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
commercial stage pharmaceutical and drug delivery company. We are in partnership with global pharmaceutical companies to develop new formulations of existing products, as well as new chemical entities, using our Eligen
®
Technology. We launched our first prescription medical food product, oral Eligen B12 in the U.S. in March 2015, and we are currently engaged in strategic discussions to optimize its economic
value in the U.S. and global markets. Beyond Eligen B12, we utilize our proprietary Eligen
®
Technology to create new oral formulations of therapeutic agents. Our product pipeline includes
prescription drug and medical food product candidates that are being developed in partnership or internally.
Our core business strategy is to build new,
high-value partnerships and expand upon our existing partnerships, to enter into strategic transactions or alliances to realize the full economic potential of the oral Eligen B12 product, evaluate commercial opportunities for new prescription
medical foods, and promote new uses for our Eligen
®
Technology, a broad based proprietary oral drug delivery platform which makes it possible to avoid injections for drug administration
through the use of delivery agents, or carriers, which facilitate or enable transport of therapeutic molecules, including large peptides and proteins, across biological membranes such as those of the gastrointestinal tract.
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, and that in order to continue as a going concern, our business will require
substantial additional investment that we have not yet secured.
As of September 30, 2016, our accumulated deficit was approximately $569.1 million;
our stockholders deficit was $166.2 million. Net loss was $5.2 million compared to a net loss of $4.4 million for the three months ended September 30, 2016 and 2015, respectively; our net loss was $14.5 million and $30.3 million for the
nine months ended September 30, 2016 and 2015, respectively. On September 30, 2016 we had approximately $7.5 million in cash. We have limited capital resources and operations to date have been funded with the proceeds from collaborative
research agreements, private and public debt and equity financings and income earned on investments.
As of September 30, 2016, our financial
obligations included approximately $49.7 million (face value) under our Second Amended and Restated Convertible Notes (the Convertible Notes), approximately $24.3 million (face value) under a loan agreement entered into on
August 20, 2014 (the Loan Agreement), approximately $0.8 million (face value) under our Second Amended and Restated Reimbursement Notes (the Reimbursement Notes), and approximately $2.3 million (face value) under our
Second Amended and Restated Bridge Notes (the Bridge Notes). The Convertible Notes and the Loan Agreement are subject to annual net sales performance targets.
Under the terms of the Loan Agreement, described in Note 9 to the Financial Statements, we borrowed an aggregate of $20.0 million to finance the development,
manufacturing, marketing and sales of our oral Eligen B12 Rx Product. The loan facility will mature on December 31, 2019 and bears interest at a rate of 13% per year. In the event that we do not satisfy annual net sales targets of Eligen
B12 by December 31 for each fiscal year beginning 2015 through 2019, we will be in default under the Loan Agreement. We do not anticipate meeting the annual sales target at December 31, 2016, however, the Company is currently in
discussions with the creditor for a permanent waiver of this condition.
On October 26, 2015, we received a total payment of $14 million from Novo
Nordisk pursuant to, and consisting of, $5 million as payment for entry into the Expansion License Agreement and $9 million as prepayment of a product development milestone and in exchange for a reduction in certain future royalty payments that may
have become due and payable under the terms of our GLP-1 Development License Agreement with Novo Nordisk.
Under the terms of our loan agreements, we are
obligated to pre-pay certain loans and notes using 50% of any extraordinary receipts, such as the $14 million received from Novo Nordisk. The creditor under our Loan Agreement and Reimbursement Notes has agreed to extend the date by which we are
required to use 50% of the $14 million received from Novo Nordisk to pre-pay certain loans and notes until November 15, 2016. Because the Loan Prepayment deadline has not been extended beyond one year from September 30, 2016, we have
classified $7.0 million of the loans and notes as a current liability as of September 30, 2016.
We believe that our current cash balance will
provide sufficient capital to continue operations through November 2016. However, if the pre-payment obligation is further extended or waived, the Company will have sufficient cash to operate through approximately December 2017. The Companys
future capital requirements beyond November 2016 (or December 2017, in the event the pre-payment obligation is further extended or waived) and our financial success depend largely on our ability to raise additional capital, including by leveraging
existing and securing new partnering opportunities for Eligen B12 and the Eligen
®
Technology.
6
While our plan is to raise capital from product partnering opportunities and/or commercial operations to address
our capital deficiencies and meet our operating cash requirements, there is no assurance that our plans will be successful. If we fail to generate sufficient capital from commercial operations or partnerships, we will need to seek capital from other
sources and risk default under the terms of our existing loans. We cannot assure you that financing will be available on favorable terms or at all. If we fail to obtain substantial cash inflows from existing or new partners or other sources prior to
November 2016 (or December 2017, in the event the prepayment obligations is further extended or waived), we could be forced to cease operations. Additionally, 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. These conditions raise substantial doubt about our ability to continue as a going concern. Consequently, the audit reports prepared by our independent registered
public accounting firm relating to our financial statements for the years ended December 31, 2015, 2014 and 2013 include an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Furthermore,
despite our optimism regarding the Eligen
®
Technology, even in the event that the Company is adequately funded, there is no guarantee that any of our partnerships will be successful, that any
of our products or product candidates will perform as hoped or that such products will be successfully commercialized.
2. Basis of Presentation
The condensed balance sheet at December 31, 2015 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 (the SEC) 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, 2015. Results of operations for the nine-month period ended
September 30, 2016 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2016.
Certain
prior period amounts have been reclassified to conform to current period presentation.
3. Revenue Recognition
Oral Eligen B12 Rx Product
We sell our oral Eligen
B12 Rx product through drug wholesalers and retail pharmacies. We recognize revenue from prescription product sales, net of sales discounts, chargebacks, and rebates. We accept returns of unsalable product from customers within a return period
of six months prior to and 12 months following product expiration. Our oral Eligen B12 Rx product currently has a shelf life of 24 months from the date of manufacture. Given the limited history of our oral Eligen B12 Rx product, we
currently cannot reliably estimate expected returns of the prescription products at the time of shipment. Accordingly, we will defer recognition of revenue on prescription products until the right of return no longer exists, which occurs at the
earlier of the time the oral Eligen B12 Rx product is dispensed through patient prescriptions or expiration of the right of return.
Collaborative Agreements and Feasibility Studies
Revenue
earned from collaborative agreements and feasibility studies is comprised of reimbursed research and development costs, as well as upfront and research and development milestone payments. Deferred revenue represents payments received which are
related to future performance. Revenue from feasibility studies, which are typically short term in nature, is recognized upon delivery of the study, provided that all other revenue recognition criteria are met.
Revenue from collaboration agreements are recognized using the proportional performance method provided that we can reasonably estimate the level of effort
required to complete our performance obligations under an arrangement and such performance obligations are provided on a best effort basis and based on expected payments. Under the proportional performance method, periodic revenue
related to nonrefundable cash payments is recognized as the percentage of actual effort expended to date as of that period to the total effort expected for all of our performance obligations under the arrangement. Actual effort is generally
determined based upon actual hours incurred and include research and development (R&D) activities performed by us and time spent for Joint Steering Committee (JSC) activities. Total expected effort is generally based upon
the total R&D and JSC hours incorporated into the project plan that is agreed to by both parties to the collaboration. Significant management judgments and estimates are required in determining the level of effort required under an arrangement
and the period over which we expect to complete the related performance obligations. Estimates of the total expected effort included in each project plan are based on historical experience of similar efforts and expectations based on the knowledge
of scientists for both the Company and its collaboration partners. The Company periodically reviews and updates the project plan for each collaborative agreement. The most recent reviews took place in January 2016. In the event that a change in
estimate occurs, the change will be accounted for using the cumulative catch-up method which provides for an adjustment to revenue in the current period. Estimates of our level of effort may change in the future, resulting in a material change in
the amount of revenue recognized in future periods.
7
Generally, under collaboration arrangements, nonrefundable payments received during the period of performance may
include time- or performance-based milestones. The proportion of actual performance to total expected performance is applied to the expected payments in determining periodic revenue. However, revenue is limited to the sum of (i) the
amount of nonrefundable cash payments received and (ii) the payments that are contractually due but have not yet been paid.
With regard to revenue
recognition in connection with development and license agreements that include multiple deliverables, Emispheres management reviews the relevant terms of the agreements and determines whether such deliverables should be accounted for as a
single unit of accounting in accordance with FASB ASC 605-25,
Multiple-Element Arrangements
. If it is determined that a delivered license and Eligen
®
Technology do not have stand-alone
value and Emisphere does not have objective evidence of fair value of the undelivered Eligen
®
Technology or the manufacturing value of all the undelivered items, then such deliverables are
accounted for as a single unit of accounting and any payments received pursuant to such agreement, including any upfront or development milestone payments and any payments received for support services, will be deferred and included in deferred
revenue within our balance sheet until such time as management can estimate when all of such deliverables will be delivered, if ever. Management reviews and reevaluates such conclusions as each item in the arrangement is delivered and circumstances
of the development arrangement change.
4. Stock-Based Compensation Plans
On April 20, 2007, our stockholders 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 our executive officers and other employees, and
non-employee directors, consultants and others who provide substantial services to us. The 2007 Plan provides for the issuance of an aggregate of 9,253,876 shares. As of September 30, 2016, 3,064,416 shares are available for future grants under
our active equity plans.
Total compensation expense recorded during the three and nine months ended September 30, 2016 for share-based payment
awards was $80 thousand and $254 thousand, respectively. At September 30, 2016, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $0.3 million which is expected to be
recognized over a weighted-average period of approximately 1.4 years. No options were exercised in the three or nine months ended September 30, 2016. No tax benefit was realized due to a continued pattern of operating losses.
During the nine months ended September 30, 2016, the Company granted 40,000 options to Michael Garone, former Chief Financial Officer (valued on the
grant date at $0.61 using the Black Scholes pricing model).
The following weighted-average assumptions were used for grants made under the stock option
plans for the nine months ended September 30, 2016:
|
|
|
|
|
Expected volatility
|
|
|
145.82
|
%
|
Expected term (years)
|
|
|
6.79
|
|
Risk free rate
|
|
|
1.82
|
%
|
Dividend yield
|
|
|
0
|
%
|
Annual forfeiture rate
|
|
|
14.523
|
%
|
5. Inventory
Inventory
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
(In thousands)
|
|
Raw Materials
|
|
$
|
|
|
|
$
|
558
|
|
Finished Goods
|
|
|
85
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85
|
|
|
$
|
1,340
|
|
|
|
|
|
|
|
|
|
|
8
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Prepaid corporate insurance
|
|
$
|
40
|
|
|
$
|
93
|
|
Deposit on inventory
|
|
|
|
|
|
|
184
|
|
Prepaid expenses and other current assets
|
|
|
154
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194
|
|
|
$
|
1,081
|
|
|
|
|
|
|
|
|
|
|
7. Equipment and Leasehold Improvements, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
in Years
|
|
|
September 30, 2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Equipment
|
|
|
3-7
|
|
|
$
|
601
|
|
|
$
|
601
|
|
Leasehold improvements
|
|
|
Term of lease
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
628
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
627
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
|
|
|
|
$
|
1
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
(In thousands)
|
|
Accounts payable
|
|
$
|
431
|
|
|
$
|
1,762
|
|
Accrued legal, professional and other fees
|
|
|
285
|
|
|
|
304
|
|
Accrued vacation
|
|
|
57
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
773
|
|
|
$
|
2,121
|
|
|
|
|
|
|
|
|
|
|
9. Notes Payable
Notes
payable, related party, net of related discounts, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Convertible Notes
|
|
$
|
39,067
|
|
|
$
|
37,450
|
|
Loan Agreement
|
|
|
24,342
|
|
|
|
22,801
|
|
Bridge Notes
|
|
|
106
|
|
|
|
166
|
|
Reimbursement Notes
|
|
|
794
|
|
|
|
755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,309
|
|
|
|
61,172
|
|
Less: Current portion
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
Non-current notes payable, net of related discounts
|
|
$
|
57,309
|
|
|
$
|
54,172
|
|
|
|
|
|
|
|
|
|
|
Loan Agreement.
On August 20, 2014, the Company entered into a series of agreements (the Transaction Documents)
with MHR Capital Partners Master Account LP, MHR Capital Partners (100) LP, MHR Institutional Partners II LP, and MHR Institutional Partners IIA LP, (collectively, MHR or the Lenders), for a new loan facility (the
Loan Agreement), an extension of the Companys existing obligations under various promissory notes previously issued to the Lenders, and for payment by the Company of certain royalties to MHR (the Transaction).
9
The Loan Agreement provides for, among other things, a commitment (the Commitment) of the Lenders to
loan the Company up to $20 million to finance the development, manufacturing, marketing and sale of oral Eligen
®
B12 (the B12 Product). The Company may made five borrowings (each,
a Borrowing, and collectively, the Loan) under the Loan Agreement. The first borrowing under the Loan Agreement occurred on August 20, 2014, in an original principal amount of $5.0 million, the second occurred on
November 4, 2014 in an original principal amount of $3.0 million, the third occurred on January 6, 2015 in an original principal amount of $5.0 million, the fourth occurred on April 6, 2015 in an original principal amount of $5.0
million, and the fifth and final borrowing occurred on July 1, 2015 in an original principal amount of $2.0 million. In addition, as described below, if the Company does not have sufficient cash in excess of the Minimum Cash Balance, as defined
below, to pay any Royalties that become due under the Royalty Agreement, as described below, such Royalties will be paid as an additional Loan under the Loan Agreement by increasing the principal amount outstanding under the Loan Agreement (any such
Loan, Paid-In-Kind Royalties). The Minimum Cash Balance generally means cash on hand (plus certain cash expenditures during such fiscal year that are unrelated to the B12 Product or related products) of at least $10 million
(or $15 million, under certain circumstances), subject to certain permitted deductions. On December 31, 2015, the Company had a $12.9 million cash balance, greater than the $10 million Minimum Cash Balance as defined under the Loan Agreement,
therefore $0.2 million Royalties payable for 2015 under the Royalty Agreement was due in cash. MHR has agreed to extend the date by which we are required to make the $0.2 million Royalty payment in cash under the terms of the Royalty Agreement until
November 15, 2016.
Except with respect to Paid-In-Kind Royalties incurred under the Loan Agreement after all amounts of principal and interest have
previously been paid in full, the Loan will mature on the earlier of (a) December 31, 2019 and, (b) 30 days after the end of any fiscal year in which the Companys cash (plus certain cash expenditures during such fiscal year that
are unrelated to the B12 Product or related products) as of the end of such fiscal year (subject to certain permitted deductions) is more than three times the principal amount of the Loan as of the end of such fiscal year. Paid-In-Kind Royalties
incurred under the Loan Agreement after all amounts of principal and interest have previously been paid in full mature one year following the date of incurrence. The Loan bears interest at a rate of 13% per annum (the Interest
Rate), compounded monthly, and will be payable in kind and in arrears on June 30 and December 31 of each year up to and including the maturity date by increasing the outstanding principal amount of the Loan by the amount of each such
interest payment. So long as an event of default under the Loan Agreement (an Event of Default) has occurred and is continuing, at the election of MHR, interest shall accrue on the Loan at a rate equal to 2% per annum above the
Interest Rate (Default Rate). Interest at the Default Rate shall accrue from the initial date of such Event of Default until that Event of Default is cured or waived in writing and shall be payable upon demand and, if not paid when due,
shall itself bear interest at the Default Rate. The Loan must be repaid from time to time prior to maturity pursuant to (a) a cash sweep of 50% of the Companys adjusted consolidated free cash flow, or 75% of the Companys adjusted
consolidated free cash flow in any year in which the adjusted consolidated free cash flow exceeds $50 million, to the extent such cash sweep does not cause the Companys cash as of the end of such year to be less than the Minimum Cash Balance,
(b) a cash sweep of 50% of any cash proceeds received from any third party in connection with the license, distribution or sale of any of the Companys products other than the B12 Product or related products (the Non-B12
Products), subject to the priority described below, and (c) a Royalty Match (as described below), to the extent such Royalty Match does not cause the Companys cash as of the end of such year to be less than the Minimum Cash Balance
and subject to the priority described below. The Loan Agreement provides for certain representations and warranties, conditions precedent to the Lenders obligation to lend, affirmative and negative covenants of the Company (including, but not
limited to, certain milestones in the development of its B12 Products) and Events of Default.
In connection with the cash proceeds of $14 million from
Novo Nordisk in October 2015, the Company was obligated to pre-pay $0.8 million of the Reimbursement Notes and $6.2 million of the Loans on November 26, 2015. The creditor under our Loan Agreement and Reimbursement Notes has agreed to extend
the date by which we are required to pre-pay such amounts under the Loan Agreement and Reimbursement Notes until November 15, 2016. Because the Loan Prepayment deadline has not been extended beyond one year from September 30, 2016, we have
classified $0.8 million of the Reimbursement Notes and $6.2 million of the Loans as a current liability as of September 30, 2016 in the accompanying condensed balance sheet.
In connection with the entry into the Loan Agreement, on August 20, 2014, the Lenders and the Company further amended and restated (i) the
Convertible Notes issued by the Company to certain of the Lenders, (ii) the Bridge Notes issued by the Company to certain of the Lenders, and (iii) the Reimbursement Notes (and, together with the Convertible Notes and Bridge Notes, the
MHR Notes). Also, in connection with the entry into the Loan Agreement and the amendment and restatement of the MHR Notes, Institutional Partners IIA and the Company have amended the Pledge and Security Agreement, dated
September 26, 2005, as amended, by and between the Company and Institutional Partners IIA to, among other things, secure the Reimbursement Notes and payments due under the Loan Agreement with substantially all of the Companys assets, and
secure the payments due under the Royalty Agreement and Paid-In-Kind Royalties due under the Loan Agreement with the Companys intellectual property relating to the B12 Products and related products. As of September 30, 2016, the principal
balance of the Loan was $24.3 million.
Convertible Notes.
On September 26, 2005, we received net proceeds of approximately $12.9 million
under a $15 million secured loan agreement (the 2005 Loan Agreement) executed with MHR. Under the 2005 Loan Agreement, MHR requested, and on May 16, 2006, we effected, the exchange of the loan from MHR for the predecessor of the
Convertible Notes, which were 11% senior secured convertible notes with substantially the same terms as the 2005 Loan Agreement, except that the original Convertible Notes were convertible, at the sole discretion of MHR, into shares of our common
stock at a price per share of $3.78. In connection with the original Convertible Notes exchange, the Company agreed to appoint a representative of MHR (the MHR Nominee) and another person (the Mutual Director) to the Board.
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 so long as MHR holds at least 2% of the outstanding common stock
of the Company. The original Convertible Notes were amended and restated on May 7, 2013 and as described above, amended and restated a second time on August 20, 2014.
10
The Convertible Notes now provide for a new maturity date of March 31, 2022 (subject to acceleration upon
the occurrence of certain specified events of default, including the failure to meet certain sales, performance, and manufacturing milestones specified in the Convertible Notes). The interest rate is 13% per annum, compounded monthly, which
interest will be payable in the form of additional Convertible Notes. The Convertible Notes are collateralized by a first priority lien in favor of the Lenders on substantially all of the Companys assets. After all principal and interest under
the Loan Agreement and Reimbursement Notes are repaid, the remaining Convertible Notes must be redeemed from time to time prior to maturity pursuant to a cash sweep of 50% of the Companys adjusted consolidated free cash flow (75% of the
Companys adjusted consolidated free cash flow in any year in which the Companys adjusted consolidated free cash flow exceeds $50 million) to the extent such cash sweep does not cause the Companys cash as of the end of such year to
be less than the Minimum Cash Balance. The Convertible Notes are convertible, at the option of the holders, at a conversion price of $1.25 per share of common stock, which conversion price is subject to adjustment upon the occurrence of specified
events, including stock dividends, stock splits, certain fundamental corporate transactions, and certain issuances of common stock by the Company. The Convertible Notes must also be redeemed from time to time prior to maturity pursuant to (a) a
cash sweep of 50% of any cash proceeds received from any third party in connection with the license, distribution or sale of any Non-B12 Product, subject to the priority described below and (b) a Royalty Match (as described below), to the
extent such Royalty Match does not cause the Companys cash as of the end of such year to be less than the Minimum Cash Balance and subject to the priority described below. If we fail to meet our obligations under the terms of the Convertible
Notes, or fail to meet any of the net sales targets included in the Convertible Notes, we would be in default under these notes, which would give MHR the option of foreclosing on substantially all of our assets. We do not anticipate meeting the
annual sales target at December 31, 2016, however, the Company is currently in discussions with the creditor for a permanent waiver of this condition. As of September 30, 2016, the principal balance of the Convertible Notes was $49.7
million; and the Convertible Notes were convertible into 39,720,243 shares of our common stock.
Reimbursement Notes.
On June 8, 2010, the
Company issued the predecessor to the Reimbursement Notes to MHR in the form of certain non-interest bearing promissory notes in the aggregate principal amount of $600,000 in reimbursement for legal expenses incurred by MHR in connection with
MHRs agreement to, among other things, waive certain rights as a senior secured party of the Company and enter into a non-disturbance agreement with the Companys collaboration partner, Novartis Pharma AG, and, if necessary, to enter into
a comparable agreement in connection with another potential Company transaction. The original Reimbursement Notes were amended and restated on May 7, 2013 and, as described above, amended and restated again on August 20, 2014.
The Reimbursement Notes provide for a maturity date of the earlier of (a) March 31, 2022 and (b) immediately prior to the time that any amounts
outstanding under the Loan Agreement are repaid (subject to acceleration upon the occurrence of certain events of default specified in the Reimbursement Notes), and bear interest at the rate of 10% per annum, compounded monthly, which interest
is payable in the form of additional Reimbursement Notes. The Reimbursement Notes are collateralized by a first priority lien in favor of the Lenders on substantially all of the Companys assets. The Reimbursement Notes are convertible, at the
option of the holders, at a conversion price of $0.50 per share of common stock, which conversion price is subject to adjustment upon the occurrence of specified events, including stock dividends, stock splits, certain fundamental corporate
transactions, and certain issuances of common stock by the Company. The Reimbursement Notes must also be redeemed from time to time prior to maturity pursuant to a cash sweep of 50% of any cash proceeds received from any third party in connection
with the license, distribution or sale of any Non-B12 Product, subject to the priority described below. As of September 30, 2016, the principal balance of the Reimbursement Notes was $0.8 million; and the Reimbursement Notes were convertible
into 1,588,682 shares of our common stock.
In connection with the cash proceeds of $14 million from Novo Nordisk in October 2015, the Company was
obligated to pre-pay $0.8 million of the Reimbursement Notes and $6.2 million of the Loans on November 26, 2015. The creditor under the Reimbursement Notes and Loan Agreement has agreed to extend the date by which we are required to pre-pay
such amounts under the Reimbursement Notes and Loan Agreement until November 15, 2016.
Bridge Notes.
On October 17, 2012, the Company
issued to MHR the predecessor to the Bridge Notes in the aggregate principal amount of $1,400,000. The original Bridge Notes provided for an interest rate of 13% per annum and were payable on demand. The Bridge Notes were amended and restated
on May 7, 2013 and restated again on August 20, 2014.
The Bridge Notes provide for a maturity date of March 31, 2022 (subject to
acceleration upon the occurrence of certain events of default specified) and bear interest at 13% per year, compounded monthly and payable in the form of additional Bridge Notes. The Bridge Notes are collateralized by a first priority lien in
favor of the Lenders on substantially all of the Companys assets. The Bridge Notes are convertible, at the option of the holders, at a conversion price of $0.50 per share of common stock, which conversion price is subject to adjustment upon
the occurrence of specified events, including stock dividends, stock splits, certain fundamental corporate transactions, and certain issuances of common stock by the Company. The Bridge Notes must also be redeemed from time to time prior to maturity
pursuant to (a) a cash sweep of 50% of any cash proceeds received from any third party in connection with the license, distribution or sale of any Non-B12 Product, subject to the priority described below and (b) a Royalty Match (as
described below), to the extent such Royalty Match does not cause the Companys cash as of the end of such year to be less than the Minimum Cash Balance and subject to the priority described below. As of September 30, 2016, the principal
balance the Bridge Notes was $2.3 million; and the Bridge Notes were convertible into 4,515,544 shares of our common stock.
The priority of the cash
sweep for Non-B12 Products is as follows: (i) to redeem the Reimbursement Notes, (ii) to prepay principal and interest outstanding under the Loan Agreement; (iii) to reduce the Commitment; (iv) to redeem the Convertible Notes;
and (v) to redeem the Bridge Notes.
Royalty Agreement
. As a condition to MHR entering into the Loan Agreement and amending and restating the
MHR Notes, the Company and MHR entered into a Royalty Agreement (the Royalty Agreement) on August 20, 2014 pursuant to which the Company agreed to pay to MHR, subject to specified terms and conditions, royalties in perpetuity (the
Royalties), commencing as of the date of the Royalty Agreement, in an amount equal to: twenty percent (20%) of all Net Product Sales (as defined in the Royalty Agreement) and any third party payments arising in connection with the
sale of the B12 Product and related products, during any fiscal year; provided that, from and after October 1, 2015, if no amount of indebtedness is outstanding under the Loan Agreement (the Indebtedness Repayment Condition), such
amount shall be reduced to (i) five percent (5%) of all Net Sales and third party payments commencing with the first quarter immediately following the quarter in which the
11
Indebtedness Repayment Condition is satisfied, or (ii) two and one half percent (2.5%) of all Net Sales commencing with the quarter immediately following the quarter in which the
Indebtedness Repayment Condition is satisfied, but only with respect to the Net Sales made in any country in which there was not a Valid Patent Claim (as defined in the Royalty Agreement) and where generic entry of a competitive product not by the
Company or its affiliates that does not infringe a Valid Patent Claim in such country has occurred, in each case as of the last day of such Fiscal Quarter. Once the royalty rate has been reduced to 5%, the rate shall not be reinstated to 20% even if
amounts become outstanding under the Loan Agreement as a result of Paid-In-Kind Royalties. Payments of Royalties shall be made in cash to the extent such Royalties do not cause the Companys cash as of the end of any year to be less than the
Minimum Cash Balance, and otherwise shall be paid as Paid-In-Kind Royalties.
If any Royalties become due under the Royalty Agreement when the royalty
rate is 5% or 2.5%, the amount outstanding under the Loan Agreement, Convertible Notes and Bridge Notes shall be reduced in an amount equal to such royalty payment, to the extent such payment does not cause the Companys cash as of the end of
such year to be less than the Minimum Cash Balance (the Royalty Match), in the following priority: (i) first, to prepay the Loan; (ii) second, to redeem the Convertible Notes; and (iii) finally, to redeem the Bridge Notes.
For the three and nine months ended September 30, 2016, the Company recorded $32 and $173 thousand of royalty expense, respectively.
The carrying
value of the MHR Notes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
(unaudited)
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Convertible Notes
|
|
$
|
49,650
|
|
|
$
|
46,542
|
|
Loan Agreement
|
|
|
24,342
|
|
|
|
22,801
|
|
Bridge Notes
|
|
|
2,258
|
|
|
|
2,115
|
|
Reimbursement Notes
|
|
|
794
|
|
|
|
755
|
|
Unamortized discounts
|
|
|
(12,735
|
)
|
|
|
(11,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,309
|
|
|
$
|
61,172
|
|
|
|
|
|
|
|
|
|
|
10. Derivative Instruments
Derivative instruments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Convertible Notes
|
|
$
|
34,388
|
|
|
$
|
30,823
|
|
Reimbursement Notes
|
|
|
1,277
|
|
|
|
1,118
|
|
Bridge Notes
|
|
|
3,628
|
|
|
|
3,130
|
|
Amended and Restated August 2009 Warrants
|
|
|
1,812
|
|
|
|
2,142
|
|
Amended and Restated June 2010 MHR Warrants
|
|
|
437
|
|
|
|
552
|
|
Amended and Restated August 2010 Warrants
|
|
|
1,275
|
|
|
|
1,507
|
|
Amended and Restated August 2010 MHR Waiver Warrants
|
|
|
474
|
|
|
|
560
|
|
Amended and Restated July 2011 Warrants
|
|
|
1,463
|
|
|
|
1,729
|
|
July 2011 Investor Warrants
|
|
|
|
|
|
|
205
|
|
Amended and Restated July 2011 MHR Waiver Warrants
|
|
|
386
|
|
|
|
456
|
|
May 2013 MHR Modification Warrants
|
|
|
4,859
|
|
|
|
5,744
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,999
|
|
|
$
|
47,966
|
|
|
|
|
|
|
|
|
|
|
Some of the Companys outstanding derivative instruments have an exercise price reset feature. The estimated fair value
of warrants and embedded conversion features that have an exercise price reset feature is estimated using the Monte Carlo valuation model. The estimated fair value of warrants that do not contain an exercise price reset feature is measured using the
Black-Scholes valuation model. Inherent in both of these models are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield. For the Monte Carlo model, we estimate the probability and timing of
potential future financing and fundamental transactions as applicable.
12
Embedded Conversion Feature of MHR Notes.
The Convertible Notes, the Reimbursement Notes, and the
Bridge Notes (collectively, the MHR 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 each of the MHR Notes and lower than the then-current market price. Under FASB ASC 815-40-15-5, the embedded conversion feature of the MHR Notes 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 liabilities associated with the Convertible Notes and the Bridge Notes have been presented as a
non-current liability as of September 30, 2016 and December 31, 2015, to correspond to their host contracts.
Convertible
Notes
.
In addition to the foregoing, the adjustment provision of the Convertible Notes does not become effective unless and until the Company were to raise $10 million through the issuance of common stock or common stock
equivalents during any consecutive 24 month period. The fair value of the embedded conversion feature of the Convertible Notes is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing
the fair values as September 30, 2016 and December 31, 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
1.25
|
|
|
$
|
1.25
|
|
Expected volatility
|
|
|
146
|
%
|
|
|
143
|
%
|
Remaining term (years)
|
|
|
5.5
|
|
|
|
6.25
|
|
Risk-free rate
|
|
|
1.20
|
%
|
|
|
1.95
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the embedded conversion feature of the Convertible Notes increased $0.6 million and $1.5 million for the
three and nine months ended September 30, 2016, respectively, which has been recognized in the accompanying statements of operations. The fair value of the embedded conversion feature of the Convertible Notes decreased $0.3 million and
increased $4.0 million for the three and nine months ended September 30, 2015, respectively, which has been recognized in the accompanying statement of operations.
Reimbursement Notes
.
The fair value of the embedded conversion feature of the Reimbursement Notes is estimated at the end of each quarterly
reporting period using the Monte Carlo model. The assumptions used in computing the fair value as of September 30, 2016 and December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Expected volatility
|
|
|
146
|
%
|
|
|
143
|
%
|
Remaining term (years)
|
|
|
5.50
|
|
|
|
6.25
|
|
Risk-free rate
|
|
|
1.20
|
%
|
|
|
1.95
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the embedded conversion of the Reimbursement Notes increased $35 thousand and $0.2 million for the three and
nine months ended September 30, 2016, respectively, which has been recognized in the accompanying statements of operations. The fair value of the embedded conversion feature of the Reimbursement Notes decreased $33 thousand and increased $0.2
million for the three and nine months ended September 30, 2015, respectively, which has been recognized in the accompanying statement of operations.
Bridge Notes
.
The fair value of the embedded conversion feature of the Bridge Notes is estimated at the end of each quarterly reporting period
using the Monte Carlo model. The assumptions used in computing the fair value as of September 30, 2016 and December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Expected volatility
|
|
|
146
|
%
|
|
|
143
|
%
|
Remaining term (years)
|
|
|
5.50
|
|
|
|
6.25
|
|
Risk-free rate
|
|
|
1.20
|
%
|
|
|
1.95
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the embedded conversion feature of the Bridge Notes increased $0.1 million and $0.4 million for the three
and nine months ended September 30, 2016 respectively, which has been recognized in the accompanying statements of operations. The fair value of the embedded conversion feature of the Bridge Notes decreased $0.1 million and increased $0.6
million for the three and nine months ended September 30, 2015, respectively, which has been recognized in the accompanying statements of operations.
13
Amended and Restated June 2010 Warrants.
In June 2010, the Company granted MHR warrants to purchase
865,000 shares of its common stock (the June 2010 Warrants). In connection with the Restructuring, on May 7, 2013, the Company amended and restated the Original Warrants such that the expiration date of the Original Warrant was
extended to July 8, 2019, and the exercise price was reduced to $0.50 per share (as amended and restated, the Amended and Restated June 2010 Warrants). The exercise price of the Amended and Restated June 2010 Warrants 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 exercise price of these warrants and lower than the current market price. However, the
adjustment provision does not become effective unless the Company were to raise $10 million through the issuance of common stock or common stock equivalents at a price which is lower than the current conversion price of these warrants and lower than
the current market price during any consecutive 24 month period. The fair value of the Amended and Restated June 2010 Warrants is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing
the fair value of the Amended and Restated June 2010 Warrants as of September 30, 2016 and December 31, 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Expected volatility
|
|
|
107
|
%
|
|
|
136
|
%
|
Remaining term (years)
|
|
|
2.77
|
|
|
|
3.52
|
|
Risk-free rate
|
|
|
0.85
|
%
|
|
|
1.42
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the Amended and Restated June 2010 MHR Warrants decreased $15 thousand and $0.1 million for the three and
nine months ended September 30, 2016, respectively, which has been recognized in the accompanying statements of operations. The fair value of the Amended and Restated June 2010 MHR Warrants decreased $60 thousand and increased $0.2 million for
the three and nine months September 30, 2015, respectively, which has been recognized in the accompanying statements of operations.
Amended and
Restated Warrants.
Prior to the Restructuring, the Company issued to MHR warrants to purchase varying amounts of its common stocks at various times from 2009 through 2011, as described more fully below (the August 2009 Warrants, August 2010
Warrants, August 2010 MHR Waiver Warrants, July 2011 Warrants, July 2011 MHR Waiver Warrants, and collectively, the Original Warrants). In connection with the Restructuring, on May 7, 2013, the Company amended and restated each of
the Original Warrants such that the expiration date of each Original Warrant was extended to July 8, 2019, and the exercise price was reduced to $0.50 per share (as amended and restated, the Amended and Restated August 2009
Warrants, Amended and Restated August 2010 Warrants, Amended and Restated August 2010 MHR Waiver Warrants, Amended and Restated July 2011 Warrants, Amended and Restated July 2011 MHR Waiver
Warrants, and collectively, the Amended and Restated Warrants) . Under the terms of each of the Amended and Restated Warrants, as well as the August 2010 Investor Warrants, July 2011 Investor Warrants and 2013 Restructuring
Warrants (collectively, the Investor Warrants, and together with the Original Warrants, the Warrants), the Company has an obligation to make a cash payment to the holders of each of the Warrants for any gain that could have been realized
if such holder exercised the warrants and we subsequently failed to deliver a certificate representing the shares to be issued upon such exercise by the third trading day after the Warrants were exercised. Accordingly, the Warrants have been
accounted for as a liability. The fair value of each 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 of the Original Warrants as of
September 30, 2016 and December 31, 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Expected volatility
|
|
|
107
|
%
|
|
|
141
|
%
|
Remaining term (years)
|
|
|
2.77
|
|
|
|
3.52
|
|
Risk-free rate
|
|
|
0.88
|
%
|
|
|
1.31
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the Original Warrants decreased $0.2 million and $1.0 million for the three and nine months ended
September 30, 2016, respectively, which has been recognized in the accompanying statements of operations. The fair value of the Original Warrants decreased $1.0 million and increased $2.5 million for the three and nine months ended
September 30, 2015, respectively, which has been recognized in the accompanying statements of operations.
14
2013 Restructuring Warrants
.
The Company issued to MHR warrants to purchase 10 million shares
of its common stock (the 2013 Restructuring Warrants) as part of the Restructuring. The assumptions used in computing the fair value of the 2013 Restructuring Warrants as of September 30, 2016 and December 31, 2015, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Closing stock price
|
|
$
|
0.70
|
|
|
$
|
0.68
|
|
Conversion price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
Expected volatility
|
|
|
107
|
%
|
|
|
141
|
%
|
Remaining term (years)
|
|
|
2.77
|
|
|
|
3.52
|
|
Risk-free rate
|
|
|
0.88
|
%
|
|
|
1.31
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The fair value of the 2013 Restructuring Warrants decreased $0.1 million and $0.9 million for the three and nine months ended
September 30, 2016, respectively, which has been recognized in the accompanying statements of operations. The fair value of the 2013 Restructuring Warrants decreased $0.9 million and increased $2.3 million for the three and nine months ended
September 30, 2015, respectively, which has been recognized in the accompanying statements of operations.
August 2010 Investor
Warrants
.
In connection with the August 2010 Financing, Emisphere sold warrants to purchase 2.6 million shares of common stock to unrelated investors (the August 2010 Warrants). On July 12, 2011, one of the unrelated
investors notified the Company of its intention to exercise 0.2 million warrants. On August 26, 2015, the remaining 2010 Investor Warrants expired.
The fair value of the August 2010 Investor Warrants decreased $15 thousand and $29 thousand for the three and nine months ended September 30, 2015,
respectively, which has been recognized in the accompanying statements of operations.
July 2011 Investor Warrants
.
In connection with the
July 2011 Financing, Emisphere sold warrants to purchase 3.01 million shares of common stock to unrelated investors (the July 2011 Warrants). On July 6, 2016, the July 2011 Warrants expired.
The fair value of the July 2011 Investor Warrants decreased $0.2 million for the nine months ended September 30, 2016, which has been recognized in the
accompanying statements of operations. The July 2011 Investor Warrants decreased $0.2 million and increased $0.2 million for the three and nine months ended September 30, 2015, respectively, which has been recognized in the accompanying
statements of operations.
11. Net Loss Per Share
For the three and nine month periods ended September 30, 2016 and 2015, certain potential shares of common stock have been excluded from the calculation
of loss per share because the exercise price was greater than the average market price of our common stock, and therefore, the effect would have been anti-dilutive. In addition, incremental shares from the assumed conversion of the MHR note payable
are excluded, as the effect of these shares is anti-dilutive. The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income per share because their effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common shares
|
|
|
6,219,100
|
|
|
|
6,390,750
|
|
|
|
6,219,100
|
|
|
|
6,390,750
|
|
Outstanding warrants
|
|
|
21,997,775
|
|
|
|
25,008,082
|
|
|
|
21,997,775
|
|
|
|
25,008,082
|
|
MHR convertible notes payable
|
|
|
45,824,469
|
|
|
|
40,297,635
|
|
|
|
45,824,469
|
|
|
|
40,297,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,051,651
|
|
|
|
8,896,702
|
|
|
|
77,051,651
|
|
|
|
74,132,112
|
|
15
12. Commitments and Contingencies
Commitments.
We lease office space at 4 Becker Farm Road,
Roseland, New Jersey under a non-cancellable operating lease expiring in 2017.
As of September 30, 2016, future minimum rental payments are as
follows:
|
|
|
|
|
Years Ending December 31,
|
|
(In thousands)
|
|
2016 (remaining)
|
|
$
|
24
|
|
2017
|
|
|
74
|
|
|
|
|
|
|
Total
|
|
$
|
129
|
|
|
|
|
|
|
The Company evaluates the financial consequences of legal actions periodically or as facts present themselves and records
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, 2016.
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.
As a condition to MHR entering into the Loan Agreement and amending and restating the MHR Notes, the
Company and MHR entered into a Royalty Agreement (the Royalty Agreement) on August 20, 2014 providing for the payment by the Company to MHR of certain royalties on the terms and conditions set forth therein (see Note 9).
Under the terms of the Royalty Agreement, the Company agreed to pay to MHR, subject to the terms and conditions of the Royalty Agreement, royalties in
perpetuity (the Royalties), commencing as of the date of the Royalty Agreement, in an amount equal to: twenty percent (20%) of all Net Product Sales (as defined in the Royalty Agreement) and any third party payments arising in
connection with the sale of the B12 Product and related products, during any fiscal year; provided that, from and after October 1, 2015, if no amount of indebtedness is outstanding under the Loan Agreement (the Indebtedness Repayment
Condition), such amount shall be reduced to (i) five percent (5%) of all Net Sales and third party payments commencing with the first quarter immediately following the quarter in which the Indebtedness Repayment Condition is
satisfied, or (ii) two and one half percent (2.5%) of all Net Sales commencing with the quarter immediately following the quarter in which the Indebtedness Repayment Condition is satisfied, but only with respect to the Net Sales made in
any country in which there was not a Valid Patent Claim (as defined in the Royalty Agreement) and where generic entry of a competitive product not by the Company or its affiliates that does not infringe a Valid Patent Claim in such country has
occurred, in each case as of the last day of such Fiscal Quarter. Once the royalty rate has been reduced to 5%, the rate shall not be reinstated to 20% even if amounts become outstanding under the Loan Agreement as a result of Paid-In-Kind
Royalties. Payments of Royalties shall be made in cash to the extent such Royalties do not cause the Companys cash as of the end of any year to be less than the Minimum Cash Balance, and otherwise shall be paid as Paid-In-Kind Royalties.
13. 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, 2015 and September 30, 2016, the Company had no
accruals for interest or penalties related to income tax matters.
14. New Accounting Pronouncements
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 requires
that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. This ASU replaces the concept of
market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after
December 15, 2016, including interim periods within those years. Prospective application is required and early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of
the new standards.
16
In April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest (ASU
2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition
and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. The adoption of ASU 2015-03 did not have a
material impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (ASU 2014-09), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to provide companies
sufficient time to implement the standards. Early adoption will be permitted, but not before the first quarter of 2017. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing which
provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of these new standards.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern
(ASU 2014-15), which provides guidance on managements responsibility in evaluating whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. ASU
2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or
cash flows.
During January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities (ASU 2016-01). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 is not expected to
have a material impact on our financial position, results of operations or cash flows.
During February 2016, the FASB issued ASU No. 2016-02,
Leases (ASU 2016-02). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands
the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the
impact of the new standard.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Option in Debt Instruments
(ASU 2016-06). ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the
embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to
exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim
periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 201601 to have a significant impact on its financial statements.
In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting (ASU 2016-09). ASU 2016-09
simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the standard and the impact on
its financial statements and footnote disclosures.
In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and
Cash Payments (ASU 2016-15). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within
those years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements.
17
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.
15. 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, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
(unaudited)
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Derivative Instruments
|
|
$
|
10,269
|
|
|
$
|
39,730
|
|
|
$
|
49,999
|
|
|
|
|
|
December 31, 2015
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Derivative Instruments
|
|
$
|
12,343
|
|
|
$
|
35,623
|
|
|
$
|
47,966
|
|
Level 3 financial instruments consist of certain common stock warrants and embedded conversion features. The fair value of
these warrants and embedded conversion features that have exercise reset features are estimated using a Monte Carlo valuation model. The unobservable input used by the Company was the estimation of the likelihood of a reset occurring on the embedded
conversion feature of the Amended and Restated Convertible Notes, the embedded conversion feature of the Amended and Restated Reimbursement Notes, the embedded conversion feature of the Amended and Restated Bridge Notes, and the embedded conversion
feature of the Amended and Restated June 2010 Warrants. These estimates of the likelihood of completing an equity raise that would meet the criteria to trigger the reset provisions are based on numerous factors, including the remaining term of the
financial instruments and the Companys overall financial condition.
The following table summarizes the changes in fair value of the Companys
Level 3 financial instruments for the periods ended September 30, 2016 and December 31, 2015.
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|
|
|
|
|
|
|
|
|
|
September 30,
2016
(unaudited)
|
|
|
December 31,
2015
|
|
Beginning Balance
|
|
$
|
35,623
|
|
|
$
|
24,414
|
|
Derivative liability of embedded conversion feature of the Bridge Notes
|
|
|
143
|
|
|
|
377
|
|
Derivative liability of embedded conversion feature of the Reimbursement Notes
|
|
|
|
|
|
|
105
|
|
Derivative liability of the embedded conversion feature of the Convertible Notes
|
|
|
2,113
|
|
|
|
3,648
|
|
Change in fair value
|
|
|
1,851
|
|
|
|
7,079
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
39,730
|
|
|
$
|
35,623
|
|
|
|
|
|
|
|
|
|
|
Changes in the unobservable input values would likely cause material changes in the fair value of the Companys Level 3
financial instruments. The significant unobservable input used in the fair value measurement is the estimation of the likelihood of the occurrence of a change to the contractual terms of the financial instruments. A significant increase (decrease)
in this likelihood would result in a higher (lower) fair value measurement.
18