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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - emis:NatureOfOperationsAndLiquidityTextBlock-->
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="left">
</div>
<div align="center" style="font-size: 10pt"><b></b></div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>1. Nature of Operations and Liquidity</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>Nature of Operations. </b>Emisphere Technologies, Inc. (“Emisphere,” “the Company,” “our,” “us,” or
“we”) is a biopharmaceutical company that focuses on a unique and improved delivery of therapeutic
molecules or nutritional supplements using its Eligen<sup style="font-size: 85%; vertical-align: text-top">®</sup> Technology. These molecules are
currently available or are under development.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Our core business strategy is to develop oral forms of drugs or nutrients that are not currently
available or have poor bioavailability in oral form, by applying the Eligen<sup style="font-size: 85%; vertical-align: text-top">®</sup> Technology
to those drugs or nutrients. Our development efforts are conducted internally or in collaboration
with corporate development partners. Typically, the drugs that we target are at an advanced stage
of development, or have already received regulatory approval, and are currently available on the
market.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>Liquidity. </b>As of June 30, 2011, we had approximately $1.3 million in cash and cash equivalents,
approximately $9.0 million in working capital deficiency, a stockholders’ deficit of approximately
$69.0 million and an accumulated deficit of approximately $468.1 million. Our operating loss for
the three months ended June 30, 2011 was approximately $2.2 million and $4.3 million for the six
months ended June 30, 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On June 30, 2011, we entered into a securities purchase agreement with various institutional
investors to sell an aggregate of 4,300,438 shares of our common stock and warrants to purchase a
total of 3,010,306 shares of our common stock for gross proceeds, before deducting fees and
expenses and excluding the proceeds, if any, from the exercise of the warrants of $3,749,982 (the
“2011 Private Placement”). The 2011 Private Placement closed on July 6, 2011. In connection with
the 2011 Private Placement, we entered into a securities purchase agreement on the same date with
MHR Fund Management LLC to sell an aggregate of 4,300,438 shares of our common stock and warrants
to purchase a total of 3,010,306 shares of our common stock for gross proceeds, before deducting
fees and expenses and excluding the proceeds, if any, from the exercise of the warrants of
$3,749,982 (the “2011 MHR Private Placement”). Simultaneous with closing the 2011 Private
Placement, we closed the 2011 MHR Private Placement with MHR and certain of its affiliated
investment funds. In connection with the 2011 Private Placement and the 2011 MHR Private Placement,
we entered into a waiver agreement with MHR, pursuant to which MHR waived certain anti-dilution
adjustment rights under its senior secured notes and certain warrants that would otherwise have
been triggered by the 2011 Private Placement. As consideration for such waiver, we issued to MHR
warrants to purchase 795,000 shares of our common stock and agreed to reimburse MHR for up to
$25,000 of its legal fees. In both the Private Placement and the MHR Private Placement (together,
the “July 2011 Financing”), each unit, consisting of one share of common stock and a warrant to
purchase 0.7 shares of common stock, were sold at a purchase price of $0.872. All of the warrants
issued in the July 2011 Financing are exercisable at an exercise price of $1.09 per share and will
expire on July 6, 2016.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">We anticipate that we will continue to generate significant losses from operations for the
foreseeable future, and that our business will require substantial additional investment that we
have not yet secured. As such, we anticipate that our existing cash resources will enable us to
continue operations through approximately April 2012, or earlier if unforeseen events arise that
negatively affect our liquidity. Further, we have significant future commitments and obligations.
These conditions raise substantial doubt about our ability to continue as a going concern.
Consequently, the audit opinion issued by our independent registered public accounting firm
relating to our financial statements for the year ended December 31, 2010 contained a going concern
explanatory paragraph. We are pursuing new and enhanced collaborations and exploring other funding
options, with the objective of minimizing dilution and disruption.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Our plan is to raise capital when needed and/or to pursue product partnering opportunities. We
expect to continue to spend substantial amounts on research and development, including amounts
spent on conducting clinical trials for our product candidates. Expenses will be partially offset
with income-generating license agreements, if possible. Further, we will not have sufficient
resources to develop fully any new products or technologies unless we are able to raise
substantial additional financing on acceptable terms or secure funds from new or existing partners.
We cannot assure that financing will be available when needed, or on favorable terms or at all. If
additional capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities would result in dilution to our existing stockholders. Our failure to
raise capital before April 2012 will adversely affect our business, financial condition and results
of operations, and could force us to reduce or cease our operations. No adjustment has been made in
the accompanying financial statements to the carrying amount and classification of recorded assets
and liabilities should we be unable to continue operations.
</div>
</div>
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<!-- Begin Block Tagged Note 2 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>2. Basis of Presentation</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The condensed balance sheet at December 31, 2010 was derived from audited financial statements but
does not include all disclosures required by accounting principles generally accepted in the United
States of America. The other information in these condensed financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair presentation of the
results for the periods covered. All such adjustments are of a normal recurring nature unless
disclosed otherwise. These condensed financial statements, including notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange Commission and do not include
all of the information and disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. These condensed financial statements
should be read in conjunction with the financial statements and additional information as contained
in our Annual Report on Form 10-K for the year ended December 31, 2010.
</div>
</div>
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<!-- Begin Block Tagged Note 3 - us-gaap:DisclosureOfCompensationRelatedCostsShareBasedPaymentsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. Stock-Based Compensation Plans</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On April 20, 2007, the stockholders of the Company approved the 2007 Stock Award and Incentive Plan
(the “2007 Plan”). The 2007 Plan provides for grants of options, stock appreciation rights,
restricted stock, deferred stock, bonus stock and awards in lieu of obligations, dividend
equivalents, other stock-based awards and performance awards to executive officers and other
employees of the Company, and non-employee directors, consultants and others who provide
substantial service to us. The 2007 Plan provides for the issuance of an aggregate 3,275,334 shares
as follows: 2,500,000 new shares, 374,264 shares remaining and transferred from the Company’s 2000
Stock Option Plan (the “2000 Plan”) (which was then replaced by the 2007 Plan) and 401,070 shares
remaining and transferred from the Company’s Stock Option Plan for Outside Directors (the
“Directors Stock Plan”). In addition, shares canceled, expired, forfeited, settled in cash, settled
by delivery of fewer shares than the number underlying the award, or otherwise terminated under the
2000 Plan will become available for issuance under the 2007 Plan.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Prior to the adoption of the 2007 Plan, the Company granted stock-based compensation to employees
under the 2000 Plan and the 2002 Broad Based Plan (the “2002 Plan”), and to non-employee directors
under the Directors Stock Plan. The Company also has grants outstanding under various expired and
terminated stock plans, including the 1991 Stock Option Plan, the 1995 Non-Qualified Stock Option
Plan, the Deferred Directors Compensation Stock Plan and Non-Plan Options. In January 2007, the
Directors Stock Plan expired.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">As of June 30, 2011, shares available for future grants under the Plans amounted to 1,587,648.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Total compensation expense recorded during the six months ended June 30, 2011 for share-based
payment awards was $0.14 million, of which $0.03 million is included in research and development
and $0.11 million is included in general and administrative expenses in the condensed statement of
operations for the six months ended June 30, 2011. Total compensation expense recorded during the
six months ended June 30, 2010 for share-based payment awards was $0.55 million, of which $0.06
million is included in research and development and $0.49 million is included in general and
administrative expenses in the condensed statement of operations for the six months ended June 30,
2010. At June 30, 2011, total unrecognized estimated compensation expense related to non-vested
stock options granted prior to that date was $0.4 million, which is expected to be recognized over
a weighted-average period of approximately two years. No options were exercised in the six months
ended June 30, 2011 or 2010. No tax benefit was realized due to a continued pattern of operating
losses.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">During the six months ended June 30, 2011, the Company granted no options. On July 15, 2011, the
Company granted 20,000 in options to Gary Riley and 30,000 options to Michael Garone.
</div>
</div>
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<!-- Begin Block Tagged Note 4 - us-gaap:InventoryDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>4. Inventories</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Inventories are stated at the lower of cost or market determined by the first in, first out method.
Inventories consist principally of finished goods at June 30, 2011 and December 31, 2010.
</div>
</div>
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<!-- Begin Block Tagged Note 5 - us-gaap:DeferredCostsCapitalizedPrepaidAndOtherAssetsDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>5. Prepaid Expenses and Other Current Assets</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Prepaid expenses and other current assets consist of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #ffffff"><b>2011</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #ffffff"><b>2010</b></td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="7">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Prepaid corporate insurance
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">85</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">41</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Deposit on inventory
</div></td>
<td> </td>
<td> </td>
<td align="right">420</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">420</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Prepaid expenses and other current assets
</div></td>
<td> </td>
<td> </td>
<td align="right">30</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">35</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">535</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">496</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>6. Fixed Assets</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Equipment and leasehold improvements, net, consists of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="64%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Useful Lives</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>in Years</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="7">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Equipment
</div></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="right"><b>3-7</b></td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">1,370</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">1,370</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Leasehold improvements
</div></td>
<td> </td>
<td colspan="3" align="center" nowrap="nowrap"><b>Term of lease</b></td>
<td> </td>
<td> </td>
<td align="right">61</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">61</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,431</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,431</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Less, accumulated depreciation and amortization
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,370</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,349</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Equipment and leasehold improvements, net
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">61</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">82</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>7. Purchased Technology</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Purchased technology represents the value assigned to patents and the rights to utilize, sell or
license certain technology in conjunction with our proprietary carrier technology. These assets are
utilized in various research and development projects. Purchased technology is amortized over a
period of 15 years, which represents the average life of the patents.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td align="center" colspan="7">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Gross carrying amount
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">4,533</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">4,533</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Less, accumulated amortization
</div></td>
<td> </td>
<td> </td>
<td align="right">3,815</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,695</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Net book value
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">718</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">838</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Amortization expense for the purchased technology is approximately $60 thousand per quarter in 2011
and in the remaining years through 2014.
</div>
</div>
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<!-- Begin Block Tagged Note 8 - us-gaap:AccountsPayableAndAccruedLiabilitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>8. Accounts Payable and Accrued Expenses</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Accounts payable and accrued expenses consist of the following:
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="7"><b>(In thousands)</b></td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accounts payable and other accrued expenses
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">1,756</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">2,201</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued bonus
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">300</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued legal, professional fees and other
</div></td>
<td> </td>
<td> </td>
<td align="right">300</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">375</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued vacation
</div></td>
<td> </td>
<td> </td>
<td align="right">77</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">69</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Clinical trial expenses and contract research
</div></td>
<td> </td>
<td> </td>
<td align="right">39</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">9</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">2,172</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">2,954</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
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<!-- Begin Block Tagged Note 9 - emis:OtherCurrentLiabilitiesTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>9. Other Current Liabilities</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">At June 30, 2011, other current liabilities included $1.15 million deposits related to the future
private placement of the Company’s common stock to certain institutional investors at a purchase
price of $0.872 per unit, with each unit consisting of one share of common stock and one warrant to
purchase 0.7 shares of common stock. As of July 6, 2011 we had closed the private placement, and
the $1.15 million deposit was reclassified as equity.
</div>
</div>
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<!-- Begin Block Tagged Note 10 - us-gaap:LongTermDebtTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>10. Notes Payable</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     Notes payable consist of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000" > </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td align="center" colspan="7" nowrap="nowrap">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">MHR Convertible Notes
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">22,480</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">19,864</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">MHR Promissory Notes
</div></td>
<td> </td>
<td> </td>
<td align="right">547</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">521</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">23,027</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">20,385</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>MHR Convertible Notes. </b>On September 26, 2005, we received net proceeds of approximately $12.9
million under a $15 million secured loan agreement (the “Loan Agreement”) executed with MHR Fund
Management LLC (together with its affiliates, “MHR”). Under the Loan Agreement, MHR requested, and
on May 16, 2006, we effected, the exchange of the loan from MHR for senior secured convertible
notes (the “MHR Convertible Notes”) with substantially the same terms as the Loan Agreement, except
that the MHR Convertible Notes are convertible, at the sole discretion of MHR, into shares of our
common stock at a price per share of $3.78. As of June 30, 2011, the MHR Convertible Notes were
convertible into 7,051,181 shares of our common stock. The MHR Convertible Notes are due on
September 26, 2012, bear interest at 11% and are collateralized by a first priority lien in favor
of MHR on substantially all of our assets. Interest is payable in the form of additional MHR
Convertible Notes rather than in cash.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In connection with the Loan Agreement, we amended MHR’s previously existing warrants to purchase
387,374 shares of common stock (“MHR 2005 Warrants”) to provide additional anti-dilution
protection. We also granted MHR the option (“MHR Option”) to purchase warrants for up to 617,211
shares of our common stock. The MHR Option was exercised during April 2006 whereby MHR acquired
617,211 warrants (“MHR 2006 Warrants”) to acquire an equal number of shares of common stock. The
exercise price for the MHR Option was $0.01 per warrant for the first 67,084 warrants and $1.00 per
warrant for each additional warrant. See Note 11 for a further discussion of the liability related
to these warrants.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Total issuance costs associated with the Loan Agreement were $2.1 million, of which $1.9 million
were allocated to the MHR Convertible Notes, and $0.2 million were allocated to the related
derivative instruments. Of the $1.9 million allocated to the MHR Convertible Notes, $1.4 million
represents reimbursement of MHR’s legal fees and $0.5 million represents our legal and other
transaction costs. The $1.4 million paid on behalf of the lender has been recorded as a reduction
of the face value of the note, while the $0.5 million of our costs has been recorded as deferred
financing costs.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The MHR Convertible Notes provide MHR with the right to require us to redeem the notes in the event
of a change in control. The change in control redemption feature has been determined to be an
embedded derivative instrument which must be separated from the host contract. For the year ended
December 31, 2006, the fair value of the change in control redemption feature was estimated using a
combination of a put option model for the penalties and the Black-Scholes model for the conversion
option that would exist under the MHR Convertible Notes. The estimate resulted in a value that was
de minimis and, therefore, no separate liability was recorded. Changes in the assumptions used to
estimate the fair value of this derivative instrument, in particular the probability that a change
in control will
occur, could result in a material change to the fair value of the instrument. For the six months
ended June 30, 2011 and for the years ended December 31, 2010, 2009 and 2008, management determined
the probability of exercise of the right due to change in control to be remote. The fair value of
the change in control redemption feature is de minimis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In connection with the MHR Convertible Notes financing, the Company agreed to appoint a
representative of MHR (“MHR Nominee”) and another person (the “Mutual Director”) to its Board of
Directors. Further, the Company agreed to amend, and in January 2006 did amend, its certificate of
incorporation to provide for continuity of the MHR Nominee and the Mutual Nominee on the Board, as
described therein, so long as MHR holds at least 2% of the outstanding common stock of the Company.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The MHR Convertible Notes provide for various events of default including for failure to perfect
any of the liens in favor of MHR, failure to observe any covenant or agreement, failure to maintain
the listing and trading of our common stock, sale of a substantial portion of our assets, merger
with another entity without the prior consent of MHR, or any governmental action renders us unable
to honor or perform our obligations under the Loan Agreement or results in a material adverse
effect on our operations. If an event of default occurs, the MHR Convertible Notes provide for the
immediate repayment and certain additional amounts as set forth in the MHR Convertible Notes. We
currently have a waiver from MHR for failure to perfect liens on certain intellectual property
rights through August 10, 2012.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Effective January 1, 2009, the Company adopted the provisions of the Financial Accounting Standards
Board Accounting Codification Topic 815-40-15-5, <i>Evaluating Whether an Instrument Involving a
Contingency is Considered Indexed to an Entity’s Own Stock </i>(“FASB ASC 815-40-15-5”). Under FASB ASC
815-40-15-5, the conversion feature embedded in the MHR Convertible Notes have been bifurcated from
the host contract and accounted for separately as a derivative. The bifurcation of the embedded
derivative increased the amount of debt discount thereby reducing the book value of the MHR
Convertible Notes and increasing prospectively the amount of interest expense to be recognized over
the life of the MHR Convertible Notes using the effective yield method.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">As consideration for its consent and limitation of rights in connection with the Master Agreement
and Amendment by and between the Company and Novartis dated as of June 4, 2010 (the “Novartis
Agreement”), the Company granted MHR warrants to purchase 865,000 shares of its common stock (the
“June 2010 MHR Warrants”) under the MHR Letter Agreement (as defined below). The Company estimated
the fair value of the June 2010 MHR Warrants on the date of grant using Black-Scholes models to be
$1.9 million. The Company determined that the resulting modification of the MHR Convertible Notes
was substantial in accordance with ASC 470-50, <i>“Modifications and Extinguishments.” </i>As such, the
modification of the MHR Convertible Notes was accounted for as an extinguishment and restructuring
of the debt, and the warrants issued to MHR were expensed as a financing fee. The fair value of the
MHR Convertible Notes as of June 4, 2010 was estimated by calculating the present value of future
cash flows discounted at a market rate of return for comparable debt instruments to be $17.2
million. The Company recognized a loss on extinguishment of debt in the amount of $17.0 million
which represented the difference between the net carrying amount of the MHR Convertible Notes and
their fair value as of the date of the Novartis Agreement and the MHR Letter Agreements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The book value of the MHR Convertible Notes is comprised of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td align="center" colspan="7" nowrap="nowrap">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Face Value of the notes (including accrued interest)
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">26,653</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">25,233</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Discount (related to the warrant purchase option and embedded conversion feature)
</div></td>
<td> </td>
<td nowrap="nowrap" align="right"> </td>
<td align="right">(4,173</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="right"> </td>
<td align="right">(5,369</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" nowrap="nowrap" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">22,480</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">19,864</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000">   </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>2010 MHR Promissory Notes</b><i>. </i>In connection with the Novartis Agreement, the Company and MHR entered
into a letter agreement (the “MHR Letter Agreement”), and MHR, the Company and Novartis entered
into a non-disturbance agreement (the “Non-Disturbance Agreement”), which was a condition to
Novartis’ execution of the Novartis Agreement. Pursuant to the MHR Letter Agreement, MHR agreed to
limit certain rights and courses of action that it
would have available to it as a secured party under the Senior Secured Term Loan Agreement and
Pledge and Security Agreement (“Loan and Security Agreement”) between MHR and the Company. MHR also
consented to the Novartis Agreement, which consent was required under the Loan and Security
Agreement, and MHR also agreed to enter into a comparable agreement at some point in the future in
connection with another potential Company transaction (the “Future Transaction Agreement”). The MHR
Letter Agreement also provided for the Company to reimburse MHR for its legal fees incurred in
connection with the Non-Disturbance Agreement for up to $500,000 and up to $100,000 in legal
expenses incurred by MHR in connection with the Future Transaction Agreement. The reimbursements
were to be paid in the form of non-interest bearing promissory notes issued on the effective date
of the MHR Letter Agreement. As such, the Company issued to MHR non-interest promissory notes for
$500,000 and $100,000 on June 8, 2010. The Company received documentation that MHR expended more
than the $500,000 of legal fees in connection with the Non-Disturbance Agreement and $100,000 of
legal fees in connection with the Future Transaction Agreement, and, consequently, recorded the
issuance of the $500,000 and $100,000 promissory notes and a corresponding charge to financing
expenses. The promissory notes are due June 4, 2012. The Company imputed interest at its
incremental borrowing rate of 10%, and discounted the face amounts of the promissory notes. As of
June 30, 2011, the unamortized discount of the $500,000 and $100,000 promissory notes are $44,000
and $9,000, respectively.
</div>
</div>
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<!-- Begin Block Tagged Note 11 - us-gaap:DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>11. Derivative Instruments</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Derivative instruments consist of the following:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td align="center" colspan="7" nowrap="nowrap">(in thousands)</td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">MHR Convertible Note
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">6,895</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,166</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">MHR 2006 Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">646</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">August 2007 Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">82</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">481</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">August 2009 Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">2,553</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,807</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">June 2010 MHR Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">619</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,495</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">August 2010 Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">3,270</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,550</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">August 2010 MHR Waiver Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">630</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,961</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">14,050</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">34,106</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 3px double #000000"> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The fair value of the warrants that have exercise price reset features is estimated using an
adjusted Black-Scholes model. The Company computes valuations each quarter, using Black-Scholes
model calculations for such warrants to account for the various possibilities that could occur due
to various circumstances that could arise in connection with the contractual terms of said
instruments. The Company weights each Black-Scholes model calculation based on its estimation of
the likelihood of the occurrence of each circumstance and adjusts relevant Black-Scholes model
input to calculate the value of the derivative at the reporting date.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>Embedded Conversion Feature of MHR Convertible Notes</b><i>. </i>The MHR Convertible Notes due to MHR contain
a provision whereby the conversion price is adjustable upon the occurrence of certain events,
including the issuance by Emisphere of common stock or common stock equivalents at a price which is
lower than the current conversion price of the MHR Convertible Notes and lower than the current
market price. However, the adjustment provision does not become effective until after the Company
raises $10 million through the issuance of common stock or common stock equivalents at a price
which is lower than the current conversion price of the convertible note and lower than the current
market price during any consecutive 24 month period. The Company adopted the provisions of FASB ASC
815-40-15-5 effective January 1, 2009. Under FASB ASC 815-40-15-5, the embedded conversion feature
is not considered indexed to the Company’s own stock and, therefore, does not meet the scope
exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The
adoption of FASB ASC 815-40-15-5 requires recognition of the cumulative effect of a change in
accounting principle to the opening balance of our accumulated deficit, additional paid in capital,
and liability for derivative financial instruments. The liability has been presented as a
non-current liability to correspond with its host contract, the MHR Convertible Notes. The fair
value of the embedded conversion feature is estimated, at the end of each quarterly reporting
period, using Black-Scholes models. The assumptions used in computing the fair value as of June 30,
2011 are a closing stock price of $0.90, conversion prices of $3.78 and $0.90, expected volatility
of 137.75% over the remaining term of one year and three
months and a risk-free rate of 0.19%. The fair value of the embedded conversion feature decreased
by $0.9 million and $4.3 million for the three and six months ended June 30, 2011, respectively,
which has been recognized in the accompanying statements of operations. The embedded conversion
feature will be adjusted to estimated fair value for each future period they remain outstanding.
See Note 10 for a further discussion of the MHR Convertible Notes.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>MHR 2006 Warrants</b>. In connection with the exercise of the MHR Option in April 2006 discussed in
Note 9 above, the Company issued to MHR warrants to purchase 617,211 shares for proceeds of $0.6
million. The MHR 2006 Warrants have an original exercise price of $4.00 and are exercisable through
September 26, 2011. The MHR 2006 Warrants have the same terms as the August 2007 Warrants (see
below). The anti-dilution feature of the MHR 2006 Warrants was triggered in connection with the
August 2007 Financing, resulting in an adjusted exercise price of $3.76. Based on the provisions of
FASB ASC 815, <i>Derivatives and Hedging</i>, the MHR 2006 Warrants have been determined to be an embedded
derivative instrument which must be separated from the host contract. The MHR 2006 Warrants contain
the same potential cash settlement provisions as the August 2007 Financing Warrants and, therefore,
they have been accounted for as a separate liability. The fair value of the MHR 2006 Warrants is
estimated at the end of each quarterly period using Black-Scholes models. The assumptions used in
computing the fair value as of June 30, 2011 are a closing stock price of $0.90, exercise price of
$3.76, expected volatility of 112.93% over the remaining term of three months and a risk-free rate
of 0.03%. The fair value of the MHR 2006 Warrants decreased by $0.1 million and $0.6 million for
the three and six months ended June 30, 2011, respectively, which has been recognized in the
accompanying statement of operations. The MHR 2006 Warrants will be adjusted to estimated fair
value for each future period they remain outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>August 2007 Warrants</b><i>. </i>In connection with an equity financing in August 2007 (the “ August 2007
Financing”), Emisphere sold warrants to purchase up to 400,000 shares of common stock (the “August
2007 Warrants”). Of these 400,000 warrants, 91,073 were sold to MHR. Each of the August 2007
Warrants were issued with an exercise price of $3.948 and expire on August 21, 2012. The August
2007 Warrants provide for certain anti-dilution protection as provided therein. Under the terms of
the August 2007 Warrants, we have an obligation to make a cash payment to the holders of the August
2007 Warrants for any gain that could have been realized if the holders exercise the August 2007
Warrants and we subsequently fail to deliver a certificate representing the shares to be issued
upon such exercise by the third trading day after such August 2007 Warrants have been exercised.
Accordingly, the 2007 Warrants have been accounted for as a liability. The fair value of the
warrants is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The assumptions used in computing the fair value as of June 30, 2011 are a closing stock
price of $0.90, expected volatility of 140.41% over the remaining term of one year and two months
and a risk-free rate of 0.19%.The fair value of the August 2007 Warrants decreased $0.1 million and
$0.4 million for the three and six months ended June 30, 2011, respectively, which has been
recognized in the accompanying statements of operations. The August 2007 Warrants will be adjusted
to estimated fair value for each future period they remain outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>August 2009 Warrants</b><i>. </i>In connection with an equity financing in August 2009 (the “August 2009
Financing”), Emisphere sold warrants to purchase 6.4 million shares of common stock to MHR (3.7
million) and other unrelated investors (2.7 million) (the “August 2009 Warrants”). The August 2009
Warrants were issued with an exercise price of $0.70 and expire on August 21, 2014. Under the terms
of the August 2009 Warrants, we have an obligation to make a cash payment to the holders of the
August 2009 Warrants for any gain that could have been realized if the holders exercise the August
2009 Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such August 2009 Warrants have been
exercised. Accordingly, the August 2009 Warrants have been accounted for as a liability. The fair
value of the August 2009 Warrants is estimated, at the end of each quarterly reporting period,
using the Black-Scholes model. The assumptions used in computing the fair value as of June 30, 2011
are a closing stock price of $0.90, expected volatility of 122.86% over the remaining term of three
years and two months and a risk-free rate of 0.81%. The fair value of the August 2009 Warrants
decreased $1.6 million and $5.3 million for the three and six months ended June 30, 2011,
respectively, which has been recognized in the accompanying statements of operations. The warrants
will be adjusted to estimated fair value for each future period they remain outstanding. During the
year ended December 31, 2010, the unrelated investors exercised their warrants to purchase up to
2,685,714 million shares of the Company’s common stock at an exercise price of $0.70, using the
“cashless exercise” provision. The Company issued an aggregate of 1,966,937 shares to such holders
in accordance with the terms of the cashless exercise provision. The Company calculated the fair
value of the 2,685,714 exercised warrants on their respective exercise dates using the
Black-Scholes model. The weighted average
assumptions used in computing the fair values were a closing stock price of $1.91, expected
volatility of 101.99% over the remaining contractual life of four years, three months and a
risk-free rate of 1.46%. The fair value of the 2.7 million exercised warrants increased by $2.2
million from January 1, 2010 through the date of exercise which has been recognized in the
accompanying statements of operations. The fair value of the derivative liabilities at the exercise
dates of $4.3 million was reclassified to additional paid-in-capital. After these cashless
exercises, warrants to purchase up to 3,729,323 shares of common stock, in the aggregate, remain
outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>June 2010 MHR Warrants. </b>As consideration for its consent and limitation of rights in
connection with the Novartis Agreement, the Company granted MHR warrants to purchase 865,000 shares
of its common stock under the MHR Letter Agreement. The June 2010 MHR Warrants are exercisable at
$2.90 per share and will expire on August 21, 2014. The June 2010 MHR Warrants provide for certain
anti-dilution protection as provided therein. We have an obligation to make a cash payment to the
holders of the warrants for any gain that could have been realized if the holders exercise the June
2010 MHR Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such June 2010 MHR Warrants have been
exercised. Accordingly, the June 2010 MHR Warrants have been accounted for as a liability. Their
fair value is estimated, at the end of each quarterly reporting period, using the Black-Scholes
model. The Company estimated the fair value of the June 2010 MHR Warrants on the date of grant
using Black-Scholes models to be $1.9 million, which triggered the recognition of extinguishment
and restructuring accounting for the MHR Convertible Notes (see Notes 9 and 15). The assumptions
used in computing the fair value of the June 2010 MHR Warrants at June 30, 2011 are closing stock
prices of $0.90, $0.54, and $2.89, exercise prices of $0.90, $0.54, $2.89, and $2.90, expected
volatility of 122.87% over the remaining three years and two months, and a risk-free rate of 0.81%.
The fair value of the June 2010 MHR Warrants decreased by $0.2 million and $0.9 million for the
three and six months ended June 30, 2011, respectively, which has been recognized in the
accompanying statements of operations. The June 2010 MHR Warrants will be adjusted to estimated
fair value for each future period they remain outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>August 2010 Warrants</b><i>. </i>On August 25, 2010, the Company entered into a securities purchase agreement
(together with the securities purchase agreement with MHR, as defined below, the “August 2010
Financing”) with certain institutional investors pursuant to which the Company agreed to sell an
aggregate of 3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146
additional shares of its common stock for total gross proceeds of $3,532,503. Each unit, consisting
of one share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a
purchase price of $1.01. The warrants to purchase additional shares are exercisable at a price of
$1.26 per share and will expire five years from the date of issuance. In accordance with the terms
of a registration rights agreement with the investors, the Company filed a registration statement
on September 15, 2010, which was declared effective October 12, 2010. On August 25, 2010, the
Company also announced that it had entered into a separate securities purchase agreement with MHR
as part of the August 2010 Financing, pursuant to which the Company agreed to sell an aggregate of
3,497,528 shares of its common stock and warrants to purchase a total of 2,623,146 additional
shares of its common stock for total gross proceeds of $3,532,503. Each unit, consisting of one
share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase
price of $1.01. The warrants to purchase additional shares are exercisable at a price of $1.26 per
share and will expire five years from the date of issuance. In connection with the August 2010
Financing, Emisphere sold warrants to purchase 5.2 million shares of common stock to MHR (2.6
million) and other unrelated investors (2.6 million) (the “August 2010 Warrants”). The August 2010
Warrants were issued with an exercise price of $1.26 and expire on August 26, 2015. Under the terms
of the August 2010 Warrants, we have an obligation to make a cash payment to the holders of the
August 2010 Warrants for any gain that could have been realized if the holders exercise the August
2010 Warrants and we subsequently fail to deliver a certificate representing the shares to be
issued upon such exercise by the third trading day after such August 2010 Warrants have been
exercised. Accordingly, the August 2010 Warrants have been accounted for as a liability. The fair
value of the warrants is estimated, at the end of each quarterly reporting period, using the
Black-Scholes model. On January 12, 2011, one of the unrelated investors notified the Company of
its intention to exercise 0.2 million warrants. The Company received proceeds of $0.2 million from
the exercise of these warrants. The Company calculated the fair value of the 0.2 million exercised
warrants on January 12, 2011 using the Black-Scholes option pricing model. The assumptions used in
computing the fair value as of January 12, 2011 are a closing stock price of $2.25, expected
volatility of 107.30% over the remaining contractual life of four years and seven months and a
risk-free rate of 1.99%. The fair value of the 0.2 million exercised warrants decreased by
approximately $28,000 for the period from January 1, 2011 through January 12, 2011 which has been
recognized in the
accompanying statements of operations The assumptions used in computing the fair value of the
remaining August 2010 Warrants as of June 30, 2011 are a closing stock price of $0.90, exercise
price of $1.26, expected volatility of 113.31% over the remaining term of four years and two
months, and a risk-free rate of 1.76%. The fair value of the August 2010 Warrants decreased by $2.1
million and $6.9 million for the three and six months ended June 30, 2011, respectively, which has
been recognized in the accompanying statements of operations. The August 2010 Warrants will be
adjusted to estimated fair value for each future period they remain outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>August 2010 MHR Waiver Warrants</b>. In connection with the August 2010 Financing, the Company entered
into a waiver agreement with MHR (“Waiver Agreement”), pursuant to which MHR waived certain
anti-dilution adjustment rights under the MHR Convertible Notes and certain warrants issued by the
Company to MHR that would otherwise have been triggered by the August 2010 Financing. As
consideration for such waiver, the Company issued to MHR warrants to purchase 975,000 shares of its
common stock (the “August 2010 MHR Waiver Warrants”). The August 2010 MHR Waiver Warrants are in
the same form of warrant as the August 2010 Warrants issued to MHR described above. Accordingly,
the August 2010 MHR Waiver Warrants have been accounted for as a liability. The fair value of the
August 2010 MHR Waiver Warrants is estimated, at the end of each quarterly reporting period, using
Black-Scholes models. The Company estimated the fair value of the warrants on the date of grant
using Black-Scholes models to be $0.8 million. The assumptions used in computing the fair value of
the August 2010 MHR Waiver Warrants at June 30, 2011 are a closing stock price of $0.90, exercise
price of $1.26, expected volatility of 113.31% over the term of four years and two months, and a
risk free rate of 1.76%. The fair value of the August 2010 MHR Waiver Warrants decreased by $0.4
million and $1.3 million for the three and six months ended June 30, 2011, respectively, which has
been recognized in the accompanying statements of operations. The August 2010 MHR Waiver Warrants
will be adjusted to estimated fair value for each future period they remain outstanding.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 12 - us-gaap:EarningsPerShareTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>12. Net income (loss) per share</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth the information needed to compute basic earnings per share:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010 Restated</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010 Restated</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">(in thousands except per share data)</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">(in thousands except per share data)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Basic net income (loss)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,842</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">(31,573</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">12,841</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(48,832</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Effect of
dilutive securities - MHR convertible note assumed conversion
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">923</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Numerator for
diluted net income (loss) per share after assumed note conversion
</div></td>
<td> </td>
<td> </td>
<td align="right">1,842</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(31,573</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">13,764</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(48,832</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" nowrap="nowrap" align="left" style="border-top: 3px double #000000"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average common shares outstanding:
</div></td>
<td> </td>
<td> </td>
<td align="right">52,076,602</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">43,338,432</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">52,064,171</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">42,711,367</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Dilutive securities
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Options
</div></td>
<td> </td>
<td> </td>
<td align="right">221,124</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">309,457</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">2,626,629</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,476,116</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Shares
underlying MHR convertible note payable
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,051,183</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Diluted weighted average common shares
outstanding and assumed conversion
</div></td>
<td> </td>
<td> </td>
<td align="right">54,924,355</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">43,338,432</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">62,900,927</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">42,711,367</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 3px double #000000"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Basic net income (loss) per share
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0.04</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">(0.73</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0.25</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">(1.14</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Diluted net income (loss) per share
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0.03</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">(0.73</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0.22</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">(1.14</td>
<td nowrap="nowrap">)</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">For the three and six months periods ended June 30, 2011 and 2010, certain potential shares of
common stock have been excluded from the calculation of diluted income (loss) per share because the
exercise price was greater than the average market price of our common stock, and therefore, the
effect on diluted loss per share would have been anti-dilutive. In addition, incremental shares from the assumed conversion of the MHR note payable are excluded for the three month periods ended June 30, 2011 and 2010 and for the six month period ended June 30, 2010 as the effect of these shares is anti-dilutive in these periods. The following table sets forth
the number of potential shares of common stock that have been excluded from diluted net income
(loss) per share because their effect was anti-dilutive.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 0px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Options to purchase common shares
</div></td>
<td> </td>
<td> </td>
<td align="right">2,759,476</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,187,116</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,671,143</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,187,116</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Outstanding warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">9,018,697</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,954,391</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">8,169,210</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,954,391</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">MHR
convertible note payable
</div></td>
<td> </td>
<td> </td>
<td align="right">7,051,183</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,319,856</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,319,856</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td> </td>
<td> </td>
<td colspan="15" align="left" style="border-top: 1px solid #000000"> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">18,829,356</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">16,461,363</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,840,353</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">16,461,363</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 13 - us-gaap:CommitmentsAndContingenciesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>13. Commitments and Contingencies</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><i>Commitments. </i>At the beginning of 2009 we had leased approximately 80,000 square feet of office
space at 765 Old Saw Mill River Road, Tarrytown, NY for use as administrative offices and
laboratories. The lease for our administrative and laboratory facilities had been set to expire on
August 31, 2012. However, on April 29, 2009, the Company entered into a Lease Termination Agreement
(the “Agreement”) with BMR-Landmark at Eastview, LLC, a Delaware limited liability company (“BMR”)
pursuant to which the Company and BMR terminated the lease of space at 765 Old Saw Mill River Road
in Tarrytown, NY. Pursuant to the Agreement, the Lease was terminated effective as of April 1,
2009. The Agreement provided that the Company make the following payments to BMR: (a) $1 million,
paid upon execution of the Agreement, (b) $0.5 million, paid six months after the execution date of
the Agreement, and (c) $0.75 million, payable twelve months after the execution date of the
Agreement. Initial and six months payments were made on schedule. Although the final payment was
due originally on April 29, 2010, on March 17, 2010 the Company and BMR agreed to amend the
Agreement (the “Amendment”). According to the Amendment, the final payment was modified as follows:
the Company was to pay Eight Hundred Thousand Dollars ($800,000), as follows: (i) Two Hundred
Thousand Dollars ($200,000) within five (5) days after the Execution Date and (ii) One Hundred
Thousand Dollars ($100,000) on each of the following dates: July 15, 2010, August 15, 2010,
September 15, 2010, October 15, 2010, November 15, 2010, and December 15, 2010. Through July 1,
2011, the Company paid in full $800,000 of principal plus $28,250 interest for late payments in
accordance with the terms of the Lease Agreement.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">We continue to lease office space at 240 Cedar Knolls Road, Cedar Knolls, NJ under a
non-cancellable operating lease expiring in 2013.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The Company evaluates the financial consequences of legal actions periodically or as facts present
themselves and books accruals to account for its best estimate of future costs accordingly.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><i>Contingencies. </i>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 June 30, 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In the normal course of business, we may be confronted with issues or events that may result in a
contingent liability. These generally relate to lawsuits, claims, environmental actions or the
action of various regulatory agencies. If necessary, management consults with counsel and other
appropriate experts to assess any matters that arise. If, in our opinion, we have incurred a
probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is
made of the loss and the appropriate accounting entries are reflected in our financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of
currently pending or threatened lawsuits and claims will have a material adverse effect on our
financial position, results of operations or cash flows.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 14 - us-gaap:RestructuringAndRelatedActivitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>14. Restructuring Expense</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On December 8, 2008, as part of our efforts to improve operational efficiency we decided to close
our research and development facilities in Tarrytown, NY to reduce costs and improve operating
efficiency which resulted in a restructuring charge of approximately $3.8 million in the fourth
quarter, 2008. On April 29, 2009, the Company entered into the Lease Termination Agreement with
BMR, and credited the restructuring charge of $0.35 million in accordance with the terms of the
Agreement. On March 17, 2010 the Company and BMR amended the Agreement as described in this Note
(above). Consequently, the restructuring liability was readjusted to reflect the terms of the
Amendment accordingly.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">Adjustments to the restructuring liability are as follows ($ thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Liability at</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Cash</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Adjustment to</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Liability at</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>Payments</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>the Liability</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Lease restructuring expense
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">300</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="right">$</td>
<td align="right">(300</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="right">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 15 - us-gaap:IncomeTaxDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>15. Income Taxes</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The Company is primarily subject to United States federal and New Jersey state income tax. The
Company’s policy is to recognize interest and penalties related to income tax matters in income tax
expense. As of December 31, 2010 and June 30, 2011, the Company had no accruals for interest or
penalties related to income tax matters. For the three and six months ended June 30, 2011 and 2010,
the effective income tax rate was 0%. The difference between the Company’s effective income tax
rate and the Federal statutory rate of 35% is attributable to state tax benefits and tax credits
offset by changes in the deferred tax valuation allowance.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 16 - us-gaap:AccountingChangesAndErrorCorrectionsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>16. New Accounting Pronouncements</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2011-04, which updated the guidance in ASC Topic 820, <i>Fair Value Measurement. </i>The
amendments in this ASU generally represent clarifications of Topic 820, but also include some
instances where a particular principle or requirement for measuring fair value or disclosing
information about fair value measurements has changed. This update results in common principles
and requirements for measuring fair value and for disclosing information about fair value
measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The
amendments in this ASU are to be applied prospectively. For public entities, the amendments are
effective for interim and annual periods beginning after December 15, 2011, and early application
is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial
position or results of operations.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In December 2010, the FASB issued ASU 2010-29, <i>“Business Combinations (ASC Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations.” </i>The amendments in this ASU
affect any public entity as defined by ASC Topic 805 that enters into business combinations that
are material on an individual or aggregate basis. The amendments in this ASU specify that if a
public entity presents comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting period only.
The amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. The amendments are
effective prospectively for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010. The
adoption of ASU 2010-29 did not have a material impact on the Company’s results of operations or
financial condition.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In December 2010, the FASB issued ASU 2010-28, <i>“Intangibles — Goodwill and Other (ASC Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts.” </i>The amendments in this ASU modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist. The qualitative factors are consistent with the existing
guidance and examples, which require that goodwill of a reporting unit be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. For public entities, the
amendments in this ASU are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on
the Company’s results of operations or financial condition.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In April 2010, the FASB issued ASU 2010-17, <i>Revenue Recognition — Milestone Method </i>(“ASU
2010-17”). ASU
2010-17 provides guidance on the criteria that should be met for determining whether the milestone
method of revenue recognition is appropriate. A vendor can recognize consideration that is
contingent upon achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered substantive. The
following criteria must be met for a milestone to be considered substantive. The consideration
earned by achieving the milestone should (i) be commensurate with either the level of effort
required to achieve the milestone or the enhancement of the value of the item delivered as a result
of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) be
related solely to past performance; and (iii) be reasonable relative to all deliverables and
payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there
can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both
substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for
milestones achieved in fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. The adoption of ASU 2010-17 did not have a material effect on the Company’s results
of operations or financial condition.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In October 2009, the FASB issued ASU 2009-13, <i>Multiple-Deliverable Revenue Arrangements,</i>
(amendments to FASB ASC Topic 605, <i>Revenue Recognition </i>) (“ASU 2009-13”). ASU 2009-13 requires
entities to allocate revenue in an arrangement using estimated selling prices of the delivered
goods and services based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative selling price method.
ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The adoption of ASU 2009-13 did not have a material impact on the Company’s results of
operations or financial condition.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">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.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>17. Fair Value</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, the following table
represents the Company’s fair value hierarchy for its financial assets and liabilities measured at
fair value on a recurring basis as of June 30, 2011 and December 31, 2010:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Level 2</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Level 2</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>($ thousands)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>($ thousands)</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Derivative instruments (short term)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">7,155</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">22,940</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Derivative instruments (long term)
</div></td>
<td> </td>
<td> </td>
<td align="right">6,895</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,166</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">14,050</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">34,106</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Some of the Company’s financial instruments are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature, such
as cash and cash equivalents, receivables and payables.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">We have determined that it is not practical to estimate the fair value of our notes payable because
of their unique nature and the costs that would be incurred to obtain an independent valuation. We
do not have comparable outstanding debt on which to base an estimated current borrowing rate or
other discount rate for purposes of estimating the fair value of the notes payable and we have not
been able to develop a valuation model that can be applied consistently in a cost efficient manner.
These factors all contribute to the impracticability of estimating the fair value of the notes
payable. At June 30, 2011, the carrying value of the notes payable and accrued interest was $26.7
million.
</div>
</div>
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<!-- Begin Block Tagged Note 18 - us-gaap:SubsequentEventsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>18. Subsequent Events</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On July 6, 2011, the Company closed a transaction with certain institutional investors
(collectively, the “Buyers”) to sell an aggregate of approximately 4.3 million shares of its common
stock and warrants (the “ Warrants”) to purchase a total of approximately 3.0 million shares of its
common stock (the “Warrant Shares”) for gross proceeds of approximately $3.75 million (the “Private
Placement”). Also on July 6, 2011, the Company and the Buyers entered
into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which the
Company provided certain registration rights to the Buyers, including an obligation of the Company
to file with the Securities and Exchange Commission within 20 days a registration statement on Form
S-1 covering the shares issued in the Private Placement and the Warrant Shares. That registration
statement on Form S-1 was filed with the SEC on July 26, 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Simultaneous with closing the Private Placement, the Company closed a transaction with MHR Fund
Management LLC and certain of its affiliated investment funds (“MHR”) to sell an aggregate of
approximately 4.3 million shares of its common stock and warrants (the “MHR Warrants”) to purchase
a total of approximately 3.0 million shares of its common stock (the “MHR Warrant Shares”) for
gross proceeds of approximately $3.75 million (the “MHR Private Placement”).
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In connection with the Private Placement and the MHR Private Placement, the Company entered into a
Waiver Agreement with MHR (“Waiver Agreement”), pursuant to which MHR waived certain anti-dilution
adjustment rights under its Senior Secured Notes and certain warrants issued by the Company to MHR
that would otherwise have been triggered by the Private Placement. As consideration for such
waiver, the Company issued to MHR warrants (the “MHR Waiver Warrants”) to purchase 795,000 shares
of its common stock (the “MHR Waiver Warrant Shares”) and agreed to reimburse MHR for up to $25,000
of its legal fees.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In both the Private Placement and the MHR Private Placement, each unit, consisting of one share of
common stock and a warrant to purchase 0.7 shares of common stock, were sold at a purchase price of
$0.872. The Warrants, the MHR Warrants and the MHR Waiver Warrants are exercisable at an exercise
price of $1.09 per share and will expire July 6, 2016.
</div>
</div>