<PAGE>
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 September 30, 1998
( ) 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 0-21595
Enamelon, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
15 Kimball Avenue
Yonkers, New York 10704
(Address of principal executive offices)
13-3669775
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code: (914) 237-1308
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---------- -----------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date 10,239,780 shares of common
stock, $.001 par value as of October 30, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
---------- -----------
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Enamelon, Inc.
Balance Sheet
<TABLE>
<CAPTION>
September 30,
-------------
1998
----
(unaudited)
<S> <C>
Assets
Current:
Cash and cash equivalents................................... $ 2,812,569
Short-term investments...................................... 17,092,108
Inventory................................................... 3,190,501
Accounts receivable......................................... 3,739,462
Prepaid expenses and other assets........................... 331,840
-------------
Total current assets...................................... 27,166,480
Equipment, less accumulated depreciation of $497,690.......... 2,809,095
Intangible assets, less accumulated amortization of $93,190.... 795,347
Other assets................................................... 168,670
-------------
Total assets $ 30,939,592
=============
Liabilities and Stockholders' Equity
Current liabilities:
Account payable.............................................. $ 2,627,578
Accrued marketing............................................ 8,009,844
Accrued expenses............................................. 2,475,480
-------------
Total current liabilities.................................. 13,112,902
-------------
Commitments
Stockholders' equity
Preferred stock, $0.01 par value-shares
authorized 5,000,000; none issued or outstanding........... --
Common stock, $0.001 par value-shares
authorized 30,000,000; issued and outstanding; 10,239,780.. 10,240
Additional paid-in capital................................... 56,913,026
Accumulated deficit.......................................... (39,096,576)
-------------
Total stockholders' equity................................. 17,826,690
-------------
Total liabilities and stockholders' equity $ 30,939,592
=============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Enamelon, Inc.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.............................. $ 4,943,965 $ $ 8,994,921 $ --
--
Cost of sales.......................... 2,286,882 -- 4,546,899 --
------------- ----------- ------------- -------------
Gross profit........................ 2,657,083 -- 4,448,022 --
------------- ----------- ------------- -------------
Operating expenses:
Marketing and selling................ 10,749,269 1,649,801 24,028,850 4,020,813
Research and testing................. 794,796 711,343 2,313,887 2,052,953
Administrative and other............. 1,062,629 587,912 3,056,207 1,685,139
------------- ----------- ------------- -------------
Total operating expenses 12,606,694 2,949,056 29,398,944 7,758,905
------------- ----------- ------------- -------------
Operating loss......................... (9,949,611) (2,949,056) (24,950,922) (7,758,905)
Interest and dividend income........... 343,948 252,551 1,317,031 493,147
------------- ----------- ------------- -------------
Net loss............................... $ (9,605,663) $(2,696,505) $ (23,633,891) $ (7,265,758)
============= =========== ============= =============
Net loss per common share, basic....... $ (0.94) $ (0.33) $ (2.33) $ (0.99)
============= =========== ============= =============
Weighted average common shares
outstanding, basic..................... 10,233,124 8,101,386 10,140,283 7,332,558
============= =========== ============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Enamelon, Inc.
Statements of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Total stockholders'
Shares Par Value paid-in capital deficit equity
------ --------- --------------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997......... 9,965,996 $ 9,966 $56,259,052 $ (15,462,685) $ 40,806,333
Warrants exercised................. 81,469 82 124,518 -- 124,600
Options exercised.................. 192,315 192 529,456 -- 529,648
Net loss........................... -- -- -- (23,633,891) (23,633,891)
---------- --------- ----------- ------------- --------------
Balance, September 30, 1998........ 10,239,780 $ 10,240 $56,913,026 $ (39,096,576) $ 17,826,690
========== ========= =========== ============= ==============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Enamelon, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $(23,633,891) $ (7,265,758)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................. 355,264 102,638
Loss on disposal of furniture and fixtures..................... 37,178 --
Change in operating assets and liabilities:
Short-term investments........................................... 802,999 --
Accounts receivable.............................................. (3,494,856) (201,095)
Prepaid expenses and other assets................................ (242,530) (16,192)
Inventory........................................................ (1,938,294) (804,742)
Accrued expenses and accounts payable............................ 9,748,992 1,701,153
------------ ------------
Net cash used in operating activities.......................... (18,365,138) (6,483,996)
------------ ------------
Cash flows from investing activities:
Purchases of equipment............................................. (695,187) (938,886)
Patents, trademarks and licenses................................... (360,962) (91,747)
------------ ------------
Net cash used in investing activities............................ (1,056,149) (1,030,633)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock................................. 654,252 14,248,533
Offering costs..................................................... (45,350) (1,022,609)
------------ ------------
Net cash provided by (used in) financing activities.............. 608,902 13,225,924
------------ ------------
Net increase (decrease) in cash and cash equivalents................. (18,812,385) 5,711,295
Cash and cash equivalents, beginning of period....................... 21,624,954 11,389,894
------------ ------------
Cash and cash equivalents, end of period............................. $ 2,812,569 $ 17,101,189
============ ============
Supplemental disclosures of noncash financing activities:
Accrued offering costs............................................. $ -- $ 7,191
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Enamelon, Inc.
Notes To The Financial Statements
(unaudited)
1. Statement of information furnished
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Results for the interim period ended September 30, 1998 are not
necessarily indicative of results for the entire year.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report filed on Form10-KSB for the
year ended December 31, 1997.
2. Inventory
Inventory is summarized as follows: September 30,
1998
------------------
Raw materials 1,479,302
Work in progress 536,797
Finished goods 1,174,402
-----------------
$ 3,190,501
3. Earnings per share
Effective December 15, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128. "Earnings Per Share," which provides
for the calculation of "Basic" and "Diluted" earnings (loss) per share. In
accordance with this statement, basic loss per share for the quarters and nine
months ended September 30, 1998 and 1997 was calculated by dividing net loss
by the weighted average number of common shares outstanding, which amounted to
10,233,124 and 10,140,283 for the three and nine months ended September 30,
1998, respectively, and 8,101,386 and 7,332,558 for the three and nine months
ended September 30, 1997, respectively. Diluted loss per share has not been
presented since the effect of dilutive shares is antidilutive in all periods.
4. Recent Accounting Standards
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 addresses standards for reporting and display
of comprehensive income and its components and SFAS 131 requires disclosure of
reportable operating segments. Both statements are effective for years
beginning after December 15, 1997. In February 1998, the FASB issued SFAS 132
"Employers Disclosures about Pensions and other Post-Retirement Plans". This
statement is effective in 1998. The Company will be reviewing these statements
to determine the applicability to the Company, if any.
6
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Item 2.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing in the Company's
Annual Report on Form 10-KSB, for the year ended December 31, 1997.
General
The Company was founded in June 1992 to develop and market
over-the-counter oral care products that prevent tooth decay at its earliest
stage and are based on proprietary formulations and technologies.
The Company began to test market Enamelon(R) anticavity fluoride
toothpaste in several representative markets in March 1997. Test marketing and
additional clinical human studies to establish additional marketing claims for
consumers and dentists continued throughout 1997 and the national distribution
of Enamelon(R) anticavity fluoride toothpaste began in the first quarter of
1998. As a result, the Company emerged from the development stage. The Company
expects to continue to incur operating losses through 1999 and may require
additional financing to continue its operations thereafter.
Results of Operations
Three Months ended September 30, 1998 Compared to Three Months ended
September 30, 1997
Net sales for the three months ended September 30, 1998 were
approximately $4,944,000 resulting in a gross profit of approximately
$2,657,000. The Company did not report net sales for the three months ended
September 30, 1997 as the Company was in the development stage. Accordingly,
net sales for the three months ended September 30, 1997 of approximately
$361,000 were offset against marketing expenses. The increase in net sales is
the result of the national distribution and growing consumer acceptance of the
Company's toothpaste as a result of coordinated marketing efforts including a
new television commercial, a successful coupon event in late August 1998 as
well as other promotional programs. While the company will continue its
marketing efforts there can be no assurance that the increased in sales levels
will be sustained.
Total operating expenses were approximately $12,607,000 for the three
months ended September 30, 1998, compared with total expenses of approximately
$2,949,000 for the same period in the prior year, an increase of $9,658,000.
This increase was primarily the result of increases in marketing and selling
expenses of $9,099,000, research and development expenses of $84,000, and
administrative and other expenses of $475,000.
Marketing and selling expenses increased from $1,650,000 to
$10,749,000 primarily as a result of advertising and promotion expenses to
launch the Company's toothpaste product into the national market. In the third
quarter of 1998, the Company continued television advertising in selected
markets throughout the United States. Marketing expenses for the three months
ended September 30, 1997 were offset by approximately $361,000 of revenues
from Enamelon anticavity fluoride toothpaste sold in test markets.
Research and testing expenses increased from $711,000 to $795,000
primarily as a result of increased personnel costs associated with new product
development.
Administrative and other expenses increased from $588,000 to
$1,063,000 primarily attributable to increased payroll, benefits, consulting
and other administrative office expenses, which resulted from the Company's
expanded operations.
7
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Interest and dividend income increased from $252,000 in 1997 to $344,000 in
1998 primarily due to the increase in cash and cash equivalents from a second
public offering of the Company's common stock in October 1997.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997.
Net sales for the nine months ended September 30, 1998 were
approximately $8,995,000 resulting in a gross profit of approximately
$4,448,000. The Company did not report net sales for the nine months ended
September 30, 1997 as the Company was in the development stage. Accordingly,
net sales for the nine months ended September 30, 1997 of approximately
$693,000 were offset against marketing expenses. Gross profit for the nine
months ended was affected by manufacturing inefficiencies experienced during
the first six months of 1998 resulting from increased production for the
national distribution of Enamelon(R) anticavity fluoride toothpaste. The
Company experienced improved gross profit for the third quarter as sales and
manufacturing volume increased. The Company believes that as sales and
manufacturing volume increase its gross profit will continue to improve.
Total operating expenses were approximately $29,399,000 for the nine
months ended September 30, 1998, compared with total operating expenses of
approximately $7,759,000 for the same period in the prior year, an increase of
$21,640,000. This increase was primarily the result of increases in marketing
and selling expenses of $20,008,000, research and development expenses of
$261,000, and administrative and other expenses of $1,371,000.
Marketing and selling expenses increased from $4,021,000 to
$24,029,000 primarily as a result of advertising and promotion expenses to
launch the Company's toothpaste product into national markets. Marketing
expenses for the nine months ended September 30, 1997 were offset by
approximately $693,000 of revenues from Enamelon anticavity fluoride
toothpaste sold in test markets.
Research and development expenses increased from $2,052,000 to
$2,314,000 primarily as a result of studies performed at universities and
research facilities and development activities to broaden the additional
marketing claims for consumers and dentists and for personnel costs associated
with the company's new product development. The Company is continuing to
expand its clinical testing.
Administrative and other expenses increased from $1,685,000 to
$3,056,000 primarily attributable to increased payroll and benefits,
consulting and other administrative office expenses, which resulted from the
Company expanded operations.
Interest and dividend income increased from $493,000 in 1997 to
$1,317,000 in 1998 primarily due to the increase in cash and cash equivalents
from a private placement and a second public offering of the Company's common
stock in 1997.
Liquidity and Capital Resources
Since its inception in June 1992, the Company has financed its
operations primarily through private placements of Series A Preferred Stock
and Common Stock, its initial public offering of Common Stock totaling
approximately $16.1 million, net of expenses, and a second public offering
totaling approximately $26.3 million,
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
net of expenses. At September 30, 1998, the Company had cash and cash
equivalents and short-term investments of approximately $19.9 million and
working capital of $14.1 million. The Company had no outstanding debt (other
than accounts payable and accrued expenses) or available lines of credit as of
September 30, 1998.
Since its inception and through September 30, 1998, the Company had
incurred losses aggregating approximately $39.1 million and had available net
operating loss carryforwards as of September 30, 1998 of approximately $29.9
million. The net operating loss carryforwards will expire if not used by the
period from 2007 through 2013 and may be limited by United States federal tax
law as a result of future changes in ownership. In March 1997, the Company
began to test market Enamelon anticavity fluoride toothpaste in selected
United States markets. The Company believes test marketing was successful and
began a national roll-out of this product in the first quarter of 1998. The
Company will continue to support its national roll-out through the first half
of 1999. The Company expects to continue to incur operating losses at least
through 1999 while it continues clinical testing and initial toothpaste
marketing efforts.
Since its inception and through September 30, 1998, the Company had
paid approximately $3,306,000 for the purchase of equipment and approximately
$889,000 for costs associated with obtaining patents, trademarks and licensing
rights.
The Company's cash requirements may vary materially from those now
planned depending on numerous factors, including the status of the Company's
marketing efforts, distribution, consumer acceptance, the Company's business
development activities, the availability of alternative financing for the
acquisition of manufacturing equipment, the results of clinical trials, the
regulatory process and competition. The Company currently estimates that cash
and cash equivalents on hand will be sufficient to finance its operating
losses, working capital and other requirements through the middle of 1999.
Thereafter, or sooner if conditions necessitate, the Company will need to
raise additional funds through public or private financings. If adequate funds
are not available, then the Company may be required to delay, reduce the scope
of, or eliminate new product introductions and otherwise reduce current and
proposed operations.
The foregoing discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this report and
in the Company's Form 10-KSB for the year ended December 31, 1997 and its
Quarterly Report of Form 10-QSB for the three months ended March 31, 1998 and
June 30, 1998. Except for the historical information contained herein, the
foregoing discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those projected in the forward-looking statements discussed herein. Factors
that could cause actual results to differ materially include, but are not
limited to, the following: acceptance of the Company's products by consumers;
the Company's ability to procure additional financing from time to time as
necessary to maintain its operations until it becomes profitable; the inherent
limitation of market research and accuracy of syndicated data purchased by the
Company; changes in Food and Drug Administration and Federal Trade Commission
regulations as they apply to the Company's products; and challenges to patents
either licensed to or held directly by the Company. Those and other risks are
described in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 and its registration statements on Form S-1 with the
Securities and Exchange Commission.
Year 2000 Compliance
The Company has reviewed its manufacturing and resource planning
software and current operating system and believes that they are Year 2000
compliant. The Company primarily utilizes operating systems obtained from
Microsoft, which the Company believes, based on information provided by
Microsoft, are Year 2000 compliant. While no material issues have been found
to date, the Company cannot fully predict the effects of failure of these
third party products to be year 2000 compliant. The Company believes that none
of the Company's equipment is
9
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
date sensitive or otherwise uses embedded computer chips. Accordingly, the
Company does not believe that embedded chip technology will present any Year
2000 issues. However the Company is also checking its equipment to verify this
as part of its overall year 2000 program. The Company expects that the costs
of achieving internal Year 2000 compliance will not have a material adverse
impact on results of operations, liquidity or capital resources.
The Company has not formally contacted suppliers or customers to
assess the readiness of their computer systems for the year 2000. The Company
plans to initiate efforts by the end of 1998 to evaluate the Year 2000 issue
as it relates to principal third parties, primarily customers and suppliers.
These efforts are expected to include written questionnaires sent to major
customers and suppliers that will help the Company predict the effect and risk
of their failure to be Year 2000 compliant.
The Company is continuing the evaluation of its information
technology systems and equipment to determine those systems and equipment that
are not Year 2000 compliant. While management has not currently formulated
formal contingency plans to handle unexpected and non-contemplated Year 2000
problems, it intends to review the need for such a plan as the millennium
shift approaches. However, based on the results of its evaluations to date,
the Company does not anticipate the need for such a plan nor that the cost
associated with Year 2000 issues will have a material impact on its financial
position, results of operations or liquidity. While the Company believes its
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that all internal systems, as well as those of third parties on
which the Company relies will be converted on a timely basis and will not have
a material adverse affect on the Company's operations.
Effect of New Accounting Pronouncement
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 addresses standards for reporting and display
of comprehensive income and its components and SFAS 131 requires disclosure of
reportable operating segments. Both statements are effective for years
beginning after December 15, 1997. In February 1998, the FASB issued SFAS 132
"Employers Disclosures about Pensions and other Post-Retirement Plans". These
statements are effective in 1998. The Company will be reviewing these
statements to determine the applicability to the Company, if any.
Part II. - Other Information
Item 2. Changes in Securities and Use of Proceeds.
In July and August 1998, the Company sold 5,455 shares of Common
Stock, $.001 par value, to a finder in connection with one of the Company's
financings, pursuant to the exercise of warrants with a stated exercise price
of $3.22 per share. The purchaser forfeited 10,545 warrants in lieu of cash to
acquire these shares. No underwriters were involved in the sales. The
purchaser represented that he was acquiring the shares for investment and not
with a view to distribution. The Company relied on the exemptions under
Sections 3(a)(9) and 4(2) of the Securities Act with respect to the sale of
such shares.
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter for which this
report is filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Enamelon, Inc.
Date November 13, 1998 By /S/ Edwin Diaz
---------------------- --------------
Vice President-Finance,
Chief Financial Officer and
Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Enamelon,
Inc. Balance Sheet as of September 30, 1998 and the Condensed Statement of
Operations for the nine months ended September 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,812,569
<SECURITIES> 17,092,108
<RECEIVABLES> 3,802,529
<ALLOWANCES> 63,067
<INVENTORY> 3,190,501
<CURRENT-ASSETS> 27,166,480
<PP&E> 3,306,785
<DEPRECIATION> 497,690
<TOTAL-ASSETS> 30,939,592
<CURRENT-LIABILITIES> 13,112,902
<BONDS> 0
0
0
<COMMON> 10,240
<OTHER-SE> 17,816,450
<TOTAL-LIABILITY-AND-EQUITY> 30,939,592
<SALES> 8,994,921
<TOTAL-REVENUES> 8,994,921
<CGS> 4,546,899
<TOTAL-COSTS> 4,546,899
<OTHER-EXPENSES> 29,398,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,317,031)
<INCOME-PRETAX> (23,633,891)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,633,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,633,891)
<EPS-PRIMARY> (2.33)
<EPS-DILUTED> (2.33)
</TABLE>
