| 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.
|