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i

 

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 June 30, 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 June 30, 2020

INDEX

 

 

 

Page

 

EXPLANATORY NOTE

3

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements

4

 

 

 

 

(a)Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

4

 

 

 

 

(b)Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019 (Unaudited)

5

 

 

 

 

(c)Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the six months ended June 30, 2020 and 2019 (Unaudited)

6

 

 

 

 

(d)Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

Part II Other Information

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5.

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

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 Holding, 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 10K 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 and six months ended June 30, 2019.

 

3


 

 

Item 1. Financial Statements

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

As of

 

 

 

June 30, 2020

 

 

 

 

 

 

 

(Unaudited)

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,032

 

 

$

1,769

 

Restricted cash

 

 

7

 

 

 

 

Accounts receivable, net

 

 

1,457

 

 

 

2,150

 

Inventories, net

 

 

7,863

 

 

 

7,971

 

Investment in marketable securities

 

 

27,007

 

 

 

27,929

 

Prepaid expenses and other current assets

 

 

1,170

 

 

 

1,402

 

Total current assets

 

 

38,536

 

 

 

41,221

 

Property and equipment, net

 

 

141

 

 

 

151

 

Equity method investment

 

 

13,005

 

 

 

13,325

 

Right of use assets

 

 

4,283

 

 

 

4,474

 

Deposits and other assets

 

 

285

 

 

 

285

 

Total assets

 

$

56,250

 

 

$

59,456

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

10,377

 

 

$

11,498

 

Operating lease liabilities

 

 

1,103

 

 

 

991

 

Other current liabilities

 

 

957

 

 

 

5,748

 

Revolving line of credit to related parties, net

 

 

600

 

 

 

600

 

Warrant derivative liabilities

 

 

1,539

 

 

 

38

 

Notes payable, current portion

 

 

4,271

 

 

 

3,749

 

Notes payable to related parties

 

 

34

 

 

 

193

 

Convertible debentures, net of discount

 

 

7,594

 

 

 

7,015

 

Convertible note payable, net of discount

 

 

 

 

 

2,995

 

Total current liabilities

 

 

26,475

 

 

 

32,827

 

Operating lease liabilities, less current portion

 

 

3,722

 

 

 

3,932

 

Other long-term liabilities

 

 

36,434

 

 

 

33,750

 

Notes payable, less current portion

 

 

488

 

 

 

 

Convertible note payable

 

 

3,150

 

 

 

 

Total liabilities

 

 

70,269

 

 

 

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 June 30, 2020 and December 31, 2019, respectively

 

 

49

 

 

 

48

 

Additional paid-in capital

 

 

216,376

 

 

 

215,207

 

Accumulated other comprehensive loss

 

 

(51

)

 

 

(79

)

Accumulated deficit

 

 

(230,393

)

 

 

(226,229

)

Total stockholders’ deficit

 

 

(14,019

)

 

 

(11,053

)

Total liabilities & stockholders’ deficit

 

$

56,250

 

 

$

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 June 30,

 

 

Six months ended June 30,

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

2019

 

 

 

2020

 

 

Restated

 

 

2020

 

 

Restated

 

REVENUES, NET

 

$

4,360

 

 

$

5,493

 

 

$

11,314

 

 

$

10,200

 

COST OF GOODS SOLD

 

 

446

 

 

 

264

 

 

 

924

 

 

 

523

 

GROSS PROFIT

 

 

3,914

 

 

 

5,229

 

 

 

10,390

 

 

 

9,677

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

589

 

 

 

540

 

 

 

1,206

 

 

 

1,053

 

Selling

 

 

1,135

 

 

 

1,891

 

 

 

2,203

 

 

 

3,370

 

General and administrative

 

 

3,725

 

 

 

2,682

 

 

 

7,382

 

 

 

6,419

 

  Total operating expenses

 

 

5,449

 

 

 

5,113

 

 

 

10,791

 

 

 

10,842

 

INCOME (LOSS) FROM OPERATIONS

 

 

(1,535

)

 

 

116

 

 

 

(401

)

 

 

(1,165

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on debt extinguishment

 

 

(1,425

)

 

 

 

 

 

(1,425

)

 

 

 

Change in fair value of warrant derivative liabilities

 

 

(101

)

 

 

854

 

 

 

(76

)

 

 

(84

)

Change in fair value of embedded conversion option

 

 

35

 

 

 

 

 

 

6

 

 

 

 

Net gains (losses) on investment in marketable securities and long-term investment

 

 

(5,631

)

 

 

(10,537

)

 

 

1,208

 

 

 

(16,994

)

Loss on equity method investment

 

 

(573

)

 

 

(458

)

 

 

(980

)

 

 

(449

)

Interest and other income

 

 

567

 

 

 

307

 

 

 

600

 

 

 

230

 

Interest expense

 

 

(1,309

)

 

 

(7,827

)

 

 

(3,109

)

 

 

(16,439

)

  Total other expenses

 

 

(8,437

)

 

 

(17,661

)

 

 

(3,776

)

 

 

(33,736

)

LOSS BEFORE INCOME TAXES

 

 

(9,972

)

 

 

(17,545

)

 

 

(4,177

)

 

 

(34,901

)

INCOME TAXES (BENEFIT)

 

 

(499

)

 

 

51

 

 

 

(213

)

 

 

103

 

NET LOSS

 

 

(9,473

)

 

 

(17,596

)

 

 

(3,964

)

 

 

(35,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(33

)

 

 

6

 

 

 

28

 

 

 

13

 

Other comprehensive income (loss)

 

 

(33

)

 

 

6

 

 

 

28

 

 

 

13

 

COMPREHENSIVE LOSS

 

$

(9,506

)

 

$

(17,590

)

 

$

(3,936

)

 

$

(34,991

)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

 

$

(0.19

)

 

$

(0.47

)

 

$

(0.08

)

 

$

(0.93

)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

 

48,987,189

 

 

 

37,836,678

 

 

 

48,805,829

 

 

 

37,656,058

 

 

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


 

5


 

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED 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

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Deficit

 

 

Balance, 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

)

 

Share-based compensation

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

 

Foreign currency translation effect

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

 

 

 

(33

)

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,473

)

 

 

(9,473

)

 

Balance, June 30, 2020

 

 

48,987,189

 

 

$

49

 

 

$

216,376

 

 

$

(51

)

 

$

(230,393

)

 

$

(14,019

)

 

 

 

 

 

Common stock

 

 

Additional Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Balance, 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

 

 

37,750,424

 

 

 

38

 

 

 

156,508

 

 

 

(62

)

 

 

(188,795

)

 

 

(32,311

)

Beneficial conversion feature relating to convertible notes

 

 

 

 

 

 

 

 

5,390

 

 

 

 

 

 

 

 

 

5,390

 

Exercise of warrants

 

 

53,032

 

 

 

 

 

 

181

 

 

 

 

 

 

 

 

 

181

 

Stock issued for cash (net of issuance cost)

 

 

76,755