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Emmaus Life Sciences, Inc. - Quarter Report: 2020 June (Form 10-Q)

i

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File No.:  001-35527

 

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

87-0419387

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

21250 Hawthorne Boulevard, Suite 800, Torrance, California

 

90503

(Address of principal executive offices)

 

(Zip code)

 

(310) 214-0065

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

The registrant had 49,311,864 shares of common stock, par value $0.001 per share, outstanding as of July 31, 2021.

 

 


 

 

EMMAUS LIFE SCIENCES, INC.

For the Quarterly Period Ended June 30, 2020

INDEX

 

 

 

Page

 

EXPLANATORY NOTE

3

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements

4

 

 

 

 

(a)Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

4

 

 

 

 

(b)Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019 (Unaudited)

5

 

 

 

 

(c)Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the six months ended June 30, 2020 and 2019 (Unaudited)

6

 

 

 

 

(d)Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)

7

 

 

 

 

(e)Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

Part II Other Information

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5.

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

Signatures

37

 

 


 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 8, 2020, the board of directors of the Emmaus Life Sciences, Inc. (“we,” “us,” “our,” “Emmaus” or the “Company”), based on the recommendation of the audit committee, concluded that, because of errors identified in the previously issued annual financial statements of our EMI Holding, Inc. subsidiary, or EMI, for the year ended December 31, 2018 as well as EMI’s unaudited consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June 30, 2019 included in our Current Report on Form 8-K/A filed with the SEC on August 8, 2019, and our previously filed unaudited consolidated financial statements for the three and nine months ended September 30, 2019, the Company would restate the previously issued financial statements. The previously issued financial statements of EMI preceded our merger with EMI in July 2019.

We determined that these errors were the result of material weaknesses in internal control over financial reporting as described in management’s report as of December 31, 2019 in Part II—Item 9A – Controls and Procedures of our Annual Report on Form 10K filed with the SEC on January 25, 2021.

The restated quarterly financial statements corrected the following errors:

 

1.

The misclassification as equity of warrants issued by EMI in October of 2018, which warrants should have been accounted for as liabilities based upon fair value.

 

 

2.

The erroneous consolidation as a variable interest entity, or VIE, of EMI’s interest in EJ Holdings, Inc., which should have been accounted for based upon the equity method.

 

 

3.

The mistreatment of the fair value of cashless exercise warrants originally recorded in the Consolidated Statements of Operations and Comprehensive Loss, which fair value should have been recorded in additional paid-in capital in the Consolidated Balance Sheets.  

 

 

4.

In addition to the errors described above, the restated financial statements also include adjustments to correct certain immaterial errors identified during the audit of the Company’s financial statements for the year ended December 31, 2019.

 

Please see Note 1 of Notes to Condensed Consolidated Financial Statements for the impact of the restatement on our financial statements as of and for the three months and six months ended June 30, 2019.

 

3


 

 

Item 1. Financial Statements

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

As of

 

 

 

June 30, 2020

 

 

 

 

 

 

 

(Unaudited)

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,032

 

 

$

1,769

 

Restricted cash

 

 

7

 

 

 

 

Accounts receivable, net

 

 

1,457

 

 

 

2,150

 

Inventories, net

 

 

7,863

 

 

 

7,971

 

Investment in marketable securities

 

 

27,007

 

 

 

27,929

 

Prepaid expenses and other current assets

 

 

1,170

 

 

 

1,402

 

Total current assets

 

 

38,536

 

 

 

41,221

 

Property and equipment, net

 

 

141

 

 

 

151

 

Equity method investment

 

 

13,005

 

 

 

13,325

 

Right of use assets

 

 

4,283

 

 

 

4,474

 

Deposits and other assets

 

 

285

 

 

 

285

 

Total assets

 

$

56,250

 

 

$

59,456

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

10,377

 

 

$

11,498

 

Operating lease liabilities

 

 

1,103

 

 

 

991

 

Other current liabilities

 

 

957

 

 

 

5,748

 

Revolving line of credit to related parties, net

 

 

600

 

 

 

600

 

Warrant derivative liabilities

 

 

1,539

 

 

 

38

 

Notes payable, current portion

 

 

4,271

 

 

 

3,749

 

Notes payable to related parties

 

 

34

 

 

 

193

 

Convertible debentures, net of discount

 

 

7,594

 

 

 

7,015

 

Convertible note payable, net of discount

 

 

 

 

 

2,995

 

Total current liabilities

 

 

26,475

 

 

 

32,827

 

Operating lease liabilities, less current portion

 

 

3,722

 

 

 

3,932

 

Other long-term liabilities

 

 

36,434

 

 

 

33,750

 

Notes payable, less current portion

 

 

488

 

 

 

 

Convertible note payable

 

 

3,150

 

 

 

 

Total liabilities

 

 

70,269

 

 

 

70,509

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, none issued or outstanding

 

 

 

 

 

 

Common stock — par value $0.001 per share, 250,000,000 shares authorized, 48,987,189 shares and 48,471,446 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

 

49

 

 

 

48

 

Additional paid-in capital

 

 

216,376

 

 

 

215,207

 

Accumulated other comprehensive loss

 

 

(51

)

 

 

(79

)

Accumulated deficit

 

 

(230,393

)

 

 

(226,229

)

Total stockholders’ deficit

 

 

(14,019

)

 

 

(11,053

)

Total liabilities & stockholders’ deficit

 

$

56,250

 

 

$

59,456

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

2019

 

 

 

2020

 

 

Restated

 

 

2020

 

 

Restated

 

REVENUES, NET

 

$

4,360

 

 

$

5,493

 

 

$

11,314

 

 

$

10,200

 

COST OF GOODS SOLD

 

 

446

 

 

 

264

 

 

 

924

 

 

 

523

 

GROSS PROFIT

 

 

3,914

 

 

 

5,229

 

 

 

10,390

 

 

 

9,677

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

589

 

 

 

540

 

 

 

1,206

 

 

 

1,053

 

Selling

 

 

1,135

 

 

 

1,891

 

 

 

2,203

 

 

 

3,370

 

General and administrative

 

 

3,725

 

 

 

2,682

 

 

 

7,382

 

 

 

6,419

 

  Total operating expenses

 

 

5,449

 

 

 

5,113

 

 

 

10,791

 

 

 

10,842

 

INCOME (LOSS) FROM OPERATIONS

 

 

(1,535

)

 

 

116

 

 

 

(401

)

 

 

(1,165

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on debt extinguishment

 

 

(1,425

)

 

 

 

 

 

(1,425

)

 

 

 

Change in fair value of warrant derivative liabilities

 

 

(101

)

 

 

854

 

 

 

(76

)

 

 

(84

)

Change in fair value of embedded conversion option

 

 

35

 

 

 

 

 

 

6

 

 

 

 

Net gains (losses) on investment in marketable securities and long-term investment

 

 

(5,631

)

 

 

(10,537

)

 

 

1,208

 

 

 

(16,994

)

Loss on equity method investment

 

 

(573

)

 

 

(458

)

 

 

(980

)

 

 

(449

)

Interest and other income

 

 

567

 

 

 

307

 

 

 

600

 

 

 

230

 

Interest expense

 

 

(1,309

)

 

 

(7,827

)

 

 

(3,109

)

 

 

(16,439

)

  Total other expenses

 

 

(8,437

)

 

 

(17,661

)

 

 

(3,776

)

 

 

(33,736

)

LOSS BEFORE INCOME TAXES

 

 

(9,972

)

 

 

(17,545

)

 

 

(4,177

)

 

 

(34,901

)

INCOME TAXES (BENEFIT)

 

 

(499

)

 

 

51

 

 

 

(213

)

 

 

103

 

NET LOSS

 

 

(9,473

)

 

 

(17,596

)

 

 

(3,964

)

 

 

(35,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(33

)

 

 

6

 

 

 

28

 

 

 

13

 

Other comprehensive income (loss)

 

 

(33

)

 

 

6

 

 

 

28

 

 

 

13

 

COMPREHENSIVE LOSS

 

$

(9,506

)

 

$

(17,590

)

 

$

(3,936

)

 

$

(34,991

)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

 

$

(0.19

)

 

$

(0.47

)

 

$

(0.08

)

 

$

(0.93

)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

 

48,987,189

 

 

 

37,836,678

 

 

 

48,805,829

 

 

 

37,656,058

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


 

5


 

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

Common stock

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Deficit

 

 

Balance, January 1, 2020

 

 

48,471,446

 

 

$

48

 

 

$

215,207

 

 

$

(79

)

 

$

(226,229

)

 

$

(11,053

)

 

Common stock issued for cash (net of issuance cost)

 

 

515,743

 

 

 

1

 

 

 

141

 

 

 

 

 

 

 

 

 

142

 

 

Fair value of warrants including down-round protection adjustments

 

 

 

 

 

 

 

 

600

 

 

 

 

 

 

(200

)

 

 

400

 

 

Share-based compensation

 

 

 

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

209

 

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

61

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,509

 

 

 

5,509

 

 

Balance, March 31, 2020

 

 

48,987,189

 

 

$

49

 

 

$

216,157

 

 

$

(18

)

 

$

(220,920

)

 

$

(4,732

)

 

Share-based compensation

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

(33

)

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,473

)

 

 

(9,473

)

 

Balance, June 30, 2020

 

 

48,987,189

 

 

$

49

 

 

$

216,376

 

 

$

(51

)

 

$

(230,393

)

 

$

(14,019

)

 

 

 

 

 

Common stock

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Balance, January 1, 2019, as restated

 

 

37,341,393

 

 

$

37

 

 

$

149,682

 

 

$

(69

)

 

$

(171,358

)

 

$

(21,708

)

Cumulative effect adjustment on adoption of ASC 842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

(29

)

Beneficial conversion feature relating to convertible notes

 

 

 

 

 

 

 

 

3,374

 

 

 

 

 

 

 

 

 

3,374

 

Exercise of warrants

 

 

525

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Stock issued for cash (net of issuance cost)

 

 

322,920

 

 

 

1

 

 

 

2,529

 

 

 

 

 

 

 

 

 

2,530

 

Conversion of notes payable to common stock

 

 

85,411

 

 

 

 

 

 

329

 

 

 

 

 

 

 

 

 

329

 

Share-based compensation

 

 

 

 

 

 

 

 

588

 

 

 

 

 

 

 

 

 

588

 

Exercise of stock options

 

 

175

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

7

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,408

)

 

 

(17,408

)

Balance, March 31, 2019

 

 

37,750,424

 

 

 

38

 

 

 

156,508

 

 

 

(62

)

 

 

(188,795

)

 

 

(32,311

)

Beneficial conversion feature relating to convertible notes

 

 

 

 

 

 

 

 

5,390

 

 

 

 

 

 

 

 

 

5,390

 

Exercise of warrants

 

 

53,032

 

 

 

 

 

 

181

 

 

 

 

 

 

 

 

 

181

 

Stock issued for cash (net of issuance cost)

 

 

76,755

 

 

 

 

 

 

731

 

 

 

 

 

 

 

 

 

731

 

Share-based compensation

 

 

 

 

 

 

 

 

438

 

 

 

 

 

 

 

 

 

438

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,596

)

 

 

(17,596

)

Balance, June 30, 2019

 

 

37,880,211

 

 

$

38

 

 

$

163,248

 

 

$

(56

)

 

$

(206,391

)

 

$

(43,161

)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 


6


 

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

2020

 

 

Restated

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(3,964

)

 

$

(35,004

)

Adjustments to reconcile net loss to net cash flows used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30

 

 

 

35

 

Impairment loss on long-term investment

 

 

 

 

 

524

 

Inventory reserve

 

 

375

 

 

 

 

Amortization of discount of notes payable and convertible notes payable

 

 

2,102

 

 

 

13,771

 

Foreign exchange adjustments on convertible notes and notes payable

 

 

(70

)

 

 

(208

)

Net losses (gains) on equity investment in marketable securities

 

 

(1,208

)

 

 

16,470

 

Loss on equity method investee

 

 

980

 

 

 

449

 

Loss on debt settlement

 

 

1,425

 

 

 

 

Share-based compensation

 

 

428

 

 

 

1,026

 

Change in fair value of warrant derivative liabilities

 

 

76

 

 

 

84

 

Change in fair value of embedded conversion option

 

 

(6

)

 

 

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

693

 

 

 

(364

)

Inventories

 

 

(267

)

 

 

(1,202

)

Prepaid expenses and other current assets

 

 

528

 

 

 

149

 

Other non-current assets

 

 

183

 

 

 

(4,298

)

Income tax receivable and payable

 

 

(295

)

 

 

(113

)

Accounts payable and accrued expenses

 

 

(412

)

 

 

4,054

 

Deferred revenue

 

 

 

 

 

500

 

Deferred rent

 

 

 

 

 

(287

)

Other current liabilities

 

 

(4,903

)

 

 

(63

)

Other long-term liabilities

 

 

2,586

 

 

 

3,217

 

Net cash flows used in operating activities

 

 

(1,719

)

 

 

(1,260

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Sale of marketable securities

 

 

2,130

 

 

 

221

 

Purchases of property and equipment

 

 

(13

)

 

 

(21

)

Loans to equity method investee

 

 

(561

)

 

 

 

Net cash flows provided by investing activities

 

 

1,556

 

 

 

200

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from notes payable issued, net of issuance cost and discount

 

 

998

 

 

 

 

Payments of notes payable

 

 

(200

)

 

 

 

Payments of convertible notes

 

 

(1,500

)

 

 

(3,368

)

Proceeds from exercise of warrants

 

 

142

 

 

 

186

 

Proceeds from issuance of common stock

 

 

 

 

 

3,261

 

Proceeds from conversion of notes payable to common stock

 

 

 

 

 

21

 

Net cash flows provided by (used in) financing activities

 

 

(560

)

 

 

100

 

Effect of exchange rate changes on cash

 

 

(7

)

 

 

2

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(730

)

 

 

(958

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

1,769

 

 

 

3,905

 

Cash, cash equivalents and restricted cash, end of period

 

$

1,039

 

 

$

2,947

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

802

 

 

$

549

 

Income taxes paid

 

$

82

 

 

$

216

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Warrants issued

 

$

1,825

 

 

$

 

Beneficial conversion feature relating to convertible notes

 

$

 

 

$

8,764

 

Common stocks issued on exercise of warrants

 

$

 

 

$

186

 

Conversion of notes payable and accrued interest to common stock

 

$

 

 

$

329

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


 

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated interim financial statements of Emmaus Life Sciences, Inc. (formerly, “MYnd Analytics, Inc.”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us,” the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. All significant intercompany transactions have been eliminated. The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. The consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021. The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated balance sheet at December 31, 2019 contained in the Form 10-K/A. The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the results to be expected for the full year or any future interim period.

Organization and Nature of Operations

The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies primarily for rare and orphan diseases. On July 17, 2019, we completed a merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), into a subsidiary of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary. Immediately after completion of the Merger, we changed our name to “Emmaus Life Sciences, Inc.”

The Merger was treated as a reverse recapitalization under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposed, EMI was considered to have acquired us. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.

In connection with and prior to the Merger, we contributed and transferred to Telemynd, Inc. (“Telemynd”), a newly formed, wholly owned subsidiary of the Company, all or substantially all our historical business, assets and liabilities and our board of directors declared a stock dividend of one share of the Telemynd common stock held by the Company for each outstanding share of our common stock after giving effect to a 1-for-6 reverse stock split of our outstanding shares of common stock.

As a result of the spin-off and the Merger, our ongoing business became EMI’s business, which is that of a commercial-stage biopharmaceutical company focused on the development, marketing and sale of innovative treatments and therapies, including those in the rare and orphan disease categories.

Principles of consolidation—The consolidated financial statements include the accounts of the Company, EMI and EMI’s wholly‑owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical, Inc.’s wholly‑owned subsidiaries. All significant intercompany transactions have been eliminated.

The preparation of the consolidated financial statements requires the use of management estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reported period. Actual results could differ materially from those estimates.

Restatement of Prior Period Amounts — In connection with the preparation of our December 31, 2019 consolidated financial statements, we identified the following material errors in our condensed consolidated financial statements as of and for the three months and six months ended June 30, 2019.

 

1.

The misclassification as equity of warrants issued by EMI in October of 2018, which warrants should have been accounted for as liabilities based upon fair value; and

 

 

2.

The erroneous consolidation as a variable interest entity, or VIE, of EMI’s interest in EJ Holdings, Inc., which should have been accounted for based upon the equity method.

 

 

3.

The misstatement of the fair value of cashless exercise warrants originally recorded in the Consolidated Statements of Operations and Comprehensive Loss, which fair value should have been recorded in additional paid-in capital in the Consolidated Balance Sheets.

8


 

 

 

4.

In addition to the errors described above, the restated financial statements also include adjustments to correct certain immaterial errors identified during the audit of the Company’s financial statements for the year ended December 31, 2019.

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

As of June 30, 2019

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,169

 

 

$

(12,222

)

(a)

$

2,947

 

 

Accounts receivable, net

 

 

1,981

 

 

 

301

 

(c)

 

2,282

 

 

Inventories, net

 

 

5,906

 

 

 

 

 

 

5,906

 

 

Investment in marketable securities

 

 

32,890

 

 

 

 

 

 

32,890

 

 

Prepaid expenses and other current assets

 

 

703

 

 

 

(107

)

(a), (c)

 

596

 

 

Total current assets

 

 

56,649

 

 

 

(12,028

)

 

 

44,621

 

 

Property and equipment, net

 

 

145

 

 

 

 

 

 

145

 

 

Equity method investment

 

 

 

 

 

13,366

 

(a)

 

13,366

 

 

Right of use assets

 

 

4,285

 

 

 

 

 

 

4,285

 

 

Deposits and other assets

 

 

412

 

 

 

 

 

 

412

 

 

Total other assets

 

 

4,697

 

 

 

13,366

 

 

 

18,063

 

 

Total assets

 

$

61,491

 

 

$

1,338

 

 

$

62,829

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

11,455

 

 

$

62

 

(a), (c)

$

11,517

 

 

Operating lease liabilities, current portion

 

 

857

 

 

 

 

 

 

857

 

 

Other current liabilities

 

 

5,259

 

 

 

2

 

(c)

 

5,261

 

 

Warrant derivative liabilities

 

 

 

 

 

9,023

 

(b), (c)

 

9,023

 

 

Notes payable, net of discount

 

 

11,163

 

 

 

91

 

(b)

 

11,254

 

 

Notes payable to related parties

 

 

470

 

 

 

 

 

 

470

 

 

Convertible notes payable, net of discount

 

 

13,867

 

 

 

 

 

 

13,867

 

 

Convertible notes payable to related parties, net of discount

 

 

14,180

 

 

 

 

 

 

14,180

 

 

Total current liabilities

 

 

57,251

 

 

 

9,178

 

 

 

66,429

 

 

Operating lease liabilities, less current portion

 

 

3,781

 

 

 

 

 

 

3,781

 

 

Other long-term liabilities

 

 

35,330

 

 

 

 

 

 

35,330

 

 

Warrant derivative liabilities

 

 

1,200

 

 

 

(1,200

)

(c)

 

 

 

Notes payable, net of discount, less current portion

 

 

703

 

 

 

(703

)

(b)

 

 

 

Convertible notes payable, net of discount, less current portion

 

 

450

 

 

 

 

 

 

450

 

 

Total liabilities

 

 

98,715

 

 

 

7,275

 

 

 

105,990

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued or outstanding

 

 

 

 

 

 

 

 

 

 

Common stock — par value $0.001 per share, 250,000,000 shares authorized, 37,880,211 shares outstanding at June 30, 2019

 

 

36

 

 

 

2

 

(d)

 

38

 

 

Additional paid-in capital

 

 

153,084

 

 

 

10,164

 

(b), (e)

 

163,248

 

 

Accumulated other comprehensive income (loss)

 

 

(56

)

 

 

 

 

 

(56

)

 

Accumulated deficit

 

 

(189,503

)

 

 

(16,888

)

(e)

 

(206,391

)

 

Total stockholders’ deficit

 

 

(36,439

)

 

 

(6,722

)

 

 

(43,161

)

 

Noncontrolling interest

 

 

(785

)

 

 

785

 

(a)

 

 

 

Total liabilities & stockholders’ deficit

 

$

61,491

 

 

$

1,338

 

 

$

62,829

 

 

(a) EJ Holdings adjustments: the correction of this misstatement resulted in increases of $13.4 million in equity method investment, $172,000 in accounts payable and accrued expenses, and $785,000 in non-controlling interest and decreases of $12.2 million in cash and cash equivalent and $187,000 in prepaid expenses and other current assets.  

(b) Warrant adjustments: the correction of this misstatement resulted in increases of $7.8 million in warrant derivative current liabilities, and $90,000 in short-term note payable and decreases of $703,000 in long-term notes payable and $9.7 million in additional paid-in capital.

(c) Corrections of other misstatement: period adjustment and reclassification of variable consideration resulted in an increase of $301,000 in accounts receivable and a decrease of $110,000 in accounts payable and accrued expenses, a decrease of $10,000 in income tax receivable and an increase of $24,000 in income tax payable; a reclassification of GPB warrants resulted an increase of short-term warrant liability and a decrease of long-term warrant liability of $1.2 million; and correction of tax provision resulted an increase of $90,000 in income tax receivable and a decrease of $24,000 in income tax payable.

(d) Retrospective adjustments made to common stock resulted from recapitalization transaction in July 2019.

(e) Carryforward impact on 2018 restatement adjustments, including cashless warrant adjustments which resulted in an increase in additional paid-in capital and a decrease in retained earnings of $18.3 million.

 

9


 

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amount)

(Unaudited)

 

 

 

Three months ended June 30, 2019

 

 

Six months ended June 30,2019

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

REVENUES, NET

 

$

5,869

 

 

$

(376

)

(c)

$

5,493

 

 

$

11,176

 

 

$

(976

)

(c)

$

10,200

 

 

COST OF GOODS SOLD

 

 

195

 

 

 

69

 

(c)

 

264

 

 

 

395

 

 

 

128

 

(c)

 

523

 

 

GROSS PROFIT

 

 

5,674

 

 

 

(445

)

 

 

5,229

 

 

 

10,781

 

 

 

(1,104

)

 

 

9,677

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

540

 

 

 

 

 

 

540

 

 

 

1,053

 

 

 

 

 

 

1,053

 

 

Selling

 

 

1,903

 

 

 

(12

)

(c)

 

1,891

 

 

 

3,388

 

 

 

(18

)

(c)

 

3,370

 

 

General and administrative

 

 

3,851

 

 

 

(1,169

)

(a), (c)

 

2,682

 

 

 

7,532

 

 

 

(1,113

)

(a), (c)

 

6,419

 

 

  Total operating expenses

 

 

6,294

 

 

 

(1,181

)

 

 

5,113

 

 

 

11,973

 

 

 

(1,131

)

 

 

10,842

 

 

INCOME (LOSS) FROM OPERATIONS

 

 

(620

)

 

 

736

 

 

 

116

 

 

 

(1,192

)

 

 

27

 

 

 

(1,165

)

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant derivative liabilities

 

 

247

 

 

 

607

 

(b)

 

854

 

 

 

199

 

 

 

(283

)

(b)

 

(84

)

 

Net losses on investment in marketable securities and long-term investment

 

 

(10,537

)

 

 

 

 

 

(10,537

)

 

 

(16,994

)

 

 

 

 

 

(16,994

)

 

Losses on equity method investment

 

 

 

 

 

(458

)

(a)

 

(458

)

 

 

 

 

 

(449

)

(a)

 

(449

)

 

Interest and other income (loss)

 

 

274

 

 

 

33

 

(a), (c)

 

307

 

 

 

163

 

 

 

67

 

(a), (c)

 

230

 

 

Interest expense

 

 

(8,474

)

 

 

647

 

(b), (c)

 

(7,827

)

 

 

(15,439

)

 

 

(1,000

)

(b), (c)

 

(16,439

)

 

  Total other income (expenses)

 

 

(18,490

)

 

 

829

 

 

 

(17,661

)

 

 

(32,071

)

 

 

(1,665

)

 

 

(33,736

)

 

LOSS BEFORE INCOME TAXES

 

 

(19,110

)

 

 

1,565

 

 

 

(17,545

)

 

 

(33,263

)

 

 

(1,638

)

 

 

(34,901

)

 

INCOME TAXES (BENEFIT)

 

 

217

 

 

 

(166

)

(c)

 

51

 

 

 

217

 

 

 

(114

)

(c)

 

103

 

 

NET LOSS INCLUDING NONCONTROLLING INTERESTS

 

 

(19,327

)

 

 

1,731

 

 

 

(17,596

)

 

 

(33,480

)

 

 

(1,524

)

 

 

(35,004

)

 

     Net (income) loss attributable to noncontrolling interests

 

 

688

 

 

 

(688

)

(a)

 

 

 

 

674

 

 

 

(674

)

(a)

 

 

 

NET LOSS ATTRIBUTABLE TO THE COMPANY

 

 

(18,639

)

 

 

1,043

 

 

 

(17,596

)

 

 

(32,806

)

 

 

(2,198

)

 

 

(35,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(9

)

 

 

15

 

(a)

 

6

 

 

 

(2

)

 

 

15

 

(a)

 

13

 

 

Other comprehensive income (loss)

 

 

(9

)

 

 

15

 

 

 

6

 

 

 

(2

)

 

 

15

 

 

 

13

 

 

COMPREHENSIVE INCOME (LOSS)

 

 

(19,336

)

 

 

1,746

 

 

 

(17,590

)

 

 

(33,482

)

 

 

(1,509

)

 

 

(34,991

)

 

Amounts attributable to noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to noncontrolling interest

 

 

688

 

 

 

(688

)

(a)

 

 

 

 

674

 

 

 

(674

)

(a)

 

 

 

Foreign currency translation adjustments

 

 

15

 

 

 

(15

)

(a)

 

 

 

 

14

 

 

 

(14

)

(a)

 

 

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

703

 

 

 

(703

)

 

 

 

 

 

688

 

 

 

(688

)

 

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

 

$

(18,633

)

 

$

1,043

 

 

$

(17,590

)

 

$

(32,794

)

 

$

(2,197

)

 

$

(34,991

)

 

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

 

$

(0.52

)

 

$

0.05

 

 

$

(0.47

)

 

$

(0.91

)

 

$

(0.01

)

 

$

(0.93

)

 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

 

35,857,944

 

 

 

37,836,678

 

 

 

37,836,678

 

 

 

35,857,944

 

 

 

37,656,058

 

 

 

37,656,058

 

 

 

(a) EJ Holdings adjustments: the correction of this misstatement resulted in increases of $33,000 in interest income and $15,000 in foreign currency translation adjustments and decreases of $1.1million in general and administrative expenses, $458,000 in loss on equity method investment, and $688,000 in net loss attributable to noncontrolling interest for three months ended June 30, 2019.  The correction of this misstatement resulted in increases of $67,000 in interest income and $14,000 in foreign currency translation adjustments and decreases of $1.1million in general and administrative expense, $449,000 in loss on equity method investment, and $674,000 in net loss attributable to noncontrolling interest for six months ended June 30, 2019.

(b) Warrant adjustments: the correction of this misstatement resulted in increases of $647,000 in interest expense and $607,000 in change in fair value of warrant derivative liabilities for the three months ended June 2019. The correction of this misstatement resulted in an increase of $335,000 in interest expense and a decrease of $283,000 in change in fair value of warrant derivative liabilities for six months ended June 30, 2019. 

10


 

(c) Corrections of other misstatement: period adjustment of variable consideration resulted in a decrease of $376,000 in revenues, net; and reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $69,000 in cost of sales and decreases of $12,000 and $58,000 in selling expense and general and administrative expense, respectively. Corrections of other misstatement for the six months ended June 30, 2019: period adjustment of variable consideration resulted in a decrease of $976,000 in revenues, net; reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $128,000 in cost of sales and decreases of $18,000 and $110,000 in selling expense and general and administrative expense, respectively; correction of stock modification accounting resulted in a decrease of $52,000 in general and administrative expense; correction of accounting treatment for convertible notes resulted in an increase of $1.3 million in interest expense; and correction of income tax provision resulted in an decrease of $113,000 in income tax provision.

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30, 2019

 

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(33,480

)

 

$

(1,524

)

 

$

(35,004

)

Adjustments to reconcile net loss to net cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35

 

 

 

 

 

 

35

 

Impairment loss on long-term investment

 

 

524

 

 

 

 

 

 

524

 

Amortization of discount of convertible notes and notes payable

 

 

12,770

 

 

 

1,001

 

 

 

13,771

 

Foreign exchange adjustments on convertible notes and notes payable

 

 

49

 

 

 

(257

)

 

 

(208

)

Net losses (gains) on equity investment in marketable securities

 

 

16,470

 

 

 

 

 

 

16,470

 

Loss on equity method investments

 

 

 

 

 

 

449

 

 

 

449

 

Share-based compensation

 

 

974

 

 

 

52

 

 

 

1,026

 

Change in fair value of warrant derivative liabilities

 

 

(199

)

 

 

283

 

 

 

84

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(630

)

 

 

266

 

 

 

(364

)

Inventories

 

 

(1,202

)

 

 

 

 

 

(1,202

)

Prepaid expenses and other current assets

 

 

69

 

 

 

80

 

 

 

149

 

Other non-current assets

 

 

(4,298

)

 

 

 

 

 

(4,298

)

Accounts payable and accrued expenses

 

 

3,226

 

 

 

828

 

 

 

4,054

 

Income tax receivable and payable

 

 

 

 

 

(113

)

 

 

(113

)

Deferred revenue

 

 

500

 

 

 

 

 

 

500

 

Deferred rent

 

 

(287

)

 

 

 

 

 

(287

)

Other current liabilities

 

 

79

 

 

 

(142

)

 

 

(63

)

Other long-term liabilities

 

 

3,217

 

 

 

 

 

 

3,217

 

Net cash flows provided by (used in) operating activities

 

 

(2,183

)

 

 

923

 

 

 

(1,260

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(21

)

 

 

 

 

 

(21

)

Sales of marketable securities

 

 

221

 

 

 

 

 

 

221

 

Purchase of marketable securities and investment at cost

 

 

 

 

 

 

 

 

 

Net cash flows provided by (used in) investing activities

 

 

200

 

 

 

 

 

 

200

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Payments of convertible notes

 

 

(3,368

)

 

 

 

 

 

(3,368

)

Proceeds from exercise of warrants

 

 

186

 

 

 

 

 

 

186

 

Proceeds from issuance of common stock

 

 

3,261

 

 

 

 

 

 

3,261

 

Proceeds from conversion of notes payable to common stock

 

 

21

 

 

 

 

 

 

21

 

Net cash flows provided by (used in) financing activities

 

 

100

 

 

 

 

 

 

100

 

Effect of exchange rate changes on cash

 

 

(28

)

 

 

30

 

 

 

2

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(1,911

)

 

 

953

 

 

 

(958

)

Cash and cash equivalents, beginning of period

 

 

17,080

 

 

 

(13,175

)

 

 

3,905

 

Cash and cash equivalents, end of period

 

$

15,169

 

 

$

(12,222

)

 

$

2,947

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

934

 

 

$

(385

)

 

$

549

 

Income taxes paid

 

$

217

 

 

$

(1

)

 

$

216

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature relating to convertible notes

 

$

8,764

 

 

$

 

 

$

8,764

 

Common stocks issued on exercise of warrants

 

$

186

 

 

$

 

 

$

186

 

Conversion of notes payable and acrued interest to common stock

 

$

308

 

 

$

 

 

$

329

 

Initial recognition of right-of-use lease asset

 

$

2,922

 

 

$

 

 

$

2,922

 

 

Refer to the descriptions of the adjustments in the Condensed Consolidated Balance Sheets and Statements of Comprehensive Loss as of and for the three months ended June 30, 2019 and their impact on net loss above. In addition, a cash flow classification adjustment related to EJ Holdings resulted in a net decrease to cash flows used by operating activities of $953,000 for the six months ended June 30, 2019.     

 

11


 

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K/A for the year ended December 31, 2020. There have been no material changes in these policies or their application.

Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.

Restricted cash — Restricted cash includes proceeds received from the sales of shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) earmarked for the purchase of Telcon convertible bond per the December 23, 2019 agreement with Telcon. See Note 5 for the additional details. Reconciliation of cash, cash equivalent and restricted cash are as follows:

 

 

Six Month Ended June 30

 

 

 

 

2020

 

 

2019

 

 

Cash and cash equivalents

 

$

1,032

 

 

$

2,947

 

 

Restricted cash

 

 

7

 

 

 

 

 

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows

 

$

1,039

 

 

$

2,947

 

 

Net loss per share — In accordance with ASC 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Dilutive loss per share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2020 and June 30, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 17,288,829 shares and 17,996,931 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all period presented.

 

NOTE 3 — REVENUES

Revenues disaggregated by category were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

Restated

 

 

2020

 

 

2019

Restated

 

Endari®

 

$

4,349

 

 

$

5,390

 

 

$

11,063

 

 

$

9,992

 

Other

 

 

11

 

 

 

103

 

 

 

251

 

 

 

208

 

Revenues, net

 

$

4,360

 

 

$

5,493

 

 

$

11,314

 

 

$

10,200

 

 

The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2020 and 2019 (in thousands):

 

 

Trade Discounts, Allowances and Chargebacks

 

 

Government Rebates and Other Incentives

 

 

Returns

 

 

Total

 

Balance as of December 31, 2019

 

$

228

 

 

$

1,354

 

 

$

315

 

 

$

1,897

 

Provision related to sales in the current year

 

 

1,438

 

 

 

1,955

 

 

 

118

 

 

 

3,511

 

Adjustments related prior period sales

 

 

16

 

 

 

(43

)

 

 

(43

)

 

 

(70

)

Credit and payments made

 

 

(1,208

)

 

 

(1,324

)

 

 

 

 

 

(2,532

)

Balance as of June 30, 2020

 

$

474

 

 

$

1,942

 

 

$

390

 

 

$

2,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

84

 

 

$

798

 

 

$

99

 

 

$

981

 

Provision related to sales in the current year

 

 

649

 

 

 

1,625

 

 

 

121

 

 

 

2,395

 

Credit and payments made

 

 

(614

)

 

 

(1,135

)

 

 

 

 

 

(1,749

)

Balance as of June 30, 2019, restated

 

$

119

 

 

$

1,288

 

 

$

220

 

 

$

1,627

 

12


 

 

 

The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of total revenues):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

Restated

 

 

2020

 

 

2019

Restated

 

Customer A

 

 

55

%

 

 

58

%

 

 

54

%

 

 

61

%

Customer B

 

 

20

%

 

 

25

%

 

 

24

%

 

 

22

%

The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $10 million upfront fee and agreement to purchase from us specified minimum quantities of the finished product. In a related license agreement with Telcon, the Company agreed to use commercially reasonable best efforts to obtain product registration in these territories within three years of obtaining FDA marketing authorization for PGLG in this indication. Telcon has the right to terminate the distributor agreement in certain circumstances for failure to obtain such product registrations, in which event the Company would be obliged to return to Telcon the $10 million upfront fee. The upfront fee of $10 million is included in other long-term liabilities as unearned revenue as of June 30, 2020 and December 31, 2019. Refer Note 11 and Note 13 for additional transaction details.  

The Company received an upfront payment of $500,000 in connection with entering into a distribution agreement with a strategic partner in 2018 to distribute Endari® in the Middle East and North Africa region. The payment was recorded as unearned revenue and included in other long-term liabilities to be recognized as revenue when the performance obligations are satisfied. The upfront payment of $500,000 is included in other long-term liabilities as unearned revenue as of December 31, 2019. In June 2020, the distribution agreement was terminated and $500,000 up front payment was recognized as other income.

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Raw materials and components

 

$

1,500

 

 

$

1,187

 

Work-in-process

 

 

1,836

 

 

 

1,629

 

Finished goods

 

 

4,948

 

 

 

5,204

 

Inventory reserve

 

 

(421

)

 

 

(49

)

Total

 

$

7,863

 

 

$

7,971

 

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Prepaid insurance

 

$

271

 

 

$

735

 

Other prepaid expenses and current assets

 

 

899

 

 

 

667

 

Total

 

$

1,170

 

 

$

1,402

 

 

Property and equipment consisted of the following (in thousands):

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Equipment

 

$

345

 

 

$

335

 

Leasehold improvements

 

 

39

 

 

 

77

 

Furniture and fixtures

 

 

99

 

 

 

95

 

Total property and equipment

 

$

483

 

 

 

507

 

Less: accumulated depreciation

 

 

(342

)

 

 

(356

)

Property and equipment, net

 

$

141

 

 

$

151

 

 

13


 

During the three months ended June 30, 2020 and 2019, depreciation expenses were approximately $11,000 and $14,000, respectively. During the six months ended June 30, 2020 and 2019, depreciation expenses were approximately $23,000 and $28,000, respectively.

NOTE 5 — INVESTMENTS

Equity securities— As of June 30, 2020 and December 31, 2019, the Company held 6,222,837 shares and 6,643,559 shares, respectively, of capital stock of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”), which were acquired in July 2017 for approximately $31.8 million.  As of June 30, 2020, and December 31, 2019, the closing prices per Telecon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were approximately $4.34 and $4.20, respectively.

Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligations under the revised API agreement with Telcon. In December 2019, the API agreement was amended to permit the release of the Telcon shares from the pledge and to permit the Company to sell the shares in exchange for a portion of the net sale proceeds to be used to purchase a 10-year convertible bond of Telcon in the principal amount of approximately $31.8 million to be substituted for the Telcon shares pledged to Telcon to secure the Company’s obligations under the revised API agreement between the Company and Telcon. During the six months ended June 30, 2020, the Company sold 420,772 shares for $2.1 million. Refer to Note 6, 11 and 13 for more information regarding this arrangement.

The Company measures all equity investments that do not result in consolidation and are not accounted for under the equity method, at fair value and recognizes any changes in such fair value in earnings. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. For the six months ended June 30, 2019, the Company recognized approximately $524,000 in impairment loss on equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.

As of June 30, 2020 and December 31, 2019, the carrying values of equity securities were included in the following line items in our consolidated balance sheets (in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Fair Value with Changes Recognized in Income

 

 

Fair Value with Changes Recognized in Income

 

Marketable securities

 

$

27,007

 

 

$

27,929

 

Total equity securities

 

$

27,007

 

 

$

27,929

 

Net unrealized loss on marketable securities available-for-sale at June 30, 2020 and June 30, 2019 was approximately $0.8 million and approximately $16.5 million, respectively.  

Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. As part of the formation, the Company invested approximately $32,000 in exchange for 40% of EJ Holdings voting shares. JIP owns 60% of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $13.6 million. The loan was valued at $13.9 million and $13.8 million as of June 30, 2020 and December 31, 2019, respectively. The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. The loan matures on September 30, 2028 and bears interest at the rate of 1% per annum payable annually. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids, that the operation of the facility will be principally for our benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility will be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the six months ended June 30, 2020, the Company had made additional loans to EJ Holdings of $561,000 and at June 30, 2020 had loans receivable from EJ Holdings valued at $14.5 million.

EJ Holdings is engaged in phasing in the Ube facility, including obtaining FDA and other regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from us or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.

14


 

The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and the EJ Holdings activities at the facility are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings. Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.

The Company’s share of the losses reported by EJ Holdings are classified as net losses from equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.

The following table sets forth certain financial information of EJ Holdings for the three months ended and the six months ended June 30, 2020 and 2019 (in thousands).

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES, NET

 

$

61

 

 

$

57

 

 

$

145

 

 

$

114

 

GROSS PROFIT

 

 

61

 

 

 

57

 

 

 

145

 

 

 

114

 

NET LOSS

 

$

(1,432

)

 

$

(1,147

)

 

$

(2,449

)

 

$

(1,124

)

 

NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES

Accounts payable and accrued expenses consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

 

 

June 30, 2020

 

 

December 31, 2019

 

Accounts payable:

 

 

 

 

 

 

 

 

Clinical and regulatory expenses

 

$

311

 

 

$

232

 

Professional fees

 

 

960

 

 

 

1,183

 

Selling expenses

 

 

798

 

 

 

1,303

 

Manufacturing costs

 

 

3,824

 

 

 

4,541

 

Other vendors

 

 

128

 

 

 

18

 

Total accounts payable

 

 

6,021

 

 

 

7,277

 

Accrued interest payable, related parties

 

 

246

 

 

 

42

 

Accrued interest payable

 

 

407

 

 

 

991

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll expenses

 

 

998

 

 

 

891

 

Government rebates and other rebates

 

 

1,943

 

 

 

1,355

 

Due to EJ Holdings

 

 

406

 

 

 

238

 

Other accrued expenses

 

 

356

 

 

 

704

 

Total accrued expenses

 

 

3,703

 

 

 

3,188

 

Total accounts payable and accrued expenses

 

$

10,377

 

 

$

11,498

 

 

Other long-term liabilities consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Trade discount

 

$

26,422

 

 

$

23,242

 

Unearned revenue

 

 

10,000

 

 

 

10,500

 

Other long-term liabilities

 

 

12

 

 

 

8

 

Total other long-term liabilities

 

$

36,434

 

 

$

33,750

 

 

On June 12, 2017, the Company entered into an API Supply Agreement, as subsequently amended (as so amended, the “API agreement”), with Telcon pursuant to which Telcon advanced to the Company approximately $31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s requirements for bulk containers of PGLG. The Company purchased $2.0 million and $2.3 million of PGLG from Telcon in the six months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020 and December 31, 2019, accounts payable to Telcon were $3.7 million. See Note 11 for additional details.

 

15


 

 

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding June 30, 2020

 

 

Discount

Amount June 30, 2020

 

 

Carrying

Amount June 30, 2020

 

 

Shares

Underlying June 30, 2020

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

928

 

 

$

 

 

$

928

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,839

 

 

 

 

 

 

2,839

 

 

 

 

 

2020

 

1% - 11%

 

 

Due on demand - 2 years

 

 

 

 

 

992

 

 

 

 

 

 

992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,759

 

 

$

 

 

$

4,759

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

4,271

 

 

$

 

 

$

4,271

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

488

 

 

$

 

 

$

488

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

34

 

 

$

 

 

$

34

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

34

 

 

$

 

 

$

34

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,143

 

 

$

1,606

 

 

$

15,537

 

 

 

4,638,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding

December 31,

2019

 

 

Discount

Amount

December 31,

2019

 

 

Carrying

Amount

December 31,

2019

 

 

Shares

Underlying

Notes

December 31, 2019

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

920

 

 

$

 

 

$

920

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,829

 

 

 

 

 

 

2,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,749

 

 

$

 

 

$

3,749

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

3,749

 

 

 

 

 

 

3,749

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2018

 

11%

 

 

Due on demand

 

 

 

 

 

159

 

 

 

 

 

 

159

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

10%

 

 

2 years

 

$

10.00

 

(b)

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,142

 

 

$

3,190

 

 

$

13,952

 

 

 

1,444,291

 

 

(a)

The notes are convertible to Emmaus Life Sciences, Inc. shares.

(b)

The notes are convertible to EMI Holding, Inc. shares.

 

 

 

 

16


 

 

The weighted-average stated interest rate of notes payable was 10% as of June 30, 2020 and December 31, 2019. The weighted-average effective annual interest rate of notes payable as of June 30, 2020 and December 31, 2019 was 34% and 66%, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.

 

As of June 30, 2020, future contractual principal payments due on notes payable were as follows:

 

Year Ending

 

 

 

2020 (six months)

$

9,040

 

2021

 

4,732

 

2022

 

221

 

2023

 

3,150

 

Total

$

17,143

 

 

Immediately prior to the completion of the Merger, all but one of the convertible notes payable were converted into shares of EMI common stock at their respective conversion prices. Upon completion of the Merger, the conversion shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable is convertible into shares of common stock of EMI at conversion price of $10.00 per share and included in convertible notes payable.

The Company estimates the total fair value of any beneficial conversion feature and any accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance. In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds are allocated to the beneficial conversion feature and the warrants based on their relative fair values.

The 10% Senior Secured Debentures of EMI were amended and restated immediately prior to the Merger to, among other things, make them convertible into shares of common stock of EMI and to provide for adjustments in the conversion shares issuable upon conversion of the Debentures and the conversion price in the event of a merger, reorganization and similar events. Accordingly, upon completion of the Merger the Amended and Restated 10% Senior Secured Convertible Debentures became convertible into shares of common stock of the Company and included in convertible notes payable.  See Note 8 for additional information regarding this arrangement.

  

The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. The following table sets forth the fair value of the conversion feature liabilities as of June 30, 2020 and December 31, 2019 (in thousands):

 

 

 

Six Months Ended

 

 

Year ended

 

Conversion feature liabilities - Amended and Restated 10% Senior Convertible Debentures

 

June 30, 2020

 

 

December 31, 2019

 

Balance, beginning of period

 

$

1

 

 

$

 

Fair value at issuance date

 

 

 

 

 

132

 

Fair value at debt modification date

 

 

118

 

 

 

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

(6

)

 

 

(131

)

Balance, end of period

 

$

113

 

 

$

1

 

 

The value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.

 

The fair values as of June 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:

17


 

 

June 30, 2020

 

February 21, 2020

(Modification date)

 

December 31, 2019

 

Stock price

$

1.67

 

$

1.89

 

$

1.97

 

Conversion price

$

2.00

 

$

3.00

 

$

9.52

 

Selected yield

 

15.73

%

 

19.12

%

 

16.77

%

Expected volatility (peer group)

 

100

%

 

65

%

 

50

%

Expected life (in years)

 

0.81

 

 

1.16

 

 

0.81

 

Expected dividend yield

 

 

 

 

 

 

Risk‑free rate

Term structure

 

Term structure

 

Term structure

 

 

See Note 13 for information regarding the prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures.

 

The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time, Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $1,000,000. Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3%. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year. The outstanding balances under the revolving line of credit agreement of $600,000 as of June 30, 2020 and December 31, 2019 were reflected in revolving line of credit, related party on the Consolidated Balance Sheet. With the tax-gross up, the effective annual interest rate on the outstanding balance as of June 30, 2020 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more information regarding this arrangement.  

 

On May 8, 2020, the Company received a loan in the amount of $797,840 under the Small Business Administration Paycheck Protection Program (“PPP”).  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loan, which is in the form of a Promissory Note dated April 29, 2020, matures on April 29, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment or the loan forgiveness process has commenced. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness on October 30, 2020. There is no assurance that the loan will be forgiven. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period. The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheet.

 

NOTE 8 — STOCKHOLDERS’ DEFICIT

Purchase Agreement with GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $13 million senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of $12.5 million, reflecting a 4.0% original issue discount.

In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,764 of common stock at an exercise price of $10.80 per share, with customary adjustments for stock splits, stock dividends and other recapitalization events. The GPB Warrant became exercisable six months after issuance and has a term of five years from the initial exercise date.

 

The Company determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.

 

The following table presents the change in fair value of the GPB Warrant as of June 30, 2020 and December 31, 2019 (in thousands):

 

18


 

 

 

 

Six Months Ended

 

 

Year Ended

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Warrant Liability - GPB

 

Warrants

 

 

Warrants

 

Balance, beginning of period

 

$

38

 

 

$

1,399

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

88

 

 

 

(1,361

)

Balance, end of period

 

$

126

 

 

$

38

 

 

The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.

 

The value as of the dates set forth in the table above was based on upon following assumptions:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Stock price

 

$

1.67

 

 

$

1.97

 

Risk‑free interest rate

 

 

0.18

%

 

 

1.64

%

Expected volatility (peer group)

 

 

106.00

%

 

 

60.00

%

Expected life (in years)

 

 

3.00

 

 

 

3.50

 

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

Number outstanding

 

 

252,802

 

 

 

252,802

 

 

Purchase Agreement with Holders of 10% Senior Secured Debentures—In October 2018, EMI sold and issued $12.2 million principal amount of 10% Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors. EMI’s obligations under the Debentures were secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S. subsidiaries. The net proceeds of the sale of the debentures and warrants were used to fund EMI’s original $13.2 million loan to EJ Holdings in October 2018 reflected on the Company’s consolidated balance sheets.

As described in Note 7 above, the Debentures were amended and restated in their entirety in conjunction with the Merger. The common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.                 

The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.

Pursuant to the terms of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $3.00 per share from $9.52 per share. The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $3.00 per share from $5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10% Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $2.00 a share under the Purchase Agreement with Lincoln Park Capital LLC described below and were subsequently reduced again as described in Note 13. See Note 13 for information regarding our recent prepayment of the Debentures.

The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the 10% Senior Secured Debentures in October 2018 under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability. The liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in fair value

19


 

is recorded in earnings. In 2019, the Debentures were amended and restated to be convertible into common stock of EMI immediately prior to completion of the Merger, which resulted in the related warrants being reclassified to equity.

Purchase agreement with Holder of a Convertible Promissory Notes - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $3,150,000 agreed to an extension of the maturity date to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12% per annum. In conjunction with this amendment, the Company issued to the holder of note five-year contingent common stock purchase warrants to purchase a total of up to 1,250,000 shares of the Company common stock at an exercise price of $2.05 a share, subject to certain conditions. Under ASC 815-40, the Company concluded that the warrants issued to the note holder should be recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in the fair value of liability is recorded in earnings.

The following table presents the change in fair value of the warrants as of June 30, 2020 (in thousands):

 

 

 

Six Months Ended

 

Warrants Derivative Liabilities - convertible promissory note

 

June 30, 2020

 

Balance, beginning of period

 

$

 

Fair value at issuance date

 

 

1,425

 

Change in fair value included in the statement of comprehensive loss

 

 

(12

)

Balance, end of period

 

$

1,413

 

 

The fair value of the warrant derivative liabilities was determined using the Black-Scholes Merton model and was

based upon following assumptions:

 

 

June 30, 2020

 

 

June 15, 2020 (modification date)

 

Exercise price

$

2.05

 

 

$

2.05

 

Stock price

$

1.67

 

 

$

1.68

 

Risk‑free interest rate

 

0.29

%

 

 

0.33

%

Expected volatility (peer group)

 

94.00

%

 

 

94.00

%

Expected life (in years)

 

4.96

 

 

 

5.00

 

Expected dividend yield

 

0.00

%

 

 

0.00

%

Warrant shares

 

1,250,000

 

 

 

1,250,000

 

 

A summary of outstanding warrants as of June 30, 2020 and December 31, 2019 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Warrants outstanding, beginning of period

 

 

4,931,099

 

 

 

3,436,431

 

Assumed as part of Merger

 

 

 

 

 

1,044,939

 

Granted

 

 

1,250,000

 

 

 

500,729

 

Exercised

 

 

 

 

 

(51,000

)

Cancelled, forfeited or expired

 

 

(115,953

)

 

 

 

Warrants outstanding, end of period

 

 

6,065,146

 

 

 

4,931,099

 

 

20


 

 

A summary of outstanding warrants by year issued and exercise price as of June 30, 2020 is presented below:

 

 

 

 

 

 

Outstanding

 

 

Exercisable

 

Year issued and Exercise Price

 

 

Number of

Warrants

Issued

 

 

Weighted-Average

Remaining

Contractual

Life (Years)

 

 

Weighted-Average

Exercise

Price

 

 

Total

 

 

Weighted-Average

Exercise

Price

 

Prior to January 1, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$2.00-$10.76

 

 

 

3,439,007

 

 

 

2.12

 

 

$

4.38

 

 

 

3,439,007

 

 

$

4.38

 

Prior to Jan 1, 2019 Total

 

 

 

3,439,007

 

 

 

 

 

 

 

 

 

 

 

3,439,007

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6.12

 

 

 

32,391

 

 

 

3.91

 

 

$

6.12

 

 

 

32,391

 

 

$

6.12

 

 

$

12.00

 

 

 

76,575

 

 

 

3.23

 

 

$

12.00

 

 

 

76,575

 

 

$

12.00

 

 

$

14.04

 

 

 

174,999

 

 

 

2.75

 

 

$

14.04

 

 

 

174,999

 

 

$

14.04

 

 

$

31.50

 

 

 

737,975

 

 

 

2.07

 

 

$

31.50

 

 

 

737,975

 

 

$

31.50

 

 

$

36.24

 

 

 

22,333

 

 

 

2.07

 

 

$

36.24

 

 

 

22,333

 

 

$

36.24

 

 

$

60.00

 

 

 

666

 

 

 

0.50

 

 

$

60.00

 

 

 

666

 

 

$

60.00

 

 

$

2.00

 

 

 

256,200

 

 

 

3.21

 

 

$

2.00

 

 

 

256,200

 

 

$

2.00

 

 

$

7.68

 

 

 

75,000

 

 

 

4.05

 

 

$

7.68

 

 

 

75,000

 

 

$

7.68

 

 

2019 Total

 

 

 

1,376,139

 

 

 

 

 

 

 

 

 

 

 

1,376,139

 

 

 

 

 

At June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2.05

 

 

 

1,250,000

 

 

 

4.96

 

 

$

2.05

 

 

 

 

 

$

 

 

Total

 

 

 

6,065,146

 

 

 

 

 

 

 

 

 

 

 

4,815,146

 

 

 

 

 

 

Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock. Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in equal quarterly installments and all other option grants vest over a minimum period of three years, in each case, subject to continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a stock option to purchase a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratio in the Merger.

 

21


 

 

The Company also has an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company may grant stock options and other stock awards to selected employees including officers, and to non-employee consultants and non-employee directors. All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger and the Company intends not to make any further awards thereunder.

 

Stock options—During the six months ended June 30, 2020, the Company granted options to purchase 90,000 shares of common stock. During the year ended December 31, 2019, the Company granted stock options to purchase 50,000 shares of Company common stock. All the options are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows: as to one‑third of the shares on the first anniversary of the grant date, and as to the remaining two‑thirds shares in twenty‑four approximately equal monthly installments over a period of two years thereafter.

 

Management has valued stock options at their date of grant utilizing the Black‑Scholes‑Merton Option pricing model. The fair value of the underlying shares was determined by the market value of stock of similar companies and recent arm’s length transactions involving the sale of the Company’s common stock. Prior the Merger, the Company lacked company-specific historical and implied volatility information for its common stock. Therefore, the expected volatility was calculated using the historical volatility of a comparative public traded companies. The following table presents the assumptions used on recent dates on which options were granted by the Company.

 

 

 

June 29, 2020

 

 

June 19, 2019

 

Stock Price

 

$

1.67

 

 

$

10.30

 

Exercise Price

 

$

2.05

 

 

$

10.30

 

Term

 

5.5-6 years

 

 

6 years

 

Risk-Free Rate

 

0.28% - 0.38%

 

 

1.83%

 

Dividend Yield

 

 

 

 

Volatility

 

78.91%-80.49%

 

 

 

67.16

%

 

A summary of outstanding stock options as of June 30, 2020 and December 31, 2019 is presented below.

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

Options outstanding, beginning of period

 

 

7,245,350

 

 

$

4.68

 

 

 

6,642,200

 

 

$

4.40

 

Granted or deemed granted

 

 

90,000

 

 

$

2.05

 

 

 

636,683

 

(a)

$

10.10

 

Exercised

 

 

 

 

$

 

 

 

(167

)

 

$

5.00

 

Cancelled, forfeited and expired

 

 

(142,818

)

 

$

5.08

 

 

 

(33,366

)

 

$

11.29

 

Options outstanding, end of period

 

 

7,192,532

 

 

$

4.63

 

 

 

7,245,350

 

 

$

4.68

 

Options exercisable, end of period

 

 

6,978,869

 

 

$

4.58

 

 

 

7,001,680

 

 

$

4.47

 

Options available for future grant

 

 

2,302,475

 

 

 

 

 

 

 

2,167,150

 

 

 

 

 

 

(a)

Upon the Merger, the exercise prices of outstanding EMI options and number of shares of the Company common stock underlying the options were adjusted based upon the exchange ratio in the Merger.

 

During the three months ended June 30, 2020 and June 30, 2019, the Company recognized $0.2 million and $0.4 million, respectively, of share-based compensation expense. During the six months ended June 30, 2020 and June 30, 2019, the Company recognized approximately $0.4 million and $1.0 million, respectively, of share-based compensation expense. As of June 30, 2020, there was approximately $1.1 million of total unrecognized compensation expense related to unvested share-based compensation which is expected to be recognized over the weighted-average remaining vesting period of 1.4 years.

 

Purchase Agreement with Lincoln Park Capital Fund, LLCOn February 28, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may elect to sell to LPC up to $25,000,000 in shares of its common stock, subject to certain limitations and conditions set forth in the Purchase Agreement, including 100,000 initial shares that the Company sold to LPC at a price of $2.00 per share.

 

Pursuant to the Purchase Agreement, on any business day over the 36-month term of the Purchase Agreement the Company has the right at its discretion and subject to certain conditions to direct LPC to purchase up to 20,000 shares of common stock, which

22


 

amount is subject to increase under certain circumstances based upon increases in the market price of its common stock. The purchase price of the common stock will be based upon the prevailing market price of common stock at the time of the purchase without any fixed discount. In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases and additional accelerated purchases under certain circumstances. Apart from the initial sale of shares described above, the Company is not obliged to sell any shares of common stock pursuant to the Purchase Agreement, and the Company will control the timing and amount of any such sales, but in no event will LPC be required to purchase more than $1,000,000 of common stock in any single regular purchase (excluding accelerated or additional accelerated purchases).

 

Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement.

 

The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC. There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement. There is no upper limit on the price per share that LPC could be obligated to pay for common stock, but shares will only be sold to LPC on a day the Company’s closing price is less than the floor price as set forth in the Purchase Agreement and if the sale of the shares would not result in LPC and its affiliates having beneficial ownership of more than 4.99% of the Company’s total outstanding shares of common stock. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. As consideration for LPC’s commitments under the Purchase Agreement, the Company issued to LPC 415,743 shares of common stock, which valued at $750,000, recorded as an addition to equity for common stock and reduction for cost of capital raised.

 

As of the date of filing of this Quarterly Report, the Company was out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement.  The Company may seek to bring itself into compliance or seek an appropriate waiver from LPC to regain the ability to utilize the Purchase Agreement, but there can be no assurance when or whether the Company may be able to do so. If the Company is able to utilize the Purchase Agreement, whether or to what extent the Company sells shares of common stock to LPC under the Purchase Agreement will depend on a variety of factors to be determined by the company from time to time, including, among others, its net revenue and other results of operations, its working capital and other funding needs, the prevailing market prices of the Company’s common stock and the availability of other sources of funding.

 

NOTE 9 — INCOME TAX

The quarterly provision for or benefit from income taxes is computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss).

 

For the three months and six months ended June 30, 2020, the Company recorded an income tax benefit of $0.5 million and $0.2 million, respectively. For the three months and six months ended June 30, 2019, the Company  recorded a provision for income taxes of $51,000 and $103,000, respectively. The provisions for income taxes for the three and six months ended June 30, 2020 and 2019, were primarily related to state tax on the Company pre-tax book income. The Company did not record a provision for federal income tax due to its net operating loss carryforwards. The Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of June 30 2020 or 2019.   

NOTE 10 — LEASES

Operating leases — The Company leases its office space under operating leases with unrelated entities.

The Company leased 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $78,543 per month, which lease will expire on September 30, 2026. The Company also leased an additional 1,850 square feet office space in New York, New York, at a base rent of $8,479, which leases will expire on January 31, 2023.

In addition, the Company leased 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $3,000, which the lease will expire on September 30, 2020.

The rent expense during the three months ended June 30, 2020 and 2019 amounted to approximately $298,000 and $219,000, respectively, and during the six months ended June 30, 2020 and 2019 amounted approximately $609,000 and $419,000, respectively.    

23


 

Future minimum lease payments under the lease agreements were as follows as of June 30, 2020 (in thousands):

 

 

Amount

 

2020 (six months)

 

$

587

 

2021

 

 

1,106

 

2022

 

 

1,138

 

2023

 

 

1,050

 

2024 and thereafter

 

 

2,984

 

Total lease payments

 

 

6,865

 

Less: Interest

 

 

2,040

 

Present value of lease liabilities

 

$

4,825

 

 

The Company adopted Accounting Standard Update (“ASU”) 2016-02 – Lease (“Topic 842”) on January 1, 2019 using a modified retrospective approach and elected the transition method and the practical expedients permitted under the transition guidance, which allowed to carryforward the historical lease classification and our assessment on whether a contract is or contains a lease. The Company also elected to combine lease and non-lease components, such as common area maintenance charges, as single lease and elected to use the short-term lease exception permitted by the standard as noted in Note 2.

As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded a $3.0 million in operating right-of-use asset and $3.3 million in lease liability and derecognized $287,000 of deferred rent as of the adoption date. These were calculated using the present value of the Company’s remaining lease payments using an estimated incremental borrowing rate. The Company also recorded a $29,000 cumulative effect increased on our accumulated deficit as of January 1, 2019. As of June 30, 2020, the Company had an operating lease right-of-use asset of $4.3 million and lease liability of $4.8 million in the balance sheet. The weighted average remaining term of the Company’s leases as of June 30, 2020 was 6.0 years and the weighted-average discount rate was 12.4%.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API agreement”) with Telcon pursuant to which Telcon paid the Company approximately $31.8 million in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”). The revised API agreement is effective for a term of five years and will renew automatically for 10 successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a total of 940,000 kilograms of PGLG at $50 per kilogram, or a total of $47.0 million, over the term of the agreement. In September 2018, the Company entered into an agreement with Ajinomoto Health and Nutrition North America, Inc. (“Ajinomoto”), the producer of the PGLG, and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the revised API agreement.

On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the revised API agreement from $50 per kilogram of PGLG to $100 per kilogram from July 1, 2019 through June 30, 2020, with the price payable after June 30, 2020 to be subject to agreement between the parties. The PGLG raw material purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount. Refer to Note 6 for more information. 

 

24


 

 

NOTE 12 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related persons outstanding as of June 30, 2020 and interest paid during the six months ended June 30, 2020 (in thousands):

Class

Lender

 

Interest

Rate

 

 

Date of

Loan

 

Term of Loan

 

Principal Amount Outstanding at June 30, 2020

 

 

Amount of

Interest

Paid

 

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

4/29/2016

 

Due on Demand

 

$

20

 

 

$

 

 

 

Lan T. Tran (2)

 

11%

 

 

2/10/2018

 

Due on Demand

 

 

 

 

 

35

 

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2019

 

Due on Demand

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

34

 

 

 

35

 

 

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (2)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

 

600

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

600

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

634

 

 

$

53

 

 

 

The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2019:

Class

Lender

 

Interest

Rate

 

 

Date of

Loan

 

Term of Loan

 

Principal Amount Outstanding at December 31, 2019

 

 

Highest

Principal

Outstanding

 

 

Amount of

Principal

Repaid or

Converted

into Stock

 

 

Amount of

Interest

Paid

 

 

Conversion

Rate

 

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

4/29/2016

 

Due on Demand

 

$

20

 

 

$

20

 

 

$

 

 

$

 

 

 

 

 

 

Hope International Hospice, Inc. (1)

 

10%

 

 

6/3/2016

 

Due on Demand

 

 

 

 

 

250

 

 

 

250

 

 

 

78

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2017

 

Due on Demand

 

 

 

 

 

12

 

 

 

 

 

 

2

 

 

 

 

 

 

Yutaka Niihara (2)(3)

 

10%

 

 

9/14/2017

 

Due on Demand

 

 

 

 

 

904

 

 

 

27

 

 

 

2

 

 

 

 

 

 

Lan T. Tran (2)

 

11%

 

 

2/10/2018

 

Due on Demand

 

 

159

 

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2019

 

Due on Demand

 

 

14

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

193

 

 

 

1,359

 

 

 

277

 

 

 

82

 

 

 

 

 

 

Current, Convertible notes payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yasushi Nagasaki (2)

 

10%

 

 

6/29/2012

 

Due on Demand

 

 

 

 

 

200

 

 

 

200

 

 

 

56

 

 

$

3.30

 

 

 

Yutaka & Soomi Niihara (2)(3)

 

10%

 

 

11/16/2015

 

2 years

 

 

 

 

 

200

 

 

 

200

 

 

 

73

 

 

$

4.50

 

 

 

Wei Peu Zen (3)

 

10%

 

 

11/6/2017

 

2 years

 

 

 

 

 

5,000

 

 

 

5,000

 

 

 

597

 

 

$

10.00

 

 

 

Profit Preview International Group, Ltd. (4)

 

10%

 

 

2/1/2018

 

2 years

 

 

 

 

 

4,037

 

 

 

4,037

 

 

 

385

 

 

$

10.00

 

 

 

Profit Preview International Group, Ltd. (4)

 

10%

 

 

3/21/2018

 

2 years

 

 

 

 

 

5,363

 

 

 

5,363

 

 

 

442

 

 

$

10.00

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

 

 

14,800

 

 

 

14,800

 

 

 

1,553

 

 

 

 

 

 

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (2)

 

5%

 

 

12/27/2019

 

Due on Demand

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

793

 

 

$

16,759

 

 

$

15,077

 

 

$

1,635

 

 

 

 

 

 

(1)

Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also a director and the Chief Executive Officer of Hope International Hospice, Inc.

(2)

Officer.

(3)

Director.

(4)

Mr. Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.

25


 

 

See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara.

 

See Notes 6 and 11 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.6% of the common stock outstanding as of June 30, 2020. As of June 30, 2020, the Company held 6,222,837 shares of Telcon stock as discussed in Note 5.

NOTE 13 — SUBSEQUENT EVENTS

On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of our outstanding 10% Senior Secured Convertible Debentures described above. The September 2020 Amendment amended in certain respects the securities purchase agreement among EMI and the Debenture holders originally entered into on September 8, 2018, as amended by the February 2020 Amendment, and provides that the Debentures are to be amended in certain respects as set forth in the form of Allonge Amendment No. 1 to the debentures included in the September 2020 Agreement (the “Allonge”). Pursuant to the Allonge, the aggregate monthly redemption payments under the Debentures were reduced to $500,000 from $1,000,000 in principal amount and the maturity date of the Debentures was extended from April 21, 2021 to August 31, 2021. The monthly redemption payments resumed in September 2020 and will continue on the first day of each month thereafter commencing October 1, 2020. The remaining principal balance of the Debentures will be due and payable upon maturity, subject to mandatory prepayment in connection with certain “Capital Events” as defined.

In consideration of the Debenture holder’s financial accommodations to the Company, the Company issued to the holders, pro rata based upon the relative principal amounts of their Debentures, five-year common stock purchase warrants to purchase a total of up to 1,840,000 shares of the Company common stock at an exercise price of $2.00 a share. The warrants provide for so-called full-ratchet anti-dilution adjustments in the event the Company sells or issues shares of common stock or common stock equivalents at an effective price per share less than the exercise price of the warrants, subject to certain exceptions. The exercise price also remains subject to adjustment for stock splits and other customary events. In October 2018, the Company granted to T.R. Winston and its affiliates for services relating to the September 2020 Amendment common stock purchase warrants to purchase up to 75,000 shares of the Company common stock at an exercise price of $2.10 a share and otherwise on terms identical to the warrants issued to the debenture holders described above. In March 2021, the conversion price of the Debentures, and the exercise price of the these and the other warrants related to the Debentures was reduced to $1.54 in connection with our issuance of shares of common stock to Kainos Medicine, Inc. referred to below in this Note 13. In March 2021, we prepaid the Debentures in full in accordance with their terms.

On September 28, 2020, the Company entered into a convertible bond purchase agreement with Telcon pursuant to which it purchased on October 16, 2020 at face value a convertible bond of Telcon in the principal amount of $26.1 million, on the terms described in the purchase agreement. The Company purchased the convertible bond with a portion of the net proceeds from the sale of Telcon common shares owned by us. The sale of the Telcon shares and purchase of the Telcon convertible bond was in accordance with our December 23, 2019 agreement with Telcon. As contemplated by the December 23, 2019 agreement, the convertible bond and any proceeds therefrom, including proceeds from any exercise of the call option or early redemption right described below, replace the Company’s former Telcon shares and proceeds therefrom as collateral under the revised API Supply Agreement with Telcon.

The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1% a year, payable quarterly. Beginning on October 16, 2021, the holder of the convertible bond will be entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond. To the extent not previously redeemed, the principal amount of the bond will be due upon maturity. The convertible bond is convertible at the holder’s option at any time and from time to time into common shares of Telcon at an initial conversion price of approximately $8.00 per share. The conversion price is subject to antidilution adjustments in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares, a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event.

In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to 50% in principal amount of the convertible bond commencing October 16, 2021 and prior to maturity. If the Company transfers the convertible bond, it will be obliged under the call option agreement to see to it that the transferee is bound by such call option.

On October 28, 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agreed to loan to EJ Holdings a total of approximately $6.5 million, in monthly installments through March 2021, including approximately $4.0 million, loaned through December 31, 2020. The loans will be unsecured general obligations of EJ Holdings, will bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and will be due and payable in a lump sum at maturity on September 30, 2028. The proceeds of the loans will be used by EJ Holdings to fund its activities and operations at its Ube facility as described under “Equity method investment” in Note 5 above.

 

26


 

 

On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. As of April 5, 2021, the Company had sold approximately $14.5 million of the convertible promissory notes. Of the net proceeds from the sale of the convertible promissory notes, $6.2 million was used to prepay the outstanding Amended and Restated 10% Senior Secured Convertible Debentures as described above.

  

Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of the Company common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of our common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.

 

The convertible promissory notes bear interest at the rate of 2% per annum payable semi-annually on the last business day of August and January of each year and will mature on the 3rd anniversary of the original issue date.  The convertible promissory notes will become prepayable in whole or in part at the election of the holders on or after February 28, 2022 if our common shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined). The Company will be entitled to prepay up to 50% of the principal amount of the convertible promissory notes at any time after the first anniversary and on or before the second anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50% of such principal amount. The convertible promissory notes are general, unsecured obligations of the Company.

Effective February 22, 2021, the Company’s subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. Emmaus Medical’s obligations to Prestige Capital under the purchase and sale agreement are secured by a security interest in the accounts receivable and all or substantially all other assets of Emmaus Medical.

In connection with the purchase and sale agreement, the Company agreed to guarantee Emmaus Medical’s obligations under the purchase and sale agreement. The Company’s obligations under the guarantee are unsecured.

 

 

 

 

27


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In the following discussion, the terms, “we,” “us,” “our,” “Emmaus” or the “Company” refer to Emmaus Life Sciences, Inc., (formerly “MYnd Analytics, Inc.”) and its direct and indirect subsidiaries.

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on January 25, 2021 (the “Annual Report”).

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including those set forth in the “Risk Factors” section of the Annual Report, many of which are beyond our control.

Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.

Company Overview

 

We are a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. On July 7, 2017, the U.S. Food and Drug Administration, or FDA, approved our lead product, Endari® (prescription-grade L-glutamine oral powder), to reduce the severe complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older. Endari® has received Orphan Drug designation from the FDA and Orphan Medical designation from the European Commission, which designations afford marketing exclusivity for Endari® for a seven-year period in the U.S. and ten-year period in the European Union, respectively, following marketing approval.

We commenced commercialization of Endari® in the U.S. in January 2018 in collaboration with a contract sales organization. Effective January 2020, we have relied upon our in-house commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs. Endari® is also reimbursable by many commercial payors. We have distribution agreements in place with the nation’s leading distributors as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected pharmacies nationwide.

Until we began marketing and selling Endari® in the U.S. in early 2018, we had minimal revenues and relied upon funding from sales of equity securities and debt financings and loans, including loans from related parties to fund our business and operations. As of June 30, 2020, our accumulated deficit was $230.7 million and we had cash and cash equivalents of $1.0 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and expand or commence early access programs and eventual marketing and commercialization abroad.

Until we can generate sufficient net revenues, our future cash requirements are expected to be financed through public or private equity or debt financings, loans or corporate collaboration and licensing agreement.

As reported in more detail in our Current Report on Form 8-K filed with the SEC on July 22, 2019, as amended by our Form 8-K/A filed on August 14, 2019, on July 17, 2019, we completed our merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of January 4, 2019, among us, Athena Merger Subsidiary, Inc., and EMI, as amended by Amendment No. 1 thereto, dated as of May 10, 2019, which we refer to as the merger agreement. Pursuant to the merger agreement, Athena Merger Subsidiary, Inc. merged into EMI, with EMI surviving as our wholly owned subsidiary. On July 17, 2019, immediately after completion of the merger, we changed our name to “Emmaus Life Sciences, Inc.”

28


 

The merger was treated as a reverse recapitalization transaction under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposes, EMI is considered to have acquired us. The merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.

Financial Overview

Revenues, net

 

Since January 2018, we have generated net revenues primarily through the sale of Endari® as a treatment for SCD.

 

Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have entered into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.

Under the Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company’s performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations.

 

Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of sales discounts, returns, government rebates, chargebacks and commercial discounts. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from the Company's estimates. If actual results vary from the Company's estimates, the Company adjusts the variable consideration in the period such variances become known, which would affect net revenues in that period. The following are our significant categories of variable consideration:

 

Sales Discounts: We provide our customers prompt payment and large order discounts and from time to time offer additional discounts that are recorded as a reduction of revenue in the period the revenue is recognized. Sales attributable to one-time discounts offered by us increased in 2019 and continued in 2020 and may adversely affect sales in subsequent periods.

 

Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.

 

Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.

 

Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors.  The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.

29


 

Cost of Goods Sold

Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping and distribution of Endari®.

Research and Development Expenses

Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.

Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.

Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approval of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of Our Business and Compliance with Law.”

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs, including share-based compensation for our directors and executive officers, of our employees, including our in-house commercialization team. Other general and administrative expenses include facility costs, patent filing costs and professional fees and expenses for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years.

Selling Expenses

Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion, sale and marketing of our products. Other selling cost include advertising, third party consulting costs, the cost of contracted and in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional sales and administrative personnel to support the commercialization of Endari® in the U.S. and abroad.

Inventories

Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis at the lower of cost or net realizable value. Substantially all raw materials purchased during the three months ended June 30, 2020 and 2019 were supplied by one vendor.

Results of Operations:

Three months ended June 30, 2020 and 2019

 

Revenues, Net. Net revenues decreased by $1.1 million, or 21%, to $4.4 million for the three months ended June 30, 2020 compared to $5.5 million for the three months ended June 30, 2019. We believe that the decrease in net revenues was primarily attributable to temporary disruptions in sales related to the COVID-19 pandemic.

 

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Cost of Goods Sold. Cost of goods sold increased by $0.2 million or 69%, to $0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase in cost of goods sold was primarily attributable to the establishment of a reserve for inventory with a shelf- life of less than two years. Substantially all the raw material purchased during the three months ended June 30, 2020 and 2019 were from one vendor.

Research and Development Expenses. Research and development expenses remained consistent at $0.6 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. We expect our research and development costs to increase in the remainder of 2020 as our sponsored diverticulosis study progresses.

Selling Expenses. Selling expenses decreased by $0.8 million, or 40%, to $1.1 million for the three months ended June 30, 2020 compared to $1.9 million for the three months ended June 30, 2019. The decrease in selling expenses was primarily due to a decrease of $1.2 million in contract sales force fees for Endari® partially offset by an increase of $0.5 million in our in-house commercial team costs for marketing and sales of Endari® in the U.S. We have relied on our in-house commercial team for marketing and sales of Endari® since January 2020.

General and Administrative Expenses. General and administrative expenses increased by $1.0 million, or 39% to $3.7 million for the three months ended June 30, 2020 compared to $2.7 million for the three months ended June 30, 2019. The increase of general and administrative expenses was primarily due to an increase of $1.4 million in professional fees and $0.2 million of insurance expenses partially offset by a decrease of $0.2 million in share-based compensation expenses.

Other Expense. Total other expenses decreased by $9.2 million, or 52%, to $8.4 million for the three months ended June 30, 2020, compared to $17.7 million of total other expenses for the three months ended June 30, 2019. The decrease in total other expenses was primarily due to a decrease of $6.5 million in interest expense and a decrease of $4.9 million in net loss on investment in marketable securities and long-term investment partially offset by an increase of $1.4 million on loss on debt extinguishment.

Net Loss. Net loss for the three months ended June 30, 2020 decreased by $8.1 million, or 46% to a net loss of $9.5 million for the three months ended June 30, 2020 from a net loss of $17.6 million for the three months ended June 30, 2019. The decrease of net loss was primarily a result of decreases of $9.2 million in other expenses partially offset by an increase of $1.7 million in loss from operations as discussed above.

 

Six months ended June 30, 2020 and 2019

 

Revenues, Net. Net revenues increased by $1.1 million, or 11% , to $11.3 million for six months ended June 30, 2020 from $10.2 million for the six months ended June 30, 2019. The increase in net revenues was primarily attributable to the higher market acceptance of Endari® and expansion of our customer base and, to a lesser extent a 4.0% price increase for Endari® implemented January 1, 2020.

 

Cost of Goods Sold. Cost of goods sold increased $0.4 million, or 77% , to $0.9 million for six months ended June 30, 2020 from $0.5 million for the six months ended June 30, 2019. The increase in cost of goods sold is primarily attributable to higher net revenues and the establishment of a reserve for inventory with an expiration date of less than two years. All the raw material purchased during the six months ended June 30, 2020 and 2019 were from one vendor.

Research and Development Expenses. Research and development expenses increased by $0.2 million, or 15%, to $1.2 million for the six months ended June 30, 2020. This increase was primarily due to an increase in expenses related to our sponsored diverticulosis study. We expect our research and development costs to increase in the remainder of 2020 as the study progresses.

Selling Expenses. Selling expenses decreased by $1.2 million, or 35%, to $2.2 million for the six months ended June 30, 2020 from $3.4 million for the six months ended June 30, 2019. The decrease in selling expenses was primarily due to a decrease of $2.3 million in contract sales force fees for Endari® partially offset by an increase of $1.2 million in our in-house commercial team costs for marketing and sales of Endari® in the U.S. We have relied on our in-house commercial team for marketing and sales of Endari® since January 2020.

General and Administrative Expenses. General and administrative expenses increased by $1.0 million, or 15%, to $7.4 million for six months ended June 30, 2020 from $6.4 million for the six months ended June 30, 2019. The increase in general and administrative expenses was primarily due to increases of $1.3 million in professional fees and $0.5 million in insurance expenses offset by decreases of $0.6 million in share-based compensation and $0.3 million in travel expenses.

Other Expense. Total other expenses decreased by $30.0 million, or 89%, to $3.8 million for the six months ended June 30, 2020 from $33.8 million in other expense for the six months ended June 30, 2019. The decrease was primarily due to decreases of

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$18.2 million in a change in the net income (loss) on investment in marketable securities and long-term investment and $13.3 million reduction in interest expenses partially offset by an increase of $1.4 million in loss on debt extinguishment.

Net Loss. Net losses decreased by $31.0 million, or 89%, to $4.0 million for the six months ended June 30, 2020 from $35.0 million for the six months ended June 30, 2019. The decrease in net losses was primarily a result of a $30.0 million decrease in other expenses and a $1.1 million increase in net revenues as discussed above.

Liquidity and Capital Resources

We anticipate that we will continue to incur net losses for the foreseeable future until we can generate increased net revenues from Endari® sales. Based on our losses, anticipated future revenues and operating expenses, cash and cash equivalents of $2.5 million as of December 31, 2020, and the remaining net proceeds from the recent sale of convertible promissory notes described below, we believe our working capital is sufficient to meet our needs at least through the third quarter of 2022. If future revenues are less than anticipated or we incur more expenses than we anticipate, we may not have sufficient operating capital for our business without curtailing certain operations or raising additional capital. Except as described below, we have no understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us or at all.

 

On February 28, 2020, we entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we may elect to sell to LPC up to $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement from time to time over the 36-month term of the Purchase Agreement. As of the date of filing of this Quarterly Report, we are out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement.  We may seek to bring the Company into compliance or seek an appropriate waiver from LPC to regain our ability to utilize the Purchase Agreement, but there can be no assurance when or whether we may be able to do so.

Effective February 22, 2021, our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable.  We recently completed our first transaction under the purchase and sale agreement.  

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Cash flows for the six months ended June 30, 2020 and 2019

Net cash from operating activities

Net cash used in operating activities increased by $0.6 million, or 50%, to $1.7 million for the six months ended June 30, 2020 from $1.1 million for the six months ended June 30, 2019. This increase was primarily due to an increase of $1.7 million in working capital partially offset by a decrease of $0.7 million in loss from operations.

Net cash from investing activities

Net cash provided by investing activities increased by $1.4 million or 678% to $1.6 million due to an increase of $1.9 million in sales of marketable securities, partially offset by $0.6 million loans made to EJ Holdings, our equity method investee.

Net cash from financing activities

Net cash used in financing activities increased by $0.7 million, or 660%, to $0.6 million for the six months ended June 30, 2020 from net cash provided by financing activities of $0.1 million for the six months ended June 30, 2019. This change was the result of $3.2 million of proceeds from sales of common stock during the six months ended June 30, 2019, partially offset by a decrease of $1.5 million in repayments of convertible notes during the six months ended June 30, 2020 compared to $3.4 million in repayments of convertible notes during the six months ended June 30, 2019.

Off-Balance-Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2020.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.

As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our DCP. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s DCP were not effective.

Changes in Internal Control over Financial Reporting

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There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2020 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Material Weakness and Plan of Remediation

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that pose a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses might cause information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

We conducted an evaluation pursuant to Rule 13a‑15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of June 30, 2020. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Interim Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our DCP were not effective as of June 30, 2020, because of the continuance of a material weaknesses in our internal control over financial reporting first identified in 2019 due to inadequate application of GAAP on certain complex transactions, inadequate financial closing process, timely filing of periodic and annual financial statements, segregation of duties including access control of information technology especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account process, and insufficient entity risk assessment process.

In 2019, we began to implement measures designed to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, including, without limitation:

 

engaging a third-party accounting consulting firm to assist us in the review of our application of GAAP on complex debt financing transactions and revenue recognition under ASC 606;

 

 

using a GAAP Disclosure and SEC Reporting Checklist;

 

 

increasing the continuing professional training and academic education on accounting subjects for accounting staff;

 

 

enhancing the level of the precision of review controls related to our financial close and reporting; and

 

 

engaging other supplemental internal and external resources.

Our management and board of directors are committed to the remediation of the material weaknesses, as well as the continued improvement of our overall system of internal control over financial reporting. In addition to the measures described above, we also intend to consider upgrading our financial accounting systems and software as our finances permit. Further, we will consider establishing a Disclosure Committee to ensure more effective internal communications significant transactions.

We believe these measures will remediate the control deficiencies that gave rise to the material weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remediation measures may be required.

We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent improvements in our internal control over financial reporting when they are fully implemented. The material weaknesses will not be considered fully remediated until controls have been designed and implemented for a sufficient period of time for our management to conclude that the control environment is operating effectively. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting and DCP.

As we continue to evaluate and work to remediate the Material Weakness and enhance our internal control over financial reporting and DCP, we may determine that we need to modify or otherwise adjust the remediation measures described above. As a result, we cannot assure you that our remediation efforts will be successful or that our internal control over financial reporting or DCP will be effective.

 

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Part II. Other Information

Not applicable.

Item 1A. Risk Factors

Please refer to the “Risk Factors” section of the Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 15, 2020, the holder of a convertible promissory note in the principal amount of $3,150,000 agreed to an extension of the maturity date to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12%. In conjunction with this amendment, the Company issued to the holder of note five-year common stock purchase warrants to purchase a total of up to 1,250,000 shares of the Company common stock at an exercise price of $2.05 a share. The securities described above were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Act for transactions not involving a public offering based upon the Company’s prior relationship with the single accredited investor note holder.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

35


 

 

Item 6. Exhibits

(a)Exhibits

 

 

Incorporated by Reference

 

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/
Furnished

 

 

 

 

 

 

 

4.1

Contingent Common Stock Purchase Warrant

10-K

001-35527

4.24

May 4, 2021

 

10.1

Amendment No. 3 to Convertible Promissory Note as of June 15, 2020 of EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.)

10-K

001-35527

10.38

May 4, 2021

 

31.1+

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

*

31.2+

Certification of Chief Financial Officer pursuant of Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

*

 

 

32.1+

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

*

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

 

 

*

Filed herewith.

+

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

36


 

 

EMMAUS LIFE SCIENCES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Emmaus Life Sciences, Inc.

 

 

 

 

Dated: August 25, 2021

By:

 

/s/ Yutaka Niihara

 

Name:

 

Yutaka Niihara, M.D., M.P.H.

 

Its:

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

By:

 

/s/ Yasushi Nagasaki

 

Name:

 

Yasushi Nagasaki

 

Its:

 

Interim Chief Financial Officer

 

 

 

 

 

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