EMMA 10-Q
Emmaus Life Sciences, Inc. (EMMA)
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)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
None |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The registrant had
EMMAUS LIFE SCIENCES, INC.
For the Quarterly Period Ended March 31, 2024
TABLE OF CONTENTS
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Part I. Financial Information |
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Item 1. |
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(a) Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II Other Information |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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As of |
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March 31, 2024 |
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December 31, 2023 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right of use assets |
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Investment in convertible bond |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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CURRENT LIABILITIES |
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Accounts payable and accrued expenses |
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$ |
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$ |
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Operating lease liabilities, current portion |
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Conversion feature derivative, notes payable |
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Other current liabilities |
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Warrant derivative liabilities |
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Notes payable, current portion, net of discount |
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Notes payable to related parties |
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Convertible notes payable, net of discount |
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Total current liabilities |
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Operating lease liabilities, less current portion |
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Other long-term liabilities |
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Notes payable to related parties, net of discount |
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Total liabilities |
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STOCKHOLDERS’ DEFICIT |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Net loan receivable from EJ Holdings |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders’ deficit |
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Total liabilities & stockholders’ deficit |
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$ |
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$ |
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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 LOSS
(In thousands, except share and per share amounts)
(Unaudited)
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Three months Ended March 31, |
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2024 |
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2023 |
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CONSOLIDATED STATEMENTS OF LOSS |
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REVENUES, NET |
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$ |
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$ |
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COST OF GOODS SOLD |
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GROSS PROFIT |
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OPERATING EXPENSES |
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Research and development |
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Selling |
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General and administrative |
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Total operating expenses |
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LOSS FROM OPERATIONS |
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OTHER INCOME (EXPENSE) |
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Change in fair value of warrant derivative liabilities |
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Change in fair value of conversion feature derivative, notes payable |
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Net loss on equity method investment |
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Gain on restructured debt |
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— |
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Foreign exchange gain (loss) |
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Interest and other income |
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Interest expense |
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Total other expense |
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LOSS BEFORE INCOME TAXES |
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Income tax provision (benefit) |
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NET LOSS |
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COMPONENTS OF OTHER COMPREHENSIVE LOSS |
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Unrealized loss on debt securities available for sale (net of tax) |
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Foreign currency translation adjustments |
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Other comprehensive loss |
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COMPREHENSIVE LOSS |
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$ |
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$ |
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NET LOSS PER COMMON SHARE - BASIC AND DILUTED |
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$ |
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$ |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |
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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)
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Common stock |
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Additional paid-in |
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Loan receivable from |
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Accumulated other comprehensive |
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Accumulated |
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Total stockholders' |
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Shares |
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Amount |
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capital |
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EJ Holdings |
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income (loss) |
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deficit |
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deficit |
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Balance, January 1, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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Unrealized loss on debt securities available for sale (net of tax) |
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— |
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— |
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— |
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— |
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( |
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— |
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Foreign currency translation effect |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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Balance, March 31, 2024 |
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Common stock |
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Additional paid-in |
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Loan receivable from |
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Accumulated other comprehensive |
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Accumulated |
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Total stockholders' |
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Shares |
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Amount |
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capital |
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EJ Holdings |
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income (loss) |
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deficit |
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deficit |
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Balance January 1, 2023 |
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$ |
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$ |
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— |
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$ |
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$ |
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$ |
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Fair value of warrants including down-round protection adjustments |
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— |
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— |
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— |
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— |
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— |
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Convertible note converted to shares |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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— |
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Unrealized loss on debt securities available for sale (net of tax) |
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— |
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— |
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— |
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— |
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( |
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— |
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Foreign currency translation effect |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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Balance, March 31, 2023 |
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— |
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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)
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Three months Ended March 31, |
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2024 |
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2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
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$ |
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Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities |
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Depreciation and amortization |
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Inventory reserve |
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— |
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Amortization of discount of notes payable and convertible notes payable |
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Foreign exchange adjustments |
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Net loss on equity method investment |
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— |
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Gain on restructured debt |
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— |
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Share-based compensation |
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Fair value of warrants issued for services |
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— |
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Change in fair value of warrant derivative liabilities |
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Change in fair value of conversion feature derivative, notes payable |
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Changes in fair value option instrument |
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— |
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Net changes in operating assets and liabilities |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Other non-current assets |
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Accounts payable and accrued expenses |
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Other current liabilities |
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( |
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( |
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Other long-term liabilities |
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( |
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Net cash flows provided by (used in) operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment |
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Loan to equity method investee |
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— |
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Net cash flows used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from notes payable issued |
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Proceeds from notes payable issued, related parties |
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— |
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Proceeds from convertible notes payable issued, related party |
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— |
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Payments of notes payable |
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( |
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Payments of notes payable, related party |
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Payments of convertible notes |
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( |
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— |
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Net cash flows provided by (used in) financing activities |
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( |
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Effect of exchange rate changes on cash |
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( |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES |
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Interest paid |
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$ |
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$ |
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Income taxes paid |
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$ |
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$ |
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NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Renewal of notes payable including interest capitalized |
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$ |
— |
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$ |
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Conversion of convertible note payable to common stock |
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$ |
— |
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$ |
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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”) on the basis that the Company will continue as a going concern. All significant intercompany transactions have been eliminated. The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on July 3, 2024. The accompanying condensed consolidated balance sheet at December 31, 2023 has been derived from the audited consolidated balance sheet at December 31, 2023 contained in the Annual Report. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year or any future interim period.
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. The Company’s only product, Endari® (prescription grade L-glutamine oral powder), is approved by the U.S. Food and Drug Administration, or FDA, and in certain jurisdictions in the Middle East North Africa, or MENA, region to reduce the acute complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older.
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 Annual Report. There have been no material changes in these policies or their application.
Going concern— The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $
Management has considered all recent accounting pronouncements and determined that they will not have a material effect on the Company’s condensed consolidated financial statements.
Prior period misclassification - During the quarter ended June 30, 2023, the Company identified a misclassification related to common stock warrants that were issued in January 2023. The common stock warrants were incorrectly recorded in additional paid-in capital at their estimated fair value of $
5
The condensed consolidated statements of changes in stockholders’ deficit included in this Quarterly Report differ from the previously filed Form 10-Q’s for period ended March 2023, reflecting the misclassification of $
Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, the Company's indirect wholly owned subsidiary, has entered into 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
Net loss per share — In accordance with Accounting Standard Codification (“ASC”) 260, “Earnings per Share,” the basic net 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 similar manner, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of March 31, 2024 and March 31, 2023, the Company had outstanding potentially dilutive securities exercisable for or convertible into
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
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Three months ended March 31, |
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2024 |
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2023 |
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Endari® |
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$ |
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$ |
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Other |
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Revenues, net |
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$ |
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$ |
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The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2024 and March 31, 2023 (in thousands):
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Trade Discounts, Allowances and Chargebacks |
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Government Rebates and Other Incentives |
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Returns |
|
|
Total |
|
||||
Balance as of December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustments related to prior period sales |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Credits and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance as of December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustments related to prior period sales |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
( |
) |
|
Credits and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our net revenues in any of the periods shown:
6
|
|
Three months ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Customer A |
|
|
% |
|
|
% |
||
Customer B |
|
|
% |
|
|
% |
||
Customer D |
|
|
% |
|
|
% |
||
Customer F |
|
|
% |
|
|
% |
||
On June 15, 2017, the Company entered into a distributor agreement with Telcon RF Pharmaceutical, Inc., or 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 $
NOTE 4 — SELECTED FINANCIAL STATEMENT — ASSETS
Inventories consisted of the following (in thousands):
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Raw materials and components |
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
||
Inventory reserve |
|
( |
) |
|
|
( |
) |
Total inventories, net |
$ |
|
|
$ |
|
||
Prepaid expenses and other current assets consisted of the following (in thousands):
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Prepaid insurance |
$ |
|
|
$ |
|
||
Prepaid expenses |
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
||
Total prepaid expenses and other current assets |
$ |
|
|
$ |
|
||
Property and equipment consisted of the following (in thousands):
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Equipment |
$ |
|
|
$ |
|
||
Leasehold improvements |
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
||
Total property and equipment |
|
|
|
|
|
||
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
Total property and equipment, net |
$ |
|
|
$ |
|
||
During the three months ended March 31, 2024 and 2023, depreciation expense was approximately $
NOTE 5 — INVESTMENTS
Investment in convertible bond - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon in the principal amount of approximately $
7
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 and to customary antidilution adjustments upon a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. As of March 31, 2024 and December 31, 2023, the principal amount of the convertible note was KRW
Concurrent with the purchase of the convertible bond, the Company entered into an agreement dated
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 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 over successive periods of time.
The revised API agreement with Telcon described in Note 6 provides for target annual revenue of more than $
In April 2023, Telcon offset KRW
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, 2024 and December 31, 2023 (in thousands):
Investment in convertible bond |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Balance, beginning of period |
|
$ |
|
|
$ |
|
||
Sales of convertible bond |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
||
|
|
( |
) |
|
|
|
||
Balance, end of period |
|
$ |
|
|
$ |
|
||
The fair value as of March 31, 2024 and December 31, 2023 was based upon following assumptions:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Principal outstanding (South Korean won) |
|
KRW |
|
|
KRW |
|
||
Stock price |
|
KRW |
|
|
KRW |
|
||
Expected life (in years) |
|
|
|
|
|
|
||
Selected yield |
|
|
% |
|
|
% |
||
Expected volatility (Telcon common stock) |
|
|
% |
|
|
% |
||
Risk-free interest rate (South Korea government bond) |
|
|
% |
|
|
% |
||
Expected dividend yield |
|
|
|
|
|
|
||
Conversion price |
|
KRW |
|
|
KRW |
|
||
Equity method investment – In 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate a former amino acids manufacturing facility in Ube, Japan. In connection with the formation, the Company invested approximately $
8
due on
EJ Holdings is engaged in seeking to refurbish and phase in the Ube facility with objective of eventually obtaining regulatory clearance 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 be dependent on loans from other financing unless and until its plant is activated and it can secure customers for its products. There is no assurance that needed funding will be available from other sources. If EJ Holdings fails to obtain needed funding, it may need to suspend activities at the Ube plant. Under the asset purchase agreement by which EJ Holdings purchased the Ube plant, the seller has the right to repurchase the plant at the purchase price, plus certain taxes, paid by EJ Holdings if the plant does not become operational within a reasonable period of time not to exceed five years, or approximately the end of 2024. In such event, it is likely that EJ Holdings would be unable to pay some or all the Company's loans.
On December 28, 2023, the Company sold and assigned its EJ Holdings shares at their cost of JPY
9
NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES
Accounts payable and accrued expenses consisted of the following at March 31, 2024 and December 31, 2023 (in thousands):
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Accounts payable: |
|
|
|
|
|
|
||
Clinical and regulatory expenses |
|
$ |
|
|
$ |
|
||
Professional fees |
|
|
|
|
|
|
||
Selling expenses |
|
|
|
|
|
|
||
Manufacturing costs |
|
|
|
|
|
|
||
Non-employee director compensation |
|
|
|
|
|
|
||
Other vendors |
|
|
|
|
|
|
||
Total accounts payable |
|
|
|
|
|
|
||
Accrued interest payable, related parties |
|
|
|
|
|
|
||
Accrued interest payable |
|
|
|
|
|
|
||
Accrued expenses: |
|
|
|
|
|
|
||
Payroll expenses |
|
|
|
|
|
|
||
Government rebates and other rebates |
|
|
|
|
|
|
||
Due to customers |
|
|
— |
|
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
||
Total accrued expenses |
|
|
|
|
|
|
||
Total accounts payable and accrued expenses |
|
$ |
|
|
|
|
||
Other current liabilities consisted of the following at March 31, 2024 and December 31, 2023 (in thousands):
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Trade discount |
$ |
|
|
$ |
|
||
Unearned revenue (a) |
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
||
Total other current liabilities |
$ |
|
|
$ |
|
||
(a)
Other long-term liabilities consisted of the following at March 31, 2024 and December 31, 2023 (in thousands):
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Trade discount |
$ |
|
|
$ |
|
||
Other long-term liabilities |
|
|
|
|
|
||
Total other long-term liabilities |
$ |
|
|
$ |
|
||
On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon advanced to the Company approximately $
NOTE 7 — NOTES PAYABLE
10
Notes payable consisted of the following at March 31, 2024 and December 31, 2023 (in thousands except for number of underlying shares):
Year |
|
Interest Rate |
|
Term of Notes |
|
Conversion |
|
|
Principal |
|
|
Unamortized Discount March 31, 2024 |
|
|
Carrying |
|
|
Underlying Shares March 31, 2024 |
|
|||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2013 |
|
|
|
|
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
— |
|
||||
2022 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2023 |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
2024 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
2020 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2021 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2022 |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
2023 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
— |
|
|||
|
|
|
|
Non-current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
2021 |
|
|
|
$ |
|
(b) |
|
|
|
|
|
|
|
|
|
|
|
|||||||
2023 |
|
|
|
$ |
|
(a) |
|
|
|
|
— |
|
|
|
|
|
|
|
||||||
2023 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2024 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
|
|
|
|
Total |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
Year |
|
Interest Rate |
|
Term of Notes |
|
Conversion |
|
|
Principal |
|
|
Unamortized |
|
|
Carrying |
|
|
Underlying Shares |
|
|||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2013 |
|
|
|
|
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
— |
|
||||
2022 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2023 |
|
|
|
|
— |
|
|
|
|
|
|
|
|
$ |
|
|
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2020 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2021 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||||
2022 |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
2023 |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
— |
|
|||
|
|
|
|
Non-current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
— |
|
||||
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2021 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2023 |
|
|
|
$ |
|
(a) |
|
|
|
|
— |
|
|
|
|
|
|
|
||||||
2023 |
|
|
|
$ |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
Current |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
|
|
|
Total |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
11
The weighted-average stated annual interest rate of notes payable was
As of March 31, 2024, future contractual principal payments due on notes payable were as follows (in thousands):
Year Ending |
|
|
|
|
2024 (nine months) |
$ |
|
|
|
2025 |
|
— |
|
|
2026 |
|
— |
|
|
2027 |
|
|
|
|
Total |
$ |
|
|
|
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 $
Commencing one year from the original issue date, the convertible promissory notes became convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price of $
In February and March 2024, Company entered into Exchange Agreements (the “Exchange Notes”) with certain convertible notes holders pursuant to which it agreed to issue total of $
12
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.
Convertible promissory notes |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Balance, beginning of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
( |
) |
||
Balance, end of period |
|
$ |
|
|
$ |
|
||
The fair value and any change in fair value of conversion feature liability are determined using a binominal 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 March 31, 2024 and December 31, 2023 was based upon following assumptions:
Convertible promissory notes |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Stock price |
|
$ |
|
|
$ |
|
||
Conversion price |
|
$ |
|
|
$ |
|
||
Selected yield |
|
|
% |
|
|
% |
||
Expected volatility |
|
|
% |
|
|
% |
||
Time until maturity (in years) |
|
|
|
|
|
|
||
Dividend yield |
|
— |
|
|
— |
|
||
Risk-free rate |
|
|
% |
|
|
% |
||
In July 2022, Dr. Niihara and his wife loaned the Company $
In August 2022, Dr. Niihara and his wife loaned the Company $
In December 2022, the Company entered into an Agreement for the Purchase and Sales of Future Receipts with a third party pursuant to which it sells $
In March 2023, Dr. Niihara and his wife and Hope International Hospice, Inc., their affiliated company, loaned the Company $
In March 2023, Emmaus Medical entered into Revenue Purchase Agreement with a third party pursuant to which it sold and assigned $
13
In March 2023, Emmaus Medical entered into Revenue Based Financing Agreement with a third party pursuant to which it sold and assigned $
In May 2023, Emmaus Medical entered into Sale of Future Receipts Agreement with third party pursuant to which it sold and assigned $
In June 2023, Emmaus Medical entered into Standard Merchant Cash Advance Agreement with a third party pursuant to which it sold and assigned $
In September 2023, the Company entered into a Business Loan and Security Agreement with a third-party lender pursuant to which the lender loaned the Company $
In September 2023, Smart Start Investments Limited, of which Wei Pei Zen, a director of the Company, is a director and
On March 5, 2024, the conversion feature of the convertible promissory note no longer met the scope exception in ASC 815-10-15-70(a) as the investors' Rule 144(d) holding period for the Company has ended and separately accounted for at fair value as a derivative liability that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in fair value of the conversion feature liability recorded in the condensed consolidated statements of operations. As of March 5, 2024 and March 31, 2024, the fair value of the conversion feature was $
The fair value of conversion feature liability is 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 over successive period of time. The following table presents the assumptions used to value the conversion features:
Smart Start Convertible Note |
|
March 31, 2024 |
|
|
March 5, 2024 |
|
||
Stock price |
|
$ |
|
|
$ |
|
||
Conversion price |
|
$ |
|
|
$ |
|
||
Selected yield |
|
|
% |
|
|
% |
||
Expected volatility |
|
|
% |
|
|
% |
||
Time until maturity (in years) |
|
|
|
|
|
|
||
Dividend yield |
|
— |
|
|
— |
|
||
Risk-free rate |
|
|
% |
|
|
% |
||
In October 2023, Emmaus Medical entered into Purchase and Sale of Future Receivables Agreement with a third party pursuant to which it sold and assigned $
14
In November 2023, Emmaus Medical entered into Agreement for the Purchase and Sale of Future Receipts with a third party pursuant to which it sold and assigned $
In December 2023, Wei Peu Zen, a director of the Company loaned the Company $
Beginning in February 2024 two related holders of demand promissory notes of the Company in the aggregate principal amount of approximately $
In March 2024, Smart Start Investments Limited, of which Wei Peu Zen, a director of the Company, is a director and
Except as otherwise indicated above, the net proceeds of the foregoing loans and other arrangements were used to augment the Company's working capital.
NOTE 8 — STOCKHOLDERS’ DEFICIT
Warrants —In September 2022, in connection with the loans from Dr. Niihara and Mrs. Niihara, the Company granted Dr. Niihara a
Warrant issued for services - - On January 12, 2023, the Company granted Dr. Niihara a
On January 12, 2023, the Company granted two consultants to the Company
15
The following table presents the assumptions used to value the warrants:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
|
March 31, 2023 |
|
|
January 2023 |
|||
Stock price |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|||
Exercise price |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|||
Expected term |
|
|
|
|
|
|
|
|||||||
Risk-free rate |
|
|
|
|
|
|
% |
|
||||||
Dividend yield |
|
— |
|
|
— |
|
|
— |
|
|
— |
|||
Volatility |
|
|
|
|
|
|
|
|||||||
A summary of outstanding warrants as of March 31, 2024 and December 31, 2023 is presented below:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Number of |
|
|
Weighted‑ |
|
|
Number of |
|
|
Weighted‑ |
|
||||
Warrants outstanding, beginning of period |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled, forfeited or expired |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Warrants outstanding, end of period |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Warrants exercisable end of period |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
As of March 31, 2024, the weighted-average remaining contractual life of outstanding warrants was
Stock options— The Company's former 2011 Stock Incentive Plan permitted 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 formerly had an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company could grant incentive stock options and non-qualified stock option to selected employees including officers, non-employee consultants and non-employee directors. The Plan was terminated in September 2021. As of March 31, 2024 and December 31, 2023, stock options to purchase up to
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
Management has valued stock options at their date of grant utilizing the Black-Scholes-Merton Option pricing model. The fair value of the underlying shares was determined by the market value of the Company's common stock. The expected volatility was adjusted using the historical volatility of the common stock and a comparable public traded securities.
16
|
|
January 2024 |
|
|
January 2023 |
|
||
Stock Price |
|
$ |
|
|
$ |
|
||
Exercise Price |
|
$ |
|
|
$ |
|
||
Expected term |
|
|
|
|
||||
Risk-Free Rate |
|
|
|
|
||||
Dividend Yield |
|
— |
|
|
— |
|
||
Volatility |
|
|
|
|
||||
A summary of outstanding stock options as of March 31, 2024 and December 31, 2023 is presented below:
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Number of |
|
|
Weighted‑ |
|
|
Number of |
|
|
Weighted‑ |
|
||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
During the three months ended March 31, 2024 and March 31, 2023, the Company recognized approximately $
Amended and Restated Warrants – The Company evaluated its outstanding amended and restated warrants to purchase up to
In January 2023, the exercise price of outstanding amended and restated warrants was reduced to $
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.
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases
The lease expense during the three months ended March 31, 2024 and 2023 was approximately $
17
Future minimum lease payments under the lease agreements were as follows as of March 31, 2024 (in thousands):
|
|
Amount |
|
|
2024 (nine months) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total lease payments |
|
|
|
|
Less: Interest |
|
|
|
|
Present value of lease liabilities |
|
$ |
|
|
As of March 31, 2024, 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 (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $
18
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding at any time during the three months ended March 31, 2024 (in thousands):
Class |
Lender |
|
Interest |
|
Date of |
|
Term of Loan |
|
Principal Amount Outstanding at March 31, 2024 |
|
|
Highest |
|
|
Amount of |
|
|
Amount of |
|
||||
Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Willis Lee(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Wei Peu Derek Zen(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Willis Lee(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Wei Peu Zen(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
Subtotal |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
19
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2023:
Class |
Lender |
|
Interest |
|
Date of |
|
Term of Loan |
|
Principal Amount Outstanding at December 31, 2023 |
|
|
Highest |
|
|
Amount of |
|
|
Amount of |
|
||||
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Willis C. Lee(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Wei Peu Zen(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Willis C. Lee(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||||
|
Seah Lim(2) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Hope International Hospice, Inc.(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Yutaka and Soomi Niihara(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
Wei Peu Zen(2) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||||
|
|
|
|
|
|
|
Subtotal |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Convertible note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Wei Peu Zen(2) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
Subtotal |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
See Note 7 for more information on recent developments with respect to certain related-party loans.
See Notes 5, 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds
20
NOTE 13 — SUBSEQUENT EVENTS
In April 2024, Telcon offset KRW
In May 2024, Emmaus Medical entered into Sale of Future Receipts Agreement with third party pursuant to which it sold and assigned $
21
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 for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on July 3, 2024 (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 only 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 the United Arab Emirates, or U.A.E, in adults and pediatric patients five years of age and older. In November and December of 2022, we received marketing authorizations for Endari® in Qatar and Kuwait, respectively. In July 2023, we received marketing approval for Endari® in Oman. Applications for marketing authorization in other Gulf Cooperation Council, or GCC, countries are pending. While the applications are pending, the FDA approval of Endari® can be referenced to allow access to Endari® on a named-patient basis.
Until August 2024, Endari® was marketed and sold in the U.S. by our internal commercial sales team. In August 2024, we reduced our reliance on our internal sales team, which we do not expect to adversely affect our Endari® sales. 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.
As of March 31, 2024, our accumulated deficit was $260.5 million and we had cash and cash equivalents of $1.7 million. Until we can generate sufficient net revenues from Endari® sales, our future cash requirements are expected to be financed through loans from related parties, third-party loans, public or private equity or debt financings or possible corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
Financial Overview
Revenues, 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 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.
22
Under the Accounting Standards Codification (“ASC”) 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract(s) 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.
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:
Sales Discounts: We afford our customers prompt payment discounts and additional discounts to encourage bulk orders to generate needed working capital.
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 fees 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 other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and applicable regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approvals of Endari® outside of the U.S. or the development of our
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other preclinical and clinical programs. In September 2023, we suspended most preclinical activities related to our product candidates to focus on commercial expansion of Endari® in the U.S. and the MENA region. 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
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, 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, sales, and marketing of Endari®. Other selling expenses include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs. We expect selling expenses to decrease due to reduction in sales force as exclusivity of Endari® in the U.S. expires in July 2024.
COVID-19
In retrospect, we believe our business and net revenues were adversely affected in 2020 and 2021 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. Ongoing COVID-19 infections or future official responses could cause a temporary or prolonged decline in our revenues and have a material adverse effect on our results of operations and financial condition. COVID-19 or governmental responses also may adversely affect the timing and conduct of clinical studies or the ability of regulatory bodies to consider or grant approvals with respect to Endari® or our prescription grade L-glutamine, or PGLG, drug candidates or oversee the development of our drug candidates, may further divert the attention and efforts of the medical community to coping with COVID-19 or variants and disrupt the marketplace in which we operate. Any outbreak of COVID-19 among our executives or key employees or their families and loved ones could disrupt our management and operations and adversely affect the effectiveness of our management, Endari® sales, and results of operations and financial condition. The foregoing factors could also have an adverse effect on economic and business conditions and the broad stock market, in general, or the market price of our common stock, in particular.
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 each of the three months ended March 31, 2024 and 2023 were supplied by one supplier.
Results of Operations:
Three months ended March 31, 2024 and 2023
Net Revenues. Net revenues decreased by $4.2 million, or 63%, to $2.5 million for the three months ended March 31, 2024, compared to $6.8 million for the three months ended March 31, 2023 due to a shortage of finished goods inventory attributable to previously reported delays by our sole packager in producing additional finished goods originally scheduled for December 2023. The shortage extended into the second quarter as well, and had a severe, adverse effect on our sales for the second quarter as compared to the same period in 2023. The packaging delays were resolved and in June 2024 we began fulfilling our order backlog of approximately $4.6 million as of May 24, 2024. In mid-July, however, we experienced a second, one-month interruption in supply due
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to the imposition and implementation of new FDA inventory tracking requirements, which interruption is expected to have a material, adverse effect on our sales for the third quarter as compared to the same period in 2023. Absent further unexpected supply interruptions, and depending on the effect on sales of the launch of the competing generic L-Glutamine Oral Powder discussed below, we expect that sales in the fourth quarter will rebound to levels experienced prior to the shortage, but sales for the full year are not expected to meet or exceed sales for the full year 2023. In the meantime, we are seeking additional sources of packaging in the U.S. and in the MENA regions to avoid similar problems in the future.
On July 15, 2024, ANI Pharmaceuticals, Inc., or ANI. announced the launch of its L-Glutamine Oral Powder, a generic version of Endari®, following final approval of its Abbreviated New Drug Application from the U.S. Food and Drug Administration. It is too early to predict the effect of the introduction of ANI’s generic product or other generic versions of L-Glutamine oral powder on Endari® sales, but it may adversely affect the reimbursement rates that Medicare, Medicaid and third-party payors are willing to pay for Endari® and on sales volume of Endari®, which could have a material, adverse effect on our future net revenues.
Cost of Goods Sold. Cost of goods sold decreased by $0.2 million, or 40%, to $0.3 million for the three months ended March 31, 2024, compared to $0.4 million for the three months ended March 31, 2023. The decrease was primarily due to the decrease in sales discussed above.
Research and Development Expenses. Research and development expenses decreased by 0.1 million, or 37%, to $0.2 million for the three months ended March 31, 2024, compared to $0.3 million for the three months ended March 31, 2023. The decrease was primarily due to a decrease in contract research organization expenses.
Selling Expenses. Selling expenses decreased by $0.4 million, or 16%, to $1.9 million for the three months ended March 31, 2024, compared to $2.3 million for the three months ended March 31, 2023. The decrease was primarily due to a decrease in payroll expenses.
General and Administrative Expenses. General and administrative expenses decreased by $2.0 million, or 41%, to $2.9 million for the three months ended March 31, 2024, compared to $4.9 million for the three months ended March 31, 2023. The decrease was primarily due to decreases of $1.1 million in share-based compensation, $0.3 million in transaction cost, $0.2 million in public relations and $0.1 million in professional services.
Other Income (Expense). Total other expense decreased by $0.6 million, or 28%, to $1.6 million for the three months ended March 31, 2024, compared to $2.2 million for the three months ended March 31, 2023. The decrease was primarily due to increases of a $1.0 million in gain on debt extinguishment and a $0.6 million in foreign exchange gain partially offset by increases of $1.0 million in change in fair value of embedded conversion option of convertible promissory notes.
Net Loss. Net loss were $4.3 million and $3.5 million for three months ended March 31, 2024 and 2023, respectively.
Liquidity and Capital Resources
Based on our losses to date, current liabilities and anticipated future net revenues and operating expenses and debt repayment obligations cash and cash equivalents balance of $1.8 million as of March 31, 2024, we do not have sufficient operating capital for our business without raising additional capital. We realized a net loss of $4.3 million for the three months ended March 31, 2024 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari® sales. 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 to 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 65-80% 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, and meet our contractual obligations and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period, net revenues, proceeds from our accounts receivable factoring arrangement with Prestige Capital and similar sales of future receipts to other parties, 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 and debt service under our convertible notes payable and notes payable.
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As of March 31, 2024, we had outstanding $16.6 million principal amount of convertible promissory notes and $12.8 million principal amount of other notes payable. Our minimum lease payment obligations were $2.4 million, of which $1.1 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, Telcon may be entitled to payment of the shortfall or to offset the shortfall against the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations. In April 2024, Telcon offset KRW3.5 billion, or approximately $2.5 million, against the principal amount of the Telcon convertible bond and we released KRW893 million, or approximately $640,000, in cash proceeds to Telcon in satisfaction the target shortfall for the year ended 2023.
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 that our condensed consolidated financial statements are issued, as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to Condensed Consolidated Financial Statements included herein.
Cash flows for the three months ended March 31, 2024 and March 31, 2023
Net cash provided by (used in) operating activities
Net cash provided by operating activities increased by $1.4 million, or 111%, to $0.1 million for the three months ended March 31, 2024 from $1.3 million net cash used in operating activities for the three months ended March 31, 2023. This increase was primarily due to a $4.4 million of cash collection from account receivables, partially offset by a $1.6 million increase in loss from operations.
Net cash used in investing activities
Net cash used in investing activities decreased by $1.1 million, or 100%, to $4,000 for the three months ended March 31, 2024 from $1.1 million for the three months ended March 31, 2023. The decrease was primarily due to the cessation of loan funding to EJ Holdings.
Net cash provided by (used in) from financing activities
Net cash used in from financing activities increased by $3.1 million, or 145%, to $1.0 million for the three months ended March 31, 2024 from a $2.1 million net cash provided by financing activities for the three months ended March 31, 2023. This increase was the result of additional $1.8 million repayment of notes payable and a $1.3 million reduction of proceeds received from issuance of promissory notes and convertible notes.
Off-Balance-Sheet Arrangements
We 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 these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2024.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our DCP. Based on that evaluation, our Chief Executive Officer and 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 March 31, 2024 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Material Weaknesses
As previously reported, in connection with the preparation of our consolidated financial statements as of December 31, 2021, our management identified ongoing material weaknesses (the “Material Weaknesses”) in our internal control over financial reporting. The Material Weaknesses related to inadequate accounting treatment for complex accounting matters, inadequate financial closing process, segregation of duties, including access control over information technology, especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account processes, and insufficient entity risk assessment processes.
Since identifying the Material Weaknesses, we took several steps to remediate the Material Weaknesses, including:
In 2022, we implemented an integrated cloud-based enterprise resource planning system to manage our financial information and replace our outdated financial accounting systems and software. As a result of these actions, management has concluded that the material weaknesses identified in previous fiscal years have been remediated but that there continued to be material weakness in our internal control over financial reporting as of December 31, 2023. In particular, our finance and financial accounting department is thinly staffed, and there are some areas in which we lack formal policies and procedures.
During 2023, the Company paid $650,000 in exchange for the promise of a standby letter of credit from foreign sources which was determined to have been fraudulent. In connection with this matter, we identified an additional material weakness related to insufficient board of directors' oversight and a lack of internal governance processes and procedures surrounding the evaluation of and background checks of advisors in foreign jurisdictions where we have less familiarity with laws and business practices.
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To address the material weakness, our board of director appointed a Steering Committee of our Co-Presidents at the time and independent directors following the termination of employment of our former Chief Executive Officer and we engaged outside counsel to advise management on additional steps which should be taken to properly vet the Company’s advisors and others with which it seeks to do business in the future.
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Part II. Other Information
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
The following should be read in conjunction with the “Risk Factors” section of the Annual Report.
The market exclusivity for Endari® for SCD in the U.S. expired on July 7, 2024 and Endari® has no intellectual property protection of Endari® in the U.S. or orphan drug or other market exclusivity in the MENA region, which lack of exclusivity may result in the introduction of generic versions of PGLG in the U.S. and MENA regions and adversely affect our Endari® sales and results of operations in future periods. On July 15, 2024, for example, ANI Pharmaceuticals, Inc., or ANI. announced the launch of its L-Glutamine Oral Powder, a generic version of Endari®, following final approval of its Abbreviated New Drug Application from the U.S. Food and Drug Administration. It is too early to predict the effect of the introduction of ANI’s generic product or other generic versions of L-Glutamine oral powder on Endari® sales, but it may have a material, adverse effect on our future net revenues. It is also possible that ANI or other generic maker will seek to introduce generic versions of Endari® in the MENA region.
Sales of Endari® depend on the availability of adequate coverage and reimbursement from third-party payors and governmental healthcare programs, such as Medicare and Medicaid in the U.S. and government payors in the MENA region. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or a significant part of the costs associated with their prescription drugs. Coverage determination depends on financial, clinical and economic outcomes that often disfavors new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Although Endari® currently 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, the reimbursement amounts are subject to change and may not be adequate and may require higher co-payments that patients find unacceptable. The Company also has negotiated reimbursement rates for Endari® in the MENA region which are comparable to Medicare and Medicaid reimbursement rates. Patients are unlikely to use Endari® unless reimbursement is adequate to cover a significant portion of the cost of Endari®. Future coverage and reimbursement rates will likely be subject to increased scrutiny from payors in the U.S. and perhaps government payors in the MENA region. Third-party coverage and reimbursement for Endari® may cease to be available or adequate, which could have a material adverse effect on our business, results of operations, financial condition, and prospects.
The market for Endari® also depends on access to third-party payors’ drug formularies, which are lists of medications for which third-party payors provide coverage and reimbursement. The competition in the industry to be included in such formularies may lead to downward pricing pressures on us. Also, third-party payors may refuse to include Endari® in their formularies or otherwise restrict patient access to Endari® if a less costly generic equivalent or other alternative treatment is available. In this regard, Medicare and Medicaid reimbursement rate for branded products such as Endari are subject to decrease to the cost of comparable generic versions of the products such as ANI’s L-Glutamine Oral Powder or other generic versions of Endari®. In light of the recent launch of ANI’s L-Glutamine Oral Powder, we expect to reduce the wholesale acquisition cost of Endari to address these reimbursement requirements.
Sales of Endari® in the MENA region are subject to lengthy reimbursement terms compared to U.S. sales, and management expects that our accounts receivable aging will be adversely affected by such terms as sales in the MENA region increase compared to our U.S. sales.
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.
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Item 5. Other Information
None.
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Item 6. Exhibits
(a) Exhibits
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Incorporated by Reference |
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Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed/ |
4.1 |
8-K |
001-35527 |
4.1 |
February 26, 2024 |
|
|
10.1 |
8-K |
001-35527 |
10.1 |
February 26, 2024 |
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10.2 |
Form of Joinder Agreement and Amendment to Transfer Restriction and Voting Agreement |
8-K |
001-35527 |
10.2 |
February 26, 2024 |
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10.3 |
8-K |
001-35527 |
10.2 |
February 16, 2021 |
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10.4 |
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* |
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31.1 |
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* |
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31.2 |
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* |
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32.1 |
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** |
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101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Document |
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104 |
Cover Page formatted as Inline XBRL and contained in Exhibit 101 |
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* Filed herewith.
** This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
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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.
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Emmaus Life Sciences, Inc. |
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Dated: September 10, 2024 |
By: |
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/s/ Willis C. Lee |
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Name: |
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Willis C. Lee |
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Its: |
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Chief Executive Officer (Principal Executive Officer) |
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By: |
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/s/ Yasushi Nagasaki |
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Name: |
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Yasushi Nagasaki |
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Its: |
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Chief Financial Officer (Principal Financial and Accounting Officer) |
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