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Item 2. Management’s Discussion and Analysis

2021-08-26 compared with 2021-08-26 · 57 added, 56 removed, 129 unchanged (47% of the section changed)

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., (formerly “MYnd Analytics, Inc.”) and its direct and indirect subsidiaries .

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

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in early 2018, we had minimal revenues and relied upon funding from sales of equity securities and debt financings and loans, including loans from related parties to fund our business and operations.

As of June 30, 2020, our accumulated deficit was $230.7 million and we had cash and cash equivalents of $1.0 million.

As of September 30, 2020, our accumulated deficit was $224.9 million and we had cash and cash equivalents of $4.9 million.

We expect net revenues to increase as we expand our commercialization of Endari ® in the U.S.

and expand or commence early access programs and eventual marketing and commercialization abroad.

Until we can generate sufficient net revenues, our future cash requirements are expected to be financed through public or private equity or debt financings, loans or corporate collaboration and licensing agreement.

As reported in more detail in our Current Report on Form 8-K filed with the SEC on July 22, 2019, as amended by our Form 8-K/A filed on August 14, 2019, on July 17, 2019, we completed our merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc.

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Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics.

In addition to agreements with these distributors, we have entered into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products.

In addition to agreements with these distributors, we enter into 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.

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We provide our customers prompt payment and large order discounts and from time to time offer additional discounts that are recorded as a reduction of revenue in the period the revenue is recognized.

Sales attributable to one-time discounts offered by us increased in 2019 and continued in 2020 and may adversely affect sales in subsequent periods.

Sales attributable to one-time discounts offered by us increased in 2019 and 2020 and may adversely affect sales in subsequent periods.

Product Returns :

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These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of Our Business and Compliance with Law.”

General and Administrative Expenses

General and Administrative Expense

General and administrative expenses consist principally of salaries and related costs, including share-based compensation for our directors and executive officers, of our employees, including our in-house commercialization team.

Other general and administrative expenses include facility costs, patent filing costs and professional fees and expenses for legal, consulting, auditing and tax services.

Inflation has not had a material impact on our general and administrative expenses over the past two years.

Inflation has not had a material impact on our general and administrative expense over the past two years.

Selling Expenses

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We expect selling expenses to increase as we acquire additional sales and administrative personnel to support the commercialization of Endari® in the U.S.

Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis at the lower of cost or net realizable value.

Substantially all raw materials purchased during the three months ended June 30, 2020 and 2019 were supplied by one vendor.

Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or net realizable value.

Substantially all raw materials purchased during the three months ended September 30, 2020 and 2019 were supplied by one vendor.

Results of Operations:

Three months ended June 30, 2020 and 2019

Three months ended September 30, 2020 and 2019

Revenues, Net .

Net revenues decreased by $1.1 million, or 21%, to $4.4 million for the three months ended June 30, 2020 compared to $5.5 million for the three months ended June 30, 2019.

We believe that the decrease in net revenues was primarily attributable to temporary disruptions in sales related to the COVID-19 pandemic.

Net revenues decreased by $0.2 million, or 3%, to $5.6 million for the three months ended September 30, 2020 compared to $5.8 million for the three months ended September 30, 2019.

We believe that the decrease in net revenues was primarily attributable to continuing disruptions in sales caused by the COVID-19 pandemic.

Cost of Goods Sold .

Cost of goods sold increased by $0.2 million or 69%, to $0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Cost of goods sold increased by $0.2 million or 95%, to $0.4 million for the three months ended September 30, 2020 compared to $0.3 million for the three months ended September 30, 2019.

The increase in cost of goods sold was primarily attributable to the establishment of a reserve for inventory with a shelf-life of less than two years.

Substantially all the raw material purchased during the three months ended June 30, 2020 and 2019 were from one vendor.

Substantially all the raw materials purchased during the three months ended September 30, 2020 and 2019 were from one vendor.

Research and Development Expenses .

Research and development expenses remained consistent at $0.6 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

We expect our research and development costs to increase in the remainder of 2020 as our sponsored diverticulosis study progresses.

Research and development expenses decreased by $0.1 million, or 13% , to $0.6 million for the three months ended September 30, 2020 compared to $0.7 million for the three months ended September 30, 2019 .

This decrease was due to higher consulting expenses related the European Medicines Agency (“ EMA ”) marketing authorization application incurred during the three months ended September 30, 2019.

We expect our research and development costs to increase in the remainder of 2020 as our Pilot/Phase 1 study of PGLG in diverticulosis progresses.

Selling Expenses .

Selling expenses decreased by $0.8 million, or 40%, to $1.1 million for the three months ended June 30, 2020 compared to $1.9 million for the three months ended June 30, 2019.

The decrease in selling expenses was primarily due to a decrease of $1.2 million in contract sales force fees for Endari® partially offset by an increase of $0.5 million in our in-house commercial team costs for marketing and sales of Endari® in the U.S.

We have relied on our in-house commercial team for marketing and sales of Endari® since January 2020.

Selling expenses decreased by $0.5 million, or, 26%, to $1.3 million for the three months ended September 30, 2020 compared to $1.8 million for the three months ended September 30, 2019.

The decrease was primarily due to a decrease of $0.9 million in contract sales force fees and $0.2 million in sales and marketing activities for Endari® partially offset by an increase of $0.7 million in in-house sales team compensation as we have relied on our in-house commercial team for sales and marketing of Endari® in the U.S.

since January 2020.

General and Administrative Expenses.

General and administrative expenses increased by $1.0 million, or 39% to $3.7 million for the three months ended June 30, 2020 compared to $2.7 million for the three months ended June 30, 2019.

The increase of general and administrative expenses was primarily due to an increase of $1.4 million in professional fees and $0.2 million of insurance expenses partially offset by a decrease of $0.2 million in share-based compensation expenses.

Other Expense .

Total other expenses decreased by $9.2 million, or 52%, to $8.4 million for the three months ended June 30, 2020, compared to $17.7 million of total other expenses for the three months ended June 30, 2019.

The decrease in total other expenses was primarily due to a decrease of $6.5 million in interest expense and a decrease of $4.9 million in net loss on investment in marketable securities and long-term investment partially offset by an increase of $1.4 million on loss on debt extinguishment.

Net loss for the three months ended June 30, 2020 decreased by $8.1 million, or 46% to a net loss of $9.5 million for the three months ended June 30, 2020 from a net loss of $17.6 million for the three months ended June 30, 2019.

The decrease of net loss was primarily a result of decreases of $9.2 million in other expenses partially offset by an increase of $1.7 million in loss from operations as discussed above.

Six months ended June 30, 2020 and 2019

General and administrative expenses decreased by $3.9 million, or 55%, to $3.2 million for the three months ended September 30, 2020 compared to $7.1 million for the three months ended September 30, 2019.

The decrease was primarily due to decreases of $2.4 million in share-based compensation, $1.3 million in professional fees, and $0.4 million in travel expenses.

Other Income (Expense) .

Total other income increased by $20.2 million, or 141%, to $5.8 million of total other income for the three months ended September 30, 2020 compared to $14.3 million of total other expense for the three months ended September 30, 2019.

The increase was primarily due to an increase of $11.7 million in the net gain (loss) on investment in marketable securities and a decrease of $7.1 million in interest expense.

Net Income (Loss) .

Net income for the three months ended September 30, 2020 increased by $24.0 million, or 130% to net income of $5.6 million for the three months ended September 30, 2020 compared to a net loss of $18.4 million for the three months ended September 30, 2019.

The increase in net income was primarily the result of an increase of $20.2 million in total other income and a decrease of $3.9 million in general and administrative expenses as discussed above.

Nine months ended September 30, 2020 and 2019

Revenues, Net .

Net revenues increased by $1.1 million, or 11% , to $11.3 million for six months ended June 30, 2020 from $10.2 million for the six months ended June 30, 2019.

The increase in net revenues was primarily attributable to the higher market acceptance of Endari® and expansion of our customer base and, to a lesser extent a 4.0% price increase for Endari® implemented January 1, 2020.

Net revenues increased by $1.0 million, or 6%, to $ 16.9 million for the nine months ended September 30, 2020 from $ 16.0 million for the nine months ended September 30, 2019.The increase was primarily attributable to the higher market acceptance of Endari® and expansion of our customer base and, to a lesser extent a 4.0% price increase for Endari® implemented January 1, 2020, partially offset by the on-going sales challenges caused by the continuing COVID-19 pandemic.

Cost of Goods Sold .

Cost of goods sold increased $0.4 million, or 77% , to $0.9 million for six months ended June 30, 2020 from $0.5 million for the six months ended June 30, 2019.

The increase in cost of goods sold is primarily attributable to higher net revenues and the establishment of a reserve for inventory with an expiration date of less than two years.

All the raw material purchased during the six months ended June 30, 2020 and 2019 were from one vendor.

Cost of goods sold increased by $0.6 million, or 83%, to $1.4 million for the nine months ended September 30, 2020 from $0.7 million for the nine months ended September 30, 2019.

The increase was primarily attributable to the establishment of a reserve for inventory with a shelf- life of less than two years.

Research and Development Expenses .

Research and development expenses increased by $0.2 million, or 15%, to $1.2 million for the six months ended June 30, 2020.

This increase was primarily due to an increase in expenses related to our sponsored diverticulosis study.

We expect our research and development costs to increase in the remainder of 2020 as the study progresses.

Research and development expenses remained consistent at $1.8 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

We expect our research and development costs to increase in the remainder of 2020 as our Pilot/Phase 1 study of PGLG in diverticulosis progresses.

Selling Expenses .

Selling expenses decreased by $1.2 million, or 35%, to $2.2 million for the six months ended June 30, 2020 from $3.4 million for the six months ended June 30, 2019.

The decrease in selling expenses was primarily due to a decrease of $2.3 million in contract sales force fees for Endari® partially offset by an increase of $1.2 million in our in-house commercial team costs for marketing and sales of Endari® in the U.S.

We have relied on our in-house commercial team for marketing and sales of Endari® since January 2020.

Selling expenses decreased by $1.6 million, or 31%, to $3.5 million for the nine months ended September 30, 2020 compared to $5.1 million for the nine months ended September 2019.

The decrease was primarily due to a decrease of $3.2 million in contract sales force fees for Endari® partially offset by an increase of $2.0 million in in-house sales team compensation as we have relied on our in-house commercial team for sales and marketing of Endari® in the U.S.

since January 2020.

General and Administrative Expenses.

General and administrative expenses increased by $1.0 million, or 15%, to $7.4 million for six months ended June 30, 2020 from $6.4 million for the six months ended June 30, 2019.

The increase in general and administrative expenses was primarily due to increases of $1.3 million in professional fees and $0.5 million in insurance expenses offset by decreases of $0.6 million in share-based compensation and $0.3 million in travel expenses.

Other Expense .

Total other expenses decreased by $30.0 million, or 89%, to $3.8 million for the six months ended June 30, 2020 from $33.8 million in other expense for the six months ended June 30, 2019.

The decrease was primarily due to decreases of

$1 8.2 million in a change in the net income ( loss ) on investment in marketable securities and long-term investment and $13.3 million reduction in interest expenses partially offset by an increase of $ 1.

4 million in loss on debt extinguishment .

Net losses decreased by $31.0 million, or 89%, to $4.0 million for the six months ended June 30, 2020 from $35.0 million for the six months ended June 30, 2019.

The decrease in net losses was primarily a result of a $30.0 million decrease in other expenses and a $1.1 million increase in net revenues as discussed above.

General and administrative expenses decreased by $2.9 million, or 22%, to $10.5 million for nine months ended September 30, 2020 compared to $13.5 million the nine months ended September 30, 2019.

The decrease was primarily due to decreases of $3.0 million in share-based compensation and $0.7 million in travel expenses partially offset by an increase of $0.4 million in insurance expenses.

Other Income and Expense .

Total other income increased by $50.1 million, or 104%, to $2.1 million for the nine months ended September 30, 2020 compared to $48.0 million in total other expense for the nine months ended September 30, 2019.

The increase was primarily due to an increase of $29.9 million in the net gain on investment in marketable securities and a decrease of $20.4 million in interest expenses partially offset by an increase of $1.0 million in loss on debt extinguishment.

Net Income (Loss) .

Net income increased by $55.0 million, or 103%, to $1.6 million for the nine months ended September 30, 2020 compared to a net loss of $53.4 million for the nine months ended September 30, 2019.

The increase was

primarily a result of a $ 50.1 million increase in other income , a $ 1.

0 million increase in net revenues and a $4.5 million decrease in operating expenses as discussed above.

Liquidity and Capital Resources

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Except as described below, we have no understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us or at all.

On February 28, 2020, we entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we may elect to sell to LPC up to $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement from time to time over the 36-month term of the Purchase Agreement.

O n February 28, 2020, we entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we may elect to sell to LPC up to $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement from time to time over the 36-month term of the Purchase Agreement.

As of the date of filing of this Quarterly Report, we are out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement.

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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.

We recently completed our first transaction under the purchase and sale agreement.

Cash flows for the six months ended June 30, 2020 and 2019

In March 2021, we completed our first transaction under the purchase and sale agreement.

Cash flows for the nine months ended September 30, 2020 and 2019

Net cash from operating activities

Net cash used in operating activities increased by $0.6 million, or 50%, to $1.7 million for the six months ended June 30, 2020 from $1.1 million for the six months ended June 30, 2019.

This increase was primarily due to an increase of $1.7 million in working capital partially offset by a decrease of $0.7 million in loss from operations.

Net cash used in operating activities increased by $0.2 million, or 5%, to $4.4 million for the nine months ended September 30, 2020 compared to the $4.1 million for the nine months ended September 30, 2019.

This increase was primarily due to an increase of $5.2 million in working capital offset by a decrease of $4.8 million in loss from operations.

Net cash from investing activities

Net cash provided by investing activities increased by $1.4 million or 678% to $1.6 million due to an increase of $1.9 million in sales of marketable securities, partially offset by $0.6 million loans made to EJ Holdings, our equity method investee.

Net cash provided by investing activities increased by $34.8 million to $33.3 million for the nine months ended September 30, 2020, compared to $1.5 million of net cash used in investing activities for the nine months ended September 30, 2019.

This change was primarily due to an increase of $35.3 million in sales of marketable securities, partially offset by $2.2 million of loans made to our equity method investee.

Net cash from financing activities

Net cash used in financing activities increased by $0.7 million, or 660%, to $0.6 million for the six months ended June 30, 2020 from net cash provided by financing activities of $0.1 million for the six months ended June 30, 2019.

This change was the result of $3.2 million of proceeds from sales of common stock during the six months ended June 30, 2019, partially offset by a decrease of $1.5 million in repayments of convertible notes during the six months ended June 30, 2020 compared to $3.4 million in repayments of convertible notes during the six months ended June 30, 2019.

Net cash provided by financing activities decreased by $3.1 million, or 103%, to $0.1 million of net cash used in financing activities for the nine months ended September 30, 2020 compared to a positive $3.0 million of net cash provided by financing activities for the nine months ended September 30, 2019.

This change was primarily attributable to a decrease of $6.1 million of the proceeds from issuance of common stock, partially offset by a decrease of $1.4 million in repayments of convertible notes during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Off-Balance-Sheet Arrangements

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Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report for our critical accounting policies.

There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2020.

There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2020.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis