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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-13 · 79 added, 44 removed, 119 unchanged (51% of the section changed)

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Food and Drug Administration, or FDA , to reduce the acute complications of sickle cell disease (“SCD”), in adult and pediatric patients five years of age and older.

In April 2022, Endari ® was approved by the Ministry of Health and Prevention in in the United Arab Emirates, or U.A.E, in adults and pediatric patients five years of age and older.

In April 2022, Endari ® was approved by the Ministry of Health and Prevention in the United Arab Emirates, or U.A.E, in adults and pediatric patients five years of age and older.

The approval of Endari® in the U.A.E.

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In April 2022 we launched an innovative telehealth solution to afford SCD patients’ direct access to Endari® remotely through a web portal managed by our strategic partners, including Asembia LLC, US Bioservices Corporation and UpScript IP Holdings, LLC.

As of March 31, 2022, our accumulated deficit was $242.9 million and we had cash and cash equivalents of $0.8 million.

As of June 30, 2022, our accumulated deficit was $252.1 million and we had cash and cash equivalents of $1.0 million.

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

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To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following:

(i) identify the contract with a customer;

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

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Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline.

In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.

In addition, we cannot predict which product candidates may be subject to future

collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.

Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approvals of Endari® outside of the U.S.

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General and Administrative Expense

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

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

Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.

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

In retrospect, we believe our business was adversely by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors’ offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care.

We intend to consider future changes to our business to adapt to the new post-pandemic environment, including our traditional reliance on our in-house sales force.

In retrospect, we believe our business and net revenues were adversely affected in 2020 and 2021 by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors’ offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care.

We do not expect the ongoing epidemic to have a material adverse affect on our business or results of operation, but intend to consider future changes to our business to adapt to the new post-pandemic environment, including an increased focus on our telehealth solution.

Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.

Environmental Expenses

The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.

The cost of compliance with environmental laws has not been material over the past two years and is not expected to have a material effect for the foreseeable future.

Any such costs are included in general and administrative costs.

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, 2022 and 2021 were supplied by one supplier.

Substantially all raw materials purchased during each of the six months ended June 30, 2022 and 2021 were supplied by one vendor.

Results of Operations:

Three months ended March 31, 2022 and 2021

Net revenues, Net .

Net revenues decreased by $2.1 million, or 39%, to $3.2 million for the three months ended March 31, 2022, compared to $5.3 million for the three months ended March 31, 2021.

The decrease in net revenues was primarily attributable to lower bulk order purchases in 2022 compared to the same period in 2021 .

Three months ended June 30, 2022 and 2021

Net revenues .

Net revenues decreased by $2.2 million, or 34%, to $4.3 million for the three months ended June 30, 2022, compared to $6.5 million for the three months ended June 30, 2021.

The decrease was primarily attributable to lower bulk order purchases in 2022 compared to the same period in 2021.

Cost of Goods Sold .

Cost of goods sold increased by $0.6 million or 131%, to $1.0 million for three months ended March 31, 2022, compared to $0.4 million for the three months ended March 31, 2021 due primarily to $0.8 million of additional reserve relating to Endari® inventory with a shelf-life of less than two years.

Cost of goods sold remained consistent at $0.4 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Research and Development Expenses .

Research and development expenses decrease by $ 1.3 million, or 74% , to $ 0.5 million for the three months ended March 31, 2022 , compared to $ 1.

8 million for the three months ended March 31, 2021 .

Th e decrease was primarily due to one-time payment of $ 0.5 million in cash and $ 0.5 million in shares of common stock in 2021 under our collaborati ve research and development agreement with Kainos .

Depending on the availability of funding, w e expect our research and development costs to increase in the remainder of 20 2 2 .

Research and development expenses de creased by $0.

5 million, or 60 % , to $0.

3 million for the three months ended June 30, 202 2 , compared to $0.

8 million for the three months ended June 30, 20 21 .

The de crease was primarily due to reduced costs associated with a pharmacokinetic characteristic and safety study for Endari ® in the U .

and a clinical study in Europe.

We expect our research and development costs to increase in the remainder of 202 2 as the stud ies progress o r other studies are undertaken .

Selling Expenses .

Selling expenses increased by $0.2 million, or 14%, to $1.5 million for the three months ended March 31, 2022 compared to $1.3 million for the three months ended March 31, 2021.

The increase was primarily due to increased travel expenses.

Selling expenses increased by $0.5 million, or 34%, to $2.0 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021.

The increase was primarily due to increases in consulting fees and in travel expenses of our in-house commercial team.

General and Administrative Expenses.

General and administrative expenses slightly decreased by $53,000, or 2%, to $3.4 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The decrease was primarily due to decreases of $0.4 million in compensation expense including share-based compensation, $0.1 million of professional fees, partially offset by an increase of $0.3 million of Dubai office operating expenses and $0.1 million of public relations expenses.

General and administrative expenses decreased by $0.3 million, or 9% to $3.1 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021.

The decrease was primarily due to a decrease of $0.5 million in professional fees, partially offset by total of $0.2 million in increased payroll expenses and travel expenses.

Other Income (Expense) .

Total other income increased by $8.2 million, or 121%, to $1.4 million for the three months ended March 31, 2022, compared to $6.8 million of other expense for the three months ended March 31, 2021.

The increase was primarily due to increases of $5.4 million in change in fair value of conversion feature derivative and $1.3 million in change in fair value of warrant derivative liabilities, a $1.2 million in loss on debt extinguishment in the comparable period in 2021, and a decrease of $0.3 million in interest expense in 2022.

Net loss for the three months ended March 31, 2022 increased by $6.9 million, or 82% to $1.5 million for the three months ended March 31, 2022, compared to $8.4 million for the three months ended March 31, 2021.

The decrease was primarily a result of an increase of $8.2 million in other income, partially offset by an increase of $1.5 million in loss from operations.

Total other expenses increased by $9.1 million, or 501%, to $7.3 million for the three months ended June 30, 2022, compared to $1.8 million of other income for the three months ended June 30, 2021.

The increase was primarily due to a decrease of $6.3 million in change in fair value of embedded conversion option and an increase of $2.4 million in foreign exchange loss.

Net Income (Loss) .

Net loss for the three months ended June 30, 2022, increased by $11.4 million, or 457%, to a net loss of $8.9 million for the three months ended June 30, 2022, compared to net income of $2.5 million for the three months ended June 30, 2021.

The increase of net loss was primarily a result of an increase of $9.1 million in other expense and a decrease of $1.9 million in income from operations as discussed above.

Six months ended June 30, 2022 and 2021

Net revenues .

Net revenues decreased by $4.3 million, or 36%, to $7.5 million for the six months ended June 30, 2022, compared to $11.8 million for the six months ended June 30, 2021.

The decrease was primarily attributable to lower bulk orders in 2022 compared to the same period in 2021.

Cost of Goods Sold .

Cost of goods sold increased by $0.5 million, or 62% to $1.4 million for six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The increase was primarily due to $0.7 million of additional reserves relating to Endari® inventory with a shelf-life of less than two years.

Research and Development Expenses .

Research and development expenses decreased by $1.8 million, or 70%, to $0.8 million for the six months ended June 30, 2022, compared to $2.6 million for the six months ended June 30, 2021.

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

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

and a clinical study in Europe.

We expect our research and development costs to increase in the remainder of 2022 as the studies progress or new studies are undertaken.

Selling Expenses .

Selling expenses increased by $0.7 million, or 25%, to $3.4 million for the six months ended June 30, 2022, compared to $2.7 million for the six months ended June 30, 2021.

The increase was primarily due to increases in the consulting fees and in travel expenses of in-house sales team.

General and Administrative Expenses.

General and administrative expenses decreased slightly by $0.3 million, or 5%, to $6.5 million for the six months ended June 30, 2022, compared to $6.8 million for the six months ended June 30, 2021.

The decrease was primarily due to decreases of $0.7 million in professional fees partially offset by $0.2 million in increased payroll expenses and travel expenses.

Other Income (Expense) .

Total other expense increased by $0.9 million, or 18%, to $5.8 million for the six months ended June 30, 2022, compared to $5.0 million for the six months ended June 30, 2021.

The increase was primarily due to increases of $2.5 million in loss in foreign exchange and $0.8 million in change in fair value of conversion feature derivative.

Net Income (Loss) .

Net loss for the six months ended June 30, 2022 increased by $4.5 million, or 76% to $10.4 million for the six months ended June 30, 2022, compared to $5.9 million for the six months ended June 30, 2021.

The increase was primarily a result of increases of $0.9 million in other expense and $3.4 million in loss from operations as discussed above.

Liquidity and Capital Resources

Based on our losses to date, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to EJ Holdings and cash and cash equivalents balance of $0.8 million as of March 31, 2022, we do not have sufficient operating capital for our business without raising additional capital.

We realized a net loss of $1.5 million for the three months ended March 31, 2022 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari ® sales.

Based on our losses to date, current liabilities, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to EJ Holdings and cash and cash equivalents balance of $1.0 million as of June 30, 2022, we do not have sufficient capital for our business without raising additional capital.

We realized a net loss of $10.0 million for the six months ended June 30, 2022 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari ® sales.

While we anticipate increased net revenues as we expand our commercialization of Endari® in the U.S.

through telehealth and other initiatives, as well as in the U.A.E.

and perhaps other GCC countries, there is no assurance that we will be able to increase our Endari® sales or attain sustainable profitability or that we will have sufficient capital resources to fund our operations until we are able to generate sufficient cash flow from operations .

and perhaps other GCC countries, there is no assurance that we will be able to significantly increase our Endari® sales or attain sustainable profitability or that we will have sufficient capital resources to fund our operations until we are able to generate sufficient cash flow from operations .

If we are unable to raise needed capital, we may need to suspend all or substantially all business activities except those essential to support our Endari sales while we seek to restructure or refinance our existing indebtedness and other current liabilities.

Our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, is party a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 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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We have no contractual commitment to provide funding to EJ Holdings, but plan to continue to do so in the foreseeable to the extent we have cash available for this purpose.

As of March 31, 2022, we had outstanding $17.6 million in principal amount of convertible promissory notes and $6.6 million in principal amount of other notes payable.

As of June 30, 2022, we had outstanding $17.6 million principal amount of convertible promissory notes and $9.7 million principal amount of other notes payable.

Our minimum lease payment obligations were $3.6 million, of which $0.6 million was payable within 12 months.

Our API supply agreement with Telcon provides for an annual API purchase target of $5 million and a target “profit” ( i.e ., gross margin) to Telcon of $2.5 million.

To the extent these targets are not met, which management refers to as a “target shortfall,”

Telcon may be entitled to payment of the shortfall or to settle the target shortfall in exchange for principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations.

I n February 2022 we agreed with Telcon to settle the target shortfall under the API supply agreement for 2020 and 2021 in exchange for principal and interest on our Telcon convertible bond and cash proceeds thereof .

Due to uncertainties regarding our ability to meet our current and future operating and capital expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to Financial Statements included herein.

Cash flows for the three months ended March 31, 2022 and March 31, 2021

We are in discussions with the holders of the convertible promissory notes to possibly restructure the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.

Of our outstanding convertible promissory notes, $14.5 million principal amount of the notes bear interest at the stated rate of 2% per year (10% in the event of a default), 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, unless earlier converted or prepaid.

We are in discussions with the holders of these convertible promissory notes to possibly restructure our obligations under the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.

Our API Supply Agreement and revised API Agreement with Telcon provide for an annual API purchase target of $5 million and a target “profit” ( i.e ., gross margin) to Telcon of $2.5 million.

To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall in cash or to settle the target shortfall in exchange for principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations.

In February 2022 we agreed with Telcon to settle the target shortfall for 2020 and 2021 in exchange for a reduction in principal and accrued interest on our Telcon convertible bond and cash proceeds thereof as described in Note 5 of the Notes to condensed consolidated financial statements.

Due to uncertainties regarding our ability to meet our current liabilities and future operating expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to condensed consolidated financial statements included herein.

Cash flows for the six months ended June 30, 2022 and June 30, 2021

Net cash used in operating activities

Net cash used in operating activities increased by $0.7 million, or 18%, to $4.7 million for the three months ended March 31, 2022 from $4.0 million for the three months ended March 31, 2021 due to an increase of $6.9 million in net loss partially offset by a decrease of $5.4 million change in fair value of conversion feature derivative.

Net cash provided by (used in) investing activities

Net cash provided by investing activities increased by $3.0 million, or 169%, to $1.2 million for the three months ended March 31, 2022 from net cash used in investing activities of $1.8 million for the three months ended March 31, 2021.

This increase was due to deemed proceeds of $2.9 million sales of convertible bonds resulting from the offset of target shortfalls against principal and interest of our Telcon convertible note against our trade discount.

Net cash provided by financing activities

Net cash provided by financing activities decreased by $5.0 million, or 71%, to $2.0 million for the three months ended March 31, 2022 from $7.0 million for the three months ended March 31, 2021.

This decrease was the result of $13.0 million in proceeds from the sales of convertible notes payable in 2021, partially offset by a $6.2 million used to prepay our outstanding 10% Senior Secured Convertible Debentures in the same period.

Net cash used in operating activities increased by $2.0 million, or 54%, to $5.8 million for the six months ended June 30, 2022 from $3.8 million for the six months ended June 30, 2021.

This increase was primarily due to an increase of $3.3 million in loss from operations.

Net cash used in investing activities

Net cash used in investing activities decreased by $3.5 million, or 89%, to $0.4 million for the six months ended June 30, 2022 from $4.0 million for the six months ended June 30, 2021.

This decrease was primarily due to deemed proceeds of $2.9 million sales of convertible bonds resulting from the offset target shortfalls against principal and interest of our Telcon convertible note against our trade discount.

Net cash from financing activities

Net cash from financing activities decreased by $2.0 million, or 29%, to $4.9 million for the six months ended June 30, 2022 from net cash provided by financing activities of $6.9 million for the six months ended June 30, 2021.

This decrease was the result of $14.5 million in proceeds from the convertible promissory notes payable issued in 2021, partially offset by a $6.2 million used to prepay our outstanding Amended and Restated10% Senior Secured Convertible Debenture in the same period and $5.0 million of proceeds from note payable issued in 2022.

Off-Balance-Sheet Arrangements

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

There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2022.

There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2022.

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