e424b3
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-175794
PROSPECTUS
7,310,744 Shares of Common Stock
This prospectus relates to the offer for sale by the existing holders of our common stock $0.01 par value per share, named in
this prospectus of 7,310,744 shares of our common stock including
3,010,306 shares of our common stock issuable upon exercise of the warrants held by the selling
security holders. These existing holders of our common stock are referred to as selling security
holders throughout this prospectus.
All of the shares of common stock offered by this prospectus are being sold by the selling security
holders. It is anticipated that the selling security holders will sell these shares of common stock
from time to time in one or more transactions, in negotiated transactions or otherwise, at
prevailing market prices or at prices otherwise negotiated. We will not receive any proceeds from
the sales of shares of common stock by the selling security holders. We have agreed to pay all fees
and expenses incurred by us incident to the registration of our common stock, including SEC filing
fees. Each selling security holder will be responsible for all costs and expenses in connection
with the sale of their shares of common stock, including brokerage commissions or dealer discounts.
Our common stock is currently traded on the Over-The-Counter Bulletin Board, commonly known as the
OTC Bulletin Board (OTCBB), under the symbol
EMIS. As of September 30, 2011, the closing sale price
of our common stock was $1.95 per share.
Investing in our securities involves substantial risks. You should carefully consider the matters
discussed under the section entitled Risk Factors
beginning on page 6 of this prospectus.
Neither the Securities and Exchange Commission (SEC) nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
The
date of this prospectus is October 12, 2011
TABLE OF CONTENTS
|
|
|
|
|
PAGE |
|
|
1 |
|
|
4 |
|
|
4 |
|
|
6 |
|
|
15 |
|
|
15 |
|
|
15 |
|
|
16 |
|
|
16 |
|
|
17 |
|
|
17 |
|
|
18 |
|
|
20 |
|
|
39 |
|
|
39 |
|
|
39 |
|
|
52 |
|
|
52 |
|
|
53 |
|
|
56 |
|
|
65 |
|
|
67 |
|
|
72 |
|
|
76 |
|
|
76 |
|
|
76 |
|
|
77 |
|
|
77 |
|
|
77 |
i
PROSPECTUS SUMMARY
This summary highlights information contained throughout this prospectus and is qualified in its
entirety to the more detailed information and financial statements included elsewhere herein. This
summary may not contain all of the information that may be important to you. You should assume that
the information appearing in this prospectus is accurate only as of the date on the front cover of
this prospectus. Our business, financial condition, results of operations and prospects may have
changed since that date. Before making an investment decision, you should read carefully the entire
prospectus, including the information under Risk Factors
beginning on page 6 and our financial
statements and related notes.
Overview of the Company
Introduction and History
Emisphere Technologies, Inc. (Emisphere, the Company, our, us, or we) 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 decreasing time to 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
deliver certain therapeutic molecules orally without altering their chemical form or biological
activity. 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. Our core business strategy is to
develop oral forms of drugs or nutrients that are not currently available or have poor
bioavailability in oral form, by applying the Eligen® Technology to those drugs or nutrients. Our
development efforts are conducted internally or in collaboration with corporate development
partners. Typically, the drugs that we target are at an advanced stage of development, or have
already received regulatory approval, and are currently available on the market. Our website is
www.emisphere.com. The contents of that website are not incorporated herein by reference.
Investor related questions should be directed to info@emisphere.com.
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 changes. A
new senior management team was hired, the Eligen® Technology was reevaluated and our corporate
strategy was refocused on commercializing it 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 through the progress made by our development partners Novartis
Pharma AG (Novartis) and Novo Nordisk A/S (Novo Nordisk) 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 Eligen® Technology
The Eligen® Technology is a broadly applicable proprietary oral drug delivery technology based on
the use of proprietary synthetic chemical compounds known as EMISPHERE® delivery agents, or
carriers. These delivery agents facilitate and enable the transport of therapeutic macromolecules
(such as proteins, peptides, and polysaccharides) and poorly absorbed small molecules across
biological membranes. The Eligen® Technology not only facilitates absorption. but it acts rapidly
in the upper sections of the GI where absorption is thought to occur. With the Eligen® Technology,
most of the molecules reach the general circulation in less than an hour post-dose. Rapid
absorption can limit enzymatic degradation that typically affects macromolecules or simply be
advantageous in cases where time to onset of action is important (i.e. analgesics). Another
characteristic that distinguishes Eligen® from the competition is absorption takes place through a
transcellular, not paracellular, pathway. This underscores the safety of Eligen® as the passage of
the Eligen® carrier and the molecule preserve the integrity of the tight junctions within the cell
and reduces any likelihood of inflammatory processes and autoimmune gastrointestinal diseases.
Furthermore, Eligen® Technology carriers are rapidly absorbed, distributed, metabolized and
eliminated from the body, they do not accumulate in the organs and tissues and they are considered
safe at anticipated doses and dosing regimens.
1
The Eligen® Technology was extensively reevaluated in 2007 by our scientists, senior management and
expert consultants. Based on this analysis, we believe that our technology can enhance overall
healthcare, including patient accessibility and compliance, while benefiting the commercial
pharmaceutical marketplace and driving company valuation. The application of the Eligen® Technology
is potentially broad and may provide for a number of opportunities across a spectrum of therapeutic
modalities.
Implementing the Eligen® Technology is quite simple. It only requires co-mixing a drug or
nutritional supplement and an Eligen® carrier to produce an effective formulation. The carrier does
not alter the chemical properties of the drug nor its biological activity. Some therapeutic
molecules are better suited for use with the Eligen® Technology than others. Drugs or nutritional
supplements whose bioavailability is limited by poor membrane permeability or chemical or
biological degradation, and which have a moderate-to-wide therapeutic index, appear to be the best
candidates. Drugs with a narrow therapeutic window or high molecular weight may not be favorable
with the technology.
We believe that our Eligen® Technology makes it possible to safely deliver a therapeutic
macromolecule orally or increase the absorption of a poorly absorbed small molecule without
altering its chemical composition or compromising the integrity of biological membranes. We believe
that the key benefit of our Eligen® Technology is that it improves the ability of the body to
absorb small and large molecules.
Emisphere Today
The Company has continued to focus on efforts to apply the Eligen® Technology and realize its value
by developing commercial applications. 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. 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 needs. Our goal is to implement our Eligen® Technology to enhance overall
healthcare, including patient accessibility and compliance, while benefiting the commercial
pharmaceutical/healthcare 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 additional investments that may be required to fund
our research and development will be approached incrementally in order to minimize disruption or
dilution.
To accelerate commercialization of the Eligen® Technology, Emisphere embarked on a two-pronged
strategy. First, we concentrated on prescription molecules and nutritional supplements obtained
through partnerships with other pharmaceutical companies for molecules where oral absorption is
difficult yet substantially beneficial if proven. With prescription molecules, we are working to
generate new interest in the Eligen® Technology with potential partners and attempting to expand
our current collaborative relationships to take advantage of the critical knowledge that others
have gained by working with our technology. Second, we continue to pursue commercialization of
product candidates developed internally. We believe that these internal candidates need to be
developed with reasonable investment in an acceptable time period and with a reasonable
risk-benefit profile.
To support our internal development programs, the Company implemented its new commercialization
strategy for the Eligen® Technology. Using extensive safety data available for its Sodium
N-[8-(2-hydroxybenzoyl) Amino] Caprylate (SNAC) carrier, the Company obtained GRAS (Generally
Recognized as Safe) status for its SNAC carrier, and then applied the Eligen® Technology with B12,
another GRAS substance where bioavailability and absorption is difficult and improving such
absorption would yield substantial benefit and value. Given sufficient time and resources, the
Company intends to apply this strategy to develop other products. Examples of other GRAS substances
that may be developed into additional commercial products using this strategy would include
vitamins such as Vitamin D, minerals such as iron, and other supplements such as the polyphenols
and catechins, among others. A higher dose (1000 mcg) formulation of Eligen® B12, for use by
patients who are Vitamin B12 deficient, is under development.
The Company also continues to focus on improving operational efficiency. By terminating the lease
of our research and development facility in Tarrytown, NY in April 2009 and by utilizing
independent contractors to conduct research and development, we reduced our annual operating costs
by approximately 45% from 2008 levels and an additional 21% from 2009 levels. Annual cash
expenditures
2
in 2009 and 2010 were reduced by approximately $11 million and $1.1 million, respectively, and the
resulting cash burn rate to support continuing operations is approximately $8 million per year.
Additionally, we expect to accelerate the commercialization of the Eligen® Technology in a cost
effective way and to gain operational efficiencies by tapping into advanced scientific processes
offered by independent contractors.
We are attempting 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.
Company Information
Our principal executive offices are located at 240 Cedar Knolls Road, Cedar Knolls, New Jersey. Our
telephone number is (973) 532-8000, fax number is (973) 532-8121 and our website address is
www.emisphere.com. The information on our website is not incorporated by reference into this
prospectus and should not be relied upon with respect to this offering.
As of June 9, 2009, our common stock has been trading on the OTCBB.
About this Prospectus
Unless the context otherwise requires, all references to Emisphere, we, us, our, our
company, or the Company in this prospectus refer to Emisphere Technologies, Inc., a Delaware
corporation.
You should rely only on the information contained in this prospectus. We have not authorized any
other person to provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. For further information, please see the
section of this prospectus entitled Where You Can Find More Information. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale is not permitted.
You should not assume that the information appearing in this prospectus is accurate as of any date
other than the date on the front cover of this prospectus, regardless of the time of delivery of
this prospectus or any sale of a security. Our business, financial condition, results of operations
and prospects may have changed since those dates.
We obtained statistical data, market data and other industry data and forecasts used throughout
this prospectus from market research, publicly available information and industry publications.
Industry publications generally state that they obtain their information from sources that they
believe to be reliable, but they do not guarantee the accuracy and completeness of the information.
Similarly, while we believe that the statistical data, industry data and forecasts and market
research are reliable, we have not independently verified the data, and we do not make any
representation as to the accuracy of the information. We have not sought the consent of the sources
to refer to their reports appearing in this prospectus.
This prospectus contains trademarks, tradenames, service marks and service names of Emisphere
Technologies, Inc. and other companies.
3
THE OFFERING
|
|
|
Common Stock being offered by the selling
security holders
|
|
Up to 7,310,744 shares of our common
stock, including 3,010,306 shares of
our common stock issuable upon
exercise of the warrants held by the
selling security holders. |
|
|
|
Common Stock outstanding prior to the offering
|
|
60,678,478 shares of common stock (1) |
|
|
|
Common Stock to be outstanding after the offering
|
|
63,697,784 shares of common stock (2) |
|
|
|
Use of proceeds
|
|
We will not receive any proceeds
from the sales of shares of common
stock by the selling security
holders. |
|
|
|
OTCBB symbol
|
|
Our common stock is currently traded
on the OTCBB under the symbol
EMIS. |
|
|
|
Risk factors
|
|
Investing in our securities involves
a high degree of risk. You should
carefully read and consider the
information set forth under the
heading Risk Factors beginning on
page 6 of this prospectus and all
other information in this prospectus
before investing in our securities. |
|
|
|
|
(1) |
|
Based upon the total number of issued and outstanding shares
as of September 30, 2011, which does not include the shares of our common stock issuable upon exercise of the warrants held by the selling security holders. |
|
|
|
(2) |
|
Based upon the total number of issued and outstanding shares
as of September 30, 2011, including
shares of our common stock issuable upon exercise of the warrants held by the selling security
holders but excluding: |
|
|
|
|
|
3,200,650 shares issuable upon the exercise of stock options outstanding at a weighted
average exercise price of $3.02 as of September 30, 2011; |
|
|
|
|
|
|
14,833,421 shares issuable upon exercise of outstanding warrants or options to purchase
warrants (excluding the warrants held by the selling security holders) at a weighted average
exercise price of $1.22 as of September 30, 2011; |
|
|
|
|
|
|
7,246,873 shares issuable upon conversion of a convertible note at a conversion price of
$3.78 which shall be issued to MHR upon exchange by MHR of the $27.4 million note payable to
MHR for such convertible note as of September 30, 2011; |
|
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information should be read in connection with, and is
qualified by reference to, our financial statements and their related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in
this prospectus. The statement of operations data for the fiscal years ended December 31, 2008,
2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 are derived from audited
financial statements included elsewhere in this prospectus. The statement of operations data for
the fiscal years ended December 31, 2006 and 2007 and the balance sheet data as of December 31,
2006, 2007 and 2008 have been derived from audited financial statements not included in this
prospectus. The statement of operations data for interim periods shown below for the three and six months
ended June 30,2010 and 2011 and the balance sheet data as of June 30, 2011 are derived from
financial statements included elsewhere in this prospectus. In January 2006, the start of the
first quarter of fiscal 2006, the Company adopted the provisions of FASB ASC 718,
Compensation-Stock Compensation, which requires that the costs resulting from all stock based
payment transactions be recognized in the financial statements at their fair values. Results from
prior periods have not been restated.
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 Restated(1) |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Revenue |
|
$ |
100 |
|
|
$ |
92 |
|
|
$ |
251 |
|
|
$ |
4,077 |
|
|
$ |
7,259 |
|
Cost of goods sold |
|
|
22 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
2,495 |
|
|
|
4,046 |
|
|
|
12,785 |
|
|
|
21,076 |
|
|
|
18,892 |
|
General and administrative expenses |
|
|
7,963 |
|
|
|
10,068 |
|
|
|
9,176 |
|
|
|
14,459 |
|
|
|
11,693 |
|
Other costs and expenses |
|
|
835 |
|
|
|
(422 |
) |
|
|
779 |
|
|
|
1,083 |
|
|
|
3,802 |
|
Restructuring charge |
|
|
50 |
|
|
|
(356 |
) |
|
|
3,831 |
|
|
|
|
|
|
|
|
|
(Income) expense from lawsuit, net |
|
|
278 |
|
|
|
1,293 |
|
|
|
|
|
|
|
(11,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
11,621 |
|
|
|
14,629 |
|
|
|
26,571 |
|
|
|
24,728 |
|
|
|
34,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(11,543 |
) |
|
|
(14,552 |
) |
|
|
(26,320 |
) |
|
|
(20,651 |
) |
|
|
(27,128 |
) |
Beneficial conversion of convertible security |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,215 |
) |
Sale of patent |
|
|
500 |
|
|
|
500 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
Investment and other income |
|
|
252 |
|
|
|
363 |
|
|
|
1,168 |
|
|
|
1,281 |
|
|
|
1,302 |
|
Change in fair value of derivative instruments |
|
|
(23,651 |
) |
|
|
(2,473 |
) |
|
|
2,220 |
|
|
|
5,057 |
|
|
|
(1,390 |
) |
Interest expense |
|
|
(3,595 |
) |
|
|
(659 |
) |
|
|
(2,956 |
) |
|
|
(2,615 |
) |
|
|
(2,335 |
) |
Loss on extinguishment of debt |
|
|
(17,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees |
|
|
(1,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(56,909 |
) |
|
|
(16,821 |
) |
|
|
(24,388 |
) |
|
|
(16,928 |
) |
|
|
(41,766 |
) |
Net loss per share basic |
|
|
(1.23 |
) |
|
|
(0.49 |
) |
|
|
(0.80 |
) |
|
|
(0.58 |
) |
|
|
(1.58 |
) |
Net loss per share diluted |
|
|
(1.23 |
) |
|
|
(0.49 |
) |
|
|
(0.80 |
) |
|
|
(0.76 |
) |
|
|
(1.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
December 31, |
|
|
|
June 30, 2011 |
|
|
2010 |
|
|
2009 Restated(1) |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments |
|
$ |
1,343 |
|
|
$ |
5,326 |
|
|
$ |
3,566 |
|
|
$ |
7,469 |
|
|
$ |
14,100 |
|
|
$ |
21,533 |
|
Working capital (deficit) |
|
|
(9,014 |
) |
|
|
(20,568 |
) |
|
|
(20,441 |
) |
|
|
(7,954 |
) |
|
|
9,622 |
|
|
|
13,377 |
|
Total assets |
|
|
3,237 |
|
|
|
7,276 |
|
|
|
5,587 |
|
|
|
10,176 |
|
|
|
19,481 |
|
|
|
28,092 |
|
Derivative instruments long and short term |
|
|
14,050 |
|
|
|
34,106 |
|
|
|
10,780 |
|
|
|
267 |
|
|
|
2,487 |
|
|
|
6,498 |
|
Other long-term liabilities and deferrals |
|
|
54,083 |
|
|
|
51,966 |
|
|
|
11,669 |
|
|
|
31,531 |
|
|
|
27,648 |
|
|
|
24,744 |
|
Accumulated deficit |
|
|
(468,102 |
) |
|
|
(480,943 |
) |
|
|
(424,034 |
) |
|
|
(433,688 |
) |
|
|
(409,300 |
) |
|
|
(392,372 |
) |
Stockholders deficit |
|
|
(68,953 |
) |
|
|
(82,520 |
) |
|
|
(35,227 |
) |
|
|
(37,028 |
) |
|
|
(13,674 |
) |
|
|
(6,106 |
) |
|
|
|
(1) |
|
For a description of such restatement of the Companys financial statements see Note 19 of
the Notes to the Financials contained in this prospectus. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
2010 Restated |
|
2011 |
|
2010 Restated |
|
Net Sales |
|
$ |
|
|
|
$ |
39 |
|
|
$ |
|
|
|
$ |
51 |
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
563 |
|
|
|
732 |
|
|
|
1,092 |
|
|
|
1,294 |
|
General and administrative |
|
|
1,593 |
|
|
|
2,129 |
|
|
|
3,043 |
|
|
|
4,463 |
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Gain on disposal of fixed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Expense from settlement of lawsuit |
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
220 |
|
Depreciation and amortization |
|
|
70 |
|
|
|
75 |
|
|
|
140 |
|
|
|
150 |
|
|
|
|
Total costs and expenses |
|
|
2,226 |
|
|
|
3,156 |
|
|
|
4,275 |
|
|
|
6,176 |
|
|
|
|
Operating loss |
|
|
(2,226 |
) |
|
|
(3,117 |
) |
|
|
(4,275 |
) |
|
|
(6,125 |
) |
|
|
|
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
45 |
|
|
|
2 |
|
|
|
68 |
|
|
|
5 |
|
Change in fair value of derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
4,310 |
|
|
|
(6,208 |
) |
|
|
16,046 |
|
|
|
(15,328 |
) |
Other |
|
|
1,079 |
|
|
|
(2,424 |
) |
|
|
3,660 |
|
|
|
(7,271 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(1,362 |
) |
|
|
(794 |
) |
|
|
(2,642 |
) |
|
|
(859 |
) |
Other |
|
|
(4 |
) |
|
|
(160 |
) |
|
|
(16 |
) |
|
|
(382 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(17,014 |
) |
|
|
|
|
|
|
(17,014 |
) |
Financing fees |
|
|
|
|
|
|
(1,858 |
) |
|
|
|
|
|
|
(1,858 |
) |
|
|
|
Total other non-operating income (expense) |
|
|
4,068 |
|
|
|
(28,456 |
) |
|
|
17,116 |
|
|
|
(42,707 |
) |
|
|
|
Net income (loss) |
|
$ |
1,842 |
|
|
$ |
(31,573 |
) |
|
$ |
12,841 |
|
|
$ |
(48,832 |
) |
|
|
|
Net income (loss) per share, basic |
|
$ |
0.04 |
|
|
$ |
(0.73 |
) |
|
$ |
0.25 |
|
|
$ |
(1.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted |
|
$ |
0.03 |
|
|
$ |
(0.73 |
) |
|
$ |
0.22 |
|
|
$ |
(1.14 |
) |
5
RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the
risks described below and the other information before deciding to invest in our securities. The
risks described below are not the only ones facing our company. Additional risks not presently
known to us or that we currently consider immaterial may also adversely affect our business. If any
of the following risks actually happen, our business, financial condition and operating results
could be materially adversely affected. In this case, you could lose all or part of your
investment.
Special Note Regarding Forward-Looking Statements
From time to time, information provided by us, statements made by our employees or information
included in our filings with the SEC (including this prospectus) may contain statements that are
not historical facts, so-called forward-looking statements, which involve risks and
uncertainties. Such forward-looking statements are made pursuant to the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). In some cases
you can identify forward-looking statements by terminology such as may, should, could,
will, expect, intend, plans, predict, anticipate, estimate, continue, believe or
the negative of these terms or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state other
forward-looking information. When considering forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this Report.
Our actual future results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited to, the factors
discussed below. Each of these factors, and others, are discussed from time to time in our filings
with the SEC.
Risks Related to the Company
Our operating results may fluctuate because of a number of factors, many of which are beyond our
control. If our operating results are below the expectations of public market analysts or
investors, then the market price of our common stock could decline. Some of the factors that affect
our quarterly and annual results, but which are difficult to control or predict, are:
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 April 2012, we may be forced to cease operations.
As of June 30, 2011, we had approximately $1.3 million in cash and cash equivalents, approximately $9.0 million in
working capital deficiency, a stockholders deficit of approximately $69.0 million and an
accumulated deficit of approximately $468.1 million. Our operating loss for the three months ended
June 30, 2011 was approximately $2.2million and $4.3 million for the six months ended June 30, 2011. 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, 2008, 2009 and 2010, respectively, included an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern.
In light of the approximately $7.5 million raised in the recent July 2011 Financing (as discussed
below), we anticipate that our existing capital resources will enable us to continue operations
through approximately April 2012, 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 April 2012, we will be forced to cease operations.
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.
6
Additionally, these conditions may increase the costs to raise capital. 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 discontinue operations.
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.
On September 26, 2005, we executed a Senior Secured Loan Agreement (the Loan Agreement) with MHR.
The Loan Agreement, as amended, provides for a seven year, $15 million secured loan from MHR to us
at an interest rate of 11% (the Loan). Under the Loan Agreement, MHR requested, and on May 16,
2006 we effected, the exchange of the Loan for 11% senior secured convertible notes (the MHR
Convertible Notes) with substantially the same terms as the Loan Agreement, except that the MHR
Convertible Notes are convertible, at the sole discretion of MHR or any assignee thereof, into
shares of our common stock at a price per share of $3.78. Interest will be payable in the form of
additional MHR Convertible Notes rather than in cash. The MHR Convertible Notes are secured by a
first priority lien in favor of MHR on substantially all of our assets.
The MHR Convertible Notes provide for certain events of default including failure to perfect liens
in favor of MHR created by the transaction, failure to observe any covenant or agreement, failure
to maintain the listing and trading of our common stock, sale of a substantial portion of our
assets, or merger with another entity without the prior consent of MHR, or any governmental action
renders us unable to honor or perform our obligations under the MHR Convertible Notes or results in
a material adverse effect on our operations among other things. If an event of default occurs, the
MHR Convertible Notes provide for the immediate repayment of the Notes and certain additional
amounts as set forth in the MHR Convertible Notes. At such time, we may not be
able to make the required payment, and if we are unable to pay the amount due under the MHR
Convertible Notes, the resulting default would enable MHR to foreclose on all of our assets. Any of
the foregoing events would have a material adverse effect on our business and on the value of our
stockholders investments in our common stock. We currently have a waiver from MHR for failure to
perfect liens on certain intellectual property rights through May 11, 2012.
Our stock was de-listed from NASDAQ.
Our common stock was suspended from trading on the NASDAQ Capital Market effective at the open of
business on June 9, 2009, and NASDAQ delisted the Companys securities thereafter. The delisting
resulted from the Companys non-compliance with the minimum market value of listed securities
requirement for continued listing on The NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule
4310(c)(3)(B). Simultaneously, the Companys securities began trading on the Over-the-Counter
Bulletin Board (the OTCBB), an electronic quotation service maintained by the Financial Industry
Regulatory Authority, effective with the open of business on June 9, 2009. The Companys trading
symbol has remained EMIS; however, it is our understanding that, for certain stock quote
publication websites, investors may be required to key EMIS.OB to obtain quotes.
Because our stock is traded on the OTCBB, selling our common stock could be more difficult because
smaller quantities of shares would likely be bought and sold, transactions could be delayed, and
security analysts coverage of us may be reduced or harder to obtain. In addition, because our
common stock was de-listed from the NASDAQ Capital Market, broker-dealers have certain regulatory
burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our
common stock, further limiting the liquidity thereof. These factors could result in lower prices
and larger spreads in the bid and ask prices for shares of our common stock and/or limit an
investors ability to execute a transaction.
The delisting from the NASDAQ Capital Market or future declines in our stock price could also
greatly impair our ability to raise additional necessary capital through equity or debt financing,
and could significantly increase the ownership dilution to stockholders caused by our issuing
equity in financing or other transactions.
Our business will suffer if we fail or are delayed in developing and commercializing an improved
oral form of Vitamin B12.
We are focusing substantial resources on the development of an oral dosage form of Vitamin B12 that
we expect will demonstrate improved bioavailability compared with current B12 tablets. During November 2009,
the Company launched its first commercially available product, oral Eligen® B12 (100 mcg), which
had been specifically developed to help improve Vitamin B12 absorption and bioavailability with a
patented formulation. During the third quarter 2010, we terminated our distributor agreement for
the marketing, distribution and sale of oral Eligen® B12 (100mcg.) with Quality Vitamins and
Supplements, Inc. to allow us to focus on the development of a higher dose, oral formulation of
Eligen® B12 (1000 mcg) to be offered for B12 deficient patients. Our inability or delay in
developing or commercializing the B12 product candidate could have a significant material adverse
effect on our business.
7
To commercialize this higher dose product candidate, we will be required to complete certain
clinical studies, develop a market introduction plan, and possibly obtain financing to support our
commercialization efforts, among other things. We cannot assure you that we will succeed in these
efforts as these involve activities (or portions of activities) that we have not previously
completed. In addition, if we succeed in these activities, Vitamin B12 is available at reasonably
low prices both in injections and tablet forms (as well as other forms) through a variety of
distributors, sellers, and other sources. We have no current commercial capabilities. Therefore, we
would be entering a highly competitive market with an untested, newly-established commercial
capability. This outline of risks involved in the development and commercialization of B12 is not
exhaustive, but illustrative. For example, it does not include additional competitive, intellectual
property, commercial, product liability, and commercial risks involved in a launch of the B12
product candidate outside the U.S. or certain of such risks in the U.S.
We are highly dependent upon collaborative partners to develop and commercialize compounds using
our delivery agents.
A key part of our strategy is to form collaborations with pharmaceutical companies that will assist
us in developing, testing, obtaining government approval for and commercializing oral forms of
therapeutic macromolecules using the Eligen® Technology. We have a collaborative agreement for
candidates in clinical development with Novartis, Novo Nordisk and Genta.
We negotiate specific ownership rights with respect to the intellectual property developed as a
result of the collaboration with each partner. While ownership rights vary from program to program,
in general we retain ownership rights to developments relating to our carrier and the collaborator
retains rights related to the drug product developed.
|
|
|
Despite our existing agreements, we cannot make any assurances that: |
|
|
|
we will be able to enter into additional collaborative arrangements to develop products
utilizing our drug delivery technology; |
|
|
|
|
any existing or future collaborative arrangements will be sustainable or successful; |
|
|
|
|
the product candidates in collaborative arrangements will be further developed by
partners in a timely fashion; |
|
|
|
|
any collaborative partner will not infringe upon our intellectual property position in
violation of the terms of the collaboration contract; or |
|
|
|
|
milestones in collaborative agreements will be met and milestone payments will be
received. |
If we are unable to obtain development assistance and funds from other pharmaceutical companies to
fund a portion of our product development costs and to commercialize our product candidates, we may
be unable to issue equity to allow us to raise sufficient capital to fund clinical development of
our product candidates. Lack of funding would cause us to delay, curtail, or stop clinical
development of one or more of our projects. The determination of the specific project to curtail
would depend upon the relative future economic value to us of each program.
Our collaborative partners control the clinical development of the drug candidates and may
terminate their efforts at will.
Novartis controls the clinical development of oral salmon calcitonin and rhGH. Novo Nordisk
controls the clinical development of oral GLP-1 analogs. Genta controls the clinical development of
oral gallium. Novartis, Novo Nordisk and Genta control the decision-making for the design and
timing of their clinical studies.
Moreover, the agreements with Novartis, Novo Nordisk and Genta provide that they may terminate
their programs at will for any reason and without any financial penalty or requirement to fund any
further clinical studies. We cannot make any assurance that Novartis, Novo Nordisk or Genta will
continue to advance the clinical development of the drug candidates subject to collaboration.
On June 17, 2011, Novartis informed us of the results of its recently completed Proof of Concept
study for an oral PTH1-34 using Emispheres Eligen® Technology in post-menapausal women with
osteoporsis or osteopenia. Novartis informed us that, although the study confirmed that oral
PTH1-34 was both safe and well-tolerated, several clinical endpoints were not met. Based on the
data analyzed, Novartis has terminated the study and anticipates no further work on oral
formulation of PTH1-34.
Our collaborative partners are free to develop competing products.
8
Aside from provisions preventing the unauthorized use of our intellectual property by our
collaborative partners, there is nothing in our collaborative agreements that prevents our partners
from developing competing products. If one of our partners were to develop a competing product, our
collaboration could be substantially jeopardized.
Our product candidates are in various stages of development, and we cannot be certain that any
will be suitable for commercial purposes.
To be profitable, we must successfully research, develop, obtain regulatory approval for,
manufacture, introduce, market, and distribute our products under development, or secure a partner
to provide financial and other assistance with these steps. The time necessary to achieve these
goals for any individual pharmaceutical product is long and can be uncertain. Before we or a
potential partner can sell any of the pharmaceutical products currently under development,
pre-clinical (animal) studies and clinical (human) trials must demonstrate that the product is safe
and effective for human use for each targeted indication. We have never successfully commercialized
a drug or a nonprescription candidate and we cannot be certain that we or our current or future
partners will be able to begin, or continue, planned clinical trials for our product candidates, or
if we are able, that the product candidates will prove to be safe and will produce their intended
effects.
Even if our products are safe and effective, the size of the solid dosage form, taste, and frequency of dosage may
impede their acceptance by patients.
A number of companies in the drug delivery, biotechnology, and pharmaceutical industries have
suffered significant setbacks in clinical trials, even after showing promising results in earlier
studies or trials. Only a small number of research and development programs ultimately result in
commercially successful drugs. Favorable results in any pre-clinical study or early clinical trial
do not imply that favorable results will ultimately be obtained in future clinical trials. We
cannot make any assurance that results of limited animal and human studies are indicative of
results that would be achieved in future animal studies or human clinical studies, all or some of
which will be required in order to have our product candidates obtain regulatory approval.
Similarly, we cannot assure you that any of our product candidates will be approved by the FDA.
Even if clinical trials or other studies demonstrate safety and effectiveness of any of our product
candidates for a specific disease or condition and the necessary regulatory approvals are obtained,
the commercial success of any of our product candidates will depend upon their acceptance by
patients, the medical community, and third-party payers and on our partners ability to
successfully manufacture and commercialize our product candidates.
Our future business success depends heavily upon regulatory approvals, which can be difficult and
expensive to obtain.
Our pre-clinical studies and clinical trials of our prescription drug and biologic product
candidates, as well as the manufacturing and marketing of our product candidates, are subject to
extensive, costly and rigorous regulation by governmental authorities in the U.S. and other
countries. The process of obtaining required approvals from the FDA and other regulatory
authorities often takes many years, is expensive, and can vary significantly based on the type,
complexity, and novelty of the product candidates. We cannot assure you that we, either
independently or in collaboration with others, will meet the applicable regulatory criteria in
order to receive the required approvals for manufacturing and marketing. Delays in obtaining U.S.
or foreign approvals for our self-developed projects could result in substantial additional costs
to us, and, therefore, could adversely affect our ability to compete with other companies.
Additionally, delays in obtaining regulatory approvals encountered by others with whom we
collaborate also could adversely affect our business and prospects. Even if regulatory approval of
a product is obtained, the approval may place limitations on the intended uses of the product, and
may restrict the way in which we or our partner may market the product.
The regulatory approval process for our prescription drug product candidates presents several risks
to us:
|
|
|
In general, pre-clinical tests and clinical trials can take many years, and require the
expenditure of substantial resources. The data obtained from these tests and trials can be
susceptible to varying interpretation that could delay, limit or prevent regulatory approval |
|
|
|
|
Delays or rejections may be encountered during any stage of the regulatory process based
upon the failure of the clinical or other data to demonstrate compliance with, or upon the
failure of the product to meet, a regulatory agencys requirements for safety, efficacy, and
quality or, in the case of a product seeking an orphan drug indication, because another
designee received approval first |
|
|
|
|
Requirements for approval may become more stringent due to changes in regulatory agency
policy or the adoption of new regulations or guidelines |
9
|
|
|
New guidelines can have an effect on the regulatory decisions made in previous years |
|
|
|
|
The scope of any regulatory approval, when obtained, may significantly limit the
indicated uses for which a product may be marketed and may impose significant limitations in
the nature of warnings, precautions, and contraindications that could materially affect the
profitability of the drug |
|
|
|
|
Approved drugs, as well as their manufacturers, are subject to continuing and ongoing
review, and discovery of problems with these products or the failure to adhere to
manufacturing or quality control requirements may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market |
|
|
|
|
Regulatory authorities and agencies may promulgate additional regulations restricting the
sale of our existing and proposed products |
|
|
|
|
Once a product receives marketing approval, the FDA may not permit us to market that
product for broader or different applications, or may not grant us clearance with respect to
separate product applications that represent extensions of our basic technology. In
addition, the FDA may withdraw or modify existing clearances in a significant manner or
promulgate additional regulations restricting the sale of our present or proposed products |
Additionally, we face the risk that our competitors may gain FDA approval for a product before we do.
Having a competitor reach the market before we do would impede the future commercial success for our
competing product because we believe that the FDA uses heightened standards of approval for
products once approval has been granted to a competing product in a particular product area. We
believe that this standard generally limits new approvals to only those products that meet or
exceed the standards set by the previously approved product.
The regulatory approval process for nonprescription product candidates will likely vary by the
nature of therapeutic molecule being delivered.
In particular, the European Medical Agency (EMA) announced in January 2011 that its committee for Medicinal Products for Human Use has begun to review available data relevant to the potential for increased risk of prostate cancer progression and other types of malignancies in patients taking calcitonin-containing medicines for the prevention of acute bone loss. The announcement indicated that the decision to review followed review of two clinical trials which suggested an increased frequency of malignancies. The EMA indicated it intended to assess the data obtained in the balance of risks and benefits of calcitonin-containing medicines.
Our collaboration partner Novartis manages the clinical development of oral salmon calcitonin, and has indicated to us that it has responded to the EMAs request for information. Novartis has informed us that it has informed the FDA of the EMA request, and has provided the FDA with relevant data regarding calcitonin at the FDAs request.
Significant delays in approval of our oral salmon calcitonin formulation or denial of approval would materially and adversely affect our business and prospects.
Our business will suffer if we cannot adequately protect our patent and proprietary rights.
Although we have patents for some of our product candidates and have applied for additional
patents, there can be no assurance that patents applied for will be granted, that patents granted
to or acquired by us now or in the future will be valid and enforceable and provide us with
meaningful protection from competition, or that we will possess the financial resources necessary
to enforce any of our patents. Also, we cannot be certain that any products that we (or a licensee)
develop will not infringe upon any patent or other intellectual property right of a third party.
We also rely upon trade secrets, know-how, and continuing technological advances to develop and
maintain our competitive position. We maintain a policy of requiring employees, scientific
advisors, consultants, and collaborators to execute confidentiality and invention assignment
agreements upon commencement of a relationship with us. We cannot assure you that these agreements
will provide meaningful protection for our trade secrets in the event of unauthorized use or
disclosure of such information.
Part of our strategy involves collaborative arrangements with other pharmaceutical companies for
the development of new formulations of drugs developed by others and, ultimately, the receipt of
royalties on sales of the new formulations of those drugs. These drugs are generally the property
of the pharmaceutical companies and may be the subject of patents or patent applications and other
rights of protection owned by the pharmaceutical companies. To the extent those patents or other
forms of rights expire, become invalid or otherwise ineffective, or to the extent those drugs are
covered by patents or other forms of protection owned by third parties, sales of those drugs by the
collaborating pharmaceutical company may be restricted, limited, enjoined, or may cease.
Accordingly, the potential for royalty revenues to us may be adversely affected.
We may be at risk of having to obtain a license from third parties making proprietary improvements
to our technology.
There is a possibility that third parties may make improvements or innovations to our technology in
a more expeditious manner than we do. Although we are not aware of any such circumstance related to
our product portfolio, should such circumstances arise, we may need to obtain a license from such
third party to obtain the benefit of the improvement or innovation. Royalties payable under such a
license would reduce our share of total revenue. Such a license may not be available to us at all
or on commercially reasonable terms. Although we currently do not know of any circumstances related
to our product portfolio which would lead us to believe that a third
10
party has developed any improvements or innovation with respect to our technology, we cannot assure
you that such circumstances will not arise in the future. We cannot reasonably determine the cost
to us of the effect of being unable to obtain any such license.
We are dependent on third parties to manufacture and test our products.
Currently, we have no manufacturing facilities for production of our carriers or any therapeutic
compounds under consideration as products. We have no facilities for clinical testing. The success
of our self-developed programs is dependent upon securing manufacturing capabilities and
contracting with clinical service and other service providers.
The availability of manufacturers is limited by both the capacity of such manufacturers and their
regulatory compliance. Among the conditions for FDA approval is the requirement that the
prospective manufacturers quality control and manufacturing procedures continually conform with
the FDAs current GMP (GMP are regulations established by the FDA that govern the manufacture,
processing, packing, storage and testing of drugs intended for human use). In complying with GMP,
manufacturers must devote extensive time, money, and effort in the area of production and quality
control and quality assurance to maintain full technical compliance. Manufacturing facilities and
company records are subject to periodic inspections by the FDA to ensure compliance. If a
manufacturing facility is not in substantial compliance with these requirements, regulatory
enforcement action may be taken by the FDA, which may include seeking an injunction against
shipment of products from the facility and recall of products previously shipped from the facility.
Such actions could severely delay our ability to obtain product from that particular source.
The success of our clinical trials and our partnerships is dependent on the proposed or current
partners capacity and ability to adequately manufacture drug products to meet the proposed demand
of each respective market. Any significant delay in obtaining a supply source (which could result
from, for example, an FDA determination that such manufacturer does not comply with current GMP)
could harm our potential for success. Additionally, if a current manufacturer were to lose its
ability to meet our supply demands during a clinical trial, the trial may be delayed or may even
need to be abandoned.
We may face product liability claims related to participation in clinical trials or future
products.
We have product liability insurance with a policy limit of $5.0 million per occurrence and in the
aggregate. The testing, manufacture, and marketing of products for humans utilizing our drug
delivery technology may expose us to potential product liability and other claims. These may be
claims directly by consumers or by pharmaceutical companies or others selling our future products.
We seek to structure development programs with pharmaceutical companies that would complete the
development, manufacturing and marketing of the finished product in a manner that would protect us
from such liability, but the indemnity undertakings for product liability claims that we secure
from the pharmaceutical companies may prove to be insufficient.
We face rapid technological change and intense competition.
Our success depends, in part, upon maintaining a competitive position in the development of
products and technologies in an evolving field in which developments are expected to continue at a
rapid pace. We compete with other drug delivery, biotechnology and pharmaceutical companies,
research organizations, individual scientists, and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and testing, as well as
with entities developing new drugs that may be orally active. Many of these competitors have
greater research and development capabilities, experience, and marketing, financial, and managerial
resources than we have, and, therefore, represent significant competition.
Our products, when developed and marketed, may compete with existing parenteral or other versions
of the same drug, some of which are well established in the marketplace and manufactured by
formidable competitors, as well as other existing drugs. For example, our salmon calcitonin product
candidate, if developed and marketed, would compete with a wide array of existing osteoporosis
therapies, including a nasal dosage form of salmon calcitonin, estrogen replacement therapy,
selective estrogen receptor modulators, bisphosphonates, and other compounds in development.
Our competitors may succeed in developing competing technologies or obtaining government approval
for products before we do. Developments by others may render our product candidates, or the
therapeutic macromolecules used in combination with our product candidates, noncompetitive or
obsolete. At least one competitor has notified the FDA that it is developing a competing
formulation of salmon calcitonin. If our products are marketed, we cannot assure you that they will
be preferred to existing drugs or that they will be preferred to or available before other products
in development.
11
If a competitor announces a successful clinical study involving a product that may be competitive
with one of our product candidates or an approval by a regulatory agency of the marketing of a
competitive product, such announcement may have a material adverse effect on our operations or
future prospects resulting from reduced sales of future products that we may wish to bring to
market or from an adverse impact on the price of our common stock or our ability to obtain
regulatory approval for our product candidates.
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.
We are dependent on our executive officers. The loss of one or more members of our executive
officers or key employees could have an adverse effect on our business, financial condition and
results of operations, given their specific knowledge related to our proprietary technology and
personal relationships with our pharmaceutical company partners. If we are not able to retain our
executive officers, our business may suffer. We do not maintain key-man life insurance policies
for any of our executive officers.
During February 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company. A comprehensive search is
underway to identify our next Chief Executive Officer. However, we cannot assure you that we will
be able to find a qualified permanent replacement for Mr. Novinski. In addition, the loss of one or
more of our other executive officers or key employees or a delay or inability to hire a new Chief
Executive Officer could seriously harm our business.
There is intense competition in the biotechnology industry for qualified scientists and managerial
personnel in the development, manufacture, and commercialization of drugs. We may not be able to
continue to attract and retain the qualified personnel necessary for developing our business.
Additionally, because of the knowledge and experience of our scientific personnel and their
specific knowledge with respect to our drug carriers the continued development of our product
candidates could be adversely affected by the loss of any significant number of such personnel.
Provisions of our corporate charter documents, Delaware law, and our stockholder rights plan may
dissuade potential acquirers, prevent the replacement or removal of our current management and may
thereby affect the price of our common stock.
Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to
determine the rights, preferences and privileges of those shares without any further vote or action
by our stockholders. Of these 1,000,000 shares, the Board of Directors has the authority to designate that number of shares of Series A Junior
Participating Cumulative Preferred Stock (A Preferred Stock) as is required under our stockholder
rights plan described below. Those shares of preferred stock not designated as A Preferred Stock remain available for future issuance. Rights of
holders of common stock may be adversely affected by the rights of the holders of any preferred
stock that may be issued in the future.
We also have a stockholder rights plan, commonly referred to as a poison pill, in which A
Preferred Stock purchase rights (the Rights) have been granted at the rate of one one-hundredth
of a share of A Preferred Stock at an exercise price of $80 for each share of our common stock. The
Rights are not exercisable or transferable apart from the common stock, until the earlier of (i)
ten days following a public announcement that a person or group of affiliated or associated persons
have acquired beneficial ownership of 20% or more of our outstanding common stock or (ii) ten
business days (or such later date, as defined) following the commencement of, or announcement of an
intention to make a tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person, or group, of 20% or more of our outstanding common stock. If we
enter into consolidation, merger, or other business combinations, as defined, each Right would
entitle the holder upon exercise to receive, in lieu of shares of A Preferred Stock, a number of
shares of common stock of the acquiring company having a value of two times the exercise price of
the Right, as defined. By potentially diluting the ownership of the acquiring company, our rights
plan may dissuade prospective acquirors of our company. MHR is specifically excluded from the
provisions of the plan.
The holders of A Preferred Stock would be entitled to a preferential cumulative quarterly dividend
of the greater of $1.00 per share or 100 times the per-share dividend declared on our stock and are
also entitled to a liquidation preference, thereby hindering an acquirers ability to freely pay
dividends or to liquidate the company following an acquisition. Each A Preferred Stock share will
have 100 votes and will vote together with the common shares, effectively preventing an acquirer
from removing existing management. The Rights contain anti-dilutive provisions and are redeemable
at our option, subject to certain defined restrictions for $.01 per Right. The Rights expire on
April 7, 2016.
Provisions of our corporate charter documents, Delaware law and financing agreements may 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.
12
In connection with the MHR financing transaction in 2005, and after approval by our Board of Directors, Dr.
Mark H. Rachesky was appointed to the Board of Directors by MHR (the MHR Nominee) and Dr. Michael
Weiser was appointed to the Board of Directors by both the majority of our Board of Directors and
MHR (the Mutual Director), as contemplated by our bylaws. Our certificate of incorporation
provides that the MHR Nominee and the Mutual Director may be removed only by the affirmative vote
of at least 85% of the shares of common stock outstanding and entitled to vote at an election of
directors. Our certificate of incorporation also provides that the MHR Nominee may be replaced only
by an individual designated by MHR unless the MHR Nominee has been removed for cause, in which case
the MHR Nominee may be replaced only by an individual approved by both a majority of our Board of
Directors and MHR. Furthermore, the amendments to the bylaws and the certificate of incorporation
provide that the rights granted to MHR by these amendments may not be amended or repealed without
the unanimous vote or unanimous written consent of the Board of Directors or the affirmative vote
of the holders of at least 85% of the shares of Common Stock outstanding and entitled to vote at
the election of directors. The amendments to the bylaws and the certificate of incorporation will
remain in effect as long as MHR holds at least 2% of the shares of fully diluted Common Stock. The
amendments to the bylaws and the certificate of incorporation will have the effect of making it
more difficult for a third party to gain control of our Board of Directors.
Additional provisions of our certificate of incorporation and bylaws could have the effect of
making it more difficult for a third party to acquire a majority of our outstanding voting common
stock. These include provisions that classify our Board of Directors, limit the ability of
stockholders to take action by written consent, call special meetings, remove a director for cause,
amend the bylaws or approve a merger with another company. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law which prohibits a publicly-held Delaware
corporation from engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner. For purposes of
Section 203, a business combination includes a merger, asset sale or other transaction resulting
in a financial benefit to the interested stockholder, and an interested stockholder is a person
who, either alone or together with affiliates and associates, owns (or within the past three years,
did own) 15% or more of the corporations voting stock.
Our stock price has been and may continue to be volatile.
The trading price for our common stock has been and is likely to continue to be highly volatile.
The market prices for securities of drug delivery, biotechnology and pharmaceutical companies have
historically been highly volatile.
|
|
|
Factors that could adversely affect our stock price include: |
|
|
|
fluctuations in our operating results; announcements of partnerships or technological
collaborations; |
|
|
|
|
innovations or new products by us or our competitors; |
|
|
|
|
governmental regulation; |
|
|
|
|
developments in patent or other proprietary rights; |
|
|
|
|
public concern as to the safety of drugs developed by us or others; |
|
|
|
|
the results of pre-clinical testing and clinical studies or trials by us, our partners or
our competitors; |
|
|
|
|
litigation; |
|
|
|
|
general stock market and economic conditions; |
|
|
|
|
number of shares available for trading (float); and |
|
|
|
|
inclusion in or dropping from stock indexes. |
As of
September 30, 2011, our 52-week high and low closing market price for
our common stock was $2.45
and $0.77, respectively.
13
Future sales of common stock or warrants, or the prospect of future sales, may depress our stock
price.
Sales of a substantial number of shares of common stock or warrants, or the perception that sales
could occur, could adversely affect the market price of our common
stock. Additionally, as of September 30, 2011,
there were outstanding options to purchase up to 2,427,753 shares of our common stock that
are currently exercisable, and additional outstanding options to purchase up to 423,918 shares of
common stock that are exercisable over the next several years. As of
September 30, 2011, the MHR
Convertible Notes were convertible into 7,246,873 shares of our
common stock. As of September 30, 2011,
there were outstanding warrants to purchase 17,843,728 shares of our stock. The holders of these
options have an opportunity to profit from a rise in the market price of our common stock with a
resulting dilution in the interests of the other shareholders. The existence of these options may
adversely affect the terms on which we may be able to obtain additional financing. The weighted
average exercise price of issued and outstanding options is $3.02 and the weighted average exercise
price of warrants is $1.22 which compares to the $1.95 market price
at closing on September 30, 2011.
Additionally, there may be additional shares available on the market if we are required to file additional re-sale registration statements on Form S-1, including if MHR exercises its registration rights under its Registration Rights Agreement with the company dated September 26, 2005.
We identified a material weakness in our internal control over financial reporting that
resulted in the restatement of our financial statements. This material weakness could continue to
adversely affect our ability to report our results of operations and financial condition accurately
and in a timely manner.
The Companys senior management is responsible for establishing and maintaining a system of
internal control over financial reporting designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. In connection with the preparation of our 2010 financial
statements, management performed a reevaluation of our system of internal control over financial
reporting for the quarterly periods ended March 31, June 30, and September 30, 2009 and 2010, and
in our Annual Report for the years ended December 31, 2009 and 2010, and concluded that our
disclosure controls and procedures were not effective as of the periods reported as a result of the
material weakness in our internal control over financial reporting. Specifically, we concluded that
the Companys system of internal controls did not effectively ensure completeness and accuracy with
regard to the proper recognition, presentation and disclosure of accounting for certain non-cash
interest expense and debt discounts in connection the MHR Convertible Notes arising from the
adoption of Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5,
Evaluating Whether an Instrument Is Considered Indexed to an Entitys Own Stock (FASB ASC
815-40-15-5) effective January 1, 2009.
We have designed new procedures and controls intended to address the material weakness described
above and in more detail in Note 19 to our audited Financial Statements contained herein over the
financial statement close process. We note that a system of procedures and controls, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. If we are unable to establish appropriate internal
controls, we may not have adequate, accurate or timely financial information, and we may be unable
to meet our reporting obligations or comply with the requirements of the SEC or the Sarbanes-Oxley
Act of 2002, which could result in the imposition of sanctions, including the inability of
registered broker dealers to make a market in our common shares, or investigation by regulatory
authorities. Any such action or other negative results caused by our inability to meet our
reporting requirements or comply with legal and regulatory requirements or by disclosure of an
accounting, reporting or control issue could adversely affect the trading price of our securities.
Further and continued determinations that there are significant deficiencies or material weaknesses
in the effectiveness of our internal controls could also reduce our ability to obtain financing or
could increase the cost of any financing we obtain and require additional expenditures to comply
with applicable requirements.
Risks Related to This Offering
Our common stock is traded on the Over-the-Counter Bulletin Board.
The Companys securities began trading on the Over-the-Counter Bulletin Board (the OTCBB), an
electronic quotation service maintained by the Financial Industry Regulatory Authority, effective
with the open of business on June 9, 2009. The Companys trading symbol has remained EMIS; however,
it is our understanding that, for certain stock quote publication websites, investors may be
required to key EMIS.OB to obtain quotes.
Because our stock is traded on the Over-the-Counter Bulletin Board market, selling our common stock
could be more difficult because smaller quantities of shares would likely be bought and sold,
transactions could be delayed, and security analysts coverage of us may be reduced or harder to
obtain. In addition, because our common stock was de-listed from the NASDAQ Capital Market,
broker-dealers have certain regulatory burdens imposed upon them, which may discourage
broker-dealers from effecting transactions in our common stock, further limiting the liquidity
thereof. These factors could result in lower prices and larger spreads in the bid and ask prices
for shares of our common stock and/or limit an investors ability to execute a transaction.
14
The listing on the OTCBB or future declines in our stock price could also greatly impair our
ability to raise additional necessary capital through equity or debt financing, and could
significantly increase the ownership dilution to stockholders caused by our issuing equity in
financing or other transactions.
Shares issuable upon the conversion of warrants or the exercise of outstanding options may
substantially increase the number of shares available for sale in the public market and depress the
price of our common stock.
As of
September 30, 2011, we had outstanding warrants exercisable for an aggregate of 17,843,728 shares
of our common stock at a weighted average exercise price of $1.22 per share. In addition, as of
September 30, 2011, options to purchase an aggregate of 3,200,650 shares of our common stock were
outstanding at a weighted average exercise price of $3.02 per share.
As of September 30, 2011, 1,367,598
shares of our stock were available for future option grants under our 2007 Stock Option Plan. To
the extent any of these warrants or options are exercised and any additional options are granted
and exercised, there will be further dilution to investors. Until the options and warrants expire,
these holders will have an opportunity to profit from any increase in the market price of our
common stock without assuming the risks of ownership. Holders of options and warrants may convert
or exercise these securities at a time when we could obtain additional capital on terms more
favorable than those provided by the options or warrants. The exercise of the options and warrants
will dilute the voting interest of the owners of presently outstanding shares by adding a
substantial number of additional shares of our common stock.
The price you pay in this offering will fluctuate and may be higher or lower than the prices paid
by other individuals or entities participating in this offering.
The price you pay in this offering may fluctuate based on the prevailing market price of our common
stock on the OTCBB. Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
There is an increased potential for short sales of our common stock due to the sales of shares
issued upon exercise of warrants or options, which could materially affect the market price of the
stock.
Downward pressure on the market price of our common stock that likely will result from sales of our
common stock issued in connection with an exercise of warrants or options could encourage short
sales of our common stock by market participants. Generally, short selling means selling a
security, contract or commodity not owned by the seller. The seller is committed to eventually
purchase the financial instrument previously sold. Short sales are used to capitalize on an
expected decline in the securitys price. As the holders exercise their warrants or options, we
issue shares to the exercising holders, which such holders may then sell into the market. Such
sales could have a tendency to depress the price of the stock, which could increase the potential
for short sales. Additionally, one or more registration statements for shares/warrants could
increase the possibility of such short sales.
DILUTION
We are not offering or selling any of the shares of common stock in this offering. All of the
offered shares of our common stock are held by selling security holders and, accordingly, no
dilution will result from the sale of the securities.
STOCKHOLDERS
As of
September 30, 2011, an aggregate of 60,687,478 shares of common stock were issued and outstanding
and were owned by approximately 232 stockholders of record, including record owners holding shares
on behalf of an indeterminate number of beneficial owners, based on information provided by our
transfer agent.
DIVIDEND POLICY
We have never paid cash dividends and do not intend to pay cash dividends in the foreseeable
future. We intend to retain earnings, if any, to finance the growth of our business.
15
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the selling security holders. All net
proceeds from the sale of the common stock covered by this prospectus will go to the selling
security holders. We will pay the expenses of registration of these shares, including legal and
accounting fees.
PRICE RANGE OF COMMON STOCK
Emisphere common stock has traded on the OTCBB under the symbol EMIS since June 9, 2009. Prior to
June 9, 2009, Emisphere common stock traded on The NASDAQ Capital Market under the symbol EMIS.
The
closing price of our common stock on September 30, 2011 was $1.95.
The following table sets forth the range of high and low intra-day sale prices as reported by the
OTCBB or The NASDAQ Capital Market, as the case may be, for each period indicated:
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
2008 |
|
|
|
|
|
|
|
|
First quarter |
|
|
2.84 |
|
|
|
1.38 |
|
Second quarter |
|
|
2.75 |
|
|
|
1.28 |
|
Third quarter |
|
|
4.45 |
|
|
|
1.70 |
|
Fourth quarter |
|
|
2.17 |
|
|
|
0.57 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
First quarter |
|
|
1.06 |
|
|
|
0.43 |
|
Second quarter |
|
|
1.49 |
|
|
|
0.42 |
|
Third quarter |
|
|
1.18 |
|
|
|
0.72 |
|
Fourth quarter |
|
|
1.08 |
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
First quarter |
|
|
2.75 |
|
|
|
0.92 |
|
Second quarter |
|
|
3.75 |
|
|
|
2.07 |
|
Third quarter |
|
|
3.20 |
|
|
|
0.77 |
|
Fourth quarter |
|
|
2.68 |
|
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
First quarter |
|
|
2.48 |
|
|
|
1.23 |
|
Second quarter |
|
|
1.80 |
|
|
|
0.85 |
|
Third quarter |
|
|
1.99 |
|
|
|
0.75 |
|
16
PRIVATE PLACEMENT OF COMMON SHARES AND WARRANTS
On June 30, 2011, we entered into a Securities Purchase Agreement (the Securities Purchase
Agreement) with the selling security holders to sell an aggregate of 4,300,438 shares of our
common stock and warrants to purchase a total of 3,010,307 shares of our common stock for gross
proceeds, before deducting fees and expenses and excluding the proceeds, if any, from the exercise
of the warrants of $3,749,982 (the Private Placement). Each unit, consisting of one share of
common stock and a warrant to purchase 0.7 shares of common stock, was sold at a purchase price of
$0.872. The warrants are exercisable at an exercise price of $1.09 per share beginning immediately
after issuance and expire 5 years from the date of issuance. The exercise price of the warrants is
subject to adjustment in the case of stock splits, stock dividends, combinations of shares and
similar recapitalization transactions. The Private Placement closed on July 6, 2011, after the
satisfaction of customary closing conditions, and we issued the shares of common stock and the
warrants to the selling security holders on such closing date.
In connection with the Securities Purchase Agreement, on July 6, 2011, we entered into a
Registration Rights Agreement (the Registration Rights Agreement) with the selling security
holders. Pursuant to the Registration Rights Agreement, we agreed to provide certain registration
rights to the selling security holders under the Securities Act and applicable state securities
laws and also agreed to file a registration statement with the SEC within 20 days of the closing
date and to use our reasonable best efforts to have such registration statement declared effective
as soon as practicable, but in no event later than 60 days of the closing date of the private
placement (90 days in the event the SEC reviews the registration statement).
Pursuant to the Securities Purchase Agreement and the Registration Rights Agreement, we are
registering 7,310,744 shares of our common stock under the Securities Act, which includes 3,010,306
shares of common stock issuable upon exercise of the warrants held by the selling security holders.
All 7,310,744 shares of common stock are being offered pursuant to this prospectus.
SELLING SECURITY HOLDERS
The shares of common stock being offered by the selling security holders are those previously
issued to the selling security holders and those issuable to the selling security holders upon
exercise of the warrants. For additional information regarding the issuance of common stock and the
warrants, see Private Placement of Common Shares and Warrants above. We are registering the
shares of common stock in order to permit the selling security holders to offer the shares for
resale from time to time. Except for the ownership of the common stock and the warrants issued
pursuant to the Securities Purchase Agreement, the selling security holders have not had any
material relationship with us within the past three years.
The table below lists the selling security holders and other information regarding the beneficial
ownership (as determined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of the shares of common stock held by each of the selling security holders. The second
column lists the number of shares of common stock beneficially owned by the selling security
holders, based on their respective ownership, of shares of common stock, as of July 7, 2011,
assuming exercise of the warrants held by each such selling security holders on that date but
taking account of any limitations on exercise set forth therein.
The third column lists the shares of common stock being offered by this prospectus by the selling
security holders and does not take in account any limitations on exercise of the warrants set forth
therein.
In accordance with the terms of the Registration Rights Agreement with the holders of the common
stock and the warrants, this prospectus generally covers the resale of the sum of (i) the number of
shares of common stock issued in connection with the Securities Purchase Agreement and (ii) maximum
number of shares of common stock issuable upon exercise of the warrants, in each case, determined
as if the outstanding warrants were exercised in full (without regard to any limitations on
exercise contained therein) as of the trading day immediately preceding the date this prospectus was initially filed with the SEC. Because the exercise price of the warrants may be
adjusted, the number of shares that will actually be issued may be more or less than the number of
shares being offered by this prospectus. The fourth column assumes the sale of all of the shares
offered by the selling security holders pursuant to this prospectus.
Under the terms of the warrants, a selling security holder, other than Bai Ye Feng, may not
exercise the warrants to the extent (but only to the extent) such selling security holders or any
of its affiliates would beneficially own a number of shares of our common stock which would exceed
4.9%. The number of shares in the second column reflects these limitations. The selling security
holders may sell all, some or none of their shares in this offering. See Plan of Distribution.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares of Common |
|
|
Number of Shares |
|
|
|
Number of Shares of |
|
|
Stock to be Sold |
|
|
of Common Stock of |
|
|
|
Common Stock Owned |
|
|
Pursuant to this |
|
|
Owned After |
|
Name of Selling Security Holder |
|
Prior to Offering |
|
|
Prospectus |
|
|
Offering |
|
Bai Ye Feng |
|
|
6,184,389 |
|
|
|
1,169,724 |
|
|
|
5,014,665 |
|
Anson Investments Master Fund LP |
|
|
974,770 |
|
|
|
974,770 |
|
|
|
|
|
Iroquois Master Fund, Ltd.(1) |
|
|
1,349,770 |
|
|
|
974,770 |
|
|
|
375,000 |
|
Cranshire Capital, L.P.(2) |
|
|
1,092,649 |
|
|
|
916,285 |
|
|
|
176,364 |
|
Freestone Advantage Partners, LP(3) |
|
|
71,762 |
|
|
|
58,487 |
|
|
|
13,275 |
|
EOS Holdings LLC(5) |
|
|
3,068,136 |
|
|
|
1,559,633 |
|
|
|
1,508,503 |
|
Kingsbrook Opportunities Master Fund LP (4) |
|
|
974,770 |
|
|
|
974,770 |
|
|
|
|
|
HF H VICTOR UW VICTOR ART 7 |
|
|
117,476 |
|
|
|
97,476 |
|
|
|
20,000 |
|
Shipman & Goodwin Profit Sharing Retirement Trust FBO
James T. Betts |
|
|
194,954 |
|
|
|
194,954 |
|
|
|
|
|
Huaidong Wang |
|
|
173,400 |
|
|
|
173,400 |
|
|
|
|
|
Son Nam Nguyen |
|
|
198,449 |
|
|
|
119,000 |
|
|
|
79,449 |
|
Pine Lodge Capital Company LTD |
|
|
97,476 |
|
|
|
97,476 |
|
|
|
|
|
Total: |
|
|
|
|
|
|
7,310,744 |
|
|
|
|
|
|
|
|
(1) |
|
Iroquois Capital Management L.L.C. (Iroquois Capital) is the investment manager of Iroquois
Master Fund, Ltd (IMF). Consequently, Iroquois Capital has voting control and investment
discretion over securities held by IMF. As managing members of Iroquois Capital, Joshua
Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital
in its capacity as investment manager to IMF. As a result of the foregoing, Mr. Silverman and
Mr. Abbe may be deemed to have beneficial ownership (as determined under Section 13(d) of the
Securities Exchange Act of 1934, as amended) of the securities held by IMF.. |
|
(2) |
|
Downsview Capital, Inc. (Downsview) is the general partner of Cranshire Capital, L.P.
(Cranshire) and consequently has voting control and investment discretion over securities
held by Cranshire. Mitchell P. Kopin (Mr. Kopin), President of Downsview, has voting control
over Downsview. As a result of the foregoing, each of Mr. Kopin and Downsview may be deemed to
have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of
1934, as amended) of the shares of common stock beneficially owned by Cranshire. |
|
(3) |
|
Downsview Capital, Inc. (Downsview) is the investment manager for a managed account of
Freestone Advantage Partners, LP and consequently has voting control and investment discretion
over securities held in such account. Mitchell P. Kopin (Mr. Kopin), President of Downsview,
has voting control over Downsview. As a result, each of Mr. Kopin and Downsview may be deemed
to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act
of 1934, as amended) of the shares held in such account which are being registered hereunder. |
|
(4) |
|
Kingsbrook Partners LP (Kingsbrook Partners) is the investment manager of Kingsbrook
Opportunities Master Fund LP (Kingsbrook Opportunities) and consequently has voting control
and investment discretion over securities held by Kingsbrook Opportunities. Kingsbrook
Opportunities GP LLC (Opportunities GP) is the general partner of Kingsbrook Opportunities
and may be considered the beneficial owner of any securities deemed to be beneficially owned
by Kingsbrook Opportunities. KB GP LLC (GP LLC) is the general partner of Kingsbrook
Partners and may be considered the beneficial owner of any securities deemed to be
beneficially owned by Kingsbrook Partners. Ari J. Storch, Adam J. Chill and Scott M. Wallace
are the sole managing members of Opportunities GP and GP LLC and as a result may be considered
beneficial owners of any securities deemed beneficially owned by Opportunities GP and GP LLC.
Each of Kingsbrook Partners, Opportunities GP, GP LLC and Messrs. Storch, Chill and Wallace
disclaim beneficial ownership of these securities. |
|
(5) |
|
Pursuant to the terms of the warrants issued on July 6, 2011, EOS Holdings LLC
will only be able to exercise its warrant for that number of shares
that, when combined with the number of shares
owned directly, would not exceed 4.9% beneficial ownership, as calculated in accordance with SEC regulations.
|
PLAN OF DISTRIBUTION
We are registering the shares of common stock previously issued and the shares of common stock
issuable upon exercise of the warrants to permit the resale of these shares of common stock by the
holders of the common stock and warrants from time to time after the date of this prospectus. We
will not receive any of the proceeds from the sale by the selling security holders of the shares of
common stock. We will bear all fees and expenses incident to our obligation to register the shares
of common stock.
18
The selling security holders may sell all or a portion of the shares of common stock held by them
and offered hereby from time to time directly or through one or more underwriters, broker-dealers
or agents. If the shares of common stock are sold through underwriters or broker-dealers, the
selling security holders will be responsible for underwriting discounts or commissions or agents
commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined at the time of sale
or at negotiated prices. These sales may be effected in transactions, which may involve crosses or
block transactions, pursuant to one or more of the following methods:
|
|
|
on any national securities exchange or quotation service on which the securities may be
listed or quoted at the time of sale; |
|
|
|
|
in the over-the-counter market; |
|
|
|
|
in transactions otherwise than on these exchanges or systems or in the over-the-counter
market; |
|
|
|
|
through the writing or settlement of options, whether such options are listed on an
options exchange or otherwise; |
|
|
|
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits
purchasers; |
|
|
|
|
block trades in which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the transaction; |
|
|
|
|
purchases by a broker-dealer as principal and resale by the broker-dealer for its
account; |
|
|
|
|
an exchange distribution in accordance with the rules of the applicable exchange; |
|
|
|
|
privately negotiated transactions; |
|
|
|
|
short sales made after the date the Registration Statement is declared effective by the
SEC; |
|
|
|
|
agreements entered into between broker-dealers and a selling security holder to sell a
specified number of such shares at a stipulated price per share; |
|
|
|
|
a combination of any such methods of sale; and |
|
|
|
|
any other method permitted pursuant to applicable law. |
The selling security holders may also sell shares of common stock under Rule 144 promulgated under
the Securities Act, if available, rather than under this prospectus. In addition, the selling
security holders may transfer the shares of common stock by other means not described in this
prospectus. If the selling security holders effect such transactions by selling shares of common
stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts, concessions or commissions from the
selling security holders or commissions from purchasers of the shares of common stock for whom they
may act as agent or to whom they may sell as principal (which discounts, concessions or commissions
as to particular underwriters, broker-dealers or agents may be in excess of those customary in the
types of transactions involved). In connection with sales of the shares of common stock or
otherwise, the selling security holders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the shares of common stock in the course of hedging in
positions they assume. The selling security holders may also sell shares of common stock short and
deliver shares of common stock covered by this prospectus to close out short positions and to
return borrowed shares in connection with such short sales. The selling security holders may also
loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
The selling security holders may pledge or grant a security interest in some or all of the warrants
or shares of common stock owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares of common stock from
time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending, if necessary, the list of selling
security holders to include the pledgee, transferee or other successors in interest as selling
security holders under this prospectus. The selling security holders also may transfer and donate
the shares of common stock in other circumstances in which case the transferees, donees, pledgees
or other successors in interest will be the selling beneficial owners for purposes of this
prospectus.
19
To the extent required by the Securities Act and the rules and regulations thereunder, the selling
security holders and any broker-dealer participating in the distribution of the shares of common
stock may be deemed to be underwriters within the meaning of the Securities Act, and any
commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed
to be underwriting commissions or discounts under the Securities Act. At the time a particular
offering of the shares of common stock is made, a prospectus supplement, if required, will be
distributed, which will set forth the aggregate amount of shares of common stock being offered and
the terms of the offering, including the name or names of any broker-dealers or agents, any
discounts, commissions and other terms constituting compensation from the selling security holders
and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states
only through registered or licensed brokers or dealers. In addition, in some states the shares of
common stock may not be sold unless such shares have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling security holder will sell any or all of the shares of
common stock registered pursuant to this prospectus.
The selling security holders and any other person participating in such distribution will be
subject to applicable provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which
may limit the timing of purchases and sales of any of the shares of common stock by the selling
security holders and any other participating person. To the extent applicable, Regulation M may
also restrict the ability of any person engaged in the distribution of the shares of common stock
to engage in market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the ability of any person
or entity to engage in market-making activities with respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common stock pursuant to the
Registration Rights Agreement, estimated to be approximately $100,000 in total, including, without
limitation, Securities and Exchange Commission filing fees and expenses of compliance with state
securities or blue sky laws; provided, however, a selling security holder will pay all
underwriting discounts and selling commissions, if any. We will indemnify the selling security
holders against liabilities, including some liabilities under the Securities Act in accordance with
the registration rights agreements or the selling security holders will be entitled to
contribution. We may be indemnified by the selling security holders against civil liabilities,
including liabilities under the Securities Act that may arise from any written information
furnished to us by the selling security holder specifically for use in this prospectus, in
accordance with the related registration rights agreements or we may be entitled to contribution.
Once sold under this prospectus, the shares of
common stock will be freely tradable in the hands of persons other than our affiliates.
BUSINESS
Overview of Emisphere
Introduction and History
Emisphere Technologies, Inc. (Emisphere, the Company, our, us, or we) 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 decreasing time to 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
deliver certain therapeutic molecules orally without altering their chemical form or biological
activity. 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. Our core business strategy is to
develop oral forms of drugs or nutrients that are not currently available or have poor
bioavailability in oral form, by applying the Eligen® Technology to those drugs or nutrients. Our
development efforts are conducted internally or in collaboration with corporate development
partners. Typically, the drugs that we target are at an advanced stage of development, or have
already received regulatory approval, and are currently available on the market. Our website is
20
www.emisphere.com. The contents of that website are not incorporated herein by reference hereto.
Investor related questions should be directed to info@emisphere.com.
Emisphere was originally founded as Clinical Technologies Associates, Inc. in 1986. We conducted an
initial public offering in 1989 and were listed on NASDAQ under the ticker symbol CTAI. In 1990,
we decided to focus on our oral drug delivery technology, now known as the Eligen® Technology. In
1991, we changed our name to Emisphere Technologies, Inc., and we continued to be listed on NASDAQ
under the new ticker symbol EMIS. The Companys securities were suspended from trading on the
NASDAQ Capital Market effective at the open of business on Tuesday, June 9, 2009, and NASDAQ
delisted the Companys securities thereafter. The delisting resulted from the Companys
non-compliance with the minimum market value of listed securities requirement for continued
listing. Simultaneously, the Companys securities began trading on the Over-the-Counter Bulletin
Board (the OTCBB), an electronic quotation service maintained by the Financial Industry
Regulatory Authority, effective with the open of business on Tuesday, June 9, 2009. The Companys
trading symbol remains EMIS, however, it is our understanding that, for certain stock quote
publication websites, investors may be required to key EMIS.OB to obtain quotes.
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 was hired, the Eligen® Technology was reevaluated and our corporate
strategy was refocused on commercializing it 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 through the progress made by our development partners Novartis
Pharma AG (Novartis) and Novo Nordisk A/S (Novo Nordisk) 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 Eligen® Technology
The Eligen® Technology is a broadly applicable proprietary oral drug delivery technology based on
the use of proprietary synthetic chemical compounds known as EMISPHERE® delivery agents, or
carriers. These delivery agents facilitate and enable the transport of therapeutic macromolecules
(such as proteins, peptides, and polysaccharides) and poorly absorbed small molecules across
biological membranes. The Eligen® Technology not only facilitates absorption. but it acts rapidly
in the upper sections of the GI where absorption is thought to occur. With the Eligen® Technology,
most of the molecules reach the general circulation in less than an hour post-dose. Rapid
absorption can limit enzymatic degradation that typically affects macromolecules or simply be
advantageous in cases where time to onset of action is important (i.e. analgesics). Another
characteristic that distinguishes Eligen® from the competition is absorption takes place through a
transcellular, not paracellular, pathway. This underscores the safety of Eligen® as the passage of
the Eligen® carrier and the molecule preserve the integrity of the tight junctions within the cell
and reduces any likelihood of inflammatory processes and autoimmune gastrointestinal diseases.
Furthermore, Eligen® Technology carriers are rapidly absorbed, distributed, metabolized and
eliminated from the body, they do not accumulate in the organs and tissues and they are considered
safe at anticipated doses and dosing regimens.
The Eligen® Technology was extensively reevaluated in 2007 by our scientists, senior management and
expert consultants. Based on this analysis, we believe that our technology can enhance overall
healthcare, including patient accessibility and compliance, while benefiting the commercial
pharmaceutical marketplace and driving company valuation. The application of the Eligen® Technology
is potentially broad and may provide for a number of opportunities across a spectrum of therapeutic
modalities.
Implementing the Eligen® Technology is quite simple. It only requires co-mixing a drug or
nutritional supplement and an Eligen® carrier to produce an effective formulation. The carrier does
not alter the chemical properties of the drug nor its biological activity. Some therapeutic
molecules are better suited for use with the Eligen® Technology than others. Drugs or nutritional
supplements whose bioavailability is limited by poor membrane permeability or chemical or
biological degradation, and which have a moderate-to-wide therapeutic index, appear to be the best
candidates. Drugs with a narrow therapeutic window or high molecular weight may not be favorable
with the technology.
We believe that our Eligen® Technology makes it possible to safely deliver a therapeutic
macromolecule orally or increase the absorption of a poorly absorbed small molecule without
altering its chemical composition or compromising the integrity of biological
21
membranes. We believe that the key benefit of our Eligen® Technology is that it improves the
ability of the body to absorb small and large molecules.
Emisphere Today
During 2010, the Company continued to focus on efforts to apply the Eligen® Technology and realize
its value by developing profitable commercial applications. 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 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 needs. Our goal is to implement our Eligen® Technology to
enhance overall healthcare, including patient accessibility and compliance, while benefiting the
commercial pharmaceutical/healthcare 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 additional investments that may be required to
fund our research and development will be approached incrementally in order to minimize disruption
or dilution.
To accelerate commercialization of the Eligen® Technology, Emisphere embarked on a two-pronged
strategy. First, we concentrated on prescription molecules and nutritional supplements obtained
through partnerships with other pharmaceutical companies for molecules where oral absorption is
difficult yet substantially beneficial if proven. With prescription molecules, we are working to
generate new interest in the Eligen® Technology with potential partners and attempting to expand
our current collaborative relationships to take advantage of the critical knowledge that others
have gained by working with our technology. Second, we continue to pursue commercialization of
product candidates developed internally. We believe that these internal candidates need to be
developed with reasonable investment in an acceptable time period and with a reasonable
risk-benefit profile.
To support our internal development programs, the Company implemented its new commercialization
strategy for the Eligen® Technology. Using extensive safety data available for its Sodium
N-[8-(2-hydroxybenzoyl) Amino] Caprylate (SNAC) carrier, the Company obtained GRAS (Generally
Recognized as Safe) status for its SNAC carrier, and then applied the Eligen® Technology with B12,
another GRAS substance where bioavailability and absorption is difficult and improving such
absorption would yield substantial benefit and value. Given sufficient time and resources, the
Company intends to apply this strategy to develop other products. Examples of other GRAS substances
that may be developed into additional commercial products using this strategy would include
vitamins such as Vitamin D, minerals such as iron, and other supplements such as the polyphenols
and catechins, among others. A higher dose (1000 mcg) formulation of Eligen® B12, for use by
patients who are Vitamin B12 deficient, is under development.
The Company also continues to focus on improving operational efficiency. By terminating the lease
of our research and development facility in Tarrytown, NY in April 2009 and by utilizing
independent contractors to conduct research and development, we reduced our annual operating costs
by approximately 45% from 2008 levels and an additional 21% from 2009 levels. Annual cash
expenditures in 2009 and 2010 were reduced by approximately $11 million and $1.1 million,
respectively, and the resulting cash burn rate to support continuing operations is approximately $8
million per year. Additionally, we expect to accelerate the commercialization of the Eligen®
Technology in a cost effective way and to gain operational efficiencies by tapping into advanced
scientific processes offered by independent contractors.
We are attempting to expand our current collaborative relationships to take advantage of the
critical knowledge that others have gained by working with our technology. We intend to 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.
Overall Product Pipeline
Emisphere has a deep and varied pipeline that includes prescription and nutritional supplement
product candidates in varying stages of development. Our product pipeline includes prescription and
medical food candidates. We have two prescription products in Phase III studies, several in Phase I
and a number of pre-clinical (research stage) projects. Some of the pre-clinical projects are
partnered; others
22
are Emisphere-initiated. We continue to assess therapeutic molecules for their potential
compatibility with our technology and market need. Our intent is to continue to expand our pipeline
with product candidates that demonstrate significant opportunities for growth. Our focus is on
molecules that meet the criteria for success based on our increased understanding of our Eligen®
Technology. Depending on the molecule, market potential and interest, we intend to pursue potential
product development opportunities through development alliances or internal development.
23
Vitamin B12
The Company is developing an oral formulation of Eligen® B12 (1000 mcg) for use by B12 deficient
individuals. During the fourth quarter 2010, the Company completed a clinical trial which showed
that oral Eligen® B12 (1000 mcg) can efficiently and quickly restore Vitamin B12 levels in
deficient individuals as effectively as the injectable formulation, which is the current standard
of care. The results from that clinical trial have been submitted for publication. We also
conducted market research to help assess the potential commercial opportunity for our potential
Eligen® B12 (1000 mcg) product. Currently, we are evaluating the results of our clinical trials and
market research and exploring alternative development and commercialization options with the
purpose of maximizing the commercial and health benefits potential of our Eligen® B12 asset.
Vitamin B12 is an important nutrient that is poorly absorbed in the oral form. In most healthy
people, Vitamin B12 is absorbed in a receptor-mediated pathway in the presence of an intrinsic
factor. A large number of people take B12 supplements by the oral route, many in megadoses, and by
injection. Currently, it is estimated that at least five million people in the U.S. are taking 40
million injections of Vitamin B12 per year to treat a variety of debilitating medical conditions.
Another estimated five million people are consuming more than 600 million tablets of Vitamin B12
orally. The international market is larger than the U.S. market. Many B12 deficient patients suffer
from pernicious anemia and neurological disorders and many of them are infirm or elderly. Vitamin
B12 deficiency can cause severe and irreversible damage, especially to the brain and nervous
system. At levels only slightly lower than normal, a variety of symptoms such as fatigue,
depression, and poor memory may be experienced.
During April 2010, the Company had announced that interim data from its recently completed study
demonstrated that its oral Eligen® B12 (1000 mcg) given to individuals with low B12 levels restored
normal B12 serum concentrations. Normal levels of serum B12 were achieved by all study participants
who had taken oral Eligen® B12 (1000 mcg) 15 days into the 90-day study when the first blood
samples were taken. This data, in Abstract Number 8370, was presented at the Experimental Biology
2010 Conference in Anaheim, California. In this open-label, randomized, parallel-group, 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 1000 mcg 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 (1000 mcg) 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 (1000 mcg) formulation
to offer a much needed alternative to painful and inconvenient IM injections.
Emisphere developed Eligen® B12 independently, as a nutritional supplement product candidate.
During November 2009, the Company launched its first commercially available product, oral Eligen®
B12 (100 mcg), which had been specifically developed to help improve Vitamin B12 absorption and
bioavailability with a patented formulation. During the third quarter 2010, we terminated our
distributor agreement for the marketing, distribution and sale of oral Eligen® B12 (100mcg) with
Quality Vitamins and Supplements, Inc. to allow us to focus on the development of the higher dose,
oral formulation of Eligen® B12 (1000 mcg) to be offered for B12 deficient patients.
Following pre-clinical pharmacokinetic studies in rats during which the absorption profile of
Vitamin B12 using our Eligen® Technology was assessed and compared to control (B12 alone),
additional preclinical studies using dogs further demonstrated that the Eligen® Technology
significantly enhances the absorption of oral B12. We completed our first clinical study in 20
normal healthy males which tested our new Vitamin B12 formulation against a commercially available
oral formulation
The data from our first pharmacokinetic study showed mean Vitamin B12 peak blood levels were more
than 10 times higher for the Eligen® B12 5mg formulation than for the 5mg commercial formulation.
The mean time to reach peak concentration (Tmax) was reduced by over 90%, to 0.5 hours for the
Eligen® B12 5mg from 6.8 hours for the commercial 5mg product. Improvement in bioavailability was
approximately 240%, with absorption time at 30 minutes and a mean bioavailability of 5%. The study
was conducted with a single administration of Eligen® B12. There were no adverse reactions, and
Eligen® B12 was well-tolerated.
In May 2009, the Company was informed by an independent expert panel of scientists that its SNAC
carrier had been provisionally designated as GRAS for its intended application in combination with
nutrients added to food and dietary supplements. Following a comprehensive evaluation of research
and toxicology data, Emispheres SNAC was found to be safe at a dosage up to 250 mg per day when
used in combination with nutrients to improve their dietary availability. In July 2009, concurrent
with the publication of two papers in the July/August issue of the peer reviewed journal,
International Journal of Toxicology, which describes the toxicology of
24
its SNAC carrier, SNAC achieved GRAS status for its intended use in combination with nutrients
added to food and dietary supplements. The publication of those two papers in the International
Journal of Toxicology was the final, necessary step in the process of obtaining GRAS status for its
SNAC carrier. Since SNAC achieved GRAS status, it is exempt from pre-market approval for its
intended use in combination with nutrients added to food and dietary supplements. This opens the
way for the potential commercialization of the Eligen® Technology with other substances such as
vitamins.
During April 2009, we announced a strategic alliance with AAIPharma, Inc. intended to expand the
application of Emispheres Eligen® Technology and AAIPharmas drug development services. AAIPharma
is a global provider of pharmaceutical product development services that enhance the therapeutic
performance of its clients drugs. AAIPharma works with many pharmaceutical and biotech companies
and currently provides drug product formulation development services to Emisphere. This
relationship expands our access to new therapeutic candidates for the Eligen® Technology, which
potentially could lead to new products and to new alliance agreements as well.
We have obtained patents for the carrier we are using in the oral B12 formulation and have filed
applications covering the combination of the carrier and many other compounds, including Vitamin
B12.
Phase III Programs
On the prescription side of our business, both of our products in Phase III are with our partner
Novartis, which is using our drug delivery technology in combination with salmon calcitonin. Their most advanced programs are testing oral formulations of salmon
calcitonin to treat osteoarthritis and osteoporosis. Novartis completed the first Phase III
clinical study for osteoarthritis, and the second Phase III clinical study for osteoarthritis is
continuing. Novartis is also conducting a Phase III clinical study for osteoporosis. In its Annual
Results Conference Media Release for the period ended December 31, 2010, Novartis reported that its
planned submissions for oral calcitonin for the treatment of osteoporosis and osteoarthritis are
scheduled to be filed with the regulatory authorities during 2011. During October 2010 the Company
announced that Novartis provided us with information regarding the first interpretable results of
the two-year Phase III Study 2301 in osteoarthritis conducted by its license partner, Nordic
Bioscience, with oral calcitonin. The recently completed study assessed the safety and efficacy of
oral calcitonin in the treatment of osteoarthritis of the knee and had three co-primary endpoints.
Novartis informed Emisphere that preliminary analysis of the data from this study shows that the
endpoint for the first of three co-primary endpoints, joint space width narrowing, was not met.
Novartis also informed Emisphere that results regarding the other two co-primary endpoints
indicated clinical efficacy related to symptom modification (WOMAC scales: pain, function). In
addition, according to Novartis, MRI analyses suggested an effect on cartilage. Nordic Bioscience
and Novartis have indicated that they are going to continue to work together to further analyze and
evaluate the results of this study. The second two-year Phase III Study 2302, which also assesses
safety and efficacy of oral calcitonin of patients with osteoarthritis of the knee, is currently
ongoing. Additionally, the Phase III clinical program of oral calcitonin in osteoporosis continues.
During July 2010, we announced that Novartis and its license partner, Nordic Bioscience, 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. An independent Data
Monitoring Committee (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 was no reason to stop Study 2302 because of safety concerns, there
was also no reason to continue the study for efficacy. The DMC also concluded that the final
decision whether to continue Study 2302 rests with Novartis and Nordic Bioscience. They currently
intend to continue the clinical program of oral calcitonin in osteoarthritis, Phase III Study 2301
was completed and Phase III Study 2302 is continuing. Novartis and Nordic Bioscience continue to
work together to assess next steps.
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 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.
25
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.
Phase I Programs
Emisphere also has several products in Phase I and a number of pre-clinical (research stage)
projects. Some of the pre-clinical projects are partnered and others were initiated by the Company.
For the treatment of diabetes, research using the Eligen® Technology and GLP-1 (Glucagon-Like
Peptide-1), a potential treatment for Type 2 diabetes, is being conducted by Novo Nordisk.
Emisphere had previously conducted extensive tests on native insulin and native GLP-1which
demonstrated that both macromolecules can be effectively delivered using the Eligen® Technology.
With the progress that has been made in the development of second generation proteins, we concluded
that a more productive pathway is to move forward with GLP-1 analogs, an oral form of which might
be used to treat Type 2 diabetes and related conditions. Our research indicated that the
development of oral formulations of Novo Nordisk proprietary GLP-1 receptor agonists may represent
an opportunity for Emisphere. 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 (the GLP-1 License Agreement). Under the
GLP-1 License Agreement Emisphere could receive more than $87 million in contingent product
development and sales milestone payments including a $10 million non-refundable license fee which
was received during June 2008. Emisphere would also be entitled to receive royalties in the event
Novo Nordisk commercializes products developed under such agreement. Under the terms of the
agreement, Novo Nordisk is responsible for the development and commercialization of the products.
Initially Novo Nordisk is focusing on the development of oral formulations of its 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 analog (NN9924). This milestone released a $2 million payment to
Emisphere, whose proprietary Eligen® Technology is used in the formulation of NN9924. GLP-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.
Novartis has conducted Phase I studies with oral salmon calcitonin. During September 2009, Novartis
and its partner Nordic Bioscience issued study results in which twice-daily oral salmon calcitonin
using Emispheres proprietary Eligen® drug delivery technology significantly suppressed markers of
cartilage and bone degradation versus placebo in men and women with osteoarthritis, the most common
form of arthritis. The study, a Phase I, placebo-controlled, double-blind, double-dummy,
randomized, gender-
26
stratified clinical trial, was conducted on behalf of Emispheres partner, Novartis, by Nordic
Bioscience, and was published online in the September 2009 issue of Osteoarthritis and Cartilage. A
total of 73 male and female subjects aged 57 to 75 years with painful osteoarthritis of the knee,
received twice-daily 0.6 mg or 0.8 mg doses of oral salmon calcitonin with the Eligen® Technology
or placebo administered over 14 days. Doses of 0.8mg compared with 0.6mg produced significantly
higher Cmax and AUC(0-4 hrs), of calcitonin, P=0.03. This resulted in significant reductions in
CTX-I and CTX-II, which are biochemical markers of bone degradation and of cartilage degradation,
respectively. Gender had no observable influence on results. Oral sCT doses were well tolerated; 44
adverse events and no serious adverse events were reported in this study. For further details,
please consult the original publication which is available online (Karsdal MA et al; The effect of
oral salmon calcitonin delivered with 5-CNAC on bone and cartilage degradation in osteoarthritic
patients: a 14-day randomized study; Osteoarthritis and Cartilage; available online September 1,
2009). Emerging data continue to indicate oral salmon calcitonin in combination with the Companys
absorption-enhancing Eligen® Technology may be a potential therapeutic option for women and men
with osteoarthritis, which affects more than 20 million people in the United States.
During June 2011, Novartis informed us of the results of its recently completed Proof of Concept
study for an oral PTH1-34 using Emispheres Eligen® Technology in post-menapausal women with
osteoporsis or osteopenia. Novartis informed us that, although the study confirmed that oral
PTH1-34 was both safe and well-tolerated, several clinical endpoints were not met. Based on the
data analyzed, Novartis has terminated the study and anticipates no further work on oral
formulation of PTH1-34.
A study conducted by Novartis and Nordic Bioscience published in the December 2008 issue of BMC
Clinical Pharmacology demonstrated that orally administered salmon calcitonin using Emispheres
carrier, (5-CNAC) an Eligen® oral delivery technology, is effective in reducing bone breakdown. The
randomized, double-blind, double-dummy, placebo-controlled study among 81 subjects in Copenhagen
was conducted on behalf of Emispheres partner Novartis by Nordic Bioscience by M.A. Karsdal, I.
Byrjalsen, B.J. Riis and C. Christiansen. The study suggests that orally administered 0.8 mg of
salmon calcitonin was effective in suppression of Serum CTX irrespective of time of dosing. Serum
CTX-1 (Serum C-terminal telo-peptide of collagen type I) is the biochemical marker used to measure
bone resorption. There were no safety concerns with the salmon calcitonin oral formulation using
Emispheres carrier 5-CNAC, which had been previously demonstrated in earlier studies.
A study conducted by Novartis and Nordic Bioscience published in the October 2008 issue of BMC
Clinical Pharmacology demonstrated that oral salmon calcitonin using Emispheres proprietary
Eligen® Technology taken 30 to 60 minutes before meals with 50 ml of water results in improved
absorption and improved efficacy measured by the biomarker of reduced bone resorption (sCTX-I)
compared to the commonly prescribed nasal formulation. The study was a randomized, partially-blind,
placebo-controlled, single-dose exploratory crossover clinical trial conducted with 56 healthy
postmenopausal women.
Professor 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 is also conducting research assessing the feasibility of using the
Eligen® Technology combined with PYY3-36 and native GLP-1, as a potential treatment for obesity.
During September 2010, we announced that a clinical study conducted by Professor Beglinger found
that the Companys proprietary oral SNAC, in combination with two digestive hormones, was
successful in reducing food intake and increasing satiety in healthy male subjects. The study was
published in the August 18, 2010, online edition of the American Journal of Clinical Nutrition, the
official publication of the American Society for Nutrition. As described in the publication, 12
healthy male subjects were studied in a randomized double-blind, placebo-controlled 4-way crossover
trial. Each subject received (in random order) 2.0 mg Native GLP-1, 1.0 mg PYY3-36, or 2.0 mg
Native GLP-1, plus 1.0 mg PYY3-36. Researchers observed that both digestive hormones, native GLP-1
and PYY3-36, were rapidly absorbed from the gut, leading to plasma concentrations several times
higher than those in response to a normal meal. Native GLP-1 alone, but not PYY3-36, significantly
reduced total food intake. Co-administration of both hormones, taken in combination with SNAC in a
single oral dose, reduced both total food intake by 21.5 percent, and increased fullness at meal
onset (P <0.05). The 24-hour food intake was not affected by the single oral administration of
the native hormones likely due to their short half-life. The two digestive hormones utilized in the
study are released naturally in proportion to ingested calories and signal satiety, or fullness, to
the brain. SNAC, which is based on Emispheres Eligen® Technology, facilitates transport of these
and other hormones with low oral bioavailability across biological membranes, such as those of the
gastrointestinal tract. Emisphere had previously announced that SNAC had achieved GRAS status for
its intended use in combination with nutrients added to food and dietary supplements.
An article published in the September 2009 issue of Clinical Pharmacology and Therapeutics
describes previously reported findings of an independent clinical study designed to assess the
pharmacokinetics, pharmacodynamics (PK/PD) and safety of oral administration of the peptide GLP-1
utilizing Emispheres Eligen® carrier technology. The study was conducted at the University
Hospital in Basel, Switzerland by Professor Beglinger. The paper, titled Orally Administered
Glucagon-Like Peptide-1 Affects
27
Glucose Homeostasis Following an Oral Glucose Tolerance Test in Healthy Male Subjects, was
published by Steinert, et.al. Publication of this data in a prominent peer reviewed journal
underscores the potential of the Eligen® Technology to transform oral peptide delivery.
Specifically, the data further supports the concept of the potential advantages of utilizing GLP-1
and similar molecules as therapeutic agents in the treatment of Type 2 diabetes. As described in
the publication, a randomized, double-blind, placebo-controlled, two-way crossover trial was
conducted in 16 healthy male subjects between the ages of 20 and 43. The study was designed to
investigate the PK/PD effects of a single dose (2 mg) of oral GLP-1 formulated with Emispheres
SNAC carrier (150 mg) and administered 15 minutes prior to an oral glucose tolerance test. The
published data show that the orally administered peptide, when administered with Emispheres SNAC
carrier, is rapidly absorbed from the gastrointestinal tract, leading to tenfold higher plasma
concentrations compared to control. The pharmacodynamic effects were consistent with the known
pharmacology of GLP-1, resulting in significantly increased basal insulin release (P< 0.027) and
marked effects on glucose levels. The postprandial glucose peak was delayed with GLP-1, suggesting
an effect on gastric emptying. No adverse events were reported.
Intravenous or subcutaneous applications of therapeutic peptide molecules are cumbersome and
impractical for chronic treatment regimens. Current oral application of peptides is ineffective
because peptides have a low oral bioavailability due to their molecular size and physico-chemical
characteristics. Professor Beglingers studies show that Emispheres Eligen® Technology can
overcome some of these oral delivery issues safely and efficiently.
Preclinical Programs
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
as we continue to expand our pipeline with product candidates that demonstrate significant
opportunities for growth. Our focus is on molecules that meet the criteria for success based on our
increased understanding of our Eligen® Technology. Our preclinical programs focus on the
development of oral formulations of potentially new treatments for diabetes and products in the
areas of cardiovascular, appetite suppression and pain and on the development and potential
expansion of nutritional supplement products.
During December 2010, the Company entered into the Insulin Agreement to develop and commercialize
oral formulations of Novo Nordisks insulins using Emispheres Eligen® Technology. This was the
second license agreement between the two companies. The GLP-1 License Agreement was signed in June
2008, with a potential drug currently in a Phase I clinical trial. Please refer to Phase I
Programs (above). The Insulin agreement included $57.5 million in potential product development
and sales milestone payments to Emisphere, of which $5 million was paid upon signing, as well as
royalties on sales. This extended partnership with Novo Nordisk has the potential to offer
significant new solutions to millions of people with diabetes worldwide and it also serves to
further validate our Eligen® Technology.
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 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.
Business Financing
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.
However, during 2010 we expanded our relationship with our
28
development partner, Novo Nordisk, and negotiated the cancellation of our current debt obligation
with our development partner, Novartis, as described below under the heading Ongoing Collaborative
Agreements and also completed the August 2010 Financing (as defined below). Further, in 2011, we
completed the July 2011 Financing, (as defined below).
On August 25, 2010, the Company entered into a securities purchase agreement (together with the
securities purchase agreement with MHR, as defined below, the August 2010 Financing) with certain
institutional investors pursuant to which the Company agreed to sell an aggregate of 3,497,528
shares of its common stock and warrants to purchase a total of 2,623,146 additional shares of its
common stock for total gross proceeds of $3,532,503. Each unit, consisting of one share of common
stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase price of $1.01.
The warrants to purchase additional shares are exercisable at a price of $1.26 per share and will
expire on August 26, 2015. In accordance with the terms of a registration rights
agreement with the investors, the Company filed a registration statement on September 15, 2010,
which was declared effective October 12, 2010. On August 25, 2010, the Company also announced that
it had entered into a separate securities purchase agreement with MHR Fund Management LLC (together
with its affiliates, MHR) as part of the August 2010 Financing, pursuant to which the Company
agreed to sell an aggregate of 3,497,528 shares of its common stock and warrants to purchase a
total of 2,623,146 additional shares of its common stock for total gross proceeds of $3,532,503.
Each unit, consisting of one share of common stock and a warrant to purchase 0.75 shares of common
stock, was sold at a purchase price of $1.01. The warrants to purchase additional shares are
exercisable at a price of $1.26 per share and will expire on August 26, 2015.
The Company received total net proceeds from the August 2010 Financing of approximately $6.7
million after deducting fees and expenses and excluding the proceeds, if any, from the exercise of
the warrants that will be issued in the transactions. Proceeds from these transactions will be used
to fund the Companys operations (including investments in new product development and
commercialization), to satisfy certain debts of the Company, to settle certain outstanding
litigation and to meet the Companys obligations as they may arise.
In connection with the August 2010 Financing, the Company entered into a waiver agreement with MHR
(the 2010 Waiver Agreement), pursuant to which MHR waived certain anti-dilution adjustment rights
under its 11% senior secured notes and warrants issued by the Company to MHR in September 2006 that
would otherwise have been triggered by the private placement described above. As consideration for
such waiver, the Company issued to MHR a warrant to purchase 975,000 shares of common stock and
agreed to reimburse MHR for 50% of its legal fees up to a maximum reimbursement of $50,000. The
terms of such warrant are identical to the warrants issued to MHR in the August 2010 Financing
transaction described above. The Company was advised in these transactions by an independent
committee of the Companys board of directors (the Board of Directors). Roth Capital Partners
served as the placement agent for the offering.
As of December 31, 2010, our accumulated deficit was approximately $480.9 million. Our loss from
operations was $11.5 million, $14.6 million and $26.3 million for the years ended December 31,
2010, 2009 and 2008, respectively. Our net loss was $56.9 million, $16.8 million and $24.4 million
for the years ended December 31, 2010, 2009 and 2008, respectively. Our net cash outlays from
operations and capital expenditures were $4.9 million, $11.9 million and $6.8 million for the years
ended December 31, 2010, 2009 and 2008, respectively. Net cash outlays include receipts of deferred
revenue of $7.1 million, and $0.2 million for 2010 and 2009, respectively. Our stockholders
deficit was $82.5 million and $35.2 million as of December 31, 2010 and 2009, respectively.
On June 30, 2011, we entered into a securities purchase agreement with the selling security holders
hereunder to sell an aggregate of 4,300,438 shares of our common stock and warrants to purchase a
total of 3,010,307 shares of our common stock to the selling security holders for gross proceeds,
before deducting fees and expenses and excluding the proceeds, if any, from the exercise of the
warrants of $3,749,982 (the 2011 Private Placement). The 2011 Private Placement closed on July
6, 2011. Also on July 6, 2011, we entered into a registration rights agreement with the selling
security holders pursuant to which we provided certain registration rights, including an obligation
that we file with the Securities and Exchange Commission within 20 days a registration statement on
Form S-1 covering the shares issued in the Private Placement and the shares underlying the warrants
sold in the 2011 Private Placement.
In connection with the 2011 Private Placement, we entered into a securities purchase agreement on
the same date with MHR Fund Management LLC to sell an aggregate of 4,300,438 shares of our common
stock and warrants to purchase a total of 3,010,306 shares of our common stock for gross proceeds,
before deducting fees and expenses and excluding the proceeds, if any, from the exercise of the
warrants of $3,749,982 (the 2011 MHR Private Placement). Simultaneous with closing the 2011
Private Placement, we closed the 2011 MHR Private Placement with MHR and certain of its affiliated
investment funds.
29
In connection with the 2011 Private Placement and the 2011 MHR Private Placement, we entered into a
waiver agreement with MHR, pursuant to which MHR waived certain anti-dilution adjustment rights
under its senior secured notes and certain warrants that would otherwise have been triggered by the
2011 Private Placement. As consideration for such waiver, we issued to MHR warrants to purchase
795,000 shares of our common stock and agreed to reimburse MHR for up to $25,000 of its legal fees.
In both the 2011 Private Placement and the 2011 MHR Private Placement (together, the July 2011 Financing),
each unit, consisting of one share of common stock and a warrant to purchase 0.7 shares of common
stock, were sold at a purchase price of $0.872. All of the warrants issued in the July 2011
Financing are exercisable at an exercise price of $1.09 per share and will expire on July 6, 2016.
We have limited capital resources and operations to date have been funded with the proceeds from
collaborative research agreements, public and private equity and debt financings and income earned
on investments. 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 capital resources will
enable us to continue operations through approximately April 2012or earlier if unforeseen events or
circumstances arise that negatively affect our liquidity. Further, we have significant future
commitments and obligations. While our plan is to raise capital when needed and/or to pursue
partnering opportunities, we cannot be sure that our plans will be successful. These conditions
raise substantial doubt about our ability to continue as a going concern. Consequently, the audit
reports prepared by our independent registered public accounting firms relating to our financial
statements for the years ended December 31, 2010, 2009 and 2008 include an explanatory paragraph
expressing the substantial doubt about our ability to continue as a going concern. We are pursuing
new as well as enhanced collaborations and exploring other financing options, with the objective of
minimizing dilution and disruption. If we fail to raise additional capital or obtain substantial
cash inflows from existing partners prior to early April 2012 we could be forced to cease
operations.
If we are successful in raising additional capital to continue operations, our business will still
require substantial additional investment that we have not yet secured. Further, we will not have
sufficient resources to fully develop 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 you that financing will be available on favorable terms or at all. For further
discussion, see Risk Factors.
Overview of Drug Delivery Industry
The drug delivery industry develops technologies for the improved administration of therapeutic
molecules with the goal of expanding markets for existing products and extending drug franchises.
Drug delivery companies also seek to develop products on their own that would be patent-protected
by applying proprietary technologies to off-patent pharmaceutical products. Primarily, drug
delivery technologies are focused on improving safety, efficacy, ease of patient use and/or patient
compliance. Pharmaceutical and biotechnology companies consider improved drug delivery as a means
of gaining competitive advantage over their peers.
Therapeutic macromolecules, of which proteins are the largest sub-class, are prime targets for the
drug delivery industry for a number of reasons. Most therapeutic macromolecules must currently be
administered by injection (most common) or other device such as an inhaler or nasal spray system.
Many of these compounds address large markets for which there is an established medical need. These
drugs are widely used, as physicians are familiar with them and accustomed to prescribing them.
Therapeutic macromolecules could be significantly enhanced through alternative delivery. These
medicines are comprised of proteins and other large or highly charged molecules (carbohydrates,
peptides, ribonucleic acids) that, if orally administered using traditional oral delivery methods,
would degrade in the stomach or intestine before they are absorbed into the bloodstream. Also,
these molecules are typically not absorbed following oral administration due to their poor
permeability. Therefore, the vast majority are administered parenterally. However, for many
reasons, parenteral administration is undesirable, including patient discomfort, inconvenience and
risk of infection. Poor patient acceptance of parenteral therapies can lead to medical
complications. In addition, parenteral therapies can often require incremental costs associated
with administration in hospitals or doctors offices.
Previously published research indicates that patient acceptance of and adherence to a dosing
regimen is higher for orally delivered medications than it is for non-orally delivered medications.
Our business strategy is partly based upon our belief that the development of an efficient and safe
oral delivery system for therapeutic macromolecules represents a significant commercial
opportunity. We believe that more patients will take orally delivered drugs more often, spurring
market expansion.
30
Leading Current Approaches to Drug Delivery
Transdermal (via the skin) and Needleless Injection
The size of most macromolecules makes penetration into or through the skin inefficient or
ineffective. Some peptides and proteins can be transported across the skin barrier into the
bloodstream using high-pressure needleless injection devices. Needleless devices, which inject
proteins through the skin into the body, have been in development for many years. We believe these
devices have not been well accepted due to patient discomfort, relatively high cost, and the
inconvenience of placing the drugs into the device.
Nasal (via the nose)
The nasal route (through the membranes of the nasal passage) of drug administration has been
limited by low and variable bioavailability for proteins and peptides. As a result, penetration
enhancers often are used with nasal delivery to increase bioavailability. These enhancers may cause
local irritation to the nasal tissue and may result in safety concerns with long-term use. A
limited number of peptides delivered nasally have been approved for marketing in the U.S. including
MIACALCIN®, developed by Novartis as an osteoporosis therapy, a therapeutic area we have targeted.
Pulmonary (via the lung)
Pulmonary delivery (through the membranes of the lungs) of drugs is emerging as a delivery route
for large molecules. Although local delivery of respiratory drugs to the lungs is common, the
systemic delivery (i.e., delivery of the drugs to the peripheral vasculature) of macromolecular
drugs is less common because it requires new formulations and delivery technologies to achieve
efficient, safe and reproducible dosing. Only one protein using pulmonary delivery has been
approved for marketing in the U.S., which is EXUBERA®, an insulin product developed by Pfizer and
Nektar, as a diabetes therapy, a therapeutic area we have targeted. However after market acceptance
of EXUBERA® was demonstrated to be limited, Pfizer withdrew from further commercialization of, and
terminated its license with Nektar for EXUBERA®.
Intraoral (via the membranes in the mouth)
Intraoral delivery is also emerging as a delivery route for large molecules. Buccal delivery
(through the membrane of the cheek) and sublingual delivery (through the membrane under the tongue)
are forms of intraoral delivery. Some Vitamin B12 manufacturers sell and distribute sublingual
versions of their product.
Oral (via the mouth)
We believe that the oral method of administration is the most patient-friendly option, in that it
offers convenience, is a familiar method of administration that enables increased compliance and,
for some therapies, may be considered the most physiologically appropriate. We, and other drug
delivery and pharmaceutical companies, have developed or are developing technologies for oral
delivery of drugs. We believe that our Eligen® Technology provides an important competitive
advantage in the oral route of administration because it does not alter the chemical composition of
the therapeutic macromolecules. We have conducted over 140,000 human dosings and have witnessed no
serious adverse events that can be attributed to the EMISPHERE® delivery agents dosed or the
mechanism of action of the Eligen® Technology.
In general, we believe that oral administration will be preferred to other methods of
administration. However, such preference may be offset by possible negative attributes of orally
administered drugs such as the quantity or frequency of the dosage, the physical size of the
capsule or tablet being swallowed or the taste. For example, in our previous Phase III trial with
heparin as an oral liquid formulation, patient compliance was hindered by patients distaste for
the liquid being administered. In addition, patients and the marketplace will more likely respond
favorably to improvements in absorption, efficacy, safety, or other attributes of therapeutic
molecules. It is possible that greater convenience alone may not lead to success.
Ongoing Collaborative Agreements
We are a party to certain collaborative agreements with corporate partners to provide development
and commercialization services relating to the products under collaboration. These agreements are
in the form of research and development collaborations and licensing agreements. Under these
agreements, we have granted licenses or the rights to obtain licenses to our oral drug delivery
technology. In return, we are entitled to receive certain payments upon the achievement of
milestones and royalties on the sales of the products should a product ultimately be
commercialized. We also are entitled to be reimbursed for certain research and development costs
that we incur.
31
All of our collaborative agreements are subject to termination by our corporate partners, without
significant financial penalty to them. Under the terms of these agreements, upon a termination we
are entitled to reacquire all rights in our technology at no cost and are free to re-license the
technology to other collaborative partners.
Novartis Pharma AG
On December 1, 2004, we issued a $10 million convertible note (the Novartis Note) to Novartis in
connection with a research collaboration option relating to the development of PTH-1-34. The
Novartis Note was originally due December 1, 2009. On November 27, 2009, Novartis agreed to extend
the maturity date of the Novartis Note to February 26, 2010. Subsequently, on February 23, 2010,
Novartis agreed to further extend the maturity date of the Novartis Note to May 26, 2010. 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: (i) 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 (the Research
Collaboration and Option Agreement), and the License Agreement, dated as of March 8, 2000, for the
development of an oral salmon calcitonin product for the treatment of osteoarthritis and
osteoporosis (the Oral Salmon Calcitonin License Agreement); (ii) 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 (iii) 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. 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.
Oral Salmon Calcitonin (sCT) Program for Osteoporosis and Osteoarthritis
Novartis most advanced program utilizing the Companys Eligen® Technology is testing an oral
formulation of calcitonin to treat osteoarthritis and osteoporosis. For osteoarthritis, Novartis
completed one Phase III trial and a second Phase III clinical study is continuing.
Novartis is also conducting a Phase III clinical study for osteoporosis. With these Phase III
studies, over 6,000 clinical study patients used the Eligen® Technology during 2010 and
approximately 5,500 continue to use it during 2011. Please refer to the earlier description of
Phase III Programs a under the subject heading Phase III Programs.
Osteoporosis
In December 1997, we entered into a collaboration agreement with Novartis to develop an oral form
of sCT, currently used to treat osteoporosis (the sCT Agreement). sCT is a hormone that inhibits
the bone-tissue resorbing activity of specialized bone cells called osteoclasts, enabling the bone
to retain more of its mass and functionality. sCT has demonstrated efficacy in increasing lumbar
spine bone mineral density and in reducing vertebral fractures. sCT is estimated to be about 30
times more potent than the human version. Synthetic sCT, which is identical to the naturally
occurring one, currently is available only as a nasal spray or injectable therapy. Novartis markets
synthetic sCT in the U.S. as MIACALCIN® nasal spray, which is indicated for the treatment of
post-menopausal osteoporosis in women greater than five years post menopause with low bone mass.
Treatment with sCT has been shown to increase bone mineral density in the spine and reduce the risk
of new vertebral fractures in post-menopausal women with osteoporosis. It is also used to treat
Pagets disease, a disease that results in, among other things, bone pain and breakdown. In its
nasal spray forms, it is believed that sCTs major advantages are its efficacy resulting from a
lack of serious side effects, excellent long-term safety profile and ease of administration. Some
studies even suggest that sCT produces an analgesic effect. Worldwide market sales for products to
treat osteoporosis are forecasted to reach $10.4 billion by 2011, from approximately $5.0 billion
in 2003.
Please refer to the earlier description of Novartis studies relating to osteoporosis under the
subject headings Phase III Programs and Phase I Programs for further information.
32
Under the sCT Agreement, Novartis has an option to an exclusive worldwide license to develop in
conjunction with us, make, have made, use and sell products developed under this program. Novartis
also had the right to exercise an option to commence a research collaboration with us on a second
compound under this agreement. Novartis rights to certain specified financial terms concerning a
license of a second compound have since expired. We have no payment obligations with respect to the
sCT Agreement; we are, however, obligated to collaborate with Novartis by providing access to our
technology that is relevant to this program. We are also obligated to help to manage this program
through a joint steering committee with Novartis.
According to the National Osteoporosis Foundation, 10 million people in the U.S. are estimated
to have the disease with 34 million more estimated to have low bone mass and are, therefore, at
risk. If successful, this product candidate for the treatment of osteoporosis would satisfy an
unmet market need, with oral salmon calcitonin expected to offer a safe, effective, and convenient
alternative to existing therapies.
Osteoarthritis
On a parallel track, Novartis is also pursuing an osteoarthritis indication for salmon calcitonin.
Approximately 21 million patients are managed for osteoarthritis in the U.S. alone, and that number
is expected to increase as the baby boomer generation continues to age. Osteoarthritis (OA) is a
clinical syndrome in which low-grade inflammation results in joint pain, caused by a wearing-away
of cartilage that cushions the joints and the destruction or decrease of synovial fluid that
lubricates those joints. As OA progresses, pain can result when the patient bears weight upon the
joints, including walking and standing. OA is the most common form of arthritis, and affects nearly
21 million people in the U.S., accounting for 25% of visits to primary care physicians, and half of
all non-steroidal anti-inflammatory drug prescriptions. It is estimated that 80% of the population
will have radiographic evidence of OA by age 65.
Novartis was engaged in two, simultaneous Phase III trials for salmon calcitonin in the treatment
of osteoarthritis. Please refer to the earlier description of Phase III Programs a under the
subject heading Phase III Programs.
Novartis has also conducted Phase I studies with oral salmon calcitonin. Please refer to the
earlier description of Phase I studies under the subject heading Phase I Programs.
Oral PTH-1-34 Program
On June 17, 2011, Novartis informed us of the results of its recently completed Proof of Concept
study for an oral PTH1-34 using Emispheres Eligen® Technology in post-menapausal women with
osteoporsis or osteopenia. Novartis informed us that, although the study confirmed that oral
PTH1-34 was both safe and well-tolerated, several clinical endpoints were not met. Based on the
data analyzed, Novartis has terminated the study and anticipates no further work on oral
formulation of PTH1-34.
33
Novo Nordisk A/S
Insulin Agreement
During December 2010, the Company entered into the Insulin Agreement to develop and commercialize
oral formulations of Novo Nordisks insulins using Emispheres Eligen® Technology (the Insulin
Agreement). This was the second license agreement between the two companies. The GLP-1 License
Agreement was signed in June 2008. The Insulin Agreement included $57.5 million in potential
product development and sales milestone payments to Emisphere, of which $5 million was paid upon
signing, as well as royalties on sales. This extended partnership with Novo Nordisk has the
potential to offer significant new solutions to millions of people with diabetes worldwide and it
also serves to further validate our Eligen® Technology.
GLP-1 Receptor Agonists Agreement
During June 2008, we entered into the GLP-1 License Agreement, pursuant to which Novo Nordisk will
develop and commercialize oral formulations of Novo Nordisk proprietary GLP-1 receptor agonists in
combination with Emisphere carriers. Under the GLP-1 License Agreement, Emisphere could receive
more than $87 million in contingent product development and sales milestone payments, including a
$10 million non-refundable license fee which was received in June 2008. Emisphere would also be
entitled to receive royalties in the event Novo Nordisk commercializes products developed under
such Agreement. Under the GLP-1 License Agreement, Novo Nordisk is responsible for the development
and commercialization of the products.
During January 2010, we announced that Novo Nordisk had initiated its first Phase I clinical trial
with a long-acting oral GLP-1 analog (NN9924). This milestone released a $2 million payment to
Emisphere, whose proprietary Eligen® Technology is used in the formulation of NN9924. GLP-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.
Oral Gallium Program
In March 2006, we announced that we had entered into an exclusive worldwide licensing agreement
with Genta, Incorporated (Genta) to develop an oral formulation of a gallium-containing compound.
Under the agreement, we will utilize our Eligen® Technology to supply a finished oral dosage form
to Genta. Genta will be responsible for toxicology, clinical development, regulatory submissions,
and worldwide commercialization. In addition to royalties on net sales of the product, Genta has
agreed to fund Emispheres development activities and to pay performance milestones related to the
filing and approval of regulatory applications. An Investigational New Drug application was filed
by Genta for gallium on July 31, 2007. Genta released final results from the Companys Phase I
clinical trial of G4544, a new tablet formulation of a proprietary small molecule intended as a
treatment for diseases associated with accelerated bone loss using delivery technology developed by
Emisphere Technologies, Inc. Results showed that the drug was very well-tolerated, and that blood
levels were achieved in a range that is known to be clinically bioactive. The data were featured in
a poster session at the annual meeting of the American Society of Clinical Oncology (ASCO) in
2008.
Revenue Recognized from Significant Collaborators during 2008 through March 31, 2011 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborator |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Novartis Pharma AG |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Novo Nordisk A/S |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
Genta |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Research and Development Costs
We have devoted substantially all of our efforts and resources to research and development
conducted on our own behalf (self-funded) and in collaborations with corporate partners
(partnered). Generally, research and development expenditures are allocated to specific research
projects. Due to various uncertainties and risks, including those described in Risk Factors
below, relating to the progress of our product candidates through development stages, clinical
trials, regulatory approval, commercialization and market acceptance, it is not possible to
accurately predict future spending or time to completion by project or project category.
34
The following table summarizes research and development spending to date by project category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
June 30, |
|
|
Year Ended December 31, |
|
|
Spending |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2011(1) |
|
|
|
(in thousands) |
|
|
|
|
|
Research(2) |
|
$ |
45 |
|
|
$ |
50 |
|
|
$ |
70 |
|
|
$ |
1,143 |
|
|
$ |
52,013 |
|
Feasibility projects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-funded |
|
|
282 |
|
|
|
1,642 |
|
|
|
1,287 |
|
|
|
1,688 |
|
|
|
12,967 |
|
Partnered |
|
|
22 |
|
|
|
34 |
|
|
|
38 |
|
|
|
425 |
|
|
|
4,280 |
|
Development projects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oral heparin (self-funded) |
|
|
117 |
|
|
|
37 |
|
|
|
148 |
|
|
|
392 |
|
|
|
99,591 |
|
Oral insulin (self-funded) |
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
53 |
|
|
|
21,288 |
|
Partnered |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
59 |
|
|
|
12,158 |
|
Other(3) |
|
|
625 |
|
|
|
732 |
|
|
|
2,498 |
|
|
|
9,025 |
|
|
|
105,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total all projects |
|
$ |
1,092 |
|
|
$ |
2,495 |
|
|
$ |
4,046 |
|
|
$ |
12,785 |
|
|
$ |
307,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cumulative spending from August 1, 1995 through June 30, 2011. |
|
|
(2) |
|
Research is classified as resources expended to expand the ability to create new carriers, to
ascertain the mechanisms of action of carriers, and to establish computer based modeling
capabilities, prototype formulations, animal models, and in vitro testing capabilities. |
|
(3) |
|
Other includes indirect costs such as rent, utilities, training, standard supplies and
management salaries and benefits. |
Patents and Other Forms of Intellectual Property
Our success depends, in part, on our ability to obtain patents, maintain trade secret protection,
and operate without infringing the proprietary rights of others (Please refer to Risk Factors for
further discussion of how business will suffer if we cannot adequately protect our patent and
proprietary rights). We seek patent protection on various aspects of our proprietary chemical and
pharmaceutical delivery technologies, including the delivery agent compounds and the structures
which encompass Emispheres delivery agents, their method of preparation, the combination of our
compounds with a pharmaceutical, and use of our compounds with therapeutic molecules to treat
various disease states. We have patents and patent applications in the U.S. and certain foreign
countries. As of July 7, 2011, Emisphere had been granted more than 110 U.S. patents and more than
200 foreign patents. Emisphere also has more than 50 pending U.S. patent applications as well as
more than 200 counterpart applications pending in foreign countries.
We intend to file additional patent applications when appropriate and to aggressively prosecute,
enforce, and defend our patents and other proprietary technology.
We have five trademarks granted by the U.S. Patent and Trademark office. They include EMISPHERE®,
Elaprin® (oral heparin), the Emisphere logo, Emigent® and Eligen®.
We also rely on trade secrets, know-how, and continuing innovation in an effort to develop and
maintain our competitive position. Patent law relating to the patentability and scope of claims in
the biotechnology and pharmaceutical fields is evolving and our patent rights are subject to this
additional uncertainty. Others may independently develop similar product candidates or technologies
or, if patents are issued to us, design around any products or processes covered by our patents. We
expect to continue, when appropriate, to file product and other patent applications with respect to
our inventions. However, we may not file any such applications or, if filed, the patents may not be
issued. Patents issued to or licensed by us may be infringed by the products or processes of
others.
Defense and enforcement of our intellectual property rights can be expensive and time consuming,
even if the outcome is favorable to us. It is possible that the patents issued to or licensed to us
will be successfully challenged, that a court may find that we are infringing validly issued
patents of third parties, or that we may have to alter or discontinue the development of our
products or pay licensing fees to take into account patent rights of third parties.
Manufacturing
The primary raw materials used in making the delivery agents for our product candidates are readily
available in large quantities from multiple sources. In the past we manufactured delivery agents
internally using our own facilities on a small scale for research purposes
35
and for early stage
clinical supplies. We believed that our manufacturing capabilities complied with the FDAs current
Good Manufacturing Practice (GMP). Beginning in 2004, we manufactured early stage clinical
supplies under GMP conditions for our oral insulin program and heparin multiple arm studies. The
FDA inspected our in-house facilities in 2003 and again in 2005. The 2003 inspection resulted in
only minor observations on Form 483 which were quickly resolved to FDAs satisfaction, while the
2005 inspection yielded no Form 483 observations.
Currently, EMISPHERE® delivery agents are manufactured by third parties in accordance with GMP
regulations. We have identified other commercial manufacturers meeting the FDAs GMP regulations
that have the capability of producing EMISPHERE® delivery agents and we do not rely on any
particular manufacturer to supply us with needed quantities.
During April 2009, we announced a strategic alliance with AAIPharma, Inc. intended to expand the
application of Emispheres Eligen® Technology and AAIPharmas drug development services. AAIPharma
is a global provider of pharmaceutical product development services that enhance the therapeutic
performance of its clients drugs. AAIPharma works with many pharmaceutical and biotech companies
and currently provides drug product formulation development services to Emisphere. This
relationship expands our access to new therapeutic candidates for the Eligen® Technology, which
potentially could lead to new products and to new alliance agreements as well. We are also pleased
that a global provider of pharmaceutical product development services with the stature of AAIPharma
has chosen to combine with Emisphere in a synergistic alliance that will benefit both
organizations. This strategic alliance supports AAIPharmas strategy to offer drug delivery options
to its pharmaceutical and biotech customers.
Competition
Our success depends in part upon maintaining a competitive position in the development of product
candidates and technologies in an evolving field in which developments are expected to continue at
a rapid pace. We compete with other drug delivery, biotechnology and pharmaceutical companies,
research organizations, individual scientists and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and testing, and with
entities developing new drugs that may be orally active. Our product candidates compete against
alternative therapies or alternative delivery systems for each of the medical conditions our
product candidates address, independent of the means of delivery. Many of our competitors have
substantially greater research and development capabilities, experience, marketing, financial and
managerial resources than we have. In many cases we rely on our development partners to develop and
market our product candidates.
Oral Osteoporosis Competition
Unigene Laboratories, Inc. (Unigene) has reported that it is developing an oral form of sCT,
which is in early stage clinical testing.
Novartis currently offers a nasal dosage form of sCT, MIACALCIN®. Other osteoporosis therapies
include estrogen replacement therapy, selective estrogen receptor modulators, bisphosphonates and
several new biologics that are under development.
Oral Osteoarthritis Competition
There has been no cure for osteoarthritis, as cartilage has not been induced to regenerate. Current
treatment is with NSAIDs, local injections of glucocorticoid or hyaluronan, and in severe cases,
with joint replacement surgery. Future potential treatments might include Autologous Chondrocyte
Implantation and cartilage regeneration.
If Novartis succeeds in developing its oral treatment for osteoarthritis, we believe it could face
competition from existing and potentially future products and treatment regimens under development.
Oral Diabetes Competition Type 2 Diabetes
In diabetes, there are a number of unmet needs which amplify the need for further product
development in the area. There are three main areas of drug therapy, oral anti-diabetes, insulin,
and injectable in which companies are attempting to develop innovative products for the treatment
of patients.
The need for new medicines due to unmet treatment needs recently resulted in two new products;
Amylins Byetta and Symlin. These products initially performed exceedingly well in the market
place. However, due to pancreatitis associated with Byetta, the trajectory for Amylins franchise
has leveled off as of the third quarter 2008.
36
There are four leading classes for new product development in the area of diabetes. All four seek
to take advantage of the potential to improve upon currently available products:
1. GLP-1 Agonists
2. Pulmonary Insulin
3. DPP-IV Inhibitors
4. PPAR modulators.
The objective of our collaboration with Novo Nordisk is to develop an orally available GLP-1
agonist for the treatment of Type 2 diabetes and potentially obesity. A product with the benefits
of glucose control, promotion of weight loss, low risk of hypoglycemia, and other benefits is
expected to significantly improve therapeutic options and can be expected to perform as well as or
better than the existing competition.
Oral Vitamin B12 Competition
Emispheres potential competition in the Vitamin B12 market will depend on the direction the
company takes in the development and commercialization of the product. In the event that Emisphere
pursues the nutritional supplements market, competition would include a number of companies selling
generic Vitamin B12 in a variety of dosage strengths and methods of delivery (e.g., oral,
transdermal, nasal, sublingual) many of which have substantial distribution and marketing
capabilities that exceed and will likely continue to exceed our own. In addition, our competition
is likely to include many sellers, distributors, and others who are in the business of marketing,
selling, and promoting multiple vitamins, vitamin-mineral, and specialized vitamin combinations.
Many of these competitors are engaged in low cost, high volume operations that could provide
substantial market barriers or other obstacles for a higher cost, potentially superior product that
has no prior market history.
If Emisphere pursues the Vitamin B12 medical food market, the Company would need to successfully
demonstrate to physicians, nurse-practitioners and payors that an oral dose would be safe,
efficacious, readily accessible and improve compliance. These factors will likely require the
Company to engage in a substantial educational and promotional product launch and a marketing
outreach initiative, the time, cost, and outcome of which are uncertain.
Competition Summary
Although we believe that our oral formulations, if successful, will likely compete with well
established injectable versions of the same drugs, we believe that we will enjoy a competitive
advantage because physicians and patients prefer orally delivered forms of products over injectable
forms. Oral forms of products enable improved compliance, and for many programs, the oral form of
products enable improved therapeutic regimens.
Government Regulation
Our operations and product candidates under development are subject to extensive regulation by the
FDA, other governmental authorities in the U.S. and governmental authorities in other countries.
The duration of the governmental approval process for marketing new pharmaceutical substances, from
the commencement of pre-clinical testing to receipt of governmental approval for marketing a new
product, varies with the nature of the product and with the country in which such approval is
sought. The approval process for new chemical entities could take eight to ten years or more. The
process for reformulations of existing drugs is typically shorter, although a combination of an
existing drug with a currently unapproved carrier could require extensive testing. In either case,
the procedures required to obtain governmental approval to market new drug products will be costly
and time-consuming to us, requiring rigorous testing of the new drug product. Even after such time
and effort, regulatory approval may not be obtained for our products.
The steps required before we can market or ship a new human pharmaceutical product commercially in
the U.S. include pre-clinical testing, the filing of an Investigational New Drug Application
(IND), the conduct of clinical trials and the filing with the FDA of either a New Drug
Application (NDA) for drugs or a Biologic License Application (BLA) for biologics.
37
In order to conduct the clinical investigations necessary to obtain regulatory approval of
marketing of new drugs in the U.S., we must file an IND with the FDA to permit the shipment and use
of the drug for investigational purposes. The IND sets forth, in part, the results of pre-clinical
(laboratory and animal) toxicology testing and the applicants initial Phase I plans for clinical
(human) testing. Unless notified that testing may not begin, the clinical testing may commence 30
days after filing an IND.
Under FDA regulations, the clinical testing program required for marketing approval of a new drug
typically involves three clinical phases. In Phase I, safety studies are generally conducted on
normal, healthy human volunteers to determine the maximum dosages and side effects associated with
increasing doses of the substance being tested. Phase II studies are conducted on small groups of
patients afflicted with a specific disease to gain preliminary evidence of efficacy, including the
range of effective doses, and to determine common short-term side effects and risks associated with
the substance being tested. Phase III involves large-scale trials conducted on disease-afflicted
patients to provide statistically significant evidence of efficacy and safety and to provide an
adequate basis for product labeling. Frequent reports are required in each phase and if unwarranted
hazards to patients are found, the FDA may request modification or discontinuance of clinical
testing until further studies have been conducted. Phase IV testing is sometimes conducted, either
to meet FDA requirements for additional information as a condition of approval. Our drug product
candidates are and will be subjected to each step of this lengthy process from conception to market
and many of those candidates are still in the early phases of testing.
Once clinical testing has been completed pursuant to an IND, the applicant files an NDA or BLA with
the FDA seeking approval for marketing the drug product. The FDA reviews the NDA or BLA to
determine whether the drug is safe and effective, and adequately labeled, and whether the applicant
can demonstrate proper and consistent manufacture of the drug. The time required for initial FDA
action on an NDA or BLA is set on the basis of user fee goals; for most NDA or BLAs the action date
is 10 months from receipt of the NDA or BLA at the FDA. The initial FDA action at the end of the
review period may be approval or a request for additional information that will be needed for
approval depending on the characteristics of the drug and whether the FDA has concerns with the
evidence submitted. Once our product candidates reach this stage, we will be subjected to these
additional costs of time and money.
The FDA has different regulations and processes governing and regulating food products, including
vitamin supplements and nutraceuticals. These products are variously referred to as dietary
supplements, food additives, dietary ingredients, medical foods, and, most broadly, food.
These foods products do not require the IND, NDA or BLA process outlined above.
The facilities of each company involved in the commercial manufacturing, processing, testing,
control and labeling of pharmaceutical products must be registered with and approved by the FDA.
Continued registration requires compliance with GMP regulations and the FDA conducts periodic
establishment inspections to confirm continued compliance with its regulations. We are subject to
various federal, state and local laws, regulations and recommendations relating to such matters as
laboratory and manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with our research and development work.
While we do not currently manufacture any commercial products ourselves, if we did, we would bear
additional cost of FDA compliance.
Employees
As of
September 30, 2011, we had 12 employees, 7 of whom are engaged in scientific research and technical
functions and 5 of whom are performing accounting, information technology, engineering, facilities
maintenance, legal and regulatory and administrative functions. Of
the 7 scientific employees, 3
hold Ph.D. and/or D.V.M. degrees. We believe our relations with our employees are good.
Available Information
Emisphere files annual, quarterly, and current reports, proxy statements, and other documents with
the Securities and Exchange Commission, (the SEC) under the Securities Exchange Act of 1934 (the
Exchange Act). The public may read and copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains an internet website that contains reports, proxy and information
statements, and other information regarding issuers,
including Emisphere, that file electronically with the SEC. The public can obtain any documents
that Emisphere files with the SEC at www.sec.gov.
38
We also make available free of charge on or through our internet website (www.emisphere.com) our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16
filings, and, if applicable, amendments to those reports filed or furnished pursuant to Section
13(a) or Section 16 of the Exchange Act as soon as reasonably practicable after we or the reporting
person electronically files such material with, or furnishes it to, the SEC. Our internet website
and the information contained therein or connected thereto are not intended to be incorporated into this prospectus.
Our Board of Directors has adopted a Code of Business Conduct and Ethics which is posted on our
website at http://ir.emisphere.com/documentdisplay.cfm?DocumentID=4947.
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 plus interest and
fees as full and final payment for all claims, defenses, counterclaims, 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. On September 23, 2010, the Company paid
approximately $2.6 million as the full and final settlement of this matter.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
provided to supplement the accompanying financial statements and notes incorporated herein to help provide an
understanding of our financial condition, changes in our financial condition and results of
operations. To supplement its audited financial statements presented in accordance with US GAAP,
the company is providing a comparison of operating results describing net income and operating
expenses which removed certain non-cash and one-time or nonrecurring charges and receipts. The
Company believes that this presentation of net income and operating expense provides useful
information to both management and investors concerning the approximate impact of the items above.
The Company also believes that considering the effect of these items allows management and
investors to better compare the Companys financial performance from period to period and to better
compare the Companys financial performance with that of its competitors. The presentation of this
additional information is not meant to be considered in isolation of, or as a substitute for,
results prepared in accordance with US GAAP.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The following discussion and analysis contain forward-looking statements that involve risks and
uncertainties. When used in this report, the words, intend, anticipate, believe, estimate,
plan, expect and similar expressions as they relate to us are included to identify
forward-looking statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of factors, including those set forth under Item 1A.
Risk Factors (above) and elsewhere in this report. This discussion and analysis should be read in
conjunction with the Selected Financial Data and the Financial Statements and notes thereto
included in this report.
Overview
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 decreasing time to onset of action. The Eligen® Technology can be applied to the oral route
of
39
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 activity. 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. Our corporate strategy is focused on commercializing the
Eligen® Technology as quickly as possible, building high-value partnerships and developing our
product pipeline. We develop potential product candidates in-house as is evident in the development
of our higher dose Eligen® B12 (1000 mcg) product, and we enhance the value of the Eligen®
Technology through our development partners, including Novartis, Novo Nordisk and others. Further
development, exploration and commercialization of the technology entail risk and operational
expenses. However, we continue to focus our efforts on strategic development initiatives as well as
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 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.
We are planning 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, medical food and nutritional supplements product
candidates that are being developed in partnership or internally. During 2010 our development
partners Novartis and Novo Nordisk continued or expanded their development programs and we
continued to make progress on our internally developed Eligen® B12 product.
Novartis, is using our Eligen® drug delivery technology in combination with salmon calcitonin. Their most advanced program utilizing the Companys Eligen® Technology is
testing an oral formulation of calcitonin to treat osteoarthritis and osteoporosis. For
osteoarthritis, Novartis completed one Phase III trial and a second Phase III clinical study is
continuing. Novartis is also conducting a Phase III clinical study for osteoporosis. In its Media
Release for the first quarter of 2011, Novartis reported that its planned submission for oral
calcitonin for the treatment of osteoporosis is scheduled to be filed with the regulatory
authorities during 2011.
Novo Nordisk is using our Eligen® drug delivery technology in combination with its proprietary
GLP-1 receptor agonists and insulins. During December 2010, the Company entered into an exclusive
Development and License Agreement with Novo Nordisk to develop and commercialize oral formulations
of Novo Nordisks insulins using Emispheres Eligen® Technology (the Insulin Agreement). This was
the second license agreement between the two companies. The first agreement, for the development of
oral formulations of GLP-1 receptor agonists, was signed in June 2008, with a potential drug
currently in a Phase I clinical trial. The Insulin Agreement included $57.5 million in potential
product development and sales milestone payments to Emisphere, of which $5 million was paid upon
signing, as well as royalties on sales. This extended partnership with Novo Nordisk has the
potential to offer significant new solutions to millions of people with diabetes worldwide and it
also serves to further validate our Eligen® Technology.
The Company is developing an oral formulation of Eligen® B12 (1000 mcg) for use by B12 deficient
individuals. During the fourth quarter 2010, the Company completed a clinical trial which
demonstrated that both oral Eligen® B12 (1000 mcg) and injectable B12 (current standard of care)
can efficiently and quickly restore normal Vitamin B12 levels in deficient individuals The
manuscript
summarizing the results from that clinical trial has been accepted for publication in the journal
Clinical Therapeutics. We also conducted market research to help assess the potential commercial
opportunity for our potential Eligen® B12 (1000 mcg) product. On August 5, 2011 we received notice from the Patent Office that the U.S. patent application directed to the oral Eligen® B12 formulation was allowed. This new patent provides intellectual property protection for Eligen® B12 through
approximately 2028. Currently, we are evaluating the results of our clinical trials and market research and exploring
alternative development and commercialization options with the purpose of maximizing the commercial and health
benefits potential of our Eligen® B12 asset.
40
Currently, we are evaluating the
results of our clinical trials and market research and exploring alternative development and
commercialization options with the purpose of maximizing the commercial and health benefits
potential of our Eligen® B12 asset.
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 this product evaluation of preclinical studies is ongoing.
By expanding our relationship with Novo Nordisk; and by settling the Novartis Note on non-dilutive
terms (see Note 8 to the Financial Statements contained in this prospectus) the Company strengthened
its Balance Sheet and demonstrated and enhanced the value of the Eligen® Technology. 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. 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.
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, 2011, our accumulated deficit was approximately $468.1 million and our stockholders
deficit was approximately $69.0 million. Our operating loss was $2.2 million for the three months
ended June 30, 2011 compared to an operating loss of $3.1 million for the three months ended June 30, 2010. Our operating loss for the six months ended June 30, 2011 was $4.3 million compared to $6.1 million for the six months ended June 30, 2010.
On June 30, 2011, we entered into a securities purchase agreement with the selling security holders
hereunder to sell an aggregate of 4,300,438 shares of our common stock and warrants to purchase a
total of 3,010,306 shares of our common stock to the selling security holders for gross proceeds,
before deducting fees and expenses and excluding the proceeds, if any, from the exercise of the
warrants of $3,749,981.94 (the 2011 Private Placement). The 2011 Private Placement closed on
July 6, 2011.
In connection with the 2011 Private Placement, we entered into a securities purchase agreement on
the same date with MHR Fund Management LLC to sell an aggregate of 4,300,438 shares of our common
stock and warrants to purchase a total of 3,010,306 shares of our common stockfor gross proceeds,
before deducting fees and expenses and excluding the proceeds, if any, from the exercise of the
warrants of $3,749,981.94 (the 2011 MHR Private Placement). Simultaneous with closing the 2011
Private Placement, we closed the 2011 MHR Private Placement with MHR and certain of its affiliated
investment funds.
In connection with the 2011 Private Placement and the 2011 MHR Private Placement, we entered into a
waiver agreement with MHR, pursuant to which MHR waived certain anti-dilution adjustment rights
under its senior secured notes and certain warrants that would otherwise have been triggered by the
2011 Private Placement. As consideration for such waiver, we issued to MHR warrants to purchase
795,000 shares of our common stock and agreed to reimburse MHR for up to $25,000 of its legal fees.
In both the Private Placement and the MHR Private Placement (together, the July 2011 Financing),
each unit, consisting of one share of common stock and a warrant to purchase 0.7 shares of common
stock, were sold at a purchase price of $0.872. All of the warrants issued in the July 2011
Financing are exercisable at an exercise price of $1.09 per share and will expire on July 6, 2016.
We have limited capital resources and operations to date have been funded with the proceeds from
collaborative research agreements, public and private equity and debt financings and income earned
on investments. 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 capital resources will
enable us to continue operations through approximately April 2012or earlier if unforeseen events or
circumstances arise that negatively affect our liquidity. Further, we have significant future
commitments and obligations. While our plan is to raise capital when needed and/or to pursue
partnering
opportunities, we cannot be sure that our plans will be successful. These conditions raise
substantial doubt about our ability to continue as a going concern. Consequently, the audit reports
prepared by our independent registered public accounting firms relating
41
to our financial statements
for the years ended December 31, 2010, 2009 and 2008 include an explanatory paragraph expressing
the substantial doubt about our ability to continue as a going concern. We are pursuing new as well
as enhanced collaborations and exploring other financing options, with the objective of minimizing
dilution and disruption. If we fail to raise additional capital or obtain substantial cash inflows
from existing partners prior to early April 2012 we could be forced to cease operations.
If we are successful in raising additional capital to continue operations, our business will still
require substantial additional investment that we have not yet secured. Further, we will not have
sufficient resources to fully develop 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 you that financing will be available on favorable terms or at all. For further
discussion, see Risk Factors
During the six months ended June 30, 2011, our cash liquidity (consisting of $1.3 million cash at
June 30, 2011) decreased as follows:
Cash and Cash Equivalents:
|
|
|
|
|
|
|
(In thousands) |
|
At December 31, 2010 |
|
$ |
5,326 |
|
At June 30, 2011 |
|
|
1,343 |
|
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
3,983 |
|
|
|
|
|
The decrease in cash and cash equivalents is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Proceeds, net, from issuance of equity securities |
|
$ |
200 |
|
|
$ |
6,700 |
|
Proceeds from notes payable |
|
|
|
|
|
|
500 |
|
Proceeds from collaboration, sale of patent, real estate sublease and other projects |
|
|
|
|
|
|
8,100 |
|
|
|
|
|
|
|
|
Sources of cash and cash equivalents |
|
|
200 |
|
|
|
15,300 |
|
|
|
|
|
|
|
|
Cash used in operations |
|
|
4,200 |
|
|
|
13,000 |
|
Repayment of debts |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
Uses of cash and cash equivalents |
|
|
4,200 |
|
|
|
13,500 |
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
$ |
(4,000 |
) |
|
$ |
1,800 |
|
During the quarter ended June 30, 2011, our working capital deficiency decreased by $11.6 million
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
Current assets |
|
$ |
2,200 |
|
|
$ |
6,100 |
|
|
$ |
(3,900 |
) |
Current liabilities |
|
|
11,200 |
|
|
|
26,700 |
|
|
|
15,500 |
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficiency) |
|
$ |
(9,000 |
) |
|
$ |
(20,600 |
) |
|
$ |
11,600 |
|
|
|
|
|
|
|
|
|
|
|
The
decrease in current assets is driven primarily by use of cash to pay operational costs. The
decrease in current liabilities is driven primarily by an decrease in the derivative instrument
liability as a result of the decrease in the price of our common stock.
Primary Sources of Cash
During 2010, we received net proceeds of $6.7 million through the issuance of common stock and
associated derivative instruments from the August 2010 Financing. We also received $5.0 million as
an upfront payment from Novo Nordisk in connection with the development and license agreement to
develop and commercialize oral formulations of Novo Nordisks insulins using the Companys
proprietary delivery agents (the Insulin Agreement), and we received a $2.0 million milestone
payment from Novo Nordisk for their initiation of a Phase I clinical trial in connection with the
2008 development and license agreement with Novo Nordisk to develop an oral formulation of GLP-1
receptor agonists (the GLP-1 License Agreement). Also during 2010, we received a $0.5 million
installment payment for sale of certain Emisphere patents and patent application relating to
diketopiparazine technology to MannKind Corporation and $0.5 million from MHR from the issuance of
a note payable.
During 2009, we received net proceeds of $7.3 million through the issuance of common stock and
associated derivative instruments from the August 2009 registered direct and private placement
offerings. We also received $1.0 million net proceeds from the sale of
42
our equipment utilized in
the former laboratory facility located at 765 Old Saw Mill River Road, Tarrytown, NY. Also during
2009, we received a $0.5 million installment payment for sale of certain Emisphere patents and a
patent application relating to diketopiparazine technology to MannKind Corporation.
During 2008, we received a $10.0 million upfront payment and reimbursement of $1.3 million in costs
from Novo Nordisk in connection with GLP-1 License Agreement. Also during 2008, we received an
initial $1.5 million payment for sale of certain Emisphere patents and a patent application
relating to diketopiparazine technology to MannKind Corporation and $800 thousand in sublease and
related payments in connection with sublease agreements for space at our laboratory and office
facilities located at Tarrytown, NY.
Restatement of Previously Issued Financial Statements
While preparing its financial statements for the 12 months ended December 31, 2010, the Company
reviewed its accounting for certain non-cash transactions and determined that its adoption of
Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5, Evaluating Whether
an Instrument Is Considered Indexed to an Entitys Own Stock (FASB ASC 815-40-15-5) effective
January 1, 2009, was not properly accounted for in accordance with FASB ASC 835-30-35-2 The
Interest Method (FASB ASC 835-30-35-2). Furthermore, as a consequence of changing its accounting
for the adoption of FASB ASC 815-40-15-5, the Company reevaluated its accounting for the
modification of the MHR Convertible Notes in connection with the Novartis Agreement and the MHR
Letter Agreement during June 2010 and determined that, in light of the changes in accounting for
adoption of FASB ASC 815-40-15-5, the modification of the MHR Convertible Notes should have been
accounted for as extinguishment of debt in accordance with FASB ASC 470-50, Modifications and
Extinguishments.
The Company evaluated the effect of these changes on its financial statements and determined that
the changes were material. Consequently, the Company decided to restate its financial statements
previously reported on Forms 10-Q for the periods ended March 31, June 30, and September 30, 2009
and 2010, and on Form 10-K for the period ended December 2009. The restatements, which were
included in the Companys Form 10-K for the year ended December 31, 2010, primarily reflect
adjustments to:
|
|
|
correct for the overstatement of interest expense reported on Forms 10-Q for the periods
ended March 31, June 30, and September 30, 2009 and March 31, and September 30, 2010, and on
Form 10-K for the period ended December 2009, in connection with the adoption of FASB ASC
815-40-15-5 |
|
|
|
|
correct for the overstatement of interest expense and understatement of loss on
extinguishment of debt reported on Form 10-Q for the period ended June 30, 2010 in
connection with the reevaluation of the modification of the MHR Convertible Notes during
June 2010 |
None of the accounting changes discussed above had any impact on the Companys cash position, its
cash flows or its future cash requirements.
Results of Operations
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
|
|
|
$ |
39 |
|
|
$ |
(39 |
) |
Operating expenses |
|
$ |
2,226 |
|
|
$ |
3,156 |
|
|
$ |
(930 |
) |
Operating loss |
|
$ |
(2,226 |
) |
|
$ |
(3,117 |
) |
|
$ |
(891 |
) |
Other income (expense) |
|
$ |
4,068 |
|
|
$ |
(28,456 |
) |
|
$ |
32,524 |
|
Net income (loss) |
|
$ |
1,842 |
|
|
$ |
(31,573 |
) |
|
$ |
33,415 |
|
Revenue decreased $0.04 million for the three months ended June 30, 2011 compared to the same
period last year due to termination of commercial sales of low dose Eligen(R) B12.
Operating expenses decreased $0.93 million or 29% for the three months ended June 30, 2011 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 |
|
$ |
(450 |
) |
Decrease in professional fees |
|
|
(100 |
) |
Decrease in occupancy costs |
|
|
(1 |
) |
Decrease in clinical costs |
|
|
(122 |
) |
Decrease in depreciation and amortization |
|
|
(5 |
) |
Decrease in other costs |
|
|
(252 |
) |
|
|
|
|
|
|
$ |
(930 |
) |
|
|
|
|
Human resource costs decreased $450 thousand, or 39%, due primarily to a $366 thousand decrease
from a reduction in personnel in 2011 and an $84 thousand reduction in non-cash compensation.
Professional fees decreased $100 thousand, or 8%, due primarily to a $243 thousand reduction in
legal fees offset by a $144 thousand net increase in other professional fees due primarily to a
$201 thousand executive search fee partially offset by a $59 thousand reduction in corporate
governance, accounting and other consulting fees.
Clinical costs decreased $122 thousand, or 48%, due primarily to a decrease in clinical trial costs
related to a B-12 trial completed in 2010 and outside lab fees.
Other costs decreased $252 thousand, or 62%, due primarily to the $220 thousand charge to settle
outstanding lawsuits in 2010 and a $32 thousand reduction in telecommunication and travel costs.
43
Our principal operating costs include the following items as a percentage of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Human resource costs, including benefits |
|
|
31 |
% |
|
|
36 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
49 |
% |
|
|
38 |
% |
Occupancy for our laboratory and operating space |
|
|
4 |
% |
|
|
3 |
% |
Clinical costs |
|
|
6 |
% |
|
|
8 |
% |
Depreciation and amortization |
|
|
3 |
% |
|
|
2 |
% |
Other |
|
|
7 |
% |
|
|
13 |
% |
Other income for the three months ended June 30, 2011 increased $32.5 million, due primarily to a
$17.0 million one-time charge for loss on extinguishment of debt during 2010; a $14.0 million gain
from the change in fair value of derivative instruments arising from the decrease in the price of
the Companys stock; financing fees of $1.9 million in connection with the settlement of the
Novartis note in June 2010 offset by a $0.3 million net increase in interest expense and other
income.
As a result of the above factors, we had a net income of $1.8 million for the three months ended
June 30, 2011, compared to a net loss of $31.6 million for the three months ended June 30, 2010.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
|
|
|
$ |
51 |
|
|
$ |
51 |
|
Operating expenses |
|
$ |
4,275 |
|
|
$ |
6,176 |
|
|
$ |
(1,901 |
) |
Operating loss |
|
$ |
(4,275 |
) |
|
$ |
(6,125 |
) |
|
$ |
(1,850 |
) |
Other income (expense) |
|
$ |
17,116 |
|
|
$ |
(42,707 |
) |
|
$ |
(59,823 |
) |
Net income (loss) |
|
$ |
12,841 |
|
|
$ |
(48,832 |
) |
|
$ |
(61,673 |
) |
Revenue decreased $0.05 million for the six months ended June 30, 2011 compared to the same period
last year due to termination of commercial sales of low dose Eligen(R) B12.
Operating expenses decreased $1.9 million or 31% for the six months ended June 30, 2011 in
comparison to the same period last year. Details of these changes are highlighted in the table
below:
|
|
|
|
|
|
|
(in thousands) |
|
Decrease in human resources costs |
|
$ |
(1,143 |
) |
Decrease in professional fees |
|
|
(235 |
) |
Increase in occupancy costs |
|
|
5 |
|
Decrease in clinical costs |
|
|
(175 |
) |
Decrease in depreciation and amortization |
|
|
(10 |
) |
Decrease in other costs |
|
|
(343 |
) |
|
|
|
|
|
|
$ |
(1,901 |
) |
|
|
|
|
Human resource costs decreased $1,143 thousand, or 42%, due primarily to a $737 thousand decrease
from a reduction in personnel in 2011, including a $638 thousand reduction from the CEO vacancy,
and a $406 thousand reduction in non-cash compensation.
Professional fees decreased $235 thousand, or 11%, due primarily to a $393 thousand decrease in
legal fees offset by a $158 thousand net increase in other professional fees due primarily to a
$201 thousand executive search fee and a $73 thousand increase in accounting fees in connection
with the restatement of prior period financial statements in the Companys Annual Report for 2010,
partially offset by a $110 thousand reduction in corporate governance and other consulting fees.
Occupancy costs increased $5 thousand, or 3%, due to higher common area maintenance costs in the
first quarter 2011.
Clinical costs decreased $175 thousand, or 47%, due primarily to a $107 thousand decrease in
clinical trial costs related to the B 12 trial completed in 2010 and a $68 thousand decrease in
outside lab fees.
Depreciation and amortization costs decreased $10 thousand, or 7%, due to certain assets being
fully depreciated during 2010.
Other costs decreased $343 thousand, or 53%, due primarily to a $220 thousand charge to settle
outstanding lawsuits in 2010; additional restructuring costs of $50 thousand for revision of lease
termination agreement with BMR in 2010; a $73 thousand reduction in telecommunication, travel ,
insurance, and other office expenses.
Our principal operating costs include the following items as a percentage of total operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Human resource costs, including benefits |
|
|
37 |
% |
|
|
44 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
44 |
% |
|
|
34 |
% |
Occupancy for our laboratory and operating space |
|
|
4 |
% |
|
|
3 |
% |
Clinical costs |
|
|
5 |
% |
|
|
6 |
% |
Depreciation and amortization |
|
|
3 |
% |
|
|
3 |
% |
Other |
|
|
7 |
% |
|
|
10 |
% |
Other income increased $59.8 million, due primarily to the $17.0 million one-time charges for loss
on extinguishment of debt; a $42.3 million gain from the change in fair value of derivative
instruments arising from the in the price of the Companys stock ; financing fees of $1.9 million
in connection with the settlement of the Novartis note in June 2010; offset by a $1.3 million net
increase in interest expense and other income.
44
As a result of the above factors, we had a net income of $12.8 million for the six months ended
June 30, 2011, compared to a net loss of $48.8 million for the six months ended June 30, 2010.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 (Restated) |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
Revenue |
|
$ |
100 |
|
|
$ |
92 |
|
|
$ |
8 |
|
Operating expenses |
|
$ |
11,643 |
|
|
$ |
14,644 |
|
|
$ |
(3,001 |
) |
Operating loss |
|
$ |
(11,543 |
) |
|
$ |
(14,552 |
) |
|
$ |
3,009 |
|
Change in fair value of derivative instruments |
|
$ |
(23,651 |
) |
|
$ |
(2,473 |
) |
|
$ |
(21,178 |
) |
Interest expense |
|
$ |
(3,595 |
) |
|
$ |
(659 |
) |
|
$ |
(2,936 |
) |
Loss on extinguishment of debt |
|
$ |
(17,014 |
) |
|
$ |
|
|
|
$ |
(17,014 |
) |
Financing fees |
|
$ |
(1,858 |
) |
|
$ |
|
|
|
$ |
(1,858 |
) |
Other non-operating income (expenses) |
|
$ |
753 |
|
|
$ |
863 |
|
|
$ |
(110 |
) |
Net loss |
|
$ |
(56,909 |
) |
|
$ |
(16,821 |
) |
|
$ |
(40,088 |
) |
Revenue increased $8 thousand for the year ended December 31, 2010 compared to December 31, 2009
due primarily to the recognition of $28 thousand deferred revenue from development partners from
prior years and the receipt of $72 thousand from the sale of Eligen® B12 (100 mcg), compared to the
receipt of $92 thousand from the sale of Eligen® B12 (100 mcg) during 2009.
Our principal operating costs include the following items as a percentage of total expense.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
Human resource costs, including benefits |
|
|
36 |
% |
|
|
35 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
38 |
% |
|
|
35 |
% |
Occupancy for our laboratory and operating space |
|
|
3 |
% |
|
|
8 |
% |
Clinical costs |
|
|
7 |
% |
|
|
8 |
% |
Depreciation and amortization |
|
|
3 |
% |
|
|
3 |
% |
Other |
|
|
13 |
% |
|
|
11 |
% |
Operating expenses, decreased by $3.0 million (20%) as a result of the following items:
|
|
|
|
|
|
|
(In thousands) |
|
Decrease in human resource costs |
|
$ |
(900 |
) |
Decrease in clinical costs and lab fees |
|
|
(800 |
) |
Decrease in professional and consulting fees |
|
|
(800 |
) |
Decrease in occupancy costs |
|
|
(800 |
) |
Reduction in depreciation and amortization |
|
|
(100 |
) |
All other |
|
|
400 |
|
|
|
|
|
Net decrease |
|
$ |
(3,000 |
) |
|
|
|
|
Human resource costs decreased approximately $0.9 million primarily due to a $0.8 million reduction
in non-cash compensation resulting from an increase in the estimated forfeiture rate of stock
options and a $0.1 million reduction commensurate with a reduction in personnel during 2010.
Clinical costs and lab fees decreased approximately $0.8 million primarily due to a decrease of
$0.5 million in costs incurred for our studies and clinical testing costs, a decrease of $0.2
million in costs to close of our laboratory facilities in Tarrytown during 2009, and a $0.06
million decrease in material production costs.
Professional and consulting fees decreased approximately $0.8 million primarily due to a decrease
of approximately $0.5 million in legal fees, a $0.2 million reduction in fees relating to investor
relations, and a $0.1 million reduction in accounting fees.
Occupancy costs decreased $0.8 million primarily due to the closure of our laboratory facilities in
Tarrytown, NY during 2009.
45
Depreciation and amortization expense decreased $0.1 million primarily due to the write-off of
leasehold improvements, laboratory equipment, abandoned furniture, fixtures and computer hardware
in connection with the closure of the Tarrytown, NY facility during 2009.
All other operating costs increased $0.4 million primarily due to a $0.5 million fee to terminate
our Distributor Agreement for the marketing, distribution and sale of oral Eligen® B12 (100mcg)
with Quality Vitamins and Supplements, Inc. during the third quarter 2010, a $0.7 million gain on
the sale of fixed assets during 2009, and a $0.4 million increase in restructuring costs related to
a credit in 2009, offset by a $0.4 million decrease in insurance, travel related, software
licensing, maintenance, and other operating expenses during 2010, and by the incremental accrual of
$0.8 million expense in connection with the final ruling of the arbitrator awarding legal fees to
Dr. Goldberg recorded in 2009.
As a result of the factors above, Emispheres operating expenses were $11.6 million for the year
ended December 31, 2010, which represents a decrease of $3.0 million or 21% compared to operating
expenses for the year ended December 31, 2009.
Other non-operating expense increased by approximately $43.1 million for the year ended December
31, 2010 in comparison to the same period last year due primarily to a $21.2 million increase in
the change in the value of derivative instruments, a $21.8 million increase in interest expense due
primarily to the extinguishment of debt of $17.0 million and financing fees of $1.9 million
associated with warrants and promissory notes issued to MHR in connection with the Novartis
Agreement and the letter agreement entered into with MHR in connection therewith (the MHR Letter
Agreement). Expense from the change in the fair value of derivative instruments for 2010 and 2009
is the result of an increase in stock price from $1.06 on December 31, 2009 to $2.41 on December
31, 2010 and from the increase in stock price from $0.79 on December 31, 2008 to $1.06 on December
31, 2009, the addition of 5,246,292 warrants in connection with the August 2010 Financing, 865,000
warrants to MHR for consent of the Novartis Agreement and 975,000 warrants to MHR for consent to
the August 2010 offering. The change in value of derivative instruments and increases in value of
the underlying shares of the Companys common stock increases the liability which is recognized as
a corresponding loss in the Companys operating statement, while decreases in the value of the
Companys common stock decrease the value of the liability with a corresponding gain recognized in
the Companys operating statement. Future gains and losses recognized in the Companys operating
results from changes in value of the derivative instrument liability are based in part on the fair
value of the Companys common stock which is outside the control of the Company. These potential
future gains and losses could be material.
As a result of the above factors, we reported a net loss of $56.9 million, which was $40.1 million
(238%) greater than the net loss of $16.8 million for the year ended December 31, 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
Revenue |
|
$ |
92 |
|
|
$ |
251 |
|
|
$ |
(159 |
) |
Operating expenses (including a $3.8 million
restructuring charge in 2008 and a $0.4
million reduction to the restructuring
liability in 2009 relating to the closure of
the facility in Tarrytown, NY) |
|
$ |
14,644 |
|
|
$ |
26,571 |
|
|
$ |
11,927 |
|
Operating loss |
|
$ |
(14,552 |
) |
|
$ |
(26,320 |
) |
|
$ |
11,768 |
|
Change in fair value of derivative instruments |
|
$ |
(2,473 |
) |
|
$ |
2,220 |
|
|
$ |
(4,693 |
) |
Interest Expense |
|
$ |
(659 |
) |
|
$ |
(2,956 |
) |
|
$ |
2,297 |
|
Other non-operating income (expenses) |
|
$ |
863 |
|
|
$ |
2,668 |
|
|
$ |
(1,805 |
) |
Net loss |
|
$ |
(16,821 |
) |
|
$ |
(24,388 |
) |
|
$ |
7,567 |
|
Revenue decreased $0.2 million for the year ended December 31, 2009 compared to December 31, 2008,
due to decreased receipts from development partners, the deferral of cost reimbursements received
from Novo Nordisk in connection with the development of an oral formulation of GLP-1 receptor
agonists in accordance with the Companys revenue recognition policy; offset by the receipt of $92
thousand B12 operating revenue during 2009. Revenue reported in 2009 relates to the sales of low
dose Eligen® B12 to Life Extension Foundation.
46
Our principal operating costs include the following items as a percentage of total expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Human resource costs, including benefits |
|
|
35 |
% |
|
|
42 |
% |
Professional fees for legal, intellectual property, accounting and consulting |
|
|
35 |
% |
|
|
22 |
% |
Occupancy for our laboratory and operating space |
|
|
8 |
% |
|
|
19 |
% |
Clinical costs |
|
|
8 |
% |
|
|
5 |
% |
Depreciation and amortization |
|
|
3 |
% |
|
|
4 |
% |
Other |
|
|
11 |
% |
|
|
8 |
% |
Operating expenses, decreased by $11.9 million (45%) as a result of the following items:
|
|
|
|
|
|
|
(In thousands) |
|
Decrease in human resource costs |
|
$ |
(4,400 |
) |
Increase in clinical costs and lab fees |
|
|
400 |
|
Increase in professional and consulting fees |
|
|
200 |
|
Decrease in occupancy costs |
|
|
(3,300 |
) |
Reduction in depreciation and amortization |
|
|
(500 |
) |
All other |
|
|
(4,300 |
) |
|
|
|
|
Net decrease |
|
$ |
(11,900 |
) |
|
|
|
|
Human resource costs decreased approximately $4.4 million primarily due to an 80% reduction in
headcount from 87 as of December 31, 2008 to 17 as of December 31, 2009.
Clinical costs and lab fees increased approximately $0.4 million primarily as a result of studies
and clinical testing related to the B12 program.
Professional and consulting fees increased approximately $0.2 million primarily due to an increase
of approximately $1.0 million in legal fees offset by a $0.5 million reduction in consulting fees
in connection with the completion of toxicology and clinical studies; $0.2 million reduction in
accounting fees; and a $0.1 million reduction in various miscellaneous professional fees.
Occupancy costs decreased $3.3 million primarily due to the closure of the Tarrytown, NY facility
and subsequent termination of our lease for that facility.
Depreciation and amortization expense decreased $0.5 million primarily due to the write-off of
leasehold improvements, laboratory equipment, abandoned furniture, fixtures and computer hardware
in connection with the closure of the Tarrytown, NY facility.
All other operating costs decreased $4.3 million primarily due to the $3.8 million restructuring
charge incurred during 2008, a $0.4 million adjustment to the restructuring liability during 2009,
an increase of $0.7 million on the gain on sale of fixed assets during 2009, and $0.7 million
decrease in insurance, travel related, software licensing, maintenance, and other operating
expenses during 2009; offset by the incremental accrual of $1.3 million expense in connection with
the final ruling of the arbitrator awarding legal fees to Dr. Goldberg.
As a result of the factors above, Emispheres operating expenses were $14.6 million for the year
ended December 31, 2009; a decrease of $11.9 million or 45% compared to operating expenses for the
year ended December 31, 2008.
Other non-operating expense increased by approximately $4.2 million for the year ended December 31,
2009 in comparison to the same period last year primarily due to a $4.7 million increase in the
change in the value of derivative instruments, a $2.3 million decrease in interest expense due
primarily to the adoption of FASB ASC 815-40-15-5, a $1.0 million reduction in the gain from sale
of patent to MannKind Corporation, a decrease of $0.6 million in sublease income during 2009, and a
$0.2 million decrease in investment income. Expense from the change in the fair value of
derivatives instruments for 2009 and 2008 is the result of the adoption of FASB ASC 815-40-15-5, an
increase in stock price from $0.79 on December 31, 2008 to $1.06 on December 31, 2009 and from the
decrease in stock price from $2.73 on December 31, 2007 to $0.79 on December 31, 2008, and the
addition of 4,523,755 warrants in connection with the August 2009 offering. The change in value of
derivative instruments: increases in value of the underlying shares of the Companys common stock
increase the liability with a corresponding loss recognized in the Companys operating statement
while decreases in the value of the Companys common stock decrease the value of the liability with
a corresponding gain recognized in the Companys operating statement. Future gains and losses
recognized in the Companys operating results from changes in value of the derivative instrument
liability are based in part on the fair value of the Companys common stock which is outside the
control of the Company. Gains and losses could be material.
47
As a result of the above factors, we reported a net loss of $16.8 million, compared to a net loss
of $24.4 million, or $7.6 million (31%) lower than the net loss for the year ended December 31,
2008.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted
in the U.S. requires management to make estimates and assumptions that affect reported amounts and
related disclosures in the financial statements. Management considers an accounting estimate to be
critical if:
|
|
|
It requires assumptions to be made that were uncertain at the time the estimate was made,
and |
|
|
|
|
Changes in the estimate or different estimates that could have been selected could have a
material impact on our results of operations or financial condition. |
Share-Based Payments We recognize expense for our share-based compensation in accordance with
FASB ASC 718, Compensation-stock Compensation, which establishes standards for share-based
transactions in which an entity receives employees services for (a) equity instruments of the
entity, such as stock options, or (b) liabilities that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718
requires that companies expense the fair value of stock options and similar awards, as measured on
the awards grant date. FASB ASC 718 applies to all awards granted after the date of adoption, and
to awards modified, repurchased or cancelled after that date.
We estimate the value of stock option awards on the date of grant using the Black-Scholes-Merton
(Black-Scholes) option-pricing model. The determination of the fair value of share-based payment
awards on the date of grant is affected by our stock price as well as assumptions regarding a
number of complex and subjective variables. These variables include our expected stock price
volatility over the term of the awards, expected term, risk-free interest rate, expected dividends
and expected forfeiture rates.
If factors change and we employ different assumptions in the application of FASB ASC 718 in future
periods, the compensation expense that we record under FASB ASC 718 may differ significantly from
what we have recorded in the current period. There is a high degree of subjectivity involved when
using option pricing models to estimate share-based compensation under FASB ASC 718. Consequently,
there is a risk that our estimates of the fair values of our share-based compensation awards on the
grant dates may bear little resemblance to the actual values realized upon the exercise,
expiration, early termination or forfeiture of those share-based payments in the future. Employee
stock options may expire worthless or otherwise result in zero intrinsic value as compared to the
fair values originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments that are significantly in excess of the
fair values originally estimated on the grant date and reported in our financial statements. During
the year ended December 31, 2010, we do not believe that reasonable changes in the projections
would have had a material effect on share-based compensation expense.
Revenue Recognition Revenue includes amounts earned from sales of our oral Eligen® B12 (100 mcg)
product, collaborative agreements and feasibility studies. Revenue earned from the sale of oral
Eligen® B12 (100 mcg) was recognized when the product was shipped, when all revenue recognition
criteria were met in accordance with Staff Accounting Bulletin No. 104 , Revenue Recognition
(codified under ASC 605 Revenue Recognition). Our Distributor Agreement for the marketing,
distribution and sale of oral Eligen® B12 (100 mcg) with Quality Vitamins and Supplements, Inc. was
terminated during the third quarter 2010. Revenue from feasibility studies, which are typically
short term in nature, is recognized upon delivery of the study, provided that all other revenue
recognition criteria are met. Revenue from collaboration agreements are recognized using the
proportional performance method provided that we can reasonably estimate the level of effort
required to complete our performance obligations under an arrangement and such performance
obligations are provided on a best effort basis and based on expected payments. Under the
proportional performance method, periodic revenue related to nonrefundable cash payments is
recognized as the percentage of actual effort expended to date as of that period to the total
effort expected for all of our performance obligations under the arrangement. Actual effort is
generally determined based upon actual hours incurred and include research and development (R&D)
activities performed by us and time spent for joint steering committee (JSC) activities. Total
expected effort is generally based upon the total R&D and JSC hours incorporated into the project
plan that is agreed to by both parties to the collaboration. Significant management judgments and
estimates are required in determining the level of effort required under an arrangement and the
period over which we expect to complete the related performance obligations. Estimates of the total
expected effort included in each project plan are based on historical experience of similar efforts
and expectations based on the knowledge of scientists for both the Company and its
48
collaboration partners. The Company periodically reviews and updates the project plan for each
collaborative agreement. The most recent reviews took place in January 2010. In the event that a
change in estimate occurs, the change will be accounted for using the cumulative catch-up method
which provides for an adjustment to revenue in the current period. Estimates of our level of effort
may change in the future, resulting in a material change in the amount of revenue recognized in
future periods.
Generally under collaboration arrangements, nonrefundable payments received during the period of
performance may include time- or performance-based milestones. The proportion of actual performance
to total expected performance is applied to the expected payments in determining periodic
revenue. However, revenue is limited to the sum of (1) the amount of nonrefundable cash payments
received and (2) the payments that are contractually due but have not yet been paid.
With regard to revenue recognition from collaboration agreements, the Company previously
interpreted expected payments to equate to total payments subject to each collaboration agreement.
On a prospective basis, the Company has revised its application of expected payments to equate to a
best estimate of payments. Under this application, expected payments typically include (i)
payments already received and (ii) those milestone payments not yet received but that the Company
believes are more likely than not of receiving. Our support for the assertion that the next
milestone is likely to be met is based on the (a) project status updates discussed at JSC meetings;
(b) clinical trial/development results of prior phases; (c) progress of current clinical
trial/development phases; (d) directional input of collaboration partners and (e) knowledge and
experience of the Companys scientific staff. After considering the above factors, the Company
believes those payments included in expected payments are more likely than not of being received.
While this interpretation differs from that used previously by the Company, it does not result in
any change to previously recognized revenues in either timing or amount for periods through
December 31, 2010.
With regard to revenue recognition in connection with the Insulins and the GLP-1 License Agreements
with Novo Nordisk: such agreements include multiple deliverables including license grants, several
versions of the Companys Eligen® Technology (or carriers), support services and manufacturing.
Emispheres management reviewed the relevant terms of the Novo Nordisk agreements and determined
such deliverables should be accounted for as a single unit of accounting in accordance with FASB
ASC 605-25, Multiple-Element Arrangements since the delivered license and Eligen® Technology do
not have stand-alone value and Emisphere does not have objective evidence of fair value of the
undelivered Eligen® Technology or the manufacturing value of all the undelivered items. Such
conclusion will be reevaluated as each item in the arrangement is delivered. Consequently any
payments received from Novo Nordisk pursuant to such agreements, including the initial $10 million
upfront payment and any payments received for support services in connection with the GLP-1 License
Agreement and the $5 million upfront payment from the Insulins Agreement, will be deferred and
included in Deferred Revenue within our balance sheet. Management cannot currently estimate when
all of such deliverables will be delivered nor can they estimate when, if ever, Emisphere will have
objective evidence of the fair value for all of the undelivered items, therefore all payments from
Novo Nordisk are expected to be deferred for the foreseeable future.
As of December 31, 2010 total deferred revenue from the GLP-1 License Agreement was $13.6 million,
comprised of the $12.0 million non-refundable license fee and $1.6 million in support services.
Total deferred revenue from the Insulins Agreement was $5 million.
Purchased Technology Purchased technology represents the value assigned to patents and the
rights to use, sell or license certain technology in conjunction with our proprietary carrier
technology. These assets underlie our research and development projects related to various research
and development projects.
Warrants Warrants issued in connection with the equity financing completed in March 2005 and
August 2007 and to MHR have been classified as liabilities due to certain provisions that may
require cash settlement in certain circumstances. At each balance sheet date, we adjust the
warrants to reflect their current fair value. We estimate the fair value of these instruments using
the Black-Scholes model which takes into account a variety of factors, including historical stock
price volatility, risk-free interest rates, remaining term and the closing price of our common
stock. Changes in the assumptions used to estimate the fair value of these derivative instruments
could result in a material change in the fair value of the instruments. We believe the assumptions
used to estimate the fair values of the warrants are reasonable. For a more complete discussion on
the volatility in market value of derivative instruments, see Quantitative and Qualitative
Disclosures about Market Risk.
Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost.
Depreciation and amortization are provided for on a straight-line basis over the estimated useful
life of the asset. Leasehold improvements are amortized over the life of the lease or of the
improvements, whichever is shorter. Expenditures for maintenance and repairs that do not materially
extend the useful lives of the respective assets are charged to expense as incurred. The cost and
accumulated depreciation or amortization of assets retired or sold are removed from the respective
accounts and any gain or loss is recognized in operations.
49
Impairment of Long-Lived Assets We review our long-lived assets for impairment whenever events
and circumstances indicate that the carrying value of an asset might not be recoverable. An
impairment loss, measured as the amount by which the carrying value exceeds the fair value, is
triggered if the carrying amount exceeds estimated undiscounted future cash flows. Actual results
could differ significantly from these estimates, which would result in additional impairment losses
or losses on disposal of the assets. During the year ended December 31, 2008 we recognized an
approximately $1.0 million charge to write down the value of leasehold improvements in connection
with the restructuring charge to estimate current and future costs to close the laboratory and
office facility located in Tarrytown, NY. In addition, with regards to the restructuring, we
accelerated the useful life of approximately $0.2 million in leasehold improvements for a portion
of the laboratory facility in Tarrytown that we continued to use through January 29, 2009.
Approximately $0.1 million in additional depreciation expense was recognized during December 2008
and approximately $0.1 million during January 2009.
Clinical Trial Accrual Methodology Clinical trial expenses represent obligations resulting from
our contracts with various research organizations in connection with conducting clinical trials for
our product candidates. We account for those expenses on an accrual basis according to the progress
of the trial as measured by patient enrollment and the timing of the various aspects of the trial.
Accruals are recorded in accordance with the following methodology: (i) the costs for period
expenses, such as investigator meetings and initial start-up costs, are expensed as incurred based
on managements estimates, which are impacted by any change in the number of sites, number of
patients and patient start dates; (ii) direct service costs, which are primarily on-going
monitoring costs, are recognized on a straight-line basis over the life of the contract; and (iii)
principal investigator expenses that are directly associated with recruitment are recognized based
on actual patient recruitment. All changes to the contract amounts due to change orders are
analyzed and recognized in accordance with the above methodology. Change orders are triggered by
changes in the scope, time to completion and the number of sites. During the course of a trial, we
adjust our rate of clinical expense recognition if actual results differ from our estimates.
New Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-29, Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma
Information for Business Combinations. The amendments in this ASU affect any public entity as
defined by ASC Topic 805 that enters into business combinations that are material on an individual
or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the combined entity as
though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendments are effective prospectively for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did
not have a material impact on the Companys results of operations or financial condition.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (ASC Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a reporting unit be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. For public entities, the
amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on
the Companys results of operations or financial condition.
In April 2010, the FASB issued 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 (i) 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; (ii) be related solely to past performance; and (iii) be
50
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 non-substantive 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 and
ddid not have a material effect on the Companys results of operations or financial condition.
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.
Management does not believe that any other recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying financial
statements.
Off-Balance Sheet Arrangements
As of December 31, 2010, we had no material off-balance sheet arrangements.
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 December 31, 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
actions of various regulatory agencies. We consult with counsel and other appropriate experts to
assess the claim. 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, including the pending litigation described in Legal Proceedings, will have a
material adverse effect on our financial position, results of operations or cash flows.
Contractual Arrangements
Significant contractual obligations as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due in |
|
|
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
Type of Obligation |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Notes Payable(1)(2) |
|
$ |
20,385 |
|
|
$ |
|
|
|
$ |
20,385 |
|
|
$ |
|
|
|
$ |
|
|
Derivative liabilities(3) |
|
|
34,106 |
|
|
|
22,940 |
|
|
|
11,166 |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
744 |
|
|
|
353 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,235 |
|
|
$ |
23,293 |
|
|
$ |
31,942 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include both principal and related interest payments. |
|
(2) |
|
We have outstanding $19.9 million (net of discounts) in Convertible Notes payable to MHR and
its affiliates (MHR) due September 2012 and convertible at the sole discretion of MHR into
shares of our common stock at a price of $3.78. Interest at 11% is payable in additional MHR
Convertible Notes rather than in cash. The MHR Convertible Notes are subject to acceleration
upon the occurrence of certain events of default. We also issued to MHR non-interest bearing
promissory notes for $0.6 million due on June 4, 2012. The notes were recorded at a discount using a rate of 10% which is being
amortized over the life of the agreements. The notes, net of discounts, total $0.5 million.
|
51
|
|
|
(3) |
|
We have issued warrants to purchase shares of our common stock which contain provisions
requiring us to make a cash payment to the holders of the warrant 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. As a result, these warrants have been recorded at
their fair value and are classified as current liabilities. The value and timing of the actual
cash payments, if any, related to these derivative instruments could differ materially from
the amounts and periods shown. |
Quantitative and Qualitative Disclosures About Market Risk
Fair Value of Warrants and Derivative Liabilities. At June 30, 2011, the value of derivative
instruments was $19.4 million. We estimate the fair values of these instruments using the
Black-Scholes model which takes into account a variety of factors, including historical stock price
volatility, risk-free interest rates, remaining term and the closing price of our common stock.
Furthermore, the Company computes the fair value of these instruments using multiple Black-Scholes
model calculations to account for the various circumstances that could arise in connection with the
contractual terms of said instruments. The Company weights each Black-Scholes model calculation
based on its estimation of the likelihood of the occurrence of each circumstance and adjusts
relevant Black-Scholes model input to calculate the value of the derivative at the reporting date.
We are required to revalue this liability each quarter. We believe that the assumption that has the
greatest impact on the determination of fair value is the closing price of our common stock. The
following table illustrates the potential effect on the fair value of derivative instruments from
changes in the assumptions made:
|
|
|
|
|
|
|
|
Increase/(Decrease) |
|
|
|
(In thousands) |
|
25% increase in stock price |
|
$ |
2,596 |
|
50% increase in stock price |
|
|
5,293 |
|
5% increase in assumed volatility |
|
|
469 |
|
25% decrease in stock price |
|
|
(2,458 |
) |
50% decrease in stock price |
|
|
(4,740 |
) |
5% decrease in assumed volatility |
|
|
(484 |
) |
|
PROPERTIES
We lease approximately 15,000 square feet of office space at 240 Cedar Knolls Road, Suite 200,
Cedar Knolls, New Jersey for use as our corporate office. The lease for our corporate office is set
to expire on January 31, 2013.
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 Lease
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 Lease Agreement, the lease was terminated effective as of April
1, 2009. The Lease Agreement provided that the Company make the following payments to BMR: (a) $1
million, paid upon execution of the Lease Agreement, (b) $0.5 million, paid six months after the
execution date of the Lease Agreement, and (c) $0.75 million, payable twelve months after the
execution date of the Lease Agreement. Initial and six months payments were made on schedule. The
final payment was originally due April 29, 2010. However, on March 17, 2010 the Company and BMR
agreed to amend the Lease Agreement (the Lease Amendment). According to the Lease Amendment, the
final payment will be modified as follows: the Company agreed to 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. Through July 7, 2011, the Company paid the remaining outstanding principal plus $28,250
interest for late payments in accordance with the terms of the termination agreement.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 6, 2010, the Company dismissed PricewaterhouseCoopers LLP (PwC) as the Companys
independent registered public accountants. This action was approved on January 6, 2010 by the Audit
Committee of the Board of Directors of the Company.
52
PwCs audit reports on the Companys financial statements as of and for the years ended December
31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles, except that for each
of the years ended December 31, 2008 and 2007 PwCs reports contained an explanatory paragraph
expressing substantial doubt about the Companys ability to continue as a going concern.
During the Companys two most recent fiscal years ended December 31, 2007 and 2008 and the
subsequent interim periods through January 6, 2010, there were no disagreements with PwC on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused PwC
to make reference to the matter in their reports. As noted in Item 4 of the Companys quarterly
report on Form 10-Q for the quarter ended September 30, 2009, and quarterly reports on Forms 10-Q/A
for the quarters ended June 30, 2009 and March 31, 2009, the Company identified a material weakness
in its internal controls over financial reporting and disclosure controls and procedures with
respect to ineffective controls to ensure completeness and accuracy with regard to the proper
recognition, presentation and disclosure of conversion features of certain convertible debt
instruments and warrants. The Audit Committee discussed the material weakness with PwC, and the
Company authorized PwC to respond fully to the inquiries of McGladrey & Pullen, LLP (M&P), the
successor independent registered public accounting firm, regarding the material weakness. Except as
previously noted in this paragraph, there were no other reportable events as defined in Item
304(a)(1)(v) of Regulation S-K during the years ended December 31, 2007 and 2008 and through
January 6, 2010.
On January 6, 2010, with the approval of the Audit Committee of the Company, the Company engaged
M&P to act as its independent registered public accounting firm. During the years ended December
31, 2007, and 2008, respectively, and in the subsequent interim periods through January 6, 2010,
neither the Company nor anyone acting on its behalf has consulted with M&P on any of the matters or
events set forth in Item 304(a)(2) of Regulation S-K.
DIRECTOR AND OFFICER INFORMATION
Director and Executive Officer Information
Information regarding those directors serving unexpired terms and our current Executive Officers,
as such term is defined in Regulation S-K under the Exchange Act, all of whom are currently serving
open-ended terms, including their respective ages, the year in which each first joined the Company
and their principal occupations or employment during the past five years, is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
Joined |
|
|
Name |
|
Age |
|
Emisphere |
|
Position with the Company |
Michael R. Garone(1)(2)
|
|
|
52 |
|
|
|
2007 |
|
|
Vice President, Interim Chief Executive Officer,
Chief Financial Officer and Corporate Secretary |
M. Gary I. Riley DVM, PhD
|
|
|
68 |
|
|
|
2007 |
|
|
Vice President of Non-Clinical Development
and Applied Biology |
John D. Harkey, Jr.
|
|
|
50 |
|
|
|
2006 |
|
|
Class I Director |
Mark H. Rachesky, M.D.
|
|
|
52 |
|
|
|
2005 |
|
|
Class III Director |
Timothy G. Rothwell
|
|
|
60 |
|
|
|
2009 |
|
|
Class I Director |
Michael Weiser, M.D.
|
|
|
48 |
|
|
|
2005 |
|
|
Class III Director |
|
|
|
(1) |
|
On February 28, 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company. |
|
(2) |
|
On February 28, 2011, Michael R. Garone was appointed as Interim Chief Executive Officer of
the Company. |
Michael R. Garone joined Emisphere in 2007 as Vice President and Chief Financial Officer. Mr.
Garone has also served as the Companys Corporate Secretary since October 2008. Mr. Garone
previously served as Interim Chief Executive Officer and Chief Financial Officer of Astralis, Ltd.
(OTCBB: ASTR.OB). Prior to that, Mr. Garone was with AT&T (NYSE: T) for 20 years, where he held
several positions, including Chief Financial Officer of AT&T Alascom. Mr. Garone received an MBA
from Columbia University and a BA in Mathematics from Colgate University. On February 28, 2011,
Michael R. Garone was appointed as Interim Chief Executive Officer of the Company.
53
John D. Harkey, Jr. has been Director of the Company since April 2006. Mr. Harkey is Chairman and
Chief Executive Officer of Consolidated Restaurant Operations, Inc. Mr. Harkey currently serves on
the Board of Directors and Audit Committees of Loral Space & Communications, Inc. (NASDAQ:LORL),
Energy Transfer Equity, LP (NYSE:ETE), Emisphere Technologies, Inc. (NASDAQ:EMIS), serves on the Board of
Directors of Leap Wireless International, Inc. (NASDAQ:LEAP), serves as Chairman of the Board of
Regency Energy Partners, (NASDAQ: RGNC), and serves on the Board of Directors of the Baylor Health Care
System Foundation. He also serves on the Presidents Development Council of Howard Payne
University, the Executive Board of Circle Ten Council of the Boy Scouts of America and is a member
of the Young Presidents Organization. Mr. Harkey obtained a B.B.A. with honors in finance, a
J.D. from the University of Texas at Austin and a M.B.A. from Stanford University School of
Business. Mr. Harkeys entrepreneurial background, his qualification as a financial expert, and
his business and leadership experiences in a range of different industries make him an asset to our
Board of Directors.
Mark H. Rachesky, M.D. has been a director of the Company since 2005. Dr. Rachesky is the
co-founder and President of MHR Fund Management LLC and affiliates, investment managers of various
private investment funds that invest in inefficient market sectors, including special situation
equities and distressed investments. Dr. Rachesky is currently the Non-Executive Chairman of the
Board of Directors of Loral Space & Communications Inc. (NASDAQ:LORL), Leap Wireless International, Inc.
(NASDAQ: LEAP) and Telesat Canada and is a member of the Board of Directors of Lions Gate
Entertainment Corp. (NYSE: LGF) and Nationshealth, Inc. (formerly quoted on OTCBB:NHRX). He
formerly served on the Board of Directors of Neose Technologies, Inc (NASDAQ: NTEC). Dr. Rachesky
is a graduate of Stanford University School of Medicine and Stanford University School of Business.
Dr. Rachesky graduated from the University of Pennsylvania with a major in Molecular Aspects of
Cancer. Dr. Racheskys extensive investing and financial background, his thorough knowledge of
capital markets and his training as an M.D., make him an asset to our Board of Directors.
Timothy G. Rothwell, has been a director of the Company since November 2009. Mr. Rothwell is the former Chairman
of Sanofi-Aventis U.S. From February 2007 to October 2009, Mr. Rothwell served as Chairman of
Sanofi-Aventis U.S. From September 2004 to February 2007, Mr. Rothwell was President and Chief
Executive Officer of the company, overseeing all domestic commercial operations as well as
coordination of Industrial Affairs and Research and Development activities. From May 2003 to
September 2004, Mr. Rothwell was President and Chief Executive Officer of Sanofi-Synthelabo, Inc.
and was instrumental in the formation of Sanofi-Aventis U.S. in 2004. Prior to that, from January
1998 to May 2003, he served in various capacities at Pharmacia, including as President of the
companys Global Prescription Business. From January 1995 to January 1998, Mr. Rothwell served as
worldwide President of Rhone-Poulenc Rorer Pharmaceuticals and President of the companys Global
Pharmaceutical Operations. In his long career, Mr. Rothwell has also served as Chief Executive
Officer of Sandoz Pharmaceuticals, Vice President, Global Marketing and Sales at Burroughs
Wellcome, and Senior Vice President of Marketing and Sales for the U.S. for Squibb Corporation. Mr.
Rothwell holds a Bachelor of Arts from Drew University and earned his J.D. from Seton Hall
University. He formerly served on the PhRMA Board of Directors, as well as the Institute of
Medicines Evidence-Based Medicine roundtable, the CEO Roundtable on Cancer, the Healthcare
Businesswomens Association Advisory Board, the Board of Trustees for the Somerset Medical Center
Foundation, the Board of Trustees for the HealthCare Institute of New Jersey, and as a Trustee of
the Corporate Council for Americas Children at the Childrens Health Fund. Presently, he is
Chairman of the Board of New American Therapeutics, and he serves on the Board of Directors of
Agenus (NASDAQ: AGEN), the Board of Visitors for Seton Hall Law School, and the PheoPara Alliance,
a nonprofit 501(c)3 organization. Mr. Rothwells broad business and leadership experiences in the
pharmaceutical industry and his affiliations with industry, educational and healthcare related
organizations make him an asset to our Board of Directors.
Michael Weiser, M.D., Ph.D. has been a director of the Company since 2005. Dr. Weiser is currently
founder and co-chairman of Actin Biomed, a New York based healthcare investment firm advancing the
discovery and development of novel treatments for unmet medical needs. Prior to joining Actin
Biomed, Dr. Weiser was the Director of Research at Paramount BioCapital where he was responsible
for the scientific, medical and financial evaluation of biomedical technologies and pharmaceutical
products under consideration for development. Dr. Weiser completed his Ph.D. in Molecular
Neurobiology at Cornell University Medical College and received his M.D. from New York University
School of Medicine. He performed his post-graduate medical training in the Department of Obstetrics
and Gynecology at New York University Medical Center. Dr. Weiser also completed a Postdoctoral
Fellowship in the Department of Physiology and Neuroscience at New York University School of
Medicine and received his B.A. in Psychology from University of Vermont. Dr. Weiser is a member of
The National Medical Honor Society, Alpha Omega Alpha, American Society of Clinical Oncology,
American Society of Hematology and Association for Research in Vision and Ophthalmology. In
addition, Dr. Weiser has received awards for both academic and professional excellence and is
published extensively in both medical and scientific journals. Dr. Weiser currently serves on the
board of directors of Chelsea Therapeutics International, and Ziopharm Oncology, Inc. as well as
several privately held companies. Dr. Weiser has an M.D. and a Ph.D., and his scientific, business
and financial experiences, as well as his knowledge of the healthcare industry, capital markets,
pharmaceutical products and biomedical technology development make him an asset to our Board of
Directors.
54
M. Gary I. Riley DVM, PhD joined Emisphere in November 2007 as Vice-President of Nonclinical
Development and Applied Biology. He was previously Vice President of Toxicology and Applied Biology
at Alkermes, Inc., Cambridge, MA, where he spent 14 years working in the field of specialized drug
delivery systems. He holds board certifications in veterinary pathology and toxicology. He was
previously employed as Director of Pathobiology at Lederle Laboratories and earlier in his career
held positions as a veterinary pathologist in academia and industry.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, and the rules of the SEC require our directors, Executive
Officers and persons who own more than 10% of common stock to file reports of their ownership and
changes in ownership of common stock with the SEC. Our employees sometimes prepare these reports on
the basis of information obtained from each director and Executive Officer. Based on written
representations of the Companys directors and Executive Officers and on confirmation that no Form
5 was required to be filed, we believe that all reports required by Section 16(a) of the Exchange
Act to be filed by its directors, Executive Officers and greater than ten (10%) percent owners
during the last fiscal year were filed on time with the exception of Form 4 filings made on behalf
of Michael R. Garone and M. Gary I. Riley on January 21, 2010.
Code of Conduct for Officers and Employees and Code of Business Conduct and Ethics for Directors
The Company has a Code of Conduct that applies to all of our officers and employees as well as a
Code of Business Conduct and Ethics that applies specifically to the members of the Board of
Directors. The directors are surveyed annually regarding their compliance with the policies as set
forth in the Code of Conduct for Directors. The Code of Conduct and the Code of Business Conduct
and Ethics for Directors are available on the Corporate Governance section of our website at
www.emisphere.com. The contents of our website are not incorporated herein by reference and the
website address provided in this prospectus is intended to be an inactive textual
reference only. The Company intends to disclose on its website any amendment to, or waiver of, a
provision of the Code of Conduct that applies to the Chief Executive Officer, Chief Financial
Officer, or Controller. Our Code of Conduct contains provisions that apply to our Chief Executive
Officer, Chief Financial Officer and all other finance and accounting personnel. These provisions
comply with the requirements of a company code of ethics for financial officers that were
promulgated by the SEC pursuant to the Exchange Act.
Stockholder Communications
We have an Investor Relations Office for all stockholder inquiries and communications. The Investor
Relations Office facilitates the dissemination of accurate and timely information to our
stockholders. In addition, the Investor Relations Office ensures that outgoing information is in
compliance with applicable securities laws and regulations. All investor queries should be directed
to our internal Director of Corporate Communications or our Corporate Secretary.
Election of Directors
The Governance and Nominating Committee identifies director nominees by reviewing the desired
experience, mix of skills and other qualities to assure appropriate Board composition, taking into
consideration the current Board members and the specific needs of the Company and the Board. Among
the qualifications to be considered in the selection of candidates, the Committee considers the
following attributes and criteria of candidates: experience, knowledge, skills, expertise,
diversity, personal and professional integrity, character, business judgment and independence.
Although it has no formal policy our Board recognizes that nominees for the Board should reflect a
reasonable diversity of backgrounds and perspectives, including those backgrounds and perspectives
with respect to business experience, professional expertise, age, gender and ethnic background.
Our Board is comprised of accomplished professionals who represent diverse and key areas of
expertise including national and international business, operations, manufacturing, finance and
investing, management, entrepreneurship, higher education and science, research and technology. We
believe our directors wide range of professional experiences and backgrounds, education and skills
has proven invaluable to the Company and we intend to continue leveraging this strength.
Nominations for the election of directors may be made by the Board of Directors or the Governance
and Nominating Committee. The committee did not reject any candidates recommended within the
preceding year by a beneficial owner of, or from a group of security holders that beneficially
owned, in the aggregate, more than five percent (5%) of the Companys voting stock.
55
Although it has no formal policy regarding stockholder nominees, the Governance and Nominating
Committee believes that stockholder nominees should be viewed in substantially the same manner as
other nominees. Stockholders may make a recommendation for a nominee by complying with the notice
procedures set forth in our bylaws. The Governance and Nominating Committee will give nominees
recommended by stockholders in compliance with these procedures the same consideration that it
gives to any board recommendations. To date, we have not received any recommendation from
stockholders requesting that the Governance and Nominating Committee (or any predecessor) consider
a candidate for inclusion among the committees slate of nominees in the Companys proxy statement.
To be considered by the committee, a director nominee must have broad experience at the
strategy/policy-making level in a business, government, education, technology or public interest
environment, high-level managerial experience in a relatively complex organization or experience
dealing with complex problems. In addition, the nominee must be able to exercise sound business
judgment and provide insights and practical wisdom based on experience and expertise, possess
proven ethical character, be independent of any particular constituency, and be able to represent
all stockholders of the Company.
The committee will also evaluate whether the nominees skills are complementary to the existing
Board members skills; the boards needs for operational, management, financial, technological or
other expertise; and whether the individual has sufficient time to devote to the interests of
Emisphere. The prospective board member cannot be a board member or officer at a competing company
nor have relationships with a competing company. He/she must be clear of any investigation or
violations that would be perceived as affecting the duties and performance of a director.
The Governance and Nominating Committee identifies nominees by first evaluating the current members
of the Board of Directors willing to continue in service. Current members of the board with skills
and experience that are relevant to the business and who are willing to continue in service are
considered for re-nomination, balancing the value of continuity of service by existing members of
the board with that of obtaining a new perspective. If any member of the board does not wish to
continue in service, or if the Governance and Nominating Committee or the board decides not to
nominate a member for re-election, the Governance and Nominating Committee identifies the desired
skills and experience of a new nominee and discusses with the board suggestions as to individuals
that meet the criteria.
The Audit Committee
The Audit Committee operates under a written charter adopted by the Board of Directors. The Audit
Committee has reviewed the relevant standards of the Sarbanes-Oxley Act of 2002, the rules of the
SEC, and the corporate governance listing standards of the NASDAQ regarding committee policies. The
committee intends to further amend its charter, if necessary, as the applicable rules and standards
evolve to reflect any additional requirements or changes. The updated Audit Committee charter can
be found on our website at www.emisphere.com. The contents of our website are not
incorporated herein by reference and the website address provided in this prospectus is
intended to be an inactive textual reference only.
The Audit Committee is currently comprised of John D. Harkey, Jr., (chairman), Timothy G. Rothwell,
who was appointed to the Committee on January 6, 2010, and Michael Weiser, M.D. All of the members
of the Audit Committee are independent within the meaning of Rule 4200 of the NASDAQ. The Board of
Directors has determined that John D. Harkey, Jr. is an Audit Committee financial expert, within
the meaning of Item 401(h) of Regulation S-K.
EXECUTIVE COMPENSATION
Summary Compensation Table 2010, 2009 and 2008
The following table sets forth information regarding the aggregate compensation Emisphere paid
during 2010, 2009 and 2008 to our Principal Executive Officer, our Principal Financial Officer, and
the two other highest paid Executive Officers:
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option |
|
|
|
|
|
|
|
Name and Principal |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Stock |
|
|
Awards |
|
|
All Other |
|
|
|
|
Position(1) |
|
Year |
|
|
($) |
|
|
($) |
|
|
Awards ($) |
|
|
($)(2) |
|
|
Compensation($) |
|
|
Total ($) |
|
Michael V. Novinski(10), |
|
|
2010 |
|
|
|
550,000 |
|
|
|
|
|
|
|
|
|
|
|
312,175 |
|
|
|
18,000 |
(4) |
|
|
880,175 |
|
President and CEO |
|
|
2009 |
|
|
|
550,000 |
|
|
|
|
|
|
|
|
|
|
|
239,759 |
|
|
|
18,000 |
(4) |
|
|
807,759 |
|
|
|
|
2008 |
|
|
|
554,231 |
|
|
|
357,123 |
(3) |
|
|
|
|
|
|
|
|
|
|
18,000 |
(4) |
|
|
929,354 |
|
|
Michael R. Garone, |
|
|
2010 |
|
|
|
241,374 |
|
|
|
|
|
|
|
|
|
|
|
19,445 |
|
|
|
|
|
|
|
260,819 |
|
Chief Financial Officer, |
|
|
2009 |
|
|
|
234,313 |
|
|
|
|
|
|
|
|
|
|
|
10,642 |
|
|
|
|
|
|
|
244,955 |
|
Corporate VP, and Corporate
Secretary(5)(11) |
|
|
2008 |
|
|
|
231,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M. Gary I. Riley DVM, PhD, |
|
|
2010 |
|
|
|
278,104 |
|
|
|
|
|
|
|
|
|
|
|
19,445 |
|
|
|
|
|
|
|
297,549 |
|
VP of Non-Clinical |
|
|
2009 |
|
|
|
269,969 |
|
|
|
|
|
|
|
|
|
|
|
10,642 |
|
|
|
8,000 |
(7) |
|
|
279,011 |
|
Development and Applied Biology(7) |
|
|
2008 |
|
|
|
267,039 |
|
|
|
40,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
14,000 |
(7) |
|
|
321,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Hart, |
|
|
2010 |
|
|
|
249,657 |
|
|
|
|
|
|
|
|
|
|
|
19,445 |
|
|
|
|
|
|
|
269,102 |
|
VP, Strategy and Development(8) (12) |
|
|
2009 |
|
|
|
242,880 |
|
|
|
|
|
|
|
|
|
|
|
10,642 |
|
|
|
|
|
|
|
253,522 |
|
|
|
|
2008 |
|
|
|
104,308 |
|
|
|
16,872 |
(9) |
|
|
|
|
|
|
173,550 |
|
|
|
|
|
|
|
294,730 |
|
|
|
|
(1) |
|
Only two individuals other than the Principal Executive Officer and the Principal Financial
Officer served as Executive Officers at the end of fiscal year 2010. As a result, the named
executive officers, as defined in Regulation S-K, Item 402(a)(3), of the Company are as
follows: Mr. Novinski, Mr. Garone, Mr. Riley and Mr. Hart. |
|
(2) |
|
Amounts shown in this column represent the aggregate grant date fair value of stock option
awards granted during the respective year computed in accordance with Financial Accounting
Standards Board ASC Topic 718. This compares to prior years, during which amounts in these
columns have represented the expensed accounting value of such awards. The amounts for 2008
and 2009 have been recomputed (along with amounts in the Total column for such years) using
the aggregate grant date fair value of stock option awards granted during both of those years.
For assumptions used in the valuation of these awards please see Note 12 to our Financial
Statements for the fiscal year ended December 31, 2010. |
|
(3) |
|
Mr. Novinski was paid a bonus in 2008 for performance in 2007 in accordance with the terms of
his employment contract. |
|
(4) |
|
All other compensation for Mr. Novinski represents an allowance for the use of a personal
automobile in accordance with the terms of his employment contract. |
|
(5) |
|
Mr. Garone was appointed Corporate Secretary effective October 24, 2008. |
|
(6) |
|
In accordance with the terms of his employment contract, Dr. Riley received a signing bonus,
payable during 2008, when he joined the Company. |
|
(7) |
|
All other compensation for Mr. Riley represents payments for relocation expenses. |
|
(8) |
|
Mr. Hart accepted the position as Vice President, Strategy and Development effective July 28,
2008. |
|
(9) |
|
Mr. Hart received a signing bonus when he joined the Company. |
|
(10) |
|
On February 28, 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company. |
|
(11) |
|
On February 28, 2011, Michael R. Garone was appointed as Interim Chief Executive Officer of
the Company. |
|
(12) |
|
On May 3, 2011, Mr. Hart resigned as Vice President of Strategy and Development, effective
May 6, 2011. |
Compensation Discussion And Analysis
Executive Summary
The discussion that follows outlines the compensation awarded to, earned by or paid to the named
executive officers of the Company including a review of the principal elements of compensation, the
objectives of the Companys compensation program, what the program is designed to reward and why
and how each element of compensation is determined.
In general, the Company operates in a marketplace where competition for talented executives is
significant. The Company is engaged in the long-term development of its technology and of drug
candidates, without the benefit of significant current revenues, and therefore its operations
require it to raise capital in order to continue its activities. Our operations entail special
needs and risks and
57
require that the Company attempt to implement programs that promote strong individual and group
performance and retention of excellent employees. The Companys compensation program for named
executive officers consists of cash compensation as base salary, medical, basic life insurance,
long term disability, flexible spending accounts, paid time off, and defined contribution
retirement plans as well as long term equity incentives offered through stock option plans. This
program is developed in part by benchmarking against other companies in the
biotechnology/pharmaceutical sectors, as well as by the judgment and discretion of our Board of
Directors.
Employee salaries are benchmarked against Radford survey information. Radford is part of the Aon
family brands. For more than 30 years, Radford has been a leading provider of compensation market
intelligence to the high-tech and life sciences industries. Radford emphasizes data integrity and
online access to data, tools and resources, as well as client service geared towards life sciences.
Radford includes more than 2,000 participating companies globally. Their services offer full
compensation consulting, reliable, current data analysis and reporting, customized data for
competitive insight, and web access to data via the Radford Network.
Discussion and Analysis
Objectives of the compensation and reward program The biopharmaceutical marketplace is highly
competitive and includes companies with far greater resources than ours. Our work involves the
difficult, unpredictable, and often slow development of our technology and of drug candidates.
Continuity of scientific knowledge, management skills, and relationships are often critical success
factors to our business. The objectives of our compensation program for named executive officers is
to provide competitive cash compensation, competitive health, welfare and defined contribution
retirement benefits as well as long-term equity incentives that offer significant reward potential
for the risks assumed and for each individuals contribution to the long-term performance of the
Company. Individual performance is measured against long-term strategic goals, short-term business
goals, scientific innovation, regulatory compliance, new business development, development of
employees, fostering of teamwork and other Emisphere values designed to build a culture of high
performance. These policies and practices are based on the principle that total compensation should
serve to attract and retain those executives critical to the overall success of Emisphere and are
designed to reward executives for their contributions toward business performance that is designed
to build and enhance stockholder value.
Elements of compensation and how they are determined The key elements of the executive
compensation package are base salary (as determined by the competitive market and individual
performance), the executive long term disability plan and other health and welfare benefits and
long-term incentive compensation in the form of periodic stock option grants. The base salary
(excluding payment for accrued but unused vacation) for the named Executive Officers for 2010
ranged from $241,374 for its Vice President and Chief Financial Officer to $550,000 for its
President and Chief Executive Officer. In determining the compensation for each named Executive
Officer, the Company generally considers (i) data from outside studies and proxy materials
regarding compensation of executive officers at companies believed to be comparable, (ii) the input
of other directors and the President and Chief Executive Officer (other than for his own
compensation) regarding individual performance of each named executive officer and (iii)
qualitative measures of Emispheres performance, such as progress in the development of the
Companys technology, the engagement of corporate partners for the commercial development and
marketing of products, effective corporate governance, fiscal responsibility, the success of
Emisphere in raising funds necessary to conduct research and development, and the pace at which the
Company continues to advance its technologies in various clinical trials. Our board of directors
and Compensation Committees consideration of these factors is subjective and informal. However, in
general, it has determined that the compensation for executive officers should be competitive with
market data reflected within the 50th-75th percentile of biotechnology companies for corresponding
senior executive positions. Compensation levels for 2009 were derived from the compensation plan
set in 2006 and were based in part by information received from executive compensation consultants,
Pearl Myer and Partners, based in New York, N.Y. Compensable factors benchmarked include market
capitalization, head count and location. While the Company has occasionally paid cash bonuses in
the past, there is no consistent annual cash bonus plan for named executive officers. When
considering the compensation of the Companys President and Chief Executive Officer, the Company
receives information and analysis prepared or secured by the Companys outside executive
compensation experts and survey data prepared by human resources management personnel as well as
any additional outside information it may have available.
The compensation program also includes periodic awards of stock options. The stock option element
is considered a long-term incentive that further aligns the interests of executives with those of
our stockholders and rewards long-term performance and the element of risk. Stock option awards are
made at the discretion of the Board of Directors based on its subjective assessment of the
individual contribution of the executive to the attainment of short and long-term Company goals,
such as collaborations with partners, attainment of successful milestones under such collaborations
and other corporate developments which advance the progress of our technology and drug candidates.
Option grants, including unvested grants, for our named executive officers range from 115,000 for
our Vice President, Chief Financial Officer and Corporate Secretary; Vice President of Non-Clinical
Development and Applied Biology; and Vice President, Strategy and Development, to 1,600,000 for
President and Chief Executive Officer as indicated in the accompanying tables. Stock option grants
to named executive officers in 2010 were made in connection with the annual compensation review.
With the exception of grants made to the Companys President and Chief Executive Officer (described
in Certain
58
Relationships, Related Transactions and Director Independence), the Companys policy with respect
to stock options granted to executives is that grant prices should be equal to the fair market
value of the common stock on the date of grant, that employee stock options should generally vest
over a three to five-year period and expire in ten years from date of grant, and that options
previously granted at exercise prices higher than the current fair market value should not be
re-priced. Once performance bonuses or awards are issued, there are currently no policies in place
to reduce, restate or otherwise adjust awards if the relevant performance measures on which they
are based are restated or adjusted. The Company has no policy to require its named executive
officers to hold any specific equity interest in the Company. The Company does not offer its named
executive officers any nonqualified deferred compensation, a defined benefit pension program or any
post retirement medical or other benefits.
Section 162(m) of the Internal Revenue Code of 1986, as amended, provides that compensation in
excess of $1,000,000 paid to the Chief Executive Officer or to any of the other four most highly
compensated executive officers of a publicly held company will not be deductible for federal income
tax purposes, unless such compensation is paid pursuant to one of the enumerated exceptions set
forth in Section 162(m). The Companys primary objective in designing and administering its
compensation policies is to support and encourage the achievement of the Companys long-term
strategic goals and to enhance stockholder value. In general, stock options granted under the
Companys 2000 Plan and 2007 Plan are intended to qualify under and comply with the performance
based compensation exemption provided under Section 162(m) thus excluding from the Section 162(m)
compensation limitation any income recognized by executives at the time of exercise of such stock
options. Because salary and bonuses paid to our Chief Executive Officer and four most highly
compensated executive officers have been below the $1,000,000 threshold, the Compensation Committee
has elected, at this time, to retain discretion over bonus payments, rather than to ensure that
payments of salary and bonus in excess of $1,000,000 are deductible. The Compensation Committee
intends to review periodically the potential impacts of Section 162(m) in structuring and
administering the Companys compensation programs.
Grants of Plan-Based Awards 2010
The following table sets forth information regarding grants of plan-based awards in 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: |
|
|
Exercise or |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Base Price of |
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Option |
|
|
Grant Date |
|
|
|
|
|
|
|
Underlying |
|
|
Awards |
|
|
Fair Value of |
|
Name |
|
Grant Date |
|
|
Options (#) |
|
|
($/Sh) |
|
|
Option Awards |
|
Michael V. Novinski(1), |
|
|
3/10/2010 |
|
|
|
300,000 |
|
|
$ |
1.34 |
|
|
$ |
312,175 |
|
President and CEO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Garone, VP, |
|
|
1/19/2010 |
|
|
|
20,000 |
|
|
|
1.25 |
|
|
|
19,445 |
|
Chief Financial Officer, Corporate VP and Corporate Secretary(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M. Gary I. Riley DVM, |
|
|
1/19/2010 |
|
|
|
20,000 |
|
|
|
1.25 |
|
|
|
19,445 |
|
PhD. VP, Non-Clinical Development and Applied Biology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Hart, |
|
|
1/19/2010 |
|
|
|
20,000 |
|
|
|
1.25 |
|
|
|
19,445 |
|
Vice President, Strategy and Development (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On February 28, 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company |
|
(2) |
|
On February 28, 2011, Michael R. Garone was appointed as Interim Chief Executive Officer of
the Company. |
|
(3) |
|
On May 3, 2011, Mr. Hart resigned as Vice President of Strategy and Development, effective
May 6, 2011. |
Outstanding Equity Awards at Fiscal Year-End 2010
The following table sets forth information as to the number and value of unexercised options held
by the Executive Officers named above as of December 31, 2010. There are no outstanding stock
awards with executive officers:
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Plan Awards: |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Securities |
|
|
Number of |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Underlying |
|
|
Securities |
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Unexercised |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
Unexercised |
|
|
Unearned |
|
|
Unexercised |
|
|
Option |
|
|
Option |
|
|
|
Options (#) |
|
|
Options (#) |
|
|
Unearned |
|
|
Exercise |
|
|
Expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
Options (#) |
|
|
Price ($) |
|
|
Date |
|
Michael V. Novinski(6), |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3.19 |
|
|
|
4/6/2017 |
|
President and CEO |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
$ |
6.38 |
|
|
|
4/6/2017 |
|
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
$ |
0.93 |
|
|
|
5/15/2019 |
|
|
|
|
200,000 |
|
|
|
100,000 |
(1) |
|
|
|
|
|
$ |
1.34 |
|
|
|
3/10/2020 |
|
Michael R. Garone, VP, |
|
|
45,000 |
|
|
|
30,000 |
(2) |
|
|
|
|
|
$ |
4.03 |
|
|
|
8/29/2017 |
|
Chief Financial Officer, |
|
|
5,000 |
|
|
|
15,000 |
(3) |
|
|
|
|
|
$ |
0.62 |
|
|
|
4/12/2019 |
|
Corporate VP and Corporate Secretary(7) |
|
|
|
|
|
|
20,000 |
(4) |
|
|
|
|
|
$ |
1.25 |
|
|
|
1/19/2020 |
|
M. Gary I. Riley DVM, |
|
|
75,000 |
|
|
|
|
|
|
|
|
|
|
$ |
4.02 |
|
|
|
11/6/2017 |
|
PhD. VP, Non-Clinical |
|
|
5,000 |
|
|
|
15,000 |
(3) |
|
|
|
|
|
$ |
0.62 |
|
|
|
4/12/2019 |
|
Development and Applied Biology |
|
|
|
|
|
|
20,000 |
(4) |
|
|
|
|
|
$ |
1.25 |
|
|
|
1/19/2020 |
|
Nicholas J. Hart, |
|
|
30,000 |
|
|
|
45,000 |
(5) |
|
|
|
|
|
$ |
2.71 |
|
|
|
7/14/2018 |
|
Vice President, Strategy |
|
|
5,000 |
|
|
|
15,000 |
(3) |
|
|
|
|
|
$ |
0.62 |
|
|
|
4/12/2019 |
|
and Development (8) |
|
|
|
|
|
|
20,000 |
(4) |
|
|
|
|
|
$ |
1.25 |
|
|
|
1/19/2020 |
|
|
|
|
(1) |
|
100,000 exercisable as of 12/31/2011 |
|
(2) |
|
15,000 exercisable as of 8/29/2011 and 8/29/2012, respectively |
|
(3) |
|
5,000 exercisable as of 4/12/2011; 10,000 exercisable as of 4/12/2012 |
|
(4) |
|
5,000 exercisable as of 1/19/2011 and 1/19/2012, respectively and 10,000 exercisable as of
1/19/2013 |
|
(5) |
|
15,000 exercisable as of 7/14/2011, 7/14/2012 and 7/14/2013, respectively |
|
(6) |
|
On February 28, 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company |
|
(7) |
|
On February 28, 2011, Michael R. Garone was appointed as Interim Chief Executive Officer of
the Company. |
|
(8) |
|
On May 3, 2011, Mr. Hart resigned as Vice President of Strategy and Development, effective
May 6, 2011. |
Option Exercises and Stock Vested 2010
There were no stock options exercised by Executive Officers during 2010.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Dr. Weiser and Dr. Rachesky. No member of the
Compensation Committee is or has ever been an executive officer or employee of our company (or any
of its subsidiaries) and no compensation committee interlocks existed during fiscal year 2010.
For further information about our processes and procedures for the consideration and determination
of executive and director compensation, please see Executive Compensation Compensation
Discussion and Analysis.
Compensation Committee Report
The Compensation Committee operates under a written charter adopted by the Board of Directors. The
Compensation Committee charter can be found on our website at www.emisphere.com. The contents of
our website are not incorporated herein by reference and the website address provided in this
prospectus is intended to be an inactive textual reference only.
60
The Compensation Committee is responsible for the consideration of stock plans, performance goals
and incentive awards, and the overall coverage and composition of the compensation arrangements
related to executive officers. The Compensation Committee may delegate any of the foregoing duties
and responsibilities to a subcommittee of the Compensation Committee consisting of not less than
two members of the committee. The Compensation Committee has the authority to retain, at the
expense of the Company, such outside counsel, experts and other advisors as deemed appropriate to
assist it in the full performance of its functions. The Companys Chief Executive Officer is
involved in making recommendations to the Compensation Committee for compensation of Executive
Officers (except for himself) as well as recommending compensation levels for directors.
Our executive compensation program is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee, which is composed of non-employee independent directors, is
responsible for reviewing with Company management and approving compensation policy and all forms
of compensation for executive officers and directors in light of the Companys current business
environment and the Companys strategic objectives. In addition, the Compensation Committee acts as
the administrator of the Companys stock option plans. The Compensation Committees practices
include reviewing and establishing executive officers compensation to ensure that base pay and
incentive compensation are competitive to attract and retain qualified executive officers, and to
provide incentive systems reflecting both financial and operating performance, as well as an
alignment with stockholder interests. These policies are based on the principle that total
compensation should serve to attract and retain those executives critical to the overall success of
Emisphere and should reward executives for their contributions to the enhancement of stockholder
value.
The Compensation Committee oversees risk management as it relates to our compensation plans,
policies and practices in connection with structuring our executive compensation programs and
reviewing our incentive compensation programs for other employees. The committee considered risk
when developing our compensation programs and believes that the design of our current compensation
programs do not encourage excessive or inappropriate risk taking. Our base salaries provide
competitive fixed compensation, while annual cash bonuses and equity-based awards encourage
long-term consideration rather than short-term risk taking.
The Compensation Committee has reviewed the Compensation Discussion and Analysis presented herein
under Compensation Plans with the management of the Company. Based on that review and discussion,
the Compensation Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in the Form 10-K and Proxy Statement of the Company.
The Members of the Compensation Committee
Michael Weiser, M.D., Ph.D. (Chairman)
Mark H. Rachesky, M.D.
Audit Committee Report
The Audit Committee operates under a written charter adopted by the Board of Directors. The Audit
Committee has reviewed the relevant standards of the Sarbanes-Oxley Act of 2002, the rules of the
SEC, and the corporate governance listing standards of the NASDAQ regarding committee policies. The
committee intends to further amend its charter, if necessary, as the applicable rules and standards
evolve to reflect any additional requirements or changes. The updated Audit Committee charter can
be found on our website at www.emisphere.com. The contents of our website are not
incorporated herein by reference and the website address provided in this prospectus is
intended to be an inactive textual reference only.
The Audit Committee is currently comprised of John D. Harkey, Jr., (chairman), Timothy G. Rothwell,
who was appointed to the Committee on January 6, 2010, and Michael Weiser, M.D. All of the members
of the Audit Committee are independent within the meaning of Rule 4200 of the NASDAQ. The Board of
Directors has determined that John D. Harkey, Jr. is an Audit Committee financial expert, within
the meaning of Item 401(h) of Regulation S-K.
On January 6, 2010, with the approval of the Audit Committee of the Company, the Company engaged
M&P to act as its independent registered public accounting firm. During the years ended December
2007, and 2008, respectively, in the subsequent interim periods through January 5, 2010, neither
the Company nor anyone acting on its behalf had consulted with M&P on any of the matters or events
set forth in Item 304(a)(2) of Regulation S-K.
Management has primary responsibility for the Companys financial statements and the overall
reporting process, including the Companys system of internal control over financial reporting.
M&P, the Companys independent registered public accountants, audit the annual financial statements
prepared by management, express an opinion as to whether those financial statements fairly present
the
61
financial position, results of operations and cash flows of the Company in conformity with
accounting principles generally accepted in the United States, and report on internal control over
financial reporting. M&P reports to the Audit Committee as members of the Board of Directors and as
representatives of the Companys stockholders.
The Audit Committee meets with management periodically to consider the adequacy of the Companys
internal control over financial reporting and the objectivity of its financial reporting. The Audit
Committee discusses these matters with the appropriate Company financial personnel. In addition,
the Audit Committee has discussions with management concerning the process used to support
certifications by the Companys Chief Executive Officer and Chief Financial Officer that are
required by the SEC and the Sarbanes-Oxley Act to accompany the Companys periodic filings with the
SEC.
On an as needed basis, the Audit Committee meets privately with M&P. The Audit Committee also
appoints the independent registered public accounting firm, approves in advance their engagements
to perform audit and any non-audit services and the fee for such services, and periodically reviews
their performance and independence from management. In addition, when appropriate, the Audit
Committee discusses with M&P plans for the audit partner rotation required by the Sarbanes-Oxley
Act.
Pursuant to its charter, the Audit Committee assists the board in, among other things, monitoring
and reviewing (i) our financial statements, (ii) our compliance with legal and regulatory
requirements and (iii) the independence, performance and oversight of our independent registered
public accounting firm. Under the Audit Committee charter, the Audit Committee is required to make
regular reports to the board.
During the 2010 Fiscal Year, the Audit Committee of the Board of Directors reviewed and assessed:
|
|
|
the quality and integrity of the annual audited financial statements with management,
including issues relating to accounting and auditing principles and practices, as well as
the adequacy of internal controls, and compliance with regulatory and legal requirements; |
|
|
|
|
the qualifications and independence of the independent registered public accounting firm;
and |
|
|
|
|
managements, as well as the independent auditors, analysis regarding financial
reporting issues and judgments made in connection with the preparation of our financial
statements, including those prepared quarterly and annually, prior to filing our quarterly
reports on Form 10-Q and annual report on Form 10-K. |
The Audit Committee has reviewed the audited financial statements and has discussed them with both
management and M&P, the independent registered public accounting firm. The Audit Committee has
discussed with the independent auditors matters required to be discussed by the applicable Auditing
Standards as periodically amended (including significant accounting policies, alternative
accounting treatments and estimates, judgments and uncertainties). In addition, the independent
auditors provided to the Audit Committee the written disclosures required by the applicable
requirements of the Public Company Accounting Oversight Board regarding the independent auditors
communications with the Audit Committee concerning independence, and the Audit Committee and the
independent auditors have discussed the auditors independence from the Company and its management,
including the matters in those written disclosures. The Audit Committee also received reports from
M&P regarding all critical accounting policies and practices used by the Company, any alternative
treatments of financial information used, generally accepted accounting principles that have been
discussed with management, ramifications of the use of alternative treatments and the treatment
preferred by M&P and other material written communications between M&P and management, including
management letters and schedules of adjusted differences.
In making its decision to select M&P as Emispheres independent registered public accounting firm
for 2010, the Audit Committee considers whether the non-audit services provided by M&P are
compatible with maintaining the independence of M&P.
Based upon the review and discussions referenced above, the Audit Committee, as comprised at the
time of the review and with the assistance of the Companys Chief Financial Officer, recommended to
the Board of Directors that the audited financial statements be included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010 and be filed with the SEC.
The Members of the Audit Committee
John D. Harkey, Jr. (Chairman)
Timothy G. Rothwell
Michael Weiser, M.D.
62
Compensation of Non-Employee Directors
A director who is a full-time employee of the Company receives no additional compensation for
services provided as a director. It is the Companys policy to provide competitive compensation and
benefits necessary to attract and retain high quality non-employee directors and to encourage
ownership of Company stock to further align their interests with those of stockholders. The
following represents the compensation of the non-employee members of the Board of Directors:
|
|
|
Prior to June 24, 2009, each non-employee director received, on the date of each regular
annual stockholders meeting, a stock option to purchase 7,000 shares of our common stock
under the 2007 Plan. The stock options vest on the six month anniversary of the grant date
provided the director continuously serves as a director from the grant date through such
vesting date. Notwithstanding the foregoing, any director who holds any stock options
granted before April 1, 2004 which remain unvested was ineligible to receive the annual
7,000-share stock option grant described in this paragraph unless and until all such prior
options had vested. Stock options granted in 2009 have a stated expiration date of ten years
after the date of grant, and are subject to accelerated vesting upon a change in control of
Emisphere. If the holder of an option ceases to serve as a director, all previously granted
options may be exercised to the extent vested within six months after termination of
directorship (one year if the termination is by reason of death), except that, after April
1, 2004 (unless otherwise provided in an option agreement), if a director becomes an
emeritus director of Emisphere immediately following his Board service, the vested options
may be exercised for six months after termination of service as an emeritus director. All
unvested options expire upon termination of service on the Board of Directors. |
|
|
|
|
On May 15, 2009, in recognition of the roles and responsibilities of the Board of
Directors and current market data, the non-employees members of the Board of Directors
compensation was revised to include a special one-time grant of 50,000 options to purchase
shares of common stock granted on May 15, 2009, an annual retainer of $35,000, payable
quarterly in cash, and an annual stock option grant of 40,000 options to purchase shares of
common stock. The annual stock option grants are granted each year on the date of the annual
meeting of stockholders of the Company. The director must be an eligible director on the
dates the retainers are paid and the stock options are granted. The options subject to the
special one-time stock option grant and annual stock option grant would vest over three
years in equal amounts on each anniversary of the grant date provided the director
continuously serves as a director from the grant date through such vesting date, subject to
accelerated vesting upon a change in control of Emisphere. Such options, once vested, remain
exercisable through the period of the option term. |
|
|
|
|
All newly appointed directors shall receive an initial stock option grant on the date of
appointment of 50,000 options to purchase shares of common stock. The options subject to
such initial stock option grant vest over three years in equal amounts on each anniversary
of the grant date provided the director continuously serves as a director from the grant
date through such vesting date, subject to accelerated vesting upon a change in control of
Emisphere. Such options, once vested, remain exercisable through the period of the option
term. |
|
|
|
|
On May 15, 2009, Messrs. Weiser, Harkey and Rachesky received a one-time special stock
option grant of 25,000 shares of common stock and a one-time fee of $10,000 in recognition
for their length of service on the Board of Directors. The options subject to these one-time
stock option grants vest over three years in equal amounts on each anniversary of the grant
date provided the director continuously serves as a director from the grant date through
such vesting date, subject to accelerated vesting upon a change in control of Emisphere.
Such options, once vested, remain exercisable through the period of the option term. |
|
|
|
|
Additional committee and chairperson fees are paid as follows: |
|
|
|
$10,000 audit committee chairperson fee; |
|
|
|
|
$2,500 audit committee member fee; |
|
|
|
|
$5,000 compensation committee chairperson fee; |
|
|
|
|
$1,000 compensation committee member fee; |
|
|
|
|
$2,500 governance and nominating committee chairperson fee; and |
|
|
|
$500 governance and nominating committee member fee. |
63
The director must be an eligible director on the dates such fees are paid.
Director Compensation Table 2010
The table below represents the compensation paid to our non-employee directors during the year
ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned |
|
|
Stock |
|
|
Option |
|
|
All Other |
|
|
|
|
|
|
or Paid |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Total |
|
Name |
|
in Cash ($) |
|
|
($)(1) |
|
|
($)(1) |
|
|
($) |
|
|
($) |
|
John D. Harkey, Jr. |
|
|
45,000 |
|
|
|
|
|
|
|
36,940 |
|
|
|
|
|
|
|
81,940 |
|
Mark H. Rachesky, M.D. |
|
|
36,500 |
|
|
|
|
|
|
|
36,940 |
|
|
|
|
|
|
|
73,440 |
|
Timothy G. Rothwell |
|
|
33,958 |
|
|
|
|
|
|
|
36,940 |
|
|
|
|
|
|
|
70,898 |
|
Michael Weiser, M.D. |
|
|
45,000 |
|
|
|
|
|
|
|
36,940 |
|
|
|
|
|
|
|
81,940 |
|
|
|
|
(1) |
|
The value listed in the above table represents the fair value of the options recognized as
expense under FASB ASC Topic 718 during 2010, including unvested options granted before 2010
and those granted in 2010. Fair value is calculated as of the grant date using the
Black-Scholes-Model. The determination of the fair value of share-based payment awards made on
the date of grant is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. Our assumptions in determining fair value are described in
note 12 to our audited financial statements for the year ended December 31, 2010. |
The following table summarizes the aggregate number of option awards and stock awards held by each
non-employee director at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
|
Stock Awards |
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Market |
|
|
|
Number of |
|
|
Securities |
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
Value of |
|
|
|
Securities |
|
|
Underlying |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
|
Units of |
|
|
Shares or |
|
|
|
Underlying |
|
|
Unexercised |
|
|
Unexercised |
|
|
|
|
|
|
|
|
|
|
Stock That |
|
|
Units of |
|
|
|
Unexercised |
|
|
Unearned |
|
|
Unearned |
|
|
Option |
|
|
Option |
|
|
Have not |
|
|
Stock That |
|
|
|
Options (#) |
|
|
Options (#) |
|
|
Options |
|
|
Exercise |
|
|
Expiration |
|
|
Vested |
|
|
Have not |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
(#) |
|
|
Price ($) |
|
|
Date |
|
|
(#) |
|
|
Vested ($) |
|
John D. Harkey, Jr. |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
8.97 |
|
|
|
5/26/2016 |
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.76 |
|
|
|
4/20/2017 |
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.79 |
|
|
|
8/8/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
50,000 |
(1) |
|
|
|
|
|
|
0.93 |
|
|
|
5/15/2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
(2) |
|
|
|
|
|
|
1.20 |
|
|
|
9/16/2020 |
|
|
|
|
|
|
|
|
|
Mark H. Rachesky, M.D. |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.76 |
|
|
|
4/20/2017 |
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.79 |
|
|
|
8/8/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
50,000 |
(1) |
|
|
|
|
|
|
0.93 |
|
|
|
5/15/2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
(2) |
|
|
|
|
|
|
1.20 |
|
|
|
9/16/2020 |
|
|
|
|
|
|
|
|
|
Michael Weiser, M.D. |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
8.97 |
|
|
|
5/26/2016 |
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.76 |
|
|
|
4/20/2017 |
|
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
3.79 |
|
|
|
8/8/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
50,000 |
(1) |
|
|
|
|
|
|
0.93 |
|
|
|
5/15/2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
(2) |
|
|
|
|
|
|
1.20 |
|
|
|
9/16/2020 |
|
|
|
|
|
|
|
|
|
Timothy G. Rothwell |
|
|
16,666 |
|
|
|
33,334 |
(3) |
|
|
|
|
|
|
0.70 |
|
|
|
11/5/2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
(2) |
|
|
|
|
|
|
1.20 |
|
|
|
9/16/2020 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
25,000 exercisable as of 5/15/2011 and 5/15/2012, respectively. |
|
(2) |
|
13,333 exercisable as of 9/16/2011 and 9/16/2012, respectively and 13,334 exercisable as of
9/16/2013. |
|
(3) |
|
16,667 exercisable as of 11/5/2011 and 11/5/2012, respectively. |
64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities Available For Future Issuance Under Equity Plans
The
following table provides information as of September 30, 2011 about the common stock that may be
issued upon the exercise of options granted to employees, consultants or members of our Board of
Directors under our existing equity compensation plans, including the 1991 Stock Option Plan, 1995
Stock Option Plan, 2000 Stock Option Plan, the 2002 Broad Based Plan, the 2007 Stock Award and
Incentive Plan (collectively the Plans) the Stock Incentive Plan for Outside Directors and the
Directors Deferred Compensation Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
|
|
|
|
(c) |
|
|
|
Number of |
|
|
|
|
|
|
Number of Securities |
|
|
|
Securities to be |
|
|
(b) |
|
|
Remaining Available for |
|
|
|
Issued Upon |
|
|
Weighted Average |
|
|
Future Issuance Under |
|
|
|
Exercise of |
|
|
Exercise Price |
|
|
Equity Compensation Plans |
|
|
|
Outstanding |
|
|
of Outstanding |
|
|
(Excluding Securities |
|
Plan Category |
|
Options |
|
|
Options |
|
|
Reflected in Column (a)) |
|
Equity Compensation Plans Approved by Security Holders |
|
|
|
|
|
|
|
|
|
|
|
|
The Plans |
|
|
3,111,650 |
|
|
$ |
2.86 |
|
|
|
1,367,598 |
|
Stock Incentive Plan for Outside Directors |
|
|
79,000 |
|
|
|
9.27 |
|
|
|
|
|
Directors Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans not approved by Security
Holders(1) |
|
|
10,000 |
|
|
|
3.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,200,650 |
|
|
$ |
3.02 |
|
|
|
1,367,598 |
|
|
|
|
(1) |
|
Our Board of Directors has granted options which are currently outstanding for a former
consultant. The Board of Directors determines the number and terms of each grant (option
exercise price, vesting and expiration date). These grants were made on 7/12/2002 and
7/14/2003. |
Common Stock Ownership by Directors and Executive Officers and Principal Holders
Directors and Executive Officers
The
following table sets forth certain information, as of
September 30, 2011, regarding the beneficial
ownership of the common stock by (i) each director, including the Director Nominees; (ii) each
Executive Officer; (iii) all of our directors and Executive Officers as a group. Applicable
percentage ownership is based on 60,687,478 shares of Common Stock
outstanding as of September 30, 2011.
The number of shares beneficially owned by each director or Executive Officer is determined under
the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under these rules, beneficial ownership includes any shares as to which the
individual has the sole or shared voting power (which includes power to vote, or direct the voting
of, such security) or investment power (which includes power to dispose of, or direct the
disposition of, such security). In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of common stock subject to options, warrants or
convertible notes held by that person that are currently exercisable or convertible into Common
Stock or will become exercisable or convertible into common stock
within 60 days after September 30, 2011
are deemed outstanding, while such shares are not deemed outstanding for purposes of computing
percentage ownership of any other person. Unless otherwise indicated, all persons named as
beneficial owners of common stock have sole voting power and sole investment power with respect to
the shares indicated as beneficially owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
|
|
|
|
|
|
|
|
Beneficially Owned |
|
|
Common Shares |
|
|
Percent |
|
Name and Address(a) |
|
(b) |
|
|
Underlying Options |
|
|
Of Class |
|
Michael R. Garone(e) |
|
|
175,000 |
|
|
|
75,000 |
|
|
|
* |
|
Gary Riley, DVM, Ph.D. |
|
|
110,500 |
|
|
|
90,000 |
|
|
|
* |
|
Mark H. Rachesky, M.D. |
|
|
38,027,951 |
(c) |
|
|
19,544,288 |
(d) |
|
|
47.4 |
% |
Timothy G. Rothwell |
|
|
46,666 |
|
|
|
46,666 |
|
|
|
* |
|
Michael Weiser, M.D. |
|
|
63,108 |
|
|
|
59,333 |
|
|
|
* |
|
John D. Harkey, Jr. |
|
|
63,108 |
|
|
|
59,333 |
|
|
|
* |
|
All directors and executive officers as a group |
|
|
38,486,833 |
|
|
|
19,874,620 |
|
|
|
47.8 |
% |
|
65
(a) |
|
Unless otherwise specified, the address of each beneficial owner is c/o Emisphere
Technologies, Inc., 240 Cedar Knolls Road, Suite 200, Cedar Knolls, New Jersey 07927. |
|
(b) |
|
The number of shares set forth for each Director and Executive Officer consists of direct and
indirect ownership of shares, including stock options, deferred common share units, restricted
stock and, in the case of Dr. Rachesky, shares of common stock that can be obtained upon
conversion of convertible notes and exercise of warrants, as further described in footnotes
(c) and (d) below. |
|
(c) |
|
This number consists of: |
|
|
|
18,483,663 shares of common stock held for the accounts of the following entities: |
|
|
|
6,226,054 shares held for the account of MHR Capital Partners Master Account LP
(Master Account) |
|
|
|
|
847,125 shares held for the account of MHR Capital Partners (100) LP (Capital
Partners (100)) |
|
|
|
|
3,240,750 shares held for the account of MHR Institutional Partners II LP
(Institutional Partners II) |
|
|
|
|
8,164,436 shares held for the account of MHR Institutional Partners IIA LP
(Institutional Partners IIA) |
|
|
|
|
5,298 shares held directly by Mark H. Rachesky, M.D. |
|
|
|
|
7,378,106 shares of common stock that can be obtained by the following entities upon
conversion of the Convertible Notes, including 326,925 shares of common stock issuable to
the following entities as payment for accrued but unpaid interest on the Convertible Notes
since the most recent interest payment date (June 30, 2011) through the date that is 60 days
after September 30, 2011: |
|
|
|
|
|
1,485,711 shares held by Master Account |
|
|
|
|
|
|
203,174 shares held by Capital Partners (100) |
|
|
|
|
|
|
1,616,575 shares held by Institutional Partners II |
|
|
|
|
|
|
4,072,646 shares held by Institutional Partners IIA |
|
|
|
|
|
12,088,849 shares of common stock that can be obtained by the following entities upon
exercise of warrants: |
|
|
|
|
|
2,704,898 shares held by Master Account |
|
|
|
|
|
|
368,479 shares held by Capital Partners (100) |
|
|
|
|
|
|
2,561,720 shares held by Institutional Partners II |
|
|
|
|
|
|
6,453,752 shares held by Institutional Partners IIA |
|
|
|
|
7,000 shares of common stock that can be obtained by Dr. Rachesky upon the exercise of
currently vested stock options at a price of $3.76 per share |
|
|
|
|
7,000 shares of common stock that can be obtained by Dr. Rachesky upon the exercise of
currently vested stock options at a price of $3.79 per share |
|
|
|
|
50,000 shares of common stock that can be obtained by Dr. Rachesky upon the exercise of
currently vested stock options at a price of $0.93 per share. |
|
|
|
|
|
13,333 shares of common stock that can be obtained by Dr. Rachesky upon the excercise of currently vested stock options at a price of $1.20 per share. |
|
|
|
|
|
MHR Advisors LLC (Advisors) is the general partner of each of Master Account and Capital
Partners (100), and, in such capacity, may be deemed to beneficially own the shares of common
stock held for the accounts of each of Master Account and Capital Partners (100). MHR
Institutional Advisors II LLC (Institutional Advisors II) is the general partner of each of
Institutional Partners II and Institutional Partners IIA, and, in such capacity, may be deemed
to beneficially own the shares of |
66
|
|
|
common stock held for the accounts of each of Institutional Partners II and Institutional
Partners IIA. MHR Fund Management LLC (Fund Management) is a Delaware limited liability
company that is an affiliate of and has an investment management agreement with Master
Account, Capital Partners (100), Institutional Partners II and Institutional Partners IIA, and
other affiliated entities, pursuant to which it has the power to vote or direct the vote and
to dispose or to direct the disposition of the shares of common stock held by such entities
and, accordingly, Fund Management may be deemed to beneficially own the shares of common stock
held for the account of each of Master Account, Capital Partners (100), Institutional Partners
II and Institutional Partners IIA. Dr. Rachesky is the managing member of Advisors,
Institutional Advisors II, and Fund Management, and, in such capacity, may be deemed to
beneficially own the shares of common stock held for the accounts of each of Master Account,
Capital Partners (100), Institutional Partners II and Institutional Partners IIA. |
|
(d) |
|
This number consists of (i) 7,378,106 shares of common stock that can be obtained by Master
Account, Capital Partners (100), Institutional Partners II and Institutional Partners IIA upon
conversion of the Convertible Notes, (ii) 12,088,849 shares of common stock that can be
obtained by Master Account, Capital Partners (100), Institutional Partners II and
Institutional Partners IIA upon exercise of warrants, (iii) 73,333 shares of common stock that
can be obtained by Dr. Rachesky upon the exercise of currently vested stock options. |
|
|
(e) |
|
On February 28, 2011, Michael R. Garone was appointed as Interim Chief Executive Officer of
the Company. |
Principal Holders of Common Stock
The following table sets forth information regarding beneficial owners of more than five (5%)
percent of the outstanding shares of Common Stock as of July 7, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Percent |
|
Name and Address |
|
Beneficially Owned |
|
|
Of Class(a) |
|
Bai Ye Feng |
|
|
|
|
|
|
|
|
16A Li Dong Building |
|
|
|
|
|
|
|
|
No. 9 Li Yuen Street East |
|
|
|
|
|
|
|
|
Central, Hong Kong |
|
|
6,184,389 |
(b) |
|
|
9.87 |
% |
Mark H. Rachesky, M.D. |
|
|
|
|
|
|
|
|
40 West 57th Street, 24th Floor |
|
|
|
|
|
|
|
|
New York, NY 10019 |
|
|
38,027,951 |
(c) |
|
|
47.4 |
% |
|
|
|
|
|
(a) |
|
Applicable percentage ownership is based on 60,687,478 shares of Common Stock outstanding as
of September 30, 2011. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to options, warrants or
convertible notes held by that person that are currently exercisable or convertible into
Common Stock or will become exercisable or convertible into Common Stock within 60 days after
September 30, 2011 are deemed outstanding, while such shares are not deemed outstanding for purposes
of computing percentage ownership of any other person. |
|
|
(b) |
|
Information based on input from Mr. Feng. Mr. Feng beneficially owns an aggregate of
6,184,389 shares of common stock, consisting of 4,202,738 shares of common stock and warrants
to purchase up to 1,981,651 shares of common stock |
|
(c) |
|
Please refer to footnote c in the table under Directors and Executive Officers (above). |
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transaction Approval Policy
In February 2007, our Board of Directors adopted a written related party transaction approval
policy, which sets forth our Companys polices and procedures for the review, approval or
ratification of any transaction required to be reported in our filings with the SEC. The Companys
policy with regard to related party transactions is that all material transactions non-compensation
related are to be reviewed by the Audit Committee for any possible conflicts of interest. The
Compensation Committee will review all material transactions that are related to compensation. All
related party transactions approved by either the Audit Committee or Compensation Committee shall
be disclosed to the Board of Directors at the next meeting.
67
Employment Agreement with Michael V. Novinski, Former President and Chief Executive Officer
On April 6, 2007, the Company entered into an employment agreement with Michael V. Novinski,
setting forth the terms and conditions of his employment as President and Chief Executive of the
Company (the Novinski Employment Agreement). The Novinski Employment Agreement was for a term of
three years, renewable annually thereafter. Effective February 25, 2011, the Company and Mr.
Novinski mutually agreed not to renew the Novinski Employment Agreement, and Mr. Novinski resigned
his employment with the Company. Under the Novinski Employment Agreement, Mr. Novinski received a
base salary of $550,000 per year, less applicable local, state and federal withholding taxes. Mr.
Novinski was also granted options to purchase 1,000,000 shares of the Companys common stock; the
exercise price for 500,000 of the shares was $3.19, the fair market value of the common stock on
the date of grant, and the exercise price for the remaining 500,000 shares is equal to two times
the fair market value of the common stock on the date of grant. At December 31, 2010, options to
purchase 1,000,000 shares were vested. In addition, he was eligible for an annual cash bonus up to
$550,000 (based on a full calendar year). In view of the Companys current liquidity constraints,
the Committee determined, and Mr. Novinski agreed, that he would be paid a $150,000 cash bonus
pursuant to his employment agreement with the Corporation in respect of the Companys 2009 fiscal
year (the 2009 Performance Bonus); additionally Mr. Novinski received a one-time grant of options
to purchase 300,000 shares in connection with his compensation for 2009. However, given the
Companys current liquidity constraints, the Compensation Committee, with the consent of Mr.
Novinski, agreed to defer the payment of the cash bonus until such time as the Companys liquidity
has stabilized and it has sufficient funding to pay it. The Committee also determined that Mr.
Novinski would be paid a special one-time cash bonus of $150,000 in connection with the successful
completion of a financing during 2009 (the 2009 Financing Bonus). However, in light of the
Companys current liquidity constraints, Mr. Novinski and the Company also agreed to defer the
payment of the $150,000 special cash bonus until such time as the Companys liquidity has
stabilized and it has sufficient funding to pay it.
In accordance with the Novinski Employment Agreement and the Separation and Release Agreement by
and between the Company and Mr. Novinski dated as of February 25, 2011 (the Separation
Agreement), the Company paid to Mr. Novinski the 2009 Performance Bonus and the 2009 Financing
Bonus, accrued but unpaid vacation benefits, and the Company also agreed to pay its portion of Mr.
Novinskis COBRA health benefits for a certain period of time as further set forth therein. Mr.
Novinski owns incentive stock options to purchase an aggregate of 1,600,000 shares of common stock,
of which 1,500,000 have vested. The Separation Agreement also provides that Mr. Novinskis 100,000
unvested stock options will continue to vest in accordance with Mr. Novinskis underlying option
agreements and that Mr. Novinski may exercise his vested stock options through April 6, 2012. Under
the terms of the Separation Agreement, Mr. Novinski has agreed to provide consulting services to
the Company for a period of 18 months and has also agreed to release the Company and certain
affiliated parties from all claims and liabilities under federal and state laws arising from his
relationship with the Company.
Agreement with M. Gary I. Riley, Vice President on Non-Clinical Development and Applied Biology
The Company has an agreement with M. Gary I. Riley (the Riley Employment Agreement) by which, in
the event that there is a Change in Control (as defined in the Riley Employment Agreement) during
Mr. Rileys first twenty-four months of employment at Emisphere resulting in termination of
employment during such twenty-four month period, a severance amount, equivalent to one years base
salary (excluding bonus and relocation assistance), will be provided to the executive. In the event
there is a Change in Control after Mr. Rileys first twenty-four months of employment, a severance
amount, equivalent to six months base salary, will be provided to him.
In addition, in the event that there is a Change in Control during Mr. Rileys employment at
Emisphere resulting in termination of employment, he shall receive, in addition to the options
already vested and subject to approval by the Board of Directors, immediate vesting of all
remaining options as set forth in the Plan.
Transactions with MHR
Mark H. Rachesky, M.D. is a director and member of the Companys compensation committee and its
governance and nominating committee. Dr. Rachesky is also the managing member of MHR Fund
Management LLC, that is an affiliate of and has an investment management agreement with MHR Capital
Partners (100) LP (Capital Partners 100), MHR Capital Partners Master Account LP (Master
Account), MHR Institutional Partners II LP (Institutional Partners II), and MHR Institutional
Partners IIA LP (Institutional Partners IIA and together with Capital Partners 100, Master
Account and Institutional Partners II MHR). In each of the transactions below that occurred
during 2009 or 2010, the Company was advised by an independent committee of the Companys Board of
Directors.
68
August 2009 Financing
On August 19, 2009, the Company entered into a Securities Purchase Agreement with MHR to sell
6,015,037 shares of common stock and warrants to purchase 3,729,323 shares of common stock for
gross proceeds of $4,000,000. Each unit, consisting of one share of common stock and a warrant to
purchase 0.62 of a share of common stock, was sold for a purchase price of $0.665. The warrants to
purchase additional shares are exercisable at an exercise price of $0.70 per share and will expire
on August 21, 2014. For a more detailed discussion, please see Notes 8 and 9 to our Financial
Statements included herein.
June 2010 Notes and Warrants
In connection with the Companys agreement with Novartis Pharma AG (Novartis) entered in June
2010 (the Novartis Agreement), the Company, Novartis and Institutional Partners IIA entered into
a non-disturbance agreement (the Non-Disturbance Agreement), pursuant to which Institutional
Partners IIA agreed to limit certain rights and courses of action that it would have available to
it as a secured party under its Senior Secured Term Loan Agreement and Pledge and Security
Agreement with the Company (collectively, the Loan and Security Agreement). Additionally,
Novartis and Institutional Partners IIA entered into a license agreement pursuant to which
Institutional Partners IIA agreed to grant a license to Novartis upon the occurrence of certain
events and subject to satisfaction of certain conditions. Institutional Partners IIA also consented
to the Company entering into the Novartis Agreement, which consent was required under the Loan and
Security Agreement, and agreed to enter into a agreement comparable to the Non-Disturbance
Agreement at some point in the future in connection with another potential Company transaction (the
Future Transaction Agreement). For a more detailed discussion, please see Notes 8 and 9 to our
Financial Statements included herein.
In consideration of the agreements and consent provided by Institutional Partners IIA described in
the foregoing paragraph, the Company entered into an agreement with Institutional Partners IIA (the
MHR Letter Agreement) pursuant to which the Company agreed to reimburse MHR for its legal
expenses incurred up to $500,000 in connection with the agreements entered into in connection with
the Novartis transaction and up to $100,000 in connection with the Future Transaction Agreement.
These reimbursements were paid in the form of non-interest bearing promissory notes for $500,000
and $100,000 issued to MHR on June 4, 2010. Pursuant to the MHR Letter Agreement, the Company also
granted to MHR warrants to purchase 865,000 shares of its common stock, with an exercise price of
$2.90 per share and an expiration date of August 21, 2014. For a more detailed discussion, please
see Notes 8 and 9 to our Financial Statements included herein.
July 2010 Promissory Notes
On July 29, 2010, in consideration for $500,000 in bridge financing funds provided to the Company,
we issued to Institutional Partners II and Institutional Partners IIA promissory notes with an
aggregate principal amount of $525,000 (the July 2010 MHR Notes). The July 2010 MHR Notes
provided for an interest rate of 15% per annum, and were due and payable on October 27, 2010.
During the quarter ended September 30, 2010, certain conditions caused the maturity date of the
July 2010 MHR Notes to accelerate, and the July 2010 MHR Notes were accordingly paid off. See Note
8 to our Financial Statements included herein for further discussion.
August 2010 Financing
On August 25, 2010, the Company entered into a securities purchase agreement with MHR (the August
2010 MHR Financing) pursuant to which the Company agreed to sell an aggregate of 3,497,528 shares
of its common stock and warrants to purchase a total of 2,623,146 additional shares of its common
stock for total gross proceeds of $3,532,503. Each unit, consisting of one share of common stock
and a warrant to purchase 0.75 shares of common stock, was sold at a purchase price of $1.01. The
warrants to purchase additional shares are exercisable at a price of
$1.26 per share and will expire on August 26, 2015. On the same date, the Company also entered into a
securities purchase agreement with certain institutional investors to sell common stock and
warrants for total gross proceeds of $3,532,503 (collectively, with the August 2010 MHR Financing,
the August 2010 Financing).
In connection with the August 2010 Financing, the Company entered into a waiver agreement with MHR
(the Waiver Agreement), pursuant to which MHR waived certain anti-dilution adjustment rights
under its 11% senior secured notes and warrants issued by the Company to MHR in September 2006 that
would otherwise have been triggered by the financings described above. As consideration for such
waiver, the Company issued to MHR a warrant to purchase 975,000 shares of common stock and agreed
to reimburse MHR for 50% of its legal fees up to a maximum reimbursement of $50,000. The terms of
such warrant are identical to the warrants issued to
69
MHR in the August 2010 MHR Financing transaction described above. For further discussion see notes 8 and 9 to our Financial Statements included herein.
July 2011 Financing
On June 30, 2011, the Company entered into the MHR Purchase Agreement, pursuant to which, on July
6, 2011, it sold an aggregate of 4,300,438 shares of its common stock and warrants to purchase a
total of 3,010,307 shares of its common stock for gross proceeds, before deducting fees and
expenses and excluding the proceeds, if any, from the exercise of the MHR Warrants of
$3,749,981.94. As part of the July 2011 Financing, the Company entered into the 2011 Waiver
Agreement with MHR, pursuant to which MHR waived certain anti-dilution adjustment rights under the
MHR Convertible Notes and certain warrants issued by the Company to MHR that would otherwise have
been triggered by the financing with other institutional investors described above. As consideration for such waiver, the Company issued the
MHR Waiver Warrants to purchase 795,000 shares of common stock and agreed to reimburse MHR for up
to $25,000 of its legal fees. Each unit, consisting of one share of common stock and a warrant to
purchase 0.7 shares of common stock, were sold at a purchase price of $0.872. The
MHR Warrants and the MHR Waiver Warrants are exercisable at an exercise price of $1.09 per share
and will expire July 6, 2016.
Ongoing Obligations Under Convertible Notes and Warrants
The senior secured convertible notes owned by MHR (the MHR Convertible Notes) contain provisions
related to anti-dilution and redemption rights. In addition, MHR has certain rights regarding
election of directors, participation in future equity financings and other related matters, which
rights are set forth in the Companys certificate of incorporation and bylaws. Additionally, the
Company issued warrants to purchase common stock to MHR in 2006 and to Institutional Partners II
and Institutional Partners IIA in 2007 (the Warrants), which are still outstanding. The Warrants
provide for anti-dilution protection, and the fair value of the Warrants is estimated at the end of
each quarterly reporting period using Black-Sholes models. See Notes 8 and 9 to our Financial
Statements included herein for a further discussion of MHRs rights under the MHR Convertible Notes
and Warrants.
Transaction with Bai Ye Feng
Bai Ye Feng has been the beneficial owner of more than five (5%) percent of the outstanding shares
of Common Stock since the August 2010 Financing. In the July 2011 Financing, Mr. Feng purchased
688,073 shares of Common Stock and warrants to purchase 481,651 shares of Common Stock, for an
aggregate purchase price of $600,000. The warrants are exercisable at an exercise price of $1.09
per share and will expire July 6, 2016. The total dollar amount of the July 2011 Financing was
$3,749,982.
Information about Board of Directors
Our business is overseen by the Board of Directors. It is the duty of the Board of Directors to
oversee the Chief Executive Officer and other senior management in the competent and ethical
operation of the Company on a day-to-day basis and to assure that the long-term interests of the
stockholders are being served. To satisfy this duty, our directors take a proactive, focused
approach to their position, and set standards to ensure that the Company is committed to business
success through maintenance of the highest standards of responsibility and ethics. The Board of
Directors is kept advised of our business through regular verbal or written reports, Board of
Directors meetings, and analysis and discussions with the Chief Executive Officer and other
officers of the Company.
Members of the Board of Directors bring to us a wide range of experience, knowledge and judgment.
Our governance organization is designed to be a working structure for principled actions, effective
decision-making and appropriate monitoring of both compliance and performance.
The Board of Directors has affirmatively determined that Mr. John D. Harkey, Jr., Dr. Mark H.
Rachesky, Mr. Timothy G. Rothwell, and Dr. Michael Weiser are independent directors within the
meaning of Rule 4200 of the NASDAQ Marketplace Rules. Until the resignation of Michael V. Novinski, the sole
non-independent director, on February 28, 2011, the independent directors meet in separate
sessions at the conclusion of board meetings and at other times as deemed necessary by the
independent directors, in the absence of Mr. Novinski. Mr. Berger
resigned the Board of Directors effective October 23, 2009. Mr. Moch resigned from the Board of
Directors effective November 10, 2009. None of the members of the Board of Directors currently serve as Chairman; leadership of
the Board is provided through consensus of the directors. Matters are explored in Committee and
brought to the full Board for discussion or action.
70
Committees of the Board of Directors
The Board of Directors has established an Audit Committee, a Compensation Committee and a
Governance and Nominating Committee. Each of the committees of the Board of Directors acts pursuant
to a separate written charter adopted by the Board of Directors.
The Audit Committee is currently comprised of Mr. Harkey (chairman), Mr. Rothwell and Dr. Weiser.
Mr. Rothwell became a member of the Audit Committee on January 6, 2010. All members of the Audit
Committee are independent within the meaning of Rule 4200 of the NASDAQ Marketplace Rules. The
Board of Directors has determined that Mr. Harkey is an Audit Committee financial expert, within
the meaning of Item 401(h) of Regulation S-K. The Audit Committees responsibilities and duties are
summarized in the report of the Audit Committee and in the Audit Committee charter which is
available on our website (www.emisphere.com).
The Compensation Committee is currently comprised of Dr. Weiser (chairman) and Dr. Rachesky. All
members of the Compensation Committee are independent within the meaning of Rule 4200 of the NASDAQ
Marketplace Rules, non-employee directors within the meaning of the rules of the Securities and
Exchange Commission and outside directors within the meaning set forth under Internal Revenue
Code Section 162(m). The Compensation Committees responsibilities and duties are summarized in the
report of the Compensation Committee and in the Compensation Committee charter also available on
our website.
The Governance and Nominating Committee is currently comprised of Dr. Weiser (chairman) and Dr.
Rachesky. All members of the Governance and Nominating Committee are independent within the meaning
of Rule 4200 of the NASDAQ Marketplace Rules. The Governance and Nominating Committees
responsibilities and duties are set forth in the Governance and Nominating Committee charter on our
website. Among other things, the Governance and Nominating Committee is responsible for
recommending to the board the nominees for election to our Board of Directors and the
identification and recommendation of candidates to fill vacancies occurring between annual
stockholder meetings.
The table below provides membership information for each committee of the Board of Directors during
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Governance |
Name |
|
Board |
|
Audit |
|
Compensation |
|
and Nominating |
Michael V. Novinski(1) |
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark H. Rachesky, M.D.(2) |
|
|
X |
|
|
|
|
|
|
|
X |
|
|
|
X |
|
Michael Weiser, M.D.(2) |
|
|
X |
|
|
|
X |
|
|
|
X |
* |
|
|
X |
* |
John D. Harkey, Jr.(3) |
|
|
X |
|
|
|
X |
* |
|
|
|
|
|
|
|
|
Timothy G. Rothwell(3) |
|
|
X |
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Chair |
|
(1) |
|
On February 28, 2011, Michael V. Novinski resigned as a director of the Company and from his
position as President and Chief Executive Officer of the Company. |
|
|
(2) |
|
Class III directors: Term as director is expected to expire in 2014. |
|
|
(3) |
|
Class I directors: Term as director is expected to expire in 2012. |
Board Involvement in Risk Oversight
Our Board of Directors is responsible for oversight of the Companys risk assessment and management
process. We believe risk can arise in every decision and action taken by the Company, whether
strategic or operational. Our comprehensive approach is reflected in the reporting processes by
which our management provides timely and fulsome information to the Board of Directors to support
its role in oversight, approval and decision-making.
The Board of Directors closely monitors the information it receives from management and provides
oversight and guidance to our management team concerning the assessment and management of risk. The
Board of Directors approves the Companys high level goals, strategies and policies to set the tone
and direction for appropriate risk taking within the business.
71
The Board of Directors delegated to the Compensation Committee basic responsibility for oversight
of managements compensation risk assessment, and that committee reports to the board on its
review. Our Board of Directors also delegated tasks related to risk process oversight to our Audit
Committee, which reports the results of its review process to the Board of Directors. The Audit
Committees process includes a review, at least annually, of our internal audit process, including
the organizational structure, as well as the scope and methodology of the internal audit process.
The Governance and Nominating Committee oversees risks related to our corporate governance,
including director performance, director succession, director education and governance documents.
In addition to the reports from the Board committees, our board periodically discusses risk
oversight.
Meetings Attendance
During the 2010 fiscal year, our Board of Directors held 5 meetings. With the exception of Mr.
Harkey, who attended 3 of 4 Audit Committee meetings held during 2010, each director attended 100
percent of the aggregate number of Board of Directors meetings and committee meetings of which he
was a member that were held during the period of his service as a director.
The Audit Committee met 4 times during the 2010 fiscal year.
The Compensation Committee met 1 time during the 2010 fiscal year.
The Governance and Nominating Committee met 1 time during the 2010 fiscal year.
The Company does not have a formal policy regarding attendance by members of the Board of
Directors at the Companys annual meeting of stockholders, although it does encourage attendance by
the directors.
DESCRIPTION OF SECURITIES TO BE REGISTERED
The following summary of certain provisions of our common stock does not purport to be complete.
You should refer to our amended and restated certificate of incorporation, as amended, and our
by-laws, as amended, both of which are incorporated by reference as an exhibit to
this prospectus. The summary below is also qualified by provisions of
applicable law.
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $.01 per
share, and 1,000,000 shares of preferred stock, par value $.01 per
share. As of September 30, 2011,
there were 60,687,478 shares of common stock outstanding and no shares of preferred stock
outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held on all matters submitted to a
vote of stockholders, and do not have cumulative voting rights. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by our board of directors
out of legally available funds, and subject to any preferential dividend rights of any then
outstanding preferred stock. Upon our liquidation, dissolution or winding-up, the holders of common
stock are entitled to receive ratably our net assets available after the payment of all debts and
other liabilities and subject to any liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive, subscription or conversion rights. There are no
redemption or sinking fund provisions applicable to the common stock. The outstanding shares of
common stock are, and the shares offered by us in this offering will be when issued and paid for,
fully paid and non-assessable.
Preferred Stock
We are authorized to issue 1,000,000 shares of preferred stock, par value $.01 per share. As of September
30, 2011, there were no shares of preferred stock outstanding. Our board of directors has the
authority, subject to certain restrictions, without further stockholder approval, to issue, at any
time and from time to time, shares of preferred stock in one or more series. Each such series shall
have such number of shares, designations,
72
preferences, voting powers, qualifications, and special or relative rights or privileges as shall
be determined by our board of directors, which may include, among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights, to the full extent now or hereafter permitted by the laws of the State of
Delaware.
The rights of the holders of common stock will be subject to, and may be adversely affected by, the
rights of holders of any preferred stock that may be issued in the future. Such rights may include
voting and conversion rights which could adversely affect the holders of the common stock.
Satisfaction of any dividend preferences of outstanding preferred stock would reduce the amount of
funds available, if any, for the payment of dividends on common stock. Holders of preferred stock
would typically be entitled to receive a preference payment.
Warrants
Warrants to purchase shares of our common stock have been issued in conjunction with various
financing transactions. The following table summarizes warrants
outstanding as of September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares |
|
|
|
|
|
|
|
|
|
|
of common stock |
|
|
|
|
|
|
|
|
|
|
issuable upon |
|
|
|
|
|
|
|
|
|
|
exercise of the |
|
|
|
|
|
|
Exercise price |
|
Related Transaction |
|
warrants (1) |
|
|
Exercise period |
|
|
(1) (2) |
|
August 2007 Offering |
|
|
400,000 |
|
|
|
8/22/07 8/21/12 |
|
|
$ |
3.948 |
|
August 2009 Offering |
|
|
3,729,323 |
|
|
|
8/21/09 8/21/14 |
|
|
$ |
0.713 |
(3) |
Warrants issued to MHR June 2010 |
|
|
865,000 |
|
|
|
6/8/10 8/21/14 |
|
|
$ |
2.900 |
|
August 2010 Offering |
|
|
5,058,792 |
|
|
|
8/26/10 8/26/15 |
|
|
$ |
1.260 |
|
Warrants issued to MHR August 2010 |
|
|
975,000 |
|
|
|
8/26/10 8/26/15 |
|
|
$ |
1.260 |
|
July 2011 Offering |
|
|
6,020,614 |
|
|
|
7/6/11 7/6/16 |
|
|
$ |
1.090 |
|
Warrants issued to MHR July 2011 |
|
|
795,000 |
|
|
|
7/6/11 7/6/16 |
|
|
$ |
1.090 |
|
73
|
|
|
(1) |
|
The exercise price and the number of shares of common stock purchasable upon the exercise of
the warrants are subject to adjustment upon the occurrence of specific events, including stock
dividends, stock splits, and combinations of our common stock. |
|
(2) |
|
The exercise price of the warrants is subject to adjustment 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 warrants. |
|
(3) |
|
Reflects the weighted average exercise price of the August 2009 Offering warrants. |
Before exercising their warrants, holders of warrants do not have any of the rights of holders of
the securities purchasable upon such exercise, including, any right to receive dividends or
payments upon our liquidation, dissolution or winding up or to exercise voting rights.
Stockholder Rights Plan
The Companys board of directors has adopted a stockholder rights plan. The stockholder rights plan
was adopted to give the board of directors increased power to negotiate in our best interests and
to discourage appropriation of control of our Company at a price that is unfair to our
stockholders. The stockholder rights plan is not applicable to MHR. It is not intended to prevent
fair offers for acquisition of control determined by our board of directors to be in our best
interests and the best interests of our Companys stockholders, nor is it intended to prevent a
person or group from obtaining representation on or control of our board of directors through a
proxy contest, or to relieve our board of directors of its fiduciary duty concerning any proposal
for our acquisition in good faith.
The stockholder rights plan involves the distribution of one right as a dividend on each
outstanding share of our common stock to all holders of record on April 7, 2006, and an ongoing
distribution of one right with respect to each share of our common stock issued subsequently. Each
right shall entitle the holder to purchase one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock. The rights trade in tandem with the common stock until,
and become exercisable upon, the occurrence of certain triggering events, and the exercise price is
based on the estimated long-term value of our common stock. The exercise of these rights becomes
economically attractive upon the triggering of certain flip-in or flip-over rights which work
in conjunction with the stockholder rights plans basic provisions. The flip-in rights will permit
the preferred stocks holders to purchase shares of common stock at a discounted rate, resulting in
substantial dilution of an acquirers voting and economic interests in our company. The flip-over
element of the stockholder rights plan involves certain mergers or significant asset purchases,
which trigger certain rights to purchase shares of the acquiring or surviving company at a
discount. The stockholder rights plan contains a permitted offer exception which allows offers
determined by our board of directors to be in our best interests and the best interests of our
stockholders to take place free of the diluting effects of the stockholder rights plans
mechanisms.
The board of directors retains the right, at all times prior to acquisition of 20% of the Companys
voting common stock by an acquirer, to discontinue the stockholder rights plan through the
redemption of all rights, or to amend the stockholder rights plan in any respect.
Delaware Law and Certain By-Law Provisions
Certain provisions of our by-laws are intended to strengthen our board of directors position in
the event of a hostile takeover attempt. These by-law provisions have the following effects:
|
|
|
they provide that only persons who are nominated in accordance with the procedures set
forth in the by-laws shall be eligible for election as directors, except as may be otherwise
provided in the by-laws; |
|
|
|
|
they provide that only business brought before the annual meeting by our board of
directors or by a stockholder who complies with the procedures set forth in the by-laws may
be transacted at an annual meeting of stockholders; and |
|
|
|
|
they establish a procedure for our board of directors to fix the record date whenever
stockholder action by written consent is undertaken. |
Furthermore, our Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an interested
74
stockholder, unless the business combination is approved in a prescribed manner. For purposes of
Section 203, a business combination includes a merger, asset sale or other transaction resulting
in a financial benefit to the interested stockholder, and an interested stockholder is a person
who, together with affiliates and associates, owns, or within three years prior, did own, 15% or
more of the corporations voting stock.
In connection with the transactions contemplated by the Senior Secured Loan Agreement and the
Investment and Exchange Agreement, on September 29, 2005, the Board of Directors approved
amendments to our By-Laws, which became effective as of such date in order to provide that:
|
|
|
The MHR Director may be nominated for election to the Board by MHR for so long as MHR
shall continue to hold at least 2% of the shares of our outstanding Common Stock, warrants
or other equity securities convertible into, or exchangeable for, any Common Stock at a
conversion price or exchange rate that is equal to or less than the closing price per share
of Common Stock on the trading date immediately prior to such calculation, and that the MHR
Director shall, to the extent permitted by law or any applicable rule or listing standard of
any applicable securities exchange or market, be a member of each committee of the Board and
shall be entitled to attend a meeting of any such committee; |
|
|
|
|
MHR and the Board shall promptly select the Mutual Director, the Mutual Director shall be
nominated for election to the Board and the Board shall elect the Mutual Director; |
|
|
|
|
MHR shall have the right to appoint the MHR Observer and the MHR Observer shall have the
right to attend meetings of the Board and any committees thereof, solely in a non-voting
capacity, and to receive all notices, written materials and other information given to
directors in connection with such meetings, subject only to attorney-client privilege
considerations; |
|
|
|
|
The number of directors on the Board may only be increased upon the unanimous vote or
unanimous written consent of the Board; |
|
|
|
|
Any vacancy on the Board created by the resignation, removal or other discontinuation of
service as a member of the Board of the MHR Director shall be filled by an individual who
shall have been (i) designated by the MHR Director prior to the effectiveness of such
vacancy, other than in the case of removal of the MHR Director for cause, or (ii) nominated
or approved in writing by both a majority of the Board of Directors and MHR, in the case of
removal of the MHR Nominee for cause; |
|
|
|
|
Any vacancy on the Board created by the resignation, removal or other discontinuation of
service as a member of the Board of the Mutual Director shall only be filled by an
individual who shall have been nominated or approved in writing by both a majority of the
Board and MHR; |
|
|
|
|
The existing removal provisions of the By-Laws be deleted in their entirety and replaced
with provisions providing that any director, other than the MHR Director and the Mutual
Director, may be removed, with or without cause, by the affirmative vote of the holders of a
majority of the shares of common stock outstanding and entitled to vote at the election of
directors and that the MHR Director and the Mutual Director, may be removed, with or without
cause, by the affirmative vote of the holders of at least 85% of the shares of common stock
outstanding and entitled to vote at the election of directors, provided that the stockholder
vote requirement shall cease to have any force or effect after MHR shall cease to hold at
least 2% of the shares of the Companys outstanding common stock, warrants or other equity
securities convertible into, or exchangeable for, any Common Stock at a conversion price or
exchange rate that is equal to or less than the closing price per share of Common Stock on
the trading date immediately prior to such calculation; |
|
|
|
|
A quorum for the transaction of business must include the MHR Director and the Mutual
Director while in office instead of a mere majority of the Board; |
|
|
|
|
The rights in the By-Laws appurtenant to MHR may only be altered, amended or repealed
with the unanimous vote or unanimous written consent of the Board or the affirmative vote of
the holders of at least 85% of the shares of common stock outstanding and entitled to vote
at the election of directors, provided that the stockholder vote requirement shall cease to
have any force or effect after MHR shall cease to hold at least 2% of the shares of fully
diluted Common Stock; and |
|
|
|
|
The Board may not adopt any resolution setting forth, or call any meeting of stockholders
for the purpose of approving, any amendment to the By-Laws that would adversely affect the
rights of MHR set forth therein without a vote in favor of such resolution by the MHR
Director for so long as MHR continues to hold at least 2% of the shares of fully diluted
Common Stock. |
75
Transfer Agent and Registrar
The transfer agent and registrar for our common stock and rights is The Bank of New York Mellon,
111 Founders Plaza-Suite 1100, East Hartford, CT 06108.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of our common stock in the public market, or the
perception that such sales may occur, could adversely affect trading prices of our common stock
from time to time. As of September 30, 2011, 60,687,478 shares of our common stock were issued and
outstanding. 4,300,438 of such shares and an additional 3,010,306 shares of common stock issuable
upon exercise of the warrants covered by this prospectus will, upon effectiveness, be
freely tradable without restriction or further registration under the Securities Act.
As of
September 30, 2011, there are a total of 4,568,248 available shares of Common Stock to be issued
upon the exercise of options that have been or may be granted to employees, consultants or members
of our Board of Directors under our existing equity compensation plans, including the 1991 Stock
Option Plan, 1995 Stock Option Plan, 2000 Stock Option Plan, the 2002 Broad Based Plan, the 2007
Stock Award and Incentive Plan, the Stock Incentive Plan for Outside Directors and the Directors
Deferred Compensation Plan. Such shares of Common Stock are covered by the Form S-8 registration
statements filed by us with the SEC and generally may be resold in the public market without
restriction or limitation, except in the case of our affiliates who generally may only resell such
shares in accordance with the provisions of Rule 144 under the Securities Act.
Rule 144
In general, under Rule 144 under the Securities Act, a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule
144 for at least six months (including any period of consecutive ownership of preceding
non-affiliated holders) would be entitled to sell those shares, subject only to the availability of
current public information about us. A non-affiliated person who has beneficially owned restricted
securities within the meaning of Rule 144 for at least one year would be entitled to sell those
shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who
has beneficially owned restricted securities within the meaning of Rule 144 for at least six months
would be entitled to sell within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our common stock or the average weekly
trading volume of our common stock during the four calendar weeks preceding such sale. Such sales
are also subject to certain manner of sale provisions, notice requirements and the availability of
current public information about us.
INTERESTS OF NAMED EXPERTS AND COUNSEL
None.
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 its
Interim Chief Executive Officer and Chief Financial Officer, as
76
of the end of March 31, 2011. Based on that evaluation, our Interim Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
In connection with the preparation of our annual financial results for the year ended December 31,
2010, our management, including our Interim Chief Executive Officer and Chief Financial Officer,
performed a reevaluation and concluded that our disclosure controls and procedures were not
effective as of the quarterly periods ended March 31, June 30, and September 30, 2009 and 2010, nor
for the year ended December 31, 2009 and 2010 as a result of a material weakness in our internal
control over financial reporting. For further discussion, please see Note 19 to our financial
statements includedherein for the year ended December 31, 2010, In light of the material weakness,
we performed additional analysis and other post closing procedures during the composition of our
quarterly report for the period ended March 31, 2011 to ensure that our financial statements were
prepared in accordance with generally accepted accounting principles. Accordingly, we believe that
the financial statements included in this report fairly present in all material respects, our
financial condition, results of operations and cash flows for the periods presented.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, our management has concluded that our internal control over financial reporting was
effective as of March 31, 2011.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
LEGAL MATTERS
The validity of the shares of common stock being offered by this prospectus has been passed upon
for Emisphere Technologies, Inc. by Brown Rudnick LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 2009 and 2010 and for year ended December 31, 2009 and
2010 included in this Prospectus have been so included in reliance on the report (which contains
and explanatory paragraph related to the Companys ability to continue as a going concern as
described in Note 1 to the financial statements for the year ending December 31, 2010 contained
herein) of McGladrey & Pullen, LLP, an independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The financial statements for the year ended December 31, 2008 included in this Prospectus have been
so included in reliance on the report, which contains an explanatory paragraph relating to the
Companys ability to continue as a going concern as described in Note 1 to the financial
statements, of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given
on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC
under the Exchange Act. The public may read and copy any materials that we file with the SEC at the
SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including Emisphere, that file electronically
with the SEC. The public can obtain any documents that Emisphere files with the SEC at www.sec.gov.
77
We also make available free of charge on or through our Internet website (www.emisphere.com)
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
Section 16 filings, and, if applicable, amendments to those reports filed or furnished pursuant to
Section 13(a) or Section 16 of the Exchange Act as soon as reasonably practicable after we or the
reporting person electronically files such material with, or furnishes it to, the SEC. Our Internet
website and the information contained therein or connected thereto are not intended to be
incorporated into the Annual Report or this prospectus.
Our Board of Directors has adopted a Code of Business Conduct and Ethics which is posted on our
website at http://ir.emisphere.com/documentdisplay.cfm?DocumentID=4947.
EMISPHERE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
Index
|
|
|
|
|
Page |
AUDITED FINANCIAL STATEMENTS |
|
|
Emisphere Technologies, Inc. |
|
|
|
|
F-1 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
|
UNAUDITED INTERIM FINANCIAL STATEMENTS |
|
|
|
|
F-39 |
|
|
F-40 |
|
|
F-41 |
|
|
F-42 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Emisphere Technologies, Inc.
We have audited the accompanying balance sheets of Emisphere Technologies, Inc. as of December
31, 2010 and 2009, and the related statements of operations, stockholders equity, and cash flows
for the years then ended. These financial statements are the responsibility of Emisphere
Technologies, Inc.s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Emisphere Technologies, Inc. as of December 31, 2010 and 2009,
and the results of its operations and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Emisphere Technologies, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our
report dated March 31, 2011 expressed an opinion that Emisphere Technologies, Inc. had not
maintained effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the Company has
suffered recurring losses from operations and its total liabilities exceed its total assets. This
raises substantial doubt about the Companys ability to continue as a going concern. Managements
plans in regard to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 19 to the financial statements, the 2009 financial statements have been
restated to correct a misstatement.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
New York, New York
March 31, 2011
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Emisphere Technologies, Inc.
We have audited Emisphere Technologies, Inc.s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Emisphere Technologies,
Inc.s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Controls and Procedures. Our responsibility is to express an opinion
on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (b) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement
of the companys annual or interim financial statements will not be prevented or detected on a
timely basis. The following material weakness has been identified and included in managements
assessment. Emisphere Technologies, Inc. did not maintain effective controls to ensure completeness
and accuracy with regard to the proper recognition, presentation and disclosure of accounting for
interest expense relating to the accretion of debt discounts on convertible notes. This material
weakness was considered in determining the nature, timing, and extent of audit tests applied in our
audit of the 2010 financial statements, and this report does not affect our report dated March 31,
2011 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Emisphere Technologies, Inc. has not
maintained effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Emisphere Technologies, Inc. as of December
31, 2010 and 2009, and the related statements of operations, stockholders equity, and cash flows
for the years then ended and our report dated March 31, 2011 expressed an unqualified opinion.
/s/ McGladrey and Pullen, LLP
New York, New York
March 31, 2011
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Emisphere Technologies, Inc.:
In our opinion, the statements of operations, of cash flows and of stockholders (deficit)
equity of Emisphere Technologies, Inc. (the Company) for the year ended December 31, 2008 present
fairly, in all material respects, the results of operations and cash flows of the Company for the
year ended December 31, 2008, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
The financial statements referred to above have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the Company has
experienced recurring operating losses, has limited capital resources and has significant future
commitments that raise substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 16, 2009
F-3
EMISPHERE TECHNOLOGIES, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2009 |
|
|
|
2010 |
|
|
Restated |
|
|
|
(In thousands, |
|
|
|
except share data) |
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,326 |
|
|
$ |
3,566 |
|
Accounts receivable, net of allowance of $0 in 2010 and 2009 |
|
|
14 |
|
|
|
158 |
|
Inventories |
|
|
260 |
|
|
|
20 |
|
Prepaid expenses and other current assets |
|
|
496 |
|
|
|
369 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
6,096 |
|
|
|
4,113 |
|
Equipment and leasehold improvements, net |
|
|
82 |
|
|
|
138 |
|
Restricted cash |
|
|
260 |
|
|
|
259 |
|
Purchased technology, net |
|
|
838 |
|
|
|
1,077 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,276 |
|
|
$ |
5,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable, including accrued interest and net of related discount |
|
$ |
|
|
|
$ |
12,588 |
|
Accounts payable and accrued expenses |
|
|
2,954 |
|
|
|
4,975 |
|
Derivative instruments: |
|
|
|
|
|
|
|
|
Related party |
|
|
17,293 |
|
|
|
3,205 |
|
Others |
|
|
5,647 |
|
|
|
2,984 |
|
Contract termination liability, current |
|
|
435 |
|
|
|
|
|
Restructuring charge, current |
|
|
300 |
|
|
|
750 |
|
Other current liabilities |
|
|
35 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
26,664 |
|
|
|
24,554 |
|
Notes payable, including accrued interest and net of related discount, related party |
|
|
20,385 |
|
|
|
93 |
|
Derivative instrument, related party |
|
|
11,166 |
|
|
|
4,591 |
|
Deferred revenue |
|
|
31,535 |
|
|
|
11,494 |
|
Deferred lease liability and other liabilities |
|
|
46 |
|
|
|
82 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
89,796 |
|
|
|
40,814 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding-none |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized 100,000,000 shares; issued 52,178,834 shares
(51,889,102 outstanding) in 2010 and 42,360,133 shares (42,070,401 outstanding) in 2009 |
|
|
522 |
|
|
|
424 |
|
Additional paid-in capital |
|
|
401,853 |
|
|
|
392,335 |
|
Accumulated deficit |
|
|
(480,943 |
) |
|
|
(424,034 |
) |
Common stock held in treasury, at cost; 289,732 shares |
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(82,520 |
) |
|
|
(35,227 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficit |
|
$ |
7,276 |
|
|
$ |
5,587 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements
F-4
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 Restated |
|
|
2008 |
|
|
|
(In thousands, except share and per share data) |
|
Revenue |
|
$ |
100 |
|
|
$ |
92 |
|
|
$ |
251 |
|
Cost of goods sold |
|
|
22 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
78 |
|
|
|
77 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,495 |
|
|
|
4,046 |
|
|
|
12,785 |
|
General and administrative |
|
|
7,963 |
|
|
|
10,068 |
|
|
|
9,176 |
|
Gain on disposal of fixed assets |
|
|
(1 |
) |
|
|
(789 |
) |
|
|
(135 |
) |
Restructuring charge |
|
|
50 |
|
|
|
(356 |
) |
|
|
3,831 |
|
Depreciation and amortization |
|
|
294 |
|
|
|
367 |
|
|
|
914 |
|
Contract termination expense |
|
|
542 |
|
|
|
|
|
|
|
|
|
Expense from settlement of lawsuit |
|
|
278 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
11,621 |
|
|
|
14,629 |
|
|
|
26,571 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(11,543 |
) |
|
|
(14,552 |
) |
|
|
(26,320 |
) |
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of patent |
|
|
500 |
|
|
|
500 |
|
|
|
1,500 |
|
Sublease income |
|
|
|
|
|
|
232 |
|
|
|
797 |
|
Investment and other income |
|
|
252 |
|
|
|
131 |
|
|
|
371 |
|
Change in fair value of derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(15,988 |
) |
|
|
(1,853 |
) |
|
|
1,085 |
|
Others |
|
|
(7,663 |
) |
|
|
(620 |
) |
|
|
1,135 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(3,201 |
) |
|
|
(82 |
) |
|
|
(2,428 |
) |
Others |
|
|
(394 |
) |
|
|
(577 |
) |
|
|
(528 |
) |
Loss on extinguishment of debt |
|
|
(17,014 |
) |
|
|
|
|
|
|
|
|
Financing fees |
|
|
(1,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-operating income (expense) |
|
|
(45,366 |
) |
|
|
(2,269 |
) |
|
|
1,932 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(56,909 |
) |
|
$ |
(16,821 |
) |
|
$ |
(24,388 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(1.23 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.80 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted |
|
|
46,206,803 |
|
|
|
34,679,321 |
|
|
|
30,337,442 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements
F-5
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 Restated |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(56,909 |
) |
|
$ |
(16,821 |
) |
|
$ |
(24,388 |
) |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
294 |
|
|
|
367 |
|
|
|
914 |
|
Non-cash interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
22,073 |
|
|
|
82 |
|
|
|
2,428 |
|
Others |
|
|
394 |
|
|
|
577 |
|
|
|
528 |
|
Changes in the fair value of derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
15,988 |
|
|
|
1,853 |
|
|
|
(1,085 |
) |
Others |
|
|
7,663 |
|
|
|
620 |
|
|
|
(1,135 |
) |
Non-cash restructuring charge |
|
|
|
|
|
|
|
|
|
|
1,040 |
|
Non-cash compensation |
|
|
799 |
|
|
|
1,587 |
|
|
|
1,011 |
|
Gain on disposal of fixed assets |
|
|
(1 |
) |
|
|
(789 |
) |
|
|
(135 |
) |
Changes in assets and liabilities excluding non-cash charges: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
145 |
|
|
|
73 |
|
|
|
60 |
|
Increase in inventories |
|
|
(24 |
) |
|
|
(20 |
) |
|
|
|
|
(Increase) decrease in prepaid expenses and other current assets |
|
|
(344 |
) |
|
|
(95 |
) |
|
|
710 |
|
Increase (decrease) in accounts payable, accrued expenses and other |
|
|
(1,554 |
) |
|
|
2,613 |
|
|
|
(513 |
) |
Increase in deferred revenue |
|
|
7,072 |
|
|
|
166 |
|
|
|
11,254 |
|
Decrease in deferred lease and other liabilities |
|
|
(35 |
) |
|
|
(14 |
) |
|
|
(253 |
) |
Increase (decrease) in restructuring charge |
|
|
(450 |
) |
|
|
(2,130 |
) |
|
|
2,880 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
52,020 |
|
|
|
4,890 |
|
|
|
17,704 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,889 |
) |
|
|
(11,931 |
) |
|
|
(6,684 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale and maturity of investments |
|
|
|
|
|
|
|
|
|
|
9,927 |
|
Equipment purchases |
|
|
|
|
|
|
|
|
|
|
(109 |
) |
Increase in restricted cash |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
Proceeds from sale of fixed assets |
|
|
1 |
|
|
|
989 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
|
|
|
|
985 |
|
|
|
9,947 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
500 |
|
|
|
|
|
|
|
|
|
Payments on notes payable |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and warrants |
|
|
|
|
|
|
|
|
|
|
13 |
|
Net proceeds from issuance of common stock and warrants |
|
|
6,674 |
|
|
|
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
6,649 |
|
|
|
7,298 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,760 |
|
|
|
(3,648 |
) |
|
|
3,276 |
|
Cash and cash equivalents, beginning of year |
|
|
3,566 |
|
|
|
7,214 |
|
|
|
3,938 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
5,326 |
|
|
$ |
3,566 |
|
|
$ |
7,214 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6 |
|
|
$ |
|
|
|
$ |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of liability warrants in connection with common stock offering |
|
$ |
4,920 |
|
|
$ |
4,523 |
|
|
$ |
|
|
Exchange of debt as deferred revenue (Note 8 ) |
|
$ |
13,000 |
|
|
$ |
|
|
|
$ |
|
|
Common stock issued to settle accrued directors compensation |
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the financial statements
F-6
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY
For the years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Comprehensive |
|
|
Common Stock |
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
(Loss) |
|
|
Held in Treasury |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
|
(In thousands, except share data) |
|
Balance, December 31, 2007 |
|
|
30,626,660 |
|
|
$ |
306 |
|
|
$ |
399,282 |
|
|
$ |
(409,300 |
) |
|
$ |
(10 |
) |
|
|
289,732 |
|
|
$ |
(3,952 |
) |
|
$ |
(13,674 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,388 |
) |
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock under
exercise of options |
|
|
4,150 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Stock based compensation
expense for employees |
|
|
|
|
|
|
|
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
30,630,810 |
|
|
|
306 |
|
|
|
400,306 |
|
|
|
(433,688 |
) |
|
|
|
|
|
|
289,732 |
|
|
|
(3,952 |
) |
|
|
(37,028 |
) |
Net loss (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,821 |
) |
Cumulative effect of change
in accounting principle
implementation of ASC
815-40-15-5 restated |
|
|
|
|
|
|
|
|
|
|
(12,215 |
) |
|
|
26,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,260 |
|
Equity proceeds from issuance
of common stock, net of share
issuance expenses |
|
|
11,729,323 |
|
|
|
118 |
|
|
|
2,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,775 |
|
Stock based compensation
expense for employees |
|
|
|
|
|
|
|
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,532 |
|
Stock based compensation
expense for directors |
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
(as restated) |
|
|
42,360,133 |
|
|
|
424 |
|
|
|
392,335 |
|
|
|
(424,034 |
) |
|
|
|
|
|
|
289,732 |
|
|
|
(3,952 |
) |
|
|
(35,227 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,909 |
) |
Issuance of common stock to
directors |
|
|
13,674 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Reclassification of
derivative liability due to
exercise of warrants |
|
|
|
|
|
|
|
|
|
|
7,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,053 |
|
Exercise of warrants |
|
|
2,809,971 |
|
|
|
28 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity proceeds from issuance
of common stock, net of share
issuance expenses |
|
|
6,995,056 |
|
|
|
70 |
|
|
|
1,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,754 |
|
Stock based compensation
expense for employees |
|
|
|
|
|
|
|
|
|
|
723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723 |
|
Stock based compensation
expense for directors |
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
52,178,834 |
|
|
$ |
522 |
|
|
$ |
401,853 |
|
|
$ |
(480,943 |
) |
|
|
|
|
|
|
289,732 |
|
|
$ |
(3,952 |
) |
|
$ |
(82,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements
F-7
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Nature of Operations, Risks and Uncertainties 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.
Risks and Uncertainties. We have no prescription products currently approved for sale by the
U.S. FDA. There can be no assurance that our research and development will be successfully
completed, that any products developed will obtain necessary government regulatory approval or that
any approved products will be commercially viable. In addition, we operate in an environment of
rapid change in technology and are dependent upon the continued services of our current employees,
consultants and subcontractors.
Liquidity. As of December 31, 2010, we had approximately $5.6 million in cash and restricted
cash, approximately $20.6 million in working capital deficiency, a stockholders deficit of
approximately $82.5 million and an accumulated deficit of approximately $480.9 million. Our net
loss and operating loss for the year ended December 31, 2010 was approximately $56.9 million and
$11.5 million, respectively. Since our inception in 1986, we have generated significant losses from
operations. 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. 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 capital resources, without implementing cost reductions, raising additional capital, or
obtaining substantial cash inflows from potential partners for our products, will enable us to
continue operations through approximately June 2011 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.
Our plan is to raise capital when needed and/or to pursue product partnering opportunities. We
expect to continue to spend substantial amounts on research and development, including amounts
spent on conducting clinical trials for our product candidates. Expenses will be partially offset
with income-generating license agreements, if possible. Further, we will not have sufficient
resources to develop fully any new products or technologies unless we are able to raise substantial
additional financing on acceptable terms or secure funds from new or existing partners. We cannot
assure that financing will be available when needed, or on favorable terms or at all. If additional
capital is raised through the sale of equity or convertible debt securities, the issuance of such
securities would result in dilution to our existing stockholders. Our failure to raise capital
before June 2011 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. Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. involves the use of estimates and assumptions that affect
the recorded amounts of assets and liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses and performance period for revenue recognition. Actual
results may differ substantially from these estimates. Significant estimates include the fair value
and recoverability of the carrying value of purchased technology, recognition of on-going clinical
trial costs, estimated costs to complete research collaboration projects, accrued expenses, the
variables and method used to calculate stock-based compensation, derivative instruments and
deferred taxes.
Concentration of Credit Risk. Financial instruments, which potentially subject us to
concentrations of credit risk, consist of cash, cash equivalents, restricted cash and investments.
We invest excess funds in accordance with a policy objective seeking to preserve both liquidity and
safety of principal. We generally invest our excess funds in obligations of the U.S. government and
its agencies, bank deposits, money market funds, and investment grade debt securities issued by
corporations and financial institutions. We hold no collateral for these financial instruments.
F-8
Cash, Cash Equivalents, and Investments. We consider all highly liquid, interest-bearing
instruments with original maturity of three months or less when purchased to be cash equivalents.
Cash and cash equivalents may include demand deposits held in banks and interest bearing money
market funds. Our investment policy requires that commercial paper be rated A-1, P-1 or better by
either Standard and Poors Corporation or Moodys Investor Services or another nationally
recognized agency and that securities of issuers with a long-term credit rating must be rated at
least A (or equivalent). As of December 31, 2010, we held no investments.
Inventory. Inventories are stated at the lower of cost or market determined by the first in,
first out method.
Equipment and Leasehold Improvements. Equipment and leasehold improvements are stated at
cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful
life of the asset. Leasehold improvements are amortized over the term of the lease or useful life
of the improvements, whichever is shorter. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the respective assets are charged to expense as incurred. The
cost and accumulated depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
Purchased Technology. Purchased technology represents the value assigned to patents and the
right to use, sell or license certain technology in conjunction with our proprietary carrier
technology that were acquired from Ebbisham Ltd. These assets are utilized in various research and
development projects. Such purchased technology is being amortized on a straight line basis over 15
years, until 2014, which represents the average life of the patents acquired.
Impairment of Long-Lived Assets. In accordance with FASB ASC 360-10-35, we review our
long-lived assets, including purchased technology, for impairment whenever events and circumstances
indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured
as the amount by which the carrying value exceeds the fair value, is recognized if the carrying
amount exceeds estimated undiscounted future cash flows.
Deferred Lease Liability. Our leases provide for rental holidays and escalations of the
minimum rent during the lease term, as well as additional rent based upon increases in real estate
taxes and common maintenance charges. We record rent expense from leases with rental holidays and
escalations using the straight-line method, thereby prorating the total rental commitment over the
term of the lease. Under this method, the deferred lease liability represents the difference
between the minimum cash rental payments and the rent expense computed on a straight-line basis.
Revenue Recognition. We recognize revenue in accordance with FASB ASC 605-10-S99, Revenue
Recognition. Revenue includes amounts earned from sales of our oral Eligen® B12 (100 mcg) product,
collaborative agreements and feasibility studies. Revenue earned from the sale of oral Eligen® B12
(100 mcg) was recognized when the product was shipped, when all revenue recognition criteria were
met in accordance with Staff Accounting Bulletin No. 104 , Revenue Recognition (codified under
ASC 605 Revenue Recognition). Our distributor agreement for the marketing, distribution and sale
of oral Eligen® B12 (100 mcg) with Quality Vitamins and Supplements, Inc. was terminated during the
third quarter, 2010. Revenue earned from collaborative agreements and feasibility studies is
comprised of reimbursed research and development costs, as well as upfront and research and
development milestone payments. Deferred revenue represents payments received which are related to
future performance. Revenue from feasibility studies, which are typically short term in nature, is
recognized upon delivery of the study, provided that all other revenue recognition criteria are
met.
Revenue from collaboration agreements are recognized using the proportional performance method
provided that we can reasonably estimate the level of effort required to complete our performance
obligations under an arrangement and such performance obligations are provided on a best effort
basis and based on expected payments. Under the proportional performance method, periodic revenue
related to nonrefundable cash payments is recognized as the percentage of actual effort expended to
date as of that period to the total effort expected for all of our performance obligations under
the arrangement. Actual effort is generally determined based upon actual hours incurred and include
R&D activities performed by us and time spent for JSC activities. Total expected effort is
generally based upon the total R&D and JSC hours incorporated into the project plan that is agreed
to by both parties to the collaboration. Significant management judgments and estimates are
required in determining the level of effort required under an arrangement and the period over which
we expect to complete the related performance obligations. Estimates of the total expected effort
included in each project plan are based on historical experience of similar efforts and
expectations based on the knowledge of scientists for both the Company and its collaboration
partners. The Company periodically reviews and updates the project plan for each collaborative
agreement. The most recent reviews took place in January 2011. In the event that a change in
estimate occurs, the change will be accounted for using the cumulative catch-up method which
provides for an adjustment to revenue in the current period. Estimates of our level of effort may
change in the future, resulting in a material change in the amount of revenue recognized in future
periods.
F-9
Generally under collaboration arrangements, nonrefundable payments received during the period
of performance may include time- or performance-based milestones. The proportion of actual
performance to total expected performance is applied to the expected payments in determining
periodic revenue. However, revenue is limited to the sum of (i) the amount of nonrefundable cash
payments received and (ii) the payments that are contractually due but have not yet been paid.
With regard to revenue recognition in connection with development and license agreements that
include multiple deliverables; Emispheres management reviews the relevant terms of the agreements
and determines whether such deliverables should be accounted for as a single unit of accounting in
accordance with FASB ASC 605-25, Multiple-Element Arrangements. If it is determined that a
delivered license and Eligen® Technology do not have stand-alone value and Emisphere does not have
objective evidence of fair value of the undelivered Eligen® Technology or the manufacturing value
of all the undelivered items, then such deliverables are accounted for as a single unit of
accounting and any payments received pursuant to such agreement, including any upfront or
development milestone payments and any payments received for support services, will be deferred and
included in deferred revenue within our balance sheet until such time as management can estimate
when all of such deliverables will be delivered, if ever. Management reviews and reevaluates such
conclusions as each item in the arrangement is delivered and circumstances of the development
arrangement change. See Note 13 for more information about the Companys accounting for revenue
from specific development and license agreements.
Research and Development and Clinical Trial Expenses. Research and development expenses
include costs directly attributable to the conduct of research and development programs, including
the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of
research equipment, costs related to research collaboration and licensing agreements, the cost of
services provided by outside contractors, including services related to our clinical trials,
clinical trial expenses, the full cost of manufacturing drug for use in research, pre-clinical
development, and clinical trials. All costs associated with research and development are expensed
as incurred.
Clinical research expenses represent obligations resulting from our contracts with various
research organizations in connection with conducting clinical trials for our product candidates. We
account for those expenses on an accrual basis according to the progress of the trial as measured
by patient enrollment and the timing of the various aspects of the trial. Accruals are recorded in
accordance with the following methodology: (i) the costs for period expenses, such as investigator
meetings and initial start-up costs, are expensed as incurred based on managements estimates,
which are impacted by any change in the number of sites, number of patients and patient start
dates; (ii) direct service costs, which are primarily ongoing monitoring costs, are recognized on a
straight-line basis over the life of the contract; and (iii) principal investigator expenses that
are directly associated with recruitment are recognized based on actual patient recruitment. All
changes to the contract amounts due to change orders are analyzed and recognized in accordance with
the above methodology. Change orders are triggered by changes in the scope, time to completion and
the number of sites. During the course of a trial, we adjust our rate of clinical expense
recognition if actual results differ from our estimates.
Income Taxes. Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements or tax returns. These
liabilities and assets are determined based on differences between the financial reporting and tax
basis of assets and liabilities measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is recognized to reduce
deferred tax assets to the amount that is more likely than not to be realized. In assessing the
likelihood of realization, management considered estimates of future taxable income.
Stock-Based Employee Compensation. We recognize expense for our share-based compensation
based on the fair value of the awards at the time they are granted. We estimate the value of stock
option awards on the date of grant using the Black-Scholes model. The determination of the fair
value of share-based payment awards on the date of grant is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include our
expected stock price volatility over the term of the awards, expected term, risk-free interest
rate, expected dividends and expected forfeiture rates. The forfeiture rate is estimated using
historical option cancellation information, adjusted for anticipated changes in expected exercise
and employment termination behavior. Our outstanding awards do not contain market or performance
conditions therefore we have elected to recognize share-based employee compensation expense on a
straight-line basis over the requisite service period.
Fair Value of Financial Instruments. The carrying amounts for cash, cash equivalents,
accounts payable, and accrued expenses approximate fair value because of their short-term nature.
We estimated the fair value of the MHR Convertible Notes, which are due on September 26, 2012 as of
June 4, 2010 when the MHR Convertible Notes were restructured to account for incremental
compensation in connection with the Novartis Agreement by calculating the present value of future
cash flows discounted at a market rate of return for a comparable debt instrument. At December 31,
2010, the carrying value of the notes payable and accrued interest was $19.9 million. See Note 8
for further discussion of the notes payable.
F-10
Derivative Instruments. Derivative instruments consist of common stock warrants, and certain
instruments embedded in the certain Notes payable and related agreements. These financial
instruments are recorded in the balance sheets at fair value as liabilities. Changes in fair value
are recognized in earnings in the period of change.
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).
FASB ASC 815-40-15-5 provides guidance in assessing whether an equity-linked financial instrument
(or embedded feature) is indexed to an entitys own stock for purposes of determining whether the
equity linked instrument (or embedded feature) qualifies as a derivative instrument. We determined
that the conversion feature of our MHR Convertible Notes and certain of our warrants contain
features that that are not indexed to our own stock and therefore, were classified as a derivative
instrument. Upon adoption, we recognized and recorded a cumulative effect of a change in accounting
principle of $26.5 million. The cumulative adjustment included a decrease in Notes payable of
approximately $18.2 million, a decrease in deferred financing fees of approximately $0.4 million,
an increase in derivative instruments of approximately $3.5 million and the balance was a reduction
in stockholders deficit.
For comparability purposes, the following table sets forth the effects of the adoption of FASB
ASC 815-40-15-5 on net loss and loss per share for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
|
Pro Forma (unaudited) |
|
|
|
December 31, 2008 |
|
|
December 31, 2008 |
|
|
|
(In thousands, except per |
|
|
(In thousands, except |
|
|
|
share amounts) |
|
|
per share amounts) |
|
Net loss |
|
$ |
(24,388 |
) |
|
$ |
(16,465 |
) |
|
|
|
|
|
|
|
Net loss per share, basic |
|
$ |
(0.80 |
) |
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
Net loss per share, dilutive |
|
$ |
(0.80 |
) |
|
$ |
(0.54 |
) |
|
|
|
|
|
|
|
Comprehensive Loss. Comprehensive loss represents the change in net assets of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources. Comprehensive loss includes net loss adjusted for the change in net unrealized gain or
loss on marketable securities. The disclosures required by FASB ASC 220-10-45, Reporting
Comprehensive Income for the year ended December 31, 2008 has been included in the statements of
stockholders equity (deficit). There are no differences between comprehensive loss and net loss
for the years ended December 31, 2010 and 2009.
Exit activities. We have adopted FASB ASC 420-10-05, Exit or Disposal Cost Obligations. This
Standard addresses financial accounting and reporting for costs associated with exit or disposal
activities. This Standard requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Standard also establishes that fair
value is the objective for initial measurement of the liability. This Standard specifies that a
liability for a cost associated with an exit or disposal activity is incurred when the definition
of a liability is met, and that fair value is the measurement at the exit, disposal or cease use
date.
Fair Value Measurements. The authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received an asset or paid to transfer a liability (an
exit price) in the principal or the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. Market participants are
buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able
to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on
the levels of inputs, of which the first two are considered observable and the last unobservable,
that may be used to measure fair value which are the following:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or corroborated by observable market data or
substantially the full term of the assets or liabilities |
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the value of the assets or liabilities |
F-11
Future Impact of Recently Issued Accounting Standards
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-29, Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma
Information for Business Combinations. The amendments in this ASU affect any public entity as
defined by ASC Topic 805 that enters into business combinations that are material on an individual
or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative
financial statements, the entity should disclose revenue and earnings of the combined entity as
though the business combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendments are effective prospectively for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The
Company does not expect adoption of ASU 2010-29 to have a material impact on the Companys results
of operations or financial condition.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (ASC Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment
test for reporting units with zero or negative carrying amounts. For those reporting units, an
entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than not that a
goodwill impairment exists, an entity should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The qualitative factors are consistent with the
existing guidance and examples, which require that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. For public entities,
the amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the
adoption of ASU 2010-28 to have a material impact on the Companys results of operations or
financial condition.
In April 2010, the FASB issued 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 (i) 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; (ii)
be related solely to past performance; and (iii) 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 non-substantive 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. Management evaluated the potential impact of ASU 2010-17 and does not expect its
adoption to have a material effect on the Companys results of operations or financial condition.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding
fair value measurements. The amended guidance requires entities to disclose the amounts of
significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for
these transfers, the reasons for any transfers in or out of Level 3, and information in the
reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements
on a gross basis. The ASU also clarifies the requirements for entities to disclose information
about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value
measurements. The amended guidance is effective for interim and annual financial periods beginning
after December 15, 2009. The adoption of ASU 2010-06 did not have a significant effect on the
Companys financial statements.
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 Company does not expect adoption of ASU 2009-13 to have a material impact on the
Companys results of operations or financial condition.
F-12
In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing, (ASU-2009-15), which provides
guidance for accounting and reporting for own-share lending arrangements issued in contemplation of
a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on
an entitys own shares should be measured at fair value in accordance with Topic 820 and recognized
as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from
basic and diluted earnings per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the terms of the
arrangement and the reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. The adoption of ASU 209-15 did not have a material impact
on the Companys results of operations or financial condition.
Management does not believe that any other recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying financial
statements.
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Work in process |
|
$ |
260 |
|
|
$ |
5 |
|
Finished goods |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
$ |
260 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Prepaid corporate insurance |
|
$ |
41 |
|
|
$ |
44 |
|
Deposit on inventory |
|
|
420 |
|
|
|
215 |
|
Prepaid expenses and other current assets |
|
|
35 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
$ |
496 |
|
|
$ |
369 |
|
|
|
|
|
|
|
|
5. Fixed Assets
Tarrytown Facility. On December 8, 2008, we decided to close our research and development
facilities in Tarrytown, NY to reduce costs and improve operating efficiency. As of December 8,
2008 we ceased using approximately 85% of the facilities which resulted in a restructuring charge
of approximately $3.8 million in the fourth quarter, 2008. As a result, the Company wrote down the
value of approximately $1.0 million (net) in leasehold improvements related to the Tarrytown
facility no longer in use as of December 31, 2008. In addition, the useful lives of approximately
$0.2 million in leasehold improvements were shortened because we ceased using the facilities on
January 29, 2009 resulting in an accelerated charge to amortization expense for 2008 of
approximately $0.1 million. Please refer to Footnote 16 Commitments and Contingencies for more
information on this subject.
Fixed Assets. Equipment and leasehold improvements, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
Useful Lives 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 |
|
|
|
|
|
|
1,349 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
|
|
|
|
F-13
Depreciation expense for the years ended December 31, 2010, 2009 and 2008, was $0.1 million,
$0.1 million and $0.7 million, respectively.
In 2009, in connection with the closure of our Tarrytown facility, we abandoned leasehold
improvements with a historical cost of $2.95 million and accumulated amortization of $2.85 million.
We also abandoned equipment with a historical cost of $2.86 million and accumulated depreciation of
$2.84. Additionally, during 2009, we sold equipment with a historical cost of $4.84 million and
accumulated depreciation of $4.76 million for $0.99 million. The effect of these abandonments and
sales was a gain of $0.79 million.
6. Purchased Technology
The carrying value of the purchased technology is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Gross carrying amount |
|
$ |
4,533 |
|
|
$ |
4,533 |
|
Less, accumulated amortization |
|
|
3,695 |
|
|
|
3,456 |
|
|
|
|
|
|
|
|
Net book value |
|
$ |
838 |
|
|
$ |
1,077 |
|
|
|
|
|
|
|
|
Annual amortization of purchased technology was $0.2 million for 2010, 2009 and 2008 and is
estimated to be $0.2 million for the years ended 2011 through 2013 and $0.1 million in 2014.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Accounts payable |
|
$ |
2,201 |
|
|
$ |
1,979 |
|
Accrued cost of lawsuit |
|
|
|
|
|
|
2,333 |
|
Accrued bonus |
|
|
300 |
|
|
|
150 |
|
Accrued legal, professional fees and other |
|
|
375 |
|
|
|
302 |
|
Accrued vacation |
|
|
69 |
|
|
|
81 |
|
Clinical trial expenses and contract research |
|
|
9 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
$ |
2,954 |
|
|
$ |
4,975 |
|
|
|
|
|
|
|
|
8. Notes Payable and Restructuring of Debt
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2009 |
|
|
|
2010 |
|
|
restated |
|
|
|
(In thousands) |
|
MHR Convertible Note |
|
$ |
19,864 |
|
|
$ |
93 |
|
MHR Promissory Notes |
|
|
520 |
|
|
|
|
|
Novartis Note |
|
|
|
|
|
|
12,588 |
|
|
|
|
|
|
|
|
|
|
$ |
20,385 |
|
|
$ |
12,681 |
|
|
|
|
|
|
|
|
MHR Convertible Notes. On September 26, 2005, we received net proceeds of approximately $12.9
million under a $15 million secured loan agreement (the Loan Agreement) executed with MHR. Under
the Loan Agreement, MHR requested, and on May 16, 2006, we effected, the exchange of the loan from
MHR for senior secured convertible notes (the MHR Convertible Notes) with substantially the same
terms as the Loan Agreement, except that the MHR Convertible Notes are convertible, at the sole
discretion of MHR, into shares of our common stock at a price per share of $3.78. As of December
31, 2010, the MHR Convertible Notes were convertible into 6,675,512 shares of our common stock. The
MHR Convertible Notes are due on September 26, 2012, bear interest at 11% and are collateralized by
a first priority lien in favor of MHR on substantially all of our assets. Interest is payable in
the form of additional MHR Convertible Notes rather than in cash.
F-14
In connection with the Loan Agreement, we amended MHRs previously existing warrants to
purchase 387,374 shares of common stock (MHR 2005 Warrants) to provide additional anti-dilution
protection. We also granted MHR the option (MHR Option) to purchase warrants for up to 617,211
shares of our common stock. The MHR Option was exercised during April 2006 whereby MHR acquired
617,211 warrants (MHR 2006 Warrants) to acquire an equal number of shares of common stock. The
exercise price for the MHR Option was $0.01 per warrant for the first 67,084 warrants and $1.00 per
warrant for each additional warrant. See Note 9 for a further discussion of the liability related
to these warrants.
Total issuance costs associated with the Loan Agreement were $2.1 million, of which $1.9
million were allocated to the MHR Convertible Note and $0.2 million were allocated to the related
derivative instruments. Of the $1.9 million allocated to the MHR Convertible Note, $1.4 million
represents reimbursement of MHRs legal fees and $0.5 million represents our legal and other
transaction costs. The $1.4 million paid on behalf of the lender has been recorded as a reduction
of the face value of the note, while the $0.5 million of our costs has been recorded as deferred
financing costs, which is included in other assets on the balance sheet.
The MHR Convertible Notes provide MHR with the right to require us to redeem the notes in the
event of a change in control. The change in control redemption feature has been determined to be an
embedded derivative instrument which must be separated from the host contract. For the year ended
December 31, 2006, the fair value of the change in control redemption feature was estimated using a
combination of a put option model for the penalties and the Black-Scholes model for the conversion
option that would exist under the MHR Convertible Note. The estimate resulted in a value that was
de minimis and, therefore, no separate liability was recorded. Changes in the assumptions used to
estimate the fair value of this derivative instrument, in particular the probability that a change
in control will occur, could result in a material change to the fair value of the instrument. For
the years ended December 31, 2010, 2009 and 2008, management determined the probability of exercise
of the right due to change in control to be remote. The fair value of the change in control
redemption feature is de minimis.
In connection with the MHR Convertible Notes financing, the Company agreed to appoint a
representative of MHR (MHR Nominee) and another person (the Mutual Director) to its Board of
Directors. Further, the Company agreed to amend, and in January 2006 did amend, 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 Convertible Notes provide for various events of default including for failure to
perfect any of the liens in favor of MHR, failure to observe any covenant or agreement, failure to
maintain the listing and trading of our common stock, sale of a substantial portion of our assets,
merger with another entity without the prior consent of MHR, or any governmental action renders us
unable to honor or perform our obligations under the Loan Agreement or results in a material
adverse effect on our operations. If an event of default occurs, the MHR Convertible Notes provide
for the immediate repayment and certain additional amounts as set forth in the MHR Convertible
Notes. We currently have a waiver from MHR for failure to perfect liens on certain intellectual
property rights through March 19, 2012.
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 815-40-15-5, the conversion feature embedded in the MHR Convertible 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 Convertible Notes and increasing prospectively the amount of interest expense to be
recognized over the life of the MHR Convertible Notes using the effective yield method. At December
31, 2010, the MHR Convertible Notes were convertible into 6,675,512 shares of our common stock.
As consideration for its consent and limitation of rights in connection with the Novartis
Agreement (as defined below), the Company granted MHR warrants to purchase 865,000 shares of its
common stock (the June 2010 MHR Warrants) under the MHR Letter Agreement. The Company estimated
the fair value of the June 2010 MHR Warrants on the date of grant using Black-Scholes models to be
$1.9 million. The Company determined that the resulting modification of the MHR Convertible Notes
was substantial in accordance with ASC 470-50, Modifications and Extinguishments. As such the
modification of the MHR Convertible Notes was accounted for as an extinguishment and restructuring
of the debt, and the warrants issued to MHR were expensed as a financing fee. The fair value of the
MHR Convertible Notes, as of June 4, 2010 was estimated by calculating the present value of future
cash flows discounted at a market rate of return for comparable debt instruments to be $17.2
million. The Company recognized a loss on extinguishment of debt in the amount of $17.0 million
which represented the difference between the net carrying amount of the MHR Convertible Notes and
their fair value as of the date of the Novartis Agreement and the MHR Letter Agreements.
F-15
The book value of the MHR Convertible Notes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2009 |
|
|
|
2010 |
|
|
restated |
|
|
|
(In thousands) |
|
Face value of the note (including accrued interest) |
|
$ |
25,233 |
|
|
$ |
22,616 |
|
Discount (related to the warrant purchase option and embedded conversion feature) |
|
|
(5,369 |
) |
|
|
(22,523 |
) |
|
|
$ |
19,864 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
Novartis Note. On June 4, 2010, the Company and Novartis entered into a Master Agreement and
Amendment (the Novartis Agreement), pursuant to which the Company was released and discharged
from its obligations under that certain convertible note to Novartis (the Novartis Note) in
exchange for (i) 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 (the Research Collaboration and Option
Agreement), and the License Agreement, dated as of March 8, 2000, for the development of an oral
salmon calcitonin product for the treatment of osteoarthritis and osteoporosis (the Oral Salmon
Calcitonin Agreement); (ii) 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 (iii) 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.
2010 MHR Promissory Notes. In connection with the Novartis Agreement, the Company and MHR
entered into a letter agreement (the MHR Letter Agreement), and MHR, the Company and Novartis
entered into a non-disturbance agreement (the Non-Disturbance Agreement), which 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 was 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 provided 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 were 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 of legal fees in connection
with the Non-Disturbance Agreement and $100,000 of legal fees in connection with the Future
Transaction Agreement, and, consequently, recorded the issuance of the $500,000 and $100,000
promissory notes 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 $66,000 and $14,000, respectively.
July 2010 MHR Promissory Note. On July 29, 2010, we issued to MHR a promissory note in the
principal amount of $525,000 (the July 2010 MHR Note). The July 2010 MHR Note provides for an
interest rate of 15% per annum, due and payable on October 27, 2010. During the quarter ended
September 30, 2010, certain conditions caused the maturity date of the July 2010 MHR Note to
accelerate, and the July 2010 MHR Note was paid.
The scheduled repayments of all debt outstanding as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
Debt |
|
|
|
(In thousands) |
|
2011 |
|
|
|
|
2012 |
|
|
20,233 |
|
|
|
|
|
|
|
$ |
20,233 |
|
|
|
|
|
F-16
9. Derivative Instruments
Derivative instruments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Elan Warrant |
|
$ |
|
|
|
$ |
394 |
|
MHR Convertible Notes |
|
|
11,166 |
|
|
|
4,591 |
|
MHR 2006 Warrants |
|
|
646 |
|
|
|
213 |
|
August 2007 Warrants |
|
|
481 |
|
|
|
141 |
|
August 2009 Warrants |
|
|
7,807 |
|
|
|
5,092 |
|
August 2009 Placement Agent Warrants |
|
|
|
|
|
|
349 |
|
June 2010 MHR Warrants |
|
|
1,495 |
|
|
|
|
|
August 2010 Warrants |
|
|
10,550 |
|
|
|
|
|
August 2010 MHR Waiver Warrants |
|
|
1,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,106 |
|
|
$ |
10,780 |
|
|
|
|
|
|
|
|
The fair value of the warrants that have exercise price reset features is estimated using an
adjusted Black-Scholes model. The Company computes valuations, each quarter, using Black-Scholes
model calculations for such warrants to account for the various possibilities that could occur due
to various circumstances that could arise in connection with the contractual terms of said
instruments. The Company weights each Black-Scholes model calculation based on its estimation of
the likelihood of the occurrence of each circumstance and adjusts relevant Black-Scholes model
input to calculate the value of the derivative at the reporting date.
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 an
equity financing conducted in August 2007 (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 an equity financing conducted in August 2009 (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 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 $1.4 million and $0.3 million during the years ended December 31, 2010 and
2009, 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 due to MHR
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 Convertible Notes and lower than the
current market price. However, the adjustment provision does not 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 convertible note 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 adoption of FASB ASC 815-40-15-5 requires recognition of the cumulative effect of a change in
accounting principle to the opening balance of our accumulated deficit, additional paid in capital,
and liability for derivative financial instruments. The liability has been presented as a
non-current liability to correspond with its host contract, the MHR Convertible Notes. The fair
value of the embedded conversion feature is estimated, at the end of each quarterly reporting
period, using Black-Scholes models. The assumptions used in computing the fair value as of December
31, 2010 are a closing stock price of $2.41, conversion prices of $3.78 and $2.41, expected
volatility of 129.74% over the remaining term of one year
F-17
and nine months and a risk-free rate of 0.61%. The fair value of the embedded conversion
feature increased by $6.6 million during the year ended December 31, 2010 which has been recognized
in the accompanying statements of operations. The embedded conversion feature will be adjusted to
estimated fair value for each future period they remain outstanding. See Note 8 for a further
discussion of the MHR Convertible Notes.
MHR 2006 Warrants. In connection with the exercise in April 2006 of the MHR Option discussed
in Note 8 above, the Company issued to MHR warrants to purchase 617,211 shares (the MHR 2006
Warrants) 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 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
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 Financing Warrants and, therefore,
they have been accounted for as a separate liability. The fair value of the MHR 2006 Warrants is
estimated, at the end of each quarterly period, using Black-Scholes models. The assumptions used in
computing the fair value as of December 31, 2010 are a closing stock price of $2.41, exercise price
of $3.76 and $2.41, expected volatility of 157.26% over the remaining term of nine months and a
risk-free rate of 0.29%. The fair value of the MHR 2006 Warrants increased by $0.4 million and $0.1
million for the year ended December 31, 2010 and 2009, respectively and decreased $0.7 million for
the year ended December 31, 2008, and the fluctuation has been recorded in the statement of
operations. The MHR 2006 Warrants will be adjusted to estimated fair value for each future period
they remain outstanding.
August 2007 Warrants. In connection with the August 2007 Financing, Emisphere sold warrants
to purchase up to 400,000 shares of common stock (the August 2007 Warrants). Of these 400,000
warrants, 91,073 were sold to MHR. Each of the August 2007 Warrants were issued with an exercise
price of $3.948 and expire on August 21, 2012. The August 2007 Warrants provide for certain
anti-dilution protection as provided therein. Under the terms of the August 2007 Warrants, we have
an obligation to make a cash payment to the holders of the August 2007 Warrants for any gain that
could have been realized if the holders exercise the August 2007 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 August 2007 Warrants have been exercised. Accordingly, the 2007 Warrants
have been accounted for as a liability. The fair value of the warrants is estimated, at the end of
each quarterly reporting period, using the Black-Scholes model. The August 2007 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 December 31, 2010 are a closing stock price of $2.41, expected
volatility of 130.99% over the remaining term of one year and eight months and a risk-free rate of
0.61%.
The fair value of the August 2007 Warrants increased $0.3 million and $0.02 million for the
years ended December 31, 2010 and December 31, 2009, respectively and decreased by $0.4 million for
the year ended December 31, 2008, and the fluctuations have been recorded in the statements of
operations. The August 2007 Warrants will be adjusted to estimated fair value for each future
period they remain outstanding.
August 2009 Warrants. In connection with the August 2009 offering, Emisphere sold warrants to
purchase 6.4 million shares of common stock to MHR (3.7 million) and other unrelated investors (2.7
million) (the August 2009 Warrants). The August 2009 Warrants were issued with an exercise price
of $0.70 and expire on August 21, 2014. Under the terms of the August 2009 Warrants, we have an
obligation to make a cash payment to the holders of the August 2009 Warrants for any gain that
could have been realized if the holders exercise the August 2009 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 August 2009 Warrants have been exercised. Accordingly, the August 2009
Warrants have been accounted for as a liability. The fair value of the August 2009 Warrants is
estimated, at the end of each quarterly reporting period, using the Black-Scholes model. The
assumptions used in computing the fair value as of December 31, 2010 are a closing stock price of
$2.41, expected volatility of 115.01% over the remaining term of three years and eight months and a
risk-free rate of 1.02%. The fair value of the August 2009 Warrants increased $4.8 million for the
year ended December 31, 2010 and $0.85 million from the commitment date of August 19, 2009 through
December 31, 2009, and the fluctuation has been recorded in the statements of operations. The
warrants will be adjusted to estimated fair value for each future period they remain outstanding.
During the year ended December 31, 2010, certain holders of the August 2009 Warrants notified the
Company of their intention to exercise their warrants to purchase up to 2,685,714 shares of the
Companys common stock at an exercise price of $0.70, using the cashless exercise provision. The
Company issued an aggregate 1,966,937 such holders in accordance with the terms of the cashless
exercise provision. The Company calculated the fair value of the 2,685,714 exercised warrants on
their respective exercise dates using the Black-Scholes model. The weighted average assumptions
used in computing the fair values were a closing stock price of $1.91, expected volatility of
101.99% over the remaining contractual life of four years and three months and a risk-free rate of
1.46%. The fair value of the 2.7 million exercised warrants increased by $2.2 million from January
1, 2010 through the date of exercise which has
F-18
been recognized in the accompanying statements of operations. The fair value of the derivative
liabilities at the exercise dates of $4.3 million was reclassified to additional paid-in-capital.
After these cashless exercises, warrants to purchase up to 3,729,323 shares of common stock, in the
aggregate, remain outstanding.
August 2009 Placement Agent Warrants. In connection with the August 2009 Financing, Emisphere
issued to the placement agent, as part of the compensation for acting as placement agent for the
August 2009 offering, warrants to purchase 504,000 shares of common stock (the August 2009
Placement Agent Warrants). The August 2009 Placement Agent Warrants were issued with an exercise
price of $0.875 and expire on October 1, 2012. Under the terms of the August 2009 Placement Agent
Warrants, we have an obligation to make a cash payment to the holders of the August 2009 Placement
Agent Warrants for any gain that could have been realized if the holders exercise the August 2009
Placement Agent 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 August 2009 Placement Agent
Warrants have been exercised. Accordingly, the August 2009 Placement Agent Warrants have been
accounted for as a liability. The fair value of the warrants are estimated, at the end of each
quarterly reporting period, using the Black-Scholes model. On April 1, 2010, the holder of the
August 2009 Placement Agent Warrants notified the Company of its intention to exercise a portion of
the warrants using the cashless exercise provision. The Company issued 297,636 shares of common
stock to such holder in accordance with the terms of the cashless exercise provision on April 5,
2010. After this cashless exercise, warrants to purchase 37,800 shares of common stock remained
outstanding. On April 28, 2010, the holder of the August 2009 Placement Agent Warrants notified the
Company of its intention to exercise the remaining outstanding portion of the August 2009 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
August 2009 Placement Agent Warrants are no longer outstanding. The Company calculated the fair
value of the 466,200 August 2009 Placement Agent Warrants on April 2, 2010 using the Black-Scholes
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 August 2009 Placement Agent
Warrants increased by $0.6 million from January 1, 2010 to the date of exercise which has been
recognized in the accompanying statements of operations. The fair value of the derivative liability
from the 466,200 August 2009 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
August 2009 Placement Agent Warrants on April 29, 2010 using the Black-Scholes 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 August 2009 Placement Agent
Warrants increased by $46 thousand from January 1, 2010 to the date of exercise which has been
recognized in the accompany statements of operations. The fair value of the derivative liability
from the 37,800 August 2009 Placement Agent Warrants at April 29, 2010 of $0.1 million was
reclassified to additional paid-in-capital.
June 2010 MHR Warrants. As consideration for its consent and limitation of rights in
connection with the Novartis Agreement, the Company granted MHR warrants to purchase 865,000 shares
of its common stock (the June 2010 MHR Warrants) under the MHR Letter Agreement. The June 2010
MHR Warrants are exercisable at $2.90 per share and will expire on August 21, 2014. The June 2010
MHR 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 June 2010 MHR 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 June 2010 MHR Warrants have been exercised. Accordingly, the June 2010 MHR 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 model. The Company estimated the fair value of the June 2010 MHR
Warrants on the date of grant using Black-Scholes models to be $1.9 million, which triggered the
recognition of extinguishment and restructuring accounting for the MHR Convertible Notes (see Notes
8 and 19). The assumptions used in computing the fair value of the June 2010 MHR Warrants at
December 31, 2010 are closing stock prices of $2.41, $0.42, and $2.89, exercise prices of $2.41,
$0.42, $2.89, and $2.90, expected volatility of 115.01% over the remaining three years and eight
months and a risk-free rate of 1.02%. The fair value of the June 2010 MHR Warrants decreased by
$0.4 million through December 31, 2010, and the fluctuation has been recorded in the statements of
operations. The June 2010 MHR Warrants will be adjusted to estimated fair value for each future
period they remain outstanding.
August 2010 Warrants. In connection with the August 2010 Financing, Emisphere sold warrants
to purchase 5.2 million shares of common stock to MHR (2.6 million) and other unrelated investors
(2.6 million) (the August 2010 Warrants). The August 2010 Warrants were issued with an exercise
price of $1.26 and expire on August 26, 2015. Under the terms of the August 2010 Warrants, we have
an obligation to make a cash payment to the holders of the August 2010 Warrants for any gain that
could have been realized if the holders exercise the August 2010 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 August 2010 Warrants have been exercised. Accordingly, the August 2010
Warrants have been accounted for as a liability. The fair value of the warrants is estimated, at
the end of each quarterly reporting period, using the Black-Scholes model. The assumptions used in
computing the fair value as of December 31, 2010 are a closing stock
F-19
price of $2.41, expected volatility of 107.32% over the remaining term of four years and
eight months and a risk-free rate of 2.01%. The fair value of the August 2010 Warrants were valued
at $4.1 million at the commitment dated of August 26, 2010 and increased by $6.4 million through
December 31, 2010, and the fluctuation has been recorded in the statements of operations. The
August 2010 Warrants will be adjusted to estimated fair value for each future period they remain
outstanding.
August 2010 MHR Waiver Warrants. In connection with the August 2010 Financing, the Company
entered into a waiver agreement with MHR (Waiver Agreement), pursuant to which MHR waived certain
anti-dilution adjustment rights under the MHR Convertible Notes and certain warrants issued by the
Company to MHR that would otherwise have been triggered by the August 2010 Financing. As
consideration for such waiver, the Company issued to MHR warrants to purchase 975,000 shares of its
common stock (the August 2010 MHR Waiver Warrants). The August 2010 MHR Waiver Warrants are in
the same form of warrant as the August 2010 Warrants issued to MHR described above. Accordingly,
the August 2010 MHR Waiver Warrants have been accounted for as a liability. The fair value of the
August 2010 MHR Waiver Warrants is estimated, at the end of each quarterly reporting period, using
Black-Scholes models. The Company estimated the fair value of the warrants on the date of grant
using Black-Scholes models to be $0.8 million. The assumptions used in computing the fair value of
the August 2010 MHR Waiver Warrants at December 31, 2010 are a closing stock price of $2.41,
exercise price of $1.26, expected volatility of 107.32% over the term of four years and eight
months and a risk free rate of 2.01%. The fair value of the August 2010 MHR Waiver Warrants
increased by $1.2 million through December 31, 2010, and the fluctuation has been recorded in the
statements of operations. The August 2010 MHR Waiver Warrants will be adjusted to estimated fair
value for each future period they remain outstanding.
10. Income Taxes
Since the Company has recurring losses and a valuation allowance against deferred tax assets,
there is no tax expense (benefit) for all periods presented.
As of December 31, 2010, we have available unused federal net operating loss (NOL)
carry-forwards of $344 million and New York NOL carry-forwards of $296 million, of which $4.4
million, $1.1 million and $15.6 million will expire in 2011, 2012 and 2013, respectively, with the
remainder expiring in various years from 2019 to 2030. We have New Jersey NOL carry-forwards of
$51.5 million, which will expire in 2014 through 2017. We have research and development tax credit
carry-forwards which will expire in various years from 2011 through 2030.
The effective rate differs from the statutory rate of 34% for 2010, 2009, and 2008 primarily
due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statutory rate on pre-tax book loss |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
Stock option issuance |
|
|
0.19 |
% |
|
|
1.62 |
% |
|
|
0.32 |
% |
Disallowed interest |
|
|
9.96 |
% |
|
|
(13.51 |
)% |
|
|
0.93 |
% |
Derivatives |
|
|
14.13 |
% |
|
|
5.74 |
% |
|
|
(3.09 |
)% |
Research and experimentation tax credit |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
(0.71 |
)% |
Expired net operating losses and credits |
|
|
1.53 |
% |
|
|
20.14 |
% |
|
|
12.12 |
% |
Other |
|
|
0.01 |
% |
|
|
(0.01 |
)% |
|
|
0.04 |
% |
Change in federal valuation allowance |
|
|
8.18 |
% |
|
|
20.02 |
% |
|
|
24.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences, net operating loss carry-forwards, and research and
experimental tax credit carry-forwards as of December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Deferred tax assets and valuation allowance: |
|
|
|
|
|
|
|
|
Current deferred tax asset: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
218 |
|
|
$ |
1,213 |
|
Valuation allowance |
|
|
(218 |
) |
|
|
(1,213 |
) |
|
|
|
|
|
|
|
Net current deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets: |
|
|
|
|
|
|
|
|
Fixed and intangible assets |
|
$ |
(87 |
) |
|
$ |
(50 |
) |
Net operation loss carry-forwards |
|
|
120,034 |
|
|
|
122,296 |
|
AMT credit carry-forwards |
|
|
74 |
|
|
|
|
|
Capital loss and charitable carry-forwards |
|
|
2,779 |
|
|
|
2,779 |
|
Research and experimental tax credits |
|
|
11,986 |
|
|
|
12,188 |
|
Stock compensation |
|
|
997 |
|
|
|
808 |
|
Deferred revenue |
|
|
12,595 |
|
|
|
4,591 |
|
Interest |
|
|
3,461 |
|
|
|
2,534 |
|
Valuation allowance |
|
|
(151,839 |
) |
|
|
(145,146 |
) |
|
|
|
|
|
|
|
Net non-current deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-20
Future ownership changes may limit the future utilization of these net operating loss and
research and development tax credit carry-forwards as defined by the Internal Revenue Code. The
amount of any potential limitation is unknown. The net deferred tax asset has been fully offset by
a valuation allowance due to our history of taxable losses and uncertainty regarding our ability to
generate sufficient taxable income in the future to utilize these deferred tax assets.
On January 1, 2007, we adopted the provisions of ASC 740-10-25. ASC 740-10-25 provides
recognition criteria and a related measurement model for uncertain tax positions taken or expected
to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be
taken in a tax return be recognized in the financial statements when it is more likely than not
that the position would be sustained upon examination by tax authorities. Tax positions that meet
the more likely than not threshold are then measured using a probability weighted approach
recognizing the largest amount of tax benefit that is greater than 50% likely of being realized
upon ultimate settlement. The Company had no tax positions relating to open income tax returns that
were considered to be uncertain. Accordingly, we have not recorded a liability for unrecognized tax
benefits upon adoption of ASC 740-10-25. There continues to be no liability related to unrecognized
tax benefits at December 31, 2009.
The Companys 2007, 2008 and 2009 federal, New York and New Jersey tax returns remain subject
to examination by the respective taxing authorities. In addition, net operating losses and research
tax credits arising from prior years are also subject to examination at the time that they are
utilized in future years. Neither the Companys federal or state tax returns are currently under
examination.
11. Stockholders Deficit
On April 20, 2007, the stockholders of the Company approved an increase in the Companys
authorized common stock from 50 million to 100 million shares.
Our certificate of incorporation provides for the issuance of 1,000,000 shares of preferred
stock with the rights, preferences, qualifications, and terms to be determined by our Board of
Directors. As of December 31, 2010 and 2009, there were no shares of preferred stock outstanding.
We have a stockholder rights plan in which Preferred Stock Purchase Rights (the Rights) have
been granted at the rate of one one-hundredth of a share of Series A Junior Participating
Cumulative Preferred Stock (A Preferred Stock) at an exercise price of $80 for each share of our
common stock. The Rights expire on April 7, 2016.
The Rights are not exercisable, or transferable apart from the common stock, until the earlier
of (i) ten days following a public announcement that a person or group of affiliated or associated
persons have acquired beneficial ownership of 20% or more of our outstanding common stock or (ii)
ten business days (or such later date, as defined) following the commencement of, or announcement
of an intention to make a tender offer or exchange offer, the consummation of which would result in
the beneficial ownership by a person, or group, of 20% or more of our outstanding common stock. MHR
is specifically excluded from the provisions of the plan.
Furthermore, if we enter into consolidation, merger, or other business combinations, as
defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of A
Preferred Stock, a number of shares of common stock of the acquiring company having a value of two
times the exercise price of the Right, as defined. The Rights contain anti-dilutive provisions and
are redeemable at our option, subject to certain defined restrictions for $.01 per Right.
As a result of the Rights dividend, the Board of Directors designated 200,000 shares of
preferred stock as A Preferred Stock. A Preferred Stockholders will be entitled to a preferential
cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend
declared on our common stock. Shares of A Preferred Stock have a liquidation preference, as
defined, and each share will have 100 votes and will vote together with the common shares.
12. Stock-Based Compensation Plans
Total compensation expense recorded during the years ended December 31, 2010, 2009 and 2008
for share-based payment awards was $0.8 million, $1.6 million and $1.0 million, respectively, of
which $0.1 million, $0.1 million and $0.4 million is recorded in research and development and $0.7
million, $1.5 million and $0.6 million is recorded in general and administrative expenses in the
statement of operations. At December 31, 2010, total unrecognized estimated compensation expense
related to non-vested stock options granted prior to that date was approximately $0.6 million,
which is expected to be recognized over a weighted-average period of 2.2 years. No tax benefit was
realized due to a continued pattern of operating losses. We have a policy of issuing new shares to
F-21
satisfy share option exercises. There were no options exercised during the years ended
December 31, 2010 and 2009. Cash received from options exercised totaled $0.01 million for the year
ended December 31, 2008.
Using the Black-Scholes model, we have estimated our stock price volatility using the
historical volatility in the market price of our common stock for the expected term of the option.
The risk-free interest rate is based on the yield curve of U.S. Treasury STRIP securities for the
expected term of the option. We have never paid cash dividends and do not intend to pay cash
dividends in the foreseeable future. Accordingly, we assumed a 0% dividend yield. The forfeiture
rate is estimated using historical option cancellation information, adjusted for anticipated
changes in expected exercise and employment termination behavior. Forfeiture rates and the expected
term of options are estimated separately for groups of employees that have similar historical
exercise behavior. The ranges presented below are the result of certain groups of employees
displaying different behavior.
The following weighted-average assumptions were used for grants made under the stock option
plans for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
Directors |
|
Executives |
|
Employees |
Expected volatility |
|
|
95.5 |
% |
|
|
85.7 |
% |
|
|
85.7 |
% |
Expected term |
|
6.8 years |
|
|
6.8 years |
|
|
6.8 years |
|
Risk-free interest rate |
|
|
2.17 |
% |
|
|
3.14 |
% |
|
|
3.20 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Annual forfeiture rate |
|
|
14.5 |
% |
|
|
14.5 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Directors |
|
Executives |
|
Employees |
Expected volatility |
|
|
87.8 |
% |
|
|
87.8 |
% |
|
|
87.9 |
% |
Expected term |
|
6.8 years |
|
|
6.8 years |
|
|
6.8 years |
|
Risk-free interest rate |
|
|
3.19 |
% |
|
|
3.14 |
% |
|
|
2.9 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Annual forfeiture rate |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Directors |
|
Executives |
|
Employees |
Expected volatility |
|
|
84.9 |
% |
|
|
85.0 |
% |
|
|
85.0 |
% |
Expected term |
|
10 years |
|
|
10 years |
|
|
10 years |
|
Risk-free interest rate |
|
|
3.89 |
% |
|
|
3.89 |
% |
|
|
3.89 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Annual forfeiture rate |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
Stock Option Plans. On April 20, 2007, the stockholders 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 3,275,334 shares as follows:
2,500,000 new shares, 374,264 shares remaining and transferred from the Companys 2000 Stock Option
Plan (the 2000 Plan) (which was then replaced by the 2007 Plan) and 401,070 shares remaining and
transferred from the Companys Stock Option Plan for Outside Directors (the Directors Stock
Plan). In addition, shares cancelled, 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, once registered. As of December 31, 2010
1,278,558 shares remain available for issuance under the 2007 Plan. Generally, the options vest at
the rate of 20% per year and expire within a five-to-ten-year period, as determined by the
compensation committee of the Board of Directors and as defined by the Plans.
The Companys other active Stock Option Plan is the 2002 Broad Based Plan (the 2002 Plan).
Under the 2002 Plan, a maximum of 160,000 shares are authorized for issuance to employees in the
form of either incentive stock options (ISOs), as defined by the Internal Revenue Code, or
non-qualified stock options, which do not qualify as ISOs. As of December 31, 2010, 153,590 shares
remain available for issuance under the 2002 Plan.
The Company also has grants outstanding under various expired and terminated Stock Option
Plans, including the 1991 Stock Option Plan (the 1991 Plan), the 1995 Non-Qualified Stock Option
Plan (the 1995 Plan) and the 2000 Plan. Under our 1991, 1995 and 2000 Plans a maximum of
2,500,000, 2,550,000 and 1,945,236 shares of our common stock, respectively, were available for
F-22
issuance. The 1991 Plan was available to employees and consultants; the 2000 Plan was
available to employees, directors and consultants. The 1991 Plan and 2000 Plan provide for the
grant of either ISOs, as defined by the Internal Revenue Code, or non-qualified stock options,
which do not qualify as ISOs. The 1995 Plan provides for grants of non-qualified stock options to
officers and key employees. Generally, the options vest at the rate of 20% per year and expire
within a five- to ten-year period, as determined by the compensation committee of the Board of
Directors and as defined by the Plans.
Transactions involving stock options awarded under the Plans described above during the years
ended December 31, 2010, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term in Years |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Outstanding at December 31, 2007 |
|
|
2,867,876 |
|
|
$ |
8.73 |
|
|
|
6.4 |
|
|
|
|
|
Granted |
|
|
133,600 |
|
|
$ |
2.84 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(300,087 |
) |
|
$ |
12.72 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(664,385 |
) |
|
$ |
8.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,150 |
) |
|
$ |
3.04 |
|
|
|
|
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
2,032,854 |
|
|
$ |
8.30 |
|
|
|
6.7 |
|
|
|
|
|
Granted |
|
|
1,041,000 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(12,643 |
) |
|
$ |
14.63 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(326,475 |
) |
|
$ |
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
2,734,736 |
|
|
$ |
6.29 |
|
|
|
6.8 |
|
|
$ |
51 |
|
Granted |
|
|
662,750 |
|
|
$ |
1.41 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(183,500 |
) |
|
$ |
37.99 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(48,120 |
) |
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
3,165,866 |
|
|
$ |
3.51 |
|
|
|
6.9 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2010 |
|
|
2,367,037 |
|
|
$ |
4.22 |
|
|
|
6.2 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2010 |
|
|
2,906,445 |
|
|
$ |
3.70 |
|
|
|
6.7 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of options granted during the years ended December
31, 2010, 2009 and 2008 was $1.26, $0.92 and $2.16, respectively.
Outside Directors Plan. We previously issued options to outside directors who are neither
officers nor employees of Emisphere nor holders of more than 5% of our common stock under the
Directors Stock Plan. As amended, a maximum of 725,000 shares of our common stock were available
for issuance under the Outside Directors Plan in the form of options and restricted stock. The
Directors Stock Plan expired on January 29, 2007. Options and restricted stock are now granted to
directors under the 2007 Plan discussed above.
F-23
Transactions involving stock options awarded under the Directors Stock Plan during the years
ended December 31, 2010, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term in Years |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Outstanding at December 31, 2007 |
|
|
156,000 |
|
|
$ |
13.38 |
|
|
|
5.0 |
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
156,000 |
|
|
$ |
13.38 |
|
|
|
4.0 |
|
|
|
|
|
Expired |
|
|
(35,000 |
) |
|
$ |
4.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
121,000 |
|
|
$ |
15.59 |
|
|
|
2.7 |
|
|
|
|
|
Expired |
|
|
(21,000 |
) |
|
$ |
41.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
100,000 |
|
|
$ |
10.24 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at December 31, 2010 |
|
|
100,000 |
|
|
$ |
10.24 |
|
|
|
2.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors Deferred Compensation Stock Plan. The Directors Deferred Compensation Stock Plan
(the Directors Deferred Plan) ceased as of May 2004. Under the Directors Deferred Plan,
directors who were neither officers nor employees of Emisphere had the option to elect to receive
one half of the annual Board of Directors retainer compensation, paid for services as a Director,
in deferred common stock. An aggregate of 25,000 shares of our common stock has been reserved for
issuance under the Directors Deferred Plan. During the years ended December 31, 2004 and 2003, the
outside directors earned the rights to receive an aggregate of 1,775 shares and 2,144 shares,
respectively. Under the terms of the Directors Deferred Plan, shares are to be issued to a
director within six months after he or she ceases to serve on the Board of Directors. We recorded
as an expense the fair market value of the common stock issuable under the plan. As of December 31,
2010, there are 3,122 shares issuable under this plan. No grants were awarded in 2010, 2009 and
2008, and none were outstanding as of December 31, 2010.
Non-Plan Options. Our Board of Directors has granted options (Non-Plan Options), which are
currently outstanding for the accounts of two consultants. The Board of Directors determines the
number and terms of each grant (option exercise price, vesting, and expiration date).
Transactions involving awards of Non-Plan Options during the year ended December 31, 2010,
2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term in Years |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Outstanding at December 31, 2007 |
|
|
20,000 |
|
|
$ |
14.84 |
|
|
|
4.3 |
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
20,000 |
|
|
$ |
14.84 |
|
|
|
3.3 |
|
|
|
|
|
Expired |
|
|
(10,000 |
) |
|
$ |
26.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
10,000 |
|
|
$ |
3.64 |
|
|
|
2.0 |
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
10,000 |
|
|
$ |
3.64 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at December 31, 2010 |
|
|
10,000 |
|
|
$ |
3.64 |
|
|
|
2.0 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Collaborative Research Agreements
We are a party to collaborative agreements with corporate partners to provide development and
commercialization services relating to the collaborative products. These agreements are in the form
of research and development collaboration and licensing agreements. In connection with these
agreements, we have granted licenses or the rights to obtain licenses to our oral drug delivery
technology. In return, we are entitled to receive certain payments upon the achievement of
milestones and will receive royalties on sales of products should they be commercialized. Under
these agreements, we are entitled to also be reimbursed for research and development costs. We also
have the right to manufacture and supply delivery agents developed under these agreements to our
corporate partners.
F-24
We also perform research and development for others pursuant to feasibility agreements, which
are of short duration and are designed to evaluate the applicability of our drug delivery agents to
specific drugs. Under the feasibility agreements, we are generally reimbursed for the cost of work
performed.
All of our collaborative agreements are subject to termination by our corporate partners
without significant financial penalty to them. Milestone and upfront payments received in
connection with these agreements was $7.0 million, $0.2 million and $11.4 million in the years
ended December 31, 2010, 2009 and 2008, respectively. Expense reimbursements received in connection
with these agreements was $0.1 million, $0.2 million and $1.3 million for the years ended December
31, 2010, 2009 and 2008, respectively. Expenses incurred in connection with these agreements and
included in research and development were $0.0 million, $0.2 million and $0.1 million in the years
ended December 31, 2010, 2009 and 2008, respectively. Significant agreements are described below.
Novartis. On June 4, 2010, the Company and Novartis entered into the Novartis Agreement,
pursuant which, the Company was released and discharged from its obligations under the Novartis
Note in exchange for (i) 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 and
the Oral Salmon Calcitonin License Agreement, date as of March 8, 2000, for the development of an
oral salmon calcitonin product for the treatment of osteoarthritis and osteoporosis; (ii) 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 (iii) 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.
2008 Novo Nordisk Agreement
On June 21, 2008, we entered into an exclusive Development and License Agreement with Novo
Nordisk pursuant to which Novo Nordisk will develop and commercialize oral formulations of Novo
Nordisk proprietary products in combination with Emisphere carriers (the GLP-1 License
Agreement). Under such the GLP-1 License Agreement, Emisphere could receive more than $87.0
million in contingent product development and sales milestone payments including a $10.0 million
non-refundable license fee which was received during June 2008. Emisphere would also be entitled to
receive royalties in the event Novo Nordisk commercializes products developed under such agreement.
Under the terms of the GLP-1 License Agreement, Novo Nordisk is responsible for the development and
commercialization of the products. Initially Novo Nordisk is focusing on the development of oral
formulations of its proprietary GLP-1 receptor agonists. In January 2010, Novo Nordisk had its
first Phase I clinical trial with a long acting oral GLP-1 receptor agonist. This milestone
released a $2 million payment to Emisphere.
The GLP-1 License Agreement includes multiple deliverables including the license grant,
several versions of the Companys Eligen® Technology (or carriers), support services and
manufacturing. Emisphere management reviewed the relevant terms of the Novo Nordisk agreement and
determined that such deliverables should be accounted for as a single unit of accounting in
accordance with FASB ASC 605-25, Multiple-Element Arrangements, since the delivered license and
Eligen® Technology do not have stand-alone value and Emisphere does not have objective evidence of
fair value of the undelivered Eligen® Technology or the manufacturing value of all the undelivered
items. Such conclusion will be reevaluated as each item in the arrangement is delivered.
Consequently, any payments received from Novo Nordisk pursuant to such agreement, including the
initial $10 million upfront payment and any payments received for support services, will be
deferred and included in Deferred Revenue within our balance sheet. Management cannot currently
estimate when all of such deliverables will be delivered nor can they estimate when, if ever,
Emisphere will have objective evidence of the fair value for all of the undelivered items,
therefore all payments from Novo Nordisk are expected to be deferred for the foreseeable future.
As of December 31, 2010 total deferred revenue from the 2008 agreement with Novo Nordisk was
$13.6 million, comprised of the $10.0 million non-refundable license fee, $2 million milestone
payment and $1.6 million in support services.
2010 Novo Nordisk Agreement
On December 20, 2010, we entered into an exclusive Development and License Agreement with Novo
Nordisk, pursuant to which we granted to Novo Nordisk an exclusive license to develop and
commercialize oral formulations of Novo Nordisks insulins, using the Companys proprietary
delivery agents (the Insulin Agreement). The Insulin Agreement includes $57.5 million in
potential
F-25
product development and sales milestone payments including a $5.0 million non- refundable,
non-creditable license fee. Emisphere would also be entitled to receive royalties in the event Novo
Nordisk commercializes products developed under such the Insulin Agreement.
The Insulin Agreement includes multiple deliverables including the license grant, several
versions of the Companys Eligen® Technology (or carriers), support services and manufacturing.
Emisphere management reviewed the relevant terms of the Novo Nordisk agreement and determined that
such deliverables should be accounted for as a single unit of accounting in accordance with FASB
ASC 605-25, Multiple-Element Arrangements, since the delivered license and Eligen® Technology do
not have stand-alone value and Emisphere does not have objective evidence of fair value of the
undelivered Eligen® Technology or the manufacturing value of all the undelivered items. Such
conclusion will be reevaluated as each item in the arrangement is delivered. Consequently any
payments received from Novo Nordisk pursuant to such agreement, including the initial $5.0 million
upfront payment and any payments received for support services, will be deferred and included in
Deferred Revenue within our balance sheet. Management cannot currently estimate when all of such
deliverables will be delivered nor can they estimate when, if ever, Emisphere will have objective
evidence of the fair value for all of the undelivered items, therefore all payments from Novo
Nordisk are expected to be deferred for the foreseeable future.
As of December 31, 2010 total deferred revenue from the 2010 agreement with Novo Nordisk was
$5.0 million, comprised of the non-refundable, non-creditable license fee.
Genta. In March 2006, we entered into a collaborative agreement with Genta to develop an oral
formulation of a gallium-containing compound. We currently receive reimbursements from Genta for
the work performed during the formulation phase. We recognized $0.0, $0.0 million and $0.1 million
in revenue related to these reimbursements for the years ended December 31, 2010, 2009 and 2008,
respectively. We are eligible for future milestone payments totaling up to a maximum of $24.3
million under this agreement.
14. Defined Contribution Retirement Plan
We have a defined contribution retirement plan (the Retirement Plan), the terms of which, as
amended, allow eligible employees who have met certain age and service requirements to participate
by electing to contribute a percentage of their compensation to be set aside to pay their future
retirement benefits, as defined by the Retirement Plan. We have agreed to make discretionary
contributions to the Retirement Plan. For the years ended December 31, 2010, 2009 and 2008, we made
contributions to the Retirement Plan totaling approximately $0.07 million, $0.06 million and $0.2
million, respectively.
15. Net Loss Per Share
The following table sets forth the information needed to compute basic and diluted earnings
per share for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 restated |
|
|
2008 |
|
|
|
(In thousands, except per share amounts) |
|
Basic and diluted net loss |
|
$ |
(56,909 |
) |
|
$ |
(16,821 |
) |
|
$ |
(24,388 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted |
|
|
46,206,803 |
|
|
|
34,679,321 |
|
|
|
30,337,442 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(1.23 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.80 |
) |
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Options to purchase common shares |
|
|
2,477,037 |
|
|
|
2,865,736 |
|
|
|
2,208,854 |
|
Outstanding warrants and options to purchase warrants |
|
|
11,832,826 |
|
|
|
9,934,253 |
|
|
|
2,972,049 |
|
Novartis convertible note payable |
|
|
|
|
|
|
14,944,980 |
|
|
|
7,537,921 |
|
MHR note payable |
|
|
6,675,512 |
|
|
|
5,983,146 |
|
|
|
5,362,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,985,375 |
|
|
|
33,728,115 |
|
|
|
18,081,420 |
|
|
|
|
|
|
|
|
|
|
|
F-26
16. 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 Lease 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 Lease Agreement, the Lease was terminated effective as
of April 1, 2009. The Lease Agreement provided that the Company make the following payments to BMR:
(a) $1 million, paid upon execution of the Lease Agreement, (b) $0.5 million, paid six months after
the execution date of the Lease Agreement, and (c) $0.75 million, payable twelve months after the
execution date of the Lease Agreement. Initial and six months payments were made on schedule.
Although the final payment was due originally on April 29, 2010, on March 17, 2010 the Company and
BMR agreed to amend the Lease Agreement (the Lease Amendment). According to the Lease 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. Through March 1, 2011 the Company paid $600,000 of the principal plus $21,000
interest for late payments in accordance with the terms of the Lease Agreement.
We continue to lease office space at 240 Cedar Knolls Road, Cedar Knolls, NJ under a
non-cancellable operating lease expiring in 2013.
As of December 31, 2010, future minimum rental payments are as follows:
|
|
|
|
|
Years Ending December 31, |
|
(In thousands) |
|
2011 |
|
|
353 |
|
2012 |
|
|
360 |
|
2013 |
|
|
31 |
|
|
|
|
|
Total |
|
|
744 |
|
Rent expense for the years ended December 31, 2010, 2009 and 2008 was $0.3 million, $0.7
million and $2.3 million, respectively. Additional charges under this lease for real estate taxes
and common maintenance charges for the years ended December 31, 2010, 2009 and 2008, were $0.03
million, $0.5 million and $0.8 million, respectively.
In accordance with the lease agreement in Cedar Knolls, NJ, the Company has entered into a
standby letter of credit in the amount of $246 thousand as a security deposit. The standby letter
of credit is fully collateralized with a time certificate of deposit account in the same amount.
The certificate of deposit has been recorded as a restricted cash balance in the accompanying
financials. As of December 31, 2010, there are no amounts outstanding under the standby letter of
credit.
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 plus interest and
fees as full and final payment for all claims, defenses, counterclaims, 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. On September 23, 2010, the Company paid
approximately $2.6 million as the full and final settlement of this matter.
The Company evaluates the financial consequences of legal actions periodically or as facts
present themselves and books accruals to account for its best estimate of future costs accordingly.
F-27
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 December 31, 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. As of December 8, 2008 we terminated all research and development staff and ceased
using approximately 85% of the facilities which resulted in a restructuring charge of approximately
$3.8 million in the fourth quarter, 2008. As part of the restructuring charge, we wrote down the
value of our leasehold improvements in Tarrytown by approximately $1.0 million (net); additionally,
the useful life of leasehold improvements in portions of the facility that were still in use as of
December 31, 2008 was recalculated, resulting in an accelerated charge to amortization expense of
approximately $0.1 million.
In accordance with FASB ASC 420-10-5, Exit or Disposal Cost Obligations, we estimated our
liability for net costs associated with terminating our lease obligation for the laboratory and
office facilities in Tarrytown and recorded a charge net of estimated sublease income. To develop
our estimate, we considered our liability under the Tarrytown lease, and estimated costs to be
incurred to satisfy rental commitments under the lease, the lead time necessary to sublease the
space, projected sublease rental rates, and the anticipated duration of subleases. We validated our
estimate and assumptions through consultations with independent third parties having relevant
expertise. We used a credit adjusted risk free rate of 1.55% to discount estimated cash flows.
We intend to review our estimate and assumptions on a quarterly basis or more frequently as
appropriate; and will make modifications to the estimated liability as deemed appropriate, based on
our judgment to reflect changing circumstances. Any change in our estimate may result in additional
restructuring charges, and those charges may be material.
The restructuring liability at December 31, 2008 of $2.9 million related primarily to the
portion of the Tarrytown facility we ceased using as of December 8, 2008, and was recorded at net
present value, and included several obligations related to the restructuring. We classified $0.9
million as short term as of December 31, 2008 and $2.0 million as long term. We recorded $3.8
million in restructuring expenses comprised of $2.6 million lease restructuring expense (net of
subleases), $0.2 million in termination benefits (employee severance and related costs) and $1.0
million in leasehold improvement abandonment. In December 2008, we made $47 thousand in net rental
payments (calculated at net present value) on the Tarrytown property and made termination payments
of $91 thousand which represent employee severance and benefits charges. The restructuring
liability was reduced by these amounts.
See also the description of the Terminated Lease Agreement described in Commitments and
Contingencies above.
The restructuring activity and related liability are as follows ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
Lease |
|
|
|
|
|
|
Liability at |
|
|
Lease |
|
|
|
|
|
|
Liability at |
|
|
|
December 31, |
|
|
Termination |
|
|
Cash |
|
|
December 31, |
|
|
Termination |
|
|
Cash |
|
|
December 31, |
|
|
|
2008 |
|
|
Adjustment |
|
|
Payments |
|
|
2009 |
|
|
Adjustment |
|
|
Payments |
|
|
2010 |
|
Lease restructuring expense |
|
$ |
2,772 |
|
|
$ |
(353 |
) |
|
$ |
(1,669 |
) |
|
$ |
750 |
|
|
$ |
50 |
|
|
$ |
(500 |
) |
|
$ |
300 |
|
Employee severance and related costs |
|
|
108 |
|
|
|
(3 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,880 |
|
|
$ |
(356 |
) |
|
$ |
(1,774 |
) |
|
$ |
750 |
|
|
$ |
50 |
|
|
$ |
(500 |
) |
|
$ |
300 |
|
F-28
17. Summarized Quarterly Financial Data (Unaudited)
Following are summarized quarterly financial data (unaudited) for the years ended December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
|
|
|
(Restated)(1) |
|
(Restated)(1) |
|
(Restated)(1) |
|
December 31 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Total revenue |
|
$ |
14 |
|
|
$ |
57 |
|
|
$ |
5 |
|
|
$ |
24 |
|
Operating loss |
|
|
(3,008 |
) |
|
|
(3,117 |
) |
|
|
(3,875 |
) |
|
|
(1,543 |
) |
Net (loss) income |
|
|
(17,259 |
) |
|
|
(31,573 |
) |
|
|
10,082 |
|
|
|
(18,159 |
) |
Net (loss) income per share, basic |
|
$ |
(0.41 |
) |
|
$ |
(0.73 |
) |
|
$ |
0.21 |
|
|
$ |
(0.35 |
) |
Net (loss) income per share, diluted |
|
$ |
(0.41 |
) |
|
$ |
(0.73 |
) |
|
$ |
0.20 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Restated(1) |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
92 |
|
Operating loss |
|
|
(4,659 |
) |
|
|
(2,998 |
) |
|
|
(3,393 |
) |
|
|
(3,502 |
) |
Net loss |
|
|
(4,381 |
) |
|
|
(3,103 |
) |
|
|
(2,907 |
) |
|
|
(6,430 |
) |
Net (loss) per share, basic and diluted |
|
$ |
(0.14 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.15 |
) |
|
|
|
(1) |
|
For a description of such restatement of the Companys financial statements see Note 19
(below). |
18. 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 liabilities measured at fair value
on a recurring basis as of December 31, 2010:
|
|
|
|
|
|
|
Level 2 |
|
|
|
2010 |
|
|
|
(In thousands) |
|
Derivative instruments (short term) |
|
$ |
22,940 |
|
Derivative instruments (long term) |
|
|
11,166 |
|
|
|
|
|
Total |
|
$ |
34,106 |
|
|
|
|
|
The derivative instruments were valued using the market approach, which is considered Level 2
because it uses inputs other than quoted prices in active markets that are either directly or
indirectly observable. Accordingly, the derivatives were valued using the Black-Scholes model. See
Note 9 for significant observable inputs used in the Black-Scholes model.
19. Restatement of Previously Issued Financial Statements
On March 28, 2011, Management of Emisphere Technologies, Inc. (the Company), after
consulting with the Audit Committee of the Board of Directors and with McGladrey and Pullen, LLP
(McGladrey), its independent registered public accounting firm, concluded that the Companys
previously issued financial statements included in its quarterly interim period reports previously
reported on Forms 10-Q for the periods ended March 31, June 30, and September 30, 2009 and 2010,
and its annual report on Form 10-K for the period ended December 31, 2009 (the Financial Statement
Periods) should no longer be relied upon due to errors in the application of accounting guidance
regarding the determination of whether a financial instrument is indexed to its own stock. At the
time these financial statements were originally issued, the Company had reviewed its accounting for
the adoption of Financial Accounting Standards Board Accounting Codification Topic 815-40-15-5,
Evaluating Whether an Instrument Is Considered Indexed to an Entitys Own Stock (FASB
815-40-15-5 or the Guidance) and concluded it was in accordance with GAAP. The Companys
adoption of the Guidance was not straightforward because GAAP specifies the application of a level
interest method to amortize interest and debt discounts in accordance with FASB 835-30-35-2, The
Interest Method (FASB 835-30-35-2) . In adopting the guidance, the Company estimated the fair
value of the bifurcated conversion feature embedded in the Companys 11% senior secured convertible
notes in favor of MHR Institutional Partners IIA due September 26, 2012 (collectively, the MHR
Convertible Notes) as a derivative liability and developed an amortization schedule to recognize
non-cash interest expense and debt discounts over time. In accordance with the guidance, the
Company deducted the incremental value of the conversion feature from the book value of the
instrument at its inception. Because the fair value of the conversion feature was in excess of the
book value of the instrument, the Company believed it could not apply a level rate method to
determine the amortization schedule because the resulting book value would have been $0 and because
it is mathematically impossible to apply a level interest rate to amortize from a $0 balance.
Therefore, the Company developed an amortization schedule that it believed was consistent with the
adoption of the new accounting
F-29
guidance and was still representative of the economic substance of the financial instrument.
This accounting treatment was reflected in the Companys financial statements during the Financial
Statement Periods.
McGladrey audited the Companys financial statements for 2009. The Companys Audit Committee
and Management discussed the results of the audit including a review of financial statements for
2009 with McGladrey.
On March 24, 2011, McGladrey notified the Company that the amortization schedule described
above was not in accordance with the level rate method required by GAAP and that it should be
recalculated accordingly. McGladrey further notified the Company that as a result of this error,
the financial statements did not reflect the proper amortization of non-cash interest expense and
debt discounts in connection with the bifurcated conversion feature embedded in the MHR Convertible
Notes as a derivative liability. McGladrey further notified the Company that it should make
disclosures and take appropriate actions to prevent future reliance on the financial statements
disclosed in the Financial Statement Periods.
After discussions between Management, the Audit Committee and McGladrey, the Company
reevaluated its accounting for the adoption of the Guidance and for its assessment of the debt
modification entered into during June 2010 and determined that its original accounting was
incorrect. Consequently, the Company determined to restate its financial statements for the
Financial Statement Periods. The Company used the level rate method in accordance with FASB
835-30-35-2 to revise its amortization schedule in accordance with GAAP. The Company assigned a
beginning balance nominally close to $0 to develop this amortization schedule. The restatements of
financial statements previously reported on Forms 10-Q for the periods ended March 31, June 30, and
September 30, 2009 and 2010, and on Form 10-K for the period ended December 31, 2009 will reflect
adjustments primarily to correct for the revised amortization schedule and resulting overstatement
of non-cash interest charges and the recorded value of notes payable, which included the effects of
the accretion of debt discount resulting from the valuation of the embedded derivative associated
with the MHR Convertible Note. Additionally, after correcting the misapplication of guidance for
determining whether a financial instrument is indexed to its own stock, the Company reevaluated its
accounting for debt modification in connection with the Master Agreement and Amendment by and
between the Company and Novartis Pharma AG dated June 4, 2010 and the letter agreement entered into
with MHR in connection therewith and concluded that modifications to the MHR Convertible Notes
should have been accounted for as extinguishment of debt in accordance with FASB ASC 470-50,
Modifications and Extinguishments, which resulted in a $17.0 million non-cash adjustment to
recognize the loss on extinguishment of debt.
The Company emphasizes that all reclassifications and related charges to correct the
misapplication of the relevant accounting pronouncement and subsequent debt modification adjustment
have no impact on the Companys operating income, its cash position, its cash flows or its future
cash requirements.
The tables below summarize the impact of the restatements described above on financial
information previously reported on the Companys Forms 10-Q for the periods ended March 31, June
30, and September 30, 2009 and 2010 and on Form 10-K for the period ended December 2009. The
restatement did not impact cash flow from operating, investing, or financing activities.
Audited Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
As Reported |
|
|
2009 |
|
Adjustments |
|
2009 |
|
|
($thousands, except per share data) |
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs |
|
$ |
|
|
|
$ |
(346 |
)(1) |
|
$ |
346 |
|
Total assets |
|
$ |
5,587 |
|
|
$ |
(346 |
) |
|
$ |
5,933 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, including accrued interest |
|
$ |
93 |
|
|
$ |
(12,983 |
)(1) |
|
$ |
13,076 |
|
Total liabilities |
|
$ |
40,814 |
|
|
$ |
(12,983 |
) |
|
$ |
53,797 |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
$ |
(424,034 |
) |
|
$ |
12,637 |
(1) |
|
$ |
(436,671 |
) |
Total stockholders deficit |
|
$ |
(35,227 |
) |
|
$ |
12,637 |
|
|
$ |
(47,864 |
) |
STATEMENT OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, related party |
|
$ |
(82 |
) |
|
$ |
4,422 |
(1) |
|
$ |
(4,504 |
) |
Total other non-operating income (expense) |
|
$ |
(2,269 |
) |
|
$ |
4,422 |
|
|
$ |
(6,691 |
) |
Net loss |
|
$ |
(16,821 |
) |
|
$ |
4,422 |
|
|
$ |
(21,243 |
) |
Loss per common share, basic and diluted |
|
$ |
(0.49 |
) |
|
$ |
0.12 |
|
|
$ |
(0.61 |
) |
CASH FLOW DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,821 |
) |
|
$ |
4,422 |
|
|
$ |
(21,243 |
) |
Non-cash interest expense related party |
|
$ |
82 |
|
|
$ |
(4,422 |
) |
|
$ |
4,504 |
|
Net cash used in operating activities |
|
$ |
(11,931 |
) |
|
$ |
|
|
|
$ |
(11,931 |
) |
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
F-30
2009 Balance Sheets
(unaudited $thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
|
September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
3,951 |
|
|
|
|
|
|
|
3,951 |
|
|
|
1,279 |
|
|
|
|
|
|
|
1,279 |
|
|
|
6,975 |
|
|
|
|
|
|
|
6,975 |
|
Accounts receivable, net |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
72 |
|
|
|
|
|
|
|
72 |
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
Prepaid expenses and other current assets |
|
|
300 |
|
|
|
|
|
|
|
300 |
|
|
|
402 |
|
|
|
|
|
|
|
402 |
|
|
|
253 |
|
|
|
|
|
|
|
253 |
|
Total current assets |
|
|
4,266 |
|
|
|
|
|
|
|
4,266 |
|
|
|
1,753 |
|
|
|
|
|
|
|
1,753 |
|
|
|
7,249 |
|
|
|
|
|
|
|
7,249 |
|
Equipment and leasehold improvements, net |
|
|
312 |
|
|
|
|
|
|
|
312 |
|
|
|
244 |
|
|
|
|
|
|
|
244 |
|
|
|
161 |
|
|
|
|
|
|
|
161 |
|
Purchased technology, net |
|
|
1,256 |
|
|
|
|
|
|
|
1,256 |
|
|
|
1,196 |
|
|
|
|
|
|
|
1,196 |
|
|
|
1,137 |
|
|
|
|
|
|
|
1,137 |
|
Restricted cash |
|
|
255 |
|
|
|
|
|
|
|
255 |
|
|
|
255 |
|
|
|
|
|
|
|
255 |
|
|
|
255 |
|
|
|
|
|
|
|
255 |
|
Other assets(1) |
|
|
|
|
|
|
(404 |
) |
|
|
404 |
|
|
|
|
|
|
|
(386 |
) |
|
|
386 |
|
|
|
|
|
|
|
(367 |
) |
|
|
367 |
|
Total assets |
|
|
6,089 |
|
|
|
(404 |
) |
|
|
6,493 |
|
|
|
3,448 |
|
|
|
(386 |
) |
|
|
3,834 |
|
|
|
8,802 |
|
|
|
(367 |
) |
|
|
9,169 |
|
Liabilities and Stockholders Deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, including accrued interest and
net of related discount |
|
|
12,146 |
|
|
|
|
|
|
|
12,146 |
|
|
|
12,283 |
|
|
|
|
|
|
|
12,283 |
|
|
|
12,422 |
|
|
|
|
|
|
|
12,422 |
|
Accounts payable and accrued expenses |
|
|
3,288 |
|
|
|
|
|
|
|
3,288 |
|
|
|
3,403 |
|
|
|
|
|
|
|
3,403 |
|
|
|
4,511 |
|
|
|
|
|
|
|
4,511 |
|
Deferred revenue, current |
|
|
110 |
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Derivative instruments Related party |
|
|
173 |
|
|
|
|
|
|
|
173 |
|
|
|
337 |
|
|
|
|
|
|
|
337 |
|
|
|
2,179 |
|
|
|
|
|
|
|
2,179 |
|
Others |
|
|
268 |
|
|
|
|
|
|
|
268 |
|
|
|
557 |
|
|
|
|
|
|
|
557 |
|
|
|
2,042 |
|
|
|
|
|
|
|
2,042 |
|
Restructuring accrual, current |
|
|
1,503 |
|
|
|
|
|
|
|
1,503 |
|
|
|
1,253 |
|
|
|
|
|
|
|
1,253 |
|
|
|
1,253 |
|
|
|
|
|
|
|
1,253 |
|
Other current liabilities |
|
|
22 |
|
|
|
|
|
|
|
22 |
|
|
|
48 |
|
|
|
|
|
|
|
48 |
|
|
|
51 |
|
|
|
|
|
|
|
51 |
|
Total current liabilities |
|
|
17,510 |
|
|
|
|
|
|
|
17,510 |
|
|
|
17,881 |
|
|
|
|
|
|
|
17,881 |
|
|
|
22,467 |
|
|
|
|
|
|
|
22,467 |
|
Notes payable, including accrued interest and
net of related discount |
|
|
19 |
|
|
|
(9,655 |
) |
|
|
9,674 |
|
|
|
32 |
|
|
|
(10,721 |
) |
|
|
10,753 |
|
|
|
52 |
|
|
|
(11,831 |
) |
|
|
11,883 |
|
Restructuring accrual |
|
|
750 |
|
|
|
|
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
11,403 |
|
|
|
|
|
|
|
11,403 |
|
|
|
11,460 |
|
|
|
|
|
|
|
11,460 |
|
|
|
11,467 |
|
|
|
|
|
|
|
11,467 |
|
Derivative instrument related party |
|
|
3,194 |
|
|
|
|
|
|
|
3,194 |
|
|
|
3,224 |
|
|
|
|
|
|
|
3,224 |
|
|
|
3,800 |
|
|
|
|
|
|
|
3,800 |
|
Deferred lease liability and other liabilities |
|
|
123 |
|
|
|
|
|
|
|
123 |
|
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
90 |
|
|
|
|
|
|
|
90 |
|
Total liabilities |
|
|
32,999 |
|
|
|
(9,655 |
) |
|
|
42,654 |
|
|
|
32,693 |
|
|
|
(10,721 |
) |
|
|
43,414 |
|
|
|
37,876 |
|
|
|
(11,831 |
) |
|
|
49,707 |
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
1,000,000 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
100,000,000 shares; issued 30,630,810 shares
(30,341,078 outstanding) ; issued 30,630,810
(30,341,078 outstanding); issued 42,360,133
(42,070,401 outstanding) in the first, second
and third quarter , respectively |
|
|
306 |
|
|
|
|
|
|
|
306 |
|
|
|
306 |
|
|
|
|
|
|
|
306 |
|
|
|
424 |
|
|
|
|
|
|
|
424 |
|
Additional paid-in-capital |
|
|
388,330 |
|
|
|
|
|
|
|
388,330 |
|
|
|
389,098 |
|
|
|
|
|
|
|
389,098 |
|
|
|
392,059 |
|
|
|
|
|
|
|
392,059 |
|
Accumulated deficit |
|
|
(411,594 |
) |
|
|
9,251 |
|
|
|
(420,845 |
) |
|
|
(414,697 |
) |
|
|
10,335 |
|
|
|
(425,032 |
) |
|
|
(417,605 |
) |
|
|
11,464 |
|
|
|
(429,069 |
) |
Common stock held in treasury, at cost;
289,732 shares |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
Total stockholders deficit |
|
|
(26,910 |
) |
|
|
9,251 |
|
|
|
(36,161 |
) |
|
|
(29,245 |
) |
|
|
10,335 |
|
|
|
(39,580 |
) |
|
|
(29,074 |
) |
|
|
11,464 |
|
|
|
(40,538 |
) |
Total liabilities and stockholders deficit |
|
|
6,089 |
|
|
|
(404 |
) |
|
|
6,493 |
|
|
|
3,448 |
|
|
|
(386 |
) |
|
|
3,834 |
|
|
|
8,802 |
|
|
|
(367 |
) |
|
|
9,169 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
F-31
2009 Statements of Operations Quarterly
(unaudited $thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Three Months Ended June 30, |
|
Three Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
1,923 |
|
|
|
|
|
|
|
1,923 |
|
|
|
748 |
|
|
|
|
|
|
|
748 |
|
|
|
782 |
|
|
|
|
|
|
|
782 |
|
General and
administrative
expenses |
|
|
2,921 |
|
|
|
|
|
|
|
2,921 |
|
|
|
2,933 |
|
|
|
|
|
|
|
2,933 |
|
|
|
2,493 |
|
|
|
|
|
|
|
2,493 |
|
Restructuring costs |
|
|
(353 |
) |
|
|
|
|
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of
fixed assets |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(779 |
) |
|
|
|
|
|
|
(779 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
Depreciation and
amortization |
|
|
211 |
|
|
|
|
|
|
|
211 |
|
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
Total costs and
expenses |
|
|
4,659 |
|
|
|
|
|
|
|
4,659 |
|
|
|
2,998 |
|
|
|
|
|
|
|
2,998 |
|
|
|
3,393 |
|
|
|
|
|
|
|
3,393 |
|
Operating income (loss) |
|
|
(4,659 |
) |
|
|
|
|
|
|
(4,659 |
) |
|
|
(2,998 |
) |
|
|
|
|
|
|
(2,998 |
) |
|
|
(3,393 |
) |
|
|
|
|
|
|
(3,393 |
) |
Other non-operating
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
27 |
|
|
|
|
|
|
|
27 |
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Sublease income |
|
|
232 |
|
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of patents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
of derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party(1) |
|
|
113 |
|
|
|
|
|
|
|
113 |
|
|
|
(193 |
) |
|
|
|
|
|
|
(193 |
) |
|
|
45 |
|
|
|
|
|
|
|
45 |
|
Other |
|
|
35 |
|
|
|
|
|
|
|
35 |
|
|
|
(289 |
) |
|
|
|
|
|
|
(289 |
) |
|
|
576 |
|
|
|
|
|
|
|
576 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(8 |
) |
|
|
1,036 |
|
|
|
(1,044 |
) |
|
|
(13 |
) |
|
|
1,084 |
|
|
|
(1,097 |
) |
|
|
(20 |
) |
|
|
1,130 |
|
|
|
(1,150 |
) |
Other |
|
|
(135 |
) |
|
|
|
|
|
|
(135 |
) |
|
|
(137 |
) |
|
|
|
|
|
|
(137 |
) |
|
|
(139 |
) |
|
|
|
|
|
|
(139 |
) |
Total other
non-operating income
(expense) |
|
|
278 |
|
|
|
1,036 |
|
|
|
(758 |
) |
|
|
(105 |
) |
|
|
1,084 |
|
|
|
(1,189 |
) |
|
|
486 |
|
|
|
1,130 |
|
|
|
(644 |
) |
Net loss |
|
|
(4,381 |
) |
|
|
1,036 |
|
|
|
(5,417 |
) |
|
|
(3,103 |
) |
|
|
1,084 |
|
|
|
(4,187 |
) |
|
|
(2,907 |
) |
|
|
1,130 |
|
|
|
(4,037 |
) |
Net loss per share,
basic and diluted |
|
|
(0.14 |
) |
|
|
0.04 |
|
|
|
(0.18 |
) |
|
|
(0.10 |
) |
|
|
0.04 |
|
|
|
(0.14 |
) |
|
|
(0.08 |
) |
|
|
0.03 |
|
|
|
(0.11 |
) |
Weighted average
shares outstanding,
basic and diluted |
|
|
30,341,078 |
|
|
|
|
|
|
|
30,341,078 |
|
|
|
30,341,078 |
|
|
|
|
|
|
|
30,341,078 |
|
|
|
35,695,769 |
|
|
|
|
|
|
|
35,695,769 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
F-32
2009 Statements of Operations Year to Date (unaudited $thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Three Months Ended June 30, |
|
Three Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,923 |
|
|
|
|
|
|
|
1,923 |
|
|
|
2,670 |
|
|
|
|
|
|
|
2,670 |
|
|
|
3,452 |
|
|
|
|
|
|
|
3,452 |
|
General and administrative expenses |
|
|
2,921 |
|
|
|
|
|
|
|
2,921 |
|
|
|
5,855 |
|
|
|
|
|
|
|
5,855 |
|
|
|
8,348 |
|
|
|
|
|
|
|
8,348 |
|
Restructuring costs |
|
|
(353 |
) |
|
|
|
|
|
|
(353 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
(353 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
(353 |
) |
Gain on disposal of fixed assets |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
(822 |
) |
|
|
(824 |
) |
|
|
|
|
|
|
(824 |
) |
Depreciation and amortization |
|
|
211 |
|
|
|
|
|
|
|
211 |
|
|
|
307 |
|
|
|
|
|
|
|
307 |
|
|
|
427 |
|
|
|
|
|
|
|
427 |
|
Total costs and expenses |
|
|
4,659 |
|
|
|
|
|
|
|
4,659 |
|
|
|
7,657 |
|
|
|
|
|
|
|
7,657 |
|
|
|
11,050 |
|
|
|
|
|
|
|
11,050 |
|
Operating income (loss) |
|
|
(4,659 |
) |
|
|
|
|
|
|
(4,659 |
) |
|
|
(7,657 |
) |
|
|
|
|
|
|
(7,657 |
) |
|
|
(11,050 |
) |
|
|
|
|
|
|
(11,050 |
) |
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
68 |
|
|
|
|
|
|
|
68 |
|
|
|
91 |
|
|
|
|
|
|
|
91 |
|
Sublease income |
|
|
232 |
|
|
|
|
|
|
|
232 |
|
|
|
232 |
|
|
|
|
|
|
|
232 |
|
|
|
232 |
|
|
|
|
|
|
|
232 |
|
Sale of patents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Change in fair value of derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party(1) |
|
|
113 |
|
|
|
|
|
|
|
113 |
|
|
|
(80 |
) |
|
|
|
|
|
|
(80 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
(35 |
) |
Other |
|
|
35 |
|
|
|
|
|
|
|
35 |
|
|
|
(254 |
) |
|
|
|
|
|
|
(254 |
) |
|
|
322 |
|
|
|
|
|
|
|
322 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(8 |
) |
|
|
1,036 |
|
|
|
(1,044 |
) |
|
|
(21 |
) |
|
|
2,119 |
|
|
|
(2,140 |
) |
|
|
(41 |
) |
|
|
3,249 |
|
|
|
(3,290 |
) |
Other |
|
|
(135 |
) |
|
|
|
|
|
|
(135 |
) |
|
|
(273 |
) |
|
|
|
|
|
|
(273 |
) |
|
|
(411 |
) |
|
|
|
|
|
|
(411 |
) |
Total other non-operating income
(expense) |
|
|
278 |
|
|
|
1,036 |
|
|
|
(758 |
) |
|
|
172 |
|
|
|
2,119 |
|
|
|
(1,947 |
) |
|
|
658 |
|
|
|
3,249 |
|
|
|
(2,591 |
) |
Net loss |
|
|
(4,381 |
) |
|
|
1,036 |
|
|
|
(5,417 |
) |
|
|
(7,485 |
) |
|
|
2,119 |
|
|
|
(9,604 |
) |
|
|
(10,392 |
) |
|
|
3,249 |
|
|
|
(13,641 |
) |
Net loss per share, basic and diluted |
|
|
(0.14 |
) |
|
|
0.04 |
|
|
|
(0.18 |
) |
|
|
(0.25 |
) |
|
|
0.07 |
|
|
|
(0.32 |
) |
|
|
(0.32 |
) |
|
|
0.10 |
|
|
|
(0.42 |
) |
Weighted average shares outstanding,
basic and diluted |
|
|
30,341,078 |
|
|
|
|
|
|
|
30,341,078 |
|
|
|
30,341,078 |
|
|
|
|
|
|
|
30,341,078 |
|
|
|
32,188,554 |
|
|
|
|
|
|
|
32,188,554 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
F-33
2009 Statements of Cash Flows
(unaudited $thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Six Months Ended June 30, |
|
Nine Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
|
2009 |
|
Adjustments |
|
2009 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(4,381 |
) |
|
|
1,036 |
|
|
|
(5,417 |
) |
|
|
(7,485 |
) |
|
|
2,119 |
|
|
|
(9,604 |
) |
|
|
(10,392 |
) |
|
|
3,249 |
|
|
|
(13,641 |
) |
Adjustments to reconcile net loss to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
151 |
|
|
|
|
|
|
|
151 |
|
|
|
187 |
|
|
|
|
|
|
|
187 |
|
|
|
248 |
|
|
|
|
|
|
|
248 |
|
Amortization |
|
|
60 |
|
|
|
|
|
|
|
60 |
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
|
179 |
|
|
|
|
|
|
|
179 |
|
Change in fair value of derivative
instruments |
|
|
(148 |
) |
|
|
|
|
|
|
(148 |
) |
|
|
334 |
|
|
|
|
|
|
|
334 |
|
|
|
(286 |
) |
|
|
|
|
|
|
(286 |
) |
Non-cash interest expense(1) |
|
|
143 |
|
|
|
(1,036 |
) |
|
|
1,179 |
|
|
|
294 |
|
|
|
(2,119 |
) |
|
|
2,413 |
|
|
|
452 |
|
|
|
(3,249 |
) |
|
|
3,701 |
|
Non-cash compensation expense |
|
|
238 |
|
|
|
|
|
|
|
238 |
|
|
|
1,007 |
|
|
|
|
|
|
|
1,007 |
|
|
|
1,301 |
|
|
|
|
|
|
|
1,301 |
|
Gain on disposal of fixed assets |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
(822 |
) |
|
|
(824 |
) |
|
|
|
|
|
|
(824 |
) |
Changes in assets and liabilities
excluding non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
217 |
|
|
|
|
|
|
|
217 |
|
|
|
160 |
|
|
|
|
|
|
|
160 |
|
|
|
211 |
|
|
|
|
|
|
|
211 |
|
Decrease (increase) in prepaid expenses
and other current assets |
|
|
(27 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
(129 |
) |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
Increase in deferred revenue |
|
|
186 |
|
|
|
|
|
|
|
186 |
|
|
|
133 |
|
|
|
|
|
|
|
133 |
|
|
|
149 |
|
|
|
|
|
|
|
149 |
|
Increase in accounts payable and accrued
expenses |
|
|
927 |
|
|
|
|
|
|
|
927 |
|
|
|
1,042 |
|
|
|
|
|
|
|
1,042 |
|
|
|
2,160 |
|
|
|
|
|
|
|
2,160 |
|
Increase in other current liabilities |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
(Decrease) in deferred lease liability |
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
(39 |
) |
Decrease in restructuring accrual |
|
|
(627 |
) |
|
|
|
|
|
|
(627 |
) |
|
|
(1,627 |
) |
|
|
|
|
|
|
(1,627 |
) |
|
|
(1,627 |
) |
|
|
|
|
|
|
(1,627 |
) |
Total adjustments |
|
|
1,073 |
|
|
|
(1,036 |
) |
|
|
2,109 |
|
|
|
694 |
|
|
|
(2,119 |
) |
|
|
2,813 |
|
|
|
1,975 |
|
|
|
(3,249 |
) |
|
|
5,224 |
|
Net cash used in operating activities |
|
|
(3,308 |
) |
|
|
|
|
|
|
(3,308 |
) |
|
|
(6,791 |
) |
|
|
|
|
|
|
(6,791 |
) |
|
|
(8,417 |
) |
|
|
|
|
|
|
(8,417 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale and maturity of
investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets |
|
|
45 |
|
|
|
|
|
|
|
45 |
|
|
|
856 |
|
|
|
|
|
|
|
856 |
|
|
|
880 |
|
|
|
|
|
|
|
880 |
|
Capital expenditures and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
45 |
|
|
|
|
|
|
|
45 |
|
|
|
856 |
|
|
|
|
|
|
|
856 |
|
|
|
880 |
|
|
|
|
|
|
|
880 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common
stock and warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,298 |
|
|
|
|
|
|
|
7,298 |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,298 |
|
|
|
|
|
|
|
7,298 |
|
Net decrease in cash and cash equivalents |
|
|
(3,263 |
) |
|
|
|
|
|
|
(3,263 |
) |
|
|
(5,935 |
) |
|
|
|
|
|
|
(5,935 |
) |
|
|
(239 |
) |
|
|
|
|
|
|
(239 |
) |
Cash and cash equivalents, beginning of
period |
|
|
7,214 |
|
|
|
|
|
|
|
7,214 |
|
|
|
7,214 |
|
|
|
|
|
|
|
7,214 |
|
|
|
7,214 |
|
|
|
|
|
|
|
7,214 |
|
Cash and cash equivalents, end of period |
|
|
3,951 |
|
|
|
|
|
|
|
3,951 |
|
|
|
1,279 |
|
|
|
|
|
|
|
1,279 |
|
|
|
6,975 |
|
|
|
|
|
|
|
6,975 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
F-34
2010 Balance Sheets (unaudited $thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
|
September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
3,015 |
|
|
|
|
|
|
|
3,015 |
|
|
|
418 |
|
|
|
|
|
|
|
418 |
|
|
|
2,961 |
|
|
|
|
|
|
|
2,961 |
|
Accounts receivable, net |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
38 |
|
|
|
|
|
|
|
38 |
|
|
|
60 |
|
|
|
|
|
|
|
60 |
|
Inventories |
|
|
233 |
|
|
|
|
|
|
|
233 |
|
|
|
261 |
|
|
|
|
|
|
|
261 |
|
|
|
260 |
|
|
|
|
|
|
|
260 |
|
Prepaid expenses and other current assets |
|
|
142 |
|
|
|
|
|
|
|
142 |
|
|
|
683 |
|
|
|
|
|
|
|
683 |
|
|
|
539 |
|
|
|
|
|
|
|
539 |
|
Total current assets |
|
|
3,394 |
|
|
|
|
|
|
|
3,394 |
|
|
|
1,400 |
|
|
|
|
|
|
|
1,400 |
|
|
|
3,820 |
|
|
|
|
|
|
|
3,820 |
|
Equipment and leasehold improvements, net |
|
|
122 |
|
|
|
|
|
|
|
122 |
|
|
|
107 |
|
|
|
|
|
|
|
107 |
|
|
|
94 |
|
|
|
|
|
|
|
94 |
|
Purchased technology, net |
|
|
1,017 |
|
|
|
|
|
|
|
1,017 |
|
|
|
957 |
|
|
|
|
|
|
|
957 |
|
|
|
897 |
|
|
|
|
|
|
|
897 |
|
Restricted cash |
|
|
259 |
|
|
|
|
|
|
|
259 |
|
|
|
259 |
|
|
|
|
|
|
|
259 |
|
|
|
259 |
|
|
|
|
|
|
|
259 |
|
Other assets(1) |
|
|
|
|
|
|
(324 |
) |
|
|
324 |
|
|
|
82 |
|
|
|
(300 |
) |
|
|
382 |
|
|
|
|
|
|
|
(273 |
) |
|
|
273 |
|
Total assets |
|
|
4,792 |
|
|
|
(324 |
) |
|
|
5,116 |
|
|
|
2,805 |
|
|
|
(300 |
) |
|
|
3,105 |
|
|
|
5,070 |
|
|
|
(273 |
) |
|
|
5,343 |
|
Liabilities and Stockholders Deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, including accrued interest and
net of related discount |
|
|
12,810 |
|
|
|
|
|
|
|
12,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
4,943 |
|
|
|
|
|
|
|
4,943 |
|
|
|
5,852 |
|
|
|
|
|
|
|
5,852 |
|
|
|
4,400 |
|
|
|
|
|
|
|
4,400 |
|
Deferred revenue, current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
8,248 |
|
|
|
|
|
|
|
8,248 |
|
|
|
12,952 |
|
|
|
|
|
|
|
12,952 |
|
|
|
7,477 |
|
|
|
|
|
|
|
7,477 |
|
Others |
|
|
7,830 |
|
|
|
|
|
|
|
7,830 |
|
|
|
4,183 |
|
|
|
|
|
|
|
4,183 |
|
|
|
2,423 |
|
|
|
|
|
|
|
2,423 |
|
Contract termination expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
435 |
|
Restructuring accrual, current |
|
|
600 |
|
|
|
|
|
|
|
600 |
|
|
|
600 |
|
|
|
|
|
|
|
600 |
|
|
|
450 |
|
|
|
|
|
|
|
450 |
|
Other current liabilities |
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
|
|
33 |
|
|
|
|
|
|
|
33 |
|
Total current liabilities |
|
|
34,460 |
|
|
|
|
|
|
|
34,460 |
|
|
|
23,618 |
|
|
|
|
|
|
|
23,618 |
|
|
|
15,218 |
|
|
|
|
|
|
|
15,218 |
|
Notes payable, including accrued interest and
net of related discount(1)(2) |
|
|
157 |
|
|
|
(14,167 |
) |
|
|
14,324 |
|
|
|
18,048 |
|
|
|
3,726 |
|
|
|
14,322 |
|
|
|
19,181 |
|
|
|
3,318 |
|
|
|
15,863 |
|
Restructuring accrual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
13,501 |
|
|
|
|
|
|
|
13,501 |
|
|
|
26,475 |
|
|
|
|
|
|
|
26,475 |
|
|
|
26,533 |
|
|
|
|
|
|
|
26,533 |
|
Derivative instrument related party |
|
|
8,669 |
|
|
|
|
|
|
|
8,669 |
|
|
|
12,031 |
|
|
|
|
|
|
|
12,031 |
|
|
|
8,557 |
|
|
|
|
|
|
|
8,557 |
|
Deferred lease liability and other liabilities |
|
|
74 |
|
|
|
|
|
|
|
74 |
|
|
|
65 |
|
|
|
|
|
|
|
65 |
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
Total liabilities |
|
|
56,861 |
|
|
|
(14,167 |
) |
|
|
71,028 |
|
|
|
80,237 |
|
|
|
3,726 |
|
|
|
76,511 |
|
|
|
69,545 |
|
|
|
3,318 |
|
|
|
66,227 |
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
1,000,000 shares; none issued and outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
100,000,000 shares; issued 42,373,807 shares
(42,804,075 outstanding) ; issued 44,222,054
(43,932,322 outstanding); issued 52,178,834
(51,889,102 outstanding) in the first, second
and third quarter, respectively |
|
|
424 |
|
|
|
|
|
|
|
424 |
|
|
|
442 |
|
|
|
|
|
|
|
442 |
|
|
|
522 |
|
|
|
|
|
|
|
522 |
|
Additional paid-in-capital |
|
|
392,753 |
|
|
|
|
|
|
|
392,753 |
|
|
|
398,945 |
|
|
|
|
|
|
|
398,945 |
|
|
|
401,740 |
|
|
|
|
|
|
|
401,740 |
|
Accumulated deficit(1)(2) |
|
|
(441,294 |
) |
|
|
13,843 |
|
|
|
(455,137 |
) |
|
|
(472,867 |
) |
|
|
(4,026 |
) |
|
|
(468,841 |
) |
|
|
(462,785 |
) |
|
|
(3,591 |
) |
|
|
(459,194 |
) |
Common stock held in treasury, at cost;
289,732 shares |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
|
|
|
(3,952 |
) |
Total stockholders deficit |
|
|
(52,069 |
) |
|
|
13,843 |
|
|
|
(65,912 |
) |
|
|
(77,432 |
) |
|
|
(4,026 |
) |
|
|
(73,406 |
) |
|
|
(64,475 |
) |
|
|
(3,591 |
) |
|
|
(60,884 |
) |
Total liabilities and stockholders deficit |
|
|
4,792 |
|
|
|
(324 |
) |
|
|
5,116 |
|
|
|
2,805 |
|
|
|
(300 |
) |
|
|
3,105 |
|
|
|
5,070 |
|
|
|
(273 |
) |
|
|
5,343 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
|
(2) |
|
Adjustment for June 2010 to account for the modification of the MHR Convertible Notes in
connection with the Novartis Agreement and the MHR Letter Agreement as an extinguishment of
debt and record the consideration for MHRs consent as a financing fee |
F-35
2010 Statement of Operations Quarterly (unaudited $thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Three Months Ended June 30, |
|
Three Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
Revenue |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
39 |
|
|
|
|
|
|
|
39 |
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
562 |
|
|
|
|
|
|
|
562 |
|
|
|
732 |
|
|
|
|
|
|
|
732 |
|
|
|
690 |
|
|
|
|
|
|
|
690 |
|
General and administrative expenses |
|
|
2,334 |
|
|
|
|
|
|
|
2,334 |
|
|
|
2,129 |
|
|
|
|
|
|
|
2,129 |
|
|
|
2,516 |
|
|
|
|
|
|
|
2,516 |
|
Restructuring costs |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of fixed assets |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
75 |
|
|
|
|
|
|
|
75 |
|
|
|
75 |
|
|
|
|
|
|
|
75 |
|
|
|
73 |
|
|
|
|
|
|
|
73 |
|
Lawsuit adverse awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
220 |
|
|
|
58 |
|
|
|
|
|
|
|
58 |
|
Contract termination expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542 |
|
|
|
|
|
|
|
542 |
|
Total costs and expenses |
|
|
3,020 |
|
|
|
|
|
|
|
3,020 |
|
|
|
3,156 |
|
|
|
|
|
|
|
3,156 |
|
|
|
3,879 |
|
|
|
|
|
|
|
3,879 |
|
Operating income (loss) |
|
|
(3,008 |
) |
|
|
|
|
|
|
(3,008 |
) |
|
|
(3,117 |
) |
|
|
|
|
|
|
(3,117 |
) |
|
|
(3,875 |
) |
|
|
|
|
|
|
(3,875 |
) |
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Sublease income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of patents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Change in fair value of derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(9,120 |
) |
|
|
|
|
|
|
(9,120 |
) |
|
|
(6,208 |
) |
|
|
|
|
|
|
(6,208 |
) |
|
|
11,766 |
|
|
|
|
|
|
|
11,766 |
|
Other |
|
|
(4,847 |
) |
|
|
|
|
|
|
(4,847 |
) |
|
|
(2,424 |
) |
|
|
|
|
|
|
(2,424 |
) |
|
|
2,831 |
|
|
|
|
|
|
|
2,831 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party(1) |
|
|
(65 |
) |
|
|
1,206 |
|
|
|
(1,271 |
) |
|
|
(794 |
) |
|
|
1,003 |
|
|
|
(1,797 |
) |
|
|
(1,138 |
) |
|
|
435 |
|
|
|
(1,573 |
) |
Other |
|
|
(222 |
) |
|
|
|
|
|
|
(222 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
(160 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Loss on extinguishment of debt(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,014 |
) |
|
|
(17,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,858 |
) |
|
|
(1,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-operating income (expense) |
|
|
(14,251 |
) |
|
|
1,206 |
|
|
|
(15,457 |
) |
|
|
(28,456 |
) |
|
|
(17,869 |
) |
|
|
(10,587 |
) |
|
|
13,957 |
|
|
|
435 |
|
|
|
13,522 |
|
Net loss (income) |
|
|
(17,259 |
) |
|
|
1,206 |
|
|
|
(18,465 |
) |
|
|
(31,573 |
) |
|
|
(17,869 |
) |
|
|
(13,704 |
) |
|
|
10,082 |
|
|
|
435 |
|
|
|
9,647 |
|
Net loss (income) per share, basic |
|
|
(0.41 |
) |
|
|
0.03 |
|
|
|
(0.44 |
) |
|
|
(0.73 |
) |
|
|
(0.41 |
) |
|
|
(0.32 |
) |
|
|
0.21 |
|
|
|
0.01 |
|
|
|
0.20 |
|
Weighted average shares outstanding, basic |
|
|
42,077,334 |
|
|
|
|
|
|
|
42,077,334 |
|
|
|
43,338,432 |
|
|
|
|
|
|
|
43,338,432 |
|
|
|
47,401,395 |
|
|
|
|
|
|
|
47,401,395 |
|
Net loss (income) per share, diluted |
|
|
(0.41 |
) |
|
|
0.03 |
|
|
|
(0.44 |
) |
|
|
(0.73 |
) |
|
|
(0.41 |
) |
|
|
(0.32 |
) |
|
|
0.20 |
|
|
|
0.01 |
|
|
|
0.19 |
|
Weighted average shares outstanding, diluted |
|
|
42,077,334 |
|
|
|
|
|
|
|
42,077,334 |
|
|
|
43,338,432 |
|
|
|
|
|
|
|
43,338,432 |
|
|
|
50,922,881 |
|
|
|
|
|
|
|
50,922,881 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
|
(2) |
|
Adjustment for June 2010 to account for the modification of the MHR Convertible Notes in
connection with the Novartis Agreement and the MHR Letter Agreement as an extinguishment of
debt and record the consideration for MHRs consent as a financing fee |
F-36
2010 Statement of Operations Year to Date (unaudited $thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Six Months Ended June 30, |
|
Nine Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
Revenue |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
51 |
|
|
|
|
|
|
|
51 |
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
562 |
|
|
|
|
|
|
|
562 |
|
|
|
1,294 |
|
|
|
|
|
|
|
1,294 |
|
|
|
1,984 |
|
|
|
|
|
|
|
1,984 |
|
General and administrative expenses |
|
|
2,334 |
|
|
|
|
|
|
|
2,334 |
|
|
|
4,463 |
|
|
|
|
|
|
|
4,463 |
|
|
|
6,979 |
|
|
|
|
|
|
|
6,979 |
|
Restructuring costs |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
|
|
|
|
|
|
50 |
|
Gain on disposal of fixed assets |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Depreciation and amortization |
|
|
75 |
|
|
|
|
|
|
|
75 |
|
|
|
150 |
|
|
|
|
|
|
|
150 |
|
|
|
223 |
|
|
|
|
|
|
|
223 |
|
Lawsuit adverse awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
220 |
|
|
|
542 |
|
|
|
|
|
|
|
542 |
|
Contract termination expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
278 |
|
Total costs and expenses |
|
|
3,020 |
|
|
|
|
|
|
|
3,020 |
|
|
|
6,176 |
|
|
|
|
|
|
|
6,176 |
|
|
|
10,055 |
|
|
|
|
|
|
|
10,055 |
|
Operating income (loss) |
|
|
(3,008 |
) |
|
|
|
|
|
|
(3,008 |
) |
|
|
(6,125 |
) |
|
|
|
|
|
|
(6,125 |
) |
|
|
(10,000 |
) |
|
|
|
|
|
|
(10,000 |
) |
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Sublease income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of patents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Change in fair value of derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(9,120 |
) |
|
|
|
|
|
|
(9,120 |
) |
|
|
(15,328 |
) |
|
|
|
|
|
|
(15,328 |
) |
|
|
(3,562 |
) |
|
|
|
|
|
|
(3,562 |
) |
Other |
|
|
(4,847 |
) |
|
|
|
|
|
|
(4,847 |
) |
|
|
(7,271 |
) |
|
|
|
|
|
|
(7,271 |
) |
|
|
(4,440 |
) |
|
|
|
|
|
|
(4,440 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party(1) |
|
|
(65 |
) |
|
|
1,206 |
|
|
|
(1,271 |
) |
|
|
(859 |
) |
|
|
2,210 |
|
|
|
(3,069 |
) |
|
|
(1,997 |
) |
|
|
2,645 |
|
|
|
(4,642 |
) |
Other |
|
|
(222 |
) |
|
|
|
|
|
|
(222 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
(382 |
) |
|
|
(386 |
) |
|
|
|
|
|
|
(386 |
) |
Loss on extinguishment of debt(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,014 |
) |
|
|
(17,014 |
) |
|
|
|
|
|
|
(17,014 |
) |
|
|
(17,014 |
) |
|
|
|
|
Financing fees(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,858 |
) |
|
|
(1,858 |
) |
|
|
|
|
|
|
(1,858 |
) |
|
|
(1,858 |
) |
|
|
|
|
Total other non-operating income (expense) |
|
|
(14,251 |
) |
|
|
1,206 |
|
|
|
(15,457 |
) |
|
|
(42,707 |
) |
|
|
(16,662 |
) |
|
|
(26,045 |
) |
|
|
(28,750 |
) |
|
|
(16,227 |
) |
|
|
(12,523 |
) |
Net loss |
|
|
(17,259 |
) |
|
|
1,206 |
|
|
|
(18,465 |
) |
|
|
(48,832 |
) |
|
|
(16,662 |
) |
|
|
(32,170 |
) |
|
|
(38,750 |
) |
|
|
(16,227 |
) |
|
|
(22,523 |
) |
Net loss per share, basic and diluted |
|
|
(0.41 |
) |
|
|
0.03 |
|
|
|
(0.44 |
) |
|
|
(1.14 |
) |
|
|
(0.39 |
) |
|
|
(0.75 |
) |
|
|
(0.87 |
) |
|
|
(0.36 |
) |
|
|
(0.51 |
) |
Weighted average shares outstanding, basic
and diluted |
|
|
42,077,334 |
|
|
|
|
|
|
|
42,077,334 |
|
|
|
42,711,367 |
|
|
|
|
|
|
|
42,711,367 |
|
|
|
44,291,889 |
|
|
|
|
|
|
|
44,291,889 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
|
(2) |
|
Adjustment for June 2010 to account for the modification of the MHR Convertible Notes in
connection with the Novartis Agreement and the MHR Letter Agreement as an extinguishment of
debt and record the consideration for MHRs consent as a financing fee |
F-37
2010 Statements of Cash Flows (unaudited $thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Six Months Ended June 30, |
|
Nine Months Ended September 30, |
|
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
Restated |
|
|
|
|
|
Reported |
|
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
|
2010 |
|
Adjustments |
|
2010 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(17,259 |
) |
|
|
1,206 |
|
|
|
(18,465 |
) |
|
|
(48,832 |
) |
|
|
(16,662 |
) |
|
|
(32,170 |
) |
|
|
(38,750 |
) |
|
|
(16,227 |
) |
|
|
(22,523 |
) |
Adjustments to reconcile net loss to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
44 |
|
|
|
|
|
|
|
44 |
|
Amortization |
|
|
60 |
|
|
|
|
|
|
|
60 |
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
|
179 |
|
|
|
|
|
|
|
179 |
|
Change in fair value of derivative
instruments |
|
|
13,968 |
|
|
|
|
|
|
|
13,968 |
|
|
|
22,599 |
|
|
|
|
|
|
|
22,599 |
|
|
|
8,003 |
|
|
|
|
|
|
|
8,003 |
|
Non-cash interest expense (1)(2) |
|
|
287 |
|
|
|
(1,206 |
) |
|
|
1,493 |
|
|
|
20,112 |
|
|
|
16,662 |
|
|
|
3,450 |
|
|
|
21,254 |
|
|
|
16,227 |
|
|
|
5,027 |
|
Non-cash compensation expense |
|
|
407 |
|
|
|
|
|
|
|
407 |
|
|
|
547 |
|
|
|
|
|
|
|
547 |
|
|
|
685 |
|
|
|
|
|
|
|
685 |
|
Gain on disposal of fixed assets |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Changes in assets and liabilities
excluding non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable |
|
|
154 |
|
|
|
|
|
|
|
154 |
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
|
|
99 |
|
|
|
|
|
|
|
99 |
|
Decrease (increase) in inventory |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
(Increase) in deposits on inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(420 |
) |
|
|
|
|
|
|
(420 |
) |
Decrease (increase) in prepaid expenses
and other current assets |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
(531 |
) |
|
|
|
|
|
|
(531 |
) |
|
|
33 |
|
|
|
|
|
|
|
33 |
|
Increase in deferred revenue |
|
|
2,007 |
|
|
|
|
|
|
|
2,007 |
|
|
|
2,012 |
|
|
|
|
|
|
|
2,012 |
|
|
|
2,069 |
|
|
|
|
|
|
|
2,069 |
|
Increase (decrease) in accounts payable
and accrued expenses |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
887 |
|
|
|
|
|
|
|
887 |
|
|
|
(516 |
) |
|
|
|
|
|
|
(516 |
) |
Increase (decrease) in other current
liabilities |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
415 |
|
|
|
|
|
|
|
415 |
|
Increase (decrease) in deferred lease
liability |
|
|
(30 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
Decrease in restructuring accrual |
|
|
(150 |
) |
|
|
|
|
|
|
(150 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
(150 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
(300 |
) |
Total adjustments |
|
|
16,707 |
|
|
|
(1,206 |
) |
|
|
17,913 |
|
|
|
45,683 |
|
|
|
16,662 |
|
|
|
29,021 |
|
|
|
31,495 |
|
|
|
16,227 |
|
|
|
15,268 |
|
Net cash used in operating activities |
|
|
(552 |
) |
|
|
|
|
|
|
(552 |
) |
|
|
(3,149 |
) |
|
|
|
|
|
|
(3,149 |
) |
|
|
(7,255 |
) |
|
|
|
|
|
|
(7,255 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Capital expenditures and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Payments on notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(525 |
) |
|
|
|
|
|
|
(525 |
) |
Proceeds from the issuance of common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,674 |
|
|
|
|
|
|
|
6,674 |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,649 |
|
|
|
|
|
|
|
6,649 |
|
Net decrease in cash and cash equivalents |
|
|
(551 |
) |
|
|
|
|
|
|
(551 |
) |
|
|
(3,148 |
) |
|
|
|
|
|
|
(3,148 |
) |
|
|
(605 |
) |
|
|
|
|
|
|
(605 |
) |
Cash and cash equivalents, beginning of
period |
|
|
3,566 |
|
|
|
|
|
|
|
3,566 |
|
|
|
3,566 |
|
|
|
|
|
|
|
3,566 |
|
|
|
3,566 |
|
|
|
|
|
|
|
3,566 |
|
Cash and cash equivalents, end of period |
|
|
3,015 |
|
|
|
|
|
|
|
3,015 |
|
|
|
418 |
|
|
|
|
|
|
|
418 |
|
|
|
2,961 |
|
|
|
|
|
|
|
2,961 |
|
Schedule of non cash financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to settle accrued
Directors compensation |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Exchange of debt as deferred revenue
(Note 8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
|
13,000 |
|
|
|
13,000 |
|
|
|
|
|
|
|
13,000 |
|
|
|
|
(1) |
|
Adjustment to amortize debt discounts and deferred financing fees based a number nominally
close to zero to enable interest and debt discounts to be accreted over the life of the debt
using a level yield method |
|
(2) |
|
Adjustment for June 2010 to account for the modification of the MHR Convertible Notes in
connection with the Novartis Agreement and the MHR Letter Agreement as an extinguishment of
debt and record the consideration for MHRs consent as a financing fee |
20. Other
On February 8, 2008, Emisphere reported that it had entered into an agreement with MannKind
Corporation to sell certain Emisphere 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. An additional $0.5 million was received in May 2009 and the remaining
payment was received September, 2010.
F-38
For the quarterly period ended June 30,2011
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
June 30, 2011 and December 31, 2010
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
(unaudited) |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,343 |
|
|
$ |
5,326 |
|
Accounts receivable, net |
|
|
60 |
|
|
|
14 |
|
Inventories |
|
|
260 |
|
|
|
260 |
|
Prepaid expenses and other current assets |
|
|
535 |
|
|
|
496 |
|
|
|
|
Total current assets |
|
|
2,198 |
|
|
|
6,096 |
|
Equipment and leasehold improvements, net |
|
|
61 |
|
|
|
82 |
|
Purchased technology, net |
|
|
718 |
|
|
|
838 |
|
Restricted cash |
|
|
260 |
|
|
|
260 |
|
|
|
|
Total assets |
|
$ |
3,237 |
|
|
$ |
7,276 |
|
|
|
|
Liabilities and Stockholders Deficit: |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
2,172 |
|
|
$ |
2,954 |
|
Notes payable related party, including accrued
interest and net of related discount |
|
|
547 |
|
|
|
|
|
Derivative instruments: |
|
|
|
|
|
|
|
|
Related party |
|
|
5,517 |
|
|
|
17,293 |
|
Others |
|
|
1,638 |
|
|
|
5,647 |
|
Contract termination liability, current |
|
|
149 |
|
|
|
435 |
|
Restructuring accrual, current |
|
|
|
|
|
|
300 |
|
Other current liabilities |
|
|
1,189 |
|
|
|
35 |
|
|
|
|
Total current liabilities |
|
|
11,212 |
|
|
|
26,664 |
|
Notes payable, including accrued interest and net of
related discount, related party |
|
|
22,480 |
|
|
|
20,385 |
|
Deferred revenue |
|
|
31,577 |
|
|
|
31,535 |
|
Derivative instrument related party |
|
|
6,895 |
|
|
|
11,166 |
|
Deferred lease liability and other liabilities |
|
|
26 |
|
|
|
46 |
|
|
|
|
Total liabilities |
|
|
72,190 |
|
|
|
89,796 |
|
|
|
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized 1,000,000
shares; none issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized 100,000,000
shares; issued 52,366,334 shares (52,076,602
outstanding) as of June 30, 2011 and issued
52,178,834 shares (51,889,102 outstanding) as
December 31, 2010 |
|
|
524 |
|
|
|
522 |
|
Additional paid-in-capital |
|
|
402,577 |
|
|
|
401,853 |
|
Accumulated deficit |
|
|
(468,102 |
) |
|
|
(480,943 |
) |
Common stock held in treasury, at cost; 289,732 shares |
|
|
(3,952 |
) |
|
|
(3,952 |
) |
|
|
|
Total stockholders deficit |
|
|
(68,953 |
) |
|
|
(82,520 |
) |
|
|
|
Total liabilities and stockholders deficit |
|
$ |
3,237 |
|
|
$ |
7,276 |
|
|
|
|
The accompanying notes are an integral part of the financial statements.
F-39
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENT OF OPERATIONS
For the three and six months ended June 30, 2011 and 2010
(in thousands, except share and per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the six months ended |
|
|
June 30, |
|
June 30, |
|
|
2011 |
|
2010 Restated |
|
2011 |
|
2010 Restated |
|
|
|
Net Sales |
|
$ |
|
|
|
$ |
39 |
|
|
$ |
|
|
|
$ |
51 |
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
563 |
|
|
|
732 |
|
|
|
1,092 |
|
|
|
1,294 |
|
General and administrative |
|
|
1,593 |
|
|
|
2,129 |
|
|
|
3,043 |
|
|
|
4,463 |
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Gain on disposal of fixed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Expense from settlement of lawsuit |
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
220 |
|
Depreciation and amortization |
|
|
70 |
|
|
|
75 |
|
|
|
140 |
|
|
|
150 |
|
|
|
|
Total costs and expenses |
|
|
2,226 |
|
|
|
3,156 |
|
|
|
4,275 |
|
|
|
6,176 |
|
|
|
|
Operating loss |
|
|
(2,226 |
) |
|
|
(3,117 |
) |
|
|
(4,275 |
) |
|
|
(6,125 |
) |
|
|
|
Other non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
45 |
|
|
|
2 |
|
|
|
68 |
|
|
|
5 |
|
Change in fair value of derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
4,310 |
|
|
|
(6,208 |
) |
|
|
16,046 |
|
|
|
(15,328 |
) |
Other |
|
|
1,079 |
|
|
|
(2,424 |
) |
|
|
3,660 |
|
|
|
(7,271 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party |
|
|
(1,362 |
) |
|
|
(794 |
) |
|
|
(2,642 |
) |
|
|
(859 |
) |
Other |
|
|
(4 |
) |
|
|
(160 |
) |
|
|
(16 |
) |
|
|
(382 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(17,014 |
) |
|
|
|
|
|
|
(17,014 |
) |
Financing fees |
|
|
|
|
|
|
(1,858 |
) |
|
|
|
|
|
|
(1,858 |
) |
|
|
|
Total other non-operating income (expense) |
|
|
4,068 |
|
|
|
(28,456 |
) |
|
|
17,116 |
|
|
|
(42,707 |
) |
|
|
|
Net income (loss) |
|
$ |
1,842 |
|
|
$ |
(31,573 |
) |
|
$ |
12,841 |
|
|
$ |
(48,832 |
) |
|
|
|
Net income (loss) per share, basic |
|
$ |
0.04 |
|
|
$ |
(0.73 |
) |
|
$ |
0.25 |
|
|
$ |
(1.14 |
) |
Net income (loss) per share, diluted |
|
$ |
0.03 |
|
|
$ |
(0.73 |
) |
|
$ |
0.22 |
|
|
$ |
(1.14 |
) |
Weighted average shares outstanding, basic |
|
|
52,076,602 |
|
|
|
43,338,432 |
|
|
|
52,064,171 |
|
|
|
42,711,367 |
|
Weighted average shares outstanding, diluted |
|
|
54,924,355 |
|
|
|
43,338,432 |
|
|
|
62,900,927 |
|
|
|
42,711,367 |
|
The accompanying notes are an integral part of the financial statements.
F-40
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2011 and 2010
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the six months ended |
|
|
June 30, |
|
|
2011 |
|
2010 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12,841 |
|
|
$ |
(48,832 |
) |
|
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
20 |
|
|
|
30 |
|
Amortization |
|
|
120 |
|
|
|
120 |
|
Change in fair value of derivative instruments |
|
|
(19,706 |
) |
|
|
22,599 |
|
Non-cash interest expense |
|
|
2,642 |
|
|
|
20,112 |
|
Non-cash compensation expense |
|
|
140 |
|
|
|
547 |
|
Gain on disposal of fixed assets |
|
|
|
|
|
|
(1 |
) |
Changes in assets and liabilities excluding non-cash transactions: |
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable |
|
|
(46 |
) |
|
|
120 |
|
Increase in inventory |
|
|
|
|
|
|
(24 |
) |
Increase in prepaid expenses and other current assets |
|
|
(39 |
) |
|
|
(531 |
) |
Increase in deferred revenue |
|
|
42 |
|
|
|
2,012 |
|
(Decrease) increase in accounts payable and accrued expenses |
|
|
(1,066 |
) |
|
|
887 |
|
Increase (decrease) in other current liabilities |
|
|
1,154 |
|
|
|
(21 |
) |
Decrease in deferred lease liability |
|
|
(21 |
) |
|
|
(17 |
) |
Decrease in restructuring accrual |
|
|
(300 |
) |
|
|
(150 |
) |
|
|
|
Total adjustments |
|
|
(17,060 |
) |
|
|
45,683 |
|
|
|
|
Net cash used in operating activities |
|
|
(4,219 |
) |
|
|
(3,149 |
) |
Net cash provided by investing activities proceeds from sale of fixed assets |
|
|
|
|
|
|
1 |
|
Net cash provided by financing activities proceeds from exercise of warrants |
|
|
236 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,983 |
) |
|
|
(3,148 |
) |
Cash and cash equivalents, beginning of period |
|
|
5,326 |
|
|
|
3,566 |
|
|
|
|
Cash and cash equivalents, end of period |
|
|
1,343 |
|
|
$ |
418 |
|
|
|
|
Schedule of non-cash financing activities |
|
|
|
|
|
|
|
|
Common stock issued to settle accrued Directors compensation |
|
|
|
|
|
$ |
11 |
|
Exchange of debt as deferred revenue |
|
|
|
|
|
$ |
13,000 |
|
Reclassification of derivative liability to equity upon exercise of warrants |
|
$ |
349 |
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
F-41
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Nature of Operations and Liquidity
Nature of Operations. Emisphere Technologies, Inc. (Emisphere, the Company, our, us, or
we) is a biopharmaceutical company that focuses on a unique and improved delivery of therapeutic
molecules or nutritional supplements using its Eligen® Technology. These molecules are
currently available or are under development.
Our core business strategy is to develop oral forms of drugs or nutrients that are not currently
available or have poor bioavailability in oral form, by applying the Eligen® Technology
to those drugs or nutrients. Our development efforts are conducted internally or in collaboration
with corporate development partners. Typically, the drugs that we target are at an advanced stage
of development, or have already received regulatory approval, and are currently available on the
market.
Liquidity. As of June 30, 2011, we had approximately $1.3 million in cash and cash equivalents,
approximately $9.0 million in working capital deficiency, a stockholders deficit of approximately
$69.0 million and an accumulated deficit of approximately $468.1 million. Our operating loss for
the three months ended June 30, 2011 was approximately $2.2 million and $4.3 million for the six
months ended June 30, 2011.
On June 30, 2011, we entered into a securities purchase agreement with various institutional
investors to sell an aggregate of 4,300,438 shares of our common stock and warrants to purchase a
total of 3,010,306 shares of our common stock for gross proceeds, before deducting fees and
expenses and excluding the proceeds, if any, from the exercise of the warrants of $3,749,982 (the
2011 Private Placement). The 2011 Private Placement closed on July 6, 2011. In connection with
the 2011 Private Placement, we entered into a securities purchase agreement on the same date with
MHR Fund Management LLC to sell an aggregate of 4,300,438 shares of our common stock and warrants
to purchase a total of 3,010,306 shares of our common stock for gross proceeds, before deducting
fees and expenses and excluding the proceeds, if any, from the exercise of the warrants of
$3,749,982 (the 2011 MHR Private Placement). Simultaneous with closing the 2011 Private
Placement, we closed the 2011 MHR Private Placement with MHR and certain of its affiliated
investment funds. In connection with the 2011 Private Placement and the 2011 MHR Private Placement,
we entered into a waiver agreement with MHR, pursuant to which MHR waived certain anti-dilution
adjustment rights under its senior secured notes and certain warrants that would otherwise have
been triggered by the 2011 Private Placement. As consideration for such waiver, we issued to MHR
warrants to purchase 795,000 shares of our common stock and agreed to reimburse MHR for up to
$25,000 of its legal fees. In both the Private Placement and the MHR Private Placement (together,
the July 2011 Financing), each unit, consisting of one share of common stock and a warrant to
purchase 0.7 shares of common stock, were sold at a purchase price of $0.872. All of the warrants
issued in the July 2011 Financing are exercisable at an exercise price of $1.09 per share and will
expire on July 6, 2016.
We anticipate that we will continue to generate significant losses from operations for the
foreseeable future, and that our business will require substantial additional investment that we
have not yet secured. As such, we anticipate that our existing cash resources will enable us to
continue operations through approximately April 2012, 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, 2010 contained a going concern
explanatory paragraph. We are pursuing new and enhanced collaborations and exploring other funding
options, with the objective of minimizing dilution and disruption.
Our plan is to raise capital when needed and/or to pursue product partnering opportunities. We
expect to continue to spend substantial amounts on research and development, including amounts
spent on conducting clinical trials for our product candidates. Expenses will be partially offset
with income-generating license agreements, if possible. Further, we will not have sufficient
resources to develop fully any new products or technologies unless we are able to raise substantial
additional financing on acceptable terms or secure funds from new or existing partners. We cannot
assure that financing will be available when needed, or on favorable terms or at all. If additional
capital is raised through the sale of equity or convertible debt securities, the issuance of such
securities would result in dilution to our existing stockholders. Our failure to raise capital
before April 2012 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.
F-42
2. Basis of Presentation
The condensed balance sheet at December 31, 2010 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, 2010.
3. Stock-Based Compensation Plans
On April 20, 2007, the stockholders of the Company approved the 2007 Stock Award and Incentive Plan
(the 2007 Plan). The 2007 Plan provides for grants of options, stock appreciation rights,
restricted stock, deferred stock, bonus stock and awards in lieu of obligations, dividend
equivalents, other stock-based awards and performance awards to executive officers and other
employees of the Company, and non-employee directors, consultants and others who provide
substantial service to us. The 2007 Plan provides for the issuance of an aggregate 3,275,334 shares
as follows: 2,500,000 new shares, 374,264 shares remaining and transferred from the Companys 2000
Stock Option Plan (the 2000 Plan) (which was then replaced by the 2007 Plan) and 401,070 shares
remaining and transferred from the Companys Stock Option Plan for Outside Directors (the
Directors Stock Plan). In addition, shares canceled, expired, forfeited, settled in cash, settled
by delivery of fewer shares than the number underlying the award, or otherwise terminated under the
2000 Plan will become available for issuance under the 2007 Plan.
Prior to the adoption of the 2007 Plan, the Company granted stock-based compensation to employees
under the 2000 Plan and the 2002 Broad Based Plan (the 2002 Plan), and to non-employee directors
under the Directors Stock Plan. The Company also has grants outstanding under various expired and
terminated stock plans, including the 1991 Stock Option Plan, the 1995 Non-Qualified Stock Option
Plan, the Deferred Directors Compensation Stock Plan and Non-Plan Options. In January 2007, the
Directors Stock Plan expired.
As of June 30, 2011, shares available for future grants under the Plans amounted to 1,587,648.
Total compensation expense recorded during the six months ended June 30, 2011 for share-based
payment awards was $0.14 million, of which $0.03 million is included in research and development
and $0.11 million is included in general and administrative expenses in the condensed statement of
operations for the six months ended June 30, 2011. 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. At June 30, 2011, total unrecognized estimated compensation expense related to non-vested
stock options granted prior to that date was $0.4 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, 2011 or 2010. No tax benefit was realized due to a continued pattern of operating
losses.
During the six months ended June 30, 2011, the Company granted no options. On July 15, 2011, the
Company granted 20,000 in options to Gary Riley and 30,000 options to Michael Garone.
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, 2011 and December 31, 2010.
F-43
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
(in thousands) |
Prepaid corporate insurance |
|
$ |
85 |
|
|
$ |
41 |
|
Deposit on inventory |
|
|
420 |
|
|
|
420 |
|
Prepaid expenses and other current assets |
|
|
30 |
|
|
|
35 |
|
|
|
|
|
|
$ |
535 |
|
|
$ |
496 |
|
|
|
|
6. Fixed Assets
Equipment and leasehold improvements, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives |
|
June 30, |
|
December 31, |
|
|
in Years |
|
2011 |
|
2010 |
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
1,370 |
|
|
|
1,349 |
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net |
|
|
|
|
|
$ |
61 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
7. 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, |
|
|
2011 |
|
2010 |
|
|
(in thousands) |
Gross carrying amount |
|
$ |
4,533 |
|
|
$ |
4,533 |
|
Less, accumulated amortization |
|
|
3,815 |
|
|
|
3,695 |
|
|
|
|
Net book value |
|
$ |
718 |
|
|
$ |
838 |
|
|
|
|
Amortization expense for the purchased technology is approximately $60 thousand per quarter in 2011
and in the remaining years through 2014.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
(In thousands) |
Accounts payable and other accrued expenses |
|
$ |
1,756 |
|
|
$ |
2,201 |
|
Accrued bonus |
|
|
|
|
|
|
300 |
|
Accrued legal, professional fees and other |
|
|
300 |
|
|
|
375 |
|
Accrued vacation |
|
|
77 |
|
|
|
69 |
|
Clinical trial expenses and contract research |
|
|
39 |
|
|
|
9 |
|
|
|
|
|
|
$ |
2,172 |
|
|
$ |
2,954 |
|
|
|
|
9. Other Current Liabilities
At June 30, 2011, other current liabilities included $1.15 million deposits related to the future
private placement of the Companys common stock to certain institutional investors at a purchase
price of $0.872 per unit, with each unit consisting of one share of common stock and one warrant to
purchase 0.7 shares of common stock. As of July 6, 2011 we had closed the private placement, and
the $1.15 million deposit was reclassified as equity.
F-44
10. Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
2011 |
|
2010 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
MHR Convertible Notes |
|
$ |
22,480 |
|
|
$ |
19,864 |
|
|
|
|
|
MHR Promissory Notes |
|
|
547 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
|
$ |
23,027 |
|
|
$ |
20,385 |
|
|
|
|
|
|
|
|
MHR Convertible Notes. On September 26, 2005, we received net proceeds of approximately $12.9
million under a $15 million secured loan agreement (the Loan Agreement) executed with MHR Fund
Management LLC (together with its affiliates, MHR). Under the Loan Agreement, MHR requested, and
on May 16, 2006, we effected, the exchange of the loan from MHR for senior secured convertible
notes (the MHR Convertible Notes) with substantially the same terms as the Loan Agreement, except
that the MHR Convertible Notes are convertible, at the sole discretion of MHR, into shares of our
common stock at a price per share of $3.78. As of June 30, 2011, the MHR Convertible Notes were
convertible into 7,051,181 shares of our common stock. The MHR Convertible Notes are due on
September 26, 2012, bear interest at 11% and are collateralized by a first priority lien in favor
of MHR on substantially all of our assets. Interest is payable in the form of additional MHR
Convertible Notes rather than in cash.
In connection with the Loan Agreement, we amended MHRs previously existing warrants to purchase
387,374 shares of common stock (MHR 2005 Warrants) to provide additional anti-dilution
protection. We also granted MHR the option (MHR Option) to purchase warrants for up to 617,211
shares of our common stock. The MHR Option was exercised during April 2006 whereby MHR acquired
617,211 warrants (MHR 2006 Warrants) to acquire an equal number of shares of common stock. The
exercise price for the MHR Option was $0.01 per warrant for the first 67,084 warrants and $1.00 per
warrant for each additional warrant. See Note 11 for a further discussion of the liability related
to these warrants.
Total issuance costs associated with the Loan Agreement were $2.1 million, of which $1.9 million
were allocated to the MHR Convertible Notes, and $0.2 million were allocated to the related
derivative instruments. Of the $1.9 million allocated to the MHR Convertible Notes, $1.4 million
represents reimbursement of MHRs legal fees and $0.5 million represents our legal and other
transaction costs. The $1.4 million paid on behalf of the lender has been recorded as a reduction
of the face value of the note, while the $0.5 million of our costs has been recorded as deferred
financing costs.
The MHR Convertible Notes provide MHR with the right to require us to redeem the notes in the event
of a change in control. The change in control redemption feature has been determined to be an
embedded derivative instrument which must be separated from the host contract. For the year ended
December 31, 2006, the fair value of the change in control redemption feature was estimated using a
combination of a put option model for the penalties and the Black-Scholes model for the conversion
option that would exist under the MHR Convertible Notes. The estimate resulted in a value that was
de minimis and, therefore, no separate liability was recorded. Changes in the assumptions used to
estimate the fair value of this derivative instrument, in particular the probability that a change
in control will occur, could result in a material change to the fair value of the instrument. For
the six months ended June 30, 2011 and for the years ended December 31, 2010, 2009 and 2008,
management determined the probability of exercise of the right due to change in control to be
remote. The fair value of the change in control redemption feature is de minimis.
In connection with the MHR Convertible Notes financing, the Company agreed to appoint a
representative of MHR (MHR Nominee) and another person (the Mutual Director) to its Board of
Directors. Further, the Company agreed to amend, and in January 2006 did amend, 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 Convertible Notes provide for various events of default including for failure to perfect
any of the liens in favor of MHR, failure to observe any covenant or agreement, failure to maintain
the listing and trading of our common stock, sale of a substantial portion of our assets, merger
with another entity without the prior consent of MHR, or any governmental action renders us unable
to honor or perform our obligations under the Loan Agreement or results in a material adverse
effect on our operations. If an event of default occurs, the MHR Convertible Notes provide for the
immediate repayment and certain additional amounts as set forth in the MHR Convertible Notes. We
currently have a waiver from MHR for failure to perfect liens on certain intellectual property
rights through August 10, 2012.
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
815-40-15-5, the conversion feature embedded in the MHR Convertible 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
Convertible Notes and increasing prospectively the amount of interest expense to be recognized over
the life of the MHR Convertible Notes using the effective yield method.
F-45
As consideration for its consent and limitation of rights in connection with the Master Agreement
and Amendment by and between the Company and Novartis dated as of June 4, 2010 (the Novartis
Agreement), the Company granted MHR warrants to purchase 865,000 shares of its common stock (the
June 2010 MHR Warrants) under the MHR Letter Agreement (as defined below). The Company estimated
the fair value of the June 2010 MHR Warrants on the date of grant using Black-Scholes models to be
$1.9 million. The Company determined that the resulting modification of the MHR Convertible Notes
was substantial in accordance with ASC 470-50, Modifications and Extinguishments. As such, the
modification of the MHR Convertible Notes was accounted for as an extinguishment and restructuring
of the debt, and the warrants issued to MHR were expensed as a financing fee. The fair value of the
MHR Convertible Notes as of June 4, 2010 was estimated by calculating the present value of future
cash flows discounted at a market rate of return for comparable debt instruments to be $17.2
million. The Company recognized a loss on extinguishment of debt in the amount of $17.0 million
which represented the difference between the net carrying amount of the MHR Convertible Notes and
their fair value as of the date of the Novartis Agreement and the MHR Letter Agreements.
The book value of the MHR Convertible Notes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
2011 |
|
2010 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Face Value of the notes (including accrued interest) |
|
$ |
26,653 |
|
|
$ |
25,233 |
|
|
|
|
|
Discount (related to the warrant purchase option and embedded conversion feature) |
|
|
(4,173 |
) |
|
|
(5,369 |
) |
|
|
|
|
|
|
|
|
|
$ |
22,480 |
|
|
$ |
19,864 |
|
|
|
|
|
|
|
|
2010 MHR Promissory Notes. In connection with the Novartis Agreement, the Company and MHR entered
into a letter agreement (the MHR Letter Agreement), and MHR, the Company and Novartis entered
into a non-disturbance agreement (the Non-Disturbance Agreement), which was a condition to
Novartis execution of the Novartis Agreement. Pursuant to the MHR Letter Agreement, MHR agreed to
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 was 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 provided for the
Company to reimburse MHR for its legal fees 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
with the Future Transaction Agreement. The reimbursements were 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 of legal fees in
connection with the Non-Disturbance Agreement and $100,000 of legal fees in connection with the
Future Transaction Agreement, and, consequently, recorded the issuance of the $500,000 and $100,000
promissory notes and a corresponding charge to financing expenses. 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 promissory notes. As of June 30, 2011, the unamortized discount of the
$500,000 and $100,000 promissory notes are $44,000 and $9,000, respectively.
11. Derivative Instruments
Derivative instruments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
(in thousands) |
MHR Convertible Note |
|
$ |
6,895 |
|
|
|
11,166 |
|
MHR 2006 Warrants |
|
|
1 |
|
|
|
646 |
|
August 2007 Warrants |
|
|
82 |
|
|
|
481 |
|
August 2009 Warrants |
|
|
2,553 |
|
|
|
7,807 |
|
June 2010 MHR Warrants |
|
|
619 |
|
|
|
1,495 |
|
August 2010 Warrants |
|
|
3,270 |
|
|
|
10,550 |
|
August 2010 MHR Waiver Warrants |
|
|
630 |
|
|
|
1,961 |
|
|
|
|
|
|
$ |
14,050 |
|
|
$ |
34,106 |
|
|
|
|
F-46
The fair value of the warrants that have exercise price reset features is estimated using an
adjusted Black-Scholes model. The Company computes valuations each quarter, using Black-Scholes
model calculations for such warrants to account for the various possibilities that could occur due
to various circumstances that could arise in connection with the contractual terms of said
instruments. The Company weights each Black-Scholes model calculation based on its estimation of
the likelihood of the occurrence of each circumstance and adjusts relevant Black-Scholes model
input to calculate the value of the derivative at the reporting date.
Embedded Conversion Feature of MHR Convertible Notes. The MHR Convertible Notes due to MHR 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 Convertible Notes and lower than the current
market price. However, the adjustment provision does not 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 convertible note 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
adoption of FASB ASC 815-40-15-5 requires recognition of the cumulative effect of a change in
accounting principle to the opening balance of our accumulated deficit, additional paid in capital,
and liability for derivative financial instruments. The liability has been presented as a
non-current liability to correspond with its host contract, the MHR Convertible Notes. The fair
value of the embedded conversion feature is estimated, at the end of each quarterly reporting
period, using Black-Scholes models. The assumptions used in computing the fair value as of June 30,
2011 are a closing stock price of $0.90, conversion prices of $3.78 and $0.90, expected volatility
of 137.75% over the remaining term of one year and three months and a risk-free rate of 0.19%. The
fair value of the embedded conversion feature decreased by $0.9 million and $4.3 million for the
three and six months ended June 30, 2011, respectively, which has been recognized in the
accompanying statements of operations. The embedded conversion feature will be adjusted to
estimated fair value for each future period they remain outstanding. See Note 10 for a further
discussion of the MHR Convertible Notes.
MHR 2006 Warrants. In connection with the exercise of the MHR Option in April 2006 discussed in
Note 9 above, the Company issued to MHR warrants to purchase 617,211 shares 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 Warrants (see
below). The anti-dilution feature of the MHR 2006 Warrants was triggered in connection with the
August 2007 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 Financing Warrants and, therefore,
they have been accounted for as a separate liability. The fair value of the MHR 2006 Warrants is
estimated at the end of each quarterly period using Black-Scholes models. The assumptions used in
computing the fair value as of June 30, 2011 are a closing stock price of $0.90, exercise price of
$3.76, expected volatility of 112.93% over the remaining term of three months and a risk-free rate
of 0.03%. The fair value of the MHR 2006 Warrants decreased by $0.1 million and $0.6 million for
the three and six months ended June 30, 2011, respectively, which has been recognized in the
accompanying statement of operations. The MHR 2006 Warrants will be adjusted to estimated fair
value for each future period they remain outstanding.
August 2007 Warrants. In connection with an equity financing in August 2007 (the August 2007
Financing), Emisphere sold warrants to purchase up to 400,000 shares of common stock (the August
2007 Warrants). Of these 400,000 warrants, 91,073 were sold to MHR. Each of the August 2007
Warrants were issued with an exercise price of $3.948 and expire on August 21, 2012. The August
2007 Warrants provide for certain anti-dilution protection as provided therein. Under the terms of
the August 2007 Warrants, we have an obligation to make a cash payment to the holders of the August
2007 Warrants for any gain that could have been realized if the holders exercise the August 2007
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 August 2007 Warrants have been exercised.
Accordingly, the 2007 Warrants have been accounted for as a liability. The fair value of the
warrants is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The assumptions used in computing the fair value as of June 30, 2011 are a closing stock
price of $0.90, expected volatility of 140.41% over the remaining term of one year and two months
and a risk-free rate of 0.19%.The fair value of the August 2007 Warrants decreased $0.1 million and
$0.4 million for the three and six months ended June 30, 2011, respectively, which has been
recognized in the accompanying statements of operations. The August 2007 Warrants will be adjusted
to estimated fair value for each future period they remain outstanding.
August 2009 Warrants. In connection with an equity financing in August 2009 (the August 2009
Financing), Emisphere sold warrants to purchase 6.4 million shares of common stock to MHR (3.7
million) and other unrelated investors (2.7 million) (the August 2009 Warrants). The August 2009
Warrants were issued with an exercise price of $0.70 and expire on August 21, 2014. Under the terms
of the August 2009 Warrants, we have an obligation to make a cash payment to the holders of the
August 2009
F-47
Warrants for any gain that could have been realized if the holders exercise the August 2009
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 August 2009 Warrants have been exercised.
Accordingly, the August 2009 Warrants have been accounted for as a liability. The fair value of the
August 2009 Warrants is estimated, at the end of each quarterly reporting period, using the
Black-Scholes model. The assumptions used in computing the fair value as of June 30, 2011 are a
closing stock price of $0.90, expected volatility of 122.86% over the remaining term of three years
and two months and a risk-free rate of 0.81%. The fair value of the August 2009 Warrants decreased
$1.6 million and $5.3 million for the three and six months ended June 30, 2011, respectively,
which has been recognized in the accompanying statements of operations. The warrants will be
adjusted to estimated fair value for each future period they remain outstanding. During the year
ended December 31, 2010, the unrelated investors exercised their warrants to purchase up to
2,685,714 million shares of the Companys common stock at an exercise price of $0.70, using the
cashless exercise provision. The Company issued an aggregate of 1,966,937 shares to such holders
in accordance with the terms of the cashless exercise provision. The Company calculated the fair
value of the 2,685,714 exercised warrants on their respective exercise dates using the
Black-Scholes model. The weighted average assumptions used in computing the fair values were a
closing stock price of $1.91, expected volatility of 101.99% over the remaining contractual life of
four years, three months and a risk-free rate of 1.46%. The fair value of the 2.7 million exercised
warrants increased by $2.2 million from January 1, 2010 through the date of exercise which has been
recognized in the accompanying statements of operations. The fair value of the derivative
liabilities at the exercise dates of $4.3 million was reclassified to additional paid-in-capital.
After these cashless exercises, warrants to purchase up to 3,729,323 shares of common stock, in the
aggregate, remain outstanding.
June 2010 MHR Warrants. As consideration for its consent and limitation of rights in
connection with the Novartis Agreement, the Company granted MHR warrants to purchase 865,000 shares
of its common stock under the MHR Letter Agreement. The June 2010 MHR Warrants are exercisable at
$2.90 per share and will expire on August 21, 2014. The June 2010 MHR 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 June
2010 MHR 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 June 2010 MHR Warrants have been
exercised. Accordingly, the June 2010 MHR 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
model. The Company estimated the fair value of the June 2010 MHR Warrants on the date of grant
using Black-Scholes models to be $1.9 million, which triggered the recognition of extinguishment
and restructuring accounting for the MHR Convertible Notes (see Notes 9 and 15). The assumptions
used in computing the fair value of the June 2010 MHR Warrants at June 30, 2011 are closing stock
prices of $0.90, $0.54, and $2.89, exercise prices of $0.90, $0.54, $2.89, and $2.90, expected
volatility of 122.87% over the remaining three years and two months, and a risk-free rate of 0.81%.
The fair value of the June 2010 MHR Warrants decreased by $0.2 million and $0.9 million for the
three and six months ended June 30, 2011, respectively, which has been recognized in the
accompanying statements of operations. The June 2010 MHR Warrants will be adjusted to estimated
fair value for each future period they remain outstanding.
August 2010 Warrants. On August 25, 2010, the Company entered into a securities purchase agreement
(together with the securities purchase agreement with MHR, as defined below, the August 2010
Financing) with certain institutional investors pursuant to which the Company agreed to sell an
aggregate of 3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146
additional shares of its common stock for total gross proceeds of $3,532,503. Each unit, consisting
of one share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a
purchase price of $1.01. The warrants to purchase additional shares are exercisable at a price of
$1.26 per share and will expire five years from the date of issuance. In accordance with the terms
of a registration rights agreement with the investors, the Company filed a registration statement
on September 15, 2010, which was declared effective October 12, 2010. On August 25, 2010, the
Company also announced that it had entered into a separate securities purchase agreement with MHR
as part of the August 2010 Financing, pursuant to which the Company agreed to sell an aggregate of
3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146 additional
shares of its common stock for total gross proceeds of $3,532,503. Each unit, consisting of one
share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase
price of $1.01. The warrants to purchase additional shares are exercisable at a price of $1.26 per
share and will expire five years from the date of issuance. In connection with the August 2010
Financing, Emisphere sold warrants to purchase 5.2 million shares of common stock to MHR (2.6
million) and other unrelated investors (2.6 million) (the August 2010 Warrants). The August 2010
Warrants were issued with an exercise price of $1.26 and expire on August 26, 2015. Under the terms
of the August 2010 Warrants, we have an obligation to make a cash payment to the holders of the
August 2010 Warrants for any gain that could have been realized if the holders exercise the August
2010 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 August 2010 Warrants have been
exercised. Accordingly, the August 2010 Warrants have been accounted for as a liability. The fair
value of the warrants is estimated, at the end of each quarterly reporting period, using the
Black-Scholes model. On January 12, 2011, one of the unrelated investors notified the Company of
its intention to exercise 0.2 million warrants. The Company received proceeds of $0.2 million from
the exercise of these warrants. The Company calculated the fair value of the 0.2 million exercised
warrants on January 12, 2011 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value as of January 12, 2011 are a closing stock price of $2.25,
F-48
expected volatility of 107.30% over the remaining contractual life of four years and seven months
and a risk-free rate of 1.99%. The fair value of the 0.2 million exercised warrants decreased by
approximately $28,000 for the period from January 1, 2011 through January 12, 2011 which has been
recognized in the accompanying statements of operations The assumptions used in computing the fair
value of the remaining August 2010 Warrants as of June 30, 2011 are a closing stock price of $0.90,
exercise price of $1.26, expected volatility of 113.31% over the remaining term of four years and
two months, and a risk-free rate of 1.76%. The fair value of the August 2010 Warrants decreased by
$2.1 million and $6.9 million for the three and six months ended June 30, 2011, respectively, which
has been recognized in the accompanying statements of operations. The August 2010 Warrants will be
adjusted to estimated fair value for each future period they remain outstanding.
August 2010 MHR Waiver Warrants. In connection with the August 2010 Financing, the Company entered
into a waiver agreement with MHR (Waiver Agreement), pursuant to which MHR waived certain
anti-dilution adjustment rights under the MHR Convertible Notes and certain warrants issued by the
Company to MHR that would otherwise have been triggered by the August 2010 Financing. As
consideration for such waiver, the Company issued to MHR warrants to purchase 975,000 shares of its
common stock (the August 2010 MHR Waiver Warrants). The August 2010 MHR Waiver Warrants are in
the same form of warrant as the August 2010 Warrants issued to MHR described above. Accordingly,
the August 2010 MHR Waiver Warrants have been accounted for as a liability. The fair value of the
August 2010 MHR Waiver Warrants is estimated, at the end of each quarterly reporting period, using
Black-Scholes models. The Company estimated the fair value of the warrants on the date of grant
using Black-Scholes models to be $0.8 million. The assumptions used in computing the fair value of
the August 2010 MHR Waiver Warrants at June 30, 2011 are a closing stock price of $0.90, exercise
price of $1.26, expected volatility of 113.31% over the term of four years and two months, and a
risk free rate of 1.76%. The fair value of the August 2010 MHR Waiver Warrants decreased by $0.4
million and $1.3 million for the three and six months ended June 30, 2011, respectively, which has
been recognized in the accompanying statements of operations. The August 2010 MHR Waiver Warrants
will be adjusted to estimated fair value for each future period they remain outstanding.
12. Net income (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, |
|
|
2011 |
|
2010 Restated |
|
2011 |
|
2010 Restated |
|
|
(in thousands except per share data) |
|
(in thousands except per share data) |
Basic net income (loss) |
|
$ |
1,842 |
|
|
$ |
(31,573 |
) |
|
$ |
12,841 |
|
|
$ |
(48,832 |
) |
|
|
|
Effect of Dilutive Securities MHR
convertible note payable assumed
conversion |
|
|
-0- |
|
|
|
-0- |
|
|
|
923 |
|
|
|
-0- |
|
|
|
|
Numerator for Diluted net income (loss)
per share after assumed note conversion |
|
|
1,842 |
|
|
|
(31,573 |
) |
|
|
13,764 |
|
|
|
(48,832 |
) |
|
|
|
Weighted average common shares outstanding: |
|
|
52,076,602 |
|
|
|
43,338,432 |
|
|
|
52,064,171 |
|
|
|
42,711,367 |
|
Dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
221,124 |
|
|
|
|
|
|
|
309,457 |
|
|
|
|
|
Warrants |
|
|
2,626,629 |
|
|
|
|
|
|
|
3,476,116 |
|
|
|
|
|
|
|
|
Shares underlying MHR convertible note
payable |
|
|
|
|
|
|
|
|
|
|
7,051,183 |
|
|
|
|
|
|
|
|
Diluted weighted average common shares
outstanding and assumed conversion |
|
|
54,924,355 |
|
|
|
43,338,432 |
|
|
|
62,900,927 |
|
|
|
42,711,367 |
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.73 |
) |
|
$ |
0.25 |
|
|
$ |
(1.14 |
) |
Diluted net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.73 |
) |
|
$ |
0.22 |
|
|
$ |
(1.14 |
) |
For the three and six months periods ended June 30, 2011 and 2010, certain potential shares of
common stock have been excluded from the calculation of diluted income (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. In addition incremental shares
from the assumed conversion of the MRH note payable are excluded for the three month periods ended
June 30, 2011 and 2010 and for the six month period ended June 30, 2010 as the effect of these
shares is anti-dilutive in these periods. The following table sets forth the number of potential
shares of common stock that have been excluded from diluted net income (loss) per share because
their effect was anti-dilutive:
F-49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Options to purchase common shares |
|
|
2,759,476 |
|
|
|
3,187,116 |
|
|
|
2,671,143 |
|
|
|
3,187,116 |
|
Outstanding warrants |
|
|
9,018,697 |
|
|
|
6,954,391 |
|
|
|
8,169,210 |
|
|
|
6,954,391 |
|
MHR convertible note payable |
|
|
7,051,181 |
|
|
|
6.319.856 |
|
|
|
-0- |
|
|
|
6,319,856 |
|
|
|
|
|
|
|
18,829,354 |
|
|
|
16,461,363 |
|
|
|
10,840,353 |
|
|
|
16,461,363 |
|
13. 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 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 was to 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. Through July 1,
2011, the Company paid in full $800,000 of principal plus $28,250 interest for late payments in
accordance with the terms of the Lease Agreement.
We continue to lease office space at 240 Cedar Knolls Road, Cedar Knolls, NJ under a
non-cancellable operating lease expiring in 2013.
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, 2011.
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.
14. 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, NY to reduce costs and improve operating
efficiency which resulted in a 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 of $0.35 million in accordance with the terms of the
Agreement. On March 17, 2010 the Company and BMR amended the Agreement as described in this Note
(above). Consequently, the restructuring liability was readjusted to reflect the terms of the
Amendment accordingly.
F-50
Adjustments to the restructuring liability are as follows ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
Cash |
|
|
Adjustment to |
|
|
Liability at |
|
|
|
December 31, 2010 |
|
|
Payments |
|
|
the Liability |
|
|
June 30, 2011 |
|
Lease restructuring expense |
|
$ |
300 |
|
|
$ |
(300 |
) |
|
$ |
|
|
|
$ |
|
|
15. 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, 2010 and June 30, 2011, the Company had no accruals for interest or
penalties related to income tax matters. For the three and six months ended June 30, 2011 and 2010,
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.
16. New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The
amendments in this ASU generally represent clarifications of Topic 820, but also include some
instances where a particular principle or requirement for measuring fair value or disclosing
information about fair value measurements has changed. This update results in common principles
and requirements for measuring fair value and for disclosing information about fair value
measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The
amendments in this ASU are to be applied prospectively. For public entities, the amendments are
effective for interim and annual periods beginning after December 15, 2011, and early application
is not permitted. ASU 2011-04 is not expected to have a material impact on the Companys financial
position or results of operations.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (ASC Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU
affect any public entity as defined by ASC Topic 805 that enters into business combinations that
are material on an individual or aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting period only.
The amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. The amendments are
effective prospectively for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010. The
adoption of ASU 2010-29 did not have a material impact on the Companys results of operations or
financial condition.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (ASC Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a reporting unit be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. For public entities, the
amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on
the Companys results of operations or financial condition.
In April 2010, the FASB issued 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 (i) 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; (ii)
be related solely to past performance; and (iii) be reasonable relative to all deliverables and
payment terms in the arrangement. No bifurcation of an individual milestone is allowed and
F-51
there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both
substantive and non-substantive 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 effect on the Companys results of operations or
financial condition.
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.
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.
17. 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, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
Level 2 |
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
($ thousands) |
|
($ thousands) |
Derivative instruments (short term) |
|
$ |
7,155 |
|
|
$ |
22,940 |
|
Derivative instruments (long term) |
|
|
6,895 |
|
|
|
11,166 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,050 |
|
|
$ |
34,106 |
|
|
|
|
|
|
|
|
|
|
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, 2011, the carrying value of the notes payable and accrued interest was $26.7
million.
18. Subsequent Events
On July 6, 2011, the Company closed a transaction with certain institutional investors
(collectively, the Buyers) to sell an aggregate of approximately 4.3 million shares of its common
stock and warrants (the Warrants) to purchase a total of approximately 3.0 million shares of its
common stock (the Warrant Shares) for gross proceeds of approximately $3.75 million (the Private
Placement). Also on July 6, 2011, the Company and the Buyers entered into a registration rights
agreement (the Registration Rights Agreement) pursuant to which the Company provided certain
registration rights to the Buyers, including an obligation of the Company to file with the
Securities and Exchange Commission within 20 days a registration statement on Form S-1 covering the
shares issued in the Private Placement and the Warrant Shares. That registration statement on Form
S-1 was filed with the SEC on July 26, 2011.
Simultaneous with closing the Private Placement, the Company closed a transaction with MHR Fund
Management LLC and certain of its affiliated investment funds (MHR) to sell an aggregate of
approximately 4.3 million shares of its common stock and warrants (the MHR Warrants) to purchase
a total of approximately 3.0 million shares of its common stock (the MHR Warrant Shares) for
gross proceeds of approximately $3.75 million (the MHR Private Placement).
In connection with the Private Placement and the MHR Private Placement, the Company entered into a
Waiver Agreement with MHR (Waiver Agreement), pursuant to which MHR waived certain anti-dilution
adjustment rights under its Senior Secured Notes and
F-52
certain warrants issued by the Company to MHR that would otherwise have been triggered by the Private Placement.
As consideration for such waiver, the Company issued to MHR warrants (the MHR Waiver Warrants) to purchase 795,000
shares of its common stock (the MHR Waiver Warrant Shares) and agreed to reimburse MHR for up to
$25,000 of its legal fees.
In both the Private Placement and the MHR Private Placement, each unit, consisting of one share of
common stock and a warrant to purchase 0.7 shares of common stock, were sold at a purchase price of
$0.872. The Warrants, the MHR Warrants and the MHR Waiver Warrants are exercisable at an exercise
price of $1.09 per share and will expire July 6, 2016.
exercise price of $1.09 per share and will expire July 6, 2016.
F-53
No dealer, salesperson or any other person is authorized to give any information or make any
representations in connection with this offering other than those contained in this prospectus and,
if given or made, the information or representations must not be relied upon as having been
authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this prospectus, or an offer to sell
or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the
offer or solicitation is not authorized or is unlawful.
7,310,744 Shares of Common Stock
PROSPECTUS
October
12, 2011
You should rely only on the information contained in this prospectus. We have not authorized any
other person to provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. For further information, please see the
section of this prospectus entitled Where You Can Find More Information. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale is not permitted.
You should not assume that the information appearing in this prospectus is accurate as of any date
other than the date on the front cover of this prospectus, regardless of the time of delivery of
this prospectus or any sale of a security. Our business, financial condition, results of operations
and prospects may have changed since those dates.