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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
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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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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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Large accelerated filer |
☐ |
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
The registrant had
EMMAUS LIFE SCIENCES, INC.
For the Quarterly Period Ended June 30, 2022
INDEX
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Page |
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Part I. Financial Information |
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Item 1. |
1 |
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(a)Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021 |
1 |
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2 |
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3 |
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4 |
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(e)Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
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Item 3. |
24 |
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Item 4. |
24 |
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Part II Other Information |
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Item 1. |
26 |
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Item 1A. |
26 |
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Item 2. |
26 |
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Item 3. |
26 |
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Item 4. |
26 |
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Item 5. |
26 |
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Item 6. |
28 |
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29 |
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Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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As of |
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June 30, 2022 |
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December 31, 2021 |
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(Unaudited) |
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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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Equity method investment |
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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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Revolving line of credit from related party |
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Warrant derivative liabilities |
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— |
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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, less current portion |
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— |
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Convertible notes payable |
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— |
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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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Accumulated other comprehensive loss |
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( |
) |
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( |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ deficit |
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( |
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( |
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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 INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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REVENUES, NET |
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$ |
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$ |
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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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INCOME (LOSS) FROM OPERATIONS |
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( |
) |
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( |
) |
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( |
) |
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OTHER INCOME (EXPENSE) |
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Loss on debt extinguishment |
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— |
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— |
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— |
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( |
) |
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Change in fair value of warrant derivative liabilities |
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( |
) |
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Change in fair value of conversion feature derivative, notes payable |
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( |
) |
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( |
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Realized loss on investment in convertible bond |
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— |
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— |
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( |
) |
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— |
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Net loss on equity method investment |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
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Foreign exchange loss |
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( |
) |
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( |
) |
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( |
) |
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( |
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Interest and other income |
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Interest expense |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
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Total other income (expense) |
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( |
) |
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( |
) |
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( |
) |
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INCOME (LOSS) BEFORE INCOME TAXES |
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( |
) |
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( |
) |
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( |
) |
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INCOME TAXES (BENEFIT) |
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( |
) |
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( |
) |
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NET INCOME (LOSS) |
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( |
) |
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( |
) |
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( |
) |
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COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
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Unrealized gain on debt securities available for sale (net of tax) |
|
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( |
) |
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( |
) |
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Reclassification adjustment for loss included in net income |
|
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— |
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— |
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— |
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|
Foreign currency translation adjustments |
|
|
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( |
) |
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Other comprehensive income (loss) |
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( |
) |
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( |
) |
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COMPREHENSIVE INCOME (LOSS) |
|
$ |
( |
) |
|
$ |
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$ |
( |
) |
|
$ |
( |
) |
|
EARNINGS (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)
|
|
Common stock |
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Additional paid-in |
|
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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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income (loss) |
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loss |
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deficit |
|
||||||
|
Balance at January 1,2022 |
|
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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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|
Unrealized gain 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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|
Reclassification adjustment for loss included in net income |
|
— |
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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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Net loss |
|
— |
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— |
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— |
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— |
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( |
) |
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( |
) |
|
Balance, March 31, 2022 |
|
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( |
) |
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( |
) |
|
Reclassification of warrants from liability to equity |
|
— |
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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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Common stock issued for services |
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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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|
Unrealized loss on debt securities available for sale (net of tax) |
|
— |
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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 income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
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— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, June 30, 2022 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
Common stock |
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Additional paid-in |
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|
Accumulated other comprehensive |
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Accumulated |
|
|
Total stockholders' |
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|||||||||
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Shares |
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Amount |
|
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capital |
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|
income (loss) |
|
|
loss |
|
|
deficit |
|
||||||
|
Balance at January 1,2021 |
|
|
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|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Fair value of warrants including down-round protection adjustments |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Common stock issued for services |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
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|
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance, March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash flows used in operating activities |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Inventory reserve |
|
|
|
|
|
|
|
|
|
Amortization of discount of notes payable and convertible notes payable |
|
|
|
|
|
|
|
|
|
Foreign exchange adjustments |
|
|
|
|
|
|
|
|
|
Tax benefit recognized on unrealized gain on debt securities |
|
|
— |
|
|
|
( |
) |
|
Net gain on investment in marketable securities |
|
|
|
|
|
|
— |
|
|
Loss on equity method investment |
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment |
|
|
— |
|
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
( |
) |
|
Loss on leased assets |
|
|
|
|
|
|
— |
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
Shares issued for services |
|
|
— |
|
|
|
|
|
|
Change in fair value of warrant derivative liabilities |
|
|
( |
) |
|
|
|
|
|
Change in fair value of conversion feature derivative, notes payable |
|
|
|
|
|
|
( |
) |
|
Net changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
Inventories |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
|
|
|
|
|
|
|
Income tax receivable and payable |
|
|
|
|
|
|
( |
) |
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
( |
) |
|
Other current liabilities |
|
|
( |
) |
|
|
|
|
|
Other long-term liabilities |
|
|
( |
) |
|
|
( |
) |
|
Net cash flows used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Sale of convertible bond |
|
|
|
|
|
|
— |
|
|
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Loan to equity method investee |
|
|
( |
) |
|
|
( |
) |
|
Net cash flows used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Proceeds from notes payable issued, net of issuance cost and discount |
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable issued, net of issuance cost and discount |
|
|
— |
|
|
|
|
|
|
Payments of notes payable |
|
|
( |
) |
|
|
( |
) |
|
Payments of convertible notes |
|
|
— |
|
|
|
( |
) |
|
Net cash flows provided by financing activities |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
( |
) |
|
|
( |
) |
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
|
|
|
NON-CASH INVESING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Debt discount due to conversion features derivative |
|
$ |
— |
|
|
$ |
|
|
|
Debt discount due to deferred financing cost |
|
$ |
|
|
|
$ |
— |
|
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. Due to the uncertainty of the Company’s ability to meet its current liabilities and operating expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and any expansion of its business is dependent upon obtaining further financing, market acceptance of Endari®, and achieving a profitable level of revenues. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 and Quarterly Report on Form 10-Q filed with the SEC on May 13, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated balance sheet at December 31, 2021 contained in the Annual Report. The results of operations for the three and six months ended June 30, 2022, 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 sale of innovative treatments and therapies, primarily for rare and orphan diseases. The Company’s lead product, Endari® (prescription grade L-glutamine oral powder), is approved by the U.S. Food and Drug Administration, or FDA, to 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 Company’s Annual Report on Form 10K for the year ended December 31, 2021. There have been no material changes in these policies or their application.
Going concern— The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $
Management has considered all recent accounting pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.
Factoring accounts receivables — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, is party to a purchase and sales agreement with Prestige Capital Finance, LLC or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of
5
million cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less fees of Prestige Capital ranging from
Net loss per share — In accordance with Accounting Standard Codification (“ASC”) 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed in a manner similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2022 and June 30, 2021, the Company had outstanding potentially dilutive securities exercisable for or convertible into
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Endari® |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
Revenues, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2022 and June 30, 2021 (in thousands):
|
|
|
Trade Discounts, Allowances and Chargebacks |
|
|
Government Rebates and Other Incentives |
|
|
Returns |
|
|
Total |
|
||||
|
Balance as of December 31, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related prior period sales |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of June 30, 2022 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Provision related to sales in the current year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related prior period sales |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Credit and payments made |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of June 30, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of net revenues):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Customer A |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Customer B |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Customer C |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
Customer D |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
The Company is party to a distributor agreement with Telcon Pharmaceutical RF, Inc., or Telcon pursuant to which the Company granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment
6
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):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
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):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Prepaid insurance |
$ |
|
|
|
$ |
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
$ |
|
|
|
$ |
|
|
Property and equipment consisted of the following (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Equipment |
$ |
|
|
|
$ |
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
Construction-in-progress |
|
— |
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
( |
) |
|
|
( |
) |
|
Total property and equipment, net |
$ |
|
|
|
$ |
|
|
During the three months ended June 30, 2022 and 2021, 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
Concurrent with the purchase of the convertible bond, the Company entered into an agreement dated
The Company has elected the fair value option method of accounting for the investment in convertible bond. The investment in convertible bond is classified as an available for sale security and remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income (loss). The fair value and any changes in fair value in the convertible bond is determined using a binominal lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.
In February 2022, the Company and Telcon agreed to settle a “target shortfall” under the revised API agreement with Telcon for the years ended 2020 and 2021 by exchanging KRW
The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of June 30, 2022 and December 31, 2021 (in thousands):
|
Investment in convertible bond |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Sales of convertible bond |
|
|
( |
) |
|
|
— |
|
|
Net loss on investment on convertible bond |
|
|
( |
) |
|
|
— |
|
|
Change in fair value included in the statement of other comprehensive income |
|
|
( |
) |
|
|
( |
) |
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
The fair value as of June 30, 2022 and December 31, 2021 was based upon following assumptions:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Principal outstanding (South Korean won) |
|
|
|
|
|
|
||
|
Stock price |
|
|
|
|
|
|
||
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
Selected yield |
|
|
|
% |
|
|
|
% |
|
Expected volatility (Telcon common stock) |
|
|
|
% |
|
|
|
% |
|
Risk-free interest rate (South Korea government bond) |
|
|
|
% |
|
|
|
% |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
|
Conversion price |
|
|
|
|
|
|
||
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate a shuttered amino acids manufacturing facility in Ube, Japan. In connection with the formation, the Company invested approximately $
EJ Holdings is engaged in retrofitting the Ube facility in order to seek regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no substantial revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from the Company or other financing
8
unless and until the Ube facility is activated and EJ Holdings can secure customers for its products. There is no assurance the Company will be able to continue to provide loan financing to support EJ Holdings’ activities at the Ube facility.
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the loan financing provided by the Company to acquire the Ube facility and fund EJ Holdings’ activities, which are principally for the Company’s benefit. JIP, however, owns
The Company’s share of the loss reported by EJ Holdings are classified as net loss on equity method investment. The investment is evaluated for impairment and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
The following table sets forth certain financial information of EJ Holdings for the three and six months ended June 30, 2022 and 2021 (in thousands):
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
2022 |
|
|
2021 |
|
||||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
(Unaudited) |
|
|
(Unaudited) |
|
||||
|
REVENUES, NET |
$ |
|
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
NET LOSS |
$ |
( |
) |
|
$ |
( |
) |
$ |
( |
) |
|
$ |
( |
) |
NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES
Accounts payable and accrued expenses consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Accounts payable: |
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses |
|
$ |
|
|
|
$ |
|
|
|
Professional fees |
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
|
|
|
|
|
|
|
Manufacturing costs |
|
|
|
|
|
|
|
|
|
Non-employee board member compensation |
|
|
|
|
|
|
|
|
|
Other vendors |
|
|
|
|
|
|
|
|
|
Total accounts payable |
|
|
|
|
|
|
|
|
|
Accrued interest payable, related parties |
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
|
|
|
|
|
|
|
Accrued expenses: |
|
|
|
|
|
|
|
|
|
Payroll expenses |
|
|
|
|
|
|
|
|
|
Government rebates and other rebates |
|
|
|
|
|
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
Total accrued expenses |
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
|
|
|
|
|
|
Other current liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Trade discount |
$ |
|
|
|
$ |
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
Total other current liabilities |
$ |
|
|
|
$ |
|
|
9
Other long-term liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Trade discount |
$ |
|
|
|
$ |
|
|
|
Unearned revenue |
|
|
|
|
|
|
|
|
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
Notes payable consisted of the following at June 30, 2022 and December 31, 2021 (in thousands except for number of underlying shares) excluding the revolving line of credit agreement with related party discussed below:
|
Year Issued |
|
Interest Rate Range |
|
|
Term of Notes |
|
Conversion Price |
|
|
Principal Outstanding June 30, 2022 |
|
|
Unamortized Discount June 30, 2022 |
|
|
Carrying Amount June 30, 2022 |
|
|
Underlying Shares June 30, 2022 |
|
|
||||||
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2021 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2022 |
|
11%-41% |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2021 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
2022 |
|
10%-12% |
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,871 |
|
|
$ |
— |
|
|
$ |
2,871 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
$ |
|
|
(b) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
$ |
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
10
|
Year Issued |
|
Interest Rate Range |
|
|
Term of Notes |
|
Conversion Price |
|
|
Principal Outstanding December 31, 2021 |
|
|
Unamortized Discount December 31, 2021 |
|
|
Carrying Amount December 31, 2021 |
|
|
Underlying Shares December 31, 2021 |
|
|
||||||
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2021 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
2021 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
— |
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
2020 |
|
|
|
|
|
|
$ |
|
|
(b) |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
$ |
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(a) |
The notes are convertible into Emmaus Life Sciences, Inc. shares. Beginning February 28, 2022, the note holders became entitled to call for early redemption of the convertible notes payable, because the Company common stock was not approved for listing on a Trading Market (as defined in the agreement). Accordingly, the notes are classified as current liabilities. |
|
|
(b) |
|
The weighted-average stated annual interest rate of notes payable was
As of June 30, 2022, future contractual principal payments due on notes payable were as follows (in thousands):
|
Year Ending |
|
|
|
|
|
2022 (six months) |
$ |
|
|
(a) |
|
2023 |
|
|
|
|
|
Total |
$ |
|
|
|
|
|
(a) |
Includes $ |
The Company is party to a revolving line of credit agreement with Yutaka Niihara, M.D., M.P.H., the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $
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 $
11
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 $
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 |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
— |
|
|
Fair value at issuance date |
|
|
— |
|
|
|
|
|
|
Change in fair value included in the statement of operations |
|
|
|
|
|
|
|
|
|
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 June 30, 2022 and December 31, 2021was based upon following assumptions:
|
Convertible promissory notes |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Stock price |
|
$ |
|
|
|
$ |
|
|
|
Conversion price |
|
$ |
|
|
|
$ |
|
|
|
Selected yield |
|
|
|
% |
|
|
|
% |
|
Expected volatility |
|
|
|
% |
|
|
|
% |
|
Time until maturity (in years) |
|
|
|
|
|
|
|
|
|
Dividend yield |
|
— |
|
|
— |
|
||
|
Risk-free rate |
|
|
|
% |
|
|
|
% |
In June 2022, we entered into a Business Loan and Security Agreement and Addenda with a third-party lender pursuant to which the lender loaned to us $
The Business Loan and Security Agreement contains representations and warranties of the parties and restrictive covenants against incurring additional indebtedness, subject to certain exceptions, granting liens or security interests in our or our subsidiaries assets, and similar matters. In the event of a breach of our representations and warranties or the restrictive covenants or other covenants, the lender would be entitled to accelerate the repayment of the loan and, in certain events, require us to pay an additional fee equal to
12
NOTE 8 — STOCKHOLDERS’ DEFICIT
Purchase Agreement with GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $
In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to
The GPB Warrant is separately recognized under ASC 815-40 at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in the condensed consolidated statements of operations and comprehensive income.
The following table presents the change in fair value of the GPB Warrant as of June 30, 2022 and December 31, 2021 (in thousands):
|
Warrant Liability—GPB |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Change in fair value included in the statement of operations |
|
|
( |
) |
|
|
( |
) |
|
Balance, end of period |
|
$ |
— |
|
|
$ |
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model. The fair value as of June 30, 2022, and December 31, 2021 was based upon the following assumptions:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Adjusted exercise price |
|
$ |
|
|
|
$ |
|
|
|
Common stock fair value |
|
$ |
|
|
|
$ |
|
|
|
Risk‑free interest rate |
|
|
|
% |
|
|
|
% |
|
Volatility |
|
|
|
% |
|
|
|
% |
|
Time until expiration (years) |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
— |
|
|
— |
|
||
|
Number outstanding |
|
|
|
|
|
|
|
|
Extension of a Convertible Promissory Note - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $
The following table presents the fair value and the change in fair value of the warrants as of June 15, 2022 and December 31, 2020 (in thousands):
|
Warrant liability—Convertible Promissory Note |
|
June 15, 2022 |
|
|
December 31, 2021 |
|
||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Change in fair value included in the statement of operations |
|
|
( |
) |
|
|
|
|
|
Reclassification to equity |
|
|
( |
) |
|
|
— |
|
|
Balance, end of period |
|
$ |
— |
|
|
$ |
|
|
13
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model based upon following assumptions:
|
|
|
June 15, 2022 |
|
|
December 31, 2021 |
|
||
|
Exercise price |
|
$ |
|
|
|
$ |
|
|
|
Stock price |
|
$ |
|
|
|
$ |
|
|
|
Risk‑free interest rate |
|
|
|
% |
|
|
|
% |
|
Expected volatility (peer group) |
|
|
|
% |
|
|
|
% |
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
— |
|
|
— |
|
||
|
Number outstanding |
|
|
|
|
|
|
|
|
A summary of outstanding warrants as of June 30, 2022 and December 31, 2021 is presented below:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
|
Number of Warrants |
|
|
Weighted‑ Average Exercise Price |
|
|
Number of Warrants |
|
|
Weighted‑ Average Exercise Price |
|
||||
|
Warrants outstanding, beginning of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Cancelled, forfeited or expired |
|
|
( |
) |
|
$ |
|
|
|
|
( |
) |
|
$ |
|
|
|
Warrants outstanding, end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Warrnts exercisable end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
As of June 30, 2022, the weighted-average remaining contractual life of outstanding warrants was
Stock options—The Company’s former Amended and Restated 2011 Stock Incentive Plan expired on May 3, 2021, and no further awards may be made under the 2011 Plan. The expiration of the 2011 Plan did not affect outstanding stock awards thereunder.
The Company also previously maintained an Amended and Restated 2012 Omnibus Incentive Compensation Plan, which was terminated in September 2021 in connection with the adoption of the 2021 Stock Incentive Plan described below.
On September 29, 2021, the Board of Directors of the Company adopted the Emmaus Life Sciences, Inc. 2021 Stock Incentive Plan upon the recommendation of the Compensation Committee of the Board. The 2021 Stock Incentive Plan was approved by stockholders on November 23, 2021. No more than
A summary of outstanding stock options as of June 30, 2022 and December 31, 2021 is presented below.
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
|
Number of Options |
|
|
Weighted‑ Average Exercise Price |
|
|
Number of Options |
|
|
Weighted‑ Average Exercise Price |
|
||||
|
Options outstanding, beginning of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted or deemed granted |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Cancelled, forfeited and expired |
|
|
( |
) |
|
$ |
|
|
|
|
( |
) |
|
$ |
|
|
|
Options outstanding, end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Options exercisable, end of period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Options available for future grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2022 and June 30, 2021, the Company recognized $
14
$
Collaborative Research and Development Agreement with Kainos Medicine, Inc—On February 26, 2021, the Company entered into a collaborative research and development agreement with Kainos Medicine, Inc. (“Kainos”) to lead the preclinical development of Kainos’ patented IRAK4 inhibitor (“KM10544”) as an anti-cancer drug and further advance Kainos’s research and development activities. The companies also entered into a letter of intent regarding possible future joint development of small molecule therapeutics and other pharmaceutical assets.
Pursuant to the collaborative research and development agreement, the Company paid and issued to Kainos $
On October 7, 2021, the Company entered into a license agreement with Kainos under which Kainos granted the Company an exclusive license in the territory encompassing the U.S., the U.K. and the EU to patent rights, know-how and other intellectual property relating to Kainos’s novel IRAK4 inhibitor, referred to as KM10544, for the treatment of cancers, including leukemia, lymphoma and solid tumor cancers. In consideration of the license, the Company paid Kainos a six-figure upfront fee in cash and agreed to make additional cash payments upon the achievement of specified milestones totaling in the mid-eight figures and pay a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.
During the six months ended June 30, 2021, the Company incurred $
Amended and Restated Warrants – The Company evaluated its outstanding amended and restated warrants to purchase up to
In June 2022, the exercise price of outstanding amended and restated warrants was reduced to $
Stock issued for services – In June 2022, the Company issued
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is computed based upon the estimated annual effective tax rate and the year-to-date pre-tax income (loss) and other comprehensive income.
For the three and six months ended June 30, 2022, the Company recorded an income tax provision of $
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases
15
The rent expense during the three months ended June 30, 2022 and 2021 was approximately $
Future minimum lease payments under the lease agreements were as follows as of June 30, 2022 (in thousands):
|
|
|
Amount |
|
|
|
2022 (six months) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: Interest |
|
|
|
|
|
Present value of lease liabilities |
|
$ |
|
|
As of June 30, 2022, 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 Supply Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $
16
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding on or at any time during the six months ended June 30, 2022 (in thousands):
|
Class |
Lender |
|
Interest Rate |
|
|
Date of Loan |
|
Term of Loan |
|
Principal Amount Outstanding at June 30, 2022 |
|
|
Highest Principal Outstanding |
|
|
Amount of Principal Repaid |
|
|
Amount of Interest Paid |
|
|
|||||
|
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Yasushi Nagasaki (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Hope International Hospice, Inc. (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Hope International Hospice, Inc. (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
George Sekulich (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Osato Medical Clinic (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Alfred Lui (2) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hope International Hospice, Inc. (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Hope International Hospice, Inc. (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Wei Pei Zen (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Hope International Hospice, Inc. (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Yutaka Niihara (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
17
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2021:
|
Class |
Lender |
|
Interest Rate |
|
|
Date of Loan |
|
Term of Loan |
|
Principal Amount Outstanding at December 31, 2021 |
|
|
Highest Principal Outstanding |
|
|
Amount of Principal Repaid |
|
|
Amount of Interest Paid |
|
|
|||||
|
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Willis Lee (2) |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soomi Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Revolving line of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Yutaka Niihara (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
|
(2) |
|
(3)
(4)
See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara and Note 13 for information regarding a recent related party loan.
Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds
NOTE 13 — SUBSEQUENT EVENTS
Subsequent to June 30, 2022, the Company received $
18
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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (the “Annual Report”).
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including those set forth in the “Risk Factors” section of the Annual Report, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. Our lead product, Endari® (prescription-grade L-glutamine oral powder) is approved by the U.S. Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“SCD”), in adult and pediatric patients five years of age and older. In April 2022, Endari® was approved by the Ministry of Health and Prevention in the United Arab Emirates, or U.A.E, in adults and pediatric patients five years of age and older. The approval of Endari® in the U.A.E. was the first granted outside the U.S. Applications for marketing authorization are pending in the Kingdom of Saudi Arabia, Bahrain, and other Gulf Cooperation Council, or GCC, countries, as well. While the applications are pending, the FDA approval of Endari® can be referenced to allow access to Endari® on a named-patient basis.
Endari® is marketed and sold in the U.S. by our internal commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs. Endari® is also reimbursable by many commercial payors. We have agreements in place with the nation’s leading distributors as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected retail and specialty pharmacies nationwide. In April 2022 we launched an innovative telehealth solution to afford SCD patients’ direct access to Endari® remotely through a web portal managed by our strategic partners, including Asembia LLC, US Bioservices Corporation and UpScript IP Holdings, LLC.
As of June 30, 2022, our accumulated deficit was $252.1 million and we had cash and cash equivalents of $1.0 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and begin to realize revenues in the U.A.E. and perhaps other GCC countries. Until we can generate sufficient net revenues from Endari® sales, our future cash requirements are expected to be financed through public or private sales of equity or debt securities and, loans, including loans from related parties, or possible corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
Financial Overview
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
19
various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.
Management estimates variable consideration using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Under the Accounting Standards Codification (“ASC”) 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to 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.
Sales Discounts: We provide our customers prompt payment discounts and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to bulk discounts offered by us increased in 2021 and adversely affected sales in the first quarter of 2022.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping, and distribution of Endari®.
Research and Development Expenses
Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future
20
collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approvals of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of our Business and Compliance with Law.”
General and Administrative Expense
General and administrative expense consists principally of salaries and related employee costs, including share-based compensation for our directors, officers, and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel involved in the promotion, sale, and marketing of Endari®. Other selling cost include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional personnel to support the commercialization of Endari® in the U.S. and abroad.
COVID-19
In retrospect, we believe our business 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. We do not expect the ongoing epidemic to have a material adverse affect on our business or results of operation, but intend to consider future changes to our business to adapt to the new post-pandemic environment, including an increased focus on our telehealth solution.
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 is not expected to have a material effect for the foreseeable future. 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 six months ended June 30, 2022 and 2021 were supplied by one vendor.
Results of Operations:
Three months ended June 30, 2022 and 2021
Net revenues. Net revenues decreased by $2.2 million, or 34%, to $4.3 million for the three months ended June 30, 2022, compared to $6.5 million for the three months ended June 30, 2021. The decrease was primarily attributable to lower bulk order purchases in 2022 compared to the same period in 2021.
Cost of Goods Sold. Cost of goods sold remained consistent at $0.4 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
21
Research and Development Expenses. Research and development expenses decreased by $0.5 million, or 60%, to $0.3 million for the three months ended June 30, 2022, compared to $0.8 million for the three months ended June 30, 2021. The decrease was primarily due to reduced costs associated with a pharmacokinetic characteristic and safety study for Endari® in the U.S. and a clinical study in Europe. We expect our research and development costs to increase in the remainder of 2022 as the studies progress or other studies are undertaken.
Selling Expenses. Selling expenses increased by $0.5 million, or 34%, to $2.0 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021. The increase was primarily due to increases in consulting fees and in travel expenses of our in-house commercial team.
General and Administrative Expenses. General and administrative expenses decreased by $0.3 million, or 9% to $3.1 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021. The decrease was primarily due to a decrease of $0.5 million in professional fees, partially offset by total of $0.2 million in increased payroll expenses and travel expenses.
Other Income (Expense). Total other expenses increased by $9.1 million, or 501%, to $7.3 million for the three months ended June 30, 2022, compared to $1.8 million of other income for the three months ended June 30, 2021. The increase was primarily due to a decrease of $6.3 million in change in fair value of embedded conversion option and an increase of $2.4 million in foreign exchange loss.
Net Income (Loss). Net loss for the three months ended June 30, 2022, increased by $11.4 million, or 457%, to a net loss of $8.9 million for the three months ended June 30, 2022, compared to net income of $2.5 million for the three months ended June 30, 2021. The increase of net loss was primarily a result of an increase of $9.1 million in other expense and a decrease of $1.9 million in income from operations as discussed above.
Six months ended June 30, 2022 and 2021
Net revenues. Net revenues decreased by $4.3 million, or 36%, to $7.5 million for the six months ended June 30, 2022, compared to $11.8 million for the six months ended June 30, 2021. The decrease was primarily attributable to lower bulk orders in 2022 compared to the same period in 2021.
Cost of Goods Sold. Cost of goods sold increased by $0.5 million, or 62% to $1.4 million for six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was primarily due to $0.7 million of additional reserves relating to Endari® inventory with a shelf-life of less than two years.
Research and Development Expenses. Research and development expenses decreased by $1.8 million, or 70%, to $0.8 million for the six months ended June 30, 2022, compared to $2.6 million for the six months ended June 30, 2021. The decrease was primarily due to $0.5 million in cash and $0.5 million in shares of the common stock issued under the agreement with Kainos Medicine, Inc. (“Kainos”) to lead the clinical development of Kainos’ patented IRAK4 inhibitor and a decrease of $0.5 million relates to a pharmacokinetic characteristic and safety study for Endari® in the U.S. and a clinical study in Europe. We expect our research and development costs to increase in the remainder of 2022 as the studies progress or new studies are undertaken.
Selling Expenses. Selling expenses increased by $0.7 million, or 25%, to $3.4 million for the six months ended June 30, 2022, compared to $2.7 million for the six months ended June 30, 2021. The increase was primarily due to increases in the consulting fees and in travel expenses of in-house sales team.
General and Administrative Expenses. General and administrative expenses decreased slightly by $0.3 million, or 5%, to $6.5 million for the six months ended June 30, 2022, compared to $6.8 million for the six months ended June 30, 2021. The decrease was primarily due to decreases of $0.7 million in professional fees partially offset by $0.2 million in increased payroll expenses and travel expenses.
Other Income (Expense). Total other expense increased by $0.9 million, or 18%, to $5.8 million for the six months ended June 30, 2022, compared to $5.0 million for the six months ended June 30, 2021. The increase was primarily due to increases of $2.5 million in loss in foreign exchange and $0.8 million in change in fair value of conversion feature derivative.
Net Income (Loss). Net loss for the six months ended June 30, 2022 increased by $4.5 million, or 76% to $10.4 million for the six months ended June 30, 2022, compared to $5.9 million for the six months ended June 30, 2021. The increase was primarily a result of increases of $0.9 million in other expense and $3.4 million in loss from operations as discussed above.
22
Liquidity and Capital Resources
Based on our losses to date, current liabilities, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to EJ Holdings and cash and cash equivalents balance of $1.0 million as of June 30, 2022, we do not have sufficient capital for our business without raising additional capital. We realized a net loss of $10.0 million for the six months ended June 30, 2022 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari® sales. While we anticipate increased net revenues as we expand our commercialization of Endari® in the U.S. through telehealth and other initiatives, as well as in the U.A.E. and perhaps other GCC countries, there is no assurance that we will be able to significantly 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. If we are unable to raise needed capital, we may need to suspend all or substantially all business activities except those essential to support our Endari sales while we seek to restructure or refinance our existing indebtedness and other current liabilities.
Our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, is party a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 75% of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable.
Liquidity represents our ability to pay our liabilities when they become due, fund our business operations, fund the operations and retrofitting of EJ Holdings’ amino acid production plant in Ube, Japan, and meet our contractual obligations, including our obligations to purchase API under our supply arrangements with Telcon, and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period, proceeds from our accounts receivable factoring arrangement with Prestige Capital and proceeds from related-party loans and other financing activities. Our short-term and long-term cash requirements consist primarily of working capital requirements, general corporate needs, our contractual obligations to purchase API from Telcon, debt service under our convertible notes payable and notes payable and planned ongoing loan funding to sustain EJ Holdings’ operations. We have no contractual commitment to provide funding to EJ Holdings, but plan to continue to do so in the foreseeable to the extent we have cash available for this purpose.
As of June 30, 2022, we had outstanding $17.6 million principal amount of convertible promissory notes and $9.7 million principal amount of other notes payable. Our minimum lease payment obligations were $3.6 million, of which $0.6 million was payable within 12 months. We are in discussions with the holders of the convertible promissory notes to possibly restructure the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.
Of our outstanding convertible promissory notes, $14.5 million principal amount of the notes bear interest at the stated rate of 2% per year (10% in the event of a default), payable semi-annually on the last business day of August and January of each year, and will mature on the 3rd anniversary of the original issue date, unless earlier converted or prepaid. We are in discussions with the holders of these convertible promissory notes to possibly restructure our obligations under the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.
Our API Supply Agreement and revised API Agreement with Telcon provide for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall in cash or to settle the target shortfall in exchange for principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations. In February 2022 we agreed with Telcon to settle the target shortfall for 2020 and 2021 in exchange for a reduction in principal and accrued interest on our Telcon convertible bond and cash proceeds thereof as described in Note 5 of the Notes to condensed consolidated financial statements.
Due to uncertainties regarding our ability to meet our current liabilities and future operating expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to condensed consolidated financial statements included herein.
23
Cash flows for the six months ended June 30, 2022 and June 30, 2021
Net cash used in operating activities
Net cash used in operating activities increased by $2.0 million, or 54%, to $5.8 million for the six months ended June 30, 2022 from $3.8 million for the six months ended June 30, 2021. This increase was primarily due to an increase of $3.3 million in loss from operations.
Net cash used in investing activities
Net cash used in investing activities decreased by $3.5 million, or 89%, to $0.4 million for the six months ended June 30, 2022 from $4.0 million for the six months ended June 30, 2021. This decrease was primarily due to deemed proceeds of $2.9 million sales of convertible bonds resulting from the offset target shortfalls against principal and interest of our Telcon convertible note against our trade discount.
Net cash from financing activities
Net cash from financing activities decreased by $2.0 million, or 29%, to $4.9 million for the six months ended June 30, 2022 from net cash provided by financing activities of $6.9 million for the six months ended June 30, 2021. This decrease was the result of $14.5 million in proceeds from the convertible promissory notes payable issued in 2021, partially offset by a $6.2 million used to prepay our outstanding Amended and Restated10% Senior Secured Convertible Debenture in the same period and $5.0 million of proceeds from note payable issued in 2022.
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 six months ended June 30, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and 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.
24
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2022 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Material Weakness and Plan of Remediation
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that pose a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses might cause information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
We conducted an evaluation pursuant to Rule 13a‑15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of June 30, 2022. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective as of June 30, 2022, because of the continuation of a material weaknesses (the “Material Weakness”) in our internal control over financial reporting due to inadequate financial closing process, segregation of duties including access control of information technology especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account process and insufficient entity risk assessment process.
We engaged in ongoing efforts to remediate the control deficiencies that constituted the Material Weakness by implementing changes to our internal control over financial reporting without limitation:
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• |
engaging a third-party accounting consulting firm to assist us in the review of our application of GAAP on complex debt financing transactions and revenue recognition under ASC 606; |
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• |
using a GAAP Disclosure and SEC Reporting Checklist; |
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• |
increasing the continuing professional training and academic education on accounting subjects for accounting staff; |
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• |
enhancing the level of the precision of review controls related to our financial close and reporting; and |
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• |
subscribing the relevant online services other supplemental internal and external resources relating to SEC reporting. |
Our management and board of directors are committed to the remediation of the material weaknesses, as well as the continued improvement of our overall system of internal control over financial reporting. In addition to the measures described above, we are in the process of implementing an integrated cloud-based enterprise resource planning (ERP) system to manage our financial information to replace our outdated financial accounting systems and software, which we expect to complete before the end of 2022 as our finances permit. We also have established a Disclosure Committee to ensure more effective internal communications significant transactions.
We believe these measures will remediate the control deficiencies that gave rise to the material weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remediation measures may be required.
We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent improvements in our internal control over financial reporting when they are fully implemented. The material weaknesses will not be considered fully remediated until controls have been designed and implemented for a sufficient period of time for our management to conclude that the control environment is operating effectively.
There is no assurance that our remediation efforts will be successful or that our internal control over financial reporting or DCP will be effective.
25
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 Company’s consolidated financial statements included in this Quarterly Report have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $10.4 million for the six months ended June 30, 2022 and had a working capital deficit of $39.5 million at June 30, 2022. Management expects that the Company’s current liabilities and operating expenses, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa region and elsewhere, will exceed our existing cash balances and cash expected to be generated from operations for the foreseeable future. To meet the Company’s current liabilities and operating expenses, the Company will need to restructure or refinance its existing indebtedness and raise additional funds through related-party loans, equity and debt financings or licensing or other strategic agreements. The Company has no understanding or arrangement to restructure or refinance its indebtedness or for any additional financing, and there can be no assurance that the Company will be able to restructure or refinance its existing indebtedness or complete any additional equity or debt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements. Due to the uncertainty of the Company’s ability to meet its current liabilities and operating expenses, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months from the date of this filing. The consolidated financial statements included in this Quarterly Report do not include any adjustments that might result from the outcome of these uncertainties.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 29, 2022, the Company entered into a Professional Services and Consulting Agreement with a strategic business outreach and professional services consulting firm pursuant to which the Company issued $110,000 of restricted shares of common stock valued for this purpose at $0.446 a share, the volume-weighted daily average closing price of the common stock as reported on the OTCQX over the previous ten trading days (the “VWAP”), in consideration of services rendered and to be rendered under the Professional Services and Consulting Agreement. The Company also agree to issue the consulting firm an additional $55,000 of restricted shares valued at the VWAP at the time on the nine-month and twelve-month anniversaries of the date of the Professional Services and Consulting Agreement. The shares were, or will be, issued without registration under the Securities Act of 1933, as amended, pursuant to the exemptions from registration under Section 4(a)(2) of such Act and Regulation D for transactions not involving a public offering based upon the facts that the shares were issued to a single accredited investor in a privately negotiated transaction not involving the services of a broker-dealer or other intermediary or general solicitation or advertising.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Related Party Loans
Over the period January 1, 2022 through June 30, 2022, certain of the Company’s directors and executive officers loaned the Company an aggregate of $2.1million to augment the Company’s working capital as reflected in the following table (in thousands):
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Principal Amounts |
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Annual Interest Rate |
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Term |
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Soomi Niihara (1) |
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$ |
300 |
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12% |
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Due on Demand |
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Yasushi Nagasaki (2) |
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$ |
50 |
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10% |
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Due on Demand |
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Hope International Hospice, Inc. (1) |
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$ |
350 |
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10% |
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Due on Demand |
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Hope International Hospice, Inc. (1) |
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$ |
210 |
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10% |
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Due on Demand |
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Soomi Niihara (1) |
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$ |
100 |
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10% |
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Due on Demand |
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Soomi Niihara (1) |
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$ |
200 |
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10% |
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Due on Demand |
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Osato Medical Clinic (3) |
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$ |
250 |
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12% |
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Due on Demand |
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Hope International Hospice, Inc. (1) |
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$ |
150 |
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12% |
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Due on Demand |
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Hope International Hospice, Inc. (1) |
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$ |
150 |
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12% |
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Due on Demand |
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Wei Pei Zen (2) |
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$ |
200 |
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10% |
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Due on Demand |
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Willis Lee (2) |
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$ |
45 |
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10% |
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Due on Demand |
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Hope International Hospice, Inc. (1) |
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$ |
40 |
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10% |
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Due on Demand |
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(1) |
Soomi Niihara is Dr. Niihara’s wife. Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also a director and the Chief Executive Officer of Hope International Hospice, Inc., which is wholly owned by him and his wife. |
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(2) |
Officer or director. |
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(3) |
Dr. Osato, a director of Emmaus, and his wife are the sole owners of Osato Medical Clinic. |
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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/ |
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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 because XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Filed herewith. |
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** |
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: August 15, 2022 |
By: |
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/s/ Yutaka Niihara |
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Name: |
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Yutaka Niihara, M.D., M.P.H. |
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Its: |
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Chief 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 |
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29