<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 September 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: 14,742,434 shares of common
stock, $.001 par value, as of November 12, 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>
September 30, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents .................................... $ 302,213 $ 13,146,989
Short-term investments ....................................... 506,737 5,028,805
Accounts receivable less allowance of $141,542 and $69,800 ... 2,501,441 3,076,595
Inventory .................................................... 2,492,677 2,980,252
Prepaid expenses and other current assets .................... 631,632 520,205
------------ ------------
Total current assets ..................................... 6,434,700 24,752,846
Equipment, less accumulated depreciation of $1,121,950
and $630,370 ................................................. 2,380,384 2,783,334
Intangible assets, less accumulated amortization of $151,041
and $103,515 ................................................. 1,047,276 827,263
Other assets ................................................... 223,000 158,670
------------ ------------
Total assets ................................................... $ 10,085,360 $ 28,522,113
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ............................ $ 1,338,585 $ --
Accounts payable ............................................. 2,898,804 3,497,888
Accrued expenses ............................................. 4,057,637 7,832,903
------------ ------------
Total current liabilities ................................ 8,295,026 11,330,791
------------ ------------
Long-term debt, less current portion ........................... 783,333 --
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value - shares authorized
5,000,000; issued and outstanding 113 and 500 Series B ..... -- --
Series B Convertible Preferred stock, $0.01 par value - shares
authorized 500; issued and outstanding 113 and 500 ......... 963,324 4,833,324
Common stock, $0.001 par value - shares authorized
50,000,000; issued and outstanding 10,241,739
and 14,013,677 ............................................. 14,014 10,242
Additional paid-in capital ................................... 61,157,467 56,923,114
Accumulated deficit .......................................... (61,127,804) (44,575,358)
------------ ------------
Total stockholders' equity ............................... 1,007,001 17,191,322
------------ ------------
Total liabilities and stockholders' equity ..................... $ 10,085,360 $ 28,522,113
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Enamelon, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- --------------------------------------------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 3,056,016 $ 4,943,965 $ 14,384,489 $ 8,994,921
Cost of sales ..................................... 1,279,503 2,286,882 5,780,203 4,546,899
------------ ------------ ------------ ------------
Gross profit ................................... 1,776,513 2,657,083 8,604,286 4,448,022
------------ ------------ ------------ ------------
Operating expenses:
Marketing and selling ........................... 2,127,777 10,749,269 18,879,333 24,028,850
Research and testing ............................ 410,528 794,796 1,949,696 2,313,887
Administrative and other ........................ 625,120 1,062,629 3,328,604 3,056,207
Restructuring charge ............................ -- -- 1,000,000 --
------------ ------------ ------------ ------------
Total operating expenses ...................... 3,163,425 12,606,694 25,157,633 29,398,944
------------ ------------ ------------ ------------
Operating loss .................................... (1,386,912) (9,949,611) (16,553,347) (24,950,922)
Interest and dividend (expense) income ............ (31,904) 343,948 194,948 1,317,031
------------ ------------ ------------ ------------
Net loss .......................................... (1,418,816) (9,605,663) (16,358,399) (23,633,891)
Accrued dividends on preferred stock .............. 35,218 -- 194,047 --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders ........ $ (1,454,034) $ (9,605,663) $(16,552,446) $(23,633,891)
============ ============ ============ ============
Net loss per common share, basic .................. $ (0.11) $ (0.94) $ (1.49) $ (2.33)
============ ============ ============ ============
Weighted average common shares outstanding, basic . 12,762,998 10,233,124 11,102,039 10,140,283
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Enamelon, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------- ------------ 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) (387) (3,870,000) 3,713,866 3,714 4,007,208 -- 140,922
Issuance of common stock for
services rendered (unaudited) ......... -- -- 19,172 19 110,484 -- 110,503
Accrued preferred stock
dividends (unaudited) ................. -- -- -- -- -- (194,047) (194,047)
Net loss (unaudited) .................... -- -- -- -- -- (16,358,399) (16,358,399)
---- ----------- ---------- ------- ----------- ------------ ------------
Balance, September 30, 1999 (unaudited) . 113 $ 963,324 14,013,677 $14,014 $61,157,467 $(61,127,804) $ 1,007,001
==== =========== ========== ======= =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Enamelon, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
- ----------------------------------------------------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (1,418,816) $(9,605,663) $(16,358,399) $(23,633,891)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for services rendered .................. 36,597 -- 110,503 --
Depreciation and amortization ....................... 151,046 131,649 539,106 355,264
Loss on disposal of furniture and fixtures .......... -- 37,178 -- 37,178
Changes in operating assets and liabilities:
Decrease in investments ........................... 993,388 4,735,925 4,522,068 802,999
Decrease (increase) in accounts receivable ........ 1,084,324 (2,088,749) 575,154 (3,494,856)
Decrease (increase) in inventory .................. 630,115 1,110,050 487,575 (1,938,294)
(Increase) decrease in prepaids and other assets .. (300,910) 11,920 (175,757) (242,530)
(Decrease) increase in accounts payable
accrued expenses ................................ (3,884,014) 787,079 (4,219,180) 9,748,992
------------ ------------ ------------ ------------
Net cash used in operating activities ......... (2,708,270) (4,880,611) (14,518,930) (18,365,138)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of equipment .................................. -- (91,819) (88,630) (695,187)
Investments in intangible assets ........................ (32,321) (67,202) (267,539) (360,962)
------------ ------------ ------------ ------------
Net cash used in investing activities ......... (32,321) (159,021) (356,169) (1,056,149)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable ............................. 3,129,421 -- 3,129,421 --
Repayment of notes payable .............................. (1,007,503) -- (1,007,503) --
Proceeds from issuances of common stock ................. -- 70,044 116,700 654,252
Offering costs .......................................... (28,492) -- (208,295) (45,350)
------------ ------------ ------------ ------------
Net cash provided by financing activities ..... 2,093,426 70,044 2,030,323 608,902
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents ................. (647,165) (4,969,588) (12,844,776) (18,812,385)
Cash and cash equivalents, beginning of period ............ 949,378 7,782,157 13,146,989 21,624,954
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period .................. $ 302,213 $ 2,812,569 $ 302,213 $ 2,812,569
============ ============ ============ ============
Supplemental disclosure of non-cash transactions:
Accrual of preferred stock dividends .................... $ 35,218 $ -- $ 194,047 $ --
============ ============ ============ ============
Issuance of common stock / reduction in accrued dividends $ 121,135 $ -- $ 140,922 $ --
============ ============ ============ ============
</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 September
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:
September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 665,441 $1,296,842
Work in progress 680,189 624,843
Finished goods 1,147,047 1,058,567
---------- ----------
$2,492,677 $2,980,252
========== ==========
3. Long-term Debt
Long-term debt is comprised of the following:
September 30,
1999
------------
Revolver $ 1,138,585
Initial term loan 983,333
------------
Total long-term debt 2,121,918
Less: current portion (1,338,585)
------------
$ 783,333
============
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 (8.25% at
September 30, 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 substantially all
of the Company's assets. As of November 12 1999, maximum available borrowings,
and actual borrowings, under the Facility totaled approximately $1,800,000.
6
<PAGE>
Enamelon, Inc.
Notes to the Financial Statements
(unaudited) (continued)
4. 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 November 12, 1999 was $0.3232. 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 trading 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.
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 November 12, 1999 there were 70 shares of Series B Convertible Preferred
Stock outstanding and the Company had issued 4,442,623 shares of Common Stock
upon the conversion of 430 shares of Series B Convertible Preferred Stock,
including 43 shares since September 30, 1999, plus accrued dividends of $162,435
including $21,513 since September 30, 1999.
5. 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.
As of September 30, 1999, the remaining accrued restructuring charge was
approximately $747,000. The Company anticipates the restructuring plan to be
completed by the end of 2000.
6. 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 2001; but
it is not expected to affect the Company.
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 has changed 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, and may be required to seek protection
under federal bankruptcy laws.
Results of Operations
Three Months ended September 30, 1999 Compared to Three Months ended September
30, 1998
Net sales for the three months ended September 30, 1999 were approximately
$3,056,000 compared to approximately $4,944,000 for the same period in 1998. The
reduction is sales is the result of the Company's refocused marketing and cost
reduction strategy. 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 September 30, 1999 was
approximately $1,777,000 compared to approximately $2,657,000 for the same
period in 1998. The reduction in gross profit is related to the decrease in
sales resulting from the Company's refocused marketing and cost reduction
strategy. There can be no assurance that the Company will sustain current gross
profit levels if current sales levels are not sustained.
Total operating expenses were approximately $3,164,000 for the three
months ended September 30, 1999, compared to approximately $12,607,000 for the
same period in 1998. This decrease of approximately $9,443,000 was the result of
lower marketing and selling expenses of $8,621,000, lower research and testing
expenses of $384,000, and lower administrative and other expenses of $438,000.
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Marketing and selling expenses decreased from approximately $10,749,000
for the three months ended September 30, 1998 to approximately $2,128,000 for
the same period in 1999, primarily as a result of decreased 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 $795,000 for
the three months ended September 30, 1998 to approximately $411,000 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 decreased from approximately $1,063,000
for the three months ended September 30, 1998 to approximately $625,000 for the
same period in 1999, primarily as a result of the Company's organizational
changes to reduce overhead. The reduction is primarily attributable to reduced
consulting, salaries and administrative office expenses.
Interest and dividend (expense)/income decreased from income of
approximately $344,000 for the three months ended September 30, 1998 to expense
of approximately $32,000 for the same period in 1999, primarily as a result of
the decrease in cash used to fund the Company's operations, and interest expense
incurred in connection with the Company's new credit facility agreement.
Borrowings outstanding under the credit facility 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%. As of November 12, 1999, maximum available borrowings, and actual
borrowings, under the Facility totaled approximately $1,800,000.
Accrued dividends of approximately $35,000 for the three months ended
September 30, 1999 resulted from the 6% annual accrual amount on the Series B
Convertible Preferred Stock issued in December 1998. The Company anticipates a
reduction in accrued dividends as a result of the conversions of the Series B
Convertible Preferred Stock. As of November 12, 1999, there were 70 shares of
Series B Convertible Preferred Stock outstanding.
Nine Months ended September 30, 1999 Compared to Nine Months ended September 30,
1998
Net sales for the nine months ended September 30, 1999 were approximately
$14,384,000 compared to approximately $8,995,000 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.
9
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Gross profit earned for the nine months ended September 30, 1999 was
approximately $8,604,000 compared to approximately $4,448,000 for the same
period in 1998. The improved gross profit for the nine months ended September
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 $25,158,000 for the nine
months ended September 30, 1999, compared to approximately $29,399,000 for the
same period in 1998. This decrease of approximately $4,241,000 was the result of
lower marketing and selling expenses of $5,149,000 and lower research and
testing expenses of $364,000, offset by higher administrative and other expenses
of $272,000 and a restructuring charge of $1,000,000.
Marketing and selling expenses decreased from approximately $24,029,000
for the nine months ended September 30, 1998 to approximately $18,880,000 for
the same period in 1999, primarily as a result of 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 $2,314,000 for
the nine months ended September 30, 1998 to approximately $1,950,000 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 $3,056,000
for the nine months ended September 30, 1998 to approximately $3,328,000 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. As a result of the Company's organization
changes, the Company expects to continue to reduce its personnel and overhead
expenses.
The Company recorded a restructuring charge of $1,000,000 in the nine
months ended September 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.
As of September 30, 1999, the remaining accrued restructuring charge was
approximately $747,000. 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 approximately $1,317,000 for
the nine months ended September 30, 1998 to approximately $195,000 for the same
period in 1999, primarily as a result of cash used to fund the Company's
operations, and interest expense incurred in connection with the Company's new
credit facility agreement. Borrowings outstanding under the credit facility 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 of approximately $194,000 for the nine months ended
September 30, 1999 resulted from the 6% annual accrual amount on the Series B
Convertible Preferred Stock issued in December 1998. The Company anticipates a
reduction in accrued dividends as a result of the conversions of the Series B
Convertible Preferred Stock. As of November 12, 1999 there were 70 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, 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 September 30, 1999, the
Company had cash, cash equivalents, and marketable securities totaling
approximately $809,000 and a working capital deficit of approximately
$1,860,000. The Company is currently seeking financing to meet its future cash
requirements.
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 (8.25% at September 30, 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 November 12, 1999, maximum
available borrowings, and actual borrowings, under the Facility totaled
approximately $1,800,000.
Since its inception, and through September 30, 1999, the Company had
incurred losses aggregating approximately $60,934,000 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 September 30, 1999 the Company had paid
approximately $3,502,000 for the purchase of equipment and approximately
$1,198,000 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, and may be required to seek
protection under federal bankruptcy laws. 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 has contacted 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.
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.
12
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
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
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 September 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 October 1, 2000 through September 30, 2005,
to a corporation in consideration for certain advertising run in its publication
during the third 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 September 30, 1999, the Company issued 480 shares
of common stock to an individual consultant in consideration for services
rendered during the three months ended June 30, 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 September 30, 1999, the Company issued 3,311,861
shares of common stock to the holders of its Series B Convertible Preferred
stock upon the conversion of 323 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.
During the three months ended September 30, 1999 the Company granted warrants to
purchase 75,000 shares of common stock exercisable at $2.07 per share from July
29, 1999 through July 29, 2004, to a finance company in connection with the
execution of a credit facility agreement. The corporation represented that it
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
warrants.
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 July 29, 1999,
announcing its three-year, $7.5 million credit facility from a finance company.
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: November 12, 1999 By: /S/ Dr. Steven R. Fox
----------------- -----------------------------------
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 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 September 30, 1999 and the Condensed
Statement of Operations for the nine months ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 302,213
<SECURITIES> 506,737
<RECEIVABLES> 2,642,983
<ALLOWANCES> 141,542
<INVENTORY> 2,492,677
<CURRENT-ASSETS> 6,434,700
<PP&E> 3,502,334
<DEPRECIATION> 1,121,950
<TOTAL-ASSETS> 10,085,360
<CURRENT-LIABILITIES> 8,295,026
<BONDS> 0
963,324
0
<COMMON> 14,014
<OTHER-SE> 29,663
<TOTAL-LIABILITY-AND-EQUITY> 10,085,360
<SALES> 14,384,489
<TOTAL-REVENUES> 14,384,489
<CGS> 5,780,203
<TOTAL-COSTS> 5,780,203
<OTHER-EXPENSES> 25,157,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (194,948)
<INCOME-PRETAX> (16,358,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,358,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,358,399)
<EPS-BASIC> (1.49)
<EPS-DILUTED> (1.49)
</TABLE>
