Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' DEFICIT

v3.21.2
STOCKHOLDERS' DEFICIT
3 Months Ended
Mar. 31, 2021
Stockholders Equity Note [Abstract]  
STOCKHOLDERS' DEFICIT

NOTE 8 — STOCKHOLDERS’ DEFICIT

Purchase Agreement with GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $13 million senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of $12.5 million, reflecting a 4.0% original issue discount.

In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,764 of common stock at an exercise price of $10.80 per share, with customary adjustments for stock splits, stock dividends and other recapitalization events. The GPB Warrant became exercisable six months after issuance and has a term of five years from the initial exercise date.

The Company determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.

The following table presents the change in fair value of the GPB Warrant as of March 31, 2021 and December 31, 2020 (in thousands):

 

 

Three Months Ended

 

 

Year Ended

 

Warrant Liability—GPB

 

March 31, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

83

 

 

$

38

 

Change in fair value included in the statement of comprehensive (income) loss

 

 

54

 

 

 

45

 

Balance, end of period

 

$

137

 

 

$

83

 

 

The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.

The fair value as of March 31, 2021 and December 31, 2020 set forth in the table above was based on upon following assumptions:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Adjusted exercise price

 

$

10.28

 

 

$

10.28

 

Common stock fair value

 

$

1.71

 

 

$

1.23

 

Risk‑free interest rate

 

 

0.21

%

 

 

0.15

%

Volatility

 

 

125.00

%

 

 

120.00

%

Time until expiration (in years)

 

 

2.25

 

 

 

2.50

 

Expected dividend yield

 

 

 

 

Number outstanding

 

 

252,802

 

 

 

252,802

 

Purchase Agreement with Holders of 10% Senior Secured Debentures—In October 2018, EMI sold and issued $12.2 million principal amount of 10% Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors. EMI’s obligations under the Debentures were secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S. subsidiaries. The net proceeds of the sale of the debentures and warrants were used to fund EMI’s original $13.2 million loan to EJ Holdings in October 2018 reflected on the Company’s condensed consolidated balance sheets.

The Debentures were amended and restated in their entirety in conjunction with the Merger. Common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.    

The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger.  Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance

with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.

Pursuant to the terms of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $3.00 per share from $9.52 per share. The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $3.00 per share from $5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10% Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $2.00 a share under the Purchase Agreement with Lincoln Park Capital LLC described below.  See Note 7 for information regarding our recent prepayment of the Debentures.    

The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the 10% Senior Secured Debentures in October 2018 under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability. The liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in fair value is recorded in earnings. In 2019, the Debentures were amended and restated to be convertible into common stock of EMI immediately prior to completion of the Merger, which resulted in the related warrants being reclassified to equity. The warrants also were amended and restated in their entirety in connection with the Merger.

The exercise price of the amended and restated warrants was reduced to $2.00 per share in February 2020, then reduced to $1.54 per share in March 2021 pursuant to the anti-dilution adjustment provisions of the warrants and the warrants were valued using Black-Scholes-Merton model. The fair value as of agreement date and the anti-dilution adjustment dates was based upon following assumptions:

 

 

March 2, 2021 (Anti-dilution adjustment date)

 

 

February 28, 2020 (Anti-dilution adjustment date)

 

 

February 21, 2020 (Amendment date)

 

Exercise price

 

$

1.54

 

 

$

2.00

 

 

$

3.00

 

Common stock fair value

 

$

1.52

 

 

$

1.60

 

 

$

1.89

 

Volatility

 

101.00%-120.00%

 

 

 

93.00

%

 

 

92.00

%

Risk-free rate

 

0.21%-0.58%

 

 

 

0.86

%

 

 

1.29

%

Expected life (in years)

 

2.64-4.56

 

 

 

3.54

 

 

 

3.56

 

Purchase agreement with Holder of a Convertible Promissory Note - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $3,150,000 agreed to an extension of the maturity date to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12% per annum. In conjunction with this amendment, the Company issued to the holder of note five-year common stock purchase warrants to purchase a total of up to 1,250,000 shares of the Company common stock at an exercise price of $2.05 a share. Under ASC 815-40, the Company concluded that the warrants issued to the holder of the notes should be recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in the fair value of liability is recorded in earnings.

The following table presents the fair value and the change in fair value of the warrants as of March 31, 2021 and December 31, 2020 (in thousands):

Warrant liability—Wealth Threshold

 

March 31, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

988

 

 

$

 

Fair value at issuance date

 

 

 

 

 

1,425

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

475

 

 

 

(437

)

Balance, end of period

 

$

1,463

 

 

$

988

 

 

The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model and was based upon following assumptions:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Exercise price

 

$

2.05

 

 

$

2.05

 

Stock price

 

$

1.71

 

 

$

1.68

 

Risk‑free interest rate

 

 

0.70

%

 

 

0.31

%

Expected volatility (peer group)

 

 

103.00

%

 

 

101.00

%

Expected life (in years)

 

 

4.21

 

 

 

4.46

 

Expected dividend yield

 

 

 

 

Number outstanding

 

 

1,250,000

 

 

 

1,250,000

 

 

A summary of outstanding warrants as of March 31, 2021 and December 31, 2020 is presented below:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Warrants outstanding, beginning of period

 

 

8,439,480

 

 

 

4,931,099

 

Granted

 

 

 

 

 

3,625,000

 

Exercised

 

 

 

 

 

 

Cancelled, forfeited or expired

 

 

 

 

 

(116,619

)

Warrants outstanding, end of period

 

 

8,439,480

 

 

 

8,439,480

 

 

A summary of outstanding warrants by year issued and exercise price as of March 31, 2021 is presented below:

 

 

 

 

 

 

Outstanding

 

 

Exercisable

 

Year issued and Exercise Price

 

 

Number of

Warrants

Issued

 

 

Weighted-Average

Remaining

Contractual

Life (Years)

 

 

Weighted-Average

Exercise

Price

 

 

Total

 

 

Weighted-Average

Exercise

Price

 

Prior to January 1, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.54-$36.24

 

 

 

4,814,480

 

 

 

1.54

 

 

$

8.89

 

 

 

4,814,480

 

 

$

8.89

 

Prior to Jan 1, 2020 Total

 

 

 

4,814,480

 

 

 

 

 

 

 

 

 

 

 

4,814,480

 

 

 

 

 

At December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2.05

 

 

 

1,250,000

 

 

 

4.21

 

 

$

2.05

 

 

 

 

 

 

 

 

$

1.54

 

 

 

2,375,000

 

 

 

4.45

 

 

$

1.54

 

 

 

2,375,000

 

 

$

1.54

 

 

2020 Total

 

 

 

3,625,000

 

 

 

 

 

 

 

 

 

 

 

2,375,000

 

 

 

 

 

At March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

$

 

 

 

 

 

$

 

 

Grand Total

 

 

 

8,439,480

 

 

 

 

 

 

Grand Total

 

 

 

7,189,480

 

 

 

 

 

 

Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock. Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in equal quarterly installments and all other option grants vest over a minimum period of three years, in each case, subject to the optionee’s all based on continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically

converted into a stock option to purchase a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratio in the Merger.

The Company also has an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company may grant stock options and other stock awards to selected employees including officers, and to non-employee consultants and non-employee directors. All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger and the Company intends not to make any further awards under thereunder.

Stock options—During the three months ended March 31, 2021, the Company did not issue any stock options. During the year ended December 31, 2020, the Company granted stock options to purchase 90,000 shares of common stock. All the options are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows: as to one‑third of the shares on the first anniversary of the grant date, and as to the remaining two‑thirds shares in twenty‑four approximately equal monthly installments over a period of two years thereafter.  

A summary of outstanding stock options as of March 31, 2021 and December 31, 2020 is presented below.

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

 

Number of

Options

 

 

Weighted‑

Average

Exercise

Price

 

Options outstanding, beginning of period

 

 

7,110,025

 

 

$

4.63

 

 

 

7,245,350

 

 

$

4.68

 

Granted or deemed granted

 

 

 

 

 

 

 

 

90,000

 

 

$

2.05

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled, forfeited and expired

 

 

(23,102

)

 

$

4.16

 

 

 

(225,325

)

 

$

5.08

 

Options outstanding, end of period

 

 

7,086,923

 

 

$

4.63

 

 

 

7,110,025

 

 

$

4.63

 

Options exercisable, end of period

 

 

6,719,323

 

 

$

4.60

 

 

 

6,986,268

 

 

$

4.47

 

Options available for future grant

 

 

2,325,577

 

 

 

 

 

 

 

2,302,475

 

 

 

 

 

 

  The Company recognized approximately $0.2 million of share-based compensation expense for both three months ended March 31, 2021 and March 31, 2020. As of March 31, 2021, there was approximately $294,000 of total unrecognized compensation expense related to unvested share-based compensation which is expected to be recognized over the weighted-average remaining vesting period of 0.6 years.

Purchase Agreement with Lincoln Park Capital Fund, LLCOn February 28, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may elect to sell to LPC from time to time up to $25,000,000 in shares of its common stock, subject to certain limitations and conditions set forth in the Purchase Agreement, including 100,000 initial shares that the Company sold to LPC at a price of $2.00 per share.

 Pursuant to the Purchase Agreement, on any business day over the 36-month term of the Purchase Agreement the Company has the right at its discretion and subject to certain conditions to direct LPC to purchase up to 20,000 shares of common stock, which amount is subject to increase under certain circumstances based upon increases in the market price of its common stock. The purchase price of the common stock will be based upon the prevailing market price of common stock at the time of the purchase without any fixed discount. In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases and additional accelerated purchases under certain circumstances. Apart from the initial sale of shares described above, the Company is not obliged to sell any shares of common stock pursuant to the Purchase Agreement, and the Company will control the timing and amount of any such sales, but in no event will LPC be required to purchase more than $1,000,000 of common stock in any single regular purchase (excluding accelerated or additional accelerated purchases).

 Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement.

The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC. There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement. There is no upper limit on the price per share that LPC could be obligated to pay for common stock, but shares will only be sold to LPC on a day the Company’s closing price is less

than the floor price as set forth in the Purchase Agreement and if the sale of the shares would not result in LPC and its affiliates having beneficial ownership of more than 4.99% of the Company’s total outstanding shares of common stock. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. As consideration for LPC’s commitments under the Purchase Agreement, the Company issued to LPC 415,743 shares of common stock, which valued at $750,000, recorded as an addition to equity for common stock and reduction for cost of capital raised.

As of the date of filing of this Quarterly Report, the Company was out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement.  The Company may seek to bring itself into compliance or seek an appropriate waiver from LPC to regain the ability to utilize the Purchase Agreement, but there can be no assurance when or whether the Company may be able to do so. If the Company is able to utilize the Purchase Agreement, whether or to what extent the Company sells shares of common stock to LPC under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, its net revenue and other results of operations, its working capital and other funding needs, the prevailing market prices of the Company’s common stock and the availability of other sources of funding.

Collaborative Research and Development Agreement with Kainos Medicine, Inc On February 26, 2021, the Company entered into an agreement with Kainos Medicine, Inc. (“Kainos”) to lead the preclinical development of Kainos’ patented IRAK4 inhibitor (“KM10544”) as an anti-cancer drug and further advance the research and development activity currently underway at Kainos. With this agreement in place, Kainos plans to complete the study of the therapeutic mechanism of action ("MOA") of KM10544 in solid cancers, blood cancers and lymphoma. The Company will be responsible for the investigation and proof of target disease selection, efficacy and safety. The companies also entered into a letter of intent regarding possible future joint development of small molecule therapeutics and other pharmaceutical assets.

Pursuant to the agreement, the Company paid $500,000 in cash and issued 324,675 of the Company’s shares equivalent to $500,000 in consideration for entering into the agreement, which were recorded as research and development expenses in the condensed consolidated statements of operations and comprehensive income (loss). The Company, in turn, has been granted rights of first negotiation and first refusal for an exclusive license regarding the development and commercialization of products based on the intellectual property resulting from the agreement.