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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-09-01 · 63 added, 44 removed, 107 unchanged (50% 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., and its direct and indirect subsidiaries .

In the following discussion, the terms, “we,” “us,” “our,” “Emmaus” or the “Company” refer to Emmaus Life Sciences, Inc.

and its direct and indirect subsidiaries .

Forward-Looking Statements

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

As of March 31, 2021, our accumulated deficit was $233.8 million and we had cash and cash equivalents of $3.8 million.

As of September 30, 2021, our accumulated deficit was $234.4 million and we had cash and cash equivalents of $2.3 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 arrangements.

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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

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 .

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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 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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Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs.

The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies.

This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.

The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally substantially higher than those of earlier studies due to their larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.

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

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

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

Substantially all raw materials purchased during the three months ended March 31, 2021 and 2020 were supplied by one vendor.

Substantially all raw materials purchased during the nine months ended September 30, 2021 and 2020 were supplied by one vendor.

Results of Operations:

Three months ended March 31, 2021 and 2020

Revenues, Net .

Net revenues decreased by $1.6 million, or 23%, to $5.3 million for the three months ended March 31, 2021 compared to $7.0 million for the three months ended March 31, 2020.

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

Three months ended September 30, 2021 and 2020

Net revenues, Net .

Net revenues increased by $0.2 million, or 3%, to $5.8 million for the three months ended September 30, 2021, compared to $5.6 million for the three months ended September 30, 2020.

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

Cost of Goods Sold .

Cost of goods sold decreased slightly by $42,000 or 9%, to approximately $436,000 for the three months ended March 31, 2021 compared to approximately $478,000 for the three months ended March 31, 2020.

The decrease in cost of goods sold is due to the decrease in net revenues partially offset by $162,000 of reserve for Endari® inventory with a shelf-life less than two years.

Cost of goods sold decreased by $0.1 million, or 8%, to $0.4 million for the three months ended September 30, 2021, compared to $0.5 million for the three months ended September 30, 2020.

Research and Development Expenses .

Research and development expenses increased by $1.2 million, or 193%, to $1.8 million for the three months ended March 31, 2021 compared to $0.6 million for the three months ended March 31, 2020.

This increase was primarily due to $500,000 in cash paid and $500,000 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 $ 0.2 million relates to a pharmacokinetic characteristic and safety study for Endari®.

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

Research and development expenses decreased by $0.2 million, or 25%, to $0.5 million for the three months ended September 30, 2021, compared to $0.6 million for the three months ended September 30, 2020.

The decrease was primarily due to nearing completion of the preclinical phase of our diverticulosis study.

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

Selling Expenses .

Selling expenses increased by $0.2 million, or 20%, to $1.3 million for the three months ended March 31, 2021 compared to $1.1 million for the three months ended March 31, 2020.

The increase in selling expenses was primarily due to an increase of $0.2 million in in-house sales team compensation as we have increased on our in-house commercial team for marketing of Endari® in the U.S.

Selling expenses increased by $0.2 million, or 15%, to $1.5 million for the three months ended September 30, 2021, compared to $1.3 million for the three months ended September 30, 2020.

The increase in selling expenses was primarily due to an increase of travel expenses as travel restrictions due to Covid-19 have been eased.

General and Administrative Expenses.

General and administrative expenses decreased slightly by $0.2 million, or 6%, to $3.4 million for the three months ended March 31, 2021 compared to $3.6 million for the three months ended March 31, 2020.

The decrease of general and administrative expenses was primarily due to a decrease of $0.2 million in consulting expenses.

General and administrative expenses increased by $0.2 million, or 7%, to $3.4 million for the three months ended September 30, 2021, compared to $3.2 million for the three months ended September 30, 2020.

The increase in general and administrative expenses was due to an increase of $0.2 million in payroll expenses attributable to our Dubai office.

Other Income ( Expense ) .

Total other expense increased by $ 11.5 million, or 246% , to $ 6.8 million for the three months ended March 31, 2021 , compared to $ 4.7 million of other income for the three months ended March 31, 2020 .

The increase in other expense s was primarily due to a decrease of $ 6.8 million in n et gain on investment in marketable securities , an increase of $ 2.3 million in loss on change in fair value of embedded conversion option, a $1.2 million in loss on debt extinguishment, and a $1.2 million increase in foreign exchange loss.

Total other expense in creased by $ 8.8 million, or 1 49 %, to $ 2.9 million for the three months ended September 30, 202 1, compared to $ 5.

9 million of other income for the three months ended September 30, 20 20 .

The increase was primarily due to decreases of $ 6.5 million in net income on investment in marketable securities, $ 1.4 million in change in fair value of embedded conversion option and $0.9 million in change in fair value of warrant derivative liabilities and an increase of $0.9 million in foreign exchange loss , partially offset by a decrease of $ 0.

9 million in interest expense.

Net Income (Loss) .

Net loss for the three months ended March 31, 2021 increased by $13.9 million, or 245% to $8.4 million from a net income of $5.5 million for the three months ended March 31, 2020.

Net loss for the three months ended September 30, 2021 increased by $8.7 million, or 156%, to a net loss of $3.2 million for the three months ended September 30, 2021 from net income of $5.6 million for the three months ended September 30, 2020.

The increased net loss was due to the decrease of $8.8 million in other expense as discussed above, partially offset by a decrease of $0.1 million in income tax provision.

Nine months ended September 30, 2021and 2020

Net revenues, Net .

Net revenues increased by $0.7 million, or 4%, to $17.6 million for the nine months ended September 30, 2021, compared to $16.9 million for the nine months ended September 30, 2020.

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

Cost of Goods Sold .

Cost of goods sold decreased by $0.1 million or 7%, to $1.3 million for nine months ended September 30, 2021, compared to $1.4 million for the nine months ended September 30, 2020.

Research and Development Expenses .

Research and development expenses increased by $1.2 million, or 65%, to $3.0 million for the nine months ended September 30, 2021, compared to $1.8 million for the nine months ended September 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 to lead the clinical development of Kainos’ patented IRAK4 inhibitor and an increase of $0.6 million relates to a pharmacokinetic characteristic and safety study for Endari® and clinical study in Europe partially offset by a decrease of $0.4 million relating to our diverticulosis study.

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

Selling Expenses .

Selling expenses increased by $0.7 million, or 21%, to $4.3 million for the nine months ended September 30, 2021, compared to $3.5 million for the nine months ended September 30, 2020.

The increase was primarily due to increased headcount of our in-house sales team and increased travel expenses.

General and Administrative Expenses.

General and administrative expenses decreased by $0.4 million, or 4%, to $10.2 million for the nine months ended September 30, 2021, compared to $10.5 million for the nine months ended September 30, 2020.

The decrease was primarily due to decreases of $0.3 million in insurance expenses, $0.3 million of professional fees, $0.2 million of recruiting expenses and $0.1 million of public relations expenses, partially offset by an increase of $0.5 million of Dubai office operating expenses.

Other Income (Expense) .

Total other expense increased by $10.0 million, or 475%, to $7.9 million for the nine months ended September 30, 2021, compared to $2.1 million of other income for the nine months ended September 30, 2020.

The increase in other expenses was primarily due to decreases of $7.7 million in net gain on investment in marketable securities, $1.2 million in change in fair value of conversion feature derivative and $1.0 million in change in fair value of warrant derivative liabilities, and an increase of $2.1 million in loss in foreign exchange loss, partially offset by a decrease of $2.3 million interest expenses.

Net Income (Loss) .

Net loss for the nine months ended September 30, 2021 increased by $10.7 million, or 660% to $9.1 million for the nine months ended September 30, 2021, compared to net income of $1.6 million for the nine months ended September 30, 2020.

The increase was primarily a result of increases of $10.0 million in other expense and $0.8 million in loss from operations as discussed above.

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

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 $3.8 million as of March 31, 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.

Based on our losses, anticipated future revenues and operating expenses and cash and cash equivalents of $2.3 million as of September 30, 2021, we believe our working capital is sufficient to meet our needs at least through the fourth quarter of 2022.

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

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

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

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.

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.

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.

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

Cash flows for the three months ended March 31, 2021 and March 31, 2020

Net cash from operating activities

Net cash provided by (used in) operating activities decreased by $5.8 million, or 321%, to net cash used in operating activities of $4.0 million for the three months ended March 31, 2021 from net cash provided by operating activities of $1.8 million for the three months ended March 31, 2020.

This decrease was primarily due to a $2.7 million decrease in income from operations and a decrease of $3.1 million in working capital.

Net cash from investing activities

Net cash used in investing activities increased by $1.8 million, to $1.8 million for the three months ended March 31, 2021 from $3,000 for the three months ended March 31, 2020.

This increase was primarily due to a $1.8 million loan made to equity method investee.

Net cash from financing activities

Net cash provided by (used in) financing activities increased by $8.4 million, or 618%, to net cash provided by financing activities of $7.0 million for the three months ended March 31, 2021 from net cash used in financing activities of $1.4 million for the three months ended March 31, 2020.

This increase was the result of $14.4 million in proceeds from the convertible promissory notes payable issued offset by $5.7 million increase in payment of convertible notes.

Cash flows for the nine months ended September 30, 2021 and September 30, 2020

Net cash provided by (used in) operating activities

Net cash used in operating activities decreased by $2.2 million, or 51%, to $2.1 million for the nine months ended September 30, 2021 from $4.4 million for the nine months ended September 30, 2020 due to a decrease of $2.5 million in working capital.

Net cash provided by (used in) investing activities

Net cash used in investing activities decreased by $38.6 million, or 116%, to $5.3 million for the nine months ended September 30, 2021 from net cash provided by investing activities of $33.3 million for the nine months ended September 30, 2020.

This decrease was primarily due to a $3.0 million loan to equity method investee and a $35.6 million of proceeds from sales of Telcon stock received during 2020.

Net cash provided by (used in) financing activities

Net cash provided by financing activities increased by $7.3 million to net cash provided by financing activities of $7.2 million for the nine months ended September 30, 2021 from net cash used in financing activities of $0.1 million for the nine months ended September 30, 2020.

This increase was the result of $14.5 million in proceeds from the sales of convertible promissory notes, partially offset by a $6.2 million used to prepay our outstanding 10% Senior Secured Convertible Debentures.

Off-Balance-Sheet Arrangements

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

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