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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/14/23 Emmaus Life Sciences, Inc. 10-Q 9/30/23 80:17M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 3.43M
2: EX-4.1 Instrument Defining the Rights of Security Holders HTML 115K
3: EX-10.1 Material Contract HTML 36K
4: EX-10.2 Material Contract HTML 432K
5: EX-10.3 Material Contract HTML 624K
6: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
7: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
14: R1 Document and Entity Information HTML 70K
15: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 129K
16: R3 Condensed Consolidated Balance Sheets HTML 42K
(Parenthetical) (Unaudited)
17: R4 Condensed Consolidated Statements of Operations HTML 136K
and Comprehensive Income (Loss) (Unaudited)
18: R5 Condensed Consolidated Statements of Changes in HTML 99K
Stockholders' Deficit (Unaudited)
19: R6 Condensed Consolidated Statements of Cash Flows HTML 136K
(Unaudited)
20: R7 Basis of Presentation HTML 27K
21: R8 Summary of Significant Accounting Policies HTML 41K
22: R9 Revenues HTML 167K
23: R10 Selected Financial Statement - Assets HTML 80K
24: R11 Investments HTML 123K
25: R12 Selected Financial Statement Captions - HTML 113K
Liabilities
26: R13 Notes Payable HTML 571K
27: R14 Stockholders' Deficit HTML 203K
28: R15 Income Tax HTML 30K
29: R16 Leases HTML 45K
30: R17 Commitments and Contingencies HTML 29K
31: R18 Related Party Transactions HTML 498K
32: R19 Subsequent Events HTML 26K
33: R20 Summary of Significant Accounting Policies HTML 47K
(Policies)
34: R21 Revenues (Tables) HTML 166K
35: R22 Selected Financial Statement - Assets (Tables) HTML 82K
36: R23 Investments (Tables) HTML 106K
37: R24 Selected Financial Statement Captions - HTML 111K
Liabilities (Tables)
38: R25 Notes Payable (Tables) HTML 558K
39: R26 Stockholders' Deficit (Tables) HTML 176K
40: R27 Leases (Tables) HTML 38K
41: R28 Related Party Transactions (Tables) HTML 492K
42: R29 Summary of Significant Accounting Policies HTML 97K
(Details Narrative)
43: R30 Revenues (Details) HTML 33K
44: R31 Revenues (Details 1) HTML 42K
45: R32 Revenues (Details 2) HTML 37K
46: R33 Revenues (Details Narrative) HTML 33K
47: R34 Selected Financial Statement - Assets (Details) HTML 32K
48: R35 Selected Financial Statement - Assets (Details 1) HTML 31K
49: R36 Selected Financial Statement - Assets (Details 2) HTML 36K
50: R37 Selected Financial Statement - Assets (Details HTML 24K
Narrative)
51: R38 Investments (Details Narrative) HTML 121K
52: R39 Investments (Details) HTML 51K
53: R40 Investments (Details 1) HTML 64K
54: R41 Investments (Details 2) HTML 76K
55: R42 Selected Financial Statement Captions - HTML 52K
Liabilities (Details)
56: R43 Selected Financial Statement Captions - HTML 31K
Liabilities (Details 1)
57: R44 Selected Financial Statement Captions - HTML 27K
Liabilities (Details 2)
58: R45 Selected Financial Statement Captions - HTML 42K
Liabilities (Details Narrative)
59: R46 Notes Payable (Details) HTML 147K
60: R47 Notes Payable (Details Narrative) HTML 200K
61: R48 Notes Payable (Details 1) HTML 36K
62: R49 Notes Payable (Details 2) HTML 32K
63: R50 Notes Payable (Details 3) HTML 39K
64: R51 Notes Payable (Details 4) HTML 63K
65: R52 Stockholders' Deficit (Details Narrative) HTML 116K
66: R53 Stockholders' Deficit (Details 1) HTML 65K
67: R54 Stockholders' Deficit (Details 2) HTML 37K
68: R55 Stockholders' Deficit (Details 3) HTML 50K
69: R56 Income Tax (Details Narrative) HTML 30K
70: R57 Leases (Details Narrative) HTML 43K
71: R58 Leases (Details) HTML 35K
72: R59 Commitments and Contingencies (Details Narrative) HTML 39K
73: R60 Related Party Transactions (Details) HTML 158K
74: R61 Related Party Transactions (Details Narrative) HTML 28K
75: R62 Subsequent Events (Details Narrative) HTML 37K
78: XML IDEA XML File -- Filing Summary XML 143K
76: XML XBRL Instance -- emma-20230930_htm XML 4.96M
77: EXCEL IDEA Workbook of Financial Report Info XLSX 164K
12: EX-101.CAL XBRL Calculations -- emma-20230930_cal XML 181K
11: EX-101.DEF XBRL Definitions -- emma-20230930_def XML 866K
10: EX-101.LAB XBRL Labels -- emma-20230930_lab XML 1.59M
9: EX-101.PRE XBRL Presentations -- emma-20230930_pre XML 1.17M
13: EX-101.SCH XBRL Schema -- emma-20230930 XSD 241K
79: JSON XBRL Instance as JSON Data -- MetaLinks 529± 827K
80: ZIP XBRL Zipped Folder -- 0000950170-23-063225-xbrl Zip 547K
| 10-Q |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
i ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended i September 30, i 2023 /
OR
i ☐ |
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.: i 001-35527
i EMMAUS LIFE SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
i Delaware |
|
i 87-0419387 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
i 21250 Hawthorne Boulevard, i Suite 800, i Torrance, i California |
|
i 90503 |
(Address of principal executive offices) |
|
(Zip code) |
( i 310) i 214-0065
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
None |
|
|
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. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
i Non-accelerated filer |
☒ |
Smaller reporting company |
i ☒ |
Emerging growth company |
i ☐ |
|
|
|
|
|
|
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 i ☐ No ☒
The registrant had i 53,637,554 shares of common stock, par value $0.001 per share, outstanding as of November 10, 2023.
EMMAUS LIFE SCIENCES, INC.
For the Quarterly Period Ended September 30, 2023
|
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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 September 30, 2023 and December 31, 2022 |
1 |
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2 |
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3 |
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5 |
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6 |
||
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
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Item 3. |
28 |
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Item 4. |
28 |
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Part II Other Information |
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Item 1. |
30 |
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Item 1A. |
30 |
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Item 2. |
30 |
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Item 3. |
30 |
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Item 4. |
31 |
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Item 5. |
31 |
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Item 6. |
32 |
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33 |
|||
Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
|
|
As of |
|
|||||
|
|
|
|
|
||||
ASSETS |
|
|
|
|
|
|
||
CURRENT ASSETS |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
i 1,505 |
|
|
$ |
i 2,021 |
|
Accounts receivable, net |
|
|
i 4,587 |
|
|
|
i 375 |
|
Inventories, net |
|
|
i 1,650 |
|
|
|
i 2,379 |
|
Prepaid expenses and other current assets |
|
|
i 1,515 |
|
|
|
i 1,514 |
|
Total current assets |
|
|
i 9,257 |
|
|
|
i 6,289 |
|
Property and equipment, net |
|
|
i 60 |
|
|
|
i 75 |
|
Equity method investment |
|
|
i 17,737 |
|
|
|
i 18,828 |
|
Right of use assets |
|
|
i 2,510 |
|
|
|
i 2,799 |
|
Investment in convertible bond |
|
|
i 17,596 |
|
|
|
i 19,971 |
|
Other assets |
|
|
i 293 |
|
|
|
i 263 |
|
Total assets |
|
$ |
i 47,453 |
|
|
$ |
i 48,225 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
||
CURRENT LIABILITIES |
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
$ |
i 16,285 |
|
|
$ |
i 13,549 |
|
Operating lease liabilities, current portion |
|
|
i 831 |
|
|
|
i 703 |
|
Conversion feature derivative, notes payable |
|
|
i 1,251 |
|
|
|
i 3,248 |
|
Other current liabilities |
|
|
i 14,400 |
|
|
|
i 12,917 |
|
Warrant derivative liabilities |
|
|
i 522 |
|
|
|
i 70 |
|
Notes payable, current portion, net of discount |
|
|
i 8,488 |
|
|
|
i 6,814 |
|
Notes payable to related parties |
|
|
i 2,422 |
|
|
|
i 2,367 |
|
Convertible notes payable, net of discount |
|
|
i 15,819 |
|
|
|
i 14,655 |
|
Convertible notes payable to related parties, net of discount |
|
|
i 899 |
|
|
|
— |
|
Total current liabilities |
|
|
i 60,917 |
|
|
|
i 54,323 |
|
Operating lease liabilities, less current portion |
|
|
i 2,070 |
|
|
|
i 2,553 |
|
Other long-term liabilities |
|
|
i 17,240 |
|
|
|
i 21,714 |
|
Notes payable, less current portion, net of discount |
|
|
i 156 |
|
|
|
i 380 |
|
Notes payable to related parties, net of discount |
|
|
i 3,400 |
|
|
|
i 3,346 |
|
Total liabilities |
|
|
i 83,783 |
|
|
|
i 82,316 |
|
STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
||
Preferred stock, par value $ i i 0.001 / per share, i i 15,000,000 / shares authorized, i i i i none / / / issued or outstanding |
|
|
— |
|
|
|
— |
|
Common stock, par value $ i i 0.001 / per share, i i 250,000,000 / shares authorized, i i 53,637,554 / and i i 49,583,501 / shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively |
|
|
i 54 |
|
|
|
i 50 |
|
Additional paid-in capital |
|
|
i 222,439 |
|
|
|
i 220,815 |
|
Accumulated other comprehensive loss |
|
|
( i 1,503 |
) |
|
|
( i 2,619 |
) |
Accumulated deficit |
|
|
( i 257,320 |
) |
|
|
( i 252,337 |
) |
Total stockholders’ deficit |
|
|
( i 36,330 |
) |
|
|
( i 34,091 |
) |
Total liabilities & stockholders’ deficit |
|
$ |
i 47,453 |
|
|
$ |
i 48,225 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|||||
REVENUES, NET |
|
|
$ |
i 5,018 |
|
|
$ |
i 4,939 |
|
|
$ |
i 22,530 |
|
|
$ |
i 12,460 |
|
COST OF GOODS SOLD |
|
|
|
i 214 |
|
|
|
i 540 |
|
|
|
i 1,151 |
|
|
|
i 1,943 |
|
GROSS PROFIT |
|
|
|
i 4,804 |
|
|
|
i 4,399 |
|
|
|
i 21,379 |
|
|
|
i 10,517 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
|
i 414 |
|
|
|
i 432 |
|
|
|
i 1,023 |
|
|
|
i 1,196 |
|
Selling |
|
|
|
i 1,497 |
|
|
|
i 1,664 |
|
|
|
i 6,345 |
|
|
|
i 5,076 |
|
General and administrative |
|
|
|
i 2,869 |
|
|
|
i 2,963 |
|
|
|
i 11,826 |
|
|
|
i 9,413 |
|
Total operating expenses |
|
|
|
i 4,780 |
|
|
|
i 5,059 |
|
|
|
i 19,194 |
|
|
|
i 15,685 |
|
INCOME (LOSS) FROM OPERATIONS |
|
|
|
i 24 |
|
|
|
( i 660 |
) |
|
|
i 2,185 |
|
|
|
( i 5,168 |
) |
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss on debt extinguishment |
|
|
|
( i 647 |
) |
|
|
( i 421 |
) |
|
|
( i 647 |
) |
|
|
( i 421 |
) |
Change in fair value of warrant derivative liabilities |
|
|
|
i 589 |
|
|
|
i 51 |
|
|
|
i 1,034 |
|
|
|
i 1,341 |
|
Change in fair value of conversion feature derivative, notes payable |
|
|
|
i 3,069 |
|
|
|
i 3,850 |
|
|
|
i 2,100 |
|
|
|
i 3,235 |
|
Realized loss on investment in convertible bond |
|
|
|
— |
|
|
|
— |
|
|
|
( i 297 |
) |
|
|
( i 133 |
) |
Net loss on equity method investment |
|
|
|
( i 381 |
) |
|
|
( i 431 |
) |
|
|
( i 1,347 |
) |
|
|
( i 1,490 |
) |
Foreign exchange loss |
|
|
|
( i 821 |
) |
|
|
( i 1,470 |
) |
|
|
( i 3,227 |
) |
|
|
( i 5,131 |
) |
Interest and other income |
|
|
|
i 181 |
|
|
|
i 175 |
|
|
|
i 514 |
|
|
|
i 530 |
|
Interest expense |
|
|
|
( i 1,909 |
) |
|
|
( i 1,520 |
) |
|
|
( i 5,204 |
) |
|
|
( i 3,544 |
) |
Total other income (expenses) |
|
|
|
i 81 |
|
|
|
i 234 |
|
|
|
( i 7,074 |
) |
|
|
( i 5,613 |
) |
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
|
i 105 |
|
|
|
( i 426 |
) |
|
|
( i 4,889 |
) |
|
|
( i 10,781 |
) |
Income tax provision (benefit) |
|
|
|
i 38 |
|
|
|
( i 35 |
) |
|
|
i 53 |
|
|
|
i 44 |
|
NET INCOME (LOSS) |
|
|
|
i 67 |
|
|
|
( i 391 |
) |
|
|
( i 4,942 |
) |
|
|
( i 10,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unrealized loss on debt securities available for sale (net of tax) |
|
|
|
( i 1,614 |
) |
|
|
( i 3,047 |
) |
|
|
( i 249 |
) |
|
|
( i 7,112 |
) |
Reclassification adjustment for gain included in net income |
|
|
|
— |
|
|
|
— |
|
|
|
i 403 |
|
|
|
i 7 |
|
Foreign currency translation adjustments |
|
|
|
i 225 |
|
|
|
i 481 |
|
|
|
i 962 |
|
|
|
i 1,455 |
|
OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
( i 1,389 |
) |
|
|
( i 2,566 |
) |
|
|
i 1,116 |
|
|
|
( i 5,650 |
) |
COMPREHENSIVE LOSS |
|
|
$ |
( i 1,322 |
) |
|
$ |
( i 2,957 |
) |
|
$ |
( i 3,826 |
) |
|
$ |
( i 16,475 |
) |
NET INCOME (LOSS) PER COMMON SHARE - BASIC |
|
|
$ |
i 0.00 |
|
|
$ |
( i 0.01 |
) |
|
$ |
( i 0.09 |
) |
|
$ |
( i 0.22 |
) |
NET LOSS PER COMMON SHARE - DILUTED |
|
|
$ |
( i 0.01 |
) |
|
$ |
( i 0.01 |
) |
|
$ |
( i 0.09 |
) |
|
$ |
( i 0.22 |
) |
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -BASIC |
|
|
|
i 53,637,554 |
|
|
|
i 49,558,501 |
|
|
|
i 52,414,903 |
|
|
|
i 49,397,690 |
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED |
|
|
|
i 138,375,065 |
|
|
|
i 49,558,501 |
|
|
|
i 52,414,903 |
|
|
|
i 49,397,690 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share and per share amounts)
(Unaudited)
|
Common stock |
|
|
Additional paid-in |
|
|
Accumulated other comprehensive |
|
|
Accumulated |
|
|
Total stockholders' |
|
|||||||||
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
deficit |
|
||||||
Balance, January 1, 2023 |
|
i 49,583,501 |
|
|
$ |
i 50 |
|
|
$ |
i 220,815 |
|
|
$ |
( i 2,619 |
) |
|
$ |
( i 252,337 |
) |
|
$ |
( i 34,091 |
) |
Change in fair value of warrants including down-round protection adjustments |
|
— |
|
|
|
— |
|
|
|
i 41 |
|
|
|
— |
|
|
|
( i 41 |
) |
|
|
— |
|
Convertible notes converted to shares |
|
i 1,351,351 |
|
|
|
i 1 |
|
|
|
i 499 |
|
|
|
— |
|
|
|
— |
|
|
|
i 500 |
|
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 37 |
|
|
|
— |
|
|
|
— |
|
|
|
i 37 |
|
Unrealized loss on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 544 |
) |
|
|
— |
|
|
|
( i 544 |
) |
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 186 |
|
|
|
— |
|
|
|
i 186 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 3,527 |
) |
|
|
( i 3,527 |
) |
Balance, March 31, 2023 |
|
i 50,934,852 |
|
|
|
i 51 |
|
|
|
i 221,392 |
|
|
|
( i 2,977 |
) |
|
|
( i 255,905 |
) |
|
|
( i 37,439 |
) |
Convertible notes converted to shares |
|
i 2,702,702 |
|
|
|
i 3 |
|
|
|
i 997 |
|
|
|
|
|
|
|
|
|
i 1,000 |
|
||
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 26 |
|
|
|
— |
|
|
|
— |
|
|
|
i 26 |
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,909 |
|
|
|
— |
|
|
|
i 1,909 |
|
Reclassification adjustment for gain included in net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 403 |
|
|
|
— |
|
|
|
i 403 |
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 551 |
|
|
|
— |
|
|
|
i 551 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1,482 |
) |
|
|
( i 1,482 |
) |
Balance, June 30, 2023 |
|
i 53,637,554 |
|
|
|
i 54 |
|
|
|
i 222,415 |
|
|
|
( i 114 |
) |
|
|
( i 257,387 |
) |
|
|
( i 35,032 |
) |
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 24 |
|
|
|
— |
|
|
|
— |
|
|
|
i 24 |
|
Unrealized loss on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1,614 |
) |
|
|
— |
|
|
|
( i 1,614 |
) |
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 225 |
|
|
|
— |
|
|
|
i 225 |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 67 |
|
|
|
i 67 |
|
Balance, September 30, 2023 |
|
i 53,637,554 |
|
|
$ |
i 54 |
|
|
$ |
i 222,439 |
|
|
$ |
( i 1,503 |
) |
|
$ |
( i 257,320 |
) |
|
$ |
( i 36,330 |
) |
3
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands, except share and per share amounts)
(Unaudited)
|
Common stock |
|
|
Additional paid-in |
|
|
Accumulated other comprehensive |
|
|
Accumulated |
|
|
Total stockholders' |
|
|||||||||
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
deficit |
|
||||||
Balance January 1, 2022 |
|
i 49,311,864 |
|
|
$ |
i 49 |
|
|
$ |
i 220,022 |
|
|
$ |
( i 255 |
) |
|
$ |
( i 241,266 |
) |
|
$ |
( i 21,450 |
) |
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 5 |
|
|
|
— |
|
|
|
— |
|
|
|
i 5 |
|
Unrealized gain on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 350 |
|
|
|
— |
|
|
|
i 350 |
|
Reclassification adjustment for gain included in net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 7 |
|
|
|
— |
|
|
|
i 7 |
|
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 331 |
|
|
|
— |
|
|
|
i 331 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1,542 |
) |
|
|
( i 1,542 |
) |
Balance, March 31, 2022 |
|
i 49,311,864 |
|
|
|
i 49 |
|
|
|
i 220,027 |
|
|
|
i 433 |
|
|
|
( i 242,808 |
) |
|
|
( i 22,299 |
) |
Reclassification of warrants from liability to equity |
|
— |
|
|
|
— |
|
|
|
i 213 |
|
|
|
— |
|
|
|
— |
|
|
|
i 213 |
|
Fair value of warrants including down-round protection adjustments |
|
— |
|
|
|
— |
|
|
|
i 446 |
|
|
|
— |
|
|
|
( i 446 |
) |
|
|
— |
|
Common stock issued for services |
|
i 246,637 |
|
|
|
i 1 |
|
|
|
i 109 |
|
|
|
|
|
|
|
|
|
i 110 |
|
||
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 5 |
|
|
|
— |
|
|
|
— |
|
|
|
i 5 |
|
Unrealized loss on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 4,415 |
) |
|
|
— |
|
|
|
( i 4,415 |
) |
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 643 |
|
|
|
— |
|
|
|
i 643 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 8,892 |
) |
|
|
( i 8,892 |
) |
Balance, June 30, 2022 |
|
i 49,558,501 |
|
|
|
i 50 |
|
|
|
i 220,800 |
|
|
|
( i 3,339 |
) |
|
|
( i 252,146 |
) |
|
|
( i 34,635 |
) |
Share-based compensation |
|
— |
|
|
|
— |
|
|
|
i 3 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3 |
|
Unrealized loss on debt securities available for sale (net of tax) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 3,047 |
) |
|
|
— |
|
|
|
( i 3,047 |
) |
Foreign currency translation effect |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 481 |
|
|
|
— |
|
|
|
i 481 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 391 |
) |
|
|
( i 391 |
) |
Balance, September 30, 2022 |
|
i 49,558,501 |
|
|
$ |
i 50 |
|
|
$ |
i 220,803 |
|
|
$ |
( i 5,905 |
) |
|
$ |
( i 252,537 |
) |
|
$ |
( i 37,589 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
|
2022 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
||
Net loss |
|
$ |
( i 4,942 |
) |
|
$ |
( i 10,825 |
) |
Adjustments to reconcile net loss to net cash flows used in operating activities |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
i 26 |
|
|
|
i 40 |
|
Inventory reserve |
|
|
i 85 |
|
|
|
i 1,240 |
|
Amortization of discount of notes payable and convertible notes payable |
|
|
i 1,849 |
|
|
|
i 1,303 |
|
Foreign exchange adjustments |
|
|
i 3,167 |
|
|
|
i 5,072 |
|
Realized loss on investment on convertible bond |
|
|
i 297 |
|
|
|
i 133 |
|
Loss on equity method investment |
|
|
i 1,347 |
|
|
|
i 1,490 |
|
Loss on debt extinguishment |
|
|
i 647 |
|
|
|
i 421 |
|
Loss on leased assets |
|
|
— |
|
|
|
i 22 |
|
Share-based compensation |
|
|
i 1,239 |
|
|
|
i 13 |
|
Shares issued for services |
|
|
— |
|
|
|
i 55 |
|
Fair value of warrants issued for services |
|
|
i 334 |
|
|
|
— |
|
Change in fair value of warrant derivative liabilities |
|
|
( i 1,034 |
) |
|
|
( i 1,341 |
) |
Change in fair value of conversion feature derivative, notes payable |
|
|
( i 2,100 |
) |
|
|
( i 3,235 |
) |
Changes in fair value option instrument |
|
|
( i 32 |
) |
|
|
— |
|
Net changes in operating assets and liabilities |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( i 4,215 |
) |
|
|
( i 485 |
) |
Inventories |
|
|
i 636 |
|
|
|
i 390 |
|
Prepaid expenses and other current assets |
|
|
( i 3 |
) |
|
|
i 176 |
|
Other non-current assets |
|
|
i 66 |
|
|
|
i 446 |
|
Accounts payable and accrued expenses |
|
|
i 3,237 |
|
|
|
i 1,479 |
|
Other current liabilities |
|
|
i 95 |
|
|
|
( i 3,199 |
) |
Other long-term liabilities |
|
|
( i 3,238 |
) |
|
|
i 55 |
|
Net cash flows used in operating activities |
|
|
( i 2,539 |
) |
|
|
( i 6,750 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Sale of convertible bond |
|
|
i 2,232 |
|
|
|
i 2,919 |
|
Purchase of property and equipment |
|
|
( i 11 |
) |
|
|
( i 18 |
) |
Loan to equity method investee |
|
|
( i 2,647 |
) |
|
|
( i 4,226 |
) |
Net cash flows used in investing activities |
|
|
( i 426 |
) |
|
|
( i 1,325 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Proceeds from notes payable issued |
|
|
i 5,706 |
|
|
|
i 4,283 |
|
Proceeds from notes payable issued, related parties |
|
|
i 227 |
|
|
|
i 5,469 |
|
Proceeds from convertible notes payable issued |
|
|
i 1,000 |
|
|
|
— |
|
Proceeds from convertible notes payable issued, related party |
|
|
i 1,000 |
|
|
|
— |
|
Payments of notes payable |
|
|
( i 5,341 |
) |
|
|
( i 2,689 |
) |
Payments of notes payable, related party |
|
|
( i 110 |
) |
|
|
— |
|
Net cash flows provided by financing activities |
|
|
i 2,482 |
|
|
|
i 7,063 |
|
Effect of exchange rate changes on cash |
|
|
( i 33 |
) |
|
|
( i 88 |
) |
Net decrease in cash and cash equivalents |
|
|
( i 516 |
) |
|
|
( i 1,100 |
) |
Cash and cash equivalents, beginning of period |
|
|
i 2,021 |
|
|
|
i 2,279 |
|
Cash and cash equivalents, end of period |
|
$ |
i 1,505 |
|
|
$ |
i 1,179 |
|
|
|
|
|
|
|
|
||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES |
|
|
|
|
|
|
||
Interest paid |
|
$ |
i 1,679 |
|
|
$ |
i 817 |
|
Income taxes paid |
|
$ |
i 35 |
|
|
$ |
i 16 |
|
NON-CASH INVESING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Renewal of notes payable, including interest capitalized |
|
$ |
i 618 |
|
|
$ |
— |
|
Conversion of convertible note payable to common stock |
|
$ |
i 1,500 |
|
|
$ |
— |
|
Newly acquired right-of-use lease asset |
|
$ |
i 189 |
|
|
$ |
— |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EMMAUS LIFE SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements of Emmaus Life Sciences, Inc., (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. All significant intercompany transactions have been eliminated. The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. The accompanying condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated balance sheet at December 31, 2022 contained in the Annual Report. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year or any future interim period.
Nature of Operations
The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies, primarily for rare and orphan diseases. The Company’s lead product, Endari® (prescription grade L-glutamine oral powder) is approved by the U.S. Food and Drug Administration, or FDA, and in certain foreign markets to reduce the acute complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Annual Report. There have been no material changes in these policies or their application.
Going concern— The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $ i 4.9 million for the nine months ended September 30, 2023 and had a working capital deficit of $ i 51.7 million as of September 30, 2023. Management expects that the Company’s current liabilities, operating losses and expected capital needs, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa ("MENA") region and elsewhere will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future. To meet the Company’s current liabilities and future obligations, the Company will need to restructure or refinance its existing indebtedness and raise additional funds through related-party loans, third-party loans, equity or debt financings or licensing or other strategic agreements. Except as described below under "Factoring accounts receivable," the Company has no understanding or arrangement for any additional financing, and there can be no assurance that the Company will be able to restructure or refinancing its existing indebtedness or obtain additional related-party or third-party loans 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 that these condensed consolidated financial statements are issued. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/
Management has considered all recent accounting pronouncements and determined that they will not have a material effect on the Company’s condensed consolidated financial statements.
Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, the Company's indirect wholly owned subsidiary, has entered into a purchase and sales agreement with Prestige Capital Finance, LLC or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of i 70% to i 75% of the face amount of the accounts receivable, subject to a $ i 7.5 million cap on advances at any time. The balance of the face amount of the accounts receivables is reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from i 2.25% to i 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. Emmaus Medical’s obligations to Prestige Capital under the purchase and sale agreement are secured by a security interest in the accounts receivable and all or substantially all other assets of Emmaus Medical. In connection with the purchase and sale agreement, Emmaus has guaranteed Emmaus Medical’s obligations under
6
the purchase and sale agreement. Accounts receivable included approximately $ i 366,000 and $ i 730,000 of factoring accounts receivable and other current liabilities included approximately $ i 8,000 and $ i 55,000 of liabilities from factoring at September 30, 2023 and December 31, 2022, respectively. For the three months ended September 30, 2023 and 2022, the Company incurred approximately $ i 100,000 and $ i 121,000, respectively, of factoring fees. For the nine months ended September 30, 2023 and 2022, the Company incurred approximately $ i 440,000 and $ i 275,000, respectively of factoring fees.
/Net income (loss) per share — In accordance with Accounting Standard Codification (“ASC”) 260, “Earnings per Share,” the basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed in a similar manner, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2023 and September 30, 2022, the Company had outstanding potentially dilutive securities exercisable for or convertible into i 108,292,553 shares and i 52,635,590 shares, respectively, of common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share, since the effect would have been anti-dilutive for the each of the nine months ended September 30, 2023 and September 30, 2022.
/Recent Accounting Pronouncement - Effective i January 1, 2023, the Company i adopted Accounting Standards Update 2016-13, Financial Instrument - Credit Losses (Topic 326), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The new model, referred to as the current expected credit losses model, applies to financial assets subject to credit losses and measured at amortized costs, as well as certain off-balance sheet credit exposures. The adoption of this pronouncement did i not have material impact on the Company's results of operations, financial condition or cash flow based on the current information.
/NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|||||
Endari® |
|
$ |
i 4,933 |
|
|
$ |
i 4,763 |
|
|
$ |
i 21,925 |
|
|
$ |
i 12,072 |
|
Other |
|
|
i 85 |
|
|
|
i 176 |
|
|
$ |
i 605 |
|
|
|
i 388 |
|
Revenues, net |
|
$ |
i 5,018 |
|
|
$ |
i 4,939 |
|
|
$ |
i 22,530 |
|
|
$ |
i 12,460 |
|
The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 2023 and September 30, 2022 (in thousands):
|
|
Trade Discounts, Allowances and Chargebacks |
|
|
Government Rebates and Other Incentives |
|
|
Returns |
|
|
Total |
|
||||
Balance as of December 31, 2022 |
|
$ |
i 1,358 |
|
|
$ |
i 3,718 |
|
|
$ |
i 415 |
|
|
$ |
i 5,491 |
|
Provision related to sales in the current year |
|
|
i 1,677 |
|
|
|
i 3,228 |
|
|
|
i 387 |
|
|
|
i 5,293 |
|
Adjustments related to prior period sales |
|
|
( i 213 |
) |
|
|
i 136 |
|
|
|
i 25 |
|
|
|
( i 52 |
) |
Credits and payments made |
|
|
( i 1,853 |
) |
|
|
( i 2,300 |
) |
|
|
( i 442 |
) |
|
|
( i 4,595 |
) |
Balance as of September 30, 2023 |
|
$ |
i 969 |
|
|
$ |
i 4,782 |
|
|
$ |
i 385 |
|
|
$ |
i 6,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance as of December 31, 2021 |
|
$ |
i 1,481 |
|
|
$ |
i 3,133 |
|
|
$ |
i 539 |
|
|
$ |
i 5,153 |
|
Provision related to sales in the current year |
|
|
i 1,859 |
|
|
|
i 1,828 |
|
|
|
i 210 |
|
|
$ |
i 3,897 |
|
Adjustments related to prior period sales |
|
|
( i 56 |
) |
|
|
i 18 |
|
|
|
i 569 |
|
|
$ |
i 531 |
|
Credits and payments made |
|
|
( i 2,379 |
) |
|
|
( i 1,656 |
) |
|
|
( i 977 |
) |
|
$ |
( i 5,012 |
) |
Balance as of September 30, 2022 |
|
$ |
i 905 |
|
|
$ |
i 3,323 |
|
|
$ |
i 341 |
|
|
$ |
i 4,569 |
|
7
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our net revenues in the periods shown:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|||||
Customer A |
|
|
i 32 |
% |
|
|
i 8 |
% |
|
|
i 20 |
% |
|
|
i 23 |
% |
Customer B |
|
|
i 21 |
% |
|
|
i 35 |
% |
|
|
i 16 |
% |
|
|
i 27 |
% |
Customer C |
|
|
i 12 |
% |
|
|
i 13 |
% |
|
|
i 9 |
% |
|
|
i 12 |
% |
Customer D |
|
|
i 21 |
% |
|
|
i 15 |
% |
|
|
i 20 |
% |
|
|
i 11 |
% |
Customer E |
|
|
i 5 |
% |
|
|
i 0 |
% |
|
|
i 14 |
% |
|
|
i 4 |
% |
On June 15, 2017, the Company entered into a distributor agreement with Telcon RF Pharmaceutical, Inc., or Telcon, pursuant to which it granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $ i 10 million upfront fee and agreement to purchase from the Company specified minimum quantities of the PGLG. Telcon had the right to terminate the distributor agreement in certain circumstances for failure to obtain such product registrations, in which event the Company is obliged to repay Telcon the $ i 10 million upfront fee. In January 2023, Telcon terminated the distributor agreement, and the upfront fee of $ i 10 million is included as unearned revenue in other current liabilities as of September 30, 2023 and December 31, 2022, respectively. See Notes 6 and 11 and for additional details of the Company's agreement with Telcon.
/NOTE 4 — SELECTED FINANCIAL STATEMENT — ASSETS
Inventories consisted of the following (in thousands):
|
|
|
|
||||
Raw materials and components |
$ |
i 1,362 |
|
|
$ |
i 1,393 |
|
Work-in-process |
|
i 228 |
|
|
|
i 513 |
|
Finished goods |
|
i 5,100 |
|
|
|
i 5,428 |
|
Inventory reserve |
|
( i 5,040 |
) |
|
|
( i 4,955 |
) |
Total inventories, net |
$ |
i 1,650 |
|
|
$ |
i 2,379 |
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
||||
Prepaid insurance |
$ |
i 132 |
|
|
$ |
i 598 |
|
Prepaid expenses |
|
i 736 |
|
|
|
i 467 |
|
Other current assets |
|
i 647 |
|
|
|
i 449 |
|
Total prepaid expenses and other current assets |
$ |
i 1,515 |
|
|
$ |
i 1,514 |
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
||||
Equipment |
$ |
i 377 |
|
|
$ |
i 367 |
|
Leasehold improvements |
|
i 39 |
|
|
|
i 39 |
|
Furniture and fixtures |
|
i 99 |
|
|
|
i 99 |
|
Total property and equipment |
|
i 515 |
|
|
|
i 505 |
|
Less: accumulated depreciation |
|
( i 455 |
) |
|
|
( i 430 |
) |
Total property and equipment, net |
$ |
i 60 |
|
|
$ |
i 75 |
|
During the three months ended September 30, 2023 and 2022, depreciation expense was approximately $ i 7,000 and $ i 9,000, respectively. During the nine months ended September 30, 2023 and 2022, depreciation expense was approximately $ i 26,000 and $ i 30,000, respectively.
/8
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 $ i 26.1 million which matures on i October 16, 2030 and bears interest at the rate of i 2.1% per year, payable quarterly. Beginning October 16, 2021, the Company became entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond. The convertible bond is convertible at the holder’s option at any time and from time to time into common shares of Telcon at an initial conversion price of KRW i 9,232, or approximately $ i 8.00 per share. The initial conversion price is subject to downward adjustment monthly based on the volume-weighted average market price of Telcon shares as reported on Korean Securities Dealers Automated Quotations Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares and to customary antidilution adjustments upon a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The conversion price as of September 30, 2023 is set forth in the “Investment in convertible bond” table below. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the early redemption right described above or the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with Telcon described in Notes 6 and 11.
Concurrent with the purchase of the convertible bond, the Company entered into an agreement dated i September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to i 50% in principal amount of the convertible bond at any time and from time to time commencing October 16, 2021 and prior to maturity.
The 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 binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.
The revised API agreement with Telcon provides for target annual revenue of more than $ i 5 million and annual “profit” (i.e., sales margin) to Telcon of $ i 2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure the Company’s obligations under the API Supply Agreement and the revised API Agreement. In February 2022, the Company agreed to the exchange of KRW i 3.5 billion, or approximately $ i 2.9 million, principal amount of and accrued and unpaid interest on the Telcon convertible bond and KRW i 400 million, or approximately $ i 310,000, in cash proceeds of the convertible bond to satisfy the target shortfall for the years ended 2021 and 2020. As a result, the Company realized a net loss on investment in convertible bond of $ i 126,000, which previously was classified as unrealized loss on debt securities available-for-sale in the other comprehensive loss, and other income of $ i 41,000.
In April 2023, Telcon offset KRW i 2.9 billion, or approximately $ i 2.2 million, against the principal amount of the Telcon convertible bond and release of KRW i 307 million, or approximately $ i 236,000, in cash proceeds to Telcon in satisfaction the target shortfall for the year ended 2022. The offset is reflected as a sale of the convertible bond in the “Investment in convertible bond” table below. As a result, the Company realized a net loss on investment in convertible bond of $ i 106,000, which previously was classified as unrealized loss on debt securities available-for-sale in the other comprehensive loss.
The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of September 30, 2023 and December 31, 2022 (in thousands):
Investment in convertible bond |
|
|
|
|
||||
Balance, beginning of period |
|
$ |
i 19,971 |
|
|
$ |
i 26,100 |
|
Sale of convertible bond |
|
|
( i 2,232 |
) |
|
|
( i 2,919 |
) |
Net gain (loss) on investment on convertible bond |
|
|
i 106 |
|
|
|
( i 126 |
) |
Change in fair value included in the statement of other comprehensive income |
|
|
( i 249 |
) |
|
|
( i 3,084 |
) |
Balance, end of period |
|
$ |
i 17,596 |
|
|
$ |
i 19,971 |
|
9
/
The fair value as of September 30, 2023 and December 31, 2022 was based upon following assumptions:
|
|
|
|
|
||||
Principal outstanding (South Korean won) |
|
KRW i 23.6 billion |
|
|
KRW i 26.5 billion |
|
||
Stock price |
|
KRW i 790 |
|
|
KRW i 1,015 |
|
||
Expected life (in years) |
|
|
i 7.04 |
|
|
|
i 7.79 |
|
Selected yield |
|
|
i 13.25 |
% |
|
|
i 13.50 |
% |
Expected volatility (Telcon common stock) |
|
|
i 75.50 |
% |
|
|
i 78.50 |
% |
Risk-free interest rate (South Korea government bond) |
|
|
i 3.96 |
% |
|
|
i 3.74 |
% |
Expected dividend yield |
|
|
— |
|
|
|
— |
|
Conversion price |
|
KRW i 818(US$ i 0.60) |
|
|
KRW i 1,068(US$ i 0.85) |
|
||
Equity method investment – In 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate a former amino acids manufacturing facility in Ube, Japan. In connection with the formation, the Company invested approximately $ i 32,000 in exchange for i 40% of EJ Holdings’ voting shares. JIP owns i 60% of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $ i 13.6 million. The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. The loan matures on i September 30, 2028 and bears interest at the rate of i 1%, payable annually. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids, that the operation of the facility would be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility would be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the nine months ended September 30, 2023, the Company made $ i 2.6 million of loans to EJ Holdings. As of September 30, 2023 and December 31, 2022, the loans receivable from EJ Holdings with foreign currency revaluation were approximately $ i 24.4 million and $ i 25.0 million, respectively, as reflected in equity method investment on the condensed consolidated balance sheets. The Company has suspended indefinitely further loan financing to EJ Holdings to focus on supporting the commercial expansion of Endari® in the U.S. and the MENA region.
EJ Holdings is engaged in seeking to refurbish and phase in the Ube facility to eventually obtain regulatory clearance for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no substantial revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations to date and will be dependent on third-party loans or other financing. There is no assurance that needed funding will be available from other sources. EJ Holdings has no commitments or understandings regarding any additional funding. If EJ Holdings fails to obtain needed funding, it may need to suspend activities at the Ube plant. Under the asset purchase agreement by which EJ Holdings purchased the Ube plant, the seller has the right to repurchase the plant at the purchase price, plus certain taxes, paid by EJ Holdings if the plant does not become operational within a reasonable period of time not to exceed five years from the purchase of the plant, or December 25, 2024. There is no assurance, therefore, the Company will recoup all or any of its investment.
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon its dependence on loan financing provided by the Company to acquire the Ube facility and to carry on EJ Holdings’ activities to date, and that the EJ Holdings’ activities to date have been principally for the Company’s benefit. JIP, however, owns i 60% of EJ Holdings and is entitled to designate a majority of the directors of EJ Holdings as well as its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings. Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.
The Company’s share of the losses reported by EJ Holdings are classified as net losses on equity method investment. The Company's investment in EJ Holdings is evaluated for impairment, an impairment charge would be recorded if facts and circumstances indicate that the carrying value may not be recoverable.
The following table sets forth certain unaudited financial information of EJ Holdings for the three and nine months ended September 30, 2023 and 2022 (in thousands):
|
Three Month Ended September 30, |
|
|
Nine Month Ended September 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Revenue, net |
$ |
i 43 |
|
|
$ |
i 46 |
|
|
$ |
i 143 |
|
|
$ |
i 148 |
|
Net loss |
$ |
( i 952 |
) |
|
$ |
( i 1,077 |
) |
|
$ |
( i 3,367 |
) |
|
$ |
( i 3,725 |
) |
Net loss attributable to the Company (40%) |
$ |
( i 381 |
) |
|
$ |
( i 431 |
) |
|
$ |
( i 1,347 |
) |
|
$ |
( i 1,490 |
) |
10
NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES
Accounts payable and accrued expenses consisted of the following at September 30, 2023 and December 31, 2022 (in thousands):
|
|
|
|
|
||||
Accounts payable: |
|
|
|
|
|
|
||
Clinical and regulatory expenses |
|
$ |
i 680 |
|
|
$ |
i 361 |
|
Professional fees |
|
|
i 723 |
|
|
|
i 626 |
|
Selling expenses |
|
|
i 1,542 |
|
|
|
i 1,363 |
|
Manufacturing costs |
|
|
i 770 |
|
|
|
i 650 |
|
Non-employee director compensation |
|
|
i 693 |
|
|
|
i 484 |
|
Other vendors |
|
|
i 397 |
|
|
|
i 301 |
|
Total accounts payable |
|
|
i 4,805 |
|
|
|
i 3,785 |
|
Accrued interest payable, related parties |
|
|
i 590 |
|
|
|
i 144 |
|
Accrued interest payable |
|
|
i 2,726 |
|
|
|
i 2,381 |
|
Accrued expenses: |
|
|
|
|
|
|
||
Payroll expenses |
|
|
i 1,310 |
|
|
|
i 1,263 |
|
Government rebates and other rebates |
|
|
i 5,131 |
|
|
|
i 5,536 |
|
Due to customers |
|
|
i 844 |
|
|
|
— |
|
Other accrued expenses |
|
|
i 879 |
|
|
|
i 440 |
|
Total accrued expenses |
|
|
i 8,164 |
|
|
|
i 7,239 |
|
Total accounts payable and accrued expenses |
|
$ |
i 16,285 |
|
|
|
i 13,549 |
|
Other current liabilities consisted of the following at September 30, 2023 and December 31, 2022 (in thousands):
|
|
|
|
||||
Trade discount |
$ |
i 3,300 |
|
|
$ |
i 1,200 |
|
Unearned revenue (a) |
|
i 10,000 |
|
|
|
i 10,000 |
|
Other current liabilities |
|
i 1,100 |
|
|
|
i 1,717 |
|
Total other current liabilities |
$ |
i 14,400 |
|
|
$ |
i 12,917 |
|
(a) Represents the fee payable to Telcon pursuant to the distributor agreement. See Note 3 for additional details.
/
Other long-term liabilities consisted of the following at September 30, 2023 and December 31, 2022 (in thousands):
|
|
|
|
||||
Trade discount |
$ |
i 17,205 |
|
|
$ |
i 21,682 |
|
Other long-term liabilities |
|
i 35 |
|
|
|
i 32 |
|
Total other long-term liabilities |
$ |
i 17,240 |
|
|
$ |
i 21,714 |
|
On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon advanced to the Company approximately $ i 31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s estimated annual target for bulk containers of PGLG. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain items of the API Supply Agreement (the “revised API Agreement”). The Company purchased $ i 674,000 and $ i 20,000 of PGLG from Telcon in nine months ended September 30, 2023 and September 30, 2022, respectively, of which $ i 681,000 and $ i 644,000 were reflected in accounts payable as of September 30, 2023 and December 31, 2022, respectively. The revised API Agreement provided for an annual API purchase target of $ i 5 million and a target “profit” (i.e., gross margin) to Telcon of $ i 2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure the Company’s obligations under the API Supply Agreement and the revised API Agreement. See Note 5 for information regarding the settlement in the nine months ended September 30, 2023 and 2022 of the target shortfall.
/
11
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at September 30, 2023 and December 31, 2022 (in thousands except for number of underlying shares):
Year |
|
Interest Rate |
|
Term of Notes |
|
Conversion |
|
|
Principal |
|
|
Unamortized Discount September 30, 2023 |
|
|
Carrying |
|
|
Underlying Shares September 30, 2023 |
|
|||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2013 |
|
i 10% |
|
i Due on demand |
|
|
— |
|
|
$ |
i 669 |
|
|
$ |
— |
|
|
$ |
i 669 |
|
|
|
— |
|
2022 |
|
i 10%- i 12% |
|
i Due on demand |
|
|
— |
|
|
|
i 1,268 |
|
|
|
— |
|
|
|
i 1,268 |
|
|
|
— |
|
2023 |
|
i 11%- i 60% |
|
i Due on demand - i 56 weeks / |
|
|
|
|
|
i 6,835 |
|
|
|
i 128 |
|
|
|
i 6,707 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
$ |
i 8,772 |
|
|
$ |
i 128 |
|
|
$ |
i 8,644 |
|
|
|
— |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 8,615 |
|
|
$ |
i 127 |
|
|
$ |
i 8,488 |
|
|
|
— |
|
|
|
|
|
|
Non-current |
|
|
|
|
$ |
i 157 |
|
|
$ |
i 1 |
|
|
$ |
i 156 |
|
|
|
— |
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2020 |
|
i 12% |
|
i Due on demand |
|
|
— |
|
|
|
i 100 |
|
|
|
— |
|
|
|
i 100 |
|
|
|
— |
|
2021 |
|
i 12% |
|
i Due on demand |
|
|
— |
|
|
|
i 700 |
|
|
|
— |
|
|
|
i 700 |
|
|
|
— |
|
2022 |
|
i 6%- i 12% |
|
i Due on demand - i 5 years / |
|
|
— |
|
|
|
i 4,916 |
|
|
|
i 151 |
|
|
|
i 4,795 |
|
(c) |
|
— |
|
2023 |
|
i 10% |
|
i Due on demand |
|
|
|
|
|
i 227 |
|
|
|
— |
|
|
|
i 227 |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
$ |
i 5,943 |
|
|
$ |
i 151 |
|
|
$ |
i 5,822 |
|
|
|
— |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 2,422 |
|
|
$ |
— |
|
|
$ |
i 2,422 |
|
|
|
— |
|
|
|
|
|
|
Non-current |
|
|
|
|
$ |
i 3,521 |
|
|
$ |
i 151 |
|
|
$ |
i 3,400 |
|
|
|
— |
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
2021 |
|
i 2% |
|
i i 3 years / |
|
$ |
i 0.17 |
|
(b) |
|
i 12,640 |
|
|
|
i 971 |
|
|
|
i 11,669 |
|
|
|
i 84,737,511 |
|
2023 |
|
i 13% |
|
i 6 month |
|
$ |
i 10.00 |
|
(a) |
|
i 3,150 |
|
|
|
— |
|
|
|
i 3,150 |
|
|
|
i 327,004 |
|
2023 |
|
i 10% |
|
i 1 year |
|
$ |
i 0.29 |
|
|
|
i 1,000 |
|
|
|
— |
|
|
|
i 1,000 |
|
|
|
i 3,472,838 |
|
|
|
|
|
|
|
|
|
|
$ |
i 16,790 |
|
|
$ |
i 971 |
|
|
$ |
i 15,819 |
|
|
|
i 88,537,353 |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 16,790 |
|
|
$ |
i 971 |
|
|
$ |
i 15,819 |
|
|
|
i 88,537,353 |
|
|
Convertible notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
2023 |
|
i 10% |
|
i i 1 - i 2 years / |
|
$ |
i 0.50 |
|
|
|
i 1,000 |
|
|
|
i 101 |
|
|
|
i 899 |
|
|
|
i 2,140,273 |
|
|
|
|
|
|
|
|
|
|
$ |
i 1,000 |
|
|
$ |
i 101 |
|
|
$ |
i 899 |
|
|
|
i 2,140,273 |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 1,000 |
|
|
$ |
i 101 |
|
|
$ |
i 899 |
|
|
|
i 2,140,273 |
|
|
|
|
|
|
Total |
|
|
|
|
$ |
i 32,505 |
|
|
$ |
i 1,351 |
|
|
$ |
i 31,184 |
|
|
|
i 90,677,626 |
|
|
Year |
|
Interest Rate |
|
Term of Notes |
|
Conversion |
|
|
Principal |
|
|
Unamortized |
|
|
Carrying |
|
|
Underlying Shares |
|
|||||
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2013 |
|
i 10% |
|
i Due on demand |
|
|
— |
|
|
$ |
i 763 |
|
|
$ |
— |
|
|
$ |
i 763 |
|
|
|
— |
|
2021 |
|
i 11% |
|
i Due on demand - i 2 years / |
|
|
— |
|
|
|
i 2,843 |
|
|
|
— |
|
|
|
i 2,843 |
|
|
|
— |
|
2022 |
|
i 10% - i 28% |
|
i Due on demand - i 15 months / |
|
|
— |
|
|
|
i 3,696 |
|
|
|
i 108 |
|
|
$ |
i 3,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
i 7,302 |
|
|
$ |
i 108 |
|
|
$ |
i 7,194 |
|
|
|
— |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 6,919 |
|
|
$ |
i 105 |
|
|
$ |
i 6,814 |
|
|
|
— |
|
|
|
|
|
|
Non-current |
|
|
|
|
$ |
i 383 |
|
|
$ |
i 3 |
|
|
$ |
i 380 |
|
|
|
— |
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2020 |
|
i 12% |
|
i Due on demand |
|
|
— |
|
|
|
i 100 |
|
|
|
— |
|
|
|
i 100 |
|
|
|
— |
|
2021 |
|
i 12% |
|
i Due on demand |
|
|
— |
|
|
|
i 700 |
|
|
|
— |
|
|
|
i 700 |
|
|
|
— |
|
2022 |
|
i 6%- i 12% |
|
i Due on demand - i 5 years / |
|
|
— |
|
|
|
i 5,026 |
|
|
|
i 175 |
|
|
|
i 4,913 |
|
(c) |
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
i 5,826 |
|
|
$ |
i 175 |
|
|
$ |
i 5,713 |
|
|
|
— |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 2,305 |
|
|
$ |
— |
|
|
$ |
i 2,367 |
|
|
|
— |
|
|
|
|
|
|
Non-current |
|
|
|
|
$ |
i 3,521 |
|
|
$ |
i 175 |
|
|
$ |
i 3,346 |
|
|
|
— |
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2020 |
|
i 12% |
|
i 3 years |
|
$ |
i 10.00 |
|
(a) |
|
i 3,150 |
|
|
|
— |
|
|
|
i 3,150 |
|
|
|
i 326,655 |
|
2021 |
|
i 2% |
|
i 3 years |
|
$ |
i 0.37 |
|
(b) |
|
i 14,140 |
|
|
|
i 2,635 |
|
|
|
i 11,505 |
|
|
|
i 41,318,094 |
|
|
|
|
|
|
|
|
|
|
$ |
i 17,290 |
|
|
$ |
i 2,635 |
|
|
$ |
i 14,655 |
|
|
|
i 41,644,749 |
|
|
|
|
|
|
Current |
|
|
|
|
$ |
i 17,290 |
|
|
$ |
i 2,635 |
|
|
$ |
i 14,655 |
|
|
|
i 41,644,749 |
|
|
|
|
|
|
Grand Total |
|
|
|
|
$ |
i 30,418 |
|
|
$ |
i 2,918 |
|
|
$ |
i 27,562 |
|
|
|
i 41,644,749 |
|
|
12
The weighted-average stated annual interest rate of notes payable was i 11% and i 8% as of September 30, 2023 and December 31, 2022, respectively. The weighted-average effective annual interest rate of notes payable for the periods ended September 30, 2023 and December 31, 2022 was i 21% and i 20%, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.
As of September 30, 2023, future contractual principal payments due on notes payable were as follows (in thousands):
Year Ending |
|
|
|
|
2023 (three months) |
$ |
i 24,784 |
|
(a) |
2024 |
|
i 3,200 |
|
|
2025 |
|
i 2,200 |
|
|
2027 |
|
i 2,321 |
|
|
Total |
$ |
i 32,505 |
|
|
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 $ i 17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. The Company sold and issued approximately $ i 14.5 million of the convertible promissory notes.
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 $ i 1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s common stock on the effective date. The initial conversion price is subject to adjustment as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. There is no floor on the conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes. In January 2023, $ i 500,000 principal amount of the convertible promissory notes was converted into i 1,351,351 shares of the Company's common stock. In April 2023, $ i 1 million principal amount of the convertible promissory note was converted into i 2,702,702 shares of common stock. As of September 30, 2023, the conversion price was $ i 0.17 per share.
i The convertible promissory notes bear interest at the rate of i 2% per year, payable semi-annually on the last business day of August and January of each year and mature on the 3rd anniversary of the original issue date, unless earlier converted or prepaid. / The convertible promissory notes are redeemable in whole or in part at the election of the holders. The convertible promissory notes are general, unsecured obligations of the Company.
The conversion feature of the convertible promissory notes is separately accounted for at fair value as a derivative liability under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liability recorded in the condensed consolidated statements of operations. i The following table sets forth the fair value of the conversion feature liability as of September 30, 2023 and December 31, 2022 (in thousands):
Convertible promissory notes |
|
|
|
|
||||
Balance, beginning of period |
|
$ |
i 3,248 |
|
|
$ |
i 7,507 |
|
Change in fair value included in the statement of operations |
|
|
( i 2,088 |
) |
|
|
( i 4,259 |
) |
Balance, end of period |
|
$ |
i 1,160 |
|
|
$ |
i 3,248 |
|
The fair value and any change in fair value of conversion feature liability are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.
13
The fair value as of September 30, 2023 and December 31, 2022 was based upon following assumptions:
Convertible promissory notes |
|
|
|
|
||||
Stock price |
|
$ |
i 0.13 |
|
|
$ |
i 0.26 |
|
Conversion price |
|
$ |
i 0.17 |
|
|
$ |
i 0.37 |
|
Selected yield |
|
|
i 28.15 |
% |
|
|
i 27.50 |
% |
Expected volatility |
|
|
i 50 |
% |
|
|
i 50 |
% |
Time until maturity (in years) |
|
|
i 0.41 |
|
|
|
i 1.16 |
|
Dividend yield |
|
— |
|
|
— |
|
||
Risk-free rate |
|
|
i 5.54 |
% |
|
|
i 4.68 |
% |
In June 2022, the Company entered into a Business Loan and Security Agreement and Addenda with a third-party lender pursuant to which the lender loaned the Company $ i 1.8 million, which we refer to as the “loan amount,” of which we received net proceeds of approximately $ i 1.7 million after deduction of the lender’s origination fee but without deduction for other transaction expenses. In August 2022, the Company repaid in full the outstanding balance of the loan and recognized debt extinguishment loss of $ i 421,000.
In July 2022, Dr. Niihara, the former Chairman of the Board and Chief Executive Officer of the Company, and his wife loaned the Company $ i 370,000, representing the net proceeds of personal loans to them from unaffiliated parties in the principal amount of $ i 402,000. The loan is due and payable in a lump sum on maturity on i July 31, 2027 and bears interest at the rate of i 12% per annum, payable monthly in arrears. In connection with the loan, the Company granted Dr. Niihara a warrant as described in Note 8. The issuance cost of $ i 32,000 and the fair value of warrant of $ i 84,000 were treated as debt discount and are amortized over the five-year term of the warrant using effective interest method.
In August 2022, Dr. Niihara and his wife loaned the Company $ i 1,576,574, representing the net proceeds of personal loans to them from unaffiliated third parties in the principal amount of $ i 1,668,751, as well as $ i 250,000 from personal funds. The loans are evidenced by promissory notes, which are due and payable in a lump sum on maturity on i August 16, 2027 and bear interest at the rate of i 10% per annum, payable monthly in arrears. The foregoing loans were in addition to a $ i 50,000 loan to the Company from Hope International Hospice, Inc., an affiliate of Dr. and Mrs. Niihara, on August 15, 2022, which is evidenced by a demand promissory note of the Company bearing interest at the rate of i 10% per annum. The proceeds of the loans were used to prepay $ i 1,924,819 indebtedness of the Company under the Business Loan and Security Agreement referred to above.
In September 2022, Seah Lim, M.D., Ph.D., a Director of the Company, loaned the Company $ i 1.2 million, the proceeds of which were used to augment the Company’s working capital. The principal amount of the loan and interest thereon at the rate of i 6% per annum, together with i 240,000 shares of the Company’s common stock, is due and payable in lump sum on maturity in September 2025. In October 2022, Dr. Lim was appointed as a director of the Company. In accordance with ACS 835, the Company accounted the right to receive shares as the bifurcated embedded derivative and the embedded derivative is measured at fair value at the inception and subsequently measured at fair value with changes in fair value recognized in the condensed consolidated statements of operations. The fair value of the embedded derivatives was approximately $ i 30,000 and $ i 63,000 as of September 30, 2023 and December 31, 2022, respectively.
In July 2022, the Company's Emmaus Medical subsidiary, entered into a Standard Merchant Cash Advance Agreement with a third party pursuant to which it sold $ i 816,000 of accounts receivable (the “Receivables Purchased Amount”) in exchange for net proceeds of $ i 516,000. In September 2022, Emmaus Medical and the third party entered into a similar agreement pursuant to which Emmaus Medical sold $ i 694,960 of accounts receivable (the “Receivables Purchased Amount”) for net proceeds of $ i 500,000. In December 2022, both loans were repaid in full and recognized debt extinguishment loss of $ i 79,000 as the Company entered into another agreement discussed below.
In December 2022, the Company entered into an Agreement for the Purchase and Sales of Future Receipts with a third party pursuant to which it sells $ i 3,105,000 of future receipt (the "Purchased Amount") in exchange for net proceeds of $ i 2.3 million. Under the agreement, the Company agrees to pay $ i 103,500 semi-monthly until the Purchased Amount is delivered. The portion of proceeds were used to prepay indebtedness of the company under the Standard Merchant Cash Advance Agreements referred to above. In September 2023, the Company repaid in full the outstanding balance of the loan and recognized debt extinguishment loss of $ i 312,000 as the Company entered into another agreement discussed below.
In January 2023, Wei Peu Zen, a Director of the Company, loaned the Company the principal amount of $ i 1 million in exchange for a convertible promissory note of the Company. The convertible promissory note is due on demand after one year from the date of issuance until two years from such date, bears interest at the annual rate of i 10%, payable quarterly, and is convertible at the
14
option of the holder into shares of the Company's common stock at a conversion rate of $ i 0.50 a share, or i 2,000,000 shares, subject to adjustment in the event of a stock split, reverse stock split and similar event.
On July 19, 2023, the conversion feature of the convertible promissory note no longer meet the scope exception in ASC 815-10-15-70(a) and 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. i The following table sets forth the fair value of the conversion feature liability as of September 30, 2023 (in thousand):
$1 million convertible promissory note |
|
|
||
Balance, beginning of period |
|
$ |
— |
|
Fair value as of July 19, 2023 |
|
|
i 103 |
|
Change in fair value included in the statement of operations |
|
|
( i 12 |
) |
Balance, end of period |
|
$ |
i 91 |
|
The fair value and any change in fair value of conversion feature liability are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.
The fair value as of July 19, 2023 and September 30, 2023 was based upon following assumptions:
$1 million convertible promissory note |
|
|
|
|
||||
Stock price |
|
$ |
i 0.13 |
|
|
$ |
i 0.25 |
|
Conversion price |
|
$ |
i 0.50 |
|
|
$ |
i 0.50 |
|
Selected yield |
|
|
i 21.49 |
% |
|
|
i 20.61 |
% |
Expected volatility |
|
|
i 50 |
% |
|
|
i 50 |
% |
Time until maturity (in years) |
|
|
i 1.30 |
|
|
|
i 1.50 |
|
Dividend yield |
|
— |
|
|
— |
|
||
Risk-free rate |
|
|
i 5.33 |
% |
|
|
i 5.03 |
% |
In February 2023, the Company entered into a promissory note agreement with a third party pursuant to which the lender loaned the Company $ i 500,000. The loan was due on demand after two months and on maturity on i August 15, 2023 and bore interest at the rate of i 5% per month. The loan was paid in full in October 2023. Refer to Note 13 for further details.
In March 2023, Dr. Niihara and his wife and Hope International Hospice, Inc. loaned the Company $ i 127,000 and $ i 100,000, respectively. Both loans are due on demand and bear interest at the rate of i i 10 / % per annum.
In March 2023, Emmaus Medical entered into Revenue Purchase Agreement with a third party pursuant to which it sold and assigned $ i 700,212 of future receipts (the "Future Receipts") in exchange for net cash proceeds of $ i 491,933. Under the agreement, the Company agreed to pay the third party i 4% of weekly sales receipts until the Future Receipts have been collected. In July 2023, Emmaus Medical reentered into a new Revenue Purchase Agreement pursuant to which it sold and assigned $ i 828,000 of future receipt in exchange for repayment of $ i 204,000 indebtedness from the previous agreement and net cash proceeds of approximately $ i 300,000. Under the new agreement, the Company agreed to pay the third party approximately $ i 26,000 weekly until the Future Receipts have been collected. The Company recognized debt extinguishment loss of $ i 81,000.
In March 2023, Emmaus Medical entered into Revenue Based Financing Agreement with a third party pursuant to which it sold and assigned $ i 700,212 of future receipt in exchange for net proceeds of $ i 492,132. Under the agreement, the Company agreed to pay the third party approximately $ i 22,000 weekly until the Future Receipts have been collected. In July 2023, Emmaus Medical reentered into a new Revenue Based Financing Agreement pursuant to which it sold and assigned $ i 828,000 of future receipt in exchange for repayment of $ i 222,000 indebtedness under the previous agreement and net cash proceeds of approximately $ i 276,000. Under the new agreement, the Company agreed to pay the third party approximately $ i 26,000 weekly until the Future Receipts have been collected. The Company recognized debt extinguishment loss of $ i 87,000.
In May 2023, Emmaus Medical entered into Sale of Future Receipts Agreement with third party pursuant to which it sold and assigned $ i 528,200 of future receipts (the "Purchased Amount") in exchange for net cash proceeds of $ i 368,600. Under the agreement, the Company agreed to pay the third party approximately $ i 19,000 weekly until the Purchased Amount has been collected. In September 2023, the Company repaid in full the outstanding balance of the loan and recognized debt extinguishment loss of $ i 43,000 as the Company entered into another agreement discussed below.
In June 2023, Emmaus Medical entered into Standard Merchant Cash Advance Agreement with a third party pursuant to which it sold and assigned $ i 877,560 of future receipts (the "Purchased Amount") in exchange for net cash proceeds of $ i 600,000.
15
Under the agreement, the Company agreed to pay the third party approximately $ i 34,000 weekly until the Purchased Amount has been collected. In September 2023, the Company repaid in full the outstanding balance of the loan and recognized debt extinguishment loss of $ i 124,000 as the Company entered into another agreement discussed below.
In September 2023, the Company entered into a Business Loan and Security Agreement with a third-party lender pursuant to which the lender loaned the Company $ i 2.2 million, of which the Company received net proceeds of approximately $ i 2.1 million after deduction of the lender’s origination fee but without deduction for other transaction expenses. The portion of proceeds were used to prepay indebtedness of the Company under the Agreement for the Purchase and Sales of Future Receipts, the Sales of Future Receipt Agreement, Standard Merchant Cash Advance Agreement referred to above.
In September 2023, Smart Start Investments Limited, of which Wei Peu Zen is a director and i 9.96% shareholder, loaned the Company $ i 1 million in exchange for a convertible promissory note of the Company. The convertible promissory note is due on i September 5, 2024, bears interest at the annual rate of i 10% payable at maturity, and is convertible at the option of the holder into shares of the Company's common stock at a conversion rate of $ i 0.29 a share, subject to adjustment in the event of a stock split, reverse stock split or similar event.
Except as otherwise indicated above, the proceeds of the foregoing loans and other arrangements were used to augment the Company's working capital.
/NOTE 8 — STOCKHOLDERS’ DEFICIT
Warrants —In September 2022, in connection with the loans from Dr. Niihara and Mrs. Niihara, the Company granted Dr. Niihara a i five-year warrant to purchase up to i 500,000 shares of common stock of the Company at an exercise price of $ i 2.50 per share. Under ASC 480-10 and ASC 815, the warrant is classified as a liability. The fair value of the warrant liability was determined using Black-Scholes Merton model and the fair value of the warrant was $ i 25,000 and $ i 70,000 as of September 30, 2023 and December 31, 2022, respectively. For the three and nine months ended September 30, 2023, the change in fair value of warrant derivative liabilities of approximately $ i 41,000 and $ i 45,000 was recorded in the condensed consolidated statements of operations.
Warrant issued for services - On January 12, 2023, the Company granted Dr. Niihara a warrant to purchase up to i 7,500,000 shares of common stock of the Company at an exercise price of $ i 4.50 in lieu of cash bonuses or salary increases. The warrant is exercisable during the i five-year period from the grant date, subject to earlier termination upon the termination of Dr. Niihara's service to the Company. The fair value of the warrant was determined using the Black-Scholes Merton option pricing model. The fair value of the underlying shares was determined based on the market value of the Company's common stock. The expected volatility was adjusted using the historical volatility of the Company's common stock and comparable publicly traded securities. The Company also granted each of two consultants to the Company i five-year warrants to purchase up to i 250,000 shares of common stock at an exercise price of $ i 0.50 a share.
On January 27, 2023, the Company granted to a consulting company a i five-year warrant to purchase up to i 500,000 shares of common stock at an exercise price of $ i 0.47 a share. The warrants are subject to adjustment in the event of a stock split, reverse stock split and similar events. The fair value of the warrants was determined using the Black-Scholes Merton option pricing model. The fair value of the underlying shares was determined based upon the market value of the common stock. The expected volatility was adjusted using the historical volatility of the common stock and the market price of comparable public traded securities.
The estimated fair value of $ i 334,000 was recorded as professional services in general and administrative expenses and the estimated fair value of $ i 1.2 million of shared-based compensation was recognized in the condensed consolidated statement of operations for the nine months ended September 30, 2023. Under ASC 480-10 and ASC 815, the warrants are classified as a liability. For the three and nine months ended September 30, 2023, the Company recorded the change in fair value of approximately $ i 548,000 and i 989,000, respectively, in the condensed consolidated statements of operations.
The following table presents the assumptions used to value the warrants:
|
|
|
|
|
|
|
||||||
Stock price |
|
$ |
i 0.13 |
|
|
$ |
i 0.23 |
|
|
$ |
i 0.30 |
|
Exercise price |
|
$ i 0.47 - $ i 4.50 |
|
|
$ i 0.47 - $ i 4.50 |
|
|
$ i 0.47 - $ i 4.50 |
|
|||
Expected term |
|
i 3.86- i 4.33 years |
|
|
i 4.11- i 4.58 years |
|
|
i 4.36 - i 4.83 years |
|
|||
Risk-free rate |
|
i 4.67%- i 4.71% |
|
|
i 4.21%- i 4.58% |
|
|
i 3.62%- i 3.67% |
|
|||
Dividend yield |
|
— |
|
|
— |
|
|
— |
|
|||
Volatility |
|
i 127.75%- i 134.24% |
|
|
i 128.78%- i 134.9% |
|
|
i 122.09% - i 126.95% |
|
|||
16
/
A summary of outstanding warrants as of September 30, 2023 and December 31, 2022 is presented below:
|
|
|
|
|
||||||||||||
|
|
Number of |
|
|
Weighted‑ |
|
|
Number of |
|
|
Weighted‑ |
|
||||
Warrants outstanding, beginning of period |
|
|
i 6,610,520 |
|
|
$ |
i 2.22 |
|
|
|
i 8,236,017 |
|
|
$ |
i 5.78 |
|
Granted |
|
|
i 8,500,000 |
|
|
|
i 4.03 |
|
|
|
i 500,000 |
|
|
|
i 2.50 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled, forfeited or expired |
|
|
( i 714,929 |
) |
|
|
i 11.53 |
|
|
|
( i 2,125,497 |
) |
|
|
i 14.38 |
|
Warrants outstanding, end of period |
|
|
i 14,395,591 |
|
|
$ |
i 2.80 |
|
|
|
i 6,610,520 |
|
|
$ |
i 2.22 |
|
Warrants exercisable end of period |
|
|
i 14,395,591 |
|
|
$ |
i 2.80 |
|
|
|
i 6,610,520 |
|
|
$ |
i 2.22 |
|
As of September 30, 2023, the weighted-average remaining contractual life of outstanding warrants was i 3.2 years.
Stock options— The Company's former 2011 Stock Incentive Plan permitted grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to i 9,000,000 shares of common stock. Options granted under the 2011 Stock Incentive Plan generally expire i ten years after grant. Options granted to directors vest in quarterly installments and all other option grants vest over a minimum period of i three years, in each case, subject to continuous service with the Company. The 2011 Stock Incentive Plan expired in i May 2021 and no further awards may be made under the Plan. As of September 30, 2023 and December 31, 2022, stock options to purchase up to i 2,050,116 shares and i 4,412,940 shares, respectively, were outstanding under the 2011 Stock Incentive Plan.
The Company also formerly had an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company could grant incentive stock options and non-qualified stock option to selected employees including officers, non-employee consultants and non-employee directors. The Plan was terminated in September 2021. As of September 30, 2023 and December 31, 2022, stock options to purchase up to i 246,224 shares and i 247,847 shares, respectively, were outstanding under the Amended and Restated 2012 Omnibus Incentive Plan.
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 of Directors. The 2021 Stock Incentive Plan was approved by stockholders on November 23, 2021. No more than i 4,000,000 shares of common stock may be issued pursuant to awards under the 2021 Stock Incentive Plan. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustment as provided in the 2021 Stock Incentive Plan for stock splits, stock dividends, reverse stock splits, recapitalizations and other similar events. During the nine months ended September 30, 2023, the Company granted options to purchase i 850,000 shares, i 300,000 shares and i 100,000 shares of common stock to employees, non-employee directors and a consultant, respectively. All options are exercisable for i ten years from the date of grant and will vest and become exercisable with respect to the underlying shares over i three years for employees, i one year for non-employee directors and immediately for the consultant. As of September 30, 2023, stock options to purchase up to i 1,250,000 shares were outstanding under the 2021 Stock Incentive Plan, while there were i no awards outstanding as of December 31, 2022.
Management has valued stock options at their date of grant utilizing the Black-Scholes-Merton Option pricing model. The fair value of the underlying shares was determined by the market value of the Company's common stock. The expected volatility was adjusted using the historical volatility of the common stock and a comparable public traded securities. i The following table presents the assumptions used on the recent dates on which options were granted by the Company. The risk‑free interest rate is based on the implied yield available on U.S. Treasury issues with a term approximating the expected life of the options depending on the date of the grant and expected life of the respective options.
|
|
|
||
Stock price |
|
$ |
i 0.31 |
|
Exercise price |
|
$ |
i 4.50 |
|
Expected term |
|
i 5- i 6 years |
|
|
Risk-free rate |
|
i 3.51- i 3.53% |
|
|
Dividend yield |
|
— |
|
|
Volatility |
|
i 108.16- i 116.40% |
|
|
17
A summary of outstanding stock options as of September 30, 2023 and December 31, 2022 is presented below.
|
|
|
|
|
||||||||||||
|
|
Number of |
|
|
Weighted‑ |
|
|
Number of |
|
|
Weighted‑ |
|
||||
Options outstanding, beginning of period |
|
|
i 4,660,787 |
|
|
$ |
i 5.08 |
|
|
|
i 5,968,338 |
|
|
$ |
i 4.78 |
|
Granted |
|
|
i 1,250,000 |
|
|
$ |
i 4.50 |
|
|
|
— |
|
|
$ |
— |
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Cancelled, forfeited and expired |
|
|
( i 2,364,447 |
) |
|
$ |
i 3.46 |
|
|
|
( i 1,307,551 |
) |
|
$ |
i 3.73 |
|
Options outstanding, end of period |
|
|
i 3,546,340 |
|
|
$ |
i 5.95 |
|
|
|
i 4,660,787 |
|
|
$ |
i 5.08 |
|
Options exercisable, end of period |
|
|
i 2,696,340 |
|
|
$ |
i 6.41 |
|
|
|
i 4,645,286 |
|
|
$ |
i 5.10 |
|
Options available for future grant |
|
|
i 2,750,000 |
|
|
|
|
|
|
i 4,000,000 |
|
|
|
|
||
During the three months ended September 30, 2023 and September 30, 2022, the Company recognized approximately $ i 24,000 and $ i 3,000, respectively of share-based compensation expense. During the nine months ended September 30, 2023 and September 30, 2022, the Company recognized approximately $ i 1,239,000 and $ i 13,000, respectively, of share-based compensation expense. As of September 30, 2023, there was approximately $ i 118,000 of unrecognized share-based compensation expense related to unvested stock options which is expected to be recognized over the weighted-average remaining vesting period of i 2.1 years.
Amended and restated warrants – The Company evaluated its outstanding amended and restated warrants to purchase up to i 4,038,200 shares of common stock under ASC 815-40 and concluded that the warrants should be accounted for as equity.
In January 2023, the exercise price of outstanding amended and restated warrants was reduced to $ i 0.37 per share pursuant to the anti-dilution adjustment provisions of the warrants triggered by the conversion of an outstanding convertible promissory note into shares of common stock of the Company at a conversion price $ i 0.37 per share. The warrants were valued using the Black-Scholes Merton option pricing model and approximately $ i 41,000 in change in fair value was recorded as additional paid-in capital and reflected in accumulated deficit as of September 30, 2023. Such warrants to purchase up to i 1,656,900 shares of common stock expired in October 2023.
/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 nine months ended September 30, 2023, the Company recorded an income tax provision of $ i 38,000 and $ i 53,000, respectively. For the three and nine months ended September 30, 2022, the Company recorded an income tax benefit of $ i 35,000 and provision of $ i 44,000, respectively. The Company did i not record a provision for federal income tax due to its net operating loss carryforwards. The Company established a full valuation allowance against its federal and state deferred tax assets and there was i i no / unrecognized tax benefit as of September 30, 2023 or September 30, 2022.
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases i 21,293 square feet of office space for its headquarters in Torrance, California, at a base rental of $ i 85,920 per month, which lease will expire on i September 30, 2026. In addition, the Company leases i 2,427 square feet of office space in Dubai, United Arab Emirates, which lease will expire on i June 19, 2026.
The lease expense during the three months ended September 30, 2023 and 2022 was approximately $ i 291,000 and $ i 272,000, respectively, and during the nine months ended September 30, 2023 and 2022, was approximately $ i 878,000 and $ i 868,000, respectively.
18
Future minimum lease payments under the lease agreements were as follows as of September 30, 2023 (in thousands):
|
|
Amount |
|
|
2023 (three months) |
|
$ |
i 282 |
|
2024 |
|
|
i 1,138 |
|
2025 |
|
|
i 1,171 |
|
2026 |
|
|
i 856 |
|
Total lease payments |
|
|
i 3,447 |
|
Less: interest |
|
|
i 546 |
|
Present value of lease liabilities |
|
$ |
i 2,901 |
|
As of September 30, 2023, the Company had an operating lease right-of-use asset of $ i 2.5 million and lease liability of $ i 2.9 million reflected on the condensed consolidated balance sheet. The weighted average remaining term of the Company’s leases as of September 30, 2023 was i 3.0 years and the weighted-average discount rate was i 12.9%.
/NOTE 11 — COMMITMENTS AND CONTINGENCIES
API supply agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $ i 31.8 million in consideration of the right to supply i 25% of the Company’s requirements for bulk containers of PGLG for a i fifteen-year term. The amount was recorded as a deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply Agreement (the “revised API agreement”). The revised API agreement is effective for a term of i five years and will renew automatically for i 10 successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a cumulative total of $ i 47.0 million, over the term of the agreement. The revised API agreement provided for an annual API purchase target of $ i 5 million and a target “profit” (i.e., gross margin) to Telcon of $ i 2.5 million. To the extent these targets are not met, Telcon may be entitled to payment of the shortfall or to offset the shortfall against the Telcon convertible bond and proceeds there of that are pledged as a collateral to secure our obligations. In September 2018, the Company entered into an agreement with Ajinomoto Health and Nutrition North America, Inc. (“Ajinomoto”), the producer of the PGLG, and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the revised API agreement. The PGLG raw material purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount. Refer to Notes 5 and 6 for more information.
/19
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding at any time during the nine months ended September 30, 2023 (in thousands):
Class |
Lender |
|
Interest |
|
Date of |
|
Term of Loan |
|
Principal Amount Outstanding at September 30, 2023 |
|
|
Highest |
|
|
Amount of |
|
|
Amount of |
|
||||
Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Willis Lee(2) |
|
i 12% |
|
i 10/29/2020 |
|
i Due on Demand |
|
$ |
i 100 |
|
|
$ |
i 100 |
|
|
|
— |
|
|
|
— |
|
|
Soomi Niihara(1) |
|
i 12% |
|
i 12/7/2021 |
|
i Due on Demand |
|
|
i 700 |
|
|
|
i 700 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 2/9/2022 |
|
i Due on Demand |
|
|
i 350 |
|
|
|
i 350 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 2/15/2022 |
|
i Due on Demand |
|
|
i 210 |
|
|
|
i 210 |
|
|
|
— |
|
|
|
— |
|
|
Soomi Niihara(1) |
|
i 10% |
|
i 2/15/2022 |
|
i Due on Demand |
|
|
i 100 |
|
|
|
i 100 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 12% |
|
i 3/15/2022 |
|
i Due on Demand |
|
|
i 150 |
|
|
|
i 150 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 12% |
|
i 3/30/2022 |
|
i Due on Demand |
|
|
i 150 |
|
|
|
i 150 |
|
|
|
— |
|
|
|
— |
|
|
Wei Peu Zen(2) |
|
i 10% |
|
i 3/31/2022 |
|
i Due on Demand |
|
|
i 200 |
|
|
|
i 200 |
|
|
|
— |
|
|
|
— |
|
|
Willis Lee(2) |
|
i 10% |
|
i 4/14/2022 |
|
i Due on Demand |
|
|
i 45 |
|
|
|
i 45 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 5/25/2022 |
|
i Due on Demand |
|
|
i 40 |
|
|
|
i 40 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 12% |
|
i 7/27/2022 |
|
i 5 years |
|
|
i 402 |
|
|
|
i 402 |
|
|
|
— |
|
|
|
i 36 |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 8/15/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 50 |
|
|
|
i 50 |
|
|
|
i 2 |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/16/2022 |
|
i 5 years |
|
|
i 250 |
|
|
|
i 250 |
|
|
|
— |
|
|
|
i 19 |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/16/2022 |
|
i 5 years |
|
|
i 1,669 |
|
|
|
i 1,669 |
|
|
|
— |
|
|
|
i 125 |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 8/17/2022 |
|
i Due on Demand |
|
|
i 50 |
|
|
|
i 50 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/17/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 60 |
|
|
|
i 60 |
|
|
|
i 6 |
|
|
Seah Lim(2) |
|
i 6% |
|
i 9/16/2022 |
|
i 3 years |
|
|
i 1,200 |
|
|
|
i 1,200 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 10/20/2022 |
|
i Due on Demand |
|
|
i 100 |
|
|
|
i 100 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 3/17/2023 |
|
i Due on Demand |
|
|
i 100 |
|
|
|
i 100 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 3/21/2023 |
|
i Due on Demand |
|
|
i 127 |
|
|
|
i 127 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Subtotal |
|
|
i 5,943 |
|
|
|
i 6,053 |
|
|
|
i 110 |
|
|
|
i 188 |
|
Convertible notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Wei Peu Zen(2) |
|
i 10% |
|
i 1/18/2023 |
|
i 1 - 2 years |
|
|
i 1,000 |
|
|
|
i 1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Subtotal |
|
|
i 1,000 |
|
|
|
i 1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
i 6,943 |
|
|
$ |
i 7,053 |
|
|
$ |
i 110 |
|
|
$ |
i 188 |
|
20
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2022:
Class |
Lender |
|
Interest |
|
Date of |
|
Term of Loan |
|
Principal Amount Outstanding at December 31, 2022 |
|
|
Highest |
|
|
Amount of |
|
|
Amount of |
|
||||
Current, Promissory note payable to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Willis Lee(2) |
|
i 12% |
|
i 10/29/2020 |
|
i Due on Demand |
|
$ |
i 100 |
|
|
$ |
i 100 |
|
|
|
— |
|
|
|
— |
|
|
Soomi Niihara(1) |
|
i 12% |
|
i 12/7/2021 |
|
i Due on Demand |
|
|
i 700 |
|
|
|
i 700 |
|
|
|
— |
|
|
|
— |
|
|
Soomi Niihara(1) |
|
i 12% |
|
i 1/18/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 300 |
|
|
|
i 300 |
|
|
|
i 32 |
|
|
|
i 10% |
|
i 2/9/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 50 |
|
|
|
i 50 |
|
|
|
i 4 |
|
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 2/9/2022 |
|
i Due on Demand |
|
|
i 350 |
|
|
|
i 350 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 2/15/2022 |
|
i Due on Demand |
|
|
i 210 |
|
|
|
i 210 |
|
|
|
— |
|
|
|
— |
|
|
Soomi Niihara(1) |
|
i 10% |
|
i 2/15/2022 |
|
i Due on Demand |
|
|
i 100 |
|
|
|
i 100 |
|
|
|
— |
|
|
|
— |
|
|
|
i 10% |
|
i 2/16/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 26 |
|
|
|
i 26 |
|
|
|
i 2 |
|
|
|
Soomi Niihara(1) |
|
i 10% |
|
i 3/7/2022 |
|
i Due on Demand |
|
|
— |
|
|
|
i 200 |
|
|
|
i 200 |
|
|
|
i 15 |
|
|
Hope International Hospice, Inc.(1) |
|
i 12% |
|
i 3/15/2022 |
|
i Due on Demand |
|
|
i 150 |
|
|
|
i 150 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 12% |
|
i 3/30/2022 |
|
i Due on Demand |
|
|
i 150 |
|
|
|
i 150 |
|
|
|
— |
|
|
|
— |
|
|
Wei Peu Zen(2) |
|
i 10% |
|
i 3/31/2022 |
|
i Due on Demand |
|
|
i 200 |
|
|
|
i 200 |
|
|
|
— |
|
|
|
— |
|
|
Willis Lee(2) |
|
i 10% |
|
i 4/14/2022 |
|
i Due on Demand |
|
|
i 45 |
|
|
|
i 45 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 5/25/2022 |
|
i Due on Demand |
|
|
i 40 |
|
|
|
i 40 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 12% |
|
i 7/27/2022 |
|
i 5 years |
|
|
i 402 |
|
|
|
i 402 |
|
|
|
— |
|
|
|
i 20 |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 8/15/2022 |
|
i Due on Demand |
|
|
i 50 |
|
|
|
i 50 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/16/2022 |
|
i 5 years |
|
|
i 250 |
|
|
|
i 250 |
|
|
|
— |
|
|
|
i 8 |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/16/2022 |
|
i 5 years |
|
|
i 1,669 |
|
|
|
i 1,669 |
|
|
|
— |
|
|
|
i 56 |
|
|
Hope International Hospice, Inc.(1) |
|
i 10% |
|
i 8/17/2022 |
|
i Due on Demand |
|
|
i 50 |
|
|
|
i 50 |
|
|
|
— |
|
|
|
— |
|
|
Yutaka and Soomi Niihara(1) |
|
i 10% |
|
i 8/17/2022 |
|
i Due on Demand |
|
|
i 60 |
|
|
|
i 60 |
|
|
|
— |
|
|
|
— |
|
|
Seah Lim(2) |
|
i 6% |
|
i 9/16/2022 |
|
i 3 years |
|
|
i 1,200 |
|
|
|
i 1,200 |
|
|
|
— |
|
|
|
— |
|
|
Hope International Hospice, Inc. |
|
i 10% |
|
i 10/20/2022 |
|
i Due on Demand |
|
|
i 100 |
|
|
|
i 100 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Subtotal |
|
|
i 5,826 |
|
|
|
i 6,402 |
|
|
|
i 576 |
|
|
|
i 137 |
|
Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Yutaka Niihara(2) |
|
i 5.25% |
|
i 12/27/2019 |
|
i Due on Demand |
|
|
— |
|
|
|
i 400 |
|
|
|
i 400 |
|
|
|
i 110 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
— |
|
|
|
i 400 |
|
|
|
i 400 |
|
|
|
i 110 |
|
|
|
|
|
|
|
|
Total |
|
$ |
i 5,826 |
|
|
$ |
i 6,802 |
|
|
$ |
i 976 |
|
|
$ |
i 247 |
|
See Notes 3, 5, 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds i 4,147,491 shares of common stock of the Company, or approximately i 7.7% of the common stock outstanding as of September 30, 2023. As of September 30, 2023, the Company held a Telcon convertible bond in the principal amount of approximately $ i 17.4 million as discussed in Note 5.
/21
NOTE 13 — SUBSEQUENT EVENTS
Subsequent to September 30, 2023, the Company entered into Addendum to Revenue Purchase Agreement with a third party pursuant to which it sold $ i 1,377,500 of future accounts receivable in exchange for net cash proceeds of $ i 950,000. Under the Addendum, payments of $ i 81,029 are due weekly until the initial loan converts to a term loan in the principal amount of $ i 1.2 million. The portion of net proceeds from the transaction were used to repay a $ i 500,000 promissory note issued in February 2023 and for working capital and general corporate purposes.
/22
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, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023 (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. In November and December of 2022, we received marketing authorizations for Endari® in Qatar and Kuwait, respectively. In July 2023, we received marketing approval for Endari® in Oman. Applications for marketing authorization in other Gulf Cooperation Council, or GCC, countries are pending. While the applications are pending, the FDA approval of Endari® can be referenced to allow access to Endari® on a named-patient basis.
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 a telehealth solution to afford SCD patients’ direct access to Endari® remotely through a web portal managed by our strategic partners, including Asembia LLC and UpScript IP Holdings, LLC.
As of September 30, 2023, our accumulated deficit was $257.3 million and we had cash and cash equivalents of $1.5 million. We expect net revenues to continue to increase as we expand our commercialization of Endari® in the U.S. and the Middle East North Africa, or MENA, region. Until we can generate sufficient net revenues from Endari® sales, our future cash requirements are expected to be financed through loans from related parties, third-party loans, public or private equity or debt financings or possible corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
23
Financial Overview
Revenues, net
We realize net revenues primarily from sales of Endari® to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.
Under the Accounting Standards Codification (“ASC”) 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligations.
Management estimates variable consideration using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Sales Discounts: We afford our customers prompt payment discounts and additional discounts to encourage bulk orders to generate needed working capital. Sales at bulk discounts offered by us increased in late 2021 and adversely affected sales in the nine months ended September 30, 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 fees in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping, and distribution of Endari®.
24
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 preclinical and clinical trials of Endari® and our product candidates, payroll-related expenses, study site payments, consultant fees and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and applicable regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approvals of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. In September 2023, we suspended most preclinical activities related to our product candidates to focus on commercial expansion of Endari® in the U.S. and the MENA region. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of our Business and Compliance with Law.”
General and Administrative Expense
General and administrative expense consists principally of salaries and related employee costs, including share-based compensation for our directors, executive officers, and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel involved in the promotion, sales, and marketing of Endari®. Other selling expenses include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional sales personnel to support the commercialization of Endari® in the U.S. and abroad.
COVID-19
We do not believe that lockdowns, travel-related restrictions and other governmental responses to the COVID 19 endemic impacted our results of operations for the nine month ended September 30, 2022 or 2023. Ongoing COVID-19 infections, however, or future official responses to public health emergencies could cause a temporary or prolonged decline in our revenues and have a material adverse effect on our results of operations and financial condition. COVID-19 or governmental responses also may adversely affect the timing and conduct of clinical studies or the ability of regulatory bodies to consider or grant approvals with respect to Endari® may further divert the attention and efforts of the medical community to coping with COVID-19 or variants and disrupt the marketplace in which we operate. Any outbreak of COVID-19 among our executives or key employees or their families and loved ones could disrupt our management and operations and adversely affect the effectiveness of our management, Endari® sales, and results of operations and financial condition. The foregoing factors could also have an adverse effect on economic and business conditions and the broad stock market, in general, or the market price of our common stock, in particular.
Inflation
Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.
25
Environmental Expenses
The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.
Inventories
Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or net realizable value. Substantially all raw materials purchased during each of the nine months ended September 30, 2023 and 2022 were supplied by one supplier.
Results of Operations:
Three months ended September 30, 2023 and 2022
Net Revenues. Net revenues increased by $0.1 million, or 2%, to $5.0 million for the three months ended September 30, 2023, compared to $4.9 million for the three months ended September 30, 2022.
Cost of Goods Sold. Cost of goods sold decreased by $0.3 million, or 60%, to $0.2 million for the three months ended September 30, 2023, compared to $0.5 million for the three months ended September 30, 2022. This decrease was primarily due to reduction in the reserve relating to Endari® inventory with a shelf-life of less than two years for the three months ended September 30, 2023 compared to the same period in 2022.
Research and Development Expenses. Research and development expenses remained consistent at $0.4 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Selling Expenses. Selling expenses decreased by $0.2 million, or 10%, to $1.5 million for the three months ended September 30, 2023, compared to $1.7 million for the three months ended September 30, 2022. The decrease was primarily due to a decrease in payroll expenses related to a reduction in sales personnel.
General and Administrative Expenses. General and administrative expenses decreased by $0.1 million, or 3%, to $2.9 million for the three months ended September 30, 2023, compared to $3.0 million for the three months ended September 30, 2022. The decrease was primarily due to a decrease in payroll expenses.
Other Income (Expense). Other income decreased by $0.2 million, or 65%, to $0.1 million for the three months ended September 30, 2023, compared to $0.2 million of other expense for the three months ended September 30, 2022. The decrease was primarily due to a decrease of $0.8 million in change in fair value of conversion feature derivative, partially offset by an increase of $0.4 million in interest expense.
Net Income. Net income increased by $0.5 million, or 117%, to $0.1 million in net income for the three months ended September 30, 2023, compared to $0.4 million in net loss for the three months ended September 30, 2022. The increase was primarily a result of an increase of $0.1 million in net revenues and a decrease of $0.3 million in operating expenses.
Nine months ended September 30, 2023 and 2022
Net Revenues. Net revenues increased by $10.1 million, or 81%, to $22.5 million for the nine months ended September 30, 2023, compared to $12.5 million for the nine months ended September 30, 2022. The increase was primarily attributable to a $5.6 million increase in net revenues in the MENA region and a recovery in U.S. sales in 2023 compared to the same period in 2022.
Cost of Goods Sold. Cost of goods sold decreased by $0.8 million, or 41%, to $1.2 million for the nine months ended September 30, 2023, compared to $1.9 million for the nine months ended September 30, 2022. This decrease was primarily due to a reduction of the reserve relating to Endari® inventory with a shelf-life of less than two years for the nine months ended September 30, 2023 compared to the same period in 2022.
Research and Development Expenses. Research and development expenses decreased by 0.2 million, or 14%, to $1.0 million for the nine months ended September 30, 2023, compared to $1.2 million for the nine months ended September 30, 2022. The decrease was primarily due to completion of the sub-study under our Pilot/Phase 1 study of PGLG in diverticulosis in 2022. In September 2023, we suspended most preclinical activities related to our product candidates, and we expect research and development expenses to decline in future periods until we undertake new clinical studies or resume preclinical activities.
26
Selling Expenses. Selling expenses increased by $1.3 million, or 25%, to $6.3 million for the nine months ended September 30, 2023, compared to $5.1 million for the nine months ended September 30, 2022. The increase was primarily due to increases in payroll expenses and consulting fees.
General and Administrative Expenses. General and administrative expenses increased by $2.4 million, or 26%, to $11.8 million for the nine months ended September 30, 2023, compared to $9.4 million for the nine months ended September 30, 2022. The increase was due to increases of $1.2 million in share-based compensation, $0.7 million in transaction costs, and $0.5 million in professional fees.
Other Income (Expense). Other expense increased by $1.5 million, or 26%, to $7.1 million for the nine months ended September 30, 2023, compared to $5.6 million of other income for the nine months ended September 30, 2022. The increase was primarily due to an increase of $1.7 million in interest expenses and a decrease of $1.1 million in change in fair value of conversion feature derivative partially offset by a decrease $1.9 million in foreign exchange loss.
Net Loss. Net loss decreased by $5.9 million, or 54%, to $4.9 million for the nine months ended September 30, 2023, compared to $10.8 million for the nine months ended September 30, 2022. The decrease was primarily a result of an increase of $10.1 million in net revenues, partially offset by increases of $3.5 million in operating expenses and $1.5 million in other expenses.
Liquidity and Capital Resources
Based on our losses to date, working capital deficit, anticipated future net revenues and operating expenses, debt repayment obligations and cash and cash equivalents balance of $1.5 million as of September 30, 2023, we do not have sufficient funds to satisfy our liabilities and obligations and operate our business without raising additional capital. We realized a net loss of $4.9 million for the nine months ended September 30, 2023, 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. In the three months ended September 30, 2023, we suspended indefinitely any further loan financing to EJ Holdings and most preclinical activities related to our product candidates and effected reductions in employee and consulting expenses, which helped to improve our cash from operations and liquidity. While we anticipate increased net revenues as we continue to expand our commercialization of Endari® in the U.S. and in the MENA region, there is no assurance that we will be able to increase our Endari® sales or attain sustainable profitability or that we will have sufficient capital resources to fund our operations until we are able to generate sufficient cash flow from operations.
Our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, is party a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% to 75% of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable.
Liquidity represents our ability to pay our liabilities when they become due, fund our business operations 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, net revenues, proceeds from our accounts receivable factoring arrangement with Prestige Capital and similar sales of future receipts to other parties, proceeds from related-party loans and other financing activities. Our short-term and long-term cash requirements consist primarily of working capital requirements, general corporate needs, our contractual obligations to purchase API from Telcon, debt service under our convertible notes payable and other notes payable.
As of September 30, 2023, we had outstanding $17.8 million principal amount of convertible promissory notes and $14.7 million principal amount of other notes payable. Our minimum lease payment obligations were $2.9 million as of September 30, 2023, of which $0.8 million was payable within 12 months.
Our API supply agreement with Telcon provides for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, Telcon may be entitled to payment of the shortfall or to offset the shortfall against the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations. In April 2023 and February 2022, Telcon retained cash collateral and made offsets against the outstanding balance of our Telcon convertible bond to compensate for target shortfalls under the API supply agreement.
Due to uncertainties regarding our ability to meet our current and future operating and capital expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date that this condensed consolidated financial statements are issued, as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to Condensed Consolidated Financial Statements included herein.
27
Cash flows for the nine months ended September 30, 2023 and September 30, 2022
Net cash used in operating activities
Net cash used in operating activities decreased by $4.2 million, or 62%, to $2.5 million for the nine months ended September 30, 2023 from $6.8 million for the nine months ended September 30, 2022. This decrease was primarily due to a decrease of $5.9 million in net loss.
Net cash used in investing activities
Net cash used in investing activities decreased by $0.9 million, or 68%, to $0.4 million for the nine months ended September 30, 2023 from $1.3 million for the nine months ended September 30, 2022. The decrease was primarily due to a decrease of $1.6 million in loans to equity method investee, partially offset by a decrease of $0.7 million in deemed sale of our Telcon convertible note.
Net cash from financing activities
Net cash from financing activities decrease by $4.6 million, or 65%, to $2.5 million for the nine months ended September 30, 2023 from $7.1 million for the nine months ended September 30, 2022. This decrease was due to a decrease of $1.8 million in proceeds received from issuance of promissory notes and convertible notes in addition to an increase of $2.8 million in repayment of promissory notes in 2023.
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 were no material changes in our critical accounting policies during the nine months ended September 30, 2023.
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 Co-presidents who serve as our chief executive officers and Chief Financial Officer, of the effectiveness of our DCP. Based on that evaluation, our chief executive officers and Chief Financial Officer concluded that the Company’s DCP were not effective.
28
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2023 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Previously Identified Material Weakness
As previously reported, in connection with the preparation of our consolidated financial statements as of December 31, 2021, our management identified ongoing material weaknesses (the “Material Weaknesses”) in our internal control over financial reporting. The Material Weaknesses related to inadequate financial closing process, segregation of duties, including access control over information technology, especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account processes, and insufficient entity risk assessment processes.
Since identifying the Material Weaknesses, we took several steps to remediate the Material Weaknesses, including:
Management does not believe the Material Weakness materially affect the accuracy of our financial statements.
29
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 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023 filed with the SEC on May 15, 2023.
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 $4.9 million for the nine months ended September 30, 2023 and had a working capital deficit of $51.7 million at September 30, 2023. Management expects that the Company’s current liabilities and operating expenses, including the expected costs relating to the commercialization of Endari® in the MENA 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, third-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, except for the factored accounts receivable arrangement of our Emmaus Medical subsidiary, 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. If the Company is unable to do so, it may need to curtail certain business activities related to the marketing and sale of Endari® or seek to restructure the Company in bankruptcy, or otherwise. 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 that these condensed consolidated financial statements are issued. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Sales of Endari® depend on the availability of adequate coverage and reimbursement from third-party payors and governmental healthcare programs, such as Medicare and Medicaid in the U.S. and government payors in the MENA region. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or a significant part of the costs associated with their prescription drugs. Coverage determination depends on financial, clinical and economic outcomes that often disfavors new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Although Endari® currently is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs, the reimbursement amounts are subject to change and may not be adequate and may require higher co-payments that patients find unacceptable. The Company also has negotiated reimbursement rates for Endari® in the MENA region which are comparable to Medicare and Medicaid reimbursement rates. Patients are unlikely to use Endari® unless reimbursement is adequate to cover a significant portion of the cost of Endari®. Future coverage and reimbursement rates will likely be subject to increased scrutiny from payors in the U.S. and perhaps government payors in the MENA region. Third-party coverage and reimbursement for Endari® may cease to be available or adequate, which could have a material adverse effect on our business, results of operations, financial condition, and prospects.
The market for Endari® also depends on access to third-party payors’ drug formularies, which are lists of medications for which third-party payors provide coverage and reimbursement. The competition in the industry to be included in such formularies may lead to downward pricing pressures on us. Also, third-party payors may refuse to include Endari® in their formularies or otherwise restrict patient access to Endari® if a less costly generic equivalent or other alternative treatment is available.
Sales of Endari® in the MENA region are subject to lengthy reimbursement terms compared to U.S. sales, and management expects that our accounts receivable aging will be adversely affected by such terms as sales in the MENA region increase compared to our U.S. sales.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
30
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
31
Item 6. Exhibits
(a) Exhibits
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Exhibit Number |
Exhibit Description |
Form |
File No. |
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Filing Date |
Filed/ |
4.1 |
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10.1 |
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* |
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10.2 |
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* |
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10.3 |
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* |
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31.1 |
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* |
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31.2 |
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* |
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32.1 |
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** |
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101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File 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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** 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.
32
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: November 13, 2023 |
By: |
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/s/ Willis C. Lee |
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Name: |
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Its: |
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Co-President and Chief Operating Officer |
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By: |
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/s/ George Sekulich |
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Name: |
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Its: |
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Co-President and Chief Commercial Officer |
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By: |
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/s/ Yasushi Nagasaki |
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Name: |
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Its: |
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Chief Financial Officer |
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33
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/16/30 | ||||
| 9/30/28 | ||||
| 8/16/27 | ||||
| 7/31/27 | ||||
| 9/30/26 | ||||
| 6/19/26 | ||||
| 12/25/24 | ||||
| 9/5/24 | ||||
| Filed as of: | 11/14/23 | |||
| Filed on: | 11/13/23 | |||
| 11/10/23 | ||||
| For Period end: | 9/30/23 | |||
| 8/15/23 | ||||
| 7/19/23 | ||||
| 6/30/23 | 10-Q | |||
| 5/15/23 | 10-Q, 8-K | |||
| 3/31/23 | 10-K, 10-Q, 8-K | |||
| 1/27/23 | ||||
| 1/12/23 | 4, 4/A, 8-K | |||
| 1/1/23 | ||||
| 12/31/22 | 10-K | |||
| 9/30/22 | 10-Q, 8-K | |||
| 8/15/22 | 10-Q, 8-K | |||
| 6/30/22 | 10-Q, D | |||
| 3/31/22 | 10-K, 10-Q, 8-K | |||
| 1/1/22 | ||||
| 12/31/21 | 10-K, 10-K/A | |||
| 11/23/21 | 3, 4, 8-K, DEF 14A, PRE 14A | |||
| 10/16/21 | ||||
| 9/29/21 | 4 | |||
| 5/31/21 | ||||
| 2/9/21 | 8-K | |||
| 9/28/20 | 8-K | |||
| 7/12/17 | 8-A12B, CORRESP, S-1/A | |||
| 6/15/17 | ||||
| 6/12/17 | ||||
| List all Filings | ||||