e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-17758
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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13-3306985 |
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(State or jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
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240 Cedar Knolls Rd, Suite 200
Cedar Knolls, NJ
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07927 |
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(Address of principal executive offices)
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(Zip Code) |
(973) 532-8000
(Registrants 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 Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ
The number of shares of the Registrants common stock, $.01 par value, outstanding as of May
1, 2009 was 30,341,078.
EMISPHERE TECHNOLOGIES, INC.
Index
All other items called for by the instructions to Form 10-Q have been omitted because the
items are not applicable or the relevant information is not material.
PART I
ITEM 1. FINANCIAL STATEMENTS
EMISPHERE TECHNOLOGIES INC.
BALANCE SHEETS
March 31, 2009 and December 31, 2008
(in thousands, except share and per share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,951 |
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$ |
7,214 |
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Accounts receivable, net of allowance of $9 in March 2009 and
December 2008 |
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15 |
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232 |
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Prepaid expenses and other current assets |
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300 |
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273 |
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Total Current Assets |
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4,266 |
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7,719 |
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Equipment and leasehold improvements, net |
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312 |
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465 |
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Purchased technology, net |
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1,256 |
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1,316 |
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Restricted cash |
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255 |
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255 |
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Other assets |
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404 |
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421 |
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Total assets |
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$ |
6,493 |
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$ |
10,176 |
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Liabilities and Stockholders Deficit: |
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Current liabilities: |
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Notes payable, including accrued interest and net of related discount |
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$ |
12,146 |
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$ |
12,011 |
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Accounts payable and accrued expenses |
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3,288 |
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2,361 |
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Deferred revenue, current |
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110 |
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87 |
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Derivative instruments
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Related party |
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102 |
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153 |
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Others |
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75 |
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114 |
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Restructuring accrual, current |
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1,503 |
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927 |
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Other current liabilities |
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22 |
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20 |
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Total current liabilities |
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17,246 |
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15,673 |
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Notes payable, including accrued interest and net of related discount |
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18,854 |
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18,209 |
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Restructuring accrual |
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750 |
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1,953 |
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Deferred revenue |
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11,403 |
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11,240 |
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Deferred lease liability and other liabilities |
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123 |
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129 |
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Total liabilities |
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48,376 |
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47,204 |
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Stockholders deficit: |
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Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued and
outstanding |
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Common
stock, $.01 par value; authorized 100,000,000 shares; issued 30,630,810
shares (30,341,078 outstanding) as of March 31, 2009 and December 31, 2008 |
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306 |
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306 |
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Additional paid-in-capital |
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400,544 |
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400,306 |
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Accumulated deficit |
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(438,781 |
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(433,688 |
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Common stock held in treasury, at cost; 289,732 shares |
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(3,952 |
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(3,952 |
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Total stockholders deficit |
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(41,883 |
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(37,028 |
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Total liabilities and stockholders deficit |
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$ |
6,493 |
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$ |
10,176 |
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The accompanying notes are an integral part of the financial statements.
1
EMISPHERE TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
For the three months ended March 31, 2009 and 2008
(in thousands, except share and per share data)
(unaudited)
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For the three months ended |
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March 31, |
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2009 |
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2008 |
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Revenue |
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$ |
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$ |
154 |
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Costs and expenses: |
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Research and development |
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1,923 |
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3,832 |
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General and administrative expenses |
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2,921 |
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2,693 |
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Restructuring costs |
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(353 |
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Gain on disposal of fixed assets |
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(43 |
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(135 |
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Depreciation and amortization |
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211 |
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226 |
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Total costs and expenses |
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4,659 |
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6,616 |
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Operating income (loss) |
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(4,659 |
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(6,462 |
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Other non-operating income (expense): |
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Other income (expense)
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41 |
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142 |
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Sublease income |
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232 |
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90 |
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Sale of patents |
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1,500 |
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Change in
fair value of derivative instruments |
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Related party |
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51 |
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724 |
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Other |
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39 |
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769 |
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Interest expense |
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Related party |
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(662 |
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(575 |
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Other |
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(135 |
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(130 |
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Total other non-operating income (expense) |
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(434 |
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2,520 |
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Net loss |
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$ |
(5,093 |
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$ |
(3,942 |
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Net loss per share, basic and diluted |
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$ |
(0.17 |
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$ |
(0.13 |
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Weighted average shares outstanding, basic and
diluted |
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30,341,078 |
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30,336,928 |
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The accompanying notes are an integral part of the financial statements.
2
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2009 and 2008
(in thousands)
(unaudited)
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For the three months ended |
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March 31, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,093 |
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$ |
(3,942 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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151 |
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166 |
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Amortization |
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60 |
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60 |
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Change in fair value of derivative instruments |
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(90 |
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(1,493 |
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Non-cash interest expense |
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797 |
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705 |
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Non-cash compensation expense |
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238 |
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339 |
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Gain on disposal of fixed assets |
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(43 |
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(135 |
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Changes in assets and liabilities excluding non-cash transactions: |
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Decrease in accounts receivable |
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217 |
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113 |
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Decrease (increase) in prepaid expenses and other current assets |
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(27 |
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207 |
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Increase (decrease) in deferred revenue |
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186 |
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Increase (decrease) in accounts payable and accrued expenses |
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927 |
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(199 |
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Increase in other current liabilities |
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2 |
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17 |
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Increase (decrease) in deferred lease liability |
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(6 |
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29 |
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Restructuring |
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(627 |
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Total adjustments |
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1,785 |
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(191 |
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Net cash used in operating activities |
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(3,308 |
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(4,133 |
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Cash flows from investing activities: |
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Proceeds from sale and maturity of investments |
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4,010 |
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Purchases of investments |
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Proceeds from sale of fixed assets |
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45 |
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138 |
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Capital expenditures and other |
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(41 |
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Net cash provided by investing activities |
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45 |
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4,107 |
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Cash flows from financing activities: |
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Net cash provided by financing activities |
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Net decrease in cash and cash equivalents |
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(3,263 |
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(26 |
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Cash and cash equivalents, beginning of period |
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7,214 |
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3,938 |
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Cash and cash equivalents, end of period |
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$ |
3,951 |
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$ |
3,912 |
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The accompanying notes are an integral part of the financial statements.
3
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1. Nature of Operations and Liquidity
Nature of Operations. Emisphere Technologies, Inc. (Emisphere, our, us, the company or
we) is a biopharmaceutical company that focuses on our improved delivery of therapeutic molecules
and pharmaceutical compounds using its Eligen® Technology. These molecules and compounds could be
currently available or are in pre-clinical or clinical development.
Our core business strategy is to develop oral forms of drugs that are not currently available
or have poor bioavailability in oral form, either alone or with corporate partners, by applying the
Eligen® Technology to those drugs. Typically, the drugs that we target have received regulatory
approval, have demonstrated safety and efficacy, and are currently available on the market. Since
inception, we have no product sales from these product candidates.
Liquidity. As of March 31, 2009, we had approximately $4.2 million in cash and restricted cash,
approximately $13.0 million in working capital deficiency, a stockholders deficit of approximately
$41.9 million and an accumulated deficit of approximately $438.8 million. Our net loss and
operating loss for the three months ended March 31, 2009 were approximately $5.1 million and $4.7
million, respectively. We anticipate that we will continue to generate significant losses from
operations for the foreseeable future, and that our business will require substantial additional
investment that we have not yet secured. As such, we anticipate that our existing cash resources
will enable us to continue operations only through approximately August 2009 or earlier if
unforeseen events arise that negatively affect our liquidity. Further, we have significant future
commitments and obligations. These conditions raise substantial doubt about our ability to continue
as a going concern. Consequently, the audit opinion issued by our independent registered public
accounting firm relating to our financial statements for the year ended December 31, 2008 contained
a going concern explanatory paragraph. We are pursuing new as well as enhanced collaborations
and exploring other financing options, with the objective of minimizing dilution and disruption.
Our plan is to raise capital when needed and/or to pursue product partnering opportunities. We
expect to continue to spend substantial amounts on research and development, including amounts
spent on conducting clinical trials for our product candidates. Expenses will be partially offset
with income-generating license agreements, if possible. Further, we will not have sufficient
resources to develop fully any new products or technologies unless we are able to raise substantial
additional financing on acceptable terms or secure funds from new or existing partners. We cannot
assure that financing will be available when needed, or on favorable terms or at all. If additional
capital is raised through the sale of equity or convertible debt securities, the issuance of such
securities would result in dilution to our existing stockholders. Our failure to raise capital
before August 2009 will adversely affect our business, financial condition and results of
operations, and could force us to reduce or cease our operations. No adjustment has been made in
the accompanying financial statements to the carrying amount and classification of recorded assets
and liabilities should we be unable to continue operations.
2. Basis of Presentation
The condensed balance sheet at December 31, 2008 was derived from audited financial statements
but does not include all disclosures required by accounting principles generally accepted in the
United States of America. The other information in these condensed financial statements is
unaudited but, in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments are of a normal recurring
nature unless disclosed otherwise. These condensed financial statements, including notes, have been
prepared in accordance with the applicable rules of the Securities and Exchange Commission and do
not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. These condensed
financial statements should be read in conjunction with the financial statements and additional
information as contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
4
Certain reclassifications have been made to prior year amounts to conform to current period
presentation.
3. Stock-Based Compensation Plans
On April 20, 2007, the stockholders of the Company approved the 2007 Stock Award and Incentive
Plan (the 2007 Plan). The 2007 Plan provides for grants of options, stock appreciation rights,
restricted stock, deferred stock, bonus stock and awards in lieu of obligations, dividend
equivalents, other stock-based awards and performance awards to executive officers and other
employees of the Company, and non-employee directors, consultants and others who provide
substantial service to us. The 2007 Plan provides for the issuance of an aggregate 3,275,334 shares
as follows: 2,500,000 new shares, 374,264 shares remaining and transferred from the Companys 2000
Stock Option Plan (the 2000 Plan) (which was then replaced by the 2007 Plan) and 401,070 shares
remaining and transferred from the Companys Stock Option Plan for Outside Directors (the
Directors Stock Plan). In addition, shares canceled, expired, forfeited, settled in cash, settled
by delivery of fewer shares than the number underlying the award, or otherwise terminated under the
2000 Plan will become available for issuance under the 2007 Plan.
Prior to the adoption of the 2007 Plan, the Company granted stock-based compensation to
employees under the 2000 Plan and the 2002 Broad Based Plan (the 2002 Plan), and to non-employee
directors under the Directors Stock Plan. The Company also has grants outstanding under various
expired and terminated stock plans, including the 1991 Stock Option Plan, the 1995 Non-Qualified
Stock Option Plan, the Deferred Directors Compensation Stock Plan and Non-Plan Options. In January
2007, the Directors Stock Plan expired.
As of March 31, 2009, shares available for future grants under the 2007 Plan and the 2002 Plan
amounted to 2,608,359 and 109,644, respectively.
Total compensation expense recorded during the three months ended March 31, 2009 for
share-based payment awards was $0.24 million, of which $0.03 million is included in research and
development and $0.21 million is included in general and administrative expenses in the condensed
statement of operations for the three months ended March 31, 2009. Total compensation expense
recorded during the three months ended March 31, 2008 for share-based payment awards was $0.3
million, of which $0.1 million is included in research and development and $0.2 million is included
in general and administrative expenses in the condensed statement of operations for the three
months ended March 31, 2008. At March 31, 2009, total unrecognized estimated compensation expense
related to non-vested stock options granted prior to that date was $1.4 million, which is expected
to be recognized over a weighted-average period of approximately two years. No options were
exercised in the three months ended March 31, 2009 or 2008. No tax benefit was realized due to a
continued pattern of operating losses.
During the three months ended March 31, 2009, the Company granted options for 149,500 shares
with a weighted average exercise price of $0.62.
4. Fixed Assets
Tarrytown Facility. On December 8, 2008, as part of our efforts to improve operational
efficiency we decided to close our research and development facilities in Tarrytown to reduce costs
and improve operating efficiency. As of December 8, 2008 we terminated all research and development
staff and ceased using approximately 85% of the facilities which resulted in a restructuring charge
of approximately $3.8 million in the fourth quarter, 2008. As part of the restructuring charge, we
wrote down the value of our leasehold improvements in Tarrytown by approximately $1.0 million
(net); additionally, the useful life of leasehold improvements in portions of the facility that
were still in use as of December 31, 2008 was recalculated, resulting in an accelerated charge to
amortization expense of approximately $0.1 million during the three months ended March 31, 2009.
During March 2009 we began selling our laboratory equipment in connection with closing laboratory
facilities in Tarrytown. Consequently we recognized a gain on disposal of fixed assets of $43
thousand during the three months ended March 31, 2009 and adjusted the net book value of equipment
accordingly. Please refer to Footnote 10 for more information on this subject.
Fixed Assets. Equipment and leasehold improvements, net, consists of the following:
5
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Useful Lives |
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March 31, |
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December 31, |
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in Years |
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2009 |
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2008 |
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(in thousands) |
Equipment |
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3-7 |
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$ |
8,931 |
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$ |
9,080 |
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Leasehold improvements |
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Life of lease |
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77 |
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3,013 |
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9,008 |
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12,093 |
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Less, accumulated depreciation and amortization |
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8,696 |
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11,628 |
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Equipment and leasehold improvements, net |
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$ |
312 |
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$ |
465 |
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5. Purchased Technology
Purchased technology represents the value assigned to patents and the rights to utilize, sell
or license certain technology in conjunction with our proprietary carrier technology. These assets
are utilized in various research and development projects. Purchased technology is amortized over a
period of 15 years, which represents the average life of the patents.
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March 31, |
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December 31, |
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2009 |
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2008 |
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(in thousands) |
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Gross carrying amount |
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$ |
4,533 |
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$ |
4,533 |
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Less, accumulated amortization |
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3,277 |
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3,217 |
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Net book value |
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$ |
1,256 |
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$ |
1,316 |
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Amortization expense for the purchased technology is approximately $60 thousand per quarter in
2009 and in the remaining years through 2014.
6. Notes Payable
Notes payable consist of the following:
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March 31, |
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December 31, |
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2009 |
|
2008 |
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(in thousands) |
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|
MHR Convertible Notes |
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$ |
18,854 |
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$ |
18,209 |
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Novartis Note |
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12,146 |
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12,011 |
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$ |
31,000 |
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$ |
30,220 |
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MHR Convertible Notes. The Convertible Notes are due on September 26, 2012, bear interest at
11% and are secured by a first priority lien in favor of MHR Institutional Partners IIA L.P.
(together with its affiliates, MHR) on substantially all of our assets. Interest is payable in
the form of additional Convertible Notes issued monthly through March 31, 2007 and then
semi-annually beginning June 30, 2008, rather than in cash and we have the right to call the
Convertible Notes after September 26, 2010 if certain conditions are satisfied. Further the
Convertible Notes provide MHR with the right to require redemption in the event of a change in
control, as defined, prior to September 26, 2009. Such required redemption would be at 102% and
101% of the then outstanding principal and interest in the years through September 26, 2008 and
2009, respectively. The Convertible Notes are convertible, at the sole discretion of MHR or any
assignee thereof through September 25, 2010, into shares of our common stock at a price per share
of $3.78. At March 31, 2009, the Convertible Notes were convertible into 5,511,423 shares of our
common stock.
6
In connection with the convertible note transaction, we amended MHRs then existing warrants
to purchase 387,374 shares of our common stock to provide for additional anti-dilution protection.
MHR was also granted the option to purchase warrants for up to an additional 617,211 shares of our
common stock (the Warrant Purchase Option) at a price per warrant equal to $0.01 per warrant for
each of the first 67,084 warrants and $1.00 per warrant for each additional warrant. This option
was exercised by MHR in April 2006. See Note 7 for a further discussion of the liability related to
these warrants.
The book value of the MHR Notes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
|
|
|
Face Value of the notes |
|
$ |
20,833 |
|
|
$ |
20,270 |
|
Discount (related to the warrant purchase option) |
|
|
(928 |
) |
|
|
(966 |
) |
Lenders financing costs |
|
|
(1,051 |
) |
|
|
(1,095 |
) |
|
|
|
|
|
$ |
18,854 |
|
|
$ |
18,209 |
|
|
|
|
The debt discount, lenders finance costs, deferred financing costs and amounts attributed to
derivative instruments are being amortized to interest expense over the life of the Convertible
Notes using an interest method to yield an effective interest rate of 14.3%.
In connection with the MHR financing, the Company agreed to appoint a representative of MHR
(the MHR Nominee) and another person (the Mutual Director) to its Board of Directors. Further,
the Company amended its certificate of incorporation to provide for continuity of the MHR Nominee
and the Mutual Nominee on the Board, as described therein, so long as MHR holds at least 2% of the
outstanding common stock of the Company.
The Convertible Notes provide for various events of default. On May 5, 2006, we received an
executed waiver from MHR providing for a temporary waiver of defaults, which were not
payment-related, under the Loan Agreement. We have received extensions of such waiver from time to
time, the latest being received April 22, 2009 and is in effect for a period greater than one year;
as such the Convertible Notes have been classified as long-term.
Novartis Note. The Novartis Note currently bears interest at a rate of 7%. We have the option
to pay interest in cash on a current basis or accrue the periodic interest as an addition to the
principal amount of the Novartis Note. We may convert the Novartis Note at any time prior to
maturity into a number of shares of our common stock equal to the principal and accrued and unpaid
interest to be converted divided by the then market price of our common stock, provided certain
conditions are met. On March 31, 2009, a portion of the Novartis Note was convertible into
7,537,921 shares of our common stock.
7. Derivative Instruments
Derivative instruments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
March 2005 Equity financing warrants
|
|
$ |
9 |
|
|
$ |
31 |
|
MHR warrants
|
|
|
78 |
|
|
|
115 |
|
August 2007 Equity financing
warrants
|
|
|
90 |
|
|
|
121 |
|
|
|
|
|
|
$ |
177 |
|
|
$ |
267 |
|
|
|
|
7
March 2005 Equity Financing Warrants. In connection with the March 2005 offering, Emisphere
sold warrants to purchase 1.5 million shares of common stock to MHR and other unrelated investors.
The warrants were originally issued with an exercise price of $4.00 and expire on March 31, 2010.
The warrants provide for certain anti-dilution protection. Warrants to purchase up to 967,464
shares of common stock provide that under no circumstances will the adjusted exercise price be less
than $3.81. The remaining warrants do not limit adjustments to the exercise price. The
anti-dilution feature of the warrants was triggered in connection with the August 2007 financing,
resulting in an increase to the warrant shares of 4,838, as well as an adjustment to the exercise
price. At March 31, 2009, we have outstanding warrants to purchase up to 1,354,838 shares of common
stock. The adjusted exercise price for 967,464 of the warrants is $3.98 and for the 387,374
warrants held by MHR (MHR 2005 Warrants) is $3.76. Under the terms of the warrants, we have an
obligation to make a cash payment to the holders of the warrants for any gain that could have been
realized if the holders exercise the warrants and we subsequently fail to deliver a certificate
representing the shares to be issued upon such exercise by the third trading day after such
warrants have been exercised. Accordingly, the warrants have been accounted for as a liability. The
fair value of the warrants is estimated, at the end of each quarterly reporting period, using the
Black-Scholes option pricing model. The assumptions used in computing the fair value as of March
31, 2009 are a closing stock price of $0.68, expected volatility of 82.05% over the remaining term
of one year and three months and a risk-free rate of 0.875%. The fair value of the warrants
decreased by $0.02 million during the three months ended March 31, 2009 which has been recognized
in the accompanying statements of operations. The warrants will be adjusted to estimated fair value
for each future period they remain outstanding.
MHR Warrants. In connection with the exercise in April 2006 of the MHR Purchase Option
discussed in Note 6 above, the Company issued warrants for 617,211 shares to MHR for proceeds of
$0.6 million. The MHR 2006 Warrants have an original exercise price of $4.00 and are exercisable
through September 26, 2011. The MHR 2006 Warrants have the same terms as the August 2007 equity
financing warrants (see below), with no limit upon adjustments to the exercise price. The
anti-dilution feature of the MHR 2006 Warrants was triggered in connection with the August 2007
equity financing, resulting in an adjusted exercise price of $3.76. Based on the provisions of SFAS
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), the MHR 2006
Warrants have been determined to be an embedded derivative instrument which must be separated from
the host contract. The MHR 2006 Warrants contain the same potential cash settlement provisions as
the August 2007 equity financing warrants and therefore they have been accounted for as a separate
liability. The fair value of the warrants is estimated, at the end of each quarterly period, using
the Black-Scholes option pricing model. The assumptions used in computing the fair value as of
March 31, 2009 are a closing stock price of $0.68, expected volatility of 97.02% over the remaining
term of two and a half years and a risk-free rate of 1.375%. The fair value of the MHR warrants
decreased by $0.04 million during the three months ended March 31, 2009 which has been recognized
in the accompanying statements of operations. The MHR warrants will be adjusted to estimated fair
value for each future period they remain outstanding. See Note 6 for a further discussion of the
MHR Note.
August 2007 Equity Financing Warrants. In connection with the August 2007 offering, Emisphere
sold warrants to purchase up to 400,000 shares of common stock. Of these 400,000 warrants, 91,073
were sold to MHR. Each of the warrants were issued with an exercise price of $3.948 and expire on
August 21, 2012. The warrants provide for certain anti-dilution protection as provided therein.
Under the terms of the warrants, we have an obligation to make a cash payment to the holders of the
warrants for any gain that could have been realized if the holders exercise the warrants and we
subsequently fail to deliver a certificate representing the shares to be issued upon such exercise
by the third trading day after such warrants have been exercised. Accordingly, the warrants have
been accounted for as a liability. The fair value of the warrants is estimated, at the end of each
quarterly reporting period, using the Black-Scholes option pricing model. The warrants were
accounted for with an initial value of $1.0 million on August 22, 2007. The assumptions used in
computing the fair value as of March 31, 2009 are a closing stock price of $0.68, expected
volatility of 104.26% over the remaining term of three years and five months and a risk-free rate
of 1.75%. The fair value of the warrants decreased by $0.03 million during the three months ended
March 31, 2009 and the fluctuations have been recorded in the statements of operations. The
warrants will be adjusted to estimated fair value for each future period they remain outstanding.
8. Net loss per share
The following table sets forth the information needed to compute basic and diluted earnings
per share:
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands except per share data) |
Basic net loss |
|
$ |
(5,093 |
) |
|
$ |
(3,942 |
) |
Dilutive securities: |
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss |
|
$ |
(5,093 |
) |
|
$ |
(3,942 |
) |
|
|
|
Weighted average common shares outstanding |
|
|
30,341,078 |
|
|
|
30,336,928 |
|
Dilutive securities: |
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
Diluted average common stock equivalents outstanding |
|
|
30,341,078 |
|
|
|
30,336,928 |
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.17 |
) |
|
$ |
(0.13 |
) |
For the three months ended March 31, 2009 and 2008, certain potential shares of common stock
have been excluded from diluted loss per share because the exercise price was greater than the
average market price of our common stock, and therefore, the effect on diluted loss per share would
have been anti-dilutive. The following table sets forth the number of potential shares of common
stock that have been excluded from diluted net loss per share because their effect was
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Options to purchase common shares |
|
|
2,230,559 |
|
|
|
2,747,700 |
|
Outstanding warrants |
|
|
2,972,049 |
|
|
|
2,972,049 |
|
Novartis convertible note payable |
|
|
7,537,921 |
|
|
|
6,991,781 |
|
MHR note payable |
|
|
5,511,423 |
|
|
|
4,939,796 |
|
|
|
|
|
|
|
|
|
|
|
18,251,952 |
|
|
|
17,651,325 |
|
|
|
|
|
|
|
|
9. Comprehensive Income and Loss
Our comprehensive income and loss was comprised of net income or loss adjusted for the change
in net unrealized gain or loss on investments. Comprehensive loss was $5.1 million and $3.9 million
for the three months ended March 31, 2009 and March 31, 2008, respectively.
10. Commitments and Contingencies
Commitments. Through March 31, 2009 we leased office and laboratory space located at 765 and 777
Old Saw Mill River Road, Tarrytown, NY 10591, under a non-cancelable operating lease expiring in
2012 as well as office space in Cedar Knolls, NJ under a non-cancelable operating lease expiring in
2013. On April 29, 2009, the Company entered into a Lease Termination Agreement (the Agreement)
with BMR-Landmark at Eastview, LLC, a Delaware limited liability company (BMR) pursuant to which
the Company and BMR terminated the lease (Lease) of space at 765 and 777 Old Saw Mill River Road
in Tarrytown, New York (the Lease Premises). The Agreement provides that Company shall make the
following payments to BMR: (a) One Million Dollars, payable upon execution of the Agreement, (b)
Five Hundred Thousand Dollars, payable six months after the execution date of the Agreement, and
(c) Seven Hundred Fifty Thousand Dollars, payable twelve months after the execution date of the
Agreement. For more information on this topic, please see the discussion on the Restructuring
Expense under Contingencies below.
Contingencies. In the ordinary course of business, we enter into agreements with third parties
that include indemnification provisions which, in our judgment, are normal and customary for
companies in our industry sector. These agreements are typically with business partners, clinical
sites, and suppliers. In these agreements, we generally
9
agree to indemnify, hold harmless and reimburse indemnified parties for losses suffered or incurred
by the indemnified parties with respect to our product candidates, use of such product candidates
or other actions taken or omitted by us. The maximum potential amount of future payments we could
be required to make under these indemnification provisions is unlimited. We have not incurred
material costs to defend lawsuits or settle claims related to these indemnification provisions. As
a result, the estimated fair value of liabilities relating to these provisions is minimal.
Accordingly, we have no liabilities recorded for these provisions as of March 31, 2009.
In the normal course of business, we may be confronted with issues or events that may result
in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the
action of various regulatory agencies. If necessary, management consults with counsel and other
appropriate experts to assess any matters that arise. If, in managements opinion, we have incurred
a probable loss as set forth by accounting principles generally accepted in the United States, an
estimate is made of the loss and the appropriate accounting entries are reflected in our financial
statements. Except as discussed below, there are no currently pending, threatened lawsuits or
claims against the Company that could have a material adverse effect on our financial position,
results of operations or cash flows.
On April 6, 2007, the Board of Directors appointed Michael V. Novinski to the position of
President and Chief Executive Officer. Pursuant to his appointment, the Company entered into a
three year employment agreement with Mr. Novinski. If Mr. Novinskis contract is terminated without
cause by the Board of Directors or at any time by the Executive for Good Reason as defined in his
contract, we are obligated to make severance payments to Mr. Novinski.
In April 2005, the Company entered into an employment contract with its then Chief Executive
Officer, Dr. Michael M. Goldberg, for services through July 31, 2007. On January 16, 2007, the
Board of Directors terminated Dr. Goldbergs services. On April 26, 2007, the Board of Directors
held a special hearing at which it determined that Dr. Goldbergs termination was for cause. On
March 22, 2007, Dr. Goldberg, through his counsel, filed a demand for arbitration asserting that
his termination was without cause and seeking $1,048,000 plus attorneys fees, interest,
arbitration costs and other relief alleged to be owed to him in connection with his employment
agreement with the Company. Dr. Goldbergs employment agreement provides, among other things, that
in the event he is terminated without cause, Dr. Goldberg would be paid his base salary plus bonus,
if any, monthly for a severance period of eighteen months or, in the event of a change of control,
twenty-four months, and he would also be entitled to continued health and life insurance coverage
during the severance period and all unvested stock options and restricted stock awards would
immediately vest in full upon such termination. Dr. Goldbergs employment agreement provided that
in the event he is terminated with cause, he will receive no additional compensation. During the
year ended December 31, 2007, the Company accrued the estimated costs to settle this matter. No
settlement has been reached and the dispute continues. In February 2008, the Company received $0.5
million as a result of a cancellation of a split dollar life insurance policy on Dr. Goldberg. Dr.
Goldberg claimed approximately $0.2 million was due him as a return of policy premium. In June
2008, Dr. Goldberg commenced a separate lawsuit in the New York State Supreme Court (New York
County) claiming that the Company breached his employment agreement by not remitting to Dr.
Goldberg that portion of the cash value of the life insurance policy. During the year ended
December 31, 2008, the Company adjusted its accrual to reflect estimated costs to settle this
matter. On January 29, 2009, after transfer from the New York State Supreme Court (New York County)
to an independent arbitrator, the Company received a finding from such arbitrator awarding a
partial summary judgment to Dr. Goldberg for compensatory damages in an amount equal to $240,101.
The company paid Dr. Goldberg such amount on February 5, 2009. All remaining claims were deferred
by the Arbitrator pending further proceedings between the parties. The Company believes the
remaining claims are without merit and will vigorously defend itself against Dr. Goldbergs claims.
The Company has made an accrual of costs estimated to settle this matter. However, it is impossible
to predict with certainty the ultimate impact the resolution of this matter will have on our
financial statements. It is possible that additional costs could be incurred to resolve the matter
and such costs could be material. The ultimate resolution could have a material adverse impact on
our financial statements.
On August 18, 2008, the Company filed a complaint in the United States District Court for the
District of New Jersey against Laura A. Kragie and Kragie BioMedWorks, Inc. seeking a declaratory
judgment affirming Emispheres sole rights to its proprietary technology for the oral
administration of Vitamin B12, as set forth in several Emisphere United States provisional patent
applications. The complaint also includes a claim under the Lanham Act arising from statements made
by defendants on their web site. Laura A. Kragie, M.D., is a former consultant for Emisphere who
later was employed by Emisphere. On February 13, 2009, the defendants filed an answer, affirmative
defenses and counterclaims, adding as counterclaim defendants current or former Emisphere
executives or employees, including Michael V. Novinski. The countersuit against Emisphere alleges
breach of contract, fraudulent inducement, trademark infringement, false advertising, and other
claims. Emisphere believes that the counterclaims are without merit, and will
10
litigate all claims vigorously. At the current time, we are unable to estimate a loss, if any, that
may result from the resolution of this matter.
The Company evaluates the financial consequences of legal actions periodically or as facts
present themselves and books accruals to account for its best estimate of future costs accordingly.
Restructuring Expense
On December 8, 2008, as part of our efforts to improve operational efficiency we decided to
close our research and development facilities in Tarrytown to reduce costs and improve operating
efficiency. In connection with the closing of those facilities we recorded $3.8 million in
restructuring expenses comprised of $2.6 million lease restructuring expense (net of subleases),
$0.2 million in termination benefits (employee severance and related costs) and $1.0 million in
leasehold improvement abandonment. The restructuring liability at December 31, 2008 of $2.9 million
relates primarily to the portion of the Tarrytown facility we ceased using as of December 8, 2008,
is recorded at net present value, and includes several obligations related to the restructuring.
During the three months ended March 31, 2009, we made approximately $170 thousand in net
rental payments (calculated at net present value) on the Tarrytown property and made termination
payments of approximately $104 thousand which represented employee severance and benefits charges.
The restructuring liability was reduced by these amounts.
On April 29, 2009, the Company entered into a Lease Termination Agreement with BMR pursuant to
which the Company and BMR terminated the lease of space at 765 and 777 Old Saw Mill River Road in
Tarrytown, New York. The Company had previously announced its decision to close its research and
development facility located on the Lease Premises in an effort to improve operational efficiency
and to strengthen its financial foundation. Pursuant to the Agreement, the Lease was terminated
effective as of April 1, 2009. The Agreement provides that Company shall make the following
payments to BMR: (a) One Million Dollars, payable upon execution of the Agreement, (b) Five Hundred
Thousand Dollars, payable six months after the execution date of the Agreement, and (c) Seven
Hundred Fifty Thousand Dollars, payable twelve months after the execution date of the Agreement.
Consequently, the restructuring liability was adjusted to reflect the terms of the Lease
Termination Agreement, resulting in a $353 thousand reduction in the liability and restructuring
costs. Adjustments to the restructuring liability and restructuring costs result in an improvement
in the net loss and net loss per share of $0.35 million and $0.01 respectively for the three months
ended March 31, 2009.
Adjustments to the restructuring liability are as follows ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
Cash |
|
|
Adjustments to |
|
|
Liability at |
|
|
|
December 31, 2008 |
|
|
Payments |
|
|
the Liability |
|
|
March 31, 2009 |
|
Lease restructuring expense |
|
$ |
2,772 |
|
|
$ |
(170 |
) |
|
$ |
(353 |
) |
|
$ |
2,249 |
|
Employee severance and related costs |
|
|
108 |
|
|
|
(104 |
) |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,880 |
|
|
|
(274 |
) |
|
|
(353 |
) |
|
|
2,253 |
|
11. Income Taxes
The Company is primarily subject to United States federal and New Jersey state income tax. The
Companys policy is to recognize interest and penalties related to income tax matters in income tax
expense. As of December 31, 2008 and March 31, 2009, the Company had no accruals for interest or
penalties related to income tax matters. For the three months ended March 31, 2009 and 2008, the
effective income tax rate was 0%. The difference between the Companys effective income tax rate
and the Federal statutory rate of 35% is attributable to state tax benefits and tax credits offset
by changes in the deferred tax valuation allowance.
12. New Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.
This FSP amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require
entities to provide disclosures about fair value of financial
11
instruments in interim financial
information. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require
those disclosures in summarized financial information at interim reporting periods. In addition,
an entity shall disclose in the body or in the accompanying notes of its summarized financial
information for interim reporting periods and in its financial statements for annual reporting
periods the fair value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial position, as required by
SFAS 107. The Company is required to adopt FSP FAS 107-1 and APB 28-1 for the quarter ended June
30, 2009. Management does not anticipate that the adoption of FSP FAS 107-1 and APB 28-1 will have
a material impact on the Companys financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP changes existing guidance for determining whether an
impairment is other than temporary to debt securities; replaces the existing requirement that
management assert it has both the intent and ability to hold an impaired security until recovery
with a requirement that management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security before recovery of its
cost basis; requires that an entity recognize noncredit losses on held-to-maturity debt securities
in other comprehensive income and amortize that amount over the remaining life of the security in a
prospective manner by offsetting the recorded value of the asset unless the security is
subsequently sold or there are additional credit loses; and requires entities to present the total
other-than-temporary impairment in the statement of earnings with an offset for the amount
recognized in other comprehensive income. When adopting FSP FAS 115-2 and FAS 124-2, entities are
required to record a cumulative-effect adjustment as of the beginning of the period of adoption to
reclassify the noncredit component of a previously recognized other-temporary impairment from
retained earnings to accumulated other comprehensive income if the entity does not intend to sell
the security and it is not more likely than not that the entity will be required to sell the
security before recovery. The Company is required to adopt FSP FAS 115-2 and FAS 124-2 for the
quarter ended June 30, 2009. Management does not anticipate that the adoption of FSP FAS 115-2 and
FAS 124-2 will have a material impact on the Companys financial statements.
In April 2009 the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. This FSP affirms that the objective of fair value when the market for an
asset is not active is the price that would be received to sell the asset in an orderly
transaction; clarifies and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that asset is not active;
and eliminates the proposed presumption that all transactions are distressed (not orderly) unless
proven otherwise. The FSP instead requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The Company is required to adopt FSP
FAS 157-4 for the quarter ended June 30, 2009. Management does not anticipate that the adoption of
FSP FAS 157-4 will have a material impact on the Companys financial statements.
In December 2007, the FASB ratified the consensus reached by the EITF with respect to EITF
Issue No. 07-01 Accounting for Collaborative Arrangements. The EITF defined collaborative
arrangements and established reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third parties. This issue
is effective for financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of EITF Issue No. 07-01 did not have a material impact on our financial position,
results of operations or cash flows.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161). The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position, financial
performance, and cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. In accordance with the provisions of SFAS 161 we
have included additional disclosures (in Note 7. Derivatives) describing how and why we use
derivative instruments. The Company has determined that the adoption of SFAS 161 did not have a
material impact on our financial statements.
Effective January, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). In February 2008, the FASB issued Staff Position (FSP) FAS 157-1 to exclude SFAS no. 13,
Accounting for Leases and its related interpretive accounting pronouncements that address leasing
transactions, from the scope of SFAS No. 157. In February 2008, the FASB also issued FASB Staff Position No. 157-2, Effective Date of
FASB Statement 157, which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial; liabilities, except those that are recognized or disclosed
in the financial statements at fair value. SFAS 157
12
defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and enhances disclosures about
fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or the most
advantageous market for an asset or liability in an orderly transaction between participants on the
measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the
use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair
value hierarchy based on the levels of inputs, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value which are the following:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities |
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or corroborated by observable market data or
substantially the full term of the assets or liabilities |
|
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the value of the assets or liabilities |
The adoption of this statement for non-financial assets and liabilities effective January 1,
2009, did not have a material impact on the Companys results of operations or financial condition.
Effective for periods beginning on or after December 15, 2008, the FASB issued SFAS 141R,
Business Combinations (SFAS 141R). SFAS 141R expands the scope of acquisition accounting to
all transactions under which control of a business is obtained. This standard requires an acquirer
to recognize the assets acquired and liabilities assumed at the acquisition date fair values with
limited exceptions. Additionally, SFAS 141R requires that contingent consideration as well as
contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired
in-process research and development be capitalized and recorded as intangible assets at the
acquisition date, and also requires transaction costs and costs to restructure the acquired company
be expensed. The adoption of SFAS 141R did not have a material impact on the Companys financial
statements.
14. Fair Value
In accordance with SFAS 157, the following table represents the Companys fair value hierarchy
for its financial assets and liabilities measured at fair value on a recurring basis as of March
31, 2009 ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
|
Derivative instruments |
|
|
$177 |
|
|
|
$267 |
|
|
|
|
Total |
|
|
177 |
|
|
|
267 |
|
|
|
|
15. Sale of Patents
On February 8, 2008, the Company sold to MannKind Corporation (Mannkind) certain patents and
a patent application relating to diketopiperazine technology for a total purchase price of $2.5
million. An initial payment of $1.5 million was received in February 2008 and recognized as other
income. An additional $0.5 million will be paid no later than July 5, 2009 with the remaining
payment to be made no later than October 5, 2010. We will recognize as revenue the additional
amounts due from Mannkind when payment becomes reasonably assured.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR CAUTIONARY STATEMENT
Certain statements in this Managements Discussion and Analysis of Financial Conditions and
Results of Operations and elsewhere in this report as well as statements made from time to time by
our representatives may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward looking statements include (without
limitation) statements regarding planned or expected studies and trials of oral formulations that
utilize our Eligen® Technology; the timing of the development and commercialization of our product
candidates or potential products that may be developed using our Eligen® Technology; the potential
market size, advantages or therapeutic uses of our potential products; variation in actual savings
and operational improvements resulting from restructurings; and the sufficiency of our available
capital resources to meet our funding needs. We do not undertake any obligation to publicly update
any forward-looking statement, whether as a result of new information, future events, or otherwise,
except as required by law. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or achievements to
be materially different from any future results or achievements expressed or implied by such
forward-looking statements. Such factors include the factors described under Part II, Item 1A.
Risk Factors and other factors discussed in connection with any forward looking statements.
General
Emisphere Technologies, Inc. is a biopharmaceutical company that focuses on a unique and
improved delivery of therapeutic molecules or nutritional supplements using its Eligen® Technology.
These molecules could be currently available or are under development. Such molecules are usually
delivered by injection; in many cases, their benefits are limited due to poor bioavailability, slow
on-set of action or variable absorption. In those cases, our technology may increase the benefit of
the therapy by improving bioavailability or absorption or by increasing the onset of action. The
Eligen® Technology can be applied to the oral route of administration as well other delivery
pathways, such as buccal, rectal, inhalation, intra-vaginal or transdermal.
Since our inception in 1986, substantial efforts and resources have been devoted to
understanding the Eligen® Technology and establishing a product development pipeline that
incorporated this technology with selected molecules. Although no products have been commercialized
to date, research and investment is now being placed behind both the pipeline and the advancement
of this technology. Further development and exploration of the technology entail risk and
operational expenses. However, we have made significant progress on refocusing our efforts on
strategic development initiatives and cost control and continue to aggressively seek to reduce
non-strategic spending.
In 2007 and 2008, Emisphere reevaluated the Eligen® Technology and refocused our corporate
strategy on commercializing the Eligen® Technology as quickly as possible, building high-value
partnerships and reprioritizing the product pipeline. Spending was redirected and aggressive cost
control initiatives were implemented. These changes resulted in redeployment of resources to
programs that may yield commercial products in a shorter period of time. In addition to continuing
to develop product candidates in-house, we demonstrated and enhanced the value of our Eligen®
Technology by attracting new partners like Novo Nordisk and rejuvenating existing partnerships like
Novartis.
The application of the Eligen® Technology is potentially broad and may provide for a number of
opportunities across a spectrum of therapeutic modalities. During the first quarter 2009, we
continued to develop our product pipeline utilizing the Eligen® Technology with prescription and
nonprescription product candidates. We prioritized our development efforts based on overall
potential returns on investment, likelihood of success, and market and medical need. Our goal is to
implement our Eligen® Technology to enhance overall healthcare, including patient accessibility and
compliance, while benefiting the commercial pharmaceutical marketplace and driving company
valuation.
Investments required to continue developing our product pipeline may be partially paid by
income-generating license arrangements whose value tends to increase as product candidates move
from pre-clinical into clinical development. It is our intention that incremental investments that
may be required to fund our research and development will be approached incrementally in order to
minimize disruption or dilution.
14
We plan to attempt to expand our current collaborative relationships to take advantage of the
critical knowledge that others have gained by working with our technology. We will also continue to
pursue product candidates for internal development and commercialization. We believe that these
internal candidates must be capable of development with reasonable investments in an acceptable
time period and with a reasonable risk-benefit profile.
Our product pipeline includes prescription and nutritional supplements candidates. On the
prescription side, our licensees include Novartis Pharma AG, which is using our drug delivery
technology in combination with salmon calcitonin, parathyroid hormone, and human growth hormone.
Their most advanced program is testing an oral formulation of calcitonin to treat osteoarthritis
and osteoporosis. Novartis is conducting two Phase III clinical studies for osteoarthritis and one
Phase III clinical study for osteoporosis. During the third quarter 2008 Novartis completed
enrollment for the first trial for osteoarthritis; a multi-center Phase III study exploring the
safety and efficacy of an oral formulation of salmon calcitonin using Emispheres proprietary
Eligen® Technology to treat patients with osteoarthritis of the knee. This study, which will be
used to support the filing with health authorities worldwide, includes more than 1,100 patients
between the ages of 51 and 80 years old with a medical history and symptoms of knee osteoarthritis.
This study will be conducted mainly in Europe and is estimated to be completed during the second
half 2010. In October 2008, Emisphere also announced that Novartis Pharma AG and Nordic Bioscience
initiated a second multi-center Phase III study exploring the safety and efficacy of an oral
formulation of salmon calcitonin to treat patients with osteoarthritis of the knee. This second
study, designed to meet FDA requirements for U.S. registration, will examine patients between 51
and 80 years of age suffering from painful symptoms of knee osteoarthritis. The study will be
conducted in multiple sites, including the U.S., with an estimated completion during the second
half 2011.
Novartis is also conducting a Phase III trial for osteoporosis. This Phase III trial is a
multi-center study exploring the safety and efficacy of oral Eligen® salmon calcitonin to treat
vertebral fractures in postmenopausal women aged 60-80 with osteoporosis. The last of 4,500+
patients was recruited for the osteoporosis study in the final week of June 2008, and the
three-year study will be conducted in North and South America, Europe and Asia. Now that these
Phase III studies are fully enrolled, over 5,500 clinical study patients will be using the Eligen®
Technology in 2009.
A study Novartis Pharma AG and its partner Nordic Bioscience published in the December 2008
issue of BMC Clinical Pharmacology demonstrated that orally administered salmon calcitonin using
Emispheres carrier, (5-CNAC) an Eligen® oral delivery technology, is effective in reducing bone
breakdown. The randomized, double-blind, double-dummy, placebo-controlled study among 81 subjects
in Copenhagen was conducted on behalf of Emispheres partner Novartis Pharma AG by Nordic
Bioscience by M.A. Karsdal, I. Byrjalsen, B.J. Riis and C. Christiansen. The study suggests that
orally administered 0.8 mg of salmon calcitonin was effective in suppression of Serum CTX
irrespective of time of dosing. Serum CTX-1 (Serum C-terminal telo-peptide of collagen type I) is
the biochemical marker used to measure bone resorption. There were no safety concerns with the
salmon calcitonin oral formulation using Emispheres carrier 5-CNAC, which had been previously
demonstrated in earlier studies.
A study Novartis Pharma AG and its partner Nordic Bioscience published in the October 2008
issue of BMC Clinical Pharmacology demonstrated that oral salmon calcitonin using Emispheres
proprietary Eligen® Technology taken 30 to 60 minutes before meals with 50 ml of water results in
improved absorption and improved efficacy measured by the biomarker of reduced bone resorption
(sCTX-I) compared to the commonly prescribed nasal formulation. The study was a randomized,
partially-blind, placebo-controlled, single dose exploratory crossover clinical trial using 56
healthy postmenopausal women.
Novartis is also conducting a Phase I study in postmenopausal women to determine the safety
and tolerability of oral PTH134, a combination of human PTH-1-34 and Emispheres delivery agent
5-CNAC, for the treatment of postmenopausal osteoporosis. The study is designed to assess the
bioavailability profile of increasing doses of PTH-1-34 combined with different amounts of 5-CNAC
administered orally. The trial is being conducted in Switzerland and is estimated to yield first
interpretable results by the end of the year.
Research using the Eligen® Technology and GLP-1, a potential treatment for Type 2 diabetes is
being conducted by Novo Nordisk and by Dr. Christoph Beglinger, M.D., an independent medical
researcher at University Hospital in Basel,
Switzerland. We had previously conducted extensive tests on oral insulin for Type 1 diabetes
and concluded that a more productive pathway is to move forward with GLP-1 and its analogs, an oral
form of which might be used to treat Type 2 diabetes and related conditions. Consequently, on June
21, 2008 we entered into an exclusive Development and License Agreement with Novo Nordisk focused
on the development of oral formulations of Novo Nordisks proprietary GLP-1 receptor agonists. Novo
Nordisks development efforts are in the early preclinical stage. Additionally, a second early
15
stage human study of an oral formulation that combines PYY and native GLP-1 with Emispheres
proprietary delivery agent known as SNAC was conducted at University Hospital by Professor
Beglinger. The study demonstrated the oral delivery of the GLP-1 peptide was safe and effective and
that the oral formulation of GLP-1 stimulated an early increase in fasting insulin and a decrease
in fasting glucose as compared to placebo.
Emisphere is independently developing Eligen® B12 as a nutritional supplement product
candidate. Following our proof of concept animal studies of the absorption of vitamin B12 using our
Eligen® Technology, additional preclinical studies using dogs further demonstrated that the Eligen®
Technology enhances the absorption of oral B12 and confirmed earlier proof of concept studies
conducted in rats. We have completed our first clinical study testing our new vitamin B12
formulation in 20 normal healthy males.
The data from our first pharmacokinetic study showed mean vitamin B12 peak blood levels were
more than 10 times higher for the Eligen® B12 5mg formulation than for the 5mg commercial
formulation. The mean time to reach peak concentration (Tmax) was reduced by over 90%; to 0.5 hours
for the Eligen® B12 5mg from 6.8 hours for the commercial 5mg product. Improvement in
bioavailability was approximately 240%, with absorption time at 30 minutes and a mean
bioavailability of 5%. The study was conducted with a single administration of Eligen® B12; there
were no adverse reactions, and Eligen® B12 was well-tolerated.
The data from our first Eligen® B12 clinical study demonstrates a new, more bioavailable oral
form vitamin B12 and a potential new avenue for addressing the problems with B12 supplementation.
Eligen® B12 avoids the normal specialized absorption process that limits absorption of vitamin B12
from current formulations. By circumventing the current absorption process, Eligen® B12 may present
an opportunity to reduce the potential uncertainty associated with oral megadoses of vitamin B12
and may reduce the substantial number of injections being taken by millions of individuals.
The Company is planning one or more additional clinical studies, including pharmacokinetic and
safety and efficacy studies in vitamin B12 deficient people to further elucidate the advantages of
the Eligen® technology. Currently, it is estimated that at least five million people in the U.S.
are taking 40 million injections of vitamin B12 per year to treat a variety of debilitating medical
conditions (as noted above). Another estimated five million are consuming more than 600 million
tablets of vitamin B12 orally.
The safety of the carrier we plan to use to deliver Eligen® B12 has been demonstrated in
earlier preclinical and clinical studies. Since vitamins are regulated by the FDA under different
provisions than those used for drugs and biologicals, we anticipate that our development of
vitamins may be shorter and less expensive than for a prescription drug.
On May 1, 2009, Emisphere Technologies was informed by an independent expert panel of
scientists that its Sodium N-[8-(2-hydroxybenzoyl) Amino] Caprylate (SNAC) carrier has been
provisionally designated as Generally Recognized as Safe (GRAS) for its intended application in
combination with nutrients added to food and dietary supplements. Following a comprehensive
evaluation of research and toxicology data, Emispheres SNAC was found to be safe at a dosage up to
250 mg per day when used in combination with nutrients to improve their dietary availability.
Achieving GRAS status will establish Emispheres carrier as exempt from pre-market approval and
enhances the potential commercialization of the Eligen® Technology with other substances such as
vitamins. The Company expects that the first of these products will be its oral Eligen® Vitamin B12
product. Management expects to achieve final GRAS status following the publication of two peer
reviewed papers describing the toxicology of SNAC, currently scheduled for July/August, in the
International Journal of Toxicology.
During 2008, Emisphere also continued to focus on improving operational efficiency. On
December 8, 2008 we announced plans to strengthen our financial foundation while maintaining our
focus on advancing and commercializing the Eligen® Technology. By closing our research and
development facility in Tarrytown, New York and utilizing independent contractors to conduct
essential research and development, we estimate that we will reduce our annual operating costs by
approximately 60% from 2008 levels. Emisphere estimates it will reduce cash expenditures by over
$11 million annually, with a targeted cash burn rate of between $7 and $8 million per year.
Additionally, we expect to accelerate the commercialization of the Eligen® Technology in a cost
effective way and to gain operational efficiencies by tapping into more advanced scientific
processes independent contractors can provide. The amount of savings realized in 2009 depends on
how quickly these actions can be fully implemented. Implementation began immediately in December
2008 and is expected to be completed during the second quarter 2009.
16
On April 29, 2009, the Company entered into a Lease Termination Agreement (the Agreement)
with BMR-Landmark at Eastview, LLC, a Delaware limited liability company (BMR) pursuant to which
the Company and BMR terminated the lease (Lease) of space at 765 and 777 Old Saw Mill River Road
in Tarrytown, New York (the Lease Premises). The Company had previously announced its decision
to close its research and development facility located on the Lease Premises in an effort to
improve operational efficiency and to strengthen its financial foundation. Pursuant to the
Agreement, the Lease was terminated effective as of April 1, 2009. The Company was allowed to
enter and access the Lease Premises from April 1, 2009 until April 30, 2009, for the sole purpose
of winding down the Companys operations in the Lease Premises, removing its property and
decommissioning the Lease Premises.
The Agreement provides that Company shall make the following payments to BMR: (a) One Million
Dollars, payable upon execution of the Agreement, (b) Five Hundred Thousand Dollars, payable six
months after the execution date of the Agreement, and (c) Seven Hundred Fifty Thousand Dollars,
payable twelve months after the execution date of the Agreement. By terminating its Tarrytown
lease, the Companys monthly cash burn rate is reduced by approximately $0.3 million immediately.
In addition, a total of approximately $14 million in future lease payments were eliminated. Through
this lease termination agreement the Company realized a critical milestone in its cost control
plan, which will help meet its cash burn target of between $7 and $8 million per year.
During April 2009 we announced a strategic alliance with AAIPharma intended to expand the
application of Emispheres Eligen® Technology and AAIPharmas drug development services. AAIPharma
Inc. is a global provider of pharmaceutical product development services that enhance the
therapeutic performance of its clients drugs. The company works with many pharmaceutical and
biotech companies and currently provides drug product formulation development services to
Emisphere. This relationship expands our access to new therapeutic candidates for the Eligen®
Technology, which potentially could lead to new products and to new alliance agreements as well. We
are also pleased that a global provider of pharmaceutical product development services with the
stature of AAI has chosen to combine with Emisphere in a synergistic alliance that will benefit
both organizations. This strategic alliance supports AAIs strategy to offer drug delivery options
to its pharmaceutical and biotech customers.
Our other product candidates in development are in earlier or preclinical research phases, and
we continue to assess them for their compatibility with our technology and market need. Our intent
is to seek partnerships with pharmaceutical and biotechnology companies for certain of these
products. We plan to expand our pipeline with product candidates that demonstrate significant
opportunities for growth.
Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
2009 |
|
2008 |
|
Change |
|
|
(in thousands) |
Revenue |
|
$ |
|
|
|
$ |
154 |
|
|
$ |
(154 |
) |
Operating expenses |
|
$ |
4,659 |
|
|
$ |
6,616 |
|
|
$ |
(1,957 |
) |
Operating loss |
|
$ |
(4,659 |
) |
|
$ |
(6,462 |
) |
|
$ |
1,803 |
|
Other income (expense) |
|
$ |
(434 |
) |
|
$ |
2,520 |
|
|
$ |
(2,954 |
) |
Net loss |
|
$ |
(5,093 |
) |
|
$ |
(3,942 |
) |
|
$ |
(1,151 |
) |
Revenue decreased $0.15 million for the three months ended March 31, 2009 compared to the same
period last year because receipts from partnerships are classified as deferred revenue.
17
Operating expenses decreased $2.0 million or 30% for the three months ended March 31, 2009 in
comparison to the same period last year. Details of these changes are highlighted in the table
below:
|
|
|
|
|
|
|
(in thousands) |
|
Decrease in human resources costs |
|
$ |
(1,880 |
) |
Increase in professional fees |
|
|
344 |
|
Decrease in occupancy costs |
|
|
(279 |
) |
Increase in clinical costs |
|
|
317 |
|
Decrease in depreciation and amortization |
|
$ |
(14 |
) |
Decrease in other costs |
|
|
(445 |
) |
|
|
|
|
|
|
$ |
(1,957 |
) |
|
|
|
|
Human resource costs declined 59% commensurate with the December 2008 reduction in headcount.
Professional fees increased 24% primarily due to increases in legal fees.
Occupancy costs decreased 23% due to the closure of our laboratory facilities in Tarrytown, NY in
December 2008.
Clinical costs increased 160% due to clinical testing programs and outside lab fees related to oral
formulations of the PYY and GLP-1 combination and B12.
Depreciation and amortization costs decreased 6% due to the write off of certain leasehold
improvements in connection with the above referenced closure of the Tarrytown facility.
Other costs decreased 120% due primarily to the $0.35 million decrease in restructuring reserve in
connection with the closure of the Tarrytown facility and reduced headcount. Without the
adjustment to the restructuring reserve other costs would have decreased 25% due to the reduction
in headcount.
Our principal operating costs include the following items as a percentage of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
Human resource costs, including
benefits |
|
|
28 |
% |
|
|
48 |
% |
Professional fees for legal, intellectual property, accounting
and consulting |
|
|
39 |
% |
|
|
22 |
% |
Occupancy for our laboratory and operating
space |
|
|
19 |
% |
|
|
18 |
% |
Clinical costs |
|
|
11 |
% |
|
|
3 |
% |
Depreciation and amortization |
|
|
5 |
% |
|
|
3 |
% |
Other |
|
|
-2 |
% |
|
|
6 |
% |
Other income decreased $3.0 million for the three months ended March 31, 2009 in comparison to
the same period last year primarily due to the receipt of the initial $1.5 million payment for the
sale of certain Emisphere patents and a patent application relating to diketopiperazine technology
to MannKind Corporation in 2008 and a net change in fair value of derivative instruments of $1.4
million due to relative changes in stock price during the three months ended March 31, 2009 and
March 31, 2008 respectively.
As a result of the above factors, we had a net loss of $5.1 million for the three months ended
March 31, 2009, compared to a net loss of $3.9 million for the three months ended March 31, 2008.
18
Liquidity and Capital Resources
Since our inception in 1986, we have generated significant losses from operations and we
anticipate that we will continue to generate significant losses from operations for the foreseeable
future. As of March 31, 2009, our accumulated deficit was approximately $438.8 million and our
stockholders deficit was approximately $41.9 million. Our net loss and operating loss was $5.1
million and $4.7 million, respectively for the three months ended March 31, 2009 and $24.4 million
and $26.3 million respectively for the year ended December 31, 2008, respectively.
We have limited capital resources and operations to date have been funded primarily with the
proceeds from collaborative research agreements, public and private equity and debt financings and
income earned on investments. As of March 31, 2009 total cash was $4.2 million including restricted
cash of $0.26 million. The change in cash relates to the net loss offset by changes in accounts
payable and non-cash items. We anticipate that our existing capital resources, without implementing
cost reductions, raising additional capital, or obtaining substantial cash inflows from potential
partners or our products, will enable us to continue operations through approximately August 2009
or sooner if unforeseen events arise that negatively impact our liquidity. Additionally, the
Company is not currently in compliance with continued listing requirements on the Nasdaq Capital
Market. If we are unable to maintain our listing on The Nasdaq Capital Market we may no longer able
to ensure that our shareholders have consistent and continual access to capital markets. These
conditions raise substantial doubt about our ability to continue as a going concern. Consequently,
the audit report prepared by our independent registered public accounting firm relating to our
financial statements for the year ended December 31, 2008 included a going concern explanatory
paragraph.
Our business will require substantial additional investment that has not yet been secured.
While our plan is to raise capital when needed and/or to pursue partnering opportunities, we cannot
be sure how much we will need to spend in order to develop, market and manufacture new products and
technologies in the future. We expect to continue to spend substantial amounts on research and
development, including amounts spent on conducting clinical trials for our product candidates.
Further, we will not have sufficient resources to develop fully any new products or technologies
unless we are able to raise substantial additional financing on acceptable terms or secure funds
from new or existing partners. We cannot assure that financing will be available on favorable terms
or at all. Additionally, these conditions may increase the cost to raise capital and/or result in
further dilution. Our failure to raise capital when needed would adversely affect our business,
financial condition and results of operations, and could force us to reduce or cease our
operations.
However, we have implemented aggressive cost control initiatives and management processes to
extend our cash runway. By terminating its Tarrytown lease, the Companys monthly cash burn rate is
reduced by approximately $0.3 million immediately. A total of approximately $14 million in future
lease payments were eliminated. The Company realized a critical milestone in its cost control plan
which will contribute to meeting its cash burn target of between $7 and $8 million per year. We are
also pursing new as well as enhanced collaborations and exploring other financing options, with the
objective of minimizing dilution and disruption.
Off-Balance Sheet Arrangements
As of March 31, 2009, we had no off-balance sheet arrangements, other than operating leases.
There were no changes in significant contractual obligations during the three months ended March
31, 2009.
Critical Accounting Estimates
Please refer to the Companys Annual Report on Form 10-K filed with the SEC on March 16, 2009
for detailed explanations of its critical accounting estimates which have not changed significantly
during the period ended March 31, 2009.
New Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.
This FSP amends SFAS 107, Disclosures
about Fair Value of Financial Instruments, to require entities to provide disclosures about fair
value of financial instruments in interim financial information. This FSP also amends APB Opinion
No. 28, Interim Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. In addition, an entity shall
19
disclose in the body or in
the accompanying notes of its summarized financial information for interim reporting periods and in
its financial statements for annual reporting periods the fair value of all financial instruments
for which it is practicable to estimate that value, whether recognized or not recognized in the
statement of financial position, as required by SFAS 107. The Company is required to adopt FSP FAS
107-1 and APB 28-1 for the quarter ended June 30, 2009. Management does not anticipate that the
adoption of FSP FAS 107-1 and APB 28-1 will have a material impact on the Companys financial
statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP changes existing guidance for determining whether an
impairment is other than temporary to debt securities; replaces the existing requirement that
management assert it has both the intent and ability to hold an impaired security until recovery
with a requirement that management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security before recovery of its
cost basis; requires that an entity recognize noncredit losses on held-to-maturity debt securities
in other comprehensive income and amortize that amount over the remaining life of the security in a
prospective manner by offsetting the recorded value of the asset unless the security is
subsequently sold or there are additional credit loses; and requires entities to present the total
other-than-temporary impairment in the statement of earnings with an offset for the amount
recognized in other comprehensive income. When adopting FSP FAS 115-2 and FAS 124-2, entities are
required to record a cumulative-effect adjustment as of the beginning of the period of adoption to
reclassify the noncredit component of a previously recognized other-temporary impairment from
retained earnings to accumulated other comprehensive income if the entity does not intend to sell
the security and it is not more likely than not that the entity will be required to sell the
security before recovery. The Company is required to adopt FSP FAS 115-2 and FAS 124-2 for the
quarter ended June 30, 2009. Management does not anticipate that the adoption of FSP FAS 115-2 and
FAS 124-2 will have a material impact on the Companys financial statements.
In April 2009 the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. This FSP affirms that the objective of fair value when the market for an
asset is not active is the price that would be received to sell the asset in an orderly
transaction; clarifies and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that asset is not active;
and eliminates the proposed presumption that all transactions are distressed (not orderly) unless
proven otherwise. The FSP instead requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The Company is required to adopt FSP
FAS 157-4 for the quarter ended June 30, 2009. Management does not anticipate that the adoption of
FSP FAS 157-4 will have a material impact on the Companys financial statements.
In December 2007, the FASB ratified the consensus reached by the EITF with respect to EITF
Issue No. 07-01 Accounting for Collaborative Arrangements. The EITF defined collaborative
arrangements and established reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third parties. This issue
is effective for financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of EITF Issue No. 07-01 did not have a material impact on our financial position,
results of operations or cash flows.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161). The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position, financial
performance, and cash flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. In accordance with the provisions of SFAS 161 we
have included additional disclosures (in Note 7. Derivatives) describing how and why we use
derivative instruments. The Company has determined that the adoption of SFAS 161 did not have a
material impact on our financial statements.
Effective January, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). In February 2008, the FASB issued Staff Position (FSP) FAS 157-1 to exclude SFAS no. 13,
Accounting for Leases and its related interpretive accounting pronouncements that address leasing
transactions, from the scope of SFAS No. 157. In February 2008, the FASB also issued FASB Staff
Position No. 157-2, Effective Date of FASB Statement 157, which provides a one year deferral of
the effective date of SFAS 157 for non-financial assets and non-financial;
liabilities, except those that are recognized or disclosed in the financial statements at fair
value. SFAS 157 defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under SFAS 157 as the exchange price that
20
would be received for an asset or
paid to transfer a liability (an exit price) in the principal or the most advantageous market for
an asset or liability in an orderly transaction between participants on the measurement date.
Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy
based on the levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the following:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities |
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or corroborated by observable market data or
substantially the full term of the assets or liabilities |
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|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the value of the assets or liabilities |
The adoption of this statement for non-financial assets and liabilities effective January 1,
2009, did not have a material impact on the Companys results of operations or financial condition.
Effective for periods beginning on or after December 15, 2008, the FASB issued SFAS 141R,
Business Combinations (SFAS 141R). SFAS 141R expands the scope of acquisition accounting to
all transactions under which control of a business is obtained. This standard requires an acquirer
to recognize the assets acquired and liabilities assumed at the acquisition date fair values with
limited exceptions. Additionally, SFAS 141R requires that contingent consideration as well as
contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired
in-process research and development be capitalized and recorded as intangible assets at the
acquisition date, and also requires transaction costs and costs to restructure the acquired company
be expensed. The adoption of SFAS 141R did not have a material impact on the Companys financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fair Value of Warrants and Derivative Liabilities. At March 31, 2009, the estimated fair value
of derivative instruments was $0.2 million. We estimate the fair values of these instruments using
the Black-Scholes option pricing model which takes into account a variety of factors, including
historical stock price volatility, risk-free interest rates, remaining maturity and the closing
price of our common stock. We believe that the assumption that has the greatest impact on the
determination of fair value is the closing price of our common stock. The following table
illustrates the potential effect of changes in the assumptions used to calculate fair value:
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|
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|
|
|
|
derivatives |
|
|
(in thousands) |
25% increase in stock price |
|
$ |
86 |
|
50% increase in stock price |
|
|
188 |
|
5% increase in assumed volatility |
|
|
26 |
|
|
|
|
|
|
25% decrease in stock price |
|
|
(71 |
) |
50% decrease in stock price |
|
|
(126 |
) |
5% decrease in assumed volatility |
|
|
(24 |
) |
21
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys senior management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities
Exchange Act of 1934 (the Exchange Act)) designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures under the supervision of and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred
during the quarter covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
In April 2005, the Company entered into an employment contract with its then Chief Executive
Officer, Dr. Michael M. Goldberg, for services through July 31, 2007. On January 16, 2007, the
Board of Directors terminated Dr. Goldbergs services. On April 26, 2007, the Board of Directors
held a special hearing at which it determined that Dr. Goldbergs termination was for cause. On
March 22, 2007, Dr. Goldberg, through his counsel, filed a demand for arbitration asserting that
his termination was without cause and seeking $1,048,000 plus attorneys fees, interest,
arbitration costs and other relief alleged to be owed to him in connection with his employment
agreement with the Company. Dr. Goldbergs employment agreement provides, among other things, that
in the event he is terminated without cause, Dr. Goldberg would be paid his base salary plus bonus,
if any, monthly for a severance period of eighteen months or, in the event of a change of control,
twenty-four months, and he would also be entitled to continued health and life insurance coverage
during the severance period and all unvested stock options and restricted stock awards would
immediately vest in full upon such termination. Dr. Goldbergs employment agreement provided that
in the event he is terminated with cause, he will receive no additional compensation. During the
year ended December 31, 2007, the Company accrued the estimated costs to settle this matter. No
settlement has been reached and the dispute continues. In February 2008, the Company received $0.5
million as a result of a cancellation of a split dollar life insurance policy on Dr. Goldberg. Dr.
Goldberg claimed approximately $0.2 million was due him as a return of policy premium. In June
2008, Dr. Goldberg commenced a separate lawsuit in the New York State Supreme Court (New York
County) claiming that the Company breached his employment agreement by not remitting to Dr.
Goldberg that portion of the cash value of the life insurance policy. During the year ended
December 31, 2008, the Company adjusted its accrual to reflect estimated costs to settle this
matter. On January 29, 2009, after transfer from the New York State Supreme Court (New York County)
to an independent arbitrator, the Company received a finding from such arbitrator awarding a
partial summary judgment to Dr. Goldberg for compensatory damages in an amount equal to $240,101.
The company paid Dr. Goldberg such amount on February 5, 2009. All remaining claims were deferred
by the Arbitrator pending further proceedings between the parties. The Company believes the
remaining claims are without merit and will vigorously defend itself against Dr. Goldbergs
claims. The ultimate cost to resolve this matter could be in excess of the amount provided for
and such amount could be material to the Company.
22
On August 18, 2008, the Company filed a complaint in the United States District Court for the
District of New Jersey against Laura A. Kragie and Kragie BioMedWorks, Inc. seeking a declaratory
judgment affirming Emispheres sole rights to its proprietary technology for the oral
administration of Vitamin B12, as set forth in several Emisphere United States provisional patent
applications. The complaint also includes a claim under the Lanham Act arising from statements made
by defendants on their web site. Laura A. Kragie, M.D., is a former consultant for Emisphere who
later was employed by Emisphere. On February 13, 2009, the defendants filed an answer, affirmative
defenses and counterclaims, adding as counterclaim defendants current or former Emisphere
executives or employees, including Michael V. Novinski. The countersuit against Emisphere alleges
breach of contract, fraudulent inducement, trademark infringement, false advertising, and other
claims. Emisphere believes that the counterclaims are without merit, and will litigate all claims
vigorously. At the current time, we are unable to estimate a loss, if any, that may result from the
resolution of this matter.
ITEM 1A. RISK FACTORS
The following risk factors should be read carefully in connection with evaluating our business
and the forward-looking statements that we make in this Report and elsewhere (including oral
statements) from time to time. Any of the following risks could materially and adversely affect our
business, our operating results, our financial condition and the actual outcome of matters as to
which forward-looking statements are made in this Report. Our business is subject to many risks,
which are detailed further in our Annual Report on Form 10-K, including:
Financial Risks
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|
|
We have a history of operating losses and we may never achieve profitability. If we
continue to incur losses or we fail to raise additional capital or receive substantial cash
inflows from our partners by August 2008, we may be forced to cease operations. |
|
|
|
|
The audit opinion issued by our independent registered public accounting firm relating
to our financial statements for the year ended December 31, 2008 contained a going concern
explanatory paragraph. |
|
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|
We may not be able to meet the covenants detailed in the Convertible Notes with MHR
Institutional Partners IIA LP, which could result in an increase in the interest rate on
the Convertible Notes and/or accelerated maturity of the Convertible Notes, which we would
not be able to satisfy. |
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|
|
We may not be able to make the payments we owe to Novartis Pharma AG. |
Risks Related to our Business
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|
|
We are highly dependent on the clinical success of our product candidates. |
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|
We are highly dependent upon collaborative partners to develop and commercialize
compounds using our delivery agents. |
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|
Our collaborative partners control the clinical development of certain of our drug
candidates and may terminate their efforts at will. |
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|
Our product candidates are in various stages of development, and we cannot be certain
that any will be suitable for commercial purposes. |
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|
Our collaborative partners are free to develop competing products. |
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|
Our business will suffer if we fail or are delayed in developing and commercializing an
improved oral form of vitamin B12. |
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|
Our business will suffer if we cannot adequately protect our patent and proprietary
rights. |
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|
We may be at risk of having to obtain a license from third parties making proprietary
improvements to our technology. |
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|
We are dependent on third parties to manufacture and, in some cases, test our products. |
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|
We are dependent on our key personnel and if we cannot recruit and retain leaders in our
research, development, manufacturing, and commercial organizations, our business will be
harmed. |
23
Risks Related to our Industry
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|
Our future business success depends heavily upon regulatory approvals, which can be
difficult to obtain for a variety of reasons, including cost. |
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|
We may face product liability claims related to participation in clinical trials for
future products. |
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|
We are subject to environmental, health and safety laws and regulations for which we
incur costs to comply. |
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|
We face rapid technological change and intense competition. |
Other Risks
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|
Provisions of our corporate charter documents, Delaware law, our financing documents and
our stockholder rights plan may dissuade potential acquirers, prevent the replacement or
removal of our current management and members of our Board of Directors and may thereby
affect the price of our common stock. |
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|
Our stock price has been and may continue to be volatile. |
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|
Future sales of common stock or warrants, or the prospect of future sales, may depress
our stock price. |
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|
If we are unable to maintain our listing on The Nasdaq Capital Market we may no longer
able to ensure that our shareholders have consistent and continual access to capital
markets. |
For a more complete listing and description of these and other risks that the Company faces,
please see our Annual Report for 2008 on Form 10-K as filed with the SEC on March 16, 2009.
ITEM 5. OTHER EVENTS
On May 1, 2009, Emisphere Technologies was informed by an independent expert panel of
scientists that its Sodium N-[8-(2-hydroxybenzoyl) Amino] Caprylate (SNAC) carrier has been
provisionally designated as Generally Recognized as Safe (GRAS) for its intended application in
combination with nutrients added to food and dietary supplements. Following a comprehensive
evaluation of research and toxicology data, Emispheres SNAC was found to be safe at a dosage up to
250 mg per day when used in combination with nutrients to improve their dietary availability.
Achieving GRAS status will establish Emispheres carrier as exempt from pre-market approval and
enhances the potential commercialization of the Eligen® Technology with other substances such as
vitamins. The Company expects that the first of these products will be its oral Eligen® Vitamin B12
product. Management expects to achieve final GRAS status following the publication of two peer
reviewed papers describing the toxicology of SNAC, currently scheduled for July/August, in the
International Journal of Toxicology.
On April 29, 2009, the Company entered into a Lease Termination Agreement with BMR-Landmark at
Eastview, LLC, a Delaware limited liability company pursuant to which the Company and BMR
terminated the lease of space at 765 and 777 Old Saw Mill River Road in Tarrytown, New York. The
Company had previously announced its decision to close its research and development facility
located on the Lease Premises in an effort to improve operational efficiency and to strengthen its
financial foundation. Pursuant to the Agreement, the Lease was terminated effective as of April 1,
2009. The Company was allowed to enter and access the Lease Premises from April 1, 2009 until
April 30, 2009, for the sole purpose of winding down the Companys operations in the Lease
Premises, removing its property and decommissioning the Lease Premises. The Agreement provides that
Company shall make the following payments to BMR: (a) One Million Dollars, payable upon execution
of the Agreement, (b) Five Hundred Thousand Dollars, payable six months after the execution date of
the Agreement, and (c) Seven Hundred Fifty Thousand Dollars, payable twelve months after the
execution date of the Agreement. By terminating its Tarrytown lease, the Companys monthly cash
burn rate is reduced by approximately $0.3 million immediately. In addition, a total of
approximately $14 million in future lease payments were eliminated. Through this lease termination
agreement the Company realized a critical milestone in its cost control plan, which will help meet
its cash burn target of between $7 and $8 million per year.
A study Novartis Pharma AG and its partner Nordic Bioscience published in the December 2008
issue of BMC Clinical Pharmacology demonstrated that orally administered salmon calcitonin using
Emispheres carrier, (5-CNAC) an Eligen® oral delivery technology, is effective in reducing bone
breakdown. The randomized, double-blind, double-dummy, placebo-controlled study among 81 subjects
in Copenhagen was conducted on behalf of Emispheres partner
Novartis Pharma AG by Nordic Bioscience by M.A. Karsdal, I. Byrjalsen, B.J. Riis and C.
Christiansen. The study suggests that orally administered 0.8 mg of salmon calcitonin was effective
in suppression of Serum CTX irrespective of
24
time of dosing. Serum CTX-1 (Serum C-terminal
telo-peptide of collagen type I) is the biochemical marker used to measure bone resorption. There
were no safety concerns with the salmon calcitonin oral formulation using Emispheres carrier
5-CNAC, which had been previously demonstrated in earlier studies.
During April 2009 we announced a strategic alliance with AAIPharma intended to expand the
application of Emispheres Eligen® Technology and AAIPharmas drug development services. AAIPharma
Inc. is a global provider of pharmaceutical product development services that enhance the
therapeutic performance of its clients drugs. The company works with many pharmaceutical and
biotech companies and currently provides drug product formulation development services to
Emisphere. This relationship expands our access to new therapeutic candidates for the Eligen®
Technology, which potentially could lead to new products and to new alliance agreements as well. We
are also pleased that a global provider of pharmaceutical product development services with the
stature of AAI has chosen to combine with Emisphere in a synergistic alliance that will benefit
both organizations. This strategic alliance supports AAIs strategy to offer drug delivery options
to its pharmaceutical and biotech customers.
On April 30, 2009, Stephen K. Carter, M.D. resigned from the Board of Directors of the
Company.
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Emisphere
Technologies, Inc., as amended by the Certificate of Amendment of
Amended and Restated Certificate of Incorporation of Emisphere
Technologies, Inc., dated April 20, 2007 (incorporated by
reference to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007). |
|
|
|
|
|
|
3.2 |
(a) |
|
By-Laws of Emisphere Technologies, Inc. as amended December 7,
1998 and September 26, 2005 (incorporated by reference to the
Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1999, and the Current Report on Form 8-K filed
September 30, 2005). |
|
|
|
|
|
|
3.2 |
(b) |
|
Amendment to the By-Laws, as amended, of Emisphere Technologies,
Inc. (incorporated by reference to the Current Report on Form 8-K
filed September 14, 2008). |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the
Sarbanes- Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
|
32.1 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes- Oxley Act of 2002
(furnished herewith). |
25
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
|
|
Emisphere Technologies, Inc.
|
|
Date: May 7, 2008 |
/s/ Michael V. Novinski
|
|
|
Michael V. Novinski |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 7, 2008 |
/s/ Michael R. Garone
|
|
|
Michael R. Garone |
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
26
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Emisphere
Technologies, Inc., as amended by the Certificate of Amendment of
Amended and Restated Certificate of Incorporation of Emisphere
Technologies, Inc., dated April 20, 2007 (incorporated by
reference to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007). |
|
|
|
|
|
|
3.2 |
(a) |
|
By-Laws of Emisphere Technologies, Inc. as amended December 7,
1998 and September 26, 2005 (incorporated by reference to the
Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1999, and the Current Report on Form 8-K filed
September 30, 2005). |
|
|
|
|
|
|
3.2 |
(b) |
|
Amendment to the By-Laws, as amended, of Emisphere Technologies,
Inc. (incorporated by reference to the Current Report on Form 8-K
filed September 14, 2008). |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the
Sarbanes- Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
|
|
|
32.1 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes- Oxley Act of 2002
(furnished herewith). |