-----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, C8eP5vqYve5bBOSnhnFZYzHeiGcQNCxbBIYcIupfYi2o7nssQjUAwJD2lMhGFMHE v4HC25p1EZCUWmzzgZQQ5g== 0000950124-00-003026.txt : 20000515 0000950124-00-003026.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950124-00-003026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIMA LABS INC CENTRAL INDEX KEY: 0000833298 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411569769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24424 FILM NUMBER: 627001 BUSINESS ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 BUSINESS PHONE: 6129478700 MAIL ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 March 31, 2000 [ ] 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 Number) incorporation or organization) 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MN 55344-9361 (952) 947-8700 (Address of principal executive offices (Registrant's telephone number, and zip code) 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, 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 practical date. Common Stock, $.01 par value 10,855,289 ---------------------------- ---------- (Class) (Outstanding at May 4, 2000) 2 INDEX CIMA LABS INC.
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets - March 31, 2000 and December 31, 1999. 3 Statements of Operations - Three months ended March 31, 2000 and March 31, 1999. 4 Statements of Cash Flows - Three months ended March 31, 2000 and March 31, 1999. 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risks 12 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 12 Items 1, 3, 4 and 5 have been omitted since all items are inapplicable or answers negative. Item 6. Exhibits and Reports on Form 8-K 13 Signature 13
We have registered "CIMA(R)," "CIMA LABS INC.(R)," "OraSolv(R)," and "OraSolv(R)SR" as trademarks with the U.S. Patent and Trademark Office. These registered trademarks are used in this Form 10-Q. We also use the trademarks "DuraSolv(TM)," "PakSolv(TM)," "OraVescent(TM)SL/BL" and "OraVescent(TM)SS" in this Form 10-Q. 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BALANCE SHEETS CIMA LABS INC.
March 31, December 31, 2000 1999 (Unaudited) (See note) ASSETS Current assets: Cash and cash equivalents $ 17,137,617 $ 2,480,698 Available-for-sale securities 1,956,924 - Accounts receivable, less allowance for doubtful accounts and returns of $298,585 and $36,000 3,864,602 3,058,258 Inventories 2,685,826 2,772,429 Prepaid expenses 129,502 73,042 ------------- -------------- Total current assets 25,774,471 8,384,427 Other assets, net 521,484 525,942 Property and equipment: Property, plant and equipment 19,765,566 16,355,463 Accumulated depreciation (7,698,005) (5,996,024) ------------- -------------- 12,067,561 10,359,439 ============= ============== Total assets $ 38,363,516 $ 19,269,808 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,865,915 $ 2,402,726 Accrued expenses 1,228,575 1,229,179 Other current liabilities 218,334 554,317 ------------- -------------- Total current liabilities 3,312,824 4,186,222 Long term debt 3,547,575 3,509,660 ------------- -------------- Total liabilities 6,860,399 7,695,882 Stockholders' equity: Convertible preferred stock, $.01 par value; 50,000 shares authorized; -0- shares issued and outstanding - - Common Stock, $.01 par value; 20,000,000 shares authorized; 10,851,569 and 9,646,241 shares issued and outstanding 108,553 96,462 Additional paid-in capital 77,363,824 57,454,661 Retained earnings (deficit) (45,969,260) (45,977,197) ------------- -------------- 31,503,117 11,573,926 Unrealized gain (loss) on available-for-sale securities - - ------------- -------------- Total stockholders' equity 31,503,117 11,573,926 ------------- -------------- Total liabilities and stockholders' equity $ 38,363,516 $ 19,269,808 ============= ==============
Note: 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. See accompanying notes. 3 4 STATEMENTS OF OPERATIONS CIMA LABS INC. (Unaudited)
For the Three Months Ended March 31, ----------------------------- 2000 1999 ------------ ----------- Revenues: Net sales $ 2,777,578 $ 35,000 Product development fees and licensing 1,645,833 1,644,452 Royalties 737,500 103,336 ------------ ----------- 5,160,911 1,782,788 Operating expenses: Cost of sales 3,156,639 931,941 Research and product development 1,026,545 1,018,698 Selling, general and administrative 948,488 668,510 ------------ ----------- 5,131,672 2,619,149 Other income: Interest income, net (10,769) 21,231 Other income (expense) (10,533) (272) ------------ ----------- (21,302) 20,959 ------------ ----------- Net income (loss) $ 7,937 $ (815,402) ============ =========== Net income (loss) per share: Basic $ .00 $ (0.08) Diluted $ .00 $ (0.08) Weighted average number of common shares: Basic 9,898,551 9,609,216 Diluted 11,046,086 9,609,216
See accompanying notes. 4 5 STATEMENTS OF CASH FLOWS CIMA LABS INC. (Unaudited)
For the Three Months Ended March 31, ------------------------------------ 2000 1999 ----------------- --------------- OPERATING ACTIVITIES: Net income (loss) $ 7,937 $ (815,402) Adjustments to reconcile net income or loss to net cash used in operating activities: Depreciation and amortization 515,029 417,920 Loss on impairment of assets 400,000 - Changes in operating assets and liabilities: Accounts receivable and current assets (866,697) (196,304) Inventories 86,603 (827,863) Accounts payable (536,811) 742,234 Accrued expenses and other (281,432) (134,621) --------------- --------------- Net cash used in operating activities (675,371) (814,036) INVESTING ACTIVITIES: Purchases of property, plant and equipment (2,597,422) (274,936) Patents and trademarks (17,378) 941 Purchases of available-for-sale securities (1,956,924) - --------------- --------------- Net cash provided by (used in) investing activities (4,571,724) (273,995) FINANCING ACTIVITIES: Stock option exercise proceeds 521,254 - Net proceeds from stock offerings 19,400,000 - Payments on capital lease obligations (17,239) (15,674) --------------- --------------- Net cash provided by financing activities 19,904,014 (15,674) --------------- --------------- Increase (decrease) in cash and cash equivalents 14,656,919 (1,103,705) Cash and cash equivalents at beginning of period 2,480,698 2,722,590 =============== =============== Cash and cash equivalents at end of period $ 17,137,617 $ 1,618,885 =============== ===============
See accompanying notes 5 6 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION CIMA LABS INC. is a Delaware corporation that develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, our leading proprietary fast-dissolve technologies, are oral dosage forms incorporating taste-masked active drug ingredients into tablets, which dissolve quickly in the mouth without chewing or water. We develop applications for our technologies that are licensed to pharmaceutical company partners. We currently manufacture and package five commercial products incorporating our proprietary fast-dissolve technologies. Revenues are generated from the sale of products we manufacture, license agreements, product development fees and royalties. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements 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, which are considered necessary for fair presentation have been included. Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, you should refer to the audited financial statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 1999. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that may affect the amounts we report in our financial statements and accompanying notes. Actual results could differ from those estimates. 3. CASH EQUIVALENTS AND INVESTMENTS We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. We invest our cash and cash equivalents in money market funds, investment grade commercial paper and United States government agency securities, including discount notes and U.S Treasury obligations. Our short-term investments consist of investment grade commercial paper and United States government agency securities, including discount notes and U.S Treasury obligations, with maturities ranging from three to six months. We classify our short-term investments as available-for-sale. Available-for-sale investments are recorded at fair value with unrealized gains and losses reported in the shareholders' equity. Fair values of investments are based on quoted market prices, 6 7 where available, and accrued interest, if applicable. No realized gains and losses have been recorded to date. Dividend and interest income is recognized when earned. 4. INCOME (LOSS) PER SHARE Income (loss) per share for the three months ended March 31, 2000 and 1999 are summarized in the following table:
Three Months Ended March 31, -------------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------- --------------------------------------------- Net Income Per Share Net Income Per Share (Loss) Shares Amount (Loss) Shares Amount ------------ ------------ ----------- -------------- ------------- ----------- Basic $ 7,937 9,898,551 $.00 $ (815,402) 9,610,394 $ (.08) Effect of dilutive stock options - 1,147,935 - - - - ------------ ----------- ---------- ------------- ------------ ----------- Diluted $ 7,937 11,046,486 $.00 $ (815,402) 9,610,394 $ (.08) ------------ ----------- ---------- ------------- ------------ -----------
5. INVENTORIES Inventories are stated at the lower of cost (first in, first out) or fair market value, whichever is lower.
March 31, 2000 March 31, 1999 --------------- --------------- Raw materials $ 1,966,463 $ 1,153,275 Work in process - 3,236 Finished products 719,363 150,398 ----------- ----------- $ 2,685,826 $ 1,306,909 ----------- -----------
6. PRIVATE PLACEMENT OF COMMON STOCK On March 17, 2000, we issued 1.1 million shares of Common Stock through a private placement. We received approximately $19.4 million in net cash proceeds and expect to use the funds for capital additions to our manufacturing facility and for working capital. We have invested the net proceeds in interest-bearing money market accounts, pending such uses. 7. ACCOUNTING PRONOUNCEMENTS In December 1999, the staff of the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements." SAB 101 requires that license and other up-front fees received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. We currently expect to implement SAB 101 in the second quarter of 2000 and, if material to the first quarter, restate the first quarter at that time. We estimate that the cumulative effect of the accounting change will be in the range of $1.0 to $2.0 million. Had we implemented this accounting change in our first quarter of 2000, we would have reported a net loss in the range of $(1.0) to $(2.0) million. In addition, we estimate that most of the cumulative effect of the accounting change, which relates primarily to transactions occurring prior to 2000, will be amortized into revenue during 2000. However, the impact of this change in revenue recognition policy is 7 8 complex and will depend on, among other things, the economic terms of existing and future license agreements, the length of time over which the development activities occur, and the technical requirements the SEC may make public in any future accounting bulletins or implementation guides. 8. RECLASSIFICATIONS Certain prior period balances have been reclassified in order to conform with the presentation for the three months ended March 31, 2000. These reclassifications have no impact on the net loss or shareholders' equity as previously reported. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT This Quarterly Report on Form 10-Q contains statements that are not descriptions of historical facts and contains 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"). All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or our future performance. We caution readers not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date this report was filed. Forward-looking statements are not descriptions of historical facts. The words or phrases "will likely result," "look for," "may result," "will continue," "is anticipated," "expect," "project," or similar expressions are intended to identify forward-looking statements, and are subject to numerous known and unknown risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified in the "Risk Factors" filed as Exhibit 99 to this Form 10-Q, and in our other filings with the SEC. We undertake no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments. GENERAL We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv technologies. We have agreements with several pharmaceutical companies regarding a variety of potential products, with an emphasis on prescription products. We currently manufacture five commercial products using our fast-dissolve technologies. These products include Triaminic for Novartis, Tempra for Bristol- Meyers Squibb and Zomig for AstraZeneca. We operate within a single segment: pharmaceutical product development. Our revenues are comprised of three components: net sales of products utilizing our proprietary fast-dissolve technologies; product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies; and royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us. In 8 9 addition, we are currently developing other drug delivery technologies. Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand for our products by patients, new product introductions, the seasonal nature of some of our products and pharmaceutical company ordering patterns. Our ability to generate product sales and royalty revenues in excess of our current forecast for 2000 and 2001 may be constrained by our manufacturing capacity. We expect our second production line, now being developed, to be operational in the second half of 2001. Revenues from product development fees and licensing revenue will fluctuate from quarter to quarter and from year to year depending on, among other factors, the number of new collaborative agreements that we enter into; the number of product development milestones we achieve under collaborative agreements, including making submissions to, and obtaining approvals from, the FDA for products in development; and the level of our development activity conducted for pharmaceutical companies under collaborative agreements. RESULTS OF OPERATIONS REVENUES. Our total revenues were $5.2 million in the quarter ended March 31, 2000 compared to $1.8 million in the quarter ended March 31, 1999. The increase of $3.4 million in revenues was primarily due to higher sales volume of commercial products. All three components of revenues increased for the quarter in comparison to the same period in 1999. Revenues from net sales of products using our drug delivery technologies totaled $2.8 million in the first quarter of 2000 compared to less than $0.1 million in the first quarter of 1999. The increase of over $2.7 million was primarily due to increased shipments of Triaminic to Novartis. We expect product sales for all of 2000 to be higher than full year 1999 because we have firm purchase order commitments for unit volume in excess of full year 1999 quantities. Although we expect additional growth in product sales in the last half of 2000, this growth will depend on pending FDA regulatory approvals for two new prescription products, FDA approval of our manufacturing compliance for prescription pharmaceuticals and the receipt of firm purchase order commitments for these new products. Revenues from product development fees and licensing were $1.6 million for the quarter ended March 31, 2000 compared to $1.6 million for the comparable period in 1999. Licensing revenues for the quarter included payments attributable to a January 2000 agreement with American Home Products. Although we expect product development activities for the year 2000 to be comparable to 1999, a significant portion of the product development fees and licensing revenues associated with these activities will be subject to deferral due to SAB 101, the SEC accounting bulletin discussed earlier, which we expect to adopt in the second quarter. In addition, product development fees and licensing revenues in subsequent quarters will depend on our success in signing new license and 9 10 development agreements with pharmaceutical companies and on expected FDA regulatory approvals for two new pharmaceutical products late in 2000. Revenues from royalties totaled $0.7 million in the quarter ended March 31, 2000 compared to $0.1 million in the corresponding period of 1999. The increase of $0.6 million resulted primarily from increased sales of Triaminic by Novartis in the U.S., which was introduced in the second quarter of 1999, and sales of Zomig by AstraZeneca, which was introduced in several countries in Europe during the third quarter of 1999. We expect royalties for the year 2000 to be higher than 1999 due to expected increases in product shipments of Triaminic, which will be sold primarily to patients in the U.S., and Zomig, which will be sold primarily to patients in Europe. OPERATING EXPENSES AND GROSS MARGIN. Cost of sales totaled $3.2 million in the first quarter of 2000 compared to $0.9 million in the corresponding period of 1999. The increase of $2.3 million was primarily due to higher Triaminic unit volumes being manufactured and shipped to Novartis and due to costs incurred to gear up for multi-shift production capabilities. In subsequent quarters, we expect cost of sales to increase as a result of expected unit volume increases. Gross margins on product sales were negative in the quarter ended March 31, 2000 and in the comparable period of 1999. To date, cost of sales have resulted in negative gross profit margins because we are operating at below manufacturing capacity, we have incurred additional costs to gear up for multi-shift production capabilities, and a product mix that has been weighted towards lower margin products. In subsequent quarters, we expect improved gross margins because manufacturing efficiencies should improve at higher unit volumes and with a more favorable mix of higher margin products. However, future gross margins will depend primarily, among other things, on the pricing of our products, our ability to effectively use our manufacturing and plant capacity, and changes in our product lines and mix of products. Research and product development expenses were $1.0 million in the quarter ended March 31, 2000 compared to $1.0 million in the quarter ended March 31, 1999. These expenses were consistent, as the level of product development activities between the periods was comparable. In subsequent quarters, we expect these expenses to increase. Selling, general and administrative expenses were $0.9 million in the quarter ended March 31, 2000 compared to $0.7 million in the quarter ended March 31, 1999. The increase of $0.2 million from 1999 was primarily due to marketing and related consulting costs associated with our business development efforts. We expect these expenses to increase in 2000. OTHER INCOME. Other income was not significant for the quarter ended March 31, 2000 nor was it significant for the comparable period in 1999. Other income consists primarily of interest income on invested funds, net of interest expense on bank lines, loan agreements and 10 11 capitalized leases. In subsequent quarters, we expect interest income to increase from the investment of the proceeds of our March 2000 private placement. NET INCOME (LOSS). Net income of $8,000 in the quarter ended March 31, 2000 compares to a net loss of $(0.8) million for the corresponding period in 1999. The net income for the quarter ended March 31, 2000 was due to an increase in total revenues of 189%, associated with an increase of total operating expenses of only 96% in 2000 compared to 1999. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through private and public sales of equity securities and revenues from product sales, product development fees and licensing revenue and royalties. Net working capital increased from $4.2 million at March 31, 1999 to $22.5 million at March 31, 2000. The increase of $18.3 million is primarily due to the positive effect of a $3.5 million loan we received from a pharmaceutical company partner and from $19.4 million we received from the private placement sale of 1.1 million shares of common stock, which were partially offset by approximately $5.1 million in expenditures for capital improvements to our manufacturing facility. We invest excess cash in interest-bearing money market accounts and investment grade securities. In December 1999, we received a $3.5 million unsecured loan from one of our pharmaceutical company partners. We may repay this loan at any time, but if the loan is not repaid by the time we are due royalties under a license agreement with an affiliate of the lender, the affiliate may offset up to half of the royalties otherwise due to us and the lender will treat the amount offset by its affiliate as a payment by us on this loan. Interest is payable on the outstanding balance of the loan at LIBOR plus one half of one percent. Interest accrues quarterly and is added to the then outstanding principal balance of the loan. In March 2000, we issued 1.1 million shares of common stock through a private placement. We received approximately $19.4 million in net cash proceeds and expect to use the funds for capital additions to our manufacturing facility and for working capital. We currently expect to spend approximately $10.0 to $12.0 million during 2000 and 2001 to complete various manufacturing facility improvements, including construction of a coating unit and a second production line. We believe our cash and cash equivalents, together with expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned. In addition, other factors that will affect future capital requirements and may 11 12 require us to seek additional financing, include the level of expenditures necessary to develop new products or technologies, the progress of our research and product development programs, the need to construct a larger than currently anticipated manufacturing facility or to construct a new manufacturing facility at an alternative site to meet demand for our products, results of our collaborative efforts with current and potential pharmaceutical company partners, and the timing of and amounts received from future product sales, product development fees and licensing revenue and royalties. We cannot be sure that additional financing will be available to us or, if available, will be on acceptable terms. Item 3. Quantitative and Qualitative Disclosures about Market Risks Not Applicable PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds Pursuant to a Stock Purchase Agreement between CIMA and certain institutional investors, or the "Purchasers," dated March 13, 2000, we issued 1,100,000 shares of Common Stock, or "Private Placement Shares," in exchange for an aggregate cash purchase price of $20,900,000. The Private Placement Shares were issued in reliance on Rule 506 of Regulation D of the Securities Act of 1933, as amended. We are obligated to the Purchasers of the Private Placement Shares to register these shares on a Registration Statement on Form S-3, which we filed on April 14, 2000. This Registration Statement has not yet become effective. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT INDEX Exhibit Number Description Method of Filing 27.1 Financial Data Schedule - For SEC EDGAR filing Filed herewith 99.1 Cautionary Statements Filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ended March 31, 2000. 12 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CIMA LABS INC. Registrant Date May 12, 2000 By /s/ David A. Feste ------------ ------------------ David A. Feste Chief Financial Officer (principal financial and accounting officer) 13 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the accompanying balance sheets of CIMA LABS, INC. as of March 31, 2000, and the related statements of operations for the year ended March 31, 2000 and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 17,137,617 1,956,924 3,864,602 298,585 2,685,826 25,774,471 19,765,566 7,698,005 38,363,516 3,312,824 0 0 0 108,553 77,363,824 31,503,117 2,777,578 5,160,911 3,156,639 1,975,033 21,302 0 74,568 7,937 0 7,937 0 0 0 7,937 .00 .00
EX-99.1 3 CAUTIONARY STATEMENTS 1 EXHIBIT 99.1 RISK FACTORS Certain statements made in this Quarterly Report on Form 10-Q are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-Q. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. RISK RELATED TO OUR COMPANY WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR PROSPECTS. We recorded the first commercial sales of products using our fast-dissolve technologies in early 1997. Since 1997, we have generated revenues from product development fees, licensing arrangements, sales of products using our fast-dissolve technologies and from royalties. We are currently making the transition from research and product development operations with limited production to commercializing our technologies and expanding our production capabilities, in addition to research and product development activities. Accordingly, we have only a limited operating history and our business and prospects must be evaluated in light of the risks and uncertainties of a company with a limited operating history and, in particular, one in the pharmaceutical industry. Many of these risks are discussed in the subheadings below. WE MAY NOT BE PROFITABLE IN THE FUTURE. We have accumulated aggregate net losses from inception through March 31, 2000 of approximately $46 million. Our losses have resulted principally from the research and product development costs for our drug delivery technologies and from general and administrative costs. If we are not profitable, the market price of our stock may fall. Profitable operations depend on a number of factors, many of which are beyond our direct control. These factors include: - - the demand for our products; - - our ability to manufacture our products efficiently and with the required quality; - - our ability to increase our manufacturing capacity; - - the level of product and price competition; - - our ability to develop additional commercial applications for our products; - - our ability to control our costs; and - - general economic conditions. 1 2 EXHIBIT 99.1 THE LOSS OF ONE OF OUR MAJOR CUSTOMERS COULD HARM OUR BUSINESS. Revenues from our three largest customers represented nearly 84% of our total revenues for the quarter ended March 31, 2000. The loss of any one of those customers could have a material adverse effect on our business and results of operations. If we cannot broaden our customer base, we will continue to depend on a few customers for the majority of our revenues. We may be unable to negotiate favorable business terms with customers that represent a significant portion of our revenues and our business and results of operations may be adversely affected. IF WE DO NOT ENTER INTO ADDITIONAL COLLABORATIVE AGREEMENTS WITH PHARMACEUTICAL COMPANIES, WE MAY NOT BE ABLE TO BECOME PROFITABLE. Our revenues depend on entering into collaborative agreements with pharmaceutical companies to develop, test, obtain governmental approval for, and commercialize oral dosage forms of active pharmaceutical ingredients using our drug delivery technologies. We currently have collaborative agreements with six pharmaceutical companies. If we do not enter into additional agreements in the future, or if our current or future agreements do not result in successful marketing of our products, our financial condition and results of operations could be materially adversely affected. In addition, we cannot be sure that: - - we will be able to enter into collaborative agreements to develop additional products using our drug delivery technologies; - - any existing or future collaborative agreements will result in additional commercial products, or that any of these products will be successful; - - we will meet the milestones established in our current or future collaborative agreements; or - - we will successfully develop new drug delivery technologies that will be attractive to potential pharmaceutical company partners. WE RELY ON THIRD PARTIES TO MARKET, DISTRIBUTE AND SELL THE PRODUCTS INCORPORATING OUR DRUG DELIVERY TECHNOLOGIES AND THOSE THIRD PARTIES MAY NOT PERFORM. We develop, manufacture and sell our products through relationships with our pharmaceutical company partners. The timing and other aspects of the development of products are sometimes out of our control, as the other party to the relationship may have priorities that differ from ours. Therefore, the timing of the commercialization of our products under development may be subject to unanticipated delays. Further, our drug delivery technologies are incorporated into the oral dosage forms of products marketed and sold by our pharmaceutical company partner and we do not have a direct marketing channel to consumers for our drug delivery technologies. Therefore, the success of the products incorporating our technologies will depend on the success of the marketing organizations of our pharmaceutical company partners, as well as the level of priority assigned to the marketing of our products by these entities, which may differ from our priorities. If one or more of our pharmaceutical company partners fail to pursue the development of, or the marketing of, our products as planned, our business may be adversely affected. IF WE CANNOT INCREASE OUR PRODUCTION CAPACITY, OUR BUSINESS WILL SUFFER. We must increase our production capacity to meet expected demand for our products. We currently have one production line and a second line is being developed. We expect our second production line to be operational in the second half of 2001, although we may experience difficulties, which could delay our ability to increase manufacturing capability. Production lines in the pharmaceutical industry generally take 16 to 24 months to complete because of the long lead times required for precision production equipment and the lengthy testing and approval process. We cannot be sure that our production capacity can be increased quickly enough to meet the requirements of our pharmaceutical company partners with whom we are developing our drug 2 3 EXHIBIT 99.1 delivery technologies. If we are unable to increase our production capacity as scheduled, our revenues may be reduced and our relationship with our pharmaceutical company partners may be harmed. WE HAVE A SINGLE MANUFACTURING FACILITY AND OUR BUSINESS WOULD SUFFER IF WE WERE TO LOSE ITS PRODUCTION CAPACITY. All of the products that we produce are manufactured on our existing production line in our Eden Prairie facility. If our existing production line or facility becomes incapable of manufacturing products for any reason, we would have no other means of producing products incorporating our drug delivery technologies until we are able to restore the manufacturing capability at our facility or develop an alternative manufacturing facility. Although we carry business interruption insurance to cover lost revenues and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing pharmaceutical company partners resulting from our inability to produce products for them. WE RELY ON A SINGLE SOURCE FOR SOME OF OUR RAW MATERIALS AND OUR BUSINESS COULD SUFFER IF THE MATERIALS WERE NOT AVAILABLE FROM THEIR CURRENT SOURCE. We rely on a single supplier for some of our raw materials and packaging supplies. If these raw materials or packaging supplies were no longer available, our manufacturing operations may be interrupted until another supplier could be identified, its products validated and trading terms with it negotiated. We cannot be sure that an alternative supplier could be identified in a timely manner, or at all, or that favorable terms could be negotiated with an alternative supplier. Any disruptions in our manufacturing operations from the loss of a supplier could have a material adverse effect on our results of operations, and potentially damage our relations with our pharmaceutical company partners. OUR ABILITY TO DEVELOP ADDITIONAL PRODUCTS IS UNCERTAIN. We intend to continue to enhance our current technologies and pursue additional proprietary drug delivery technologies. Even if these technologies appear promising during various stages of development, we may not be able to develop commercial applications for them because: - the potential technologies may fail clinical studies; - we may not find a pharmaceutical company to adopt the technologies; - it may be difficult to apply the technologies on a commercial scale; or - the technologies may be uneconomical to market. IF PATIENTS AND PHYSICIANS DO NOT ACCEPT OUR DRUG DELIVERY TECHNOLOGIES, WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUES, IF ANY. Our revenues depend on ultimate patient and physician acceptance of our drug delivery technologies as an alternative to conventional drug delivery systems. If our drug delivery technologies are not accepted in the marketplace, our pharmaceutical company partners may be unable to successfully market and sell our products, which would limit our ability to generate revenues and harm our results of operations. The degree of acceptance of any drug delivery system depends on a number of factors. These factors include, but are not limited to: - - demonstrated bioequivalency and safety; - - cost-effectiveness; - - convenience and ease of administration; - - advantages over alternative drug delivery systems; and - - marketing and distribution support. 3 4 EXHIBIT 99.1 Because only a limited number of products incorporating our drug delivery technologies are commercially available, we cannot be sure of the level of market acceptance of our drug delivery technologies. We expect that products incorporating our drug delivery technologies will be priced slightly higher than conventional swallowable or chewable tablets. DEMAND FOR SOME OF OUR PRODUCTS IS SEASONAL, AND OUR OPERATING RESULTS MAY SUFFER DURING PERIODS WHEN DEMAND IS LIGHT. Certain non-prescription products we manufacture are used to treat seasonal ailments such as colds and the flu. In 1999, revenue from Novartis, which included sales of our Triaminic products, royalties on sales of Triaminic by Novartis and product development fees, represented 42% of our total revenues. Our partners may not market our products in off-seasons and our operating results consequently may suffer. We are focused on developing a mix of non-prescription and prescription products to reduce these seasonal variations but we may not be successful. IF WE CANNOT ADEQUATELY PROTECT OUR PATENT AND PROPRIETARY RIGHTS, OUR BUSINESS WILL SUFFER. Our success depends, in part, on our ability to obtain and enforce patents for our products, processes and technologies and to preserve our trade secrets and other proprietary information. We have been granted seven patents on our drug delivery systems in the U.S., which will expire beginning in 2010. We cannot be sure that any patent applications relating to our potential products or processes will result in patents being issued. Our current patents may not be valid or enforceable, or protect us against competitors who challenge our patents, or obtain patents that may have an adverse effect on our ability to conduct business, or who are able to circumvent our patents. Further, we cannot be sure that we will have the necessary financial resources to enforce our patents. To protect our trade secrets and proprietary technologies and processes, we rely, in part, on confidentiality agreements with our employees, consultants and advisors. We cannot be sure that these agreements will prove adequate protection for our trade secrets and other proprietary information in the event of any unauthorized use or disclosure, or if others lawfully develop the information. WE MAY BE SUBJECT TO CLAIMS THAT OUR TECHNOLOGIES, OR THE PRODUCTS IN WHICH THEY ARE USED, INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS. The manufacture, use or sale of our drug delivery technologies may infringe the patent rights of others. We may be unable to avoid infringement of those patents and we may have to seek licenses, defend infringement actions or challenge the validity of those patents in court. We cannot be sure that, if required, licenses from third parties will be available to us on terms and conditions acceptable to us, if at all, or that we would prevail in any patent litigation. If we could not obtain required licenses, are found liable for infringement, or are not able to have these patents declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to market, or be precluded from participating in the manufacture, use or sale of products or methods of drug delivery covered by the patents of others. We cannot be sure that we have identified, or will identify in the future, U.S. and foreign patents that pose a risk of potential infringement claims. We enter into collaborative agreements with pharmaceutical companies to apply our drug delivery technologies to drugs developed by others and, ultimately, receive license revenues and product development fees, as well as revenues from the sale of products incorporating our technology and royalties. The drugs are generally the property of the pharmaceutical companies and may be the subject of patents or patent applications and other forms of protection owned by the pharmaceutical companies. To the extent those patents or other forms of protection expire, become invalid or otherwise ineffective, or to the extent the drugs are covered by patents or other forms of protection owned by third parties, sales of the drugs by the collaborating pharmaceutical company may be restricted, limited or may cease. Our revenues, in that event, may be adversely affected. 4 5 EXHIBIT 99.1 WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR AT ALL. All new pharmaceutical products, including our products and those under development, are subject to extensive and rigorous regulation by the federal government, principally the U.S. Food and Drug Administration, or FDA, and by state and local government agencies. These regulations govern the research, development, testing, manufacture, safety, storage, record keeping, labeling, advertising and promotion and marketing and distribution of pharmaceutical products. If marketed abroad, these products also are subject to regulation by foreign governments. The process for obtaining FDA approvals for drug products is generally lengthy, expensive and uncertain. Securing FDA approvals often requires applicants to submit extensive clinical data and supporting information to the FDA. We depend on external laboratories and medical institutions to conduct pre-clinical and clinical testing of our products in compliance with clinical and laboratory practices established by the FDA. The data obtained from pre-clinical and clinical testing is subject to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejection also may occur due to changes in FDA approval policy during the development period, or changes in regulatory review for each submitted New Drug Application. Even if the FDA approves a product, the approval may limit the uses or "indications" for which a product may be marketed, or may require further studies. The FDA also can withdraw product clearances and approvals for failure to comply with regulatory requirements or if unforeseen problems follow initial marketing. Once a drug product is approved, the Division of Drug Marketing, Advertising and Communication, or DDMAC, the FDA's marketing surveillance department within the Center for Drugs, must approve marketing claims asserted by our pharmaceutical company partners, which are the basis for a product's labeling, advertising and promotion. We cannot be sure that the claims our pharmaceutical company partners are asserting about our drug delivery technology, or the drug product itself, will be approved by DDMAC. If our pharmaceutical company partners fail to obtain from DDMAC acceptable marketing claims for a product, our business and results of operations could be materially adversely effected. If we, or pharmaceutical companies with whom we are developing our technologies, fail to comply with applicable FDA and other regulatory requirements, we, and they, are subject to sanctions, including: - - warning letters; - - fines; - - product seizures or recalls; - - injunctions; - - refusals to permit products to be imported into or exported out of the U.S.; - - total or partial suspension of production; - - withdrawals of previously approved marketing applications; and - - criminal prosecutions. Manufacturers of drugs also must comply with applicable Good Manufacturing Practices, or GMP, requirements, which relate to product testing, quality assurance and maintaining records and documentation. We cannot be sure that we will be able to comply with the applicable GMP and other FDA regulatory requirements for manufacturing as we expand our manufacturing operations, which would impair our business. If our products are marketed in foreign jurisdictions, we, and the pharmaceutical companies with whom we are developing our technologies, must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations regarding safety and quality. We cannot be sure that we will obtain all necessary regulatory approvals or that we will not be required to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If approvals to market our products are 5 6 EXHIBIT 99.1 delayed, if we fail to receive these approvals, or if we lose previously received approvals, our business would be impaired. WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH. Any failure to properly manage our growth may have a material adverse effect on our business, operating results and financial condition. The rapid growth that we have experienced places significant challenges on our management, administrative and operational resources. To properly manage this growth, we must, among other things, implement additional and improve existing administrative, financial and operational systems, procedures and controls on a timely basis. We will also need to expand our finance, administrative and operations staff as part of our increased need for infrastructure. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. Management may not be able to hire, train, integrate, retain, motivate and manage required personnel and may not be able to successfully identify, manage and exploit existing and potential market opportunities. Improving our systems and increasing our staff will increase our operating expenses. Our failure to generate additional revenue in excess of increased operating expenses in any fiscal period could have a material adverse effect on our financial results for that period. WE DEPEND ON KEY PERSONNEL AND MUST CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL. Our success depends upon the continued contributions of our executive officers and scientific and technical personnel. During our operating history, many key responsibilities within our company have been assigned to a relatively small number of individuals. The competition for qualified personnel is intense, and the loss of services of key personnel could adversely affect our business. In particular, the loss of the services of John Siebert, our Chief Executive Officer, and/or John Hontz, our Chief Operating Officer, could have a material adverse effect on our operations. We have an employment agreement through December 31, 2000 with Dr. Siebert. We rely on our key personnel and our consultants to assist us in formulating our research and development and medical/clinical strategy. All of our consultants are otherwise employed and each of these consultants may have commitments to other entities that may limit their availability to us or other interests that may conflict with our interests. WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO PARTICIPATION IN CLINICAL TRIALS OR THE USE OR MISUSE OF OUR PRODUCTS. The testing, manufacturing and marketing of products utilizing our drug delivery technologies may expose us to potential product liability and other claims resulting from their use. We cannot be sure that any indemnification we have obtained, or may obtain, from contract research organizations or pharmaceutical companies conducting human clinical trials on our behalf protect us from product liability claims or from the costs of related litigation. Similarly, we cannot be sure that any indemnification we have obtained, or may obtain, from pharmaceutical companies with whom we are developing our drug delivery technologies will protect us from product liability claims from the consumers of those products or from the costs of related litigation. If we are subject to a product liability claim, we cannot be sure that our product liability insurance, which has an aggregate policy limit of $5 million, will reimburse us, or will be sufficient to reimburse us, for any expenses or losses we may suffer. A successful product liability claim against us, if not covered by, or if in excess of, our product liability insurance, may have a material adverse effect on our business and results of operations. RISKS RELATED TO OUR INDUSTRY WE FACE RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION. Our success depends, in part, upon maintaining a competitive position in the development of products and technologies in a rapidly evolving field. We compete with other drug delivery, biotechnology 6 7 EXHIBIT 99.1 and pharmaceutical companies, engaged in the development of alternative drug delivery technologies or new drug research and testing, as well as with entities developing new drugs that may be taken orally. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do, and, therefore, represent significant competition for us. Our competitors may succeed in developing competing technologies, obtain patents or obtain governmental approval for products before we do. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our products, or potential products, noncompetitive or obsolete. THE CONTINUING EFFORTS OF GOVERNMENT AND THIRD-PARTY PAYERS TO CONTAIN OR REDUCE THE COSTS OF HEALTHCARE COULD ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY. Our revenue, particularly revenue from royalties on sales of our product by our pharmaceutical company partners, may be affected by the continuing efforts of government and third-party payers to contain or reduce the costs of healthcare. We cannot predict the effect that these healthcare reforms may have on our business. In addition, in the United States and elsewhere, sales of prescription pharmaceuticals are dependent in part on the availability of reimbursement to the consumer by third-party payers, like government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. If our current and proposed products are not considered cost-effective, reimbursement to the consumer may not be available or be sufficient to allow us or our pharmaceutical company partners to sell products on a competitive basis. OUR COMMERCIAL PRODUCTS ARE SUBJECT TO CONTINUING REGULATION. Even if our products receive regulatory approval, either in the U.S. or internationally, we will continue to be subject to extensive regulatory requirements. These regulations are wide-ranging and govern, among other things: - adverse drug experience reporting regulations; - product promotion; - product manufacturing, including good manufacturing practice, or GMP, requirements; and - product changes or modifications - process changes or modifications If we fail to comply or maintain compliance with these laws and regulations, we may be fined or barred from selling our products. If the FDA believes that we are not complying with the law, it can: - seize our products; - mandate a recall; - stop future sales through injunctive procedures; and/or - assess civil and criminal penalties against us. RISKS RELATED TO OUR COMMON STOCK ANTI-TAKEOVER PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS, DELAWARE LAW AND OUR STOCKHOLDERS' RIGHTS PLAN MAY AFFECT THE PRICE OF OUR COMMON STOCK. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of holders of our common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a 7 8 EXHIBIT 99.1 majority of our outstanding voting common stock. These include provisions that limit the ability of stockholders to take action by written consent, call special meetings or remove a director for cause. We are subject to the provisions of Section 203 of the Delaware General Corporation Law which prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation's voting stock. We also have a stockholders' rights plan, commonly referred to as a poison pill, that makes it difficult, if not impossible, for a person to acquire control of us without the consent of our board of directors. The anti-takeover provisions of our corporate charter documents, Delaware law and our stockholders' rights plan may have the effect of depriving our stockholders of the opportunity to sell their stock at a price in excess of prevailing market prices in an acquisition of us by another company. OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE. The trading price of our common stock has been, and is likely to continue to be highly volatile. The market prices for securities of drug delivery, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect our stock price include: - - fluctuations in our operating results; - - announcements of technological collaborations, innovations or new products by us or our competitors; - - governmental regulations; - - developments in patent or other proprietary rights; - - public concern as to the safety of drugs developed by us or others; - - the results of preclinical testing and clinical studies or trials by us or our competitors; - - litigation; and - - general market conditions. OUR OPERATING RESULTS MAY FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL. Our operating results may fluctuate from quarter to quarter and from year to year depending on: - - demand by patients for the products we produce; - - new product introductions; - - the seasonal nature of the products produced to treat seasonal ailments; - - pharmaceutical company ordering patterns; - - the number of new collaborative agreements that we enter into; - - our achievement of product development milestones under collaborative agreements; and - - our level of activity conducted on behalf and at the direction of pharmaceutical companies. Fluctuations in our operating results may lead to fluctuations, including declines, in our stock price. FUTURE SALES OF COMMON STOCK, OR THE PROSPECT OF FUTURE SALES, MAY DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of common stock, or the perception that sales could occur, could adversely affect the market price of our common stock. On March 17, 2000, we issued and sold 1,100,000 shares of our common stock to a limited number of investors in a private placement, exempt from registration under the Securities Act of 1933. Under the stock purchase agreement with the investors, we 8 9 EXHIBIT 99.1 were required to file a registration statement with the Securities and Exchange Commission within thirty days after March 17, 2000 for the resale by the investors of the shares of common stock issued in the private placement. This registration statement was filed on April 14, 2000. We also are required to use our reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission and maintain its effectiveness until the earlier of March 17, 2002, the time at which all shares acquired in the private placement have been sold under the registration statement, or the date on which each investor may sell all of the shares of common stock acquired by the investor in the private placement without registration or without regard to any volume limitations. Significant resales of the common stock issued in the private placement could adversely affect the market price of our common stock. WE MAY REQUIRE ADDITIONAL FINANCING. We expect operating expenses and capital expenditures to increase as we commercialize additional applications of our drug delivery technologies and increase our production capacity. We believe our cash and cash equivalents, together with the net proceeds from the private placement of common stock and expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned. In addition, other factors that will affect future capital requirements and may require us to seek additional financing, include the level of expenditures necessary to develop new products or technologies, the progress of our research and product development programs, the need to construct a larger than currently anticipated manufacturing facility or to construct a new manufacturing facility at an alternative site to meet demand for our products, results of our collaborative efforts with current and potential pharmaceutical company partners, and the timing of and amounts received from future product sales, product development fees and licensing revenue and royalties. We cannot be sure that additional financing will be available to us or, if available, on acceptable terms. Further, if we issue equity securities, our stockholders may experience dilution. 9 -----END PRIVACY-ENHANCED MESSAGE-----