FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10615
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15 Skyline Drive 10532
Hawthorne, New York (Zip Code)
(Address of principal
executive offices)
(914) 347-2220
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of June 1, 1998 was: 10,981,694
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
TABLE OF CONTENTS
April 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
----
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statement of Stockholders' Equity 5
Condensed Statements of Cash Flows 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
July 31, April 30,
1997 1998
Assets: ----------- -----------
Current assets:
Cash and cash equivalents $22,398,967 $18,570,644
Marketable securities 11,291,255 9,008,174
Receivable due from Ebbisham Ltd. 648,786 5,308,908
Prepaid expenses and other current assets 448,114 738,098
----------- -----------
Total current assets 34,787,122 33,625,824
Equipment and leasehold improvements, at cost, net
of accumulated depreciation and amortization 2,046,087 8,048,445
Other assets 64,243 61,243
----------- ----------
Total assets $36,897,452 $41,735,512
=========== ===========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 254,715 $ 614,972
Accrued compensation 215,000 266,000
Accrued professional fees 288,000 161,000
Accrued expenses 166,858 18,569
Investment deficiency in Ebbisham Ltd. 2,539,958 5,710,202
----------- -----------
Total current liabilities 3,464,531 6,770,743
Deferred lease liability 34,542 444,177
----------- -----------
Total liabilities 3,499,073 7,214,920
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value; 20,000,000 shares
authorized; 10,733,877 shares issued
(10,690,377 outstanding) at July 31, 1997;
11,023,438 shares issued (10,979,938
outstanding) at April 30, 1998 107,339 110,234
Additional paid-in capital 83,516,461 88,355,340
Accumulated deficit (50,057,115) (53,756,368)
Net unrealized gain on marketable securities 24,507 4,199
----------- -----------
33,591,192 34,713,405
Less, common stock held in treasury, at cost;
43,500 shares (192,813) (192,813)
----------- -----------
Total stockholders' equity 33,398,379 34,520,592
----------- -----------
Total liabilities and stockholders' equity $36,897,452 $41,735,512
=========== ===========
See accompanying notes to financial statements. The July 31, 1997 Condensed
Balance Sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
3
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
April 30, April 30,
------------------------- -------------------------
1997 1998 1997 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Contract revenues $ 1,595,078 $6,467,939 $ 4,124,594 $11,592,162
----------- ---------- ----------- -----------
Costs and expenses:
Research and development 2,010,506 3,343,381 5,536,583 9,983,162
Loss in Ebbisham Ltd. 689,524 975,622 1,987,069 3,170,244
General and administrative 1,190,752 1,236,254 2,839,103 3,446,836
----------- ---------- ----------- -----------
Total operating expenses 3,890,782 5,555,257 10,362,755 16,600,242
Operating (loss) income (2,295,704) 912,682 (6,238,161) (5,008,080)
----------- ---------- ----------- ----------
Other income:
Investment income 221,420 366,348 728,839 1,308,827
----------- ---------- ----------- ----------
Net (loss) income $(2,074,284) $1,279,030 $(5,509,322) $(3,699,253)
=========== ========== =========== ===========
Net (loss) income per share-basic $(0.22) $0.12 $(0.58) $(0.35)
====== ===== ====== ======
Net (loss) income per share-diluted $(0.22) $0.10 $(0.58) $(0.35)
====== ===== ====== ======
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the nine months ended April 30, 1998
<TABLE>
<CAPTION>
Net
Unrealized Common Stock
Common Stock Additional Gain On Held In Treasury
-------------------- Paid-in Accumulated Marketable ------------------
Shares Amount Capital Deficit Securities Shares Amount Total
---------- -------- ----------- ------------- ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1997 10,733,877 $107,339 $83,516,461 $(50,057,115) $ 24,507 43,500 $(192,813) $33,398,379
Exercise of options and
employee stock purchases 39,561 395 483,879 484,274
Exercise of warrants 250,000 2,500 4,060,000 4,062,500
Issuance of stock options to
consultants in exchange for
services rendered 295,000 295,000
Change in net unrealized gain
on marketable securities (20,308) (20,308)
Net loss for the nine months
ended April 30, 1998 (3,699,253) (3,699,253)
---------- -------- ----------- ------------ -------- ------ --------- -----------
Balance, April 30, 1998 11,023,438 $110,234 $88,355,340 $(53,756,368) $ 4,199 43,500 $(192,813) $34,520,592
========== ======== =========== ============ ======== ====== ========= ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
April 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,509,322) $(3,699,253)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss in Ebbisham Ltd. 1,987,069 3,170,244
Depreciation and amortization 312,310 342,249
Decrease in deferred lease liability (7,711) 409,635
Realized gain on sale of marketable securities (29) (14,123)
Noncash compensation in connection with
issuance of equity securities 295,000
Change in assets and liabilities:
Receivable due from Ebbisham Ltd (662,730) (4,660,122)
Prepaid expenses and other current assets (82,777) (289,984)
Other assets 3,000
Accounts payable and accrued expenses 77,746 (6,106)
Investment in Ebbisham Ltd. (9,998)
----------- -----------
Total adjustments 1,613,880 (750,207)
----------- -----------
Net cash (used in) operating activities (3,895,442) (4,449,460)
----------- -----------
Cash flows from investing activities:
Capital expenditures (278,278) (6,202,533)
Purchase of marketable securities (9,952,421) (6,526,959)
Proceeds from sales of marketable securities 7,294,913 8,803,855
----------- -----------
Net cash (used in) investing activities (2,935,786) (3,925,637)
----------- -----------
Cash flows from financing activities:
Net proceeds from exercise of warrants 4,062,500
Proceeds from exercise of options and employee
stock purchases 1,049,254 484,274
----------- -----------
Net cash provided by financing activities 1,049,254 4,546,774
----------- -----------
Net (decrease) in cash and cash equivalents (5,781,974) (3,828,323)
Cash and cash equivalents, beginning of period 11,904,674 22,398,967
----------- -----------
Cash and cash equivalents, end of period $ 6,122,700 $18,570,644
=========== ===========
Supplemental disclosure of non-cash items:
Equipment and leasehold improvements included
in accounts payable and accrued expenses $ 142,074
===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
EMISPHERE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements:
The interim Condensed Statements of Operations for the three months and nine
months ended April 30, 1997 and 1998 and Condensed Statements of Cash Flows for
the nine months ended April 30, 1997 and 1998, and the Condensed Balance
Sheets as of July 31, 1997 and April 30, 1998, of Emisphere Technologies, Inc.
(the "Company"), have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
information and disclosures necessary for a presentation of the Company's
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, these
financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for such periods. The
results of operations for any interim period are not necessarily indicative of
the results for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1997.
2. Elan-Emisphere Venture:
During October 1996, the equally owned joint venture formed by the Company and
Elan Corporation plc (the "Elan-Emisphere Venture" or the "Venture") commenced
operations. The Company accounts for its investment in the Venture in
accordance with the equity method of accounting. Since the Venture's inception
(September 1996), the Company has contributed capital to the Venture of
approximately $10,000.
Contract revenue from the Venture, with respect to services provided by the
Company to the Venture, is recognized as the related services are rendered.
Such revenue for the three and nine months ended April 30, 1998 totaled
approximately $1,786,000 and $4,660,000, respectively, as compared to $970,000
for the three months ended April 30, 1997 and $3,351,000, for the period from
the Venture's inception (September 1996) to April 30, 1997.
Selected financial data of the Venture as of April 30, 1998 and for the three
and nine months ended April 30, 1998 and 1997 is as follows:
Balance Sheet Data
Assets:
Cash $ 732,000
Accounts payable 6,940,000
Subordinated debt 4,500,000
Stockholders' deficit (10,708,000)
Statement of
Operations Data
Three Months Ended Nine Months Ended
------------------------- --------------------------
Inception
(September
April 30, April 30, 1996 to April April 30,
1997 1998 30, 1997) 1998
---------- ---------- ------------- ----------
Total Revenue $ 26,000 $ 8,000 $ 71,000 $ 24,000
Total Expenses 1,406,000 1,959,000 4,046,000 6,364,000
---------- ---------- ---------- ----------
Net Loss $1,380,000 $1,951,000 $3,975,000 $6,340,000
========== ========== ========== ==========
7
<PAGE>
3. Novartis Pharma AG
During December of 1997, (the "Effective Date"), the Company and Novartis
Pharma AG ("Novartis") entered into a Research Collaboration to investigate
Emisphere's technology for oral delivery of two selected Novartis compounds.
The Company's agreement with Novartis provides for an initial research
collaboration period of at least 12 months and an option on the part of
Novartis to acquire an exclusive license to use the Company's technologies for
the development and commercialization of oral formulations of the Novartis
compounds.
In addition, Novartis, at the Company's option, has the obligation to purchase,
in four tranches up to $16 million of the Company's Common Stock. Subject to
certain limitations as to potential price variability with respect to the price
for the first tranche, the Common Stock purchased by Novartis will be based on
market prices.
During the initial term, and if applicable, the extension period, Novartis will
provide quarterly payments to the Company for work performed by the Company in
connection with the collaboration. For the period ended April 30, 1998,
revenue recognized from the Novartis agreement totaled $1,000,000. In
addition, the agreement provides for future payments in the event certain
milestones are achieved.
Either party may terminate the Novartis agreement upon written notice to the
other party that such party has breached the Agreement if, within 60 days of
receipt of such notice, such breach has not been cured.
4. Net Loss Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"). As required by SFAS 128, the prior
periods loss per share data have been restated to conform to the provisions of
SFAS No. 128; however, the impact of the restatement was not material.
The Company's basic net (loss) income per share amounts have been computed by
dividing net (loss) income by the weighted average number of Common Shares
outstanding. Diluted net (loss) income per share includes, when dilutive, the
number of shares issuable upon exercise of outstanding options and warrants
using the treasury stock method. The calculations of basic and diluted loss
per share are as follows:
Net (Loss) Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------- ---------
Three months ended April 30,
1997-basic and diluted $(2,074,284) 9,518,876 $(0.22)
=========== ========= =======
Three months ended April 30,
1998-basic $ 1,279,030 10,721,114 $0.12
=====
Effect diluted securities:
Options and warrants 1,748,919
----------- ----------
Diluted per share amounts $ 1,279,030 12,470,033 $0.10
=========== ========== =====
Nine months ended April 30,
1997-basic and diluted $(5,509,322) 9,484,117 $(0.58)
=========== ========== =======
Nine months ended April 30,
1998-basic and diluted $(3,699,253) 10,708,236 $(0.35)
=========== ========== =======
8
<PAGE>
Options and warrants which have been excluded from the diluted per share
amounts because their effect would have been antidilutive include the
following:
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
---------------------------------------- ----------------------------------------
1997 1998 1997 1998
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options and warrants with an
exercise price below the average
fair market value of the
Company's common stock 4,126,817 $10.44 - - 4,065,967 $10.38 4,064,419 $10.46
========= ====== ========= ====== ========= ====== ========= ======
Options and warrants with an
exercise price above the average
fair market value of the
Company's common stock 87,400 $21.56 253,422 $19.63 148,250 $19.66 97,650 $21.44
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
5. Taxes
No provisions for income taxes was recorded for the three months ended April
30, 1998 as the Company was able to reduce its tax liability by utilizing net
operating loss carry forwards.
6. Subsequent Event
On May 1, 1998, the Company issued in a private placement $13,500,000 in
aggregate principal amount of its 5% Senior Convertible Notes due 2001 (the
"Notes"). The Notes were sold at par, mature on May 1, 2001 and bear interest
at 5% per annum, payable in cash or, at the election of the Company, shares of
the Company's Common Stock.
The Notes are convertible at any time into shares of the Company's common stock
at a conversion price, subject to certain floor prices as defined, equal to the
lowest trade price as reported on the Nasdaq National Market during the ten
trading days immediately preceding the date of conversion. In no event may the
holder convert at less than $10 a share and no holder may convert if the
conversion would result in the holder owning more than 4.9% of the Common Stock
then outstanding.
The maximum number of shares that can be issued upon conversion of the Notes is
1,000,000. If at any time the number of shares that would otherwise be
issuable upon conversion of the Notes exceeds 1,000,000, the Company may be
required to redeem, at a premium, a sufficient portion of the Notes so that the
conversion of the remaining portion does not result in more than 1,000,000
shares being issued. The Company may at its option redeem the Notes under
defined conditions. In the event of the default, principal, including a
premium, and accrued interest become due.
If any portion of the Notes has not been converted by May 1, 2001, the Company
may at its option issue four-year 13.75% notes in exchange for the Notes. The
Notes include in addition to other covenants, limitations on the amount of
additional indebtedness the Company may incur.
7. Impact of the Future Adoption of Recently Issued Accounting Standard
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130. "Reporting Comprehensive Income" ("SFAS No. 130")
in June 1997. Comprehensive Income represents the change in net assets of a
business enterprise as a result of nonowner transactions. Management does not
believe that the future adoption of SFAS No. 130 will have a material effect on
the Company's financial position and results of operations. The Company will
adopt SFAS No. 130 for the year ending July 31, 1998.
Also in June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 requires
that a business enterprise report certain information about operating segments,
products and services, geographic areas of operation, and major customer. The
Company is required to adopt this standard for the year ending July 31, 1998
and is currently evaluating the impact of the standard.
In February, 1998, the FASB issued Financial Accounting Standard No. 132,
Employers' Disclosures abut Pensions and Other Postretirement Benefits. This
statement modifies financial statement disclosures related to pension and other
postretirement plans, and will not have an effect on the Company's financial
position or results of operations, and is effective for periods beginning after
December 15, 1997.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and elsewhere in this report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: uncertainties related to future
test results and viability of the Company's product candidates, which are in
the early stages of development; the need to obtain regulatory approval for the
Company's product candidates; the Company's dependence on partnerships with
pharmaceutical companies to develop, manufacture and commercialize products
using the Company's drug delivery technologies; the Company's dependence on the
success of its joint venture with Elan Corporation plc ("Elan") (the "Elan
Joint Venture" or "Ebbisham Ltd.") for the development and commercialization of
an oral heparin and low molecular weight heparin product and its strategic
alliance with Eli Lilly and Company ("Lilly") (The "Lilly Strategic Alliance")
for the development and commercialization of certain of Lilly's therapeutic
proteins; and its research collaboration with Novartis Pharma AG ("Novartis")
to investigate Emisphere's technology for oral delivery of two selected
Novartis compounds (the "Novartis Collaboration"); the risk of technological
obsolescence and risks associated with the Company's highly competitive
industry; the Company's dependence on others to manufacture the Company's
chemical compounds; the risk of product liability and policy limits of product
liability insurance; potential liability for human clinical trials; the
Company's dependence on key personnel; the quality, judgment and strategic
decisions of management and other personnel; uncertain availability of
third-party reimbursement for commercial medical products; and general
business and economic conditions; and other factors referenced in the Company's
report on Form 10-K for the fiscal year ended July 31, 1997.
General
Emisphere is a drug delivery company focused on the discovery and application
of proprietary synthetic chemical compounds that enable the oral delivery of
macromolecules and other compounds that are not currently deliverable by oral
means. Since its inception in 1986, the Company has devoted substantially all
of its efforts and resources to research and development conducted on its own
behalf and through collaborations with corporate partners and academic research
institutions. The Company has had no product sales to date. The major sources
of the Company's working capital have been proceeds from public offerings,
private equity financing, reimbursement of expenses and other payments from
corporate partners, and income earned on the investment of available funds.
The Company's operations are not significantly affected by inflation or
seasonality.
Results of Operations
The Company has since its inception generated significant losses from
operations. The Company does not expect to achieve profitability in the
foreseeable future. Profitability will ultimately depend on the Company's
ability to develop its lead products, in conjunction with the Elan Joint
Venture, Lilly and Novartis Strategic Alliances or to develop other projects in
conjunction with other partners. There can be no assurance that the
development will be completed or if completed, any regulatory agency will
approve the final product. Even if final products are developed and approved,
there is no assurance that sales will be sufficient to achieve profitability.
If development of such products is not achieved or approval not granted, the
Company's prospects will be materially affected.
10
<PAGE>
The ability of the Company to reduce its operating losses in the near term will
be dependent upon, among other things, its ability to attract new
pharmaceutical and other companies who are willing to provide funding to the
Company for a portion of the Company's research and development with respect to
specific projects. While the Company is constantly engaged in discussions with
pharmaceutical and other companies, there can be no assurance that the Company
will enter into any additional agreements or that the agreements will provide
research and development revenues to the Company.
Three Months Ended April 30, 1998 vs. Three Months Ended April 30, 1997:
For the three months ended April 30, 1998, the Company recognized $6,468,000
of contract revenue compared to $1,595,000 contract revenue for the three
months ended April 30, 1997. The majority of contract revenue for the three
months ended April 30, 1998 consisted of two milestone and a research funding
payment from Lilly under the research collaboration and option agreement (the
"Lilly Agreement") to combine Lilly's therapeutic protein and formulation
capabilities with the Company's carrier technologies, and the balance from the
recognition of revenues from Ebbisham, Ltd. For the three months ended April
30, 1997 , contract revenue consisted of revenues from the Ebbisham Ltd., of
approximately $970,000 and the balance from Lilly under the Lilly agreement.
Total operating expenses for the fiscal quarter ended April 30, 1998, increased
by $1,664,000, or 43%, as compared to the fiscal quarter ended April 30, 1997.
The details of this increase are as follows:
Research and development costs increased by approximately $1,333,000, or 66%,
in the fiscal quarter ended April 30, 1998, as compared to the fiscal quarter
ended April 30, 1997. This increase is mainly attributable to increased
personnel and laboratory supply costs in connection with the collaborations
with Lilly, Novartis and the ongoing clinical trials work for heparin. The
Company also experienced an increase in funding of outside consultants and
universities engaged to conduct studies to help advance the Company's
scientific research efforts, perform services related to the manufacturing of
the Company's carriers, and consult on the Company's ongoing clinical studies
with heparin. The Company also experienced an increase in rent expense in
connection with payments for a new lease for laboratory space. The Company
believes that this level of research and development spending will continue for
the foreseeable future and may increase if operations are expanded.
The loss in Ebbisham Ltd., increased by approximately $286,000, or 41%, in the
fiscal quarter ended April 30, 1998, as compared to the fiscal quarter ended
April 30, 1997. This increase is attributable to the timing of costs
associated with ongoing clinical development of heparin. The costs associated
with Ebbisham may increase substantially depending upon the agreed timing and
scope of future research and development efforts.
General and administrative expenses increased by approximately $46,000, or 4%,
in the fiscal quarter ended April 30, 1998, as compared to the fiscal quarter
ended April 30, 1997. This increase is primarily the result of costs
associated with the ongoing computer consulting. The Company also experienced
an increase in rent expense in connection with payments for a new lease for
office space and an increase in personnel and related expenses associated with
an increase in administrative staff positions. This was partially offset by a
decrease in legal and professional fees paid in connection with the
finalization of the Ebbisham, Ltd. joint venture and the agreement with Lilly
during the same period last year.
The Company's other income in the fiscal quarter ended April 30, 1998 increased
by approximately $145,000, or 65%, as compared to the fiscal quarter ended
April 30, 1997. The increase was primarily due to the Company's larger
investment portfolio.
Based on the above factors, the Company's net income for the third quarter of
fiscal 1998 totaled $1,279,000 as compared to a net loss of $2,074,000 for the
1997 fiscal quarter.
11
<PAGE>
Nine Months Ended April 30, 1998 vs. Nine Months Ended April 30, 1997:
For the nine months ended April 30, 1998, the Company recognized $11,592,000 of
contract revenue compared to $4,125,000 for the nine months ended April 30,
1997. Contract revenue for the nine months ended April 30, 1998 consisted of
the recognition of revenues from Ebbisham, Ltd. of approximately $4,660,000 and
payments from Lilly under the research collaboration and option agreement to
combine Lilly's therapeutic protein and formulation capabilities with the
Company's carrier technologies, Novartis Pharma AG under the research
collaboration and option agreement (the "Novartis Agreement") to investigate to
Company's carrier technologies with two selected Novartis compounds. For the
nine months ended April 30, 1997, revenue consisted of the recognition of
revenue from Ebbisham, Ltd. of approximately $3,351,000 and a payment under the
Lilly agreement, and from two pharmaceutical companies for which the Company
performed feasibility studies.
Total operating expenses for the nine month period ended April 30, 1998,
increased by approximately $6,237,000, or 60%, as compared to the nine month
period ended April 30, 1997. The details of this increase are as follows:
Research and development costs increased by approximately $4,447,000, or 80%,
for the nine months ended April 30, 1998, as compared to the nine months ended
April 30, 1997. This increase is mainly attributable to increased personnel
and laboratory supply costs in connection with the collaborations with Lilly,
Novartis and the ongoing clinical trials work for heparin. The Company also
experienced an increase in funding of outside consultants and universities
engaged to conduct studies to help advance the Company's scientific research
efforts, perform services related to the manufacturing of the Company's
carriers, and consult on the Company's ongoing clinical studies with heparin.
The Company also experienced an increase in rent expense in connection with
payments for a new lease for laboratory space. The Company believes that this
level of research and development spending will continue for the foreseeable
future and may increase if operations are expanded.
The loss in Ebbisham Ltd., increased by approximately $1,183,000 or 60%, in the
nine months ended April 30, 1998, as compared to the nine months ended April
30, 1997. This increase is attributable to the timing of costs associated with
ongoing clinical development of heparin. The costs associated with Ebbisham
may increase substantially depending upon the agreed timing and scope of future
research and development efforts.
General and administrative expenses increased by approximately $608,000, or
21%, for the nine months ended April 30, 1998, as compared to the nine months
ended April 30, 1997. This increase is primarily the result of costs
associated with the ongoing computer consulting. The Company also experienced
an increase in rent expense in connection with payments for a new lease for
offices and an increase in personnel and related expenses associated with an
increase in administrative staff positions. This was partially offset by a
decrease in legal and professional fees paid in connection with the
finalization of the Ebbisham, Ltd. joint venture and the agreement with Lilly
during the same period last year.
The Company's other income in the nine months ended April 30, 1998 increased by
approximately $580,000, or 80%, compared to the nine months ended April 30,
1997. This was primarily the result of a larger investment portfolio.
Based on the above factors, the Company sustained a net loss for the nine
months ended April 30, 1998 of $3,699,000, a 32% decrease over the net loss of
$5,509,000 for the nine months ended April 30, 1997.
Liquidity and Capital Resources
As of April 30, 1998, the Company had working capital of approximately
$26,855,000 as compared with approximately $31,323,000 at July 31, 1997. Cash
and cash equivalents and marketable securities were approximately $27,579,000
as of April 30, 1998, as compared to approximately $33,690,000 at July 31,
1997. The decrease in the Company's cash and cash equivalents and marketable
securities was primarily due to cash used to fund operations in the first nine
months of fiscal 1998, partially offset by the exercise of options and payments
connected with the Company's agreements with Lilly and Novartis.
12
<PAGE>
The Company entered into a ten-year noncancellable lease for new office and
laboratory space commencing August 1997. The annual minimum rental is to be
approximately $1,300,000. The Company has expended approximately $6,610,000 in
capital expenditures to date in connection with the occupation of the new
space, and anticipates approximately $2,000,000 in additional expenditures
during the next three months.
The Company expects to continue to incur substantial research and development
expenses associated with the development of the Company's oral drug delivery
system. As a result of the ongoing research and development efforts of the
Company, management believes that the Company will continue to incur operating
losses and that, potentially, such losses could increase. The Company expects
to need substantial resources to continue its research and development efforts.
In addition, the Company is obligated to fund one-half of the Elan Joint
Venture's cash needs upon the Venture's request. The Company expects to
commence funding the Venture during the next quarter. Funding requirements are
established to initially be $5,000,000 over the next three months and depending
upon the agreed timing and scope of the future research and development efforts
may increase substantially thereafter. Pursuant to the Elan Joint Venture, the
Company and Elan are sharing the financial benefits and expense obligations of
the Venture on a 50/50 basis. The Company expects the research funding from
Lilly to approximate the costs to be incurred by the company in connection with
the development of the Lilly therapeutic proteins. Under present operating
assumptions, the Company expects that cash, cash equivalents and marketable
securities will be adequate to meet its liquidity and capital requirements
through fiscal 2000. Thereafter, the Company would need to seek additional
funds, primarily in the public and private equity markets and, to the extent
necessary and available, through debt financing. The Company has no firm
agreements with respect to any additional financing and there can be no
assurance that the Company would be able to obtain adequate funds on acceptable
terms. If adequate funds were not available, the Company would be required to
delay, scale back , or eliminate one or more of its research and development
programs, or obtain funds, if available, through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, or products that the
Company would not otherwise relinquish. The Company does not maintain any
credit lines with financial institutions.
Impact of the Adoption of Recently Issued Accounting Standards:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130") in June 1997. Comprehensive Income represents the change in net assets
of a business enterprise as a result of nonowner transactions. Management does
not believe that the future adoption of SFAS No. 130 will have a material
effect on the Company's financial position and results of operations. The
Company will adopt SFAS No. 130 for the year ending July 31, 1998.
Also in June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 requires
that a business enterprise report certain information about operating segments,
products and services, geographic areas of operation, and major customer. The
Company is required to adopt this standard for the year ending July 31, 1998
and is currently evaluating the impact of the standard.
In February, 1998, the FASB issued Financial Accounting Standard No. 132,
Employers' Disclosures abut Pensions and Other Postretirement Benefits. This
statement modifies financial statement disclosures related to pension and other
postretirement plans, and will not have an effect on the Company's financial
position or results of operations, and is effective for periods beginning after
December 15, 1997.
13
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K.
On May 1, 1998, the registrant filed a Current Report on Form 8-K which
reported Item 5 Other Events and included no financial statements.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Emisphere Technologies, Inc.
Dated: June 13, 1998 /S/Michael M. Goldberg, M.D.
----------------------------
Michael M. Goldberg, M.D.
Chairman, and Chief Executive Officer
/S/Joseph D. Poveromo, C.P.A.
-----------------------------
Joseph D. Poveromo, C.P.A.
Controller and Chief Accounting
Officer (Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Financial Statements of Emisphere Technologies, Inc. at April 30, 1998
and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 18,570,644
<SECURITIES> 9,008,174
<RECEIVABLES> 5,308,908
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,625,824
<PP&E> 11,422,834
<DEPRECIATION> 3,374,389
<TOTAL-ASSETS> 41,735,512
<CURRENT-LIABILITIES> 6,770,743
<BONDS> 0
0
0
<COMMON> 110,234
<OTHER-SE> 88,166,726
<TOTAL-LIABILITY-AND-EQUITY> 41,735,512
<SALES> 0
<TOTAL-REVENUES> 11,592,162
<CGS> 0
<TOTAL-COSTS> 16,600,242
<OTHER-EXPENSES> (1,308,827)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,699,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,699,253)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,699,253)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
