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EXCEL - IDEA: XBRL DOCUMENT - EMISPHERE TECHNOLOGIES INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - EMISPHERE TECHNOLOGIES INC | b87831exv32w1.htm |
EX-31.1 - EX-31.1 - EMISPHERE TECHNOLOGIES INC | b87831exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-17758
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 13-3306985 | |
(State or jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
240 Cedar Knolls Rd, Suite 200 Cedar Knolls, NJ |
07927 | |
(Address of principal executive offices) | (Zip Code) |
(973) 532-8000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ
The number of shares of the Registrants common stock, $.01 par value, outstanding as of November
1, 2011 was 60,687,478.
EMISPHERE TECHNOLOGIES, INC.
Index
3 | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
18 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
27 | ||||||||
28 | ||||||||
EX-31.1 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
All other items called for by the instructions to Form 10-Q have been omitted because the
items are not applicable or the relevant information is not material.
2
Table of Contents
PART I
ITEM 1. FINANCIAL STATEMENTS |
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
September 30, 2011 and December 31, 2010
(in thousands, except share and per share data)
September 30, 2011 and December 31, 2010
(in thousands, except share and per share data)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,729 | $ | 5,326 | ||||
Accounts receivable, net |
35 | 14 | ||||||
Inventories |
258 | 260 | ||||||
Prepaid expenses and other current assets |
483 | 496 | ||||||
Total current assets |
5,505 | 6,096 | ||||||
Equipment and leasehold improvements, net |
51 | 82 | ||||||
Purchased technology, net |
658 | 838 | ||||||
Restricted cash |
260 | 260 | ||||||
Total assets |
$ | 6,474 | $ | 7,276 | ||||
Liabilities and Stockholders Deficit: |
||||||||
Current liabilities |
||||||||
Accounts payable and accrued expenses |
$ | 981 | $ | 2,954 | ||||
Notes payable related party, including accrued interest and net of related discount |
24,475 | | ||||||
Derivative instruments: |
||||||||
Related party |
24,981 | 17,293 | ||||||
Others |
8,839 | 5,647 | ||||||
Contract termination liability, current |
| 435 | ||||||
Restructuring accrual, current |
| 300 | ||||||
Other current liabilities |
41 | 35 | ||||||
Total current liabilities |
59,317 | 26,664 | ||||||
Notes payable related party, including accrued interest and net of related discount |
| 20,385 | ||||||
Deferred revenue |
31,578 | 31,535 | ||||||
Derivative instrument related party |
| 11,166 | ||||||
Deferred lease liability and other liabilities |
16 | 46 | ||||||
Total liabilities |
90,911 | 89,796 | ||||||
Stockholders deficit: |
||||||||
Preferred stock, $.01 par value; authorized 1,000,000 shares; none issued and outstanding |
| | ||||||
Common stock, $.01 par value; authorized 100,000,000 shares; issued 60,977,210 shares
(60,687,478 outstanding) as of September 30, 2011 and issued 52,178,834 shares
(51,889,102 outstanding) as December 31, 2010 |
610 | 522 | ||||||
Additional paid-in-capital |
404,613 | 401,853 | ||||||
Accumulated deficit |
(485,708 | ) | (480,943 | ) | ||||
Common stock held in treasury, at cost; 289,732 shares |
(3,952 | ) | (3,952 | ) | ||||
Total stockholders deficit |
(84,437 | ) | (82,520 | ) | ||||
Total liabilities and stockholders deficit |
$ | 6,474 | $ | 7,276 | ||||
The accompanying notes are an integral part of the financial statements.
3
Table of Contents
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENT OF OPERATIONS
For the three and nine months ended September 30, 2011 and 2010
(in thousands, except share and per share data)
(unaudited)
For the three and nine months ended September 30, 2011 and 2010
(in thousands, except share and per share data)
(unaudited)
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 Restated | 2011 | 2010 Restated | |||||||||||||
Net Sales |
$ | | $ | 4 | $ | | $ | 55 | ||||||||
Costs and expenses: |
||||||||||||||||
Research and development |
424 | 690 | 1,516 | 1,984 | ||||||||||||
General and administrative |
1,037 | 2,516 | 4,080 | 6,979 | ||||||||||||
Restructuring costs |
| | | 50 | ||||||||||||
Gain on disposal of fixed assets |
| | | (1 | ) | |||||||||||
Expense from settlement of lawsuit |
| 58 | | 278 | ||||||||||||
Contract termination expense |
| 542 | | 542 | ||||||||||||
Depreciation and amortization |
70 | 73 | 210 | 223 | ||||||||||||
Total costs and expenses |
1,531 | 3,879 | 5,806 | 10,055 | ||||||||||||
Operating loss |
(1,531 | ) | (3,875 | ) | (5,806 | ) | (10,000 | ) | ||||||||
Other non-operating income (expense): |
||||||||||||||||
Other income |
4 | 2 | 73 | 7 | ||||||||||||
Sale of patent |
| 500 | | 500 | ||||||||||||
Change in fair value of derivative instruments |
||||||||||||||||
Related party |
(9,700 | ) | 11,766 | 6,345 | (3,562 | ) | ||||||||||
Other |
(4,931 | ) | 2,831 | (1,270 | ) | (4,440 | ) | |||||||||
Interest expense |
||||||||||||||||
Related party |
(1,448 | ) | (1,138 | ) | (4,090 | ) | (1,997 | ) | ||||||||
Other |
| (4 | ) | (16 | ) | (386 | ) | |||||||||
Loss on extinguishment of debt |
| | | (17,014 | ) | |||||||||||
Financing fees |
| | | (1,858 | ) | |||||||||||
Total other non-operating income (expense) |
(16,075 | ) | 13,957 | 1,042 | (28,750 | ) | ||||||||||
Net income (loss) |
$ | (17,606 | ) | $ | 10,082 | $ | (4,764 | ) | $ | (38,750 | ) | |||||
Net income (loss) per share, basic |
$ | (0.29 | ) | $ | 0.21 | $ | (0.09 | ) | $ | (0.87 | ) | |||||
Net income (loss) per share, diluted |
$ | (0.29 | ) | $ | 0.20 | $ | (0.09 | ) | $ | (0.87 | ) | |||||
Weighted average shares outstanding, basic |
60,122,747 | 47,401,395 | 54,811,423 | 44,291,889 | ||||||||||||
Weighted average shares outstanding, diluted |
60,122,747 | 50,922,881 | 54,811,423 | 44,291,889 |
The accompanying notes are an integral part of the financial statements.
4
Table of Contents
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2011 and 2010
(in thousands)
(unaudited)
For the nine months ended September 30, 2011 and 2010
(in thousands)
(unaudited)
For the nine months ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (4,764 | ) | $ | (38,750 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
31 | 44 | ||||||
Amortization |
179 | 179 | ||||||
Change in fair value of derivative instruments |
(5,075 | ) | 8,003 | |||||
Non-cash interest expense |
4,091 | 21,254 | ||||||
Non-cash compensation expense |
220 | 685 | ||||||
Gain on disposal of fixed assets |
| (1 | ) | |||||
Changes in assets and liabilities excluding non-cash transactions: |
||||||||
(Increase) decrease in accounts receivable |
(21 | ) | 99 | |||||
Decrease (increase) in inventory |
2 | (24 | ) | |||||
Decrease (increase) in prepaid expenses and other current assets |
13 | (387 | ) | |||||
Increase in deferred revenue |
43 | 2,069 | ||||||
Decrease in accounts payable and accrued expenses |
(2,408 | ) | (516 | ) | ||||
Increase in other current liabilities |
6 | 415 | ||||||
Decrease in deferred lease liability |
(30 | ) | (25 | ) | ||||
Decrease in restructuring accrual |
(300 | ) | (300 | ) | ||||
Total adjustments |
(3,249 | ) | 31,495 | |||||
Net cash used in operating activities |
(8,013 | ) | (7,255 | ) | ||||
Net cash provided by investing activities proceeds from sale of fixed assets |
| 1 | ||||||
Cash flows provided by financing activities |
||||||||
Exercise of warrants |
236 | | ||||||
Proceeds from the issuance of common stock |
7,174 | 6,674 | ||||||
Exercise of options |
6 | | ||||||
Proceeds from notes payable |
| 500 | ||||||
Payment on notes payable |
| (525 | ) | |||||
Net cash provided by financing activities |
7,416 | 6,649 | ||||||
Net decrease in cash and cash equivalents |
(597 | ) | (605 | ) | ||||
Cash and cash equivalents, beginning of period |
5,326 | 3,566 | ||||||
Cash and cash equivalents, end of period |
4,729 | $ | 2,961 | |||||
Schedule of non-cash financing activities |
||||||||
Common stock issued to settle accrued Directors compensation |
$ | | $ | 11 | ||||
Exchange of debt as deferred revenue |
$ | | $ | 13,000 | ||||
Reclassification of derivative liability to equity upon exercise of warrants |
$ | 349 | $ | |
The accompanying notes are an integral part of the financial statements.
5
Table of Contents
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Nature of Operations and Liquidity
Nature of Operations. Emisphere Technologies, Inc. (Emisphere, the Company, our, us, or
we) is a biopharmaceutical company that focuses on a unique and improved delivery of therapeutic
molecules or nutritional supplements using its Eligen® Technology. These molecules are
currently available or are under development.
Our core business strategy is to develop oral forms of drugs or nutrients that are not currently
available or have poor bioavailability in oral form, by applying the Eligen® Technology
to those drugs or nutrients. Our development efforts are conducted internally or in collaboration
with corporate development partners. Typically, the drugs that we target are at an advanced stage
of development, or have already received regulatory approval, and are currently available on the
market.
Liquidity. As of September 30, 2011, we had approximately $4.7 million in cash and cash
equivalents, approximately $53.8 million in working capital deficiency, a stockholders deficit of
approximately $84.4 million and an accumulated deficit of approximately $485.7 million. Our
operating loss for the three months ended September 30, 2011 was approximately $1.5 million and
$5.8 million for the nine months ended September 30, 2011.
On June 30, 2011, we entered into a securities purchase agreement with various institutional
investors to sell an aggregate of 4,300,438 shares of our common stock and warrants to purchase a
total of 3,010,306 shares of our common stock for gross proceeds, before deducting fees and
expenses and excluding the proceeds, if any, from the exercise of the warrants, of $3,749,982 (the
2011 Private Placement). The 2011 Private Placement closed on July 6, 2011. In connection with
the 2011 Private Placement, we entered into a securities purchase agreement on the same date with
MHR Fund Management LLC to sell an aggregate of 4,300,438 shares of our common stock and warrants
to purchase a total of 3,010,306 shares of our common stock for gross proceeds, before deducting
fees and expenses and excluding the proceeds, if any, from the exercise of the warrants, of
$3,749,982 (the 2011 MHR Private Placement). Simultaneous with closing the 2011 Private
Placement, we closed the 2011 MHR Private Placement with MHR Fund Management LLC and certain of its
affiliated investment funds (collectively, MHR). In connection with the 2011 Private Placement
and the 2011 MHR Private Placement, we entered into a waiver agreement with MHR, pursuant to which
MHR waived certain anti-dilution adjustment rights under its senior secured notes and certain
warrants that would otherwise have been triggered by the 2011 Private Placement. As consideration
for such waiver, we issued to MHR warrants to purchase 795,000 shares of our common stock and
agreed to reimburse MHR for up to $25,000 of its legal fees. In both the 2011 Private Placement and
the 2011 MHR Private Placement (together, the July 2011 Financing), each unit, consisting of one
share of common stock and a warrant to purchase 0.7 shares of common stock, was sold at a purchase
price of $0.872. All of the warrants issued in the July 2011 Financing are exercisable at an
exercise price of $1.09 per share and will expire on July 6, 2016.
We anticipate that we will continue to generate significant losses from operations for the
foreseeable future, and that our business will require substantial additional investment that we
have not yet secured. As such, we anticipate that our existing cash resources will enable us to
continue operations through approximately May 2012, or earlier if unforeseen events arise that
negatively affect our liquidity. Further, we have significant future commitments and obligations.
These conditions raise substantial doubt about our ability to continue as a going concern.
Consequently, the audit opinion issued by our independent registered public accounting firm
relating to our financial statements for the year ended December 31, 2010 contained a going concern
explanatory paragraph. We are pursuing new and enhanced collaborations and exploring other funding
options, with the objective of minimizing dilution and disruption.
Our plan is to raise capital when needed and/or to pursue product partnering opportunities. We
expect to continue to spend substantial amounts on research and development, including amounts
spent on conducting clinical trials for our product candidates. Expenses will be partially offset
with income-generating license agreements, if possible. Further, we will not have sufficient
resources to develop fully any new products or technologies unless we are able to raise substantial
additional financing on acceptable terms or secure funds from new or existing partners. We cannot
assure that financing will be available when needed, or on favorable terms or at all. If additional
capital is raised through the sale of equity or convertible debt securities, the issuance of such
securities would result in dilution to our existing stockholders. Our failure to raise capital
before May 2012 will adversely affect our business, financial condition and results of operations,
and could force us to reduce or cease our operations. No adjustment has been made in the
accompanying financial statements to the carrying amount and classification of recorded assets and
liabilities should we be unable to continue operations.
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Table of Contents
2. Basis of Presentation
The condensed balance sheet at December 31, 2010 was derived from audited financial statements but
does not include all disclosures required by accounting principles generally accepted in the United
States of America. The other information in these condensed financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair presentation of the
results for the periods covered. All such adjustments are of a normal recurring nature unless
disclosed otherwise. These condensed financial statements, including notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange Commission and do not include
all of the information and disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. These condensed financial statements
should be read in conjunction with the financial statements and additional information as contained
in our Annual Report on Form 10-K for the year ended December 31, 2010.
3. Stock-Based Compensation Plans
On April 20, 2007, the stockholders of the Company approved the 2007 Stock Award and Incentive Plan
(the 2007 Plan). The 2007 Plan provides for grants of options, stock appreciation rights,
restricted stock, deferred stock, bonus stock and awards in lieu of obligations, dividend
equivalents, other stock-based awards and performance awards to executive officers and other
employees of the Company, and non-employee directors, consultants and others who provide
substantial service to us. The 2007 Plan provides for the issuance of an aggregate 3,275,334 shares
as follows: 2,500,000 new shares, 374,264 shares remaining and transferred from the Companys 2000
Stock Option Plan (the 2000 Plan) (which was then replaced by the 2007 Plan) and 401,070 shares
remaining and transferred from the Companys Stock Option Plan for Outside Directors (the
Directors Stock Plan). In addition, shares canceled, expired, forfeited, settled in cash, settled
by delivery of fewer shares than the number underlying the award, or otherwise terminated under the
2000 Plan will become available for issuance under the 2007 Plan.
As of September 30, 2011, shares available for future grants under the Plans amounted to 1,367,598.
Total compensation expense recorded during the three months ended September 30, 2011 for
share-based payment awards was $0.08 million, of which $0.01 million is included in research and
development and $0.07 million is included in general and administrative expenses in the condensed
statement of operations for the three months ended September 30, 2011. Total compensation expense
recorded during the nine months ended September 30, 2011 for share-based payment awards was $0.22
million, of which $0.04 million is included in research and development and $0.18 million is
included in general and administrative expenses in the condensed statement of operations for the
nine months ended September 30, 2011. At September 30, 2011, total unrecognized estimated
compensation expense related to non-vested stock options granted prior to that date was $0.5
million, which is expected to be recognized over a weighted-average period of approximately two
years. Ten thousand options were exercised in the nine months ended September 30, 2011 and no
options were exercised in the nine months ended September 30, 2010. No tax benefit was realized due
to a continued pattern of operating losses.
During the nine months ended September 30, 2011, the Company granted 309,000 options which included
20,000 options to Gary Riley, 30,000 options to Michael Garone and 40,000 each to Mark Rachesky,
Michael Weiser, John Harkey and Timothy Rothwell.
4. Inventories
Inventories are stated at the lower of cost or market determined by the first in, first out method.
Inventories consist principally of finished goods at September 30, 2011 and December 31, 2010.
7
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5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Prepaid corporate insurance |
$ | 29 | $ | 41 | ||||
Deposit on inventory |
420 | 420 | ||||||
Prepaid expenses and other current assets |
34 | 35 | ||||||
$ | 483 | $ | 496 | |||||
6. Fixed Assets
Equipment and leasehold improvements, net, consists of the following:
Useful Lives | September 30, | December 31, | ||||||||||
in Years | 2011 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Equipment |
3-7 | $ | 1,370 | $ | 1,370 | |||||||
Leasehold improvements |
Term of lease | 61 | 61 | |||||||||
1,431 | 1,431 | |||||||||||
Less, accumulated depreciation and amortization |
1,380 | 1,349 | ||||||||||
Equipment and leasehold improvements, net |
$ | 51 | $ | 82 | ||||||||
7. Purchased Technology
Purchased technology represents the value assigned to patents and the rights to utilize, sell or
license certain technology in conjunction with our proprietary carrier technology. These assets are
utilized in various research and development projects. Purchased technology is amortized over a
period of 15 years, which represents the average life of the patents.
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Gross carrying amount |
$ | 4,533 | $ | 4,533 | ||||
Less, accumulated amortization |
3,875 | 3,695 | ||||||
Net book value |
$ | 658 | $ | 838 | ||||
Amortization expense for the purchased technology is approximately $60 thousand per quarter in 2011
and in the remaining years through 2014.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Accounts payable and other accrued expenses |
$ | 383 | $ | 2,201 | ||||
Accrued bonus |
| 300 | ||||||
Accrued legal, professional fees and other |
512 | 375 | ||||||
Accrued vacation |
47 | 69 | ||||||
Clinical trial expenses and contract research |
39 | 9 | ||||||
$ | 981 | $ | 2,954 | |||||
9. Notes Payable
Notes payable consist of the following:
8
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September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
MHR Convertible Notes |
$ | 23,914 | $ | 19,864 | ||||
MHR Promissory Notes |
561 | 521 | ||||||
$ | 24,475 | $ | 20,385 | |||||
MHR Convertible Notes. On September 26, 2005, we received net proceeds of approximately $12.9
million under a $15 million secured loan agreement (the Loan Agreement) executed with MHR Fund
Management LLC (together with its affiliates, MHR). Under the Loan Agreement, MHR requested, and
on May 16, 2006, we effected, the exchange of the loan from MHR for senior secured convertible
notes (the MHR Convertible Notes) with substantially the same terms as the Loan Agreement, except
that the MHR Convertible Notes are convertible, at the sole discretion of MHR, into shares of our
common stock at a price per share of $3.78. As of September 30, 2011, the MHR Convertible Notes
were convertible into 7,246,873 shares of our common stock. The MHR Convertible Notes are due on
September 26, 2012, bear interest at 11% and are collateralized by a first priority lien in favor
of MHR on substantially all of our assets. Interest is payable in the form of additional MHR
Convertible Notes rather than in cash. Effective September 27, 2011, the MHR Convertible Notes were
reclassified as a short term liability in accordance with their September 26, 2012 maturity date.
In connection with the Loan Agreement, we amended MHRs previously existing warrants to purchase
387,374 shares of common stock (MHR 2005 Warrants) to provide additional anti-dilution
protection. We also granted MHR the option (MHR Option) to purchase warrants for up to 617,211
shares of our common stock. The MHR Option was exercised during April 2006 whereby MHR acquired
617,211 warrants (MHR 2006 Warrants) to acquire an equal number of shares of common stock. The
exercise price for the MHR Option was $0.01 per warrant for the first 67,084 warrants and $1.00 per
warrant for each additional warrant. See Note 10 for a further discussion of the liability related
to these warrants.
Total issuance costs associated with the Loan Agreement were $2.1 million, of which $1.9 million
were allocated to the MHR Convertible Notes, and $0.2 million were allocated to the related
derivative instruments. Of the $1.9 million allocated to the MHR Convertible Notes, $1.4 million
represents reimbursement of MHRs legal fees and $0.5 million represents our legal and other
transaction costs. The $1.4 million paid on behalf of the lender has been recorded as a reduction
of the face value of the note, while the $0.5 million of our costs has been recorded as deferred
financing costs.
The MHR Convertible Notes provide MHR with the right to require us to redeem the notes in the event
of a change in control. The change in control redemption feature has been determined to be an
embedded derivative instrument which must be separated from the host contract. For the year ended
December 31, 2006, the fair value of the change in control redemption feature was estimated using a
combination of a put option model for the penalties and the Black-Scholes model for the conversion
option that would exist under the MHR Convertible Notes. The estimate resulted in a value that was
de minimis and, therefore, no separate liability was recorded. Changes in the assumptions used to
estimate the fair value of this derivative instrument, in particular the probability that a change
in control will occur, could result in a material change to the fair value of the instrument. For
the nine months ended September 30, 2011 and for the years ended December 31, 2010, 2009 and 2008,
management determined the probability of exercise of the right due to change in control to be
remote. The fair value of the change in control redemption feature is de minimis.
In connection with the MHR Convertible Notes financing, the Company agreed to appoint a
representative of MHR (MHR Nominee) and another person (the Mutual Director) to its Board of
Directors. Further, the Company agreed to amend, and in January 2006 did amend, its certificate of
incorporation to provide for continuity of the MHR Nominee and the Mutual Nominee on the Board, as
described therein, so long as MHR holds at least 2% of the outstanding common stock of the Company.
The MHR Convertible Notes provide for various events of default including the failure to perfect
any of the liens in favor of MHR, failure to observe any covenant or agreement, failure to maintain
the listing and trading of our common stock, sale of a substantial portion of our assets, merger
with another entity without the prior consent of MHR, or any governmental action that renders us
unable to honor or perform our obligations under the Loan Agreement or results in a material
adverse effect on our operations. If an event of default occurs, the MHR Convertible Notes provide
for the immediate repayment and certain additional amounts as set forth in the MHR Convertible
Notes. We currently have a waiver from MHR for failure to perfect liens on certain intellectual
property rights through September 26, 2012.
Effective January 1, 2009, the Company adopted the provisions of the Financial Accounting Standards
Board (FASB) Accounting Codification Topic 815-40-15-5, Evaluating Whether an Instrument
Involving a Contingency is Considered Indexed to an Entitys Own Stock (FASB ASC 815-40-15-5).
Under FASB ASC 815-40-15-5, the conversion feature embedded in the MHR Convertible
9
Table of Contents
Notes have been bifurcated from the host contract and accounted for separately as a derivative. The
bifurcation of the embedded derivative increased the amount of debt discount thereby reducing the
book value of the MHR Convertible Notes and increasing prospectively the amount of interest expense
to be recognized over the life of the MHR Convertible Notes using the effective yield method.
As consideration for its consent and limitation of rights in connection with the Master Agreement
and Amendment by and between the Company and Novartis dated as of June 4, 2010 (the Novartis
Agreement), the Company granted MHR warrants to purchase 865,000 shares of its common stock (the
June 2010 MHR Warrants) under the MHR Letter Agreement (as defined below). The Company estimated
the fair value of the June 2010 MHR Warrants on the date of grant using Black-Scholes models to be
$1.9 million. The Company determined that the resulting modification of the MHR Convertible Notes
was substantial in accordance with FASB ASC 470-50, Modifications and Extinguishments. As such,
the modification of the MHR Convertible Notes was accounted for as an extinguishment and
restructuring of the debt, and the warrants issued to MHR were expensed as a financing fee. The
fair value of the MHR Convertible Notes as of June 4, 2010 was estimated by calculating the present
value of future cash flows discounted at a market rate of return for comparable debt instruments to
be $17.2 million. The Company recognized a loss on extinguishment of debt in the amount of $17.0
million which represented the difference between the net carrying amount of the MHR Convertible
Notes and their fair value as of the date of the Novartis Agreement and the MHR Letter Agreement.
The book value of the MHR Convertible Notes is comprised of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Face Value of the notes (including accrued interest)
|
$ | 27,393 | $ | 25,233 | ||||
Discount (related to the warrant purchase option and embedded conversion feature)
|
(3,479 | ) | (5,369 | ) | ||||
$ | 23,914 | $ | 19,864 | |||||
2010 MHR Promissory Notes. In connection with the Novartis Agreement, the Company and MHR entered
into a letter agreement (the MHR Letter Agreement), and MHR, the Company and Novartis entered
into a non-disturbance agreement (the Non-Disturbance Agreement), which was a condition to
Novartis execution of the Novartis Agreement. Pursuant to the MHR Letter Agreement, MHR agreed to
limit certain rights and courses of action that it would have available to it as a secured party
under the Senior Secured Term Loan Agreement and Pledge and Security Agreement (Loan and Security
Agreement) between MHR and the Company. MHR also consented to the Novartis Agreement, which
consent was required under the Loan and Security Agreement, and MHR also agreed to enter into a
comparable agreement at some point in the future in connection with another potential Company
transaction (the Future Transaction Agreement). The MHR Letter Agreement also provided for the
Company to reimburse MHR for its legal fees incurred in connection with the Non-Disturbance
Agreement for up to $500,000 and up to $100,000 in legal expenses incurred by MHR in connection
with the Future Transaction Agreement. The reimbursements were to be paid in the form of
non-interest bearing promissory notes issued on the effective date of the MHR Letter Agreement. As
such, the Company issued to MHR non-interest promissory notes for $500,000 and $100,000 on June 8,
2010 (collectively, the 2010 MHR Promissory Notes). The Company received documentation that MHR
expended more than the $500,000 of legal fees in connection with the Non-Disturbance Agreement and
$100,000 of legal fees in connection with the Future Transaction Agreement, and, consequently,
recorded the issuance of the 2010 MHR Promissory Notes and a corresponding charge to financing
expenses. The 2010 MHR Promissory Notes are due June 4, 2012. The Company imputed interest at its
incremental borrowing rate of 10%, and discounted the face amounts of the 2010 MHR Promissory
Notes. As of September 30, 2011, the unamortized discount of the $500,000 and $100,000 promissory
notes are $33,000 and $7,000, respectively.
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10. Derivative Instruments
Derivative instruments consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
MHR Convertible Note |
$ | 5,905 | 11,166 | |||||
MHR 2006 Warrants |
| 646 | ||||||
August 2007 Warrants |
132 | 481 | ||||||
August 2009 Warrants |
6,094 | 7,807 | ||||||
June 2010 MHR Warrants |
1,092 | 1,495 | ||||||
August 2010 Warrants |
7,952 | 10,550 | ||||||
August 2010 MHR Waiver Warrants |
1,533 | 1,961 | ||||||
July 2011 Warrants |
9,816 | | ||||||
July 2011 MHR Waiver Warrants |
1,296 | | ||||||
$ | 33,820 | $ | 34,106 | |||||
The fair value of the warrants that have exercise price reset features is estimated using an
adjusted Black-Scholes model. The Company computes valuations each quarter, using Black-Scholes
model calculations for such warrants to account for the various possibilities that could occur due
to various circumstances that could arise in connection with the contractual terms of said
instruments. The Company weights each Black-Scholes model calculation based on its estimation of
the likelihood of the occurrence of each circumstance and adjusts relevant Black-Scholes model
input to calculate the value of the derivative at the reporting date.
Embedded Conversion Feature of MHR Convertible Notes. The MHR Convertible Notes contain a provision
whereby the conversion price is adjustable upon the occurrence of certain events, including the
issuance by Emisphere of common stock or common stock equivalents at a price which is lower than
the current conversion price of the MHR Convertible Notes and lower than the current market price.
However, the adjustment provision does not become effective until after the Company raises $10
million through the issuance of common stock or common stock equivalents at a price which is lower
than the current conversion price of the convertible note and lower than the current market price
during any consecutive 24 month period. Effective January 1, 2009, the Company adopted the
provisions of FASB ASC 815-40-15-5. Under FASB ASC 815-40-15-5, the embedded conversion feature is
not considered indexed to the Companys own stock and, therefore, does not meet the scope exception
in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The adoption of
FASB ASC 815-40-15-5 requires recognition of the cumulative effect of a change in accounting
principles to the opening balance of our accumulated deficit, additional paid in capital, and
liability for derivative financial instruments. This liability had been presented as a non-current
liability as of December 31, 2010 and has been presented as a current liability as of September 30,
2011 to correspond with its host contract, the MHR Convertible Notes. The fair value of the
embedded conversion feature is estimated, at the end of each quarterly reporting period, using
Black-Scholes models. The assumptions used in computing the fair value as of September 30, 2011 are
a closing stock price of $1.95, conversion prices of $3.78 and $1.95, expected volatility of
100.74% over the remaining term of one year and a risk-free rate of 0.13%. The fair value of the
embedded conversion feature decreased by $1.0 million and $5.3 million for the three and nine
months ended September 30, 2011, respectively, which has been recognized in the accompanying
statements of operations. The embedded conversion feature will be adjusted to estimated fair value
for each future period they remain outstanding. See Note 9 for a further discussion of the MHR
Convertible Notes.
MHR 2006 Warrants. In connection with the exercise of the MHR Option in April 2006 discussed in
Note 9 above, the Company issued to MHR warrants to purchase 617,211 shares for proceeds of $0.6
million. The MHR 2006 Warrants had an original exercise price of $4.00 and were exercisable through
September 26, 2011. The MHR 2006 Warrants had the same terms as the August 2007 Warrants (see
below). The anti-dilution feature of the MHR 2006 Warrants was triggered in connection with the
August 2007 Financing, resulting in an adjusted exercise price of $3.76. Based on the provisions of
FASB ASC 815, Derivatives and Hedging, the MHR 2006 Warrants have been determined to be an embedded
derivative instrument which must be separated from the host contract. The MHR 2006 Warrants
contained the same potential cash settlement provisions as the August 2007 Financing Warrants and,
therefore, they have been accounted for as a separate liability. The fair value of the MHR 2006
Warrants is estimated at the end of each quarterly period that they remain outstanding using
Black-Scholes models. The MHR 2006 Warrants expired September 26, 2011. The fair value of the MHR
2006 Warrants decreased by $1 thousand and $0.6 million for the three and nine months ended
September 30, 2011, respectively, which has been recognized in the accompanying statement of
operations.
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August 2007 Warrants. In connection with an equity financing in August 2007 (the August 2007
Financing), Emisphere sold warrants to purchase up to 400,000 shares of common stock (the August
2007 Warrants). Of these 400,000 warrants, 91,073 were sold to MHR. Each of the August 2007
Warrants were issued with an exercise price of $3.948 and expire on August 21, 2012. The August
2007 Warrants provide for certain anti-dilution protection as provided therein. Under the terms of
the August 2007 Warrants, we have an obligation to make a cash payment to the holders of the August
2007 Warrants for any gain that could have been realized if the holders exercise the August 2007
Warrants and we subsequently fail to deliver a certificate representing the shares to be issued
upon such exercise by the third trading day after such August 2007 Warrants have been exercised.
Accordingly, the August 2007 Warrants have been accounted for as a liability. The fair value of the
warrants is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The assumptions used in computing the fair value as of September 30, 2011 are a closing
stock price of $1.95, expected volatility of 100.54% over the remaining term of eleven months and a
risk-free rate of 0.13%.The fair value of the August 2007 Warrants increased $0.05 million for the
three months ended September 30, 2011 and decreased $0.35 million for the nine months ended
September 30, 2011, respectively, which has been recognized in the accompanying statements of
operations. The August 2007 Warrants will be adjusted to estimated fair value for each future
period they remain outstanding.
August 2009 Warrants. In connection with an equity financing in August 2009 (the August 2009
Financing), Emisphere sold warrants to purchase 6.4 million shares of common stock to MHR (3.7
million) and other unrelated investors (2.7 million) (the August 2009 Warrants). The August 2009
Warrants were issued with an exercise price of $0.70 and expire on August 21, 2014. Under the terms
of the August 2009 Warrants, we have an obligation to make a cash payment to the holders of the
August 2009 Warrants for any gain that could have been realized if the holders exercise the August
2009 Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such August 2009 Warrants have been
exercised. Accordingly, the August 2009 Warrants have been accounted for as a liability. The fair
value of the August 2009 Warrants is estimated, at the end of each quarterly reporting period,
using the Black-Scholes model. The assumptions used in computing the fair value as of September 30,
2011 are a closing stock price of $1.95, expected volatility of 124.35% over the remaining term of
two years and eleven months and a risk-free rate of 0.42%. The fair value of the August 2009
Warrants increased $3.5 million for the three months ended September 30, 2011 and decreased $1.7
million for the nine months ended September 30, 2011, respectively, which has been recognized in
the accompanying statements of operations. The warrants will be adjusted to estimated fair value
for each future period they remain outstanding. During the year ended December 31, 2010, the
unrelated investors exercised their warrants to purchase up to 2,685,714 million shares of the
Companys common stock at an exercise price of $0.70, using the cashless exercise provision. The
Company issued an aggregate of 1,966,937 shares to such holders in accordance with the terms of the
cashless exercise provision. The Company calculated the fair value of the 2,685,714 exercised
warrants on their respective exercise dates using the Black-Scholes model. The weighted average
assumptions used in computing the fair values were a closing stock price of $1.91, expected
volatility of 101.99% over the remaining contractual life of four years, three months and a
risk-free rate of 1.46%. The fair value of the 2,685,714 exercised warrants increased by $2.2
million from January 1, 2010 through the date of exercise, and this increase has been recognized in
the accompanying statements of operations. The fair value of the derivative liabilities at the
exercise dates of $4.3 million was reclassified to additional paid-in-capital. After these cashless
exercises, warrants to purchase up to 3,729,323 shares of common stock, in the aggregate, remain
outstanding.
June 2010 MHR Warrants. As consideration for its consent and limitation of rights in connection
with the Novartis Agreement, the Company granted MHR warrants to purchase 865,000 shares of its
common stock under the MHR Letter Agreement. The June 2010 MHR Warrants are exercisable at $2.90
per share and will expire on August 21, 2014. The June 2010 MHR Warrants provide for certain
anti-dilution protection as provided therein. We have an obligation to make a cash payment to the
holders of the warrants for any gain that could have been realized if the holders exercise the June
2010 MHR Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such June 2010 MHR Warrants have been
exercised. Accordingly, the June 2010 MHR Warrants have been accounted for as a liability. Their
fair value is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The Company estimated the fair value of the June 2010 MHR Warrants on the date of grant
using Black-Scholes models to be $1.9 million, which triggered the recognition of extinguishment
and restructuring accounting for the MHR Convertible Notes. The assumptions used in computing the
fair value of the June 2010 MHR Warrants at September 30, 2011 are closing stock prices of $1.95,
$0.44, and $2.89, exercise prices of $1.95, $0.44, $2.89, and $2.90, expected volatility of 124.35%
over the remaining two years and eleven months, and a risk-free rate of 0.42%. The fair value of
the June 2010 MHR Warrants increased by $0.5 million for the three months ended September 30, 2011
and decreased $0.4 million for the nine months ended September 30, 2011, respectively, which has
been recognized in the accompanying statements of operations. The June 2010 MHR Warrants will be
adjusted to estimated fair value for each future period they remain outstanding.
August 2010 Warrants. On August 25, 2010, the Company entered into a securities purchase agreement
with certain institutional investors pursuant to which the Company agreed to sell an aggregate of
3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146 additional
shares of its common stock for total gross proceeds of $3,532,503 (together with the
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transactions contemplated by the MHR August 2010 Securities Purchase Agreement, as defined below,
the August 2010 Financing). Each unit, consisting of one share of common stock and a warrant to
purchase 0.75 shares of common stock, was sold at a purchase price of $1.01. The warrants to
purchase additional shares are exercisable at a price of $1.26 per share and will expire five years
from the date of issuance. In accordance with the terms of a registration rights agreement with the
investors, the Company filed a registration statement on September 15, 2010, which was declared
effective October 12, 2010. On August 25, 2010, the Company also announced that it had entered into
a separate securities purchase agreement with MHR as part of the August 2010 Financing (the
MHR August 2010 Securities Purchase Agreement), pursuant to which the Company agreed to sell an
aggregate of 3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146
additional shares of its common stock for total gross proceeds of $3,532,503. Each unit, consisting
of one share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a
purchase price of $1.01. The warrants to purchase additional shares are exercisable at a price of
$1.26 per share and will expire five years from the date of issuance. In connection with the August
2010 Financing, Emisphere sold warrants to purchase 5.2 million shares of common stock to MHR (2.6
million) and other unrelated investors (2.6 million) (the August 2010 Warrants). The August 2010
Warrants were issued with an exercise price of $1.26 and expire on August 26, 2015. Under the terms
of the August 2010 Warrants, we have an obligation to make a cash payment to the holders of the
August 2010 Warrants for any gain that could have been realized if the holders exercise the August
2010 Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such August 2010 Warrants have been
exercised. Accordingly, the August 2010 Warrants have been accounted for as a liability. The fair
value of the warrants is estimated, at the end of each quarterly reporting period, using the
Black-Scholes model. On January 12, 2011, one of the unrelated investors notified the Company of
its intention to exercise 0.2 million warrants. The Company received proceeds of $0.2 million from
the exercise of these warrants. The Company calculated the fair value of the 0.2 million exercised
warrants on January 12, 2011 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value as of January 12, 2011 are a closing stock price of $2.25, expected
volatility of 107.30% over the remaining contractual life of four years and seven months and a
risk-free rate of 1.99%. The fair value of the 0.2 million exercised warrants decreased by
approximately $28,000 for the period from January 1, 2011 through January 12, 2011, which has been
recognized in the accompanying statements of operations. The assumptions used in computing the fair
value of the remaining August 2010 Warrants as of September 30, 2011 are a closing stock price of
$1.95, exercise price of $1.26, expected volatility of 117.41% over the remaining term of three
years and eleven months, and a risk-free rate of 0.42%. The fair value of the August 2010 Warrants
increased by $4.7 million for the three months ended September 30, 2011 and decreased $2.2 million
for the nine months ended September 30, 2011, respectively, which has been recognized in the
accompanying statements of operations. The August 2010 Warrants will be adjusted to estimated fair
value for each future period they remain outstanding.
August 2010 MHR Waiver Warrants. In connection with the August 2010 Financing, the Company entered
into a waiver agreement with MHR, pursuant to which MHR waived certain
anti-dilution adjustment rights under the MHR Convertible Notes and certain warrants issued by the
Company to MHR that would otherwise have been triggered by the August 2010 Financing. As
consideration for such waiver, the Company issued to MHR warrants to purchase 975,000 shares of its
common stock (the August 2010 MHR Waiver Warrants). The August 2010 MHR Waiver Warrants are in
the same form of warrant as the August 2010 Warrants issued to MHR as part of the August 2010
Financing described above. Accordingly, the August 2010 MHR Waiver Warrants have been accounted for
as a liability. The fair value of the August 2010 MHR Waiver Warrants is estimated, at the end of
each quarterly reporting period, using Black-Scholes models. The Company estimated the fair value
of the warrants on the date of grant using Black-Scholes models to be $0.8 million. The assumptions
used in computing the fair value of the August 2010 MHR Waiver Warrants at September 30, 2011 are a
closing stock price of $1.95, exercise price of $1.26, expected volatility of 117.41% over the term
of three years and eleven months, and a risk free rate of 0.42%. The fair value of the August 2010
MHR Waiver Warrants increased by $0.9 million for the three months ended September 30, 2011 and
decreased $0.4 million for the nine months ended September 30, 2011, respectively, and the decrease
has been recognized in the accompanying statements of operations. The August 2010 MHR Waiver
Warrants will be adjusted to estimated fair value for each future period they remain outstanding.
July 2011 Warrants. On July 6, 2011, as part of the July 2011 Financing, the Company entered into a
securities purchase agreement with certain institutional investors pursuant to which the Company
agreed to sell an aggregate of 4,300,438 shares of its common stock and warrants to purchase a
total of 3,010,306 additional shares of its common stock for total gross proceeds of $3,749,982.
Each unit, consisting of one share of common stock and a warrant to purchase 0.7 shares of common
stock, was sold at a purchase price of $0.872. The warrants to purchase additional shares are
exercisable at a price of $1.09 per share and will expire five years from the date of issuance. In
accordance with the terms of a registration rights agreement with the investors, the Company filed
a registration statement on July 26, 2011, which was declared effective October 12, 2011. On July
6, 2011, the Company also announced that it had entered into a separate securities purchase
agreement with MHR as part of the July 2011 Financing, pursuant to which the Company agreed to sell
an aggregate of 4,300,438 shares of its common stock and warrants to purchase a total of 3,010,306
additional shares of its common stock for total gross proceeds of $3,749,982. Each unit, consisting
of one share of common stock and a warrant to purchase 0.7 shares of common stock, was sold at a
purchase price of $0.872. The warrants to purchase additional shares are exercisable at a price of
$1.09 per share and will expire five years from the date of issuance. In connection with the July
2011 Financing, Emisphere sold warrants to purchase 6.02 million shares of common stock to MHR
(3.01 million) and other unrelated investors (3.01 million) (the July 2011 Warrants). The July
2011 Warrants were issued with an exercise price of $1.09 and expire on July 6, 2016. Under the
terms of the July 2011 Warrants, we have an obligation to make a cash payment to the holders of the
July
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2011 Warrants for any gain that could have been realized if the holders exercise the July 2011
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 July 2011 Warrants have been exercised.
Accordingly, the July 2011 Warrants have been accounted for as a liability. The fair value of the
warrants is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The Company estimated the fair value of the warrants as of the date of grant using
Black-Scholes models to be $4.5 million. The assumptions used in computing the fair value of the
July 2011 Warrants as of September 30, 2011 are a closing stock price of $1.95, exercise price of
$1.09, expected volatility of 110.35% over the remaining term of four years and ten months, and a
risk-free rate of 0.96%. The fair value of the July 2011 Warrants increased by $5.3 million from
the date of issue until the quarter ended September 30, 2011 and the fluctuation has been recorded
in the statements of operations.
July 2011 MHR Waiver Warrants. In
connection with the July 2011 Financing, the Company entered into
a waiver agreement with MHR, pursuant to which MHR waived certain
anti-dilution adjustment rights under the MHR Convertible Notes and certain warrants issued by the
Company to MHR that would otherwise have been triggered by the July 2011 Financing. As
consideration for such waiver, the Company issued to MHR warrants to purchase 795,000 shares of its
common stock (the July 2011 MHR Waiver Warrants). The July 2011 MHR Waiver Warrants are in the
same form of warrant as the July 2011 Warrants issued to MHR described above. Accordingly, the July
2011 MHR Waiver Warrants have been accounted for as a liability. The fair value of the July 2011
MHR Waiver Warrants is estimated, at the end of each quarterly reporting period, using
Black-Scholes models. The Company estimated the fair value of the warrants on the date of grant
using Black-Scholes models to be $0.6 million. The assumptions used in computing the fair value of
the July 2011 MHR Waiver Warrants at September 30, 2011 are a closing stock price of $1.95,
exercise price of $1.09, expected volatility of 110.35% over the term of four years and ten months,
and a risk free rate of 0.96%. The fair value of the July 2011 MHR Waiver Warrants increased by
$0.7 million from the date of issue until the quarter ended September 30, 2011 and the fluctuation
has been recorded in the statements of operations.
11. Stockholders Deficit
On July 6, 2011, we completed the July 2011 Financing, which included the sale of 4,300,438 shares
of common stock and 3,010,306 warrants to purchase shares of common stock to certain institutional
investors for gross proceeds of $3,749,982 and the sale of 4,300,438 shares of common stock and
3,010,306 warrants to purchase shares of common stock to MHR for gross proceeds of $3,749,982.
Proceeds from the offering, net of cash issuance costs of $0.3 million, were $7.2 million.
Additional issuance costs consisted of $0.6 million from the issuance of the July 2011 MHR Waiver
Warrants, as described in Note 10 above, and $25,000 in accrued expenses to reimburse MHR for its
legal fees, each in consideration of waiving certain anti-dilution adjustments rights under the MHR
Convertible Notes and certain warrants issued by the Company to MHR that would otherwise have been
triggered by the July 2011 Financing.
12. Net income (loss) per share
The following table sets forth the information needed to compute basic earnings per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 Restated | 2011 | 2010 Restated | |||||||||||||
(in thousands except per share data) | (in thousands except per share data) | |||||||||||||||
Basic net income (loss) |
$ | (17,606 | ) | $ | 10,082 | $ | (4,764 | ) | $ | (38,750 | ) | |||||
Effect of dilutive securities MHR
convertible note assumed conversion |
| | | | ||||||||||||
Numerator for diluted net income (loss)
per share after assumed note conversion |
(17,606 | ) | 10,082 | (4,764 | ) | (38,750 | ) | |||||||||
Weighted average common shares outstanding: |
60,122,747 | 47,401,395 | 54,811,423 | 44,291,889 | ||||||||||||
Dilutive securities |
||||||||||||||||
Options |
| 410,378 | | | ||||||||||||
Warrants |
| 3,111,108 | | | ||||||||||||
Diluted weighted average common shares
outstanding and assumed conversion |
60,122,747 | 50,922,881 | 54,811,423 | 44,291,889 | ||||||||||||
Basic net income (loss) per share |
$ | (0.29 | ) | $ | 0.21 | $ | (0.09 | ) | $ | (0.87 | ) | |||||
Diluted net income (loss) per share |
$ | (0.29 | ) | $ | 0.20 | $ | (0.09 | ) | $ | (0.87 | ) |
For the three and nine months periods ended September 30, 2011 and 2010, certain potential shares
of common stock have been excluded from the calculation of diluted income (loss) per share because
the exercise price was greater than the average market price
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of our common stock, and therefore, the effect on diluted loss per share would have been
anti-dilutive. In addition, incremental shares from the assumed conversion of the MHR note payable
are excluded for the three and nine month periods ended September 30, 2011 and 2010 as the effect
of these shares is anti-dilutive in these periods. The following table sets forth the number of
potential shares of common stock that have been excluded from diluted net income (loss) per share
because their effect was anti-dilutive.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Options to purchase common shares |
3,200,650 | 2,815,088 | 3,200,650 | 3,225,466 | ||||||||||||
Outstanding warrants |
17,843,727 | 8,721,717 | 17,843,727 | 11,832,826 | ||||||||||||
MHR convertible note payable |
7,246,873 | 6,495,250 | 7,246,873 | 6,495,250 | ||||||||||||
28,291,250 | 18,032,055 | 28,291,250 | 21,553,542 |
13. Commitments and Contingencies
Commitments. At the beginning of 2009 we had leased approximately 80,000 square feet of office
space at 765 Old Saw Mill River Road, Tarrytown, NY (the Tarrytown Facility) for use as
administrative offices and laboratories. The lease for the Tarrytown Facility (the Lease) had
been set to expire on August 31, 2012. However, on April 29, 2009 (the Execution Date), the
Company entered into a Lease Termination Agreement (the Lease Termination Agreement) with
BMR-Landmark at Eastview, LLC, a Delaware limited liability company (BMR) pursuant to which the
Company and BMR terminated the lease of the Tarrytown Facility. Pursuant to the Lease Termination
Agreement, the Lease was terminated effective as of April 1, 2009. The Lease Termination Agreement
provided that the Company make the following payments to BMR: (a) $1 million, paid on the Execution
Date, (b) $0.5 million, paid six months after the Execution Date, and (c) $0.75 million, payable
twelve months after the Execution Date. Initial and six months payments were made on schedule.
Although the final payment was due originally on April 29, 2010, on March 17, 2010 the Company and
BMR agreed to amend the Lease Termination Agreement (the Amendment). According to the Amendment,
the final payment was modified as follows: the Company was to pay Eight Hundred Thousand Dollars
($800,000), as follows: (i) Two Hundred Thousand Dollars ($200,000) within five (5) days after the
execution date of the Amendment, and (ii) One Hundred Thousand Dollars ($100,000) on each of the
following dates: July 15, 2010, August 15, 2010, September 15, 2010, October 15, 2010, November 15,
2010, and December 15, 2010. Through July 1, 2011, the Company paid in full $800,000 of principal
plus $28,250 interest for late payments in accordance with the terms of the Lease Termination
Agreement, as amended by the Amendment.
We continue to lease office space at 240 Cedar Knolls Road, Suite 200, Cedar Knolls, New Jersey
under a non-cancellable operating lease expiring in 2013.
The Company evaluates the financial consequences of legal actions periodically or as facts present
themselves and books accruals to account for its best estimate of future costs accordingly.
Contingencies. In the ordinary course of business, we enter into agreements with third parties that
include indemnification provisions which, in our judgment, are normal and customary for companies
in our industry sector. These agreements are typically with business partners, clinical sites, and
suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and
reimburse indemnified parties for losses suffered or incurred by the indemnified parties with
respect to our product candidates, use of such product candidates, or other actions taken or
omitted by us. The maximum potential amount of future payments we could be required to make under
these indemnification provisions is unlimited. We have not incurred material costs to defend
lawsuits or settle claims related to these indemnification provisions. As a result, the estimated
fair value of liabilities relating to these provisions is minimal. Accordingly, we have no
liabilities recorded for these provisions as of September 30, 2011.
In the normal course of business, we may be confronted with issues or events that may result in a
contingent liability. These generally relate to lawsuits, claims, environmental actions or the
action of various regulatory agencies. If necessary, management consults with counsel and other
appropriate experts to assess any matters that arise. If, in our opinion, we have incurred a
probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is
made of the loss and the appropriate accounting entries are reflected in our financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of
currently pending or threatened lawsuits and claims will have a material adverse effect on our
financial position, results of operations or cash flows.
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14. Restructuring Expense
On December 8, 2008, as part of our efforts to improve operational efficiency we decided to close
our research and development facilities in Tarrytown, NY, which resulted in a restructuring charge
of approximately $3.8 million in the fourth quarter 2008. As described in Note 13 above, on April
29, 2009, the Company entered into the Lease Termination Agreement with BMR, and credited the
restructuring charge of $0.35 million in accordance with the terms of the Lease Termination
Agreement. On March 17, 2010 the Company and BMR amended the Lease Termination Agreement as
described in Note 13 above. Consequently, the restructuring liability was readjusted to reflect the
terms of the Amendment accordingly.
Adjustments to the restructuring liability are as follows ($ thousands):
Liability at | Cash | Adjustment to | Liability at | |||||||||||||
December 31, 2010 | Payments | the Liability | June 30, 2011 | |||||||||||||
Lease restructuring expense |
$ | 300 | $ | (300 | ) | $ | | $ | |
15. Income Taxes
The Company is primarily subject to United States federal and New Jersey state income tax. The
Companys policy is to recognize interest and penalties related to income tax matters in income tax
expense. As of December 31, 2010 and September 30, 2011, the Company had no accruals for interest
or penalties related to income tax matters. For the three and nine month periods ended September
30, 2011 and 2010, the effective income tax rate was 0%. The difference between the Companys
effective income tax rate and the Federal statutory rate of 35% is attributable to state tax
benefits and tax credits offset by changes in the deferred tax valuation allowance.
16. New Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (ASU 2011-08), which
updates the guidance in ASC Topic 350, Intangibles Goodwill & Other. The amendments in ASU
2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely
than not that the fair value of a reporting unit is less than the carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test described in
ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than
fifty percent. If, after assessing the totality of events or circumstances, an entity determines
that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08
include examples of events and circumstances that an entity should consider in evaluating whether
it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. However, the examples are not intended to be all-inclusive and an entity may identify other
relevant events and circumstances to consider in making the determination. The examples in this ASU
2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity
should consider in determining whether it should test for impairment between annual tests, and also
supersede the examples of events and circumstances that an entity having a reporting unit with a
zero or negative should consider in determining whether to perform the second step of the
impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry
forward its detailed calculation of a reporting units fair value from a prior year as previously
permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 is not expected to
have a material impact on the Companys financial position or results of operations.
In May 2011, the FASB issued Accounting Standards Update 2011-04 (ASU 2011-04), which updated the
guidance in ASC Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 generally
represent clarifications of Topic 820, but also include some instances where a particular principle
or requirement for measuring fair value or disclosing information about fair value measurements has
changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for
disclosing information about fair value measurements in accordance with U.S. GAAP and International
Financial Reporting Standards. The amendments in ASU 2011-04 are to be applied prospectively. For
public entities, the amendments are effective for interim and annual periods beginning after
December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a
material impact on the Companys financial position or results of operations.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (ASC Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29). The amendments in
ASU 2010-29 affect any public entity as defined by ASC Topic 805 that enters into business
combinations that are material on an individual or aggregate basis. The amendments in ASU 2010-29
specify that if a public entity presents comparative financial statements, the entity should
disclose
16
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revenue and earnings of the combined entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the comparable prior annual reporting
period only. The amendments also expand the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
The amendments in ASU 2010-29 are effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2010. The adoption of ASU 2010-29 did not have a material impact on the
Companys results of operations or financial condition.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (ASC Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU 2010-28). The amendments in ASU 2010-28 modify Step 1 of the goodwill
impairment test for reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. In determining whether it is more likely than not that
goodwill impairment exists, an entity should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The qualitative factors are consistent with the
existing guidance and examples, which require that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. For public entities,
the amendments in ASU 2010-28 are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material
impact on the Companys results of operations or financial condition.
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition Milestone Method (ASU
2010-17). ASU 2010-17 provides guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. The following criteria must be met for a milestone to be considered substantive: the
consideration earned by achieving the milestone should (i) be commensurate with either the level of
effort required to achieve the milestone or the enhancement of the value of the item delivered as a
result of a specific outcome resulting from the vendors performance to achieve the milestone; (ii)
be related solely to past performance; and (iii) be reasonable relative to all deliverables and
payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there
can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both
substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of ASU 2010-17 did not have a material effect on the Companys results
of operations or financial condition.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements (ASU
2009-13). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price hierarchy. The
amendments in ASU 2009-13 eliminate the residual method of revenue allocation and require revenue
to be allocated using the relative selling price method. ASU 2009-13 should be applied on a
prospective basis for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU 2009-13 did
not have a material impact on the Companys results of operations or financial condition.
Management does not believe there would have been a material effect on the accompanying financial
statements had any other recently issued, but not yet effective, accounting standards been adopted
in the current period.
17. Fair Value
In accordance with FASB ASC 820, Fair Value Measurements and Disclosures, the following table
represents the Companys fair value hierarchy for its financial assets and liabilities measured at
fair value on a recurring basis as of September 30, 2011 and December 31, 2010:
Level 2 | Level 2 | |||||||
September 30, 2011 | December 31, 2010 | |||||||
($ thousands) | ($ thousands) | |||||||
Derivative instruments (short term) |
$ | 33,820 | $ | 22,940 | ||||
Derivative instruments (long term) |
| 11,166 | ||||||
Total |
$ | 33,820 | $ | 34,106 | ||||
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Some of the Companys financial instruments are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature, such
as cash and cash equivalents, receivables and payables.
We have determined that it is not practical to estimate the fair value of our notes payable because
of their unique nature and the costs that would be incurred to obtain an independent valuation. We
do not have comparable outstanding debt on which to base an estimated current borrowing rate or
other discount rate for purposes of estimating the fair value of the notes payable and we have not
been able to develop a valuation model that can be applied consistently in a cost efficient manner.
These factors all contribute to the impracticability of estimating the fair value of the notes
payable. At September 30, 2011, the carrying value of the notes payable and accrued interest was
$27.4 million.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SAFE HARBOR CAUTIONARY STATEMENT
Certain statements in this Managements Discussion and Analysis of Financial Conditions and Results
of Operations and elsewhere in this report as well as statements made from time to time by our
representatives may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include (without
limitation) statements regarding planned or expected studies and trials of oral formulations that
utilize our Eligen® Technology; the timing of the development and commercialization of
our product candidates or potential products that may be developed using our Eligen®
Technology; the potential market size, advantages or therapeutic uses of our potential products;
variation in actual savings and operational improvements resulting from restructurings; and the
sufficiency of our available capital resources to meet our funding needs. We do not undertake any
obligation to publicly update any forward-looking statement, whether as a result of new
information, future events, or otherwise, except as required by law. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any future results or
achievements expressed or implied by such forward-looking statements. Such factors include the
factors described under Part II, Item 1A. Risk Factors and other factors discussed in connection
with any forward-looking statements.
General
Emisphere Technologies, Inc. is a biopharmaceutical company that focuses on a unique and improved
delivery of therapeutic molecules or nutritional supplements using its Eligen®
Technology. These molecules could be available currently or are under development. Such molecules
are usually delivered by injection; in many cases, their benefits are limited due to poor
bioavailability, slow onset of action or variable absorption. In those cases, our technology may
increase the benefit of the therapy by improving the absorption of a therapeutic molecule thereby
increasing its bioavailability, or by decreasing the time to peak blood concentrations which could
result in faster onset of the molecules therapeutic action. The Eligen® Technology can
make it possible to deliver certain therapeutic molecules orally, without altering their chemical
form or biological activity. Eligen® delivery agents, or carriers, facilitate or
enable the transport of therapeutic molecules across the mucous membranes of the gastrointestinal
tract, to reach the general circulation where they dissociate from the carrier and are free to
elicit their pharmacological effect. The Eligen® Technology can be applied to the oral
route of administration as well other delivery pathways, such as buccal, rectal, inhalation,
intra-vaginal or transdermal.
Since our inception in 1986, substantial efforts and resources have been devoted to understanding
the Eligen® Technology and establishing a product development pipeline that incorporated
this technology with selected molecules. Our corporate strategy is focused on commercializing the
Eligen® Technology as quickly as possible, building high-value partnerships and
developing our product pipeline. We develop potential product candidates in-house, as is evident in
the development of our higher dose Eligen® B12 (1000 mcg) product, and we enhance the
value of the Eligen® Technology through our development partners, including Novartis,
Novo Nordisk A/S (Novo Nordisk) and others. Further development, exploration and
commercialization of the technology entail risk and operational expenses. However, we continue to
focus our efforts on strategic development initiatives as well as cost control, and aggressively
seek to reduce non-strategic spending.
The application of the Eligen® Technology is potentially broad and may provide for a
number of opportunities across a spectrum of therapeutic modalities or nutritional supplements.
During the third quarter 2011, we continued to develop our product pipeline utilizing the
Eligen® Technology with prescription and non-prescription product candidates. We
prioritized our development efforts based on overall potential returns on investment, likelihood of
success, and market and medical need. Our goal is to implement our
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Eligen® Technology to enhance overall healthcare, including patient accessibility and
compliance, while benefiting the commercial pharmaceutical marketplace and driving company
valuation. Investments required to continue developing our product pipeline may be partially paid
by income-generating license arrangements whose value tends to increase as product candidates move
from pre-clinical into clinical development. It is our intention that investments that may be
required to fund our research and development will be approached incrementally in order to minimize
disruption or dilution.
We are planning to expand our current collaborative relationships to take advantage of the critical
knowledge that others have gained by working with our technology. We will also continue to pursue
product candidates for internal development and commercialization. We believe that these internal
candidates must be capable of development with reasonable investments in an acceptable time period
and with a reasonable risk-benefit profile.
Our product pipeline includes prescription, medical food and nutritional supplements product
candidates that are being developed in partnership or internally. During 2010 our development
partners Novartis and Novo Nordisk continued or expanded their development programs and we
continued to make progress on our internally developed Eligen® B12 product.
Novartis is using our Eligen® drug delivery technology in combination with salmon
calcitonin. Their most advanced program utilizing the Companys Eligen® Technology is
testing an oral formulation of calcitonin to treat osteoarthritis and osteoporosis. For
osteoarthritis, Novartis completed two Phase III trials. Novartis is also conducting a Phase III
clinical study for osteoporosis. Novartis recently informed Emisphere that its Phase III study of
oral calcitonin in osteoporosis has been completed and first interpretable results are expected in
the fourth quarter of 2011.
Novartis and its license partner Nordic Bioscience A/S (Nordic Bioscience) recently completed the
Phase III Study 2302, assessing the safety and efficacy of oral calcitonin (oCT) in the treatment
of osteoarthritis of the knee. Study 2302, along with its companion Study 2301, incorporates
Emispheres unique and proprietary Eligen® Drug Delivery Technology for the improved
oral absorption of salmon calcitonin. Novartis has recently informed Emisphere that it has reviewed
the first interpretable results of Study 2302 and has advised the Company of its top line
conclusions as follows: Preliminary analysis of two year study data showed both co-primary
endpoints and secondary endpoints of the study were not met. Additionally, preliminary analysis of
Study 2302 data showed a positive safety profile.
In addition, Nordic Bioscience recently published the results from the two-year Study 2301, the
companion study to Study 2302, in the Osteoarthritis Research Society International (OARSI)
Abstract #64, Volume 19, Supplement 1 (ISSN 1063-4584). The OARSI abstract contains the conclusion
twice daily oCT over 2 years resulted in a significant symptom-modifying efficacy in patients with
painful knee OA as assessed by WOMAC pain, physical function, and stiffness scores. Although
improvement on the primary endpoint of JSW (joint-space width) was not reached, there was an
increase in cartilage volume vs. placebo indicating some structure-modifying efficacy.
Novartis has not provided Emisphere with any further data from either Study 2302 or Study 2301 at
this time. Nordic Bioscience and Novartis have indicated that they are going to continue to
collaborate to further analyze and evaluate the results.
On August 3, 2011, the Company received notification from Novartis that Novartis will be
terminating that certain Research Collaboration and License Agreement by and among the Company and
Novartis (the Oral HGH Agreement), dated September 22, 2004, as amended (the Termination). The
Oral HGH Agreement provided for collaboration between the Company and Novartis on clinical trials
of an oral human growth hormone product using the Eligen® Technology and provided
Novartis with an exclusive worldwide license to develop, make, have made, use and sell products
developed under the program. In connection with the Termination, Emisphere may continue to develop
and/or commercialize the product.
The Termination was effective as of October 26, 2011. In connection with the Oral HGH Agreement and
the Termination, Novartis will provide the Company, upon request, with the data generated from the
collaboration that would be necessary for the Company to continue to develop and commercialize an
oral human growth hormone product using the Eligen® Technology. The Company has not
incurred any penalties in connection with the Termination.
On June 17, 2011, Novartis informed us of the results of its recently completed Proof of Concept
study for an oral PTH1-34 using Emispheres Eligen® Technology in post-menopausal women
with osteoporosis or osteopenia. Novartis informed us that, although the study confirmed that oral
PTH1-34 was both safe and well-tolerated, several clinical endpoints were not met. Based on the
data analyzed, Novartis has terminated the study and anticipates no further work on oral
formulation of PTH1-34.
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Novo Nordisk is using our Eligen® drug delivery technology in combination with its
proprietary GLP-1 receptor agonists and insulins. During December 2010, the Company entered into an
exclusive Development and License Agreement with Novo Nordisk to develop and commercialize oral
formulations of Novo Nordisks insulins using Emispheres Eligen® Technology (the
Insulin Agreement). This was the second license agreement between the two companies. The first
agreement, for the development of oral formulations of GLP-1 receptor agonists, was signed in June
2008, with a potential drug currently in a Phase I clinical trial. The Insulin Agreement included
$57.5 million in potential product development and sales milestone payments to Emisphere, of which
$5 million was paid upon signing, as well as royalties on sales. This extended partnership with
Novo Nordisk has the potential to offer significant new solutions to millions of people with
diabetes worldwide and it also serves to further validate our Eligen® Technology.
The Company is developing an oral formulation of Eligen® B12 (1000 mcg) for use by B12
deficient individuals. During the fourth quarter 2010, the Company completed a clinical trial which
demonstrated that both oral Eligen® B12 (1000 mcg) and injectable B12 (current standard
of care) can efficiently and quickly restore normal Vitamin B12 levels in deficient individuals.
The manuscript summarizing the results from that clinical trial has been published in the July 2011
edition of the journal Clinical Therapeutics (Volume 22, pages 934 945). We also conducted
market research to help assess the potential commercial opportunity for our potential
Eligen® B12 (1000 mcg) product. On August 5, 2011, we received notice from the United
States Patent Office that the U.S. patent application directed to the oral Eligen® B12
formulation was allowed. This new patent provides intellectual property protection for
Eligen® B12 through approximately October 2029. Currently, we are evaluating the results
of our clinical trials and market research and exploring alternative development and
commercialization options with the purpose of maximizing the commercial and health benefits
potential of our Eligen® B12 asset.
Our other product candidates in development are in earlier or preclinical research phases, and we
continue to assess them for their compatibility with our technology and market needs. Our intent is
to seek partnerships with pharmaceutical and biotechnology companies for certain of these products.
We plan to expand our pipeline with product candidates that demonstrate significant opportunities
for growth.
Results of Operations
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010:
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | | $ | 4 | $ | (4 | ) | |||||
Operating expenses |
$ | 1,531 | $ | 3,879 | $ | (2,348 | ) | |||||
Operating loss |
$ | (1,531 | ) | $ | (3,875 | ) | $ | (2,344 | ) | |||
Other income (expense) |
$ | (16,075 | ) | $ | 13,957 | $ | (30,032 | ) | ||||
Net income (loss) |
$ | (17,606 | ) | $ | 10,082 | $ | (27,688 | ) |
Revenue decreased $4 thousand for the three months ended September 30, 2011 compared to the same
period last year due to termination of commercial sales of low dose Eligen® B12.
Operating expenses decreased $2.3 million or 61% for the three months ended September 30, 2011 in
comparison to the same period last year. Details of these changes are highlighted in the table
below:
(in thousands) | ||||
Decrease in human resources costs |
$ | (458 | ) | |
Decrease in professional fees |
(1,022 | ) | ||
Decrease in occupancy costs |
| |||
Decrease in clinical costs |
(236 | ) | ||
Decrease in depreciation and amortization |
(4 | ) | ||
Decrease in other costs |
(628 | ) | ||
$ | (2,348 | ) | ||
Human resource costs decreased $458 thousand, or 43%, due primarily to a $399 thousand
reduction in wages and wage related costs in 2011 and a $59 thousand reduction in non-cash
compensation commensurate with a reduction in personnel.
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Professional fees decreased $1.02 million, or 63%, due primarily to a $554 thousand reduction
in legal fees in connection with commercial development efforts and the cancellation of the
Novartis Note during 2010, a $280 thousand decrease in corporate legal fees, and a $192 thousand
decrease in other professional fees.
Clinical costs decreased $236 thousand, or 94%, due primarily to the completion of ourB-12 clinical
trial in 2010 and outside lab fees related to formulation and analytical testing incurred during
2010.
Other costs decreased $628 thousand, or 80%, due primarily to $542 thousand contract termination
expense for discontinuance of the low dose B-12 program and a $58 thousand charge to settle
outstanding lawsuits incurred during 2010 and a $27 thousand reduction in telecommunication and
maintenance costs in 2011.
Our principal operating costs include the following items as a percentage of total operating
expenses:
Three Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Human resource costs, including benefits |
39 | % | 27 | % | ||||
Professional fees for legal, intellectual property, accounting and consulting |
39 | % | 42 | % | ||||
Occupancy for our laboratory and operating space |
6 | % | 2 | % | ||||
Clinical costs |
1 | % | 7 | % | ||||
Depreciation and amortization |
5 | % | 2 | % | ||||
Other |
10 | % | 20 | % |
Other expenses for the three months ended September 30, 2011 increased $30.0 million, due primarily
to a $14.6 million expense from the change in fair value of derivative instruments in 2011 arising
from the increase in the price of the Companys stock during the third quarter 2011, compared to a
$14.6 million gain from the change in fair value of derivatives arising from the decrease in the
price of the Companys stock during the third quarter 2010; proceeds of $0.5 million from the sale
of patents in 2010; and a $0.3 million increase in interest expense net of other income.
As a result of the above factors, we had a net loss of $17.6 million for the three months ended
September 30, 2011, compared to a net income of $10.1 million for the three months ended September
30, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010:
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | | $ | 55 | $ | 55 | ||||||
Operating expenses |
$ | 5,806 | $ | 10,055 | $ | (4,249 | ) | |||||
Operating loss |
$ | (5,806 | ) | $ | (10,000 | ) | $ | (4,194 | ) | |||
Other income (expense) |
$ | 1,042 | $ | (28,750 | ) | $ | 29,792 | |||||
Net income (loss) |
$ | (4,764 | ) | $ | (38,750 | ) | $ | 33,986 |
Revenue decreased $55 thousand for the nine months ended September 30, 2011 compared to the same
period last year due to termination of commercial sales of low dose Eligen® B12.
Operating expenses decreased $4.2 million or 42% for the nine months ended September 30, 2011 in
comparison to the same period last year. Details of these changes are highlighted in the table
below:
(in thousands) | ||||
Decrease in human resources costs |
$ | (1,600 | ) | |
Decrease in professional fees |
(1,258 | ) | ||
Increase in occupancy costs |
4 | |||
Decrease in clinical costs |
(410 | ) | ||
Decrease in depreciation and amortization |
(14 | ) | ||
Decrease in other costs |
(971 | ) | ||
$ | (4,249 | ) | ||
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Human resource costs decreased $1,600 thousand, or 42%, due primarily to a $1,135 thousand
reduction in wages and wage related costs, and a $465 thousand reduction in non-cash compensation
commensurate with a reduction in personnel.
Professional fees decreased $1,258 thousand, or 34%, due primarily to a $751 thousand decrease in
legal fees in connection with commercial development efforts and the cancellation of the Novartis
Note during 2010 and a $479 thousand decrease in corporate legal fees.
Occupancy costs increased $4 thousand, or 1%, due to higher common area maintenance costs in the
first quarter 2011.
Clinical costs decreased $410 thousand, or 66%, due primarily to a $183 thousand decrease in
clinical trial costs related to the B 12 trial completed in 2010 and a $227 thousand decrease in
outside lab fees.
Depreciation and amortization costs decreased $14 thousand, or 6%, due to certain assets being
fully depreciated during 2010.
Other costs decreased $971 thousand, or 68%, due primarily to a $542 thousand charge for contract
termination with Life Extension Foundation in 2010 for cancellation of the low dose B-12 sales
agreement; $278 thousand charge to settle outstanding lawsuits in 2010; additional restructuring
costs of $50 thousand in 2010 for an amendment to a lease termination agreement with BMR-Landmark
at Eastview, LLC, a Delaware limited liability company, regarding former administrative and
laboratory space leased by the Company; and a $101 thousand reduction in 2011 in telecommunication,
travel, insurance, and other office expenses.
Our principal operating costs include the following items as a percentage of total operating
expenses:
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Human resource costs, including benefits |
38 | % | 38 | % | ||||
Professional fees for legal, intellectual property, accounting and consulting |
42 | % | 37 | % | ||||
Occupancy for our laboratory and operating space |
4 | % | 3 | % | ||||
Clinical costs |
4 | % | 6 | % | ||||
Depreciation and amortization |
4 | % | 2 | % | ||||
Other |
8 | % | 14 | % |
Other income increased $29.8 million, due primarily to the $17.0 million one-time charges for loss
on extinguishment of debt in 2010; a $13.1 million gain from the change in fair value of derivative
instruments in 2011 arising from the decrease in the price of the Companys stock during 2011;
financing fees of $1.9 million in connection with the settlement of the Novartis Note in June 2010;
offset by a $2.2 million increase in interest expense net of other income in 2011.
As a result of the above factors, we had a net loss of $4.8 million for the nine months ended
September 30, 2011, compared to a net loss of $38.7 million for the nine months ended September 30,
2010.
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, 2011, our accumulated deficit was approximately $485.7 million and our
stockholders deficit was approximately $84.4 million. Our operating loss was $1.5 million for the
three months ended September 30, 2011 compared to an operating loss of $3.9 million for the three
months ended September 30, 2010. Our operating loss for the nine months ended September 30, 2011
was $5.8 million compared to $10.0 million for the nine months ended September 30, 2010.
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. On July 6, 2011, we closed the transactions contemplated by the July
2011 Financing, as further described in the Notes to our Condensed Financial Statements set forth
in Part I, Item 1 of this Report, resulting in proceeds, net of cash issuance costs of $0.03
million, of $7.2 million. As of September 30, 2011, total cash and cash equivalents was $4.7
million compared to $5.3 million as of December 31, 2010. The change in cash relates to the
operating loss offset by changes in accounts payable and non-cash items net of the proceeds from
the July 2011 Financing. We anticipate that our existing capital resources, without implementing
cost reductions, raising additional capital, or obtaining substantial cash inflows from potential
partners for our products, will enable us to continue operations through approximately May 2012.
However, this expectation is based on the current operating plan that could change as a result of
many
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factors and additional funding may be required sooner than anticipated. These conditions raise
substantial doubt about our ability to continue as a going concern. The audit report prepared by
our independent registered public accounting firm relating to our financial statements for the year
ended December 31, 2010 includes an explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern.
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 that financing will be available on favorable terms
or at all. Additionally, these conditions may increase the cost to raise capital. If additional
capital is raised through the sale of equity or convertible debt securities, the issuance of such
securities would result in dilution to our existing stockholders. Additionally, these conditions
may increase costs to raise capital and/or result in further dilution. Our failure to raise capital
when needed would adversely affect our business, financial condition and results of operations, and
could force us to reduce or cease our operations.
If we are successful in raising additional capital to continue operations, our business will still
require substantial additional investment that we have not yet secured. For further discussion, see
Part II, Item 1A Risk Factors.
Off-Balance Sheet Arrangements
As of September 30, 2011, we had no off-balance sheet arrangements. There were no changes in
significant contractual obligations during the three months ended September 30, 2011.
Critical Accounting Estimates
Please refer to the Companys Annual Report on Form 10-K filed with the SEC on March 31, 2011 for
detailed explanations of its critical accounting estimates, which have not changed significantly
during the period ended September 30, 2011.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 16 set forth in the Notes to Condensed
Financial Statements contained in Part I, Item 1 of this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fair Value of Warrants and Derivative Liabilities. As further described in Note 10 to our Condensed
Financial Statements set forth in Part I, Item 1 of this Report, at September 30, 2011, the
estimated fair value of derivative instruments was $33.8 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. Furthermore, the Company computes the fair
value of these instruments using multiple Black-Scholes model calculations to account for the
various circumstances that could arise in connection with the contractual terms of said
instruments. The Company weights each Black-Scholes model calculation based on its estimation of
the likelihood of the occurrence of each circumstance and adjusts relevant Black-Scholes model
input to calculate the value of the derivative at the reporting date. We are required to revalue
this liability each quarter. We believe that the assumption that has the greatest impact on the
determination of fair value is the closing price of our common stock. The following table
illustrates the potential effect of changes in the assumptions used to calculate fair value:
Derivatives | ||||
(in thousands) | ||||
25% increase in stock price |
$ | 8,969 | ||
50% increase in stock price |
18,222 | |||
5% increase in assumed volatility |
850 | |||
25% decrease in stock price |
(8599 | ) | ||
50% decrease in stock price |
(16,697 | ) | ||
5% decrease in assumed volatility |
(880 | ) |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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The Companys senior management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar functions, as appropriate,
to allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of the design and operation of its disclosure controls
and procedures under the supervision of and with the participation of management, including its
Interim Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by
this report. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial
Officer has concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three month
period ended September 30, 2011 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II
ITEM 1A. RISK FACTORS
The following risk factors should be read carefully in connection with evaluating our business and
the forward-looking statements that we make in this Report and elsewhere (including oral
statements) from time to time. Any of the following risks could materially and adversely affect our
business, our operating results, our financial condition and the actual outcome of matters as to
which forward-looking statements are made in this Report. Our business is subject to many risks,
which are detailed further in our Annual Report on Form 10-K as filed with the SEC on March 31, 2011, including:
Financial Risks
| We have a history of operating losses and we may never achieve profitability. If we continue to incur losses or we fail to raise additional capital or receive substantial cash inflows from our partners by April 2012, we may be forced to cease operations. | ||
| The audit opinion issued by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2010 contained a going concern explanatory paragraph. | ||
| We may not be able to meet the covenants detailed in the Convertible Notes with MHR Institutional Partners IIA LP, which could result in an increase in the interest rate on the Convertible Notes and/or accelerated maturity of the Convertible Notes, which we would not be able to satisfy. | ||
| Our stock was de-listed from NASDAQ. |
Risks Related to our Business
| Our business will suffer if we fail or are delayed in developing and commercializing an improved oral form of Vitamin B12. | ||
| We are highly dependent on the clinical success of our product candidates. | ||
| We are highly dependent upon collaborative partners to develop and commercialize compounds using our delivery agents. | ||
| Our collaborative partners control the clinical development of certain of our drug candidates and may terminate their efforts at will. | ||
| Our product candidates are in various stages of development, and we cannot be certain that any will be suitable for commercial purposes. |
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| Our collaborative partners are free to develop competing products. | ||
| Our business will suffer if we cannot adequately protect our patent and proprietary rights. | ||
| We may be at risk of having to obtain a license from third parties making proprietary improvements to our technology. | ||
| We are dependent on third parties to manufacture and, in some cases, test our products. | ||
| We are dependent on our key personnel and if we cannot recruit and retain leaders in our research, development, manufacturing, and commercial organizations, our business will be harmed. |
Risks Related to our Industry
| Our future business success depends heavily upon regulatory approvals, which can be difficult to obtain for a variety of reasons, including cost. More specifically, the regulatory approval process for nonprescription product candidates will likely vary by the nature of the therapeutic molecule being delivered. In particular, the European Medical Agency (EMA) announced in January 2011 that its committee for Medicinal Products for Human Use has begun to review available data relevant to the potential for increased risk of prostate cancer progression and other types of malignancies in patients taking calcitonin-containing medicines for the prevention of acute bone loss. The announcement indicated that that the decision to review followed review of two clinical trials which suggested an increased frequency of malignancies. The EMA indicated it intended to assess the data obtained in the balance of risks and benefits of calcitonin-containing medicines. | ||
Our collaboration partner Novartis manages the clinical development of oral salmon calcitonin, and has indicated to us that it has responded to the EMAs request for information. Novartis has informed us that it has informed the FDA of the EMA request, and has provided the FDA with relevant data regarding calcitonin at its request. | |||
Significant delays in approval of our oral salmon calcitonin formulation or denial of approval would materially and adversely affect our business and prospects. | |||
| We may face product liability claims related to participation in clinical trials for future products. | ||
| 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 or 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. |
For a more complete listing and description of these and other risks that the Company faces, please
see our Annual Report for 2010 on Form 10-K as filed with the SEC on March 31, 2011. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition or future results.
ITEM 6. EXHIBITS
Exhibit | ||
Number | Description of Exhibit | |
3.1
|
Amended and Restated Certificate of Incorporation of Emisphere Technologies, Inc., as amended by the Certificate of Amendment of Amended and Restated Certificate of Incorporation of Emisphere Technologies, Inc., dated April 20, 2007 (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007 and incorporated herein by reference (SEC File No. 000-17758)). |
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Table of Contents
Exhibit | ||
Number | Description of Exhibit | |
3.2
|
By-Laws of Emisphere Technologies, Inc., as amended December 7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999) and as further amended on September 23, 2005 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 30, 2005 and incorporated herein by reference (SEC File No. 000-17758)). | |
3.3
|
Amendment, effective as of September 11, 2007, to the Amended By-Laws of Emisphere Technologies, Inc. (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 14, 2007 and incorporated herein by reference (SEC File No. 000-17758)). | |
4.1
|
Restated Rights Agreement dated as of April 7, 2006 between Emisphere Technologies, Inc. and Mellon Investor Services, LLC (filed as Exhibit 1.1 to the Current Report on Form 8-K filed on April 10, 2006 and incorporated herein by reference (SEC File No. 000-17758)). | |
31.1
|
Certification of the Interim Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith). | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002 (furnished herewith). | |
101. INS*
|
XBRL Instance Document. | |
101. SCH*
|
XBRL Taxonomy Extension Schema Document. | |
101. CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document. | |
101. LAB*
|
XBRL Taxonomy Extension Label Linkbase Document. | |
101. PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document. | |
101. DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document. |
* | Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, and are otherwise not subject to liability under these sections. |
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Table of Contents
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Emisphere Technologies, Inc. |
||||
Date: November 8, 2011 | /s/ Michael R. Garone | |||
Michael R. Garone | ||||
Interim Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer) | ||||
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Table of Contents
EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibit | |
3.1
|
Amended and Restated Certificate of Incorporation of Emisphere Technologies, Inc., as amended by the Certificate of Amendment of Amended and Restated Certificate of Incorporation of Emisphere Technologies, Inc., dated April 20, 2007 (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007 and incorporated herein by reference (SEC File No. 000-17758)). | |
3.2
|
By-Laws of Emisphere Technologies, Inc., as amended December 7, 1998 (filed as Exhibit 3(ii) to the Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1999) and as further amended on September 23, 2005 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 30, 2005 and incorporated herein by reference (SEC File No. 000-17758)). | |
3.3
|
Amendment, effective as of September 11, 2007, to the Amended By-Laws of Emisphere Technologies, Inc. (filed as Exhibit 3.1 to the Current Report on Form 8-K, filed on September 14, 2007 and incorporated herein by reference (SEC File No. 000-17758)). | |
4.1
|
Restated Rights Agreement dated as of April 7, 2006 between Emisphere Technologies, Inc. and Mellon Investor Services, LLC (filed as Exhibit 1.1 to the Current Report on Form 8-K filed April 10, 2006 and incorporated herein by reference (SEC File No. 000-17758)). | |
31.1
|
Certification of the Interim Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith). | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002 (furnished herewith). | |
101. INS*
|
XBRL Instance Document. | |
101. SCH*
|
XBRL Taxonomy Extension Schema Document. | |
101. CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document. | |
101. LAB*
|
XBRL Taxonomy Extension Label Linkbase Document. | |
101. PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document. | |
101. DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document. | |
* | Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, and are otherwise not subject to liability under these sections. |
28