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Item 2. Management’s Discussion and Analysis

2021-09-01 compared with 2021-08-26 · 64 added, 53 removed, 111 unchanged (51% 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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on January 25, 2021 (the “Annual Report”).

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021 (the “Annual Report”).

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties.

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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 March 31, 2020, our accumulated deficit was $220.9 million and we had cash and cash equivalents of $2.2 million.

As of June 30, 2021, our accumulated deficit was $233.7 million and we had cash and cash equivalents of $3.8 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.

(“EMI”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of January 4, 2019, among us, Athena Merger Subsidiary, Inc., and EMI, as amended by Amendment No.

1 thereto, dated as of May 10, 2019, which we refer to as the merger agreement.

Pursuant to the merger agreement, Athena Merger Subsidiary, Inc.

merged into EMI, with EMI surviving as our wholly owned subsidiary.

On July 17, 2019, immediately after completion of the merger, we changed our name to “Emmaus Life Sciences, Inc.”

The merger was treated as a reverse recapitalization transaction under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S.

For accounting purposes, EMI is considered to have acquired us.

The merger is intended to qualify as a tax-free reorganization for U.S.

federal income tax purposes.

Financial Overview

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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.

These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.

provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products.

These various discounts, rebates, and chargebacks are referred to as “variable consideration .

” Revenue from product sales is recorded net of variable consideration .

Under the Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery.

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Sales Discounts :

We provide our customers prompt payment and large order discounts and from time to time offer additional discounts for bulk orders 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 in the three months ended March 31, 2020 and may adversely affect sales in subsequent periods.

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 2020 and 2021 and may adversely affect sales in subsequent periods.

Product Returns :

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Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees.

The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows.

The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment

Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

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General and Administrative Expenses

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.

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

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

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Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion, sale and marketing of our products.

Other selling cost include advertising, third party consulting costs, the cost of contracted and in-house sales personnel and travel-related costs.

Other selling cost include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs.

We expect selling expenses to increase as we acquire additional 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 March 31, 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 six months ended June 30, 2021 and 2020 were supplied by one vendor.

Results of Operations:

Three months ended March 31, 2020 and 2019

Revenues, Net .

Net revenues increased by $2.3 million, or 48%, to $7.0 million for the three months ended March 31, 2020 compared to $4.7 million for the three months ended March 31, 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.

Three months ended June 30, 2021 and 2020

Net revenues, Net .

Net revenues increased by $2.1 million, or 49%, to $6.5 million for the three months ended June 30, 2021, compared to $4.4 million for the three months ended June 30, 2021.

The increase in net revenues was primarily attributable to bulk order purchases and recovery from the temporary disruptions in revenues related the COVID-19 pandemic during 2020.

Cost of Goods Sold .

Cost of goods sold increased by $0.2 million or 85%, to $0.5 million for the three months ended March 31, 2020 compared to $0.3 million for the three months ended March 31, 2019.

Substantially all the raw material purchased during the three months ended March 31, 2020 and 2019 were from one vendor.

Cost of goods sold remained consistent at $0.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Research and Development Expenses .

Research and development expenses increased by $0.1 million, or 20%, to $0.6 million for the three months ended March 31, 2020 compared to $0.5 million for the three months ended March 31, 2019.

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

Research and development expenses increased by $0.2 million, or 28%, to $0.8 million for the three months ended June 30, 2021 compared to $0.6 million for the three months ended June 30, 2021.

The increase in research and development expenses was primarily due to a pharmacokinetic characteristic and safety study for Endari® in the US and clinical study in Europe.

We expect our research and development costs to increase in the remainder of 2021 as the study progresses.

Selling Expenses .

Selling expenses decreased by $0.4 million, or 28%, to $1.1 million for the three months ended March 31, 2019 compared to $1.5 million for the three months ended March 31, 2019.

The decrease in selling expenses was primarily due to a decrease of $1.1 million in contract sales force fees for Endari® 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 marketing of Endari® in the U.S.

starting in January 2020.

Selling expenses increased by $0.3 million, or 28%, to $1.5 million for the three months ended June 30, 2021, compared to $1.1 million for the three months ended June 30, 2020.

The increase in selling expenses was primarily due to an increase of the headcount of our in-house commercial team.

General and Administrative Expenses.

General and administrative expenses decreased slightly by $0.1 million, or 2%, to $3.7 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The decrease of general and administrative expenses was primarily due to a decrease of $0.4 million in shared-based compensation expenses partially offset by increases of $0.2 million in insurance expenses and $0.1 million in office rent expenses.

General and administrative expenses decreased by $0.4 million, or 10% to $3.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The decrease in general and administrative expenses was primarily due to decreases of $0.2 million in professional fees and $0.2 million of insurance expenses.

Other Income ( Expense ) .

Total other income increased by $20.7 million, or 129%, to $4.7 million for the three months ended March 31, 2020, compared to $16.1 million of other expense for the three months ended March 31, 2019.

The increase in other income was primarily due to an increase of approximately $13.3 million in net gain on investment in marketable securities and a decrease of $6.8 million in interest expense.

Total other income in creased by $ 10.3 million, or 12 2%, to $ 1.8 million for the three months ended June 30, 202 1, compared to $ 8.4 million of other expense for the three months ended June 30, 20 20 .

The increase in other income was primarily due to a n increase of $2.5 million in change in fair value of embedded conversion option and decrease s of $ 5.6 million in net loss on investment in marketable securities , $1.4 million in loss on debt extinguishment and $ 0.7 million in interest expense.

Net Income (Loss) .

Net income for the three months ended March 31, 2020 increased by $22.9 million, or 132% to $5.5 million from a net loss of $17.4 million for the three months ended March 31, 2019.

The increase was primarily a result of increases of $20.7 million in other income and $2.4 million in income from operations as discussed above.

These results are not necessarily indicative of the expected results for the full year.

Net income for the three months ended June 30, 2021 increased by $12.0 million, or 126%, to a net income of $2.5 million for the three months ended June 30, 2021 from net loss of $9.5 million for the three months ended June 30, 2020.

The increase of net income was primarily a result of decreases of $10.3 million in other expense and an increase of $2.0 million in income from operations as discussed above.

Six months ended June 30, 2021 and 2020

Net revenues, Net .

Net revenues increased by $0.5 million, or 5%, to $11.8 million for the six months ended June 30, 2021 compared to $11.3 million for the six months ended June 30, 2020.

The increase in net revenues was primarily attributable to bulk order purchases and recovery from the temporary disruptions in revenues related the COVID-19 pandemic during 2020.

Cost of Goods Sold .

Cost of goods sold remained consistent at $0.9 million for six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Research and Development Expenses .

Research and development expenses increased by $1.4 million, or 112%, to $2.6 million for the six months ended June 30, 2021 compared to $1.2 million for the six months ended June 30, 2020.

The increase was primarily due to $0.5 million in cash and $0.5 million in shares of the Company’s stock issued under the agreement with Kainos Medicine, Inc.

(“Kainos”) to lead the clinical development of Kainos’ patented IRAK4 inhibitor and an increase of $0.5 million relates to a pharmacokinetic characteristic and safety study for Endari® and clinical study in Europe.

We expect our research and development costs to increase in the remainder of 2021 as our studies progress.

Selling Expenses .

Selling expenses increased by $0.5 million, or 24%, to $2.7 million for the six months ended June 30, 2021 compared to $2.2 million for the six months ended June 30, 2020.

The increase in selling expenses was primarily due to an increase of the headcount of in-house sales team.

General and Administrative Expenses.

General and administrative expenses decreased slightly by $0.6 million, or 8%, to $6.8 million for the six months ended June 30, 2021 compared to $7.4 million for the six months ended June 30, 2020.

The decrease of general and administrative expenses was primarily due to decreases of $0.4 million in insurance expenses and $0.2 million of professional fees.

Other Income (Expense) .

Total other expense increased by $1.2 million, or 32%, to $5.0 million for the six months ended June 30, 2021, compared to $3.8 million of other expense for the six months ended June 30, 2020.

The increase in other expenses was primarily due to a decrease of $1.2 million in net gain on investment in marketable securities and an increase of $1.2 million in loss in foreign exchange loss partially offset by a decrease of $1.4 million interest expenses.

Net Income (Loss) .

Net loss for the six months ended June 30, 2021 increased by $2.0 million, or 50% to $5.9 million for the six months ended June 30, 2021 from a net loss of $4.0 million for the six months ended June 30, 2020.

The increase was primarily a result of increases of $1.2 million in other expense and $0.7 million in loss from operations as discussed above.

Liquidity and Capital Resources

We anticipate that we will continue to incur net losses for the foreseeable future until we can generate increased net revenues from Endari® sales.

Based on our losses, anticipated future revenues and operating expenses, cash and cash equivalents of $2.5 million as of December 31, 2020, and the remaining net proceeds from the recent sale of convertible promissory notes described below, we believe our working capital is sufficient to meet our needs through at least through the third quarter of 2022.

Based on our losses, anticipated future revenues and operating expenses, cash and cash equivalents of $1.7 million as of June 30, 2021, and the remaining net proceeds from the recent sale of convertible promissory notes discussed in Note 7, we believe our working capital is sufficient to meet our needs at least through the third quarter of 2022.

If future revenues are less than anticipated or we incur more expenses than we anticipate, we may not have sufficient operating capital for our business without curtailing certain operations or raising additional capital.

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We may seek to bring the Company into compliance or seek an appropriate waiver from LPC to regain our ability to utilize the Purchase Agreement, but there can be no assurance when or whether we may be able to do so.

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 has 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 March 31, 2021, we 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 the outstanding 10% Senior Secured Convertible Debentures as described above.

Effective February 22, 2021, our 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.

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

Cash flows for the three months ended March 31, 2020 and March 31, 2019

Cash flows for the six months ended June 30, 2021 and June 30, 2020

Net cash from operating activities

Net cash provided by operating activities increased by $3.0 million, or 253%, to $1.8 million for the three months ended March 31, 2020 from net cash used in operation activities of $1.2 million for the three months ended March 31, 2019.

This increase was primarily due to a $2.4 million increase in income from operations.

Net cash used in operating activities decreased by $2.0 million, or 119%, to net cash used in operating activities of $3.8 million for the six months ended June 30, 2021 from net cash used in operating activities of $1.7 million for the six months ended June 30, 2020.

This increase of cash used in operating activities was primarily due to a decrease of $2.0 million in working capital.

Net cash from investing activities

Net cash provided by (used in) investing activities was not material for the three months ended March 31, 2020 or March 31, 2019.

Net cash used in investing activities decreased by $5.5 million, or 355%, to $3.9 million for the six months ended June 30, 2021 from net cash provided by investing activities of $1.6 million for the six months ended June 30, 2020.

This increase was primarily due to a $4.0 million loan to equity method investee and a $2.1 million of proceeds from sales of Telcon stock received during 2020.

Net cash from financing activities

Net cash used in financing activities increased by $0.9 million, or 176%, to $1.4 million for the three months ended March 31, 2020 from $0.5 million for the three months ended March 31, 2019.

This increase was the result of a decrease in proceeds from the issuance of common stock to $0.1 million for the three months ended March 31, 2020 from $2.5 million for the same period in 2019, which was partially offset by the decreased repayments of convertible notes to $1.5 million during the three months ended March 31, 2020 from $3.0 million for the same period in 2019.

Net cash provided by (used in) financing activities increased by $7.5 million, or 1334%, to net cash provided by financing activities of $6.9 million for the six months ended June 30, 2021 from net cash used in financing activities of $0.6 million for the six months ended June 30, 2020.

This increase was the result of $14.5 million in proceeds from the convertible promissory notes payable issued partially offset by a $5.7 million increase in payments of convertible notes.

Off-Balance-Sheet Arrangements

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Actual results may differ materially from these estimates.

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

There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2020.

Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Amended 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, 2021.

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