Emmaus Life Sciences, Inc 10-Q for FY2021 Q2
Emmaus Life Sciences, Inc. (EMMA)
About this 10-Q
Emmaus Life Sciences, Inc filed this 10-Q on September 1, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.49M
- up 48.8% from $4.36M a year earlier
- Net income
- $2.49M
- compared with a net loss of $9.47M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.:
(Exact name of Registrant as specified in its charter)
|
|
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
(Address of principal executive offices) |
|
(Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
None |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
|
☒ |
Smaller reporting company |
|
|
Emerging growth company |
|
|
|
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The registrant had
EMMAUS LIFE SCIENCES, INC.
For the Quarterly Period Ended June 30, 2021
INDEX
|
|
|
Page |
|
|
|
|
||
|
|
|
||
|
Part I. Financial Information |
|
||
|
|
|
|
|
|
Item 1. |
1 |
||
|
|
|
|
|
|
|
(a)Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020 |
1 |
|
|
|
|
|
|
|
|
2 |
||
|
|
|
|
|
|
|
3 |
||
|
|
|
|
|
|
|
4 |
||
|
|
|
|
|
|
|
(e)Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 |
|
|
|
|
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
|
|
|
|
|
|
|
Item 3. |
24 |
||
|
|
|
|
|
|
Item 4. |
24 |
||
|
|
|
|
|
|
Part II Other Information |
|
||
|
|
|
|
|
|
Item 1. |
27 |
||
|
|
|
|
|
|
Item 1A. |
27 |
||
|
|
|
|
|
|
Item 2. |
27 |
||
|
|
|
|
|
|
Item 3. |
27 |
||
|
|
|
|
|
|
Item 4. |
27 |
||
|
|
|
|
|
|
Item 5. |
27 |
||
|
|
|
|
|
|
Item 6. |
28 |
||
|
|
|
|
|
|
29 |
|||
Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
As of |
|
|||||
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
Inventories, net |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
|
Equity method investment |
|
|
|
|
|
|
|
|
|
Right of use assets |
|
|
|
|
|
|
|
|
|
Investment in convertible bond |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
|
|
|
Operating lease liabilities, current portion |
|
|
|
|
|
|
|
|
|
Conversion feature derivative, notes payable |
|
|
|
|
|
|
— |
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
Revolving line of credit from related party |
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities |
|
|
|
|
|
|
|
|
|
Notes payable, current portion |
|
|
|
|
|
|
|
|
|
Notes payable to related parties |
|
|
|
|
|
|
|
|
|
Convertible debentures, net of discount |
|
|
— |
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
Operating lease liabilities, less current portion |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
Notes payable, less current portion |
|
|
|
|
|
|
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
Preferred stock, par value $ |
|
|
|
|
|
|
|
|
|
Common stock, par value $ |
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
|
Total stockholders’ deficit |
|
|
( |
) |
|
|
( |
) |
|
Total liabilities & stockholders’ deficit |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
Three months ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
REVENUES, NET |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Change in fair value of warrant derivative liabilities |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Change in fair value of conversion feature derivative, notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on investment in marketable securities |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
Net losses on equity method investment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Foreign exchange loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
Interest and other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total other income (expense) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
INCOME TAXES (BENEFIT) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
NET INCOME (LOSS) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on debt securities available for sale (net of tax) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Foreign currency translation adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
EARNINGS (NET LOSS) PER COMMON SHARE - BASIC and DILUTED |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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 |
|
|
Income |
|
|
Deficit |
|
||||||
|
Balance at January 1,2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Fair value of warrants including down-round protection adjustments |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Common stock issued for services |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
Common Stock |
|
|
Additional Paid-In |
|
|
Accumulated Other Comprehensive |
|
|
Accumulated |
|
|
Total Stockholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Loss |
|
|
Deficit |
|
||||||
|
Balance at January 1, 2020 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Fair value of warrants including down-round protection adjustments |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
Common stock issued for cash (net of issuance cost) |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, June 30, 2020 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash flows used in operating activities |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Inventory reserve |
|
|
|
|
|
|
|
|
|
Amortization of discount of notes payable and convertible notes payable |
|
|
|
|
|
|
|
|
|
Foreign exchange adjustments |
|
|
|
|
|
|
( |
) |
|
Tax benefit recognized on unrealized gain on debt securities |
|
|
( |
) |
|
|
— |
|
|
Net gain on investment in marketable securities |
|
|
— |
|
|
|
( |
) |
|
Loss on equity method investment |
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
Gain on disposal of property and equipment |
|
|
( |
) |
|
|
— |
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
Shares issued for services |
|
|
|
|
|
|
— |
|
|
Change in fair value of warrant derivative liabilities |
|
|
|
|
|
|
|
|
|
Change in fair value of conversion feature derivative, notes payable |
|
|
( |
) |
|
|
( |
) |
|
Net changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
|
|
|
Inventories |
|
|
|
|
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
|
|
|
|
|
|
|
Income tax receivable and payable |
|
|
( |
) |
|
|
( |
) |
|
Accounts payable and accrued expenses |
|
|
( |
) |
|
|
( |
) |
|
Other current liabilities |
|
|
|
|
|
|
( |
) |
|
Other long-term liabilities |
|
|
( |
) |
|
|
|
|
|
Net cash flows used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Sale of marketable securities |
|
|
— |
|
|
|
|
|
|
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Loan to equity method investee |
|
|
( |
) |
|
|
( |
) |
|
Net cash flows provided by (used in) investing activities |
|
|
( |
) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Proceeds from notes payable issued, net of issuance cost and discount |
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable issued, net of issuance cost and discount |
|
|
|
|
|
|
— |
|
|
Payments of notes payable |
|
|
( |
) |
|
|
( |
) |
|
Payments of convertible notes |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from issuance of common stock, net of issuance cost |
|
|
— |
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities |
|
|
|
|
|
|
( |
) |
|
Effect of exchange rate changes on cash |
|
|
( |
) |
|
|
( |
) |
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
NON-CASH INVESING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Debt discount due to conversion features derivative |
|
$ |
|
|
|
$ |
— |
|
|
Debt discount due to warrant issued with debt |
|
$ |
— |
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMMAUS LIFE SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements of Emmaus Life Sciences, Inc., (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions have been eliminated. The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021. The accompanying condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated balance sheet at December 31, 2020 contained in the Form 10-K/A. The results of operations for the three and six months ended June 30, 2021, are not necessarily indicative of the results to be expected for the full year or any future interim period.
Organization and Nature of Operations
The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies primarily for rare and orphan diseases. On July 17, 2019, we completed a merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), into a subsidiary of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary. Immediately after completion of the Merger, we changed our name to “Emmaus Life Sciences, Inc.”
Principles of consolidation—The consolidated financial statements include the accounts of Emmaus and its direct and indirect consolidated subsidiaries. All significant intercompany transactions have been eliminated.
The preparation of the consolidated financial statements requires the use of management estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reported period. Actual results could differ materially from those estimates.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K/A for the year ended December 31, 2020. There have been no material changes in these policies or their application.
Management has considered all recent accounting pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.
Restricted cash — Restricted cash includes proceeds received from the sales of shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) earmarked for the purchase of Telcon convertible bond per the December 23, 2019 agreement with Telcon. See Note 5 for the additional details. Reconciliation of cash, cash equivalent and restricted cash are as follows:
|
|
As of June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
Cash and cash equivalents |
$ |
|
|
|
$ |
|
|
|
Restricted cash |
|
— |
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows |
$ |
|
|
|
$ |
|
|
Factoring accounts receivables — The Company entered into a factoring agreement with Prestige Capital Finance, LLC on February 22, 2021. Under the agreement, the Company may factor its accounts receivables of up to
5
2021. For three months and six months ended June 30, 2021, the Company incurred approximately $
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Endari® |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2021 and June 30, 2020 (in thousands):
|
|
|
Trade Discounts, Allowances and Chargebacks |
|
|
Government Rebates and Other Incentives |
|
|
Returns |
|
|
Total |
|
||||
|
Balance as of December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related prior period sales |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Credit and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of June 30, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related prior period sales |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Credit and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance as of June 30, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of net revenues):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Customer A |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Customer B |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $
6
million is included in other long-term liabilities as unearned revenue as of June 30, 2021 and December 31, 2020. Refer to Note 11 and for additional transaction details.
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Raw materials and components |
$ |
|
|
|
$ |
|
|
|
Work-in-process |
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
Inventory reserve |
|
( |
) |
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
|
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Prepaid insurance |
$ |
|
|
|
$ |
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
Due from EJ Holdings |
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
Property and equipment consisted of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Equipment |
$ |
|
|
|
$ |
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
|
Property and Equipment, net |
$ |
|
|
|
$ |
|
|
During the three months ended June 30, 2021 and 2020, depreciation expense was approximately $
NOTE 5 — INVESTMENTS
Investment in convertible bonds - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon RF Pharmaceutical, Inc., or Telcon in the principal amount of approximately $
In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated
The Company has elected the fair value option method to measure the investment in the Telcon convertible bond. The investment 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. The fair value and any change in fair value of the
7
convertible bond is determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the market price of the underlying common stock.
The following table sets forth the fair value and changes in fair value of the investment in convertible bonds as of June 30, 2021 and December 31, 2020 (in thousands):
|
Investment in convertible bond |
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
— |
|
|
Fair value at issuance date |
|
|
— |
|
|
|
|
|
|
Change in fair value included in the statement of other comprehensive income |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
The fair value as of June 30, 2021 and December 31, 2020 was based upon following assumptions:
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Principal outstanding (South Korean won) |
|
|
|
|
|
|
||
|
Stock price |
|
|
|
|
|
|
||
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
Selected yield |
|
|
|
% |
|
|
|
% |
|
Expected volatility (Telcon common stock) |
|
|
|
% |
|
|
|
% |
|
Risk-free interest rate (South Korea government bond) |
|
|
|
% |
|
|
|
% |
|
Expected dividend yield |
|
|
|
% |
|
|
|
% |
|
Conversion price |
|
|
|
|
|
|
||
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. In connection with the formation, the Company invested approximately $
EJ Holdings is engaged in phasing in the Ube facility, including obtaining regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from the Company or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and the EJ Holdings activities at the facility are principally for the Company’s benefit. JIP, however, owns
The Company’s share of the losses of EJ Holdings are classified as net losses on equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
The following table sets forth certain financial information of EJ Holdings for the three and six months ended June 30, 2021 and 2020 (in thousands):
8
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
||||
|
REVENUES, NET |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Accounts payable: |
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses |
|
$ |
|
|
|
$ |
|
|
|
Professional fees |
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
|
|
|
|
|
|
|
Manufacturing costs |
|
|
|
|
|
|
|
|
|
Other vendors |
|
|
|
|
|
|
|
|
|
Total accounts payable |
|
|
|
|
|
|
|
|
|
Accrued interest payable, related parties |
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
|
|
|
|
|
|
|
Accrued expenses: |
|
|
|
|
|
|
|
|
|
Payroll expenses |
|
|
|
|
|
|
|
|
|
Government rebates and other rebates |
|
|
|
|
|
|
|
|
|
Due to EJ Holdings |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
Total accrued expenses |
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
|
|
|
|
|
|
Other current liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Trade discount |
$ |
|
|
|
$ |
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
Total other current liabilities |
$ |
|
|
|
$ |
|
|
Other long-term liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Trade discount |
$ |
|
|
|
$ |
|
|
|
Unearned revenue |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
Total other long-term liabilities |
$ |
|
|
|
$ |
|
|
On June 12, 2017, the Company and Telcon entered into an API Supply Agreement, as subsequently amended (so as amended, the “API agreement”), pursuant to which Telcon advanced to the Company approximately $
9
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at June 30, 2021 and December 31, 2020 (in thousands except for number of shares):
|
Year Issued |
|
Interest Rate Range |
|
|
Term of Notes |
|
Conversion Price |
|
|
Principal Outstanding June 30, 2021 |
|
|
Unamortized Discount June 30, 2021 |
|
|
Carrying Amount June 30, 2021 |
|
|
Shares Underlying June 30, 2021 |
|
|
||||||
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2020 |
|
|
|
|
2 years |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2021 |
|
|
|
|
Due on demand - 2 years |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
$ |
|
|
(b) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
$ |
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
Year Issued |
|
Interest Rate Range |
|
|
Term of Notes |
|
Conversion Price |
|
|
Principal Outstanding December 31, 2020 |
|
|
Unamortized Discount December 31, 2020 |
|
|
Carrying Amount December 31, 2020 |
|
|
Shares Underlying Notes December 31, 2020 |
|
|
||||||
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2019 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2020 |
|
1%-11% |
|
|
Due on demand - 2 years |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2016 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2019 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2020 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Convertible debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2019 |
|
|
|
|
|
|
$2.00-$9.52 |
|
(a) |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
Convertible note payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2018 |
|
|
|
|
|
|
$ |
|
|
(b) |
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
(a) |
The notes are convertible to Emmaus Life Sciences, Inc. shares. |
|
|
(b) |
|
10
The weighted-average stated annual interest rate of notes payable was
As of June 30, 2021, future contractual principal payments due on notes payable were as follows:
|
Year Ending |
|
|
|
|
2021 (six months) |
$ |
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Total |
$ |
|
|
On March 8, 2021, the Company prepaid in full outstanding Amended and Restated
The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. Upon prepayment of the Debentures, the outstanding liability was recognized in change in fair value in earnings.
|
|
|
Six Months Ended |
|
|
Year Ended |
|
||
|
Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures |
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Fair value at debt modification date |
|
|
— |
|
|
|
|
|
|
Change in fair value included in the statement of comprehensive income |
|
|
( |
) |
|
|
( |
) |
|
Balance, end of period |
|
$ |
— |
|
|
$ |
|
|
The fair value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.
The fair value as of December 31, 2020 was based upon following assumptions:
|
|
|
December 31, 2020 |
|
|
|
Stock price |
|
$ |
|
|
|
Conversion price |
|
$ |
|
|
|
Selected yield |
|
|
|
% |
|
Expected volatility (peer group) |
|
|
|
% |
|
Expected life (in years) |
|
|
|
|
|
Expected dividend yield |
|
— |
|
|
|
Risk-free rate |
|
|
|
|
The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $
On May 8, 2020, the Company received a loan in the amount of $
11
of the qualifying business. The loan, which is in the form of a Promissory Note dated
On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of
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 $
The conversion feature of the convertible promissory notes was separately accounted for at fair value as a derivative liability under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liability recorded in earnings.
|
|
|
Six Months Ended |
|
|
|
Convertible promissory notes |
|
June 30, 2021 |
|
|
|
Balance, beginning of period |
|
$ |
— |
|
|
Fair value at issuance date |
|
|
|
|
|
Change in fair value included in the statement of comprehensive (income) loss |
|
|
( |
) |
|
Balance, end of period |
|
$ |
|
|
The fair value and any change in fair value of conversion feature liability are determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.
12
The fair value as of June 30, 2021 and at issuance date was based upon following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes |
|
June 30, 2021 |
|
|
Issuance Date |
|
||
|
Stock price |
|
$ |
|
|
|
$ |
|
|
|
Conversion price |
|
$ |
|
|
|
$ |
|
|
|
Selected yield |
|
|
|
% |
|
|
|
% |
|
Expected volatility |
|
|
|
% |
|
|
|
% |
|
Time until maturity (in years) |
|
|
|
|
|
|
|
|
|
Dividend yield |
|
— |
|
|
— |
|
||
|
Risk-free rate |
|
|
|
% |
|
|
|
% |
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 $
In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to
The Company determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.
The following table presents the change in fair value of the GPB Warrant as of June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
Six Months Ended |
|
|
Year Ended |
|
||
|
Warrant Liability—GPB |
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Change in fair value included in the statement of comprehensive (income) loss |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.
The fair value as of June 30, 2021, and December 31, 2020 set forth in the table above was based on upon following assumptions:
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Adjusted exercise price |
|
$ |
|
|
|
$ |
|
|
|
Common stock fair value |
|
$ |
|
|
|
$ |
|
|
|
Risk‑free interest rate |
|
|
|
% |
|
|
|
% |
|
Volatility |
|
|
|
% |
|
|
|
% |
|
Time until expiration (years) |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
— |
|
|
— |
|
||
|
Number outstanding |
|
|
|
|
|
|
|
|
Purchase Agreement with Holders of 10% Senior Secured Debentures—In October 2018, EMI sold and issued $
13
of the debentures and warrants were used to fund EMI’s original $
The Debentures were amended and restated in their entirety in conjunction with the Merger. Common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.
The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $
Pursuant to the terms of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated
The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the
On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of the Amended and Restated
In consideration of the Debenture holder’s financial accommodations to the Company, the Company issued to the holders, pro rata based upon the relative principal amounts of their Debentures, common stock purchase warrants to purchase a total of up to
14
The exercise price of the amended and restated warrants was reduced to $
|
|
|
March 2, 2021 (Anti-dilution adjustment date) |
|
|
February 28, 2020 (Anti-dilution adjustment date) |
|
|
February 21, 2020 (Amendment date) |
|
|||
|
Exercise price |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Common stock fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Volatility |
|
101.00%-120.00% |
|
|
|
|
% |
|
|
|
% |
|
|
Risk-free rate |
|
0.21%-0.58% |
|
|
|
|
% |
|
|
|
% |
|
|
Expected life (in years) |
|
2.64-4.56 |
|
|
|
|
|
|
|
|
|
|
Purchase agreement with Holder of a Convertible Promissory Note - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $
The following table presents the fair value and the change in fair value of the warrants as of June 30, 2021 and December 31, 2020 (in thousands):
|
Warrant liability—Wealth Threshold |
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
— |
|
|
Fair value at issuance date |
|
|
— |
|
|
|
|
|
|
Change in fair value included in the statement of comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model and was based upon following assumptions:
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Exercise price |
|
$ |
|
|
|
$ |
|
|
|
Stock price |
|
$ |
|
|
|
$ |
|
|
|
Risk‑free interest rate |
|
|
|
% |
|
|
|
% |
|
Expected volatility (peer group) |
|
|
|
% |
|
|
|
% |
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
— |
|
|
— |
|
||
|
Number outstanding |
|
|
|
|
|
|
|
|
A summary of outstanding warrants as of June 30, 2021 and December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Warrants outstanding, beginning of period |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
Cancelled, forfeited or expired |
|
|
( |
) |
|
|
( |
) |
|
Warrants outstanding, end of period |
|
|
|
|
|
|
|
|
15
A summary of outstanding warrants by year issued and exercise price as of June 30, 2021 is presented below:
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
||||||||||||||
|
Year issued and Exercise Price |
|
|
|
|
Number of Warrants Issued |
|
|
Weighted-Average Remaining Contractual Life (Years) |
|
|
Weighted-Average Exercise Price |
|
|
Total |
|
|
Weighted-Average Exercise Price |
|
|||||||
|
Prior to January 1, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.54-$36.24 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
Prior to Jan 1, 2020 Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
At December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.05 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
— |
|
|
|
— |
|
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
2020 Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
Grand Total |
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total |
|
|
|
|
|
|
|
|
|
||
Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to
The Company also has an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company may grant stock options and other stock awards to selected employees including officers, and to non-employee consultants and non-employee directors. All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger and the Company intends not to make any further awards under thereunder.
Stock options—During the six months ended June 30, 2021, the Company did
A summary of outstanding stock options as of June 30, 2021 and December 31, 2020 is presented below.
|
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||||||||||
|
|
|
Number of Options |
|
|
Weighted‑ Average Exercise Price |
|
|
Number of Options |
|
|
Weighted‑ Average Exercise Price |
|
||||
|
Options outstanding, beginning of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted or deemed granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
$ |
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cancelled, forfeited and expired |
|
|
( |
) |
|
$ |
|
|
|
|
( |
) |
|
$ |
|
|
|
Options outstanding, end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Options exercisable, end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Options available for future grant |
|
|
— |
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Option plans were expired and therefore |
16
During the three months ended June 30, 2021 and June 30, 2020, the Company recognized $
Purchase Agreement with Lincoln Park Capital Fund, LLC—On February 28, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may elect to sell to LPC from time to time up to $
Pursuant to the Purchase Agreement, on any business day over the 36-month term of the Purchase Agreement the Company has the right at its discretion and subject to certain conditions to direct LPC to purchase up to
Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement.
The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC. There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement. There is no upper limit on the price per share that LPC could be obligated to pay for common stock, but shares will only be sold to LPC on a day the Company’s closing price is less than the floor price as set forth in the Purchase Agreement and if the sale of the shares would not result in LPC and its affiliates having beneficial ownership of more than
As of the date of filing of this Quarterly Report, the Company was out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement. The Company may seek to bring itself into compliance or seek an appropriate waiver from LPC to regain the ability to utilize the Purchase Agreement, but there can be no assurance when or whether the Company may be able to do so. If the Company is able to utilize the Purchase Agreement, whether or to what extent the Company sells shares of common stock to LPC under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, its net revenue and other results of operations, its working capital and other funding needs, the prevailing market prices of the Company’s common stock and the availability of other sources of funding.
Collaborative Research and Development Agreement with Kainos Medicine, Inc—On February 26, 2021, the Company entered into an agreement with Kainos Medicine, Inc. (“Kainos”) to lead the preclinical development of Kainos’ patented IRAK4 inhibitor (“KM10544”) as an anti-cancer drug and further advance the research and development activity currently underway at Kainos. With this agreement in place, Kainos plans to complete the study of the therapeutic mechanism of action ("MOA") of KM10544 in solid cancers, blood cancers and lymphoma. The Company will be responsible for the investigation and proof of target disease selection, efficacy and safety. The companies also entered into a letter of intent regarding possible future joint development of small molecule therapeutics and other pharmaceutical assets.
Pursuant to the agreement, the Company paid $
17
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is separately computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss) and other comprehensive income.
For the three and six months ended June 30, 2021, the Company recorded income tax benefit of $
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases
In addition, the Company leases
The rent expense during the three months ended June 30, 2021 and 2020 amounted to approximately $
Future minimum lease payments under the lease agreements were as follows as of June 30, 2021 (in thousands):
|
|
|
Amount |
|
|
|
2021 (six months) |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 and thereafter |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: Interest |
|
|
|
|
|
Present value of lease liabilities |
|
$ |
|
|
As of June 30, 2021, the Company had an operating lease right-of-use asset of $
NOTE 11 — COMMITMENTS AND CONTINGENCIES
API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon paid the Company approximately $
On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the Revised API Agreement from $50 per kilogram of PGLG to $
18
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding on or at any time during the six months ended June 30, 2021 (in thousands):
|
Class |
Lender |
|
Interest Rate |
|
|
Date of Loan |
|
Term of Loan |
|
Principal Amount Outstanding at June 30, 2021 |
|
|
Highest Principal Outstanding |
|
|
Amount of Principal Repaid |
|
|
Amount of Interest Paid |
|
|
|||||
|
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Yutaka Niihara (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2020:
|
Class |
Lender |
|
Interest Rate |
|
|
Date of Loan |
|
Term of Loan |
|
Principal Amount Outstanding at December 31, 2020 |
|
|
Highest Principal Outstanding |
|
|
Amount of Principal Repaid |
|
|
Amount of Interest Paid |
|
|
|||||
|
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Lan T. Tran (2) |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
Lan T. Tran (2) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lan T. Tran (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Hope Int'l Hospice (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hope Int'l Homecare (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Yutaka Niihara (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
|
(2) |
|
See Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds
NOTE 13 — SUBSEQUENT EVENTS
The Company evaluated events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion, the terms, “we,” “us,” “our,” “Emmaus” or the “Company” refer to Emmaus Life Sciences, Inc. and its direct and indirect subsidiaries.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021 (the “Annual Report”).
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including those set forth in the “Risk Factors” section of the Annual Report, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. On July 7, 2017, the U.S. Food and Drug Administration, or FDA, approved our lead product, Endari® (prescription-grade L-glutamine oral powder), to reduce the severe complications of sickle cell disease (“SCD”), in adult and pediatric patients five years of age and older. Endari® has received Orphan Drug designation from the FDA and Orphan Medical designation from the European Commission, which designations afford marketing exclusivity for Endari® for a seven-year period in the U.S. and ten-year period in the European Union, respectively, following marketing approval.
We commenced commercialization of Endari® in the U.S. in January 2018 in collaboration with a contract sales organization. Effective January 2020, we have relied upon our in-house commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs. Endari® is also reimbursable by many commercial payors. We have distribution agreements in place with the nation’s leading distributors as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected pharmacies nationwide.
Until we began marketing and selling Endari® in the U.S. in early 2018, we had minimal revenues and relied upon funding from sales of equity securities and debt financings and loans, including loans from related parties to fund our business and operations. As of June 30, 2021, our accumulated deficit was $233.7 million and we had cash and cash equivalents of $3.8 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and expand or commence early access programs and eventual marketing and commercialization abroad.
Until we can generate sufficient net revenues, our future cash requirements are expected to be financed through public or private equity or debt financings, loans or corporate collaboration and licensing arrangements.
Financial Overview
Revenues, net
Since January 2018, we have generated net revenues primarily through the sale of Endari® as a treatment for SCD.
Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have entered into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that
20
provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.
Under the Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company’s performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations.
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of sales discounts, returns, government rebates, chargebacks and commercial discounts. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from the Company's estimates. If actual results vary from the Company's estimates, the Company adjusts the variable consideration in the period such variances become known, which would affect net revenues in that period. The following are our significant categories of variable consideration:
Sales Discounts: We provide our customers prompt payment and large order discounts and from time to time offer additional discounts that are recorded as a reduction of revenue in the period the revenue is recognized. Sales attributable to one-time discounts offered by us increased in 2020 and 2021 and may adversely affect sales in subsequent periods.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping and distribution of Endari®.
Research and Development Expenses
Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment
21
flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approval of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of Our Business and Compliance with Law.”
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related employee costs, including share-based compensation for our directors, executive officers and employees. Other general and administrative expenses include facility costs, patent filing costs and professional fees and expenses for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion, sale and marketing of our products. Other selling cost include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional sales and administrative personnel to support the commercialization of Endari® in the U.S. and abroad.
Inventories
Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or net realizable value. Substantially all raw materials purchased during the six months ended June 30, 2021 and 2020 were supplied by one vendor.
Results of Operations:
Three months ended June 30, 2021 and 2020
Net revenues, Net. Net revenues increased by $2.1 million, or 49%, to $6.5 million for the three months ended June 30, 2021, compared to $4.4 million for the three months ended June 30, 2021. The increase in net revenues was primarily attributable to bulk order purchases and recovery from the temporary disruptions in revenues related the COVID-19 pandemic during 2020.
Cost of Goods Sold. Cost of goods sold remained consistent at $0.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Research and Development Expenses. Research and development expenses increased by $0.2 million, or 28%, to $0.8 million for the three months ended June 30, 2021 compared to $0.6 million for the three months ended June 30, 2021. The increase in research and development expenses was primarily due to a pharmacokinetic characteristic and safety study for Endari® in the US and clinical study in Europe. We expect our research and development costs to increase in the remainder of 2021 as the study progresses.
Selling Expenses. Selling expenses increased by $0.3 million, or 28%, to $1.5 million for the three months ended June 30, 2021, compared to $1.1 million for the three months ended June 30, 2020. The increase in selling expenses was primarily due to an increase of the headcount of our in-house commercial team.
General and Administrative Expenses. General and administrative expenses decreased by $0.4 million, or 10% to $3.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The decrease in general and administrative expenses was primarily due to decreases of $0.2 million in professional fees and $0.2 million of insurance expenses.
22
Other Income (Expense). Total other income increased by $10.3 million, or 122%, to $1.8 million for the three months ended June 30, 2021, compared to $8.4 million of other expense for the three months ended June 30, 2020. The increase in other income was primarily due to an increase of $2.5 million in change in fair value of embedded conversion option and decreases of $5.6 million in net loss on investment in marketable securities, $1.4 million in loss on debt extinguishment and $0.7 million in interest expense.
Net Income (Loss). Net income for the three months ended June 30, 2021 increased by $12.0 million, or 126%, to a net income of $2.5 million for the three months ended June 30, 2021 from net loss of $9.5 million for the three months ended June 30, 2020. The increase of net income was primarily a result of decreases of $10.3 million in other expense and an increase of $2.0 million in income from operations as discussed above.
Six months ended June 30, 2021 and 2020
Net revenues, Net. Net revenues increased by $0.5 million, or 5%, to $11.8 million for the six months ended June 30, 2021 compared to $11.3 million for the six months ended June 30, 2020. The increase in net revenues was primarily attributable to bulk order purchases and recovery from the temporary disruptions in revenues related the COVID-19 pandemic during 2020.
Cost of Goods Sold. Cost of goods sold remained consistent at $0.9 million for six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Research and Development Expenses. Research and development expenses increased by $1.4 million, or 112%, to $2.6 million for the six months ended June 30, 2021 compared to $1.2 million for the six months ended June 30, 2020. The increase was primarily due to $0.5 million in cash and $0.5 million in shares of the Company’s stock issued under the agreement with Kainos Medicine, Inc. (“Kainos”) to lead the clinical development of Kainos’ patented IRAK4 inhibitor and an increase of $0.5 million relates to a pharmacokinetic characteristic and safety study for Endari® and clinical study in Europe. We expect our research and development costs to increase in the remainder of 2021 as our studies progress.
Selling Expenses. Selling expenses increased by $0.5 million, or 24%, to $2.7 million for the six months ended June 30, 2021 compared to $2.2 million for the six months ended June 30, 2020. The increase in selling expenses was primarily due to an increase of the headcount of in-house sales team.
General and Administrative Expenses. General and administrative expenses decreased slightly by $0.6 million, or 8%, to $6.8 million for the six months ended June 30, 2021 compared to $7.4 million for the six months ended June 30, 2020. The decrease of general and administrative expenses was primarily due to decreases of $0.4 million in insurance expenses and $0.2 million of professional fees.
Other Income (Expense). Total other expense increased by $1.2 million, or 32%, to $5.0 million for the six months ended June 30, 2021, compared to $3.8 million of other expense for the six months ended June 30, 2020. The increase in other expenses was primarily due to a decrease of $1.2 million in net gain on investment in marketable securities and an increase of $1.2 million in loss in foreign exchange loss partially offset by a decrease of $1.4 million interest expenses.
Net Income (Loss). Net loss for the six months ended June 30, 2021 increased by $2.0 million, or 50% to $5.9 million for the six months ended June 30, 2021 from a net loss of $4.0 million for the six months ended June 30, 2020. The increase was primarily a result of increases of $1.2 million in other expense and $0.7 million in loss from operations as discussed above.
Liquidity and Capital Resources
We anticipate that we will continue to incur net losses for the foreseeable future until we can generate increased net revenues from Endari® sales. Based on our losses, anticipated future revenues and operating expenses, cash and cash equivalents of $1.7 million as of June 30, 2021, and the remaining net proceeds from the recent sale of convertible promissory notes discussed in Note 7, we believe our working capital is sufficient to meet our needs at least through the third quarter of 2022. If future revenues are less than anticipated or we incur more expenses than we anticipate, we may not have sufficient operating capital for our business without curtailing certain operations or raising additional capital. Except as described below, we have no understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us or at all
On February 28, 2020, we entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we may elect to sell to LPC up to $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement from time to time over the 36-month term of the Purchase Agreement. As of the date of filing of this Quarterly Report, we are out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement. We may seek to bring the Company into compliance or seek an appropriate waiver from LPC to regain our ability to utilize the Purchase Agreement, but there can be no assurance when or whether we may be able to do so.
23
Effective February 22, 2021, our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. In March 2021, we completed our first transaction under the purchase and sale agreement.
Cash flows for the six months ended June 30, 2021 and June 30, 2020
Net cash from operating activities
Net cash used in operating activities decreased by $2.0 million, or 119%, to net cash used in operating activities of $3.8 million for the six months ended June 30, 2021 from net cash used in operating activities of $1.7 million for the six months ended June 30, 2020. This increase of cash used in operating activities was primarily due to a decrease of $2.0 million in working capital.
Net cash from investing activities
Net cash used in investing activities decreased by $5.5 million, or 355%, to $3.9 million for the six months ended June 30, 2021 from net cash provided by investing activities of $1.6 million for the six months ended June 30, 2020. This increase was primarily due to a $4.0 million loan to equity method investee and a $2.1 million of proceeds from sales of Telcon stock received during 2020.
Net cash from financing activities
Net cash provided by (used in) financing activities increased by $7.5 million, or 1334%, to net cash provided by financing activities of $6.9 million for the six months ended June 30, 2021 from net cash used in financing activities of $0.6 million for the six months ended June 30, 2020. This increase was the result of $14.5 million in proceeds from the convertible promissory notes payable issued partially offset by a $5.7 million increase in payments of convertible notes.
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Amended Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2021.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under
24
the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our DCP. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s DCP were not effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2021 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Material Weakness and Plan of Remediation
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that pose a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses might cause information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
We conducted an evaluation pursuant to Rule 13a‑15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of June 30, 2020. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Interim Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our DCP were not effective as of June 30, 2021, because of the continuance of a material weaknesses in our internal control over financial reporting first identified in 2019 due to inadequate application of GAAP on certain complex transactions, inadequate financial closing process, timely filing of periodic and annual financial statements, segregation of duties including access control of information technology especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account process and insufficient entity risk assessment process.
In 2019, we began to implement measures designed to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, including, without limitation:
|
|
• |
engaging a third-party accounting consulting firm to assist us in the review of our application of GAAP on complex debt financing transactions and revenue recognition under ASC 606; |
|
|
• |
using a GAAP Disclosure and SEC Reporting Checklist; |
|
|
• |
increasing the continuing professional training and academic education on accounting subjects for accounting staff; |
|
|
• |
enhancing the level of the precision of review controls related to our financial close and reporting; and |
|
|
• |
engaging other supplemental internal and external resources. |
Our management and board of directors are committed to the remediation of the material weaknesses, as well as the continued improvement of our overall system of internal control over financial reporting. In addition to the measures described above, we also intend to consider upgrading our financial accounting systems and software as our finances permit. Further, we will consider establishing a Disclosure Committee to ensure more effective internal communications significant transactions.
We believe these measures will remediate the control deficiencies that gave rise to the material weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remediation measures may be required.
We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent improvements in our internal control over financial reporting when they are fully implemented. The material weaknesses will not be considered fully remediated until controls have been designed and implemented for a sufficient period of time for our management to conclude that the control environment is operating effectively. Additional remediation measures may be required,
25
which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting and DCP.
As we continue to evaluate and work to remediate the Material Weakness and enhance our internal control over financial reporting and DCP, we may determine that we need to modify or otherwise adjust the remediation measures described above. As a result, we cannot assure you that our remediation efforts will be successful or that our internal control over financial reporting or DCP will be effective.
26
Part II. Other Information
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Please refer to the “Risk Factors” section of the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company has agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. As of June 30, 2021, we had sold approximately $14.5 million of the convertible promissory notes. Of the net proceeds from the sale of the convertible promissory notes, $6.2 million was used to prepay the outstanding 10% Senior Secured Convertible Debentures as described in Note 7.
Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of our common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of our common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
27
Item 6. Exhibits
(a)Exhibits
|
|
|
Incorporated by Reference |
|
|||
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed/ |
|
10.1 |
Promissory Note dated April 24, 2021 issued by registrant to Eastwind, Ltd. |
|
|
|
|
* |
|
10.2 |
Promissory Note dated May 26, 2021 issued by registrant to Shigeru Matsuda |
|
|
|
|
* |
|
31.1+ |
|
|
|
|
* |
|
|
31.2+ |
|
|
|
|
* |
|
|
32.1+ |
|
|
|
|
* |
|
|
101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
|
|
|
|
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
|
|
* |
Filed herewith. |
|
+ |
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. |
28
EMMAUS LIFE SCIENCES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Emmaus Life Sciences, Inc. |
||
|
|
|
|
|
|
Dated: September 1, 2021 |
By: |
|
/s/ Yutaka Niihara |
|
|
Name: |
|
Yutaka Niihara, M.D., M.P.H. |
|
|
Its: |
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Yasushi Nagasaki |
|
|
Name: |
|
Yasushi Nagasaki |
|
|
Its: |
|
Interim Chief Financial Officer |
|
|
|
|
|
29