UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-24424
CIMA LABS INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1569769
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10000 Valley View Road, Eden Prairie, Minnesota 55344-9361
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(612) 947-8700
--------------
(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 filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 9,610,394 Shares
---------------------------- ---------------------------------
(Class) (Outstanding at October 30, 1998)
1
CIMA LABS INC.
TABLE OF CONTENTS
PAGE NUMBER
-----------
COVER PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets as of September 30, 1998
and December 31, 1997 3
Condensed Statements of Operations for the three-
month and nine-month periods ended September 30, 1998
and 1997 4
Condensed Statements of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 13
ITEM 2. CHANGES IN SECURITIES. 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 13
ITEM 5. OTHER INFORMATION. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 13
SIGNATURES 15
EXHIBIT INDEX 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CIMA LABS INC.
Condensed Balance Sheets
September 30, December 31,
1998 1997(1)
------------------------------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $3,188,295 $1,145,760
Short-term investments - 3,277,300
Accounts receivable:
Net of allowance for doubtful accounts
$64,300-1998; $32,150-1997 1,062,525 1,597,814
Inventories--Note B 638,698 630,619
Prepaid expenses 192,522 146,805
------------------- ------------------
Total current assets 5,082,040 6,798,298
Property, plant and equipment 14,682,301 14,149,345
Less accumulated depreciation (4,946,149) (3,891,167)
------------------- ------------------
9,736,152 10,258,178
Other assets:
Lease deposits 40,651 40,651
Patents and trademarks, net of amortization 212,005 230,889
------------------- ------------------
252,656 271,540
------------------- ------------------
------------------- ------------------
Total assets $15,070,848 $17,328,016
------------------- ------------------
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $363,961 $128,712
Accrued expenses 863,704 620,580
Advance royalties 576,405 741,405
------------------- ------------------
Total current liabilities 1,804,070 1,490,697
Long term liabilities:
Equipment financing 196,551 -
Stockholders' equity
Preferred Stock, $.01 par value:
Authorized shares--5,000,000; issued and
outstanding shares--none
Common Stock, $.01 par value:
Authorized shares--20,000,000; issued and
outstanding shares--9,610,394--September 30,
1998; 9,608,394--December 31, 1997 96,104 96,084
Additional paid-in capital 57,274,274 57,268,594
Accumulated losses (44,300,151) (41,527,359)
------------------- ------------------
Total stockholders' equity 13,070,227 15,837,319
------------------- ------------------
Total liabilities and stockholders' equity $15,070,848 $17,328,016
------------------- ------------------
------------------- ------------------
- --------
(1) The balance sheet at December 31, 1997 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. See notes to condensed financial statements.
3
CIMA LABS INC.
Condensed Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
------------------------------------- ------------------------------------
September 30, September 30,
------------------------------------- ------------------------------------
1998 1997 1998 1997
------------------------------------- ------------------------------------
Revenues:
Net sales $719,695 $825,117 $877,387 $1,657,689
Research and development fees &
licensing revenues 1,587,669 800,884 3,905,594 1,258,996
------------------------------------- ------------------------------------
2,307,364 1,626,001 4,782,981 2,916,685
Costs and expenses:
Cost of goods sold 1,166,857 1,323,096 1,804,379 2,891,202
Research and product development 1,030,371 594,773 3,378,147 2,579,434
Selling, general and administrative 793,869 739,751 2,494,811 2,628,110
------------------------------------- ------------------------------------
2,991,097 2,657,620 7,677,337 8,098,746
Other income (expense):
Interest income, net 29,471 68,783 121,770 262,487
Other income (expense) (1,086) 1,418 (204) 125,640
------------------------------------- ------------------------------------
28,385 70,201 121,566 388,127
Net loss: ($655,348) ($961,418) ($2,772,790) ($4,793,934)
------------------------------------- ------------------------------------
------------------------------------- ------------------------------------
Net loss per share:
Basic and diluted $(0.07) $(0.10) $(0.29) $(0.50)
Weighted average shares outstanding:
Basic and diluted 9,610,394 9,556,054 9,610,006 9,498,266
See notes to condensed financial statements.
4
CIMA LABS INC.
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997
------------------------ -----------------------
OPERATING ACTIVITIES
Net loss ($2,772,792) ($4,793,934)
Adjustments to reconcile net loss to net cash used
in operating activities:
depreciation and amortization 1,251,746 695,145
gain on sale of property, plant and equipment 4,734 0
Changes in operating assets and liabilities:
accounts receivable 495,001 (1,122,175)
inventories (8,078) (399,051)
other current assets (5,429) (139,026)
accounts payable 235,249 85,422
accrued expenses 208,798 860,635
advance royalties (180,000) 0
------------------------ -----------------------
Net cash used in operating activities (770,771) (4,812,984)
INVESTING ACTIVITIES
Purchase of and deposits on property, plant and equipment (436,113) (588,969)
Purchase of short-term investments 0 (1,257,262)
Proceeds from sale of property, plant & equipment 33,000 0
Proceeds of maturities of short-term investments 3,277,300 5,350,885
Patents and trademarks (66,581) (80,030)
------------------------ -----------------------
Net cash provided by (used in) investing activities 2,807,606 3,424,624
FINANCING ACTIVITIES
Proceeds from issuance of stock:
Common Stock 5,700 562,188
Security deposits on leases 0 250,000
------------------------ -----------------------
Net cash provided by financing activities 5,700 812,188
------------------------ -----------------------
Increase (decrease) in cash and cash equivalents 2,042,535 (576,172)
Cash and cash equivalents at beginning of period 1,145,760 2,666,032
------------------------ -----------------------
Cash and cash equivalents at end of period $3,188,295 $2,089,860
------------------------ -----------------------
------------------------ -----------------------
Supplemental schedule of noncash investing and
financing activities:
Acquisition of equipment pursuant to equipment loan
and capital lease obligation 245,876 --
See notes to condensed financial statements.
5
CIMA LABS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. 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) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or fair
market value.
September 30, December 31,
1998 1997
------------------ ------------------
Raw materials $638,698 $484,582
Work in process -- --
Finished products -- 146,037
------------------ ------------------
$638,698 $630,619
------------------ ------------------
------------------ ------------------
NOTE C - NET LOSS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No.
128, EARNINGS PER SHARE. This statement replaces previously reported primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary EPS, basic EPS excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is very
similar to previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented to conform with
Statement 128 requirements.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE,"
"EXPECT," "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR
ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S
TECHNOLOGY, THE AVAILABILITY OF ADEQUATE FUNDS FOR THE COMPANY'S OPERATIONS,
THE SUCCESS OF THE COMPANY IN COMMERCIALIZING ITS NEW DRUG DELIVERY PROGRAMS,
AND THE COMPANY'S RELIANCE ON ITS KEY PERSONNEL AND COLLABORATIVE PARTNERS,
AS WELL AS THOSE DISCUSSED IN "BUSINESS RISKS" BELOW.
GENERAL
CIMA LABS INC. (the "Company"), founded in 1986, is a drug delivery
company focused primarily on the development and manufacture of
pharmaceutical products based upon its patented OraSolv(R) technology for
marketing by multinational pharmaceutical companies. OraSolv is an oral
dosage formulation incorporating microencapsulated active drug ingredients
into a tablet which dissolves quickly in the mouth without chewing or water
and which effectively masks the taste of the medication being delivered.
OraSolv's fast-dissolving capability may enable patients in certain age
groups or those with any of a variety of conditions that limit their ability
to swallow conventional tablets to receive medication in a more convenient
oral dosage form. The Company believes that OraSolv is more convenient than
traditional tablet-based oral dosages as it does not require water to be
ingested, thereby enabling immediate medication at the onset of symptoms. In
addition, OraSolv can provide more accurate administration of doses than
liquid or suspension formulations as no measuring is required. The Company
believes OraSolv's ease of use and effective taste-masking may foster greater
patient compliance with recommended dosage regiments, for both prescription
and over-the-counter ("OTC") products, thereby improving therapeutic outcomes
and reducing costs in the healthcare system.
The Company's business strategy is to commercialize its OraSolv
technology through collaborations with multinational pharmaceutical companies
with emphasis on products that command a large market share, are in large
market segments, or are profitable prescription pharmaceuticals. Product
differentiation and brand name identity are critical to the successful
marketing of pharmaceutical products. The Company believes that OraSolv
affords pharmaceutical companies a means to significantly differentiate their
products in the competitive pharmaceutical marketplace. Because it is a
patented technology, OraSolv affords more enduring product differentiation
than some of the more traditional approaches of changing product flavor or
packaging innovations, which can be easily replicated. The Company has
entered into agreements with a number of pharmaceutical companies for
development, manufacture and commercialization of OraSolv products.
The Company is currently focusing on developing OraSolv products for
selected prescription drug applications. The Company believes that such
prescription OraSolv products should result in improved taste acceptance and
ease of administration, and so enhance patient compliance with the
recommended dosage regimen for such prescription pharmaceuticals. In the
third quarter of 1997, the Company signed its first two pharmaceutical
license option and product development agreements with two multinational
pharmaceutical companies, and is actively working on both of these projects.
The Company is also continuing its ongoing
7
arrangements involving OTC products, having moved to a successive phase in
its relationship with Novartis Consumer Health, Inc. ("Novartis"), a
multinational pharmaceutical company, by signing exclusive License and Supply
Agreements with that company on July 1, 1998. The agreements cover full scale
production of three Triaminic(R) products in the Company's OraSolv dosage
form. The Company began commercial production for this product during the
second quarter of 1998, and sales commenced in the third quarter of 1998.
This has been a regional launch, with a full national launch anticipated in
1999. The Company has also initiated the development of new oral drug
delivery technologies. These technologies include a new oral solid delivery
system, DuraSolv(TM); a unique sustained-released delivery system,
OraSolv(R)SR; and an improved efficacy delivery system, OraVescent(TM). One
of the Company's recently signed agreements utilizes the OraSolvSR
technology. The goal of the Company is to focus on drug delivery technologies
that improve efficacy and therefore provide greater value-added benefits.
At September 30, 1998, the Company had accumulated losses of
approximately $44,300,000. The Company recorded its first commercial sales
using the Company's OraSolv technology in the three-month period ended March
31, 1997. The Company's revenues have previously been from sales using the
Company's older AutoLution(R) (a liquid effervescent) technology, license
fees paid by corporate partners in consideration of the transfer of rights
under collaborative agreements, and product research and development fees
paid by corporate partners to fund the Company's research and development
efforts for products developed under such agreements. Approximately 48% of
the Company's total revenues to date have been generated from development
work and sales of AutoLution products. The Company is not currently
manufacturing liquid effervescent products, and has not recognized any
revenues from such products since 1995. Over the last three years
approximately $11,200,000 of revenue has been generated from three major
sources: product development fees (approximately 50% of the total) for work
related to OraSolv products, and to a lesser extent sales (approximately 30%)
of OraSolv products and licensing revenues (approximately 20%) related to
OraSolv products. In addition to revenues from product development,
manufacturing and licensing, the Company has funded operations from private
and public sales of equity securities, realizing net proceeds of
approximately $26,000,000 from private sales of equity securities and
$16,400,000 and $12,000,000 from the Company's July 1994 initial public
offering and May 1996 public offering of its Common Stock, respectively. At
September 30, 1998, the Company had 9,610,394 shares of its Common Stock
outstanding.
The Company's ability to generate revenues is dependent upon its
ability to develop new, innovative drug delivery technologies and to enter
into and be successful in collaborative arrangements with pharmaceutical and
other healthcare companies for the development and manufacture of OraSolv
products and products based on the Company's other new technologies to be
marketed by these corporate partners. The Company is highly dependent upon
the efforts of their corporate partners to successfully market these.
Although the Company believes these partners have, and future partners will
have, an economic motivation to market these products vigorously, the amount
and timing of their resources to be devoted to marketing are not within the
control of the Company. These partners could make independent material
marketing and other commercialization decisions which could adversely affect
the Company's future revenues. Moreover, certain of the Company's products
are seasonal in nature, and the Company's revenues could vary materially from
quarter to quarter depending on which of such products, if any, are then
being marketed.
The Company expects that losses will continue through at least 1998,
even though the Company expects to continue to generate sales revenue from
manufacturing OraSolv products in 1998. Research and development expenses
will increase as the Company continues to investigate new drug delivery
technologies. In addition, the Company is investigating the possibility of
utilizing microencapsulation for the development of sustained-release
systems. Personnel costs for research and development are expected to
increase
8
moderately as the efforts expended on new technologies such as this
increases. Personnel costs for administration may decrease slightly as a
result of our effort to reduce corporate overhead. However, as the Company
continues production, additional operations personnel may need to be added to
meet corporate partners' orders. Manufacturing infrastructure costs should
not increase materially in 1998 or 1999 as capacity is expected to meet
short-term production needs.
In recent years, the Company has actively marketed its OraSolv
technology to the pharmaceutical industry. The Company is presently engaged
in product development and manufacturing scale-up efforts with several
different pharmaceutical companies regarding a variety of potential products,
with an emphasis on prescription products. In the first quarter of 1997, the
Company began commercial production for Bristol-Myers Squibb Company
("Bristol-Myers") of the first product in the Company's OraSolv dosage form,
which was officially launched in September 1997. In the second quarter of
1997, the Company expanded its relationship with Bristol-Myers and signed a
global non-exclusive license agreement which covers multiple products. In the
third quarter of 1997, the first two prescription product license option and
development agreements were signed. Each agreement is for a product which is
currently marketed by the Company's partners, Schering Corporation
("Schering-Plough") and Zeneca Pharmaceuticals ("Zeneca"). The product under
development for Zeneca is its new antimigraine compound zolmitriptan
(Zomig-Registered Trademark-). In the third quarter of 1998, the development
and option agreement with Schering-Plough was amended to extend the
previously executed agreement. In October of 1998, the Company and SmithKline
Beecham terminated their License Agreement related to an OTC product, as the
Company continues to focus its efforts on the development of prescription
pharmaceuticals. In the fourth quarter of 1997, the development and license
option agreement was signed with Novartis which has been converted to
exclusive license and supply agreements effective July 1, 1998. In the third
quarter 1998 financial results, sales are recorded to Novartis for shipments
of Triaminic-Registered Trademark- Softchews-Registered Trademark- for a
regional launch. However, there can be no assurance that any of these
activities or discussions will result in the eventual marketing of products
using OraSolv or the Company's other technologies.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company's results of operations for the three- and nine-month
periods ended September 30, 1998 reflect the continued emphasis of developing
Orasolv products for its corporate partners and research efforts for the
Company's new technologies. Total revenues increased to $2,307,000 and
$4,783,000 in the three- and nine-month periods ended September 30, 1998,
respectively, from $1,626,000 and $2,917,000 in the three- and nine-month
periods ended September 30, 1997. In 1998, over 80% of the revenue relates to
product development and milestone fees and licensing revenues earned from the
Company's corporate partners. The majority of these revenues were generated
by two prescription product collaborations, one each with each of
Schering-Plough and Zeneca, and an over-the-counter cough cold product,
Triaminic(R) Softchews, with Novartis. Sales were $720,000 for the
three-month period ended September 30, 1998, representing the initial
shipments to Novartis for their regional launch of Triaminic Softchews. Sales
were $825,000 for the same period in 1997. The decrease in sales is caused by
ordering patterns of our corporate partners to support the marketing of their
products. Sales were $877,000 for the nine-month period ended September 30,
1998, as compared to $1,658,000 for the same period in 1997. The decrease in
sales is due to the ordering patterns of our corporate partners, with the
1997 sales representing a national launch for a product, while in 1998, the
majority of the sales are for the regional launch of Triaminic Softchews.
Product development fees and licensing revenues were $1,587,000 and
$3,906,000 for the three- and nine-month periods ended September 30, 1998,
respectively, compared to $801,000 and $1,259,000, respectively, in the
comparable periods of 1997. The increase in 1998 in these fees and revenues
is mainly from the Company's collaborative arrangements with Novartis,
Schering-Plough and Zeneca and represents progress made on these projects. In
1997, the revenues consist principally of the
9
license fees for the signing of the Company's two prescription product
agreements in the third quarter of 1997, and product development fees for the
OTC product, Tempra(R); from Bristol-Myers earned in the first half of 1997.
The sales and other revenues reflect the signing of license option and
development agreements with multinational pharmaceutical companies that
provide for licensing fees, milestone payments and manufacturing fees. So
long as the Company has relatively few agreements with corporate partners,
sales, license revenues and product development fees will tend to fluctuate
on a quarter-to-quarter basis.
Cost of goods sold decreased to $1,167,000 and $1,804,000 in the three-
and nine-month periods ended September 30, 1998, respectively, from
$1,323,000 and $2,891,000 in the three- and nine-month periods ended
September 30, 1997. The decrease in 1998 costs is primarily attributable to
decreased production and to certain non-recurring start-up costs that were
incurred in the first quarter of 1997 for the initial commercial production
of a product using OraSolv technology. Research and development expenses
increased to $1,030,000 and $3,378,000 for the three- and nine-month periods
ended September 30, 1998, respectively, from $595,000 and $2,580,000 in the
three- and nine-month periods ended September 30, 1997. The increase is a
direct result of increased research and product development efforts being
performed for the Company's corporate partners. In addition, research
personnel have expended resources to focus on discovery and development of
new technologies. Selling, general and administrative expenses increased to
$794,000 for the three-month period ended September 30, 1998, as compared to
$740,000 for the same period in 1997. This small increase is primarily
attributable to the timing of recording the bonus accrual. On a year-to-date
basis, the total of the accruals in 1997 and 1998 are approximately the same;
however, for the three-month period ended September 30, 1998 there is
approximately $60,000 more accrued than in the comparable period of 1997. On a
year-to-date basis, 1998 selling, general and administrative expenses have
decreased compared to 1997, as there has been a reduction in spending on
consumer marketing research studies conducted to support OraSolv.
Other income decreased to $29,000 and $121,000 in the three- and
nine-month periods ended September 30, 1998, respectively, from $70,000 and
$388,000 for the same periods in 1997, respectively. Other income is
comprised mainly of interest income, which has decreased as it is dependent
on the cash position of the Company. In addition, other income in the
nine-month period ended September 30, 1997 included a $120,000 state sales
and use tax refund for previously purchased fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through
private and public sales of its equity securities and revenues from
manufacturing and supply agreements. Through September 30, 1998, the Company
had received net offering proceeds from such private and public sales of
approximately $57,268,000, had net sales from manufacturing and supply
agreements of approximately $17,257,000, and other revenues that include
licensing fees, product and development and milestone fees of $11,536,000.
Among other things, these funds were used to purchase approximately
$16,100,000 of capital equipment, including approximately $7,500,000 in the
last two quarters of 1994 in connection with completing the Company's
manufacturing facility. Cash, cash equivalents and short-term investments
were approximately $3,188,000 at September 30, 1998.
The Company's long-term capital requirements will depend upon numerous
factors, including the status of the Company's collaborative arrangements
with corporate partners, the progress of the Company's research and
development programs and receipt of revenues from the collaborative
agreements, sales of the Company's products, and the need to expand
production capacity. The Company believes that its currently available funds
together with revenues from operations will meet its anticipated needs
through 1998. Thereafter, or sooner if conditions make it necessary, the
Company will need to raise additional funds through research and development
relationships with suitable potential corporate partners and/or through
public or private financings, including equity financing, which may be
dilutive to stockholders. There can be no assurance that the Company will be
able to raise additional funds if its capital resources are exhausted, or
that funds will be available on terms attractive to the Company.
10
The Company has not generated taxable income through September 30, 1998.
At December 31, 1997, the net operating losses available to offset taxable
income were approximately $42,259,000. Because the Company has experienced
ownership changes, pursuant to Internal Revenue Code regulations, future
utilization of the operating loss carryforwards will be limited in any one
fiscal year. The carryforwards expire beginning in 2001. As a result of the
annual limitation, a portion of these carryforwards may expire before
ultimately becoming available to reduce potential federal income tax
liabilities.
BUSINESS RISKS
The Company began commercial production of its first product in the
Company's OraSolv dosage form in the first quarter of 1997 and its second in
the second quarter of 1998. The Company must be evaluated in light of the
uncertainties and complications present for any company that only recently
began to derive product revenues and, in particular, a company in the
pharmaceutical industry. The Company has accumulated aggregate net losses
from inception through September 30, 1998 of $44,300,000. Losses have
resulted principally from costs incurred in research and development of the
Company's technologies, marketing the Company's technologies and from general
and administrative costs. These costs have exceeded the Company's revenues,
which historically had been derived primarily from the manufacturing of
AutoLution and other non-OraSolv products which the Company no longer
manufactures. In more recent years, the Company has received revenue from its
commercial partners for product development and licensing of OraSolv and, to
a lesser extent, commercial production of an OraSolv dosage form product
which commenced in the first quarter of 1997 for Bristol-Myers. The Company
expects to continue to incur additional losses at least through the end of
1998. There can be no assurance that the Company will ever generate
substantial revenues or achieve profitability.
The Company is dependent upon its ability to enter into and perform
under collaborative arrangements with pharmaceutical companies for the
development and commercialization of its products. Failure of these partners
to market the Company's products successfully could have a material adverse
effect on the Company's financial condition and results of operations. The
Company's revenues are also dependent upon ultimate consumer acceptance of
the OraSolv drug delivery system and newly developed technologies as
alternatives to conventional oral dosage forms. The Company expects that
OraSolv products will be priced slightly higher than conventional swallow
tablets. Although the Company has found the results of consumer research it
has conducted to be very encouraging, there can be no assurance that market
acceptance for the Company's OraSolv products will ever develop or be
sustained.
The Company began manufacturing OraSolv products in commercial
quantities in February 1997. To achieve future desired levels of production,
the Company will be required to increase its manufacturing capabilities.
There can be no assurance that manufacturing can be scaled-up in a timely
manner to allow production in sufficient quantities to meet the needs of the
Company's corporate partners. Furthermore, the Company has only one
manufacturing line and one facility capable of manufacturing OraSolv
products. If this production line and/or facility becomes damaged or becomes
incapable of manufacturing products due to natural disaster, governmental
regulatory issues or otherwise, the Company would have no other means of
producing OraSolv products.
The quick dissolve drug delivery field is fairly new and rapidly
evolving and it is expected to continue to undergo improvements and rapid
technological changes. There can be no assurance that current or new
competitors of the Company will not succeed in developing technologies and
products that are more effective than any that are being developed by the
Company or that could render the Company's technology and products
non-competitive, or that any technology developed by the Company will be
preferred by consumers to any existing or newly developed technologies.
The Company intends to increase its research and development
expenditures to enhance its current technologies, to pursue internal
proprietary drug delivery technologies and to pursue new technologies. Even
if
11
these technologies appear promising during various stages of development,
they may not reach the commercialization stage for a number of reasons,
including the inability to find a partner to market the product, difficulty
in manufacturing the product on a large scale, or inability to render the
product economical to market.
The Company has substantially completed the assessment of the impact
that the Year 2000 date conversion may have on its internal systems and
software, including information technology ("IT") and non-IT, or embedded
technology systems. The Company believes its risks relating to Year 2000
problems in its systems to be very low, as its IT systems are relatively
small and predominantly new and its software consists entirely of "off the
shelf" packages for which Year 2000 compliant upgrades are available and have
largely already been implemented. The Company's engineers also believe that
its non-IT systems will not experience adverse effects from the Year 2000
date conversion.
The Company has designated an individual to oversee Year 2000
compliance, and has implemented a plan to ensure that during 1999 the Company
will have upgraded each of its software packages to versions, or have
converted to a replacement package, that the vendors thereof claim to be free
of Year 2000 problems. The Company plans to replace any hardware that may be
affected by the Year 2000 date conversion, or alter its use to one not
sensitive to Year 2000 issues. The Company has spent approximately $3,000 on
software upgrades and expects the total expenditure for such upgrades to be
less than $10,000. The Company has largely completed its replacement or
reallocation of hardware that may present Year 2000 concerns, and estimates
the total cost of any replacement to be less than $10,000. The Company also
plans to spend approximately $2,000 during the fourth quarter of 1998 to hire
a consultant to review the Company's plans and actions relating to Year 2000
compliance. The Company believes that its risks related to Year 2000
compliance of its internal systems to be immaterial.
The Company has also initiated discussions with its corporate partners
to determine that those parties have appropriate plans to remediate Year 2000
issues. To date, none of the Company's partners has indicated significant
concerns about their ability to do so. However, a substantial negative impact
of Year 2000 issues on one of the Company's few large corporate partners that
significantly affects the partner's ability to do business could have a
material adverse effect on the operations and financial condition of the
Company.
The foregoing risks reflect the Company's stage of development and the
nature of the Company's industry. The Company is also subject to a range of
additional risks, including competition, uncertainties regarding the effects
of healthcare reform on the pharmaceutical industry, including pressures
exerted on the prices charged for pharmaceutical products and uncertainties
regarding protection of patents and proprietary rights, all of which may have
a material adverse effect on the Company's business.
12
CIMA LABS INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has instituted an opposition proceeding in the European Patent
Office, and has requested that the United States Patent and Trademark
Office declare an interference proceeding, each of which has been reported
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997.
Eurand America, Inc. and Eurand International, S.p.A. (collectively,
"Eurand") have filed a complaint in the United States District Court for
the District of Delaware, but have not served the same upon the Company.
The complaint alleges various causes of action including unfair
competition, misappropriation of trade secrets and conversion, all arising
out of the filing by the Company and Stanford Research Institute ("SRI") of
a patent application relating to coating of active ingredients to
taste-mask them by a process referred to as "coacervation". The Company
has used, and may continue to use coacervation to provide taste-masking.
The specific coacervation technology and active target addressed in the
patent is not expected to be used in the future. The complaint was filed
in the course of continuing negotiations between the Company and Eurand
with regard to rights to the subject matter claimed in such applications.
Those negotiations are continuing, and the Company presently expects to
dispose of the matter through such negotiations without any material
adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Item Description
---- -----------
10.31 License Agreement between Novartis
Consumer Health, Inc. and the
Company, dated July 1, 1998.(1)
10.32 Supply Agreement between Novartis
Consumer Health, Inc., and the Company,
dated July 1, 1998.(1)
27 Financial Data Schedule.
- ---------------
(1) Confidential treatment has been requested for this exhibit.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CIMA LABS INC.
Date: November 16, 1998 By: /s/ John M. Siebert
------------------------ -------------------------------------
John M. Siebert
President and Chief Executive Officer
Date: November 16, 1998 By: /s/ Keith P. Salenger
------------------------ -------------------------------------
Keith P. Salenger
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION
- -------------- -----------
10.31 License Agreement between Novartis Consumer Health, Inc.
and the Company, dated July 1, 1998.(1)
10.32 Supply Agreement between Novartis Consumer Health, Inc.,
and the Company, dated July 1, 1998.(1)
27 Financial Data Schedule.
- -----------------
(1) Confidential treatment has been requested for this exhibit.
16