-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EUjc8xilJDeAnSXtwyiGOtLpHNbGG5IwCowfnUzbLupjyGucfI646mfCd3Wtgo1d olSjSi/QNMuKm2amNEXW0w== /in/edgar/work/20000814/0000912057-00-037236/0000912057-00-037236.txt : 20000921 0000912057-00-037236.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEPOMED INC CENTRAL INDEX KEY: 0001005201 STANDARD INDUSTRIAL CLASSIFICATION: [8731 ] IRS NUMBER: 943229046 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13111 FILM NUMBER: 698557 BUSINESS ADDRESS: STREET 1: 366 LAKESIDE DRIVE CITY: FOSTER CITY STATE: CA ZIP: 94404-1167 BUSINESS PHONE: 6505130990 MAIL ADDRESS: STREET 1: 1170 B CHESS DRIVE CITY: FOSTER CITY STATE: CA ZIP: 94404 10-Q 1 a10-q.txt 10-Q UNITED STATES 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER 000-23267 DEPOMED, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3229046 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1360 O'BRIEN DRIVE MENLO PARK, CALIFORNIA 94025 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (650) 462-5900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES [X] NO [ ] The number of issued and outstanding shares of the Registrant's Common Stock, no par value, as of July 28, 2000, was 7,189,363. DEPOMED, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements: PAGE ---- Balance Sheets at June 30, 2000 and December 31, 1999 ...................................... 3 Statements of Operations for the three-month and six-month periods ended June 30, 2000 and 1999, and for the period from inception (August 7, 1995) to June 30, 2000 ....................................................................... 4 Statements of Cash Flows for the six-month periods ended June 30, 2000 and 1999, and for the period from inception (August 7, 1995) to June 30, 2000 ....................................................................... 5 Notes to Financial Statements .............................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders...................................... 19 Item 6. Exhibits and Reports on Form 8-K ........................................................ 19 Signature ....................................................................................... 20
-2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
JUNE 30, 2000 DECEMBER 31, 1999 ----------------- ------------------ (UNAUDITED) (SEE NOTE 1) ASSETS Current assets: Cash and cash equivalents................................................. $ 2,621,286 $ 934,317 Marketable securities..................................................... 2,999,455 3,532,065 Receivable for capital stock.............................................. -- 17,015,000 Receivable from joint venture............................................. 585,562 -- Prepaid and other current assets.......................................... 121,550 169,385 ----------------- ------------------ Total current assets.............................................. 6,327,853 21,650,767 Property and equipment, net..................................................... 863,218 779,631 Other assets.................................................................... 293,756 4,467 ----------------- ------------------ $ 7,484,827 $ 22,434,865 ================= ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................................... $ 326,791 $ 219,675 Accrued compensation...................................................... 205,520 275,047 Other accrued liabilities................................................. 340,320 131,889 Payable to joint venture.................................................. 659,147 12,015,000 Capital lease obligation, current portion................................. 34,631 41,131 Long-term debt, current portion........................................... 130,863 123,042 ----------------- ------------------ Total current liabilities......................................... 1,697,272 12,805,784 Capital lease obligation, non-current portion................................... 36,090 53,952 Long-term debt, non-current portion............................................. 289,202 356,649 Commitments Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; Series A convertible exchangeable preferred stock; 25,000 shares designated, 12,015 and no shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively.................. 12,386,000 -- Common stock, no par value, 25,000,000 shares authorized; 7,189,363 and 6,475,077 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively.................. 19,731,149 14,797,072 Capital stock issuable.................................................... -- 17,015,000 Deferred compensation..................................................... (147,736) (282,184) Deficit accumulated during the development stage.......................... (26,496,082) (22,298,416) Accumulated other comprehensive loss...................................... (11,068) (12,992) ----------------- ------------------ Total shareholders' equity........................................ 5,462,263 9,218,480 ----------------- ------------------ $ 7,484,827 $ 22,434,865 ================= ==================
See accompanying notes to Financial Statements. -3- DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (UNAUDITED)
PERIOD FROM INCEPTION (AUGUST 7, 1995) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, TO ----------------------------- ------------------------------- JUNE 30, 2000 1999 2000 1999 2000 ----------- ------------- ------------- ------------- ---------------- Revenue: Collaborative agreements...................... $ -- $ -- $ -- $ 115,327 $ 1,801,312 Collaborative agreements with affiliates...... 585,562 -- 961,980 -- 961,980 ----------- ------------- ------------- ------------- ---------------- Total revenue................................. 585,562 -- 961,980 115,327 2,763,292 Operating expenses: Research and development................ 1,715,616 763,889 2,988,377 1,493,081 10,166,992 General and administrative.............. 494,483 479,781 997,076 967,972 6,344,022 Purchase of in-process research and development............. -- -- -- -- 298,154 ----------- ------------- ------------- ------------- ---------------- Total operating expenses...................... 2,210,099 1,243,670 3,985,453 2,461,053 16,809,168 ----------- ------------- ------------- ------------- ---------------- Loss from operations.......................... (1,624,537) (1,243,670) (3,023,473) (2,345,726) (14,045,876) Other income (expenses): Equity in loss of joint venture............... (659,961) -- (990,006) -- (13,005,006) Interest income, net.......................... 105,286 80,362 186,813 174,681 925,800 ----------- ------------- ------------- ------------- ---------------- Total other income (expenses)................. (554,675) 80,362 (803,193) 174,681 (12,079,206) ----------- ------------- ------------- ------------- ---------------- Net loss...................................... (2,179,212) (1,163,308) (3,826,666) (2,171,045) (26,125,082) Accretion of dividend on preferred stock...... (210,000) -- (371,000) -- (371,000) ----------- ------------- ------------- ------------- ---------------- Net loss applicable to common stock........... $(2,389,212) $ (1,163,308) $ (4,197,666) $ (2,171,045) $ (26,496,082) =========== ============= ============= ============== ================= Basic and diluted net loss per share.......... $ (0.33) $ (0.18) $ (0.59) $ (0.34) =========== ============= ============= ============== Shares used in computing basic and diluted net loss per share.......... 7,189,363 6,475,000 7,110,870 6,473,991 =========== ============= ============= ==============
See accompanying notes to Financial Statements. -4- DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIOD FROM INCEPTION SIX MONTHS ENDED JUNE 30, (AUGUST 7, 1995) ---------------------------------- TO 2000 1999 JUNE 30, 2000 ----------------- ---------------- ------------------ OPERATING ACTIVITIES Net loss..................................................................... $(3,826,666) $(2,171,045) $(26,125,082) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of joint venture.......................................... 990,006 -- 13,005,006 Depreciation and amortization............................................ 186,185 199,845 900,511 Accrued interest expense on notes........................................ -- -- 13,618 Amortization of deferred compensation.................................... 134,447 136,332 799,513 Value of stock options issued for services............................... 17,847 -- 43,897 Purchase of in-process research and development.......................... -- -- 298,154 Changes in assets and liabilities: Accounts receivable.................................................. -- 306,148 -- Accounts receivable from joint venture............................... (585,562) -- (585,562) Other current assets................................................. 47,835 33,360 (121,550) Other assets......................................................... (289,289) 34,404 (293,914) Accounts payable and other accrued liabilities....................... 315,547 (105,746) 667,111 Accrued compensation................................................. (69,527) 31,561 138,044 ----------------- ---------------- ------------------ Net cash used in operating activities........................ (3,079,177) (1,535,141) (11,260,254) ----------------- ---------------- ------------------ INVESTING ACTIVITIES Investment in joint venture.................................................. (330,859) -- (330,859) Expenditures for property and equipment...................................... (265,388) (86,417) (1,395,229) Purchases of marketable securities........................................... (1,487,620) (1,576,830) (8,455,459) Maturities of marketable securities.......................................... 2,017,770 2,098,823 5,384,732 ----------------- ---------------- ------------------ Net cash provided by (used in) investing activities.......... (66,097) 435,576 (4,796,815) ----------------- ---------------- ------------------ FINANCING ACTIVITIES Payments on capital lease obligations........................................ (24,362) (30,778) (237,475) Proceeds on equipment loan................................................... -- 105,734 599,867 Payments on equipment loan................................................... (59,626) (60,331) (179,802) Proceeds from issuance of notes.............................................. -- -- 1,050,000 Payments on notes............................................................ -- -- (1,000,000) Payments on shareholder loans................................................ -- -- (294,238) Proceeds on issuance of common stock......................................... 4,916,231 4,998 18,740,003 ----------------- ---------------- ------------------ Net cash provided by financing activities.................... 4,832,243 19,623 18,678,355 ----------------- ---------------- ------------------ Net increase (decrease) in cash and cash equivalents......................... 1,686,969 (1,079,942) 2,621,286 Cash and cash equivalents at beginning of period............................. 934,317 4,058,716 -- ----------------- ---------------- ------------------ Cash and cash equivalents at end of period................................... $ 2,621,286 $ 2,978,774 $ 2,621,286 ================= ================ ================== Supplemental schedule of noncash investing and financing activities: Preferred stock issuance in exchange for interest in joint venture......... $ 12,015,000 $ -- $ 12,015,000 ================= ================ ================== Payable to joint venture................................................... $ 659,147 $ -- $ 12,674,147 ================= ================ ==================
See accompanying notes to Financial Statements. -5- DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited condensed financial statements and the related footnote information of DepoMed, Inc. (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company's management, the accompanying interim unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the interim period ended June 30, 2000 are not necessarily indicative of results to be expected for the entire year ending December 31, 2000 or future operating periods. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1999. As of June 30, 2000 the Company had approximately $5,600,000 in cash, cash equivalents and marketable securities, working capital of $4,600,000 and accumulated losses of $26,100,000. In the course of its development activities, the Company expects such losses to continue over the next several years. Management plans to continue to finance the operations with a combination of stock sales and revenue from corporate alliances and technology licenses. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its development programs. The Company expects its existing capital resources will permit it to meet its capital and operational requirements through the next nine months. 2. REVENUE RECOGNITION Revenue related to collaborative research agreements with corporate partners and our joint venture is recognized as the expenses are incurred for each contract. The Company is required to perform research activities as specified in each respective agreement on a best efforts basis, and the Company is reimbursed based on the costs associated with supplies and the hours worked by employees on each specific contract. Nonrefundable milestone payments are recognized pursuant to collaborative agreements upon the achievement of specified milestones where no further obligation to perform exists under that provision of the arrangement. -6- DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality, U.S. financial institutions and, to date, has not experienced losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value. The remaining contractual period until maturity of marketable securities ranges from 1 to 24 months. All marketable securities are classified as available-for-sale. These securities are carried at market value with unrealized gains and losses included in accumulated other comprehensive income (loss) in shareholders' equity. 4. NET LOSS PER SHARE Net loss per share is computed using the weighted-average number of shares of common stock outstanding. Common stock equivalent shares from outstanding stock options and warrants are not included as their effect is antidilutive. 5. COMPREHENSIVE LOSS Total comprehensive loss for the three and six months ended June 30, 2000 and 1999, approximates net loss and includes unrealized gains and losses on marketable securities. 6. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the SEC staff released Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company will adopt SAB 101 as required in the fourth quarter of 2000. The impact of the bulletin on the Company's financial position and results of operations is not expected to be material. On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), which provides guidance on several implementation issues related to Accounting Principles Board Opinion No. 25 ("APB 25"). The most significant topics discussed in FIN 44 are the clarification of the definition of employee for purposes of applying Opinion No. 25 and the accounting for stock options that have been repriced. FIN 44 is effective for the most significant topics discussed beginning July 15, 2000. The impact of the interpretation on the Company's financial position and results of operations is not expected to be material. -7- DEPOMED, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. COLLABORATIVE AGREEMENTS In November 1999, the Company entered into a joint venture agreement with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together "Elan") to develop products using drug delivery technologies and expertise of both companies. This joint venture, DepoMed Development, Ltd. ("DDL"), a Bermuda limited liability company, is initially owned 80.1% by DepoMed and 19.9% by Elan. DDL will fund its research through capital contributions from its partners based on the partners' ownership percentage. DDL will subcontract research and development efforts to DepoMed, Elan and others. DepoMed began subcontract development work for DDL in January 2000. While the Company owns 80.1% of the outstanding common stock of DDL, Elan and its subsidiaries have retained significant minority investor rights that are considered "participating rights" as defined in the Emerging Issues Task Force Consensus No. 96-16. Accordingly, DepoMed does not consolidate the financial statements of DDL, but instead accounts for its investment in DDL under the equity method of accounting. For the three and six months ended June 30, 2000, and for the period from inception (November 30, 1999) to June 30, 2000, DDL recognized a net loss of approximately $823,000, $1,236,000 and $16,236,000, respectively. The net loss from inception to June 30, 2000, includes a $15,000,000 payment to Elan for a technology license fee. DepoMed recognized 80.1% of DDL's net loss, or approximately $660,000, $990,000 and $13,005,000 for the three and six months ended June 30, 2000, and for the period from inception to June 30, 2000, respectively. To date, DDL has not recognized any revenue. 8. SHAREHOLDERS' EQUITY On January 21, 2000, 717,286 shares of common stock and 12,015 shares of Series A convertible exchangeable preferred stock ("Series A Preferred Stock") were issued to Elan Corporation, plc ("Elan") for consideration of $5,000,000 and $12,015,000, respectively. Proceeds from the sale of the Series A Preferred Stock were used to fund the Company's 80.1% share of DDL, a joint venture with Elan (See Note 5 "Collaborative Agreements"). The Series A Preferred Stock accrues a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock is convertible at any time after two years, at Elan's option, into the Company's common stock at a price of $12.00 per share. For the quarter ended June 30, 2000, the Company accrued $210,000 as a dividend on the Series A Preferred Stock. To date, the Company has accrued a total of $371,000 related to the dividend on the Series A Preferred Stock. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included with the company's Annual Report on Form 10-KSB for the year ended December 31, 1999 and the company's Financial Statements and related notes thereto appearing elsewhere in this quarterly report. Statements made in this quarterly report that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). A number of risks and uncertainties, including those discussed under the caption "FACTORS THAT MAY AFFECT FUTURE RESULTS" below and elsewhere in this quarterly report on Form 10-Q, could affect such forward-looking statements and could cause actual results to differ materially from the statements made. The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. ABOUT THE COMPANY We are a development stage company engaged in the development of new and proprietary oral drug delivery technologies. We have developed two types of oral drug delivery systems, the Gastric Retention System (the "GR System") and the Reduced Irritation System (the "RI System" and together, the "DepoMed Systems"). The GR System is designed to be retained in the stomach for an extended period of time while it delivers the incorporated drug or drugs, and the RI System is designed to reduce the gastrointestinal irritation that is a side effect of many orally administered drugs. In addition, the DepoMed Systems are designed to provide continuous, controlled delivery of an incorporated drug. In this "Management's Discussion and Analysis of Financial Condition and Results of Operations", the "company," "DepoMed," "we," "us," and "our," refer to DepoMed, Inc. Since the company's inception in August 1995, we have devoted substantially all our efforts to research and development conducted on our own behalf and through collaborations with pharmaceutical partners in connection with the DepoMed Systems. Our primary activities since inception (August 7, 1995) have been, in addition to research and development, establishing our offices and research facilities, recruiting personnel, filing patent applications, developing a business strategy and raising capital. We have also been involved in revenue generating research and development projects for clients including R.W. Johnson Pharmaceutical Research Institute ("PRI"). To date, we have received only limited revenue, all of which has been from these collaborative research and feasibility arrangements. In November 1999, we entered into a joint venture with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together "Elan") to develop products using drug delivery technologies and expertise of both companies. This joint venture, DepoMed Development, Ltd. ("DDL"), a Bermuda limited liability company, is initially owned 80.1% by DepoMed and 19.9% by Elan. DDL will fund its research through capital contributions from its partners based on the partners' ownership percentage. DDL will subcontract research and development efforts to DepoMed, Elan and others. DepoMed began subcontract development work for DDL in January 2000. -9- We also have in development Metformin GR-TM-, a potential once-daily metformin product for the treatment of Type II diabetes. In July 2000, we completed a second Phase I clinical trial of Metformin GR. Both trials showed positive results, and we are planning to initiate a Phase II clinical trial in the third quarter of 2000. We have also developed a reduced irritation aspirin and an enhanced absorption calcium supplement product. These products have been reformulated to incorporate advances in polymer technology and to address potential marketing opportunities. We are currently seeking marketing partners to commercialize these products. In June 2000, we announced the initiation of a collaboration with AVI Biopharma, Inc. ("AVI") to investigate the feasibility of controlled oral delivery of AVI's proprietary NEUGENE antisense agents. We are also developing certain other product candidates expected to benefit from incorporation into the DepoMed Systems. We have in development a GR System formulation of an undisclosed antibiotic and an undisclosed cardiovascular drug. The antibiotic product is scheduled to enter Phase I clinical trials in the fourth quarter of 2000. We will ultimately seek marketing partners to commercialize both of these products. DepoMed has generated a cumulative net loss of approximately $26,100,000 for the period from inception through June 30, 2000. $13,005,000 of this loss is attributable to our share of the loss in DDL. We intend to continue investing in the further development of our drug delivery technologies and the DepoMed Systems. We also intend to internally develop and find partners to commercialize products based on generic and over-the-counter compounds. Depending upon a variety of factors, including collaborative arrangements, available personnel and financial resources, we will conduct or fund clinical trials on such products and will undertake the associated regulatory activities. We will need to make additional capital investments in laboratories and related facilities. As additional personnel are hired in 2000 and beyond, expenses are expected to increase from their 1999 levels. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Revenue for the quarter ended June 30, 2000 was $586,000. There were no revenues in the second quarter of 1999. Revenue for the six-month period ended June 30, 2000 was $962,000, compared to $115,000 in the same period of 1999. The increase in 2000 revenue results from research and development work performed for DDL. In 1999, revenues consisted of amounts earned under the feasibility arrangement with PRI. In the first quarter of 1999, we completed the first phase of research and development under the March 1998 PRI feasibility agreement. The product is currently under review at PRI. Research and development expense increased to $1,716,000 and $2,988,000 for the three and six months ended June 30, 2000, respectively, compared to $764,000 and $1,493,000 in the same periods in 1999. These increases were primarily due to expenses for clinical trials with DepoMed proprietary products which began in the third quarter of 1999. Consulting expense also increased in the areas of clinical, regulatory and drug manufacturing as we sought additional expertise to move our proprietary products through the development process. Also contributing to the increase was the hiring of additional employees and related expenses. General and administrative expense for the second quarter of 2000 and 1999 was $494,000 and $480,000, respectively. General and administrative expense for the six months ended June 30, 2000 was $997,000 compared to $968,000 in the same period of 1999. In the three- and six-month periods of 2000, increased salaries and travel expense for business development purposes were offset by decreased legal and accounting fees realized as we reduced our reliance on outside professionals for some reporting services. Amortization of leasehold improvements also decreased from 1999 levels but is expected to increase through the year as we complete the build-out of our new facility. -10- In the second quarter of 2000, we recognized a net loss of approximately $660,000 as our share in the net loss of our joint venture with Elan. We expect to record additional net losses in DDL in 2000 and net losses totaling approximately $8,000,000 through 2001. DDL recorded research and development expense of approximately $823,000 and no general and administrative expense. Elan has made a loan facility available to us for approximately $8,000,000 to support DepoMed's share of the joint venture's research and development costs pursuant to a convertible promissory note issued by DepoMed to Elan. There is no amount outstanding on the loan at June 30, 2000; however, $990,000 is available under the facility and we expect to utilize it in the third quarter. Net interest income was approximately $105,000 for the three months ended June 30, 2000, compared to approximately $80,000 during the three months ended June 30, 1999. In the six months ended June 30, 2000 and 1999, net interest income was $187,000 and $175,000. The increase was due to higher cash and investment balances as a result of the private placement completed in January 2000. Net interest income also includes immaterial gains realized on the sale of marketable securities. In January 2000, we issued 12,015 shares of Series A convertible exchangeable preferred stock ("Series A Preferred Stock") at a price of $1,000 per share to fund our 80.1% share of the initial capitalization of DDL. The Series A Preferred Stock accrues a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock is convertible at anytime after two years, at Elan's option, into DepoMed's common stock at a price of $12.00 per share. For the quarter ended June 30, 2000, we accrued a dividend on the Series A Preferred Stock of $210,000. To date, we have accrued a total of $371,000 related to the dividend on the Series A Preferred Stock. LIQUIDITY AND CAPITAL RESOURCES Cash used in operations in the six months ended June 30, 2000 was approximately $3,079,000, compared to approximately $1,535,000 for the six months ended June 30, 1999. During the six months ended June 30, 2000, the cash used in operations was due primarily to the net loss. Other increases in our equity in the loss of the joint venture and accounts payable were partially offset by increases in accounts receivable from the joint venture and other assets, including approximately $290,000 as a security deposit for our new facility. In 1999, the cash used in operations was due primarily to the net loss offset by decreases in accounts receivable. Cash used in investing activities in the six months ended June 30, 2000 totaled approximately $66,000 and consisted of our investment in our joint venture and purchases of lab equipment, office equipment and leasehold improvements, offset by a net decrease in marketable securities of approximately $530,000. Net cash provided by investing activities in the six months ended June 30, 1999 totaled approximately $436,000 and consisted primarily of a net decrease in marketable securities of approximately $522,000 less purchases of laboratory equipment, fixtures and office equipment. We expect that future capital expenditures may include additional product development and quality control laboratory equipment as we work towards implementation of current Good Manufacturing Practices ("cGMP") in our laboratories. We also expect to spend approximately $700,000 over the next two quarters of 2000 for leasehold improvements at our new facility. We anticipate financing some portion of these improvements. Cash provided by financing activities in the six months ended June 30, 2000 was approximately $4,832,000 and consisted primarily of net proceeds of approximately $4,915,000 received in January 2000 from a private placement of 717,286 shares of common stock at a price of $7.00 per share. Cash provided by financing activities in the six months ended June 30, 1999 was approximately $20,000, which consisted primarily of proceeds of $106,000 from the equipment financing credit facility offset by payments on the equipment financing credit facility and on capital lease obligations. -11- As of June 30, 2000, we had approximately $5,600,000 in cash, cash equivalents and marketable securities, working capital of $4,600,000 and accumulated losses of $26,100,000. We expect to continue to incur operating losses over the next several years. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through the next nine months. However, we base this expectation on our current operating plan which may change as a result of many factors. Accordingly, we could require additional funding sooner than anticipated. Our cash needs may also vary materially from our current expectations because of numerous factors, including: - results of research and development; - relationships with collaborative partners; - changes in the focus and direction of our research and development programs; - technological advances; and - results of clinical testing, requirements of the FDA and comparable foreign regulatory agencies. We will need substantial funds of our own or from third parties to: - conduct research and development programs; - conduct preclinical and clinical testing; and - manufacture (or have manufactured) and market (or have marketed) potential products using the DepoMed Systems. Our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. We have limited credit facilities and no other committed source of capital. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds to continue our development programs. We may not be able to raise such additional capital on favorable terms, or at all. If the company raises additional capital by selling its equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders' equity positions. If adequate funds are not available the company may have to: - curtail operations significantly; or - obtain funds through entering into collaboration agreements on unattractive terms. The inability to raise capital would have a material adverse effect on the company. FACTORS THAT MAY AFFECT FUTURE RESULTS EARLY STAGE OF DEVELOPMENT; LIMITED REVENUES We are at an early stage of development. Accordingly, our business is subject to all of the business risks associated with a new enterprise, including: - uncertainties regarding product development; - risks related to collaborative partnering relationships; - lack of revenue and uncertainty regarding future revenues; - limited financial and personnel resources; and - lack of established credit facilities. -12- As we expand our research and development efforts, we anticipate that we will continue to incur substantial operating losses for at least the next several years. Therefore, we expect our cumulative losses to increase. To date, we have had no revenues from product sales and only limited revenues from our collaborative research and development arrangements and feasibility studies. Our success will depend on commercial sales of products that generate significant revenues for us. We cannot predict whether we will be able to achieve commercial sales of any revenue-generating products. NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT Our research and development programs are at an early stage. In order for us to incorporate a pharmaceutical product into a DepoMed System, we would need to complete substantial additional research and development on an off-patent drug or a drug provided by a collaborative partner. Even if we are successful, the drug incorporated in the DepoMed System: - may not be offered for commercial sale; or - may prove to have undesirable or unintended side effects that prevent or limit its commercial use. Before we or others make commercial sales of products using the DepoMed Systems, we or our collaborative partners would need to: - conduct clinical tests showing that these products are safe and effective; and - obtain regulatory approval. This process involves substantial financial investment. Successful commercial sales of any of these products require: - market acceptance; - cost-effective commercial scale production; and - reimbursement under private or governmental health plans. We will have to curtail, redirect or eliminate our product development programs if we or our collaborative partners find that: - the DepoMed Systems prove to have unintended or undesirable side effects; or - products which appear promising in preclinical studies do not demonstrate efficacy in larger scale clinical trials. These events could have a material adverse effect on the company. DEPENDENCE ON ELAN AND NEED FOR ADDITIONAL COLLABORATIVE PARTNERS We have generated all of our revenues through collaborative arrangements with pharmaceutical and biotechnology companies. Currently, all of our revenues are derived from our joint venture with Elan. If our joint venture with Elan is terminated or fails to produce desired results, our revenues and results of operations will suffer. Our strategy to continue the research, development, clinical testing, manufacturing and commercial sale of products using the DepoMed Systems requires that we enter into additional collaborative arrangements. The success of the Elan joint venture and any additional collaborative arrangements requires that the company's collaborative partners: - perform their obligations as expected; and - devote sufficient resources to the development, clinical testing and marketing of products developed under collaborations. -13- It is possible that Elan or our future collaborative partners may not: - continue to fund their particular projects; - perform their agreed-to obligations; or - choose to develop and make commercial sales of products using the DepoMed Systems. For example, the company is not currently conducting research and development under the PRI feasibility agreement while PRI completes its internal review of our work to date under the feasibility agreement. There can be no assurance that PRI will support further development of its program based on our technology. Further, the company may not be able to enter into future collaborative arrangements on acceptable terms. Any of following events could have a material adverse effect on the company: - any parallel development by a collaborative partner of competitive technologies or products; - arrangements with collaborative partners that limit or preclude the company from developing products or technologies; - premature termination of an agreement; or - failure by a collaborative partner to devote sufficient resources to the development; and commercial sales of products using the DepoMed Systems. Collaborative agreements are generally complex and may contain provisions which give rise to disputes regarding the relative rights and obligations of the parties. Any such dispute could delay collaborative research, development or commercialization of potential products, or could lead to lengthy, expensive litigation or arbitration. COMPETITION Competition in pharmaceutical products and drug delivery systems is intense. We expect competition to increase. Competing technologies or products developed in the future may prove superior either generally or in particular market segments to the DepoMed Systems or products using the DepoMed Systems. These developments would make the DepoMed Systems or products using them noncompetitive or obsolete. All of our principal competitors have substantially greater financial, marketing, personnel and research and development resources than us. In addition, many of our potential collaborative partners have devoted, and continue to devote, significant resources to the development of their own drug delivery systems and technologies. GOVERNMENT REGULATION Numerous governmental authorities in the United States and other countries regulate our research and development activities and those of our collaborative partners. Governmental approval is required of all potential pharmaceutical products using the DepoMed Systems and the manufacture and marketing of products using the DepoMed Systems prior to the commercial use of those products. The regulatory process will take several years and require substantial funds. If products using the DepoMed Systems do not receive the required regulatory approvals or if such approvals are delayed, the company's business would be materially adversely affected. There can be no assurance that the requisite regulatory approvals will be obtained without lengthy delays, if at all. -14- In the United States, the United States Food and Drug Administration (the "FDA") rigorously regulates pharmaceutical products, including any drugs using the DepoMed Systems. If a company fails to comply with applicable requirements, the FDA or the courts may impose sanctions. These sanctions may include civil penalties, criminal prosecution of the company or its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production. The FDA may withdraw approved applications or refuse to approve pending new drug applications, premarket approval applications, or supplements to approved applications. The company generally must conduct preclinical testing on laboratory animals of new pharmaceutical products prior to commencement of clinical studies involving human beings. These studies evaluate the potential efficacy and safety of the product. The company then submits the results of these studies to the FDA as part of an Investigational New Drug application ("IND"), which must become effective before beginning clinical testing in humans. Typically, human clinical evaluation involves a time-consuming and costly three-phase process: - In Phase I, the company conducts clinical trials with a small number of subjects to determine a drug's early safety profile and its pharmacokinetic pattern. - In Phase II, the company conducts clinical trials with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and further evidence of safety. - In Phase III, the company conducts large-scale, multi-center, comparative trials with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA prior to commercialization. The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing based upon the data accumulated to that point and the FDA's assessment of the risk/benefit ratio to patients. The results of the preclinical and clinical testing are submitted to the FDA in the form of a new drug application (an "NDA") for approval prior to commercialization. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application. Failure to receive approval for any products using the DepoMed Systems would have a material adverse effect on the company. Various FDA regulations apply to over-the-counter products that comply with monographs issued by the FDA. These regulations include: - cGMP requirements; - general and specific over-the-counter labeling requirements (including warning statements); - advertising restrictions; and - requirements regarding the safety and suitability of inactive ingredients. In addition, the FDA may inspect over-the-counter products and manufacturing facilities. A failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties. If an over-the-counter product differs from the terms of a monograph, it will, in most cases, require FDA approval of an NDA for the product to be marketed. -15- Foreign regulatory approval of a product must also be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country. The time required for approval may delay or prevent marketing in certain countries. In certain instances the company or its collaborative partners may seek approval to market and sell certain products outside of the United States before submitting an application for United States approval to the FDA. The clinical testing requirements and the time required to obtain foreign regulatory approvals may differ from that required for FDA approval. Although there is now a centralized European Union ("EU") approval mechanism in place, each EU country may nonetheless impose its own procedures and requirements. Many of these procedures and requirements are time-consuming and expensive. Some EU countries require price approval as part of the regulatory process. These constraints can cause substantial delays in obtaining required approval from both the FDA and foreign regulatory authorities after the relevant applications are filed, and approval in any single country may not meaningfully indicate that another country will approve the product. MANUFACTURING, MARKETING AND SALES We do not have and do not intend to establish in the foreseeable future internal manufacturing, marketing or sales capabilities. Rather, we intend to use the facilities of our collaborative partners or those of contract manufacturers to manufacture products using the DepoMed Systems. Our dependence on third parties for the manufacture of products using the DepoMed Systems may adversely affect our ability to develop and deliver such products on a timely and competitive basis. There may not be sufficient manufacturing capacity available to the company when, if ever, it is ready to seek commercial sales of products using the DepoMed Systems. In addition, we expect to rely on our collaborative partners or to develop distributor arrangements to market and sell products using the DepoMed Systems. The company may not be able to enter into manufacturing, marketing or sales agreements on reasonable commercial terms, or at all, with third parties. Failure to do so would have a material adverse effect on the company. Applicable cGMP requirements and other rules and regulations prescribed by foreign regulatory authorities will apply to the manufacture of products using the DepoMed Systems. The company will depend on the manufacturers of products using the DepoMed Systems to comply with cGMP and applicable foreign standards. Any failure by a manufacturer of products using the DepoMed Systems to maintain cGMP or comply with applicable foreign standards could delay or prevent their commercial sale. This could have a material adverse effect on the company. PATENTS AND PROPRIETARY RIGHTS Our success will depend in part on our ability to obtain and maintain patent protection for our technologies and to preserve our trade secrets. Our policy is to file patent applications in the United States and foreign jurisdictions. We currently hold three issued United States patents and three United States patent applications are pending. Additionally, we are currently preparing a series of patent applications representing our expanding technology for filing in the United States. We have also applied for patents in numerous foreign countries. Some of those countries have granted our applications and other applications are still pending. No assurance can be given that our patent applications will be approved, or that any issued patents will provide competitive advantages for the DepoMed Systems or our technologies. -16- With respect to already issued patents and any patents which may issue from our applications, there can be no assurance that claims allowed will be sufficient to protect our technologies. The United States maintains patent applications in secrecy until a patent issues. As a result, the company cannot be certain that others have not filed patent applications for technology covered by our pending applications or that the company was the first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes that may block our patent rights or permit the competitors to compete without infringing the patent rights of the company. In addition, there can be no assurance that: - any patents issued to the company will not be challenged, invalidated or circumvented; or - the rights granted under the patents issued to the company will provide proprietary protection or commercial advantage to the company. We also rely on trade secrets and proprietary know-how. We seek to protect that information, in part, through entering into confidentiality agreements with employees, consultants, collaborative partners and others before such persons or entities have access to our proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases, due to, among other things, the lack of an adequate remedy for breach of an agreement or a finding that an agreement is unenforceable. In addition, our trade secrets may otherwise become known or be independently developed by competitors. Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing others' patents. We are not aware of any claim of patent infringement against us. However, if claims concerning patents and proprietary technologies arise and are determined adversely to the company, the claims could have a material adverse effect on the company. Extensive litigation regarding patent and other intellectual property rights is common in the pharmaceutical industry. We may need to engage in litigation to enforce any patents issued or licensed to the company or to determine the scope and validity of third-party proprietary rights. There can be no assurance that our issued or licensed patents would be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to the company, the diversion of our financial and managerial resources to such litigation could have a material adverse effect on the company. We may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with the patent applications of the company or other parties. Adverse determinations in litigation or interference proceedings could require the company to seek licenses (which may not be available on commercially reasonable terms) or subject the company to significant liabilities to third parties. These events could have a material adverse effect on the company. FLUCTUATIONS IN OPERATING RESULTS The following factors will affect our quarterly operating results and may result in a material adverse effect on the company: - variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues; - success or failure of the company in entering into further collaborative relationships; - decisions by collaborative partners to proceed or not to proceed with subsequent phases of the relationship or program; - the timing of any future product introductions by us or our collaborative partners; - market acceptance -17- - of the DepoMed Systems; - regulatory actions; - adoption of new technologies; - the introduction of new products by our competitors; - manufacturing costs and capabilities; - changes in government funding; and - third-party reimbursement policies. RELATIONSHIPS OF ADVISORS WITH OTHER ENTITIES Two groups (the Policy Advisory Board and Development Advisory Board) advise the company on business and scientific issues and future opportunities. Certain members of our Policy Advisory Board and Development Advisory Board work full-time for academic or research institutions. Others act as consultants to other companies. In addition, except for work performed specifically for and at the direction of the company, any inventions or processes discovered by such persons will be their own intellectual property or that of their institutions or other companies. Further, invention assignment agreements signed by such persons in connection with their relationships with the company may be subject to the rights of their primary employers or other third parties with whom they have consulting relationships. If the company desires access to inventions which are not its property, the company will have to obtain licenses to such inventions from these institutions or companies. The company may not be able to obtain these licenses on commercially reasonable terms. HEALTHCARE REFORM; UNCERTAIN AVAILABILITY OF HEALTHCARE REIMBURSEMENT The healthcare industry is changing rapidly as the public, government, medical professionals, third-party payors and the pharmaceutical industry examine ways to contain or reduce the cost of health care. Changes in the healthcare industry could impact our business, particularly to the extent that the company develops the DepoMed Systems for use in prescription drug applications. Certain foreign governments regulate pricing or profitability of prescription pharmaceuticals sold in their countries. There have been a number of federal and state proposals to implement similar government control in the United States, particularly with respect to Medicare payments. The company expects that these proposals will continue to be advanced. In addition, downward pressure on pharmaceutical pricing in the United States has increased due to an enhanced emphasis on managed care. The company expects this pressure to continue to increase. The company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business. However, the announcement of such proposals or efforts could have a material adverse effect on the company's ability to raise capital. Further, the adoption of such proposals or efforts would have a material adverse effect on the company and any prospective collaborative partners. Sales of products using the DepoMed Systems in domestic and foreign markets will depend in part on the availability of reimbursement from third-party payors, such as government health administration authorities and private health insurers. Third-party payors are increasingly challenging the price and cost-effectiveness of prescription pharmaceutical products. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Accordingly, products using the DepoMed Systems may not be eligible for third-party reimbursement at price levels sufficient for us or our collaborative partners to realize appropriate returns on our investments in the DepoMed Systems. -18- PRODUCT LIABILITY Our business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. Any such claims could have a material adverse effect on the company. We have obtained product liability insurance for clinical trials currently underway. Although, there can be no assurance that: - the company will be able to obtain product liability insurance for future trials; - the company will be able to maintain product liability insurance on acceptable terms; - the company will be able to secure increased coverage as the commercialization of the DepoMed Systems proceeds; or - any insurance will provide adequate protection against potential liabilities. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The company held its annual meeting of shareholders on June 7, 2000 (the "Annual Meeting") to consider and vote on the following proposals: (i) election of directors until the next Annual Meeting (Proposal 1), (ii) amendment of the company's Amended and Restated 1995 Stock Option Plan (the "Plan") to increase the number of shares available for issuance from 1,800,000 to 2,400,000 (Proposal 2) and (iii) ratification of Ernst & Young LLP as the company's independent auditors (Proposal 3). PROPOSAL 1 Drs. John W. Shell, John W. Fara, Messrs. John N. Shell and G. Steven Burrill and Dr. W. Leigh Thompson, each of whom was a director of DepoMed prior to the Annual Meeting, were elected as directors of the company to serve until the next annual meeting of the shareholders of DepoMed. Of the 5,884,444 shares voted at the Annual Meeting, 5,859,192 shares were voted for the election of Dr. Shell with 25,252 shares voting against Dr. Shell; 5,863,293 shares were voted for the election of Dr. Fara with 21,151 voting against Dr. Fara; 5,866,443 shares were voted for the election of Messrs. Shell and Burrill with 18,001 voting against Messrs. Shell and Burrill; and 5,866,444 shares were voted for the election of Dr. Thompson with 18,000 shares voting against Dr. Thompson. PROPOSAL 2 The shareholders of DepoMed approved Proposal 2 with a vote of 2,847,327 shares voted for, 174,942 shares against, 3,941 abstaining. PROPOSAL 3 The shareholders of DepoMed approved Proposal 3 with a vote of 5,880,403 for, 2,450 shares against with 1,591 shares abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None -19- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2000 DEPOMED, INC. By /s/ John F. Hamilton ---------------------------------- John F. Hamilton Vice President and Chief Financial Officer (Authorized Officer and Principal Accounting and Financial Officer) -20- EX-27.1 2 ex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM DEPOMED, INC.'S BALANCE SHEET (UNAUDITED) FOR JUNE 30, 2000 AND STATEMENT OF INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 APR-01-2000 JAN-01-2000 JUN-30-2000 JUN-30-2000 2,621,286 2,621,286 2,999,455 2,999,455 585,562 585,562 0 0 0 0 121,550 121,550 1,443,212 1,443,212 (579,994) (579,994) 7,484,827 7,484,827 1,697,272 1,697,272 0 0 0 0 12,386,000 12,386,000 19,731,149 19,731,149 0 0 7,484,827 7,484,827 0 0 585,562 961,980 0 0 0 0 2,210,099 3,985,453 0 0 16,013 33,712 (2,179,212) (3,826,666) 0 0 (2,179,212) (3,826,666) 0 0 0 0 0 0 (2,179,212) (3,826,666) (0.33) (0.59) (0.33) (0.59)
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