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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
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
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EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
765 Old Saw Mill River Road
Tarrytown, New York 10591
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(Address of principal executive offices) (Zip Code)
(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 filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of May 3, 2002 was 17,860,178.
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EMISPHERE TECHNOLOGIES, INC.
Index
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001........................................ 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001......................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote for Security Holders......... 10
Item 5. Other Information............................................ 10
Item 6. Exhibits and Reports on Form 8-K............................. 11
SIGNATURES........................................................... 12
All other schedules and compliance information called for by the
instructions to Form 10-Q have been omitted because the required information is
not applicable or not present in amounts sufficient to require submission.
2
Item 1. FINANCIAL STATEMENTS
EMISPHERE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(in thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
Assets:
Current assets:
Cash and cash equivalents..................................................... $ 53,026 $ 42,853
Investments................................................................... 34,334 31,016
Receivables and other current assets.......................................... 4,299 4,621
--------- ---------
Total current assets...................................................... 91,659 78,490
Equipment and leasehold improvements, net........................................ 31,245 31,089
Purchased technology, net........................................................ 6,895 7,035
Investments...................................................................... 31,927 65,409
Other assets..................................................................... 60 60
--------- ---------
Total assets.............................................................. $ 161,786 $ 182,083
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued expenses......................................... $ 13,858 $ 13,581
Deferred revenue.............................................................. -- 8
--------- ---------
Total current liabilities................................................. 13,858 13,589
Note payable..................................................................... 29,789 28,712
Deferred lease liability......................................................... 2,086 2,140
--------- ---------
Total liabilities......................................................... 45,733 44,441
--------- ---------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued and
outstanding................................................................. -- --
Common stock, $.01 par value; authorized 40,000,000 shares; issued 18,073,000
shares (17,829,000 outstanding) as of March 31, 2002, and issued 18,041,000
shares (17,797,000 outstanding) as of December 31, 2001..................... 181 180
Additional paid-in capital....................................................... 320,370 319,916
Note receivable from officer and director........................................ (804) (804)
Accumulated deficit.............................................................. (200,222) (178,822)
Accumulated other comprehensive income........................................... 315 959
--------- ---------
119,840 141,429
Less, common stock held in treasury, at cost; 244,000 shares..................... (3,787) (3,787)
--------- ---------
Total stockholders' equity.................................................... 116,053 137,642
--------- ---------
Total liabilities and stockholders' equity.................................... $ 161,786 $ 182,083
========= =========
The accompanying notes are an integral part of the financial statements
3
EMISPHERE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2002 and 2001
(in thousands, except share and per share data)
(Unaudited)
For the Three Months Ended
March 31,
-------------------------
2002 2001
----------- -----------
Contract research revenues.........................
$ 729 $ 1,559
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Costs and expenses:
Research and development........................ 17,631 9,393
General and administrative expenses............. 3,203 1,926
Depreciation and amortization................... 1,416 754
----------- -----------
22,250 12,073
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Operating loss........................... (21,521) (10,514)
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Investment income and expense:
Investment income............................... 1,201 3,177
Interest expense and other...................... (1,080) (928)
----------- -----------
121 2,249
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Net loss........................................... $ (21,400) $ (8,265)
=========== ===========
Net loss per share, basic and diluted.............. $ (1.20) $ (0.47)
=========== ===========
Weighted average shares outstanding, basic and
diluted.......................................... 17,833,000 17,692,000
=========== ===========
The accompanying notes are an integral part of the financial statements
4
EMISPHERE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2002 and 2001
(in thousands)
(Unaudited)
For the Three Months
Ended March 31,
-------------------
2002 2001
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Cash flows from operating activities:
Net loss............................................ $(21,400) $ (8,265)
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Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................... 1,275 614
Amortization of purchased technology............ 141 141
(Amortization of discount) premium
on investments................................ (18) 265
Non-cash interest expense....................... 1,077 928
Net realized gain on sale of
investments................................... (377) --
Changes in assets and liabilities:
Decrease in deferred lease liability............ (54) (14)
Decrease in deferred revenue.................... (8) (287)
Increase (decrease) in receivables
and other current assets...................... 322 (185)
Increase in accounts payable and
accrued expenses.............................. 278 1,974
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Total adjustments............................ 2,636 3,436
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Net cash used in operating
activities............................. (18,764) (4,829)
Cash flows from investing activities:
Proceeds from maturity of investments............... 104,906 63,524
Purchases of investments............................ (74,992) (48,419)
Capital expenditures................................ (1,431) (4,837)
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Net cash provided by investing
activities.................................... 28,483 10,268
Cash flows from financing activities:
Proceeds from exercise of options................... 454 772
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Net cash provided by financing
activities.................................... 454 772
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Net increase in cash and cash
equivalents................................... 10,173 6,211
Cash and cash equivalents, beginning of
period............................................... 42,853 21,626
-------- --------
Cash and cash equivalents, end of period............... $ 53,026 $ 27,837
======== ========
The accompanying notes are an integral part of the financial statements
5
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The accompanying unaudited Condensed Consolidated financial statements of
Emisphere Technologies, Inc. ("Emisphere" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and 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 Emisphere's financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles.
In the opinion of management, the accompanying Condensed Consolidated
Balance Sheets as of March 31, 2002 and December 31, 2001, Condensed
Consolidated Statements of Operations for the three months ended March 31, 2002
and 2001, and the Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001, and the reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of Emisphere's financial position, results of operations, and cash flows for
such periods and as of such dates. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in
Emisphere's Annual Report on Form 10-K for the year ended December 31, 2001.
The December 31, 2001 Condensed Consolidated Balance Sheet data were derived
from audited financial statements, but do not include all disclosures required
by generally accepted accounting principles.
The results of operations for any interim period are not necessarily
indicative of the results for the full year.
On May 14, 2002 Emisphere announced the initial results from its Phase III
study with an oral heparin solution (formulation) for the prevention of Deep
Vein Thrombosis (DVT, or blood clots) in total hip replacement surgery
patients. The results did not demonstrate the superiority of oral heparin
solution, when dosed in a 30-day treatment regimen, compared to Aventis'
Lovenox(R) (enoxaparin) administered by injection in a 10-day dosing regimen in
preventing DVTs. Management has not fully assessed the impact of discontinuing
its clinical development of oral heparin solution or how the results of this
study will impact its operations in 2002, however management believes the
impact will include the potential write-down of certain tangible and intangible
assets, as well as the potential reduction in workforce which may have a
material effect on the Company's financial statements.
Emisphere does not expect to incur further substantial expenses for heparin
solution clinical development, except for close out costs associated with the
unsuccessful PROTECT(R) Trial (Phase III), the potential write-down of certain
tangible and intangible assets, and the elimination of the Protect 2 Trial, but
expects to incur a substantial increase compared to prior periods in costs
associated with an increased number of Phase I trials related to solid dosage
forms of heparin, insulin, cromolyn and other projects during the remainder of
2002. However, based on the unfavorable results of the Protect Phase III trial,
Emisphere's future spending will be redefined in the context of the performance
of the product in the PROTECT study and Emisphere's other product candidates
currently in clinical development. Emisphere expects to continue to incur
operating losses in 2002.
2. Net Loss Per Share
Net loss per share, basic and diluted, is computed using the weighted
average number of shares of the Company's common stock outstanding during the
period. For all periods presented, the Company reported net losses and,
therefore, no common stock equivalents were included in the computation of
diluted net loss per share, since such inclusion would have been anti-dilutive.
Stock options that have been excluded from diluted net loss per share amounted
to 4,802,316 and 4,978,724 for the three months ended March 31, 2002 and 2001,
respectively.
6
3. Comprehensive Loss
Emisphere's comprehensive loss was comprised of net loss adjusted for the
change in net unrealized gain or loss on investments. Comprehensive loss
amounted to approximately $22.0 million and $8.0 million for the three months
ended March 31, 2002 and 2001, respectively.
4. Ebbisham Limited
Ebbisham Limited ("Ebbisham"), was an Irish corporation owned jointly by
Elan Corporation, plc ("Elan") and the Company until July 1999, when the
Company acquired Elan's ownership interest in Ebbisham. In March 2002, Ebbisham
was liquidated.
5. Related Party Transaction
In February 2002, the Company cancelled 70,000 fully vested options that had
been granted to an outside director under the Option Plan for Outside
Directors. The director was paid a cash consideration, and the Company
recognized compensation expense, of $0.3 million equal to the intrinsic value
of the options on the date of cancellation.
6. Subsequent Event
On May 14, 2002, Emisphere announced the initial results from its Phase III
study with an oral heparin solution (formulation) for the prevention of Deep
Vein Thrombosis (DVT, or blood clots) in total hip replacement surgery
patients. The results did not demonstrate the superiority of oral heparin
solutions, when dosed in a 30-day treatment regimen, compared to Aventis'
Lovenox(R) (enoxaparin) administered by injection in a 10-day dosing regimen in
preventing DVTs. Management has not fully assessed the impact of discontinuing
its clinical development of oral heparin solution or how the results of this
study will impact its operations in 2002, however management believes the
impact will include the potential write-down of certain tangible and intangible
assets, as well as the potential reduction in workforce, which may have a
material effect on the Company's financial statements.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report that do not relate to present or historical conditions are "forward
looking statements" within the meaning of that term in Section 21E of the
Securities Exchange Act of 1934, as amended. Additional oral or written
statements may be made from time to time, and such statements may be included
in documents filed with the Securities and Exchange Commission. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results, performance or achievements
of Emisphere to be materially different from those expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, those
factors referenced in Item 5 to this quarterly report. Emisphere encourages you
to read all statements in this quarterly report in conjunction with Item 5.
General
Emisphere is a biopharmaceutical company specializing in the oral delivery
of therapeutic macromolecules and other compounds that are not currently
deliverable by oral means. Since our inception in 1986, Emisphere 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. We have no product sales to date. Our major
sources of working capital have been proceeds from various public and private
equity and debt financings, reimbursement of expenses and other payments from
corporate partners, and income earned on the investment of available funds.
Neither inflation nor seasonality significantly affects our operations.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001
Contract research revenues were $0.7 million in the first quarter of 2002.
Revenues for the quarter ended March 31, 2002 related to research and
development expense reimbursement primarily under our collaborative agreements
with Eli Lilly and Company and Cubist Pharmaceuticals. Contract research
revenues recorded in the first quarter of 2001 amounted to $1.6 million. The
decrease of $0.9 million was mainly attributable to lower recorded revenues
from Eli Lilly and Company as a result of the timing of research activities.
Costs of contract research revenues approximate such revenues and are included
in research and development expenses.
Total operating expenses were $22.3 million in the quarter ended March 31,
2002 an increase of $10.2 million, or 84%, compared to the same period last
year. The details of this increase are as follows:
Research and development costs were $17.6 million in the quarter ended March
31, 2002, an increase of $8.2 million or 88%, compared to the same period last
year. Out of the $8.2M increase, Clinical trial expenses increased by $3.7
million due to close out costs associated with the PROTECT(R) Trial, initiation
costs of Protect 2 Trial as well as increased number of Phase I trials related
to insulin, SNAC/heparin, SNAD/heparin, Cromolyn and other projects. The
balance of the $8.2 million increase was in R&D operating expenses which grew
by $4.5 million due to a 49% increase in personnel, higher costs associated
with the expanded research facilities, as well as toxicology and pharmacology
costs primarily supporting our ongoing clinical trials.
General and administrative expenses were $3.2 million in the quarter ended
March 31, 2002, an increase of $1.3 million, or 66%, compared to the same
period last year. This increase is primarily the result of additional staff
needed and associated costs to support our expanded levels of research and
development efforts.
Depreciation and amortization costs were $1.4 million in the quarter ended
March 31, 2002, an increase of $0.7 million, or 88%, compared to the same
period of 2001. This increase is mainly the result of amortization expense for
leasehold improvements related to additional laboratory and office space made
during 2001.
8
As a result of the above, our operating loss was $21.5 million in the
quarter ended March 31, 2002, an increase of $11.0 million, or 105% as compared
to $10.5 million for the quarter ended March 31, 2001.
Other income and expense decreased to approximately $0.1 million of income,
a decrease of $2.1 million or 95% compared to $2.2 million of income in the
comparative period in 2001. The change is primarily the result of a decrease in
investment income of $2.0 million, and an increase in interest expense of $0.1
million. The decrease in investment income resulted from lower cash and
investment balances, and interest rates.
Based on the above, we sustained a net loss of $21.4 million in the quarter
ended March 31, 2002 as compared to a net loss of $8.3 million in the same
period of 2001.
Liquidity and Capital Resources
As of March 31, 2002, total cash, cash equivalents and investments was
$119.3 million, a decrease of $20.0 million as compared to December 31, 2001.
Net cash used in operations was $18.8 million in the quarter ended March 31,
2002, as compared to $4.8 million in the quarter ended March 31, 2001. This
increase is primarily the result of our expanded research and development
efforts for both proprietary and partnered product candidates.
Cash provided by investing activities was $28.5 million in the quarter ended
March 31, 2002, as compared to $10.3 million of cash provided by the comparable
quarter of 2001, an increase of $18.2 million. This increase is the result of
investment maturities totaling $104.9 million offset by reinvestment of $75.0
million in securities. Capital expenditures were approximately $1.4 million in
the quarter ended March 31, 2002, as compared to $4.8 million for the same
period in 2001. The decrease in capital expenditures is due to the build-out of
additional laboratory space at our Tarrytown, New York leased facilities in the
prior year.
Cash provided by financing activities decreased by $0.3 million during the
first quarter 2002 when compared to the same period last year due to a decrease
in stock option exercise activities.
Based on the results of the PROTECT(R) Trial (Phase III), Emisphere does not
expect to continue to incur substantial expenses for heparin solution clinical
development, except for close out costs, the potential write down of certain
tangible and intangible assets, and the elimination of the Protect 2 Trial, but
expects to incur a substantial increase in costs associated with Phase I trials
related to solid dosage forms of heparin, insulin, cromolyn and other projects
during the remainder of 2002. However, based on the unfavorable results of the
Protect Phase trial, Emisphere's future spending will be redefined in the
context of the results of the trial and Emisphere's other product candidates
currently in clinical development. Emisphere expects to continue to incur
operating losses in 2002 and that the cash required to fund these losses will
increase accordingly.
We expect that cash, cash equivalents, investments and the related projected
interest income, along with committed funding from our corporate partners, will
be adequate to meet our liquidity requirements for at least the next eighteen
months. Management believes that the unsuccessful outcome of the PROTECT trial
will result in the potential write-down of certain tangible and intangible
assets, as well as a decrease in cash requirements due to lower clinical trial
and operating expenses, and a potential reduction in the workforce. This may
have a material effect on the Company's financial statements. The results may
also have an adverse effect on our potential for raising additional cash
through public stock offerings and entering into other partnerships.
9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary investment objective is to preserve principal while maximizing
yield without significantly increasing our risk. Our investments consist of
U.S. Treasuries, commercial paper and corporate notes. Our cash, cash
equivalents and investments totaled $119.3 million at March 31, 2002.
Approximately $47.3 million of these instruments had fixed interest rates, and
$72.0 million had interest rates that were variable.
Due to the conservative nature of our short-term fixed interest rate
investments, we do not believe that we have a material exposure to interest
rate risk. Our fixed interest rate long-term investments are sensitive to
changes in interest rates. Interest rate changes would result in a change in
the fair value of these investments due to differences between the market
interest rate and the rate at the date of purchase of the investment. A 100
basis point increase in the March 31, 2002 market interest rates would result
in a decrease of approximately $0.2 million in the market values of these
investments.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" (Item 2) and the notes to
Emisphere's unaudited financial statements (Item 1) as well as certain oral
statements made from time to time by representatives of the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward looking statements include (but
are not limited to) statements regarding: planned or expected studies and
trials of oral formulations that utilize Emisphere's technology; the timing of
the development and commercialization of Emisphere's products; potential
products that may be developed using Emisphere's technology; the potential
market size, advantages or therapeutic uses of Emisphere's products; and the
sufficiency of Emisphere's available capital resources to meet its funding
needs. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause Emisphere's actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These factors include, among others, the following: the success of
Emisphere's solid oral heparin product and Emisphere's ability to find a
marketing partner to help us commercialize it; prospects for Emisphere's salmon
calcitonin product candidate in development with a partner; the viability of
Emisphere's other product candidates, most of which are in the early stages of
development; the need to obtain regulatory approval for Emisphere's product
candidates; Emisphere's dependence on collaborative partners to develop and
commercialize products; Emisphere's ability to fund such efforts with or
without partners and uncertainty as to the timing and outcome commercialization
decisions made by Emisphere's collaborative partners; Emisphere's absence of
profitable operations and need for additional capital; Emisphere's dependence
on patents and proprietary rights; and other factors described in this Report
and Emisphere's Annual Report on Form 10-K for the year ending December 31,
2001 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors".
10
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Certificate of Incorporation of Emisphere, dated June 13, 1997, as amended by the Certificate
of Amendment dated February 5, 1999 (filed as Exhibit 3(i) to the Quarterly Report on Form 10-Q for
the quarterly period ended January 31, 1999, filed on March 16, 1999).
3.2 By-Laws of Emisphere, as amended December 7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 1999, filed on March 16, 1999).
(b) Reports on Form 8-K
None
11
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: May 15, 2002
EMISPHERE TECHNOLOGIES, INC.
/s/ FREDRICK D. COBB
_____________________________________
Fredrick D. Cobb
Assistant Vice President Finance
and Accounting
(Principal Financial Officer)
/s/ FRIEDRICH K. PFETSCH
_____________________________________
Friedrich K. Pfetsch
Controller and Chief Accounting
Officer
(Principal Accounting Officer)
12