<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal period ended: June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-16033
ESPERION THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 2834 38-3419139
(State of incorporation) (Primary Standard Industrial (IRS Employer
Classification Code No.) Identification No.)
3621 S. State Street, 695 KMS Place
Ann Arbor, MI 48108
(734) 332-0506
(Address of principal executive offices, including zip
code, and 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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[_] Yes [X] No
The number of outstanding shares of the Registrant's common stock, as of
September 15, 2000, was 24,944,559.
<PAGE>
ESPERION THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999................................................................. 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999 and the period from inception to
June 30, 2000............................................................ 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 and the period from inception to June 30, 2000.... 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 14
Item 2. Changes in Securities and Use of Proceeds.................................... 14
Item 3. Defaults Upon Senior Securities.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................... 15
Item 5. Other Information............................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................. 15
SIGNATURES.............................................................................. 16
INDEX TO EXHIBITS....................................................................... 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ESPERION THERAPEUTICS, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
in thousands 2000 1999
----------------------------------------------------------------------------------------------------------------
Assets: (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,685 $ 5,904
Prepaid expenses and other 399 139
----------------------------------------------------------------------------------------------------------------
Total current assets 23,084 6,043
----------------------------------------------------------------------------------------------------------------
Furniture and equipment, net 2,138 1,956
Deposits and other assets 655 0
----------------------------------------------------------------------------------------------------------------
Total assets $ 25,877 $ 7,999
================================================================================================================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 495 $ 495
Accounts payable 1,143 1,425
Accrued liabilities 3,732 980
----------------------------------------------------------------------------------------------------------------
Total current liabilities 5,370 2,900
----------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 1,975 2,284
Stockholders' equity:
Convertible preferred stock 219 105
Common stock 2 2
Additional paid-in capital 45,712 16,467
Notes receivable (91) (106)
Accumulated deficit during the development stage (24,020) (12,813)
Deferred stock compensation (3,282) (838)
Accumulated other comprehensive loss (8) (2)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 18,532 2,815
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,877 $ 7,999
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Inception to
June 30, June 30, June 30,
-------------------------------------------------------
in thousands except share and per share data 2000 1999 2000 1999 2000
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 6,103 $ 2,422 $ 10,166 $ 3,692 $ 20,574
General and administrative 720 563 1,726 878 4,707
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,823 2,985 11,892 4,570 25,281
---------------------------------------------------------------------------------------------------------------------------
Operating loss (6,823) (2,985) (11,892) (4,570) (25,281)
Other income, net 309 99 685 234 1,261
---------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (6,514) (2,886) (11,207) (4,336) (24,020)
Provision for income taxes 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------------------
Net loss (6,514) (2,886) (11,207) (4,336) (24,020)
Beneficial conversion feature on preferred stock 0 0 (22,870) 0 (22,870)
---------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($6,514) ($2,886) ($34,077) ($4,336) ($46,890)
---------------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share ($2.95) ($1.68) ($16.28) ($2.53)
-------------------------------------------------------------------------------------------------------------
Weighted average common shares 2,208,721 1,721,797 2,093,361 1,713,448
-------------------------------------------------------------------------------------------------------------
Pro forma basic and diluted net loss per share ($0.36) ($0.31) ($1.96) ($0.47)
-------------------------------------------------------------------------------------------------------------
Pro forma weighted average common shares 18,023,681 9,308,041 17,383,060 9,299,692
-------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Inception to
June 30, June 30,
-----------------------------
in thousands 2000 1999 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($11,207) ($4,336) ($24,020)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 328 143 799
Amortization of deferred stock compensation 506 140 785
Stock-based compensation expense 413 0 688
Decrease in notes receivable 15 7 34
Changes in assets and liabilities:
Prepaid expenses and other (314) 64 (452)
Other assets (5) (20) (4)
Accounts payable (262) 923 1,133
Accrued liabilities 1,638 379 2,371
------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (8,888) (2,700) (18,666)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of furniture and equipment (510) (944) (2,937)
Deposit on furniture and equipment (450) 0 (450)
------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (960) (944) (3,387)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock 26,871 0 42,200
Proceeds from the issuance of common stock 50 0 52
Proceeds from long-term debt 0 1,486 3,027
Repayments of long-term debt (248) 0 (496)
------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,673 1,486 44,783
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (44) (20) (45)
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,781 (2,178) 22,685
Cash and cash equivalents at beginning of period 5,904 12,541 0
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,685 $ 10,363 $ 22,685
------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 142 $ 0
Income taxes $ 0 $ 0
-------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ESPERION THERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Esperion Therapeutics, Inc. ("Esperion" or the "Company") and
its subsidiary, and have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The Company believes
that all adjustments, consisting of normal recurring adjustments considered
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Form S-1.
Operating results for the three and six month periods ended June 30, 2000 and
1999 are not necessarily indicative of the results that may be expected for the
full year.
(2) - Initial Public Offering of Common Stock
In August 2000, the Company completed an initial public offering of its stock,
which resulted in the issuance of 6,000,000 shares of common stock at $9.00 per
share. In September 2000, an additional 900,000 shares were sold by the Company
at $9.00 per share to cover the underwriters' over-allotment.
(3) - Comprehensive Loss
Comprehensive loss is the total of net loss and all other non-owner changes in
equity. Total comprehensive loss was $6,518,000 and $2,881,000 for the three
month periods ended June 30, 2000 and 1999, respectively, and $11,213,000 and
$4,330,000 for the six month periods ended June 30, 2000 and 1999, respectively.
The difference between net loss, as reported in the accompanying condensed
consolidated statements of operations, and comprehensive loss is the foreign
currency translation adjustment for the respective periods.
(4) - Basic, Diluted and Pro Forma Loss per Share
Basic and diluted loss per share amounts have been calculated using the
weighted average number of shares of common stock outstanding during the
respective periods.
In all periods presented, options for the purchase of common stock were not
included in the calculation of diluted loss per share as doing so would have
been anti-dilutive.
6
<PAGE>
The following table presents the calculation of pro forma basic and diluted net
loss per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2000 1999 2000 1999
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders........... $(6,514,000) $(2,886,000) $(34,077,000) $(4,336,000)
============================= ==============================
Shares used in computing basic and diluted net loss
per share............................................. 2,208,721 1,721,797 2,093,361 1,713,448
Pro forma adjustment to reflect assumed conversion
of Series A and Series B preferred stock.............. 7,586,244 7,586,244 7,586,244 7,586,244
Pro forma adjustment to reflect assumed conversion
of Series C and Series D preferred stock.............. 8,228,716 -- 7,703,455 --
----------------------------- ------------------------------
Shares used in computing pro forma basic and diluted
net loss per share.................................... 18,023,681 9,308,041 17,383,060 9,299,692
============================= ==============================
Pro forma basic and diluted net loss per share......... $ (0.36) $ (0.31) $ (1.96) $ (0.47)
============================= ==============================
</TABLE>
Series C and Series D Preferred Stock
In accordance with EITF 98-5, the Company recorded approximately $22.9 million
relating to the beneficial conversion feature of the Series C preferred stock
and Series D preferred stock in the first quarter of fiscal 2000 through equal
and offsetting adjustments to additional paid-in capital with no net impact on
stockholders' equity, as the preferred stock was convertible immediately on the
date of issuance. The beneficial conversion feature was considered in the
determination of the Company's loss per common share amounts in the applicable
periods.
(5) - Commitments and Contingencies
Legal Proceeding
On March 22, 2000, Talaria Therapeutics, Inc. filed a lawsuit, in which the
Company was one of several named defendants, regarding intellectual property and
other matters. In this lawsuit, Talaria alleges, among other things, that a
patent application that the Company sublicenses improperly incorporates within
it confidential information belonging to the person named as the investor in
certain patents. In August 2000, the Company entered into a non-binding letter
of intent providing for the acquisition of Talaria (see Note 7). The
acquisition, if completed, would resolve such litigation and remove the
uncertainty about the patent application that the Company sublicenses. The
completion of the acquisition of Talaria is subject to certain closing
conditions. If the acquisition is not completed, the Company is prepared to
defend this litigation in court. At this time, the Company is not able to
determine with any certainty the potential outcome of this action or the
potential liability, if any, and as such, no reserve has been recorded in the
accompanying condensed consolidated balance sheets at June 30, 2000.
Contingent repurchase of stock
The Company may be required to repurchase approximately 47,000 shares of
common stock that was sold to certain employees and others under the Company's
directed share program as part of the initial public offering (see Note 2). The
Company believes that the maximum liability arising from this repurchase would
be approximately $423,000 plus interest. A liability has not been recorded in
the financial statements, as management believes that the potential repurchase
of these shares is not likely.
7
<PAGE>
(6) - Reverse Stock Split
The Company effected a 0.7225-for-1 reverse stock split of all outstanding
common stock and stock options as of March 24, 2000. All references to the
number of shares and per share amounts have been retroactively restated to
reflect this reverse stock split.
(7) - Subsequent Events
In August 2000, the Company entered into a non-binding letter of intent to
acquire Talaria Therapeutics, Inc. by way of a merger. The letter of intent
provides for the exchange of all of the outstanding shares of stock of Talaria
for 813,008 shares of our common stock. The letter of intent also provides for
additional payments to Talaria stockholders of up to $6.25 million in cash or
common stock upon the achievement of four future development milestones. The
milestone payments would become due upon the enrollment of the first patient in
certain clinical trials and each of the filing and approval of a new drug
application in the United States. These milestones would increase the amount of
the initial purchase price in the period when the milestone is achieved. The
letter of intent further provides for deferred contingent payments in cash or
common stock due to Talaria stockholders based on future net sales of the
product in North America, as defined in the letter of intent. The deferred
contingent payments would be calculated at a rate of approximately 6% of such
net sales or 25% of any sublicensing royalties that the Company receives based
upon such net sales. Both the milestone payments and the deferred contingent
payments are subject to a combined maximum aggregate amount of $20.0 million.
These deferred contingent payments would be included in cost of sales in the
period when the respective sales are recognized. The acquisition is subject to
the negotiation of a definitive merger agreement and related documents, which
would include customary closing conditions, including approval by each company's
board of directors and Talaria's stockholders.
The acquisition, if completed, would be accounted for under the purchase
method of accounting. The purchase price would be allocated to both tangible and
intangible assets. As a result of this allocation, the Company expects to write-
off approximately $4.0 million of acquired in-process research and development.
Any remaining purchase price would be allocated to goodwill and amortized over a
period of five years. The final allocation would be based on an independent
appraisal of the fair values on the closing date.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
Company's consolidated financial statements and the notes included in Item 1 of
this Form 10-Q.
Forward-Looking Information is Subject to Risk and Uncertainty
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as information contained elsewhere in this report
contains "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include, but are not limited to, statements concerning certain costs and
operating expense levels, the level of other income, the Company's liquidity and
capital needs, various business environment and trend information, completion of
clinical trials, the Company's product candidates, research and development,
manufacturing, sales, marketing and commercialization of potential products, and
the potential acquisition of Talaria Therapeutics, Inc. When used in this
report, we intend the words "may," "believe," "anticipate," "planned," "expect,"
"require," "intend," "assume" and similar words to identify "forward-looking
statements." Our forward-looking statements involve uncertainties and other
factors that may cause our actual results, performance or achievements, to be
far different from that suggested by our forward-looking statements. These
factors include, but are not limited to, risks associated with the development
of our product candidates, including regulatory approval; dependence on clinical
research organizations, license arrangements and other strategic relationships;
dependence on patents and proprietary rights; procurement, maintenance,
enforcement and defense of its patents and proprietary rights; risks related to
manufacturing; risks related to the ability to consummate the potential
acquisition of Talaria; risks associated with the timing and acceptance of new
products by the Company or its competitors; competitive conditions in the
industry; business cycles affecting the markets in which the Company's products
are sold; extraordinary events, such as litigation; risks inherent in seeking
and consummating acquisitions, including the diversion of management attention
to the assimilation of the operations and personnel of the acquired business;
fluctuations in foreign exchange rates; and economic conditions generally or in
various geographic areas. All of the foregoing factors are difficult to
forecast. The future operating results of the Company may fluctuate materially
as a result of these and other risk factors detailed from time to time in the
Company's Securities and Exchange Commission reports and detailed in the
Company's Registration Statement on Form S-1, as amended (Registration No. 333-
31032), originally filed with the Securities and Exchange Commission on February
24, 2000. Accordingly, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance. It is likely that, in some
future quarters, the Company's operating results will be below the expectations
of stock market analysts and investors. In such an event, the price of the
Company's common stock would likely be materially adversely affected. You should
not place undue reliance on our forward-looking statements. We do not intend to
update any of these factors or to publicly announce the results of any revisions
to any of these forward-looking statements.
Overview
Background
We have devoted substantially all of our resources since we began our
operations in May 1998 to the research and development of pharmaceutical product
candidates for cardiovascular disease. We are a development stage pharmaceutical
company and have not generated any revenues from product sales. We have not been
profitable and have incurred a cumulative net loss of approximately $24.0
million from inception through June 30, 2000. These losses have resulted
principally from costs incurred in research and development activities, and
general and administrative expenses. We expect to incur significant additional
operating losses for at least the next several years and until such time as we
generate sufficient revenue to offset expenses. Research and development costs
relating to product candidates will continue to increase. Manufacturing, sales
and marketing costs will increase as we prepare for the commercialization of our
products.
9
<PAGE>
Recent Development
In August 2000, we entered into a non-binding letter of intent providing for
our acquisition of Talaria Therapeutics, Inc. by way of a merger. The proposed
letter of intent provides for the exchange of all of the outstanding shares of
stock of Talaria for 813,008 shares of our common stock. The letter of intent
also provides for additional payments by us to Talaria stockholders of up to
$6.25 million in cash or common stock upon the achievement of four future
development milestones, of which $750,000 may become due within the next twelve
months. The milestone payments would become due upon the enrollment of the first
patient in certain future clinical trials and each of the filing and approval of
a new drug application in the United States. The letter of intent further
provides for deferred contingent payments in cash or common stock payable to
Talaria stockholders based on net sales of large unilamellar vesicles, or LUVs,
in North America, as defined in the letter of intent. We expect that the
deferred contingent payments would be calculated at a rate of approximately 6%
of such net sales, or 25% of sublicensing royalties that we would receive based
upon such net sales. Both the milestone payments and the deferred contingent
payments are subject to a combined maximum aggregate amount of $20.0 million.
The acquisition, if completed, would be accounted for under the purchase
method of accounting. The initial purchase price for amounts due at closing
would be allocated to both tangible and intangible assets. As a result of this
initial estimated allocation, we expect to write-off approximately $4.0 million
of acquired in-process research and development. Any remaining purchase price
would be allocated to goodwill and amortized over a five-year period. The final
allocation would be based on an independent appraisal of the fair values on the
closing date. We expect that we would account for the milestone payments as
increases to the initial purchase price in the period when the milestone is
achieved and we would include these additional amounts as part of goodwill. We
expect to account for any deferred contingent payments relating to sales of the
LUV product as cost of sales in the period when the related sales are
recognized.
We expect to allocate $4.0 million of the initial purchase price to acquired
in-process research and development based on the assumption that the development
of LUVs has not yet reached technological feasibility, and that no alternative
future uses have been identified. Significant further investment is required to
complete the development of the acquired technology, including completion of
clinical trials, manufacturing scale-up and successful regulatory approvals.
Talaria had spent approximately $3.2 million on the development of the in-
process project since its inception in 1998; the patent holders spent additional
amounts on scientific research prior to 1998. We expect to spend an additional
$20.0 million in third party costs over all phases of the project prior to
commercialization. Of these remaining costs, approximately $15.0 million would
relate to a Phase III clinical trial which is expected to commence after the
Phase II clinical trials are completed, but not sooner than 2002. Our
expectations with respect to these additional costs, adjustments and periods are
preliminary and therefore subject to substantial sequential adjustments.
Results of Operations
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
dollars in thousands 2000 1999 % Change 2000 1999 % Change
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $6,103 $2,422 152.0% $10,166 $3,692 175.4%
% of total 89.4% 81.1% 85.5% 80.8%
General and administrative $ 720 $ 563 27.9% $ 1,726 $ 878 96.6%
% of total 10.6% 18.9% 14.5% 19.2%
</TABLE>
10
<PAGE>
Three Months Ended June 30, 2000
Research and Development Expenses. Research and development expenses increased
to approximately $6.1 million for the three months ended June 30, 2000 compared
to approximately $2.4 million for the three months ended June 30, 1999. This
increase is primarily due to the costs associated with developing our product
candidates, including new product candidates discovered or in-licensed over the
past year, as well as higher personnel costs.
General and Administrative Expenses. General and administrative expenses
increased to approximately $720,000 for the three months ended June 30, 2000
compared to approximately $563,000 for the three months ended June 30, 1999.
This increase is primarily due to higher personnel costs to support the growth
in the operations.
Other Income (Expense). Interest income increased to approximately $313,000
for the three months ended June 30, 2000 compared to approximately $99,000 for
the three months ended June 30, 1999. The increase is attributable to higher
levels of cash and cash equivalents available for investment in 2000. Interest
expense for the three months ended June 30, 2000 and 1999 was approximately
$48,000 and $0, respectively, and represents interest incurred on an equipment
financing facility and a special project loan in 2000. During the three months
ended June 30, 2000, we recorded approximately $44,000 of foreign currency
transaction gains on transactions denominated in various currencies of European
countries.
Net Loss. The net loss was approximately $6.5 million for the three months
ended June 30, 2000 compared to approximately $2.9 million for the three months
ended June 30, 1999. The increase reflects increases in research and development
and general and administrative expenses, offset in part by the increase in
interest income.
Six Months Ended June 30, 2000
Research and Development Expenses. Research and development expenses increased
to approximately $10.2 million for the six months ended June 30, 2000 compared
to approximately $3.7 million for the six months ended June 30, 1999. This
increase is primarily due to the costs associated with developing our product
candidates, including new product candidates discovered or in-licensed over the
past year, as well as higher personnel costs.
General and Administrative Expenses. General and administrative expenses
increased to approximately $1.7 million for the six months ended June 30, 2000
compared to approximately $878,000 for the six months ended June 30, 1999. This
increase is primarily due to increased general and administrative personnel and
facility costs as well as a $413,000 non-cash compensation charge related to the
issuance of series C preferred stock in exchange for services rendered by an
employee and a director.
Other Income (Expense). Interest income increased to approximately $665,000
for the six months ended June 30, 2000 compared to approximately $235,000 for
the six months ended June 30, 1999. The increase is attributable to higher
levels of cash and cash equivalents available for investment in 2000. Interest
expense for the same periods was approximately $177,000 and $1,000 and
represents interest incurred on an equipment financing facility and a special
project loan in 2000. During the six months ended June 30, 2000, we recorded
approximately $197,000 of foreign currency transaction gains on transactions
denominated in various currencies of European countries.
Net Loss. The net loss was approximately $11.2 million for the six months
ended June 30, 2000 compared to approximately $4.3 million for the six months
ended June 30, 1999. The increase reflects increases in research and development
and general and administrative expenses, offset in part by the increase in
interest income.
Net Loss Attributable to Common Stockholders. The net loss attributable to
common stockholders for the six months ended June 30, 2000 includes a one-time
$22.9 million charge related to the beneficial conversion feature on the series
C and series D convertible preferred stock. The total of the non-cash beneficial
conversion feature was reflected through equal and offsetting adjustments to
additional paid-in-capital with no net impact on stockholders' equity. The
beneficial conversion feature was considered in the determination of our loss
per common share amounts.
11
<PAGE>
Liquidity and Capital Resources
In August 2000, the Company completed an initial public offering of its stock,
which resulted in the issuance of 6,000,000 shares of common stock at $9.00 per
share. In September 2000, an additional 900,000 shares were sold by the Company
at $9.00 per share to cover the underwriters' over-allotment. Total proceeds to
the Company from the offering were approximately $57.8 million, after deducting
the underwriting discount. As of June 30, 2000, the Company had cash and cash
equivalents of approximately $22.7 million, an increase of approximately $16.8
million from December 31, 1999 resulting primarily from the issuance of series C
and series D preferred stock financings in January 2000 and February 2000,
respectively, offset by approximately $8.9 million in cash used to fund
operations. We believe that our current cash position, available borrowings
under our credit facilities and the proceeds of the initial public offering will
be sufficient to fund our operations and capital expenditures until at least the
end of 2002.
During the six months ended June 30, 2000 and 1999, net cash used in operating
activities was approximately $8.9 and $2.7 million, respectively. This cash was
used to fund our net losses for the periods, adjusted for non-cash expenses and
changes in operating assets and liabilities.
Net cash used in investing activities for the six months ended June 30, 2000
and 1999 was $960,000 and $944,000, respectively, primarily the result of the
acquisition of laboratory equipment, furniture and fixtures and office
equipment.
Net cash proceeds from financing activities were $26.7 million and $1.5
million for the six months ended June 30, 2000 and 1999, respectively. The net
cash proceeds from financing activities for the six months ended June 30, 2000
were primarily from the issuance of preferred stock. The net cash proceeds from
financing activities during the six months ended June 30, 1999 were from
borrowings on an equipment loan.
We anticipate that our capital expenditures will be approximately $2.5 million
in 2000. These expenditures include an agreement we have entered into with a
scientific instrument manufacturer to purchase a specialized piece of equipment
for $1.0 million. We expect delivery in the second half of 2000.
As of June 30, 2000, we had approximately $991,000 outstanding under a credit
facility with a U.S. bank. This credit facility was used to finance purchases of
equipment. Borrowings under the facility bear interest at the bank's prime rate
plus 1.0%. We also have a credit facility with a Swedish entity totaling 50
million Swedish kronor (approximately $1.5 million of which was outstanding as
of June 30, 2000) that may only be used to finance the development of our AIM
product candidate. If a related product is not developed or does not succeed in
the market, our obligation to repay the loan may be forgiven. Borrowings under
the loan facility bear interest at 17.0% of which 9.5% is payable quarterly. The
remaining 7.5% of interest together with principal are payable in five equal
annual installments starting December 2004.
We have signed a commitment letter with a U.S. lender for a credit facility
that may be used to finance past and future purchases of equipment. If final
loan documents are signed relating to this facility, the aggregate borrowings
available under the facility would be $2.5 million. This facility is subject to
completion of the final loan documents and approval from the lender.
We lease our corporate and research and development facilities under operating
leases expiring at various times through June 2002. We may extend these leases
for additional periods. Minimum annual payments under these leases are
approximately $491,000 as of June 30, 2000.
We expect that our operating expenses and capital expenditures will increase
in future periods. We also intend to hire additional research and development,
clinical testing and administrative staff. Our capital expenditure requirements
will depend on numerous factors, including the progress of our research and
development programs, the time required to file and process regulatory approval
applications, the development of commercial manufacturing capability, the
ability to obtain additional licensing arrangements, and the demand for our
product candidates, if and when approved by the FDA or other regulatory
authorities.
12
<PAGE>
Income Taxes
As of June 30, 2000, we had net operating loss carryforwards of approximately
$20.9 million. These net operating loss carryforwards expire beginning in 2018.
Additionally, utilization of net operating loss carryforwards may be limited
under Section 382 of the Internal Revenue Code. These and other deferred income
tax assets are fully reserved by a valuation allowance as management has
determined that it is more likely than not that the deferred tax assets will not
be realized.
Employees
As of June 30, 2000, we had 47 employees. Of these employees, 39 were engaged
in research, preclinical and clinical development, regulatory affairs,
intellectual property activities, and/or manufacturing activities and 8 were
engaged in finance and general administrative activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Under our current policies, we do not use interest rate derivative instruments
to manage our exposure to interest rate changes. We ensure the safety and
preservation of our invested principal funds by limiting default risks, market
risk and reinvestment risk. We mitigate default risk by investing in investment
grade securities. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at June 30, 2000.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 22, 2000, Talaria filed a lawsuit against us and Inex Pharmaceuticals
Corp., or Inex, the University of British Columbia, or UBC, and the two
inventors named on patent applications we sub-licensed from Inex. One of these
inventors is now employed by us. One of the allegations in the lawsuit, which
was filed in the United States District Court for the Eastern District of
Virginia, is the improper incorporation into a UBC patent application of certain
confidential information of Dr. Williams. This UBC patent application is
exclusively licensed to Inex and sublicensed to us. In addition to seeking
damages, Talaria is asking to be named as the owner or co-owner of the UBC
patent application. The parties to the lawsuit have agreed that UBC would take
appropriate action in the United States Patent and Trademark Office to prevent
issuance of the UBC patent application as a patent until the court had an
opportunity to decide certain motions. These motions include one filed by
Talaria for a preliminary injunction that would have UBC withdraw the UBC patent
applications pending a full trial of the lawsuit or prevent UBC from prosecuting
the patent applications. In August 2000, the Company entered into a non-binding
letter of intent providing for the acquisition of Talaria. The acquisition, if
completed, would resolve such litigation and remove the uncertainty about the
patent application that the Company sublicenses. The completion of the
acquisition of Talaria is subject to certain closing conditions. If the
acquisition is not completed, the Company is prepared to defend this litigation
in court. No assurance can be given that any acquisition of Talaria, or any
settlement of litigation, can be successfully completed. While we believe that
there are valid defenses to Talaria's claims as well as certain indemnification
rights against Inex, any such defense would be expensive and would divert
management's attention, and there can be no assurances as to the ultimate
outcome.
Item 2. Changes in Securities and Use of Proceeds
On August 10, 2000, the Company consummated its initial public offering (the
"Offering") of its common stock, .001 par value (the "Common Stock") based on
the Registration Statement on Form S-1, as amended, relating to this offering
(Registration No. 333-31032), which was declared effective on August 9, 2000.
Robertson Stephens, Chase H&Q and U.S. Bancorp Piper Jaffray were the managing
underwriters of the Offering. The Offering terminated on September 8, 2000 upon
the sale of all shares registered. The number of shares registered, the
aggregate price of the offering amount registered, the amount sold and the
aggregate offering price of the amount sold by the Company in the Offering were
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Shares Aggregate Price Aggregate
Closing Date Registered Registered Amount Sold Price Sold
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary Offering August 15, 2000 6,000,000 $54,000,000 6,000,000 $54,000,000
--------------------------------------------------------------------------------------------------------------------
Over-allotment Offering September 8, 2000 900,000 $ 8,100,000 900,000 $ 8,100,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>
As of the closing of the Offering on September 8, 2000, the Company had
incurred the following expenses, none of which were direct or indirect payments
to directors, officers, general partners of the Company or their associates or
to persons owning 10% of more of any class of equity securities of the Company
or to affiliates of the Company:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Underwriting
Discounts and Underwriters' Other Total
Commissions Finders Fees Expenses Expenses (1) Expenses (1)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary Offering $3,780,000 $0 $0 $1,800,000 $5,580,000
--------------------------------------------------------------------------------------------------------------------
Over-allotment Offering $ 567,000 $0 $0 $ 100,000 $ 667,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated.
14
<PAGE>
The net offering proceeds to the Company, from the Offering, after deducting
the foregoing discounts, commissions, fees and expenses were $55,853,000. From
August 15, 2000 through the date of this filing, the Company invested the net
proceeds from the Offering in cash equivalents and short-term investments.
Pursuant to our 1998 Stock Option Plan, during the three months ended June 30,
2000, we have granted options to purchase a total of 23,837 shares of common
stock. During the three months ended June 30, 2000, options to purchase a total
of 7,768 shares of common stock were exercised. In granting the options and
selling the underlying securities upon exercises of the options, we are relying
upon exemptions from registration set forth in Section 4(2) of the Securities
Act of 1933, as amended, and/or Rule 701, Regulation D or Regulation S
promulgated thereunder.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
-------------------------------------------------------------------------------
(3.3) Fifth Amended and Restated Certificate of Incorporation of the
Company.
(3.4) Amended and Restated Bylaws of the Company.
(27.1) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 2000.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: September 20, 2000 ESPERION THERAPEUTICS, INC.
(Registrant)
By: /s/ Roger S. Newton
--------------------------------------------
Roger S. Newton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy M. Mayleben
--------------------------------------------
Timothy M. Mayleben
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
INDEX TO EXHIBITS
Number Exhibit
--------------------------------------------------------------------------------
(3.3) Fifth Amended and Restated Certificate of Incorporation of the
Company.
(3.4) Amended and Restated Bylaws of the Company.
(27.1) Financial Data Schedule.
17
