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 consolidated interim financial statements of Emmaus Life Sciences, Inc., (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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, 2020 has been derived from the audited consolidated balance sheet at December 31, 2020 contained in the Form 10-K/A. The results of operations for the three months ended March 31, 2021, 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.”
Principles of consolidation—The consolidated financial statements include the accounts of Emmaus and its direct and indirect consolidated 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.
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 will not have a material effect on the Company’s condensed consolidated financial statements.
Factoring accounts receivables — The Company entered into a factoring agreement with Prestige Capital Finance, LLC on February 22, 2021. Under the agreement, the Company may factor its accounts receivables of up to 70% of the face value with maximum outstanding balance of $7.5 million and the fee ranges between 2.25% and 7.25% depending on the period when customers pay the outstanding accounts receivables. The Company had no factoring accounts receivables outstanding as of March 31, 2021. For three month ended March 31, 2021, the Company incurred approximately $31,000 of factoring fees.
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 March 31, 2021 and March 31, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 24,515,738 shares and 16,698,829 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted net income per share since the potential dilutive securities were out of the money for the period ended March 31, 2020 and were anti-dilutive for period ended March 31, 2021.
7
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Endari®
|
|
$
|
5,176
|
|
|
$
|
6,714
|
|
|
Other
|
|
|
159
|
|
|
|
240
|
|
|
Revenues, net
|
|
$
|
5,335
|
|
|
$
|
6,954
|
|
The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2021 and March 31, 2020 (in thousands):
|
|
|
Trade Discounts, Allowances and Chargebacks
|
|
|
Government Rebates and Other Incentives
|
|
|
Returns
|
|
|
Total
|
|
|
Balance as of December 31, 2020
|
|
$
|
134
|
|
|
$
|
2,119
|
|
|
$
|
473
|
|
|
$
|
2,726
|
|
|
Provision related to sales in the current year
|
|
|
575
|
|
|
|
864
|
|
|
|
57
|
|
|
|
1,496
|
|
|
Adjustments related prior period sales
|
|
|
14
|
|
|
|
2
|
|
|
|
(37
|
)
|
|
|
(21
|
)
|
|
Credit and payments made
|
|
|
(281
|
)
|
|
|
(792
|
)
|
|
|
—
|
|
|
|
(1,073
|
)
|
|
Balance as of March 31, 2021
|
|
$
|
442
|
|
|
$
|
2,193
|
|
|
$
|
493
|
|
|
$
|
3,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
228
|
|
|
$
|
1,354
|
|
|
$
|
315
|
|
|
$
|
1,897
|
|
|
Provision related to sales in the current year
|
|
|
942
|
|
|
|
1,122
|
|
|
|
71
|
|
|
|
2,135
|
|
|
Adjustments related prior period sales
|
|
|
16
|
|
|
|
(44
|
)
|
|
|
(22
|
)
|
|
|
(50
|
)
|
|
Credit and payments made
|
|
|
(794
|
)
|
|
|
(709
|
)
|
|
|
—
|
|
|
|
(1,503
|
)
|
|
Balance as of March 31, 2020
|
|
$
|
392
|
|
|
$
|
1,723
|
|
|
$
|
364
|
|
|
$
|
2,479
|
|
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 net revenues):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Customer A
|
|
|
63
|
%
|
|
|
54
|
%
|
|
Customer B
|
|
|
17
|
%
|
|
|
27
|
%
|
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 March 31, 2021 and December 31, 2020. Refer to Note 11 for additional details.
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Raw materials and components
|
$
|
1,486
|
|
|
$
|
1,486
|
|
|
Work-in-process
|
|
690
|
|
|
|
721
|
|
|
Finished goods
|
|
5,913
|
|
|
|
6,064
|
|
|
Inventory reserve
|
|
(1,349
|
)
|
|
|
(1,184
|
)
|
|
Total
|
$
|
6,740
|
|
|
$
|
7,087
|
|
8
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Prepaid insurance
|
$
|
236
|
|
|
$
|
388
|
|
|
Prepaid expenses
|
|
397
|
|
|
$
|
454
|
|
|
Due from EJ Holdings
|
|
400
|
|
|
$
|
376
|
|
|
Other current assets
|
|
237
|
|
|
|
267
|
|
|
Total
|
$
|
1,270
|
|
|
$
|
1,485
|
|
Property and equipment consisted of the following (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Equipment
|
$
|
331
|
|
|
$
|
347
|
|
|
Leasehold improvements
|
|
39
|
|
|
|
39
|
|
|
Furniture and fixtures
|
|
99
|
|
|
|
99
|
|
|
Total property and equipment
|
|
469
|
|
|
|
485
|
|
|
Less: accumulated depreciation
|
|
(360
|
)
|
|
|
(365
|
)
|
|
Property and Equipment, net
|
$
|
109
|
|
|
$
|
120
|
|
During the three months ended March 31, 2021 and March 31, 2020, depreciation expense was approximately $11,000 and $12,000, respectively.
NOTE 5 — INVESTMENTS
Investment in convertible bonds - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon RF Pharmaceutical, Inc., or Telcon in the principal amount of approximately $26.1 million which matures on October 16, 2030 and bears interest at the rate of 2.1% per year, payable quarterly. Beginning on October 16, 2021, the Company 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. 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. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the early redemption right or the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with Telcon described in Note 6 and Note 11.
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.
The Company has elected the fair value option method to measure the investment in the Telcon convertible bond. The investment is classified as an available for sale security and remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income. The fair value and any change in fair value of the convertible bond is determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the market price of the underlying common stock.
The following table sets forth the fair value and changes in fair value of the investment in convertible bonds as of March 31, 2021, and December 31, 2020 (in thousands):
|
Investment in convertible bond
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Balance, beginning of period
|
|
$
|
27,866
|
|
|
$
|
—
|
|
|
Fair value at issuance date
|
|
|
—
|
|
|
|
22,059
|
|
|
Change in fair value included in the statement of other comprehensive income (loss)
|
|
|
77
|
|
|
|
5,807
|
|
|
Balance, end of period
|
|
$
|
27,943
|
|
|
$
|
27,866
|
|
9
The fair value as of March 31, 2021, and December 31, 2020 was based upon following assumptions:
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Principal outstanding (South Korean won)
|
|
KRW 30 billion
|
|
|
KRW 30 billion
|
|
|
Stock price
|
|
KRW 5,020
|
|
|
KRW 6,060
|
|
|
Expected life (in years)
|
|
|
9.55
|
|
|
|
9.79
|
|
|
Selected yield
|
|
|
9.50
|
%
|
|
|
10.50
|
%
|
|
Expected volatility (Telcon common stock)
|
|
|
84.50
|
%
|
|
|
85.80
|
%
|
|
Risk-free interest rate (South Korea government bond)
|
|
|
2.02
|
%
|
|
|
1.72
|
%
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Conversion price
|
|
KRW 5,023
|
|
|
KRW 6,028
|
|
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. In connection with 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 matures on September 30, 2028 and bears interest at the rate of 1% per annum, payable annually. The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. In October 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agrees to loan to EJ Holdings a total of approximately $6.5 million in monthly instalments through March 2021. The loans are unsecured general obligations of EJ Holdings, bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and are due and payable in a lump sum at maturity on September 30, 2028. The proceeds of the loans are used by EJ Holdings to fund its activities and operations at its Ube facility. The parties contemplate 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’ three-person board of directors, one of whom is a designee of the Company and two of who are representatives of JIP, in consultation with the Company. As of March 31, 2021, and December 31, 2020, the loans receivable from EJ Holdings were approximately $19.0 million and $18.6 million, respectively.
EJ Holdings is engaged in reestablishing operations at the Ube facility, including obtaining regulatory approvals for the manufacture of prescription grade L-glutamine (“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.
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 of EJ Holdings are classified as net losses on 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 March 31, 2021 and March 31, 2020 (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
REVENUES, NET
|
|
59
|
|
|
|
84
|
|
|
GROSS PROFIT
|
|
59
|
|
|
|
84
|
|
|
NET LOSS
|
$
|
(1,886
|
)
|
|
$
|
(1,021
|
)
|
10
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses
|
|
$
|
531
|
|
|
$
|
262
|
|
|
Professional fees
|
|
|
418
|
|
|
|
252
|
|
|
Selling expenses
|
|
|
339
|
|
|
|
395
|
|
|
Manufacturing costs
|
|
|
11
|
|
|
|
596
|
|
|
Other vendors
|
|
|
100
|
|
|
|
518
|
|
|
Total accounts payable
|
|
|
1,399
|
|
|
|
2,023
|
|
|
Accrued interest payable, related parties
|
|
|
54
|
|
|
|
41
|
|
|
Accrued interest payable
|
|
|
491
|
|
|
|
627
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
Payroll expenses
|
|
|
1,083
|
|
|
|
1,053
|
|
|
Government rebates and other rebates
|
|
|
2,193
|
|
|
|
2,659
|
|
|
Due to EJ Holdings
|
|
|
371
|
|
|
|
545
|
|
|
Other accrued expenses
|
|
|
400
|
|
|
|
512
|
|
|
Total accrued expenses
|
|
|
4,047
|
|
|
|
4,769
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
5,991
|
|
|
|
7,460
|
|
Other current liabilities consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Trade discount
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
Other current liabilities
|
|
739
|
|
|
|
706
|
|
|
Total other current liabilities
|
$
|
2,739
|
|
|
$
|
2,706
|
|
Other long-term liabilities consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Trade discount
|
$
|
24,453
|
|
|
$
|
24,453
|
|
|
Unearned revenue
|
|
10,000
|
|
|
|
10,000
|
|
|
Other long-term liabilities
|
|
20
|
|
|
|
17
|
|
|
Total other long-term liabilities
|
$
|
34,473
|
|
|
$
|
34,470
|
|
On June 12, 2017, the Company and Telcon entered into an API Supply Agreement, as subsequently amended (so as amended, the “API agreement”), 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 a specific portion of the Company’s estimated annual targets for bulk containers of PGLG. The Company did not purchase PGLG from Telcon in the three months ended March 31, 2021 and purchased $2.0 million of PGLG in the three months ended March 31, 2020. As of March 31, 2021, and December 31, 2020, respectively, accounts payable to Telcon were zero and $208,000, respectively. See Note 11 for additional details.
11
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at March 31, 2021 and December 31, 2020 (in thousands except for number of shares):
|
Year
Issued
|
|
Interest Rate
Range
|
|
|
Term of Notes
|
|
Conversion
Price
|
|
|
Principal
Outstanding March 31, 2021
|
|
|
Unamortized
Discount March 31, 2021
|
|
|
Carrying
Amount March 31, 2021
|
|
|
Shares
Underlying March 31, 2021
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
903
|
|
|
$
|
—
|
|
|
$
|
903
|
|
|
|
—
|
|
|
2016
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
|
2019
|
|
11%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
2,065
|
|
|
|
—
|
|
|
|
2,065
|
|
|
|
—
|
|
|
2020
|
|
1%
|
|
|
2 years
|
|
|
—
|
|
|
|
798
|
|
|
|
—
|
|
|
|
798
|
|
|
|
—
|
|
|
2021
|
|
11%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
919
|
|
|
|
—
|
|
|
|
919
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,705
|
|
|
$
|
—
|
|
|
$
|
4,705
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
4,616
|
|
|
$
|
—
|
|
|
$
|
4,616
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
89
|
|
|
|
—
|
|
|
Notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
|
—
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
3 years
|
|
$
|
10.00
|
|
(b)
|
|
3,150
|
|
|
|
—
|
|
|
|
3,150
|
|
|
|
316,604
|
|
|
2021
|
|
2%
|
|
|
3 years
|
|
$
|
1.48
|
|
(a)
|
|
14,390
|
|
|
|
5,434
|
|
|
|
8,956
|
|
|
|
9,739,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,540
|
|
|
$
|
5,434
|
|
|
$
|
12,106
|
|
|
|
10,055,939
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
17,540
|
|
|
$
|
5,434
|
|
|
$
|
12,106
|
|
|
|
10,055,939
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
22,345
|
|
|
$
|
5,434
|
|
|
$
|
16,911
|
|
|
|
10,055,939
|
|
|
Year
Issued
|
|
Interest Rate
Range
|
|
|
Term of Notes
|
|
Conversion
Price
|
|
|
Principal
Outstanding
December 31,
2020
|
|
|
Unamortized
Discount
December 31,
2020
|
|
|
Carrying
Amount
December 31,
2020
|
|
|
Shares
Underlying
Notes
December 31, 2020
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
969
|
|
|
$
|
—
|
|
|
$
|
969
|
|
|
|
—
|
|
|
2019
|
|
11%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
2,899
|
|
|
|
|
|
|
|
2,899
|
|
|
|
—
|
|
|
2020
|
|
1%-11%
|
|
|
Due on demand - 2 years
|
|
|
—
|
|
|
|
942
|
|
|
|
—
|
|
|
|
942
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,810
|
|
|
$
|
—
|
|
|
$
|
4,810
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
4,588
|
|
|
$
|
—
|
|
|
$
|
4,588
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
222
|
|
|
|
—
|
|
|
Notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
|
—
|
|
|
2019
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
2020
|
|
12%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
134
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
134
|
|
|
|
—
|
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
10%
|
|
|
18 months
|
|
$2.00-$9.52
|
|
(a)
|
$
|
7,200
|
|
|
$
|
1,720
|
|
|
$
|
5,480
|
|
|
|
3,630,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,200
|
|
|
$
|
1,720
|
|
|
$
|
5,480
|
|
|
|
3,630,000
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
7,200
|
|
|
$
|
1,720
|
|
|
$
|
5,480
|
|
|
|
3,630,000
|
|
|
Convertible note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
10%
|
|
|
2 years
|
|
$
|
10.00
|
|
(b)
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
316,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
316,723
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
3,150
|
|
|
|
316,723
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
`
|
$
|
15,294
|
|
|
$
|
1,720
|
|
|
$
|
13,574
|
|
|
|
3,946,723
|
|
|
|
(a)
|
The notes are convertible to Emmaus Life Sciences, Inc. shares.
|
|
|
(b)
|
The notes are convertible to EMI Holding, Inc. shares.
|
12
The weighted-average annual stated interest rate of notes payable was 5% and 10% as of March 31, 2021 and December 31, 2020, respectively. The weighted-average annual effective annual interest rate of notes payable as of March 31, 2021 and December 31, 2020 was 14% and 37%, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.
As of March 31, 2021, future contractual principal payments due on notes payable were as follows:
|
Year Ending
|
|
|
|
|
2021 (nine months)
|
$
|
4,583
|
|
|
2022
|
|
222
|
|
|
2023
|
|
3,150
|
|
|
2024
|
|
14,390
|
|
|
Total
|
$
|
22,345
|
|
On March 8, 2021, the Company prepaid in full outstanding Amended and Restated 10% Senior Secured Convertible Debentures and recognized $1.2 million of loss on debt extinguishment due to recognize the remaining unamortized discount.
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. Upon prepayment of the Debentures, the outstanding liability was recognized in change in fair value in earnings. The following table sets forth the fair value of the conversion feature liabilities as of March 31, 2021 and December 31, 2020 (in thousands):
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Balance, beginning of period
|
|
$
|
7
|
|
|
$
|
1
|
|
|
Fair value at debt modification date
|
|
|
—
|
|
|
|
118
|
|
|
Change in fair value included in the statement of comprehensive (income) loss
|
|
|
(7
|
)
|
|
|
(112
|
)
|
|
Balance, end of period
|
|
$
|
—
|
|
|
$
|
7
|
|
The fair 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.
The fair value as of December 31, 2020 was based upon following assumptions:
|
|
|
December 31, 2020
|
|
|
Stock price
|
|
$
|
1.23
|
|
|
Conversion price
|
|
$
|
2.00
|
|
|
Selected yield
|
|
|
10.48
|
%
|
|
Expected volatility (peer group)
|
|
|
95
|
%
|
|
Expected life (in years)
|
|
|
0.67
|
|
|
Expected dividend yield
|
|
—
|
|
|
Risk-free rate
|
|
Term structure
|
|
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 balance under the revolving line of credit agreement of $800,000 as of March 31, 2021 and December 31, 2020 was reflected in revolving line of credit, related party on the Consolidated Balance Sheets. With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of March 31, 2021 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 11 for related party information.
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
13
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 sheets at March 31, 2021 and December 31, 2020.
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 March 31, 2021, we had sold approximately $14.4 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’s common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s 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. There is no floor on the 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 year, 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 the Company’s common stock 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.
The conversion feature of the convertible promissory notes was separately accounted for at fair value as a derivative liability 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 liability recorded in earnings. The following table sets forth the fair value of the conversion feature liability as of March 31, 2021(in thousands):
|
|
|
Three Months Ended
|
|
|
Convertible promissory notes
|
|
March 31, 2021
|
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
Fair value at issuance date
|
|
|
5,555
|
|
|
Change in fair value included in the statement of comprehensive (income) loss
|
|
|
2,345
|
|
|
Balance, end of period
|
|
$
|
7,900
|
|
The fair value and any change in fair value of conversion feature liability are determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.
The fair value as of March 31, 2021 and at issuance date was based upon following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
March 31, 2021
|
|
|
At issuance date
|
|
|
Stock price
|
|
$
|
1.71
|
|
|
$
|
1.41
|
|
|
Conversion price
|
|
$
|
1.48
|
|
|
$
|
1.48
|
|
|
Selected yield
|
|
|
20.50
|
%
|
|
|
20.29
|
%
|
|
Expected volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
|
Time until maturity (in years)
|
|
|
2.91
|
|
|
|
3.00
|
|
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
Risk-free rate
|
|
|
0.33
|
%
|
|
|
0.30
|
%
|
14
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
15
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:
16
|
|
|
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
17
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, 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 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
18
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.
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is separately computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss) and other comprehensive income.
For the three months ended March 31, 2021 and March 2020, the Company recorded income tax provision of $18,000 and $0.3 million, respectively. 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 March 31, 2021 and 2020.
NOTE 10 — LEASES
Operating leases — The Company leases its office space under operating leases with unrelated entities.
The Company leases 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $80,886 per month, which lease will expire on September 30, 2026. The Company also leases an additional 1,850 square feet office space in New York, New York, at a base rent of $8,691, which lease will expire on January 31, 2023.
In addition, the Company leases 1,322 square feet of office space in Tokyo, Japan, which lease will expire on September 30, 2022 and 1,163 square feet of office space in Dubai, United Arab Emirates, which lease will expire on June 19, 2023.
The rent expense during the three months ended March 31, 2021 and March 31, 2020 amounted to approximately $301,000 and $311,000, respectively.
19
Future minimum lease payments under the lease agreements were as follows as of March 31, 2021 (in thousands):
|
|
|
Amount
|
|
|
2021 (nine months)
|
|
$
|
864
|
|
|
2022
|
|
|
1,172
|
|
|
2023
|
|
|
1,058
|
|
|
2024
|
|
|
1,063
|
|
|
2025 and thereafter
|
|
|
1,928
|
|
|
Total lease payments
|
|
|
6,085
|
|
|
Less: Interest
|
|
|
1,600
|
|
|
Present value of lease liabilities
|
|
$
|
4,485
|
|
As of March 31, 2021, the Company had an operating lease right-of-use asset of $3.9 million and lease liability of $4.5 million in the condensed consolidated balance sheet. The weighted average remaining term of the Company’s leases as of March 31, 2021 was 5.3 years and the weighted-average discount rate was 11.4%.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
API Supply Agreement — On June 12, 2017, the Company entered into an API Supply 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 original 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 purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount.
20
NOTE 12 — RELATED PARTY TRANSACTIONS
The following table sets forth information relating to loans from related parties outstanding on or at any time during the three months ended March 31, 2021 (in thousands):
|
Class
|
Lender
|
|
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of Loan
|
|
Principal Amount Outstanding at March 31, 2021
|
|
|
Highest
Principal
Outstanding
|
|
|
Amount of
Principal
Repaid
|
|
|
Amount of
Interest
Paid
|
|
|
|
Current, Promissory note payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Willis Lee (2)
|
|
12%
|
|
|
10/29/2020
|
|
Due on Demand
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
100
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Revolving line of credit agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (2)
|
|
5.25%
|
|
|
12/27/2019
|
|
Due on Demand
|
|
|
800
|
|
|
|
800
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
800
|
|
|
|
800
|
|
|
|
—
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
900
|
|
|
$
|
900
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2020:
|
Class
|
Lender
|
|
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of Loan
|
|
Principal Amount Outstanding at December 31, 2020
|
|
|
Highest
Principal
Outstanding
|
|
|
Amount of
Principal
Repaid
|
|
|
Amount of
Interest
Paid
|
|
|
|
Current, Promissory note payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
4/29/2016
|
|
Due on Demand
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Lan T. Tran (2)
|
|
11%
|
|
|
2/10/2018
|
|
Due on Demand
|
|
|
—
|
|
|
|
159
|
|
|
|
159
|
|
|
|
35
|
|
|
|
|
Lan T. Tran (2)
|
|
10%
|
|
|
2/9/2019
|
|
Due on Demand
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Hope Int'l Hospice (1)
|
|
12%
|
|
|
9/1/2020
|
|
Due on Demand
|
|
|
—
|
|
|
|
194
|
|
|
|
194
|
|
|
|
2
|
|
|
|
|
Hope Int'l Homecare (1)
|
|
12%
|
|
|
9/1/2020
|
|
Due on Demand
|
|
|
—
|
|
|
|
189
|
|
|
|
189
|
|
|
|
1
|
|
|
|
|
Soomi Niihara (1)
|
|
12%
|
|
|
9/1/2020
|
|
Due on Demand
|
|
|
—
|
|
|
|
98
|
|
|
|
98
|
|
|
|
4
|
|
|
|
|
Soomi Niihara (1)
|
|
12%
|
|
|
10/28/2020
|
|
Due on Demand
|
|
|
—
|
|
|
|
395
|
|
|
|
395
|
|
|
|
12
|
|
|
|
|
Willis Lee (2)
|
|
12%
|
|
|
9/1/2020
|
|
Due on Demand
|
|
|
—
|
|
|
|
685
|
|
|
|
685
|
|
|
|
1
|
|
|
|
|
Willis Lee (2)
|
|
12%
|
|
|
10/29/2020
|
|
Due on Demand
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
134
|
|
|
|
1,854
|
|
|
|
1,820
|
|
|
|
55
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (2)
|
|
5.25%
|
|
|
12/27/2019
|
|
Due on Demand
|
|
|
800
|
|
|
|
800
|
|
|
|
200
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
800
|
|
|
|
800
|
|
|
|
200
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
934
|
|
|
$
|
2,654
|
|
|
$
|
2,020
|
|
|
$
|
92
|
|
|
|
(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.
|
21
See Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.4% of the common stock outstanding as of March 31, 2021. As of March 31, 2021, the Company held a Telcon convertible bond in the principal amount of approximately $27.9 million as discussed in Note 5.
NOTE 13 — SUBSEQUENT EVENTS
The Company evaluated events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements.
22