Quarterly report pursuant to Section 13 or 15(d)

BASIS OF PRESENTATION

v3.21.2
BASIS OF PRESENTATION
6 Months Ended
Jun. 30, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
BASIS OF PRESENTATION

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 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 Form 10-K/A. The results of operations for the three and six months ended June 30, 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 and six months ended June 30, 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 misstatement 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.

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

As of June 30, 2019

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,169

 

 

$

(12,222

)

(a)

$

2,947

 

 

Accounts receivable, net

 

 

1,981

 

 

 

301

 

(c)

 

2,282

 

 

Inventories, net

 

 

5,906

 

 

 

 

 

 

5,906

 

 

Investment in marketable securities

 

 

32,890

 

 

 

 

 

 

32,890

 

 

Prepaid expenses and other current assets

 

 

703

 

 

 

(107

)

(a), (c)

 

596

 

 

Total current assets

 

 

56,649

 

 

 

(12,028

)

 

 

44,621

 

 

Property and equipment, net

 

 

145

 

 

 

 

 

 

145

 

 

Equity method investment

 

 

 

 

 

13,366

 

(a)

 

13,366

 

 

Right of use assets

 

 

4,285

 

 

 

 

 

 

4,285

 

 

Deposits and other assets

 

 

412

 

 

 

 

 

 

412

 

 

Total other assets

 

 

4,697

 

 

 

13,366

 

 

 

18,063

 

 

Total assets

 

$

61,491

 

 

$

1,338

 

 

$

62,829

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

11,455

 

 

$

62

 

(a), (c)

$

11,517

 

 

Operating lease liabilities, current portion

 

 

857

 

 

 

 

 

 

857

 

 

Other current liabilities

 

 

5,259

 

 

 

2

 

(c)

 

5,261

 

 

Warrant derivative liabilities

 

 

 

 

 

9,023

 

(b), (c)

 

9,023

 

 

Notes payable, net of discount

 

 

11,163

 

 

 

91

 

(b)

 

11,254

 

 

Notes payable to related parties

 

 

470

 

 

 

 

 

 

470

 

 

Convertible notes payable, net of discount

 

 

13,867

 

 

 

 

 

 

13,867

 

 

Convertible notes payable to related parties, net of discount

 

 

14,180

 

 

 

 

 

 

14,180

 

 

Total current liabilities

 

 

57,251

 

 

 

9,178

 

 

 

66,429

 

 

Operating lease liabilities, less current portion

 

 

3,781

 

 

 

 

 

 

3,781

 

 

Other long-term liabilities

 

 

35,330

 

 

 

 

 

 

35,330

 

 

Warrant derivative liabilities

 

 

1,200

 

 

 

(1,200

)

(c)

 

 

 

Notes payable, net of discount, less current portion

 

 

703

 

 

 

(703

)

(b)

 

 

 

Convertible notes payable, net of discount, less current portion

 

 

450

 

 

 

 

 

 

450

 

 

Total liabilities

 

 

98,715

 

 

 

7,275

 

 

 

105,990

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued or outstanding

 

 

 

 

 

 

 

 

 

 

Common stock — par value $0.001 per share, 250,000,000 shares authorized, 37,880,211 shares outstanding at June 30, 2019

 

 

36

 

 

 

2

 

(d)

 

38

 

 

Additional paid-in capital

 

 

153,084

 

 

 

10,164

 

(b), (e)

 

163,248

 

 

Accumulated other comprehensive income (loss)

 

 

(56

)

 

 

 

 

 

(56

)

 

Accumulated deficit

 

 

(189,503

)

 

 

(16,888

)

(e)

 

(206,391

)

 

Total stockholders’ deficit

 

 

(36,439

)

 

 

(6,722

)

 

 

(43,161

)

 

Noncontrolling interest

 

 

(785

)

 

 

785

 

(a)

 

 

 

Total liabilities & stockholders’ deficit

 

$

61,491

 

 

$

1,338

 

 

$

62,829

 

 

(a) EJ Holdings adjustments: the correction of this misstatement resulted in increases of $13.4 million in equity method investment, $172,000 in accounts payable and accrued expenses, and $785,000 in non-controlling interest and decreases of $12.2 million in cash and cash equivalent and $187,000 in prepaid expenses and other current assets.  

(b) Warrant adjustments: the correction of this misstatement resulted in increases of $7.8 million in warrant derivative current liabilities, and $90,000 in short-term note payable and decreases of $703,000 in long-term notes payable and $9.7 million in additional paid-in capital.

(c) Corrections of other misstatement: period adjustment and reclassification of variable consideration resulted in an increase of $301,000 in accounts receivable and a decrease of $110,000 in accounts payable and accrued expenses, a decrease of $10,000 in income tax receivable and an increase of $24,000 in income tax payable; a reclassification of GPB warrants resulted an increase of short-term warrant liability and a decrease of long-term warrant liability of $1.2 million; and correction of tax provision resulted an increase of $90,000 in income tax receivable and a decrease of $24,000 in income tax payable.

(d) Retrospective adjustments made to common stock resulted from recapitalization transaction in July 2019.

(e) Carryforward impact on 2018 restatement adjustments, including cashless warrant adjustments which resulted in an increase in additional paid-in capital and a decrease in retained earnings of $18.3 million.

 

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amount)

(Unaudited)

 

 

 

Three months ended June 30, 2019

 

 

Six months ended June 30,2019

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

 

REVENUES, NET

 

$

5,869

 

 

$

(376

)

(c)

$

5,493

 

 

$

11,176

 

 

$

(976

)

(c)

$

10,200

 

 

COST OF GOODS SOLD

 

 

195

 

 

 

69

 

(c)

 

264

 

 

 

395

 

 

 

128

 

(c)

 

523

 

 

GROSS PROFIT

 

 

5,674

 

 

 

(445

)

 

 

5,229

 

 

 

10,781

 

 

 

(1,104

)

 

 

9,677

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

540

 

 

 

 

 

 

540

 

 

 

1,053

 

 

 

 

 

 

1,053

 

 

Selling

 

 

1,903

 

 

 

(12

)

(c)

 

1,891

 

 

 

3,388

 

 

 

(18

)

(c)

 

3,370

 

 

General and administrative

 

 

3,851

 

 

 

(1,169

)

(a), (c)

 

2,682

 

 

 

7,532

 

 

 

(1,113

)

(a), (c)

 

6,419

 

 

  Total operating expenses

 

 

6,294

 

 

 

(1,181

)

 

 

5,113

 

 

 

11,973

 

 

 

(1,131

)

 

 

10,842

 

 

INCOME (LOSS) FROM OPERATIONS

 

 

(620

)

 

 

736

 

 

 

116

 

 

 

(1,192

)

 

 

27

 

 

 

(1,165

)

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant derivative liabilities

 

 

247

 

 

 

607

 

(b)

 

854

 

 

 

199

 

 

 

(283

)

(b)

 

(84

)

 

Net losses on investment in marketable securities and long-term investment

 

 

(10,537

)

 

 

 

 

 

(10,537

)

 

 

(16,994

)

 

 

 

 

 

(16,994

)

 

Losses on equity method investment

 

 

 

 

 

(458

)

(a)

 

(458

)

 

 

 

 

 

(449

)

(a)

 

(449

)

 

Interest and other income (loss)

 

 

274

 

 

 

33

 

(a), (c)

 

307

 

 

 

163

 

 

 

67

 

(a), (c)

 

230

 

 

Interest expense

 

 

(8,474

)

 

 

647

 

(b), (c)

 

(7,827

)

 

 

(15,439

)

 

 

(1,000

)

(b), (c)

 

(16,439

)

 

  Total other income (expenses)

 

 

(18,490

)

 

 

829

 

 

 

(17,661

)

 

 

(32,071

)

 

 

(1,665

)

 

 

(33,736

)

 

LOSS BEFORE INCOME TAXES

 

 

(19,110

)

 

 

1,565

 

 

 

(17,545

)

 

 

(33,263

)

 

 

(1,638

)

 

 

(34,901

)

 

INCOME TAXES (BENEFIT)

 

 

217

 

 

 

(166

)

(c)

 

51

 

 

 

217

 

 

 

(114

)

(c)

 

103

 

 

NET LOSS INCLUDING NONCONTROLLING INTERESTS

 

 

(19,327

)

 

 

1,731

 

 

 

(17,596

)

 

 

(33,480

)

 

 

(1,524

)

 

 

(35,004

)

 

     Net (income) loss attributable to noncontrolling interests

 

 

688

 

 

 

(688

)

(a)

 

 

 

 

674

 

 

 

(674

)

(a)

 

 

 

NET LOSS ATTRIBUTABLE TO THE COMPANY

 

 

(18,639

)

 

 

1,043

 

 

 

(17,596

)

 

 

(32,806

)

 

 

(2,198

)

 

 

(35,004

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(9

)

 

 

15

 

(a)

 

6

 

 

 

(2

)

 

 

15

 

(a)

 

13

 

 

Other comprehensive income (loss)

 

 

(9

)

 

 

15

 

 

 

6

 

 

 

(2

)

 

 

15

 

 

 

13

 

 

COMPREHENSIVE INCOME (LOSS)

 

 

(19,336

)

 

 

1,746

 

 

 

(17,590

)

 

 

(33,482

)

 

 

(1,509

)

 

 

(34,991

)

 

Amounts attributable to noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to noncontrolling interest

 

 

688

 

 

 

(688

)

(a)

 

 

 

 

674

 

 

 

(674

)

(a)

 

 

 

Foreign currency translation adjustments

 

 

15

 

 

 

(15

)

(a)

 

 

 

 

14

 

 

 

(14

)

(a)

 

 

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

703

 

 

 

(703

)

 

 

 

 

 

688

 

 

 

(688

)

 

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

 

$

(18,633

)

 

$

1,043

 

 

$

(17,590

)

 

$

(32,794

)

 

$

(2,197

)

 

$

(34,991

)

 

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

 

$

(0.52

)

 

$

0.05

 

 

$

(0.47

)

 

$

(0.91

)

 

$

(0.01

)

 

$

(0.93

)

 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

 

35,857,944

 

 

 

37,836,678

 

 

 

37,836,678

 

 

 

35,857,944

 

 

 

37,656,058

 

 

 

37,656,058

 

 

 

(a) EJ Holdings adjustments: the correction of this misstatement resulted in increases of $33,000 in interest income and $15,000 in foreign currency translation adjustments and decreases of $1.1million in general and administrative expenses, $458,000 in loss on equity method investment, and $688,000 in net loss attributable to noncontrolling interest for three months ended June 30, 2019.  The correction of this misstatement resulted in increases of $67,000 in interest income and $14,000 in foreign currency translation adjustments and decreases of $1.1million in general and administrative expense, $449,000 in loss on equity method investment, and $674,000 in net loss attributable to noncontrolling interest for six months ended June 30, 2019.

(b) Warrant adjustments: the correction of this misstatement resulted in increases of $647,000 in interest expense and $607,000 in change in fair value of warrant derivative liabilities for the three months ended June 2019. The correction of this misstatement resulted in an increase of $335,000 in interest expense and a decrease of $283,000 in change in fair value of warrant derivative liabilities for six months ended June 30, 2019. 

(c) Corrections of other misstatement: period adjustment of variable consideration resulted in a decrease of $376,000 in revenues, net; and reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $69,000 in cost of sales and decreases of $12,000 and $58,000 in selling expense and general and administrative expense, respectively. Corrections of other misstatement for the six months ended June 30, 2019: period adjustment of variable consideration resulted in a decrease of $976,000 in revenues, net; reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $128,000 in cost of sales and decreases of $18,000 and $110,000 in selling expense and general and administrative expense, respectively; correction of stock modification accounting resulted in a decrease of $52,000 in general and administrative expense; correction of accounting treatment for convertible notes resulted in an increase of $1.3 million in interest expense; and correction of income tax provision resulted in an decrease of $113,000 in income tax provision.

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30, 2019

 

 

 

Previously Reported

 

 

Adjustment

 

 

Restated

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(33,480

)

 

$

(1,524

)

 

$

(35,004

)

Adjustments to reconcile net loss to net cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35

 

 

 

 

 

 

35

 

Impairment loss on long-term investment

 

 

524

 

 

 

 

 

 

524

 

Amortization of discount of convertible notes and notes payable

 

 

12,770

 

 

 

1,001

 

 

 

13,771

 

Foreign exchange adjustments on convertible notes and notes payable

 

 

49

 

 

 

(257

)

 

 

(208

)

Net losses (gains) on equity investment in marketable securities

 

 

16,470

 

 

 

 

 

 

16,470

 

Loss on equity method investments

 

 

 

 

 

 

449

 

 

 

449

 

Share-based compensation

 

 

974

 

 

 

52

 

 

 

1,026

 

Change in fair value of warrant derivative liabilities

 

 

(199

)

 

 

283

 

 

 

84

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(630

)

 

 

266

 

 

 

(364

)

Inventories

 

 

(1,202

)

 

 

 

 

 

(1,202

)

Prepaid expenses and other current assets

 

 

69

 

 

 

80

 

 

 

149

 

Other non-current assets

 

 

(4,298

)

 

 

 

 

 

(4,298

)

Accounts payable and accrued expenses

 

 

3,226

 

 

 

828

 

 

 

4,054

 

Income tax receivable and payable

 

 

 

 

 

(113

)

 

 

(113

)

Deferred revenue

 

 

500

 

 

 

 

 

 

500

 

Deferred rent

 

 

(287

)

 

 

 

 

 

(287

)

Other current liabilities

 

 

79

 

 

 

(142

)

 

 

(63

)

Other long-term liabilities

 

 

3,217

 

 

 

 

 

 

3,217

 

Net cash flows provided by (used in) operating activities

 

 

(2,183

)

 

 

923

 

 

 

(1,260

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(21

)

 

 

 

 

 

(21

)

Sales of marketable securities

 

 

221

 

 

 

 

 

 

221

 

Purchase of marketable securities and investment at cost

 

 

 

 

 

 

 

 

 

Net cash flows provided by (used in) investing activities

 

 

200

 

 

 

 

 

 

200

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Payments of convertible notes

 

 

(3,368

)

 

 

 

 

 

(3,368

)

Proceeds from exercise of warrants

 

 

186

 

 

 

 

 

 

186

 

Proceeds from issuance of common stock

 

 

3,261

 

 

 

 

 

 

3,261

 

Proceeds from conversion of notes payable to common stock

 

 

21

 

 

 

 

 

 

21

 

Net cash flows provided by (used in) financing activities

 

 

100

 

 

 

 

 

 

100

 

Effect of exchange rate changes on cash

 

 

(28

)

 

 

30

 

 

 

2

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(1,911

)

 

 

953

 

 

 

(958

)

Cash and cash equivalents, beginning of period

 

 

17,080

 

 

 

(13,175

)

 

 

3,905

 

Cash and cash equivalents, end of period

 

$

15,169

 

 

$

(12,222

)

 

$

2,947

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

934

 

 

$

(385

)

 

$

549

 

Income taxes paid

 

$

217

 

 

$

(1

)

 

$

216

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature relating to convertible notes

 

$

8,764

 

 

$

 

 

$

8,764

 

Common stocks issued on exercise of warrants

 

$

186

 

 

$

 

 

$

186

 

Conversion of notes payable and acrued interest to common stock

 

$

308

 

 

$

 

 

$

329

 

Initial recognition of right-of-use lease asset

 

$

2,922

 

 

$

 

 

$

2,922

 

 

Refer to the descriptions of the adjustments in the Condensed Consolidated Balance Sheets and Statements of Comprehensive Loss as of and for the three months ended June 30, 2019 and their impact on net loss above. In addition, a cash flow classification adjustment related to EJ Holdings resulted in a net decrease to cash flows used by operating activities of $953,000 for the six months ended June 30, 2019.