Annual report pursuant to Section 13 and 15(d)

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

v3.20.4
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
12 Months Ended
Dec. 31, 2019
Accounting Changes And Error Corrections [Abstract]  
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

NOTE 3 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on July 8, 2020, the board of directors of the Company, based on the recommendation of the audit committee and in consultation with management and the Company’s predecessor independent registered public accounting firm, concluded that, because of errors identified in the previously issued audited financial statements of EMI Holding, Inc. as of and for the year ended December 31, 2018, the Company would restate the previously issued financial statements.

The restated financial statements correct the following errors:

 

1.

The common stock purchase warrants issued in connection with the 10% Senior Secured Debentures in October 2018 and accounted for as equity should have been treated as derivative liabilities and accounted for at fair value with changes in fair value recorded in earnings. This error resulted in $7.5 million and $9.7 million understatement of the fair value of warrant derivative liabilities and stockholder’s deficit, respectively, as of December 31, 2018. This error also resulted in a $2.4 million overstatement of net loss for the year ended December 31, 2018. In connection with the completion of the Merger on July 17, 2019, the warrants were reclassified as equity.

 

 

2.

EJ Holdings was incorrectly consolidated as a VIE and the Company’s variable interest in EJ Holdings should have been accounted for using the equity method. This error resulted in $13.2 million and $0.2 million overstatements of cash and other current assets, respectively, and a $13.5 million understatement of the equity method investment as of December 31, 2018. The error also resulted in a $0.2 million overstatement of loss from operations and a $0.1 million overstatement of loss before income taxes for the year ended December 31, 2018.

 

 

3.

The fair value of cashless warrants exercised in September 2018 upon their expiration of warrants should have been recorded in additional paid-in capital. The error resulted in a $18.3 million overstatement of change in fair value of warrant derivative liabilities and an understatement of additional paid-in capital for the year ended December 31, 2018.

     

 

4.

Other adjustments: The restated financial statements also include adjustments to correct certain insignificant errors to the financial statements as of and for the year ending December 31, 2018.

Emmaus Life Sciences, Inc.

Consolidated Balance Sheet

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

Previously Reported

 

 

Adjustments

 

 

As Restated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,080

 

 

$

(13,175

)

(b)

$

3,905

 

Accounts receivable, net

 

 

1,351

 

 

 

437

 

(d)

 

1,788

 

Inventories, net

 

 

4,705

 

 

 

 

 

 

4,705

 

Investment in marketable securities

 

 

49,343

 

 

 

 

 

 

49,343

 

Marketable securities, pledged to creditor

 

 

238

 

 

 

 

 

 

238

 

Prepaid expenses and other current assets

 

 

743

 

 

 

(109

)

(b)(d)

 

634

 

Total current assets

 

 

73,460

 

 

 

(12,847

)

 

 

60,613

 

Property and equipment, net

 

 

152

 

 

 

 

 

 

152

 

Long-term investment

 

 

538

 

 

 

 

 

 

538

 

Equity method investment

 

 

 

 

 

13,569

 

(b)

 

13,569

 

Other assets

 

 

406

 

 

 

 

 

 

406

 

Total assets

 

$

74,556

 

 

$

722

 

 

$

75,278

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

9,122

 

 

 

(887

)

(b)

 

8,235

 

Deferred rent, current portion

 

 

19

 

 

 

 

 

 

19

 

Other current liabilities

 

 

5,181

 

 

 

161

 

(d)

 

5,342

 

Warrant derivative liabilities

 

 

 

 

 

8,939

 

(a)(d)

 

8,939

 

Notes payable, net of discount

 

 

6,394

 

 

 

(182

)

(a)

 

6,212

 

Notes payable to related parties

 

 

468

 

 

 

 

 

 

468

 

Convertible notes payable, net of discount

 

 

11,253

 

 

 

 

 

 

11,253

 

Convertible notes payable to related parties, net of discount

 

 

5,089

 

 

 

 

 

 

5,089

 

Total current liabilities

 

 

37,526

 

 

 

8,031

 

 

 

45,557

 

Deferred rent, less current portion

 

 

268

 

 

 

 

 

 

268

 

Other long-term liabilities

 

 

36,222

 

 

 

 

 

 

36,222

 

Warrant derivative liabilities

 

 

1,399

 

 

 

(1,399

)

(d)

 

 

Notes payable, net of discount, less current portion

 

 

1,021

 

 

 

(96

)

(a)

 

925

 

Convertible notes payable, net of discount, less current portion

 

 

5,485

 

 

 

 

 

 

5,485

 

Convertible notes payable to related parties, net of discount, less current portion

 

 

8,529

 

 

 

 

 

 

8,529

 

Total liabilities

 

 

90,450

 

 

 

6,536

 

 

 

96,986

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, no shares issued or outstanding

 

 

 

 

 

 

 

 

 

Common stock — par value $0.001 per share, 250,000,000 shares authorized, 37,341,393 shares issued and outstanding at December 31, 2018

 

 

37

 

 

 

 

 

 

37

 

Additional paid-in capital

 

 

140,903

 

 

 

8,779

 

(a)(c)(d)

 

149,682

 

Accumulated other comprehensive loss

 

 

(69

)

 

 

 

 

 

(69

)

Accumulated deficit

 

 

(156,668

)

 

 

(14,690

)

 

 

(171,358

)

Stockholders’ deficit

 

 

(15,797

)

 

 

(5,911

)

 

 

(21,708

)

Noncontrolling interests

 

 

(97

)

 

 

97

 

(b)

 

 

Total liabilities and stockholders’ deficit

 

$

74,556

 

 

$

722

 

 

$

75,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Warrant adjustments: The correction of this misstatement resulted in an increase of $7.5 million in warrant derivative liabilities and decreases of $182,000 in short-term notes payable, $96,000 in long-term notes payable and $9.7 million in additional paid-in capital.

 

(b) EJ Holdings adjustments: The correction of this misstatement resulted in increases of $13.6 million in equity method investment, $58,000 in accounts payable and accrued expenses, and $97,000 in non-controlling interest and decreases of $13.2 million in cash and cash equivalent and $240,000 in prepaid expenses and other current assets.  

 

(c) Cashless warrants adjustments: The correction of this misstatement resulted in an increase of $18.3 million in additional paid-in capital.

 

(d) Corrections of other misstatement were as follows: (i) period adjustment and reclassification of variable consideration resulted in an increase of $436,000 in accounts receivable and a decrease of $946,000 in accounts payable and accrued expense. It also resulted a decrease of $10,000 in income tax receivable and an increase of $24,000 in income tax payable; (ii) correction of financing of insurance premium resulted in an increase of $141,000 in each of prepaid expenses and current liabilities; (iii) correction of stock modification accounting resulted in an increase of $52,000 in additional paid-in capital; and (iv) correction of accounting treatment for conversion feature of senior secured convertible promissory note resulted in an increase of $172,000 in additional paid-in capital.

 

 

 

Emmaus Life Sciences, Inc.

Consolidated Statement of operations and Comprehensive Loss

(In thousands, except share and per share amounts)

 

 

Years Ended December 31, 2018

 

 

Previously

Reported

 

 

Adjustments

 

 

As Restated

 

CONSOLIDATED STATEMENTS OF LOSS

 

 

 

 

 

 

 

 

 

 

 

REVENUES, NET

$

15,077

 

 

$

1,382

 

(d)

$

16,459

 

COST OF GOODS SOLD

 

764

 

 

 

229

 

(d)

 

993

 

GROSS PROFIT

 

14,313

 

 

 

1,153

 

 

 

15,466

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,723

 

 

 

 

 

 

1,723

 

Selling

 

4,813

 

 

 

(80

)

(d)

 

4,733

 

General and administrative

 

17,877

 

 

 

(413

)

(b)(d)

 

17,464

 

  Total operating expenses

 

24,413

 

 

 

(493

)

 

 

23,920

 

LOSS FROM OPERATIONS

 

(10,100

)

 

 

1,646

 

 

 

(8,454

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

Loss on debt extinguishment

 

(3,245

)

 

 

543

 

(d)

 

(2,702

)

Change in fair value of warrant derivative liabilities

 

20,674

 

 

 

(16,198

)

(a) (c)

 

4,476

 

Change in fair value of embedded conversion option

 

466

 

 

 

(466

)

(d)

 

 

Net losses on investment in marketable securities

 

(43,977

)

 

 

 

 

 

(43,977

)

Net losses on equity method investment

 

 

 

 

(97

)

(b)

 

(97

)

Interest and other income (loss)

 

969

 

 

 

33

 

(b)

 

1,002

 

Interest expense

 

(22,825

)

 

 

29

 

(a)(d)

 

(22,796

)

  Total other income (expense)

 

(47,938

)

 

 

(16,156

)

 

 

(64,094

)

LOSS BEFORE INCOME TAXES

 

(58,038

)

 

 

(14,510

)

 

 

(72,548

)

INCOME TAXES

 

6

 

 

 

33

 

(d)

 

39

 

NET LOSS INCLUDING NONCONTROLLING INTEREST

 

(58,044

)

 

 

(14,543

)

 

 

(72,587

)

     Net loss attributable to noncontrolling interest

 

146

 

 

 

(146

)

 

 

 

NET LOSS ATTRIBUTABLE TO THE COMPANY

 

(57,898

)

 

 

(14,689

)

 

 

(72,587

)

 

 

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

17

 

 

 

(1

)

(b)

 

16

 

Other comprehensive income (loss)

 

17

 

 

 

(1

)

 

 

16

 

COMPREHENSIVE LOSS

 

(58,027

)

 

 

(14,544

)

 

 

(72,571

)

Amounts attributable to noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

146

 

 

 

(146

)

(b)

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

$

(57,881

)

 

$

(14,690

)

 

$

(72,571

)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

 

(1.57

)

 

 

(0.40

)

 

 

(1.97

)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

 

36,857,995

 

 

 

36,857,995

 

 

 

36,857,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Warrant adjustments: The correction of this misstatement resulted in an increase of $2.1 million in change in fair value of warrant derivative liabilities and a decrease of $278,000 in interest expense.

 

(b) EJ Holdings adjustments: The correction of this misstatement resulted in a decrease of $211,000 in general and administrative expense, an increase of $97,000 in loss on equity method investment and an increase in $32,000 in interest income.

 

(c) Cashless warrant adjustments: The correction of this misstatement resulted in a decrease of $18.3 million in change in fair value of warrant derivative liabilities.

 

(d) Corrections of other misstatement were as follows: (i) period adjustment of variable consideration resulted in increases of $1.4 million in revenue, net and $33,000 in income tax provision; (ii) reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $229,000 in cost of sales and decreases of $80,000 and $141,000 in selling expense and general and administrative expense, respectively; (iii) correction of stock modification accounting resulted in a decrease of $52,000 in general and administrative expense; and (iv) correction of accounting treatment for conversion feature resulted in an increase of $249,000 in interest expense and decreases of $543,000 and $466,000 in loss on debt extinguishment and change in fair value of embedded conversion option, respectively.

 

Emmaus Life Sciences, Inc.

Consolidated Statement of Cash Flows

(In thousands)

 

Year ended December 31, 2018

 

 

Previously Reported

 

 

Adjustments

 

 

As Restated

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(58,044

)

 

$

(14,543

)

 

$

(72,587

)

Adjustments to reconcile net loss to net cash flows used in operating activities

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

61

 

 

 

 

 

 

61

 

Amortization of discount of notes payable and convertible notes payable

 

18,263

 

 

 

(29

)

(d)

 

18,234

 

Foreign exchange adjustments

 

53

 

 

 

(350

)

(b)

 

(297

)

Net losses on investment in marketable securities

 

43,977

 

 

 

 

 

 

43,977

 

Loss on equity method investment

 

 

 

 

97

 

(b)

 

97

 

Loss on debt extinguishment

 

3,245

 

 

 

(543

)

(d)

 

2,702

 

Share-based compensation and fair value of replacement equity award

 

4,597

 

 

 

(52

)

(d)

 

4,545

 

Change in fair value of warrant derivative liabilities

 

(20,674

)

 

 

16,198

 

(a)(c)

 

(4,476

)

Change in fair value of embedded conversion option

 

(466

)

 

 

466

 

(d)

 

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(1,324

)

 

 

(437

)

(d)

 

(1,761

)

Inventories

 

(4,079

)

 

 

 

 

 

(4,079

)

Prepaid expenses and other current assets

 

(431

)

 

 

99

 

(b)(d)

 

(332

)

Other non-current assets

 

(241

)

 

 

 

 

 

(241

)

Income tax receivable and payable

 

(10

)

 

 

34

 

(d)

 

24

 

Accounts payable and accrued expenses

 

4,631

 

 

 

(1,059

)

(b)(d)

 

3,572

 

Deferred rent

 

245

 

 

 

 

 

 

245

 

Other current liabilities

 

5,174

 

 

 

138

 

(d)

 

5,312

 

Other long-term liabilities

 

(630

)

 

 

 

 

 

(630

)

Net cash flows used in operating activities

 

(5,653

)

 

 

19

 

 

 

(5,634

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Sale of marketable securities

 

6,439

 

 

 

 

 

 

6,439

 

Purchases of property and equipment

 

(94

)

 

 

 

 

 

(94

)

Purchase of marketable securities and investment at cost

 

(469

)

 

 

 

 

 

(469

)

Capital contributions and loan to equity method investees

 

 

 

 

(13,316

)

(d)

 

(13,316

)

Net cash flows provided by (used in) investing activities

 

5,876

 

 

 

(13,316

)

 

 

(7,440

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock and warrants

 

(11,262

)

 

 

 

 

 

(11,262

)

Proceeds from notes payable issued, net of issuance cost and discount

 

11,560

 

 

 

 

 

 

11,560

 

Proceeds from convertible notes payable issued, net of issuance cost and discount

 

17,645

 

 

 

171

 

(d)

 

17,816

 

Payments of notes payable

 

(5,077

)

 

 

 

 

 

(5,077

)

Payments of convertible notes

 

(20,000

)

 

 

 

 

 

(20,000

)

Proceeds from exercise of warrants

 

111

 

 

 

 

 

 

111

 

Proceeds from issuance of common stock

 

1,275

 

 

 

 

 

 

1,275

 

Proceeds from noncontrolling interest

 

48

 

 

 

(48

)

(b)

 

 

Net cash flows provided by (used in) financing activities

 

(5,700

)

 

 

123

 

 

 

(5,577

)

Effect of exchange rate changes on cash

 

 

 

 

 

 

 

 

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

 

(5,477

)

 

 

(13,174

)

 

 

(18,651

)

Cash, cash equivalents, beginning of period

 

22,556

 

 

 

 

 

 

22,556

 

Cash, cash equivalents, end of period

$

17,079

 

 

$

(13,174

)

 

$

3,905

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Interest paid

$

2,178

 

 

$

 

 

$

2,178

 

Income taxes paid

$

3

 

 

$

 

 

$

3

 

Exercised of warrants and options on cashless basis

$

1,712

 

 

$

16,633

 

(c)

$

18,345

 

 

Refer to the descriptions of the adjustments and their impact on net loss in the Consolidated Balance Sheet and Statement of Comprehensive Loss as of and for the year ended December 31, 2018 above except for those below:

 

Cash flow classification adjustment related to EJ Holdings resulted in a net increase to cash flows provided by operating activities of $0.1 million and a decrease in net cash flows provided by investing activities of $13.3 million for the year ended December 31, 2018.

 

(d) Correction of unpaid deferred financing cost included in proceeds from convertible notes payable issued, net of issuance cost and discount resulted in a net increase to cash flow from financing activities and a net decrease to cash flow provided by operating activities of $171,000.