UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section

QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended DecemberQuarterly Period Ended March 31, 2017 2022

OR

Transition Report Pursuant to Section

TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            __________________ to ______________________.

Commission file numberFile No.:  001-35527

 

MYnd Analytics, Inc.EMMAUS LIFE SCIENCES, INC.

(Exact name of registrantRegistrant as specified in its charter)

 

Delaware

87-0419387

(State or other jurisdiction of

(I.R.S. Employer
incorporation or organization)

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

21250 Hawthorne Boulevard, Suite 800, Torrance, California

90503

(Address of principal executive offices)

(Zip code)

 

26522 La Alameda, Suite 290

Mission Viejo, California 92691

(Address of principal executive offices) (Zip Code)

(949) 420-4400(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

Common Stock, $0.001 par value

The Nasdaq Stock Market LLC
Warrants to Purchase Common StockThe Nasdaq Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes                           No     

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes                           No     

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  

Yes   No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

☐ 

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

 

Large accelerated filer          ☐

Accelerated filer

Non-accelerated filer            ☐      (Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

 

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

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

The registrant had 49,311,864 shares of common stock, par value $0.001 per share, outstanding as of May 10, 2022.

 

As of February 20, 2018, the registrant had 4,363,061 shares of Common Stock, $0.001 par value, issued and outstanding.


 

EMMAUS LIFE SCIENCES, INC.

MYnd Analytics, Inc.

For the Quarterly Period Ended March 31, 2022

INDEX

 

Page

PART I

FINANCIAL INFORMATION3

Part I. Financial Information

Item 1.

Financial Statements

3

Item 1.

Financial Statements

1

Unaudited (a)Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2017 and September 30, 20172021

3

1

Unaudited (b)Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended DecemberMarch 31, 20172022 and 20162021 (Unaudited)

4

2

Unaudited (c)Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2022 and 2021 (Unaudited)

3

(d)Condensed Consolidated Statements of Cash Flows for the three months ended DecemberMarch 31, 20172022 and 20162021 (Unaudited)

5

4

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

6

5

Item 2.

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

31

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

23

Item 4.

Controls and Procedures

47

23

PART

Part II Other Information

OTHER INFORMATION48

Item 1.

Legal Proceedings

48

26

Item 1A.

Risk Factors

48

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

26

Item 5.3.

Other InformationDefaults Upon Senior Securities

49

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

28

49

Signatures

29


 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

MYND ANALYTICS,EMMAUS LIFE SCIENCES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

     
  As of
December 31,
2017
 As of
September 30,
2017
ASSETS    
CURRENT ASSETS:        
Cash and cash equivalents $2,658,300  $5,449,000 
Accounts receivable, net  81,100   6,500 
Prepaid insurance  23,900   57,200 
Note receivable - related party     159,500 
Prepaid other assets  67,000   22,000 
Total current assets  2,830,300   5,694,200 
Property and equipment, net  136,400   120,700 
Intangible assets, net  158,300   60,200 
Goodwill  1,386,800    
Investment in Arcadian Services     195,900 
Other assets  31,300   25,100 
TOTAL ASSETS $4,543,100  $6,096,100 
LIABILITIES AND STOCKHOLDERS’ EQUITY:        
CURRENT LIABILITIES:        
Accounts payable (including $56,000 and $10,000 to related parties as of December 31, 2017 and September 30, 2017, respectively) $1,015,800  $736,900 
Accrued liabilities  22,900   55,200 
Accrued compensation  397,100   466,000 
Accrued compensation – related parties  237,200   204,600 
Accrued interest and other  3,900   3,900 
Deferred revenue - grant funds  45,900   45,900 
Current portion of note payable  16,900   31,500 
Note payable - finance company  5,600    
Current portion of capital lease  1,300   1,300 
Total current liabilities  1,746,600   1,545,300 
LONG-TERM LIABILITIES        
Long - term borrowing, net  559,700    
Accrued interest on long - term borrowing  104,200    
Long-term portion of capital lease  3,100   3,400 
Total long-term liabilities  667,000   3,400 
TOTAL LIABILITIES  2,413,600   1,548,700 
STOCKHOLDERS’ EQUITY:        
Preferred stock, $0.001 par value; authorized 15,000,000 shares, no shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively      
Common stock, $0.001 par value; 250,000,000 shares and 500,000,000 shares authorized as of December 31, 2017 and September 30, 2017 respectively, 4,360,561 and 4,299,311 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively  4,400   4,300 
Additional paid-in capital  80,541,000   80,189,700 
Accumulated deficit  (78,415,900)  (75,646,600)
Total stockholders’ equity  2,129,500   4,547,400 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $4,543,100  $6,096,100 

(In thousands, except share and per share amounts)

 

 

 

As of

 

 

 

March 31, 2022 (Unaudited)

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

813

 

 

$

2,279

 

Accounts receivable, net

 

 

938

 

 

 

1,040

 

Inventories, net

 

 

3,453

 

 

 

4,392

 

Prepaid expenses and other current assets

 

 

1,244

 

 

 

1,380

 

Total current assets

 

 

6,448

 

 

 

9,091

 

Property and equipment, net

 

 

138

 

 

 

147

 

Equity method investment

 

 

17,771

 

 

 

17,616

 

Right of use assets

 

 

3,318

 

 

 

3,485

 

Investment in convertible bond

 

 

23,521

 

 

 

26,100

 

Other assets

 

 

297

 

 

 

295

 

Total assets

 

$

51,493

 

 

$

56,734

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

9,718

 

 

$

9,189

 

Operating lease liabilities, current portion

 

 

738

 

 

 

740

 

Conversion feature derivative, notes payable

 

 

4,427

 

 

 

7,507

 

Other current liabilities

 

 

2,822

 

 

 

4,404

 

Revolving line of credit from related party

 

 

400

 

 

 

400

 

Warrant derivative liabilities

 

 

755

 

 

 

1,503

 

Notes payable, current portion

 

 

2,286

 

 

 

2,399

 

Notes payable to related parties

 

 

2,836

 

 

 

800

 

Convertible notes payable, net of discount

 

 

10,569

 

 

 

10,158

 

Total current liabilities

 

 

34,551

 

 

 

37,100

 

Operating lease liabilities, less current portion

 

 

3,084

 

 

 

3,261

 

Other long-term liabilities

 

 

31,507

 

 

 

33,173

 

Notes payable, less current portion

 

 

1,500

 

 

 

1,500

 

Convertible notes payable

 

 

3,150

 

 

 

3,150

 

Total liabilities

 

 

73,792

 

 

 

78,184

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

49

 

Additional paid-in capital

 

 

220,027

 

 

 

220,022

 

Accumulated other comprehensive income (loss)

 

 

433

 

 

 

(255

)

Accumulated deficit

 

 

(242,808

)

 

 

(241,266

)

Total stockholders’ deficit

 

 

(22,299

)

 

 

(21,450

)

Total liabilities & stockholders’ deficit

 

$

51,493

 

 

$

56,734

 

See

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


MYND ANALYTICS,EMMAUS LIFE SCIENCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

REVENUES, NET

 

$

3,234

 

 

$

5,335

 

COST OF GOODS SOLD

 

 

1,007

 

 

 

436

 

GROSS PROFIT

 

 

2,227

 

 

 

4,899

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Research and development

 

 

466

 

 

 

1,809

 

Selling

 

 

1,460

 

 

 

1,283

 

General and administrative

 

 

3,369

 

 

 

3,422

 

  Total operating expenses

 

 

5,295

 

 

 

6,514

 

LOSS FROM OPERATIONS

 

 

(3,068

)

 

 

(1,615

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Loss on debt extinguishment, net

 

 

 

 

 

(1,172

)

Change in fair value of warrant derivative liabilities

 

 

748

 

 

 

(529

)

Change in fair value of conversion feature derivative, notes payable

 

 

3,080

 

 

 

(2,338

)

Realized loss on investment on convertible bond

 

 

(133

)

 

 

 

Net loss on equity method investment

 

 

(566

)

 

 

(754

)

Foreign exchange loss

 

 

(1,191

)

 

 

(1,132

)

Interest and other income

 

 

222

 

 

 

190

 

Interest expense

 

 

(737

)

 

 

(1,054

)

  Total other income (expense)

 

 

1,423

 

 

 

(6,789

)

LOSS BEFORE INCOME TAXES

 

 

(1,645

)

 

 

(8,404

)

INCOME TAXES (BENEFIT)

 

 

(103

)

 

 

18

 

NET LOSS

 

 

(1,542

)

 

 

(8,422

)

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

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

 

 

331

 

 

 

165

 

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

 

 

  Three Months Ended
December 31,
  2017 2016
REVENUES    
Neurometric Services $53,300  $22,200 
Telepsychiatry Services  68,700    
Total Revenues $122,000  $22,200 
         
OPERATING EXPENSES        
Cost of revenue  84,900   3,700 
Research  81,500   31,600 
Product development  269,200   295,300 
Sales and marketing  667,200   105,700 
General and administrative  1,774,800   1,021,800 
         
Total operating expenses  2,877,600   1,458,100 
         
OPERATING LOSS  (2,755,600)  (1,435,900)
         
OTHER INCOME (EXPENSE):        
Interest expense, net  (13,700)  (2,500)
LOSS BEFORE PROVISION FOR INCOME TAXES  (2,769,300)  (1,438,400)
Income taxes     1,800 
NET LOSS $(2,769,300) $(1,440,200)
         
BASIC AND DILUTED LOSS PER SHARE: $(0.64) $(0.69)
         
WEIGHTED AVERAGE SHARES OUTSTANDING:        
Basic and Diluted  4,332,927   2,101,061 

SeeThe accompanying notes to unauditedare 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

 

 

Income

 

 

Deficit

 

 

Deficit

 

Balance January 1, 2022

 

49,311,864

 

 

$

49

 

 

$

220,022

 

 

$

(255

)

 

$

(241,266

)

 

$

(21,450

)

Share-based compensation

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

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

 

 

 

 

 

 

 

 

 

 

331

 

 

 

 

 

 

331

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,542

)

 

 

(1,542

)

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.



MYND ANALYTICS,

EMMAUS LIFE SCIENCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(1,542

)

 

$

(8,422

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15

 

 

 

15

 

Inventory reserve

 

 

794

 

 

 

162

 

Amortization of discount of notes payable and convertible notes payable

 

 

411

 

 

 

669

 

Foreign exchange adjustments

 

 

1,205

 

 

 

1,180

 

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

)

Share-based compensation

 

 

5

 

 

 

181

 

Shares issued for services

 

 

 

 

 

500

 

Change in fair value of warrant derivative liabilities

 

 

(748

)

 

 

529

 

Change in fair value of conversion feature derivative, note payable

 

 

(3,080

)

 

 

2,338

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

102

 

 

 

(2,176

)

Inventories

 

 

143

 

 

 

180

 

Prepaid expenses and other current assets

 

 

103

 

 

 

158

 

Other non-current assets

 

 

160

 

 

 

122

 

Income tax receivable and payable

 

 

10

 

 

 

33

 

Accounts payable and accrued expenses

 

 

530

 

 

 

(1,295

)

Other current liabilities

 

 

(2,980

)

 

 

42

 

Other long-term liabilities

 

 

(443

)

 

 

(123

)

Net cash flows used in operating activities

 

 

(4,733

)

 

 

(4,001

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Sale of convertible bond

 

 

2,919

 

 

 

 

Purchases of property and equipment

 

 

(2

)

 

 

 

Loan to equity method investee

 

 

(1,690

)

 

 

(1,769

)

Net cash flows provided by (used in) investing activities

 

 

1,227

 

 

 

(1,769

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from notes payable issued

 

 

2,056

 

 

 

700

 

Proceeds from convertible notes payable issued

 

 

 

 

 

14,390

 

Payments of notes payable

 

 

 

 

 

(844

)

Payments of convertible notes

 

 

 

 

 

(7,200

)

Net cash flows provided by financing activities

 

 

2,056

 

 

 

7,046

 

Effect of exchange rate changes on cash

 

 

(16

)

 

 

(4

)

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

 

 

(1,466

)

 

 

1,272

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

2,279

 

 

 

2,487

 

Cash, cash equivalents and restricted cash, end of period

 

$

813

 

 

$

3,759

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

212

 

 

$

319

 

Income taxes paid

 

$

4

 

 

$

5

 

NON-CASH INVESTMENT AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Debt discount due to conversion features derivative

 

$

 

 

$

5,555

 

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


EMMAUS LIFE SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  Three Months Ended
December 31,
  2017 2016
OPERATING ACTIVITIES:        
Net loss $(2,769,300) $(1,440,200)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  23,300   8,000 
Provision for doubtful accounts  600    
Stock-based compensation  336,600   501,000 
Common stock issued to vendors for services  14,800    
Accretion of debt discount  4,700    
Changes in operating assets and liabilities:        
Accounts receivable  (18,100)  1,900 
Prepaid expenses and other assets  6,100   36,400 
Accounts payable and accrued liabilities  (38,600)  88,300 
Accrued compensation     38,800 
Net cash used in operating activities  (2,439,900)  (765,800)
INVESTING ACTIVITIES:        
Purchase of furniture and equipment  (28,100)  (1,600)
Payment for acquisition of business, net of cash acquired  (306,600)   
Costs incurred to develop intangible assets     (2,100)
Net cash used in investing activities  (334,700)  (3,700)
FINANCING ACTIVITIES:        
Principal payments on note payable  (15,800)   
Principal payments on capital lease  (300)  (300)
Proceeds from sale of common stock     1,500,000 
Net cash provided by (used in) financing activities  (16,100)  1,499,700 
NET INCREASE(DECREASE) IN CASH  (2,790,700)  730,200 
CASH AND CASH EQUIVALENTS - BEGINNING OF THE PERIOD  5,449,000   318,200 
CASH AND CASH EQUIVALENTS - END OF THE PERIOD $2,658,300  $1,048,400 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $3,000  $2,500 
Income taxes $  $1,800 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:        
Long-term borrowings assumed in business combination $651,700  $ 

NOTE 1 — BASIS OF PRESENTATION

SeeThe accompanying notes to unaudited condensed consolidated interim financial statements


MYND ANALYTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Organization and Nature of Operations

MYnd Analytics, of Emmaus Life Sciences, Inc., (“MYnd,” “CNS,”Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “us,” “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®, formerly known as CNS Response Inc., was incorporatedand 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 Delawareconjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 20, 1987, under31, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021 has been derived from the name Age Research, Inc. Prior to January 16, 2007,audited consolidated balance sheet at December 31, 2021 contained in the Company (then called Strativation, Inc.) was a “shell company” with nominal assets and our sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On January 16, 2007,Annual Report. The results of operations for the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response, Inc., a California corporation formed on January 11, 2000 (“CNS California”), and CNS Merger Corporation, a California corporation and the Company’s wholly-owned subsidiary (“MergerCo”) pursuant to which the Company agreed to acquire CNS California in a merger transaction wherein MergerCo would merge with and into CNS California, with CNS California being the surviving corporation (the “Merger”). Onthree months ended March 7, 2007, the Merger closed, CNS California became a wholly-owned subsidiary31, 2022, are not necessarily indicative of the Company, and onresults to be expected for the same date the corporate name was changed from Strativation, Inc. to CNS Response, Inc. At the annual meeting held on October 28, 2015, shareholders approved a change in our name from CNS Response, Inc. to MYnd Analytics, Inc. On November 2, 2015, the Company filed an amendment to its Articlesfull year or any future interim period.

Nature of Incorporation which, among other things, effected the name change to MYnd Analytics, Inc.

Operations

The Company is a predictive analyticscommercial-stage biopharmaceutical company that has developed a decision support toolengaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. The Company’s lead product, Endari® (prescription grade L-glutamine oral powder), is approved by the U.S. Food and Drug Administration, or FDA, to help physicians reduce trialthe acute complications of sickle cell disease (“SCD”) in adult and error treatmentpediatric patients five years of age and older.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in mental health and provide more personalized care to patients. The Company provides objective clinical decision support to healthcare providersNote 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K for the personalized treatment of behavioral disorders, including depression, anxiety, bipolar disorder, post-traumatic stress disorder (“PTSD”) and other non-psychotic disorders. The Company uses its proprietary neurometric platform, PEER Online, to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict the likelihood of response by an individual to a range of medications prescribed for the treatment of behavioral disorders. The Company continues to be focused on military personnel andyear ended December 31, 2021. There have been no material changes in these policies or their family members who are suffering from depression, PTSD and other disorders through the military, Veterans Administration, and Canadian Forces. Commercial expansion is focused on payer and self-insured markets, provider direct sales to multi-physician and multi-practice provider groups, and patient direct referrals to these groups. The Company continues to expand its database, including younger adults and adolescents.

Arcadian Telepsychiatry Services LLC (“Arcadian Services”), our wholly owned subsidiary acquired in November 2017, manages the delivery of telebehavioral health services through a multi-state network of licensed and credentialed psychiatrists, psychologists and other behavioral health therapists (“Providers”). Although many companies provide broad telehealth services within the U.S., only a few companies have a primary focus on telepsychiatry and telebehavioral health. Arcadian Services’ business model is unique, because it has access to a broad network of licensed behavioral health professionals exclusively focused on telepsychiatry and telebehavioral health. These Providers collectively offer a full suite of behavioral health and wellness services, including short-term (urgent), medium-term (rehabilitation) and long-term (management) behavioral care.

Private Placements

Between September 30, 2016, and March 20, 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in private placements to 13 accredited investors, for which it received gross cash proceeds of $2,981,300. Five of the 13 accredited investors were affiliates of the Company which represented 70% of such cash proceeds.


Public Offering

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8,790,000. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date.

In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant.

Acquisition

On November 13, 2017, Arcadian Telepsychiatry LLC (“Arcadian”), MYnd and certain third-party physicians entered into a number of transactions to reorganize the operations of Arcadian and implement a new ownership and management structure. Arcadian converted into a Pennsylvania professional corporation after the equity interests in Arcadian were sold to a third - party physician for nominal consideration. On that same date, Arcadian entered into a Management Services Agreement with Arcadian Telepsychiatry Services LLC (“Arcadian Services”) and transferred certain assets and liabilities to Arcadian Services including its debt obligations. MYnd subsequently acquired 100% of the equity interests in Arcadian Services and in consideration for the transfer of the equity interests in Arcadian Services, MYnd entered into an employment agreement with the founder of Arcadian, pursuant to which MYnd will continue to employ the former founder of Arcadian as the CEO of Arcadian Services for an annual salary of $215,000 and granted him options to purchase 35,000 shares of common stock of MYnd. In addition, MYnd agreed to guarantee Arcadian Services’ assumed debt.

Arcadian Services manages the delivery of telebehavioral health services through a multi–state network of licensed and credentialed psychiatrists, psychologists and other behavioral health therapists (“Providers”). As a result of certain state regulations, Arcadian Services entered into several management services agreements with professional entities owned by physicians who are licensed in those states to provide telepsychiatry services directly to patients. Arcadian Services will collect revenue based on management fees charged to the doctors who own the professional entities through which the telepsychiatry services are being delivered. Arcadian Services is not capital intensive and had a limited number of employees, therefore their balance sheet consisted primarily of working capital accounts and a limited amount of property and equipment primarily office furniture and computer equipment. Working capital and property equipment (no value assigned) were deemed to be at their fair value due to their short–term nature. The Company hired an independent third–party Valuation Services firm to assist the Company in its accounting for the intangibles and non–compete in accordance with Financial Accounting Standards Board Accounting Standards (“FASB”) Codification 805, Business Combinations (“ASC 805”).application.

 

Going Concern Uncertainty

concernThe accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation ofon the basis that the Company will continue as a going concern. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.

The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During three months ended December 31, 2017, the Company incurred a net loss of $2.8$1.5 million for the three months ended March 31, 2022, and used $2.4 millionhad a working capital deficit of net cash in operating activities. As of December 31, 2017,$28.1 million. Management expects that the Company’s accumulated deficit was $78.4 million. In connection with these consolidated financial statements, management evaluated whether there were conditionscurrent liabilities, operating losses and events, consideredexpected capital needs, including the expected costs relating to the commercialization of Endari® in the aggregate,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 raisedthe 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 meet its obligationscontinue as they become duea going concern for the next twelve12 months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.


If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.

To date, the Company has financed its cash requirements primarily from debt and equity financings.this filing. The Company will need to raise additional funds immediately to continue its operations and needs to raise substantial additional funds before the Company can increase demand for its PEER Online and telepsychiatry services. Until it can generate sufficient revenues to meet its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in this Quarterly Report on Form 10-Q.  The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Management has considered all recent accounting pronouncements and 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.

Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, is 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 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 necessaryreserved by Prestige Capital and paid to Emmaus Medical, less 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 has guaranteed Emmaus Medical’s obligations under the purchase and sale agreement. At March 31, 2022, accounts receivable included 0 factoring accounts receivable and there were 0 liabilities related to factoring reflected in other current liabilities. For three months ended March 31, 2022 and March 31, 2021, the Company incurred approximately $53,000, and $31,000, respectively, of factoring fees.

Net loss per share — In accordance with Accounting Standard Codification (“ASC”) 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed in a manner similar to basic 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 March 31, 2022 and March 31, 2021, the Company is unable to continuehad outstanding potentially dilutive securities exercisable for or convertible into 23,261,199 shares and 24,515,738 shares, respectively, of common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since the potential dilutive securities were anti-dilutive for each of the three months ended March 31, 2022 and 2021.

NOTE 3 — REVENUES, NET

Revenues, net disaggregated by category, were as a going concern.follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Endari®

 

$

3,048

 

 

$

5,176

 

Other

 

 

186

 

 

$

159

 

Revenues, net

 

$

3,234

 

 

$

5,335

 

 

The Aspire Capital Equity Linefollowing table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2022 and March 31, 2021 (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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

$

134

 

 

$

2,119

 

 

$

473

 

 

$

2,726

 

Provision related to sales in the current year

 

 

575

 

 

 

864

 

 

 

57

 

 

 

1,496

 

Adjustments related prior period sales

 

 

14

 

 

 

2

 

 

 

(37

)

 

 

(21

)

Credit and payments made

 

 

(281

)

 

 

(792

)

 

 

 

 

 

(1,073

)

Balance as of March 31, 2021

 

$

442

 

 

$

2,193

 

 

$

493

 

 

$

3,128

 

The following table summarizes net revenues attributable to each of Creditour customers that accounted for 10% or more of net revenues (as a percentage of net revenues) during the periods presented:

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Customer A

 

 

1

%

 

 

63

%

Customer B

 

 

46

%

 

 

17

%

Customer C

 

 

15

%

 

 

9

%

Customer D

 

 

16

%

 

 

Total

 

 

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 $10 million in upfront fees 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 fees. The upfront fees are included in other long-term liabilities as unearned revenue as of both March 31, 2022 and December 31, 2021. Refer to Notes 6 and 11 for additional details.

NOTE 4 — SELECTED FINANCIAL STATEMENT - ASSETS

Inventories consisted of the following (in thousands):

 

March 31, 2022

 

 

December 31, 2021

 

Raw materials and components

$

1,477

 

 

$

1,439

 

Work-in-process

 

132

 

 

 

115

 

Finished goods

 

6,028

 

 

 

6,228

 

Inventory reserve

 

(4,184

)

 

 

(3,390

)

Total

$

3,453

 

 

$

4,392

 

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

 

March 31, 2022

 

 

December 31, 2021

 

Prepaid insurance

$

466

 

 

$

660

 

Prepaid expenses

 

399

 

 

 

326

 

Other current assets

 

379

 

 

 

394

 

Total

$

1,244

 

 

$

1,380

 

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

 

March 31, 2022

 

 

December 31, 2021

 

Equipment

$

344

 

 

$

342

 

Leasehold improvements

 

39

 

 

 

39

 

Furniture and fixtures

 

103

 

 

 

103

 

Construction-in-progress

 

57

 

 

 

57

 

Total property and equipment

 

543

 

 

 

541

 

Less: accumulated depreciation

 

(405

)

 

 

(394

)

Property and equipment, net

$

138

 

 

$

147

 

During each of the three months ended March 31, 2022 and 2021, depreciation expenses were approximately $11,000.

NOTE 5 — INVESTMENTS

Investment in convertible bond -On December 6, 2016,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% a year, payable quarterly. Beginning October 16, 2021, the Company became 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 monthly based on the volume-weighted average market price of Telcon shares as reported on Korean Securities Dealers Automated Quotations Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares or upon a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The conversion price as of March 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 early redemption right described above or


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.

Concurrent with the purchase of the convertible bond, the Company entered into an 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.

The Company has elected the fair value option method of accounting for the investment in 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 (loss). The fair value and any changes in fair value in the convertible bond is determined using a binominal lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock Purchaseover 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 March 31, 2022 and December 31, 2021 (in thousands):

Investment in convertible bond

 

March 31, 2022

 

 

December 31, 2021

 

Balance, beginning of period

 

$

26,100

 

 

$

27,866

 

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

 

 

466

 

 

 

(1,766

)

Balance, end of period

 

$

23,521

 

 

$

26,100

 

The fair value as of March 31, 2022 and December 31, 2021 was based upon following assumptions:

 

 

March 31, 2022

 

 

December 31, 2021

 

Principal outstanding (South Korean won)

 

KRW 26.5 billion

 

 

KRW 30 billion

 

Stock price

 

KRW2,410

 

 

KRW2,925

 

Expected life (in years)

 

 

8.55

 

 

 

8.79

 

Selected yield

 

 

11.00

%

 

 

10.50

%

Expected volatility (Telcon common stock)

 

 

80.43

%

 

 

81.31

%

Risk-free interest rate (South Korea government bond)

 

 

2.94

%

 

 

2.19

%

Expected dividend yield

 

 

 

 

 

 

Conversion price

 

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 a 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%, payable annually. The parties also contemplated that the Ube facility would eventually supply the Company with the facility’s output of amino acids and that the operation of the facility would be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility would be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the three months ended March 31, 2022, the Company made an additional $1.7 million of loans to EJ Holdings. As of March 31, 2022, and December 31, 2021, the loans receivable from EJ Holdings were approximately $22.2 million and $22.6 million, respectively, as reflected in equity method investment on the consolidated balance sheets.

EJ Holdings is engaged in retrofitting the Ube facility in order to seek regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no substantial 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 loan financing provided by the Company to acquire the Ube facility and fund EJ Holdings’ activities, which are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and, its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings. Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.

The Company’s share of the losses reported by EJ Holdings are classified as net losses 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 months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

 

 

2022

(Unaudited)

 

 

2021

(Unaudited)

 

REVENUES, NET

$

54

 

 

$

59

 

NET LOSS

$

(1,414

)

 

$

(1,886

)

NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES

Accounts payable and accrued expenses consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

 

 

March 31, 2022

 

 

December 31, 2021

 

Accounts payable:

 

 

 

 

 

 

 

 

Clinical and regulatory expenses

 

$

699

 

 

$

534

 

Professional fees

 

 

817

 

 

 

477

 

Selling expenses

 

 

671

 

 

 

932

 

Manufacturing costs

 

 

283

 

 

 

378

 

Board member compensation

 

 

283

 

 

 

136

 

Other vendors

 

 

120

 

 

 

262

 

Total accounts payable

 

 

2,873

 

 

 

2,719

 

Accrued interest payable, related parties

 

 

142

 

 

 

91

 

Accrued interest payable

 

 

618

 

 

 

579

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll expenses

 

 

877

 

 

 

1,097

 

Government rebates and other rebates

 

 

4,461

 

 

 

4,371

 

Other accrued expenses

 

 

747

 

 

 

332

 

Total accrued expenses

 

 

6,085

 

 

 

5,800

 

Total accounts payable and accrued expenses

 

$

9,718

 

 

$

9,189

 

Other current liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

 

March 31, 2022

 

 

December 31, 2021

 

Trade discount

$

1,600

 

 

$

3,000

 

Other current liabilities

 

1,222

 

 

 

1,404

 

Total other current liabilities

$

2,822

 

 

$

4,404

 

Other long-term liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

 

March 31, 2022

 

 

December 31, 2021

 

Trade discount

$

21,480

 

 

$

23,148

 

Unearned revenue

 

10,000

 

 

 

10,000

 

Other long-term liabilities

 

27

 

 

 

25

 

Total other long-term liabilities

$

31,507

 

 

$

33,173

 


 On June 12, 2017, the Company entered into an API Supply 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 target 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 “Purchase Agreement”“revised API agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”)The Company purchased $200,000 and $2.0 million of PGLG from Telcon in the three months ended March 31, 2022, and March 31, 2021, respectively, of which provides$200,000 and $378,000 were reflected in accounts payable as of March 31, 2022 and December 31, 2021, 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 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 “target shortfall,” or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that uponare pledged as a collateral to secure our obligations. See Note 5 for information regarding a settlement in the termsthree months ended March 31, 2022 of the target shortfall for 2020 and subject2021.

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at March 31, 2022 and December 31, 2021 (in thousands except for number of shares):

Year

Issued

 

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

 

 

 

 

$

821

 

 

$

 

 

$

821

 

 

 

 

 

2021

 

11%

 

 

Due on demand - 2 years

 

 

 

 

 

2,945

 

 

 

 

 

 

2,945

 

 

 

 

 

2022

 

10%

 

 

Due on demand

 

 

 

 

 

20

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,786

 

 

$

 

 

$

3,786

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

2,286

 

 

$

 

 

$

2,286

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

1,500

 

 

$

 

 

$

1,500

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

$

100

 

 

 

 

 

 

100

 

 

 

 

 

2021

 

12%

 

 

Due on demand

 

 

 

 

 

700

 

 

 

 

 

 

700

 

 

 

 

 

2022

 

10-12%

 

 

Due on demand

 

 

 

 

 

2,036

 

 

 

 

 

 

2,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,836

 

 

$

 

 

$

2,836

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

2,836

 

 

$

 

 

$

2,836

 

 

 

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

 

3,150

 

 

 

 

 

 

3,150

 

 

 

319,804

 

 

2021

 

2%

 

 

3 years

 

$

1.48

 

(a)

 

14,490

 

 

 

3,921

 

 

 

10,569

 

 

 

9,806,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,640

 

 

$

3,921

 

 

$

13,719

 

 

 

10,126,654

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

14,490

 

 

$

3,921

 

 

$

10,569

 

 

 

9,806,850

 

 

 

 

 

 

 

 

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,

2021

 

 

Unamortized

Discount

December 31,

2021

 

 

Carrying

Amount

December 31,

2021

 

 

Underlying

Shares

Notes

December 31, 2021

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

869

 

 

$

 

 

$

869

 

 

 

 

 

2021

 

11%

 

 

Due on demand - 2 years

 

 

 

 

 

3,030

 

 

 

 

 

 

3,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,899

 

 

$

 

 

$

3,899

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

2,399

 

 

$

 

 

$

2,399

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

1,500

 

 

$

 

 

$

1,500

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

$

100

 

 

$

 

 

$

100

 

 

 

 

 

2021

 

12%

 

 

Due on demand

 

 

 

 

 

700

 

 

 

 

 

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

800

 

 

$

 

 

$

800

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

800

 

 

$

 

 

$

800

 

 

 

 

 

Convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,640

 

 

$

4,332

 

 

$

13,308

 

 

 

10,173,099

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

14,490

 

 

$

4,332

 

 

$

10,158

 

 

 

9,856,343

 

 

 

 

 

 

 

 

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)

This note is convertible into shares of EMI Holding, Inc., a wholly owned subsidiary of Emmaus.

The weighted-average stated annual interest rate on notes payable was 6% as of both March 31, 2022 and December 31, 2021. The weighted-average effective annual interest rate of notes payable as of both March 31, 2022 and December 31, 2021 was 15%, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the conditionsnotes.

As of March 31, 2022, future contractual principal payments due on notes payable were as follows (in thousands):

Year Ending

 

 

 

 

2022

 

19,612

 

(a)

2023

 

4,650

 

 

Total

$

24,262

 

 

(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 Yutaka Niihara, M.D., M.P.H., the Company’s Chairman and limitations set forth therein, Aspire CapitalChief Executive Officer. Under the agreement, at the Company’s request from time to time Dr. Niihara may, but is committednot obligated to, purchaseloan or re-loan to the Company up to an aggregate$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 $10.0interest, 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. As of March 31, 2022 and December 31, 2021, the outstanding balance of $400,000 was reflected in revolving line of credit, related party on the condensed consolidated balance sheets. With the tax-gross up, the effective interest rate on the outstanding balance as of 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 February 9, 2021, the Company entered into a securities purchase agreement 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. The Company sold and issued approximately $14.5 million of the convertible promissory notes.


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, unless earlier converted or prepaid. The convertible promissory notes became redeemable in whole or in part at the election of the holders on or after February 28, 2022. The Company is entitled to prepay up to 50% of the principal amount of the convertible promissory notes at any time on or before February 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 is 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 the condensed consolidated statements of operations. The following table sets forth the fair value of the conversion feature liability as of March 31, 2022, and December 31, 2021 (in thousands):

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 values as of March 31, 2022, and December 31, 2021 were based upon following assumptions:

Convertible promissory notes

 

March 31, 2022

 

 

December 31, 2021

 

Stock price

 

$

1.00

 

 

$

1.67

 

Conversion price

 

$

1.48

 

 

$

1.48

 

Selected yield

 

 

23.42

%

 

 

21.99

%

Expected volatility

 

 

50

%

 

 

50

%

Time until maturity (in years)

 

 

1.91

 

 

 

2.16

 

Dividend yield

 

 

 

 

Risk-free rate

 

 

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 GPB Warrant is separately recognized under ASC 815-40 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 the condensed consolidated statements of operations.

The following table presents the change in fair value of the GPB Warrant as of March 31, 2022 and December 31, 2021 (in thousands):

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 Merton model.

The fair values as of March 31, 2022, and December 31, 2021 were based on upon following assumptions:

 

 

March 31, 2022

 

 

December 31, 2021

 

Adjusted exercise price

 

$

10.28

 

 

$

10.28

 

Common stock fair value

 

$

1.00

 

 

$

1.67

 

Risk‑free interest rate

 

 

1.79

%

 

 

0.56

%

Volatility

 

 

97.00

%

 

 

104.00

%

Time until expiration (years)

 

 

1.25

 

 

 

1.50

 

Expected dividend yield

 

 

 

 

Number outstanding

 

 

252,802

 

 

 

252,802

 

Extension of a 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 the extension, the Company issued to the note holder five-year 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 warrants are 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 the condensed consolidated statements of operations.

The following table presents the fair values and changes in fair value of the warrants as of March 31, 2022 and December 31, 2021 (in thousands):

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 values of the warrant derivative liability were determined using the Black-Scholes Merton model 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

 


A summary of outstanding warrants as of March 31, 2022 and December 31, 2021 is presented below:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Warrants outstanding beginning of period

 

 

8,236,017

 

 

 

8,439,480

 

Granted

 

 

0

 

 

 

 

Exercised

 

 

 

 

 

 

Cancelled, forfeited or expired

 

 

 

 

 

(203,463

)

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 March 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, 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

 

 

 

 

 

Stock options – The Company’s former Amended and Restated 2011 Stock Incentive Plan expired on May 3, 2021, and 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 previously maintained an Amended and Restated 2012 Omnibus Incentive Compensation Plan, 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 be 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 splits, stock dividends, reverse stock splits, recapitalizations and other similar events. As of March 31, 2022, no awards were outstanding under the 2021 Stock Incentive Plan.

A summary of the Company’s stock option activity for three months ended March 31, 2022 and for the year ended December 31, 2021 is presented below.

 

 

March 31, 2022

 

 

December 31, 2021

 

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

Options outstanding, beginning of period

 

 

5,968,338

 

 

$

4.78

 

 

 

7,110,025

 

 

$

4.63

 

Granted or deemed granted

 

 

 

 

$

 

 

 

 

 

$

 

Exercised

 

 

 

 

$

 

 

 

 

 

$

 

Cancelled, forfeited and expired

 

 

(6

)

 

$

3,600.00

 

 

 

(1,141,687

)

 

$

3.82

 

Options outstanding, end of period

 

 

5,968,332

 

 

$

4.78

 

 

 

5,968,338

 

 

$

4.78

 

Options exercisable, end of period

 

 

5,942,831

 

 

$

4.80

 

 

 

5,937,837

 

 

$

4.80

 

Options available for future grant

 

 

4,000,000

 

 

 

 

 

 

 

4,000,000

 

 

 

 

 

During the three months ended March 31, 2022, and 2021, the Company recognized $5,000 and $182,000, respectively, of share-based compensation expense. As of March 31, 2022, there was approximately $16,000 of total unrecognized compensation expense related to unvested share-based compensation awards outstanding under the former Amended and Restated 2011 Stock Incentive Plan. That expense is expected to be recognized over the 30-month termweighted-average remaining vesting period of 1.1 years.


Collaborative Research and Development Agreement with Kainos Medicine, IncOn February 26, 2021, the Company entered into a 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 Kainos’s research and development activities. 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 324,675 shares of common stock of the Purchase Agreement.Company equivalent to $500,000 in additional consideration, which amounts were recorded as research and development expenses in the statement of operations and comprehensive income (loss) for each of the periods ended March 31, 2021 and December 31, 2021. The Company, in turn, was 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.

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 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 paid Kainos a six-figure upfront fee in cash and agreed to make additional 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 computed based upon the estimated annual effective tax rate and the year-to-date pre-tax income (loss) and other comprehensive income.

For the three months ended March 31, 2022 and 2021, the Company recorded an income tax benefit of $103,000 and a provision for state income tax of $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 unrecognized tax benefit as of March 31, 2022 or March 31, 2021.  

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 $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 $8,908, 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 March 31, 2022 and 2021 was $303,000 and $301,000, respectively.

Future minimum lease payments were as follows as of March 31, 2022 (in thousands):

 

 

Amount

 

2022 (nine months)

 

$

880

 

2023

 

 

1,058

 

2024

 

 

1,063

 

2025

 

 

1,092

 

2026 and thereafter

 

 

836

 

Total lease payments

 

 

4,929

 

Less imputed interest

 

 

1,107

 

Present value of lease liabilities

 

$

3,822

 


 

As of DecemberMarch 31, 2022, the Company had an operating lease right-of-use asset of $3.3 million and lease liability of $3.8 million. The weighted average remaining term of the Company’s leases as of March 31, 2022 was 4.4 years and the weighted-average discount rate was 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 $9.9$31.8 million in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”). The revised API agreement is effective for a term of five years and will renew automatically for 10 successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a cumulative 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 and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the Purchase Agreement remains availablerevised API 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 Notes 5 and 6 for salemore information.


NOTE 12 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to Aspire Capital.loans from related parties outstanding on or at any time during the three months ended March 31, 2022 (in thousands):

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Class

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Hope International Hospice, Inc. (1)

 

12%

 

 

3/30/2022

 

Due on Demand

 

 

150

 

 

 

150

 

 

 

 

 

 

 

 

 

Wei Pei Zen (2)

 

10%

 

 

3/31/2022

 

Due on Demand

 

 

200

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

2,836

 

 

 

2,836

 

 

 

 

 

 

 

 

Revolving line of credit agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (1)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

 

400

 

 

 

400

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

400

 

 

 

400

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,236

 

 

$

3,236

 

 

$

 

 

$

3

 

 

 

Basis of Presentation


 

The accompanying unaudited condensed consolidated financial statements offollowing table sets forth information relating to loans from related parties outstanding at any time during the Company have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In the opinionyear ended December 31, 2021:

Class

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Willis Lee (2)

 

12%

 

 

10/29/2020

 

Due on Demand

 

$

100

 

 

$

100

 

 

$

 

 

$

 

 

 

Soomi Niihara (1)

 

12%

 

 

1/20/2021

 

Due on Demand

 

 

 

 

 

700

 

 

 

700

 

 

 

13

 

 

 

Soomi Niihara (1)

 

12%

 

 

9/15/2021

 

Due on Demand

 

 

 

 

 

300

 

 

 

300

 

 

 

3

 

 

 

Soomi Niihara (1)

 

12%

 

 

12/7/2021

 

Due on Demand

 

 

700

 

 

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

$

800

 

 

$

1,800

 

 

$

1,000

 

 

$

16

 

 

Revolving line of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yutaka Niihara (1)

 

5.25%

 

 

12/27/2019

 

Due on Demand

 

$

400

 

 

$

800

 

 

$

400

 

 

$

35

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

$

400

 

 

$

800

 

 

$

400

 

 

$

35

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,200

 

 

$

2,600

 

 

$

1,400

 

 

$

51

 

 

(1)

Dr. Niihara, the Chairman of the Board and Chief Executive Officer of Emmaus, is also a director and the Chief Executive Officer of Hope International Hospice, Inc. Soomi Niihara is Dr. Niihara’s wife.

(2)

Current officer or director.

(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 management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consistingrevolving line of normal recurring accrualscredit agreement with Dr. Niihara.

See Notes 6 and adjustments) necessary to present fairly the financial position, results of operations and cash flows11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the Emmaus common stock, or approximately 8.4% of the common stock outstanding as of March 31, 2022 and, as such, may be deemed to be an affiliate of the Company. As of March 31, 2022, the Company atheld a Telcon convertible bond in the datesprincipal amount of approximately $23.5 million as discussed in Note 5.

NOTE 13 — SUBSEQUENT EVENTS

Subsequent to March 31, 2022, the Company received $1.2 million of proceeds from loans from related and forunrelated parties to augment its working capital.


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

In the periods indicated. The interim results forfollowing discussion, the quarter ended December 31, 2017 are not necessarily indicativeterms, “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 results for the full 2018 fiscal year or any other future interim periods. As such, the information included in this quarterly report on Form 10-QFinancial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and accompanyingthe related notes included in the Company’sour Annual Report on Form 10-K for the year ended September 30, 2017.December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 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 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. Our lead product, Endari® (prescription-grade L-glutamine oral powder) is approved by the U.S. Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older. In April 2022, Endari® was approved by the Ministry of Health and Prevention in in the United Arab Emirates, or U.A.E, in adults and pediatric 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 the 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.

 

BasisEndari® is marketed and sold in the U.S. by our internal 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 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.

As of ConsolidationMarch 31, 2022, our accumulated deficit was $242.9 million and we had cash and cash equivalents of $0.8 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and begin to realize revenues in the U.A.E. and 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 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

The unaudited condensed consolidated financial statements includeRevenues, net

We realize net revenues primarily from sales of Endari® 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 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 resultspurchase of Mynd, its wholly owned subsidiary, Arcadian Services, one professional association, Arcadian Telepsychiatry (“PA”) which is located in Texas, and one professional corporation, Arcadian Telepsychiatry P.C. (“PC”) which is located in Pennsylvania, collectively the “entities.”

our products. These


Arcadian Servicesvarious discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is partyrecorded net of variable consideration.

Management estimates variable consideration 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 our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments 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 Management Services Agreementsreceive 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 discounts and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to bulk discounts offered by us increased in 2021 and among itadversely affected sales in 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 pursuantat prices lower than the list prices charged to which each entity provides servicesdistributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to Arcadian Services.  Each entitythese specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.

Cost of Goods Sold

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

Research and Development Expenses

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

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


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

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

General and Administrative Expense

All intercompany balances and transactions have been eliminated upon consolidation.

Variable Interest Entities (VIE)

On November 13, 2017, Arcadian Services entered into a managementGeneral and administrative servicesexpense consists principally of salaries and related employee costs, including share-based compensation for our directors, executive officers and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.

Selling Expenses

Selling expenses consist principally of salaries and related costs for personnel involved in the promotion, sale and marketing of 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 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 three months ended March 31, 2022 and 2021 were supplied by one supplier.

Results of Operations:

Three months ended March 31, 2022 and 2021

Net revenues, Net. Net revenues decreased by $2.1 million, or 39%, to $3.2 million for the three months ended March 31, 2022, compared to $5.3 million for the three months ended March 31, 2021. The decrease in net revenues was primarily attributable to lower bulk order purchases in 2022 compared to the same period in 2021.

Cost of Goods Sold. Cost of goods sold increased by $0.6 million or 131%, to $1.0 million for three months ended March 31, 2022, compared to $0.4 million for the three months ended March 31, 2021 due primarily to $0.8 million of additional reserve relating to Endari® inventory with a shelf-life of less than two years.


Research and Development Expenses. Research and development expenses decrease by $1.3 million, or 74%, to $0.5 million for the three months ended March 31, 2022, compared to $1.8 million for the three months ended March 31, 2021. The decrease was primarily due to one-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 Arcadian Telepsychiatry PA (“PA”) which is locatedKainos. Depending on the availability of funding, we expect our research and development costs to increase in Texas,the remainder of 2022.

Selling Expenses. Selling expenses increased by $0.2 million, or 14%, to $1.5 million for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PA is determinedthe three months ended March 31, 2022 compared to be a Variable Interest Entity (“VIE”)$1.3 million for the three months ended March 31, 2021. The increase was primarily due to increased travel expenses.

General and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PA’s economic performance through its majority representation of the PA; therefore, PA is consolidated by MYND.

On November 13, 2017, Arcadian Services entered into a managementAdministrative Expenses. General and administrative services agreement with Arcadian Telepsychiatry P.C. (“PC”) which is locatedexpenses slightly decreased by $53,000, or 2%, to $3.4 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The decrease was primarily due to decreases of $0.4 million in Pennsylvania,compensation expense including share-based compensation, $0.1 million of professional fees, partially offset by an increase of $0.3 million of Dubai office operating expenses and $0.1 million of public relations expenses.

Other Income (Expense). Total other income increased by $8.2 million, or 121%, to $1.4 million for an initial fixed termthe three months ended March 31, 2022, compared to $6.8 million of 20 years. In accordance with relevant accounting guidance, PC is determinedother expense for the three months ended March 31, 2021. The increase was primarily due to beincreases of $5.4 million in change in fair value of conversion feature derivative and $1.3 million in change in fair value of warrant derivative liabilities, a Variable Interest Entity and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PC’s economic performance through its majority representation of PC; therefore, PC is consolidated by MYND.

The Company holds a variable interest$1.2 million in loss on debt extinguishment in the entities, which contract with physicianscomparable period in 2021, and a decrease of $0.3 million in interest expense in 2022.

Net Loss. Net loss for the three months ended March 31, 2022 increased by $6.9 million, or 82% to $1.5 million for the three months ended March 31, 2022, compared to $8.4 million for the three months ended March 31, 2021. The decrease was primarily a result of an increase of $8.2 million in other health professionalsincome, partially offset by an increase of $1.5 million in orderloss from operations.

Liquidity and Capital Resources

Based on our losses to provide servicesdate, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to Arcadian Services. The entities are considered variable interest entity since theyEJ Holdings and cash and cash equivalents balance of $0.8 million as of March 31, 2022, we do not have sufficient equityoperating capital for our business without raising additional capital. We realized a net loss of $1.5 million for the three months ended March 31, 2022 and anticipate that we will continue to finance theirincur net losses for the foreseeable future and until we can generate increased net revenues from Endari® sales. While we anticipate increased net revenues as we expand 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 capital resources to fund our operations until we are able to generate sufficient cash flow from operations.

Our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, is 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 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 three months ended March 31, 2022and March 31, 2021

Net cash used in operating activities without additional subordinated financial support. An enterprise having

Net cash used in operating activities increased by $0.7 million, or 18%, to $4.7 million for the three months ended March 31, 2022 from $4.0 million for the three months ended March 31, 2021 due to an increase of $6.9 million in net loss partially offset  by a controlling financial interestdecrease of $5.4 million change in a VIE must consolidatefair 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 VIE if it has both power and benefits—that is, it has (1) the power to direct thethree months ended March 31, 2022 from net cash used in investing activities of a VIE that most significantly impact$1.8 million for the VIE’s economic performance (power) and (2) the obligationthree months ended March 31, 2021. This increase was due to absorb lossesdeemed proceeds of the VIE that potentially could be significant to the VIE or the right to receive benefits$2.9 million sales of convertible bonds resulting from the VIE that potentially could be significantoffset of target shortfalls against principal and interest of our Telcon convertible note against our trade discount.

Net cash provided by financing activities

Net cash provided by financing activities decreased by $5.0 million, or 71%, to $2.0 million for the VIE (benefits). The Company hasthree months ended March 31, 2022 from $7.0 million for the power and rightsthree months ended March 31, 2021. This decrease was the result of $13.0 million in proceeds from the sales of convertible notes payable in 2021, partially offset by a $6.2 million used to control all activities ofprepay our outstanding 10% Senior Secured Convertible Debentures in the entities and funds and absorbs all losses of the VIE.same period.

Off-Balance-Sheet Arrangements

Use ofWe have no off-balance sheet arrangements.

Critical Accounting Estimates

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 the unaudited condensed consolidatedthese financial statements requires managementus to make estimates and judgments that affect the reported amounts of certain assets, liabilities revenue and expense, and related disclosure of assets and liabilities.expenses. On an ongoing basis, the Company evaluates itswe evaluate these estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, useful lives of furniture and equipment, intangible assets, valuation allowancedescribed below. We base our estimates on deferred taxes, valuation of equity instruments, and accrued liabilities. The Company bases its estimates onour historical experience and on various other assumptions that are believedwe believe to be reasonable under the circumstances, the results of whichpresent 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.

Cash

The Company deposits its cash with major financial institutions and may at times exceed the federally insured limit of $250,000.  At December 31, 2017 cash exceeds the federally insured limit by $2,346,600.  The Company believes that the risk of loss is minimal. To date, the Company has not experienced any losses relatedRefer to cash deposits with financial institutions. 

Debt Instruments

Debt instruments are initially recorded at fair value, with coupon interest and amortization of debt issuance discounts recognized in the statement of operations as interest expense at each period end while such instruments are outstanding.


Fair Value of Financial Instruments

Financial“Critical Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, ASC 825-10 - Recognition and Measurement of Financial Assets and Financial Liabilities defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.

The Company also analyzes all financial instruments with features of both liabilities and equity under ASC 480-10, ASC 815-10 and ASC 815-40.

The Company adopted ASC 820-10 on January 1, 2008. ASC 820-10 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

Level I inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level II inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments; and

Level III inputs to the valuation methodology are unobservable and significant to the fair value.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table summarizes fair value measurements by level at December 31, 2017 for assets and liabilities measured at fair value on a recurring basis:

  Level I Level II Level III Total
Long-term borrowings $   559,700  $   559,700 

The changes in carrying amounts of the debt for the three months ended December 31, 2017 and December 31, 2016 were as follows:

  December 31,
2017
 December 31,
2016
Beginning balance $  $ 
Debt acquired through acquisition  555,000    
Accretion of debt discount  4,700    
Ending balance $559,700  $ 

Liabilities were fair valued in connection with the business combination will not be fair valued going forward.

Accounts Receivable

The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer.  Allowances are provided for specific receivables deemed to be at risk for collection which as of December 31, 2017 and September 30, 2017 are $1,600 and $1,000, respectively.


Property and Equipment

Property and Equipment, which are recorded at cost, consist of office furniture and equipment which are depreciated, over their estimated useful life on a straight-line basis.  The useful life of these assets is estimated to be between three and five years.  Depreciation expense on furniture and equipment for the three months ended December 31, 2017 and 2016 was $12,400 and $700, respectively.  Accumulated depreciation at December 31, 2017 and September 30, 2017 was $96,600 and $84,200, respectively.

Long-Lived Assets

As required by ASC 350-30 - Intangibles — Goodwill and other (formerly SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets), the Company reviews the carrying value of its long-lived assets at least annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value. No impairment loss was recorded for the three months ended December 31, 2017 and 2016. 

Intangible Assets 

Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheets. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. At December 31, 2017, the Company had $80,500 in capitalized software development costs. The Company started amortizing the software over its estimated economic life once it was placed into service in September 2016. Amortization was $6,700 for the three months ended December 31, 2017 and $6,700 for the three months ended December 31, 2016.  Accumulated amortization on the intellectual property was $35,800 and $29,100 at December 31, 2017 and September 30, 2017 respectively.

On November 23, 2011, the Company acquired intellectual property in the form of transcranial magnetic stimulation (TMS) biomarkers at a cost of $21,200 which was recorded at cost and is being amortized over its estimated useful life of 10 years on a straight-line basis. Amortization was $500 for the three months ended December 31, 2017 and $500 for the three months ended December 31, 2016.  Accumulated amortization on the intellectual property was $12,900 and $12,400 at December 31, 2017 and at September 30, 2017, respectively.

On November 13, 2017, the Company acquired customer relationship and tradename intangibles in connection with the Arcadian Services acquisition at $109,000 which was recorded at fair value and is being amortized over its estimated useful life of four years on a straight-line basis. Amortization was $3,700 for the three months ended December 31, 2017 and $0 for the three months ended December 31, 2016.  Accumulated amortization on the intellectual property was $3,700 and $0 at December 31, 2017 and at September 30, 2017, respectively.


The expected amortization of the intangible assets, as of December 31, 2017, for each of the next five years and thereafter is as follows:

   For the fiscal years ending
September 30,
 
2018 (for the remaining nine months)  $44,300 
2019   51,700 
2020   29,400 
2021   29,400 
2022   3,500 
Total  $158,300 

Goodwill

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. The Company does not amortize goodwill and intangible assets with indefinite useful lives.

The Company reviews goodwill at least annually, or at the time a triggering event is identified for possible impairment. Goodwill is reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company tests its goodwill each year on September 30th. The Company reviews the carrying value of goodwill utilizing an income approach model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. At December 31, 2017, the Company did not record any Goodwill impairment. The Goodwill balance was $1,386,800 as of December 31, 2017 and $0 as of December 31, 2016, respectively.

Accrued Compensation

Accrued compensation consists of accrued vacation pay, accrued bonuses granted by the Board but not paid, and accrued pay due to staff members.

Accrued compensation – related parties consists of accrued vacation pay, accrued bonuses granted by the Board but not paid for officers and directors.

Deferred Revenue

Deferred revenue represents cash collected in advance of services being rendered but not earned as of December 31, 2017 and September 30, 2017. This represents a philanthropic grant for the payment of PEER Reports ordered in a clinical trial for a member of the U.S. Military, a veteran or their family members, the cost of which is not covered by other sources. These deferred revenue grant funds total $45,900 as of December 31, 2017 and at September 30, 2017.

Revenues

The Company recognizes revenue on services, in accordance with the ASC No. 605, “Revenue Recognition”. Revenue is recognized when we have persuasive evidence of an arrangement, a determinable fee, collection is considered to be reasonably assured and the services are delivered.


Research and Development Expenses

The Company charges research and development expenses to operations as incurred.

Advertising Expenses

The Company charges all advertising expenses to operations as incurred. For the three months ended December 31, 2017 and 2016 advertising expenses were $151,000 and $0, respectively.

Stock-Based Compensation

The Company has adopted ASC 718-20 and related interpretations which establish the accounting for equity instruments exchanged for employee services. Under ASC 718-20, share-based compensation cost for employees, directors and consultants is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the option grantees’ requisite service period, generally the vesting period of the award.

Income Taxes

The Company accounts for income taxes under the asset and liability method.  Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into legislation. The Company is currently evaluating the impact of the Tax Cuts and Job Act on its condensed consolidated financial statements and related disclosures for Fiscal 2018 and cannot be determined with certainty at this time because of a blended rate. Any impact against the Company’s gross deferred tax asset will be offset by a 100% valuation allowance, therefore the Company expects no material impact on its condensed consolidated financial statements. The Company will continue to review the components of the Tax Cuts and Job Act and its related regulations and evaluate their impact to its condensed consolidated financial statements and related disclosures for Fiscal 2018.

As a result of the implementation of certain provisions of FASB ASC 740, Income Taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, the Company has analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions.  We have identified U.S. Federal and California as our major tax jurisdictions.  Generally, we remain subject to Internal Revenue Service examination of our 2013 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2012 through 2016 California Franchise Tax Returns.  We have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.  Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

Noncontrolling Interest

The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and variable interest entities (VIEs) in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in the Company’s consolidated entities. The amount of net income attributable to noncontrolling interests for the three months ended December 31, 2017 was $0. There was no equity or losses for the three months ended December 31, 2017.


Earnings (Loss) per Share

Basic earnings (loss) per share are computed by dividing income (loss) available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into Common Stock.

Recent Accounting Pronouncements

Apart from the below-mentioned recent accounting pronouncements, there are no new accounting pronouncements that are currently applicable to the Company.

In May 2014, the FASB issued Accounting Standards Update, ASU, ASU 2014-9, “Revenue from Contracts with Customers” (ASU 2014-9) and has subsequently issued a number of amendments to ASU 2014-9. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for us beginning October 1, 2018 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-9 on its consolidated financial statements and has not yet selected the transition method. The Company is currently evaluating the method and timing of its adoption and impact of adopting this new standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842). This ASU requires that a lessee recognize lease assets and lease liabilities for those leases classified as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018 and will be applied at the beginning of the earliest period presented using a modified retrospective approach. This ASU may have a material impact on the Company’s financial statements. The impact on the Company’s results of operations is currently being evaluated.

In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, and classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The guidance will be applied prospectively, retrospectively, or by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, dependent upon the specific amendment that is adopted within the ASU. The adoption of this new guidance did not have a material effect on the consolidated results of operations, cash flows, and financial position. The Company adopted the guidance on October 1, 2017 and chose to prospectively apply the guidance in its financial statements.


In December 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). Restricted Cash: this update clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash flows to the related cash and cash equivalents and restricted cash captions in the balance sheet. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017 with early adoption permitted. The Company adopted the guidance on October 1, 2017.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This guidance narrows the definition of a business. This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. This guidance must be applied prospectively to transactions occurring within the period of adoption. The Company adopted ASU 2017-01 for the three months ended December 31, 2017, and prospectively applied ASU 2017-01 as required with no impact on its consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This guidance must be applied on a prospective basis. The Company adopted ASU 2017-04 for the three months ended December 31, 2017, and prospectively applied ASU 2017-04 as required with no impact on its consolidated financial position, results of operations or cash flows.

In May 2017, the FASB issued ASU 2017-9, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. ASU 2017-9 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. For all entities, including emerging growth companies, the standard is effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. The Company adopted the guidance on October 1, 2017 and there is no impact on the financial statements.

In July 2017, the FASB issued a two-part ASU 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendmentsPolicies” in Part II, of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted ASU 2017-11 for the three months ended December 31, 2017, and retrospectively applied ASU 2017-11 as required with no impact on its consolidated financial position or results of operations.


3.ACCOUNTS RECEIVABLE

Accounts receivable, net, is as follows:

  December 31, 2017  September 30, 2017 
Accounts receivable $82,700  $7,500 
Allowance for doubtful accounts  (1,600)  (1,000)
Accounts receivable, net $81,100  $6,500 

4.LONG - TERM BORROWINGS AND OTHER NOTE PAYABLES

Debt assumed from Arcadian Services

As a result of the acquisition of with Arcadian Services, the Company guaranteed Arcadian Services’ then outstanding debt obligations totalling $700,000 owed to Ben Franklin Technology Partners of Southeastern Pennsylvania (“BFTP”). The maturity date for the debt is September 30, 2021 and interest accrues at an 8% annual rate.  Unpaid interest of $104,200 as of December 31, 2017 is classified as long-term in the accompanying condensed consolidated balance sheet because interest is not due until maturity. The Company recorded the debt at its fair value as result of a discount of $145,000 attributable to the difference between the market interest rate and the stated interest rate on the debt. Interest expense of $4,700 was recorded for the three months ended December 31, 2017 related to the accretion of debt discount. There were no debt covenants associated with the debt.

A balloon payment of $700,000 plus interest will be made on the scheduled maturity date of September 30, 2021.

Other Notes Payable

Note Payable - finance company, principal is payable over thirty-six equal payments of $1,200 through May 2018. Interest is payable monthly on the unpaid balance at 19% per annum. 

Loan payable to a vendor, principal payments of $5,000 per month, together with interest computed at 6% per annum.  Maturity date is April 2018.   

5.ACQUISITION

The Company accounted for the acquisition of Arcadian Services using the acquisition method of accounting for business combinations under ASC 805, Business Combinations. The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.

As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period (a period not to exceed 12 months). Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materiality impact our results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates. The finalization of the purchase accounting assessment may result in a change in the fair value of the debt assumed and intangible assets, which may have a material impact on our results of operations and financial position.


On November 13, 2017, the Company acquired Arcadian Services. The purchase price, including the value of the indebtedness and payables of Arcadian Services, is $1,339,600 based upon a deemed acquisition of all of the assets and liabilities of Arcadian Services, including the equity interests in Arcadian Services. The aggregate purchase price consists of (i) initial investment in Arcadian of $195,900 (ii) $317,000 of forgiveness of a note receivable with the primary member of Arcadian (iii) assumption by Arcadian Services of subordinated debt (“Arcadian Notes”) with a fair value of $555,000, plus accrued interest of $96,700 (iv) $175,000 payment for the redemption and cancellation of two warrants to purchase equity interests in Arcadian Services. The Arcadian Notes bears interest at an annual rate of 8% and matures on September 30, 2021. 

The following table summarizes the allocation of the purchase consideration and the estimated fair value of the assets acquired and the liabilities assumed for the acquisition of Arcadian Services made by the Company: 

Assets acquired:   
Cash $25,900 
Accounts receivable  57,100 
Other assets  24,000 
Intangibles  109,000 
Goodwill  1,386,800 
Total assets acquired $1,602,800 
     
Liabilities assumed    
Accounts payable $147,700 
Accrued other liabilities  108,700 
Notes payable  6,800 
Total liabilities assumed $263,200 
     
Net assets acquired $1,339,600 
     
Consideration paid:    
Initial investment in Arcadian Services  195,900 
Long-term debt  555,000 
Accrued interest  96,700 
Payment on warrant outstanding  175,000 
Forgiveness of loan in relation of acquisition  317,000 
Total consideration $1,339,600 


The weighted average useful life of all identified acquired intangible assets is 3.9 years. The weighted average useful lives for trade names and customer relationships are 1.0 years and 4.0 years. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of one to four years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. 

As a result of the acquisition, the Company recorded $1,386,800 of goodwill. The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of Arcadian Services’ products with the Company’s other solutions. The Company believes that the factors listed above support the amount of goodwill recorded as a result of the purchase price paid.

For the three months ended December 31, 2017, the Company incurred transaction costs of $438,600 in connection with the Arcadian Services acquisition, which were expensed as incurred and included in general and administrative expenses within the accompanying consolidated statements of operations.

Unaudited Pro Forma Financial Information 

The unaudited pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisitions been consummated at October 1, 2016 nor of the results which may occur in the future. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. 

  For Three Months Ended December 31, 
  2017  2016 
Revenues $267,200  $259,200 
Net income (loss) $(2,949,100) $(1,789,000)
Net income (loss) per common share:        
Basic and diluted $(0.68) $(0.85)
         
Outstanding at Weighted average shares outstanding  4,332,927   2,101,061 

6.STOCKHOLDERS’ EQUITY

The Aspire Capital Equity Line 

On December 6, 2016, the Company, entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the Purchase Agreement. Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company maintains an effective registration statement registering the sale of the shares of Common Stock that have and may be issued to Aspire under the Purchase Agreement. Under the Purchase Agreement, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

a)the lowest sale price of Common Stock on the purchase date; or

b)the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.

In addition, on any date on which the Company submits a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date. 

The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed. 

The Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Purchase Agreement on any purchase date where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “Commitment Shares”). The Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $100,000 per business day. 

On February 23, 2017, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds to the Company of $145,000.

The issuance of shares of common stock that may be issued from time to time to Aspire Capital under the Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act. 

Variable Interest Entities (VIE) 

On November 13, 2017, Arcadian Services entered into a management and administrative services agreement with Arcadian Telepsychiatry PA, which is located in Texas, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PA is determined to be a Variable Interest Entity and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PA’s economic performance through its majority representation of the PA; therefore, PA is consolidated by MYND. As of December 31, 2017, PA owns no percentage of MYnd.


On November 13, 2017, Arcadian Services entered into a management and administrative services agreement with Arcadian Telepsychiatry P.C., which is located in Pennsylvania, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PC is determined to be a Variable Interest Entity and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PC’s economic performance through its majority representation of the PC; therefore, PC is consolidated by MYND. As of December 31, 2017, PC owns no percentage of MYnd. 

Common and Preferred Stock 

As of September 30, 2017 the Company was authorized to issue 515,000,000 shares of stock, of which 500,000,000 shares were Common Stock, and 15,000,000 shares were preferred stock. 

As of December 31, 2017, the Company reduced the amount of stock it was authorized to issue to 265,000,000 shares of stock of which 250,000,000 shares were Common Stock, and 15,000,000 shares were preferred stock.

As of December 31, 2017, 4,360,561 shares of Common Stock were issued and outstanding. No shares of preferred stock were issued or outstanding.

See “-2012 Omnibus Incentive Compensation Plan” below for a discussion of equity based awards granted under the Company’s incentive compensation plan. 

Private Placement of Common Stock 

On November 30, 2016, the Company sold and issued an aggregate of 160,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to six accredited investors, for which it received gross cash proceeds of $1,000,000. Three of the six accredited investors are affiliates of the Company, and represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust, of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. 

On December 21, 2016, the Company sold and issued an additional 48,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to fourteen accredited investors, for which it received gross cash proceeds of $300,000. 

On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000. 

From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property. 

These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.


Stock Dividend Warrants 

On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter. 

The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of five years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing. 

Underwritten Public Offering 

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. 

As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering. 

On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. Gross proceeds amounted to $2,100. 

Stock-Option Plans and Stock-Based Compensation

2006 Stock Incentive Plan

On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the Board. A total of 3,339 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of December 31, 2017, zero options were exercised and there were 1,513 option shares outstanding under the amended 2006 Plan. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $2,400 to $5,760 per share.


2012 Omnibus Incentive Compensation Plan

On March 22, 2012, our Board approved the MYnd Analytics, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 1,667 shares of stock for issuance and on December 10, 2012, the Board approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 1,667 shares to 27,500 shares. On March 26, 2013, the Board further approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 27,500 shares to 75,000 shares. The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.

On April 5, 2016, the Board approved a further amendment of the 2012 Plan to increase the Common Stock authorized for issuance from 75,000 shares to 200,000 shares.

On September 22, 2016 the Board amended the 2012 Plan to: (i) increase the total number of shares of Common Stock available for grant under the 2012 Plan from 200,000 shares to an aggregate of 500,000 shares, (ii) add an “evergreen” provision which, on January 1st of each year through 2022, automatically increases the number of shares subject to the 2012 Plan by the lesser of: (a) a number equal to 10% of the shares of Common Stock authorized under the 2012 Plan as of the preceding December 31st, or (b) an amount, or no amount, as determined by the Board, but in no event may the number of shares of Common Stock authorized under the 2012 Plan exceed 885,781 and (iii) increase the annual individual award limits under the 2012 Plan to 100,000 shares of Common Stock, subject to adjustment in accordance with the 2012 Plan. Per the above mentioned “evergreen” provision, an additional 50,000 shares were automatically allocated for distribution under the 2012 Plan as of January 1, 2017.

At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”), held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”) to increase: (i) the total number of shares of common stock, par value $0.001 per share (“Common Stock”), available for grant under the 2012 Plan (subject to the overall limits described in clause (ii) below) from 550,000 shares to an aggregate of 975,000 shares; (ii) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 885,781 shares to 1,570,248 shares and (iii) the annual individual award limits under the 2012 Plan to 150,000 shares of Common Stock (subject to adjustment in accordance with the 2012 Plan); 

On September 22, 2016, the Board granted options to purchase 144,000 shares of Common Stock under the 2012 Plan at an exercise price of $6.00 to certain directors and officers as follows:

our Chairman Dr. Smith was granted options to purchase 40,000 shares of Common Stock which vested in accordance with certain specified performance criteria;

our CEO, George Carpenter, was granted options to purchase 32,000 shares of Common Stock which vested in accordance with certain specified performance criteria;

our former CFO, Paul Buck, was granted options to purchase 32,000 shares of Common Stock which vested in accordance with certain specified performance criteria;

two of our outgoing directors, Mr. McAdoo and Mr. Sassine, were each granted 20,000 fully vested options to purchase Common Stock, which expired on November 1, 2017, and were never exercised.

On September 22, 2016, pursuant to the 2012 Plan, the Board granted shares of Common Stock to Board members as follows: 40,000 shares to our Chairman, Dr. Smith, and 20,000 shares to each of our directors, Messrs. Pappajohn, Follman, Harris and Votruba. Mr. Votruba’s shares are assigned to RSJ. These shares, were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $720,000. Our outgoing directors, Mr. McAdoo and Mr. Sassine were offered stock, however, elected to each receive 20,000 fully vested options to purchase shares of Common Stock.

On September 29, 2016, pursuant to the 2012 Plan, the Board granted 20,000 shares of Common Stock to Thomas Tierney upon his appointment to the Board. These shares were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $120,000.


On October 2, 2016, the Compensation Committee of the Board granted options to purchase 102,000 shares of the Company’s Common Stock under the 2012 Plan to staff members. These options vest pro-rata over 12 months starting on the date of grant. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $6.00 per share. 

On July 27, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $7.25 per share. 

On March 31, 2017, the Compensation Committee of the Board granted options to our Chief Financial Officer Mr. D’Ambrosio to purchase 18,000 shares of the Company’s common stock at an exercise price of $5.90 per share, which was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant, with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares which vested upon the Company’s successful listing of its common stock on a national securities exchange. 

On May 30, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $6.00 per share, as of September 30, 2017, 2,000 options are fully vested. 

On July 14, 2017, the Company entered into a Chairman Services Agreement (the “Agreement”) with Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”). Pursuant to the Agreement, Dr. Smith is also entitled to receive the following equity awards: (a) on the Effective Date, a grant of 25,000 shares of restricted stock (vesting immediately) under the 2012 Plan; (b) on the Effective Date, options to purchase 75,000 shares of Common Stock under the Plan; and (c) on the date of the Company’s 2017 annual meeting of stockholders, an award of options to purchase 50,000 shares of Common Stock (the “2017 Option Award”) was granted. In addition, at each annual meeting of stockholders of the Company thereafter beginning in 2018 during the Term, Dr. Smith will be entitled to receive a grant of 25,000 shares of restricted stock (vesting immediately) under the Plan and options to purchase 75,000 shares of Common Stock under the Plan. Other than the 2017 Option Award, all options granted under the Agreement will vest 1/3 on the date of grant, 1/3 on the six month anniversary of the date of grant and 1/3 on the twelve month anniversary of the date of grant. The 2017 Option Award will vest on December 1, 2018. Pursuant to the Agreement, all options owned by Dr. Smith will remain exercisable for a period of 10 years from the date of grant, even if Dr. Smith is no longer with the Company. 

On July 26, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.15 per share. 

On July 31, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $3.81 per share. 

On August 21, 2017, the award (“Option Grant 2”) was granted, and approved by the board of directors of the Registrant, subject to stockholder approval of an amendment to a provision of the Registrant’s Plan, pursuant to the Agreement. The Registrant’s stockholders approved the amendment to the provision of the Plan granted options to purchase 50,000 shares of Common Stock under the 2012 Plan at an exercise price of $4.16 per share to Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”).


On August 22, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.10 per share. 

On September 19, 2017, the Board granted (i) 12,000 shares of restricted common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) 18,000 shares of restricted common stock under the 2012 Plan to to Mr. Harris, who serves as the Audit Committee chairperson. Mr. Votruba’s shares of restricted common stock are assigned to RSJ. 

On September 19, 2017, the Board granted (i) options to purchase 12,000 shares of common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) options to purchase 18,000 shares of common stock under the 2012 Plan to Mr. Harris, who serves as the Audit Committee chairperson. All such options have an exercise price of $3.60, which was the closing price on the date of grant of our common stock on the Nasdaq Capital Market. Mr. Votruba’s options are assigned to RSJ.

On November 5, 2017, the Board granted options to purchase 20,000 shares of common stock under the 2012 Plan to David Nash, with an exercise price of $3.88, and will vest quarterly over the following year.

On November 13, 2017, the Board granted options to purchase 35,000 shares of common stock under the 2012 Plan to Robert Plotkin, with an exercise price of $3.96, for which 11,667 shares vest immediately, 11,667 shares vest on November 13, 2019, and rest 11,666 shares will vest on the date Arcadian Services achieves aggregate revenues of at least $2.5 million from and after November 13, 2017.

On December 18, 2017, the Board granted options to purchase 5,000 shares of common stock under the 2012 Plan to each of the three staff members, with an exercise price of $3.74, for which 1,000 shares vest upon achieving individual revenues of $150,000; 1,000 shares vest upon achieving individual revenues of $325,000; 1,000 shares vest upon achieving individual revenues of $500,000; 1,000 shares vest upon achieving individual revenues of $625,000; 1,000 shares vest upon achieving individual revenues of $725,000.

As of December 31, 2017, options to purchase 577,546 shares of Common Stock were outstanding under the 2012 Plan with exercise prices ranging from $3.60 to $600, with a weighted average exercise price of $6.64. Additionally, 280,250 restricted shares of Common Stock have been issued under the 2012 Plan, leaving 117,204 shares of Common Stock available to be awarded. 


Stock-based compensation expenses are generally recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying unaudited condensed consolidated statements of operations for the three months ended December 31, 2017 and 2016 is as follows: 

  Three months ended December 31 
  2017  2016 
Stock-based compensation expense by type of award:      
Stock options $117,400  $287,600 
Restricted stock  219,200   213,400 
Total stock-based compensation expenses $336,600  $501,000 
         
Stock-based compensation expense by line item:        
Research $  $6,600 
Product development  100   97,400 
Sales and marketing  100   22,500 
General and administrative  336,400   374,500 
Total $336,600  $501,000 

Total unrecognized stock compensation expense as of December 31, 2017 amounted to $1,173,000.

The following table sets forth the Company’s unrecognized stock-based compensation expense, net of estimated forfeitures, by type of award and the weighted-average period over which that expense is expected to be recognized:

  December 31
  2017 2016
  Unrecognized Expense, net of estimated forfeitures Weighted average Recognition Period (in years) Unrecognized Expense, net of estimated forfeitures Weighted average Recognition Period (in years)
Type of Award:                
Stock Options $963,200   8.82  $474,300   9.01 
Restricted Stock $209,800   0.74  $   0 
Total $1,173,000   7.86  $474,300   9.01 

A summary of stock option activity is as follows:

  Number of
Shares
  Weighted
Average
Exercise
Price
  Weighted-Average Remaining Contractual Term (in years)  Intrinsic Value 
Outstanding at September 30, 2017  554,083  $16.14   8.29  $11,340 
Granted  70,000   3.85       
Exercised            
Forfeited or expired  (45,024)  8.69         
Outstanding at December 31, 2017  579,059  $15.24   8.82  $ 

There are 344,934 options vested and 234,125 unvested as of December 31, 2017; there are 352,812 options vested and 201,271 options unvested as of September 30, 2017; 


Following is a summary of the restricted stock activity for the three months ended December 31, 2017:

  Number of
Shares
  Weighted Average
Grant Date Fair Value
 
Outstanding at September 30, 2017  222,750  $5.31 
Granted  57,500   3.88 
Forfeited      
Outstanding at December 31, 2017  280,250  $5.02 

There are 219,021 shares of restricted stock vested and 61,229 unvested as of December 31, 2017; there are 167,708 shares of restricted stock vested and 55,042 unvested as of September 30, 2017; 

Awards of Restricted Stock 

On November 5, 2017, the Board granted 20,000 shares of restricted common stock under the 2012 Plan to David Nash.

On November 13, 2017 George C. Carpenter IV, President and Chief Executive Officer of the Company; Donald D’Ambrosio, Chief Financial Officer and the Chairman Robin L. Smith, were each granted 7,500 shares. In addition, the Company granted another 15,000 shares of restricted common stock to various employees as satisfaction of certain performance criteria. 

The range of Black-Scholes option-pricing model assumption inputs for all the valuation dates are in the table below:

  Three months ended December 31, 2017
  Low  High 
Annual dividend yield  %  %
Expected life (years)  5   5 
Risk-free interest rate  1.99%  2.87%
Expected volatility  209.77%  210.39%

Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

Expected Life. The Company elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term.

Expected Volatility. The expected volatility rate used to value stock option grants is based on the historical volatilities of the Company’s common stock.

Risk-free Interest Rate. The risk-free interest rate assumption was based on U.S. Treasury bill instruments that had terms consistent with the expected term of the Company’s stock option grants.

Warrants to Purchase Common Stock

As of December 31, 2017 and September 30, 2017, there were 4,567,672 warrants outstanding with a weighted average exercise price of $5.30. There was no warrant activity during the three month period ended December 31, 2017.


Following is a summary of the status of warrants outstanding at December 31, 2017: 

Exercise
Price
 Number
of Shares
  Expiration
Date
 Weighted Average
Exercise Price
$5.25   2,539,061 (1)  07/2022 $5.25 
 5.25   1,675,000 (2)  07/2022  5.25 
 5.25   213,800 (3)  07/2022  5.25 
 6.04   134,000 (4)  07/2022  6.04 
 9.44   191    03/2018  9.44 
 10.00   4,000 (5)  06/2021  10.00 
$55.00   1,620    06/2018 – 03/2019  55.00 
 Total   4,567,672      $5.30 

(1)On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.

(2)On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering.

(3)On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering.

(4)As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering.

(5)On June 10, 2016, we issued two warrants, pursuant to a Finder’s Fee Agreement with Maxim Group LLC, to purchase in aggregate 4,000 shares of Common Stock following the introduction of an accredited investor who entered into a Second Amended Note and Warrant Purchase Agreement in the principal amount of $200,000. Each warrant is exercisable, in whole or in part, during the period beginning on the date of its issuance, and ending on the earlier of (i) December 31, 2020 and (ii) the date that is forty-five (45) days following the date on which the daily closing price of shares of the Company’s Common Stock quoted on the OTCQB Venture Marketplace (or other bulletin board or exchange on which the Company’s Common Stock is traded or listed) exceeds $50.00 for at least ten (10) consecutive trading days. In connection therewith, the Company will promptly notify the Note Warrant holders in the event that the daily closing price of the Company’s shares of Common Stock exceeds $50.00 for at least ten (10) consecutive trading days. Pursuant to the Finder’s Fee Agreement, Maxim was also paid $20,000 cash for their efforts.

7.INCOME TAXES

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.


As a result of the implementation of certain provisions of ASC 740,Income Taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, the Company has analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified U.S. Federal and California as our major tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2013 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2012 through 2016 California Franchise Tax Returns. We have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US Federal corporate tax rate from 35% to 21%. The reduction in the US Federal tax rate would not have an impact, thus no benefit or expense needs to be recognized in our tax provision for the period ended December 31, 2017. The Company’s Federal net deferred tax assets currently are in a full valuation allowance position and will continue to be in a full valuation allowance position, therefore the rate reduction does not affect the net deferred Federal tax asset balance. Additionally, for the Company’s state net deferred tax asset balance, the state deferred rate has been determined at the full amount without a reduction for the Federal benefit (no benefit recognized in a full valuation allowance), and therefore the state deferred rate and net deferred tax asset balances would not change with the reduction in the Federal tax rate.

Current and non–current deferred taxes have been recorded on a net basis in the accompanying balance sheet. The Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. During the three months ended December 31, 2017, the Company recorded a $6.2 million tax expense representing the detriment of remeasuring its U.S. deferred tax assets at the lower 21% statutory tax rate, as well as a corresponding full valuation allowance for the same amount resulting in no impact to our Statement of Operations. As of December 31, 2017, the Company had Federal net operating loss carryforwards of approximately $10.8 million and State net operating loss carryforwards of approximately $2.0 million, both tax effected. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2018 respectively. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future.

The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.

8.RELATED PARTY TRANSACTIONS

DCA Agreement 

On September 25, 2013, the Board approved a consulting agreement effective May 1, 2013, for marketing services provided by Decision Calculus Associates, an entity operated by Mr. Carpenter’s spouse, Jill Carpenter. Effective August 2015, DCA was engaged at a fee of $10,000 per month. From August 2015 through February 2017, DCA has been paid $170,000. The Decision Calculus Associates (“DCA”) contract was renewed at $3,000 a month effective March 1, 2017. The Company incurred $9,000 and $25,000 for the three months ended December 31, 2017 and 2016, respectively.

Hooper Holmes Agreement 

In 2016, we entered into an agreement with Hooper Holmes Inc, in which Dr. Smith, our Chairman of the Board, became an advisory member of its board as of March 16, 2017, and in which Mr. Pappajohn, our director, has participated in equity raises to become the beneficial owner of a greater than 10% interest. Hooper Holmes performs EEGs nationwide to patients who wish to obtain a PEER report. The Company incurred $36,400 and $0 for these services during the three months ended December 31, 2017 and 2016, respectively. 

Investment in Arcadian Telepsychiatry LLC 

On April 1, 2017, the Company entered into a Master Purchase and Option Agreement with Arcadian Telepsychiatry LLC (“Arcadian”), a Pennsylvania based Limited Liability Company and Mr. Robert Plotkin. Consideration paid for a 10% equity interest in Arcadian was in the form of (i) a $100,000 capital contribution to Arcadian and (ii) the issuance of 1,000 shares of Common Stock to Mr. Plotkin. On June 19, 2017, the Company made an additional $20,000 capital contribution to Arcadian. From July 6, 2017 through September 30, 2017 the Company made an additional $70,000 capital contribution to Arcadian. As of September 30, 2017 the Company’s cumulative equity interest in Arcadian is 19%.


On November 13, 2017, Arcadian, MYnd and certain third party physicians entered into a number of transactions to reorganize the operations of Arcadian and implement a new ownership and management structure. Accordingly, on November 13, 2017, Arcadian converted into a Pennsylvania professional corporation after the equity interests in Arcadian were transferred to a third party physician. On that same date, Arcadian entered into a Management Services Agreement with Arcadian Telepsychiatry Services LLC (“Arcadian Services”) and transferred certain assets and liabilities including its debt obligations to Arcadian in connection therewith. MYnd subsequently acquired 100% of the equity interests in Arcadian Services. In connection with the transfer of the equity interests in Arcadian Services, MYnd entered into an employment agreement with the founder of the Company, pursuant to which MYnd will continue to employ the former founder of the Company as the CEO of Arcadian Services for an annual salary of $215,000, and granted him options to purchase 35,000 shares of common stock of MYnd. In addition, MYnd assumed to guaranty Arcadian Services’ amended debt, seeNote 5. Acquisition.

Sublease with BREC 

On November 13, 2017, Arcadian Services assumed a lease with a $2,500 monthly payment through February 28, 2018 for 2250 square feet. Arcadian Services’ operations are located at 7241 Hollywood Road, Fort Washington, Pennsylvania 19034. The lease terminated on December 31, 2017. On January 2, 2018, Arcadian Services was granted a two month extension until February 28, 2018 with a monthly rental rate of $2,500. The sub-landlord BREC and the property owner of Hollywood Road, LLC are both owed by Mr. Plotkin.


9.LOSS PER SHARE

In accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per Share”), basic net income (loss) per share is computed by dividing the net income (loss) to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the three-month periods ended December 31, 2017 and 2016, the Company has excluded all common equivalent shares from the calculation of diluted net loss per share as such securities are anti-dilutive.

A summary of the net income (loss) and shares used to compute net income (loss) per share for the three-month periods ended December 31, 2017 and 2016 is as follows: 

  Three months ended
December 31,
 
  2017  2016 
Net Loss for computation of basic and diluted net loss per share:      
Net loss $(2,769,300) $(1,440,200)
Basic and Diluted net loss per share:        
Basic and diluted net loss per share $(0.64) $(0.70)
Basic and Diluted weighted average shares outstanding  4,332,927   2,101,061 
         
Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share:        
Warrants  4,567,672   7,155 
Restricted Common Stock  254,333   143,750 
Options  559,617   325,103 
Total warrants and options  5,381,622   476,008 

10. COMMITMENTS AND CONTINGENT LIABILITIES

Litigation

The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.

Lease Commitments

The Company’s policy is to account for the lease expense on the straight–line method.

The Company’s Headquarters and Neurometric Services business is located at 26522 La Alameda, Suite 290, Mission Viejo, CA 92691, which is 2,290 square feet in size. The lease period commenced on February 1, 2016 and terminated on January 31, 2018. The rent for the first four months was $2,290 per month, which was abated by 50%; for months 5 through 12 the rent increased to 4,580 per month and for the final 12 months the rent increased by 5% to 4,809 per month. On October 31, 2017 we signed a First Amendment to our initial lease, lease period commenced on February 1, 2018 and terminates on January 31, 2019. The rent for the twelve month period is $5,267 per month.

On February 2, 2016, we signed a 23.5 months lease for 1,092 square feet of office space to house our EEG testing center. The premises are located at 25201 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on February 15, 2016 and terminated on January 31, 2018. The rent for first half month of February was prorated at $928; for the next 11 months the rent was $1,856 per month, and for the remaining twelve months the rent increased by 3% to $1,911 per month. On November 10, 2017 we signed a First Amendment to our initial lease, lease period commenced on February 1, 2018 and terminates on January 31, 2019. The rent for the twelve-month period is $2,129 per month. Additionally, we expanded into premises which are located at 25231 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on December 1, 2017 and terminates on January 31, 2019. The rent for the fourteen-month period is $3,270 per month


On August 1, 2017, we signed a four-month lease for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 350, New York, New York 10170. The lease period commenced on August 1, 2017 and terminated on December 31, 2017. The rent for was $4,500 per month, with a first and last month lease fee of $9,000 which was due upon signing. On December 27, 2017 we signed a month to month for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 300, New York, New York 10170. The rent will be for $4,995 per month, with security deposit including first month due on signing of $13,483.

On September 14, 2017, we signed a three-year lease for 1,180 square feet. The premises are located at 8000 Westpark Drive, Suite 125, Tysons, Virginia 22102. The lease period commenced on September 15, 2017 and terminates on September 30, 2020. The rent for September 15, 2017 through September 30, 2018 is prorated at $2,508, the next 12 months the rent is prorated at $2,576; and for the remaining twelve months the rent prorated at $2,647, the landlord abated one hundred percent of the base rent for the first two full calendar months of the term, October and November 2017.

On November 13, 2017, Arcadian Services assumed a sublease for a three year term for 2250 square feet. The premises are located at 7241 Hollywood Road, Fort Washington, Pennsylvania 19034. The lease terminated on December 31, 2017 and the rent is $2,500 a month. On January 2, 2018, Arcadian Services was granted a two month extension until February 28, 2018 with a monthly rent rate of $2,500.

On January 29, 2018, Arcadian Services signed a two year lease for 2,338 square feet. The premises are located at 1300 Virginia Drive, Suite 110, Fort Washington, PA 19034. The lease period commences on March 1, 2018 and terminates on February 28, 2020. The rent for the first twelve months of the lease is $3,312 and for the last twelve months of the lease the rent is $3,410. Arcadian Services paid a security deposit of $3,312.16 upon signing.

The Company incurred rent expense of $44,800 and $18,200 for the three months ended December 31, 2017 and 2016, respectively.

Item 2. Management’s7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysisOperations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our financial condition and results of operation should be read in conjunction with our unaudited condensed consolidated financial statements as of, and for,critical accounting policies during the three months ended DecemberMarch 31, 2017 and 2016, and our Annual Report on Form 10-K for the year ended September 30, 2017, filed with the U.S. Securities and Exchange Commission on December 29, 2017.2022.

Forward-Looking Statements

This discussion summarizes the significant factors affecting the unaudited condensed consolidated operating results, financial condition and liquidity and cash flows of MYnd Analytics, Inc. (“we,” “us,” “our,” or the “Company”) for the three month periods ended December 31, 2017 and 2016. Except for historical information, the matters discussed in this management’s discussion and analysis or plan of operation and elsewhere in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new products or services; our statements concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; trends affecting our financial condition, results of operations or future prospects; our financing plans or growth strategies; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.


Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:

our need for immediate additional funding to support our operations and capital expenditures;

our ability to successfully maintain listing of our shares of common stock on the Nasdaq Capital Market;

our history of operating losses;

our inability to gain widespread acceptance of our PEER Reports;

our inability to prevail in convincing the United States Food and Drug Administration (the “FDA”), that our rEEG or PEER Online service does not constitute a medical device and should, therefore, not be subject to regulations;

the possible imposition of fines or penalties by the FDA for alleged violations of its rules and regulations;

our new subsidiary in telebehavioral health may be harmed by evolving governmental regulation;

our new subsidiary’s business model requires work with affiliated professional entities not owned by the Company;

our new subsidiary may require an expanded and maintained network of certified professionals;

our revenue and prospects for profitability may be harmed;

our business may be subject to additional regulations in the future that could increase our compliance costs;

our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the expectation of analysts or investors;

our intellectual property position;

our inability to achieve greater and broader market acceptance of our products and services in existing and new market segments;

any negative or unfavorable media coverage;

our inability to generate and commercialize additional products and services;

our inability to comply with the substantial and evolving regulation by state and federal authorities, which could hinder, delay or prevent us from commercializing our products and services;

our inability to successfully compete against existing and future competitors;

delays or failure in clinical trials;

any losses we may incur as a result of litigation;

our inability to manage and maintain the growth of our business;

our inability to protect our intellectual property rights;

employee relations;

possible security breaches;

possible medical liability claims;

our ability to sell common stock to Aspire Capital Fund LLC under our current common stock purchase agreement;

possible personal injury claims in the future; and

our limited trading volume.

Additional risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found and in our Annual Report on Form 10-K for the year ended September 30, 2017 under the headings “Risk Factors” and “Business,” as updated in this Quarterly Report on Form 10-Q.


Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Overview

MYnd Analytics, Inc. (the “Company” or “MYnd”) employs a clinically validated scalable technology platform to support personalized care for mental health patients. The Company utilizes its patented machine learning, artificial intelligence, data analytics platform for the delivery of telebehavioral health services and its PEER predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian Telepsychiatry Services LLC (“Arcadian Services”), which manages the delivery of telepsychiatry and telebehavioral health services through a nationwide network of licensed and credentialed psychiatrists, psychologists and master’s-level therapists. The Company is commercializing its PEER predictive analytics tool to help physicians reduce trial and error treatment in mental health. MYnd’s patented, clinically validated technology platform (“PEER Online”) utilizes complex algorithms to analyze electroencephalograms (“EEGs”) to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict individual responses to a range of medications prescribed for the treatment of behavioral disorders including depression, anxiety, bipolar disorder, post-traumatic stress disorder (“PTSD”) and other non-psychotic disorders.

Acquisition of Arcadian Telepsychiatry Services LLC

On November 13, 2017, the Company entered into an equity purchase agreement (the “Agreement”) with Arcadian Telepsychiatry Services LLC (“Arcadian Services”) and Mr. Robert Plotkin, pursuant to which the Company acquired all of the issued and outstanding membership interests (the “Equity Interests”) of Arcadian Services from Mr. Plotkin. In consideration for the Equity Interests, the Company entered into an employment agreement with Mr. Plotkin, pursuant to which the Company will continue to employ Mr. Plotkin as the CEO of Arcadian Services for an annual salary of $215,000, and granted him 35,000 options to purchase common stock of the Company. In addition, the Company entered into the Guaranty (as described below).

In connection with the Agreement, Arcadian Telepsychiatry LLC (“Arcadian”) and Arcadian Telepsychiatry Services LLC (“Arcadian Services”), entered into the Side Agreement and Seed Capital Amendment with Ben Franklin Technology Partners of Southeastern Pennsylvania (“BFTP”), pursuant to which BFTP waived its rights (a) to an equity conversion contemplated by the existing funding agreements (as they may be amended, supplemented or otherwise modified from time to time, the “BFTP Loan Documents”) between Arcadian and BFTP, under which BFTP has loaned Arcadian the aggregate principal amount of $700,000 and upon which an aggregate of $96,700 of interest had then accrued (collectively, the “Loan Amount”) and (b) to act as an observer to Arcadian’s board. Under the Side Agreement and Seed Capital Amendment, Arcadian acknowledged and reaffirmed all of BFTP’s claims, encumbrances granted by Arcadian to BFTP, and BFTP’s other rights, interests and remedies pursuant to the BFTP Loan Documents and otherwise. The effectiveness of the Side Agreement and Seed Capital Amendment are conditioned upon (i) MYnd making a one-time payment to BFTP of $175,000 as payment for the redemption and cancellation of two warrants to purchase equity interests in Arcadian and (ii) the Company entering into a guaranty with respect to Arcadian’s obligations (including the Loan Amount) to BFTP under the BFTP Loan Documents, as amended by the Side Agreement and Seed Capital Amendment.The Side Agreement and Seed Capital Amendment further provides that all of Arcadian’s rights, benefits, title, interests, liabilities and obligations under the BFTP Loan Agreements were assigned to Arcadian Services and the Company will becombe obligated to complete all financial reporting to BFTP required under the BFTP Loan Documents.


In addition, the Company executed an absolute, unconditional, irrevocable and continuing guaranty and suretyship (the “Guaranty”) in favor of BFTP, pursuant to which it unconditionally guaranteed the prompt payment and performance, when due, of all loans (including the Loan Amount), advances, debts, liabilities, obligations, covenants and duties owing by Arcadian Services to BFTP under the BFTP Loan Documents. Under the Guaranty, if Arcadian Services defaults under any obligation under the BFTP Loan Documents, the Company will be required to pay the amount then due to BFTP. The Guaranty contains representations, warranties, covenants, conditions, events of default and indemnities that are customary for agreements of this type.

Working Capital

Since our inception, we have never been profitable and we have generated significant net losses. As of December 31, 2017, we had an accumulated deficit of $78.4 million, compared to accumulated deficit of $75.6 million as of September 30, 2017. We incurred operating losses of $2.8 million and $1.4 million for the three months ended December 31, 2017 and 2016, respectively, and incurred net losses of $2.8 million and $1.4 million for those respective periods.

We anticipate that a substantial portion of our capital resources and efforts would be focused on conducting our clinical trials, the scale-up of our commercial sales organization, further research, product development and other general corporate purposes, including accrued but unpaid expenses. We also anticipate that some future research and development projects would be funded by grants or third-party sponsorship, along with funding by the Company.

As of December 31, 2017, our current assets of $2.8 million exceeded our current liabilities of $1.7 million by $1.1 million.

On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Aspire Purchase Agreement, Aspire Capital purchased 20,000 shares of its Common Stock, at a per share price of $7.25, resulting in gross cash proceeds to the Company of $145,000.

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of $8.79 million.

In November 2017, the Company guaranteed the $700,000 principle loan to Arcadian from BFTP as part of the acquisition of Arcadian Services.

During fiscal year 2016, we raised $2.95 million in the private placement of secured convertible debt convertible at $10.00 per share. For details of these financings see “Private Placement Transactions―Private Placement of Common Stock” below.

On December 6, 2016, the Company, entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. For details of the Purchase Agreement financing see “Private Placement Transactions―The Aspire Capital Equity Line” below.

We will need additional funding to conduct the planned clinical trials and to conduct a marketing campaign to significantly increase the demand for our PEER Online services. We are actively exploring additional sources of capital. However, we cannot offer assurances that additional funding will be available on acceptable terms, or at all. Even if we were to raise additional funds, any additional equity funding may result in significant dilution to existing stockholders, and, if we incur additional debt financing, a substantial additional portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting the funds available for our business activities. If adequate funds are not available, it will likely force us to cease operations or would otherwise have a material adverse effect on our business, financial condition and/or results of operations.


Public Offering

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.

Capitalization

At our annual meeting of stockholders held on October 28, 2015 (the “2015 Stockholder Meeting”), our stockholders approved a proposal to amend the Company’s Certificate of Incorporation in order to increase the number of shares of Common Stock authorized for issuance under our Charter from 180,000,000 to 500,000,000.

Also at our 2015 Stockholder Meeting, our stockholders approved an amendment to amend the Company’s Charter for the purposes of effecting a reverse stock-split of our Common Stock at a later time and at any time until the next meeting of the Company’s stockholders which are entitled to vote on such actions, by a ratio of not less than 1-for-10 and not more than 1-for-200, and to authorize the Board of Directors (“Board”) to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock-split.

On August 24, 2016, the Board approved a 1-for-200 reverse stock-split which was effected on September 21, 2016.

On September 19, 2016, pursuant to the Second Omnibus Amendment, the Company exercised the Mandatory Conversion and, on September 21, 2016, (i) converted the entire outstanding principal balance of $6,000,000, plus accrued interest of $317,000 on all of the Notes into 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share and (ii) canceled all 600,000 Warrants.

At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”), held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s certificate of incorporation (the “Charter”) to reduce the number of shares of Common Stock authorized for issuance under the Charter from 500,000,000 to 250,000,000. The certificate evidencing the resolution reducing the shares was filed with the Delaware Secretary of State.

  Shares 
Shares of Common Stock Authorized  250,000,000 
Shares of Preferred stock Authorized (none issued and outstanding)  15,000,000 
Total Authorized Shares  265,000,000 
     
Shares of Common Stock Issued and Outstanding at December 31, 2017  4,360,561 
Common Stock issuable upon the exercise of outstanding stock options at December 31, 2017  579,059(1)
Common Stock issuable upon the exercise of outstanding warrants at December 31, 2017  4,567,672(1)
     
Total securities outstanding and reserved for issuance at December 31, 2017  9,507,292 

(1)For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 7. Stockholders’ Equity to the Condensed Consolidated Financial Statements.


Warrants

On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.

The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing.

On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering. The public offering warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the public offering warrant at issuance date to be $10,802,728 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.

As part of the underwritten public offering on July 19, 2017, the Company issued Common Stock warrants to purchase 134,000 shares of common stock to the underwriters as part of the services performed by them in connection with the underwritten public offering. The underwriter warrant has an exercise price of $6.04 and expires on July 19, 2022. We estimated the fair value of the underwriter warrant at issuance date to be $863,225 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.

On August 23, 2017, the Company issued common stock warrants to purchase 213,800 shares of common stock to the underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. The overallotment warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the overallotment warrant at issuance date to be $880,710 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $4.20 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.

(1)For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 6. Stockholders’ Equity to the Condensed Consolidated Financial Statements.


Financial Operations Overview

Revenues

Our neurometric services revenues are derived from the sale of PEER Reports to physicians. Physicians are generally billed upon delivery of a PEER Report. The list price of our PEER Reports to physicians is $400 per report which excludes the cost of conducting the EEG. The Company also derives revenue from its subsidiary Arcadian Services who manages the delivery of telepsychiatry and telebehavioral health services which are delivered directly to patients.

Cost of Revenues

Cost of revenues are for services and represent the cost of direct labor, the costs associated with external processing, analysis and consulting services necessary to generate the revenues.

Research and Product Development

Research and Product development expenses are associated with our neurometric and telepsychiatry services and primarily represent costs incurred to design and conduct clinical studies, to recruit patients into the studies, to add data to our database, to improve analytical techniques and advance application of the methodology. We charge all research and development expenses to operations as they are incurred.

Sales and Marketing

For our neurometric and telepsychiatry services, our selling and marketing expenses consist primarily of personnel, media, support and travel costs to inform user organizations and consumers of our products and services. Additional marketing expenses are the costs of advertising, educating physicians, laboratory personnel, other healthcare professionals regarding our products and services.

General and Administrative

Our general and administrative expenses consist primarily of personnel, occupancy, legal, audit, consulting and administrative support costs.

Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

There have been no changes to our critical accounting policies as compared to the critical accounting policies disclosed in the Annual Report 10–K files with the SEC on December 29, 2017.

Revenue Recognition

We have generated limited revenues since our inception. Revenues for our Neurometric Service product are recognized when a PEER Report is delivered to a Client-Physician. The Company also recognizes revenue from its subsidiary, Arcadian Services who manages the delivery of telepsychiatry and telebehavioral health services. Revenue is recognized when the doctor or clinician performs the services.


Stock-based Compensation Expense

Stock-based compensation expense, which is a non-cash charge, results from stock option grants and restricted stock awards. Compensation cost is measured at the grant date based on the calculated fair value of the award. We recognize stock-based compensation expense on a straight-line basis over the vesting period of the underlying option. The amount of stock-based compensation expense expected to be amortized in future periods may decrease if unvested options are subsequently cancelled or may increase if future option grants are made.

Long-Lived Assets and Intangible Assets

Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible assets with finite lives are amortized on a straight-line basis over their useful lives.

Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. The Company will begin amortizing the software over its estimated economic life once it has been placed into service.

The Company evaluates the recoverability of its long lived assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows, if any.

Goodwill

Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional impairment testing is not required. However, if the Company concludes otherwise, the Company is required to perform the first step of a two-step impairment test. Alternatively, the Company may elect to proceed directly to the first step of the two-step impairment test and bypass the qualitative assessment. The first step of the impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, the carrying amount of the goodwill is compared to its implied fair value. The estimate of implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company tests for goodwill impairment annually on September 30.

Derivative accounting for convertible debt and warrants

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2017, the Company had no financial instruments that contain embedded derivative features.

Inflation

For the three most recent fiscal years of the registrant or for those fiscal years in which the registrant has been engaged in business, whichever period is shortest, discuss the impact of inflation and changing prices on the registrant’s net sales and revenues and on income from continuing operations.

Results of Operations for Three Months Ended December 31, 2017 and 2016

MYnd Analytics is focused on research and the commercialization of its PEER Reports through its Neurometric Services, as well as providing telehealth service through scheduling and videoconferencing that being accessible through a secure portal.


The following table presents consolidated statement of operations data for each of the periods:

Revenues

  Three months ended December 31,  Change 
  2017  2016    
Neurometric Services $53,300  $22,200  $31,100 
Telepsychiatry Services  68,700      68,700 
Total Revenues $122,000  $22,200  $99,800 

The increase was primarily due to increased sales of PEER reports, as well as sales generated from Arcadian Services during the period from November 13, 2017 through December 31, 2017.

Cost of Revenues

  Three months ended December 31,  Change 
  2017  2016    
Cost of Revenues $84,900  $3,700  $81,200 

The increase was primarily due to increased consulting fees for EEG techs of $47,000 for the three months ended December 31, 2017, compared to $3,700 for the three months ended December 31, 2016, as well as cost of services generated from Arcadian Services during the period from November 13, 2017 through December 31, 2017.

Research

  Three months ended December 31,  Change 
  2017  2016    
Services Research $81,500  $31,600  $49,900 

Research expenses consist of payroll expenses, (including stock-based compensation), consulting fees, travel expenses, conference fees, and other miscellaneous costs listed as following:

    Three months ended December 31,  Change 
    2017  2016    
(1)Salaries and benefit costs $  $6,500  $(6,500)
(2)Consulting fees  79,000   22,800   56,200 
(3)Other miscellaneous costs  2,500   2,300   200 
  Total Research $81,500  $31,600  $49,900 

(1)Salary and benefit costs, which are solely comprised of stock-based compensation, was zero for the three months ended December 31, 2017, primarily due to certain stock-based compensation fully vested;

(2)Consulting costs increased in the three months ended December 31, 2017 as a result of a new consulting agreement with our Medical Officer to assist with the training of clinical trial investigators on the PEER Report allowing them to participate in trials, and consult with other physicians in the use and interpretation of the PEER Report; additionally on November 13, 2017 we entered into two consulting agreement for medical directors to provide consulting services for the telepsychiatry business; and

(3)Other miscellaneous costs for the three months ended December 31, 2017 and December 31, 2016 were relatively unchanged.


Product Development

  Three months ended December 31,  Change 
  2017  2016    
Product Development $269,200  $295,300  $(26,100)

Product development expenses consist of payroll costs, (including stock-based compensation), consulting fees, system development costs, conference fee, travel expenses, and miscellaneous costs which were as follows:

    Three months ended December 31,  Change 
    2017  2016    
(1)Salaries and benefit costs $124,400  $203,000  $(78,600)
(2)Consulting fees  72,500   51,700   20,800 
(3)System development costs  36,000   15,500   20,500 
(4)Conference & Travel  10,900   7,400   3,500 
(5)Other miscellaneous costs  25,400   17,700   7,700 
  Total Product Development $269,200  $295,300  $(26,100)

(1)Salaries and benefits decreased by $78,600 for the three months ended December 31, 2017, primarily due to certain stock-based compensation fully vested. The remainder was due to additional staff was hired;

(2)Consulting fees increased by $20,800 for the three months ended December 31, 2017, primarily due to services in relation to the upgrade of the Company’s cloud based sales platform and for a data science project to improve the Company’s algorithms for the production of an enhanced PEER report;

(3)System development and maintenance costs increased by $20,500 during the three months ended December 31, 2017 , primarily due to increased time in our contract system programmers for work on quality management initiatives, research support, transitioning to file sharing, and media management;

(4)Conference and travel costs increased by $3,500 during the three months December 31, 2017, primarily due to travel for the Canadian Armed Forces Trial ; and

(5)Other miscellaneous costs increased slightly by $7,700 for the three months ended December 31, 2017.

Sales and marketing

  Three months ended December 31,  Change 
  2017  2016    
Sales and Marketing $667,200  $105,700  $561,500 

Sales and marketing expense for the three months ended December 31, 2017 was $667,200, compared to $105,700 for the three months ended December 31, 2016.


Sales and marketing expenses consist of payroll and benefit costs, (including stock-based compensation), advertising and marketing expenses, consulting fees, and miscellaneous expenses.

  Three months ended December 31, 
  2017  2016   Change 
(1)Salaries and benefit costs$247,100  $48,900  $198,200 
(2)Consulting fees174,900  45,200  129,700 
(3)Advertising and marketing costs151,100    151,100 
(4)Conferences and travel costs25,600    25,600 
(5)Other miscellaneous costs68,500  11,600  56,900 
 Total Sales and marketing$667,200  $105,700  $561,500 

(1)Salaries and benefits for the 2017 period increased by $198,200 from the 2016 period; primarily due to the hiring of new marketing sales staff which increased salaries and the remainder of was offset to stock-based compensation which all of the stock-based compensation expense had been recognized;

(2)Consulting fees for the three months ended December 31, 2017 increased by $129,700. This difference was primarily due to the reduction of $21,000 from renegotiating our contract with a consultant to $3,000 per month; offset by increases in the number of other additional marketing consultants. An increase of $77,900 was related to hiring consultants to assist the Company with engaging with payers, health systems, provider networks, and strategic partners; an increase of $28,100 from the prior period was related to a media consultant managing our Facebook advertising, and consultants with public relations; and $38,600 a marketing consultant from the telepsychiatry business to help with competitive analysis, product descriptions and capital budget/technology planning. The remaining $6,100 increase relates to consultants directly related to the operations support;

(3)Advertising and marketing expenses for the three months ended December 31, 2017 was $151,100 directly related to Facebook advertising;

(4)Conference and travel expenditures for the three months ended December 31, 2017 was $25,600 directly related to travel expense for the sales staff; and

(5)Miscellaneous expenditures for the three months ended December 31, 2017 period increased by $56,900, primarily due to the Company opening PEER Centers in New York and Washington DC. Additional costs were incurred for rent and office supplies.

General and administrative

 Three months ended December 31, 
 2017  2016   Change 
General and administrative expenses$1,774,800  $1,021,800  $753,000 
            

General and administrative expenses consist of payroll and benefit costs, (including stock based compensation), legal fees, patent costs, other professional and consulting fees, general administrative and occupancy costs, dues and subscriptions, conference fees, and travel expenses.


  Three months ended December 31, 
   2017   2016   Change 
(1)Salaries and benefit costs$702,800  $528,400  $174,400 
(2)Transaction fees 438,600      438,600 
(3)Consulting fees198,100    198,100 
(4)Legal fees34,600  219,900  (185,300)
(5)Other professional fees121,100  55,500  65,600 
(6)Patent costs9,500  14,000  (4,500)
(7)Marketing and investor relations costs72,500  58,100  14,400 
(8)Conference and travel costs56,700  30,800  25,900 
(9)Dues & subscriptions fees45,300  32,900  12,400 
(10)General admin and occupancy costs95,600  82,200  13,400 
 Total General and administrative costs$1,774,800  $1,021,800  $753,000 

(1)Salaries and benefit expenses increased by $174,400 for the three months ended December 31, 2017 period. This increase was primarily due to $106,100 which were related to the acquisition of telepsychiatry management and staff; the remaining balance relates to new hiring general counsel and operations staff in the 2017 period, and offset with stock compensation which had become fully recognized;

(2)Transaction fees in relation to Arcadian acquisition was $438,600 for the three months ended December 31, 2017 period, including $355,000 legal fees, and remaining $83,600 for accounting and consulting fees;

(3)Consulting fees was $198,100 for the three months ended December 31, 2017 period, including $93,500 as directors' fees, and $104,600 was related to operational and related consulting fees;

(4)Legal fees decreased by $185,300 for the three months ended December 31, 2017 period. The decrease was primarily due to during the three months ended December 31, 2016, there was $87,900 legal fees associated with fund raising activities, $47,700 related to reverse stock split corporate action, and $36,300 related to legal fees for the review of the Aspire Capital Equity Purchase Agreement;

(5)Other professional fees increased by $65,600 for the three months ended December 31, 2017 period. The majority of the increase was due to additional audit fees;

(6)Patent costs decreased by $4,500 due to the timing and volume of patent and trademark applications and maintenance costs;

(7)Marketing and investor relations costs increased by a net $14,400 for the three months ended December 31, 2017 period as we engaged public relations firms to enhance the Company’s presence in the media;

(8)Conference and travel costs increased by a net $25,900 for the three months ended December 31, 2017 period. The increase was primarily due to conferences attended, increased travel by our executive management for meetings with investors, healthcare payers and providers on the East Coast;

(9)Dues and subscription costs increased by $12,400 for the three months ended December 31, 2017 period was due to additional licenses for our Salesforce platform; and

(10)General administrative and occupancy costs increased by $13,400 for the three months ended December 31, 2017 period. The increase was primarily due to depreciation of fixed assets and amortization of intangible asset purchased; the remainder increase relates to increased operating cost.

Other income (expense)

 Three months ended
December 31,
  Change 
 2017  2016    
Interest expense$(13,700) $(2,500) $(11,200)
            
Interest expense for the three months ended December 31, 2017 was $13,700 compared to $2,500 for the three months of December 31, 2016, the increase was due to interest expense on acquisition of the long term borrowing on Arcadian Services;

Net Loss

  Three months ended
December 31,
   Change 
 2017  2016    
Loss, net$(2,769,300) $(1,440,200) $(1,329,100)
            

Our net loss was $2.8 million for the three months ended December 31, 2017, compared to approximately $1.4 million for the three months of December 31, 2016. The change in net loss consists of increased general & administrative costs related to the hiring of additional operational staff and consultants. Also, sales and marketing costs increased as a result of additional headcount for sales and call center staff and our social media campaign in 2017. Costs for the acquisition of Arcadian Telepsychiatry Services LLC contributed to the increase in the net loss as well.

Liquidity and Capital Resources

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern.

Since our inception, we have never been profitable and we have generated significant losses. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.

As of December 31, 2017, we had an accumulated deficit of approximately $78.4 million compared to our accumulated deficit as of September 30, 2017, of approximately $75.6 million. Our management expects that with our proposed clinical trials, sales and marketing and general and administrative costs, our expenditures will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. The Company continues to explore additional sources of capital but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations.

As of December 31, 2017, we had $2.7 million in cash and cash equivalents and a working capital surplus of approximately $1.1 million. This is compared to our cash position of $5.4 million as of September 30, 2017 and working capital of $4.1 million.

The Company has been funded through multiple rounds of private placements, primarily from members of our Board or our affiliates.

On November 30, 2016, and December 21, 2016 the Company sold and issued an aggregate of 208,000 shares of its Common Stock, at a per share price of $6.25, in private placements to a total of ten accredited investors, for which it received gross cash proceeds to the Company of $1,300,000. Three of the ten accredited investors were affiliates who represented 38.5% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. Also on December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.

On December 6, 2016, the Company, entered into a Common Stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement.


From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million.

Working Capital, Going Concern, Operating Capital and Capital Expenditure Requirements

As of December 31, 2017, we had approximately $2.7 million in cash and cash equivalents, compared to $5.4 million of cash and cash equivalents as of September 30, 2017.

Our recurring net losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Management’s assessment of substantial doubt of going concern is based on current estimates and assumptions regarding our programs and business needs. Actual working capital requirements could differ materially from the above working capital projection. We may explore strategic opportunities including partnerships, licensing and acquisitions of other entities, assets or products.

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I Item 1A and elsewhere in our Annual Report on Form 10-K and in other reports we file with the SEC.

The amount of capital we will need to conduct our operations and the time at which we will require such capital may vary significantly depending upon a number of factors, such as:

the amount and timing of costs we incur in connection with our clinical trials and product development activities, including enhancements to our PEER Online database and costs we incur to further validate the efficacy of our technology;

whether we can receive sufficient business revenues from Arcadian Services to adequately cover our costs;

the amount and timing of costs we incur in connection with the expansion of our commercial operations, including our sales and marketing efforts;

whether we incur additional consulting and legal fees in our efforts in conducting Non-Significant Risk trials within FDA requirements, which will enable us to obtain a 510(k) clearance from the FDA; and

if we expand our business by acquiring or investing in complimentary businesses.

Sources of Liquidity

Since our inception, substantially all of our operations have been financed from equity and debt financings.


Private Placement of Common Stock

Between November 2016 through March 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to thirteen accredited investors, of which five are affiliated with the Company, for which it received gross cash proceeds to the Company of $2,981,300.

The Aspire Capital Equity Line of Credit

On December 6, 2016, the Company, entered into a Common Stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock.

On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Purchase Agreement, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds of $145,000.

The issuance of shares of common stock that may be issued from time to time to Aspire Capital under the Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.

Public Offering

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.

Cash Flows

Net cash used in operating activities was $2,439,900 for the three months ended December 31, 2017, compared to $765,800 for the same period in 2016. The $1.7 million net increase in cash used for operations was primarily due to an increase in net loss of $1,329,100.

During the three months ended ended December 31, 2017, the Company used $334,700 in investing activities, including $28,100 for the purchase of office equipment and $306,600 related to the acquisition of Arcadian Services.

Net Cash used in financing activities for the three months ended December 31, 2017 was $16,100, and relate to payments on notes payable and capital leases. Financing activities for the quarter ended December 31, 2016, consisted of $1.5 million in cash proceeds received from private placements of equity from 11 accredited investors, of which three are affiliated with the Company.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or financing activities with special purpose entities.


Private Placement Transactions

Private Placement of Common Stock

On November 30, 2016, the Company sold and issued an aggregate of 160,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to six accredited investors, for which it received gross cash proceeds of $1,000,000. Three of the six accredited investors were affiliates and represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board, purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust, of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. In connection with this private placement, certain investors (comprised of our executive officers, current and certain former directors) agreed to a 180-day “lock-up”, commencing on November 30, 2016, with respect to shares of Common Stock and other of our securities that they beneficially own, including securities that are convertible into shares of Common Stock and securities that are exchangeable or exercisable for shares of Common Stock. As a result, subject to certain exceptions, for a period of 180 days following November 30, 2016, such persons may not offer, sell, pledge or otherwise dispose of these securities without the Company’s prior written consent.The “lock-up” period expired without any persons requesting the Company’s consent or dispose of these securities.

On December 21, 2016, the Company sold and issued an aggregate of 48,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four accredited investors who were new to the Company.for which it received gross cash proceeds to the Company of $300,000.

On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.

From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to four affiliated accredited investors, resulting in gross cash proceeds to the Company of $1,481,250. The affiliated investors were as follows: RSJ PE a greater than 10% shareholder and where Mr. Votruba (a member of our Board) is Director for Life Sciences for the RSJ/Gradus Fund, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; and Geoffrey Harris, a member of the Board purchased 5,000 shares for $31,250, representing the aggregate gross proceeds to the Company. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.

These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.

The Aspire Capital Equity Line

On December 6, 2016, the Company, entered into the Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock. SeeNote 7. Stockholders’ Equity”,Consolidated Financial Statements for additional detail.


Under the Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

1)the lowest sale price of Common Stock on the purchase date; or

2)the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.

The Company has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.

The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

The Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “Commitment Shares”). The Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the Purchase Agreement are expected to be used for working capital and general corporate purposes.

On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Purchase Agreement, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds of $145,000.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Risk

Not applicable.required for a smaller reporting company.

Item 4. Controls and Procedures.Procedures

 

Evaluation of Disclosure Controls and Procedures.Procedures

 

In connection withDisclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the preparationreports 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 Quarterly Report,Form 10-Q, we carried outconducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and PrincipalChief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures, as of December 31, 2017, in accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act.


DCP. Based on that evaluation, our Chief Executive Officer and PrincipalChief Financial and Accounting Officer have concluded that our disclosure controls and proceduresthe Company’s DCP were not effective as of December 31, 2017.effective.

 

We have identified a material weaknesses in our disclosure controls and procedures. The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise that is commensurate with our financial reporting requirements. We do not have adequate review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to adequately review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically feasible.

Based on the foregoing material weaknesses, we have determined that, as of December 31, 2017, our internal controls over our financial reporting are not effective. We are developing a remediation plan outlining the steps and resources necessary to address each material weakness. Additionally, we continue to add employees and consultants to address these issues and we will continue to broaden the scope of our accounting and realign responsibilities in our financial and accounting review functions. The Company does not believe that the material weakness has resulted in any material inaccuracies in the financial statements included in its Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 or any prior periods.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal ControlsControl over Financial Reporting

 

There has beenwere no changechanges 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 three-month periodfiscal quarter ended DecemberMarch 31, 2017 that has2022which have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

OTHER INFORMATIONMaterial 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 March 31, 2022. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective as of March 31, 2022, because of the continuation of a material weaknesses (the “Material Weakness”) in our internal control over financial reporting due to inadequate financial closing process, 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.

We engaged in ongoing efforts to remediate the control deficiencies that constituted the Material Weakness by implementing changes to 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

subscribing the relevant online services other supplemental internal and external resources relating to SEC reporting.

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 are in the process of implementing an integrated cloud-based enterprise resource planning (ERP) system to manage 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. We 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

Not applicable.

Item 1A. Risk Factors

 

The 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 is not currently partywill 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 any legal proceedings, the adverse outcomecommercialization of which,Endari® in the Company’s management’s opinion, individually or inMiddle East North Africa region and elsewhere, will exceed its existing cash balances and cash expected to be generated from operations for the aggregate, would have a material adverse effect onforeseeable future. To meet the Company’s results of operationscurrent liabilities and future obligations, the Company will need to raise additional funds through related-party loans, equity and debt financings or financial position.

Item 1A.       Risk Factors

Except as set forth below, there have beenlicensing or other strategic agreements. The Company has no material changes to the risk factors included in the Risk Factors section in our Annual Report on Form 10-Kunderstanding or arrangement for the year ended September 30, 2017.


The risk factor capitioned “If we cannot continue to satisfy NASDAQ’s continuing listing criteria, NASDAQ may subsequently delist our Common Stock” is hereby amended as follows:

NASDAQ requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock. Generally, we must maintain a minimum amount of stockholders equity (generally $2.5 million) and a minimum number of holders of our securities (generally 300 round lot holders). If we fail to meet any of the continuing listing requirements, our Common Stock may be subject to delisting. As December 31, 2017, we had stockholders’ equity of approximately $2.1 million, and we are no longer in compliance with such continue listing requirement. If our Common Stock is delisted and we are not able to list our Common Stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing, in the future. Thereand there can be no assurance that an active trading market for our Common Stockthe Company will developbe able to complete any additional equity or be sustained. We may choosedebt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements. Due to raise additional capital in order to increase our stockholders’ equity in orderthe uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the NASDAQ continued listing standards. Any additional equity financings may be financially dilutiveCompany’s ability to and will be dilutivecontinue as a going concern for 12 months from an ownership perspective to our stockholders, and such dilution may be significant based upon the sizedate of such financing. Additionally, we cannot assurethis filing. The consolidated financial statements included in this Quarterly Report do not include any adjustments that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all.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

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.


 

None

Item 6. Exhibits

(a)Exhibits

The following exhibits are filed as part of this report or incorporated by reference herein:

 

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit Title

Filing Date

Filed/
Furnished

3.1

10.1

Promissory Note date January18,2022 issued by registrant to Soomi Niihara.

Certificate of Incorporation, as amended.

*

10.32

10.2

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

Management Services Agreement between Arcadian Telepsychiatry Services LLC and Arcadian Telepsychiatry P.C.

*

10.33

10.3

Promissory Note date March 31,2022 issued by registrant to Wei Peu Zen.

Management Services Agreement between Arcadian Telepsychiatry Services LLC and Arcadian Telepsychiatry PA

*

31.1

Certification of PrincipalChief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)Item 601(b)(31) of Regulation S-K, as adopted pursuant to sectionSection 302 of the Sarbanes-Oxley Act of 2002.2002

*

31.2

Certification of PrincipalChief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a)of Item 601(b)(31) of Regulation S-K, as adopted pursuant to sectionSection 302 of the Sarbanes-Oxley Act of 2002.2002

*

32.1

Certification of PrincipalChief Executive Officer and PrincipalChief Financial Officer pursuantPursuant to 18 U.S.C. Section 1350, as adopted pursuant to sectionSection 906 of the Sarbanes-Oxley Act of 2002.2002

*

101.INS

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

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

*

Filed herewith.

**

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.


SIGNATURESEMMAUS LIFE SCIENCES, INC.

SIGNATURES

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

 

MYnd Analytics,

Emmaus Life Sciences, Inc.

Date: February 20, 2018

Dated: May 12, 2022

By:

/s/ George C. Carpenter IVYutaka Niihara

By:

Name:

George C. Carpenter IV

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

Its:

Chief Executive Officer (Principal Executive Officer)

/s/ Donald D’Ambrosio

By:

Donald D’Ambrosio

/s/ Yasushi Nagasaki

Its:

Name:

Yasushi Nagasaki

Its:

Chief Financial Officer (Principal Financial Officer)


29