FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-10615
-------
EMISPHERE TECHNOLOGIES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
-------- ----------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
765 Old Saw Mill River Road 10591
Tarrytown, New York -----
--------------------------- (Zip Code)
(Address of principal
executive offices)
(914) 347-2220
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be files by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of May 24, 1999 was: 12,111,127
EMISPHERE TECHNOLOGIES, INC.
TABLE OF CONTENTS
April 30, 1999
Page
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statement of Stockholders' Equity 5
Condensed Statements of Cash Flows 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
July 31. April 30,
1998 1999
Assets: ------------- ------------
Current assets:
Cash and cash equivalents $21,358,308 $ 3,541,377
Marketable securities 13,469,733 13,348,117
Receivable due from Ebbisham Ltd. 7,710,056 8,474,463
Receivable due from Novartis Pharma AG 208,333
Prepaid expenses and other current assets 729,587 1,050,911
------------ ------------
Total current assets 43,267,684 26,623,201
Equipment and leasehold improvements, at cost,
net of accumulated depreciation and amortization 9,619,856 11,705,592
Deferred finance costs 742,500 33,624
Other assets 59,970 60,164
------------ ------------
Total assets $53,690,010 $38,422,581
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 724,848 $ 560,526
Accrued compensation 266,000 278,500
Accrued professional fees 203,000 161,000
Accrued interest expense 168,750 132,380
Accrued clinical trial expenses 122,034 735,000
Accrued expenses 242,449 143,332
Senior convertible notes, current portion 3,500,000 2,647,603
Investment deficiency in Ebbisham Ltd. 6,583,670 4,675,795
------------ ------------
Total current liabilities 11,810,751 9,334,136
Senior convertible notes 10,000,000
Deferred lease liability 598,111 1,974,858
------------ ------------
Total liabilities 22,408,862 11,308,994
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized, none issued and outstanding
Common stock, $.01 par value; 20,000,000 shares
authorized; 11,037,238 shares issued
(10,993,738 outstanding) at July 31,1998;
12,153,785 shares issued (12,110,285
outstanding) at April 30, 1999 110,372 121,538
Additional paid-in capital 88,481,742 98,727,408
Accumulated deficit (57,123,403) (71,581,339)
Accumulated other comprehensive income 5,250 38,793
------------ ------------
31,473,961 27,306,400
Less, common stock held in treasury, at cost;
43,500 shares (192,813) (192,813)
------------ ------------
Total stockholders' equity 31,281,148 27,113,587
------------ ------------
Total liabilities and stockholders' equity $53,690,010 $38,422,581
============ ============
See accompanying notes to financial statements. The July 31, 1998 Condensed
Balance Sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
3
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the nine months
ended April 30, ended April 30,
--------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
Contract research revenues $6,467,939 $1,523,825 $11,592,162 $ 9,554,925
------------ ------------ ------------ ------------
Costs and expenses:
Research and development 3,343,391 6,441,587 9,983,162 17,428,285
Loss in Ebbisham Ltd. 975,622 379,433 3,170,244 3,092,125
General and administrative 1,236,254 1,226,658 3,446,836 4,236,180
------------ ------------ ------------ ------------
Total operating expenses 5,555,257 8,047,678 16,600,242 24,756,590
------------ ------------ ------------ ------------
Operating (loss) income 912,682 (6,523,853) (5,008,080) (15,201,665)
------------ ------------ ------------ ------------
Other income and expenses:
Investment income 366,348 293,475 1,308,827 1,179 729
Interest expense (164,504) (562,372)
Rental income 61,791 126,372
------------ ------------ ------------ ------------
366,348 190,762 1,308,827 743,729
------------ ------------ ------------ ------------
Net (loss) income $ 1,279,030 $(6,333,091) $(3,699,253) $(14,457,936)
============ ============ ============ ============
Net (loss) income per share
-basic $ 0.12 $(0.52) $(0.35) $(1.25)
======= ======= ======= =======
Net (loss) income per share
-diluted $ 0.10 $(0.52) $(0.35) $(1.25)
======= ======= ======= =======
See accompanying notes to the financial statements
4
EMISPHERE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the six months ended April 30, 1999
Accumu-
lated
Other Common Stock
Common Stock Additional Compre- Held In Treasury Compre-
-------------------- Paid-in Accumulated hensive ------------------ hensive
Shares Amount Capital Deficit Income Shares Amount Total loss
---------- -------- ----------- ------------- ------- ------ ---------- ----------- ------------
Balance,
July 31, 1998 11,037,238 $110,372 $88,481,742 $(57,123,403) $ 5,250 43,500 $(192,813) $31,281,148
Sale of common stock
under employee stock
purchase plans and
exercise of options 116,945 1,170 796,194 797,364
Conversion of senior
convertible debt, net
of adjustments 999,602 9,996 9,449,472 9,459,468
Change in net
unrealized gain
on marketable
securities 33,543 33,543 33,543
Net loss for the nine
months ended April
30, 1999 (14,457,936) (14,457,936) (14,457,936)
---------- -------- ----------- ------------- ------- ------ ---------- ----------- ------------
Balance,
April 30, 1999 12,153,785 $121,538 $98,727,408 $(71,581,339) $38,793 43,500 $(192,813) $27,113,587 $(14,424,393)
========== ======== =========== ============= ======= ====== ========== =========== ============
See accompanying notes to financial statements
5
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
For the nine months ended
April 30,
--------------------------
1998 1999
------------ ------------
Cash flows from operating activities:
Net loss $(3,699,253) $(14,457,936)
------------ ------------
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Loss in Ebbisham Ltd. 3,170,244 3,092,125
Depreciation 342,249 1,198,350
Amortization of (premium)discount on
marketable securities 61,937
Amortization of deferred finance costs 125,109
Increase in deferred lease liability 409,635 1,376,747
Realized gain on sale of marketable
securities (14,123)
Noncash compensation in connection with
issuance of equity securities 295,000
Change in assets and liabilities:
(Increase) in receivable due from Ebbisham
and Novartis (4,660,122) (972,740)
(Increase) in prepaid expenses and other
current assets (289,984) (321,324)
Decrease(Increase) in other assets 3,000 (194)
(Decrease) in accounts payable and
accrued expenses (6,106) (33,786)
Increase in accrued interest payable 278,606
Increase in accrued clinical trial expenses 612,966
(Increase) in investment in
Ebbisham Ltd. (5,000,000)
------------ ------------
Total adjustments (750,207) 417,796
------------ ------------
Net cash (used in) operating activities (4,449,460) (14,040,140)
------------ ------------
Cash flows from investing activities:
Capital expenditures (6,202,533) (3,543,239)
Purchase of marketable securities (6,526,959) (2,352,367)
Proceeds from sales of marketable securities 8,803,855 2,445,589
------------ ------------
Net cash (used in) investing activities (3,925,637) (3,450,017)
------------ ------------
Cash flows from financing activities:
Net proceeds from exercise of warrants 4,062,500
Cash payments for redemption of senior convertible
notes payable (1,124,138)
Proceeds from exercise of options and employee
stock purchases 484,274 797,364
------------ ------------
Net cash provided by (used in) financing
activities 4,546,774 (326,774)
------------ ------------
Net (decrease) in cash and cash
equivalents (3,828,323) (17,816,931)
Cash and cash equivalents, beginning of period 22,398,967 21,358,308
------------ ------------
Cash and cash equivalents, end of period $18,570,644 $ 3,541,377
============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Capital expenditures in accounts payable $ 142,074 $ 4,337
============ ============
Conversion of debt, including accrued
interest, to equity, net of adjustments $ 9,459,468
============
See accompanying notes to financial statements
6
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements:
The interim Condensed Statements of Operations for the three months and
nine months ended April 30, 1998 and 1999 and Condensed Statements of
Cash Flows for the nine months ended April 30, 1998 and 1999, the
Condensed Statement of Stockholders? Equity for the nine months ended
April 30, 1999, the Condensed Balance Sheets as of July 31, 1998 and
April 30, 1999, of Emisphere Technologies, Inc. (the "Company"), have
been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and disclosures necessary for a presentation of the
Company's financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the
opinion of management, these financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for
a fair presentation of the Company's financial position, results of
operations and cash flows for such periods. The results of operations
for any interim period are not necessarily indicative of the results for
the full year. These financial statements should be read in conjunction
with the financial statements and notes thereto contained in the
Company`s Annual Report on Form 10-K for the fiscal year ended July 31,
1998.
The Company has limited capital resources and recurring net operating
losses. The Company is dependent upon receipt of additional capital
investment or other financing to fund its planned research activities
over the next twelve months. The Company has no firm agreements with
respect to any additional financing and there can be no assurances that
the Company would be able to obtain adequate funds on acceptable terms.
In the event the Company is unable to raise adequate funds, operations
would need to be scaled back.
2. Elan-Emisphere Venture
During October 1996, Ebbisham Limited, the equally owned joint venture
formed by the Company and Elan Corporation plc ("Ebbisham"), commenced
operations. The Company accounts for its investment in Ebbisham in
accordance with the equity method of accounting. Since Ebbisham's
inception (September 1996), the Company has contributed capital to
Ebbisham of approximately $5,010,000.
Contract revenue from Ebbisham, with respect to services provided by
the Company to Ebbisham, is recognized as the related services are
rendered. Such revenue for the three and nine months ended April
30, 1999 totaled approximately $503,000 and $5,733,000, respectively, as
compared to $1,786,000 and $4,660,000, respectively, for the three and
nine months ended April 30, 1998.
Selected financial data of Ebbisham as of April 30, 1999 and for the
three and nine months ended April 30, 1999 and 1998 is as follows:
Balance Sheet Data
April 30, 1999
----------------
Cash $ 4,217,000
Accounts payable 9,069,000
Subordinated debt 14,500,000
Stockholders' deficit (19,352,000)
Statement of Operations Data
Three Months Ended Nine Months Ended
-------------------------- --------------------------
April 30, April 30, April 30, April 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
Total Revenue $ 8,000 $ 3,000 $ 24,000 $106,000
Total Expenses 1,959,000 762,000 6,364,000 6,290,000
------------ ------------ ------------ ------------
Net Loss $(1,951,000) $ (759,000) $(6,340,000) $(6,184,000)
============ ============ ============ ============
7
The Company and Elan Corp. are currently in the process of attempting to
resolve strategic differences that have arisen over their collaborations
to develop and market oral heparin. Depending on the outcome of these
discussions, the Company's expenditures to fund clinical trials of oral
heparin may be significantly greater than they would be if such trials
were conducted under the existing arrangement. The Company may also
need to find a marketing partner to proceed with the commercialization
of oral heparin.
3. Net Loss Per Share
The Company's basic net (loss)income per share amounts have been computed
by dividing net (loss) income by the weighted average number of Common
Shares outstanding. Diluted net (loss) income per share includes, when
dilutive, the number of shares issuable upon exercises of outstanding
options and warrants using the treasury stock method. The calculations
of basic and diluted net (loss) income per share are as follows:
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Three months ended April
30, 1998-basic and diluted $ 1,279,030 10,721,114 $ 0.12
=========
Effect diluted securities:
Options and warrants 1,748,919
------------- ----------
Diluted per share amounts $ 1,279,030 12,470,033 $ 0.10
============= ========== =========
Three months ended April
30, 1999-basic and diluted $ (6,333,091) 12,091,717 $ (0.52)
============= ========== =========
Nine months ended April 30,
1998-basic and diluted $( 3,699,253) 10,708,236 $ (0.35)
============= ========== =========
Nine months ended April 30,
1999-basic and diluted $(14,457,936) 11,522,421 $ (1.25)
============= ========== =========
Options which have been excluded from the diluted per share amount
because their effect would have been antidilutive, include the
following:
Three months ended April 30, Nine months ended April 30,
----------------------------------------- -----------------------------------------
1998 1999 1998 1999
------------------- ------------------- ------------------- -------------------
Wtd. Wtd. Wtd. Wtd.
Avg. Avg. Avg. Avg.
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
--------- -------- --------- -------- --------- -------- --------- --------
Options with exercise
prices below the average
fair market value of the
Company's common stock for
the respective period 2,880,019 $ 8.66 --- -- 2,690,716 $ 8.46 4,064,419 $10.46
========= ====== ======= ====== ========= ====== ========= ======
Options with exercise
prices above the average
fair market value of the
Company's common stock for
the respective period 1,564,581 $13.64 253,422 $19.63 1,753,884 $13.42 97,650 $21.44
========= ====== ======= ====== ========== ====== ========= ======
8
4. Comprehensive Income
Comprehensive loss of the Company includes net loss adjusted for the
change in net unrealized gain or loss on marketable securities. The net
effect of income taxes on comprehensive loss is immaterial. For the
nine months ended April 30, 1999 and 1998, the components of
comprehensive loss were:
1998 1999
--------------- ----------------
Net loss $ (3,699,253) $ (14,457,936)
Change in net unrealized gain on
marketable securities (20,308) 33,543
--------------- ----------------
Total comprehensive loss $ (3,719,561) $ (14,424,393)
=============== ================
5. Notes Payable
As of July 31, 1998, the Company had outstanding $13,500,000 of its 5%
Senior Convertible Notes, due May 1, 2001 (the "Notes"). During the
quarter ended April 30, 1999, the Company repaid $1,124,138 of the Notes
and paid $158,656 of interest to the date of repayment. During the
quarter ended January 31, 1999, holders of the Notes converted principal
and accrued interest in the amounts of $9,728,258 and $314,975,
respectively, into 999,602 shares of the Company's Common Stock. Of the
$810,000 incurred in connection with the issuance of the Notes and
classified as deferred financing costs, $125,109 was amortized to
interest expense during the nine months ended April 30, 1999 and
$583,767 was recorded as a reduction to additional paid-in capital upon
conversion of the Notes.
6. Reclassifications
Certain amounts at July 31, 1998 have been reclassified to conform to
the presentation at April 30, 1999.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and elsewhere in this report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: uncertainties related to future
test results and viability of the Company's product candidates, which are in
the early stages of development; the need to obtain regulatory approval for the
Company's product candidates; the Company's dependence on partnerships with
pharmaceutical companies to develop, manufacture and commercialize products
using the Company's drug delivery technologies; the Company's dependence on the
success of its joint venture with Elan Corporation plc ("Elan") (the "Elan
Joint Venture" or "Ebbisham Ltd.") for the development and commercialization of
an oral heparin and low molecular weight heparin product and the resolution of
strategic differences that have arisen over the collaboration between the
Company and Elan; the Company's dependence on the success of its strategic
alliance with Eli Lilly and Company ("Lilly") (The "Lilly Strategic Alliance")
for the development and commercialization of certain of Lilly's therapeutic
proteins; and its research collaboration with Novartis Pharma AG ("Novartis")
to investigate Emisphere's technology for oral delivery of two selected
Novartis compounds (the "Novartis Collaboration"); the risk of technological
obsolescence and risks associated with the Company's highly competitive
industry; the Company's dependence on others to manufacture the Company's
chemical compounds; the risk of product liability and policy limits of product
liability insurance; potential liability for human clinical trials; the
Company's dependence on key personnel; the quality, judgment and strategic
decisions of management and other personnel; uncertain availability of
third-party reimbursement for commercial medical products; and general
business and economic conditions; and other factors referenced in the Company's
report on Form 10-K for the fiscal year ended July 31, 1998.
General
Emisphere is a drug delivery company focused on the discovery and application
of proprietary synthetic chemical compounds that enable the oral delivery of
macromolecules and other compounds that are not currently deliverable by oral
means. Since its inception in 1986, the Company has devoted substantially all
of its efforts and resources to research and development conducted on its own
behalf and through collaborations with corporate partners and academic research
institutions. The Company has had no product sales to date. The major sources
of the Company's working capital have been proceeds from its initial public
offering in 1989, a second public offering in 1993, a third public offering in
1997, private equity financing, issuance to an affiliate of Elan Corporation
plc of stock and warrants in 1995 and subsequent exercise of the warrants in
April 1998, reimbursement of expenses and other payments from corporate
partners, the registered sale of one million shares of common stock to two
institutional investors in 1996, the issuance on May 1, 1998 of three year,
$13,500,000 aggregate principal, 5% senior convertible notes, and income earned
on the investment of available funds. The Company's operations are not
significantly affected by inflation or seasonality.
Results of Operations
The Company has since its inception generated significant losses from
operations. The Company does not expect to achieve profitability in the
foreseeable future. Profitability will ultimately depend on the Company's
ability to develop its lead products, in conjunction with its strategic
partners and other collaborators. There can be no assurance that the
development will be completed or if completed, any regulatory agency will
approve the final product. Even if final products are developed and approved,
there is no assurance that sales will be sufficient to achieve profitability.
If development of such products is not achieved or approval not granted, the
Company's prospects will be materially affected.
11
The ability of the Company to reduce its operating losses in the near term will
be dependent upon, among other things, its ability to attract new
pharmaceutical and other companies who are willing to provide funding to the
Company for a portion of the Company's research and development with respect to
specific projects. While the Company is constantly engaged in discussions with
pharmaceutical and other companies, there can be no assurance that the Company
will enter into any additional agreements or that the agreements will provide
research and development revenues to the Company.
Three Months Ended April 30, 1999 vs. Three Months Ended April 30, 1998:
For the three months ended April 30, 1999, the Company recognized $1,524,000
of contract research revenue compared to $6,468,000 for the three months
ended April 30, 1998. The majority of contract research revenue for the
three months ended April 30, 1999 consisted of research funding from Novartis,
recognition of a final payment from the research funding agreement with Lilly,
which expired in February 1999, and revenue from Ebbisham Ltd. of $503,000.
For the three months ended April 30, 1998 , contract research revenue consisted
of revenues from Ebbisham Ltd. of $1,786,000 and payments from Lilly and
Novartis.
Total operating expenses for the fiscal quarter ended April 30, 1999, increased
by $2,492,000, or 45%, as compared to the fiscal quarter ended April 30, 1998.
The details of this increase are as follows:
Research and development costs increased by approximately $3,098,000, or 93%,
in the fiscal quarter ended April 30, 1999, as compared to the fiscal quarter
ended April 30, 1998. This increase is mainly attributable to an increase in
funding of ongoing clinical studies with heparin. The Company also contracts
with consultants and universities to conduct studies to help advance the
Company's scientific research efforts and perform services related to the
manufacturing of the Company's carriers. In addition, the Company experienced
an increase in personnel and laboratory supply costs in connection with the
collaborations with Novartis, Lilly and ongoing clinical trials work for
heparin. The Company also experienced an increase in rent expense in
connection with payments for a new lease for laboratory space. The Company
believes that this level of research and development spending will continue for
the foreseeable future and may increase if operations are expanded.
The loss in Ebbisham Ltd., decreased by approximately $596,000, or 61%, in the
fiscal quarter ended April 30, 1999, as compared to the fiscal quarter ended
April 30, 1998. This decrease is attributable to the timing of costs
associated with ongoing clinical development of heparin.
General and administrative expenses decreased by approximately $10,000, or 1%,
in the fiscal quarter ended April 30, 1999, as compared to the fiscal quarter
ended April 30, 1998. This decrease is primarily the result of costs
associated with an information technology project the Company started in the
prior year. This project is nearly completed and the Company believes the
majority of costs associated with the project have been incurred. This
decrease was partially offset by an increase in rent and operating expenses in
connection with a new lease for office space and personnel and related expenses
associated with an increase in administrative staff positions to support the
increased research and development activities.
As a result of these factors, the Company's operating loss for the quarter
ended April 30, 1999 increased by $7,437,000, as compared to the operating
profit for the fiscal quarter ended April 30, 1998. The Company does not
expect to generate an operating profit, and may possibly generate larger losses
in the foreseeable future.
The Company's other income in the fiscal quarter ended April 30, 1999 decreased
by approximately $176,000, or 48%, as compared to the fiscal quarter ended
April 30, 1998. The decrease is primarily the result of interest expense which
the Company accrued on outstanding, 5% Senior Convertible Notes due May 1, 2001
and amortization of deferred financing costs incurred in obtaining the notes.
Based on the above factors, the Company's net loss for the third quarter of
fiscal 1999 totaled $6,333,000 as compared to a net income of $1,279,000 for
the 1998 fiscal quarter.
12
Nine Months Ended April 30, 1999 vs. Nine Months Ended April 30, 1998:
For the nine months ended April 30, 1999, the Company recognized $9,555,000 of
contract research revenue compared to $11,592,000 for the nine months ended
April 30, 1998. Research and development revenue for the nine months ending
April 30, 1999 consisted of the recognition of revenues from Ebbisham, Ltd. of
approximately $5,733,000 and research funding payments from Lilly, Novartis and
a pharmaceutical company for which the Company performed a feasibility study.
For the nine months ended April 30, 1998, contract research revenue consisted
of revenues from Ebbisham, Ltd. of $4,660,000 and payments from Lilly and
Novartis under their respective research collaboration agreements.
Total operating expenses for the nine-month period ended April 30, 1999,
increased by approximately $8,156,000, or 49%, as compared to the nine month
period ended April 30, 1998. The details of this increase are as follows:
Research and development costs increased by approximately $7,445,000, or 75%,
for the nine months ended April 30, 1999, as compared to the nine months ended
April 30, 1998. This increase is mainly attributable to an increase in funding
of ongoing clinical studies with heparin. The Company also contracts with
consultants and universities to conduct studies to help advance the Company's
scientific research efforts and perform services related to the manufacturing
of the Company's carriers. In addition, the Company also experienced an
increase in personnel and laboratory supply costs in connection with the
collaborations with Novartis, Lilly and ongoing clinical trials work for
heparin. The Company also experienced an increase in rent expense in
connection with payments for a new lease for laboratory space. The Company
believes that this level of research and development spending will continue for
the foreseeable future and may increase if operations are expanded.
The loss in Ebbisham Ltd., decreased by approximately $78,000 or 2%, in the
nine months ended April 30, 1999, as compared to the nine months ended April
30, 1998. This decrease is attributable to the timing of costs associated with
ongoing clinical development of heparin.
General and administrative expenses increased by approximately $789,000, or
23%, for the nine months ended April 30, 1999, as compared to the nine months
ended April 30, 1998. This increase is primarily the result of costs
associated with an information technology project. The Company also
experienced an increase in rent expense in connection with payments for a new
lease for offices and an increase in personnel and related expenses associated
with an increase in administrative staff positions. This was partially offset
by a decrease in legal and professional fees paid.
The Company's other income in the nine months ended April 30, 1999 decreased by
approximately $565,000, or 43%, as compared to the nine months ended April 30,
1998. The decrease is primarily the result of interest expense which the
Company accrued on outstanding, 5% Senior Convertible Notes due May 1, 2001 and
amortization of deferred financing costs incurred in obtaining the notes.
Based on the above factors, the Company's net loss for the third quarter of
fiscal 1999 totaled $14,458,000, as compared to the net loss of $3,699,000
for the nine months ended April 30, 1998.
13
Liquidity and Capital Resources
As of April 30, 1999, the Company had working capital of approximately
$17,289,000 as compared with approximately $31,457,000 at July 31, 1998. Cash
and cash equivalents and marketable securities were approximately $16,889,000
as of April 30, 1999, as compared to approximately $34,828,000 at July 31,
1998. The decrease in the Company's cash and cash equivalents and marketable
securities was primarily due to cash used to fund operations in the first nine
months of fiscal 1999 and repayment of senior notes. This was partially offset
by the exercise of options.
The Company expects to continue to incur substantial research and development
expenses associated with the development of the Company's oral drug delivery
system. As a result of the ongoing research and development efforts of the
Company, management believes that the Company will continue to incur operating
losses and that, potentially, such losses could increase. The Company expects
to need substantial resources to continue its research and development efforts.
The Company expects the research funding received from Novartis to approximate
the costs to be incurred by the Company in connection with the development of
each of the Company's projects with Novartis. The Company's research funding
agreement with Lilly expired in February 1999. Lilly's development agreement
with Emisphere remains in effect and, accordingly, Emisphere may receive
predetermined payments in the event that milestones are achieved. In August
1998, the Company loaned Ebbisham Ltd. $5,000,000 to cover past costs incurred
by Ebbisham Ltd. The Company and Elan Corp. are currently in the process of
attempting to resolve strategic differences that have arisen over their
collaborations to develop and market oral heparin. Depending on the outcome of
these discussions, the Company's expenditures to fund clinical trials of oral
heparin may be significantly greater than they would be if such trials were
conducted under the existing arrangement. The Company may also need to find
a marketing partner to proceed with the commercialization of oral heparin.
Under present operating assumptions, the Company expects that cash, cash
equivalents and marketable securities will be adequate to meet its liquidity
and capital requirements through the second quarter of fiscal 2000.
Thereafter, the Company would need to seek additional funds, primarily in the
public and private equity markets and, to the extent necessary and available,
through debt financing. The Company has no firm agreements with respect to any
additional financing and there can be no assurance that the Company would be
able to obtain adequate funds on acceptable terms. If adequate funds were not
available, the Company would be required to delay, scale back, or eliminate one
or more of its research and development programs, or obtain funds, if
available, through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies,
product candidates, or products that the Company would not otherwise
relinquish. The Company does not maintain any credit lines with financial
institutions. The Company had previously estimated that its cash, cash
equivalents and marketable securities would be adequate to meet its liquidity
and capital requirements until as late as the end of fiscal 2000. The new
estimate reflects the Company's expected additional expenditures to fund
clinical trials of oral heparin as well as increased head count.
Year 2000 Compliance
The "Year 2000" problem relates to many currently installed computers,
software, and other equipment that rely on embedded technology (collectively,
"Business Systems"). These Business systems are not capable of distinguishing
21st century dates for 20th century dates. As a result, in less than one year,
Business systems used by many companies, in a very wide variety of
applications, will experience operating difficulties unless they are modified,
upgraded, or replaced to adequately process information involving, related to
or dependent upon the century change. If a Business system used by the Company
or a third party dealing with the Company fails because of the inability of the
Business system to properly read a 21st century date, the results could have a
material adverse effect on the Company.
14
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 Business systems failures and has established a
team to address Year 2000 risk. The team has reviewed the Company's internal
infrastructure and believes that it has identified substantially all of the
major Business systems used in connection with its internal operations. The
Company has completed the process of identifying and correcting the major
Business systems that may need to be modified, upgraded, or replaced.
Costs incurred to date to correct Year 2000 problems have been immaterial.
The Company estimates the total cost to complete any required modifications,
upgrades, or replacements of affected Business systems will not have a
material impact on the Company's business or results of operations. This
estimate is being monitored and will be revised, if necessary, as
additional information becomes available.
The Company also recognizes the risk that suppliers of products, services, and
collaborators with whom the Company transacts business on a worldwide basis may
not comply with Year 2000 requirements. The Company has initiated formal
communications with significant suppliers and collaborators to determine the
extent to which the Company is vulnerable if these third parties fail to
remediate their own Year 2000 issues. The review is ongoing and the Company is
unable to determine, at this time, the probability that any material supplier
or collaborator will not be able to correct any Year 2000 problem in a timely
manner. In the event any such third parties cannot provide the Company with
products, services, or continue the collaborations with the Company, the
Company's results of operations could be materially adversely affected.
Based on the above, the Company has yet to develop a comprehensive contingency
plan with respect to the Year 2000 problem. The Company will continue to
monitor its own Business systems and, to the extent possible, evaluate the
Business systems of its third party suppliers and collaborators to ensure
progress on this critical matter. However, if the Company identifies
significant risk related to the Year 2000 compliance or progress deviates from
anticipated time lines, the Company will develop contingency plans as deemed
necessary at that time.
THE DISCUSSION OF THE COMPANY'S EFFORTS, ESTIMATES, AND CONCLUSIONS HEREIN
CONTAIN FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES
OF FUTURE EVENTS. THE COMPANY'S ABILITY TO ACHIEVE YEAR 2000 COMPLIANCE AND THE
LEVEL OF INCREMENTAL COSTS ASSOCIATED THEREWITH, COULD BE ADVERSELY IMPACTED
BY, AMONG OTHER THINGS, THE AVAILABILITY AND COST OF MODIFICATIONS, OUR ABILITY
TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 PROBLEM, AND UNANTICIPATED
PROBLEMS IDENTIFIED IN THE ONGOING COMPLIANCE REVIEW.
15
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports
During the fiscal quarter ended April 30, 1999, the Company filed no
Current Reports on Form 8-K.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Emisphere Technologies, Inc.
by /s/Joseph D. Poveromo
----------------------------
Joseph D. Poveromo
Controller and Chief Accounting Officer
(Principal Accounting Officer)
by /s/Charles H. Abdalian, Jr.
----------------------------
Charles H. Abdalian, Jr.
Chief Financial Officer
(Principal Financial Officer)