231,683
Property and equipment, net.................................................... 915,792
Other assets................................................................... 53,528
---------------
$ 8,201,003
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 127,884
Accrued compensation..................................................... 202,556
Other accrued liabilities................................................ 23,797
Capital lease obligation, current portion................................ 48,736
Long-term debt, current portion.......................................... 119,471
---------------
Total current liabilities........................................ 522,444
Capital lease obligation, non-current portion.................................. 70,722
Long-term debt, non-current portion............................................ 420,065
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; 6,475,077 shares issued and outstanding.................. 14,797,072
Deferred compensation.................................................... (374,000)
Deficit accumulated during the development stage......................... (7,260,661)
Accumulated other comprehensive income................................... 25,361
---------------
Total shareholders' equity....................................... 7,187,772
---------------
$ 8,201,003
===============
</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
(August 7, 1995)
Three Months Ended June 30, Six Months Ended June 30, to
--------------------------------- ---------------------------------
1999 1998 1999 1998 June 30, 1999
------------- ------------- --------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Product development revenue..... $ -- $ 129,803 $ 115,327 $ 239,303 $ 1,801,312
Operating expenses:
Research and development.. 763,889 442,008 1,493,081 839,315 4,937,500
General and............... 479,781 420,604 967,972 721,849 4,443,322
administrative
Purchase of in-process
research and
development........... -- -- -- -- 298,154
------------- ------------- --------------- ------------- ------------------
Total operating expenses........ 1,243,670 862,612 2,461,053 1,561,164 9,678,976
Loss from operations............ (1,243,670) (732,809) (2,345,726) (1,321,861) (7,877,664)
Interest income, net............ 80,362 146,670 174,681 242,403 617,003
------------- ------------- --------------- ------------- ------------------
Net loss........................ $ (1,163,308) $ (586,139) $ (2,171,045) $ (1,079,458) $ (7,260,661)
============= ============= =============== ============= ==================
Basic and diluted net loss
per share...................... $ (0.18) $ (0.09) $ (0.34) $ (0.17)
============= ============= =============== =============
Shares used in computing basic
and diluted net loss
per share................ 6,475,000 6,463,438 6,473,991 6,170,620
============= ============= =============== =============
</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
Six Months Ended June 30, (August 7, 1995)
---------------------------- to
1999 1998 June 30, 1999
------------- ------------ ---------------
<S> <C> <C> <C>
Operating Activities
Net loss............................................................ $ (2,171,045) $ (1,079,458) $ (7,260,661)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 199,845 63,910 498,828
Accrued interest expense on shareholder notes................... -- -- 13,618
Amortization of deferred compensation........................... 136,332 93,511 573,250
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......................................... 306,148 15,084 --
Other current assets........................................ 33,360 25,035 (153,664)
Other assets................................................ 34,404 (25,242) (53,686)
Accounts payable and other accrued liabilities.............. (105,746) (200,897) 151,681
Accrued compensation........................................ 31,561 33,462 135,080
Other current liabilities................................... -- (53,191) --
------------ ------------ ---------------
Net cash used in operating activities................ (1,535,141) (1,127,786) (5,771,350)
------------ ------------ ---------------
Investing Activities
Expenditures for property and equipment............................. (86,417) (279,759) (1,078,026)
Purchases of marketable securities.................................. (1,576,830) (1,507,995) (6,280,587)
Maturities of marketable securities................................. 2,098,823 -- 2,178,405
------------ ------------ --------------
Net cash provided by (used in) investing activities.. 435,576 (1,787,754) (5,180,208)
------------ ------------ --------------
Financing Activities
Payments on capital lease obligations............................... (30,778) (30,322) (188,738)
Proceeds from equipment loan........................................ 105,734 -- 599,867
Payments on equipment loan.......................................... (60,331) -- (60,331)
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 7,492,631 13,823,772
------------ ------------ --------------
Net cash provided by financing activities............ 19,623 7,462,309 13,930,332
------------ ------------ --------------
Net (decrease) increase in cash and cash equivalents................ (1,079,942) 4,546,769 2,978,774
Cash and cash equivalents at beginning of period.................... 4,058,716 4,129,545 --
------------ ------------ --------------
Cash and cash equivalents at end of period.......................... $ 2,978,774 $ 8,676,314 $ 2,978,774
============ ============ ==============
</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 June 30, 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 three months or less. Marketable
securities consist of debt securities with original maturities between three
months and two years. The debt securities are all classified as available-for-
sale.
3. NET LOSS PER SHARE
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 June 30, 1999, comprehensive income
approximated net loss.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into a $600,000 equipment financing credit
facility ("Credit Facility") with a third party in 1998. As of December 1998,
the Company had utilized approximately $494,000 of the Credit Facility. In June
1999, the Company financed additional equipment of approximately $106,000 under
the agreement. The financed equipment serves as collateral for the loan.
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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
$7,261,000 for the period from inception through June 30, 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 June 30, 1999 and 1998
We had no revenues for the three months ended June 30, 1999 compared to
approximately $130,000 for the three months ended June 30, 1998. In the first
quarter of 1999, we completed a phase of research and development, under the
March 1998 PRI feasibility agreement, that is currently in the standard review
process at PRI. In 1998, these revenues consisted of amounts also earned under
the feasibility agreement with PRI.
Research and development expenses for the three months ended June 30, 1999
were approximately $764,000 compared to approximately $442,000 during the three
months ended June 30, 1998. The increase was due to the hiring of additional
employees and related expenses, increased patent legal expense, increased
laboratory supplies and services, and increased depreciation and amortization
expense of equipment and facilities improvements.
General and administrative expenses for the three months ended June 30,
1999 were approximately $480,000 compared to approximately $421,000 during the
three months ended June 30, 1998. The increase was due to increased salaries
and the additional expense incurred as a result of expanded investor relations
activities.
Net interest income was approximately $80,000 for the three months ended in
June 30, 1999 compared to approximately $147,000 during the three months ended
June 30, 1998. The decrease was due to declining cash and investment balances.
Net interest income also includes immaterial gains realized on sale of
securities.
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 subsequently authorized an increase in
the number of shares reserved under the Plan by 800,000; however, these shares
were not duly authorized and available for grant until our shareholders approved
the increase at the Annual Meeting of Shareholders in June 1999. For accounting
purposes, the company is required to recognize a compensation expense if the
fair market value on the measurement date (date of shareholder approval) is
higher than 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. Since the fair market value of
the underlying common stock was lower than the exercise price on the date of
shareholder approval, June 2, 1999, the company will not be required to
recognize any compensation expense related to these grants.
Six Months Ended June 30, 1999 and 1998
Revenues for the six months ended June 30, 1999 and 1998 were approximately
$115,000 and $239,000, respectively. In 1999, these revenues consisted entirely
of amounts earned under the feasibility arrangement with PRI. In 1998, these
revenues consisted of amounts earned under the feasibility, and the research and
development, arrangements with PRI and Bristol-Myers Squibb Company ("BMS"),
respectively. Research and development payments from PRI declined as a result of
our having completed a phase of formulation development in March 1999, which is
currently under review at PRI. Revenues from BMS ended in March 1998 as a result
of our having completed our activities for BMS. In April 1999, we were notified
by BMS that BMS would not exercise its license and development option to use the
DepoMed Gastric Retention System for an undisclosed pharmaceutical product.
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<PAGE>
Research and development expenses for the six months ended June 30, 1999
were approximately $1,493,000 compared to approximately $839,000 incurred during
the six months ended June 30, 1998. The increase was due to the hiring of
additional employees and related expenses as well as increased laboratory
supplies and services, increased patent legal expense, and increased
depreciation and amortization expense of equipment and facilities improvements.
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 six months ended in June 30,
1999 were approximately $968,000 compared to approximately $722,000 incurred
during the six months ended June 30, 1998. The increase was due to expenses for
expanded investor relations activities, the hiring of additional employees,
increased salaries and increased occupancy expense of our subleased facility.
Net interest income was approximately $175,000 for the six months ended in
June 30, 1999 compared to net interest income of approximately $242,000 received
during the six months ended June 30, 1998. The decrease was due to declining
cash and investment balances. Net interest income also includes immaterial gains
realized on sale of securities.
Liquidity and Capital Resources
Cash used in operations in the six months ended June 30, 1999 was
approximately $1,535,000 compared to approximately $1,128,000 for the six months
ended June 30, 1998. During the six months ended June 30, 1999 the change in
cash used was due primarily to the net loss offset by the decrease in accounts
receivable. In 1998, the change in cash used in operations was due primarily to
the net loss.
Cash provided by investing activities in the six months ended June 30, 1999
totaled approximately $436,000 and consisted of a net decrease of approximately
$522,000 of marketable securities as well as purchases of laboratory equipment,
fixtures and office equipment. Net cash used in investing activities in the six
months ended June 30, 1998 totaled approximately $1,788,000 and consisted
primarily of purchases of short-term investments as well as 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 provided by financing activities in the six months ended June 30, 1999
was approximately $20,000 and consisted of approximately $106,000 in proceeds
from the equipment financing credit facility (See Note 5 of Notes to Unaudited
Condensed Financial Statements), as well as payments on the credit facility and
capital lease obligations. Cash provided by financing activities in the six
months ended June 30, 1998 was approximately $7,462,000 which consisted almost
entirely 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 collaborative partners;
. changes in the focus and direction of our research and development
programs;
. technological advances; and
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<PAGE>
. 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 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
in order to minimize disruptions in operations should Y2K compliance not be
achieved.
. Phase III is the remediation and 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 financial, research, development, quality and
administrative 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.
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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 also completed 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.
Phase III of our Y2K compliance plan is partially completed. All internal
software and hardware in Areas 1 and 2 have been evaluated, upgraded as
necessary, tested and certified compliant by an independent consultant. All
internal microprocessors have been evaluated, upgraded as necessary, tested and
certified compliant by the manufacturers of our laboratory equipment,
administrative equipment and security systems. In Area 3, we have confirmed the
Y2K compliance of some of our suppliers and service providers, including banks,
payroll service, utilities and security systems. We continue to monitor the
progress toward compliance of those suppliers who currently are not Y2K
compliant. We cannot guarantee that those suppliers will be compliant by
December 31, 1999.
We believe that DepoMed has limited exposure to problems arising out of Y2K
noncompliance. We currently do not rely on sales revenue to maintain our
business operations nor are we engaged in highly time-sensitive proprietary
research and development or research and development contracts that could
subject us to penalties as a result of delays caused by Y2K. At this time, we
believe that our Y2K exposure is limited to supply chain problems with our
outside vendors. Should these vendors fail to meet their scheduled Y2K
compliance, we have developed a contingency plan to stockpile certain materials
that can only be procured from the vendors in question. We will begin
increasing our laboratory supply inventory as of October 1, 1999. We intend to
maintain in inventory two to three months of those laboratory supplies which may
have limited availability after December 31, 1999. These supplies will be
stored in our onsite warehouse.
As a normal business procedure and a Y2K precaution, on our last working
day of the year, December 30, 1999, we will produce a backup copy of all data
maintained on our internal computer systems and store it safely offsite.
We have paid to date all costs of approximately $15,000, related toY2K
compliance. The funds for compliance were part of our cash flow from operations
and capital expenditures.
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
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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.
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 would need
to complete substantial additional research and development on a drug provided
by a collaborative partner. 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 would need to:
. 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 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.
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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 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 enter into additional
collaborative arrangements. The success of any such collaborative arrangements
requires that the company's collaborative partners:
. perform their obligations as expected; and
. devote sufficient resources to the development, clinical testing and
marketing of products developed under collaborations.
Even when such arrangements are entered into, 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. Additionally, the company is not currently
conducting research and development under the PRI feasibility agreement while
PRI completes its internal review of our work to date under the feasibility
agreement. There can be no assurance that PRI will support further development
of its program based on our technology.
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.
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<PAGE>
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.
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
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<PAGE>
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);
. 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 patents and two United
States
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<PAGE>
patent applications are pending. Additionally, we are currently preparing a
series of patent applications representing our expanding technology for filing
in the United States. We have also 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 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;
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<PAGE>
. 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.
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
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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.
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 and process the new year, "00", as "2000" instead of "1900". 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 that systems will be able
to process accurately. We have developed and implemented 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 DepoMed 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
DepoMed. 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 June 30, 1999, we
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 DepoMed, including repayment of indebtedness of
approximately $308,000 to certain related parties. In addition, upon
consummation of the Initial Public Offering, DepoMed 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 June 30, 1999, we
have used approximately $4,376,000 to fund ongoing operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholders on June 2, 1999 (the
"Annual Meeting") to consider and vote on the following proposals: (i) election
of directors until the next Annual Meeting (Proposal 1), (ii) amendment of the
company's 1995 Stock Option Plan (the "Plan") to increase the number of shares
available for issuance from 1,000,000 to 1,800,000 (Proposal 2) and (iii)
ratification of Ernst & Young LLP as the company's independent auditors
(Proposal 3).
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<PAGE>
Proposal 1 Drs. John W. Shell, John W. Fara, Mr. John N. Shell, Mr. G.
----------
Steven Burrill and Dr. Leigh Thompson, each of whom was a director of DepoMed
prior to the Annual Meeting, were elected as directors of the company to serve
until the next annual meeting of the shareholders of DepoMed. Of the 3,882,737
shares voted at the Annual Meeting, 3,854,587 shares were voted for the election
of Drs. Shell, Fara and Thompson with 28,150 shares voting against Drs. Shell,
Fara and Thompson; and 3,854,487 shares were voted for the election of Messrs.
Shell and Burrill with 28,250 shares voting against Messrs. Shell and Burrill.
Proposal 2 The shareholders of DepoMed approved Proposal 2 with a vote of
----------
3,781,967 shares voted for, 97,370 shares against, 3,400 abstaining.
Proposal 3 The shareholders of DepoMed approved Proposal 3 with a vote of
----------
3,869,337 for, 11,500 shares against with 1,900 shares abstaining.
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<PAGE>
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: August 16, 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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