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 June 30, 2010
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 o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
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, $.01 par value, outstanding as of August 1,
2010 was 44,894,046.
EMISPHERE TECHNOLOGIES, INC.
Index
All other items called for by the instructions to Form 10-Q have been omitted because the
items are not applicable or the relevant information is not material.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
June 30, 2010 and December 31, 2009
(in thousands, except share and per share data)
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June 30, 2010 |
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December 31, |
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(unaudited) |
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2009 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
418 |
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$ |
3,566 |
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Accounts receivable, net |
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38 |
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158 |
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Inventories |
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261 |
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20 |
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Prepaid expenses and other current assets |
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683 |
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369 |
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Total current assets |
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1,400 |
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4,113 |
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Equipment and leasehold improvements, net |
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107 |
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138 |
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Purchased technology, net |
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957 |
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1,077 |
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Restricted cash |
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259 |
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259 |
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Deferred financing cost |
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382 |
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346 |
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Total assets |
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$ |
3,105 |
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$ |
5,933 |
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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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$ |
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$ |
12,588 |
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Accounts payable and accrued expenses |
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5,852 |
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4,975 |
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Derivative instruments |
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Related party |
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12,952 |
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3,205 |
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Others |
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4,183 |
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2,984 |
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Restructuring accrual, current |
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600 |
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750 |
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Other current liabilities |
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31 |
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52 |
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Total current liabilities |
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23,618 |
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24,554 |
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Notes payable, including accrued interest and net of related
discount, related party |
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14,322 |
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13,076 |
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Deferred revenue |
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26,475 |
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11,494 |
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Derivative instrument related party |
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12,031 |
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4,591 |
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Deferred lease liability and other liabilities |
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65 |
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82 |
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Total liabilities |
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76,511 |
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53,797 |
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Commitments and Contingencies |
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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, $.01 par value; authorized 100,000,000 shares; issued
44,222,054 shares (43,932,322 outstanding) as of June 30, 2010 and
issued 42,360,133 shares (42,070,401 outstanding) as December 31,
2009 |
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442 |
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424 |
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Additional paid-in-capital |
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398,945 |
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392,335 |
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Accumulated deficit |
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(468,841 |
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(436,671 |
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Common stock held in treasury, at cost; 289,732 shares |
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(3,952 |
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(3,952 |
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Total stockholders deficit |
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(73,406 |
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(47,864 |
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Total liabilities and stockholders deficit |
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$ |
3,105 |
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$ |
5,933 |
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The accompanying notes are an integral part of the financial statements.
3
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENT OF OPERATIONS
For the three months ended June 30, 2010 and 2009
(in thousands, except share and per share data)
(unaudited)
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For the three months ended |
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For the six months ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net Sales |
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$ |
39 |
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$ |
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$ |
51 |
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$ |
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Costs and expenses: |
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Research and development |
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732 |
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748 |
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1,294 |
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2,670 |
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General and administrative expenses |
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2,129 |
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2,933 |
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4,463 |
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5,855 |
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Restructuring costs |
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50 |
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(353 |
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Gain on disposal of fixed assets |
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(779 |
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(1 |
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(822 |
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Expense from settlement of lawsuit |
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220 |
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220 |
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Depreciation and amortization |
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75 |
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96 |
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150 |
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307 |
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Total costs and expenses |
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3,156 |
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2,998 |
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6,176 |
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7,657 |
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Operating loss |
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(3,117 |
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(2,998 |
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(6,125 |
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(7,657 |
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Other non-operating income (expense): |
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Other income |
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2 |
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27 |
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5 |
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68 |
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Sublease income |
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232 |
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Sale of patents |
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500 |
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500 |
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Change in fair value of derivative instruments |
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Related party |
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(6,208 |
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(193 |
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(15,328 |
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(80 |
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Other |
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(2,424 |
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(289 |
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(7,271 |
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(254 |
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Interest expense |
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Related party |
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(1,797 |
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(1,097 |
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(3,069 |
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(2,140 |
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Other |
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(160 |
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(137 |
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(382 |
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(273 |
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Total other non-operating expense |
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(10,587 |
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(1,189 |
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(26,045 |
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(1,947 |
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Net loss |
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$ |
(13,704 |
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$ |
(4,187 |
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$ |
(32,170 |
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$ |
(9,604 |
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Net loss per share, basic and diluted |
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$ |
(0.32 |
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$ |
(0.14 |
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$ |
(0.75 |
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$ |
(0.32 |
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Weighted average shares outstanding, basic and diluted |
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43,338,432 |
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30,341,078 |
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42,711,367 |
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30,341,078 |
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The accompanying notes are an integral part of the financial statements.
4
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2010 and 2009
(in thousands)
(unaudited)
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For the six months ended |
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June 30, |
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2010 |
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2009 |
Cash flows from operating activities: |
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Net loss |
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$ |
(32,170 |
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$ |
(9,604 |
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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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30 |
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187 |
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Amortization |
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120 |
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120 |
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Change in fair value of derivative instruments |
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22,599 |
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334 |
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Non-cash interest expense |
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3,450 |
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2,413 |
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Non-cash compensation expense |
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547 |
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1,007 |
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Gain on disposal of fixed assets |
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(1 |
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(822 |
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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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120 |
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160 |
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Increase in inventory |
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(24 |
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Increase (decrease) in prepaid expenses and other current assets |
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(531 |
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(129 |
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Increase in deferred revenue |
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2,012 |
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133 |
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Increase in accounts payable and accrued expenses |
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887 |
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1,042 |
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Increase (decrease) in other current liabilities |
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(21 |
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28 |
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Decrease in deferred lease liability |
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(17 |
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(33 |
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Decrease in restructuring accrual |
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(150 |
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(1,627 |
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Total adjustments |
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29,021 |
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2,813 |
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Net cash used in operating activities |
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(3,149 |
) |
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(6,791 |
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Net cash provided by investing activities proceeds from sale of fixed assets |
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1 |
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856 |
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Net decrease in cash and cash equivalents |
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(3,148 |
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(5,935 |
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Cash and cash equivalents, beginning of period |
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3,566 |
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7,214 |
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Cash and cash equivalents, end of period |
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$ |
418 |
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$ |
1,279 |
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Schedule of non-cash financing activities |
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Common stock issued to settle accrued Directors compensation |
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$ |
11 |
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$ |
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Exchange of debt as deferred revenue (Note 8) |
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$ |
13,000 |
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$ |
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The accompanying notes are an integral part of the financial statements.
5
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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. However, in
November 2009 the Company launched its first commercially available product, oral
Eligen® B12 (100mcg), which had been specifically developed to help improve Vitamin B12
absorption and bioavailability with a patented formulation.
Liquidity. As of June 30, 2010, we had approximately $0.7 million in cash and restricted cash,
approximately $22.2 million in working capital deficiency, a stockholders deficit of approximately
$73.4 million and an accumulated deficit of approximately $468.8 million. Our net loss and
operating loss for the three months ended June 30, 2010 were approximately $13.7 million and $3.1
million, respectively and $32.2 million and $6.1 million, respectively for the six months ended
June 30, 2010.
On July 29, 2010, we issued a promissory note (the July 2010 MHR Note) to MHR Institutional
Partners IIA LP and MHR Institutional Partners II LP (together, MHR) in the principal amount of
$525,000. The July 2010 MHR Note provides for an interest rate of 15% per annum, with the entire
principal amount due and payable on October 27, 2010 (the Maturity Date). The Maturity Date will
be accelerated, in certain circumstances, to the date that is two business days following the
receipt by the Issuer of at least $1,000,000 aggregate cash proceeds from third parties, whether in
connection with certain financing transactions, commercial transactions or otherwise. The
obligations under the July 2010 MHR Note are secured in accordance with the terms of the Amendment
(the Amendment) to the Pledge and Security Agreement whereby Emisphere and MHR amended that
certain Pledge and Security Agreement, dated as of September 26, 2005 (the Security Agreement) to
extend the terms of the Security Agreement other than the intellectual property licensed to
Novartis Pharma AG (Novartis) pursuant to the Master Agreement and Amendment dated June 4, 2010
by and between Emisphere and Novartis, as further described below, to include the principal,
interest and other obligations provided under the July 2010 MHR Note. In accordance with the terms
of that certain 11.00% Senior Secured Convertible Note issued by the Emisphere to MHR and due
September 26, 2012, MHR also provided a written consent to allow for the issuance of the Note and
related obligations provided under the Amendment.
In April 2005, the Company entered into an amended and restated employment agreement 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. During the arbitration, Dr. Goldberg sought a total damage
amount of at least $9,223,646 plus interest. On February 11, 2010, the arbitrator issued the final
award in favor of Dr. Goldberg for a total amount of approximately $2,333,115 as full and final
payment for all claims, defenses, counterclaims, fees and related matters. The Company opposed Dr.
Goldbergs petition to confirm the arbitration award. On July 12, 2010 the award was confirmed by
the court. As of August 10, 2010, the Company adjusted its estimate of costs to settle this matter
to approximately $2.6 million to account for potential additional interest costs on the settlement
amount and additional legal fees. Dr. Goldberg has proposed an order of settlement in the amount of
approximately $2.6 million and seeks to have a final order entered August 16, 2010.
6
On June 4, 2010, we entered into a Master Agreement and Amendment with Novartis (the Novartis
Agreement). Pursuant to the Novartis Agreement, the Company was released and discharged from its
obligations under the Novartis Note in exchange for (1) the reduction of future royalty and
milestone payments up to an aggregate amount of $11.0 million due the Company under the Research
Collaboration and Option Agreement, dated as of December 3, 1997, as amended on October 20, 2000,
and the License Agreement, date as of March 8, 2000, for the development of an oral salmon
calcitonin product for the treatment of osteoarthritis and osteoporosis.; (2) the right for
Novartis to evaluate the feasibility of using Emispheres Eligen® Technology with two new
compounds to assess the potential for new product development opportunities; and (3) other
amendments to the Research Collaboration and Option Agreement and License Agreement. As of the
date of the Novartis Agreement, the outstanding principal balance and accrued interest of the
Novartis Note was approximately $13.0 million.
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, including the
amounts provided by MHR in connection with the July 2010 MHR Note but not accounting for an approximately $2.6
million arbitration award in favor of the Companys former CEO, will enable us to continue
operations through approximately August 31, 2010 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, 2009 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 or operating revenue, 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 31, 2010 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, 2009 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, 2009.
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
7
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 June 30, 2010, shares available for future grants under the Plans amounted to 1,533,398.
Total compensation expense recorded during the six months ended June 30, 2010 for share-based
payment awards was $0.55 million, of which $0.06 million is included in research and development
and $0.49 million is included in general and administrative expenses in the condensed statement of
operations for the six months ended June 30, 2010. Total compensation expense recorded during the
six months ended June 30, 2009 for share-based payment awards was $1.01 million, of which $0.06
million is included in research and development and $0.95 million is included in general and
administrative expenses in the condensed statement of operations for the six months ended June 30,
2009. At June 30, 2010, total unrecognized estimated compensation expense related to non-vested
stock options granted prior to that date was $0.7 million, which is expected to be recognized over
a weighted-average period of approximately two years. No options were exercised in the six months
ended June 30, 2010 or 2009. No tax benefit was realized due to a continued pattern of operating
losses.
During the six months ended June 30, 2010, the Company granted options for 502,750 shares with
a weighted average exercise price of $1.48.
4. Inventories
Inventories are stated at the lower of cost or market determined by the first in, first out
method. Inventories consist principally of finished goods at June 30, 2010 and December 31, 2009.
5. Fixed Assets
Equipment and leasehold improvements, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives |
|
|
June 30, |
|
|
December 31, |
|
|
|
in Years |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
Equipment |
|
|
3-7 |
|
|
$ |
1,370 |
|
|
$ |
1,370 |
|
Leasehold improvements |
|
Term of lease |
|
|
61 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431 |
|
|
|
1,431 |
|
Less, accumulated depreciation and amortization |
|
|
|
|
|
|
1,324 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net |
|
|
|
|
|
$ |
107 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
6. 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.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Gross carrying amount |
|
$ |
4,533 |
|
|
$ |
4,533 |
|
Less, accumulated amortization |
|
|
3,576 |
|
|
|
3,456 |
|
|
|
|
Net book value |
|
$ |
957 |
|
|
$ |
1,077 |
|
|
|
|
8
Amortization expense for the purchased technology is approximately $60 thousand per quarter in
2010 and in the remaining years through 2014.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Accounts payable and other accrued expenses |
|
$ |
2,133 |
|
|
$ |
1,979 |
|
Accrued cost of lawsuit |
|
|
2,553 |
|
|
|
2,333 |
|
Accrued bonus |
|
|
575 |
|
|
|
150 |
|
Accrued legal, professional fees and other |
|
|
433 |
|
|
|
302 |
|
Accrued vacation |
|
|
150 |
|
|
|
81 |
|
Clinical trial expenses and contract research |
|
|
8 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
$ |
5,852 |
|
|
$ |
4,975 |
|
|
|
|
|
|
|
|
8. Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
MHR Convertible Notes |
|
$ |
13,826 |
|
|
$ |
13,076 |
|
MHR Promissory Notes |
|
|
496 |
|
|
|
|
|
Novartis Note |
|
|
|
|
|
|
12,588 |
|
|
|
|
|
|
$ |
14,322 |
|
|
$ |
25,664 |
|
|
|
|
MHR Convertible Notes. The MHR 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 (the MHR Notes).
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 would have the
right to call the MHR Notes after September 26, 2010 if certain conditions are satisfied. If those
conditions are not satisfied; the Company will forfeit the right to call the MHR Notes after
September 26, 2010. The MHR 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.
If certain conditions are not met and the Company subsequently forfeits its right to call the MHR
Notes after September 26, 2010, the MHR Notes will continue to be convertible, at the sole
discretion of MHR or any assignee thereof through September 25, 2012. At June 30, 2010, the MHR
Notes were convertible into 6,319,856 shares of our common stock. 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 8 for a further discussion of the liability related to these warrants.
The book value of the MHR Notes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Face Value of the notes |
|
$ |
23,889 |
|
|
$ |
22,616 |
|
Discount (related to the embedded conversion feature) |
|
|
(686 |
) |
|
|
(793 |
) |
Discount (related to the warrant purchase option) |
|
|
(6,791 |
) |
|
|
(7,848 |
) |
Discount (related to 2010 debt modification) |
|
|
(1,808 |
) |
|
|
|
|
Lenders financing costs |
|
|
(778 |
) |
|
|
(899 |
) |
|
|
|
|
|
$ |
13,826 |
|
|
$ |
13,076 |
|
|
|
|
9
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 MHR Notes using
an interest method to yield an effective interest rate of 43.5%.
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 MHR 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 August 12, 2010 and is in effect through August 17, 2011; as such the MHR Notes have been
classified as long-term. Effective January 1, 2009, the Company adopted the provisions of the
Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5, Evaluating Whether
an Instrument Involving a Contingency is Considered Indexed to an Entitys Own Stock (FASB ASC
815-40-15-5). Under FASB ASC 85-40-15-5, the conversion feature embedded in the MHR notes have
been bifurcated from the host contract and accounted for separately as a derivative. The
bifurcation of the embedded derivative increased the amount of debt discount thereby reducing the
book value of the MHR Notes and increasing prospectively the amount of interest expense to be
recognized over the life of the MHR Notes.
Novartis Note. The Convertible Promissory Note due originally on December 1, 2009, was issued by us
to Novartis on December 1, 2004 (the Novartis Note), in accordance with and pursuant to the terms
and conditions therein. The Novartis Note was issued in a private placement transaction pursuant to
Section 4(2) of the Securities Act in connection with a new research collaboration option relating
to the development of PTH-1-34. The Novartis Note accrued interest at a rate of 7%. The Novartis
Note was originally due December 1, 2009. On November 30, 2009, Novartis agreed to extend the
maturity date to February 26, 2010. On February 23, 2010, Novartis agreed to extend the maturity
date to May 26, 2010. And on May 27, 2010, Novartis agreed to a further extension through June 4,
2010. On June 4, 2010, the Company and Novartis entered into a Master Agreement and Amendment (the
Novartis Agreement). Pursuant to the Novartis Agreement, the Company was released and discharged
from its obligations under the Novartis Note in exchange for (1) the reduction of future royalty
and milestone payments up to an aggregate amount of $11.0 million due the Company under the
Research Collaboration and Option Agreement, dated as of December 3, 1997, as amended on October
20, 2000, and the License Agreement, date as of March 8, 2000, for the development of an oral
salmon calcitonin product for the treatment of osteoarthritis and osteoporosis.; (2) the right for
Novartis to evaluate the feasibility of using Emispheres Eligen ® Technology with two new
compounds to assess the potential for new product development opportunities; and (3) other
amendments to the Research Collaboration and Option Agreement and License Agreement. As of the
date of the Novartis Agreement, the outstanding principal balance and accrued interest of the
Novartis Note was approximately $13.0 million. The Company recognized the full value of the debt
released as consideration for the transfer of the rights and other intangibles to Novartis and
deferred the related revenue in accordance with applicable accounting guidance for the sale of
rights to future revenue until the earnings process has been completed based on achievement of
certain milestones or other deliverables.
June 2010 MHR Promissory Notes. In connection with the Novartis Agreement, the Company and MHR
Institutional Partners IIA, LP (together with its affiliates, as applicable, MHR) entered into a
Letter Agreement (the MHR Letter Agreement) and MHR, the Company and Novartis entered into an
agreement (the Non-Disturbance Agreement), which Non-Disturbance Agreement was a condition to
Novartis execution of the Novartis Agreement. Pursuant to the MHR Letter Agreement, MHR agreed to
the limit certain rights and courses of action that it would have available to it as a secured
party under the Senior Secured Term Loan Agreement and Pledge and Security Agreement (Loan and
Security Agreement between MHR and the Company. MHR also consented to the Novartis Agreement,
which consent is required under the Loan and Security Agreement, and MHR also agreed to enter into
a comparable agreement at some point in the future in connection with another potential Company
transaction (the Future Transaction Agreement). The MHR Letter Agreement also provides for the
Company to reimburse MHR for its legal fess incurred in connection with the Non-Disturbance
Agreement for up to $500,000 and up to $100,000 in legal expenses incurred by MHR in connection the
Future Transaction Agreement. The reimbursements are to be paid in the form of non-interest
bearing promissory notes issued on the effective date of the MHR Letter Agreement. As such, the
Company issued to MHR non-interest promissory notes for $500,000 and $100,000 on June 8, 2010.
The Company received documentation that MHR expended more than the $500,000
10
of legal fees in connection with the Non-Disturbance Agreement and consequently recorded the
issuance of the $500,000 promissory note and a corresponding charge to financing expenses. The
Company has not yet received any documentation or communication that indicates MHR has spent any
legal fees in connection with the Future Transaction Agreement. Therefore, the issuance of the
$100,000 promissory note was recorded as a prepaid expense. The promissory notes are due June 4,
2012. The Company imputed interest at its incremental borrowing rate of 10%, and discounted the
face amounts of the $500,000 and $100,000 promissory notes by $87,000 and $18,000, respectively.
Additionally, as consideration for its consent, limitation of rights, and pledge to enter into the
Future Transaction Agreement, the Company granted MHR warrants to purchase 865,000 shares of its
Common Stock. See Note 9 for more information on the MHR Novartis Note Warrants. The Company
determined that the modification of the MHR Convertible Debt agreement was not a substantial
modification in accordance with ASC 470-50, Modifications and Extinguishments. As such, the
warrants issued to MHR were recorded as a debt discount to the MHR Convertible Debt and are being
amortized to interest expense over the remaining term of the debt.
9. Derivative Instruments
Derivative instruments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Elan Warrants |
|
$ |
|
|
|
$ |
394 |
|
MHR Convertible Note |
|
|
12,031 |
|
|
|
4,591 |
|
MHR warrants |
|
|
761 |
|
|
|
213 |
|
August 2007 Equity financing warrants |
|
|
666 |
|
|
|
141 |
|
August 2009 equity financing warrants |
|
|
13,857 |
|
|
|
5,092 |
|
August 2009 equity financing warrants to placement agent |
|
|
|
|
|
|
349 |
|
June 2010 MHR Warrants |
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,166 |
|
|
$ |
10,780 |
|
|
|
|
|
|
|
|
Elan Warrant. In connection with a restructuring of debt in March 2005, we issued to Elan
Corporation, plc (Elan) a warrant to purchase up to 600,000 shares of our common stock at an
exercise price of $3.88 (the Elan Warrant). The Elan Warrant provides for adjustment of the
exercise price upon the occurrence of certain events, including the issuance by Emisphere of common
stock or common stock equivalents that have an effective price that is less than the exercise price
of the warrant. The anti-dilution feature of the Elan Warrant was triggered in connection with the
August 2007 financing, resulting in an adjustment to the exercise price to $3.76. The anti-dilution
feature of the Elan Warrant was triggered again in connection with the August 2009 financing,
resulting in an adjustment to the exercise price to $0.4635. The Company adopted the provisions of
FASB ASC 815-40-15-5 effective January 1, 2009. Under FASB ASC 815-40-15-5, the Elan Warrant is not
considered indexed to the Companys own stock and, therefore, does not meet the scope exception in
FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. On April 20, 2010,
Elan notified the Company of its intention to exercise the Elan Warrant using the cashless
exercise provision. The Company issued 518,206 shares of common stock to Elan in accordance with
the terms of the cashless exercise provision on April 21, 2010. After the cashless exercise, the
Elan Warrant is no longer outstanding. The Company calculated the fair value of the Elan warrants
on April 21, 2010 using the Black-Scholes option pricing model. The assumptions used in computing
the fair value as of April 21, 2010 are a closing stock price of $3.40, expected volatility of
89.91% over the remaining contractual life of four months and a risk-free rate of 0.16%. The fair
value of the Elan warrants increased by $0.6 million and $1.4 million during the three and six
months ended June 30, 2010, respectively, which has been recognized in the accompanying statements
of operations. The fair value of the derivative liability at April 21, 2010 of $1.8 million was
reclassified to additional paid-in-capital.
Embedded Conversion Feature of MHR Convertible Notes. The MHR Convertible Notes contain a provision
whereby, the conversion price is adjustable upon the occurrence of certain events, including the
issuance by Emisphere of common stock or common stock equivalents at a price which is lower than
the current conversion price of the MHR Notes and lower than the current market price. However, the
adjustment provision does not
11
become effective until after the Company raises $10 million through the issuance of common stock or
common stock equivalents at a price which is lower than the current conversion price of the MHR
Notes and lower than the current market price during any consecutive 24 month period. The Company
adopted the provisions of FASB ASC 815-40-15-5 effective January 1, 2009. Under FASB ASC
815-40-15-5, the embedded conversion feature is not considered indexed to the Companys own stock
and, therefore, does not meet the scope exception in FASB ASC 815-10-15 and thus needs to be
accounted for as a derivative liability. The liability has been presented as a non-current
liability to correspond with its host contract, the MHR Notes. The fair value of the embedded
conversion feature 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 June 30,
2010 are a closing stock price of $3.14, expected volatility 107.56% over the remaining term of two
years and three months and a risk-free rate of 0.61%. The fair value of the embedded conversion
feature increased by $3.4 million and $7.4 million during the three and six months ended June 30,
2010, respectively, which has been recognized in the accompanying statements of operations. The
embedded conversion feature will be adjusted to fair value for each future period it remains
outstanding.
MHR Warrants. In connection with the exercise in April 2006 of the Warrant Purchase Option
discussed in Note 8 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 FASB
ASC 815, Derivatives and Hedging, 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 June 30, 2010 are a closing stock price of
$3.14, expected volatility of 100% over the remaining term of one year and three months and a
risk-free rate of 0.32%. The fair value of the MHR warrants increased by $0.1 million and $0.5
million during the three and six months ended June 30, 2010, respectively, 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 8 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 (the 2007 Warrants). Of these 400,000
warrants, 91,073 were sold to MHR. Each of the 2007 Warrants were issued with an exercise price of
$3.948 and expire on August 21, 2012. The 2007 Warrants provide for certain anti-dilution
protection as provided therein. Under the terms of the 2007 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 2007 Warrants have been accounted for as a liability. The fair value of
the 2007 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 June 30, 2010
are a closing stock price of $3.14, expected volatility of 108.88% over the remaining term of two
years and two months and a risk-free rate of 1.02%. The fair value of the 2007 Warrants increased
by $0.2 million and $0.5 million during the three and six months ended June 30, 2010, respectively,
and the fluctuations have been recorded in the statements of operations. The 2007 Warrants will be
adjusted to estimated fair value for each future period they remain outstanding.
August 2009 Equity Financing Investors Warrants. In connection with the August 2009 offering,
Emisphere sold warrants to purchase 6.4 million shares of common stock (the 2009 Warrants),
consisting of warrants to purchase 3.7 million shares of common stock to MHR and warrants to
purchase 2.7 million shares of common stock to other unaffiliated investors (the 2009 Investor
Warrants). The 2009 Warrants were issued with an exercise price of $0.70 and expire on August 21,
2014. Under the terms of the 2009 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 2009 Warrants have been accounted for as a liability. The fair value of the 2009 Warrants is
estimated, at the end of each quarterly reporting period, using the
12
Black-Scholes option pricing model. The assumptions used in computing the fair value as of June 30,
2010 are a closing stock price of $3.14, expected volatility of 94.03% over the remaining term of
four years and two months and a risk-free rate of 1.79%. The fair value of the 2009 Warrants
increased by $3.7 million and $9.8 million for the three and six months ended June 30, 2010,
respectively and the fluctuation has been recorded in the statements of operations. The 2009
Warrants will be adjusted to estimated fair value for each future period they remain outstanding.
On May 13, 2010, the BAM Opportunity Fund LP (BAM) notified the Company of its intention to
exercise its 2009 Investor Warrant to purchase up to 1,342,857 shares of the Companys common stock
at an exercise price of $0.70, using the cashless exercise provision. The Company issued
1,005,213 shares of common stock to BAM in accordance with the terms of the cashless exercise
provision on May 18, 2010. The Company calculated the fair value of the 1,342,857 million exercised
warrants on May 13, 2010 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value as of May 13, 2010 are a closing stock price of $2.88, expected volatility
of 93.1% over the remaining contractual life of four years and four months and a risk-free rate of
2.27%. The fair value of the 1.3 exercised warrants increased by $0.6 million and $2.3 million
during the three and six months ended June 30, 2010, respectively, which has been recognized in the
accompanying statements of operations. The fair value of the derivative liability at May 13, 2010
of $3.3 million was reclassified to additional paid-in-capital. The fair value calculation for the
2009 Investor Warrants was adjusted to reflect the 2009 Investor Warrants outstanding as of June
30, 2010. Subsequent to the quarter ended June 30, 2010, MOG Capital, LLC (MOG Capital) notified
the Company of its intention to exercise its 2009 Investor Warrant to purchase up to 1,342,857
shares of the Companys common stock at an exercise price of $0.70, using the cashless exercise
provision. The Company issued an aggregate 961,724 shares to MOG Capital in accordance with the
terms of the cashless exercise provision. After this cashless exercise, 2009 Investor Warrants to
purchase up to 3,729,323 shares of common stock, in the aggregate, remain outstanding.
August 2009 Equity Financing Placement Agent Warrants. In connection with the August 2009 offering,
Emisphere issued to Rodman & Renshaw, LLC (the Placement Agent), as part of the compensation for
acting as placement agent for the August 2009 financing, warrants to purchase 504,000 shares of
common stock (the Placement Agent Warrants). The Placement Agent Warrants were issued with an
exercise price of $0.875 and expire on October 1, 2012. 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 Placement Agent Warrants have been accounted for as
a liability. On April 1, 2010, the Placement Agent notified the Company of its intention to
exercise a portion of the Placement Agent Warrants using the cashless exercise provision. The
Company issued 297,636 shares of common stock to the Placement Agent in accordance with the terms
of the cashless exercise provision on April 5, 2010. After this cashless exercise, Placement Agent
Warrants to purchase 37,800 share of common stock remained outstanding. On April 28, 2010, the
Placement Agent notified the Company of its intention to exercise the remaining outstanding portion
of the Placement Agent Warrants using the cashless exercise provision. The Company issued an
additional 27,192 shares of common stock to the purchase agent on April 30, 2010. After this
cashless exercise, the Placement Agent Warrants are no longer outstanding. The Company calculated
the fair value of the 466,200 Placement Agent Warrants on April 2, 2010 using the Black-Scholes
option pricing model. The assumptions used in computing the fair value as of April 2, 2010 are a
closing stock price of $2.40, expected volatility of 104.70% over the remaining contractual life of
two years and six months and a risk-free rate of 1.11%. The fair value of the 466,200 Placement
Agent Warrants increased by $32 thousand and $0.6 million during the three and six months ended
June 30, 2010, respectively, which has been recognized in the accompanying statements of
operations. The fair value of the derivative liability from the 466,200 Placement Agent Warrants
at April 2, 2010 of $0.9 million was reclassified to additional paid-in-capital. The Company
calculated the fair value of the 37,800 Placement Agent Warrants on April 29, 2010 using the
Black-Scholes option pricing model. The assumptions used in computing the fair value as of April
29, 2010 are a closing stock price of $3.05, expected volatility of 107.10% over the remaining
contractual life of two years and five months and a risk-free rate of 1.11%. The fair value of the
37,800 Placement Agent Warrants increased by $3 thousand and $46 thousand during the three and six
months June 30, 2010, respectively, which has been recognized in the accompany statements of
operations. The fair value of the derivative liability from the 37,800 Placement Agent Warrants at
April 29, 2010 of $0.1 million was reclassified to additional paid-in-capital.
June 2010 MHR Warrants. In connection with the Novartis Agreement, the Company and MHR
entered into the MHR Letter Agreement and MHR, the Company and Novartis entered into the
Non-Disturbance Agreement, which agreement was a condition to Novartis execution
of the Novartis Agreement. Pursuant to the MHR Letter
13
Agreement, MHR agreed to the limit certain rights and courses of action that it would have
available to it as a secured party under the Loan and Security Agreement. MHR also consented to
the Novartis Agreement, which consent is required under the Loan and Security Agreement, as well as
MHRs agreement to enter into the Future Transaction Agreement in connection with another potential
Company transaction. As consideration for its consent and limitation of rights, the Company
granted MHR warrants to purchase 865,000 shares of its Common Stock. The warrants are exercisable
at $2.90 per share and will expire on August 21, 2014. The Novartis Note warrants provide for
certain anti-dilution protection as provided therein. 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 Novartis Note warrants have been accounted for as a liability. Their fair value is estimated,
at the end of each quarterly reporting period, using the Black-Scholes option pricing model. The
Company estimated the fair value of the warrants on the date of grant using the Black-Scholes
option pricing model to be $1.9 million which was recorded as a debt discount to the MHR
Convertible Notes (see Note 8).. The assumptions used in computing the fair value of the warrants
were a closing stock price of $3.15, expected volatility of 93.22% over the term of 4.2 years and a
risk free rate of 1.02%. The assumptions used in computing the fair value as of June 30, 2010 are a
closing stock price of $3.14, expected volatility of 93.95% over the remaining term of 4.2 years
and a risk-free rate of 1.02%. The three and six months change in fair value of the MHR warrants
was insignificant.
10. Net loss per share
The following table sets forth the information needed to compute basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands except per share data) |
|
|
(in thousands except per share data) |
|
Basic net loss |
|
$ |
(13,704 |
) |
|
$ |
(4,187 |
) |
|
$ |
(32,170 |
) |
|
$ |
(9,604 |
) |
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
43,338,432 |
|
|
|
30,341,078 |
|
|
|
42,711,367 |
|
|
|
30,341,078 |
|
|
|
|
|
|
|
Basic net loss per share |
|
$ |
(0.32 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.75 |
) |
|
$ |
(0.32 |
) |
For the six months ended June 30, 2010 and 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2010 |
|
|
2009 |
|
Options to purchase common shares |
|
|
3,187,116 |
|
|
|
3,962,139 |
|
|
|
|
|
|
|
|
|
|
Outstanding warrants |
|
|
6,954,391 |
|
|
|
2,972,049 |
|
Novartis convertible note payable |
|
|
|
|
|
|
7,537,921 |
|
MHR note payable |
|
|
6,319,856 |
|
|
|
5,664,381 |
|
|
|
|
|
|
|
|
|
|
|
16,461,363 |
|
|
|
20,136,490 |
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
Commitments. At the beginning of 2009 we had leased approximately 80,000 square feet of office
space at 765 Old Saw Mill River Road, Tarrytown, NY for use as administrative offices and
laboratories. The lease for our administrative and laboratory facilities had been set to expire on
August 31, 2012. However, 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 of space at 765 Old Saw Mill River Road
in Tarrytown, NY. Pursuant to the Agreement, the Lease was terminated effective as of April 1,
2009. The Agreement provided that the Company make the following payments to BMR: (a) $1 million,
paid upon execution of the Agreement, (b) $0.5 million, paid six months after the execution date of
the Agreement, and (c) $0.75 million, payable twelve months after the execution date of the
Agreement. Initial and six months payments were made on schedule. Although the final payment was
due originally on April 29, 2010, on
14
March 17, 2010 the Company and BMR agreed to amend the
Agreement (the Amendment). According to the Amendment, the final payment was modified as follows:
the Company will pay Eight Hundred Thousand Dollars ($800,000), as follows: (i) Two Hundred
Thousand Dollars ($200,000) within five (5) days after the Execution Date and (ii) One Hundred
Thousand Dollars ($100,000) on each of the following dates: July 15, 2010, August 15, 2010,
September 15, 2010, October 15, 2010, November 15, 2010, and December 15, 2010.
We continue to lease office space at 240 Cedar Knolls Road, Cedar Knolls, NJ under a
non-cancellable operating lease expiring in 2013.
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 has entered into a
three year employment agreement with Mr. Novinski. Mr. Novinskis employment agreement renews
automatically in one year increments unless either party notifies the other at least 60 days prior
to the date of expiration of their intention to terminate. 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 amended and restated employment agreement 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. During the arbitration, Dr. Goldberg sought a total damage
amount of at least $9,223,646 plus interest. On February 11, 2010, the arbitrator issued the final
award in favor of Dr. Goldberg for a total amount of approximately $2,333,115 as full and final
payment for all claims, defenses, counterclaims, fees and related matters. The Company opposed Dr.
Goldbergs petition to confirm the arbitration award. On July 12, 2010 the award was confirmed by
the court. As of August 10, 2010, the Company adjusted its estimate of costs to settle this matter
to $2.6 million to account for potential additional interest costs on the settlement amount and
additional legal fees. Dr. Goldberg has proposed an order of settlement in the amount of
approximately $2.6 million and seeks to have a final order entered August 16, 2010.
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.
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. Pursuant to these agreements, we generally 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 June 30, 2010.
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 our opinion, we have incurred a
probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is
made of the loss and the appropriate accounting entries are reflected in our financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of
currently pending or threatened lawsuits and claims will have a material adverse effect on our
financial position, results of operations or cash flows.
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 which resulted in a
15
restructuring charge of approximately $3.8 million in the fourth
quarter, 2008. On April 29, 2009, the Company entered into the Lease Termination Agreement with
BMR, and credited the restructuring charge $0.35 million in accordance with the terms of the
Agreement. On March 17, 2010 the Company and BMR amended the Agreement as described in this Note
(above). Consequently, the restructuring liability was readjusted to reflect the terms of the
Amendment accordingly.
Adjustments to the restructuring liability are as follows ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
Cash |
|
|
Adjustment to |
|
|
Liability at |
|
|
|
December 31, 2009 |
|
|
Payments |
|
|
the Liability |
|
|
June 30, 2010 |
|
Lease restructuring expense |
|
$ |
750 |
|
|
$ |
(200 |
) |
|
$ |
50 |
|
|
$ |
600 |
|
12. 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, 2009 and June 30, 2010, the Company had no accruals for interest or
penalties related to income tax matters. For the three months ended June 30, 2010 and 2009, 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.
13. New Accounting Pronouncements
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements,
(amendments to FASB ASC Topic 605, Revenue Recognition ) (ASU 2009-13). ASU 2009-13 requires
entities to allocate revenue in an arrangement using estimated selling prices of the delivered
goods and services based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative selling price method.
ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The adoption of ASU 2009-13 did not have a material impact on the Companys results of
operations or financial condition.
In April 2010, the FASB issue ASU 2010-17, Revenue Recognition Milestone Method (ASU
2010-17). ASU 2010-17 provides guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. The following criteria must be met for a milestone to be considered substantive. The
consideration earned by achieving the milestone should 1. be commensurate with either the level of
effort required to achieve the milestone or the enhancement of the value of the item delivered as a
result of a specific outcome resulting from the vendors performance to achieve the milestone; 2.
be related solely to past performance; and 3. be reasonable relative to all deliverables and
payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there
can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both
substantive and nonsubstantive milestones. ASU 2010-17 is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of ASU 2010-17 did not have a material impact on the Companys results
of operations or financial condition.
Management does not believe there would have been a material effect on the accompanying
financial statements had any other recently issued, but not yet effective, accounting standards
been adopted in the current period.
14. Fair Value
In accordance with FASB ASC 820, Fair Value Measurements and Disclosures, 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 June 30, 2010 and December 31, 2009:
16
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
|
Level 2 |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
($ thousands) |
|
|
($ thousands) |
|
Derivative instruments (short term) |
|
$ |
17,135 |
|
|
$ |
6,189 |
|
Derivative instruments (long term) |
|
|
12,031 |
|
|
|
4,591 |
|
|
|
|
|
|
|
|
Total |
|
$ |
29,166 |
|
|
$ |
10,780 |
|
|
|
|
|
|
|
|
Some of the Companys financial instruments are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature, such
as cash and cash equivalents, receivables and payables.
We have determined that it is not practical to estimate the fair value of our notes payable
because of their unique nature and the costs that would be incurred to obtain an independent
valuation. We do not have comparable outstanding debt on which to base an estimated current
borrowing rate or other discount rate for purposes of estimating the fair value of the notes
payable and we have not been able to develop a valuation model that can be applied consistently in
a cost efficient manner. These factors all contribute to the impracticability of estimating the
fair value of the notes payable. At June 30, 2010, the carrying value of the notes payable and
accrued interest was $13.8 million. The MHR Convertible Notes, which are due on September 26, 2012,
yield an effective interest rate of 43.5%. Refer to Note 8 of these financial statements for more
information about the Companys notes payable.
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 was paid in May 2009 with the remaining $0.5 million 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.
16. Subsequent Events
July 2010 MHR Promissory Note. On July 29, 2010, we issued a promissory note (the July 2010 MHR
Note) to MHR Institutional Partners IIA LP and MHR Institutional Partners II LP (together, MHR)
in the principal amount of $525,000. The July 2010 MHR Note provides for an interest rate of 15%
per annum, with the entire principal amount due and payable on October 27, 2010 (the Maturity
Date). The Maturity Date will be accelerated, in certain circumstances, to the date that is two
business days following the receipt by the Issuer of at least $1,000,000 aggregate cash proceeds
from third parties, whether in connection with certain financing transactions, commercial
transactions or otherwise. MHR may, at its option, apply the amount of any payment of principal or
interest on account of this July 2010 MHR Note as consideration for the purchase of any securities
that may, from time to time, be issued by the Company to the MHR for value. The obligations under
the July 2010 MHR Note are secured in accordance with the terms of the Amendment (the Amendment)
to the Pledge and Security Agreement whereby Emisphere and MHR amended that certain Pledge and
Security Agreement, dated as of September 26, 2005 (the Security Agreement) to extend the terms
of the Security Agreement other than the intellectual property licensed to Novartis pursuant to the
Master Agreement and Amendment dated June 4, 2010 by and between Emisphere and Novartis, to include
the principal, interest and other obligations provided under the July 2010 MHR Note. In accordance
with the terms of that certain 11.00% Senior Secured Convertible Note issued by the Emisphere to
MHR and due September 26, 2012, MHR also provided a written consent to allow for the issuance of
the Note and related obligations provided under the Amendment.
Subsequent to the quarter ended June 30, 2010, MOG Capital, LLC (MOG Capital) notified the
Company of its intention to exercise its 2009 Investor Warrant to purchase up to 1,342,857 shares
of the Companys common stock at an exercise price of $0.70, using the cashless exercise
provision. The Company issued an aggregate 961,724 shares to MOG Capital in accordance with the
terms of the cashless exercise provision. After this cashless exercise, 2009 Investor Warrants to
purchase up to 3,729,323 shares of common stock, in the aggregate, remain outstanding.
17
|
|
|
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. The Eligen® Technology can make it possible to orally deliver certain
therapeutic molecules without altering their chemical form or biological integrity.
Eligen® delivery agents, or carriers, facilitate or enable the transport of
therapeutic molecules across the mucous membranes of the gastrointestinal tract, to reach the
tissues of the body where they can exert their intended pharmacological effect.
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. Since 2007, Emisphere has undergone many
positive changes. A new senior management team, led by Michael V. Novinski, was hired; the
Eligen® Technology was reevaluated and our corporate strategy was refocused 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, one of which, yielded the introduction of our first commercial product during 2009. We
continue to develop potential product candidates in-house and we demonstrated and enhanced the
value of the Eligen® Technology as evident in the progress made by our development
partners Novo Nordisk A/S (Novo Nordisk) and Novartis Pharma AG (Novartis) on their respective
product development programs. Further development, exploration and commercialization 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.
The application of the Eligen® Technology is potentially broad and may provide for
a number of opportunities across a spectrum of therapeutic modalities or nutritional supplements.
During the second quarter 2010, 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.
18
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 medical foods candidates. We reported progress
on our planned second product, a higher dose, medical food formulation of Eligen® B12 for use by
B12 deficient individuals. Our recently completed clinical trial showed that high dose Eligen® B12
1000mcg can efficiently and quickly restore Vitamin B12 levels in deficient individuals compared to
the current standard of care. During July 2010, we announced that we are engaged in ongoing
discussions with a potential licensee for our high dose oral Eligen® B12 1000mcg as a Medical Food
for individuals with B12 deficiency. In addition, we are evaluating other potential licensees as
well as the possibility of marketing the product without a partner. As a medical food, Emispheres
Eligen® B12 (1000 mcg) is designed as a specially formulated and processed oral formulation for the
specific dietary management of patients under medical supervision who, because of a limited or
impaired capacity to absorb Vitamin B12 , have a diagnosed Vitamin B12 deficiency. It is planned to
be available early in 2011. It is estimated that as many as 10 million people in the U.S. and over
100 million people worldwide may be B12 deficient. Oral Eligen® B12 and the foregoing statements
have not been evaluated by the Food and Drug Administration. Oral Eligen® B12 is not intended to
diagnose, treat, cure, or prevent any disease.
Previously, the Company had announced interim data from the recently completed study
demonstrated that its high-dose oral Eligen® B12 (1000mcg) given to individuals with low B12 levels
restores normal B12 serum concentrations. Normal levels of serum B12 were achieved by all study
participants who had taken Eligen® B12 (1000mcg) 15 days into the 90-day study when the first blood
samples were taken. These data, in Abstract Number 8370, were presented at the Experimental Biology
2010 Conference in Anaheim, California. In this open-label, randomized, 90-day study, serum
cobalamin (B12) and holotranscobalamin (active B12) were collected and measured at Baseline, Day
15, Day 31, Day 61 and Day 91. A total of 49 study participants were enrolled (26 on IM injection
and 23 on oral) and received either nine 1000mcg intramuscular injections of Vitamin B12 or once
daily tablets of oral Eligen® B12 (1000 mcg). The results from the interim analysis showed that
serum cobalamin and active B12 returned to the normal range with both products and normalization
was maintained. With participants in the oral Eligen® B12 (1000mcg) group showing the ability to
rapidly achieve normalized serum and active B12 levels, the study illustrates the potential of the
Eligen® Technology and of the high dose, oral Eligen® B12 (1000mcg) formulation to offer a much
needed medical food alternative to painful and inconvenient IM injections.
On the prescription side, our licensees include Novartis, which is using our drug delivery
technology in combination with salmon calcitonin, parathyroid hormone, and human growth hormone.
During June 2010, we announced that we entered into an expanded relationship with Novartis pursuant
to which Novartis has cancelled the Companys Convertible Promissory Note (the Novartis Note).
The Novartis Note was originally issued to Novartis on December 1, 2004 in connection with the
Research Collaboration and Option License Agreement between the parties of that date and was
originally due December 1, 2009. Previously, Novartis had agreed to extend the maturity date to
June 4, 2010. In connection with the cancellation of the Novartis Note, the parties agreed to
modify the royalty and milestone payment schedule for the Research Collaboration and Option
Agreement and License Agreement between the parties for the development of an oral salmon
calcitonin product for the treatment of osteoarthritis and osteoporosis. Additionally, we have
granted Novartis the right to evaluate the feasibility of using Emispheres Eligen® Technology with
two new compounds to assess the potential for new product development opportunities. If Novartis
chooses to develop oral formulations of these new compounds using the Eligen® Technology, the
parties will negotiate additional agreements. In that case, Emisphere could be entitled to receive
development milestone and royalty payments in connection with the development and commercialization
of these potentially new products.
Novartis 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. Now that these Phase III studies
are fully enrolled, over 5,500 clinical study patients used the Eligen® Technology during 2009 and
continue to use it during 2010. During July 2010, we announced that Novartis Pharma AG and its
license partner Nordic Bioscience a/s (the Sponsor) reported the following in connection with
their Phase III Study 2302 in osteoarthritis assessing the safety and efficacy of oral calcitonin
in the treatment of osteoarthritis of the knee. This study incorporates Emispheres unique and
proprietary Eligen® Drug Delivery Technology for the improved oral absorption of salmon calcitonin.
An independent Data Monitoring Committee
19
(DMC) conducted a futility analysis of one-year data for
all patients enrolled in this two-year study, including assessments of safety and efficacy
parameters. The DMC concluded that although there is no reason to stop Study 2302 because of safety
concerns, there is no reason to continue the study for efficacy. The DMC also concluded that the
final decision whether to continue Study 2302 rests with the Sponsor. A parallel two-year Phase III
Study 2301 in osteoarthritis assessing the safety and efficacy of oral calcitonin in the treatment
of osteoarthritis of the knee is
still in progress. In December 2009, the DMC conducted a futility analysis of one-year data
for all patients enrolled in this two-year study, including assessments of safety and efficacy
parameters, and recommended to continue with such Study. The Sponsor currently intends to continue
the clinical program of oral calcitonin in osteoarthritis, including both Phase III Study 2301 and
Phase III Study 2302. Novartis and Nordic Bioscience will continue to work together to assess next
steps once the final data of Study 2301 is available. This data is expected to be available in the
fourth quarter, 2010. Additionally, the Sponsor currently intends to continue the clinical program
of oral calcitonin in osteoporosis. Previously, in its quarterly earnings report for the period
ended June 30, 2010, Novartis stated that oral calcitonin for the treatment of osteoporosis is
planned to file with the regulatory authorities during 2011.
During April 2010, we announced the publication of a research study entitled, Investigation
of the Direct Effect of Salmon Calcitonin on Human Osteoarthritic Chondrocytes, by Nordic
Bioscience in the April 5, 2010 edition of the publication BMC Musculoskeletal Disorders. Oral
salmon calcitonin, which uses Emispheres proprietary Eligen® Technology, is currently being
studied in osteoarthritis and osteoporosis by Novartis Pharma AG and Nordic Bioscience. The study
was conducted in vitro on cartilage samples obtained from female patients undergoing total knee
arthroplasty surgery for the treatment of osteoarthritis. The article describes the growth
promoting effects of salmon calcitonin on these cartilage samples. The study shows that treatment
with pharmacological concentrations of calcitonin increases synthesis of both proteoglycan
(proteins and sugars which interweave with collagen) and collagen type II the key components of
articular cartilage. This research is unique and significant as it represents the first work to
look chiefly at the ability of salmon calcitonin to stimulate cartilage synthesis. These findings
provide evidence to substantiate the theory that calcitonin may exert a positive effect on joint
health through its dual action of promoting both bone and cartilage formation.
During December 2009, we announced a meta-analysis published in the December 2009 edition of
Rheumatology Reports examining independent evidence of the analgesic action of the hormone
calcitonin. This publication restated the potential of calcitonin in filling a significant unmet
need for alternative treatments for persistent musculoskeletal pain. Scientists from Nordic
Bioscience were involved in the preparation of this meta-analysis. Non-malignant musculoskeletal
pain is the most common clinical symptom that causes patients to seek medical attention and is a
major cause of disability in the world. Musculoskeletal pain can arise from a variety of common
conditions including osteoarthritis, rheumatoid arthritis, osteoporosis, surgery, low back pain and
bone fracture. The meta-analysis, conducted by researchers at the Center for Sensory-Motor
Interaction in the Department of Health Science and Technology at Aalborg University in Denmark,
examined independent pre-clinical and clinical studies spanning nearly 45 years of the possible
intrinsic analgesic properties of calcitonin, with special focus on the challenges in the
musculoskeletal system. The authors concluded that well-designed clinical trials should be
conducted to further validate evidence of calcitonins analgesic action and its promising potential
role in the management of musculoskeletal pain. The effects of calcitonin on clinical pain
conditions have received increasing attention in the past decades, although a consensus on
mechanism-of-action and potential indications has not been reached. The analgesic activity of oral
salmon calcitonin has been shown in several controlled prospective double-blind studies; besides
pain management in osteoporosis, calcitonin has shown analgesic action in painful conditions such
as phantom limb pain, diabetic neuropathy, complex regional pain syndrome, adhesive capsulitis,
rheumatoid arthritis, vertebral crush fractures, spondylitis, tumor metastasis, cancer pain,
migraine, Pagets disease of bone as well as post-operative pain. An ideal treatment with an
optimal efficacy, safety and convenience profile is not available for the musculoskeletal pain
associated with such conditions as osteoporosis and osteoarthritis. This review of the literature
highlights the clear unmet medical need that could be addressed by Emispheres oral salmon
calcitonin product.
Novartis is also engaged in research using the Eligen® Technology and PTH-1-34 to
develop a safe and effective oral formulation of PTH for the treatment of postmenopausal
osteoporosis, PTH is produced by the parathyroid glands to regulate the amount of calcium and
phosphorus in the body. When used therapeutically, it increases bone density and bone strength to
help prevent fractures. It is approved to treat osteoporosis, a disease associated with a gradual
thinning and weakening of the bones that occurs most frequently in women after menopause. Untreated
postmenopausal osteoporosis can lead to chronic back pain, disabling fractures, and lost mobility.
Novartis
20
conducted a Phase I study in postmenopausal women to determine the safety and tolerability
of oral PTH-1-34, a combination of human PTH-1-34 and Emispheres delivery agent 5-CNAC, for the
treatment of postmenopausal osteoporosis. The study was designed to assess the bioavailability
profile of increasing doses of PTH-1-34 combined with different amounts of 5-CNAC administered
orally. The results, from the single-center, partially-blinded, incomplete cross-over study were
presented October 19, 2009 in a poster session at the 73rd Annual Scientific
Meeting of the American College of Rheumatology in Philadelphia. Study results demonstrated
that a single dose of the novel oral parathyroid hormone PTH-1-34, which utilizes Emispheres
proprietary Eligen® Drug Delivery Technology and absorption-enhancing carrier molecule
5-CNAC, achieved potentially therapeutically relevant exposure and safety profiles similar to those
of the currently available injectable formulation in healthy postmenopausal women.
During April 2010, we announced that Novartis Pharma AG initiated a second Phase I trial for
an oral PTH-1-34 which uses Emispheres Eligen® Technology, and is in development for the
treatment of postmenopausal osteoporosis. The study is a partially blinded, placebo controlled,
active comparator study to explore the safety, tolerability, pharmacokinetics and pharmacodynamics
in postmenopausal women after daily oral doses of PTH-1-34. The study has two parts (A and B) and
will enroll a total of approximately up to 120 postmenopausal women. In Part A of the trial,
ascending doses of oral PTH-1-34 using the Eligen® Technology will be tested for safety,
tolerability and pharmacokinetics and compared to Forsteo®. In Part B, in addition to
safety and tolerability of oral PTH-1-34 using the Eligen® Technology, pharmacodynamic
responses will be measured by bone biomarker levels and bone mineral density, and compared to
Forsteo®. The first patient was enrolled in April.
Research using the Eligen® Technology and GLP-1, a potential treatment for Type 2
Diabetes is being conducted by Novo Nordisk A/S (Novo Nordisk) and by Dr. Christoph Beglinger,
M.D., of the Clinical Research Center, Department of Biomedicine Division of Gastroenterology, and
Department of Clinical Pharmacology and Toxicology 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.
During January 2010, we announced that Novo Nordisk had initiated its first Phase I clinical
trial with a long-acting oral GLP-1 analogue (NN9924). This milestone released a $2 million payment
to Emisphere, whose proprietary Eligen® Technology is used in the formulation of NN9924.
GLP-1 (Glucagon-Like Peptide-1) is a natural hormone involved in controlling blood sugar levels. It
stimulates the release of insulin only when blood sugar levels become too high. GLP-1 secretion is
often impaired in people with Type 2 Diabetes. The aim of this trial, which is being conducted in
the UK, is to investigate the safety, tolerability and bioavailability of NN9924 in healthy
volunteers. The trial will enroll approximately 155 individuals and results from the trial are
expected in 2011. There are many challenges in developing an oral formulation of GLP-1, in
particular obtaining adequate bioavailability. NN9924 addresses some of these key challenges by
utilizing Emispheres Eligen® Technology to facilitate absorption from the
gastrointestinal tract.
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. During March 2010, Emisphere and Alchemia Ltd. (ASX:ACL) announced that
they would join efforts to develop an oral formulation of the anti-coagulant drug fondaparinux with
Emispheres Eligen® Technology. Fondaparinux, an anti-coagulant used for the prevention
of deep vein thrombosis, is marketed in injectable form as Arixtra® by GlaxoSmithKline.
Arixtra® has been off patent since 2002 but, due to the complexity of its synthesis,
there is currently no approved generic or alternative source of commercial scale active
pharmaceutical ingredient (API). Alchemia has developed a novel, patent protected, synthesis for
the manufacture of fondaparinux at commercial scale. In March 2009, Alchemias manufacturing and
U.S. marketing partner, Dr Reddys Laboratories (NYSE: RDY) submitted an ANDA to the U.S. FDA for a
generic version of the injectable form of fondaparinux. We believe an oral formulation of
fondaparinux could dramatically increase the market potential for fondaparinux. Based on what we
know from our experience with other chemically-related anti-coagulants, the profile of fondaparinux
should fit very well with the Eligen® Technology given its half life and safety profile.
Although developing an oral formulation of an injectable compound is always challenging, this
project could produce substantial benefits for the medical community. The
21
combination of
Emispheres delivery technology and Alchemias fondaparinux may ultimately allow us to bring an
oral anti-coagulant to market in an accelerated fashion. Alchemia has already seen preclinical data
suggesting that enhanced levels of oral absorption can be achieved for fondaparinux. If the dose
formulated with the Eligen® Technology can be successfully optimized, it could open up a
host of medically and commercially compelling
opportunities for fondaparinux, Alchemia plans to evaluate a number of different formulations
initially in order to optimize oral bioavailability and pharmacokinetics, with the aim of then
rapidly moving into human clinical studies.
By expanding our relationship with Novartis and settling the Novartis Note on non-dilutive
terms (see Note 8 to the Financial Statements contained in this quarterly report) the Company
strengthened its Balance Sheet and enhanced the potential future value of its Eligen® Technology
through the potential future additional development and commercialization of potentially new
products by Novartis. By focusing on improving operational efficiency, we have strengthened our
financial foundation while maintaining our focus on advancing and commercializing the Eligen®
Technology. By closing our research and development facility in Tarrytown, NY and utilizing
independent contractors to conduct essential research and development, we reduced our annual cash
burn from operating activities to approximately $8 million per year. Additionally, we have
accelerated the commercialization of the Eligen® Technology in a cost effective way and gained
operational efficiencies by tapping into more advanced scientific processes independent contractors
can provide.
Results of Operations
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
39 |
|
|
$ |
|
|
|
$ |
39 |
|
Operating expenses |
|
$ |
3,156 |
|
|
$ |
2,998 |
|
|
$ |
158 |
|
Operating loss |
|
$ |
(3,117 |
) |
|
$ |
(2,998 |
) |
|
$ |
(119 |
) |
Other income (expense) |
|
$ |
(10,587 |
) |
|
$ |
(1,189 |
) |
|
$ |
(9,398 |
) |
Net loss |
|
$ |
(13,704 |
) |
|
$ |
(4,187 |
) |
|
$ |
(9,517 |
) |
Revenue increased $0.04 million for the three months ended June 30, 2010 compared to the same
period last year due to commercial sales of low dose Eligen® B-12.
Operating expenses increased $0.16 million or 5% for the three months ended June 30, 2010 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 |
|
$ |
(673 |
) |
Decrease in professional fees |
|
|
(13 |
) |
Increase in occupancy costs |
|
|
2 |
|
Decrease in clinical costs |
|
|
(72 |
) |
Decrease in depreciation and amortization |
|
|
(21 |
) |
Increase in other costs |
|
|
935 |
|
|
|
|
|
|
|
$ |
158 |
|
|
|
|
|
Human resource costs decreased $673 thousand, or 37%, due primarily to a $70 thousand decrease from
a reduction in personnel in 2010 and a $631 thousand reduction in non-cash compensation, partially
offset by the receipt of a refund in workers compensation insurance during 2009.
Professional fees decreased $13 thousand, or 1%, due primarily to a net decrease in legal fees.
Occupancy costs increased $2 thousand, or 2%, due to higher common area maintenance costs.
Clinical costs decreased $72 thousand, or 22%, due primarily to a decrease in clinical trial costs
related to B-12 as the trial nears completion.
22
Depreciation and amortization costs decreased $21 thousand, or 22%, due to the write off of certain
equipment in connection with the closure of the Tarrytown facility as a result of our fixed asset
audit in the fourth quarter of 2009.
Other costs increased $935 thousand, or 174%, due primarily to the receipt of $779 thousand
proceeds from the sale of fixed asset equipment in 2009 and an increase of $220 thousand in
estimated costs to settle outstanding lawsuits during 2010; partially offset by a $63 thousand
reduction in expenses associated with the abandonment of the Tarrytown NY facility during 2009.
Our principal operating costs include the following items as a percentage of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2010 |
|
2009 |
Human resource costs, including benefits |
|
|
36 |
% |
|
|
61 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
38 |
% |
|
|
40 |
% |
Occupancy for our laboratory and operating space |
|
|
3 |
% |
|
|
3 |
% |
Clinical costs |
|
|
8 |
% |
|
|
11 |
% |
Depreciation and amortization |
|
|
2 |
% |
|
|
3 |
% |
Other |
|
|
13 |
% |
|
|
-18 |
% |
Other expense increased $9.4 million for the three months ended June 30, 2010 in comparison to
the same period last year primarily due to a $8.2 million increase in the fair value of derivative
instruments due to relative changes in stock price during the three months ended June 30, 2010
compared to the three months period ended June 30, 2009; an increase of $0.7 million in interest
expense and a decrease of $0.5 million in other income due to the receipt of a $0.5 million
installment payment on the sale of a patent to MannKind during the three months ended June 30,
2009.
As a result of the above factors, we had a net loss of $13.7 million for the three months
ended June 30, 2010, compared to a net loss of $4.2 million for the three months ended June 30,
2009.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
2010 |
|
2009 |
|
Change |
|
|
(in thousands) |
Revenue |
|
$ |
51 |
|
|
$ |
|
|
|
$ |
51 |
|
Operating expenses |
|
$ |
6,176 |
|
|
$ |
7,657 |
|
|
$ |
(1,481 |
) |
Operating loss |
|
$ |
(6,125 |
) |
|
$ |
(7,657 |
) |
|
$ |
1,532 |
|
Other income (expense) |
|
$ |
(26,045 |
) |
|
$ |
(1,947 |
) |
|
$ |
(24,098 |
) |
Net loss |
|
$ |
(32,170 |
) |
|
$ |
(9,604 |
) |
|
$ |
(22,566 |
) |
Revenue increased $0.05 million for the six months ended June 30, 2010 compared to the same
period last year due to commercial sales of low dose Eligen® B-12.
Operating expenses decreased $1.6 million or 21% for the six months ended June 30, 2010 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 |
|
$ |
(374 |
) |
Decrease in professional fees |
|
|
(908 |
) |
Decrease in occupancy costs |
|
|
(822 |
) |
Decrease in clinical costs |
|
|
(522 |
) |
Decrease in depreciation and amortization |
|
|
(157 |
) |
Increase in other costs |
|
|
1,302 |
|
|
|
|
|
|
|
$ |
(1,481 |
) |
|
|
|
|
Human resource costs decreased $374 thousand, or 12%, due primarily to a $460 thousand decrease in
non-cash compensation and a $79 thousand decrease from reduction in personnel, offset by the award
of a $150 thousand special bonus to the Companys CEO and a $15 thousand increase in employee
benefits.
23
Professional fees decreased $908 thousand, or 30%, due primarily to a $597 thousand decrease in
legal fees primarily in connection with the completion of the arbitration with the Companys former
CEO; a $252 thousand decrease in consulting costs and $59 thousand decrease from other professional
fees.
Occupancy costs decreased $822 thousand, or 82%, due to the closure of our laboratory facilities in
Tarrytown, NY.
Clinical costs decreased $522 thousand, or 57%, due primarily to a $247 thousand decrease in
clinical trial costs and a $132 thousand decrease in outside lab fees associated with the
completion of analytical testing programs related to the B-12 program; a $103 thousand decrease in
lab supplies and a $57 thousand decrease in repairs and maintenance of laboratory equipment as a
result of closure of the Tarrytown NY facility in 2009.
Depreciation and amortization costs decreased $157 thousand, or 51%, due to the sales of laboratory
equipment and the write off of certain equipment in connection with the closure of the Tarrytown
facility.
Other costs increased $1.3 million, or 194%, due primarily to the receipt of $822 thousand
proceeds from the sale of fixed asset equipment in 2009, an increase of $220 thousand in estimated
costs to settle outstanding lawsuit and a $353 thousand credit adjustment to restructuring expense
taken during the first quarter 2009 in connection with the closure of the Tarrytown facility.
Our principal operating costs include the following items as a percentage of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2010 |
|
2009 |
Human resource costs, including benefits |
|
|
44 |
% |
|
|
41 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
34 |
% |
|
|
39 |
% |
Occupancy for our laboratory and operating space |
|
|
3 |
% |
|
|
13 |
% |
Clinical costs |
|
|
6 |
% |
|
|
12 |
% |
Depreciation and amortization |
|
|
3 |
% |
|
|
4 |
% |
Other |
|
|
10 |
% |
|
|
-9 |
% |
Other expense increased $24.1 million for the six months ended June 30, 2010 in comparison to
the same period last year primarily due to a $22.3 million increase in the fair value of derivative
instruments due to the issuance of new warrants which are required to be accounted for as a
derivative instruments and to relative changes in stock price during the six months ended June 30,
2010 and June 30, 2009 respectively; an increase of $1.1 million in interest expense and a decrease
of $0.7 million in other income due primarily from a $0.5 installment payment on the sale of patent
to MannKind and $0.2 million decrease in sublease income in connection with the closure of our
Tarrytown facility during 2009.
As a result of the above factors, we had a net loss of $32.2 million for the six months ended
June 30, 2010, compared to a net loss of $9.6 million for the six months ended June 30, 2009.
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 June 30, 2010, our accumulated deficit was approximately $468.8 million and our
stockholders deficit was approximately $73.4 million. Our net loss and operating loss was $13.7
million and $3.1 million, respectively for the three months ended June 30, 2010 compared to a net
loss and net operating loss of $4.2 million and $3.0 million, respectively for the three months
ended June 30, 2009. Our net loss and net operating loss for the six months ended June 30, 2010
were $32.2 million and $6.1 million respectively compared to $9.6 million and $7.7 million,
respectively for the six months ended June 30, 2009.
On July 29, 2010, we issued a promissory note (the Note) to MHR Institutional Partners IIA
LP and MHR Institutional Partners II LP (together, MHR) in the principal amount of $525,000. The
Note provides for an interest rate of 15% per annum, with the entire principal amount due and
payable on October 27, 2010 (the Maturity Date). The Maturity Date will be accelerated, in
certain circumstances, to the date that is two business
24
days following the receipt by the Issuer of at least $1,000,000 aggregate cash proceeds from
third parties, whether in connection with certain financing transactions, commercial transactions
or otherwise. The obligations under the Note are secured in accordance with the terms of the
Amendment (the Amendment) to the Pledge and Security Agreement whereby Emisphere and MHR amended
that certain Pledge and Security Agreement, dated as of September 26, 2005 (the Security
Agreement) to extend the terms of the Security Agreement other than the intellectual property
licensed to Novartis pursuant to the Master Agreement and Amendment dated June 4, 2010 by and
between Emisphere and Novartis, to include the principal, interest and other obligations provided
under the Note. In accordance with the terms of that certain 11.00% Senior Secured Convertible
Note issued by the Emisphere to MHR and due September 26, 2012, MHR also provided a written consent
(the Consent) to allow for the issuance of the Note and related obligations provided under the
Amendment.
In April 2005, the Company entered into an amended and restated employment agreement 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. During the arbitration, Dr. Goldberg sought a total damage
amount of at least $9,223,646 plus interest. On February 11, 2010, the arbitrator issued the final
award in favor of Dr. Goldberg for a total amount of approximately $2,333,115 as full and final
payment for all claims, defenses, counterclaims, fees and related matters. The Company opposed Dr.
Goldbergs petition to confirm the arbitration award. On July 12, 2010 the award was confirmed by
the court. As of August 10, 2010, the Company adjusted its estimate of costs to settle this matter
to $2.6 million to account for potential additional interest costs on the settlement amount and
additional legal fees. Dr. Goldberg has proposed an order of settlement in the amount of
approximately $2.6 million and seeks to have a final order entered August 16, 2010.
On June 4, 2010, we entered into a Master Agreement and Amendment with Novartis (the Novartis
Agreement). Pursuant to the Novartis Agreement, we were released and discharged from its
obligations under the Novartis Note in exchange for (1) the reduction of future royalty and
milestone payments up to an aggregate amount of $11.0 million due the Company under the Research
Collaboration and Option Agreement, dated as of December 3, 1997, as amended on October 20, 2000,
and the License Agreement, date as of March 8, 2000, for the development of an oral salmon
calcitonin product for the treatment of osteoarthritis and osteoporosis.; (2) the right for
Novartis to evaluate the feasibility of using Emispheres Eligen® Technology with two new
compounds to assess the potential for new product development opportunities; and (3) other
amendments to the Research Collaboration and Option Agreement and License Agreement. As of the
date of the Novartis Agreement, the outstanding principal balance and accrued interest of the
Novartis Note was approximately $13.0 million.
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 June 30, 2010 total cash was $0.7 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 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,
including the amounts provided by MHR in connection with the July
2010 MHR Note but not accounting for an
approximately $2.6 million arbitration award in favor of the Companys former CEO, will enable us
to continue operations through approximately August 31, 2010 or earlier if unforeseen events arise
that negatively affect our liquidity. However, this expectation is based on the current operating
plan that could change as a result of many factors and additional funding may be required sooner
than anticipated. These conditions raise substantial doubt about our ability to continue as a going
concern. The audit reports prepared by our independent registered public accounting firms relating
to our financial statements for the years ended December 31, 2009, 2008 and 2007 include an
explanatory paragraph expressing substantial doubt about our ability to continue as a going
concern.
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
25
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. 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 June 30, 2010, we had no off-balance sheet arrangements, other than operating leases.
There were no changes in significant contractual obligations during the three months ended June 30,
2010.
Critical Accounting Estimates
Please refer to the Companys Annual Report on Form 10-K filed with the SEC on March 25, 2010
for detailed explanations of its critical accounting estimates which have not changed significantly
during the period ended June 30, 2010.
New Accounting Pronouncements
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements,
(amendments to FASB ASC Topic 605, Revenue Recognition) (ASU 2009-13). ASU 2009-13 requires
entities to allocate revenue in an arrangement using estimated selling prices of the delivered
goods and services based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative selling price method.
ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The adoption of ASU 2009-13 did not have a material impact on the Companys results of
operations or financial condition.
In April 2010, the FASB issue ASU 2010-17, Revenue Recognition Milestone Method (ASU
2010-17). ASU 2010-17 provides guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. The following criteria must be met for a milestone to be considered substantive. The
consideration earned by achieving the milestone should 1. Be commensurate with either the level of
effort required to achieve the milestone or the enhancement of the value of the item delivered as a
result of a specific outcome resulting from the vendors performance to achieve the milestone. 2,
Related solely to past performance. 3. Be reasonable relative to all deliverables and payment terms
in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than
one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and
nonsubstantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved
in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The
adoptions of ASU 2010-17 did not have a material impact on the Companys results of operations or
financial condition.
Management does not believe there would have been a material effect on the accompanying
financial statements had any other recently issued, but not yet effective, accounting standards
been adopted in the current period.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Fair Value of Warrants and Derivative Liabilities. At June 30, 2010, the estimated fair value
of derivative instruments was $29.2 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
26
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:
|
|
|
|
|
|
|
Derivatives |
|
|
(in thousands) |
25% increase in stock price |
|
$ |
9,282 |
|
50% increase in stock price |
|
|
18,827 |
|
5% increase in assumed volatility |
|
|
739 |
|
25% decrease in stock price |
|
|
(8,419 |
) |
50% decrease in stock price |
|
|
(16,448 |
) |
5% decrease in assumed volatility |
|
|
(760 |
) |
|
|
|
ITEM 4T. |
|
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 have been no changes in our internal control over financial reporting during the three
month period ended June 30, 2010 that materially affected, or are 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 amended and restated employment agreement 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. During the arbitration, Dr. Goldberg sought a total damage
amount of at least $9,223,646 plus interest. On February 11, 2010, the arbitrator issued the final
award in favor of Dr. Goldberg for a total amount of approximately $2,333,115 as full and final
payment for all claims, defenses, counterclaims, fees and related matters. The Company opposed Dr.
Goldbergs petition to confirm the arbitration award. On July 12, 2010 the award was confirmed by
the court. As of August 10, 2010, the Company adjusted its estimate of costs to settle this matter
to $2.6 million to account for potential additional interest costs on the settlement amount and
additional legal fees. Dr. Goldberg has proposed an order of settlement in the amount of
approximately $2.6 million and seeks to have a final order entered August 16, 2010.
27
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
|
|
|
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 June 2010, we may be forced to cease operations. |
|
|
|
As of June 30, 2010, we had approximately $0.7 million in cash and restricted cash,
approximately $22.2 million in working capital deficiency, a stockholders deficit of
approximately $73.4 million and an accumulated deficit of approximately $468.8 million. Our
net loss and operating loss for the three months ended June 30, 2010 were approximately $13.7
million and $3.1 million, respectively and $32.2 million and $6.1 million, respectively for
the six months ended June 30, 2010. Since our inception in 1986, we have generated
significant losses from operations. 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. These conditions
raise substantial doubt about our ability to continue as a going concern. The audit reports
prepared by our independent registered public accounting firms relating to our financial
statements for the years ended December 31, 2007, 2008 and 2009, respectively included an
explanatory paragraph expressing substantial doubt about our ability to continue as a going
concern. |
|
|
|
On July 29, 2010, we issued a promissory note (the Note) to MHR in the principal amount of
$525,000. The Note provides for an interest rate of 15% per annum, with the entire principal
amount due and payable on October 27, 2010.We anticipate that our existing capital resources,
including the amounts provided by MHR in connection with the Note will enable us to continue
operations through approximately August 31, 2010, or earlier if unforeseen events or
circumstances arise that negatively affect our liquidity. If we fail to raise additional
capital or obtain substantial cash inflows from existing partners prior to August 31, 2010,
we will be forced to cease operations. |
|
|
|
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, including
the amounts provided by MHR in connection with the July
2010 MHR Note but not accounting for an
approximately $2.6 million arbitration award in favor of the Companys former CEO, will
enable us to continue operations through approximately August 31, 2010 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, 2009 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. |
|
|
|
While our plan is to raise capital when needed and/or to pursue product 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 or to secure funds from new or existing partners. We cannot assure you
that financing will be available when needed, or on favorable terms or at all. The current
economic environment combined with a number of other factors pose additional challenges to
the Company in securing adequate financing under acceptable terms. 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. Additionally, these
conditions may increase the costs to raise capital. Our failure to raise capital when needed
would adversely |
28
|
|
|
affect our business, financial condition, and results of operations, and could force us to
reduce or discontinue operations. |
|
|
|
The audit opinion issued by our independent registered public accounting firm relating
to our financial statements for the year ended December 31, 2009 contained a going concern
explanatory paragraph. |
|
|
|
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. |
|
|
|
Our stock was de-listed from NASDAQ. |
Risks Related to our Business
|
|
|
Our business will suffer if we fail or are delayed in developing and commercializing an
improved oral form of Vitamin B12. |
|
|
|
We are highly dependent on the clinical success of our product candidates. |
|
|
|
We are highly dependent upon collaborative partners to develop and commercialize
compounds using our delivery agents. |
|
|
|
Our collaborative partners control the clinical development of certain of our drug
candidates and may terminate their efforts at will. |
|
|
|
Our product candidates are in various stages of development, and we cannot be certain
that any will be suitable for commercial purposes. |
|
|
|
Our collaborative partners are free to develop competing products. |
|
|
|
Our business will suffer if we cannot adequately protect our patent and proprietary
rights. |
|
|
|
We may be at risk of having to obtain a license from third parties making proprietary
improvements to our technology. |
|
|
|
We are dependent on third parties to manufacture and, in some cases, test our products. |
|
|
|
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. |
Risks Related to our Industry
|
|
|
Our future business success depends heavily upon regulatory approvals, which can be
difficult to obtain for a variety of reasons, including cost. |
|
|
|
We may face product liability claims related to participation in clinical trials for
future products. |
|
|
|
We are subject to environmental, health and safety laws and regulations for which we
incur costs to comply. |
|
|
|
We face rapid technological change and intense competition. |
Other Risks
|
|
|
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. |
29
|
|
|
Our stock price has been and may continue to be volatile. |
|
|
|
Future sales of common stock or warrants, or the prospect of future sales, may depress
our stock price. |
For a more complete listing and description of these and other risks that the Company faces,
please see our Annual Report for 2009 on Form 10-K as filed with the SEC on March 25, 2010.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On April 5, 2010, Rodman & Renshaw, LLC (Rodman) notified the Company of its intention to
exercise part of its warrants to purchase 504,000 shares of common stock at an exercise price of
$0.875, using the cashless exercise provision. The Company issued 297,636 shares of common stock
to Rodman on April 5, 2010. On April 30, 2010, Rodman notified the Company of its intention to
exercise the remaining outstanding portion of the Warrant using the cashless exercise provision.
The Company issued an additional 27,192 shares of common stock to the purchase agent on April 30,
2010. After this cashless exercise, the August 2009 Equity Financing Placement Agent Warrants are
no longer outstanding.
On April 20, 2010, Elan Corporation, plc (Elan) notified the Company of its intention to
exercise its Warrant to purchase up to 600,000 shares of the Companys common stock at an exercise
price of $0.4635 (as adjusted pursuant to the terms of the warrant) using the cashless exercise
provision. On April 21, 2010, the Company issued 518,206 shares of common stock to Elan. After the
cashless exercise, the Elan Warrant is no longer outstanding.
On May 13, 2010, the BAM Opportunity Fund LP (BAM) notified the Company of its intention to
exercise its warrant to purchase up to 1,342,857 shares of the Companys common stock, originally
issued in August 2009 at an exercise price of $0.70, using the cashless exercise provision. The
Company issued 1,005,213 shares of common stock to BAM on May 18, 2010.
On July 21, 2010, MOG Capital, LLC (MOG Capital) notified the Company of its intention to
exercise part of its warrant to purchase up to 1,342,857 shares of the Companys common stock
originally issued in August 2009 at an exercise price of $0.70. using the cashless exercise
provision. The Company issued 6,000 shares to MOG Capital on July 26, 2010. On July 23, 2010, MOG
notified the Company of its intention to exercise the remaining outstanding portion of its warrant
using the cashless exercise provision. The Company issued an additional 955,724 shares of common
stock to MOG on July 28, 2010. After such cashless exercises, August 2009 Warrants originally
issued in August 2009 to purchase 3,729,323 shares of common stock, in the aggregate, remained
outstanding.
For these issuances, the Company is relying on the exemption from federal registration under
Section 4(2) of the Securities Act of 1933, as amended.
|
|
|
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 (filed as
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2007 and incorporated herein by
reference). |
|
|
|
3.2
|
|
By-Laws of Emisphere Technologies, Inc., as amended December
7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 1999) and
as further amended on September 23, 2005 (filed as Exhibit 3.1
to the Current Report on Form 8-K filed on September 30, 2005
and incorporated herein by reference). |
|
|
|
3.3
|
|
Amendment, effective as of September 11, 2007, to the Amended
By-Laws of Emisphere Technologies, Inc. (filed as Exhibit 3.1
to the Current Report on Form 8-K filed on September 14, 2007
and incorporated herein by reference). |
30
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
4.1
|
|
Restated Rights Agreement dated as of April 7, 2006 between
Emisphere Technologies, Inc. and Mellon Investor Services, LLC
(filed as Exhibit 1.1 to the Current Report on Form 8-K filed
on April 10, 2006 and incorporated herein by reference. |
|
|
|
4.2
|
|
Form of Emisphere Technologies, Inc. Warrant (filed as Exhibit
4.1 to the Current Report on Form 8-K, filed on June 8, 2010
and incorporated herein by reference). |
|
|
|
10.1
|
|
Letter Agreement by and between Emisphere Technologies, Inc.
and MHR Institutional Partners IIA LP, dated June 8, 2010
(filed as Exhibit 10.1 to the Current Report on Form 8-K,
filed on June 8, 2010 and incorporated herein by reference).* |
|
|
|
10.2
|
|
Form of Emisphere Technologies, Inc. Reimbursement Note (filed
as Exhibit 10.2 to the Current Report on Form 8-K, filed on
June 8, 2010 and incorporated herein by reference). |
|
|
|
10.3
|
|
Form of Emisphere Technologies, Inc. Second Reimbursement Note
(filed as Exhibit 10.3 to the Current Report on Form 8-K,
filed on June 8, 2010 and incorporated herein by reference). |
|
|
|
10.4
|
|
Research Master Agreement and Amendment by and between
Emisphere Technologies, Inc. and Novartis Pharma AG, effective
as of June 4, 2010 (filed herewith).** |
|
|
|
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). |
|
|
|
* |
|
Confidential treatment has been granted for the redacted
portions of this agreement. A complete copy of this agreement,
including the redacted portions, has been filed separately
with the Securities and Exchange Commission. |
|
** |
|
Confidential treatment has been requested for the redacted
portions of this agreement. A complete copy of this agreement,
including the redacted portions, has been filed separately
with the Securities and Exchange Commission. |
31
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.
|
|
|
|
|
|
Emisphere Technologies, Inc.
|
|
Date: August 16, 2010 |
/s/ Michael V. Novinski
|
|
|
Michael V. Novinski |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 16, 2010 |
/s/ Michael R. Garone
|
|
|
Michael R. Garone |
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
32
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 (filed as
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2007 and incorporated herein by
reference). |
|
|
|
3.2
|
|
By-Laws of Emisphere Technologies, Inc., as amended December
7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 1999) and
as further amended on September 23, 2005 (filed as Exhibit 3.1
to the Current Report on Form 8-K filed on September 30, 2005
and incorporated herein by reference). |
|
|
|
3.3
|
|
Amendment, effective as of September 11, 2007, to the Amended
By-Laws of Emisphere Technologies, Inc. (filed as Exhibit 3.1
to the Current Report on Form 8-K, filed on September 14, 2007
and incorporated herein by reference). |
|
|
|
4.1
|
|
Restated Rights Agreement dated as of April 7, 2006 between
Emisphere Technologies, Inc. and Mellon Investor Services, LLC
(filed as Exhibit 1.1 to the Current Report on Form 8-K filed
April 10, 2006 and incorporated herein by reference. |
|
|
|
4.2
|
|
Form of Emisphere Technologies, Inc. Warrant (filed as Exhibit
4.1 to the Current Report on Form 8-K, filed on June 8, 2010
and incorporated herein by reference). |
|
|
|
10.1
|
|
Letter Agreement by and between Emisphere Technologies, Inc.
and MHR Institutional Partners IIA LP, dated June 8, 2010
(filed as Exhibit 10.1 to the Current Report on Form 8-K,
filed on June 8, 2010 and incorporated herein by reference).* |
|
|
|
10.2
|
|
Form of Emisphere Technologies, Inc. Reimbursement Note (filed
as Exhibit 10.2 to the Current Report on Form 8-K, filed on
June 8, 2010 and incorporated herein by reference). |
|
|
|
10.3
|
|
Form of Emisphere Technologies, Inc. Second Reimbursement Note
(filed as Exhibit 10.3 to the Current Report on Form 8-K,
filed on June 8, 2010 and incorporated herein by reference). |
|
|
|
10.4
|
|
Research Master Agreement and Amendment by and between
Emisphere Technologies, Inc. and Novartis Pharma AG, effective
as of June 4, 2010 (filed herewith).** |
|
|
|
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). |
|
|
|
* |
|
Confidential treatment has been granted for the redacted
portions of this agreement. A complete copy of this agreement,
including the redacted portions, has been filed separately
with the Securities and Exchange Commission. |
|
** |
|
Confidential treatment has been requested for the redacted
portions of this agreement. A complete copy of this agreement,
including the redacted portions, has been filed separately
with the Securities and Exchange Commission. |
33