Item 1. Financial Statements
Item 1. Financial Statements
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
As of
September 30, 2020
(Unaudited)
December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
4,949
$
1,769
Restricted cash
25,680
—
Accounts receivable, net
1,726
2,150
Inventories, net
7,422
7,971
Investment in marketable securities
—
27,929
Prepaid expenses and other current assets
1,117
1,402
Total current assets
40,894
41,221
Property and equipment, net
130
151
Equity method investment
14,484
13,325
Right of use assets
4,145
4,474
Deposits and other assets
291
285
Total assets
$
59,944
$
59,456
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses
$
7,675
$
11,498
Operating lease liabilities, current portion
1,100
991
Other current liabilities
1,934
5,748
Revolving line of credit to related parties, net
800
600
Warrant derivative liabilities
794
38
Notes payable, current portion
4,452
3,749
Notes payable to related parties
816
193
Convertible debentures, net of discount
6,209
7,015
Convertible note payable, net of discount
—
2,995
Total current liabilities
23,780
32,827
Operating lease liabilities, less current portion
3,588
3,932
Other long-term liabilities
35,436
33,750
Notes payable, less current portion
355
—
Convertible note payable
3,150
—
Total long-term liabilities
42,529
37,682
Total liabilities
66,309
70,509
STOCKHOLDERS’ DEFICIT
Preferred stock — par value $ 0.001 per share, 15,000,000 shares authorized, none issued or outstanding
—
—
Common stock — par value $ 0.001 per share, 250,000,000 shares authorized, 48,987,189 shares and 48,471,446 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
49
48
Additional paid-in capital
218,484
215,207
Accumulated other comprehensive loss
( 86
)
( 79
)
Accumulated deficit
( 224,812
)
( 226,229
)
Total stockholders’ deficit
( 6,365
)
( 11,053
)
Total liabilities & stockholders’ deficit
$
59,944
$
59,456
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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,
2020
2019
2020
2019
REVENUES, NET
$
5,601
$
5,760
$
16,915
$
15,960
COST OF GOODS SOLD
484
248
1,408
771
GROSS PROFIT
5,117
5,512
15,507
15,189
OPERATING EXPENSES
Research and development
629
725
1,835
1,778
Selling
1,324
1,778
3,527
5,148
General and administrative
3,156
7,056
10,538
13,475
Total operating expenses
5,109
9,559
15,900
20,401
INCOME (LOSS) FROM OPERATIONS
8
( 4,047
)
( 393
)
( 5,212
)
OTHER INCOME (EXPENSE)
Loss on debt extinguishment
—
( 438
)
( 1,425
)
( 438
)
Change in fair value of warrant derivative liabilities
745
3,576
669
3,492
Change in fair value of embedded conversion option
45
131
51
131
Net gain (loss) on investment in marketable securities
6,464
( 5,248
)
7,672
( 22,242
)
Gain (loss) on equity method investment
( 494
)
36
( 1,474
)
( 413
)
Miscellaneous reverse merger costs
—
( 309
)
—
( 309
)
Notes conversion costs
—
( 3,341
)
—
( 3,341
)
Interest and other income
718
18
1,318
248
Interest expense
( 1,608
)
( 8,714
)
( 4,717
)
( 25,153
)
Total other income (expense)
5,870
( 14,289
)
2,094
( 48,025
)
INCOME (LOSS) BEFORE INCOME TAXES
5,878
( 18,336
)
1,701
( 53,237
)
INCOME TAXES
293
56
80
159
NET INCOME (LOSS)
5,585
( 18,392
)
1,621
( 53,396
)
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments
( 35
)
5
( 7
)
18
Other comprehensive income (loss)
( 35
)
5
( 7
)
18
COMPREHENSIVE INCOME (LOSS)
$
5,550
$
( 18,387
)
$
1,614
$
( 53,378
)
NET INCOME (LOSS) PER COMMON SHARE - BASIC and DILUTED
$
0.11
$
( 0.40
)
$
0.03
$
( 1.32
)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
48,987,189
46,004,942
48,866,724
40,469,601
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
(Unaudited)
Common Stock
Additional
Paid-In
Accumulated Other Comprehensive
Accumulated
Total Stockholders'
Shares
Amount
Capital
Loss
Deficit
Deficit
Balance, January 1, 2020
48,471,446
$
48
$
215,207
$
( 79
)
$
( 226,229
)
$
( 11,053
)
Common stock issued for cash (net of issuance cost)
515,743
1
141
—
—
142
Fair value of warrants including down-round protection adjustments
—
—
600
—
( 200
)
400
Share-based compensation
—
—
209
—
—
209
Foreign currency translation effect
—
—
—
61
—
61
Net income
—
—
—
—
5,509
5,509
Balance, March 31, 2020
48,987,189
49
216,157
( 18
)
( 220,920
)
( 4,732
)
Share-based compensation
—
—
219
—
—
219
Foreign currency translation effect
—
—
—
( 33
)
—
( 33
)
Net loss
—
—
—
—
( 9,473
)
( 9,473
)
Balance, June 30, 2020
48,987,189
49
216,376
( 51
)
( 230,393
)
( 14,019
)
Fair value of warrants including down-round protection adjustments
—
—
1,987
—
( 4
)
1,983
Share-based compensation
—
—
121
—
—
121
Foreign currency translation effect
—
—
—
( 35
)
—
( 35
)
Net income
—
—
—
—
5,585
5,585
Balance, September 30, 2020
48,987,189
$
49
$
218,484
$
( 86
)
$
( 224,812
)
$
( 6,365
)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
(Unaudited)
Common Stock
Additional
Paid-In
Accumulated Other Comprehensive
Accumulated
Total Stockholders'
Shares
Amount
Capital
Loss
Deficit
Deficit
Balance, January 1, 2019
37,341,393
$
37
$
149,682
$
( 69
)
$
( 171,358
)
$
( 21,708
)
Cumulative effect adjustment on adoption of ASC 842
—
—
—
—
( 29
)
( 29
)
Beneficial conversion feature relating to convertible notes
—
—
3,374
—
—
3,374
Exercise of warrants
525
—
5
—
—
5
Stock issued for cash
322,920
1
2,529
—
—
2,530
Conversion of notes payable to common stock
85,411
—
329
—
—
329
Share-based compensation
—
—
588
—
—
588
Exercise of common stock options
175
—
1
—
—
1
Foreign currency translation effect
—
—
—
7
—
7
Net loss
—
—
—
—
( 17,408
)
( 17,408
)
Balance, March 31, 2019
37,750,424
38
156,508
( 62
)
( 188,795
)
( 32,311
)
Beneficial conversion feature relating to convertible notes
—
—
5,390
—
—
5,390
Exercise of warrants
53,032
—
181
—
—
181
Stock issued for cash
76,755
—
731
—
—
731
Share-based compensation
—
—
438
—
—
438
Foreign currency translation effect
—
—
—
6
—
6
Net loss
—
—
—
—
( 17,596
)
( 17,596
)
Balance, June 30, 2019
37,880,211
38
163,248
( 56
)
( 206,391
)
( 43,161
)
Stock issued for cash (net of issuance cost)
477,339
1
2,999
—
—
3,000
Conversion of convertible note and promissory notes payable to common stock
6,983,350
7
35,452
—
—
35,459
Conversion note inducement
—
—
3,662
—
—
3,662
Reclassification of warrant liability to permanent equity
—
—
6,336
—
—
6,336
Exchange of common stock in connection with merger
2,330,546
2
( 1,644
)
—
—
( 1,642
)
Share-based compensation
—
—
129
—
—
129
Fair value of replacement equity awards
—
—
2,437
—
—
2,437
Foreign currency translation effect
—
—
—
5
—
5
Net loss
—
—
—
—
( 18,392
)
( 18,392
)
Balance, September 30, 2019
47,671,446
$
48
$
212,619
$
( 51
)
$
( 224,783
)
$
( 12,167
)
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
EMMAUS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
1,621
$
( 53,396
)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization
45
54
Impairment loss on long-term investment
—
524
Inventory reserve
596
—
Amortization of discount of notes payable and convertible notes payable
3,200
21,875
Foreign exchange adjustments on convertible notes and notes payable
( 316
)
( 207
)
Net (gain) loss on investment in marketable securities
( 7,672
)
21,718
Loss on equity method investment
1,474
413
Loss on debt extinguishment
1,425
438
Share-based compensation and fair value of replacement equity award
549
3,593
Notes conversion costs
—
3,341
Change in fair value of warrant derivative liabilities
( 669
)
( 3,492
)
Change in fair value of embedded conversion option
( 51
)
( 131
)
Net changes in operating assets and liabilities
Accounts receivable
425
( 193
)
Inventories
( 44
)
( 2,787
)
Prepaid expenses and other current assets
336
( 1,025
)
Other non-current assets
313
( 4,150
)
Income tax receivable and payable
( 43
)
( 82
)
Accounts payable and accrued expenses
( 3,119
)
5,966
Deferred revenue
—
500
Deferred rent
—
( 287
)
Other current liabilities
( 3,883
)
828
Other long-term liabilities
1,451
2,363
Net cash flows used in operating activities
( 4,362
)
( 4,137
)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in connection with the Merger
—
( 1,641
)
Sale of marketable securities
35,601
221
Purchases of property and equipment
( 13
)
( 55
)
Loan made to equity investee
( 2,274
)
—
Net cash flows provided by (used in) investing activities
33,314
( 1,475
)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable issued, net of issuance cost and discount
1,980
—
Payments of notes payable
( 200
)
—
Payments of convertible notes
( 2,000
)
( 3,368
)
Proceeds from exercise of warrants
—
186
Proceeds from issuance of common stock
142
6,210
Net cash flows provided by (used in) financing activities
( 78
)
3,028
Effect of exchange rate changes on cash
( 14
)
5
Net increase (decrease) in cash, cash equivalents and restricted cash
28,860
( 2,579
)
Cash, cash equivalents and restricted cash, beginning of period
1,769
3,905
Cash, cash equivalents and restricted cash, end of period
$
30,629
$
1,326
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid
$
1,543
$
1,239
Income taxes paid
$
126
$
242
NON-CASH INVESTING AND FINANCING ACTIVITIES
Warrants issued
$
3,808
$
—
Beneficial conversion feature relating to convertible notes
$
—
$
8,764
Warrant liabilities reclassified to equity
$
—
$
6,337
Conversion of notes payable to common stock
$
—
$
33,777
Conversion of accrued interest payable to common stock
$
—
$
2,381
Initial recognition of right to use assets
$
—
$
2,922
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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. (formerly, “MYnd Analytics, Inc.”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us,” the “Company” or “Emmaus”) 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/A for the year ended December 31, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021. The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated balance sheet at December 31, 2019 contained in the Form 10-K/A. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year or any future interim period.
Organization and Nature of Operations
The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies primarily for rare and orphan diseases. On July 17, 2019, we completed a merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), into a subsidiary of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary of the Company. Immediately after completion of the Merger, we changed our name to “Emmaus Life Sciences, Inc.”
The Merger was treated as a reverse recapitalization under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposed, EMI was considered to have acquired us. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.
In connection with and prior to the Merger, we contributed and transferred to Telemynd, Inc. (“Telemynd”), a newly formed, wholly owned subsidiary of the Company, all or substantially all our historical business, assets and liabilities and our board of directors declared a stock dividend of one share of the Telemynd common stock held by the Company for each outstanding share of our common stock after giving effect to a 1-for-6 reverse stock split of our outstanding shares of common stock.
As a result of the spin-off and the Merger, our ongoing business became EMI’s business, which is that of a commercial-stage biopharmaceutical company focused on the development, marketing and sale of innovative treatments and therapies, including those in the rare and orphan disease categories.
Principles of consolidation —The consolidated financial statements include the accounts of the Company, EMI and EMI’s wholly‑owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical, Inc.’s wholly‑owned subsidiaries. All significant intercompany transactions have been eliminated.
The preparation of the consolidated financial statements requires the use of management estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reported period. Actual results could differ materially from those estimates.
Reclassification of prior year presentation —Certain reclassifications have been made to the prior period amounts to confirm with the current year presentation.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K/A for the year ended December 31, 2020. There have been no material changes in these policies or their application.
Management has considered all recent accounting pronouncements will not have a material effect on the Company’s condensed consolidated financial statements. Refer to the Amended Annual Report for a summary of significant accounting policies. There were no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2020.
8
Restricted cash — Restricted cash includes proceeds received from the sales of shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) earmarked for the purchase of Telcon convertible bond per the December 23, 2019 agreement with Telcon. See Note 5 for the additional details. Reconciliation of cash, cash equivalent and restricted cash are as follows:
Nine Months Ended September 30,
2020
2019
Cash and cash equivalents
$
4,949
$
1,326
Restricted cash
25,680
—
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
30,629
$
1,326
Net loss per share — In accordance with ASC 260, “Earnings per Share, ” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Dilutive loss per share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2020 and September 30, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 19,276,395 shares and 13,457,963 shares, respectively, of Company common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all periods presented.
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Endari®
$
5,485
$
5,669
$
16,548
$
15,661
Other
116
91
367
299
Revenues, net
$
5,601
$
5,760
$
16,915
$
15,960
The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 2020 and 2019 (in thousands):
Trade Discounts, Allowances and Chargebacks
Government Rebates and Other Incentives
Returns
Total
Balance as of December 31, 2019
$
228
$
1,354
$
315
$
1,897
Provision related to sales in the current year
2,106
2,917
180
5,203
Adjustments related prior period sales
15
( 43
)
( 65
)
( 93
)
Credit and payments made
( 2,144
)
( 1,762
)
—
( 3,906
)
Balance as of September 30, 2020
$
205
$
2,466
$
430
$
3,101
Balance as of December 31, 2018
$
84
$
798
$
99
$
981
Provision related to sales in the current year
1,039
2,368
190
3,597
Credit and payments made
( 866
)
( 1,816
)
—
( 2,682
)
Balance as of September 30, 2019
$
257
$
1,350
$
289
$
1,896
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of total revenues):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Customer A
49
%
62
%
53
%
60
%
Customer B
32
%
22
%
27
%
21
%
The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $ 10 million upfront fee and agreement to purchase from us specified minimum quantities of the
9
finished product. In a related license agreement with Telcon, the Company agreed to use commercially reasonable best efforts to obtain product registration in these territories within three years of obtaining FDA marketing authorization for PGLG in this indication. Telcon has the right to terminate the distributor agreement in certain circumstances for failure to obtain such product registrations, in which event the Company would be obliged to return to Telcon the $ 10 million upfront fee . The upfront fee of $ 10 million is included in other long-term liabilities as unearned revenue as of September 30, 2020 and December 31, 2019. See Note 1 0 for additional details.
The Company received an upfront payment of $ 500,000 in connection with entering into a distribution agreement with a strategic partner in 2018 to distribute Endari® in the Middle East and North Africa region. The payment was recorded as unearned revenue and included in other long-term liabilities to be recognized as revenue when the performance obligations are satisfied. The upfront payment of $ 500,000 is included in other long-term liabilities as unearned revenue as of December 31, 2019. During the nine months ended September 30, 2020, the distribution agreement was terminated, and the Company recognized the $ 500,000 up front payment as other income in the Consolidated Comprehensive Statements of Income (Loss).
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
September 30, 2020
December 31, 2019
Raw materials and components
$
1,486
$
1,187
Work-in-process
1,254
1,629
Finished goods
5,338
5,204
Inventory reserve
( 656
)
( 49
)
Total
$
7,422
$
7,971
Prepaid expenses and other current assets consisted of the following (in thousands):
September 30, 2020
December 31, 2019
Prepaid insurance
$
545
$
735
Other prepaid expenses and current assets
572
667
$
1,117
$
1,402
Property and equipment consisted of the following (in thousands):
September 30, 2020
December 31, 2019
Equipment
345
335
Leasehold improvements
39
77
Furniture and fixtures
99
95
Total property and equipment
483
507
Less: accumulated depreciation
( 353
)
( 356
)
Property and equipment, net
$
130
$
151
During the three months ended September 30, 2020 and 2019, depreciation expenses were approximately $ 12,000 and $ 16,000 , respectively. During the nine months ended September 30, 2020 and 2019, depreciation expenses were approximately $ 35,000 and $ 44,000 , respectively.
NOTE 5 — INVESTMENTS
Equity securities— As of December 31, 2019, the Company held 6,643,559 shares of capital stock of Telcon which were acquired in July 2017 for approximately $ 31.8 million. As of December 31, 2019, the closing price of Telecon shares on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was approximately $ 4.20 . As of December 31, 2019, the fair value of the shares of $ 27.9 million was recorded in investment in marketable securities as of December 31, 2019. The net unrealized losses on available-for sale marketable securities held as of December 31, 2019 and since the adoption of ASU 2016-01 as of January 1, 2018 was $ 43.2 million.
Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligation under the revised API agreement with Telcon. In December 2019, the API agreement was amended to permit the release of the Telcon shares from the pledge and to permit the Company to sell the shares in exchange for a portion of the net sale proceeds to be used to purchase a 10-year convertible bond of Telcon in the principal amount of approximately $ 26.1 million to be substituted for the Telcon shares pledged to Telcon to secure the Company’s obligations under the revised API agreement between the Company and Telcon. During the nine months ended September 30, 2020, the Company sold all of the Telcon shares for total net proceeds of $ 35.6 million. Refer to Note 6, 11 and 13 for more information regarding this arrangement.
10
The Company measures all equity investments that do not result in consolidation and are not accounted for under the equity method, at fair value and recognizes any changes in such fair value in earnings. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. For the nine months ended September 30, 2019, the Company recognized approximately $ 524,000 in impairment loss for equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. As part of the formation, the Company invested approximately $ 32,000 in exchange for 40 % of EJ Holdings voting shares. JIP owns 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 $ 13.2 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 September 30, 2028 and bears interest at the rate of 1 % per annum payable annually. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids and the operation of the facility will be principally for our benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility will 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, 2020, the Company made additional loans of $ 2.6 million to EJ Holdings. As of September 30, 2020 and December 31, 2019, the loans receivable were approximately $ 14.5 million and $ 13.8 million, respectively.
EJ Holdings is engaged in phasing in the Ube facility, including obtaining regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from us or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and EJ Holdings’ activities at the facility are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and 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 from equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
The following table sets forth certain financial information of EJ Holdings for three months and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
REVENUES, NET
$
55
$
61
$
201
$
175
GROSS PROFIT
55
61
201
175
NET LOSS
$
( 1,228
)
$
74
$
( 3,677
)
$
( 1,050
)
11
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
December 31, 2019
Accounts payable:
Clinical and regulatory expenses
$
419
$
232
Professional fees
636
1,183
Selling expenses
654
1,303
Manufacturing costs
112
4,541
Other vendors
352
18
Total accounts payable
2,173
7,277
Accrued interest payable, related parties
47
42
Accrued interest payable
523
991
Accrued expenses:
Payroll expenses
1,024
891
Government rebates and other rebates
2,465
1,355
Due to EJ Holdings
474
238
Other accrued expenses
969
704
Total accrued expenses
4,932
3,188
Total accounts payable and accrued expenses
$
7,675
$
11,498
Other long-term liabilities consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
December 31, 2019
Trade discount
$
25,421
$
23,242
Unearned revenue
10,000
10,500
Other long-term liabilities
15
8
Total other long-term liabilities
$
35,436
$
33,750
On June 12, 2017, the Company entered into an API Supply Agreement, as subsequently amended (as so amended, the “API agreement”), with Telcon pursuant to which Telcon advanced to the Company approximately $ 31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s requirements for bulk containers of PGLG. The Company purchased $ 2 million and $ 3.5 million of PGLG from Telcon in the nine months ended September 30, 2020 and September 30, 2019, respectively. As of September 30, 2020 and December 31, 2019, accounts payable to Telcon were zero and $ 3.3 million, respectively. See Note 11 for additional details.
12
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):
Year
Issued
Interest Rate
Range
Term of Notes
Conversion
Price
Principal
Outstanding September 30, 2020
Discount
Amount September 30, 2020
Carrying
Amount September 30, 2020
Shares
Underlying September 30, 2020
Notes payable
2013
10 %
Due on demand
—
$
947
$
—
$
947
—
2019
11 %
Due on demand - 6 months
—
2,867
—
2,867
—
2020
1% - 11%
Due on demand - 2 years
—
993
—
993
—
$
4,807
$
—
$
4,807
—
Current
$
4,452
$
—
$
4,452
—
Non-current
$
355
$
—
$
355
—
Notes payable - related parties
2016
10 %
Due on demand
—
20
$
—
$
20
—
2019
10 %
Due on demand
14
—
$
14
—
2020
12 %
Due on demand
—
782
—
$
782
—
$
816
$
—
$
816
—
Current
$
816
$
—
$
816
—
Convertible debentures
2019
10 %
18 months
$2.00-$9.52
(a)
8,700
$
2,491
$
6,209
4,387,986
$
8,700
$
2,491
$
6,209
4,387,986
Current
$
8,700
$
2,491
$
6,209
4,387,986
Convertible note payable
2020
12 %
3 years
$
10.00
(b)
3,150
$
—
$
3,150
316,637
$
3,150
$
—
$
3,150
316,637
Non-current
$
3,150
$
—
$
3,150
—
Total
$
17,473
$
2,491
$
14,982
4,704,623
Year
Issued
Interest Rate
Range
Term of Notes
Conversion
Price
Principal
Outstanding
December 31,
2019
Discount
Amount
December 31,
2019
Carrying
Amount
December 31,
2019
Shares
Underlying
Notes
December 31, 2019
Notes payable
2013
10 %
Due on demand
—
$
920
$
—
$
920
—
2019
11 %
Due on demand - 6 months
—
2,829
—
2,829
—
$
3,749
$
—
$
3,749
$
—
Current
$
3,749
$
—
$
3,749
—
Notes payable - related parties
2016
10 %
Due on demand
—
$
20
$
—
$
20
—
2018
11 %
Due on demand
—
159
—
159
—
2019
10 %
Due on demand
—
14
—
14
—
$
193
$
—
$
193
—
Current
$
193
$
—
$
193
—
Convertible debentures
2019
10 %
18 months
$2.00-$9.52
(a)
$
10,200
$
3,185
7,015
1,080,415
$
10,200
$
3,185
$
7,015
1,080,415
Current
$
10,200
$
3,185
$
7,015
1,080,415
Convertible note payable
2018
10 %
2 years
$
10.00
(b)
$
3,000
$
5
$
2,995
363,876
$
3,000
$
5
$
2,995
363,876
Current
$
3,000
$
5
$
2,995
363,876
Total
$
17,142
$
3,190
$
13,952
1,444,291
(a) These debentures are convertible into Emmaus Life Sciences, Inc. shares.
(b) This note is convertible into EMI Holding, Inc. shares.
13
The weighted-average stated interest rate of notes payable was 10 % as of September 30, 2020 and December 31, 2019. The weighted-average effective annual interest rate of notes payable as of September 30, 2020 and December 31, 2019 was 35 % and 66 %, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.
As of September 30, 2020, future contractual principal payments due on notes payable were as follows:
Year Ending
2020 (three months)
$
6,369
2021
7,732
2022
222
2023
3,150
Total
$
17,473
Immediately prior to the completion of the Merger, all but one of the convertible notes payable (excluding the 10% Senior Secured Debentures of EMI discussed below) were converted into shares of EMI common stock at their respective conversion prices. Upon completion of the Merger, the conversion shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable is convertible into shares of common stock of EMI at conversion price of $ 10.00 per share and included in convertible notes payable .
The Company estimates the total fair value of any beneficial conversion feature and any accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance. In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds are allocated to the beneficial conversion feature and the warrants based on their relative fair values.
The 10 % Senior Secured Debentures of EMI were amended and restated immediately prior to the Merger to, among other things, make them convertible into shares of common stock of EMI and to provide for adjustments in the conversion shares issuable upon conversion of the Debentures and the conversion price in the event of a merger, reorganization and similar events. Accordingly, upon completion of the Merger the Amended and Restated 10% Senior Secured Convertible Debentures became convertible into shares of common stock of the Company and included in convertible notes payable. See Note 8 for additional information regarding this arrangement.
The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. The following table sets forth the fair value of the conversion feature liabilities as of September 30, 2020 and December 31, 2019 (in thousands):
Nine Months Ended
Year ended
Conversion feature liabilities - Amended and Restated 10% Senior Secured Convertible Debentures
September 30, 2020
December 31, 2019
Balance, beginning of period
$
1
$
—
Fair value at issuance date
—
132
Fair value at debt modification date
118
—
Change in fair value included in the statement of comprehensive loss
( 51
)
( 131
)
Balance, end of period
$
68
$
1
The value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.
The fair values as of September 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:
14
September 30, 2020
February 21, 2020
(Modification date)
December 31, 2019
Stock price
$
0.97
$
1.89
$
1.97
Conversion price
$
2.00
$
3.00
$
9.52
Selected yield
17.06
%
19.12
%
16.77
%
Expected volatility (peer group)
113
%
65
%
50
%
Expected life (in years)
0.92
1.16
0.81
Expected dividend yield
—
—
—
Risk‑free rate
Term structure
Term structure
Term structure
See Note 13 for information regarding the prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures.
The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time, Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $ 1,000,000 . Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3 %. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year. The outstanding balances under the revolving line of credit agreement of $ 800,000 and $ 600,000 as of September 30, 2020 and December 31, 2019, respectively were reflected in revolving line of credit, related party on the Consolidated Balance Sheet. With the tax-gross up, the effective annual interest rate on the outstanding balance as of September 30, 2020 was 10.4 %. The revolving line of credit agreement will expire on November 22, 2022 . Refer to Note 12 for more information regarding this arrangement.
On May 8, 2020, the Company received a loan in the amount of $ 797,840 under the Small Business Administration Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loan, which was in the form of a Promissory Note dated April 29, 2020 , matures on April 29, 2022 and bears interest at a rate of 1 % per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness on October 30, 2020. There is no assurance that the loan will be forgiven. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period. The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheets.
NOTE 8 — STOCKHOLDERS’ DEFICIT
Purchase Agreement with GPB —On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $ 13 million senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of $ 12.5 million, reflecting a 4.0 % original issue discount.
In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,764 of common stock at an exercise price of $ 10.80 per share, with customary adjustments for stock splits, stock dividends and other recapitalization events. The GPB Warrant became exercisable six months after issuance and has a term of five years from the initial exercise date.
The Company determined that under ASC 815-40, the GPB Warrant should be separately recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.
The following table presents the change in fair value of the GPB Warrant as of September 30, 2020 and December 31, 2019 (in thousands):
Nine Months Ended
Year Ended
Warrant Derivative Liabilities—GPB
September 30, 2020
December 31, 2019
Balance, beginning of period
$
38
$
1,399
Change in fair value included in the statement of comprehensive income (loss)
18
( 1,361
)
Balance, end of period
$
56
$
38
15
The fair value of the warrant derivative liability was determined using the Black-Scholes-Merton option pricing model.
The value as of the dates set forth in the table above was based on upon following assumptions:
September 30, 2020
December 31, 2019
Stock price
$
0.97
$
1.97
Risk‑free interest rate
0.15
%
1.64
%
Expected volatility (peer group)
114.00
%
60.00
%
Expected life (in years)
2.75
3.50
Expected dividend yield
0.00
%
0.00
%
Number outstanding
252,802
252,802
Purchase Agreement with Holders of 10% Senior Secured Debentures —In October 2018, EMI sold and issued $ 12.2 million principal amount of 10 % Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors. EMI’s obligations under the Debentures were secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S. subsidiaries. The net proceeds of the sale of the Debentures and warrants were used to fund EMI’s original $ 13.2 million loan to EJ Holdings in October 2018 reflected on the Company’s consolidated balance sheets.
As described in Note 7 above, the Debentures were amended and restated in their entirety in conjunction with the Merger. The common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.
The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $ 10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $ 10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $ 5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.
Pursuant to the terms of a securities amendment agreement entered into in February 2020 he Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $ 3.00 per share from $ 9.52 per share. The related amended and restated common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $ 3.00 per share from $ 5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10 % Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $ 2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $ 2.00 a share under the Purchase Agreement with Lincoln Park Capital LLC described below.
On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of the Amended and Restated 10 % Senior Secured Convertible Debentures described above. The September 2020 Amendment amended in certain respects the securities purchase agreement among EMI and the Debenture holders originally entered into on September 8, 2018, as amended by the February 2020 Amendment, and provides that the Debentures are to be amended in certain respects as set forth in the form of Allonge Amendment No. 1 to the debentures included in the September 2020 Agreement (the “Allonge”). Pursuant to the Allonge, the aggregate monthly redemption payments under the Debentures were reduced to $ 500,000 from $ 1,000,000 in principal amount and the maturity date of the Debentures was extended from April 21, 2021 to August 31, 2021 . The monthly redemption payments resumed in September 2020 and will continue on the first day of each month thereafter commencing October 1, 2020. The remaining principal balance of the Debentures will be due and payable upon maturity, subject to mandatory prepayment in connection with certain “Capital Events” as defined.
In consideration of the Debenture holder’s financial accommodations to the Company, the Company issued to the holders, pro rata based upon the relative principal amounts of their Debentures, five-year common stock purchase warrants to purchase a total of up to 1,840,000 shares of the Company common stock at an exercise price of $ 2.00 a share. The warrants provide for so-called full-
16
ratchet anti-dilution adjustments in the event the Company sells or issues shares of common stock or common stock equivalents at an effective price per share less than the exercise price of the warrants, subject to certain exceptions. The exercise price also remains subject to adjustment for stock splits and other customary events. In October 2018, the Company granted to T.R. Winston and its affiliates for services relating to the September 2020 Amendment common stock purchase warrants to purchase up to 75,000 shares of the Company common stock at an exercise price of $ 2.10 a share and otherwise on terms identical to the warrants issued to the debenture holders described above. In March 2021, the conversion price of the Debentures, and the exercise price of the these and the other warrants related to the Debentures was reduced to $ 1.54 in connection with our issuance of shares of common stock to Kainos Medicine, Inc. See Note 12 for information regarding our recent prepayment of the Debentures.
The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the 10% Senior Secured Debentures in October 2018 under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability. The liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in fair value is recorded in earnings. In 2019, the Debentures were amended and restated to be convertible into common stock of EMI immediately prior to completion of the Merger, which resulted in the related warrants being reclassified to equity.
Purchase agreement with Holder of a Convertible Promissory Notes - On June 15, 2020, the holder of a convertible promissory note of EMI in the principal amount of $ 3,150,000 agreed to an extension of the maturity date to June 15, 2023 in exchange for an increase in the interest rate on the note from 11 % to 12 % per annum. In conjunction with this amendment, the Company issued to the holder of note five-year common stock purchase warrants to purchase a total of up to 1,250,000 shares of the Company common stock at an exercise price of $ 2.05 a share. Under ASC 815-40, the Company concluded that the warrants issued to the holder of the note should be recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in the fair value of liability is recorded in earnings.
The following table presents the change in fair value of the warrants as of September 30, 2020 (in thousands):
Warrants Derivative Liabilities - convertible promissory note
September 30, 2020
Balance, beginning of period
$
—
Fair value at issuance date
1,425
Change in fair value included in the statement of comprehensive loss
( 687
)
Balance, end of period
$
738
The fair value of the warrant derivative liabilities was determined using the Black-Scholes-Merton option pricing model based on upon following assumptions:
September 30, 2020
June 15, 2020 (modification date)
Exercise price
$
2.05
$
2.05
Stock price
$
0.97
$
1.68
Risk‑free interest rate
0.26
%
0.33
%
Expected volatility (peer group)
99.00
%
94.00
%
Expected life (in years)
4.71
5.00
Expected dividend yield
0.00
%
0.00
%
Warrant shares
1,250,000
1,250,000
A summary of outstanding warrants as of September 30, 2020 and December 31, 2019 is presented below:
September 30, 2020
December 31, 2019
Warrants outstanding, beginning of period
4,931,099
3,436,431
Assumed as part of Merger
—
1,044,939
Granted
3,550,000
500,729
Exercised
—
( 51,000
)
Cancelled, forfeited or expired
( 115,953
)
—
Warrants outstanding, end of period
8,365,146
4,931,099
17
A summary of outstanding warrants by year issued and exercise price as of September 30, 2020 is presented below:
Outstanding
Exercisable
Year issued and Exercise Price
Number of
Warrants
Issued
Weighted-Average
Remaining
Contractual
Life (Years)
Weighted-Average
Exercise
Price
Total
Weighted-Average
Exercise
Price
Prior to January 1, 2019
$2.00-$10.76
3,439,007
1.91
$
4.38
3,439,007
$
4.38
Prior to Jan 1, 2019 Total
3,439,007
3,439,007
At December 31, 2019
$
6.12
32,391
3.66
$
6.12
32,391
$
6.12
$
12.00
76,575
2.98
$
12.00
76,575
$
12.00
$
14.04
174,999
2.49
$
14.04
174,999
$
14.04
$
31.50
737,975
1.82
$
31.50
737,975
$
31.50
$
36.24
22,333
1.82
$
36.24
22,333
$
36.24
$
60.00
666
0.25
$
60.00
666
$
60.00
$
2.00
256,200
3.08
$
2.00
256,200
$
2.00
$
7.68
75,000
3.80
$
7.68
75,000
$
7.68
2019 Total
1,376,139
1,376,139
At September 30, 2020
$
2.05
1,250,000
4.71
$
2.05
—
$
—
$
2.00
2,300,000
4.95
$
2.00
2,300,000
2
Total
8,365,146
7,115,146
Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock . Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in equal quarterly installments and all other option grants vest over a minimum period of three years , in each case, subject to continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a stock option to purchase a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratio in the Merger.
The Company also has an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company may grant stock options and other stock awards to selected employees including officers, and to non-employee consultants and non-employee directors. All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger.
18
Stock options — During the nine months ended September 3 0 , 20 20 , the Company granted options to purchase 90,000 shares of common stock . During the year ended December 31, 201 9 , the Company granted stock options to purchase 50,000 shares of Company common stock . All the option s are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows: as to one‑third of the share s on the first anniversary of the grant date, and as to the remaining two‑thirds shares in twenty ‑four approximately equal monthly installments over a period of two years thereafter .
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 stock of similar companies and recent arm’s length transactions involving the sale of the Company’s common stock. Prior the Merger, the Company lacked company-specific historical and implied volatility information for its common stock. Therefore, the expected volatility was calculated using the historical volatility of a comparative public traded companies. The following table presents the assumptions used on recent dates on which options were granted by the Company.
6/29/2020
6/19/2019
Stock Price
$
1.67
$
10.30
Exercise Price
$
2.05
$
10.30
Term
5.5-6 years
6 years
Risk-Free Rate
0.28%-0.38%
1.83
%
Dividend Yield
—
—
Volatility
78.91%-80.49%
67.16
%
A summary of outstanding stock options as of September 30, 2020 and December 31, 2019 is presented below:
September 30, 2020
December 31, 2019
Number of
Options
Weighted‑
Average
Exercise
Price
Number of
Options
Weighted‑
Average
Exercise
Price
Options outstanding, beginning of period
7,245,350
$
4.68
6,642,200
$
4.40
Granted or deemed granted
90,000
$
2.05
636,683
(a)
$
10.10
Exercised
—
$
—
( 167
)
$
5.00
Cancelled, forfeited and expired
( 62,087
)
$
6.06
( 33,366
)
$
11.29
Options outstanding, end of period
7,273,263
$
4.63
7,245,350
$
4.68
Options exercisable, end of period
7,114,657
$
4.64
7,001,680
$
4.47
Options available for future grant
2,139,237
2,167,150
(a)
Upon the Merger, the exercise prices of outstanding EMI options and number of shares of the Company common stock underlying the options were adjusted based upon the exchange ratio in the Merger.
During the three months ended September 30, 2020 and September 30, 2019, the Company recognized $ 0.1 million and $ 3.5 million, respectively, of share-based compensation expense. During the nine months ended September 30, 2020 and September 30, 2019, the Company recognized approximately $ 0.5 million and $ 4.6 million, respectively, of share-based compensation expense. During the three months and nine months ended September 30, 2019, $ 1.9 million of one-time adjustments resulting from the Merger is included in the share-based compensation expense. As of September 30, 2020, there was approximately $ 0.7 million of total unrecognized compensation expense related to unvested share-based compensation. That expense is expected to be recognized over the weighted-average remaining vesting period of 1.0 year.
Purchase Agreement with Lincoln Park Capital Fund, LLC — On February 28, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may elect to sell to LPC up to $ 25,000,000 in shares of its common stock, subject to certain limitations and conditions set forth in the Purchase Agreement, including 100,000 initial shares that the Company sold to LPC at a price of $ 2.00 per share.
Pursuant to the Purchase Agreement, on any business day over the 36-month term of the Purchase Agreement the Company has the right at its discretion and subject to certain conditions to direct LPC to purchase up to 20,000 shares of common stock, which amount is subject to increase under certain circumstances based upon increases in the market price of its common stock. The purchase price of the common stock will be based upon the prevailing market price of common stock at the time of the purchase without any fixed discount. In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases and additional accelerated purchases under certain circumstances. Apart from the initial sale of shares described above, the Company is not obliged to sell any shares of common stock pursuant to the Purchase Agreement, and the Company will control the timing and amount of any such
19
sales, but in no event will LPC be required to purchase more than $ 1,000,000 of common stock in any single regular purchase (excluding accelerated or additional accelerated purchases).
Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement.
The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC. There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement. There is no upper limit on the price per share that LPC could be obligated to pay for common stock, but shares will only be sold to LPC on a day the Company’s closing price is less than the floor price as set forth in the Purchase Agreement and if the sale of the shares would not result in LPC and its affiliates having beneficial ownership of more than 4.99 % of the Company’s total outstanding shares of common stock. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. As consideration for LPC’s commitments under the Purchase Agreement, the Company issued to LPC 415,743 shares of common stock, which valued at $ 750,000 , recorded as an addition to equity for common stock and reduction for cost of capital raised.
As of the date of filing of this Quarterly Report, the Company was out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement. The Company may seek to bring itself into compliance or seek an appropriate waiver from LPC to regain the ability to utilize the Purchase Agreement, but there can be no assurance when or whether the Company may be able to do so. If the Company is able to utilize the Purchase Agreement, whether or to what extent the Company sells shares of common stock to LPC under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, its net revenue and other results of operations, its working capital and other funding needs, the prevailing market prices of the Company’s common stock and the availability of other sources of funding.
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss).
For the three months and nine months ended September 30, 2020, the Company recorded a provision for income tax for $ 0.3 million and $ 80,000 , respectively. For the three months and nine months ended September 30, 2019, the Company recorded a provision for income tax of approximately $ 56,000 and $ 159,000 , respectively. The provisions for income taxes for the three and nine months ended September 30, 2020 and 2019 were primarily related to state tax on the Company’s pre-tax book income. The Company did 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 no unrecognized tax benefit as of September 30, 2020 or 2019.
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leased 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $ 78,543 per month, which lease will expire on September 30, 2026 . The Company also leased an additional 1,850 square feet office space in New York, New York, at a base rent of $ 8,479 , which leases will expire on January 31, 2023 .
In addition, the Company leased 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $ 3,000 , which the lease was expired on September 30, 2020 . Upon the expiration of the lease, the lease was renewed and the new lease will expire on September 30, 2022 .
The rent expense during the three months ended September 30, 2020 and 2019 amounted to approximately $ 286,000 and $ 280,000 , respectively, and during the nine months ended September 30, 2020 and 2019 amounted approximately $ 895,000 and $ 705,000 , respectively.
20
Future minimum lease payments under the lease agreements were as follows as of September 30, 2020 (in thousands):
Amount
2020 (three months)
$
282
2021
1,142
2022
1,165
2023
1,050
2024 and thereafter
2,982
Total lease payments
6,621
Less: Interest
1,933
Present value of lease liabilities
$
4,688
The Company adopted Accounting Standard Update (“ASU”) 2016-02 – Lease (“Topic 842”) on January 1, 2019 using a modified retrospective approach and elected the transition method and the practical expedients permitted under the transition guidance, which allowed to carryforward the historical lease classification and our assessment on whether a contract is or contains a lease. The Company also elected to combine lease and non-lease components, such as common area maintenance charges, as single lease and elected to use the short-term lease exception permitted by the standard .
As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded a $ 3.0 million in operating right-of-use asset and $ 3.3 million in lease liability and derecognized $ 287,000 of deferred rent as of the adoption date. These were calculated using the present value of the Company’s remaining lease payments using an estimated incremental borrowing rate. The Company also recorded a $ 29,000 cumulative effect increased on our accumulated deficit as of January 1, 2019. As of September 30, 2020, the Company had an operating lease right-of-use asset of $ 4.1 million and lease liability of $ 4.7 million in the balance sheet. The weighted-average remaining term of the Company’s leases as of September 30, 2020 was 5.7 years and the weighted-average discount rate was 12.75 %.
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 $ 31.8 million in consideration of the right to supply 25 % of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as 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 five years and will renew automatically for 10 successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a total of 940,000 kilograms of PGLG at $ 50 per kilogram, or a total of $ 47.0 million, over the term of the agreement. 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.
On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the revised API agreement from $50 per kilogram of PGLG to $ 100 per kilogram from July 1, 2019 through September 30, 2020, with the price payable after September 30, 2020 to be subject to agreement between the parties. 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 Note 6 for more information.
21
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to our loans from related persons outstanding as of September 30, 2020 and any interest paid during the nine months ended September 30, 2020 (in thousands):
Class
Lender
Interest
Rate
Date of
Loan
Term of Loan
Principal Amount Outstanding at September 30, 2020
Amount of
Interest
Paid
Current, Promissory note payable to related parties:
Lan T. Tran (2)
10 %
4/29/2016
Due on Demand
$
20
$
—
Lan T. Tran (2)
11 %
2/10/2018
Due on Demand
—
35
Lan T. Tran (2)
10 %
2/9/2019
Due on Demand
14
—
Hope International Hospice, Inc.
12 %
9/1/2020
Due on Demand
189
—
Hope International Homecare, Inc.
12 %
9/1/2020
Due on Demand
98
—
Soomi Niihara
12 %
9/1/2020
Due on Demand
395
—
Willis Lee
12 %
9/1/2020
Due on Demand
100
—
Subtotal
816
35
Revolving line of credit
Yutaka Niihara (2)
5.25 %
12/27/2019
Due on Demand
800
27
Subtotal
800
27
Total
$
1,616
$
62
The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2019:
Class
Lender
Interest
Rate
Date of
Loan
Term of Loan
Principal Amount Outstanding at December 31, 2019
Highest
Principal
Outstanding
Amount of
Principal
Repaid or
Converted
into Stock
Amount of
Interest
Paid
Conversion
Rate
Current, Promissory note payable to related parties:
Lan T. Tran (2)
10 %
4/29/2016
Due on Demand
$
20
$
20
$
—
$
—
—
Hope International Hospice, Inc. (1)
10 %
6/3/2016
Due on Demand
—
250
250
78
—
Lan T. Tran (2)
10 %
2/9/2017
Due on Demand
—
12
—
2
—
Yutaka Niihara (2)(3)
10 %
9/14/2017
Due on Demand
—
904
27
2
—
Lan T. Tran (2)
11 %
2/10/2018
Due on Demand
159
159
—
—
—
Lan T. Tran (2)
10 %
2/9/2019
Due on Demand
14
14
—
—
—
Subtotal
193
1,359
277
82
Current, Convertible notes payable to related parties:
Yasushi Nagasaki (2)
10 %
6/29/2012
Due on Demand
—
200
200
56
$
3.30
Yutaka & Soomi Niihara (2)(3)
10 %
11/16/2015
2 years
—
200
200
73
$
4.50
Wei Peu Zen (3)
10 %
11/6/2017
2 years
—
5,000
5,000
597
$
10.00
Profit Preview International Group, Ltd. (4)
10 %
2/1/2018
2 years
—
4,037
4,037
385
$
10.00
Profit Preview International Group, Ltd. (4)
10 %
3/21/2018
2 years
—
5,363
5,363
442
$
10.00
Subtotal
—
14,800
14,800
1,553
Revolving line of credit
Yutaka Niihara (2)
5 %
12/27/2019
Due on Demand
600
600
—
—
Subtotal
600
600
—
—
Total
$
793
$
16,759
$
15,077
$
1,635
(1)
Dr. Niihara, the Chairman and Chief Executive Officer of the Company, and his wife, Soomi Niihara, are the co-owners and directors of Hope International Hospice, Inc., of which Dr. Niihara is the Chief Executive Officer.
(2)
Officer.
(3)
Director .
( 4 )
Mr. Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.
22
See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara.
See Notes 6, 11 and 13 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.6 % of the common stock outstanding as of September 30, 2020.
NOTE 13 — SUBSEQUENT EVENTS
On September 28, 2020, the Company entered into a convertible bond purchase agreement with Telcon pursuant to which it purchased on October 16, 2020 at face value a convertible bond of Telcon in the principal amount of $ 26.1 million, on the terms described in the purchase agreement. The Company purchased the convertible bond with a portion of the net proceeds from the sale of Telcon shares owned by the Company. The sale of the Telcon shares and purchase of the Telcon convertible bond was in accordance with our December 23, 2019 agreement with Telcon. As contemplated by the December 23, 2019 agreement, the convertible bond and any proceeds therefrom, including proceeds from any exercise of the call option or early redemption right described below, replace the Company’s former Telcon shares and proceeds therefrom as collateral under the API agreement with Telcon.
The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1 % per annum payable quarterly. Beginning on October 16, 2021, the holder of the convertible bond will be entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond. To the extent not previously redeemed, the principal amount of the bond will be due upon maturity. 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 approximately $ 8.00 per share. The conversion price is subject to antidilution adjustments in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares, a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event.
In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to 50 % in principal amount of the convertible bond commencing October 16, 2021 and prior to maturity. If the Company transfers the convertible bond, it will be obliged under the call option agreement to see to it that the transferee is bound by such call option.
On October 28, 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agreed to loan to EJ Holdings a total of approximately $ 6.5 million, in monthly installments through March 2021, including approximately $ 4.0 million, loaned through December 31, 2020. The loans will be unsecured general obligations of EJ Holdings, will bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and will be due and payable in a lump sum at maturity on September 30, 2028. The proceeds of the loans will be used by EJ Holdings to fund its activities and operations at its Ube facility as described under “Equity method investment” in Note 5 above.
On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $ 17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. As of April 5, 2021, the Company had sold approximately $ 14.5 million of the convertible promissory notes. Of the net proceeds from the sale of the convertible promissory notes, $ 6.2 million was used to prepay in full the outstanding Amended and Restated 10 % Senior Secured Convertible Debentures in March 2021.
Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of our common stock at an initial conversion price of $ 1.48 per share, which equaled the “Average VWAP” (as defined) of the Company common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.
The convertible promissory notes bear interest at the rate of 2 % per annum payable semi-annually on the last business day of August and January of each year and will mature on the 3rd anniversary of the original issue date. The convertible promissory notes will become prepayable in whole or in part at the election of the holders on and after February 28, 2022 if our common stock shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined). The Company will be entitled to prepay up to 50 % of the principal amount of the convertible promissory notes at any time after the 1st anniversary and on or before the 2 nd anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50 % of such principal amount. The convertible promissory notes are general, unsecured obligations of the Company.
23
Effective February 22, 2021, the Company’s subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70 % (subject to increase to 75 %) of the face amount of the accounts receivable, subject to a $ 7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25 % to 7.25 % of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. 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, the Company agreed to guarantee Emmaus Medical’s obligations under the purchase and sale agreement. The Company’s obligations under the guarantee are unsecured.
24
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.