UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-16033
ESPERION THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3419139
(State of incorporation) (IRS Employer Identification No.)
3621 S. STATE STREET, 695 KMS PLACE
ANN ARBOR, MI 48108
(734) 332-0506
(Address of principal executive offices, including zip
code, and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the Registrant's common stock, as of
November 2, 2001, was 29,169,835.
ESPERION THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000................................................................... 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2001 and 2000, and the period
from inception to September 30, 2001................................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2001 and 2000, and the period from inception to September 30, 2001.................. 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 15
Item 2. Changes in Securities and Use of Proceeds.................................................. 15
Item 3. Defaults Upon Senior Securities............................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders........................................ 15
Item 5. Other Information.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 16
SIGNATURES............................................................................................ 17
INDEX TO EXHIBITS..................................................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
in thousands 2001 2000
--------------------------------------------------------------------------------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 76,985 $ 70,228
Prepaid expenses and other 840 1,112
------------------------------------------------------------------------------------
Total current assets 77,825 71,340
------------------------------------------------------------------------------------
Furniture and equipment, net 3,400 2,503
Goodwill, net 3,317 3,500
Deposits and other assets 421 534
------------------------------------------------------------------------------------
Total assets $ 84,963 $ 77,877
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 952 $ 697
Accounts payable 2,621 3,936
Accrued liabilities 3,247 2,526
------------------------------------------------------------------------------------
Total current liabilities 6,820 7,159
------------------------------------------------------------------------------------
Long-term debt, less current portion 5,386 3,027
Stockholders' equity:
Common stock 29 26
Additional paid-in capital 133,575 110,650
Notes receivable (18) (67)
Accumulated deficit during the development stage (58,976) (40,389)
Deferred stock compensation (2,012) (2,774)
Accumulated other comprehensive income 159 245
------------------------------------------------------------------------------------
Total stockholders' equity 72,757 67,691
------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 84,963 $ 77,877
====================================================================================
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, Inception to
------------------------------------------------------------ September 30,
in thousands except share and per share data 2001 2000 2001 2000 2001
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development $ 4,902 $ 6,701 $ 16,303 $ 16,867 $ 49,534
General and administrative 1,395 611 3,732 2,337 9,642
Goodwill amortization 210 63 630 63 880
Purchased in-process research and development 0 4,000 0 4,000 4,000
----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,507 11,375 20,665 23,267 64,056
----------------------------------------------------------------------------------------------------------------------------------
Operating loss (6,507) (11,375) (20,665) (23,267) (64,056)
----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 679 782 2,351 1,446 5,654
Interest expense (228) (157) (540) (333) (1,040)
Other, net (225) (54) 267 143 466
----------------------------------------------------------------------------------------------------------------------------------
Total other income 226 571 2,078 1,256 5,080
----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (6,281) (10,804) (18,587) (22,011) (58,976)
Provision for income taxes 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
Net loss (6,281) (10,804) (18,587) (22,011) (58,976)
Beneficial conversion feature on preferred stock 0 0 0 (22,870) (22,870)
----------------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders ($6,281) ($10,804) ($18,587) ($44,881) ($81,846)
==================================================================================================================================
Basic and diluted net loss per common share ($0.22) ($0.74) ($0.70) ($3.50)
============================================================
Weighted average common shares 28,177,102 14,670,614 26,675,598 6,285,788
============================================================
Basic and diluted net loss per share
attributable to common stockholders ($0.22) ($0.74) ($0.70) ($7.14)
============================================================
Weighted average common shares 28,177,102 14,670,614 26,675,598 6,285,788
============================================================
Pro forma basic and diluted net loss
per common share ($0.50) ($1.17)
============ ============
Pro forma weighted average common shares 21,699,485 18,821,878
============ ============
Pro forma basic and diluted net loss per share
attributable to common stockholders ($0.50) ($2.38)
============ ============
Pro forma weighted average common shares 21,699,485 18,821,878
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, Inception to
---------------------- September 30,
in thousands 2001 2000 2001
-----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($18,587) ($22,011) ($58,976)
Adjustments to reconcile net loss to net cash
used in operating activities:
Purchased in-process research and development 0 4,000 4,000
Depreciation and amortization 2,209 1,342 5,010
Stock-based compensation expense 0 413 688
Decrease in notes receivable 49 32 108
Loss on sale of furniture and equipment 22 0 22
Non-cash interest included in long-term debt 171 108 331
Changes in assets and liabilities:
Prepaid expenses and other (320) (642) (1,714)
Other assets (7) (110) (92)
Accounts payable (1,130) 1,280 2,884
Accrued liabilities 860 3,484 3,275
-----------------------------------------------------------------------------------------------
Net cash used in operating activities (16,733) (12,104) (44,464)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of furniture and equipment (1,259) (785) (5,027)
Deposit on furniture and equipment (382) (450) (832)
Acquisition of Talaria Therapeutics, Inc. 0 (233) (233)
Proceeds from sale of furniture and equipment 2 0 2
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (1,639) (1,468) (6,090)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of convertible
preferred stock 0 26,871 42,200
Proceeds from the issuance of common stock 22,481 56,337 78,759
Proceeds from long-term debt 3,409 781 7,925
Repayments of long-term debt (689) (450) (1,455)
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,201 83,539 127,429
-----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (72) (233) 110
-----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,757 69,734 76,985
Cash and cash equivalents at beginning of period 70,228 5,904 0
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 76,985 $ 75,638 $ 76,985
===============================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 362 $ 256
Income taxes $ 0 $ 0
==================================================================================
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Esperion Therapeutics, Inc. ("Esperion" or the
"Company") and its subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The Company believes that all adjustments, consisting of normal
recurring adjustments considered necessary for a fair presentation, have been
included. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
2000.
Operating results for the three- and nine-month periods ended September 30,
2001 and 2000 are not necessarily indicative of the results that may be expected
for the full year.
(2) - PRIVATE PLACEMENT OF COMMON STOCK
In July 2001, the Company completed a private placement of its stock, which
resulted in the issuance of 3,183,335 shares of common stock at $7.50 per share.
The net proceeds from the private placement approximated $22.3 million. In
August 2001, the Company filed a Registration Statement to register these shares
under the Securities Act of 1933, as amended. The Registration Statement was
declared effective by the Securities and Exchange Commission on September 4,
2001.
(3) - COMPREHENSIVE LOSS
Comprehensive loss is the total of net loss and all other non-owner changes
in equity. Total comprehensive loss was $6,285,000 and $10,555,000 for the
three-month periods ended September 30, 2001 and 2000, respectively, and
$18,501,000 and $21,768,000, for the nine-month periods ended September 30, 2001
and 2000, respectively. The difference between net loss, as reported in the
accompanying condensed consolidated statements of operations, and comprehensive
loss is the foreign currency translation adjustment for the respective periods.
(4) - BASIC, DILUTED AND PRO FORMA LOSS PER SHARE
Basic and diluted net loss per share amounts have been calculated using the
weighted average number of shares of common stock outstanding during the
respective periods. Options for the purchase of 764,938 and 1,092,727 shares of
common stock, for the three-month periods ended September 30, 2001 and 2000,
respectively, and 760,994 and 1,023,928 for the nine-month periods ended
September 30, 2001 and 2000, respectively, were not included in the calculation
of diluted net loss per share as doing so would have been anti-dilutive.
Pro forma basic and diluted net loss per share includes the shares used in
computing basic and diluted net loss per share and the assumed conversion of all
outstanding shares of preferred stock from the original date of issuance.
6
ESPERION THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents the calculation of pro forma basic and diluted
net loss per share:
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
------------ ------------
Net loss attributable to common stockholders ........ $(10,804,000) $(44,881,000)
============ ============
Shares used in computing basic and diluted net loss
per share ...................................... 14,670,614 6,285,788
Pro forma adjustment to reflect assumed conversion of
Series A and Series B preferred stock .......... 3,371,664 6,181,384
Pro forma adjustment to reflect assumed conversion of
Series C and Series D preferred stock .......... 3,657,207 6,354,706
------------ ------------
Shares used in computing pro forma basic and diluted
net loss per share ............................. 21,699,485 18,821,878
============ ============
Pro forma basic and diluted net loss per share ...... $ (0.50) $ (2.38)
============ ============
(5) - COMMITMENTS AND CONTINGENCIES
Contingent repurchase of stock
The Company may be required to repurchase approximately 47,000 shares of common
stock that were sold to certain employees and others under the Company's
directed share program as part of the initial public offering. The Company
believes that the maximum liability arising from this repurchase would be
approximately $423,000 plus interest. A liability has not been recorded in the
financial statements, as management believes that the potential repurchase of
these shares is not likely.
(6) - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In August 2001,
the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 141 supersedes Accounting Principles Board Opinion No. 16, "Business
Combinations". The most significant changes made by SFAS 141 are (1) requiring
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) establishing specific criteria for the
recognition of intangible assets separately from goodwill, and (3) requiring
unallocated negative goodwill to be written off immediately as an extraordinary
gain (rather than being deferred and amortized).
SFAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible
Assets", and primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant changes made by
SFAS 142 are that: (1) goodwill and indefinite lived intangible assets will no
longer be amortized, (2) goodwill will be tested for impairment at least
annually at the reporting level, (3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and (4) the
amortization of intangible assets with finite lives will no longer be limited to
forty years. SFAS 142 also specifies that certain intangible assets that were
7
previously identified as separate from goodwill (i.e., assembled workforce) are
not considered separately identifiable for purposes of this standard and should
be included as part of goodwill and subject to the non-amortization provisions
for SFAS 142.
The provisions for SFAS 142 will be effective for the Company's fiscal year
beginning January 1, 2002. At effectiveness, an evaluation of goodwill will be
required, and any impairment of goodwill at that time will be recognized as a
cumulative effect of adoption. Total goodwill included in the Company's
Consolidated Financial Statements was $3.3 million at September 30, 2001 and
$3.5 million at December 31, 2000. Goodwill amortization expense was $210,000
and $63,000 for the three-month periods ended September 30, 2001 and 2000,
respectively. Goodwill amortization expense was $630,000 and $63,000 for the
nine-month periods ended September 30, 2001 and 2000, respectively. As a result
of the non-amortization provisions of SFAS 142, the Company expects reported net
loss to decrease subsequent to the effectiveness of SFAS 142. In addition, based
on management's current financial projections, management does not believe that
goodwill and other intangibles are currently impaired. The Company will perform
a more detailed assessment to determine the effect of this new standard.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS 144 is effective for the Company's fiscal year beginning
January 1, 2002 and is not expected to have a material impact upon
effectiveness.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's condensed
financial condition and results of operations, and should be read in conjunction
with the Company's consolidated financial statements and the notes included in
Item 1 of this Form 10-Q.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations as well as information contained elsewhere in this
report contains "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are often identified by words such as "may," "believe," "anticipate,"
"planned," "expect," "require," "intend," "assume," and similar expressions. Our
forward-looking statements involve uncertainties and other factors that may
cause our actual results, performance or achievements to be far different from
those suggested by our forward-looking statements. These factors include, but
are not limited to, risks associated with the development of our product
candidates, including regulatory approval; dependence on contract research
organizations, license arrangements and other strategic relationships with third
parties for the research, development, manufacturing and commercialization of
our products; dependence on patents and proprietary rights; procurement,
maintenance, enforcement and defense of the Company's patents and proprietary
rights; risks related to manufacturing; risks associated with the timing and
acceptance of new products by the Company or its competitors; competitive
conditions in the industry; business cycles affecting the markets in which the
Company's products are sold; extraordinary events, such as litigation; risks
inherent in seeking and consummating acquisitions, including the diversion of
management attention to the assimilation of the operations and personnel of the
acquired business; risks relating to the timing of the Company's financing
needs; fluctuations in foreign exchange rates; and economic conditions generally
or in various geographic areas. All of the foregoing factors are difficult to
forecast. More detailed information about these and other factors is set forth
in our other filings with the Securities and Exchange Commission. We do not
intend to publicly update or revise any forward-looking statements to reflect
new information or future events or circumstances.
OVERVIEW
Background
We have devoted substantially all of our resources since we began our
operations in May 1998 to the research and development of pharmaceutical product
candidates for cardiovascular and metabolic diseases. We are a development stage
pharmaceutical company and have not generated any revenues from product sales.
We have not been profitable and have incurred a cumulative net loss of
approximately $59.0 million from inception through September 30, 2001. These
losses have resulted principally from costs incurred in research and development
activities, and general and administrative expenses. We expect to incur
significant additional operating losses for at least the next several years and
until such time as we generate sufficient revenue to offset expenses. Also, we
anticipate that research and development costs relating to product candidates
will increase. Finally, we expect to have increasing development, manufacturing,
sales and marketing costs as we prepare for the commercialization of our product
candidates.
9
RESULTS OF OPERATIONS
Operating Expenses
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
dollars in thousands 2001 2000 % Change 2001 2000 % Change
---------------------------------------------------------------------------------------------------------------------
Research and development $4,902 $6,701 -26.8% $16,303 $16,867 -3.3%
% of total 75.4% 58.9% 78.9% 72.5%
General and administrative $1,395 $611 128.3% $3,732 $2,337 59.7%
% of total 21.4% 5.4% 18.1% 10.0%
Goodwill amortization $210 $63 233.3% $630 $63 900.0%
% of total 3.2% 0.6% 3.0% 0.3%
Purchased in-process R&D $0 $4,000 -100.0% $0 $4,000 -100.0%
% of total 0.0% 35.1% 0.0% 17.2%
Three Months Ended September 30, 2001 and 2000
Research and Development Expenses. Research and development expenses include
both external and internal costs related to the research and development
activities of our existing product candidates as well as discovery efforts on
potential new product candidates. External costs include costs related to
manufacturing, clinical trials, toxicology or pharmacology studies performed by
third parties, milestone payments under certain license agreements and other
related expenses. Internal costs include all payroll and related costs
attributable to research and development activities, as well as an allocation of
overhead expenses incurred by the Company. Research and development expenses
decreased to approximately $4.9 million for the three months ended September 30,
2001 compared to approximately $6.7 million for the three months ended September
30, 2000. This 26.8% decrease is primarily due to lower manufacturing and other
costs related to clinical trials, as well as lower costs related to pre-clinical
development of our biopharmaceutical product candidates in the third quarter of
2001. During the third quarter of 2000, the Company had certain costs associated
with one clinical trial and contract manufacturing costs related to three of its
product candidates. Many of these costs were not recurring in the third quarter
of 2001. The magnitude of the Company's operating expenses, particularly
research and development expense, is largely dependant upon the timing and size
of the clinical trials. As additional clinical trials begin in the fourth
quarter of this year and into next year, the Company anticipates research and
development expenses will increase over current quarter levels.
General and Administrative Expenses. General and administrative expenses
include the cost of salaries, employee benefits, and other costs associated with
the Company's finance, accounting, human resources, legal, administrative and
executive management functions. General and administrative expenses also include
an allocation of overhead expenses incurred by the Company. General and
administrative expenses increased to approximately $1.4 million for the three
months ended September 30, 2001 compared to approximately $611,000 for the three
months ended September 30, 2000. This 128.3% increase resulted from higher
payroll, overhead and related costs in support of the Company's anticipated
growing research and development activities as compared to the prior year.
Included in this increase are costs related to a market research study performed
by a third party to provide the Company with some preliminary assessment about
product positioning and market potential of certain product candidates.
Goodwill Amortization. Goodwill amortization reflects the amortization of
the amount of the excess of the purchase price over net assets in the Company's
September 2000 acquisition of Talaria Therapeutics, Inc. ("Talaria") and the
milestone payments made to date. Total goodwill included in the Company's
Consolidated Financial
10
Statements was $3.3 million at September 30, 2001 and $3.5 million at December
31, 2000. Goodwill amortization expense was $210,000 and $63,000 for the three
months ended September 30, 2001 and 2000, respectively. Goodwill amortization
expense was $630,000 and $63,000 for the nine months ended September 30, 2001
and 2000, respectively. The increase in goodwill amortization is a result of
higher goodwill upon the achievement of certain LUV clinical development
milestones as well as the timing of the acquisition of Talaria. The Company is
amortizing this goodwill over five years, which represents the period estimated
to be benefited from the acquisition, after considering such factors as product
development timelines, revenue potential, competition and patent life.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets"
("SFAS 142"), which primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. The provisions for SFAS 142
will be effective for the Company's fiscal year beginning January 1, 2002. This
statement is summarized in Note 6 of Notes to Consolidated Financial Statements.
Purchased in-process research and development. Purchased in-process research
and development in 2000 represents a $4.0 million one-time charge to operations
in connection with the acquisition of Talaria in September 2000. This represents
the write-off of acquired in-process research and development that had not
reached technological feasibility. The allocation of the purchase price was
based on an independent appraisal of the fair values on the closing date.
Other Income, Net. Other income, net consists of interest income (expense),
foreign currency transaction loss, and gain (loss) on the disposal of property
and equipment. Interest income decreased to approximately $679,000 for the three
months ended September 30, 2001 compared to approximately $782,000 for the three
months ended September 30, 2000. The decrease is primarily attributable to lower
interest rates in 2001 compared to the same period last year. Interest expense
for the three months ended September 30, 2001 and 2000 was approximately
$228,000 and $157,000, respectively, and represents interest incurred on
equipment financing facilities and a special project loan. The increase in
interest expense resulted from higher outstanding borrowings in 2001 as compared
to the comparable period in 2000. During the three months ended September 30,
2001 and 2000, we recorded approximately $179,000 and $54,000, respectively, of
foreign currency transaction losses on transactions denominated in various
currencies of European countries.
Net Loss. The net loss was approximately $6.3 million for the three months
ended September 30, 2001 compared to approximately $10.8 million for the three
months ended September 30, 2000. The decrease in net loss resulted from lower
research and development expenses, offset in part by the increases in general
and administrative expenses. In addition, the net loss for the three months
ended September 30, 2000 includes the $4.0 million one-time charge related to
purchased in-process research and development.
Nine Months Ended September 30, 2001 and 2000
Research and Development Expenses. Research and development expenses include
both external and internal costs related to the research and development
activities of our existing product candidates as well as discovery efforts on
potential new product candidates. External costs include costs related to
manufacturing, clinical trials, toxicology or pharmacology studies performed by
third parties, milestone payments under certain license agreements and other
related expenses. Internal costs include all payroll and related costs
attributable to research and development activities, as well as an allocation of
overhead expenses incurred by the Company. Research and development expenses
decreased to approximately $16.3 million for the nine months ended September 30,
2001 compared to approximately $16.9 million for the nine months ended September
30, 2000. This 3.3% decrease is primarily due to lower manufacturing and other
costs related to clinical trials, as well as lower costs related to pre-clinical
development of our biopharmaceutical product candidates during 2001. During the
third quarter of 2000, the Company had certain costs associated with one
clinical trial and contract manufacturing costs related to three of its product
candidates. Many of these costs were not recurring in the third quarter of 2001.
The magnitude of the Company's operating expenses, particularly research and
development expense, is largely dependant upon the timing and size of the
clinical trials. As additional clinical trials begin in the fourth quarter of
this year and into next year, the Company anticipates research and development
expenses will increase over current quarter levels.
11
General and Administrative Expenses. General and administrative expenses
include the cost of salaries, employee benefits, and other costs associated with
the Company's finance, accounting, human resources, legal, administrative and
executive management functions. General and administrative expenses also include
an allocation of overhead expenses incurred by the Company. General and
administrative expenses increased to approximately $3.7 million for the nine
months ended September 30, 2001 compared to approximately $2.3 million for the
nine months ended September 30, 2000. This 59.7% increase resulted from higher
payroll, overhead and related costs in support of the Company's growing research
and development activities as compared to the prior year. Included in this
increase are costs related to a market research study performed by a third party
to provide the Company with some preliminary assessment about product
positioning and market potential of certain product candidates.
Other Income, Net. Other income, net consists of interest income (expense),
foreign currency transaction gain, and the loss on the disposal of property and
equipment. Interest income increased to approximately $2.4 million for the nine
months ended September 30, 2001 compared to approximately $1.4 million for the
nine months ended September 30, 2000. The increase is attributable to higher
levels of cash and cash equivalents available for investment in 2001 as a result
of the cash raised in the Company's initial public offering in August 2000, as
well as the private placement in July 2001. This increase was partially offset
by lower interest rates on these investments. Interest expense for the same
periods was approximately $540,000 and $333,000, respectively, and represents
interest incurred on the higher amount of borrowings under the equipment
financing facilities and a special project loan. The increase in interest
expense resulted from higher outstanding borrowings in 2001 as compared to the
comparable period in 2000. During the nine months ended September 30, 2001 and
2000, we recorded approximately $340,000 and $143,000, respectively, of foreign
currency transaction gains on transactions denominated in various currencies of
European countries.
Net Loss. The net loss was approximately $18.6 million for the nine months
ended September 30, 2001 compared to approximately $22.0 million for the nine
months ended September 30, 2000. The decrease in net loss resulted from lower
research and development offset in part by general and administrative expenses.
In addition, the net loss for the three months ended September 30, 2000 includes
the $4.0 million one-time charge related to purchased in-process research and
development.
Net Loss Attributable to Common Stockholders. The net loss attributable to
common stockholders for the nine months ended September 30, 2000 includes a
one-time $22.9 million charge related to the beneficial conversion feature on
the series C and series D convertible preferred stock. The total of the non-cash
beneficial conversion feature was reflected through equal and offsetting
adjustments to additional paid-in-capital with no net impact on stockholders'
equity. The beneficial conversion feature was considered in the determination of
our loss per common share amounts.
LIQUIDITY AND CAPITAL RESOURCES
In July 2001, the Company issued 3,183,335 shares of common stock at $7.50
per share in a private placement. Net proceeds to the Company from the private
placement were approximately $22.3 million, after deducting expenses related to
the issuance.
In August 2000, the Company completed an initial public offering of its
stock, which resulted in the issuance of 6,000,000 shares of common stock at
$9.00 per share. In September 2000, an additional 900,000 shares were sold by
the Company at $9.00 per share to cover the underwriters' over-allotment. Net
proceeds to the Company from the offering were approximately $56.2 million,
after deducting the underwriting discount and offering expenses.
As of September 30, 2001, the Company had cash and cash equivalents of
approximately $77.0 million. Our investment policy emphasizes liquidity and
preservation of principal over other portfolio considerations. We select
investments that maximize interest income to the extent possible by investing
cash in short-term, investment-grade, interest-bearing securities. We believe
that our current cash position, along with available borrowings under our
12
credit facilities will be sufficient to fund our operations and capital
expenditures for at least the next twelve months. We anticipate that our capital
expenditures for the next twelve months will be approximately $2.5 million.
During the nine months ended September 30, 2001 and 2000, net cash used in
operating activities was approximately $16.7 million and $12.1 million,
respectively. This cash was used to fund our net losses for the periods,
adjusted for non-cash expenses and changes in operating assets and liabilities.
Net cash used in investing activities for the nine months ended September
30, 2001 and 2000 was approximately $1.6 million and $1.5 million, respectively.
The net cash used in investing activities for the nine months ended September
30, 2001 and 2000 resulted primarily from the acquisition of laboratory
equipment, furniture and fixtures and office equipment. The Company also used
approximately $233,000 in cash related to the acquisition of Talaria in
September 2000.
Net cash proceeds from financing activities were $25.2 million and $83.5
million for the nine months ended September 30, 2001 and 2000, respectively. The
net cash proceeds from financing activities for the nine months ended September
30, 2001 resulted primarily from $22.3 million raised in the private placement,
$3.4 million of additional borrowings on the special project loan and equipment
term loans, and $139,000 raised from the issuance of common stock to employees
as part of the Company's equity compensation plans. The proceeds were partially
offset by $689,000 of cash used to repay borrowings under equipment loans. Also,
the Company issued 58,626 shares of common stock to Talaria stockholders for the
payment of a milestone achieved in January 2001. The net cash proceeds from
financing activities for the nine months ended September 30, 2000 resulted
primarily from $56.2 million raised in the initial public offering, $26.9
million raised in preferred stock financings, $781,000 of additional borrowings
on a special project loan, and $84,000 raised from the issuance of common stock
to employees as part of the Company's equity compensation plans. The proceeds
were partially offset by $450,000 of cash used to repay borrowings under an
equipment loan.
As of September 30, 2001, we had approximately $372,000 outstanding under an
equipment term loan with a U.S. bank. Borrowings under the term loan bear
interest at the bank's prime rate plus 1.0%. Also, we have a second equipment
term loan with another U.S. bank. Outstanding borrowings under this equipment
term loan have a weighted average interest rate of approximately 12% per annum
and amounted to approximately $2.0 million as of September 30, 2001. We also
have a memorandum of understanding with respect to entering into an equipment
loan with an economic development group whereby we may borrow up to $500,000 for
equipment purchases. Outstanding borrowings under the term loan bear interest at
4% per annum and total approximately $268,000 as of September 30, 2001. In
addition, we have a special project loan with a Swedish entity with outstanding
borrowings totaling 37 million Swedish kronor (approximately $3.7 million of
which was outstanding as of September 30, 2001) that may only be used to finance
the development of our AIM product candidate. If a related product is not
developed or does not succeed in the market, our obligation to repay the loan
may be forgiven. Borrowings under the Swedish credit facility bear interest at
17.0% per annum, of which 9.5% is payable quarterly. The remaining 7.5% of
interest together with principal are payable in five equal annual installments
starting December 2004. The Company has 13 million Swedish kronor (approximately
$1.3 million as of September 30, 2001) available under this special project loan
that is available upon the achievement of certain product development
milestones.
We lease our corporate and research and development facilities under
operating leases expiring at various times through December 2003. Minimum annual
payments under these leases for the next twelve months are approximately
$701,000 as of September 30, 2001.
We expect that our operating expenses and capital expenditures will increase
in future periods in part because of our intent to hire additional research and
development, clinical testing and administrative staff. Our capital expenditure
requirements will depend on numerous factors, including the progress of our
research and development programs, the time required to file and process
regulatory approval applications, the development of commercial manufacturing
capability, the ability to obtain additional licensing arrangements, and the
demand for our product candidates, if and when approved by the FDA or other
regulatory authorities.
13
INCOME TAXES
As of September 30, 2001, we had operating loss carryforwards of
approximately $40.6 million. These net operating loss carryforwards begin to
expire in 2013. Additionally, utilization of net operating loss carryforwards
may be limited under Section 382 of the Internal Revenue Code. These and other
deferred income tax assets are fully reserved by a valuation allowance.
EMPLOYEES
As of September 30, 2001, we had 71 full-time employees. Of these employees,
55 were engaged in research, preclinical and clinical development, regulatory
affairs, intellectual property activities, and/or manufacturing activities and
16 were engaged in general and administrative activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Under our current policies, we do not use interest rate derivative instruments
to manage our exposure to interest rate changes. We ensure the safety and
preservation of our invested principal funds by limiting default risks, market
risk and reinvestment risk. We mitigate default risk by investing in investment
grade securities. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at September 30, 2001.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
Although currency fluctuations are currently not a material risk to our
operating results, we have and will continue to monitor our exposure to currency
fluctuations and when appropriate, we may use financial hedging techniques to
minimize the effect of these fluctuations in the future. We cannot ensure that
exchange rate fluctuations will not harm our business in the future.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 25, 2001, the Company completed a private placement of 3,183,335
shares of common stock for $7.50 per share, raising net proceeds of
approximately $22.3 million. The Company relied on an exemption from
registration under the Securities Act of 1933, as amended, based upon the offer
and sale of the securities only to accredited investors. In August 2001, the
Company filed a Registration Statement to register these shares under the
Securities Act of 1933, as amended. The Registration Statement was declared
effective by the Securities and Exchange Commission on September 4, 2001. In
August 2000, the Company completed an initial public offering of its common
stock, raising net proceeds of approximately $56.2 million. The Company invested
the net proceeds from the private placement and the initial public offering in
short-term, investment-grade, interest-bearing securities. These proceeds, as
well as proceeds from earlier private placements, are being used to fund
research and development, payments under current licensing agreements, and for
other working capital and general corporate purposes, including employee
compensation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NUMBER EXHIBIT
--------------- -----------------------------------------------------------------------------------------------------
10.33 Commercial Sublease between SWMF Holdings Corporation and Esperion Therapeutics, Inc. dated as of
June 22, 2001.
10.34 Lease Extension - Second Renewal Term between Maxey LLC and Esperion Therapeutics, Inc. dated
September 21, 2001.
10.35@ License Agreement Michigan File 1855 Technology between the Regents of the University of Michigan
and Esperion Therapeutics, Inc. dated effective September 18, 2001.
@ Confidential treatment has been requested with respect to the portions of the
Agreement indicated with brackets and asterisks [***]. A complete copy of this
Agreement, including the redacted portions, has been separately filed with the
Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
Not applicable.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2001 ESPERION THERAPEUTICS, INC.
(Registrant)
By: /s/ Roger S. Newton
--------------------------------------
Roger S. Newton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy M. Mayleben
--------------------------------------
Timothy M. Mayleben
Vice President and Chief Financial Officer
(Principal Financial Officer)
17
INDEX TO EXHIBITS
NUMBER EXHIBIT
--------------- -----------------------------------------------------------------------------------------------------
10.33 Commercial Sublease between SWMF Holdings Corporation and Esperion Therapeutics, Inc. dated as of
June 22, 2001.
10.34 Lease Extension - Second Renewal Term between Maxey LLC and Esperion Therapeutics, Inc. dated
September 21, 2001.
10.35@ License Agreement Michigan File 1855 Technology between the Regents of the University of Michigan
and Esperion Therapeutics, Inc. dated effective September 18, 2001.
@ Confidential treatment has been requested with respect to the portions of the
Agreement indicated with brackets and asterisks [***]. A complete copy of this
Agreement, including the redacted portions, has been separately filed with the
Securities and Exchange Commission.
18