For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes model. The assumptions used in computing the fair value of options granted are expected volatility of 91% in the first quarter of 2005, 87% in the second quarter of 2005 and 86% in the third quarter of 2005, expected lives of five years, zero dividend yield, and weighted-average risk-free interest rate of 4.17% in the first quarter of 2005, 3.61% in the second quarter of 2005 and 4.06% in the third quarter of 2005. For the Purchase Plans, the total number of quarterly options awarded can vary as the exercise price per share is equal to the lesser of the fair market value of our common stock on the date of grant or 85% of the fair market value on the date of exercise. Therefore the final measure of compensation cost for these awards has been determined on the date at which the number of shares to which an employee is entitled and the exercise price are determinable, which is the exercise date. We calculate estimates of compensation cost as of balance sheet dates subsequent to the grant date and prior to the exercise date based on the current intrinsic value of the award, determined in accordance with the terms that would apply if the award had been exercised on those balance sheet dates. Those amounts are included in the pro forma compensation expense for the quarter.
Included in equipment and leasehold improvements at September 30, 2006 are assets which were acquired under capital leases with a cost of $0.7 million and a net book value of $0.2 million.
Purchased technology represents the value assigned to patents and the rights to utilize, sell or license certain technology in conjunction with solid oral heparin. These assets underlie our research and development projects related to solid oral heparin, and if the projects prove unsuccessful, the assets have no alternative future use. Purchased technology is amortized over a period of 15 years, which represents the average life of the patents.
The carrying value of the purchased technology is comprised as follows:
Estimated amortization expense for the purchased technology is $60 thousand for the remaining three months of 2006 and $239 thousand annually through 2014.
7. | Notes Payable and Restructuring of Debt |
Notes payable consist of the following:
| | September 30,
2006 | | December 31,
2005 | |
| |
|
| |
|
| |
| | (in thousands) | |
Novartis Note | | $ | 10,858 | | $ | 10,498 | |
MHR Notes | | | 13,288 | | | 12,359 | |
| |
|
| |
|
| |
| | $ | 24,146 | | $ | 22,857 | |
| |
|
| |
|
| |
Novartis Note. On December 1, 2004 we issued a $10 million convertible note to Novartis in connection with a new research collaboration option relating to the development of PTH 1-34. The Novartis Note bears interest at a rate of 3% prior to December 1, 2006, 5% from December 1, 2006 through December 1, 2008, and 7% from that point until maturity on December 1, 2009. We have the option to pay interest in cash on a current basis or accrue the periodic interest as an addition to the principal amount of the Novartis Note. We are recording interest using the effective interest rate method, which results in an interest rate of 4.5%. We may convert the Novartis Note at any time prior to maturity into a number of shares of our common stock equal to the principal and accrued and unpaid interest to be converted divided by the then market price of our common stock, provided certain conditions are met, as described in our Annual Report on Form 10-K for the year ended December 31, 2005. On September 30, 2006, the Novartis Note was convertible into 1,276,818 shares of our common stock.
MHR Notes. On September 26, 2005, we executed a loan agreement (the “Loan Agreement”) with MHR Institutional Partners IIA LP (together with certain affiliated funds “MHR”). The Loan Agreement provides for a seven year, $15 million secured loan from MHR to us at an interest rate of 11% (the “Loan”). The Loan Agreement was amended on November 11, 2005 to clarify certain terms. Net proceeds from the Loan were approximately $12.9 million. We are recording interest using the effective interest method, which results in an effective interest rate of 14.4%. 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 “Convertible Notes”) with substantially the same terms as the Loan Agreement, except that the 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 Convertible Notes rather than in cash and we have the right to call the Convertible Notes after September 26, 2010 if certain conditions are satisfied. The Convertible Notes are secured by a first priority lien in favor of MHR on substantially all of our assets.
The Convertible Notes provide for various events of default as discussed in our Annual Report on Form 10-K for the year ended December 31, 2005. On May 5, 2006, we received an executed waiver from MHR providing for a temporary waiver of defaults, which were not payment-related, under the Loan Agreement. We have received extensions of such waiver from time to time, the latest being received October 18, 2006. The waiver received October 18, 2006 is in effect for a period greater than one year; as such the Convertible Notes have been classified as long-term.
In connection with the financing transaction, we amended MHR’s existing warrants to purchase 387,374 shares of our common stock to provide for additional anti-dilution protection. MHR was also granted the option to purchase warrants for up to an additional 617,211 shares of our common stock (the “warrant purchase option”) at a price per warrant equal to $0.01 per warrant for each of the first 67,084 warrants and $1.00 per warrant for each additional warrant. This option was exercised by MHR in April 2006. These warrants have an exercise price of $4.00, subject to anti-dilution protection. The fair value of the warrant purchase option at issuance was $1.3 million, which has been recorded as a separate liability and as a discount from the face value of the note. See Note 7 for a further discussion of the liability related to these warrants.
The Convertible Notes provide MHR with the right to require us to redeem the Convertible Notes in the event of a change in control, as defined in the Convertible Notes. The Convertible Notes provide for a redemption penalty as described in Note 7.
Total issuance costs associated with the Convertible Notes were $2.1 million, of which $1.9 million have been allocated to the MHR Note and $0.2 million have been allocated to the related derivative instruments. Of the $1.9 million allocated to the MHR Note, $1.4 million represents reimbursement of MHR’s 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 current portion of which is included in prepaid expenses and other current assets and the long term portion of which is included in other assets on the condensed consolidated balance sheets. Both amounts will be amortized to interest expense over the life of the Convertible Notes.
11
The book value of the MHR Notes is comprised of the following:
| | September 30,
2006 | | December 31,
2005 | |
| |
|
| |
|
| |
| | (in thousands) | |
Face value of the notes | | $ | 15,844 | | $ | 15,000 | |
Discount (related to the warrant purchase option) | | | (1,198 | ) | | (1,238 | ) |
Lender’s financing costs | | | (1,358 | ) | | (1,403 | ) |
| |
|
| |
|
| |
| | $ | 13,288 | | $ | 12,359 | |
| |
|
| |
|
| |
Restructuring of Debt. Ebbisham Limited (“Ebbisham”) was an Irish corporation owned jointly by Elan and us. Ebbisham was formed to develop and market heparin products using technologies contributed by Elan and us. On February 28, 2002 Ebbisham was voluntarily liquidated.
Pursuant to a series of transactions which are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2005, we owed Elan $29.2 million under a zero coupon note (the “Modified Elan Note”). As of March 31, 2005, we issued to Elan a warrant to purchase up to 600,000 shares of our common stock at an exercise price of $3.88, subject to anti dilution adjustments. The warrants provide for adjustments to 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 warrants. On April 1, 2005, we made a $13 million payment to Elan, which completed our repurchase of our indebtedness to Elan. This transaction was accounted for as a troubled debt restructuring. The carrying amount of the debt was reduced to an amount equal to the total future cash payments, or $13 million. The fair value of the warrant issued, estimated using the Black-Scholes option pricing model, is $1.6 million. A gain of $14.7 million, calculated as the difference between the carrying value of approximately $29 million and the fair value of cash paid and warrants issued, was recognized in our condensed consolidated statement of operations for the quarter ended March 31, 2005. Under the accounting for a restructuring of debt, no interest expense was recorded during the quarter ended March 31, 2005.
Derivative instruments consist of the following:
| | September 30, 2006 | | December 31, 2005 | |
| |
|
| |
|
| |
| | (in thousands) | |
Stock warrant issued to Kingsbridge | | $ | — | | $ | 743 | |
Stock warrants issued in equity financing | | | 8,939 | | | 4,330 | |
MHR warrants and warrant purchase option | | | 4,146 | | | 1,455 | |
| |
|
| |
|
| |
| | $ | 13,085 | | $ | 6,528 | |
| |
|
| |
|
| |
Kingsbridge Warrant. On December 27, 2004, we entered into a Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Kingsbridge, providing for the commitment of Kingsbridge to purchase up to $20 million of our common stock until December 27, 2006. In return for the commitment, we issued to Kingsbridge a warrant to purchase 250,000 shares of our common stock at an exercise price of $3.811 (representing a premium to the market price of shares of our common stock on the date of issuance of the warrant). On September 21, 2005, the Common Stock Purchase Agreement was terminated as a condition of closing the Loan Agreement with MHR. In January 2006, Kingsbridge exercised all of the warrants and sold all shares of common stock issued upon exercise of the warrants, and as a result, the related liability was reclassified as equity. The company realized proceeds of $1.0 million related to the exercise of the warrants. The fair value of the warrants increased by $215 thousand from the period between January 1, 2006 and the exercise and sale of all shares, and this increase is included in the statement of operations.
12
Equity Financing Warrants. As of March 31, 2005, we completed the sale of 4 million shares of common stock and warrants to purchase up to 1.5 million shares of common stock. The stock and warrants were sold as units, each unit consisting of one share of common stock and a warrant to purchase 0.375 shares of common stock. The warrants have an exercise price of $4.00 and an exercise period that begins on March 31, 2005 and expires on March 31, 2010. The warrants provide for adjustments to 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 then current market price or the exercise price of the warrants. Warrants to purchase up to 1,112,626 shares of common stock provide that under no circumstances will the adjusted exercise price be less than $3.81. The remaining warrants do not limit adjustments to the exercise price. Under the terms of the warrant, we have an obligation 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. Accordingly, the warrant has been accounted for as a liability. The fair value of the warrants is estimated using the Black-Scholes option pricing model. The assumptions used in computing the fair value as of September 30, 2006 are a closing stock price of $8.45, expected volatility of 70.68% over the remaining term of three years and six months and a risk-free rate of 4.55%. The fair value of the warrants decreased by $540 thousand and increased by $4.6 million during the three and nine months ended September 30, 2006, respectively and the fluctuations have been recorded in the statement of operations. The warrants will be adjusted to estimated fair value for each future period they remain outstanding.
MHR Warrants and Warrant Purchase Option. In connection with the Loan Agreement with MHR, Emisphere agreed to sell warrants for up to 617,211 shares to MHR at any date more than 45 days after the closing date. The first 67,084 warrants have a purchase price of $0.01 per share, and the remaining 550,127 warrants have a purchase price of $1.00 per share. In April 2006, MHR exercised its right to purchase warrants for all 617,211 shares. The warrants have an exercise price of $4.00 and are exercisable through September 26, 2011.The warrants have the same terms as the equity financing warrants, with no limit upon adjustments to the exercise price. Based on the provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), the warrant purchase option was determined to be an embedded derivative instrument which must be separated from the host contract. The MHR warrants contain the same potential cash settlement provisions as the equity financing warrants and therefore they have been accounted for as a separate liability. The fair value of the warrant purchase option was $1.3 million at issuance, which was estimated using the Black-Scholes option pricing model. The assumptions used in computing the fair value as of September 30, 2006 are a closing stock price of $8.45, expected volatility of 82.32% over the remaining term of five years and a risk-free rate of 4.53%. $49 thousand of the deferred financing costs related to the Loan Agreement and $128 thousand representing reimbursement of MHR’s legal fees have been allocated to the warrant purchase option. Both amounts were expensed at issuance. The fair value of the MHR warrants/warrant purchase option decreased by $116 thousand and increased by $2.7 million during the three and nine months ended September 30, 2006 and the fluctuation has been recorded in the statement of operations. The MHR warrants will be adjusted to estimated fair value for each future period they remain outstanding. See Note 7 for a further discussion of the warrant purchase option and the MHR Note.
Change in Control Redemption Feature. The Convertible Notes provide MHR with the right to require us to redeem the Convertible Notes in the event of a change in control, as defined in the Convertible Notes. The Convertible Notes provide for a redemption penalty equal to 104% through September 26, 2006, 103% through September 26, 2007, 102% through September 26, 2008 and 101% through September 26, 2009. After September 26, 2009, the change in control redemption feature in the Convertible Notes will expire. Based on the provisions of SFAS 133, the change in control redemption feature has been determined to be an embedded derivative instrument which must be separated from the host contract. 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 option pricing model for the conversion option that exists under the 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.
On May 15, 2006, we completed the sale of 4 million registered shares of common stock at $8.26 per share. Net proceeds from this offering were $31.1 million, net of total issuance costs of $2.0 million, which will be used for general corporate purposes. MHR was a purchaser in this offering.
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 September 30, 2006 and December 31, 2005, there were no shares of preferred stock outstanding.
13
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 as described further in our Annual Report on Form 10-K.
On August 1, 2005, our Chairman and Chief Executive Officer repaid a note receivable with $1.9 million in cash and 46,132 shares of our common stock valued at $0.2 million that had been held as collateral. All such repurchased and reacquired stock is held by us as treasury stock.
In connection with the Loan Agreement with MHR (see Note 6), Emisphere held a special stockholder meeting on January 17, 2006 at which the stockholders approved (i) the exchange of the Loan for an 11% senior secured convertible note (the “Convertible Note”) with substantially the same terms as the Loan Agreement, except that the Convertible Note will be convertible, at the sole discretion of MHR or any assignee thereof, into shares of our common stock (the “Conversion Shares”) at a price per share of $3.78, interest will be payable in kind rather than in cash and we will have the right to call the Convertible Note after September 26, 2010 if certain conditions are satisfied and (ii) the amendment and restatement of our Restated Certificate of Incorporation. On January 17, 2006, the special meeting of stockholders was held and both proposals were approved by our stockholders. Under the guidance of EITF issues 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” we determined that as of January 17, 2006, a commitment date for issuing a Convertible Note was established and accordingly, an embedded beneficial conversion feature should be recorded. The value of the beneficial conversion feature was based on the effective conversion price after allocating a portion of the proceeds of the loan to the warrant purchase option and adjusting for financing costs paid by us on behalf of the lender. Since the calculated value of the beneficial conversion feature exceeded the net proceeds allocated to the MHR Note, the beneficial conversion feature was recorded at an amount equal to the net proceeds allocated to the MHR Note, or $12.2 million, with a corresponding amount recorded as additional paid-in-capital. Since MHR can convert the Convertible Note to realize a return at any time, the entire beneficial conversion feature was immediately recorded.
The following table sets forth the information needed to compute basic and diluted earnings per share for the three months ended September 30, 2006 and 2005:
| | Three months ended
September 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
|
| |
|
| |
| | (in thousands, except share amounts) | |
Basic net loss | | $ | (8,158 | ) | $ | (9,640 | ) |
Dilutive securities: | | | | | | | |
Warrants | | | (656 | ) | | — | |
| |
|
| |
|
| |
Diluted net loss | | $ | (8,814 | ) | $ | (9,640 | ) |
| |
|
| |
|
| |
Weighted average common shares outstanding | | | 28,006,828 | | | 23,298,313 | |
Dilutive securities: | | | | | | | |
Warrants | | | 1,063,123 | | | — | |
| |
|
| |
|
| |
Diluted average common stock equivalents outstanding | | | 29,069,951 | | | 23,298,313 | |
| |
|
| |
|
| |
Basic net loss per share | | $ | (0.29 | ) | $ | (0.41 | ) |
Diluted net loss per share | | $ | (0.30 | ) | $ | (0.41 | ) |
14
For the three and nine months ended September 30, 2006 and 2005, certain potential shares of common stock have been excluded from diluted loss per share because the exercise price was greater than the average market price of our common stock, and therefore, the effect on diluted loss per share would have been anti-dilutive. The following table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share because their effect was anti-dilutive:
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
|
| |
|
| |
|
| |
|
| |
Options to purchase common shares | | | 3,970,677 | | | 5,669,083 | | | 3,970,677 | | | 5,669,083 | |
Outstanding warrants and options to purchase warrants | | | 600,000 | | | 2,967,211 | | | 2,717,211 | | | 2,967,211 | |
Novartis convertible note payable | | | 1,276,818 | | | 2,876,820 | | | 1,276,818 | | | 2,876,820 | |
MHR note payable | | | 4,191,571 | | | — | | | 4,191,571 | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
| | | 10,039,066 | | | 11,513,114 | | | 12,156,277 | | | 11,513,114 | |
| |
|
| |
|
| |
|
| |
|
| |
Our comprehensive loss was comprised of net loss adjusted for the change in net unrealized gain or loss on investments. Comprehensive loss was $8.2 million and $9.6 million for the three months, and a loss of $38.8 million and income of $8.9 million for the nine months, ended September 30, 2006 and 2005, respectively.
12. | Commitments and 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 September 30, 2006.
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. Management consults with counsel and other appropriate experts to assess the claim. If, in management’s opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss, and the appropriate accounting entries are reflected in our consolidated 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 consolidated financial position, results of operations or cash flows.
There is currently pending in the United States District Court for the Southern District of Indiana, Indianapolis Division, a lawsuit with Eli Lilly and Company. The suit results from a notice that we delivered to Lilly declaring that Lilly was in material breach of certain research and collaboration agreements entered into with Lilly with respect to oral formations of PTH 1-34. The case went to trial on January 31, 2005. The trial lasted 4 days and closing arguments were heard on February 9, 2005. On January 6, 2006, the district court ruled in our favor, finding that Lilly had breached the agreements on all counts tried and that our termination was proper. On April 6, 2006, the District Court granted in part a motion by Lilly to amend the January 6 decision to clarify the claims that were resolved by the decision. Although the January 6, 2006 decision was interlocutory, Lilly has publicly stated its intention to appeal the decision. A reversal of the decision in this litigation concerning our claim and subsequent court decision that Lilly breached our agreements could limit our future ability to realize the potential value of our oral PTH 1-34 assets. On April 25, 2006, the United States District Court in the Southern District of Indiana ordered Eli Lilly and Company to assign to Emisphere the patent application Lilly filed with the World Intellectual Property Organization, including any final patents that may be issued as a result of that application. On May 3, 2006, Lilly notified Emisphere that it has assigned the patent to Emisphere. Although the costs of litigating this matter to its ultimate resolution may be material, we anticipate that near-term costs will be minimal and we do not anticipate any significant impact on our ability to develop our product candidates. Through September 30, 2006, we have incurred approximately $2.6 million in expenses relating to this litigation of which $293 thousand and $862 thousand were spent for the nine months ended September 30, 2006 and 2005, respectively.
15
The lease for the Company’s principal executive, administrative and laboratory facilities expires on September 1, 2007, unless the Company exercises one of its five year renewal options prior to, as extended, December 1, 2006. The Company is in discussions regarding the exercise of such option or making alternate arrangements.
In November 2006, we received notice from F. Hoffman- La Roche Ltd. (“Roche”) that they are exercising their right to terminate the November 17, 2004 Development and License Agreement. Roche’s decision was not related to the performance of the eligen® technology. We will continue to work with Roche on the multi-product research collaboration agreement signed in July 2006, to explore the use of Emisphere’s eligen® technology in feasibility studies for new oral formulations of a number of Roche molecules. As per the July 2006 agreement, Roche will fund the research, which will be conducted at both Roche and Emisphere.
16
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SAFE HARBOR CAUTIONARY STATEMENT
Certain statements in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations as well as statements made from time to time by our representatives may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the ACT). These forward looking statements include (without limitation) statements regarding planned or expected studies and trials of oral formulations that utilize our eligen® technology; the timing of the development and commercialization of our product candidates or potential products that may be developed using our eligen® technology; the potential market size, advantages or therapeutic uses of our potential products; and the sufficiency of our available capital resources to meet our funding needs. We do not undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Our business is subject to many risks including:
Financial Risks |
| • | If we fail to raise additional capital or receive substantial cash inflows from our partners by the third quarter of 2007, we may be forced to cease operations. |
| • | We may not be able to meet the covenants detailed in the Convertible Notes with MHR, 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. |
| | |
Risks Related to our Business |
| • | We are highly dependent on the clinical success of our oral heparin and insulin product candidates. |
| • | We are highly dependent upon collaborative partners to develop and commercialize compounds using our delivery agents. |
| • | Our collaborative partners control the clinical development of certain of our drug candidates and may terminate their efforts at will. |
| • | Our product candidates are in various stages of development, and we cannot be certain that any will be suitable for commercial purposes. |
| • | Our collaborative partners are free to develop competing products. |
| • | Our business will suffer if we cannot adequately protect our patent and proprietary rights. |
| • | We are currently in litigation with one of our previous collaborative partners, Eli Lilly and Company. On January 6, 2006, the United States District Court for the Southern District of Indiana, Indianapolis Division ruled in our favor. Lilly has publicly stated its intention to appeal the decision. A reversal of the decision in this litigation concerning our claim and subsequent court decision that Lilly breached our agreements could limit our future ability to realize the potential value of our oral PTH 1-34 assets. |
| • | We may be at risk of having to obtain a license from third parties making proprietary improvements to our technology. |
| • | We are dependent on third parties to manufacture and, in some cases, test our products. |
| • | We are dependent on our key personnel and if we cannot recruit and retain leaders in our research, development, manufacturing, and commercial organizations, our business will be harmed. |
| | |
Risks Related to our Industry |
| • | Our future business success depends heavily upon regulatory approvals, which can be difficult to obtain for a variety of reasons, including cost. |
| • | We may face product liability claims related to participation in clinical trials for future products. |
| • | We are subject to environmental, health and safety laws and regulations for which we incur costs to comply. |
| • | We face rapid technological change and intense competition. |
| | |
Other Risks |
| • | Provisions of our corporate charter documents, Delaware law, our financing documents and our stockholder rights plan may dissuade potential acquirers, prevent the replacement or removal of our current management and members of our Board of Directors and may thereby affect the price of our common stock. |
| • | Our stock price has been and may continue to be volatile. |
| • | Future sales of common stock or warrants, or the prospect of future sales, may depress our stock price. |
17
For a more complete listing and description of these and other risks that the Company faces, please see our Annual Report on Form 10-K. The forward looking statements are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe-harbor” provisions of the Act. The Company cautions investors that any forward-looking statements it makes are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. Any investment in our common stock involves a high degree of risk.
General
Emisphere Technologies, Inc. is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently available or have poor bioavailability in oral form. Since our inception in 1986, we have devoted substantially all of our efforts and resources to research and development conducted on our own behalf and in collaborations with corporate partners and academic research institutions. Our product pipeline includes product candidates for the treatment of cardiovascular diseases, osteoporosis, growth disorders, diabetes, asthma/allergies, obesity and infectious diseases. Development and commercialization of these product candidates entails risk and significant expense. Since inception, we have had no product sales from these product candidates.
Oral heparin and oral insulin are our two lead programs, both of which are currently unpartnered. Our strategy for the heparin program includes plans for a pivotal registration trial. In further support of the heparin program, during the third quarter of 2005 we conducted a multi-arm, cross-over, clinical trial with sixteen subjects to compare heparin delivered by different injection routes to heparin delivered orally in normal subjects. In March 2006, we announced that preliminary results confirm that heparin delivered orally utilizing our eligen® drug delivery technology is chemically identical to heparin delivered by injection. The detailed results of this study will be made available through publication. We have discussed the data with the FDA and are formulating our plans for further development of this product and registration.
On October 30, 2006 and November 8, 2006, we announced the results of our 90 day Phase II trial to evaluate the safety and efficacy of low and high doses of oral insulin tablets utilizing our eligen® drug delivery technology. The four-arm study evaluated the safety and efficacy of low and high fixed doses of oral insulin tablets versus placebo in patients with Type 2 Diabetes Mellitus on existing oral metformin monotherapy. The trial focused on the safety of oral insulin, specifically noting incidents of hypoglycemia, as well as the occurrence of insulin antibodies. The efficacy component of the trial was designed to measure changes in Hemoglobin A1c (HbA1c) over 90 days, the standard for evaluating glucose control in Type II diabetics. An additional objective was to confirm that insulin delivered orally could be administered as a fixed dose product without the need to conduct glucose monitoring or titrate the insulin dose. The study met our objectives for both safety and efficacy.
We will also continue to advance our collaborations with Novartis on salmon calcitonin, parathyroid hormone and recombinant human growth hormone (“rhGH”), with Genta on gallium nitrate and with a pharmaceutical company based outside the United States to develop an improved oral formulation of the antiviral compound acyclovir.
On September 5, 2006, we announced that Novartis had informed us that the results from a Phase 1 study indicated that rhGH can be absorbed when given to growth hormone-deficient patients in a prototype oral form using our eligen® delivery technology.
In November 2006, we received notice from Roche that they are exercising their right to terminate the November 17, 2004 Development and License Agreement. Roche’s decision was not related to the performance of the eligen® technology. We will continue to work with Roche on the multi-product research collaboration agreement signed in July 2006, to explore the use of Emisphere’s eligen® technology in feasibility studies for new oral formulations of a number of Roche molecules. As per the July 2006 agreement, Roche will fund the research, which will be conducted at both Roche and Emisphere.
18
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
| | Three Months Ended September 30, | | | | | | | |
| |
| | | | | | | |
| | 2006 | | 2005 | | Change | | % Change | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | (in thousands) | | | | | |
Revenue | | $ | 60 | | $ | 431 | | $ | (371 | ) | | (86 | )% |
Research and development | | | 4,790 | | | 4,660 | | | 130 | | | 3 | % |
General and administrative expenses | | | 3,039 | | | 2,819 | | | 220 | | | 8 | % |
Gain on sale of fixed assets | | | — | | | 4 | | | (4 | ) | | (100 | )% |
Depreciation and amortization | | | 922 | | | 1,059 | | | (137 | ) | | (13 | )% |
Operating expenses | | | 8,751 | | | 8,542 | | | 209 | | | 2 | % |
Operating loss | | | (8,691 | ) | | (8,111 | ) | | 580 | | | 7 | % |
Change in fair value of derivative instruments | | | 656 | | | (1,310 | ) | | 1,966 | | | 150 | % |
Interest (expense) | | | (589 | ) | | (325 | ) | | 264 | | | 81 | % |
Other income | | | 466 | | | 106 | | | 360 | | | 340 | % |
Net loss | | | (8,158 | ) | | (9,640 | ) | | (1,482 | ) | | (15 | )% |
Revenue decreased from the same quarter of 2005, primarily due to the decrease in revenue associated with our Roche and Novartis collaborations.
Research and development costs increased by $130 thousand compared to the second quarter of 2005. This increase is the result of: (a) the implementation of SFAS 123(R), which resulted in non-cash stock-based compensation charges of $239 thousand for the quarter , and (b) an increase in professional fees and relocation expenses of $88 thousand associated with the hiring of a VP of Regulatory Affairs. The increase is offset by a decrease in the expenses for clinical trials and lab fees of $180 thousand.
General and administrative expenses increased by $220 thousand compared to the second quarter of 2005. The increase is primarily the result of: (a) the implementation of SFAS 123(R), which resulted in non-cash stock-based compensation charges of $162 thousand for the quarter; and (b) approximately $105 thousand in printing and filing fees associated with recent financings, which are partially offset by a decrease in other costs including head count.
Depreciation and amortization costs decreased by $137 thousand when compared to the same quarter of the prior year due to a decrease in capital expenditures over the past several years.
The change in fair value of derivative instruments increased by $2 million compared to the same quarter for the prior year primarily due to the rise in the stock price from $4.50 to $8.45 at September 30, 2005 and 2006, respectively.
The increase in the interest expense is due to the issuance of the MHR loan in September 2005. Interest expense for the quarter ended September 30, 2006 reflected a full three months of interest on the loan.
Other income increased as a direct result in the increase in interest income related to the increase in investments.
Based on the above, we sustained a net loss of $8.2 million during the three months ended September 30, 2006 as compared to a net loss of $9.6 million during the three months ended September 30, 2005.
19
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
| | Nine Months Ended September 30, | | | | | | | |
| |
| | | | | | | |
| | 2006 | | 2005 | | Change | | % Change | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | (in thousands) | | | | | |
Revenue | | $ | 6,976 | | $ | 3,385 | | $ | 3,591 | | | 106 | % |
Research and development | | | 14,165 | | | 13,690 | | | 475 | | | 3 | % |
General and administrative expenses | | | 8,658 | | | 9,766 | | | (1,108 | ) | | (11 | )% |
Gain on sale of fixed assets | | | (4 | ) | | (563 | ) | | (559 | ) | | (99 | )% |
Depreciation and amortization | | | 2,884 | | | 3,261 | | | (377 | ) | | (12 | )% |
Operating expenses | | | 25,703 | | | 26,154 | | | (451 | ) | | (2 | )% |
Operating loss | | | (18,727 | ) | | (22,769 | ) | | (4,042 | ) | | (18 | )% |
Charge for beneficial conversion feature of convertible security | | | (12,215 | ) | | — | | | 12,215 | | | 100 | % |
Change in fair value of derivative instruments | | | (6,964 | ) | | (1,518 | ) | | (5,446 | ) | | (359 | )% |
Interest (expense) | | | (1,730 | ) | | (574 | ) | | (1,156 | ) | | (202 | )% |
Gain on extinguishment of debt | | | — | | | 14,663 | | | (14,663 | ) | | (100 | )% |
Other income | | | 884 | | | 1,303 | | | (419 | ) | | 32 | % |
Net loss | | | (38,752 | ) | | (8,895 | ) | | 29,857 | | | 336 | % |
Revenue increased compared to 2005 as a result of the achievement of milestones in the Novartis rhGH and Roche collaborations. Additional milestone payments under these agreements may not be earned in the short-term or at all.
The increase in research and development of $0.5 million as compared to the same period in 2005 is the result of: (a) the implementation of SFAS 123(R), which resulted in non-cash stock-based compensation charges of $0.6 million, and (b) an increase in utility costs of $0.2 million, partially offset by a decrease in outside laboratory analysis fees of $0.5 million.
General and administrative expenses decreased by $1.1 million due primarily to a decrease in professional fees, particularly those related to the Lilly litigation. Small decreases in most other expense categories, particularly occupancy costs, which decreased as a result of the sale of our Farmington, Connecticut research facility, were offset by non-cash stock-based compensation charges of $0.6 million recorded in connection with the implementation of SFAS 123(R).
The $0.6 million gain on sale of fixed assets in 2005 relates to the sale of the Farmington, Connecticut research facility.
Depreciation and amortization costs decreased by $377 thousand due to a decrease in capital expenditures over the past several years.
The increase in the charge for beneficial conversion of is due to the beneficial conversion feature in the MHR notes payable.
The change in fair value of derivative instruments increased by $5.4 million primarily due to the rise in the stock price from $4.34 at December 31, 2005 to $8.45 at September 30, 2006.
The increase in interest expense of $1.2 million is due to the issuance of the MHR notes payable in September 2005.
The gain on the extinguishment of debt in 2005 related to the repurchase of our indebtedness to Elan.
Other income decreased by $419 thousand due to the gain on the sale of investments of $1 million in 2005 which did not reoccur in 2006, partially offset by an increase in interest income of $.5 million in 2006 related to the increase in the investment balance.
20
Based on the above, we had a net loss of $38.8 million in the nine months ended September 30, 2006 as compared to net loss of $8.9 million for the same period in 2005. The significant fluctuation is the result of non-recurring transactions – the increase in the fair value of derivative instruments and the beneficial conversion feature in 2006, and the gains on the extinguishment of the note payable to Elan and the sales of fixed assets and investments in 2005 – and are therefore not necessarily indicative of future results.
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 September 30, 2006, our accumulated deficit was approximately $389 million and our stockholders deficit was $5.6 million. Our operating loss was $18.7 million for the nine months ended September 30, 2006 and $32.5 million for the year ended December 31, 2005. 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. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2005 included an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
On May 3, 2006, we received a $5 million milestone payment from Novartis and on May 15, 2006, we completed the sale of 4 million shares of our common stock for net proceeds of approximately $31 million. MHR was a purchaser in this offering. As of September 30, 2006, total cash, cash equivalents and investments were $28 million. 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 into the third quarter of 2007. However, this expectation is based on the current operating plan that could change as a result of many factors and additional funding may be required sooner than anticipated.
�� The lease for the Company’s principal executive, administrative and laboratory facilities expires on September 1, 2007, unless the Company exercises one of its five year renewal options prior to, as extended, December 1, 2006. The Company is in discussions regarding the exercise of such option or making alternate arrangements.
Our business will require substantial additional investment that we have not yet secured. While our plan is to raise capital when needed and/or to pursue partnering opportunities, we cannot be sure how much we will need to spend in order to develop, market and manufacture new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials for our product candidates. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. We cannot assure you that financing will be available on favorable terms or at all. 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 our operations at some time in the future. 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.
During the nine months ended September 30, 2006, our cash liquidity (consisting of cash, restricted cash and short-term investments) increased as follows:
Cash, restricted cash and investments: | | | | |
At December 31, 2005 | | $ | 9,218 | |
At September 30, 2006 | | | 28,004 | |
| |
|
| |
Increase in cash and investments | | $ | 18,786 | |
| |
|
| |
21
The increase in cash and investments is comprised of the following components:
Proceeds, net, from issuance of equity securities | | $ | 34,194 | |
Proceeds from collaboration and other projects | | | 6,976 | |
| |
|
| |
Sources of cash | | | 41,170 | |
| |
|
| |
Cash used in operations (grossed up for collaborations) | | | 22,040 | |
Repayment of debts and capital expenditures | | | 397 | |
Other | | | (53 | ) |
| |
|
| |
Applications of cash | | | 22,384 | |
| |
|
| |
Increase in cash and investments | | $ | 18,786 | |
| |
|
| |
During the nine months ended September 30, 2006, our working capital liquidity increased by $13.1 million as follows:
| | September 30,
2006 | | December 31,
2005 | | Change | |
| |
|
| |
|
| |
|
| |
| | (in thousands) | |
Current assets | | $ | 28,766 | | $ | 10,240 | | $ | 18,526 | |
Current liabilities | | | 16,229 | | | 10,762 | | | 5,467 | |
| |
|
| |
|
| |
|
| |
Working capital | | $ | 12,537 | | $ | (522 | ) | $ | 13,059 | |
| |
|
| |
|
| |
|
| |
The increase in current assets is driven primarily by the increase in cash and investments. The increase in current liabilities is driven largely by the increase in the estimated fair value of derivative instruments ($6.6 million), offset by decreases in accounts payable, accrued expenses and other current liabilities ($1.1 million).
Warrants to purchase 150,000 shares of our common stock at $4 per share were exercised on October 12, 2006, resulting in proceeds of $600 thousand to the Company.
Off-Balance Sheet Arrangements
As of September 30, 2006, we had no off-balance sheet arrangements, other than operating leases. There were no changes in significant contractual obligations during the quarter ended September 30, 2006.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 consolidated results of operations or financial condition. |
Share-Based Payments – On January 1, 2006, we adopted SFAS 123(R), “Share-Based Payment”, which establishes standards for share-based transactions in which an entity receives employee’s services for (a) equity instruments of the entity, such as stock options, or (b) liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) supercedes the option of accounting for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires that companies expense the fair value of stock options and similar awards, as measured on the awards’ grant date. SFAS 123(R) applies to all awards granted after the date of adoption, and to awards modified, repurchased or cancelled after that date. We have elected to apply SFAS 123(R) using a modified version of prospective application, under which compensation cost is recognized only for the portion of awards outstanding for which the requisite service has not been rendered as of the adoption date, based on the grant date fair value of those awards calculated under SFAS 123 for pro forma disclosures.
22
We grant options to purchase our common stock to our employees and directors under our stock option plans. Employees are also granted options to purchase shares of our common stock at the lower of the fair market value on the grant date or 85% of the fair market value on the date of exercise under our employee stock purchase plans. The benefits provided under these plans are share-based payments subject to the provisions of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) during the nine months of 2006 was $1.3 million. At September 30, 2006, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $1.5 million, of which approximately $0.2 million is expected to be recognized over the remaining three months of 2006.
We estimate the value of stock option awards on the date of grant using the Black-Scholes-Merton option-pricing model (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.
If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) 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 SFAS 123(R). 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 is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. During the three and nine months ended September 30, 2006, we do not believe that reasonable changes in the projections would have had a material effect on share-based compensation expense.
The guidance in SFAS 123(R) and Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”) is relatively new, and best practices are not well established. There are significant differences among valuation models, and there is a possibility that we will adopt a different valuation model in the future. Theoretical valuation models are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors.
Revenue Recognition – Revenue includes amounts earned from collaborative agreements and feasibility studies and is recognized using the lower of the percentage completed based on hours expended applied to expected contractual payments or the total non-refundable cash received to date. Changes in the projected hours to complete the project could significantly change the amount of revenue recognized. During the three and nine months ended September 30, 2006, we do not believe that reasonable changes in the projections would have had a material effect on recorded revenue.
Warrants – Warrants issued in connection with the equity financing completed in March 2005 and to MHR have been classified as liabilities due to certain provisions that could require cash settlement in certain circumstances. The warrants are recorded at fair value, and fluctuations in fair value are recorded as interest expense. We use the Black-Scholes option pricing model to estimate fair value. The Black-Scholes option pricing model requires that we make certain assumptions about the risk-free interest rate, volatility, expected term and dividend yield. Warrants 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 is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. During the three and nine months ended September 30, 2006, we do not believe that reasonable changes in the projections would have had a material effect on interest expense. Although we believe the assumptions used to estimate the fair values of the warrants are reasonable, we cannot assure the accuracy of the assumptions or estimates. See Item 3. Quantitative and Qualitative Disclosures about Market Risk for additional information on the volatility in market value of derivative instruments.
New Accounting Pronouncements
The Company does not believe that the new accounting pronouncements issued during the quarter ended September 30, 2006 have a material effect on the Company’s financial statements.
23
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Fair Value of Warrants and Derivative Liabilities. At September 30, 2006, the estimated fair value of derivative instruments was $13.1 million. We estimate the fair values of these instruments using the Black-Scholes option pricing model which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock. We believe that the assumption that has the greatest impact on the determination of fair value is the closing price of our common stock. The following table illustrates the potential effect of changes in the assumptions used to calculate fair value:
| | Increase/(decrease) in
fair value of derivative
instruments | |
| |
|
| |
| | (in thousands) | |
10% increase in stock price | | $ | 1,647 | |
20% increase in stock price | | | 3,310 | |
5% increase in assumed volatility | | | 271 | |
10% decrease in stock price | | | (1,627 | ) |
20% decrease in stock price | | | (3,231 | ) |
5% decrease in assumed volatility | | | (273 | ) |
Investments. Our primary investment objective is to preserve principal while maximizing yield without significantly increasing risk. Our investments consist of commercial paper, mortgage-backed securities and auction-rate securities. Our fixed-rate interest-bearing investments totaled $4 million at September 30, 2006. These investments mature in less than one year. We have classified all investments as short-term based on our intent to liquidate the investments to fund operations over the upcoming twelve month period.
Due to the conservative nature of our short-term fixed interest rate investments (maturities in less than one year), we do not believe that we have a material exposure to interest rate risk.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company’s 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 Commission’s 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 issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision of and with the participation of management, including the Chief Executive Officer and Principal Accounting Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
24
PART II
None
The following represents material changes from risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. This information should be read in conjunction with such Annual Report and Quarterly Reports and considered carefully in connection with evaluating our business and the forward-looking statements that we make in this Report and elsewhere (including oral statements) from time to time. The following risk could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Report. See also Part 1, Item 2, Safe Harbor Cautionary Statement for a summary of certain known risks to our business.
We have incurred substantial losses since inception and we expect to continue to incur development expenses for self-funded programs, partnered programs and programs for which we are attempting to secure a partner. As a result, we are likely to require additional capital and if additional capital is not raised, we may be unable to continue operations.
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. These conditions have raised substantial doubt about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm related to our consolidated financial statements for the year ended December 31, 2005 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. As of September 30, 2006, we had cash, cash equivalents and investments of $28 million. On May 3, 2006, we received a $5 million milestone payment from Novartis and on May 15, 2006, we completed the sale of 4 million shares of our common stock for net proceeds of $31.1 million. We anticipate that our existing capital resources, including these recent cash receipts but without implementing cost reductions, raising additional capital, or obtaining substantial cash inflows from potential partners for our products, will enable us to continue operations into the third quarter of 2007. 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 September 30, 2006, our accumulated deficit was $389 million. Our operating loss for the nine months ended September 30, 2006 (after receipt of $7 million of milestone payments which does not recur with regularity or at all) was approximately $18.7 million. Our cash outlays from operations and capital expenditures were $15.3 million for the nine months ended September 30, 2006 and $30.4 million for the year ended December 31, 2005.
Our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop, market and manufacture new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials for our product candidates. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. We cannot assure you that financing will be available on favorable terms or at all. 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 our operations at some time in the future. 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.
25
On November 2, 2006, we received notice from Roche that they are exercising their right to terminate the November 17, 2004 Development and License Agreement. Roche’s decision was not related to the performance of the eligen® technology. We will continue to work with Roche on the multi-product research collaboration agreement signed in July 2006, to explore the use of Emisphere’s eligen® technology in feasibility studies for new oral formulations of a number of Roche molecules. As per the July 2006 agreement, Roche will fund the research, which will be conducted at both Roche and Emisphere.
| Exhibit Number | | Description of Exhibit |
|
| |
|
| 31.1 | | Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith). |
| | | |
| 31.2 | | Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | | |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002 (furnished herewith). |
26
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2006
| Emisphere Technologies, Inc. |
| |
| |
| /s/ Michael M. Goldberg, M.D. |
|
|
| Michael M. Goldberg, M.D. |
| Chairman and Chief Executive Officer |
| |
| |
| /s/ William T. Rumble |
|
|
| William T. Rumble |
| Corporate Controller
(Principal Accounting Officer) |
27
