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 SeptemberJune 30, 20202021

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,August 24, 2021.

 

 


 

EMMAUS LIFE SCIENCES, INC.

For the Quarterly Period Ended SeptemberJune 30, 20202021

INDEX

 

 

 

Page

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements

31

 

 

 

 

(a)Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20202021 (Unaudited) and December 31, 20192020

31

 

 

 

 

(b)Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 (Unaudited)

42

 

 

 

 

(c)Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)Deficit for the ninethree and six months ended SeptemberJune 30, 20202021 and 20192020 (Unaudited)

53

 

 

 

 

(d)Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 (Unaudited)

74

 

 

 

 

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

85

 

 

 

Item 2.

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

2620

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3124

 

 

 

Item 4.

Controls and Procedures

3124

 

 

 

Part II Other Information

 

 

 

 

Item 1.

Legal Proceedings

3327

 

 

 

Item 1A.

Risk Factors

3327

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3327

 

 

 

Item 3.

Defaults Upon Senior Securities

3327

 

 

 

Item 4.

Mine Safety Disclosures

3327

 

 

 

Item 5.

Other Information

3327

 

 

 

Item 6.

Exhibits

3428

 

 

 

Signatures

3529

 

 


 

Item 1. Financial Statements

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

As of

 

 

As of

 

 

September 30, 2020

 

 

 

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

(Unaudited)

 

 

December 31, 2019

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,949

 

 

$

1,769

 

 

$

1,671

 

 

$

2,487

 

Restricted cash

 

 

25,680

 

 

 

 

Accounts receivable, net

 

 

1,726

 

 

 

2,150

 

 

 

3,359

 

 

 

198

 

Inventories, net

 

 

7,422

 

 

 

7,971

 

 

 

6,543

 

 

 

7,087

 

Investment in marketable securities

 

 

 

 

 

27,929

 

Prepaid expenses and other current assets

 

 

1,117

 

 

 

1,402

 

 

 

1,467

 

 

 

1,485

 

Total current assets

 

 

40,894

 

 

 

41,221

 

 

 

13,040

 

 

 

11,257

 

Property and equipment, net

 

 

130

 

 

 

151

 

 

 

99

 

 

 

120

 

Equity method investment

 

 

14,484

 

 

 

13,325

 

 

 

17,383

 

 

 

15,925

 

Right of use assets

 

 

4,145

 

 

 

4,474

 

 

 

3,796

 

 

 

4,072

 

Deposits and other assets

 

 

291

 

 

 

285

 

Investment in convertible bond

 

 

28,671

 

 

 

27,866

 

Other assets

 

 

290

 

 

 

296

 

Total assets

 

$

59,944

 

 

$

59,456

 

 

$

63,279

 

 

$

59,536

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

7,675

 

 

$

11,498

 

 

$

6,301

 

 

$

7,460

 

Operating lease liabilities, current portion

 

 

1,100

 

 

 

991

 

 

 

689

 

 

 

1,143

 

Conversion feature derivative, notes payable

 

 

5,376

 

 

 

 

Other current liabilities

 

 

1,934

 

 

 

5,748

 

 

 

2,894

 

 

 

2,706

 

Revolving line of credit to related parties, net

 

 

800

 

 

 

600

 

Revolving line of credit from related party

 

 

600

 

 

 

800

 

Warrant derivative liabilities

 

 

794

 

 

 

38

 

 

 

1,262

 

 

 

1,071

 

Notes payable, current portion

 

 

4,452

 

 

 

3,749

 

 

 

3,291

 

 

 

4,588

 

Notes payable to related parties

 

 

816

 

 

 

193

 

 

 

100

 

 

 

134

 

Convertible debentures, net of discount

 

 

6,209

 

 

 

7,015

 

 

 

 

 

 

5,480

 

Convertible note payable, net of discount

 

 

 

 

 

2,995

 

Total current liabilities

 

 

23,780

 

 

 

32,827

 

 

 

20,513

 

 

 

23,382

 

Operating lease liabilities, less current portion

 

 

3,588

 

 

 

3,932

 

 

 

3,639

 

 

 

3,470

 

Other long-term liabilities

 

 

35,436

 

 

 

33,750

 

 

 

34,476

 

 

 

34,470

 

Notes payable, less current portion

 

 

355

 

 

 

 

 

 

1,500

 

 

 

222

 

Convertible note payable

 

 

3,150

 

 

 

 

Total long-term liabilities

 

 

42,529

 

 

 

37,682

 

Convertible notes payable

 

 

12,526

 

 

 

3,150

 

Total liabilities

 

 

66,309

 

 

 

70,509

 

 

 

72,654

 

 

 

64,694

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, NaN 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 September 30, 2020 and December 31, 2019, respectively

 

 

49

 

 

 

48

 

Preferred stock, par value $0.001 per share, 15,000,000 shares authorized, NaN issued or outstanding

 

 

 

 

 

 

Common stock, par value $0.001 per share, 250,000,000 shares authorized, 49,311,864 and 48,987,198 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

 

49

 

 

 

49

 

Additional paid-in capital

 

 

218,484

 

 

 

215,207

 

 

 

219,924

 

 

 

218,728

 

Accumulated other comprehensive loss

 

 

(86

)

 

 

(79

)

Accumulated other comprehensive income

 

 

1,905

 

 

 

1,144

 

Accumulated deficit

 

 

(224,812

)

 

 

(226,229

)

 

 

(231,253

)

 

 

(225,079

)

Total stockholders’ deficit

 

 

(6,365

)

 

 

(11,053

)

 

 

(9,375

)

 

 

(5,158

)

Total liabilities & stockholders’ deficit

 

$

59,944

 

 

$

59,456

 

 

$

63,279

 

 

$

59,536

 

 

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


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 September 30,

 

 

Nine Months Ended September 30,

 

 

Three months ended June 30,

 

 

Six Months Ended June 30,

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

REVENUES, NET

$

5,601

 

 

$

5,760

 

 

$

16,915

 

 

$

15,960

 

 

$

6,489

 

 

$

4,360

 

 

$

11,824

 

 

$

11,314

 

COST OF GOODS SOLD

 

484

 

 

 

248

 

 

 

1,408

 

 

 

771

 

 

 

430

 

 

 

446

 

 

 

866

 

 

 

924

 

GROSS PROFIT

 

5,117

 

 

 

5,512

 

 

 

15,507

 

 

 

15,189

 

 

 

6,059

 

 

 

3,914

 

 

 

10,958

 

 

 

10,390

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

629

 

 

 

725

 

 

 

1,835

 

 

 

1,778

 

 

 

753

 

 

 

589

 

 

 

2,562

 

 

 

1,206

 

Selling

 

1,324

 

 

 

1,778

 

 

 

3,527

 

 

 

5,148

 

 

 

1,453

 

 

 

1,135

 

 

 

2,736

 

 

 

2,203

 

General and administrative

 

3,156

 

 

 

7,056

 

 

 

10,538

 

 

 

13,475

 

 

 

3,370

 

 

 

3,725

 

 

 

6,792

 

 

 

7,382

 

Total operating expenses

 

5,109

 

 

 

9,559

 

 

 

15,900

 

 

 

20,401

 

 

 

5,576

 

 

 

5,449

 

 

 

12,090

 

 

 

10,791

 

INCOME (LOSS) FROM OPERATIONS

 

8

 

 

 

(4,047

)

 

 

(393

)

 

 

(5,212

)

 

 

483

 

 

 

(1,535

)

 

 

(1,132

)

 

 

(401

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on debt extinguishment

 

 

 

 

(438

)

 

 

(1,425

)

 

 

(438

)

 

 

 

 

 

(1,425

)

 

 

(1,172

)

 

 

(1,425

)

Change in fair value of warrant derivative liabilities

 

745

 

 

 

3,576

 

 

 

669

 

 

 

3,492

 

 

 

338

 

 

 

(101

)

 

 

(191

)

 

 

(76

)

Change in fair value of embedded conversion option

 

45

 

 

 

131

 

 

 

51

 

 

 

131

 

Net gain (loss) on investment in marketable securities

 

6,464

 

 

 

(5,248

)

 

 

7,672

 

 

 

(22,242

)

Gain (loss) on equity method investment

 

(494

)

 

 

36

 

 

 

(1,474

)

 

 

(413

)

Miscellaneous reverse merger costs

 

 

 

 

(309

)

 

 

 

 

 

(309

)

Notes conversion costs

 

 

 

 

(3,341

)

 

 

 

 

 

(3,341

)

Change in fair value of conversion feature derivative, notes payable

 

 

2,563

 

 

 

35

 

 

 

225

 

 

 

6

 

Net gain on investment in marketable securities

 

 

 

 

 

(5,631

)

 

 

 

 

 

1,208

 

Net losses on equity method investment

 

 

(582

)

 

 

(573

)

 

 

(1,336

)

 

 

(980

)

Foreign exchange loss

 

 

(43

)

 

 

(1

)

 

 

(1,175

)

 

 

 

Interest and other income

 

718

 

 

 

18

 

 

 

1,318

 

 

 

248

 

 

 

191

 

 

 

568

 

 

 

381

 

 

 

600

 

Interest expense

 

(1,608

)

 

 

(8,714

)

 

 

(4,717

)

 

 

(25,153

)

 

 

(653

)

 

 

(1,309

)

 

 

(1,707

)

 

 

(3,109

)

Total other income (expense)

 

5,870

 

 

 

(14,289

)

 

 

2,094

 

 

 

(48,025

)

 

 

1,814

 

 

 

(8,437

)

 

 

(4,975

)

 

 

(3,776

)

INCOME (LOSS) BEFORE INCOME TAXES

 

5,878

 

 

 

(18,336

)

 

 

1,701

 

 

 

(53,237

)

 

 

2,297

 

 

 

(9,972

)

 

 

(6,107

)

 

 

(4,177

)

INCOME TAXES

 

293

 

 

 

56

 

 

 

80

 

 

 

159

 

INCOME TAXES (BENEFIT)

 

 

(192

)

 

 

(499

)

 

 

(174

)

 

 

(213

)

NET INCOME (LOSS)

 

5,585

 

 

 

(18,392

)

 

 

1,621

 

 

 

(53,396

)

 

 

2,489

 

 

 

(9,473

)

 

 

(5,933

)

 

 

(3,964

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on debt securities available for sale (net of tax)

 

 

546

 

 

 

 

 

 

604

 

 

 

 

Foreign currency translation adjustments

 

(35

)

 

 

5

 

 

 

(7

)

 

 

18

 

 

 

(8

)

 

 

(33

)

 

 

157

 

 

 

28

 

Other comprehensive income (loss)

 

(35

)

 

 

5

 

 

 

(7

)

 

 

18

 

 

 

538

 

 

 

(33

)

 

 

761

 

 

 

28

 

COMPREHENSIVE INCOME (LOSS)

$

5,550

 

 

$

(18,387

)

 

$

1,614

 

 

$

(53,378

)

 

$

3,027

 

 

$

(9,506

)

 

$

(5,172

)

 

$

(3,936

)

NET INCOME (LOSS) PER COMMON SHARE - BASIC and DILUTED

$

0.11

 

 

$

(0.40

)

 

$

0.03

 

 

$

(1.32

)

EARNINGS (NET LOSS) PER COMMON SHARE - BASIC and DILUTED

 

$

0.05

 

 

$

(0.19

)

 

$

(0.12

)

 

$

(0.08

)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

48,987,189

 

 

 

46,004,942

 

 

 

48,866,724

 

 

 

40,469,601

 

 

 

49,311,864

 

 

 

48,987,189

 

 

 

49,193,474

 

 

 

48,805,829

 

 

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



EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)DEFICIT

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Common Stock

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Income

 

 

Deficit

 

Balance at January 1,2021

 

48,987,189

 

 

$

49

 

 

$

218,728

 

 

$

1,144

 

 

$

(225,079

)

 

$

(5,158

)

Fair value of warrants including down-round protection adjustments

 

 

 

 

 

 

 

241

 

 

 

 

 

 

(241

)

 

 

 

Common stock issued for services

 

324,675

 

 

 

 

 

 

500

 

 

 

 

 

 

 

 

 

500

 

Share-based compensation

 

 

 

 

 

 

 

181

 

 

 

 

 

 

 

 

 

181

 

Unrealized gain on debt securities available for sale (net of tax)

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

165

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,422

)

 

 

(8,422

)

Balance, March 31, 2021

 

49,311,864

 

 

 

49

 

 

 

219,650

 

 

 

1,367

 

 

 

(233,742

)

 

 

(12,676

)

Share-based compensation

 

 

 

 

 

 

 

274

 

 

 

 

 

 

 

 

 

274

 

Unrealized gain on debt securities available for sale (net of tax)

 

 

 

 

 

 

 

 

 

 

546

 

 

 

 

 

 

546

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,489

 

 

 

2,489

 

Balance, June 30, 2021

 

49,311,864

 

 

$

49

 

 

$

219,924

 

 

$

1,905

 

 

$

(231,253

)

 

$

(9,375

)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

Common Stock

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Loss

 

 

Deficit

 

Balance, January 1, 2020

 

 

48,471,446

 

 

$

48

 

 

$

215,207

 

 

$

(79

)

 

$

(226,229

)

 

$

(11,053

)

Balance at January 1, 2020

 

48,471,446

 

 

$

48

 

 

$

215,207

 

 

$

(79

)

 

$

(226,229

)

 

$

(11,053

)

Fair value of warrants including down-round protection adjustments

 

 

 

 

 

 

 

600

 

 

 

 

 

 

(200

)

 

 

400

 

Common stock issued for cash (net of issuance cost)

 

 

515,743

 

 

 

1

 

 

 

141

 

 

 

 

 

 

 

 

 

142

 

 

515,743

 

 

 

1

 

 

 

141

 

 

 

 

 

 

 

 

 

142

 

Fair value of warrants including down-round protection adjustments

 

 

 

 

 

 

 

 

600

 

 

 

 

 

 

(200

)

 

 

400

 

Share-based compensation

 

 

 

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

209

 

 

 

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

209

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

61

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,509

 

 

 

5,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,509

 

 

 

5,509

 

Balance, March 31, 2020

 

 

48,987,189

 

 

 

49

 

 

 

216,157

 

 

 

(18

)

 

 

(220,920

)

 

 

(4,732

)

 

48,987,189

 

 

 

49

 

 

 

216,157

 

 

 

(18

)

 

 

(220,920

)

 

 

(4,732

)

Share-based compensation

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

(33

)

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

(33

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,473

)

 

 

(9,473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,473

)

 

 

(9,473

)

Balance, June 30, 2020

 

 

48,987,189

 

 

 

49

 

 

 

216,376

 

 

 

(51

)

 

 

(230,393

)

 

 

(14,019

)

 

48,987,189

 

 

$

49

 

 

$

216,376

 

 

$

(51

)

 

$

(230,393

)

 

$

(14,019

)

Fair value of warrants including down-round protection adjustments

 

 

 

 

 

 

 

 

1,987

 

 

 

 

 

 

(4

)

 

 

1,983

 

Share-based compensation

 

 

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

121

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

 

 

 

(35

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,585

 

 

 

5,585

 

Balance, September 30, 2020

 

 

48,987,189

 

 

$

49

 

 

$

218,484

 

 

$

(86

)

 

$

(224,812

)

 

$

(6,365

)

 

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

 

 


EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Balance, January 1, 2019

 

 

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

 

 

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 common 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

 

 

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

)

Stock issued for cash (net of issuance cost)

 

 

477,339

 

 

 

1

 

 

 

2,999

 

 

 

 

 

 

 

 

 

3,000

 

Conversion of convertible note and promissory notes payable to common stock

 

 

6,983,350

 

 

 

7

 

 

 

35,452

 

 

 

 

 

 

 

 

 

35,459

 

Conversion note inducement

 

 

 

 

 

 

 

 

3,662

 

 

 

 

 

 

 

 

 

3,662

 

Reclassification of warrant liability to permanent equity

 

 

 

 

 

 

 

 

6,336

 

 

 

 

 

 

 

 

 

6,336

 

Exchange of common stock in connection with merger

 

 

2,330,546

 

 

 

2

 

 

 

(1,644

)

 

 

 

 

 

 

 

 

(1,642

)

Share-based compensation

 

 

 

 

 

 

 

 

129

 

 

 

 

 

 

 

 

 

129

 

Fair value of replacement equity awards

 

 

 

 

 

 

 

 

2,437

 

 

 

 

 

 

 

 

 

2,437

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,392

)

 

 

(18,392

)

Balance, September 30, 2019

 

 

47,671,446

 

 

$

48

 

 

$

212,619

 

 

$

(51

)

 

$

(224,783

)

 

$

(12,167

)

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



EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

Nine Months Ended September 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

1,621

 

 

$

(53,396

)

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

 

 

 

 

 

 

 

Net loss

 

$

(5,933

)

 

$

(3,964

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

45

 

 

 

54

 

 

 

30

 

 

 

30

 

Impairment loss on long-term investment

 

 

 

 

524

 

Inventory reserve

 

596

 

 

 

 

 

 

300

 

 

 

375

 

Amortization of discount of notes payable and convertible notes payable

 

3,200

 

 

 

21,875

 

 

 

1,028

 

 

 

2,102

 

Foreign exchange adjustments on convertible notes and notes payable

 

(316

)

 

 

(207

)

Net (gain) loss on investment in marketable securities

 

(7,672

)

 

 

21,718

 

Foreign exchange adjustments

 

 

1,215

 

 

 

(70

)

Tax benefit recognized on unrealized gain on debt securities

 

 

(201

)

 

 

 

Net gain on investment in marketable securities

 

 

 

 

 

(1,208

)

Loss on equity method investment

 

1,474

 

 

 

413

 

 

 

1,336

 

 

 

980

 

Loss on debt extinguishment

 

1,425

 

 

 

438

 

 

 

1,172

 

 

 

1,425

 

Share-based compensation and fair value of replacement equity award

 

549

 

 

 

3,593

 

Notes conversion costs

 

 

 

 

3,341

 

Gain on disposal of property and equipment

 

 

(1

)

 

 

 

Share-based compensation

 

 

455

 

 

 

428

 

Shares issued for services

 

 

500

 

 

 

 

Change in fair value of warrant derivative liabilities

 

(669

)

 

 

(3,492

)

 

 

191

 

 

 

76

 

Change in fair value of embedded conversion option

 

(51

)

 

 

(131

)

Change in fair value of conversion feature derivative, notes payable

 

 

(225

)

 

 

(6

)

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

425

 

 

 

(193

)

 

 

(3,163

)

 

 

693

 

Inventories

 

(44

)

 

 

(2,787

)

 

 

237

 

 

 

(267

)

Prepaid expenses and other current assets

 

336

 

 

 

(1,025

)

 

 

5

 

 

 

528

 

Other non-current assets

 

313

 

 

 

(4,150

)

 

 

272

 

 

 

183

 

Income tax receivable and payable

 

(43

)

 

 

(82

)

 

 

(14

)

 

 

(295

)

Accounts payable and accrued expenses

 

(3,119

)

 

 

5,966

 

 

 

(884

)

 

 

(412

)

Deferred revenue

 

 

 

 

500

 

Deferred rent

 

 

 

 

(287

)

Other current liabilities

 

(3,883

)

 

 

828

 

 

 

197

 

 

 

(4,903

)

Other long-term liabilities

 

1,451

 

 

 

2,363

 

 

 

(276

)

 

 

2,586

 

Net cash flows used in operating activities

 

(4,362

)

 

 

(4,137

)

 

 

(3,759

)

 

 

(1,719

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid in connection with the Merger

 

 

 

 

(1,641

)

Sale of marketable securities

 

35,601

 

 

 

221

 

 

 

 

 

 

2,130

 

Purchases of property and equipment

 

(13

)

 

 

(55

)

 

 

(1

)

 

 

(13

)

Loan made to equity investee

 

(2,274

)

 

 

 

Loan to equity method investee

 

 

(3,965

)

 

 

(561

)

Net cash flows provided by (used in) investing activities

 

33,314

 

 

 

(1,475

)

 

 

(3,966

)

 

 

1,556

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,980

 

 

 

 

 

 

700

 

 

 

998

 

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

 

 

14,490

 

 

 

 

Payments of notes payable

 

(200

)

 

 

 

 

 

(1,079

)

 

 

(200

)

Payments of convertible notes

 

(2,000

)

 

 

(3,368

)

 

 

(7,200

)

 

 

(1,500

)

Proceeds from exercise of warrants

 

 

 

 

186

 

Proceeds from issuance of common stock

 

142

 

 

 

6,210

 

Proceeds from issuance of common stock, net of issuance cost

 

 

 

 

 

142

 

Net cash flows provided by (used in) financing activities

 

(78

)

 

 

3,028

 

 

 

6,911

 

 

 

(560

)

Effect of exchange rate changes on cash

 

(14

)

 

 

5

 

 

 

(2

)

 

 

(7

)

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

 

28,860

 

 

 

(2,579

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(816

)

 

 

(730

)

Cash, cash equivalents and restricted cash, beginning of period

 

1,769

 

 

 

3,905

 

 

 

2,487

 

 

 

1,769

 

Cash, cash equivalents and restricted cash, end of period

$

30,629

 

 

$

1,326

 

 

$

1,671

 

 

$

1,039

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

$

1,543

 

 

$

1,239

 

 

$

590

 

 

$

802

 

Income taxes paid

$

126

 

 

$

242

 

 

$

41

 

 

$

82

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

Warrants issued

$

3,808

 

 

$

 

Beneficial conversion feature relating to convertible notes

$

 

 

$

8,764

 

Warrant liabilities reclassified to equity

$

 

 

$

6,337

 

Conversion of notes payable to common stock

$

 

 

$

33,777

 

Conversion of accrued interest payable to common stock

$

 

 

$

2,381

 

Initial recognition of right to use assets

$

 

 

$

2,922

 

NON-CASH INVESING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Debt discount due to conversion features derivative

 

$

5,555

 

 

$

 

Debt discount due to warrant issued with debt

 

$

 

 

$

400

 

 

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


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.”, (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us,”“us” or 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 condensed 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, 20192020 has been derived from the audited consolidated balance sheet at December 31, 20192020 contained in the Form 10-K/A. The results of operations for the three and ninesix months ended SeptemberJune 30, 2020,2021, 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 of the Company.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 1 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, EMIEmmaus and EMI’s wholly‑owned subsidiary, Emmaus Medical, Inc.,its direct and Emmaus Medical, Inc.’s wholly‑ownedindirect consolidated 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.

Reclassification of prior year presentation—Certain reclassifications have been made to the prior period amounts to confirm with the current year presentation.

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 will not have a material effect on the Company’s condensed consolidated financial statements. Refer to the Amended Annual Report for a summary of significant accounting policies. There were no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2020.


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:

 

Nine Months Ended September 30,

 

 

As of June 30,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Cash and cash equivalents

 

$

4,949

 

 

$

1,326

 

 

$

1,671

 

 

$

1,032

 

Restricted cash

 

 

25,680

 

 

 

 

 

 

 

 

 

7

 

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

 

$

30,629

 

 

$

1,326

 

 

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

$

1,671

 

 

$

1,039

 

Factoring accounts receivables — The Company entered into a factoring agreement with Prestige Capital Finance, LLC on February 22, 2021. Under the agreement, the Company may factor its accounts receivables of up to 70% of the face value with maximum outstanding balance of $7.5 million and the fee ranges between 2.25% and 7.25% depending on the period when customers pay the outstanding accounts receivables. The Company had 0 factoring accounts receivables balance outstanding as of June 30,


2021. For three months and six months ended June 30, 2021, the Company incurred approximately $44,000 and $75,000 of factoring fees, respectively.

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 SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 19,276,39523,326,667 shares and 13,457,96317,288,829 shares, respectively, of Companythe Company’s common stock. No potentially dilutive securities were included in the calculation of diluted net lossincome per share since their effect would bethe potential dilutive securities were out of the money for the period ended June 30, 2020 and were anti-dilutive for all periods presented.period ended June 30, 2021.

NOTE 3 — REVENUES

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

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Endari®

 

$

5,485

 

 

$

5,669

 

 

$

16,548

 

 

$

15,661

 

 

$

6,445

 

 

$

4,349

 

 

$

11,596

 

 

$

11,063

 

Other

 

 

116

 

 

 

91

 

 

 

367

 

 

 

299

 

 

 

44

 

 

 

11

 

 

 

228

 

 

 

251

 

Revenues, net

 

$

5,601

 

 

$

5,760

 

 

$

16,915

 

 

$

15,960

 

 

$

6,489

 

 

$

4,360

 

 

$

11,824

 

 

$

11,314

 

 

The following table summarizes the revenue allowance and accrual activities for the ninesix months ended SeptemberJune 30, 20202021 and 2019June 30, 2020 (in thousands):

 

Trade Discounts, Allowances and Chargebacks

 

 

Government Rebates and Other Incentives

 

 

Returns

 

 

Total

 

Balance as of December 31, 2020

 

$

134

 

 

$

2,119

 

 

$

473

 

 

$

2,726

 

Provision related to sales in the current year

 

 

1,417

 

 

 

1,870

 

 

 

127

 

 

 

3,414

 

Adjustments related prior period sales

 

 

12

 

 

 

5

 

 

 

(59

)

 

 

(42

)

Credit and payments made

 

 

(581

)

 

 

(1,657

)

 

 

(20

)

 

 

(2,258

)

Balance as of June 30, 2021

 

$

982

 

 

$

2,337

 

 

$

521

 

 

$

3,840

 

 

Trade Discounts, Allowances and Chargebacks

 

 

Government Rebates and Other Incentives

 

 

Returns

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

$

228

 

 

$

1,354

 

 

$

315

 

 

$

1,897

 

 

$

228

 

 

$

1,354

 

 

$

315

 

 

$

1,897

 

Provision related to sales in the current year

 

 

2,106

 

 

 

2,917

 

 

 

180

 

 

 

5,203

 

 

 

1,438

 

 

 

1,955

 

 

 

118

 

 

 

3,511

 

Adjustments related prior period sales

 

 

15

 

 

 

(43

)

 

 

(65

)

 

 

(93

)

 

 

16

 

 

 

(43

)

 

 

(43

)

 

 

(70

)

Credit and payments made

 

 

(2,144

)

 

 

(1,762

)

 

 

 

 

 

(3,906

)

 

 

(1,208

)

 

 

(1,324

)

 

 

 

 

 

(2,532

)

Balance as of September 30, 2020

 

$

205

 

 

$

2,466

 

 

$

430

 

 

$

3,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

84

 

 

$

798

 

 

$

99

 

 

$

981

 

Provision related to sales in the current year

 

 

1,039

 

 

 

2,368

 

 

 

190

 

 

 

3,597

 

Credit and payments made

 

 

(866

)

 

 

(1,816

)

 

 

 

 

 

(2,682

)

Balance as of September 30, 2019

 

$

257

 

 

$

1,350

 

 

$

289

 

 

$

1,896

 

Balance as of June 30, 2020

 

$

474

 

 

$

1,942

 

 

$

390

 

 

$

2,806

 

 

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 totalnet revenues):

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Customer A

 

 

49

%

 

 

62

%

 

 

53

%

 

 

60

%

 

 

48

%

 

 

55

%

 

 

54

%

 

 

54

%

Customer B

 

 

32

%

 

 

22

%

 

 

27

%

 

 

21

%

 

 

36

%

 

 

20

%

 

 

28

%

 

 

24

%

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 SeptemberJune 30, 20202021 and December 31, 2019.  See2020. Refer to Note 1011 and 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. During the nine months ended September 30, 2020, the distribution agreement was terminated, and the Company recognized the $500,000 up front payment as other income in the Consolidated Comprehensive Statements of Income (Loss).

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

Inventories consisted of the following (in thousands):

 

September 30, 2020

 

 

December 31, 2019

 

June 30, 2021

 

 

December 31, 2020

 

Raw materials and components

 

$

1,486

 

 

$

1,187

 

$

1,439

 

 

$

1,486

 

Work-in-process

 

 

1,254

 

 

 

1,629

 

 

315

 

 

 

721

 

Finished goods

 

 

5,338

 

 

 

5,204

 

 

6,276

 

 

 

6,064

 

Inventory reserve

 

 

(656

)

 

 

(49

)

 

(1,487

)

 

 

(1,184

)

Total

 

$

7,422

 

 

$

7,971

 

$

6,543

 

 

$

7,087

 

 

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

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

June 30, 2021

 

 

December 31, 2020

 

Prepaid insurance

 

$

545

 

 

$

735

 

$

355

 

 

$

388

 

Other prepaid expenses and current assets

 

 

572

 

 

 

667

 

 

$

1,117

 

 

$

1,402

 

Prepaid expenses

 

332

 

 

 

454

 

Due from EJ Holdings

 

509

 

 

 

376

 

Other current assets

 

271

 

 

 

267

 

Total

$

1,467

 

 

$

1,485

 

 

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

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

June 30, 2021

 

 

December 31, 2020

 

Equipment

 

 

345

 

 

 

335

 

$

332

 

 

$

347

 

Leasehold improvements

 

 

39

 

 

 

77

 

 

39

 

 

 

39

 

Furniture and fixtures

 

 

99

 

 

 

95

 

 

99

 

 

 

99

 

Total property and equipment

 

 

483

 

 

 

507

 

 

470

 

 

 

485

 

Less: accumulated depreciation

 

 

(353

)

 

 

(356

)

 

(371

)

 

 

(365

)

Property and equipment, net

 

$

130

 

 

$

151

 

Property and Equipment, net

$

99

 

 

$

120

 

 

During the three months ended SeptemberJune 30, 2021 and 2020, and 2019, depreciation expenses wereexpense was approximately $12,000 and $16,000,$11,000 respectively. During the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, depreciation expensesexpense were approximately $35,000 and $44,000, respectively.$23,000 for both period.

NOTE 5 — INVESTMENTS

Equity securities—Investment in convertible bonds - As of December 31, 2019,On September 28, 2020, the Company held 6,643,559 shares of capital stockentered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon which were acquired in July 2017 for approximately $31.8 million.  As of December 31, 2019, the closing price of Telecon shares on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was approximately $4.20. As of December 31, 2019, the fair value of the shares of $27.9 million was recorded in investment in marketable securities as of December 31, 2019. The net unrealized losses on available-for sale marketable securities held as of December 31, 2019 and since the adoption of ASU 2016-01 as of January 1, 2018 was $43.2 million.

Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligation 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 ofRF Pharmaceutical, Inc., or Telcon in the principal amount of approximately $26.1 million which matures on October 16, 2030 and bears interest at the rate of 2.1% per year, payable quarterly. Beginning on October 16, 2021, the Company will be entitled on a quarterly basis to be substitutedcall for early redemption of all or any portion of the principal amount of the convertible bond. 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. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the early redemption right or the call option described below, are pledged to Telconas collateral to secure the Company’s obligations under the revised API agreement betweenSupply Agreement with Telcon described in Note 6 and Note 11.

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 Telcon. During the nine months ended September 30, 2020,prior to maturity. If the Company sold all oftransfers the Telcon shares for total net proceeds of $35.6 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 forconvertible bond, it will be obliged under the equity method, at fair value and recognizes any changes incall option agreement to see to it that the transferee is bound by such fair value in earnings. call option.

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 whichfair value option method to measure the Company measures these investmentsinvestment in the Telcon convertible bond. The investment is classified as an available for sale security and remeasured 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,fair value on a quarterlyrecurring basis management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determineusing Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income. The fair value and any change in fair value of these investments unless impairment indicators existed. When impairment indicators exist,the


convertible bond is determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the Company generally uses discounted cash flow analyses to determinemarket price of the underlying common stock.

The following table sets forth the fair value. Forvalue and changes in fair value of the nine months ended September 30, 2019, the Company recognized approximately $524,000 in impairment loss for equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.convertible bonds as of June 30, 2021 and December 31, 2020 (in thousands):

Investment in convertible bond

 

June 30, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

27,866

 

 

$

 

Fair value at issuance date

 

 

 

 

 

22,059

 

Change in fair value included in the statement of other comprehensive income

 

 

805

 

 

 

5,807

 

Balance, end of period

 

$

28,671

 

 

$

27,866

 

The fair value as of June 30, 2021 and December 31, 2020 was based upon following assumptions:

 

 

June 30, 2021

 

 

December 31, 2020

 

Principal outstanding (South Korean won)

 

KRW 30 billion

 

 

KRW 30 billion

 

Stock price

 

KRW 4,580

 

 

KRW 6,060

 

Expected life (in years)

 

 

9.30

 

 

 

9.79

 

Selected yield

 

 

9.00

%

 

 

10.50

%

Expected volatility (Telcon common stock)

 

 

83.02

%

 

 

85.80

%

Risk-free interest rate (South Korea government bond)

 

 

2.04

%

 

 

1.72

%

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

Conversion price

 

KRW 4,546

 

 

KRW 6,028

 

Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. As part ofIn connection with 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 $13.2 million. 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 annumyear, payable annually. The parties also contemplated that thehe Ube facility will eventually supply the Company with the facility’s output of amino acids and 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 ninesix months ended SeptemberJune 30, 2020,2021, the Company made additional loans$4.0 million of $2.6 millionloans to EJ Holdings. As of SeptemberJune 30, 20202021, and December 31, 2019,2020, the loans receivable from EJ Holdings were approximately $14.5$21.1 million and $13.8$18.6 million, respectively.respectively.

EJ Holdings is engaged in phasing in the Ube facility, including obtaining 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 usthe Company or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.

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’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 byof EJ Holdings are classified as net losses fromon 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 and ninesix months ended SeptemberJune 30, 20202021 and 20192020 (in thousands):  

 

 

Three Months Ended September  30,

 

 

Nine Months Ended September  30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES, NET

 

$

55

 

 

$

61

 

 

$

201

 

 

$

175

 

GROSS PROFIT

 

 

55

 

 

 

61

 

 

 

201

 

 

 

175

 

NET LOSS

 

$

(1,228

)

 

$

74

 

 

$

(3,677

)

 

$

(1,050

)


 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES, NET

$

58

 

 

$

61

 

 

$

117

 

 

$

145

 

GROSS PROFIT

 

58

 

 

 

61

 

 

 

117

 

 

 

145

 

NET LOSS

$

(1,455

)

 

$

(1,432

)

 

$

(3,341

)

 

$

(2,449

)

 

NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES

Accounts payable and accrued expenses consisted of the following at SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Accounts payable:

 

 

 

 

 

 

 

 

Clinical and regulatory expenses

 

$

335

 

 

$

262

 

Professional fees

 

 

343

 

 

 

252

 

Selling expenses

 

 

436

 

 

 

395

 

Manufacturing costs

 

 

14

 

 

 

596

 

Other vendors

 

 

200

 

 

 

518

 

Total accounts payable

 

 

1,328

 

 

 

2,023

 

Accrued interest payable, related parties

 

 

65

 

 

 

41

 

Accrued interest payable

 

 

383

 

 

 

627

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll expenses

 

 

1,075

 

 

 

1,053

 

Government rebates and other rebates

 

 

2,337

 

 

 

2,659

 

Due to EJ Holdings

 

 

427

 

 

 

545

 

Other accrued expenses

 

 

686

 

 

 

512

 

Total accrued expenses

 

 

4,525

 

 

 

4,769

 

Total accounts payable and accrued expenses

 

$

6,301

 

 

 

7,460

 

 

Other current liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

September 30, 2020

 

 

December 31, 2019

 

Accounts payable:

 

 

 

 

 

 

 

 

Clinical and regulatory expenses

 

$

419

 

 

$

232

 

Professional fees

 

 

636

 

 

 

1,183

 

Selling expenses

 

 

654

 

 

 

1,303

 

Manufacturing costs

 

 

112

 

 

 

4,541

 

Other vendors

 

 

352

 

 

 

18

 

Total accounts payable

 

 

2,173

 

 

 

7,277

 

Accrued interest payable, related parties

 

 

47

 

 

 

42

 

Accrued interest payable

 

 

523

 

 

 

991

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll expenses

 

 

1,024

 

 

 

891

 

Government rebates and other rebates

 

 

2,465

 

 

 

1,355

 

Due to EJ Holdings

 

 

474

 

 

 

238

 

Other accrued expenses

 

 

969

 

 

 

704

 

Total accrued expenses

 

 

4,932

 

 

 

3,188

 

Total accounts payable and accrued expenses

 

$

7,675

 

 

$

11,498

 

 

June 30, 2021

 

 

December 31, 2020

 

Trade discount

$

2,000

 

 

$

2,000

 

Other current liabilities

 

894

 

 

 

706

 

Total other current liabilities

$

2,894

 

 

$

2,706

 

 

Other long-term liabilities consisted of the following at SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

June 30, 2021

 

 

December 31, 2020

 

Trade discount

 

$

25,421

 

 

$

23,242

 

$

24,453

 

 

$

24,453

 

Unearned revenue

 

 

10,000

 

 

 

10,500

 

 

10,000

 

 

 

10,000

 

Other long-term liabilities

 

 

15

 

 

 

8

 

 

23

 

 

 

17

 

Total other long-term liabilities

 

$

35,436

 

 

$

33,750

 

$

34,476

 

 

$

34,470

 

 

On June 12, 2017, the Company and Telcon entered into an API Supply Agreement, as subsequently amended (as so(so as 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 requirementsestimated annual targets for bulk containers of PGLG. The Company purchased $2 million and $3.5 million ofdid 0t purchase PGLG from Telcon in the ninesix months ended SeptemberJune 30, 20202021 and Septemberpurchased $2.0 million of PGLG in the six months ended June 30, 2019, respectively.2020. As of SeptemberJune 30, 20202021, and December 31, 2019,2020, respectively, accounts payable to Telcon were 0 and $ 3.3 million,$208,000, respectively.See Note 11 for additional details.

 

 


NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands)thousands except for number of shares):

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding September 30, 2020

 

 

Discount

Amount September 30, 2020

 

 

Carrying

Amount September 30, 2020

 

 

Shares

Underlying September 30, 2020

 

 

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding June 30, 2021

 

 

Unamortized Discount June 30, 2021

 

 

Carrying

Amount June 30, 2021

 

 

Shares

Underlying June 30, 2021

 

 

Notes payable

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

947

 

 

$

 

 

$

947

 

 

 

 

 

 

10%

 

 

Due on demand

 

 

 

 

$

903

 

 

$

 

 

$

903

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,867

 

 

 

 

 

 

2,867

 

 

 

 

 

2020

 

1%

 

 

2 years

 

 

 

 

 

798

 

 

 

 

 

 

798

 

 

 

 

 

2021

 

11%

 

 

Due on demand - 2 years

 

 

 

 

 

3,090

 

 

 

 

 

 

3,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,791

 

 

$

 

 

$

4,791

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,291

 

 

$

 

 

$

3,291

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

1,500

 

 

$

 

 

$

1,500

 

 

 

 

 

Notes payable - related parties

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

1% - 11%

 

 

Due on demand - 2 years

 

 

 

 

 

993

 

 

 

 

 

 

993

 

 

 

 

 

 

12%

 

 

Due on demand

 

 

 

 

 

100

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,807

 

 

$

 

 

$

4,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

100

 

 

$

 

 

$

100

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

4,452

 

 

$

 

 

$

4,452

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

100

 

 

$

 

 

$

100

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

355

 

 

$

 

 

$

355

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

 

 

$

 

 

$

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

 

20

 

 

$

 

 

$

20

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

 

14

 

 

 

 

 

$

14

 

 

 

 

 

Convertible notes payable

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

 

782

 

 

 

 

 

$

782

 

 

 

 

 

 

12%

 

 

3 years

 

$

10.00

 

(b)

 

3,150

 

 

 

 

 

 

3,150

 

 

 

316,584

 

 

 

 

 

 

 

 

 

 

 

 

 

$

816

 

 

$

 

 

$

816

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

816

 

 

$

 

 

$

816

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

 

8,700

 

 

$

2,491

 

 

$

6,209

 

 

 

4,387,986

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,700

 

 

$

2,491

 

 

$

6,209

 

 

 

4,387,986

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

8,700

 

 

$

2,491

 

 

$

6,209

 

 

 

4,387,986

 

 

Convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

 

3,150

 

 

$

 

 

$

3,150

 

 

 

316,637

 

 

2021

 

2%

 

 

3 years

 

$

1.48

 

(a)

 

14,490

 

 

 

5,114

 

 

 

9,376

 

 

 

9,856,378

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,637

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,640

 

 

$

5,114

 

 

$

12,526

 

 

 

10,172,962

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

17,640

 

 

$

5,114

 

 

$

12,526

 

 

 

10,172,962

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,473

 

 

$

2,491

 

 

$

14,982

 

 

 

4,704,623

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

22,531

 

 

$

5,114

 

 

$

17,417

 

 

 

10,172,962

 

 

 

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

 

 

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding

December 31,

2020

 

 

Unamortized

Discount

December 31,

2020

 

 

Carrying

Amount

December 31,

2020

 

 

Shares

Underlying

Notes

December 31, 2020

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

920

 

 

$

 

 

$

920

 

 

 

 

 

 

10%

 

 

Due on demand

 

 

 

 

$

969

 

 

$

 

 

$

969

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,829

 

 

 

 

 

 

2,829

 

 

 

 

 

 

11%

 

 

Due on demand

 

 

 

 

 

2,899

 

 

 

 

 

 

2,899

 

 

 

 

 

2020

 

1%-11%

 

 

Due on demand - 2 years

 

 

 

 

 

942

 

 

 

 

 

 

942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,810

 

 

$

 

 

$

4,810

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,749

 

 

$

 

 

$

3,749

 

 

$

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

4,588

 

 

$

 

 

$

4,588

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,749

 

 

$

 

 

$

3,749

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

222

 

 

$

 

 

$

222

 

 

 

 

 

Notes payable - related parties

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2018

 

11%

 

 

Due on demand

 

 

 

 

 

159

 

 

 

 

 

 

159

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

 

100

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

134

 

 

$

 

 

$

134

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

134

 

 

$

 

 

$

134

 

 

 

 

 

Convertible debentures

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

10,200

 

 

$

3,185

 

 

 

7,015

 

 

 

1,080,415

 

 

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

Convertible note payable

Convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

10%

 

 

2 years

 

$

10.00

 

(b)

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

10%

 

 

2 years

 

$

10.00

 

(b)

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,142

 

 

$

3,190

 

 

$

13,952

 

 

 

1,444,291

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

15,294

 

 

$

1,720

 

 

$

13,574

 

 

 

3,946,723

 

 

 

(a) These debentures are convertible into Emmaus Life Sciences, Inc. shares.  

(b) This note is convertible into EMI Holding, Inc. shares.

 

(a)

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

(b)

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


The weighted-average stated annual interest rate of notes payable was 5% and 10% as of SeptemberJune 30, 20202021 and December 31, 2019.2020, respectively. The weighted-average effective annual interest rate of notes payable as of SeptemberJune 30, 20202021 and December 31, 20192020 was 35%14% and 66%37%, respectively, after giving effect to discounts relating to the conversion feature,features, warrants and deferred financing cost in connection with thesecosts relating to the notes.

As of SeptemberJune 30, 2020,2021, future contractual principal payments due on notes payable were as follows:

 

Year Ending

 

 

 

 

 

 

2020 (three months)

$

6,369

 

2021

 

7,732

 

2021 (six months)

$

3,169

 

2022

 

222

 

 

222

 

2023

 

3,150

 

 

4,650

 

2024

 

14,490

 

Total

$

17,473

 

$

22,531

 

 

Immediately prior to the completion of the Merger, all but one of the convertible notes payable (excluding the 10% Senior Secured Debentures of EMI discussed below) 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 ofOn March 8, 2021, the Company common stockprepaid in the same manner as otherfull 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 sharesand recognized $1.2 million of common stock ofloss on debt extinguishment due to recognize the Company and included in convertible notes payable. See Note 8 for additional information regarding this arrangement.remaining unamortized discount.

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. Upon prepayment of the Debentures, the outstanding liability was recognized in change in fair value in earnings. The following table sets forth the fair value of the conversion feature liabilities as of SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):

 

 

Nine Months Ended

 

 

Year ended

 

 

Six Months Ended

 

 

Year Ended

 

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

 

September 30, 2020

 

 

December 31, 2019

 

Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures

 

June 30, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

1

 

 

$

 

 

$

7

 

 

$

1

 

Fair value at issuance date

 

 

 

 

 

132

 

Fair value at debt modification date

 

 

118

 

 

 

 

 

 

 

 

 

118

 

Change in fair value included in the statement of comprehensive loss

 

 

(51

)

 

 

(131

)

Change in fair value included in the statement of comprehensive income

 

 

(7

)

 

 

(112

)

Balance, end of period

 

$

68

 

 

$

1

 

 

$

 

 

$

7

 

 

The fair 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.stock.

 

The fair valuesvalue as of September 30, 2020, the February 21, 2020 modification date and December 31, 2019 were2020 was based upon following assumptions:

 


 

 

December 31, 2020

 

Stock price

 

$

1.23

 

Conversion price

 

$

2.00

 

Selected yield

 

 

10.48

%

Expected volatility (peer group)

 

 

95

%

Expected life (in years)

 

 

0.67

 

Expected dividend yield

 

 

Risk-free rate

 

Term structure

 

          

 

September 30, 2020

 

February 21, 2020

(Modification date)

 

December 31, 2019

 

Stock price

$

0.97

 

$

1.89

 

$

1.97

 

Conversion price

$

2.00

 

$

3.00

 

$

9.52

 

Selected yield

 

17.06

%

 

19.12

%

 

16.77

%

Expected volatility (peer group)

 

113

%

 

65

%

 

50

%

Expected life (in years)

 

0.92

 

 

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 balancesbalance under the revolving line of credit agreement of $800,000 and $600,000 as of SeptemberJune 30, 20202021 and December 31, 2019, respectively2020 were reflected in revolving line of credit, related party on the Consolidated Balance Sheet.condensed consolidated balance sheets. With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of SeptemberJune 30, 20202021, 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.related party information.  

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 wasis 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.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 Sheets.condensed consolidated balance sheets at June 30, 2021 and December 31, 2020.

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 June 30, 2021, we 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’s common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s 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. There is no floor on the 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 year, 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 the Company’s common stock 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.

The conversion feature of the convertible promissory notes was separately accounted for at fair value as a derivative liability 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 liability recorded in earnings. The following table sets forth the fair value of the conversion feature liability as of June 30, 2021 (in thousands):

 

 

Six Months Ended

 

Convertible promissory notes

 

June 30, 2021

 

Balance, beginning of period

 

$

 

Fair value at issuance date

 

 

5,555

 

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

 

 

(179

)

Balance, end of period

 

$

5,376

 

The fair value and any change in fair value of conversion feature liability are determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.


The fair value as of June 30, 2021 and at issuance date was based upon following assumptions:

 

 

 

 

 

 

 

 

 

Convertible promissory notes

 

June 30, 2021

 

 

Issuance Date

 

Stock price

 

$

1.42

 

 

$

1.41

 

Conversion price

 

$

1.48

 

 

$

1.48

 

Selected yield

 

 

19.69

%

 

 

20.29

%

Expected volatility

 

 

50

%

 

 

50

%

Time until maturity (in years)

 

 

2.66

 

 

 

3.00

 

Dividend yield

 

 

 

 

Risk-free rate

 

 

0.39

%

 

 

0.30

%

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, the 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 SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):

 

 

Nine Months Ended

 

 

Year Ended

 

Warrant Derivative Liabilities—GPB

 

September 30, 2020

 

 

December 31, 2019

 

Balance, beginning of period

 

$

38

 

 

$

1,399

 

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

 

 

18

 

 

 

(1,361

)

Balance, end of period

 

$

56

 

 

$

38

 


 

 

Six Months Ended

 

 

Year Ended

 

Warrant Liability—GPB

 

June 30, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

83

 

 

$

38

 

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

 

 

16

 

 

 

45

 

Balance, end of period

 

$

99

 

 

$

83

 

 

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

The fair value as of the datesJune 30, 2021, and December 31, 2020 set forth in the table above was based on upon following assumptions:

 

 

September 30, 2020

 

 

December 31, 2019

 

 

June 30, 2021

 

 

December 31, 2020

 

Stock price

 

$

0.97

 

 

$

1.97

 

Adjusted exercise price

 

$

10.28

 

 

$

10.28

 

Common stock fair value

 

$

1.42

 

 

$

1.23

 

Risk‑free interest rate

 

 

0.15

%

 

 

1.64

%

 

 

0.25

%

 

 

0.15

%

Expected volatility (peer group)

 

 

114.00

%

 

 

60.00

%

Expected life (in years)

 

 

2.75

 

 

 

3.50

 

Volatility

 

 

130.00

%

 

 

120.00

%

Time until expiration (years)

 

 

2.00

 

 

 

2.50

 

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

 

 

 

 

Number outstanding

 

 

252,802

 

 

 

252,802

 

 

 

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 Debenturesdebentures and warrants were used to fund EMI’s original $13.2 million loan to EJ Holdings, Inc. in October 2018 reflected on the Company’s consolidated balance sheets.

As described in Note 7 above, theThe Debentures were amended and restated in their entirety in conjunction with the Merger. The commonCommon 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 inon February 21, 2020, hethe 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 restatedrestate 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. See Note 7 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 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. The warrants also were amended and restated in their entirety in connection with the Merger.

On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of the Amended and Restated 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.above.  In March 2021, the conversion price of the Debentures, and the


The exercise price of the theseamended and the otherrestated warrants related to the Debentures was reduced to $2.00 per share in February 2020 and to $1.54 per share in connection with our issuance of shares of common stockMarch 2021 pursuant to Kainos Medicine, Inc. See Note 12 for information regarding our recent prepaymentthe anti-dilution adjustment provisions of the Debentures.    

warrants. 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 atwere valued using Black-Scholes-Merton model. The fair value as a liability. The liability is remeasured at fair value on a recurring basis using Level 3 inputof agreement date and any changes in fair value 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.anti-dilution adjustment dates was based upon following assumptions:

 

 

March 2, 2021 (Anti-dilution adjustment date)

 

 

February 28, 2020 (Anti-dilution adjustment date)

 

 

February 21, 2020 (Amendment date)

 

Exercise price

 

$

1.54

 

 

$

2.00

 

 

$

3.00

 

Common stock fair value

 

$

1.52

 

 

$

1.60

 

 

$

1.89

 

Volatility

 

101.00%-120.00%

 

 

 

93.00

%

 

 

92.00

%

Risk-free rate

 

0.21%-0.58%

 

 

 

0.86

%

 

 

1.29

%

Expected life (in years)

 

2.64-4.56

 

 

 

3.54

 

 

 

3.56

 

Purchase agreement with Holder of a Convertible Promissory NotesNote - On June 15, 2020, the holder of a convertible promissory note of EMI 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 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. Under ASC 815-40, the Company concluded that the warrants issued to the holder of the notenotes 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 fair value and the change in fair value of the warrants as of SeptemberJune 30, 2021 and December 31, 2020 (in thousands):

 

 

 

 

Warrants Derivative Liabilities - convertible promissory note

 

September 30, 2020

 

Warrant liability—Wealth Threshold

 

June 30, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

 

 

$

988

 

 

$

 

Fair value at issuance date

 

 

1,425

 

 

 

 

 

 

1,425

 

Change in fair value included in the statement of comprehensive loss

 

 

(687

)

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

 

 

175

 

 

 

(437

)

Balance, end of period

 

$

738

 

 

$

1,163

 

 

$

988

 

The fair value of the warrant derivative liabilitiesliability was determined using the Black-Scholes-Merton option pricingBlack-Scholes Merton model and was based on upon following assumptions:

September 30, 2020

 

 

June 15, 2020 (modification date)

 

 

June 30, 2021

 

 

December 31, 2020

 

Exercise price

$

2.05

 

 

$

2.05

 

 

$

2.05

 

 

$

2.05

 

Stock price

$

0.97

 

 

$

1.68

 

 

$

1.42

 

 

$

1.68

 

Risk‑free interest rate

 

0.26

%

 

 

0.33

%

 

 

0.66

%

 

 

0.31

%

Expected volatility (peer group)

 

99.00

%

 

 

94.00

%

 

 

106.00

%

 

 

101.00

%

Expected life (in years)

 

4.71

 

 

 

5.00

 

 

 

3.96

 

 

 

4.46

 

Expected dividend yield

 

0.00

%

 

 

0.00

%

 

 

 

 

Warrant shares

 

1,250,000

 

 

 

1,250,000

 

Number outstanding

 

 

1,250,000

 

 

 

1,250,000

 

A summary of outstanding warrants as of SeptemberJune 30, 20202021 and December 31, 20192020 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

June 30, 2021

 

 

December 31, 2020

 

Warrants outstanding, beginning of period

 

 

4,931,099

 

 

 

3,436,431

 

 

 

8,439,480

 

 

 

4,931,099

 

Assumed as part of Merger

 

 

 

 

 

1,044,939

 

Granted

 

 

3,550,000

 

 

 

500,729

 

 

 

0

 

 

 

3,625,000

 

Exercised

 

 

 

 

 

(51,000

)

 

 

 

 

 

 

Cancelled, forfeited or expired

 

 

(115,953

)

 

 

 

 

 

(203,463

)

 

 

(116,619

)

Warrants outstanding, end of period

 

 

8,365,146

 

 

 

4,931,099

 

 

 

8,236,017

 

 

 

8,439,480

 

 


A summary of outstanding warrants by year issued and exercise price as of SeptemberJune 30, 20202021 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

 

 

 

1.91

 

 

$

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

 

 

 

3.66

 

 

$

6.12

 

 

 

32,391

 

 

$

6.12

 

 

$

12.00

 

 

 

76,575

 

 

 

2.98

 

 

$

12.00

 

 

 

76,575

 

 

$

12.00

 

 

$

14.04

 

 

 

174,999

 

 

 

2.49

 

 

$

14.04

 

 

 

174,999

 

 

$

14.04

 

 

$

31.50

 

 

 

737,975

 

 

 

1.82

 

 

$

31.50

 

 

 

737,975

 

 

$

31.50

 

 

$

36.24

 

 

 

22,333

 

 

 

1.82

 

 

$

36.24

 

 

 

22,333

 

 

$

36.24

 

 

$

60.00

 

 

 

666

 

 

 

0.25

 

 

$

60.00

 

 

 

666

 

 

$

60.00

 

 

$

2.00

 

 

 

256,200

 

 

 

3.08

 

 

$

2.00

 

 

 

256,200

 

 

$

2.00

 

 

$

7.68

 

 

 

75,000

 

 

 

3.80

 

 

$

7.68

 

 

 

75,000

 

 

$

7.68

 

 

2019 Total

 

 

 

1,376,139

 

 

 

 

 

 

 

 

 

 

 

1,376,139

 

 

 

 

 

At September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2.05

 

 

 

1,250,000

 

 

 

4.71

 

 

$

2.05

 

 

 

 

 

$

 

 

$

2.00

 

 

 

2,300,000

 

 

 

4.95

 

 

$

2.00

 

 

 

2,300,000

 

 

 

2

 

 

Total

 

 

 

8,365,146

 

 

 

 

 

 

 

 

 

 

 

7,115,146

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.54-$36.24

 

 

 

 

 

4,611,017

 

 

 

1.64

 

 

$

9.14

 

 

 

4,611,017

 

 

$

9.14

 

Prior to Jan 1, 2020 Total

 

 

 

 

 

4,611,017

 

 

 

 

 

 

 

 

 

 

 

4,611,017

 

 

 

 

 

At December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2.05

 

 

 

 

 

1,250,000

 

 

 

3.96

 

 

$

2.05

 

 

 

 

 

 

 

 

$

1.54

 

 

 

 

 

2,375,000

 

 

 

4.20

 

 

$

1.54

 

 

 

2,375,000

 

 

$

1.54

 

 

2020 Total

 

 

 

 

 

3,625,000

 

 

 

 

 

 

 

 

 

 

 

2,375,000

 

 

 

 

 

At June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

 

Grand Total

 

 

 

 

 

8,236,017

 

 

 

 

 

 

Grand Total

 

 

 

6,986,017

 

 

 

 

 

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 the optionee’s all based on 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. The 2011 Stock Incentive Plan expired in May 2021, after which no further awards may be made under the Plan.

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.Merger and the Company intends not to make any further awards under thereunder.


Stock options—During the ninesix months ended SeptemberJune 30, 2020,2021, the Company granted options to purchase 90,000 shares of common stock.did 0t issue any stock options. During the year ended December 31, 2019,2020, the Company granted stock options to purchase 50,00090,000 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‑thirdof the shares on the first anniversary of the grant date, and as to the remaining two‑thirds of the 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.

 

6/29/2020

 

 

6/19/2019

 

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 SeptemberJune 30, 20202021 and December 31, 20192020 is presented below:below.

 

September 30, 2020

 

 

December 31, 2019

 

 

June 30, 2021

 

 

December 31, 2020

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

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

 

 

 

7,110,025

 

 

$

4.63

 

 

 

7,245,350

 

 

$

4.68

 

Granted or deemed granted

 

 

90,000

 

 

$

2.05

 

 

 

636,683

 

(a)

$

10.10

 

 

 

 

 

 

 

 

 

90,000

 

 

$

2.05

 

Exercised

 

 

 

 

$

 

 

 

(167

)

 

$

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled, forfeited and expired

 

 

(62,087

)

 

$

6.06

 

 

 

(33,366

)

 

$

11.29

 

 

 

(1,125,753

)

 

$

3.82

 

 

 

(225,325

)

 

$

5.08

 

Options outstanding, end of period

 

 

7,273,263

 

 

$

4.63

 

 

 

7,245,350

 

 

$

4.68

 

 

 

5,984,272

 

 

$

4.78

 

 

 

7,110,025

 

 

$

4.63

 

Options exercisable, end of period

 

 

7,114,657

 

 

$

4.64

 

 

 

7,001,680

 

 

$

4.47

 

 

 

5,915,180

 

 

$

4.05

 

 

 

6,986,268

 

 

$

4.47

 

Options available for future grant

 

 

2,139,237

 

 

 

 

 

 

 

2,167,150

 

 

 

 

 

 

 

 

(a)

 

 

 

 

 

2,302,475

 

 

 

 

 

(a)

Upon the Merger, the exercise prices of outstanding EMI(a)

Option plans were expired and therefore 0 options and number of shares of the Company common stock underlying the options were adjusted based upon the exchange ratio in the Merger.available for future grants.


During the three months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, the Company recognized $0.1$0.3 million and $3.5$0.2 million respectively, of share-based compensation expense.expense, respectively. During each of the ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, the Company recognized approximately $0.5 million and $4.6$0.4 million respectively, of share-based compensation expense. During the three months and nine months ended September 30, 2019, $1.9 million of one-time adjustments resulting from the Merger is included in the share-based compensation expense.expense, respectively. As of SeptemberJune 30, 2020,2021, there was approximately $0.7 million$119,000 of total unrecognized compensation expense related to unvested share-based compensation. That expensecompensation which is expected to be recognized over the weighted-average remaining vesting period of 1.00.6 year.

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 from time to time 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 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 no0 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.

Collaborative Research and Development Agreement with Kainos Medicine, IncOn February 26, 2021, the Company entered into an agreement with Kainos Medicine, Inc. (“Kainos”) to lead the preclinical development of Kainos’ patented IRAK4 inhibitor (“KM10544”) as an anti-cancer drug and further advance the research and development activity currently underway at Kainos. With this agreement in place, Kainos plans to complete the study of the therapeutic mechanism of action ("MOA") of KM10544 in solid cancers, blood cancers and lymphoma. The Company will be responsible for the investigation and proof of target disease selection, efficacy and safety. The companies also entered into a letter of intent regarding possible future joint development of small molecule therapeutics and other pharmaceutical assets.

Pursuant to the agreement, the Company paid $500,000 in cash and issued 324,675 of the Company’s shares equivalent to $500,000 in consideration for entering into the agreement, which were recorded as research and development expenses in the condensed consolidated statements of operations and comprehensive income (loss). The Company, in turn, has been granted rights of first negotiation and first refusal for an exclusive license regarding the development and commercialization of products based on the intellectual property resulting from the agreement.


NOTE 9 — INCOME TAX

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

For the three months and ninesix months ended SeptemberJune 30, 2021, the Company recorded income tax benefit of $192,000 and $174,000 million respectively. For three and six month ended June 30, 2020, the Company recorded a provision for income tax for $0.3benefit of $0.5 million and $80,000, respectively. For the three months and nine months ended September 30, 2019, the Company recorded a provision for income tax of approximately $56,000 and $159,000, respectively. The provisions for income taxes for the three and nine months ended September 30, 2020 and 2019 were primarily related to state tax on the Company’s pre-tax book income.$0.2 million. The Company did not0t 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 assetsasset and there was 0 unrecognized tax benefit as of SeptemberJune 30, 2020 or 2019.2021 and 2020.  

NOTE 10 — LEASES

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

The Company leasedleases 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $78,543$80,886 per month, which lease will expire on September 30, 2026. The Company also leasedleases an additional 1,850 square feet office space in New York, New York, at a base rent of $8,479,$8,691, which leaseslease will expire on January 31, 2023.

In addition, the Company leasedleases 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $3,000, which the lease was expired on September 30, 2020. Upon the expiration of the lease, the lease was renewed and the new lease will expire on September 30, 2022.2022 and 1,163 square feet of office space in Dubai,m United Arb Emirates, which lease will expire on June 19, 2023.

The rent expense during the three months ended SeptemberJune 30, 20202021 and 20192020 amounted to approximately $286,000$288,000 and $280,000,$298,000, respectively, and during the ninesix months ended SeptemberJune 30, 2021 and June 30, 2020 amounted to approximately $589,000 and 2019 amounted approximately $ 895,000and $705,000,$609,000, respectively.


Future minimum lease payments under the lease agreements were as follows as of SeptemberJune 30, 20202021 (in thousands):

 

Amount

 

 

Amount

 

2020 (three months)

 

$

282

 

2021

 

 

1,142

 

2021 (six months)

 

$

577

 

2022

 

 

1,165

 

 

 

1,172

 

2023

 

 

1,050

 

 

 

1,058

 

2024 and thereafter

 

 

2,982

 

2024

 

 

1,063

 

2025 and thereafter

 

 

1,928

 

Total lease payments

 

 

6,621

 

 

 

5,798

 

Less: Interest

 

 

1,933

 

 

 

1,470

 

Present value of lease liabilities

 

$

4,688

 

 

$

4,328

 

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 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 SeptemberJune 30, 2020,2021, the Company had an operating lease right-of-use asset of $4.1$3.8 million and lease liability of $ 4.7$4.3 million in the balance sheet. The weighted-averageweighted average remaining term of the Company’s leases as of SeptemberJune 30, 20202021 was 5.75.0 years and the weighted-average discount rate was 12.75 %.11.5%.

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 original API supply agreementSupply Agreement (the “revised“Revised API agreement”Agreement”). The revisedRevised API agreementAgreement 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 revisedRevised API agreement,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 revisedRevised API agreement.Agreement.

On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the revisedRevised API agreementAgreement from $50 per kilogram of PGLG to $100 per kilogram from July 1, 2019 through SeptemberJune 30, 2020, with the price payable after SeptemberJune 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.


NOTE 12 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related personsparties outstanding as of September 30, 2020 andon or at any interest paidtime during the ninesix months ended SeptemberJune 30, 20202021 (in thousands):

Class

Lender

 

Interest

Rate

 

 

Date of

Loan

 

Term of Loan

 

Principal Amount Outstanding at September 30, 2020

 

 

 

Amount of

Interest

Paid

 

 

Lender

 

Interest

Rate

 

 

Date of

Loan

 

Term of Loan

 

Principal Amount Outstanding at June 30, 2021

 

 

Highest

Principal

Outstanding

 

 

Amount of

Principal

Repaid

 

 

Amount of

Interest

Paid

 

 

Current, Promissory note payable to related parties:

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

4/29/2016

 

Due on Demand

 

$

20

 

 

 

$

 

 

Willis Lee (2)

 

12%

 

 

10/29/2020

 

Due on Demand

 

 

100

 

 

 

100

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

11%

 

 

2/10/2018

 

Due on Demand

 

 

 

 

 

 

35

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

100

 

 

 

100

 

 

 

 

 

 

 

 

Revolving line of credit agreement

Revolving line of credit agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2019

 

Due on Demand

 

 

14

 

 

 

 

 

 

Yutaka Niihara (2)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

 

600

 

 

 

800

 

 

 

 

 

 

47

 

 

Hope International Hospice, Inc.

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

600

 

 

 

800

 

 

 

 

 

 

47

 

 

Hope International Homecare, Inc.

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

700

 

 

$

900

 

 

$

 

 

$

47

 

 

Soomi Niihara

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

395

 

 

 

 

 

 

Willis Lee

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

816

 

 

 

 

35

 

 

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (2)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

 

800

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

800

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,616

 

 

 

$

62

 

 

 

The following table sets forth information relating to our loans from related personsparties outstanding at any time during the year ended December 31, 2019:2020:

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

 

 

Lender

 

Interest

Rate

 

 

Date of

Loan

 

Term of Loan

 

Principal Amount Outstanding at December 31, 2020

 

 

Highest

Principal

Outstanding

 

 

Amount of

Principal

Repaid

 

 

Amount of

Interest

Paid

 

 

Current, Promissory note payable to related parties:

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

4/29/2016

 

Due on Demand

 

$

20

 

 

$

20

 

 

$

 

 

$

 

 

 

 

 

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)

 

11%

 

 

2/10/2018

 

Due on Demand

 

 

 

 

 

159

 

 

 

159

 

 

 

35

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2017

 

Due on Demand

 

 

 

 

 

12

 

 

 

 

 

 

2

 

 

 

 

 

Lan T. Tran (2)

 

10%

 

 

2/9/2019

 

Due on Demand

 

 

14

 

 

 

14

 

 

 

 

 

 

 

 

Yutaka Niihara (2)(3)

 

10%

 

 

9/14/2017

 

Due on Demand

 

 

 

 

 

904

 

 

 

27

 

 

 

2

 

 

 

 

 

Hope Int'l Hospice (1)

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

 

 

 

194

 

 

 

194

 

 

 

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

 

 

Hope Int'l Homecare (1)

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

 

 

 

189

 

 

 

189

 

 

 

1

 

 

Yutaka & Soomi Niihara (2)(3)

 

10%

 

 

11/16/2015

 

2 years

 

 

 

 

 

200

 

 

 

200

 

 

 

73

 

 

$

4.50

 

 

Soomi Niihara (1)

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

 

 

 

98

 

 

 

98

 

 

 

4

 

 

Wei Peu Zen (3)

 

10%

 

 

11/6/2017

 

2 years

 

 

 

 

 

5,000

 

 

 

5,000

 

 

 

597

 

 

$

10.00

 

 

Soomi Niihara (1)

 

12%

 

 

10/28/2020

 

Due on Demand

 

 

 

 

 

395

 

 

 

395

 

 

 

12

 

 

Profit Preview International Group, Ltd. (4)

 

10%

 

 

2/1/2018

 

2 years

 

 

 

 

 

4,037

 

 

 

4,037

 

 

 

385

 

 

$

10.00

 

 

Willis Lee (2)

 

12%

 

 

9/1/2020

 

Due on Demand

 

 

 

 

 

685

 

 

 

685

 

 

 

1

 

 

Profit Preview International Group, Ltd. (4)

 

10%

 

 

3/21/2018

 

2 years

 

 

 

 

 

5,363

 

 

 

5,363

 

 

 

442

 

 

$

10.00

 

 

Willis Lee (2)

 

12%

 

 

10/29/2020

 

Due on Demand

 

 

100

 

 

 

100

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

 

 

 

14,800

 

 

 

14,800

 

 

 

1,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

134

 

 

 

1,854

 

 

 

1,820

 

 

 

55

 

 

Revolving line of credit

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (2)

 

5%

 

 

12/27/2019

 

Due on Demand

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (2)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

 

800

 

 

 

800

 

 

 

200

 

 

 

37

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

800

 

 

 

800

 

 

 

200

 

 

 

37

 

 

 

 

 

 

 

 

 

 

Total

 

$

793

 

 

$

16,759

 

 

$

15,077

 

 

$

1,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

934

 

 

$

2,654

 

 

$

2,020

 

 

$

92

 

 

 

(1)

Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also a director and his wife, Soomi Niihara, are the co-owners and directorsChief Executive Officer of Hope International Hospice, Inc., of which Dr. Niihara is the Chief Executive Officer.

(2)

Officer.

(3)

Director.

(4)

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


 

SSee Note 7ee Notes 6 and 11 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara.

See Notes 6, 11 and 13 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%8.4% of the common stock outstanding as of SeptemberJune 30, 2020.2021. As of June 30, 2020, the Company held a Telcon convertible bond in the principal amount of approximately $27.9 million as discussed in Note 5.

NOTE 13 — SUBSEQUENT EVENTS

On September 28, 2020,The Company evaluated events subsequent to the Company entered into a convertible bond purchase agreement with Telcon pursuant to which it purchasedon October 16, 2020 at face value a convertible bond of Telconbalance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure 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 shares owned by the Company. 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 API agreement with Telcon.

The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1% per annum 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.

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 in full the outstanding Amended and Restated 10% Senior Secured Convertible Debentures in March 2021.

Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of our common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of the Company 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 and after February 28, 2022 if our common stock 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 1st anniversary and on or before the 2nd 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.financial statements.


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.


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., 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-K10-K/A for the year ended December 31, 20192020 filed with the Securities and Exchange Commission (“SEC”) on January 25,August 10, 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(“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 SeptemberJune 30, 2020,2021, our accumulated deficit was $224.9$233.7 million and we had cash and cash equivalents of $4.9$3.8 million. We expect net revenues to increase as we expand our commercialization of Endari®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 arrangements.

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.”


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 enterhave 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 20192020 and 20202021 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.

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 ExpenseExpenses

General and administrative expenses consist principally of salaries and related employee costs, including share-based compensation for our directors, and executive officers of our employees, including our in-house commercialization team.and employees. 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 expenseexpenses 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 and at the lower of cost or net realizable value. Substantially all raw materials purchased during the threesix months ended SeptemberJune 30, 20202021 and 20192020 were supplied by one vendor.

Results of Operations:

Three months ended SeptemberJune 30, 20202021 and 20192020

Revenues,

              Net revenues, Net. Net revenues decreasedincreased by $0.2$2.1 million, or 3%49%, to $5.6$6.5 million for the three months ended SeptemberJune 30, 20202021, compared to $5.8$4.4 million for the three months ended SeptemberJune 30, 2019. We believe that the decrease2021. The increase in net revenues was primarily attributable to continuingbulk order purchases and recovery from the temporary disruptions in sales caused byrevenues related the COVID-19 pandemic.pandemic during 2020.

Cost of Goods Sold. Cost of goods sold increased by $0.2 million or 95%, toremained consistent at $0.4 million for the three months ended SeptemberJune 30, 20202021 compared to $0.3the three months ended June 30, 2020.

Research and Development Expenses. Research and development expenses increased by $0.2 million, or 28%, to $0.8 million for the three months ended SeptemberJune 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 materials purchased during the three months ended September 30, 2020 and 2019 were from one vendor.


Research and Development Expenses. Research and development expenses decreased by $0.1 million, or 13%,2021 compared to $0.6 million for the three months ended SeptemberJune 30, 2020 compared to $0.7 million for the three months ended September 30, 2019. This decrease2021. The increase in research and development expenses was primarily due to higher consulting expenses relateda pharmacokinetic characteristic and safety study for Endari® in the European Medicines Agency (“EMA”) marketing authorization application incurred during the three months ended September 30, 2019.US and clinical study in Europe. We expect our research and development costs to increase in the remainder of 20202021 as our Pilot/Phase 1the study of PGLG in diverticulosis progresses.

Selling Expenses. Selling expenses decreasedincreased by $0.5$0.3 million, or 26%28%, to $1.3$1.5 million for the three months ended SeptemberJune 30, 20202021, compared to $1.8$1.1 million for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease in selling expenses was primarily due to a decrease of $0.9 million in contract sales force fees and $0.2 million in sales and marketing activities for Endari® partially offset by an increase of $0.7 million in in-house sales team compensation as we have relied onthe headcount of our in-house commercial team for sales and marketing of Endari® in the U.S. since January 2020.team.

General and Administrative Expenses. General and administrative expenses decreased by $3.9$0.4 million, or 55%,10% to $3.2$3.4 million for the three months ended SeptemberJune 30, 20202021 compared to $7.1the three months ended June 30, 2020. The decrease in general and administrative expenses was primarily due to decreases of $0.2 million in professional fees and $0.2 million of insurance expenses.


Other Income (Expense). Total other income increased by $10.3 million, or 122%, to $1.8 million for the three months ended SeptemberJune 30, 2019. The decrease was primarily due to decreases of $2.4 million in share-based compensation, $1.3 million in professional fees, and $0.4 million in travel expenses.

Other Income (Expense). Total other income increased by $20.2 million, or 141%, to $5.8 million of total other income for the three months ended September 30, 20202021, compared to $14.3$8.4 million of total other expense for the three months ended SeptemberJune 30, 2019.2020. The increase in other income was primarily due to an increase of $11.7$2.5 million in thechange in fair value of embedded conversion option and decreases of $5.6 million in net gain (loss)loss on investment in marketable securities, $1.4 million in loss on debt extinguishment and a decrease of $7.1$0.7 million in interest expense.

Net Income (Loss). Net income for the three months ended SeptemberJune 30, 20202021 increased by $24.0$12.0 million, or 130%126%, to a net income of $5.6$2.5 million for the three months ended SeptemberJune 30, 2020 compared to a2021 from net loss of $18.4$9.5 million for the three months ended SeptemberJune 30, 2019.2020. The increase inof net income was primarily thea result of decreases of $10.3 million in other expense and an increase of $20.2$2.0 million in total other income and a decrease of $3.9 million in general and administrative expensesfrom operations as discussed above.

NineSix months ended SeptemberJune 30, 20202021 and 20192020

Revenues,Net revenues, Net. Net revenues increased by $1.0$0.5 million, or 6%5%, to $ 16.9$11.8 million for the ninesix months ended SeptemberJune 30, 2020 from $ 16.02021 compared to $11.3 million for the ninesix months ended SeptemberJune 30, 2019.The2020. The increase in net revenues was primarily attributable to bulk order purchases and recovery from 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, partially offset by temporary disruptions in revenues related the on-going sales challenges caused by the continuing COVID-19 pandemic.pandemic during 2020.

Cost of Goods Sold. Cost of goods sold increased by $0.6 million, or 83%, to $1.4remained consistent at $0.9 million for the ninesix months ended SeptemberJune 30, 2020 from $0.7 million for2021 compared to the ninesix months ended SeptemberJune 30, 2019. The increase was primarily attributable to the establishment of a reserve for inventory with a shelf- life of less than two years.2020.

Research and Development Expenses. Research and development expenses remained consistent at $1.8increased by $1.4 million, or 112%, to $2.6 million for the ninesix months ended SeptemberJune 30, 20202021 compared to $1.2 million for the ninesix months ended SeptemberJune 30, 2019.2020. The increase was primarily due to $0.5 million in cash and $0.5 million in shares of the Company’s stock issued under the agreement with Kainos Medicine, Inc. (“Kainos”) to lead the clinical development of Kainos’ patented IRAK4 inhibitor and an increase of $0.5 million relates to a pharmacokinetic characteristic and safety study for Endari® and clinical study in Europe. We expect our research and development costs to increase in the remainder of 20202021 as our Pilot/Phase 1 study of PGLG in diverticulosis progresses.studies progress.

Selling Expenses. Selling expenses decreasedincreased by $1.6$0.5 million, or 31%24%, to $3.5$2.7 million for the ninesix months ended SeptemberJune 30, 20202021 compared to $5.1$2.2 million for the ninesix months ended September 2019.June 30, 2020. The decreaseincrease in selling expenses was primarily due to a decrease of $3.2 million in contract sales force fees for Endari® partially offset by an increase of $2.0 million inthe headcount of in-house sales team compensation as we have relied on our in-house commercial team for sales and marketing of Endari® in the U.S. since January 2020.team.

General and Administrative Expenses. General and administrative expenses decreased slightly by $2.9$0.6 million, or 22%8%, to $10.5$6.8 million for ninethe six months ended SeptemberJune 30, 20202021 compared to $13.5$7.4 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease of general and administrative expenses was primarily due to decreases of $3.0 million in share-based compensation and $0.7 million in travel expenses partially offset by an increase of $0.4 million in insurance expenses.expenses and $0.2 million of professional fees.

Other Income and Expense(Expense). Total other incomeexpense increased by $50.1$1.2 million, or 104%32%, to $2.1$5.0 million for the ninesix months ended SeptemberJune 30, 20202021, compared to $48.0$3.8 million in totalof other expense for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in other expenses was primarily due to an increasea decrease of $29.9$1.2 million in the net gain on investment in marketable securities and an increase of $1.2 million in loss in foreign exchange loss partially offset by a decrease of $20.4$1.4 million in interest expenses partially offset by an increase of $1.0 million in loss on debt extinguishment.expenses.

Net Income (Loss). Net incomeloss for the six months ended June 30, 2021 increased by $55.0$2.0 million, or 103%,50% to $1.6$5.9 million for the ninesix months ended SeptemberJune 30, 2020 compared to2021 from a net loss of $53.4$4.0 million for the ninesix months ended SeptemberJune 30, 2019.2020. The increase was


primarily a result of a $50.1increases of $1.2 million increase in other income, a $1.0expense and $0.7 million increase in net revenues and a $4.5 million decrease in operating expensesloss from operations 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$1.7 million as of December 31, 2020,June 30, 2021, and the remaining net proceeds from the recent sale of convertible promissory notes described below,discussed in Note 7, 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.all

OnOn 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.  In March 2021, we completed our first transaction under the purchase and sale agreement.


Cash flows for the ninesix months ended SeptemberJune 30, 20202021 and 2019June 30, 2020

Net cash from operating activities

Net cash used in operating activities increaseddecreased by $0.2$2.0 million, or 5%119%, to $4.4net cash used in operating activities of $3.8 million for the ninesix months ended SeptemberJune 30, 2020 compared to the $4.12021 from net cash used in operating activities of $1.7 million for the ninesix months ended SeptemberJune 30, 2019.2020. This increase of cash used in operating activities was primarily due to an increasea decrease of $5.2$2.0 million in working capital offset by a decrease of $4.8 million in loss from operations.capital.

Net cash from investing activities

Net cash used in investing activities decreased by $5.5 million, or 355%, to $3.9 million for the six months ended June 30, 2021 from net cash provided by investing activities increased by $34.8 million to $33.3of $1.6 million for the ninesix months ended SeptemberJune 30, 2020, compared to $1.5 million of net cash used in investing activities for the nine months ended September 30, 2019.2020. This changeincrease was primarily due to an increasea $4.0 million loan to equity method investee and a $2.1 million of $35.3 million inproceeds from sales of marketable securities, partially offset by $2.2 million of loans made to our equity method investee.Telcon stock received during 2020.

Net cash from financing activities

Net cash provided by (used in) financing activities decreasedincreased by $3.1$7.5 million, or 103%1334%, to $0.1net cash provided by financing activities of $6.9 million offor the six months ended June 30, 2021 from net cash used in financing activities of $0.6 million for the ninesix months ended SeptemberJune 30, 2020 compared to a positive $3.02020. This increase was the result of $14.5 million of net cash provided by financing activities for the nine months ended September 30, 2019. This change was primarily attributable to a decrease of $6.1 million of thein proceeds from issuance of common stock,the convertible promissory notes payable issued partially offset by a decrease of $1.4$5.7 million increase in repaymentspayments of convertible notes during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.notes.

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 Amended Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the ninesix months ended SeptemberJune 30, 2020.2021.

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


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 SeptemberJune 30, 20202021 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 SeptemberJune 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 SeptemberJune 30, 2020,2021, 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.


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

During

On February 9, 2021, the third quarter of 2020, weCompany entered into a securities amendment agreement (the “Amendment”) with the holders of $9.2 million principal amount of outstanding Amended and Restated 10% Senior Secured Convertible Debentures (the “Debentures”).The Agreement amended in certain respects the securities purchase agreement amongwith an effective date of February 8, 2021 pursuant to which the company, EMICompany has agreed to sell and the holders of the Debentures originally entered into on September 8, 2018, as previously amended, and provided that the Debentures are to be amended in certain respects as set forth in the form of Allonge Amendment No. 1issue to the Debentures attached as Exhibit Apurchasers thereunder in a private placement pursuant to the Agreement (the “Allonge”). In connection with the Amendment and the Allonge, we issued to the holdersRule 4(a)(2) of the Debentures, pro rata based upon the relative principal amounts of their Debentures, five-year Common Stock Purchase Warrants to purchase up to 1,840,000 shares of Company common stock at an exercise price of $2.00 a share.

The issuance of the Warrants was made without registration under the Securities Act of 1933, as amended, (the “Act”), in reliance upon the exemptions from registration afforded by Section 4(2) of the Act and Regulation D thereunder a total of up to $17 million in principal amount of convertible promissory notes of the Company for transactions not involving a public offeringpurchase price equal to the principal amount thereof. As of June 30, 2021, we 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 10% Senior Secured Convertible Debentures as described in Note 7.

Commencing one year from the Warrants were issuedoriginal issue date, the convertible promissory notes will be convertible at the option of the holder into shares of our 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 limited number of accredited investors.stock split, reverse stock split or certain other events specified in the convertible promissory notes.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 


Item 6. Exhibits

(a)Exhibits

 

 

Incorporated by Reference

 

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/
Furnished

 

 

 

 

 

 

 

4.1

Form of July 31, 2020 Common Stock Purchase Warrants

10-K

001-35527

4.25

May 4, 2021

 

4.2

Form of September 22, 2020 Common Stock Purchase Warrants

8-K

001-35527

10.1

September 24, 2020

 

10.1

Form of Promissory note issued by the registrant to the persons indicated in Schedule A attached to the Form of Promissory Note

 

 

 

 

*

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)

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/
Furnished

10.1

Promissory Note dated April 24, 2021 issued by registrant to Eastwind, Ltd.

*

10.2

Promissory Note dated May 26, 2021 issued by registrant to Shigeru Matsuda

*

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.


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,September 1, 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

 

 

 

 

 

3429