CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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., (“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 condensed 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 Annual Report. The results of operations for the three and nine months ended September 30, 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.
Restricted cash — Restricted cash as of September 30, 2020 includes proceeds received from the sale of 6,643,559 shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”) which were earmarked for the purchase of a Telcon convertible bond, described in Note 5. Reconciliation of cash, cash equivalent and restricted cash in the condensed consolidated statements of cash flows is as follows:
|
|
As of September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Cash and cash equivalents
|
$
|
2,321
|
|
|
$
|
4,949
|
|
|
Restricted cash
|
|
—
|
|
|
|
25,680
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
2,321
|
|
|
$
|
30,629
|
|
Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, entered into a purchase and sales 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 $7.5 million 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
6
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, Emmaus guarantees Emmaus Medical’s obligations under the purchase and sale agreement. At September 30, 2021, accounts receivable included approximately $472,000 of factoring accounts receivable and other current liabilities included approximately $9,000 related to factoring. For three and nine months ended September 30, 2021, the Company incurred approximately $106,000 and $181,000, respectively, of factoring fees.
Earnings (net loss) per share — In accordance with ASC 260, “Earnings per Share,” the basic earnings (net loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (net loss) per common share except that the denominator is increased to include the number of additional common shares issuable under securities exercisable for or convertible into common shares had been issued if the additional common shares would be dilutive. As of September 30, 2021 and September 30, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 23,276,594 shares and 19,276,395 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted earnings (net loss) per share since the potential dilutive securities were anti-dilutive for three and nine months ended September 30, 2021, and 2020.
NOTE 3 — REVENUES, NET
Revenues, net disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Endari®
|
|
$
|
5,590
|
|
|
$
|
5,485
|
|
|
$
|
17,186
|
|
|
$
|
16,548
|
|
|
Other
|
|
|
176
|
|
|
|
116
|
|
|
|
404
|
|
|
|
367
|
|
|
Revenues, net
|
|
$
|
5,766
|
|
|
$
|
5,601
|
|
|
$
|
17,590
|
|
|
$
|
16,915
|
|
The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 2021 and September 30, 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
|
|
|
2,374
|
|
|
|
2,627
|
|
|
|
188
|
|
|
|
5,189
|
|
|
Adjustments related prior period sales
|
|
|
13
|
|
|
|
8
|
|
|
|
(111
|
)
|
|
|
(90
|
)
|
|
Credit and payments made
|
|
|
(1,217
|
)
|
|
|
(2,201
|
)
|
|
|
(20
|
)
|
|
|
(3,438
|
)
|
|
Balance as of September 30, 2021
|
|
$
|
1,304
|
|
|
$
|
2,553
|
|
|
$
|
530
|
|
|
$
|
4,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
228
|
|
|
$
|
1,354
|
|
|
$
|
315
|
|
|
$
|
1,897
|
|
|
Provision related to sales in the current year
|
|
|
2,106
|
|
|
|
2,917
|
|
|
|
180
|
|
|
|
5,203
|
|
|
Adjustments related prior period sales
|
|
|
15
|
|
|
|
(43
|
)
|
|
|
(65
|
)
|
|
|
(93
|
)
|
|
Credit and payments made
|
|
|
(2,144
|
)
|
|
|
(1,762
|
)
|
|
|
—
|
|
|
|
(3,906
|
)
|
|
Balance as of September 30, 2020
|
|
$
|
205
|
|
|
$
|
2,466
|
|
|
$
|
430
|
|
|
$
|
3,101
|
|
7
The following table summarizes net revenues attributable to each of our customers that accounted for 10% or more of net revenues (as a percentage of net revenues):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Customer A
|
|
|
31
|
%
|
|
|
49
|
%
|
|
|
47
|
%
|
|
|
52
|
%
|
|
Customer B
|
|
|
49
|
%
|
|
|
32
|
%
|
|
|
35
|
%
|
|
|
27
|
%
|
|
Customer C
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
|
Total
|
|
|
92
|
%
|
|
|
90
|
%
|
|
|
92
|
%
|
|
|
87
|
%
|
The Company is party to a distributor agreement with Telcon pursuant to which the Company 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 the Company specified minimum quantities of the PGLG. 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 September 30, 2021 and December 31, 2020. Refer to Note 11 and for additional details.
NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS
Inventories consisted of the following (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Raw materials and components
|
$
|
1,472
|
|
|
$
|
1,486
|
|
|
Work-in-process
|
|
70
|
|
|
|
721
|
|
|
Finished goods
|
|
6,317
|
|
|
|
6,064
|
|
|
Inventory reserve
|
|
(1,607
|
)
|
|
|
(1,184
|
)
|
|
Total
|
$
|
6,252
|
|
|
$
|
7,087
|
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Prepaid insurance
|
$
|
167
|
|
|
$
|
388
|
|
|
Prepaid expenses
|
|
242
|
|
|
|
454
|
|
|
Due from equity method investee
|
|
579
|
|
|
|
376
|
|
|
Other current assets
|
|
250
|
|
|
|
267
|
|
|
Total
|
$
|
1,238
|
|
|
$
|
1,485
|
|
Property and equipment consisted of the following (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Equipment
|
$
|
339
|
|
|
$
|
347
|
|
|
Leasehold improvements
|
|
39
|
|
|
|
39
|
|
|
Furniture and fixtures
|
|
102
|
|
|
|
99
|
|
|
Total property and equipment
|
|
480
|
|
|
|
485
|
|
|
Less: accumulated depreciation
|
|
(383
|
)
|
|
|
(365
|
)
|
|
Property and equipment, net
|
$
|
97
|
|
|
$
|
120
|
|
During the three months ended September 30, 2021 and 2020, depreciation expenses were approximately $11,000 and $12,000, respectively. During the nine months ended September 30, 2021 and 2020, depreciation expenses were approximately $34,000 and $35,000, respectively.
NOTE 5 — INVESTMENTS
8
Investment in convertible bond - 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 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 is entitled on a quarterly basis to call for early redemption 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 KRW9,232, or approximately $8.00, per share. The initial conversion price is subject to downward adjustment on a monthly based on the volume-weighted average market price of Telcon shares as reported on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon share. The conversion price also is subject to customary antidilution adjustments upon a merger or other reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The conversion price as of September 30, 2021 is set forth in the “Investment in convertible bond” table below. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the holder’s early redemption right or Telcon’s 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 bond as of September 30, 2021 and December 31, 2020 (in thousands):
|
Investment in convertible bond
|
|
September 30, 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
|
|
|
(2,150
|
)
|
|
|
5,807
|
|
|
Balance, end of period
|
|
$
|
25,716
|
|
|
$
|
27,866
|
|
The fair value as of September 30, 2021 and December 31, 2020 was based upon following assumptions:
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Principal outstanding (South Korean won)
|
|
KRW 30 billion
|
|
|
KRW 30 billion
|
|
|
Stock price
|
|
KRW 3,990
|
|
|
KRW 6,060
|
|
|
Expected life (in years)
|
|
|
9.04
|
|
|
|
9.79
|
|
|
Selected yield
|
|
|
10.50
|
%
|
|
|
10.50
|
%
|
|
Expected volatility (Telcon common stock)
|
|
|
82.15
|
%
|
|
|
85.80
|
%
|
|
Risk-free interest rate (South Korea government bond)
|
|
|
2.18
|
%
|
|
|
1.72
|
%
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
Conversion price
|
|
KRW 4,110 (US$3.47)
|
|
|
KRW 6,028 (US$5.54)
|
|
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 $13.2 million. 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 year, payable annually. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids and the operation of the facility will be principally for the Company’s 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 nine months ended September 30, 2021, the Company made additional $3.6 million
9
of loans to EJ Holdings. As of September 30, 2021, and December 31, 2020, the loans receivable from EJ Holdings were approximately $22.2 million and $18.6 million, respectively.
EJ Holdings is engaged in phasing in the Ube facility, which will include eventually obtaining 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 the Company 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 to fund its activities there and that the EJ Holdings activities 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 loss on equity method investment. The investment is evaluated for impairment 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 and nine months ended September 30, 2021 and 2020 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
REVENUES, NET
|
$
|
57
|
|
|
$
|
55
|
|
|
$
|
174
|
|
|
$
|
201
|
|
|
GROSS PROFIT
|
|
57
|
|
|
|
55
|
|
|
|
174
|
|
|
|
201
|
|
|
NET LOSS
|
$
|
(1,657
|
)
|
|
$
|
(1,228
|
)
|
|
$
|
(4,998
|
)
|
|
$
|
(3,677
|
)
|
NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES
Accounts payable and accrued expenses consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses
|
|
$
|
443
|
|
|
$
|
262
|
|
|
Professional fees
|
|
|
552
|
|
|
|
252
|
|
|
Selling expenses
|
|
|
508
|
|
|
|
395
|
|
|
Manufacturing costs
|
|
|
253
|
|
|
|
596
|
|
|
Other vendors
|
|
|
66
|
|
|
|
518
|
|
|
Total accounts payable
|
|
|
1,822
|
|
|
|
2,023
|
|
|
Accrued interest payable, related parties
|
|
|
79
|
|
|
|
41
|
|
|
Accrued interest payable
|
|
|
418
|
|
|
|
627
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
Payroll expenses
|
|
|
1,067
|
|
|
|
1,053
|
|
|
Government rebates and other rebates
|
|
|
2,553
|
|
|
|
2,659
|
|
|
Due to equity method investee
|
|
|
480
|
|
|
|
545
|
|
|
Other accrued expenses
|
|
|
554
|
|
|
|
512
|
|
|
Total accrued expenses
|
|
|
4,654
|
|
|
|
4,769
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
6,973
|
|
|
|
7,460
|
|
10
Other current liabilities consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Trade discount
|
$
|
4,000
|
|
|
$
|
2,000
|
|
|
Other current liabilities
|
|
940
|
|
|
|
706
|
|
|
Total other current liabilities
|
$
|
4,940
|
|
|
$
|
2,706
|
|
Other long-term liabilities consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Trade discount
|
$
|
22,251
|
|
|
$
|
24,453
|
|
|
Unearned revenue
|
|
10,000
|
|
|
|
10,000
|
|
|
Other long-term liabilities
|
|
24
|
|
|
|
17
|
|
|
Total other long-term liabilities
|
$
|
32,275
|
|
|
$
|
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 the Company’s estimated annual targets for bulk containers of PGLG. The Company purchased $250,000 and $2.0 million of PGLG from Telcon in the nine months ended September 30, 2021, and September 30, 2020, respectively. As of September 30, 2021, and December 31, 2020, respectively, accounts payable to Telcon were $250,000 and $208,000. See Note 11 for additional details.
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at September 30, 2021 and December 31, 2020 (in thousands except for number of shares):
|
Year
Issued
|
|
Interest Rate
Range
|
|
|
Term of Notes
|
|
Conversion
Price
|
|
|
Principal
Outstanding September 30, 2021
|
|
|
Unamortized Discount September 30, 2021
|
|
|
Carrying
Amount September 30, 2021
|
|
|
Underlying Shares
September 30, 2021
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
10%
|
|
|
Due on demand
|
|
|
—
|
|
|
$
|
895
|
|
|
$
|
—
|
|
|
$
|
895
|
|
|
|
—
|
|
|
|
2020
|
|
1%
|
|
|
2 years
|
|
|
—
|
|
|
|
798
|
|
|
|
—
|
|
|
|
798
|
|
|
|
—
|
|
|
|
2021
|
|
11%
|
|
|
Due on demand - 2 years
|
|
|
—
|
|
|
|
3,076
|
|
|
|
—
|
|
|
|
3,076
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,769
|
|
|
$
|
—
|
|
|
$
|
4,769
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
3,269
|
|
|
$
|
—
|
|
|
$
|
3,269
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
1,500
|
|
|
|
—
|
|
|
|
Notes payable - related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
2021
|
|
12%
|
|
|
Due on demand
|
|
|
—
|
|
|
|
300
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
3 years
|
|
$
|
10.00
|
|
(b)
|
|
3,150
|
|
|
|
—
|
|
|
|
3,150
|
|
|
|
316,669
|
|
|
|
2021
|
|
2%
|
|
|
3 years
|
|
$
|
1.48
|
|
(a)
|
|
14,490
|
|
|
|
4,732
|
|
|
|
9,758
|
|
|
|
9,806,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,640
|
|
|
$
|
4,732
|
|
|
$
|
12,908
|
|
|
|
10,122,974
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
$
|
17,640
|
|
|
$
|
4,732
|
|
|
$
|
12,908
|
|
|
|
10,122,974
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
22,809
|
|
|
$
|
4,732
|
|
|
$
|
18,077
|
|
|
|
10,122,974
|
|
|
11
|
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
|
|
|
Underlying
Shares
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
12%
|
|
|
3 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 into Emmaus Life Sciences, Inc. shares.
|
|
|
(b)
|
The notes are convertible into EMI Holding, Inc. shares.
|
The weighted-average stated annual interest rate of notes payable was 5% and 10% as of September 30, 2021 and December 31, 2020, respectively. The weighted-average effective annual interest rate of notes payable as of September 30, 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 September 30, 2021, future contractual principal payments due on notes payable were as follows:
|
Year Ending
|
|
|
|
|
2021 (three months)
|
$
|
3,447
|
|
|
2022
|
|
222
|
|
|
2023
|
|
4,650
|
|
|
2024
|
|
14,490
|
|
|
Total
|
$
|
22,809
|
|
In March 2021, the Company prepaid in full its outstanding Amended and Restated 10% Senior Secured Convertible Debentures and recognized $1.2 million of loss on debt extinguishment relating to 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.
12
The following table sets forth the fair value of the conversion feature liabilities as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures
|
|
September 30, 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 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 $600,000 as of September 30, 2021 and December 31, 2020 were reflected in revolving line of credit, related party on the condensed consolidated balance sheets. With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of September 30, 2021, was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 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 evidenced by 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 sheets at September 30, 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 September 30, 2021, we 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’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
13
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 September 30, 2021 (in thousands):
|
Convertible promissory notes
|
|
September 30, 2021
|
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
Fair value at issuance date
|
|
|
5,594
|
|
|
Change in fair value included in the statement of comprehensive (income) loss
|
|
|
1,139
|
|
|
Balance, end of period
|
|
$
|
6,733
|
|
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 September 30, 2021 and at issuance date was based upon following assumptions:
|
Convertible promissory notes
|
|
September 30, 2021
|
|
|
Issuance Date
|
|
|
Stock price
|
|
$
|
1.60
|
|
|
$
|
1.41
|
|
|
Conversion price
|
|
$
|
1.48
|
|
|
$
|
1.48
|
|
|
Selected yield
|
|
|
21.62
|
%
|
|
|
20.29
|
%
|
|
Expected volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
|
Time until maturity (in years)
|
|
|
2.41
|
|
|
|
3.00
|
|
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
Risk-free rate
|
|
|
0.38
|
%
|
|
|
0.30
|
%
|
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. The GPB Note was repaid in February 2018.
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 September 30, 2021 and December 31, 2020 (in thousands):
14
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Warrant Liability—GPB
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Balance, beginning of period
|
|
$
|
83
|
|
|
$
|
38
|
|
|
Change in fair value included in the statement of comprehensive income
|
|
|
(40
|
)
|
|
|
45
|
|
|
Balance, end of period
|
|
$
|
43
|
|
|
$
|
83
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.
The fair value as of September 30, 2021, and December 31, 2020 set forth in the table above was based on upon following assumptions:
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Adjusted exercise price
|
|
$
|
10.28
|
|
|
$
|
10.28
|
|
|
Common stock fair value
|
|
$
|
1.60
|
|
|
$
|
1.23
|
|
|
Risk‑free interest rate
|
|
|
0.23
|
%
|
|
|
0.15
|
%
|
|
Volatility
|
|
|
100.00
|
%
|
|
|
120.00
|
%
|
|
Time until expiration (years)
|
|
|
1.75
|
|
|
|
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 the original $13.2 million loan to EJ Holdings, Inc. in October 2018 reflected on the Company’s consolidated balance sheets.
The Debentures were amended and restated in their entirety in conjunction with the Merger. Common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.
The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.
Pursuant to the terms of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $3.00 per share from $9.52 per share. The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $3.00 per share from $5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10% Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $2.00 a share under the Purchase Agreement with Lincoln Park Capital LLC. 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
15
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.
On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of the Amended and Restated 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 continued on the first day of each month thereafter commencing October 1, 2020. The remaining principal balance of the Debentures was 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.
The exercise price of the amended and restated warrants was reduced to $2.00 per share in February 2020 and to $1.54 per share in March 2021 pursuant to the anti-dilution adjustment provisions of the warrants. 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 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%. In conjunction with this amendment, the Company issued to the holder 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 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 September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Warrant liability—Wealth Threshold
|
|
September 30, 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)
|
|
|
362
|
|
|
|
(437
|
)
|
|
Balance, end of period
|
|
$
|
1,350
|
|
|
$
|
988
|
|
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model and was based upon following assumptions:
16
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Exercise price
|
|
$
|
2.05
|
|
|
$
|
2.05
|
|
|
Stock price
|
|
$
|
1.60
|
|
|
$
|
1.68
|
|
|
Risk‑free interest rate
|
|
|
0.69
|
%
|
|
|
0.31
|
%
|
|
Expected volatility (peer group)
|
|
|
110.00
|
%
|
|
|
101.00
|
%
|
|
Expected life (in years)
|
|
|
3.71
|
|
|
|
4.46
|
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
|
Number outstanding
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
A summary of all outstanding warrants as of September 30, 2021 and December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Warrants outstanding, beginning of period
|
|
|
8,439,480
|
|
|
|
4,931,099
|
|
|
Granted
|
|
|
—
|
|
|
|
3,625,000
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled, forfeited or expired
|
|
|
(203,463
|
)
|
|
|
(116,619
|
)
|
|
Warrants outstanding, end of period
|
|
|
8,236,017
|
|
|
|
8,439,480
|
|
A summary of all outstanding warrants by year issued and exercise price as of September 30, 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
|
|
|
|
4,611,017
|
|
|
|
1.39
|
|
|
$
|
9.14
|
|
|
|
4,611,017
|
|
|
$
|
9.14
|
|
|
Prior to Jan 1, 2020 Total
|
|
|
|
4,611,017
|
|
|
|
|
|
|
|
|
|
|
|
4,611,017
|
|
|
|
|
|
|
At December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.05
|
|
|
|
1,250,000
|
|
|
|
3.71
|
|
|
$
|
2.05
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1.54
|
|
|
|
2,375,000
|
|
|
|
3.95
|
|
|
$
|
1.54
|
|
|
|
2,375,000
|
|
|
$
|
1.54
|
|
|
|
2020 Total
|
|
|
|
3,625,000
|
|
|
|
|
|
|
|
|
|
|
|
2,375,000
|
|
|
|
|
|
|
At September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
Grand Total
|
|
|
|
8,236,017
|
|
|
|
|
|
|
Grand Total
|
|
|
|
6,986,017
|
|
|
|
|
|
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 permitted grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock. Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in equal quarterly installments and all other option grants vest over a minimum period of three years, in each case, subject to the optionee’s all based on continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a stock option to purchase a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratio in the Merger. The 2011 Stock Incentive Plan expired in May 2021, after which no further awards may be made under the Plan.
17
The Company also had 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 nine months ended September 30, 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 of the shares in twenty‑four approximately equal monthly installments over a period of two years thereafter. In September 2021, the 2012 Omnibus Incentive Compensation Plan was terminated. The termination of the Plan did not affect outstanding awards under the Plan.
A summary of outstanding stock options as of September 30, 2021 and December 31, 2020 is presented below.
|
|
|
September 30, 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
|
|
|
(1,125,753
|
)
|
|
$
|
3.82
|
|
|
|
(225,325
|
)
|
|
$
|
5.08
|
|
|
Options outstanding, end of period
|
|
|
5,984,272
|
|
|
$
|
4.78
|
|
|
|
7,110,025
|
|
|
$
|
4.63
|
|
|
Options exercisable, end of period
|
|
|
5,948,771
|
|
|
$
|
4.80
|
|
|
|
6,986,268
|
|
|
$
|
4.47
|
|
|
Options available for future grant
|
|
|
—
|
|
(a)
|
|
|
|
|
|
2,302,475
|
|
|
|
|
|
|
|
(a)
|
Option plans were expired and therefore no options available for future grants.
|
During the three months ended September 30, 2021 and September 30, 2020, the Company recognized $93,000 and $121,000, respectively of share-based compensation expense. During the nine months ended September 30, 2021 and September 30, 2020, the Company recognized $548,000 and $549,000 of share-based compensation expenses, respectively. As of September 30, 2021, there was approximately $26,000 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 1.5 year.
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. Refer to Note 13 for additional information.
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 and nine months ended September 30, 2021, the Company recorded income tax provision of $232,000 and $58,000, respectively. For three and nine month ended September 30, 2020, the Company recorded income tax provision of $293,000 and $80,000. The Company did not record a provision for federal income tax due to its net operating loss carryforwards. The
18
Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of September 30, 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 September 30, 2021 and 2020 amounted to approximately $300,000 and $286,000, respectively, and during the nine months ended September 30, 2021 and 2020 amounted to approximately $889,000 and $895,000, respectively.
Future minimum lease payments under the lease agreements were as follows as of September 30, 2021 (in thousands):
|
|
|
Amount
|
|
|
2021 (three months)
|
|
$
|
290
|
|
|
2022
|
|
|
1,174
|
|
|
2023
|
|
|
1,058
|
|
|
2024
|
|
|
1,063
|
|
|
2025 and thereafter
|
|
|
1,928
|
|
|
Total lease payments
|
|
|
5,513
|
|
|
Less: Interest
|
|
|
1,346
|
|
|
Present value of lease liabilities
|
|
$
|
4,167
|
|
As of September 30, 2021, the Company had an operating lease right-of-use asset of $3.6 million and lease liability of $4.2 million in the balance sheet. The weighted average remaining term of the Company’s leases as of September 30, 2021 was 4.8 years and the weighted-average discount rate was 11.6%.
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. There has been no changes to the price through September 30, 2021. The PGLG 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.
19
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 nine months ended September 30, 2021 (in thousands):
|
Class
|
Lender
|
|
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of Loan
|
|
Principal Amount Outstanding at September 30, 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
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Soomi Niihara (1)
|
|
12%
|
|
|
9/15/2021
|
|
Due on Demand
|
|
|
300
|
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
400
|
|
|
|
400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Revolving line of credit agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (1)
|
|
5.25%
|
|
|
12/27/2019
|
|
Due on Demand
|
|
|
600
|
|
|
|
800
|
|
|
|
—
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
600
|
|
|
|
800
|
|
|
|
—
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,000
|
|
|
$
|
1,200
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
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.
|
|
(2)
|
Current or former officer.
|
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 September 30, 2021. As of September 30, 2021, the Company held a Telcon convertible bond in the principal amount of approximately $25.7 million as discussed in Note 5.
NOTE 13 — SUBSEQUENT EVENTS
20
On October 7, 2021, the Company entered into a License Agreement, effective as of October 6, 2021, with Kainos, under which Kainos granted the Company an exclusive license in the territory encompassing the U.S., the U.K. and the EU to patent rights, know-how and other intellectual property relating to Kainos’s novel IRAK4 inhibitor, referred to as KM10544, for the treatment of cancers, including leukemia, lymphoma and solid tumor cancers. In consideration of the license, the Company has agreed in the License Agreement to pay Kainos a six-figure upfront fee in cash within 90 days from the effective date of the License Agreement, cash payments upon the achievement of specified milestones totaling in the mid-eight figures, a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.
21