<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
Form 10-Q
( 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
( ) 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 13-3669775
(State of Incorporation) (I.R.S. Employer Identification No.)
7 Cedar Brook Drive
Cranbury, New Jersey 08512
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 395-6900
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
Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 12,661,809 shares of common
stock, $.001 par value, as of August 9, 1999.
Transitional Small Business Disclosure Format (check one):
Yes _______ No ___X___
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Enamelon, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents................................................... $ 949,378 $ 13,146,989
Short-term investments...................................................... 1,500,125 5,028,805
Accounts receivable less allowance of $145,312 and $69,800 ................. 3,585,765 3,076,595
Inventory................................................................... 3,122,792 2,980,252
Prepaid expenses and other current assets................................... 332,198 520,205
------------ ------------
Total current assets.................................................... 9,490,258 24,752,846
Equipment, less accumulated depreciation of $988,608
and $630,370................................................................ 2,513,727 2,783,334
Intangible assets, less accumulated amortization of $133,338
and $103,515................................................................ 1,032,658 827,263
Other assets.................................................................. 221,524 158,670
------------ ------------
Total assets.................................................................. $ 13,258,167 $ 28,522,113
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................................ $ 5,003,522 $ 3,497,888
Accrued expenses............................................................ 5,951,342 7,832,903
------------ ------------
Total current liabilities............................................... 10,954,864 11,330,791
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value - shares
authorized 5,000,000; none issued or outstanding.......................... --- ---
Series B Convertible Preferred stock, $0.01 par value - shares
authorized 500; issued and outstanding 436 and 500........................ 4,193,324 4,833,324
Common stock, $0.001 par value - shares authorized
50,000,000; issued and outstanding 10,695,459
and 10,241,739............................................................ 10,696 10,242
Additional paid-in capital.................................................. 57,773,053 56,923,114
Accumulated deficit......................................................... (59,673,770) (44,575,358)
------------ ------------
Total stockholders' equity.............................................. 2,303,303 17,191,322
------------ ------------
Total liabilities and stockholders' equity.................................... $ 13,258,167 $ 28,522,113
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Enamelon, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- -------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .............................................. $ 5,525,067 $ 2,337,546 $ 11,328,473 $ 4,050,956
Cost of sales .......................................... 2,221,360 1,251,160 4,500,700 2,260,192
------------ ------------ ------------ ------------
Gross profit ........................................ 3,303,707 1,086,386 6,827,773 1,790,764
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling ................................ 7,065,632 9,715,334 16,751,556 13,279,581
Research and testing ................................. 733,072 834,945 1,539,168 1,519,090
Administrative and other ............................. 1,454,044 1,078,006 2,703,484 1,993,407
Restructuring charge ................................. 1,000,000 -- 1,000,000 --
------------ ------------ ------------ ------------
Total operating expenses ........................... 10,252,748 11,628,285 21,994,208 16,792,078
------------ ------------ ------------ ------------
Operating loss ......................................... (6,949,041) (10,541,899) (15,166,435) (15,001,314)
Interest and dividend income ........................... 64,138 462,011 226,852 973,084
------------ ------------ ------------ ------------
Net loss ............................................... (6,884,903) (10,079,888) (14,939,583) (14,028,230)
Accrued dividends on preferred stock ................... (83,829) -- (158,829) --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders ............. $ (6,968,732) $(10,079,888) $(15,098,412) $(14,028,230)
============ ============ ============ ============
Net loss per common share, basic ....................... $ (0.68) $ (0.99) $ (1.47) $ (1.39)
============ ============ ============ ============
Weighted average common shares outstanding, basic ...... 10,315,773 10,151,121 10,289,055 10,093,093
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
3
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Enamelon, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock paid-in Accumulated stockholders'
Shares Amount Shares Par value capital deficit equity
------ ----------- ---------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ............ 500 $ 4,833,324 10,241,739 $ 10,242 $ 56,923,114 $(44,575,358) $ 17,191,322
Options exercised (unaudited) ......... -- -- 38,900 39 116,661 -- 116,700
Conversion of preferred stock
(unaudited) ......................... (64) (640,000) 402,005 402 659,385 -- 19,787
Issuance of common stock for
services rendered (unaudited) ....... -- -- 12,815 13 73,893 -- 73,906
Accrued preferred stock
dividends (unaudited) ............... -- -- -- -- -- (158,829) (158,829)
Net loss (unaudited) .................. -- -- -- -- -- (14,939,583) (14,939,583)
----- ----------- ---------- -------- ------------ ------------ ------------
Balance, June 30, 1999 (unaudited) .... 436 $ 4,193,324 10,695,459 $ 10,696 $ 57,773,053 $(59,673,770) $ 2,303,303
===== =========== ========== ======== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Enamelon, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (6,884,903) $(10,079,888) $(14,939,583) $(14,028,230)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Stock issued for services rendered .................. 37,912 -- 73,906 --
Depreciation and amortization ....................... 240,249 127,104 388,061 223,617
Changes in operating assets and liabilities:
Decrease (increase) in investments ................ 1,557,363 6,867,750 3,528,680 (3,932,926)
Decrease (increase) in accounts receivable ........ 761,019 (582,191) (509,170) (1,406,107)
Decrease (increase) in inventory .................. 309,052 (1,796,233) (142,540) (3,048,344)
Decrease (increase) in prepaids and other assets .. 26,376 (263,739) 125,153 (254,450)
Increase (decrease) in accounts payable and
accrued expenses ................................ 134,013 6,625,917 (335,166) 8,961,913
------------ ------------ ------------ ------------
Net cash (used in) provided by operating
activities ................................... (3,818,919) 898,720 (11,810,659) (13,484,527)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment .................................. (21,627) (176,773) (88,631) (603,368)
Investments in intangible assets ........................ (144,498) (93,859) (235,218) (293,760)
------------ ------------ ------------ ------------
Net cash used in investing activities ......... (166,125) (270,632) (323,849) (897,128)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuances of common stock ................. 0 215,246 116,700 584,208
Offering costs .......................................... (93,886) (88,728) (179,803) (45,350)
------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities .................................. (93,886) 126,518 (63,103) 538,858
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ...... (4,078,930) 754,606 (12,197,611) (13,842,797)
Cash and cash equivalents, beginning of period ............ 5,028,308 7,027,551 13,146,989 21,624,954
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period .................. $ 949,378 $ 7,782,157 $ 949,378 $ 7,782,157
============ ============ ============ ============
Supplemental disclosure of non-cash transactions:
Accrual of preferred stock dividends .................... 83,829 158,829
============ ============
Issuance of common stock / reduction in
accrued dividends .................................... 19,787 19,787
============ ============
</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 with the instructions to Form 10-Q. 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 June 30,
1999 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 Form 10-KSB.
2. Inventory
Inventory is summarized as follows:
June 30, December 31,
1999 1998
----------- -----------
Raw materials $ 811,590 $ 1,296,842
Work in progress 837,165 624,843
Finished goods 1,474,037 1,058,567
----------- -----------
$ 3,122,792 $ 2,980,252
=========== ===========
3. Series B Convertible Preferred Stock
In December 1998, the Company completed a private placement of 500 shares of
Series B Convertible Preferred Stock, $.01 par value, to three purchasers, for
an aggregate purchase price of $5,000,000. Each share has a stated value of
$10,000, and each shareholder is entitled to a 6% return per annum, which is
being accounted for as a cumulative dividend and will be payable on conversion
in cash or the Company's Common Stock at the Company's option. The holders of
the Series B Convertible Preferred Stock can convert it into Common Stock at the
lower of (i) 92.84% of the average of the five lowest closing sales prices in
the 40 trading days immediately preceding the conversion or (ii) $6.67. The
conversion price as of August 9, 1999 was $1.01544. The Company can require
holders of the Series B Convertible Preferred Stock to convert it into Common
Stock at any time between March 1, 1999 and August 28, 1999 if the closing price
of the Company's Common Stock exceeds 200% of the maximum conversion price for
20 consecutive trading days. After August 28, 1999, the Company can require
holders of the Series B Convertible Preferred Stock to convert to Common Stock
if the closing price of the Company's Common Stock exceeds 150% of the maximum
conversion price for 20 consecutive days. Holders of the Series B Convertible
Preferred Stock will be required to convert their shares on December 17, 2001,
if they have not converted prior to that time.
6
<PAGE>
Enamelon, Inc.
Notes to the Financial Statements
(unaudited) (continued)
3. Series B Convertible Preferred Stock (continued)
Under the Series B Convertible Preferred Stock certificate of designations, no
selling securityholder can convert Series B Convertible Preferred Stock to the
extent such conversion would cause such selling securityholder's beneficial
ownership of Common Stock (other than shares deemed beneficially owned through
ownership of unconverted shares of Series B Convertible Preferred Stock) to
exceed 4.99% of the outstanding shares of Common Stock. In addition, the Company
is not required to issue shares of Common Stock on conversion of Series B
Convertible Preferred Stock if any holder, together with its affiliates, (1)
would beneficially own more than 10% of the outstanding Common Stock after
conversion and (2) would have acquired more than 10% of the Common Stock in the
60-day period ending on the date of conversion.
As of August 9, 1999 there were 238 shares of Series B Convertible Preferred
Stock outstanding and the Company has issued 2,336,396 shares of Common Stock
for the conversion of 262 shares of Series B Convertible Preferred Stock,
including 198 shares since June 30, 1999, plus accrued dividends of $87,220,
including $67,433 since June 30, 1999.
4. Restructuring Charge
On June 4, 1999 the Company authorized and announced organizational changes to
refocus the Company's marketing efforts and reduce overhead to lower its
operating costs. In connection with these organizational changes, the Company
recorded a $1 million restructuring charge. This charge includes approximately
$782,000 for anticipated costs related to ceasing operations in leased
facilities which are not currently being fully used, $166,000 for penalty costs
related to the early termination of contractual obligations, and $52,000 for
costs incurred in connection with the termination of approximately 20 employees.
The Company anticipates the restructuring plan to be completed by the end of
2000.
5. Recent Accounting Standards
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, as amended, is effective in the year
2001; but is not expected to affect the Company.
6. Subsequent Event
On July 29, 1999, the Company entered into a three-year, $7,500,000
million credit facility (the "Facility") from a finance company. The
Facility consists of a $1,000,000 term loan (the "Initial Term Loan"), a
$2,500,000 line to be used for future capital expenditures (the
"Additional Term Loans"), and $4,000,000 (plus any unused portion of the
Initial Term Loan and the Additional Term Loans) as a revolving line of
credit (the "Revolver") based upon eligible accounts receivable and
inventory. Availability of the Additional Term Loans, as well as
availability under the Revolver based upon eligible inventory, are
conditioned upon the Company securing equity financing of at least
$5,000,000. All borrowings under the Facility bear interest at the prime
rate (8.0% at August 9, 1999) plus 1.5%, subject to a minimum borrowing
level of $2,000,000. If the Company does not secure equity financing of
at least $5,000,000 by November 26, 1999, the lender can increase the
interest rate to the prime rate plus 2.0%. The Facility is secured by a
lien on the Company's assets. As of August 9, 1999, maximum available
borrowings, and actual borrowings, under the Facility totaled
approximately $2,000,000.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 national distribution of Enamelon(R) all-family toothpaste
began in the first quarter of 1998, and the Company emerged from the
development stage at that time. During the second quarter of 1999, the
Company introduced its second product, Enamelon(R) Calcium Whitening
System(TM) toothpaste. On June 4, 1999, the Company announced organizational
changes to refocus its marketing efforts and reduce its overhead with
the intention of lowering operating costs. The Company will change the
balance of its marketing efforts, with increased focus on targeting
dental professionals to increase their awareness of its products and
reduced focus on consumer mass media. The Company also plans to
concentrate its research and development expenditures on obtaining the
American Dental Association Seal of Approval for its all-family
toothpaste and continuing clinical studies of its remineralization
technology. Consistent with this reorganization, the Company reduced its
staff from 50 employees to approximately 30 employees. The Company
believes that these actions will help it approach break even on a cash
basis, which should enhance its opportunities to obtain additional
financing. The Company expects to continue to incur operating losses
through 2000 and will require additional financing to continue operating
at its current level. The Company is actively seeking financing from a
variety of sources. There can be no assurances that the Company will be
able to obtain additional financing to fund its operations. If adequate
funds are not available, then the Company may be required to further
reduce the scope of operations or cease operating entirely.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales for the three months ended June 30, 1999 were approximately
$5,525,000 compared to approximately $2,338,000 for the same period in 1998. The
increase in sales is the result of the national distribution and growing
customer acceptance of the Company's toothpaste products resulting from
coordinated marketing efforts, successful coupon events, as well as other
promotional programs that were expanded in early 1999. In addition, during the
second quarter of 1999, the Company launched its second product,
Enamelon(R) Calcium Whitening System(TM) toothpaste. As a result of the
Company's refocused marketing and cost reduction strategy, the Company
anticipates that there will be a concomitant reduction in sales.
Gross profit earned for the three months ended June 30, 1999 was
approximately $3,304,000 compared to approximately $1,086,000 for the same
period in 1998. The improved gross profit for the quarter ended June 30, 1999
was the result of higher sales, lower product cost resulting from manufacturing
efficiencies, and reduced raw material and packaging costs due to increased
volume. As a result of the Company's refocused marketing and cost reduction
strategy, there can be no assurance that the Company will sustain these gross
profit levels if current sales levels are not sustained.
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Total operating expenses were approximately $10,253,000 for the three
months ended June 30, 1999, compared to approximately $11,628,000 for the same
period in 1998. This decrease of approximately $1,376,000 was primarily the
result of lower marketing and selling expenses of $2,650,000 and lower research
and testing expenses of $102,000, offset by increased administrative and other
expenses of $376,000 and a restructuring charge of $1,000,000.
Marketing and selling expenses decreased from approximately $9,715,000
for the three months ended June 30, 1998 to approximately $7,065,000 for the
same period in 1999, primarily as a result of a decrease in advertising and
promotion expenses. The Company's revised marketing strategy includes focusing
its marketing efforts to target the dental community, while reducing consumer
advertising and media spending. By targeting dental professionals the Company
intends to increase the number of dentists and hygienists recommending its
products, with the expectation that this will drive consumer demand. The Company
intends to align its marketing expenditures to be consistent with its
anticipated sales levels.
Research and testing expenses decreased from approximately $835,000 for
the three months ended June 30, 1998 to approximately $733,000 for the same
period in 1999, primarily as a result of confining the Company's research and
testing expenditures primarily to obtaining the American Dental Association's
seal of approval for its all-family toothpaste and continuing clinical studies
of its remineralization technology. The Company will continue to limit its
personnel and overhead expenses associated with research and testing programs.
Administrative and other expenses increased from approximately
$1,078,000 for the three months ended June 30, 1998 to approximately $1,454,000
for the same period in 1999, primarily as a result of increased payroll and
benefits, consulting, and other administrative office expenses which resulted
from the Company's increased operations.
The Company recorded a restructuring charge of $1,000,000 in the three
months ended June 30, 1999 for costs related to implementing the organizational
changes discussed above. These costs include approximately $782,000 for
anticipated costs associated with ceasing operations in leased facilities which
are not currently being fully used, $166,000 for penalty costs related to the
early termination of contractual obligations, and $52,000 for costs incurred in
connection with the termination of approximately 20 employees. The Company
anticipates the restructuring plan to be completed by the end of 2000.
Interest and dividend income decreased from approximately $462,000 for
the three months ended June 30,1998 to approximately $64,000 for the same period
in 1999, primarily as a result of cash used to fund the Company's operations.
The Company will begin to record interest expense as a result of a new credit
facility agreement. Borrowings outstanding under the credit facility will bear
interest at the prime rate plus 1.5%, subject to a minimum borrowing level of
$2,000,000. If the Company does not secure equity financing of at least
$5,000,000 by November 26, 1999, the lender has the right to increase the
interest rate to the prime rate plus 2%.
Accrued dividends on preferred stock of $83,829 for the three months
ended June 30, 1999 relate to the $5,000,000 Series B Preferred Stock offering
in December 1998 which accrue at an annual rate of 6%. The Company anticipates a
reduction in accrued dividends as result of the conversions of the Series B
Convertible Preferred Stock. As of August 9, 1999 there were 238 shares of
Series B Convertible Preferred Stock outstanding.
9
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales for the six months ended June 30, 1999 were
approximately $11,328,000 compared to approximately $4,051,000 for the
same period in 1998. The increase in sales is the result of the national
distribution and growing customer acceptance of the Company's toothpaste
resulting from coordinated marketing efforts, successful coupon events,
as well as other promotional programs that were expanded in early 1999.
In addition, during the second quarter of 1999, the Company launched its
second product, Enamelon(R) Calcium Whitening System(TM) toothpaste. As
a result of the Company's refocused marketing and cost reduction
strategy, the Company anticipates that there will be a concomitant
reduction in sales.
Gross profit earned for the six months ended June 30, 1999 was
approximately $6,828,000 compared to approximately $1,791,000 for the same
period in 1998. The improved gross profit for the six months ended June 30, 1999
was the result of higher sales, lower product cost resulting from manufacturing
efficiencies, and reduced raw material and packaging costs due to increased
volume. As a result of the Company's refocused marketing and cost reduction
strategy, there can be no assurance that the Company will sustain these gross
profit levels if current sales levels are not sustained.
Total operating expenses were approximately $21,994,000 for the six
months ended June 30, 1999, compared to approximately $16,792,000 for the same
period in 1998. This increase of approximately $5,202,000 was the result of
higher marketing and selling expenses of $3,472,000, higher research and testing
expenses of $20,000, higher administrative and other expenses of $710,000, and a
restructuring charge of $1,000,000.
Marketing and selling expenses increased from approximately $13,280,000
for the six months ended June 30, 1998 to approximately $16,752,000 for the same
period in 1999, primarily as a result of increased advertising and promotion
expenses in the first quarter of 1999 to continue launching the Company's
toothpaste product into the national market. Increased marketing and selling
expenses are primarily attributable to consumer and trade programs for the all
family and whitening toothpaste, which include: consumer advertising and media,
coupons, trade displays and promotion. Expenses also increased as a result of
increased sales and increased distribution levels over the same period in 1998.
Research and testing expenses increased from approximately $1,519,000
for the six months ended June 30, 1998 to approximately $1,539,000 for the same
period in 1999, primarily as a result of additional personnel and overhead
expenses associated with the Company's research and development programs.
Administrative and other expenses increased from approximately
$1,993,000 for the six months ended June 30, 1998 to approximately $2,703,000
for the same period in 1999, primarily as a result of increased payroll and
benefits, consulting, and other administrative office expenses which resulted
from the Company's expanded operations.
The Company recorded a restructuring charge of $1,000,000 in the six
months ended June 30, 1999 for costs related to implementing the organizational
changes discussed above. These costs include approximately $782,000 for
anticipated costs associated with ceasing operations in leased facilities which
are not currently being fully used, $166,000 for penalty costs related to the
early termination of contractual obligations, and $52,000 for costs incurred in
connection with the termination of approximately 20 employees. The Company
anticipates the restructuring plan to be completed by the end of 2000.
10
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Interest and dividend income decreased from $973,000 for the
six months ended June 30, 1998 to $227,000 for the same period in 1999,
primarily as a result of cash used to fund the Company's operations. The
Company will begin to record interest expense as a result of a new
credit facility agreement. Borrowings outstanding under the credit
facility will bear interest at the prime rate plus 1.5%, subject to a
minimum borrowing level of $2,000,000. If the Company does not secure
equity financing of at least $5,000,000 by November 26, 1999,
outstanding borrowings will bear interest at the prime rate plus 2%.
Accrued dividends on preferred stock of $158,829 for the six months
ended June 30, 1999 is a result of the $5,000,000 Preferred Stock offering in
December 1998 which accrue at an annual rate of 6%. The Company anticipates a
reduction in accrued dividends as result of the conversions of the Series B
Convertible Preferred Stock. As of August 9, 1999 there were 238 shares of
Series B Convertible Preferred Stock outstanding.
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, and public offerings of Common Stock totaling approximately
$56,900,000, net of expenses, and a private placement of Series B Convertible
Preferred Stock totaling approximately $4,833,000, net of expenses. At June 30,
1999, the Company had cash, cash equivalents, and marketable securities totaling
approximately $2,450,000 and a working capital deficit of $1,465,000. The
Company had no outstanding debt (other than accounts payable and accrued
expenses) or available lines of credit as of June 30, 1999.
On July 29, 1999, the Company entered into a three-year, $7,500,000
million credit facility (the "Facility") from a finance company. The Facility
consists of a $1,000,000 term loan (the "Initial Term Loan"), a $2,500,000 line
to be used for future capital expenditures (the "Additional Term Loans"), and
$4,000,000 (plus any unused portion of the Term Loan) as a revolving line of
credit (the "Revolver") based upon eligible accounts receivable and inventory.
Availability of the Additional Term Loans, as well as availability under the
Revolver based upon eligible inventory, are conditioned upon the Company
securing equity financing of at least $5,000,000. All borrowings under the
Facility bear interest at the prime rate (8.0% at August 9, 1999) plus 1.5%,
subject to a minimum borrowing level of $2,000,000. If the Company does not
secure equity financing of at least $5,000,000 by November 26, 1999, the lender
can increase the interest rate to the prime rate plus 2.0%. The Facility is
secured by a lien on the Company's assets. As of August 9, 1999, maximum
available borrowings, and actual borrowings, under the Facility totaled
approximately $2,000,000.
Since its inception, and through June 30, 1999, the Company had
incurred losses aggregating approximately $59,515,000 and had available net
operating loss carry-forwards as of December 31, 1998 of approximately
$44,400,000. The net operating loss carry-forwards will expire if not used by
the period from 2007 through 2018 and may be limited by United States federal
tax law as a result of future changes in ownership. The Company expects to
continue to incur operating losses at least through 2000 while it continues
clinical testing and toothpaste marketing efforts.
11
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
From its inception through June 30, 1999 the Company had paid
approximately $3,502,000 for the purchase of equipment and approximately
$1,166,000 for costs associated with obtaining patents, trademarks and licensing
rights. If the Company obtains equity financing of at least $5 million, it will
have $2,500,000 of its credit facility available for future capital expenditure
requirements.
The Company presently has a substantial cash flow deficit and
will require significant additional financing to continue its operations
until it can generate positive cash flow from operations. It is actively
seeking additional financing through a variety of sources. There can be no
assurance, however, that the Company will be able to obtain such
additional financing. If the Company is unable to obtain additional
financing in the near future, it will be required to further curtail or
suspend its operations. Additional equity financing, if available, may
involve substantial dilution to existing stockholders.
Readiness for Year 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Year 2000 ("Y2K") issue refers to possible events resulting
directly or indirectly from the inability of digital computer equipment or
software to accurately and without interruption handle dates both before and
after January 1, 2000 and to process the year 2000 as a leap year. The Company
has reviewed its manufacturing and resource planning software and current
operating system and believes that they are Y2K compliant. The Company primarily
utilizes operating systems obtained from Microsoft, which the Company believes,
based on information provided by Microsoft, are Y2K compliant. The Company
believes that none of the Company's equipment is date sensitive or otherwise
uses embedded computer chips. Accordingly, the Company does not believe that
embedded chip technology will present any Y2K issues. However, the Company is
also checking its equipment to verify this as part of its overall Y2K program.
The Company expects that the costs of achieving internal Y2K compliance will not
have a material adverse impact on results of operations, liquidity or capital
resources.
The Company is in the process of formally contacting its suppliers to
identify any potential disruption in the supply of raw materials. Responses to
date have indicated that those suppliers do not anticipate encountering any
material Y2K issues. The Company expects to resolve any significant Y2K issues
before the occurrence of any business disruptions, although the Company has
limited or no control over the actions of the suppliers. However, the Company
believes that the supply of chemicals and raw materials used in its
manufacturing processes is unlikely to be significantly disrupted. In addition,
the Company, in the normal course of business, maintains adequate inventories of
such raw materials to protect against short-term delivery interruptions.
12
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
The risk to the Company resulting from the failure of customers and
other third parties to attain Y2K readiness is the same as other companies in
its industry or other business enterprises generally. The Company expects to
resolve any significant Y2K issues with customers before the occurrence of any
business disruptions, although the Company has limited or no control over the
actions of these customers. The Company expects to maintain adequate finished
goods inventories to protect customers against the possibility of temporary
service disruptions, if any.
The Company expects to find and adequately prepare for all significant
internal Y2K issues that could adversely affect its business operations. The
Company does not anticipate that the cost of resolving such 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 the Y2K 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. However, the
Company does not believe that it is possible to identify, with complete
certainty, all potential Y2K issues that may affect the Company, its suppliers,
or its customers. The Company expects that any disputes arising as a result of
such identified Y2K issues will be resolved in the normal course of business.
Effect of New Accounting Pronouncement
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, as
amended, is effective in the year 2001; but it is not expected to affect
the Company.
Forward-Looking Statements
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,
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; 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 Registration Statements on Forms S-1 and S-3 and in its Annual
Report on Form 10-KSB for the year ended December 31, 1998.
13
<PAGE>
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the three months ended June 30, 1999 the Company issued 5,877 shares of
common stock and granted warrants to purchase 1,176 shares of common stock
exercisable at $6.125 per share from January 1, 2000 through December 31, 2004,
to a corporation in consideration for certain advertising run in its publication
during the second quarter of 1999. The corporation represented that each of its
stockholders was an accredited investor. The Company relied on Sections 4(2) and
4(6) of the Securities Act of 1933 and Rule 506 under Regulation D of the
Securities Act for the exemption from registration in connection with the
issuance of such shares and warrants.
During the three months ended June 30, 1999, the Company issued 365 shares of
common stock to an individual consultant in consideration for services rendered
during the three months ended March 31, 1999. The consultant represented that he
was an accredited investor. The Company relied on Sections 4(2) and 4(6) of the
Securities Act of 1933 and Rule 506 under Regulation D of the Securities Act for
the exemption from registration in connection with the issuance of such shares.
During the three months ended June 30, 1999, the Company issued 402,005 shares
of common stock to the holders of its Series B Convertible Preferred stock upon
the conversion of 64 shares of Series B Convertible Preferred stock plus the 6%
accrual amount on such shares. The Company relied on Section 3(a)(9) of the
Securities Act for the exemption from registration in connection with the
issuance of such shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated June 4, 1999,
representing the restructuring of its business under Item 5.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Enamelon, Inc.
Date: August 16, 1999 By: /S/ Dr. Steven R. Fox
----------------------- ------------------------------------
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 By: /S/ Edwin Diaz
----------------------- ------------------------------------
Vice President - Finance,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Enamelon, Inc. Balance Sheet as of June 30, 1999 and the Condensed Statement of
Operations for the six months ended June 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 949,378
<SECURITIES> 1,500,125
<RECEIVABLES> 3,731,077
<ALLOWANCES> (145,312)
<INVENTORY> 3,122,792
<CURRENT-ASSETS> 9,490,258
<PP&E> 3,502,335
<DEPRECIATION> 988,608
<TOTAL-ASSETS> 13,258,167
<CURRENT-LIABILITIES> 10,954,864
<BONDS> 0
4,193,324
0
<COMMON> 10,696
<OTHER-SE> (1,900,717)
<TOTAL-LIABILITY-AND-EQUITY> 13,258,167
<SALES> 11,328,473
<TOTAL-REVENUES> 11,328,473
<CGS> 4,500,700
<TOTAL-COSTS> 4,500,700
<OTHER-EXPENSES> 21,994,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (226,852)
<INCOME-PRETAX> 14,939,583
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,939,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,939,583
<EPS-BASIC> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
