<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 March 31, 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.)
15 Kimball Avenue
Yonkers, New York 10704
(Address of principal executive offices)
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
Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 10,289,536 shares of common
stock, $.001 par value, as of May 3, 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>
March 31, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents ........................................................... $ 5,028,308 $ 13,146,989
Short-term investments .............................................................. 3,057,488 5,028,805
Accounts receivable less allowance of $103,279 and $69,800 .......................... 4,346,784 3,076,595
Inventory ........................................................................... 3,431,844 2,980,252
Prepaid expenses and other assets ................................................... 421,428 520,205
------------ ------------
Total current assets ........................................................... 16,285,852 24,752,846
Equipment, less accumulated depreciation of $763,938
and $630,370 ........................................................................ 2,716,770 2,783,334
Intangible assets, less accumulated amortization of $117,759
and $103,515 ........................................................................ 903,739 827,263
Other assets .......................................................................... 158,670 158,670
------------ ------------
Total assets .......................................................................... $ 20,065,031 $ 28,522,113
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................................... $ 3,465,916 $ 3,497,888
Accrued expenses .................................................................... 7,384,779 7,832,903
------------ ------------
Total current liabilities ....................................................... 10,850,695 11,330,791
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value - shares
authorized 5,000,000; none issued or outstanding .................................. -- --
Series B Convertible Preferred stock, .$.01 par value-
shares authorized 500; issued and outstanding 500 ................................. 4,833,324 4,833,324
Common stock, $0.001 par value - shares authorized
30,000,000; issued and outstanding; 10,287,212
and 10,241,739 .................................................................... 10,287 10,242
Additional paid-in capital .......................................................... 57,075,763 56,923,114
Accumulated deficit ................................................................. (52,705,038) (44,575,358)
------------ ------------
Total stockholders' equity ...................................................... 9,214,336 17,191,322
------------ ------------
Total liabilities and stockholders' equity ............................................ $ 20,065,031 $ 28,522,113
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Enamelon, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
- ------------------------------------------------- ------------ ------------
<S> <C> <C>
Net sales ....................................... $ 5,803,406 $ 1,713,410
Cost of sales ................................... 2,279,340 1,009,032
------------ ------------
Gross profit ................................. 3,524,066 704,378
------------ ------------
Operating expenses:
Marketing and selling ......................... 9,685,924 3,564,247
Research and testing .......................... 806,096 684,145
Administrative and other ...................... 1,249,440 915,401
------------ ------------
Total operating expenses .................... 11,741,460 5,163,793
------------ ------------
Operating loss .................................. (8,217,394) (4,459,415)
Interest and dividend income .................... 162,714 511,073
------------ ------------
Net loss ........................................ (8,054,680) (3,948,342)
Accrued dividends on preferred stock ............ 75,000 --
------------ ------------
Net loss applicable to common stockholders ...... $ (8,129,680) $ (3,948,342)
============ ============
Net loss per common share, basic ................ $ (0.79) $ (0.39)
============ ============
Weighted average common shares outstanding, basic 10,262,041 10,026,704
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
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
Issuance of common stock for
services rendered (unaudited) ....... -- -- 6,573 6 35,988 -- 35,994
Accrued preferred stock
dividends (unaudited) ............... -- -- -- -- -- (75,000) (75,000)
Net loss (unaudited) .................. -- -- -- -- -- (8,054,680) (8,054,680)
------- ---------- ---------- -------- ------------ ------------ ------------
Balance, March 31, 1999 (unadudited) .. 500 4,833,324 10,287,212 $ 10,287 $ 57,075,763 $(52,705,038) $ 9,214,336
======= ========== ========== ======== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Enamelon, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998
- ----------------------------------------------------------- ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (8,054,680) $ (3,948,342)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Stock issued for services rendered .................. 35,994 --
Depreciation and amortization ....................... 147,810 96,513
Changes in operating assets and liabilities:
Decrease (increase) in investments ................ 1,971,317 (10,800,676)
Increase in accounts receivable ................... (1,270,189) (823,916)
Increase in inventory ............................. (451,592) (1,252,111)
Decrease in prepaid expenses and other assets ..... 98,777 9,289
(Decrease) increase in accounts payable
and accrued expenses ............................ (469,179) 2,424,724
------------ ------------
Net cash used in operating activities ......... (7,991,742) (14,294,519)
------------ ------------
Cash flows from investing activities:
Purchases of equipment .................................. (67,002) (426,595)
Investments in intangible assets ........................ (90,720) (199,901)
------------ ------------
Net cash used in investing activities ......... (157,722) (626,496)
------------ ------------
Cash flows from financing activities:
Proceeds from issuances of common stock ................. 116,700 368,962
Offering costs .......................................... (85,917) (45,350)
------------ ------------
Net cash provided by financing activities ..... 30,783 323,612
------------ ------------
Net decrease in cash and cash equivalents ................. (8,118,681) (14,597,403)
Cash and cash equivalents, beginning of period ............ 13,146,989 21,624,954
------------ ------------
Cash and cash equivalents, end of period .................. $ 5,028,308 $ 7,027,551
============ ============
</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 March 31, 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
<TABLE>
<CAPTION>
Inventory is summarized as follows: March 31, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Raw materials $ 1,275,207 $ 1,296,842
Work in progress
622,168 624,843
Finished goods 1,534,469 1,058,567
---------------- ----------------
$ 3,431,844 $ 2,980,252
================ ================
</TABLE>
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 ended March 31, 1999
and 1998 was calculated by dividing net loss by the weighted average number of
common shares outstanding, which amounted to 10,262,041 and 10,026,704
respectively. Diluted loss per share has not been presented since the effect of
dilutive shares is antidilutive in both periods.
4. Recent Accounting Standards
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective in the year 2000 but is not
expected to affect the Company.
6
<PAGE>
Item 2. Management's Discussion and Analysis and 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 all-family toothpaste began
in the first quarter of 1998, and the Company emerged from the development stage
at that time. The Company expects to continue to incur operating losses through
2000 and will require additional financing by mid-year 1999. The Company has
retained an investment banking firm to assist it in obtaining additional
financing to meet its future cash requirements. 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 reduce
the scope of operations.
Results of Operations
Three Months ended March 31, 1999 Compared to Three Months ended March 31, 1998
Net sales for the three months ended March 31, 1999 were approximately
$5,803,000 compared with approximately $1,713,000 for the three months ended
March 31, 1998. The increase in sales is the result of the national distribution
and growing customer acceptance of the Company's toothpaste as a result of
coordinated marketing efforts, including television and radio advertising,
successful coupon events as well as other promotional programs that were
expanded in 1999. While the Company will continue its marketing efforts, there
can be no assurance that the Company will sustain these or future increased
sales levels.
Gross profit earned for the three months ended March 31, 1999 was
approximately $3,524,000 compared with approximately $704,000 for the same
period in 1998. The improved gross profit for the quarter ended March 31, 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. The Company believes that the gross profit margin can be sustained or
further improved as production levels increase as a result of manufacturing
efficiencies, and if the sales volume levels are sustained.
Total operating expenses were approximately $11,741,000 for the three
months ended March 31, 1999, compared to approximately $5,164,000 for the same
period in the prior year, an increase of $6,578,000. This increase was primarily
the result of higher marketing and selling expenses, which increased by
$6,122,000, higher research and testing expenses, which increased by $122,000,
and higher administrative and other expenses, which increased by $334,000. The
Company anticipates that total expenses will continue to increase over the next
few years as the Company increases its product development, manufacturing and
marketing activities. Such increased business activities will require additional
personnel and payments to third parties.
7
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
Marketing and selling expenses increased from $3,564,000 in 1998 to
$9,686,000 in 1999 as a result of advertising and promotion expenses 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. The increase is
attributable to the increased sales and increased distribution levels over 1998.
Research and testing expenses increased from $684,000 in 1998 to
$806,000 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 $915,000 in 1998 to
$1,249,000 in 1999 primarily attributable to increased payroll and benefits,
consulting, and other administrative office expenses which resulted from the
Company's expanded operations.
Interest and dividend income decreased from $511,000 in 1998 to
$163,000 in 1999 as a result of cash used to fund the Company's operations.
Accrued dividends on preferred stock of $75,000 for the three months
ended March 31, 1999 is a result of the $5,000,000 Preferred Stock offering in
December 1998 which accrues interest at an annual rate of 6%.
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 March 31,
1999, the Company had cash and cash equivalents and marketable securities of
approximately $8,086,000 and working capital of $5,435,000. The Company had no
outstanding debt (other than accounts payable and accrued expenses) or available
lines of credit as of March 31, 1999.
Since its inception and through March 31, 1999, the Company had
incurred losses aggregating approximately $52,705,000 and had available net
operating loss carryforwards as of December 31, 1998 of approximately
$44,400,000. The net operating loss carryforwards 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 initial toothpaste marketing efforts.
Since its inception and through March 31, 1999 the Company had paid
approximately $3,481,000 for the purchase of equipment and approximately
$1,021,000 for costs associated with obtaining patents, trademarks and licensing
rights. The Company intends to use approximately $1,300,000 of its cash to
purchase additional manufacturing equipment for the production of the Company's
patented split system toothpaste tube, high-speed filling equipment, and
computer equipment and software to support operations.
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(continued)
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, 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. Under the Company's current plan, management estimates that cash
and cash equivalents on hand, together with its projected cash flow from
operations, if any, will be sufficient to finance its working capital and other
requirements through mid-1999. The Company has retained an investment banking
firm to assist it in obtaining additional financing, either through public or
private offerings, to meet its future cash requirements. Should such additional
financing not become available through the investment banking firm, management
believes that the Company can obtain additional financing through other sources
to continue its operations. There can be no assurance 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 reduce the scope of
operations.
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.
9
<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 is effective in the year 2000 but 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.
10
<PAGE>
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the three months ended March 31, 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
in during the first 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 March 31, 1999 the Company issued 696 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the quarter
ended March 31, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Enamelon, Inc.
Date: May 12, 1999 By: /S/ Dr. Steven R. Fox
--------------------- ------------------------------------
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1999 By: /S/ Edwin Diaz
--------------------- ------------------------------------
Vice President - Finance,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
enamelon, Inc. Balance Sheet as of March 31, 1999 and the Condensed Statement of
Operations for the three months ended March 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,028,308
<SECURITIES> 3,057,488
<RECEIVABLES> 4,450,063
<ALLOWANCES> (103,279)
<INVENTORY> 3,431,844
<CURRENT-ASSETS> 16,285,852
<PP&E> 3,480,706
<DEPRECIATION> 763,936
<TOTAL-ASSETS> 20,065,031
<CURRENT-LIABILITIES> 10,850,695
<BONDS> 0
4,833,324
0
<COMMON> 10,287
<OTHER-SE> 4,370,725
<TOTAL-LIABILITY-AND-EQUITY> 20,065,031
<SALES> 5,803,406
<TOTAL-REVENUES> 5,803,406
<CGS> 2,279,340
<TOTAL-COSTS> 2,279,340
<OTHER-EXPENSES> 11,741,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (162,714)
<INCOME-PRETAX> (8,054,680)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,054,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,054,680)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
