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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

OR

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:

 

1.

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.

 

 

2.

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.

 

 

3.

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.  

 

 

4.

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.

 

3


 

 

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.

4


 

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.


 

5


 

 

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.

 

 

 

 

 

 

 

 

 

 


6


 

 

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.

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 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.

 

1.

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

 

 

2.

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.

 

 

3.

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

8


 

 

Consolidated Balance Sheets.  

 

 

4.

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.

 

 

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