emma-10q_20200331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 001-35527

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

Delaware		87-0419387
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21250 Hawthorne Boulevard, Suite 800, Torrance, California		90503
(Address of principal executive offices)		(Zip code)

(310) 214-0065

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 49,311,864 shares of common stock, par value $0.001 per share, outstanding as of July 31, 2021.

EMMAUS LIFE SCIENCES, INC.

For the Quarterly Period Ended March 31, 2020

INDEX

		Page
	EXPLANATORY NOTE	3

Part I. Financial Information

Item 1.	Financial Statements	4

	(a)Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019	4

	(b)Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019 (Unaudited)	5

	(c)Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2020 and 2019 (Unaudited)	6

	(d)Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (Unaudited)	7

	(e)Notes to Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

Part II Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signatures		37

EXPLANATORY NOTE

As previously disclosed in the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 8, 2020, the board of directors of the Emmaus Life Sciences, Inc. (“we,” “us,” “our,” “Emmaus” or the “Company”), based on the recommendation of the audit committee, concluded that, because of errors identified in the previously issued annual financial statements of our EMI Holdings, Inc. subsidiary, or EMI, for the year ended December 31, 2018 as well as EMI’s unaudited consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June 30, 2019 included in our Current Report on Form 8-K/A filed with the SEC on August 8, 2019, and our previously filed unaudited consolidated financial statements for the three and nine months ended September 30, 2019, the Company would restate the previously issued financial statements. The previously issued financial statements of EMI preceded our merger with EMI in July 2019.

We determined that these errors were the result of material weaknesses in internal control over financial reporting as described in management’s report as of December 31, 2019 in Part II—Item 9A – Controls and Procedures of our Annual Report on Form 10-K filed with the SEC on January 25, 2021.

The restated quarterly financial statements corrected the following errors:

The misclassification as equity of warrants issued by EMI in October of 2018, which warrants should have been accounted for as liabilities based upon fair value.

The erroneous consolidation as a variable interest entity, or VIE, of EMI’s interest in EJ Holdings, Inc., which should have been accounted for based upon the equity method.

The mistreatment of the fair value of cashless exercise warrants originally recorded in the Consolidated Statements of Operations and Comprehensive Loss, which fair value should have been recorded in additional paid-in capital in the Consolidated Balance Sheets.

In addition to the errors described above, the restated financial statements also include adjustments to correct certain immaterial errors identified during the audit of the Company’s financial statements for the year ended December 31, 2019.

Please see Note 1 of Notes to Condensed Consolidated Financial Statements for the impact of the restatement on our financial statements as of and for the three months ended March 31, 2019.

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	As of
	March 31, 2020			December 31, 2019
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,213		$	1,769
Accounts receivable, net		1,900			2,150
Inventories, net		8,255			7,971
Investment in marketable securities		34,768			27,929
Prepaid expenses and other current assets		1,102			1,402
Total current assets		48,238			41,221
Property and equipment, net		142			151
Equity method investment		12,980			13,325
Right of use assets		4,344			4,474
Deposits and other assets		288			285
Total assets	$	65,992		$	59,456
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	13,209		$	11,498
Operating lease liabilities, current portion		1,079			991
Other current liabilities		1,113			5,748
Revolving line of credit to related parties		600			600
Warrant derivative liabilities		13			38
Notes payable		3,954			3,749
Notes payable to related parties		34			193
Convertible debentures, net of discount, current portion		5,908			7,015
Convertible note payable, net of discount		3,150			2,995
Total current liabilities		29,060			32,827
Operating lease liabilities, less current portion		3,810			3,932
Other long-term liabilities		36,968			33,750
Convertible debentures, net of discount, less current portion		886			—
Total liabilities		70,724			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 March 31, 2020 and December 31, 2019, respectively		49			48
Additional paid-in capital		216,157			215,207
Accumulated other comprehensive loss		(18	)		(79	)
Accumulated deficit		(220,920	)		(226,229	)
Total stockholders’ deficit		(4,732	)		(11,053	)
Total liabilities & stockholders’ deficit	$	65,992		$	59,456

The accompanying notes are an integral part of these condensed consolidated financial statements.

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 March 31,
	2020			2019 Restated
REVENUES, NET	$	6,954		$	4,707
COST OF GOODS SOLD		478			259
GROSS PROFIT		6,476			4,448
OPERATING EXPENSES
Research and development		617			513
Selling		1,068			1,479
General and administrative		3,657			3,737
Total operating expenses		5,342			5,729
INCOME (LOSS) FROM OPERATIONS		1,134			(1,281	)
OTHER INCOME (EXPENSE)
Change in fair value of warrant derivative liabilities		25			(938	)
Change in fair value of embedded conversion option		(29	)		—
Net gains (losses) on investment in marketable securities		6,839			(6,457	)
Gain (loss) on equity method investment		(407	)		9
Interest and other income (loss)		33			(77	)
Interest expense		(1,800	)		(8,612	)
Total other income (expense)		4,661			(16,075	)
INCOME (LOSS) BEFORE INCOME TAXES		5,795			(17,356	)
INCOME TAXES		286			52
NET INCOME (LOSS)		5,509			(17,408	)

COMPONENTS OF OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments		61			7
Other comprehensive income		61			7
COMPREHENSIVE INCOME (LOSS)	$	5,570		$	(17,401	)
EARNINGS (NET LOSS) PER COMMON SHARE - BASIC AND DILUTED	$	0.11		$	(0.46	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		48,624,469			37,473,431

The accompanying notes are an integral part of these condensed consolidated financial statements.

EMMAUS LIFE SCIENCES, INC.

CONDESED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share and per share amounts)

(Unaudited)

	Common Stock				Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Stockholder's
	Shares		Amount		Capital		Loss			Deficit			Deficit
Balance at 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	)

	Common Stock				Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Stockholder's
	Shares		Amount		Capital		Loss			Deficit			Deficit
Balance at January 1, 2019, as restated		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 (net of issuance cost)		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 stock options		175		—		1		—			—			1
Foreign currency translation effect		—		—		—		7			—			7
Net loss		—		—		—		—			(17,408	)		(17,408	)
Balance, March 31, 2019, as restated		37,750,424	$	38	$	156,508	$	(62	)	$	(188,795	)	$	(32,311	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,

				2019
	2020			Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)	$	5,509		$	(17,408	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		15			17
Amortization of discount of notes payable and convertible notes payable		1,302			7,288
Foreign exchange adjustments		(50	)		89
Net (gain) loss on investment in marketable securities		(6,839	)		6,457
Loss (gain) on equity method investment		407			(9	)
Share-based compensation		209			588
Change in fair value of warrant derivative liabilities		(25	)		938
Change in fair value of embedded conversion option		29			—
Net changes in operating assets and liabilities
Accounts receivable		249			(143	)
Inventories		(285	)		(1,091	)
Prepaid expenses and other current assets		260			(115	)
Other non-current assets		133			(2,813	)
Income tax receivable and payable		286			52
Accounts payable and accrued expenses		2,449			2,725
Deferred revenue		—			500
Deferred rent		—			(287	)
Other current liabilities		(5,025	)		36
Other long-term liabilities		3,184			1,997
Net cash flows provided by (used in) operating activities		1,808			(1,179	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(3	)		(16	)
Net cash flows used in investing activities		(3	)		(16	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of convertible notes		(1,500	)		(3,048	)
Proceeds from exercise of warrants		—			5
Proceeds from issuance of common stock		142			2,530
Proceeds from conversion of notes payable to common stock		—			21
Net cash flows used in financing activities		(1,358	)		(492	)
Effect of exchange rate changes on cash		(3	)		22
Net increase (decrease) in cash, cash equivalents and restricted cash		444			(1,665	)
Cash, cash equivalents and restricted cash, beginning of period		1,769			3,905
Cash, cash equivalents and restricted cash, end of period	$	2,213		$	2,240
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	312		$	385
NON-CASH INVESTING AND FINANCING ACTIVITIES
Warrants issued	$	400		$	—
Beneficial conversion feature relating to convertible notes	$	—		$	3,374
Initial recognition of right to use assets	$	—		$	2,922
Conversion of notes payable to common stock	$	—		$	329

The accompanying notes are an integral part of these condensed consolidated financial statements.

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 From 10-K/A. The results of operations for the three months ended March 31, 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. 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.

Restatement of Prior Period Amounts — In connection with the preparation of our December 31, 2019 consolidated financial statements, we identified the following material errors in our condensed consolidated financial statements as of and for the three months ended March 31, 2019.

The misclassification as equity of warrants issued by EMI in October of 2018, which warrants should have been accounted for as liabilities based upon fair value; and

The erroneous consolidation as a variable interest entity, or VIE, of EMI’s interest in EJ Holdings, Inc., which should have been accounted for based upon the equity method.

Consolidated Balance Sheets.

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	As of March 31, 2019
	Previously Reported		Adjustment				Restated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	15,310	$	(13,070	)	(a)	$	2,240
Accounts receivable, net		1,760		301		(c)		2,061
Inventories, net		5,795		—				5,795
Investment in marketable securities		42,873		—				42,873
Marketable securities, pledged to creditor		251		—				251
Prepaid expenses and other current assets		818		(215	)	(a), (c)		603
Total current assets		66,807		(12,984	)			53,823
Property and equipment, net		153