Item 1. Financial Statements
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
|
8
|
|
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.
9
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.
10
(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.
11
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K/A for the year ended December 31, 2020. There have been no material changes in these policies or their application.
Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.
Restricted cash — Restricted cash includes proceeds received from the sales of shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) earmarked for the purchase of Telcon convertible bond per the December 23, 2019 agreement with Telcon. See Note 5 for the additional details. Reconciliation of cash, cash equivalent and restricted cash are as follows:
|
|
|
Six Month Ended June 30
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,032
|
|
|
$
|
2,947
|
|
|
|
Restricted cash
|
|
|
7
|
|
|
|
—
|
|
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
1,039
|
|
|
$
|
2,947
|
|
|
Net loss per share — In accordance with ASC 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Dilutive loss per share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2020 and June 30, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 17,288,829 shares and 17,996,931 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all period presented.
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
Restated
|
|
|
2020
|
|
|
2019
Restated
|
|
|
Endari®
|
|
$
|
4,349
|
|
|
$
|
5,390
|
|
|
$
|
11,063
|
|
|
$
|
9,992
|
|
|
Other
|
|
|
11
|
|
|
|
103
|
|
|
|
251
|
|
|
|
208
|
|
|
Revenues, net
|
|
$
|
4,360
|
|
|
$
|
5,493
|
|
|
$
|
11,314
|
|
|
$
|
10,200
|
|
The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
Trade Discounts, Allowances and Chargebacks
|
|
|
Government Rebates and Other Incentives
|
|
|
Returns
|
|
|
Total
|
|
|
Balance as of December 31, 2019
|
|
$
|
228
|
|
|
$
|
1,354
|
|
|
$
|
315
|
|
|
$
|
1,897
|
|
|
Provision related to sales in the current year
|
|
|
1,438
|
|
|
|
1,955
|
|
|
|
118
|
|
|
|
3,511
|
|
|
Adjustments related prior period sales
|
|
|
16
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(70
|
)
|
|
Credit and payments made
|
|
|
(1,208
|
)
|
|
|
(1,324
|
)
|
|
|
—
|
|
|
|
(2,532
|
)
|
|
Balance as of June 30, 2020
|
|
$
|
474
|
|
|
$
|
1,942
|
|
|
$
|
390
|
|
|
$
|
2,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
84
|
|
|
$
|
798
|
|
|
$
|
99
|
|
|
$
|
981
|
|
|
Provision related to sales in the current year
|
|
|
649
|
|
|
|
1,625
|
|
|
|
121
|
|
|
|
2,395
|
|
|
Credit and payments made
|
|
|
(614
|
)
|
|
|
(1,135
|
)
|
|
|
—
|
|
|
|
(1,749
|
)
|
|
Balance as of June 30, 2019, restated
|
|
$
|
119
|
|
|
$
|
1,288
|
|
|
$
|
220
|
|
|
$
|
1,627
|
|
12
The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of total revenues):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
Restated
|
|
|
2020
|
|
|
2019
Restated
|
|
|
Customer A
|
|
|
55
|
%
|
|
|
58
|
%
|
|
|
54
|
%
|
|
|
61
|
%
|
|
Customer B
|
|
|
20
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
22
|
%
|
The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $10 million upfront fee and agreement to purchase from us specified minimum quantities of the finished product. In a related license agreement with Telcon, the Company agreed to use commercially reasonable best efforts to obtain product registration in these territories within three years of obtaining FDA marketing authorization for PGLG in this indication. Telcon has the right to terminate the distributor agreement in certain circumstances for failure to obtain such product registrations, in which event the Company would be obliged to return to Telcon the $10 million upfront fee. The upfront fee of $10 million is included in other long-term liabilities as unearned revenue as of June 30, 2020 and December 31, 2019. Refer Note 11 and Note 13 for additional transaction details.
The Company received an upfront payment of $500,000 in connection with entering into a distribution agreement with a strategic partner in 2018 to distribute Endari® in the Middle East and North Africa region. The payment was recorded as unearned revenue and included in other long-term liabilities to be recognized as revenue when the performance obligations are satisfied. The upfront payment of $500,000 is included in other long-term liabilities as unearned revenue as of December 31, 2019. In June 2020, the distribution agreement was terminated and $500,000 up front payment was recognized as other income.
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Raw materials and components
|
|
$
|
1,500
|
|
|
$
|
1,187
|
|
|
Work-in-process
|
|
|
1,836
|
|
|
|
1,629
|
|
|
Finished goods
|
|
|
4,948
|
|
|
|
5,204
|
|
|
Inventory reserve
|
|
|
(421
|
)
|
|
|
(49
|
)
|
|
Total
|
|
$
|
7,863
|
|
|
$
|
7,971
|
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Prepaid insurance
|
|
$
|
271
|
|
|
$
|
735
|
|
|
Other prepaid expenses and current assets
|
|
|
899
|
|
|
|
667
|
|
|
Total
|
|
$
|
1,170
|
|
|
$
|
1,402
|
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Equipment
|
|
$
|
345
|
|
|
$
|
335
|
|
|
Leasehold improvements
|
|
|
39
|
|
|
|
77
|
|
|
Furniture and fixtures
|
|
|
99
|
|
|
|
95
|
|
|
Total property and equipment
|
|
$
|
483
|
|
|
|
507
|
|
|
Less: accumulated depreciation
|
|
|
(342
|
)
|
|
|
(356
|
)
|
|
Property and equipment, net
|
|
$
|
141
|
|
|
$
|
151
|
|
13
During the three months ended June 30, 2020 and 2019, depreciation expenses were approximately $11,000 and $14,000, respectively. During the six months ended June 30, 2020 and 2019, depreciation expenses were approximately $23,000 and $28,000, respectively.
NOTE 5 — INVESTMENTS
Equity securities— As of June 30, 2020 and December 31, 2019, the Company held 6,222,837 shares and 6,643,559 shares, respectively, of capital stock of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”), which were acquired in July 2017 for approximately $31.8 million. As of June 30, 2020, and December 31, 2019, the closing prices per Telecon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were approximately $4.34 and $4.20, respectively.
Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligations under the revised API agreement with Telcon. In December 2019, the API agreement was amended to permit the release of the Telcon shares from the pledge and to permit the Company to sell the shares in exchange for a portion of the net sale proceeds to be used to purchase a 10-year convertible bond of Telcon in the principal amount of approximately $31.8 million to be substituted for the Telcon shares pledged to Telcon to secure the Company’s obligations under the revised API agreement between the Company and Telcon. During the six months ended June 30, 2020, the Company sold 420,772 shares for $2.1 million. Refer to Note 6, 11 and 13 for more information regarding this arrangement.
The Company measures all equity investments that do not result in consolidation and are not accounted for under the equity method, at fair value and recognizes any changes in such fair value in earnings. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. For the six months ended June 30, 2019, the Company recognized approximately $524,000 in impairment loss on equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.
As of June 30, 2020 and December 31, 2019, the carrying values of equity securities were included in the following line items in our consolidated balance sheets (in thousands):
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Fair Value with Changes Recognized in Income
|
|
|
Fair Value with Changes Recognized in Income
|
|
|
Marketable securities
|
|
$
|
27,007
|
|
|
$
|
27,929
|
|
|
Total equity securities
|
|
$
|
27,007
|
|
|
$
|
27,929
|
|
Net unrealized loss on marketable securities available-for-sale at June 30, 2020 and June 30, 2019 was approximately $0.8 million and approximately $16.5 million, respectively.
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. As part of the formation, the Company invested approximately $32,000 in exchange for 40% of EJ Holdings voting shares. JIP owns 60% of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $13.6 million. The loan was valued at $13.9 million and $13.8 million as of June 30, 2020 and December 31, 2019, respectively. The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. The loan matures on September 30, 2028 and bears interest at the rate of 1% per annum payable annually. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids, that the operation of the facility will be principally for our benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility will be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the six months ended June 30, 2020, the Company had made additional loans to EJ Holdings of $561,000 and at June 30, 2020 had loans receivable from EJ Holdings valued at $14.5 million.
EJ Holdings is engaged in phasing in the Ube facility, including obtaining FDA and other regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to be dependent on loans from us or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.
14
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and the EJ Holdings activities at the facility are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings. Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.
The Company’s share of the losses reported by EJ Holdings are classified as net losses from equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
The following table sets forth certain financial information of EJ Holdings for the three months ended and the six months ended June 30, 2020 and 2019 (in thousands).
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
REVENUES, NET
|
|
$
|
61
|
|
|
$
|
57
|
|
|
$
|
145
|
|
|
$
|
114
|
|
|
GROSS PROFIT
|
|
|
61
|
|
|
|
57
|
|
|
|
145
|
|
|
|
114
|
|
|
NET LOSS
|
|
$
|
(1,432
|
)
|
|
$
|
(1,147
|
)
|
|
$
|
(2,449
|
)
|
|
$
|
(1,124
|
)
|
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses
|
|
$
|
311
|
|
|
$
|
232
|
|
|
Professional fees
|
|
|
960
|
|
|
|
1,183
|
|
|
Selling expenses
|
|
|
798
|
|
|
|
1,303
|
|
|
Manufacturing costs
|
|
|
3,824
|
|
|
|
4,541
|
|
|
Other vendors
|
|
|
128
|
|
|
|
18
|
|
|
Total accounts payable
|
|
|
6,021
|
|
|
|
7,277
|
|
|
Accrued interest payable, related parties
|
|
|
246
|
|
|
|
42
|
|
|
Accrued interest payable
|
|
|
407
|
|
|
|
991
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
Payroll expenses
|
|
|
998
|
|
|
|
891
|
|
|
Government rebates and other rebates
|
|
|
1,943
|
|
|
|
1,355
|
|
|
Due to EJ Holdings
|
|
|
406
|
|
|
|
238
|
|
|
Other accrued expenses
|
|
|
356
|
|
|
|
704
|
|
|
Total accrued expenses
|
|
|
3,703
|
|
|
|
3,188
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
10,377
|
|
|
$
|
11,498
|
|
Other long-term liabilities consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Trade discount
|
|
$
|
26,422
|
|
|
$
|
23,242
|
|
|
Unearned revenue
|
|
|
10,000
|
|
|
|
10,500
|
|
|
Other long-term liabilities
|
|
|
12
|
|
|
|
8
|
|
|
Total other long-term liabilities
|
|
$
|
36,434
|
|
|
$
|
33,750
|
|
On June 12, 2017, the Company entered into an API Supply Agreement, as subsequently amended (as so amended, the “API agreement”), with Telcon pursuant to which Telcon advanced to the Company approximately $31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s requirements for bulk containers of PGLG. The Company purchased $2.0 million and $2.3 million of PGLG from Telcon in the six months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020 and December 31, 2019, accounts payable to Telcon were $3.7 million. See Note 11 for additional details.
15
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
Year
Issued
|
|
Interest Rate
Range
|
|
|
Term of Notes
|
|
Conversion
Price
|
|
|
Principal
Outstanding June 30, 2020
|
|
|
Discount
Amount June 30, 2020
|
|
|
Carrying
Amount June 30, 2020
|
|
|
Shares
Underlying June 30, 2020
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
928
|
|
|
$
|
—
|
|
|
$
|
928
|
|
|
|
—
|
|
|
|
2019
|
|
11%
|
|
|
Due on demand - 6 months
|
|
|
—
|
|
|
|
2,839
|
|
|
|
—
|
|
|
|
2,839
|
|
|
|
—
|
|
|
|
2020
|
|
1% - 11%
|
|
|
Due on demand - 2 years
|
|
|
—
|
|
|
|
992
|
|
|
|
—
|
|
|
|
992
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,759
|
|
|
$
|
—
|
|
|
$
|
4,759
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
4,271
|
|
|
$
|
—
|
|
|
$
|
4,271
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
488
|
|
|
$
|
—
|
|
|
$
|
488
|
|
|
|
—
|
|
|
|
Notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
|
—
|
|
|
|
2019
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
|
—
|
|
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
10%
|
|
|
18 months
|
|
$2.00-$9.52
|
|
(a)
|
$
|
9,200
|
|
|
$
|
1,606
|
|
|
$
|
7,594
|
|
|
|
4,638,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,200
|
|
|
$
|
1,606
|
|
|
$
|
7,594
|
|
|
|
4,638,333
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
9,200
|
|
|
$
|
1,606
|
|
|
$
|
7,594
|
|
|
|
4,638,333
|
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
3 years
|
|
$
|
10.00
|
|
(b)
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
17,143
|
|
|
$
|
1,606
|
|
|
$
|
15,537
|
|
|
|
4,638,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Issued
|
|
Interest Rate
Range
|
|
|
Term of Notes
|
|
Conversion
Price
|
|
|
Principal
Outstanding
December 31,
2019
|
|
|
Discount
Amount
December 31,
2019
|
|
|
Carrying
Amount
December 31,
2019
|
|
|
Shares
Underlying
Notes
December 31, 2019
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
920
|
|
|
$
|
—
|
|
|
$
|
920
|
|
|
|
—
|
|
|
|
2019
|
|
11%
|
|
|
Due on demand - 6 months
|
|
|
—
|
|
|
|
2,829
|
|
|
|
—
|
|
|
|
2,829
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,749
|
|
|
$
|
—
|
|
|
$
|
3,749
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
3,749
|
|
|
|
—
|
|
|
|
3,749
|
|
|
|
—
|
|
|
|
Notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
|
—
|
|
|
|
2018
|
|
11%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
159
|
|
|
|
—
|
|
|
|
159
|
|
|
|
—
|
|
|
|
2019
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
193
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
193
|
|
|
|
—
|
|
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
10%
|
|
|
18 months
|
|
$2.00-$9.52
|
|
(a)
|
$
|
10,200
|
|
|
$
|
3,185
|
|
|
$
|
7,015
|
|
|
|
1,080,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,200
|
|
|
$
|
3,185
|
|
|
$
|
7,015
|
|
|
|
1,080,415
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
10,200
|
|
|
$
|
3,185
|
|
|
$
|
7,015
|
|
|
|
1,080,415
|
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
10%
|
|
|
2 years
|
|
$
|
10.00
|
|
(b)
|
$
|
3,000
|
|
|
$
|
5
|
|
|
$
|
2,995
|
|
|
|
363,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,000
|
|
|
$
|
5
|
|
|
$
|
2,995
|
|
|
|
363,876
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
3,000
|
|
|
$
|
5
|
|
|
$
|
2,995
|
|
|
|
363,876
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
17,142
|
|
|
$
|
3,190
|
|
|
$
|
13,952
|
|
|
|
1,444,291
|
|
|
|
(a)
|
The notes are convertible to Emmaus Life Sciences, Inc. shares.
|
|
(b)
|
The notes are convertible to EMI Holding, Inc. shares.
|
16
The weighted-average stated interest rate of notes payable was 10% as of June 30, 2020 and December 31, 2019. The weighted-average effective annual interest rate of notes payable as of June 30, 2020 and December 31, 2019 was 34% and 66%, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.
As of June 30, 2020, future contractual principal payments due on notes payable were as follows:
|
Year Ending
|
|
|
|
|
2020 (six months)
|
$
|
9,040
|
|
|
2021
|
|
4,732
|
|
|
2022
|
|
221
|
|
|
2023
|
|
3,150
|
|
|
Total
|
$
|
17,143
|
|
Immediately prior to the completion of the Merger, all but one of the convertible notes payable were converted into shares of EMI common stock at their respective conversion prices. Upon completion of the Merger, the conversion shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable is convertible into shares of common stock of EMI at conversion price of $10.00 per share and included in convertible notes payable.
The Company estimates the total fair value of any beneficial conversion feature and any accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance. In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds are allocated to the beneficial conversion feature and the warrants based on their relative fair values.
The 10% Senior Secured Debentures of EMI were amended and restated immediately prior to the Merger to, among other things, make them convertible into shares of common stock of EMI and to provide for adjustments in the conversion shares issuable upon conversion of the Debentures and the conversion price in the event of a merger, reorganization and similar events. Accordingly, upon completion of the Merger the Amended and Restated 10% Senior Secured Convertible Debentures became convertible into shares of common stock of the Company and included in convertible notes payable. See Note 8 for additional information regarding this arrangement.
The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. The following table sets forth the fair value of the conversion feature liabilities as of June 30, 2020 and December 31, 2019 (in thousands):
|
|
|
Six Months Ended
|
|
|
Year ended
|
|
|
Conversion feature liabilities - Amended and Restated 10% Senior Convertible Debentures
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Balance, beginning of period
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Fair value at issuance date
|
|
|
—
|
|
|
|
132
|
|
|
Fair value at debt modification date
|
|
|
118
|
|
|
|
—
|
|
|
Change in fair value included in the statement of comprehensive income (loss)
|
|
|
(6
|
)
|
|
|
(131
|
)
|
|
Balance, end of period
|
|
$
|
113
|
|
|
$
|
1
|
|
The value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.
The fair values as of June 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:
17
|
|
June 30, 2020
|
|
February 21, 2020
(Modification date)
|
|
December 31, 2019
|
|
|
Stock price
|
$
|
1.67
|
|
$
|
1.89
|
|
$
|
1.97
|
|
|
Conversion price
|
$
|
2.00
|
|
$
|
3.00
|
|
$
|
9.52
|
|
|
Selected yield
|
|
15.73
|
%
|
|
19.12
|
%
|
|
16.77
|
%
|
|
Expected volatility (peer group)
|
|
100
|
%
|
|
65
|
%
|
|
50
|
%
|
|
Expected life (in years)
|
|
0.81
|
|
|
1.16
|
|
|
0.81
|
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Risk‑free rate
|
Term structure
|
|
Term structure
|
|
Term structure
|
|
See Note 13 for information regarding the prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures.
The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time, Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $1,000,000. Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3%. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year. The outstanding balances under the revolving line of credit agreement of $600,000 as of June 30, 2020 and December 31, 2019 were reflected in revolving line of credit, related party on the Consolidated Balance Sheet. With the tax-gross up, the effective annual interest rate on the outstanding balance as of June 30, 2020 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more information regarding this arrangement.
On May 8, 2020, the Company received a loan in the amount of $797,840 under the Small Business Administration Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loan, which is in the form of a Promissory Note dated April 29, 2020, matures on April 29, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment or the loan forgiveness process has commenced. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness on October 30, 2020. There is no assurance that the loan will be forgiven. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period. The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheet.
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 June 30, 2020 and December 31, 2019 (in thousands):
18
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Warrant Liability - GPB
|
|
Warrants
|
|
|
Warrants
|
|
|
Balance, beginning of period
|
|
$
|
38
|
|
|
$
|
1,399
|
|
|
Change in fair value included in the statement of comprehensive income (loss)
|
|
|
88
|
|
|
|
(1,361
|
)
|
|
Balance, end of period
|
|
$
|
126
|
|
|
$
|
38
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.
The value as of the dates set forth in the table above was based on upon following assumptions:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Stock price
|
|
$
|
1.67
|
|
|
$
|
1.97
|
|
|
Risk‑free interest rate
|
|
|
0.18
|
%
|
|
|
1.64
|
%
|
|
Expected volatility (peer group)
|
|
|
106.00
|
%
|
|
|
60.00
|
%
|
|
Expected life (in years)
|
|
|
3.00
|
|
|
|
3.50
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
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 consolidated balance sheets.
As described in Note 7 above, the Debentures were amended and restated in their entirety in conjunction with the Merger. The 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 and were subsequently reduced again as described in Note 13. See Note 13 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
19
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.
Purchase agreement with Holder of a Convertible Promissory Notes - 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 contingent 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, subject to certain conditions. Under ASC 815-40, the Company concluded that the warrants issued to the note holder 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 change in fair value of the warrants as of June 30, 2020 (in thousands):
|
|
|
Six Months Ended
|
|
|
Warrants Derivative Liabilities - convertible promissory note
|
|
June 30, 2020
|
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
Fair value at issuance date
|
|
|
1,425
|
|
|
Change in fair value included in the statement of comprehensive loss
|
|
|
(12
|
)
|
|
Balance, end of period
|
|
$
|
1,413
|
|
The fair value of the warrant derivative liabilities was determined using the Black-Scholes Merton model and was
based upon following assumptions:
|
|
June 30, 2020
|
|
|
June 15, 2020 (modification date)
|
|
|
Exercise price
|
$
|
2.05
|
|
|
$
|
2.05
|
|
|
Stock price
|
$
|
1.67
|
|
|
$
|
1.68
|
|
|
Risk‑free interest rate
|
|
0.29
|
%
|
|
|
0.33
|
%
|
|
Expected volatility (peer group)
|
|
94.00
|
%
|
|
|
94.00
|
%
|
|
Expected life (in years)
|
|
4.96
|
|
|
|
5.00
|
|
|
Expected dividend yield
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Warrant shares
|
|
1,250,000
|
|
|
|
1,250,000
|
|
A summary of outstanding warrants as of June 30, 2020 and December 31, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Warrants outstanding, beginning of period
|
|
|
4,931,099
|
|
|
|
3,436,431
|
|
|
Assumed as part of Merger
|
|
|
—
|
|
|
|
1,044,939
|
|
|
Granted
|
|
|
1,250,000
|
|
|
|
500,729
|
|
|
Exercised
|
|
|
—
|
|
|
|
(51,000
|
)
|
|
Cancelled, forfeited or expired
|
|
|
(115,953
|
)
|
|
|
—
|
|
|
Warrants outstanding, end of period
|
|
|
6,065,146
|
|
|
|
4,931,099
|
|
20
A summary of outstanding warrants by year issued and exercise price as of June 30, 2020 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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.00-$10.76
|
|
|
|
3,439,007
|
|
|
|
2.12
|
|
|
$
|
4.38
|
|
|
|
3,439,007
|
|
|
$
|
4.38
|
|
|
Prior to Jan 1, 2019 Total
|
|
|
|
3,439,007
|
|
|
|
|
|
|
|
|
|
|
|
3,439,007
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.12
|
|
|
|
32,391
|
|
|
|
3.91
|
|
|
$
|
6.12
|
|
|
|
32,391
|
|
|
$
|
6.12
|
|
|
|
$
|
12.00
|
|
|
|
76,575
|
|
|
|
3.23
|
|
|
$
|
12.00
|
|
|
|
76,575
|
|
|
$
|
12.00
|
|
|
|
$
|
14.04
|
|
|
|
174,999
|
|
|
|
2.75
|
|
|
$
|
14.04
|
|
|
|
174,999
|
|
|
$
|
14.04
|
|
|
|
$
|
31.50
|
|
|
|
737,975
|
|
|
|
2.07
|
|
|
$
|
31.50
|
|
|
|
737,975
|
|
|
$
|
31.50
|
|
|
|
$
|
36.24
|
|
|
|
22,333
|
|
|
|
2.07
|
|
|
$
|
36.24
|
|
|
|
22,333
|
|
|
$
|
36.24
|
|
|
|
$
|
60.00
|
|
|
|
666
|
|
|
|
0.50
|
|
|
$
|
60.00
|
|
|
|
666
|
|
|
$
|
60.00
|
|
|
|
$
|
2.00
|
|
|
|
256,200
|
|
|
|
3.21
|
|
|
$
|
2.00
|
|
|
|
256,200
|
|
|
$
|
2.00
|
|
|
|
$
|
7.68
|
|
|
|
75,000
|
|
|
|
4.05
|
|
|
$
|
7.68
|
|
|
|
75,000
|
|
|
$
|
7.68
|
|
|
|
2019 Total
|
|
|
|
1,376,139
|
|
|
|
|
|
|
|
|
|
|
|
1,376,139
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.05
|
|
|
|
1,250,000
|
|
|
|
4.96
|
|
|
$
|
2.05
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
Total
|
|
|
|
6,065,146
|
|
|
|
|
|
|
|
|
|
|
|
4,815,146
|
|
|
|
|
|
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 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.
21
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 thereunder.
Stock options—During the six months ended June 30, 2020, the Company granted options to purchase 90,000 shares of common stock. During the year ended December 31, 2019, the Company granted stock options to purchase 50,000 shares of Company 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.
Management has valued stock options at their date of grant utilizing the Black‑Scholes‑Merton Option pricing model. The fair value of the underlying shares was determined by the market value of stock of similar companies and recent arm’s length transactions involving the sale of the Company’s common stock. Prior the Merger, the Company lacked company-specific historical and implied volatility information for its common stock. Therefore, the expected volatility was calculated using the historical volatility of a comparative public traded companies. The following table presents the assumptions used on recent dates on which options were granted by the Company.
|
|
|
June 29, 2020
|
|
|
June 19, 2019
|
|
|
Stock Price
|
|
$
|
1.67
|
|
|
$
|
10.30
|
|
|
Exercise Price
|
|
$
|
2.05
|
|
|
$
|
10.30
|
|
|
Term
|
|
5.5-6 years
|
|
|
6 years
|
|
|
Risk-Free Rate
|
|
0.28% - 0.38%
|
|
|
1.83%
|
|
|
Dividend Yield
|
|
—
|
|
|
—
|
|
|
Volatility
|
|
78.91%-80.49%
|
|
|
|
67.16
|
%
|
A summary of outstanding stock options as of June 30, 2020 and December 31, 2019 is presented below.
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Number of
Options
|
|
|
Weighted‑
Average
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted‑
Average
Exercise
Price
|
|
|
Options outstanding, beginning of period
|
|
|
7,245,350
|
|
|
$
|
4.68
|
|
|
|
6,642,200
|
|
|
$
|
4.40
|
|
|
Granted or deemed granted
|
|
|
90,000
|
|
|
$
|
2.05
|
|
|
|
636,683
|
|
(a)
|
$
|
10.10
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(167
|
)
|
|
$
|
5.00
|
|
|
Cancelled, forfeited and expired
|
|
|
(142,818
|
)
|
|
$
|
5.08
|
|
|
|
(33,366
|
)
|
|
$
|
11.29
|
|
|
Options outstanding, end of period
|
|
|
7,192,532
|
|
|
$
|
4.63
|
|
|
|
7,245,350
|
|
|
$
|
4.68
|
|
|
Options exercisable, end of period
|
|
|
6,978,869
|
|
|
$
|
4.58
|
|
|
|
7,001,680
|
|
|
$
|
4.47
|
|
|
Options available for future grant
|
|
|
2,302,475
|
|
|
|
|
|
|
|
2,167,150
|
|
|
|
|
|
|
|
|
|
(a)
|
Upon the Merger, the exercise prices of outstanding EMI options and number of shares of the Company common stock underlying the options were adjusted based upon the exchange ratio in the Merger.
|
During the three months ended June 30, 2020 and June 30, 2019, the Company recognized $0.2 million and $0.4 million, respectively, of share-based compensation expense. During the six months ended June 30, 2020 and June 30, 2019, the Company recognized approximately $0.4 million and $1.0 million, respectively, of share-based compensation expense. As of June 30, 2020, there was approximately $1.1 million 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 1.4 years.
Purchase Agreement with Lincoln Park Capital Fund, LLC—On 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 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
22
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.
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss).
For the three months and six months ended June 30, 2020, the Company recorded an income tax benefit of $0.5 million and $0.2 million, respectively. For the three months and six months ended June 30, 2019, the Company recorded a provision for income taxes of $51,000 and $103,000, respectively. The provisions for income taxes for the three and six months ended June 30, 2020 and 2019, were primarily related to state tax on the Company pre-tax book income. The Company did not record a provision for federal income tax due to its net operating loss carryforwards. The Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of June 30 2020 or 2019.
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leased 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $78,543 per month, which lease will expire on September 30, 2026. The Company also leased an additional 1,850 square feet office space in New York, New York, at a base rent of $8,479, which leases will expire on January 31, 2023.
In addition, the Company leased 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $3,000, which the lease will expire on September 30, 2020.
The rent expense during the three months ended June 30, 2020 and 2019 amounted to approximately $298,000 and $219,000, respectively, and during the six months ended June 30, 2020 and 2019 amounted approximately $609,000 and $419,000, respectively.
23
Future minimum lease payments under the lease agreements were as follows as of June 30, 2020 (in thousands):
|
|
|
Amount
|
|
|
2020 (six months)
|
|
$
|
587
|
|
|
2021
|
|
|
1,106
|
|
|
2022
|
|
|
1,138
|
|
|
2023
|
|
|
1,050
|
|
|
2024 and thereafter
|
|
|
2,984
|
|
|
Total lease payments
|
|
|
6,865
|
|
|
Less: Interest
|
|
|
2,040
|
|
|
Present value of lease liabilities
|
|
$
|
4,825
|
|
The Company adopted Accounting Standard Update (“ASU”) 2016-02 – Lease (“Topic 842”) on January 1, 2019 using a modified retrospective approach and elected the transition method and the practical expedients permitted under the transition guidance, which allowed to carryforward the historical lease classification and our assessment on whether a contract is or contains a lease. The Company also elected to combine lease and non-lease components, such as common area maintenance charges, as single lease and elected to use the short-term lease exception permitted by the standard as noted in Note 2.
As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded a $3.0 million in operating right-of-use asset and $3.3 million in lease liability and derecognized $287,000 of deferred rent as of the adoption date. These were calculated using the present value of the Company’s remaining lease payments using an estimated incremental borrowing rate. The Company also recorded a $29,000 cumulative effect increased on our accumulated deficit as of January 1, 2019. As of June 30, 2020, the Company had an operating lease right-of-use asset of $4.3 million and lease liability of $4.8 million in the balance sheet. The weighted average remaining term of the Company’s leases as of June 30, 2020 was 6.0 years and the weighted-average discount rate was 12.4%.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API agreement”) with Telcon pursuant to which Telcon paid the Company approximately $31.8 million in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”). The revised API agreement is effective for a term of five years and will renew automatically for 10 successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a total of 940,000 kilograms of PGLG at $50 per kilogram, or a total of $47.0 million, over the term of the agreement. In September 2018, the Company entered into an agreement with Ajinomoto Health and Nutrition North America, Inc. (“Ajinomoto”), the producer of the PGLG, and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the revised API agreement.
On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the revised API agreement from $50 per kilogram of PGLG to $100 per kilogram from July 1, 2019 through June 30, 2020, with the price payable after June 30, 2020 to be subject to agreement between the parties. The PGLG raw material purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount. Refer to Note 6 for more information.
24
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to our loans from related persons outstanding as of June 30, 2020 and interest paid during the six months ended June 30, 2020 (in thousands):
|
Class
|
Lender
|
|
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of Loan
|
|
Principal Amount Outstanding at June 30, 2020
|
|
|
Amount of
Interest
Paid
|
|
|
|
Current, Promissory note payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
4/29/2016
|
|
Due on Demand
|
|
$
|
20
|
|
|
$
|
—
|
|
|
|
|
Lan T. Tran (2)
|
|
11%
|
|
|
2/10/2018
|
|
Due on Demand
|
|
|
—
|
|
|
|
35
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
2/9/2019
|
|
Due on Demand
|
|
|
14
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
34
|
|
|
|
35
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (2)
|
|
5.25%
|
|
|
12/27/2019
|
|
Due on Demand
|
|
|
600
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
600
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
634
|
|
|
$
|
53
|
|
|
The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2019:
|
Class
|
Lender
|
|
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of Loan
|
|
Principal Amount Outstanding at December 31, 2019
|
|
|
Highest
Principal
Outstanding
|
|
|
Amount of
Principal
Repaid or
Converted
into Stock
|
|
|
Amount of
Interest
Paid
|
|
|
Conversion
Rate
|
|
|
|
Current, Promissory note payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
4/29/2016
|
|
Due on Demand
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
Hope International Hospice, Inc. (1)
|
|
10%
|
|
|
6/3/2016
|
|
Due on Demand
|
|
|
—
|
|
|
|
250
|
|
|
|
250
|
|
|
|
78
|
|
|
|
—
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
2/9/2017
|
|
Due on Demand
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
|
Yutaka Niihara (2)(3)
|
|
10%
|
|
|
9/14/2017
|
|
Due on Demand
|
|
|
—
|
|
|
|
904
|
|
|
|
27
|
|
|
|
2
|
|
|
|
—
|
|
|
|
|
Lan T. Tran (2)
|
|
11%
|
|
|
2/10/2018
|
|
Due on Demand
|
|
|
159
|
|
|
|
159
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
2/9/2019
|
|
Due on Demand
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
193
|
|
|
|
1,359
|
|
|
|
277
|
|
|
|
82
|
|
|
|
|
|
|
|
Current, Convertible notes payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yasushi Nagasaki (2)
|
|
10%
|
|
|
6/29/2012
|
|
Due on Demand
|
|
|
—
|
|
|
|
200
|
|
|
|
200
|
|
|
|
56
|
|
|
$
|
3.30
|
|
|
|
|
Yutaka & Soomi Niihara (2)(3)
|
|
10%
|
|
|
11/16/2015
|
|
2 years
|
|
|
—
|
|
|
|
200
|
|
|
|
200
|
|
|
|
73
|
|
|
$
|
4.50
|
|
|
|
|
Wei Peu Zen (3)
|
|
10%
|
|
|
11/6/2017
|
|
2 years
|
|
|
—
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
597
|
|
|
$
|
10.00
|
|
|
|
|
Profit Preview International Group, Ltd. (4)
|
|
10%
|
|
|
2/1/2018
|
|
2 years
|
|
|
—
|
|
|
|
4,037
|
|
|
|
4,037
|
|
|
|
385
|
|
|
$
|
10.00
|
|
|
|
|
Profit Preview International Group, Ltd. (4)
|
|
10%
|
|
|
3/21/2018
|
|
2 years
|
|
|
—
|
|
|
|
5,363
|
|
|
|
5,363
|
|
|
|
442
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
—
|
|
|
|
14,800
|
|
|
|
14,800
|
|
|
|
1,553
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (2)
|
|
5%
|
|
|
12/27/2019
|
|
Due on Demand
|
|
|
600
|
|
|
|
600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
600
|
|
|
|
600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
793
|
|
|
$
|
16,759
|
|
|
$
|
15,077
|
|
|
$
|
1,635
|
|
|
|
|
|
|
|
(1)
|
Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also a director and the Chief Executive Officer of Hope International Hospice, Inc.
|
|
(4)
|
Mr. Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.
|
25
See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara.
See Notes 6 and 11 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.6% of the common stock outstanding as of June 30, 2020. As of June 30, 2020, the Company held 6,222,837 shares of Telcon stock as discussed in Note 5.
NOTE 13 — SUBSEQUENT EVENTS
On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of our outstanding 10% Senior Secured Convertible Debentures described above. The September 2020 Amendment amended in certain respects the securities purchase agreement among EMI and the Debenture holders originally entered into on September 8, 2018, as amended by the February 2020 Amendment, and provides that the Debentures are to be amended in certain respects as set forth in the form of Allonge Amendment No. 1 to the debentures included in the September 2020 Agreement (the “Allonge”). Pursuant to the Allonge, the aggregate monthly redemption payments under the Debentures were reduced to $500,000 from $1,000,000 in principal amount and the maturity date of the Debentures was extended from April 21, 2021 to August 31, 2021. The monthly redemption payments resumed in September 2020 and will continue on the first day of each month thereafter commencing October 1, 2020. The remaining principal balance of the Debentures will be due and payable upon maturity, subject to mandatory prepayment in connection with certain “Capital Events” as defined.
In consideration of the Debenture holder’s financial accommodations to the Company, the Company issued to the holders, pro rata based upon the relative principal amounts of their Debentures, five-year common stock purchase warrants to purchase a total of up to 1,840,000 shares of the Company common stock at an exercise price of $2.00 a share. The warrants provide for so-called full-ratchet anti-dilution adjustments in the event the Company sells or issues shares of common stock or common stock equivalents at an effective price per share less than the exercise price of the warrants, subject to certain exceptions. The exercise price also remains subject to adjustment for stock splits and other customary events. In October 2018, the Company granted to T.R. Winston and its affiliates for services relating to the September 2020 Amendment common stock purchase warrants to purchase up to 75,000 shares of the Company common stock at an exercise price of $2.10 a share and otherwise on terms identical to the warrants issued to the debenture holders described above. In March 2021, the conversion price of the Debentures, and the exercise price of the these and the other warrants related to the Debentures was reduced to $1.54 in connection with our issuance of shares of common stock to Kainos Medicine, Inc. referred to below in this Note 13. In March 2021, we prepaid the Debentures in full in accordance with their terms.
On September 28, 2020, the Company entered into a convertible bond purchase agreement with Telcon pursuant to which it purchased on October 16, 2020 at face value a convertible bond of Telcon in the principal amount of $26.1 million, on the terms described in the purchase agreement. The Company purchased the convertible bond with a portion of the net proceeds from the sale of Telcon common shares owned by us. The sale of the Telcon shares and purchase of the Telcon convertible bond was in accordance with our December 23, 2019 agreement with Telcon. As contemplated by the December 23, 2019 agreement, the convertible bond and any proceeds therefrom, including proceeds from any exercise of the call option or early redemption right described below, replace the Company’s former Telcon shares and proceeds therefrom as collateral under the revised API Supply Agreement with Telcon.
The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1% a year, payable quarterly. Beginning on October 16, 2021, the holder of the convertible bond will be entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond. To the extent not previously redeemed, the principal amount of the bond will be due upon maturity. The convertible bond is convertible at the holder’s option at any time and from time to time into common shares of Telcon at an initial conversion price of approximately $8.00 per share. The conversion price is subject to antidilution adjustments in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares, a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event.
In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to 50% in principal amount of the convertible bond commencing October 16, 2021 and prior to maturity. If the Company transfers the convertible bond, it will be obliged under the call option agreement to see to it that the transferee is bound by such call option.
On October 28, 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agreed to loan to EJ Holdings a total of approximately $6.5 million, in monthly installments through March 2021, including approximately $4.0 million, loaned through December 31, 2020. The loans will be unsecured general obligations of EJ Holdings, will bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and will be due and payable in a lump sum at maturity on September 30, 2028. The proceeds of the loans will be used by EJ Holdings to fund its activities and operations at its Ube facility as described under “Equity method investment” in Note 5 above.
26
On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. As of April 5, 2021, the Company had sold approximately $14.5 million of the convertible promissory notes. Of the net proceeds from the sale of the convertible promissory notes, $6.2 million was used to prepay the outstanding Amended and Restated 10% Senior Secured Convertible Debentures as described above.
Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of the Company common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of our common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.
The convertible promissory notes bear interest at the rate of 2% per annum payable semi-annually on the last business day of August and January of each year and will mature on the 3rd anniversary of the original issue date. The convertible promissory notes will become prepayable in whole or in part at the election of the holders on or after February 28, 2022 if our common shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined). The Company will be entitled to prepay up to 50% of the principal amount of the convertible promissory notes at any time after the first anniversary and on or before the second anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50% of such principal amount. The convertible promissory notes are general, unsecured obligations of the Company.
Effective February 22, 2021, the Company’s subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. Emmaus Medical’s obligations to Prestige Capital under the purchase and sale agreement are secured by a security interest in the accounts receivable and all or substantially all other assets of Emmaus Medical.
In connection with the purchase and sale agreement, the Company agreed to guarantee Emmaus Medical’s obligations under the purchase and sale agreement. The Company’s obligations under the guarantee are unsecured.
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