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 |
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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 | ☐ |
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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
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Part I. Financial Information |
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Item 1. |
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| (e)Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II Other Information |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
| As of |
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| As of |
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| September 30, 2020 |
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| June 30, 2021 |
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| December 31, 2020 |
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| (Unaudited) |
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| December 31, 2019 |
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| (Unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 4,949 |
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| $ | 1,769 |
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| $ | 1,671 |
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| $ | 2,487 |
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Restricted cash |
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| 25,680 |
|
|
| — |
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Accounts receivable, net |
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| 1,726 |
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|
| 2,150 |
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|
| 3,359 |
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|
| 198 |
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Inventories, net |
|
| 7,422 |
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|
| 7,971 |
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|
| 6,543 |
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|
| 7,087 |
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Investment in marketable securities |
|
| — |
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| 27,929 |
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Prepaid expenses and other current assets |
|
| 1,117 |
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|
| 1,402 |
|
|
| 1,467 |
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|
| 1,485 |
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Total current assets |
|
| 40,894 |
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|
| 41,221 |
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|
| 13,040 |
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| 11,257 |
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Property and equipment, net |
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| 130 |
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|
| 151 |
|
|
| 99 |
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|
| 120 |
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Equity method investment |
|
| 14,484 |
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|
| 13,325 |
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|
| 17,383 |
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|
| 15,925 |
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Right of use assets |
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| 4,145 |
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| 4,474 |
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| 3,796 |
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| 4,072 |
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Deposits and other assets |
|
| 291 |
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| 285 |
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Investment in convertible bond |
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| 28,671 |
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| 27,866 |
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Other assets |
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| 290 |
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| 296 |
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Total assets |
| $ | 59,944 |
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| $ | 59,456 |
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| $ | 63,279 |
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| $ | 59,536 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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CURRENT LIABILITIES |
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Accounts payable and accrued expenses |
| $ | 7,675 |
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| $ | 11,498 |
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| $ | 6,301 |
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| $ | 7,460 |
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Operating lease liabilities, current portion |
|
| 1,100 |
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| 991 |
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|
| 689 |
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| 1,143 |
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Conversion feature derivative, notes payable |
|
| 5,376 |
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|
| — |
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Other current liabilities |
|
| 1,934 |
|
|
| 5,748 |
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| 2,894 |
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|
| 2,706 |
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Revolving line of credit to related parties, net |
|
| 800 |
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| 600 |
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Revolving line of credit from related party |
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| 600 |
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| 800 |
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Warrant derivative liabilities |
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| 794 |
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| 38 |
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| 1,262 |
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| 1,071 |
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Notes payable, current portion |
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| 4,452 |
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| 3,749 |
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| 3,291 |
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| 4,588 |
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Notes payable to related parties |
|
| 816 |
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| 193 |
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| 100 |
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| 134 |
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Convertible debentures, net of discount |
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| 6,209 |
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| 7,015 |
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| — |
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| 5,480 |
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Convertible note payable, net of discount |
|
| — |
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| 2,995 |
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Total current liabilities |
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| 23,780 |
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| 32,827 |
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| 20,513 |
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| 23,382 |
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Operating lease liabilities, less current portion |
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| 3,588 |
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| 3,932 |
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| 3,639 |
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| 3,470 |
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Other long-term liabilities |
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| 35,436 |
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| 33,750 |
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| 34,476 |
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| 34,470 |
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Notes payable, less current portion |
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| 355 |
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|
| — |
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| 1,500 |
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| 222 |
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Convertible note payable |
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| 3,150 |
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| — |
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Total long-term liabilities |
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| 42,529 |
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| 37,682 |
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Convertible notes payable |
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| 12,526 |
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| 3,150 |
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Total liabilities |
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| 66,309 |
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| 70,509 |
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| 72,654 |
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| 64,694 |
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STOCKHOLDERS’ DEFICIT |
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Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, NaN issued or outstanding |
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| — |
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| — |
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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 |
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| 49 |
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| 48 |
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Preferred stock, par value $0.001 per share, 15,000,000 shares authorized, NaN issued or outstanding |
|
| — |
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| — |
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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 |
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| 49 |
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Additional paid-in capital |
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| 218,484 |
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| 215,207 |
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| 219,924 |
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| 218,728 |
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Accumulated other comprehensive loss |
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| (86 | ) |
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| (79 | ) | ||||||||
Accumulated other comprehensive income |
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| 1,905 |
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| 1,144 |
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Accumulated deficit |
|
| (224,812 | ) |
|
| (226,229 | ) |
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| (231,253 | ) |
|
| (225,079 | ) |
Total stockholders’ deficit |
|
| (6,365 | ) |
|
| (11,053 | ) |
|
| (9,375 | ) |
|
| (5,158 | ) |
Total liabilities & stockholders’ deficit |
| $ | 59,944 |
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| $ | 59,456 |
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| $ | 63,279 |
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| $ | 59,536 |
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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, |
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| Six Months Ended June 30, |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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| 2021 |
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| 2020 |
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| 2021 |
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| 2020 |
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REVENUES, NET | $ | 5,601 |
|
| $ | 5,760 |
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| $ | 16,915 |
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| $ | 15,960 |
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| $ | 6,489 |
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| $ | 4,360 |
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| $ | 11,824 |
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| $ | 11,314 |
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COST OF GOODS SOLD |
| 484 |
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|
| 248 |
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| 1,408 |
|
|
| 771 |
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| 430 |
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|
| 446 |
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|
| 866 |
|
|
| 924 |
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GROSS PROFIT |
| 5,117 |
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| 5,512 |
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| 15,507 |
|
|
| 15,189 |
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| 6,059 |
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| 3,914 |
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| 10,958 |
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| 10,390 |
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OPERATING EXPENSES |
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Research and development |
| 629 |
|
|
| 725 |
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|
| 1,835 |
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| 1,778 |
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| 753 |
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|
| 589 |
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| 2,562 |
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|
| 1,206 |
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Selling |
| 1,324 |
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|
| 1,778 |
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|
| 3,527 |
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|
| 5,148 |
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|
| 1,453 |
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|
| 1,135 |
|
|
| 2,736 |
|
|
| 2,203 |
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General and administrative |
| 3,156 |
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|
| 7,056 |
|
|
| 10,538 |
|
|
| 13,475 |
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|
| 3,370 |
|
|
| 3,725 |
|
|
| 6,792 |
|
|
| 7,382 |
|
Total operating expenses |
| 5,109 |
|
|
| 9,559 |
|
|
| 15,900 |
|
|
| 20,401 |
|
|
| 5,576 |
|
|
| 5,449 |
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|
| 12,090 |
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|
| 10,791 |
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INCOME (LOSS) FROM OPERATIONS |
| 8 |
|
|
| (4,047 | ) |
|
| (393 | ) |
|
| (5,212 | ) |
|
| 483 |
|
|
| (1,535 | ) |
|
| (1,132 | ) |
|
| (401 | ) |
OTHER INCOME (EXPENSE) |
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Loss on debt extinguishment |
| — |
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|
| (438 | ) |
|
| (1,425 | ) |
|
| (438 | ) |
|
| — |
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|
| (1,425 | ) |
|
| (1,172 | ) |
|
| (1,425 | ) |
Change in fair value of warrant derivative liabilities |
| 745 |
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| 3,576 |
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|
| 669 |
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|
| 3,492 |
|
|
| 338 |
|
|
| (101 | ) |
|
| (191 | ) |
|
| (76 | ) |
Change in fair value of embedded conversion option |
| 45 |
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|
| 131 |
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|
| 51 |
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|
| 131 |
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Net gain (loss) on investment in marketable securities |
| 6,464 |
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|
| (5,248 | ) |
|
| 7,672 |
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| (22,242 | ) | ||||||||||||||||
Gain (loss) on equity method investment |
| (494 | ) |
|
| 36 |
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|
| (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 | ) |
|
| — |
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|
| 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 | ) |
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COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
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|
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|
|
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|
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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 |
|
|
|
|
|
|
| Option plans were expired and therefore 0 options |
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, LLC—On 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, Inc—On 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 |
(2) | Officer. |
|
|
|
|
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
Item 1. Legal Proceedings
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
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4.1 | 10-K | 001-35527 | 4.25 | May 4, 2021 |
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Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/ |
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 | * | ||||
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* | 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. | ||
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Dated: | By: |
| /s/ Yutaka Niihara |
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| Yutaka Niihara, M.D., M.P.H. |
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| /s/ Yasushi Nagasaki |
| Name: |
| Yasushi Nagasaki |
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| Interim Chief Financial Officer |
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