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 September 30, 2021March 31, 2022
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 NovemberMay 10, 2021.2022.
EMMAUS LIFE SCIENCES, INC.
For the Quarterly Period Ended September 30, 2021March 31, 2022
INDEX
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Part I. Financial Information |
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Item 1. | 1 | ||
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| 2 | ||
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| 3 | ||
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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 |
| |||||||||||||
|
| September 30, 2021 |
|
| December 31, 2020 |
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| As of |
| |||||||
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| (Unaudited) |
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|
| March 31, 2022 (Unaudited) |
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| December 31, 2021 |
| |||
ASSETS |
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CURRENT ASSETS |
|
|
|
|
|
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Cash and cash equivalents |
| $ | 2,321 |
|
| $ | 2,487 |
|
| $ | 813 |
|
| $ | 2,279 |
|
Accounts receivable, net |
|
| 2,663 |
|
|
| 198 |
|
|
| 938 |
|
|
| 1,040 |
|
Inventories, net |
|
| 6,252 |
|
|
| 7,087 |
|
|
| 3,453 |
|
|
| 4,392 |
|
Prepaid expenses and other current assets |
|
| 1,238 |
|
|
| 1,485 |
|
|
| 1,244 |
|
|
| 1,380 |
|
Total current assets |
|
| 12,474 |
|
|
| 11,257 |
|
|
| 6,448 |
|
|
| 9,091 |
|
Property and equipment, net |
|
| 97 |
|
|
| 120 |
|
|
| 138 |
|
|
| 147 |
|
Equity method investment |
|
| 17,835 |
|
|
| 15,925 |
|
|
| 17,771 |
|
|
| 17,616 |
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Right of use assets |
|
| 3,642 |
|
|
| 4,072 |
|
|
| 3,318 |
|
|
| 3,485 |
|
Investment in convertible bond |
|
| 25,716 |
|
|
| 27,866 |
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|
| 23,521 |
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|
| 26,100 |
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Other assets |
|
| 293 |
|
|
| 296 |
|
|
| 297 |
|
|
| 295 |
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Total assets |
| $ | 60,057 |
|
| $ | 59,536 |
|
| $ | 51,493 |
|
| $ | 56,734 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
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CURRENT LIABILITIES |
|
|
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Accounts payable and accrued expenses |
| $ | 6,973 |
|
| $ | 7,460 |
|
| $ | 9,718 |
|
| $ | 9,189 |
|
Operating lease liabilities, current portion |
|
| 718 |
|
|
| 1,143 |
|
|
| 738 |
|
|
| 740 |
|
Conversion feature derivative, notes payable |
|
| 6,733 |
|
|
| — |
|
|
| 4,427 |
|
|
| 7,507 |
|
Other current liabilities |
|
| 4,940 |
|
|
| 2,706 |
|
|
| 2,822 |
|
|
| 4,404 |
|
Revolving line of credit from related party |
|
| 600 |
|
|
| 800 |
|
|
| 400 |
|
|
| 400 |
|
Warrant derivative liabilities |
|
| 1,393 |
|
|
| 1,071 |
|
|
| 755 |
|
|
| 1,503 |
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Notes payable, current portion |
|
| 3,269 |
|
|
| 4,588 |
|
|
| 2,286 |
|
|
| 2,399 |
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Notes payable to related parties |
|
| 400 |
|
|
| 134 |
|
|
| 2,836 |
|
|
| 800 |
|
Convertible debentures, net of discount |
|
| — |
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|
| 5,480 |
| ||||||||
Convertible notes payable, net of discount |
|
| 10,569 |
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|
| 10,158 |
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Total current liabilities |
|
| 25,026 |
|
|
| 23,382 |
|
|
| 34,551 |
|
|
| 37,100 |
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Operating lease liabilities, less current portion |
|
| 3,449 |
|
|
| 3,470 |
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|
| 3,084 |
|
|
| 3,261 |
|
Other long-term liabilities |
|
| 32,275 |
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|
| 34,470 |
|
|
| 31,507 |
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|
| 33,173 |
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Notes payable, less current portion |
|
| 1,500 |
|
|
| 222 |
|
|
| 1,500 |
|
|
| 1,500 |
|
Convertible notes payable |
|
| 12,908 |
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|
| 3,150 |
|
|
| 3,150 |
|
|
| 3,150 |
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Total liabilities |
|
| 75,158 |
|
|
| 64,694 |
|
|
| 73,792 |
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| 78,184 |
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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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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 September 30, 2021 and December 31, 2020, respectively |
|
| 49 |
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| 49 |
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Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, NaN issued and outstanding |
|
| — |
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| — |
| ||||||||
Common stock — par value $0.001 per share, 250,000,000 shares authorized, shares 49,311,864 shares issued and outstanding as of March 31, 2022 and December 31, 2021 |
|
| 49 |
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| 49 |
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Additional paid-in capital |
|
| 220,017 |
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| 218,728 |
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| 220,027 |
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|
| 220,022 |
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Accumulated other comprehensive income |
|
| (763 | ) |
|
| 1,144 |
| ||||||||
Accumulated other comprehensive income (loss) |
|
| 433 |
|
|
| (255 | ) | ||||||||
Accumulated deficit |
|
| (234,404 | ) |
|
| (225,079 | ) |
|
| (242,808 | ) |
|
| (241,266 | ) |
Total stockholders’ deficit |
|
| (15,101 | ) |
|
| (5,158 | ) |
|
| (22,299 | ) |
|
| (21,450 | ) |
Total liabilities and stockholders’ deficit |
| $ | 60,057 |
|
| $ | 59,536 |
| ||||||||
Total liabilities & stockholders’ deficit |
| $ | 51,493 |
|
| $ | 56,734 |
|
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)LOSS
(In thousands, except share and per share amounts)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2021 |
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| 2020 |
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| 2021 |
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| 2020 |
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| 2022 |
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| 2021 |
| ||||||
REVENUES, NET |
| $ | 5,766 |
|
| $ | 5,601 |
|
| $ | 17,590 |
|
| $ | 16,915 |
|
| $ | 3,234 |
|
| $ | 5,335 |
|
COST OF GOODS SOLD |
|
| 445 |
|
|
| 484 |
|
|
| 1,311 |
|
|
| 1,408 |
|
|
| 1,007 |
|
|
| 436 |
|
GROSS PROFIT |
|
| 5,321 |
|
|
| 5,117 |
|
|
| 16,279 |
|
|
| 15,507 |
|
|
| 2,227 |
|
|
| 4,899 |
|
OPERATING EXPENSES |
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|
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Research and development |
|
| 470 |
|
|
| 629 |
|
|
| 3,032 |
|
|
| 1,835 |
|
|
| 466 |
|
|
| 1,809 |
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Selling |
|
| 1,518 |
|
|
| 1,324 |
|
|
| 4,254 |
|
|
| 3,527 |
|
|
| 1,460 |
|
|
| 1,283 |
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General and administrative |
|
| 3,364 |
|
|
| 3,156 |
|
|
| 10,156 |
|
|
| 10,538 |
|
|
| 3,369 |
|
|
| 3,422 |
|
Total operating expenses |
|
| 5,352 |
|
|
| 5,109 |
|
|
| 17,442 |
|
|
| 15,900 |
|
|
| 5,295 |
|
|
| 6,514 |
|
INCOME (LOSS) FROM OPERATIONS |
|
| (31 | ) |
|
| 8 |
|
|
| (1,163 | ) |
|
| (393 | ) | ||||||||
LOSS FROM OPERATIONS |
|
| (3,068 | ) |
|
| (1,615 | ) | ||||||||||||||||
OTHER INCOME (EXPENSE) |
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|
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|
|
Loss on debt extinguishment |
|
| — |
|
|
| — |
|
|
| (1,172 | ) |
|
| (1,425 | ) | ||||||||
Loss on debt extinguishment, net |
|
| — |
|
|
| (1,172 | ) | ||||||||||||||||
Change in fair value of warrant derivative liabilities |
|
| (131 | ) |
|
| 745 |
|
|
| (322 | ) |
|
| 669 |
|
|
| 748 |
|
|
| (529 | ) |
Change in fair value of conversion feature derivative, notes payable |
|
| (1,357 | ) |
|
| 45 |
|
|
| (1,132 | ) |
|
| 51 |
|
|
| 3,080 |
|
|
| (2,338 | ) |
Net gain on investment in marketable securities |
|
| — |
|
|
| 6,464 |
|
|
| — |
|
|
| 7,672 |
| ||||||||
Realized loss on investment on convertible bond |
|
| (133 | ) |
|
| — |
| ||||||||||||||||
Net loss on equity method investment |
|
| (663 | ) |
|
| (494 | ) |
|
| (1,999 | ) |
|
| (1,474 | ) |
|
| (566 | ) |
|
| (754 | ) |
Foreign exchange gain (loss) |
|
| (246 | ) |
|
| 657 |
|
|
| (1,421 | ) |
|
| 685 |
| ||||||||
Foreign exchange loss |
|
| (1,191 | ) |
|
| (1,132 | ) | ||||||||||||||||
Interest and other income |
|
| 192 |
|
|
| 59 |
|
|
| 573 |
|
|
| 629 |
|
|
| 222 |
|
|
| 190 |
|
Interest expense |
|
| (683 | ) |
|
| (1,606 | ) |
|
| (2,390 | ) |
|
| (4,713 | ) |
|
| (737 | ) |
|
| (1,054 | ) |
Total other income (expense) |
|
| (2,888 | ) |
|
| 5,870 |
|
|
| (7,863 | ) |
|
| 2,094 |
|
|
| 1,423 |
|
|
| (6,789 | ) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
| (2,919 | ) |
|
| 5,878 |
|
|
| (9,026 | ) |
|
| 1,701 |
| ||||||||
INCOME TAXES PROVISION |
|
| 232 |
|
|
| 293 |
|
|
| 58 |
|
|
| 80 |
| ||||||||
NET INCOME (LOSS) |
|
| (3,151 | ) |
|
| 5,585 |
|
|
| (9,084 | ) |
|
| 1,621 |
| ||||||||
LOSS BEFORE INCOME TAXES |
|
| (1,645 | ) |
|
| (8,404 | ) | ||||||||||||||||
INCOME TAXES (BENEFIT) |
|
| (103 | ) |
|
| 18 |
| ||||||||||||||||
NET LOSS |
|
| (1,542 | ) |
|
| (8,422 | ) | ||||||||||||||||
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|
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COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on debt securities available for sale (net of tax) |
|
| (2,754 | ) |
|
| — |
|
|
| (2,150 | ) |
|
| — |
| ||||||||
Unrealized gain on debt securities available for sale (net of tax) |
|
| 350 |
|
|
| 58 |
| ||||||||||||||||
Reclassification adjustment for loss included in net income |
|
| 7 |
|
|
| — |
| ||||||||||||||||
Foreign currency translation adjustments |
|
| 86 |
|
|
| (35 | ) |
|
| 243 |
|
|
| (7 | ) |
|
| 331 |
|
|
| 165 |
|
Other comprehensive loss |
|
| (2,668 | ) |
|
| (35 | ) |
|
| (1,907 | ) |
|
| (7 | ) | ||||||||
COMPREHENSIVE INCOME (LOSS) |
| $ | (5,819 | ) |
| $ | 5,550 |
|
| $ | (10,991 | ) |
| $ | 1,614 |
| ||||||||
EARNINGS (NET LOSS) PER COMMON SHARE - BASIC AND DILUTED |
| $ | (0.06 | ) |
| $ | 0.11 |
|
| $ | (0.18 | ) |
| $ | 0.03 |
| ||||||||
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |
|
| 49,311,864 |
|
|
| 48,987,189 |
|
|
| 49,233,371 |
|
|
| 48,866,724 |
| ||||||||
Other comprehensive income |
|
| 688 |
|
|
| 223 |
| ||||||||||||||||
COMPREHENSIVE LOSS |
| $ | (854 | ) |
| $ | (8,199 | ) | ||||||||||||||||
NET LOSS PER COMMON SHARE - BASIC AND DILUTED |
| $ | (0.03 | ) |
| $ | (0.17 | ) | ||||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
|
| 49,311,864 |
|
|
| 49,073,769 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share and per share amounts)
(Unaudited)
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
| ||||||||||||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Income |
|
| Deficit |
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Deficit |
|
| 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 |
| |||||||||||||||||||||||
Balance January 1, 2022 |
| 49,311,864 |
|
| $ | 49 |
|
| $ | 220,022 |
|
| $ | (255 | ) |
| $ | (241,266 | ) |
| $ | (21,450 | ) | |||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 181 |
|
|
| — |
|
|
| — |
|
|
| 181 |
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
Unrealized gain on debt securities available for sale (net of tax) |
| — |
|
|
| — |
|
|
| — |
|
|
| 58 |
|
|
| — |
|
|
| 58 |
| |||||||||||||||||||||||
Unrealized loss on debt securities available for sale (net of tax) |
| — |
|
|
| — |
|
|
| — |
|
|
| 350 |
|
|
| — |
|
|
| 350 |
| |||||||||||||||||||||||
Reclassification adjustment for loss included in net income |
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| 7 |
| |||||||||||||||||||||||
Foreign currency translation effect |
| — |
|
|
| — |
|
|
| — |
|
|
| 165 |
|
|
| — |
|
|
| 165 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 331 |
|
|
| — |
|
|
| 331 |
|
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,422 | ) |
|
| (8,422 | ) |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,542 | ) |
|
| (1,542 | ) |
Balance at 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 at June 30, 2021 |
| 49,311,864 |
|
|
| 49 |
|
|
| 219,924 |
|
|
| 1,905 |
|
|
| (231,253 | ) |
|
| (9,375 | ) | |||||||||||||||||||||||
Share-based compensation |
| — |
|
|
| — |
|
|
| 93 |
|
|
| — |
|
|
| — |
|
|
| 93 |
| |||||||||||||||||||||||
Unrealized loss on debt securities available for sale (net of tax) |
| — |
|
|
| — |
|
|
| — |
|
|
| (2,754 | ) |
|
| — |
|
|
| (2,754 | ) | |||||||||||||||||||||||
Foreign currency translation effect |
| — |
|
|
| — |
|
|
| — |
|
|
| 86 |
|
|
| — |
|
|
| 86 |
| |||||||||||||||||||||||
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,151 | ) |
|
| (3,151 | ) | |||||||||||||||||||||||
Balance at September 30, 2021 |
| 49,311,864 |
|
| $ | 49 |
|
| $ | 220,017 |
|
| $ | (763 | ) |
| $ | (234,404 | ) |
| $ | (15,101 | ) | |||||||||||||||||||||||
Balance March 31, 2022 |
| 49,311,864 |
|
| $ | 49 |
|
| $ | 220,027 |
|
| $ | 433 |
|
| $ | (242,808 | ) |
| $ | (22,299 | ) |
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Deficit |
|
| Deficit |
| ||||||
Balance 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 loss 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 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share and per share amounts)
(Unaudited)
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Loss |
|
| Deficit |
| ||||||
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 |
|
Share-based compensation |
| — |
|
|
| — |
|
|
| 209 |
|
|
| — |
|
|
| — |
|
|
| 209 |
|
Foreign currency translation effect |
| — |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
|
| — |
|
|
| 61 |
|
Net income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,509 |
|
|
| 5,509 |
|
Balance at March 31, 2020 |
| 48,987,189 |
|
|
| 49 |
|
|
| 216,157 |
|
|
| (18 | ) |
|
| (220,920 | ) |
|
| (4,732 | ) |
Share-based compensation |
| — |
|
|
| — |
|
|
| 219 |
|
|
| — |
|
|
| — |
|
|
| 219 |
|
Foreign currency translation effect |
| — |
|
|
| — |
|
|
| — |
|
|
| (33 | ) |
|
| — |
|
|
| (33 | ) |
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,473 | ) |
|
| (9,473 | ) |
Balance at June 30, 2020 |
| 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 at 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 STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (9,084 | ) |
| $ | 1,621 |
| ||||||||
Net loss |
| $ | (1,542 | ) |
| $ | (8,422 | ) | ||||||||
Adjustments to reconcile net loss to net cash flows used in operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 44 |
|
|
| 45 |
|
|
| 15 |
|
|
| 15 |
|
Inventory reserve |
|
| 423 |
|
|
| 596 |
|
|
| 794 |
|
|
| 162 |
|
Amortization of discount of notes payable and convertible notes payable |
|
| 1,410 |
|
|
| 3,200 |
|
|
| 411 |
|
|
| 669 |
|
Foreign exchange adjustments |
|
| 1,415 |
|
|
| (316 | ) |
|
| 1,205 |
|
|
| 1,180 |
|
Net gain on investment in marketable securities |
|
| — |
|
|
| (7,672 | ) | ||||||||
Loss on equity method investment, net |
|
| 1,999 |
|
|
| 1,474 |
| ||||||||
Loss on debt extinguishment |
|
| 1,172 |
|
|
| 1,425 |
| ||||||||
Tax benefit recognized on unrealized gain on debt securities |
|
| (117 | ) |
|
| (19 | ) | ||||||||
Realized loss on investment on convertible bond |
|
| 133 |
|
|
| — |
| ||||||||
Net loss on equity method investment |
|
| 566 |
|
|
| 754 |
| ||||||||
Net loss on debt extinguishment |
|
| — |
|
|
| 1,172 |
| ||||||||
Gain on disposal of property and equipment |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) |
Share-based compensation |
|
| 548 |
|
|
| 549 |
|
|
| 5 |
|
|
| 181 |
|
Shares issued for services |
|
| 500 |
|
|
| — |
|
|
| — |
|
|
| 500 |
|
Change in fair value of warrant derivative liabilities |
|
| 322 |
|
|
| (669 | ) |
|
| (748 | ) |
|
| 529 |
|
Change in fair value of conversion feature derivative, notes payable |
|
| 1,132 |
|
|
| (51 | ) | ||||||||
Change in fair value of conversion feature derivative, note payable |
|
| (3,080 | ) |
|
| 2,338 |
| ||||||||
Net changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (2,469 | ) |
|
| 425 |
|
|
| 102 |
|
|
| (2,176 | ) |
Inventories |
|
| 404 |
|
|
| (44 | ) |
|
| 143 |
|
|
| 180 |
|
Prepaid expenses and other current assets |
|
| 202 |
|
|
| 336 |
|
|
| 103 |
|
|
| 158 |
|
Other non-current assets |
|
| 417 |
|
|
| 313 |
|
|
| 160 |
|
|
| 122 |
|
Income tax receivable and payable |
|
| 15 |
|
|
| (43 | ) |
|
| 10 |
|
|
| 33 |
|
Accounts payable and accrued expenses |
|
| (173 | ) |
|
| (3,119 | ) |
|
| 530 |
|
|
| (1,295 | ) |
Other current liabilities |
|
| 242 |
|
|
| (3,883 | ) |
|
| (2,980 | ) |
|
| 42 |
|
Other long-term liabilities |
|
| (637 | ) |
|
| 1,451 |
|
|
| (443 | ) |
|
| (123 | ) |
Net cash flows used in operating activities |
|
| (2,119 | ) |
|
| (4,362 | ) |
|
| (4,733 | ) |
|
| (4,001 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of marketable securities |
|
| — |
|
|
| 35,601 |
| ||||||||
Sale of convertible bond |
|
| 2,919 |
|
|
| — |
| ||||||||
Purchases of property and equipment |
|
| (11 | ) |
|
| (13 | ) |
|
| (2 | ) |
|
| — |
|
Loan to equity method investee |
|
| (5,241 | ) |
|
| (2,274 | ) |
|
| (1,690 | ) |
|
| (1,769 | ) |
Net cash flows (used in) provided by investing activities |
|
| (5,252 | ) |
|
| 33,314 |
| ||||||||
Net cash flows provided by (used in) investing activities |
|
| 1,227 |
|
|
| (1,769 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable issued, net of issuance cost and discount |
|
| 1,000 |
|
|
| 1,980 |
| ||||||||
Proceeds from convertible notes payable issued, net of issuance cost and discount |
|
| 14,490 |
|
|
| — |
| ||||||||
Proceeds from notes payable issued |
|
| 2,056 |
|
|
| 700 |
| ||||||||
Proceeds from convertible notes payable issued |
|
| — |
|
|
| 14,390 |
| ||||||||
Payments of notes payable |
|
| (1,079 | ) |
|
| (200 | ) |
|
| — |
|
|
| (844 | ) |
Payments of convertible notes |
|
| (7,200 | ) |
|
| (2,000 | ) |
|
| — |
|
|
| (7,200 | ) |
Proceeds from issuance of common stock, net of issuance cost |
|
| — |
|
|
| 142 |
| ||||||||
Net cash flows provided by (used in) financing activities |
|
| 7,211 |
|
|
| (78 | ) | ||||||||
Net cash flows provided by financing activities |
|
| 2,056 |
|
|
| 7,046 |
| ||||||||
Effect of exchange rate changes on cash |
|
| (6 | ) |
|
| (14 | ) |
|
| (16 | ) |
|
| (4 | ) |
Net decrease in cash, cash equivalents and restricted cash |
|
| (166 | ) |
|
| 28,860 |
| ||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
| (1,466 | ) |
|
| 1,272 |
| ||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 2,487 |
|
|
| 1,769 |
|
|
| 2,279 |
|
|
| 2,487 |
|
Cash, cash equivalents and restricted cash, end of period |
| $ | 2,321 |
|
| $ | 30,629 |
|
| $ | 813 |
|
| $ | 3,759 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 840 |
|
| $ | 1,543 |
|
| $ | 212 |
|
| $ | 319 |
|
Income taxes paid |
| $ | 43 |
|
| $ | 126 |
|
| $ | 4 |
|
| $ | 5 |
|
NON-CASH INVESING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
NON-CASH INVESTMENT AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Debt discount due to conversion features derivative |
| $ | 5,555 |
|
| $ | — |
|
| $ | — |
|
| $ | 5,555 |
|
Debt discount due to warrant issued with debt |
| $ | — |
|
| $ | 3,808 |
|
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., (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us” or the “Company”) 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. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, market acceptance of Endari®, and achieving a profitable level of revenues. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties.The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K/A10-K for the year ended December 31, 20202021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021.March 31, 2022. The accompanying condensed consolidated balance sheet at December 31, 20202021 has been derived from the audited consolidated balance sheet at December 31, 20202021 contained in the Annual Report. The results of operations for the three and nine months ended September 30, 2021,March 31, 2022, 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 salessale of innovative treatments and therapies, primarily for rare and orphan diseases. On July 17, 2019, we completed a merger transaction with EMI Holding, Inc.The Company’s lead product, Endari® (prescription grade L-glutamine oral powder), formerly known as Emmaus Life Sciences, Inc.is approved by the U.S. Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“EMI”SCD”), into a subsidiary in adult and pediatric patients five years of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary. Immediately after completion of the Merger, we changed our name to “Emmaus Life Sciences, Inc.”
Principles of consolidation—The consolidated financial statements include the accounts of Emmausage and its direct and indirect consolidated subsidiaries. All significant intercompany transactions have been eliminated.older.
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.
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/A10K for the year ended December 31, 2020.2021. There have been no material changes in these policies or their application.
Going concern—The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $1.5 million for the three months ended March 31, 2022, and had a working capital deficit of $28.1 million. Management expects that the Company’s current liabilities, operating losses and expected capital needs, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa region and elsewhere, will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future. In order to meet the Company’s current liabilities and future obligations, the Company will need to raise additional funds through related-party loans, equity and debt financings or licensing or other strategic agreements. The Company has no understanding or arrangement for any additional financing, and there can be no assurance that the Company will be able to complete any additional equity or debt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months from the date of this filing. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Management has considered all recent accounting pronouncements will notand has determined that there are no recent accounting pronouncements that are expected to have a material effect on the Company’s condensed consolidated financial statements.
Restricted cash — Restricted cash as of September 30, 2020 includes proceeds received from the sale of 6,643,559 shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) which were earmarked for the purchase of a Telcon convertible bond, described in Note 5. Reconciliation of cash, cash equivalent and restricted cash in the condensed consolidated statements of cash flows is as follows:
| As of September 30, |
| |||||
| 2021 |
|
| 2020 |
| ||
Cash and cash equivalents | $ | 2,321 |
|
| $ | 4,949 |
|
Restricted cash |
| — |
|
|
| 25,680 |
|
Total cash, cash equivalents and restricted cash | $ | 2,321 |
|
| $ | 30,629 |
|
Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, entered intois party to a purchase and sales 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 $7.5 million 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, Emmaus guaranteeshas guaranteed Emmaus Medical’s obligations under the purchase and sale agreement. At September 30, 2021,March 31, 2022, accounts receivable included approximately $472,000 of0 factoring accounts receivable and there were 0 liabilities related to factoring reflected in other current liabilities included approximately $9,000 related to factoring.liabilities. For three and nine months ended September 30,March 31, 2022 and March 31, 2021, the Company incurred approximately $106,00053,000, and $181,000,$31,000, respectively, of factoring fees.
Earnings (net loss)Net loss per share — In accordance with ASCAccounting Standard Codification (“ASC”) 260, “Earnings per Share,” the basic earnings (net loss)loss per common share is computed by dividing net income (loss)loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss)net loss per share is computed in a manner similar to basic earnings (net loss)net loss per common share except that the denominator is increased to include the number of additional common shares issuable under securities exercisable for or convertible into common shares had been issued if the additional common shares would be dilutive. As of September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 23,276,59423,261,199 shares and 19,276,39524,515,738 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted earnings (net loss)net loss per share since the potential dilutive securities were anti-dilutive for each of the three and nine months ended September 30, 2021,March 31, 2022 and 2020.2021.
NOTE 3 — REVENUES, NET
Revenues, net disaggregated by category, were as follows (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Endari® |
| $ | 5,590 |
|
| $ | 5,485 |
|
| $ | 17,186 |
|
| $ | 16,548 |
|
| $ | 3,048 |
|
| $ | 5,176 |
|
Other |
|
| 176 |
|
|
| 116 |
|
|
| 404 |
|
|
| 367 |
|
|
| 186 |
|
| $ | 159 |
|
Revenues, net |
| $ | 5,766 |
|
| $ | 5,601 |
|
| $ | 17,590 |
|
| $ | 16,915 |
|
| $ | 3,234 |
|
| $ | 5,335 |
|
The following table summarizes the revenue allowance and accrual activities for the ninethree months ended September 30,March 31, 2022 and March 31, 2021 and September 30, 2020 (in thousands):
|
| Trade Discounts, Allowances and Chargebacks |
|
| Government Rebates and Other Incentives |
|
| Returns |
|
| Total |
| ||||||||||||||||||||
Balance as of December 31, 2021 |
| $ | 1,480 |
|
| $ | 3,134 |
|
| $ | 540 |
|
| $ | 5,154 |
| ||||||||||||||||
Provision related to sales in the current year |
|
| 428 |
|
|
| 435 |
|
|
| 30 |
|
|
| 893 |
| ||||||||||||||||
Adjustments related prior period sales |
|
| (10 | ) |
|
| 13 |
|
|
| (47 | ) |
|
| (44 | ) | ||||||||||||||||
Credit and payments made |
|
| (1,064 | ) |
|
| (453 | ) |
|
| (32 | ) |
|
| (1,549 | ) | ||||||||||||||||
Balance as of March 31, 2022 |
| $ | 834 |
|
| $ | 3,129 |
|
| $ | 491 |
|
| $ | 4,454 |
| ||||||||||||||||
|
| Trade Discounts, Allowances and Chargebacks |
|
| Government Rebates and Other Incentives |
|
| Returns |
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2020 |
| $ | 134 |
|
| $ | 2,119 |
|
| $ | 473 |
|
| $ | 2,726 |
|
| $ | 134 |
|
| $ | 2,119 |
|
| $ | 473 |
|
| $ | 2,726 |
|
Provision related to sales in the current year |
|
| 2,374 |
|
|
| 2,627 |
|
|
| 188 |
|
|
| 5,189 |
|
|
| 575 |
|
|
| 864 |
|
|
| 57 |
|
|
| 1,496 |
|
Adjustments related prior period sales |
|
| 13 |
|
|
| 8 |
|
|
| (111 | ) |
|
| (90 | ) |
|
| 14 |
|
|
| 2 |
|
|
| (37 | ) |
|
| (21 | ) |
Credit and payments made |
|
| (1,217 | ) |
|
| (2,201 | ) |
|
| (20 | ) |
|
| (3,438 | ) |
|
| (281 | ) |
|
| (792 | ) |
|
| — |
|
|
| (1,073 | ) |
Balance as of September 30, 2021 |
| $ | 1,304 |
|
| $ | 2,553 |
|
| $ | 530 |
|
| $ | 4,387 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance as of December 31, 2019 |
| $ | 228 |
|
| $ | 1,354 |
|
| $ | 315 |
|
| $ | 1,897 |
| ||||||||||||||||
Provision related to sales in the current year |
|
| 2,106 |
|
|
| 2,917 |
|
|
| 180 |
|
|
| 5,203 |
| ||||||||||||||||
Adjustments related prior period sales |
|
| 15 |
|
|
| (43 | ) |
|
| (65 | ) |
|
| (93 | ) | ||||||||||||||||
Credit and payments made |
|
| (2,144 | ) |
|
| (1,762 | ) |
|
| — |
|
|
| (3,906 | ) | ||||||||||||||||
Balance as of September 30, 2020 |
| $ | 205 |
|
| $ | 2,466 |
|
| $ | 430 |
|
| $ | 3,101 |
| ||||||||||||||||
Balance as of March 31, 2021 |
| $ | 442 |
|
| $ | 2,193 |
|
| $ | 493 |
|
| $ | 3,128 |
|
The following table summarizes net revenues attributable to each of our customers that accounted for 10% or more of net revenues (as a percentage of net revenues): during the periods presented:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
Customer A |
|
| 31 | % |
|
| 49 | % |
|
| 47 | % |
|
| 52 | % |
|
| 1 | % |
|
| 63 | % |
Customer B |
|
| 49 | % |
|
| 32 | % |
|
| 35 | % |
|
| 27 | % |
|
| 46 | % |
|
| 17 | % |
Customer C |
|
| 12 | % |
|
| 9 | % |
|
| 10 | % |
|
| 8 | % |
|
| 15 | % |
|
| 9 | % |
Customer D |
|
| 16 | % |
| — |
| |||||||||||||||||
Total |
|
| 92 | % |
|
| 90 | % |
|
| 92 | % |
|
| 87 | % |
|
| 78 | % |
|
| 89 | % |
The Company is party to a distributor agreement with Telcon Pharmaceutical RF, Inc., or Telcon pursuant to which the Company 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 in upfront feefees and agreement to purchase from the Company specified minimum quantities of the PGLG. 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.fees. The upfront fee of $10 million isfees are included in other long-term liabilities as unearned revenue as of September 30, 2021both March 31, 2022 and December 31, 2020.2021. Refer to NoteNotes 6 and 11 and for additional details.
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Raw materials and components | $ | 1,472 |
|
| $ | 1,486 |
| $ | 1,477 |
|
| $ | 1,439 |
|
Work-in-process |
| 70 |
|
|
| 721 |
|
| 132 |
|
|
| 115 |
|
Finished goods |
| 6,317 |
|
|
| 6,064 |
|
| 6,028 |
|
|
| 6,228 |
|
Inventory reserve |
| (1,607 | ) |
|
| (1,184 | ) |
| (4,184 | ) |
|
| (3,390 | ) |
Total | $ | 6,252 |
|
| $ | 7,087 |
| $ | 3,453 |
|
| $ | 4,392 |
|
Prepaid expenses and other current assets consisted of the following (in thousands):
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Prepaid insurance | $ | 167 |
|
| $ | 388 |
| $ | 466 |
|
| $ | 660 |
|
Prepaid expenses |
| 242 |
|
|
| 454 |
|
| 399 |
|
|
| 326 |
|
Due from equity method investee |
| 579 |
|
|
| 376 |
| |||||||
Other current assets |
| 250 |
|
|
| 267 |
|
| 379 |
|
|
| 394 |
|
Total | $ | 1,238 |
|
| $ | 1,485 |
| $ | 1,244 |
|
| $ | 1,380 |
|
Property and equipment consisted of the following (in thousands):
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Equipment | $ | 339 |
|
| $ | 347 |
| $ | 344 |
|
| $ | 342 |
|
Leasehold improvements |
| 39 |
|
|
| 39 |
|
| 39 |
|
|
| 39 |
|
Furniture and fixtures |
| 102 |
|
|
| 99 |
|
| 103 |
|
|
| 103 |
|
Construction-in-progress |
| 57 |
|
|
| 57 |
| |||||||
Total property and equipment |
| 480 |
|
|
| 485 |
|
| 543 |
|
|
| 541 |
|
Less: accumulated depreciation |
| (383 | ) |
|
| (365 | ) |
| (405 | ) |
|
| (394 | ) |
Property and equipment, net | $ | 97 |
|
| $ | 120 |
| $ | 138 |
|
| $ | 147 |
|
During each of the three months ended September 30,March 31, 2022 and 2021, and 2020, depreciation expenses were approximately $11,000 and $12,000, respectively. During the nine months ended September 30, 2021 and 2020, depreciation expenses were approximately $34,000 and $35,000, respectively.$11,000.
NOTE 5 — INVESTMENTS
Investment in convertible bond - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of 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% pera year, payable quarterly. Beginning on October 16, 2021, the Company isbecame entitled on a quarterly basis to call 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 KRW9,232, or approximately $8.00, per share. The initial conversion price is subject to downward adjustment on a monthly based on the volume-weighted average market price of Telcon shares as reported on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon share. The conversion price also is subject to customary antidilution adjustmentsshares or upon a merger or othersimilar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The conversion price as of September 30, 2021March 31, 2022 is set forth in the “Investment in convertible bond” table below. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the holder’s early redemption right described above or Telcon’s
the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with Telcon described in Note 6 and Note 11.
In connectionConcurrent with the purchase of the convertible bond, the Company entered into a call optionan 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 at any time and from time to time 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.
The Company has elected the fair value option method to measureof accounting for the investment in the Telcon convertible bond. The investment in convertible bond is classified as an available for sale security and remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income.income (loss). The fair value and any changechanges in fair value ofin the convertible bond is determined using a convertible bondbinominal lattice model. The model produces an estimated fair value based on changes in the market price of the underlying common stock.stock over successive periods of time.
In February 2022, the Company and Telcon agreed to settle a “target shortfall” under the revised API agreement with Telcon for the years ended 2020 and 2021 by exchanging KRW3.5 billion, or approximately US$2.9 million, principal amount and accrued and unpaid interest of the Telcon convertible bond and KRW400 million, or approximately US$310,000 in cash proceeds of the convertible bond. As a result, the Company realized net loss on investment convertible bond of $126,000 and other income of $41,000, which are reflected in the statement of operations. See Notes 6 and 11 for additional information on the “target shortfall”.
The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
Investment in convertible bond |
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Balance, beginning of period |
| $ | 27,866 |
|
| $ | — |
|
| $ | 26,100 |
|
| $ | 27,866 |
|
Fair value at issuance date |
|
| — |
|
|
| 22,059 |
| ||||||||
Sales of convertible bond |
|
| (2,919 | ) |
|
| — |
| ||||||||
Net loss on investment on convertible bond |
|
| (126 | ) |
|
| — |
| ||||||||
Change in fair value included in the statement of other comprehensive income |
|
| (2,150 | ) |
|
| 5,807 |
|
|
| 466 |
|
|
| (1,766 | ) |
Balance, end of period |
| $ | 25,716 |
|
| $ | 27,866 |
|
| $ | 23,521 |
|
| $ | 26,100 |
|
The fair value as of September 30, 2021March 31, 2022 and December 31, 20202021 was based upon following assumptions:
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Principal outstanding (South Korean won) |
| KRW 30 billion |
|
| KRW 30 billion |
|
| KRW 26.5 billion |
|
| KRW 30 billion |
| ||||
Stock price |
| KRW 3,990 |
|
| KRW 6,060 |
|
| KRW2,410 |
|
| KRW2,925 |
| ||||
Expected life (in years) |
|
| 9.04 |
|
|
| 9.79 |
|
|
| 8.55 |
|
|
| 8.79 |
|
Selected yield |
|
| 10.50 | % |
|
| 10.50 | % |
|
| 11.00 | % |
|
| 10.50 | % |
Expected volatility (Telcon common stock) |
|
| 82.15 | % |
|
| 85.80 | % |
|
| 80.43 | % |
|
| 81.31 | % |
Risk-free interest rate (South Korea government bond) |
|
| 2.18 | % |
|
| 1.72 | % |
|
| 2.94 | % |
|
| 2.19 | % |
Expected dividend yield |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion price |
| KRW 4,110 (US$3.47) |
|
| KRW 6,028 (US$5.54) |
|
| KRW2,140 (US$1.82) |
|
| KRW2,847 (US$2.39) |
|
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 ana shuttered amino acids manufacturing facility in Ube, Japan. In 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 annual rate of 1% per year,, payable annually. The parties also contemplated that the Ube facility willwould eventually supply the Company with the facility’s output of amino acids and that the operation of the facility willwould be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility willwould be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the ninethree months ended September 30, 2021,March 31, 2022, the Company made an additional $3.6$1.7 million
of loans to EJ Holdings. As of September 30, 2021,March 31, 2022, and December 31, 2020,2021, the loans receivable from EJ Holdings were approximately $22.2$22.2 million and $18.6$22.6 million, respectively, as reflected in equity method investment on the consolidated balance sheets.
EJ Holdings is engaged in phasing inretrofitting the Ube facility which will include eventually obtainingin order to seek regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no significantsubstantial 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 the 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 thatloan financing provided by the Company provided the loan financing to acquire the Ube facility and to fund itsEJ Holdings’ activities, there and that the EJ Holdings activitieswhich 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 ofreported by EJ Holdings are classified as net losslosses on equity method investment. The investment is evaluated for impairment 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 and nine months ended September 30,March 31, 2022 and 2021 and 2020 (in thousands):
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| Three Months Ended March 31, |
| |||||||||
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
| 2022 (Unaudited) |
|
| 2021 (Unaudited) |
| ||||||
REVENUES, NET | $ | 57 |
|
| $ | 55 |
|
| $ | 174 |
|
| $ | 201 |
| $ | 54 |
|
| $ | 59 |
|
GROSS PROFIT |
| 57 |
|
|
| 55 |
|
|
| 174 |
|
|
| 201 |
| |||||||
NET LOSS | $ | (1,657 | ) |
| $ | (1,228 | ) |
| $ | (4,998 | ) |
| $ | (3,677 | ) | $ | (1,414 | ) |
| $ | (1,886 | ) |
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Accounts payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses |
| $ | 443 |
|
| $ | 262 |
|
| $ | 699 |
|
| $ | 534 |
|
Professional fees |
|
| 552 |
|
|
| 252 |
|
|
| 817 |
|
|
| 477 |
|
Selling expenses |
|
| 508 |
|
|
| 395 |
|
|
| 671 |
|
|
| 932 |
|
Manufacturing costs |
|
| 253 |
|
|
| 596 |
|
|
| 283 |
|
|
| 378 |
|
Board member compensation |
|
| 283 |
|
|
| 136 |
| ||||||||
Other vendors |
|
| 66 |
|
|
| 518 |
|
|
| 120 |
|
|
| 262 |
|
Total accounts payable |
|
| 1,822 |
|
|
| 2,023 |
|
|
| 2,873 |
|
|
| 2,719 |
|
Accrued interest payable, related parties |
|
| 79 |
|
|
| 41 |
|
|
| 142 |
|
|
| 91 |
|
Accrued interest payable |
|
| 418 |
|
|
| 627 |
|
|
| 618 |
|
|
| 579 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll expenses |
|
| 1,067 |
|
|
| 1,053 |
|
|
| 877 |
|
|
| 1,097 |
|
Government rebates and other rebates |
|
| 2,553 |
|
|
| 2,659 |
|
|
| 4,461 |
|
|
| 4,371 |
|
Due to equity method investee |
|
| 480 |
|
|
| 545 |
| ||||||||
Other accrued expenses |
|
| 554 |
|
|
| 512 |
|
|
| 747 |
|
|
| 332 |
|
Total accrued expenses |
|
| 4,654 |
|
|
| 4,769 |
|
|
| 6,085 |
|
|
| 5,800 |
|
Total accounts payable and accrued expenses |
| $ | 6,973 |
|
|
| 7,460 |
|
| $ | 9,718 |
|
| $ | 9,189 |
|
Other current liabilities consisted of the following at September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Trade discount | $ | 4,000 |
|
| $ | 2,000 |
| $ | 1,600 |
|
| $ | 3,000 |
|
Other current liabilities |
| 940 |
|
|
| 706 |
|
| 1,222 |
|
|
| 1,404 |
|
Total other current liabilities | $ | 4,940 |
|
| $ | 2,706 |
| $ | 2,822 |
|
| $ | 4,404 |
|
Other long-term liabilities consisted of the following at September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| September 30, 2021 |
|
| December 31, 2020 |
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Trade discount | $ | 22,251 |
|
| $ | 24,453 |
| $ | 21,480 |
|
| $ | 23,148 |
|
Unearned revenue |
| 10,000 |
|
|
| 10,000 |
|
| 10,000 |
|
|
| 10,000 |
|
Other long-term liabilities |
| 24 |
|
|
| 17 |
|
| 27 |
|
|
| 25 |
|
Total other long-term liabilities | $ | 32,275 |
|
| $ | 34,470 |
| $ | 31,507 |
|
| $ | 33,173 |
|
On June 12, 2017, the Company and Telcon entered into an API Supply Agreement as subsequently amended (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 estimated annual targetstarget requirements for bulk containers of PGLG. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain items of the API Supply Agreement (the “revised API agreement”). The Company purchased $250,000$200,000 and $2.0 million of PGLG from Telcon in the ninethree months ended September 30,March 31, 2022, and March 31, 2021, respectively, of which $200,000and September 30, 2020, respectively. As$378,000 were reflected in accounts payable as of September 30, 2021,March 31, 2022 and December 31, 2020, respectively, accounts payable2021, respectively. The revised API agreement provided for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon were $250,000of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the “target shortfall,” or to settle the target shortfall by exchange of principal and $208,000.interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure our obligations. See Note 115 for additional details.information regarding a settlement in the three months ended March 31, 2022 of the target shortfall for 2020 and 2021.
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands except for number of shares):
Year Issued |
| Interest Rate Range |
|
| Term of Notes |
| Conversion Price |
|
| Principal Outstanding September 30, 2021 |
|
| Unamortized Discount September 30, 2021 |
|
| Carrying Amount September 30, 2021 |
|
| Underlying Shares September 30, 2021 |
|
|
| Interest Rate Range |
|
| Term of Notes |
| Conversion Price |
|
| Principal Outstanding March 31, 2022 |
|
| Unamortized Discount March 31, 2022 |
|
| Carrying Amount March 31, 2022 |
|
| Underlying Shares March 31, 2022 |
|
| ||||||||||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
| 10% |
|
| Due on demand |
|
| — |
|
| $ | 895 |
|
| $ | — |
|
| $ | 895 |
|
|
| — |
|
|
| 10% |
|
| Due on demand |
|
| — |
|
| $ | 821 |
|
| $ | — |
|
| $ | 821 |
|
|
| — |
|
| ||
2020 |
| 1% |
|
| 2 years |
|
| — |
|
|
| 798 |
|
|
| — |
|
|
| 798 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
2021 |
| 11% |
|
| Due on demand - 2 years |
|
| — |
|
|
| 3,076 |
|
|
| — |
|
|
| 3,076 |
|
|
| — |
|
|
| 11% |
|
| Due on demand - 2 years |
|
| — |
|
|
| 2,945 |
|
|
| — |
|
|
| 2,945 |
|
|
| — |
|
| ||
2022 |
| 10% |
|
| Due on demand |
|
| — |
|
|
| 20 |
|
|
| — |
|
|
| 20 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,769 |
|
| $ | — |
|
| $ | 4,769 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,786 |
|
| $ | — |
|
| $ | 3,786 |
|
|
| — |
|
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 3,269 |
|
| $ | — |
|
| $ | 3,269 |
|
|
| — |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 2,286 |
|
| $ | — |
|
| $ | 2,286 |
|
|
| — |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 1,500 |
|
| $ | — |
|
| $ | 1,500 |
|
|
| — |
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 1,500 |
|
| $ | — |
|
| $ | 1,500 |
|
|
| — |
|
|
Notes payable - related parties | Notes payable - related parties |
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
| Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
2020 |
| 12% |
|
| Due on demand |
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 12% |
|
| Due on demand |
|
| — |
|
| $ | 100 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
| ||
2021 |
| 12% |
|
| Due on demand |
|
| — |
|
|
| 300 |
|
|
|
|
|
|
| 300 |
|
|
|
|
|
|
| 12% |
|
| Due on demand |
|
| — |
|
|
| 700 |
|
|
| — |
|
|
| 700 |
|
|
| — |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| $ | 400 |
|
| $ | — |
|
| $ | 400 |
|
|
| — |
|
| |||||||||||||||||||||||||||
2022 |
| 10-12% |
|
| Due on demand |
|
| — |
|
|
| 2,036 |
|
|
| — |
|
|
| 2,036 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
| Current |
|
|
|
|
| $ | 400 |
|
| $ | — |
|
| $ | 400 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 2,836 |
|
| $ | — |
|
| $ | 2,836 |
|
|
| — |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
|
| — |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 2,836 |
|
| $ | — |
|
| $ | 2,836 |
|
|
| — |
|
|
Convertible notes payable | Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
2020 |
| 12% |
|
| 3 years |
| $ | 10.00 |
| (b) |
| 3,150 |
|
|
| — |
|
|
| 3,150 |
|
|
| 316,669 |
|
|
| 12% |
|
| 3 years |
| $ | 10.00 |
| (b) |
| 3,150 |
|
|
| — |
|
|
| 3,150 |
|
|
| 319,804 |
|
| ||
2021 |
| 2% |
|
| 3 years |
| $ | 1.48 |
| (a) |
| 14,490 |
|
|
| 4,732 |
|
|
| 9,758 |
|
|
| 9,806,305 |
|
|
| 2% |
|
| 3 years |
| $ | 1.48 |
| (a) |
| 14,490 |
|
|
| 3,921 |
|
|
| 10,569 |
|
|
| 9,806,850 |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| $ | 17,640 |
|
| $ | 4,732 |
|
| $ | 12,908 |
|
|
| 10,122,974 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 17,640 |
|
| $ | 3,921 |
|
| $ | 13,719 |
|
|
| 10,126,654 |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 17,640 |
|
| $ | 4,732 |
|
| $ | 12,908 |
|
|
| 10,122,974 |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 14,490 |
|
| $ | 3,921 |
|
| $ | 10,569 |
|
|
| 9,806,850 |
|
|
|
|
|
|
|
| Total |
|
|
|
|
| $ | 22,809 |
|
| $ | 4,732 |
|
| $ | 18,077 |
|
|
| 10,122,974 |
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 3,150 |
|
| $ | — |
|
| $ | 3,150 |
|
|
| 319,804 |
|
|
|
|
|
|
|
| Total |
|
|
|
|
| $ | 24,262 |
|
| $ | 3,921 |
|
| $ | 20,341 |
|
|
| 10,126,654 |
|
|
Year Issued |
| Interest Rate Range |
|
| Term of Notes |
| Conversion Price |
|
| Principal Outstanding December 31, 2020 |
|
| Unamortized Discount December 31, 2020 |
|
| Carrying Amount December 31, 2020 |
|
| Underlying Shares Notes December 31, 2020 |
|
|
| Interest Rate Range |
|
| Term of Notes |
| Conversion Price |
|
| Principal Outstanding December 31, 2021 |
|
| Unamortized Discount December 31, 2021 |
|
| Carrying Amount December 31, 2021 |
|
| Underlying Shares Notes December 31, 2021 |
|
| ||||||||||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
| 10% |
|
| Due on demand |
|
| — |
|
| $ | 969 |
|
| $ | — |
|
| $ | 969 |
|
|
| — |
|
|
| 10% |
|
| Due on demand |
|
| — |
|
| $ | 869 |
|
| $ | — |
|
| $ | 869 |
|
|
| — |
|
| ||
2019 |
| 11% |
|
| Due on demand |
|
| — |
|
|
| 2,899 |
|
|
| — |
|
|
| 2,899 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
2020 |
| 1%-11% |
|
| Due on demand - 2 years |
|
| — |
|
|
| 942 |
|
|
| — |
|
|
| 942 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
2021 |
| 11% |
|
| Due on demand - 2 years |
|
| — |
|
|
| 3,030 |
|
|
| — |
|
|
| 3,030 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,810 |
|
| $ | — |
|
| $ | 4,810 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,899 |
|
| $ | — |
|
| $ | 3,899 |
|
|
| — |
|
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 4,588 |
|
| $ | — |
|
| $ | 4,588 |
|
|
| — |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 2,399 |
|
| $ | — |
|
| $ | 2,399 |
|
|
| — |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 222 |
|
| $ | — |
|
| $ | 222 |
|
|
| — |
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 1,500 |
|
| $ | — |
|
| $ | 1,500 |
|
|
| — |
|
|
Notes payable - related parties | Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
2016 |
| 10% |
|
| Due on demand |
|
| — |
|
| $ | 20 |
|
| $ | — |
|
| $ | 20 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
2019 |
| 10% |
|
| Due on demand |
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| 14 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
2020 |
| 12% |
|
| Due on demand |
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 12% |
|
| Due on demand |
|
| — |
|
| $ | 100 |
|
| $ | — |
|
| $ | 100 |
|
|
| — |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| $ | 134 |
|
| $ | — |
|
| $ | 134 |
|
|
| — |
|
| |||||||||||||||||||||||||||
|
|
|
|
|
| Current |
|
|
|
|
| $ | 134 |
|
| $ | — |
|
| $ | 134 |
|
|
| — |
|
| |||||||||||||||||||||||||||
Convertible debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
2019 |
| 10% |
|
| 18 months |
| $2.00-$9.52 |
| (a) | $ | 7,200 |
|
| $ | 1,720 |
|
| $ | 5,480 |
|
|
| 3,630,000 |
|
| |||||||||||||||||||||||||||||
2021 |
| 12% |
|
| Due on demand |
|
| — |
|
|
| 700 |
|
|
| — |
|
|
| 700 |
|
|
| — |
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 7,200 |
|
| $ | 1,720 |
|
| $ | 5,480 |
|
|
| 3,630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 800 |
|
| $ | — |
|
| $ | 800 |
|
|
| — |
|
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 7,200 |
|
| $ | 1,720 |
|
| $ | 5,480 |
|
|
| 3,630,000 |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 800 |
|
| $ | — |
|
| $ | 800 |
|
|
| — |
|
|
Convertible note payable | Convertible note payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible note payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
2020 |
| 12% |
|
| 3 years |
| $ | 10.00 |
| (b) | $ | 3,150 |
|
| $ | — |
|
| $ | 3,150 |
|
|
| 316,723 |
|
|
| 12% |
|
| 3 years |
| $ | 10.00 |
| (b) |
| 3,150 |
|
|
| — |
|
|
| 3,150 |
|
|
| 316,756 |
|
| ||
2021 |
| 2% |
|
| 3 years |
| $ | 1.48 |
| (a) |
| 14,490 |
|
|
| 4,332 |
|
|
| 10,158 |
|
|
| 9,856,343 |
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,150 |
|
| $ | — |
|
| $ | 3,150 |
|
|
| 316,723 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 17,640 |
|
| $ | 4,332 |
|
| $ | 13,308 |
|
|
| 10,173,099 |
|
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 3,150 |
|
| $ | — |
|
| $ | 3,150 |
|
|
| 316,723 |
|
|
|
|
|
|
| Current |
|
|
|
|
| $ | 14,490 |
|
| $ | 4,332 |
|
| $ | 10,158 |
|
|
| 9,856,343 |
|
|
|
|
|
|
|
| Total |
|
|
|
|
| $ | 15,294 |
|
| $ | 1,720 |
|
| $ | 13,574 |
|
|
| 3,946,723 |
|
|
|
|
|
|
| Non-current |
|
|
|
|
| $ | 3,150 |
|
| $ | — |
|
| $ | 3,150 |
|
|
| 316,756 |
|
|
|
|
|
|
|
| Total |
|
|
|
|
| $ | 22,339 |
|
| $ | 4,332 |
|
| $ | 18,007 |
|
|
| 10,173,099 |
|
|
| (a) | The notes are convertible into Emmaus Life Sciences, Inc. shares. Beginning February 28, 2022, the note holders became entitled to call for early redemption of the convertible notes payable, because the Company common stock was not approved for listing on the NYSE American, the Nasdaq Capital Market or other Trading Market (as defined in the agreement). Accordingly, the notes were classified as current. |
| (b) |
|
The weighted-average stated annual interest rate ofon notes payable was 5% and 10%6% as of September 30, 2021both March 31, 2022 and December 31, 2020, respectively.2021. The weighted-average effective annual interest rate of notes payable as of September 30, 2021both March 31, 2022 and December 31, 20202021 was 14% and 37%15%, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.
As of September 30, 2021,March 31, 2022, future contractual principal payments due on notes payable were as follows:follows (in thousands):
Year Ending |
|
|
|
|
|
|
|
2021 (three months) | $ | 3,447 |
| ||||
2022 |
| 222 |
|
| 19,612 |
| (a) |
2023 |
| 4,650 |
|
| 4,650 |
|
|
2024 |
| 14,490 |
| ||||
Total | $ | 22,809 |
| $ | 24,262 |
|
|
In March 2021, the Company prepaid in full its outstanding Amended and Restated 10% Senior Secured Convertible Debentures and recognized $1.2 million of loss on debt extinguishment relating to the 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 September 30, 2021 and December 31, 2020 (in thousands):
|
| Nine Months Ended |
|
| Year Ended |
| ||
Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Balance, beginning of period |
| $ | 7 |
|
| $ | 1 |
|
Fair value at debt modification date |
|
| — |
|
|
| 118 |
|
Change in fair value included in the statement of comprehensive loss |
|
| (7 | ) |
|
| (112 | ) |
Balance, end of period |
| $ | — |
|
| $ | 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.
The fair value as of December 31, 2020 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 |
|
(a) | Includes $14.5 million principal amount of convertible notes is which, the holders are entitled to call for early redemption. |
The Company is party to a revolving line of credit agreement with Dr.Yutaka Niihara, M.D., M.P.H., 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 and employment taxes payable by him with respect to interest and tax gross-up paid to him in the previous year. The outstanding balance under the revolving lineAs of credit agreement of $600,000 as of September 30, 2021March 31, 2022 and December 31, 2020 were2021, the outstanding balance of $400,000 was reflected in revolving line of credit, related party on the condensed consolidated balance sheets. With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of September 30, 2021,March 31, 2022, was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more 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 is evidenced by a Promissory Note dated April 29, 2020, matures on April 29, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment or the loan forgiveness process has commenced. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness on October 30, 2020. There is no assurance that the loan will be forgiven. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period.The PPP loan was included in notes payable on the condensed consolidated balance sheets at September 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 September 30, 2021, we hadThe Company sold and issued 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.date, unless earlier converted or prepaid. The convertible promissory notes will become prepayablebecame redeemable 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).2022. The Company will beis 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 dateFebruary 28, 2023 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 wasis 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 condensed consolidated statements of operations. The following table sets forth the fair value of the conversion feature liability as of September 30,March 31, 2022, and December 31, 2021 (in thousands):
Convertible promissory notes |
| September 30, 2021 |
| |
Balance, beginning of period |
| $ | — |
|
Fair value at issuance date |
|
| 5,594 |
|
Change in fair value included in the statement of comprehensive (income) loss |
|
| 1,139 |
|
Balance, end of period |
| $ | 6,733 |
|
Convertible promissory notes |
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Balance beginning of period |
| $ | 7,507 |
|
| $ | — |
|
Fair value at issuance date |
|
| — |
|
|
| 5,594 |
|
Change in fair value included in the statement of operations |
|
| (3,080 | ) |
|
| 1,913 |
|
Balance end of period |
| $ | 4,427 |
|
| $ | 7,507 |
|
The fair value and any change in fair value of the 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 valuevalues as of September 30,March 31, 2022, and December 31, 2021 and at issuance date waswere based upon following assumptions:
Convertible promissory notes |
| September 30, 2021 |
|
| Issuance Date |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Stock price |
| $ | 1.60 |
|
| $ | 1.41 |
|
| $ | 1.00 |
|
| $ | 1.67 |
|
Conversion price |
| $ | 1.48 |
|
| $ | 1.48 |
|
| $ | 1.48 |
|
| $ | 1.48 |
|
Selected yield |
|
| 21.62 | % |
|
| 20.29 | % |
|
| 23.42 | % |
|
| 21.99 | % |
Expected volatility |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
|
| 50 | % |
Time until maturity (in years) |
|
| 2.41 |
|
|
| 3.00 |
|
|
| 1.91 |
|
|
| 2.16 |
|
Dividend yield |
| — |
|
| — |
|
| — |
|
| — |
| ||||
Risk-free rate |
|
| 0.38 | % |
|
| 0.30 | % |
|
| 2.22 | % |
|
| 0.77 | % |
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. The GPB Note was repaid in February 2018.
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 thatGPB Warrant is separately recognized under ASC 815-40 GPB Warrant should be separately recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.the condensed consolidated statements of operations.
The following table presents the change in fair value of the GPB Warrant as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
|
| Nine Months Ended |
|
| Year Ended |
| ||
Warrant Liability—GPB |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Balance, beginning of period |
| $ | 83 |
|
| $ | 38 |
|
Change in fair value included in the statement of comprehensive income |
|
| (40 | ) |
|
| 45 |
|
Balance, end of period |
| $ | 43 |
|
| $ | 83 |
|
Warrant Liability—GPB |
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Balance beginning of period |
| $ | 40 |
|
| $ | 83 |
|
Change in fair value included in the statement of operations |
|
| (35 | ) |
|
| (43 | ) |
Balance end of period |
| $ | 5 |
|
| $ | 40 |
|
The fair value of the warrant derivative liability was determined using the Black-Scholes option pricingMerton model.
The fair valuevalues as of September 30, 2021,March 31, 2022, and December 31, 2020 set forth in the table above was2021 were based on upon following assumptions:
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Adjusted exercise price |
| $ | 10.28 |
|
| $ | 10.28 |
|
| $ | 10.28 |
|
| $ | 10.28 |
|
Common stock fair value |
| $ | 1.60 |
|
| $ | 1.23 |
|
| $ | 1.00 |
|
| $ | 1.67 |
|
Risk‑free interest rate |
|
| 0.23 | % |
|
| 0.15 | % |
|
| 1.79 | % |
|
| 0.56 | % |
Volatility |
|
| 100.00 | % |
|
| 120.00 | % |
|
| 97.00 | % |
|
| 104.00 | % |
Time until expiration (years) |
|
| 1.75 |
|
|
| 2.50 |
|
|
| 1.25 |
|
|
| 1.50 |
|
Expected dividend yield |
| — |
|
| — |
|
| — |
|
| — |
| ||||
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 debentures and warrants were used to fund the original $13.2 million loan to EJ Holdings, Inc. in October 2018 reflected on the Company’s consolidated balance sheets.
The Debentures were amended and restated in their entirety in conjunction with the Merger. Common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.
The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.
Pursuant to the termsExtension of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $3.00 per share from $9.52 per share. The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $3.00 per share from $5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10% Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $2.00 a share under the Purchase Agreement with Lincoln Park Capital LLC. 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 continued on the first day of each month thereafter commencing October 1, 2020. The remaining principal balance of the Debentures was 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.
The exercise price of the amended and restated warrants was reduced to $2.00 per share in February 2020 and to $1.54 per share in March 2021 pursuant to the anti-dilution adjustment provisions of the warrants. The warrants were valued using Black-Scholes-Merton model. The fair value as of agreement date and the 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 Convertible Promissory Note - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $3,150,000 agreed to an extension of the maturity date of the convertible promissory note to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12%. In conjunction with this amendment,the extension, the Company issued to the note holder 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 should beare 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 condensed consolidated statements of operations.
The following table presents the fair valuevalues and the changechanges in fair value of the warrants as of September 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
|
| Nine Months Ended |
|
| Year Ended |
| ||
Warrant liability—Wealth Threshold |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Balance, beginning of period |
| $ | 988 |
|
| $ | — |
|
Fair value at issuance date |
|
| — |
|
|
| 1,425 |
|
Change in fair value included in the statement of comprehensive income (loss) |
|
| 362 |
|
|
| (437 | ) |
Balance, end of period |
| $ | 1,350 |
|
| $ | 988 |
|
Warrant liability— Convertible Promissory Note |
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Balance beginning of period |
| $ | 1,463 |
|
| $ | 988 |
|
Change in fair value included in the statement of operations |
|
| (713 | ) |
|
| 475 |
|
Balance end of period |
| $ | 750 |
|
| $ | 1,463 |
|
The fair valuevalues of the warrant derivative liability waswere determined using the Black-Scholes Merton model and was based upon following assumptions:
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Exercise price |
| $ | 2.05 |
|
| $ | 2.05 |
|
Stock price |
| $ | 1.00 |
|
| $ | 1.67 |
|
Risk‑free interest rate |
|
| 2.45 | % |
|
| 1.04 | % |
Expected volatility (peer group) |
|
| 117.00 | % |
|
| 117.00 | % |
Expected life (in years) |
|
| 3.21 |
|
|
| 3.46 |
|
Expected dividend yield |
| — |
|
| — |
| ||
Number outstanding |
|
| 1,250,000 |
|
|
| 1,250,000 |
|
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Exercise price |
| $ | 2.05 |
|
| $ | 2.05 |
|
Stock price |
| $ | 1.60 |
|
| $ | 1.68 |
|
Risk‑free interest rate |
|
| 0.69 | % |
|
| 0.31 | % |
Expected volatility (peer group) |
|
| 110.00 | % |
|
| 101.00 | % |
Expected life (in years) |
|
| 3.71 |
|
|
| 4.46 |
|
Expected dividend yield |
| — |
|
| — |
| ||
Number outstanding |
|
| 1,250,000 |
|
|
| 1,250,000 |
|
A summary of all outstanding warrants as of September 30, 2021March 31, 2022 and December 31, 20202021 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||
Warrants outstanding, beginning of period |
|
| 8,439,480 |
|
|
| 4,931,099 |
| ||||||||
Warrants outstanding beginning of period |
|
| 8,236,017 |
|
|
| 8,439,480 |
| ||||||||
Granted |
|
| 0 |
|
|
| 3,625,000 |
|
|
| 0 |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Cancelled, forfeited or expired |
|
| (203,463 | ) |
|
| (116,619 | ) |
|
| — |
|
|
| (203,463 | ) |
Warrants outstanding, end of period |
|
| 8,236,017 |
|
|
| 8,439,480 |
| ||||||||
Warrants outstanding end of period |
|
| 8,236,017 |
|
|
| 8,236,017 |
|
A summary of all outstanding warrants by year issued and exercise price as of September 30, 2021March 31, 2022 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, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $1.54-$36.24 |
|
|
| 4,611,017 |
|
|
| 1.39 |
|
| $ | 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 |
|
|
| 3.71 |
|
| $ | 2.05 |
|
|
| — |
|
|
| — |
|
| $ | 1.54 |
|
|
| 2,375,000 |
|
|
| 3.95 |
|
| $ | 1.54 |
|
|
| 2,375,000 |
|
| $ | 1.54 |
|
| 2020 Total |
|
|
| 3,625,000 |
|
|
|
|
|
|
|
|
|
|
| 2,375,000 |
|
|
|
|
| |
At September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
| Grand Total |
|
|
| 8,236,017 |
|
|
|
|
|
| Grand Total |
|
|
| 6,986,017 |
|
|
|
|
|
|
|
|
|
| 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, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $1.54-$36.24 |
|
|
| 8,236,017 |
|
|
| 1.98 |
|
| $ | 5.87 |
|
|
| 6,986,017 |
|
| $ | 5.87 |
| |
At March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
| Total |
|
|
| 8,236,017 |
|
|
|
|
|
| Total |
|
|
| 6,986,017 |
|
|
|
|
|
Summary of Plans
Stock options – Upon completion of the Merger, the EMIThe Company’s former Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permitted grants of incentive stock options to employees, including executive officers,expired on May 3, 2021, 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 2011 Plan. The expiration of the 2011 Plan did not affect outstanding stock options thereunder.
The Company also hadpreviously maintained an Amended and Restated 2012 Omnibus Incentive Compensation Plan, under which was terminated in September 2021 in connection with the adoption of the 2021 Stock Incentive Plan described below.
On September 29, 2021, the Board of Directors of the Company adopted the Emmaus Life Sciences, Inc. 2021 Stock Incentive Plan upon the recommendation of the Compensation Committee of the Board. The 2021 Stock Incentive Plan was approved by stockholders on November 23, 2021. No more than 4,000,000 shares of common stock may grantbe issued pursuant to awards under the 2021 Stock Incentive Plan. The number of shares available for Awards, as well as the terms of outstanding awards, is subject to adjustment as provided in the Stock Incentive Plan for stock optionssplits, stock dividends, reverse stock splits, recapitalizations and other stocksimilar events. As of March 31, 2022, no awards to selected employees including officers, and to non-employee consultants and non-employee directors. Allwere outstanding stock award under the 2012 Omnibus2021 Stock Incentive Compensation Plan were fully vested prior toPlan.
A summary of the Merger and the Company intends not to make any further awards under thereunder.
Stock options—During the nineCompany’s stock option activity for three months ended September 30, 2021, the Company did 0t issue any stock options. DuringMarch 31, 2022 and for the year ended December 31, 2020, the Company grantedstock options to purchase 90,000 shares of common stock. All the options are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows: as to one‑third of the shares on the first anniversary of the grant date, and as to the remaining two‑thirds of the shares in twenty‑four approximately equal monthly installments over a period of two years thereafter. In September 2021 the 2012 Omnibus Incentive Compensation Plan was terminated. The termination of the Plan did not affect outstanding awards under the Plan.
A summary of outstanding stock options as of September 30, 2021 and December 31, 2020 is presented below.
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||||||||||||||||||||
|
| 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 |
|
| 7,110,025 |
|
| $ | 4.63 |
|
|
| 7,245,350 |
|
| $ | 4.68 |
|
|
| 5,968,338 |
|
| $ | 4.78 |
|
|
| 7,110,025 |
|
| $ | 4.63 |
|
Granted or deemed granted |
|
| — |
|
|
| — |
|
|
| 90,000 |
|
| $ | 2.05 |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Cancelled, forfeited and expired |
|
| (1,125,753 | ) |
| $ | 3.82 |
|
|
| (225,325 | ) |
| $ | 5.08 |
|
|
| (6 | ) |
| $ | 3,600.00 |
|
|
| (1,141,687 | ) |
| $ | 3.82 |
|
Options outstanding, end of period |
|
| 5,984,272 |
|
| $ | 4.78 |
|
|
| 7,110,025 |
|
| $ | 4.63 |
|
|
| 5,968,332 |
|
| $ | 4.78 |
|
|
| 5,968,338 |
|
| $ | 4.78 |
|
Options exercisable, end of period |
|
| 5,948,771 |
|
| $ | 4.80 |
|
|
| 6,986,268 |
|
| $ | 4.47 |
|
|
| 5,942,831 |
|
| $ | 4.80 |
|
|
| 5,937,837 |
|
| $ | 4.80 |
|
Options available for future grant |
|
| — |
| (a) |
|
|
|
|
| 2,302,475 |
|
|
|
|
|
|
| 4,000,000 |
|
|
|
|
|
|
| 4,000,000 |
|
|
|
|
|
|
|
|
During the three months ended September 30,March 31, 2022, and 2021, and September 30, 2020, the Company recognized $93,000$5,000 and $121,000,$182,000, respectively, of share-based compensation expense. During the nine months ended September 30, 2021 and September 30, 2020, the Company recognized $548,000 and $549,000 of share-based compensation expenses, respectively. As of September 30, 2021,March 31, 2022, there was approximately $26,000$16,000 of total unrecognized compensation expense related to unvested share-based compensation whichawards outstanding under the former Amended and Restated 2011 Stock Incentive Plan. That expense is expected to be recognized over the weighted-average remaining vesting period of 1.5 year.1.1 years.
Collaborative Research and Development Agreement with Kainos Medicine, Inc—On February 26, 2021, the Company entered into ana collaborative research and development 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 theKainos’s research and development activity currently underway at Kainos.activities. 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 collaborative research and development agreement, the Company paid and issued to Kainos $500,000 in cash and issued 324,675 shares of common stock of the Company’s sharesCompany equivalent to $500,000 in additional consideration, for entering into the agreement, which amounts were recorded as research and development expenses in the condensed consolidated statementsstatement of operations and comprehensive income (loss). for each of the periods ended March 31, 2021 and December 31, 2021. The Company, in turn, has beenwas 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. Refer
On October 7, 2021, the Company entered into a license agreement with Kainos under which Kainos granted the Company an exclusive license in the territory encompassing the U.S., the U.K. and the EU to Note 13patent rights, know-how and other intellectual property relating to Kainos’s novel IRAK4 inhibitor, referred to as KM10544, for the treatment of cancers, including leukemia, lymphoma and solid tumor cancers. In consideration of the license, the Company paid Kainos a six-figure upfront fee in cash and agreed to make additional information.cash payments upon the achievement of specified milestones totaling in the mid-eight figures and pay a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.
During the three months ended March 31, 2021, the Company incurred $1.0 million of research and development expenses related to the Kainos collaboration and license agreement. The Company incurred 0 such expenses in the three months ended March 31, 2022.
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is separately computed at anbased upon the estimated annual effective tax rate toand the year-to-date pre-tax income (loss) and other comprehensive income.
For the three and nine months ended September 30,March 31, 2022 and 2021, the Company recorded an income tax benefit of $103,000 and a provision of $232,000 and $58,000, respectively. For three and nine month ended September 30, 2020, the Company recordedfor state income tax provision of $293,000 and $80,000.$18,000, respectively. The Company did 0t record a provision for federal income tax due to its net operating loss carryforwards. The
Company established a full valuation allowance against its federal and state deferred tax asset and there was 0 unrecognized tax benefit as of September 30, March 31, 2022 or March 31, 2021 and 2020. .
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $80,886$83,365 per month, which lease will expire on September 30, 2026. The Company also leases an additional 1,850 square feet office space in New York, New York, at a base rent of $8,691,$8,908, which lease will expire on January 31, 2023.
In addition, the Company leases 1,322 square feet of office space in Tokyo, Japan, which lease will expire on September 30, 2022 and 1,163 square feet of office space in Dubai, United Arab Emirates, which lease will expire on June 19, 2023.
The rent expense during the three months ended September 30,March 31, 2022 and 2021 was $303,000 and 2020 amounted to approximately $300,000 and $286,000, respectively, and during the nine months ended September 30, 2021 and 2020 amounted to approximately $889,000 and $895,000,$301,000, respectively.
Future minimum lease payments under the lease agreements were as follows as of September 30, 2021March 31, 2022 (in thousands):
|
| Amount |
|
| Amount |
| ||
2021 (three months) |
| $ | 290 |
| ||||
2022 |
|
| 1,174 |
| ||||
2022 (nine months) |
| $ | 880 |
| ||||
2023 |
|
| 1,058 |
|
|
| 1,058 |
|
2024 |
|
| 1,063 |
|
|
| 1,063 |
|
2025 and thereafter |
|
| 1,928 |
| ||||
2025 |
|
| 1,092 |
| ||||
2026 and thereafter |
|
| 836 |
| ||||
Total lease payments |
|
| 5,513 |
|
|
| 4,929 |
|
Less: Interest |
|
| 1,346 |
| ||||
Less imputed interest |
|
| 1,107 |
| ||||
Present value of lease liabilities |
| $ | 4,167 |
|
| $ | 3,822 |
|
As of September 30, 2021,March 31, 2022, the Company had an operating lease right-of-use asset of $3.6$3.3 million and lease liability of $4.2 million in the balance sheet.$3.8 million. The weighted average remaining term of the Company’s leases as of September 30, 2021March 31, 2022 was 4.84.4 years and the weighted-average discount rate was 11.6%12.0%.
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 acumulative total of $47.0 million of PGLG over the term of the agreement.The revised API agreement provided for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the shortfall, or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure our obligations. 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.
On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the Revised API Agreement from $50 per kilogram of PGLG to $100 per kilogram from July 1, 2019 through June 30, 2020, with the price payable after June 30, 2020 to be subject to agreement between the parties. There has been 0 changes to the price through September 30, 2021.agreement. 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 NoteNotes 5 and 6 for more information.
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding on or at any time during the ninethree months ended September 30, 2021March 31, 2022 (in thousands):
Class | Lender |
| Interest Rate |
|
| Date of Loan |
| Term of Loan |
| Principal Amount Outstanding at September 30, 2021 |
|
| Highest Principal Outstanding |
|
| Amount of Principal Repaid |
|
| Amount of Interest Paid |
|
| Lender |
| Interest Rate |
|
| Date of Loan |
| Term of Loan |
| Principal Amount Outstanding at March 31, 2022 |
|
| 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Willis Lee (2) |
| 12% |
|
| 10/29/2020 |
| Due on Demand |
|
| 100 |
|
|
| 100 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Soomi Niihara (1) |
| 12% |
|
| 12/7/2021 |
| Due on Demand |
|
| 700 |
|
|
| 700 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Soomi Niihara (1) |
| 12% |
|
| 1/18/2022 |
| Due on Demand |
|
| 300 |
|
|
| 300 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Yasushi Nagasaki (2) |
| 10% |
|
| 2/9/2022 |
| Due on Demand |
|
| 50 |
|
|
| 50 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Hope International Hospice, Inc. (1) |
| 10% |
|
| 2/9/2022 |
| Due on Demand |
|
| 350 |
|
|
| 350 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Hope International Hospice, Inc. (1) |
| 10% |
|
| 2/15/2022 |
| Due on Demand |
|
| 210 |
|
|
| 210 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Soomi Niihara (1) |
| 10% |
|
| 2/15/2022 |
| Due on Demand |
|
| 100 |
|
|
| 100 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| George Sekulich (2) |
| 10% |
|
| 2/16/2022 |
| Due on Demand |
|
| 26 |
|
|
| 26 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Soomi Niihara (1) |
| 10% |
|
| 3/7/2022 |
| Due on Demand |
|
| 200 |
|
|
| 200 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Osato Medical Clinic (3) |
| 12% |
|
| 3/11/2022 |
| Due on Demand |
|
| 250 |
|
|
| 250 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Alfred Lui (2) |
| 12% |
|
| 3/11/2022 |
| Due on Demand |
|
| 50 |
|
|
| 50 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Hope International Hospice, Inc. (1) |
| 12% |
|
| 3/15/2022 |
| Due on Demand |
|
| 150 |
|
|
| 150 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Willis Lee (2) |
| 12% |
|
| 10/29/2020 |
| Due on Demand |
|
| 100 |
|
|
| 100 |
|
|
| — |
|
|
| — |
|
| Hope International Hospice, Inc. (1) |
| 12% |
|
| 3/30/2022 |
| Due on Demand |
|
| 150 |
|
|
| 150 |
|
|
| — |
|
|
| — |
|
| ||
| Soomi Niihara (1) |
| 12% |
|
| 9/15/2021 |
| Due on Demand |
|
| 300 |
|
|
| 300 |
|
|
| — |
|
|
| — |
|
| Wei Pei Zen (2) |
| 10% |
|
| 3/31/2022 |
| Due on Demand |
|
| 200 |
|
|
| 200 |
|
|
| — |
|
|
| — |
|
| ||
|
|
|
|
|
|
|
|
| Subtotal |
|
| 400 |
|
|
| 400 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
| Subtotal |
|
| 2,836 |
|
|
| 2,836 |
|
|
| — |
|
|
| — |
|
|
Revolving line of credit agreement | Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Yutaka Niihara (1) |
| 5.25% |
|
| 12/27/2019 |
| Due on Demand |
|
| 600 |
|
|
| 800 |
|
|
| — |
|
|
| 28 |
|
| Yutaka Niihara (1) |
| 5.25% |
|
| 12/27/2019 |
| Due on Demand |
|
| 400 |
|
|
| 400 |
|
|
| — |
|
|
| 3 |
|
| ||
|
|
|
|
|
|
|
|
| Subtotal |
|
| 600 |
|
|
| 800 |
|
|
| — |
|
|
| 28 |
|
|
|
|
|
|
|
|
|
| Subtotal |
|
| 400 |
|
|
| 400 |
|
|
| — |
|
|
| 3 |
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 1,000 |
|
| $ | 1,200 |
|
| $ | — |
|
| $ | 28 |
|
|
|
|
|
|
|
|
|
| Total |
| $ | 3,236 |
|
| $ | 3,236 |
|
| $ | — |
|
| $ | 3 |
|
|
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2020:2021:
Class | 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 |
|
| Lender |
| Interest Rate |
|
| Date of Loan |
| Term of Loan |
| Principal Amount Outstanding at December 31, 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 |
|
| $ | 20 |
|
| $ | — |
|
| $ | — |
|
| |||||||||||||||||||||||||||
| Lan T. Tran (2) |
| 11% |
|
| 2/10/2018 |
| Due on Demand |
|
| — |
|
|
| 159 |
|
|
| 159 |
|
|
| 35 |
|
| |||||||||||||||||||||||||||
| Lan T. Tran (2) |
| 10% |
|
| 2/9/2019 |
| Due on Demand |
|
| 14 |
|
|
| 14 |
|
|
| — |
|
|
| — |
|
| |||||||||||||||||||||||||||
| Hope Int'l Hospice (1) |
| 12% |
|
| 9/1/2020 |
| Due on Demand |
|
| — |
|
|
| 194 |
|
|
| 194 |
|
|
| 2 |
|
| |||||||||||||||||||||||||||
| Hope Int'l Homecare (1) |
| 12% |
|
| 9/1/2020 |
| Due on Demand |
|
| — |
|
|
| 189 |
|
|
| 189 |
|
|
| 1 |
|
| |||||||||||||||||||||||||||
| Soomi Niihara (1) |
| 12% |
|
| 9/1/2020 |
| Due on Demand |
|
| — |
|
|
| 98 |
|
|
| 98 |
|
|
| 4 |
|
| Willis Lee (2) |
| 12% |
|
| 10/29/2020 |
| Due on Demand |
| $ | 100 |
|
| $ | 100 |
|
| $ | — |
|
| $ | — |
|
| ||
| Soomi Niihara (1) |
| 12% |
|
| 10/28/2020 |
| Due on Demand |
|
| — |
|
|
| 395 |
|
|
| 395 |
|
|
| 12 |
|
| Soomi Niihara (1) |
| 12% |
|
| 1/20/2021 |
| Due on Demand |
|
| — |
|
|
| 700 |
|
|
| 700 |
|
|
| 13 |
|
| ||
| Willis Lee (2) |
| 12% |
|
| 9/1/2020 |
| Due on Demand |
|
| — |
|
|
| 685 |
|
|
| 685 |
|
|
| 1 |
|
| Soomi Niihara (1) |
| 12% |
|
| 9/15/2021 |
| Due on Demand |
|
| — |
|
|
| 300 |
|
|
| 300 |
|
|
| 3 |
|
| ||
| Willis Lee (2) |
| 12% |
|
| 10/29/2020 |
| Due on Demand |
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
|
| — |
|
| Soomi Niihara (1) |
| 12% |
|
| 12/7/2021 |
| Due on Demand |
|
| 700 |
|
|
| 700 |
|
|
| — |
|
|
| — |
|
| ||
|
|
|
|
|
|
|
|
| Subtotal |
|
| 134 |
|
|
| 1,854 |
|
|
| 1,820 |
|
|
| 55 |
|
|
|
|
|
|
|
|
|
| Subtotal |
| $ | 800 |
|
| $ | 1,800 |
|
| $ | 1,000 |
|
| $ | 16 |
|
|
Revolving line of credit | Revolving line of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revolving line of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Yutaka Niihara (2) |
| 5.25% |
|
| 12/27/2019 |
| Due on Demand |
|
| 800 |
|
|
| 800 |
|
|
| 200 |
|
|
| 37 |
|
| Yutaka Niihara (1) |
| 5.25% |
|
| 12/27/2019 |
| Due on Demand |
| $ | 400 |
|
| $ | 800 |
|
| $ | 400 |
|
| $ | 35 |
|
| ||
|
|
|
|
|
|
|
|
| Subtotal |
|
| 800 |
|
|
| 800 |
|
|
| 200 |
|
|
| 37 |
|
|
|
|
|
|
|
|
|
| Subtotal |
| $ | 400 |
|
| $ | 800 |
|
| $ | 400 |
|
| $ | 35 |
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 934 |
|
| $ | 2,654 |
|
| $ | 2,020 |
|
| $ | 92 |
|
|
|
|
|
|
|
|
|
| Total |
| $ | 1,200 |
|
| $ | 2,600 |
|
| $ | 1,400 |
|
| $ | 51 |
|
|
(1) | Dr. Niihara, |
(2) | Current officer or |
(3) | Dr. Osato, a director of Emmaus and his wife are the sole owner of Osato Medical Clinic. |
See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara.
See Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the CompanyEmmaus common stock, or approximately 8.4% of the common stock outstanding as of September 30, 2021.March 31, 2022 and, as such, may be deemed to be an affiliate of the Company. As of September 30, 2021,March 31, 2022, the Company held a Telcon convertible bond in the principal amount of approximately $25.7$23.5 million as discussed in Note 5.
NOTE 13 — SUBSEQUENT EVENTS
On October 7, 2021,Subsequent to March 31, 2022, the Company entered into a License Agreement, effective asreceived $1.2 million of October 6, 2021, with Kainos, under which Kainos granted the Company an exclusive license in the territory encompassing the U.S., the U.K.proceeds from loans from related and the EUunrelated parties to patent rights, know-how and other intellectual property relating to Kainos’s novel IRAK4 inhibitor, referred to as KM10544, for the treatment of cancers, including leukemia, lymphoma and solid tumor cancers. In consideration of the license, the Company has agreed in the License Agreement to pay Kainos a six-figure upfront fee in cash within 90 days from the effective date of the License Agreement, cash payments upon the achievement of specified milestones totaling in the mid-eight figures, a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.augment its working capital.
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-K/A10-K for the year ended December 31, 20202021 filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021March 31, 2022 (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,Our lead product, Endari® (prescription-grade L-glutamine oral powder) is approved by the U.S. Food and Drug Administration, or FDA, approved our lead product, Endari® (prescription-grade L-glutamine oral powder), to reduce the severeacute complications of sickle cell disease (“SCD”), in adult and pediatric patients five years of age and older. In April 2022, Endari® has received Orphan Drug designation fromwas approved by the FDAMinistry of Health and Orphan Medical designation from the European Commission, which designations afford marketing exclusivity for Endari® for a seven-year periodPrevention in in the U.S.United Arab Emirates, or U.A.E, in adults and ten-year period in the European Union, respectively, following marketing approval.
We commenced commercializationpediatric patients five years of age and older. The approval of Endari® in the U.A.E. was the first granted outside the U.S. Applications for marketing authorization are pending in January 2018the Kingdom of Saudi Arabia, Bahrain and other Gulf Cooperation Council, or GCC, countries, as well. While the applications are pending, the FDA approval of Endari® can be referenced to allow access to Endari® on a named-patient basis.
Endari® is marketed and sold in collaboration with a contract sales organization. Effective January 2020, we have relied uponthe U.S. by our in-houseinternal 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 retail and specialty pharmacies nationwide. In April 2022 we launched an innovative telehealth solution to afford SCD patients’ direct access to Endari® remotely through a web portal managed by our strategic partners, including Asembia LLC, US Bioservices Corporation and UpScript IP Holdings, LLC.
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 September 30, 2021,March 31, 2022, our accumulated deficit was $234.4$242.9 million and we had cash and cash equivalents of $2.3$0.8 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and expand or commence early access programsbegin to realize revenues in the U.A.E. and eventual marketing and commercialization abroad.
perhaps other GCC countries. Until we can generate sufficient net revenues from Endari® sales, our future cash requirements are expected to be financed through public or private sales of equity or debt financings,securities and, loans, including loans from related parties, or possible corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
Financial Overview
Revenues, net
Since January 2018, we have generatedWe realize net revenues primarily through the salefrom sales of Endari® as a treatment for SCD.
Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have entered into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that
provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These
various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.
Under the Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company’s performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations.
Revenue from product sales is recorded at the transaction price, net ofManagement 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'sour estimates. If actual results vary from the Company's estimates, the Company adjustswe adjust the variable consideration in the period such variances become known, which would affectadjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Under the Accounting Standards Codification (“ASC”) 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligations.
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.to encourage bulk orders to generate needed working capital. Sales attributable to one-timebulk discounts offered by us increased in 2020 and 2021 and may adversely affectaffected sales in subsequent periods.the first quarter of 2022.
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 substantially higher than those of earlier studiesstudies. This is primarily due to theirthe 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 approvalapprovals 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 Ourour Business and Compliance with Law.”
General and Administrative ExpensesExpense
General and administrative expenses consistexpense consists principally of salaries and related employee costs, including share-based compensation for our directors, executive officers and employees. Other general and administrative expenses includeexpense includes facility costs, patent filing costs, and professional fees and expenses for audit, legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion, sale and marketing of our products.Endari®. Other selling cost include advertising, third party consulting costs, the cost of 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.
COVID-19
In retrospect, we believe our business was adversely by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors’ offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care. We intend to consider future changes to our business to adapt to the new post-pandemic environment, including our traditional reliance on our in-house sales force.
Inflation
Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.
Environmental Expenses
The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.
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 ninethree months ended September 30,March 31, 2022 and 2021 and 2020 were supplied by one vendor.supplier.
Results of Operations:
Three months ended September 30,March 31, 2022 and 2021 and 2020
Net revenues, Net. Net revenues increaseddecreased by $0.2$2.1 million, or 3%39%, to $5.8$3.2 million for the three months ended September 30, 2021,March 31, 2022, compared to $5.6$5.3 million for the three months ended September 30, 2020.March 31, 2021. The increasedecrease in net revenues was primarily attributable to lower bulk order purchases and recovery fromin 2022 compared to the temporary disruptionssame period in revenues related to 2021the COVID-19 pandemic during 2020..
Cost of Goods Sold. Cost of goods sold decreasedincreased by $0.1$0.6 million or 8%131%, to $1.0 million for three months ended March 31, 2022, compared to $0.4 million for the three months ended September 30,March 31, 2021 compareddue primarily to $0.5$0.8 million for the three months ended September 30, 2020.of additional reserve relating to Endari® inventory with a shelf-life of less than two years.
Research and Development Expenses. Research and development expenses decreaseddecrease by $0.2$1.3 million, or 25%74%, to $0.5 million for the three months ended September 30, 2021,March 31, 2022, compared to $0.6$1.8 million for the three months ended September 30, 2020.March 31, 2021. The decrease was primarily due to nearing completionone-time payment of $0.5 million in cash and $0.5 million in shares of common stock in 2021 under our collaborative research and development agreement with Kainos. Depending on the preclinical phaseavailability of our diverticulosis study. Wefunding, we expect our research and development costs to increase in the remainder of 2021.2022.
Selling Expenses. Selling expenses increased by $0.2 million, or 15%14%, to $1.5 million for the three months ended September 30, 2021,March 31, 2022 compared to $1.3 million for the three months ended September 30, 2020. The increase in selling expenses was primarily due to an increase of travel expenses as travel restrictions due to Covid-19 have been eased.
General and Administrative Expenses. General and administrative expenses increased by $0.2 million, or 7%, to $3.4 million for the three months ended September 30, 2021, compared to $3.2 million for the three months ended September 30, 2020. The increase in general and administrative expenses was due to an increase of $0.2 million in payroll expenses attributable to our Dubai office.
Other Income (Expense). Total other expense increased by $8.8 million, or 149%, to $2.9 million for the three months ended September 30, 2021, compared to $5.9 million of other income for the three months ended September 30, 2020.March 31, 2021. The increase was primarily due to decreases of $6.5 million in net income on investment in marketable securities, $1.4 million in change in fair value of embedded conversion option and $0.9 million in change in fair value of warrant derivative liabilities and an increase of $0.9 million in foreign exchange loss, partially offset by a decrease of $0.9 million in interest expense.
Net Income (Loss). Net loss for the three months ended September 30, 2021 increased by $8.7 million, or 156%, to a net loss of $3.2 million for the three months ended September 30, 2021 from net income of $5.6 million for the three months ended September 30, 2020. The increased net loss was due to the decrease of $8.8 million in other expense as discussed above, partially offset by a decrease of $0.1 million in income tax provision.
Nine months ended September 30, 2021and 2020
Net revenues, Net. Net revenues increased by $0.7 million, or 4%, to $17.6 million for the nine months ended September 30, 2021, compared to $16.9 million for the nine months ended September 30, 2020. The increase in net revenues was primarily attributable to higher bulk order purchases compared to the same period in 2020 and gradual recovery from the temporary disruptions in revenues related the COVID-19 pandemic during 2020.
Cost of Goods Sold. Cost of goods sold decreased by $0.1 million or 7%, to $1.3 million for nine months ended September 30, 2021, compared to $1.4 million for the nine months ended September 30, 2020.
Research and Development Expenses. Research and development expenses increased by $1.2 million, or 65%, to $3.0 million for the nine months ended September 30, 2021, compared to $1.8 million for the nine months ended September 30, 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 to lead the clinical development of Kainos’ patented IRAK4 inhibitor and an increase of $0.6 million relates to a pharmacokinetic characteristic and safety study for Endari® and clinical study in Europe partially offset by a decrease of $0.4 million relating to our diverticulosis study. We expect our research and development costs to increase in the remainder of 2021.
Selling Expenses. Selling expenses increased by $0.7 million, or 21%, to $4.3 million for the nine months ended September 30, 2021, compared to $3.5 million for the nine months ended September 30, 2020. The increase was primarily due to increased headcount of our in-house sales team and increased travel expenses.
General and Administrative Expenses. General and administrative expenses slightly decreased by $0.4 million,$53,000, or 4%2%, to $10.2$3.4 million for the ninethree months ended September 30, 2021,March 31, 2022, compared to $10.5 million for the ninethree months ended September 30, 2020.March 31, 2021. The decrease was primarily due to decreases of $0.3$0.4 million in insurance expenses, $0.3compensation expense including share-based compensation, $0.1 million of professional fees, $0.2partially offset by an increase of $0.3 million of recruitingDubai office operating expenses and $0.1 million of public relations expenses, partially offset by an increase of $0.5 million of Dubai office operating expenses.
Other Income (Expense). Total other expenseincome increased by $10.0$8.2 million, or 475%121%, to $7.9$1.4 million for the ninethree months ended September 30, 2021,March 31, 2022, compared to $2.1$6.8 million of other incomeexpense for the ninethree months ended September 30, 2020.March 31, 2021. The increase in other expenses was primarily due to decreasesincreases of $7.7 million in net gain on investment in marketable securities, $1.2$5.4 million in change in fair value of conversion feature derivative and $1.0$1.3 million in change in fair value of warrant derivative liabilities, and an increase of $2.1a $1.2 million in loss on debt extinguishment in foreign exchange loss, partially offset bythe comparable period in 2021, and a decrease of $2.3$0.3 million in interest expenses.expense in 2022.
Net Income (Loss)Loss. Net loss for the ninethree months ended September 30, 2021March 31, 2022 increased by $10.7$6.9 million, or 660%82% to $9.1$1.5 million for the ninethree months ended September 30, 2021,March 31, 2022, compared to net income of $1.6$8.4 million for the ninethree months ended September 30, 2020.March 31, 2021. The increasedecrease was primarily a result of increasesan increase of $10.0$8.2 million in other expense and $0.8income, partially offset by an increase of $1.5 million in loss from operations as discussed above.operations.
Liquidity and Capital Resources
Based on our losses to date, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to EJ Holdings and cash and cash equivalents balance of $0.8 million as of March 31, 2022, we do not have sufficient operating capital for our business without raising additional capital. Werealized a net loss of $1.5 million for the three months ended March 31, 2022 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari®Endari® sales. Based on our losses, anticipated future revenues and operating expenses and cash and cash equivalents of $2.3 million as of September 30, 2021, we believe our working capital is sufficient to meet our needs at least through the fourth quarter of 2022. If future revenues are less than anticipated or we incur more expenses thanWhile we anticipate increased net revenues as we may notexpand our commercialization of Endari® in the U.S. through telehealth and other initiatives, as well as in the U.A.E. and perhaps other GCC countries, there is no assurance that we will be able to increase our Endari® sales or attain sustainable profitability or that we will have sufficient operating capital forresources to fund our business without curtailing certain operations our investment in equity method investment (EJ Holdings) or raising additional capital. Except as described below,until we have no understanding or arrangements with respectare able to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us or at all.generate sufficient cash flow from operations.
Effective February 22, 2021, ourOur subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered intois party 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.
Liquidity represents our ability to pay our liabilities when they become due, fund our business operations, fund the operations and retrofitting of EJ Holdings’ amino acid production plant in Ube, Japan, and meet our contractual obligations, including our obligations to purchase API under our supply arrangements with Telcon, and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period, proceeds from our accounts receivable factoring arrangement with Prestige Capital and proceeds from related-party loans and other financing activities. Our short-term and long-term cash requirements consist primarily of working capital requirements, general corporate needs, our contractual obligations to purchase API from Telcon, debt service under our convertible notes payable and notes payable and planned ongoing loan funding to sustain EJ Holdings’ operations. We have no contractual commitment to provide funding to EJ Holdings, but plan to continue to do so in the foreseeable to the extent we have cash available for this purpose.
As of March 31, 2022, we had outstanding $17.6 million in principal amount of convertible promissory notes and $6.6 million in principal amount of other notes payable. Our minimum lease payment obligations were $3.8 million, of which $0.7 million was payable within 12 months.
Our API supply agreement with Telcon provides for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,”
Telcon may be entitled to payment of the shortfall or to settle the target shortfall in exchange for principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations. In February 2022 we agreed with Telcon to settle the target shortfall under the API supply agreement for 2020 and 2021 in exchange for principal and interest on our Telcon convertible bond and cash proceeds thereof.
Due to uncertainties regarding our ability to meet our current and future operating and capital expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to Financial Statements included herein.
Cash flows for the ninethree months ended September 30, 2021March 31, 2022 and September 30, 2020March 31, 2021
Net cash provided by (used in)used in operating activities
Net cash used in operating activities decreasedincreased by $2.2$0.7 million, or 51%18%, to $2.1$4.7 million for the ninethree months ended September 30, 2021March 31, 2022 from $4.4$4.0 million for the ninethree months ended September 30, 2020March 31, 2021 due to an increase of $6.9 million in net loss partially offset by a decrease of $2.5$5.4 million change in working capital.fair value of conversion feature derivative.
Net cash provided by (used in) investing activities
Net cash provided by investing activities increased by $3.0 million, or 169%, to $1.2 million for the three months ended March 31, 2022 from net cash used in investing activities decreased by $38.6 million, or 116%, to $5.3of $1.8 million for the ninethree months ended September 30, 2021 from net cash provided by investing activities of $33.3 million for the nine months ended September 30, 2020.March 31, 2021. This decreaseincrease was primarily due to a $3.0deemed proceeds of $2.9 million loan to equity method investee and a $35.6 million of proceeds from sales of convertible bonds resulting from the offset of target shortfalls against principal and interest of our Telcon stock received during 2020.convertible note against our trade discount.
Net cash provided by (used in) financing activities
Net cash provided by financing activities increaseddecreased by $7.3$5.0 million, or 71%, to net cash provided by financing activities of $7.2$2.0 million for the ninethree months ended September 30, 2021March 31, 2022 from net cash used in financing activities of $0.1$7.0 million for the ninethree months ended September 30, 2020.March 31, 2021. This increasedecrease was the result of $14.5$13.0 million in proceeds from the sales of convertible promissory notes payable in 2021, partially offset by a $6.2 million used to prepay our outstanding 10% Senior Secured Convertible Debentures.Debentures in the same period.
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting PoliciesEstimates
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 certain 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 ninethree months ended September 30, 2021.March 31, 2022.
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 September 30, 2021March 31, 2022 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 September 30, 2021.March 31, 2022. 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 September 30, 2021,March 31, 2022, because of the continuancecontinuation of a material weaknesses (the “Material Weakness”) 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 beganWe engaged in ongoing efforts to implement measures designed to remediate the underlying causes of the control deficiencies that gave riseconstituted the Material Weakness by implementing changes to the material weaknesses, including,our internal control over financial reporting, 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 |
| • |
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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 intendare in the process of implementing an integrated cloud-based enterprise resource planning (ERP) system to consider upgradingmanage our financial information to replace our outdated financial accounting systems and software, which we expect to complete before the end of 2022 as our finances permit. Further, we recentlyWe also have established 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. There is no assurance 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 toThe following should be read in conjunction with the “Risk Factors” section of the Annual Report.
The Company’s consolidated financial statements included in this Quarterly Report have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $1.5 million for the three months ended March 31, 2022 and had a working capital deficit of $28.1 million at March 31, 2022.Management expects that the Company’s current liabilities, operating losses and expected capital needs, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa region and elsewhere, will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future. To meet the Company’s current liabilities and future obligations, the Company will need to raise additional funds through related-party loans, equity and debt financings or licensing or other strategic agreements. The Company has no understanding or arrangement for any additional financing, and there can be no assurance that the Company will be able to complete any additional equity or debt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months from the date of this filing. The consolidated financial statements included in this Quarterly Report do not include any adjustments that might result from the outcome of these uncertainties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Beginning January 18th through April 19th of this year, certain of our directors and officers made loans to the Company, the proceeds of which were used to augment our working capital and for general corporate purposes, including payment of employee compensation and loans to EJ Holdings to fund operations at its facility in Ube, Japan. The loans are evidenced by demand promissory notes of the Company, the form of which is included as Exhibit 10.2 to this Quarterly Report and incorporated herein by reference. The following table sets forth information regarding the related-party loans:
Lender |
| Annual Interest Rate |
|
| Date of Loan |
| Term of Loan |
| Principal Loan Amount |
| ||
Soomi Niihara (1) |
|
| 12 | % |
| 1/18/2022 |
| On demand |
| $ | 300,000 |
|
Yasushi Nagasaki (2) |
|
| 10 | % |
| 2/9/2022 |
| On demand |
| $ | 50,000 |
|
Hope International Hospice, Inc. (3) |
|
| 10 | % |
| 2/9/2022 |
| On demand |
| $ | 350,000 |
|
Hope International Hospice, Inc. (3) |
|
| 10 | % |
| 2/15/2022 |
| On demand |
| $ | 210,000 |
|
Soomi Niihara (1) |
|
| 10 | % |
| 2/15/2022 |
| On demand |
| $ | 100,000 |
|
George Sekulich (2) |
|
| 10 | % |
| 2/16/2022 |
| On demand |
| $ | 25,622 |
|
Soomi Niihara (1) |
|
| 10 | % |
| 3/7/2022 |
| On demand |
| $ | 200,000 |
|
Osato Medical Clinic (4) |
|
| 12 | % |
| 3/11/2022 |
| On demand |
| $ | 250,000 |
|
Alfred Lui (5) |
|
| 12 | % |
| 3/11/2022 |
| On demand |
| $ | 50,000 |
|
Hope International Hospice, Inc. (3) |
|
| 12 | % |
| 3/15/2022 |
| On demand |
| $ | 150,000 |
|
Hope International Hospice, Inc. (3) |
|
| 12 | % |
| 3/30/2022 |
| On demand |
| $ | 150,000 |
|
Wei Pei Zen (5) |
|
| 10 | % |
| 3/31/2022 |
| On demand |
| $ | 200,000 |
|
Willis Lee (2) (5) |
|
| 10 | % |
| 4/14/2022 |
| On demand |
| $ | 45,000 |
|
Total Loan Amount |
|
|
|
|
|
|
|
|
| $ | 2,080,622 |
|
(1) | Soomi Niihara is the wife of Yutaka Niihara, M.D., M.P.H., the Chairman and Chief Executive Officer of the Company. |
(2) | Officer of the Company. |
(3) | Dr. Niihara is co-owner with his wife, Soomi Niihara, and a director and the Chief Executive Officer of Hope International Hospice, Inc. |
(4) | Osato Medical Clinic is owned by Masaharu Osato, M.D., a director of the Company. |
(5) | Director of the Company. |
Item 6. Exhibits
(a)Exhibits
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| Incorporated by Reference |
| |||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/ |
10.1 | Promissory Note date January18,2022 issued by registrant to Soomi Niihara. | * | ||||
10.2 | * | |||||
10.3 | Promissory Note date March 31,2022 issued by registrant to Wei Peu Zen. | * | ||||
31.1 |
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| * | |
31.2 |
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| * | |
32.1
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101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
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101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* | Filed herewith. |
** | Furnished herewith and not “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 |
| Name: |
| Yutaka Niihara, M.D., M.P.H. |
| Its: |
| Chief Executive Officer |
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| By: |
| /s/ Yasushi Nagasaki |
| Name: |
| Yasushi Nagasaki |
| Its: |
| Chief Financial Officer |
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