EMMAUS LIFE SCIENCES, INC.
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.
EMMAUS LIFE SCIENCES, INC.
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”) on the basis that the Company will continue as a going concern. All significant intercompany transactions have been eliminated. The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. Due to the uncertainty of the Company’s ability to meet its current liabilities and operating expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and any expansion of its business is dependent upon obtaining further financing, market acceptance of Endari®, and achieving a profitable level of revenues. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 and Quarterly Report on Form 10-Q filed with the SEC on May 13, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated balance sheet at December 31, 2021 contained in the Annual Report. The results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full year or any future interim period.
Nature of Operations
The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. The Company’s lead product, Endari® (prescription grade L-glutamine oral powder), is approved by the U.S. Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older.
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 for the year ended December 31, 2021. There have been no material changes in these policies or their application.
Going concern— The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company incurred a net loss of $10.4 million for the six months ended June 30, 2022 and had a working capital deficit of $39.5 million. Management expects that the Company’s current liabilities, operating losses and expected capital needs, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa region and elsewhere, will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future. In order to meet the Company’s current liabilities and future obligations, the Company will need to restructure or refinance its existing indebtedness and raise additional funds through related-party loans, equity or debt financings or licensing or other strategic agreements. The Company is in discussions with the holders of its outstanding convertible promissory notes and certain other creditors to restructure or refinance the convertible promissory notes and other current liabilities, but has no understanding or agreement to do so and has no understanding or arrangement for any additional financing. There can be no assurance that the Company will be able to restructure or refinance its existing indebtedness or other current liabilities or complete any additional equity or debt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements. Due to the uncertainty of the Company’s ability to meet its current liabilities and operating expenses, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months from the date of this filing. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Management has considered all recent accounting pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.
Factoring accounts receivables — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, is party to 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 75% of the face amount of the accounts receivable, subject to a $7.5
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 fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. Emmaus Medical’s obligations to Prestige Capital under the purchase and sale agreement are secured by a security interest in the accounts receivable and all or substantially all other assets of Emmaus Medical. In connection with the purchase and sale agreement, Emmaus has guaranteed Emmaus Medical’s obligations under the purchase and sale agreement. At June 30, 2022, accounts receivable included $402,000 of factoring accounts receivable and there were $14,000 liabilities related to factoring reflected in other current liabilities. For three and six months ended June 30, 2022, the Company incurred approximately $101,000, and $154,000, respectively, of factoring fees.
Net loss per share — In accordance with Accounting Standard Codification (“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. Diluted net loss per share is computed in a manner similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2022 and June 30, 2021, the Company had outstanding potentially dilutive securities exercisable for or convertible into 52,523,286 shares and 23,326,667 shares, respectively, of the Company’s common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since the potential dilutive securities were anti-dilutive for period ended June 30, 2021 and June 30, 2022.
NOTE 3 — REVENUES
Revenues disaggregated by category were as follows (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
Endari® |
|
$ |
4,261 |
|
|
$ |
6,445 |
|
|
$ |
7,309 |
|
|
$ |
11,596 |
|
|
Other |
|
|
26 |
|
|
|
44 |
|
|
$ |
212 |
|
|
|
228 |
|
|
Revenues, net |
|
$ |
4,287 |
|
|
$ |
6,489 |
|
|
$ |
7,521 |
|
|
$ |
11,824 |
|
The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2022 and June 30, 2021 (in thousands):
|
|
|
Trade Discounts, Allowances and Chargebacks |
|
|
Government Rebates and Other Incentives |
|
|
Returns |
|
|
Total |
|
|
Balance as of December 31, 2021 |
|
$ |
1,480 |
|
|
$ |
3,134 |
|
|
$ |
540 |
|
|
$ |
5,154 |
|
|
Provision related to sales in the current year |
|
|
1,329 |
|
|
|
1,311 |
|
|
|
159 |
|
|
|
2,799 |
|
|
Adjustments related prior period sales |
|
|
(56 |
) |
|
|
13 |
|
|
|
728 |
|
|
|
685 |
|
|
Credit and payments made |
|
|
(1,288 |
) |
|
|
(1,055 |
) |
|
|
(854 |
) |
|
|
(3,197 |
) |
|
Balance as of June 30, 2022 |
|
$ |
1,465 |
|
|
$ |
3,403 |
|
|
$ |
573 |
|
|
$ |
5,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
$ |
134 |
|
|
$ |
2,119 |
|
|
$ |
473 |
|
|
$ |
2,726 |
|
|
Provision related to sales in the current year |
|
|
1,417 |
|
|
|
1,870 |
|
|
|
127 |
|
|
|
3,414 |
|
|
Adjustments related prior period sales |
|
|
12 |
|
|
|
5 |
|
|
|
(59 |
) |
|
|
(42 |
) |
|
Credit and payments made |
|
|
(581 |
) |
|
|
(1,657 |
) |
|
|
(20 |
) |
|
|
(2,258 |
) |
|
Balance as of June 30, 2021 |
|
$ |
982 |
|
|
$ |
2,337 |
|
|
$ |
521 |
|
|
$ |
3,840 |
|
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 June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
Customer A |
|
|
50 |
% |
|
|
48 |
% |
|
|
31 |
% |
|
|
54 |
% |
|
Customer B |
|
|
9 |
% |
|
|
36 |
% |
|
|
23 |
% |
|
|
28 |
% |
|
Customer C |
|
|
10 |
% |
|
|
8 |
% |
|
|
12 |
% |
|
|
8 |
% |
|
Customer D |
|
|
15 |
% |
|
|
0 |
% |
|
|
9 |
% |
|
|
0 |
% |
The Company is party to a distributor agreement with Telcon Pharmaceutical RF, Inc., or Telcon pursuant to which the Company granted Telcon exclusive rights to the Company’s prescription grade L-glutamine (“PGLG”) oral powder for the treatment
6
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 specified in the distributor agreement 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 fee is included in other long-term liabilities as unearned revenue as of June 30, 2022 and December 31, 2021. Refer to Note 6 and 11 and for additional transaction details.
NOTE 4 — SELECTED FINANCIAL STATEMENT — ASSETS
Inventories consisted of the following (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Raw materials and components |
$ |
1,441 |
|
|
$ |
1,439 |
|
|
Work-in-process |
|
362 |
|
|
|
115 |
|
|
Finished goods |
|
5,739 |
|
|
|
6,228 |
|
|
Inventory reserve |
|
(4,408 |
) |
|
|
(3,390 |
) |
|
Total inventories, net |
$ |
3,134 |
|
|
$ |
4,392 |
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Prepaid insurance |
$ |
378 |
|
|
$ |
660 |
|
|
Prepaid expenses |
|
435 |
|
|
|
326 |
|
|
Other current assets |
|
422 |
|
|
|
394 |
|
|
Total prepaid expenses and other current assets |
$ |
1,235 |
|
|
$ |
1,380 |
|
Property and equipment consisted of the following (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Equipment |
$ |
358 |
|
|
$ |
342 |
|
|
Leasehold improvements |
|
39 |
|
|
|
39 |
|
|
Furniture and fixtures |
|
99 |
|
|
|
103 |
|
|
Construction-in-progress |
|
— |
|
|
|
57 |
|
|
Total property and equipment |
|
496 |
|
|
|
541 |
|
|
Less: accumulated depreciation |
|
(411 |
) |
|
|
(394 |
) |
|
Total property and equipment, net |
$ |
85 |
|
|
$ |
147 |
|
During the three months ended June 30, 2022 and 2021, depreciation expense was approximately $10,000 and $12,000, respectively. During the six months ended June 30, 2022 and 2021, depreciation expense was approximately $21,000 and $23,000, respectively.
NOTE 5 — INVESTMENTS
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 October 16, 2021, the Company became 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 KRW9,232, or approximately $8.00 per share. The initial conversion price is subject to downward adjustment monthly based on the volume-weighted average market price of Telcon shares as reported on Korean Securities Dealers Automated Quotations Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares or upon a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The conversion price as of June 30, 2022 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 early redemption right described above or the call option described below, are pledged as collateral to secure the Company’s obligations under the API Supply Agreement and revised API Agreement with Telcon described in Note 6 and Note 11.
7
Concurrent with the purchase of the convertible bond, the Company entered into an 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 at any time and from time to time commencing October 16, 2021 and prior to maturity.
The Company has elected the fair value option method of accounting for the investment in convertible bond. The investment in convertible bond 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 (loss). The fair value and any changes in fair value in the convertible bond is determined using a binominal lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.
In February 2022, the Company and Telcon agreed to settle a “target shortfall” under the revised API agreement with Telcon for the years ended 2020 and 2021 by exchanging KRW3.5 billion, or approximately US$2.9 million, principal amount and accrued and unpaid interest of the Telcon convertible bond and KRW400 million, or approximately US$310,000, in cash proceeds of the convertible bond. As a result, the Company realized a net loss on investment convertible bond of $126,000 and other income of $41,000 as reflected in the statement of operations. See Notes 6 and 11 for additional information on the “target shortfall.”
The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of June 30, 2022 and December 31, 2021 (in thousands):
|
Investment in convertible bond |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Balance, beginning of period |
|
$ |
26,100 |
|
|
$ |
27,866 |
|
|
Sales of convertible bond |
|
|
(2,919 |
) |
|
|
— |
|
|
Net loss on investment on convertible bond |
|
|
(126 |
) |
|
|
— |
|
|
Change in fair value included in the statement of other comprehensive income |
|
|
(4,065 |
) |
|
|
(1,766 |
) |
|
Balance, end of period |
|
$ |
18,990 |
|
|
$ |
26,100 |
|
The fair value as of June 30, 2022 and December 31, 2021 was based upon following assumptions:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Principal outstanding (South Korean won) |
|
KRW 26.5 billion |
|
|
KRW 30 billion |
|
|
Stock price |
|
KRW1,400 |
|
|
KRW2,925 |
|
|
Expected life (in years) |
|
|
8.30 |
|
|
|
8.79 |
|
|
Selected yield |
|
|
14.75 |
% |
|
|
10.50 |
% |
|
Expected volatility (Telcon common stock) |
|
|
79.50 |
% |
|
|
81.31 |
% |
|
Risk-free interest rate (South Korea government bond) |
|
|
3.64 |
% |
|
|
2.19 |
% |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
|
Conversion price |
|
KRW1,498 (US$1.16) |
|
|
KRW2,847 (US$2.39) |
|
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 a shuttered 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 annual rate of 1%, payable annually. The parties also contemplated that the Ube facility would eventually supply the Company with the facility’s output of amino acids and that the operation of the facility would be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility would be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company. During the six months ended June 30, 2022, the Company made an additional $3.3 million of loans to EJ Holdings. As of June 30, 2022, and December 31, 2021, the loans receivable from EJ Holdings were approximately $22.1 million and $22.6 million, respectively, as reflected in equity method investment on the consolidated balance sheets.
EJ Holdings is engaged in retrofitting the Ube facility in order to seek regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no substantial 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
8
unless and until the Ube facility is activated and EJ Holdings can secure customers for its products. There is no assurance the Company will be able to continue to provide loan financing to support EJ Holdings’ activities at the Ube facility.
The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon the loan financing provided by the Company to acquire the Ube facility and fund EJ Holdings’ activities, which are principally for the Company’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of the directors of EJ Holdings 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 loss reported by EJ Holdings are classified as net loss on equity method investment. The investment is evaluated for impairment 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 and six months ended June 30, 2022 and 2021 (in thousands):
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
2022 |
|
|
2021 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
REVENUES, NET |
$ |
48 |
|
|
$ |
58 |
|
$ |
102 |
|
|
$ |
117 |
|
|
NET LOSS |
$ |
(1,234 |
) |
|
$ |
(1,455 |
) |
$ |
(2,648 |
) |
|
$ |
(3,341 |
) |
NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES
Accounts payable and accrued expenses consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Accounts payable: |
|
|
|
|
|
|
|
|
|
Clinical and regulatory expenses |
|
$ |
537 |
|
|
$ |
534 |
|
|
Professional fees |
|
|
615 |
|
|
|
477 |
|
|
Selling expenses |
|
|
1,001 |
|
|
|
932 |
|
|
Manufacturing costs |
|
|
245 |
|
|
|
378 |
|
|
Non-employee board member compensation |
|
|
417 |
|
|
|
136 |
|
|
Other vendors |
|
|
192 |
|
|
|
262 |
|
|
Total accounts payable |
|
|
3,007 |
|
|
|
2,719 |
|
|
Accrued interest payable, related parties |
|
|
227 |
|
|
|
91 |
|
|
Accrued interest payable |
|
|
1,288 |
|
|
|
579 |
|
|
Accrued expenses: |
|
|
|
|
|
|
|
|
|
Payroll expenses |
|
|
1,303 |
|
|
|
1,097 |
|
|
Government rebates and other rebates |
|
|
4,520 |
|
|
|
4,371 |
|
|
Other accrued expenses |
|
|
373 |
|
|
|
332 |
|
|
Total accrued expenses |
|
|
6,196 |
|
|
|
5,800 |
|
|
Total accounts payable and accrued expenses |
|
$ |
10,718 |
|
|
|
9,189 |
|
Other current liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Trade discount |
$ |
1,600 |
|
|
$ |
3,000 |
|
|
Other current liabilities |
|
1,191 |
|
|
|
1,404 |
|
|
Total other current liabilities |
$ |
2,791 |
|
|
$ |
4,404 |
|
9
Other long-term liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Trade discount |
$ |
21,666 |
|
|
$ |
23,148 |
|
|
Unearned revenue |
|
10,000 |
|
|
|
10,000 |
|
|
Other long-term liabilities |
|
28 |
|
|
|
25 |
|
|
Total other long-term liabilities |
$ |
31,694 |
|
|
$ |
33,173 |
|
On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon advanced to the Company approximately $31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s estimated annual target requirements for bulk containers of PGLG. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain items of the API Supply Agreement (the “revised API Agreement”). The Company purchased $245,000 of PGLG from Telcon in the six months ended June 30, 2022 and purchased none of PGLG in the six months ended June 30, 2021 of which $248,000 and $378,000 were reflected in accounts payable as of June 30, 2022 and December 31, 2021, respectively. The revised API Agreement provided for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure the Company’s obligations under the API Supply Agreement and he revised API Agreement. See Note 5 for information regarding the settlement in the six months ended June 30, 2022 of the target shortfall for 2021 and 2020.
NOTE 7 — NOTES PAYABLE
Notes payable consisted of the following at June 30, 2022 and December 31, 2021 (in thousands except for number of underlying shares) excluding the revolving line of credit agreement with related party discussed below:
|
Year
Issued |
|
Interest Rate
Range |
|
|
Term of Notes |
|
Conversion
Price |
|
|
Principal
Outstanding June 30, 2022 |
|
|
Unamortized Discount June 30, 2022 |
|
|
Carrying
Amount June 30, 2022 |
|
|
Underlying Shares June 30, 2022 |
|
|
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
10% |
|
|
Due on demand |
|
|
— |
|
|
$ |
734 |
|
|
$ |
— |
|
|
$ |
734 |
|
|
|
— |
|
|
|
2021 |
|
11% |
|
|
Due on demand - 2 years |
|
|
— |
|
|
|
2,793 |
|
|
|
— |
|
|
|
2,793 |
|
|
|
— |
|
|
|
2022 |
|
11%-41% |
|
|
Due on demand - 10 month |
|
|
— |
|
|
|
2,985 |
|
|
|
118 |
|
|
|
2,867 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,512 |
|
|
$ |
118 |
|
|
$ |
6,394 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
6,512 |
|
|
$ |
118 |
|
|
$ |
6,394 |
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
12% |
|
|
Due on demand |
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
2021 |
|
12% |
|
|
Due on demand |
|
|
— |
|
|
|
700 |
|
|
|
— |
|
|
|
700 |
|
|
|
— |
|
|
|
2022 |
|
10%-12% |
|
|
Due on demand |
|
|
— |
|
|
|
2,071 |
|
|
|
— |
|
|
|
2,071 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,871 |
|
|
$ |
— |
|
|
$ |
2,871 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
2,871 |
|
|
$ |
— |
|
|
$ |
2,871 |
|
|
|
— |
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
12% |
|
|
3 years |
|
$ |
10.00 |
|
(b) |
|
3,150 |
|
|
|
— |
|
|
|
3,150 |
|
|
|
323,016 |
|
|
|
2021 |
|
2% |
|
|
3 years |
|
$ |
0.37 |
|
(a) |
|
14,490 |
|
|
|
3,578 |
|
|
|
10,912 |
|
|
|
40,739,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,640 |
|
|
$ |
3,578 |
|
|
$ |
14,062 |
|
|
|
41,062,535 |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
17,640 |
|
|
$ |
3,578 |
|
|
$ |
14,062 |
|
|
|
41,062,535 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
27,023 |
|
|
$ |
3,696 |
|
|
$ |
23,326 |
|
|
|
41,062,535 |
|
|
10
|
Year
Issued |
|
Interest Rate
Range |
|
|
Term of Notes |
|
Conversion
Price |
|
|
Principal
Outstanding
December 31,
2021 |
|
|
Unamortized
Discount
December 31,
2021 |
|
|
Carrying
Amount
December 31,
2021 |
|
|
Underlying Shares
December 31, 2021 |
|
|
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
10% |
|
|
Due on demand |
|
|
— |
|
|
$ |
869 |
|
|
$ |
— |
|
|
$ |
869 |
|
|
|
— |
|
|
|
2021 |
|
11% |
|
|
Due on demand - 2 years |
|
|
— |
|
|
|
3,030 |
|
|
|
— |
|
|
|
3,030 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,899 |
|
|
$ |
— |
|
|
$ |
3,899 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
2,399 |
|
|
$ |
— |
|
|
$ |
2,399 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
1,500 |
|
|
$ |
— |
|
|
$ |
1,500 |
|
|
|
— |
|
|
|
Notes payable - related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
12% |
|
|
Due on demand |
|
|
— |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
100 |
|
|
|
— |
|
|
|
2021 |
|
12% |
|
|
Due on demand |
|
|
— |
|
|
|
700 |
|
|
|
— |
|
|
|
700 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
800 |
|
|
$ |
— |
|
|
$ |
800 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
800 |
|
|
$ |
— |
|
|
$ |
800 |
|
|
|
— |
|
|
|
Convertible notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
12% |
|
|
3 years |
|
$ |
10.00 |
|
(b) |
|
3,150 |
|
|
|
— |
|
|
|
3,150 |
|
|
|
316,756 |
|
|
|
2021 |
|
2% |
|
|
3 years |
|
$ |
1.48 |
|
(a) |
|
14,490 |
|
|
|
4,332 |
|
|
|
10,158 |
|
|
|
9,856,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,640 |
|
|
$ |
4,332 |
|
|
$ |
13,308 |
|
|
|
10,173,099 |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
$ |
14,490 |
|
|
$ |
4,332 |
|
|
$ |
10,158 |
|
|
|
9,856,343 |
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
$ |
3,150 |
|
|
$ |
— |
|
|
$ |
3,150 |
|
|
|
316,756 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
22,339 |
|
|
$ |
4,332 |
|
|
$ |
18,007 |
|
|
$ |
10,173,099 |
|
|
|
|
(a) |
The notes are convertible into Emmaus Life Sciences, Inc. shares. Beginning February 28, 2022, the note holders became entitled to call for early redemption of the convertible notes payable, because the Company common stock was not approved for listing on a Trading Market (as defined in the agreement). Accordingly, the notes are classified as current liabilities. |
|
|
(b) |
This note is convertible into shares of EMI Holding, Inc., a wholly owned subsidiary of Emmaus Life Sciences, Inc. |
The weighted-average stated annual interest rate of notes payable was 12% and 6% as of June 30, 2022 and December 31, 2021, respectively. The weighted-average effective annual interest rate of notes payable as of June 30, 2022 and December 31, 2021 was 22% and 15%, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.
As of June 30, 2022, future contractual principal payments due on notes payable were as follows (in thousands):
|
Year Ending |
|
|
|
|
|
2022 (six months) |
$ |
23,763 |
|
(a) |
|
2023 |
|
3,260 |
|
|
|
Total |
$ |
27,023 |
|
|
|
|
(a) |
Includes $14.5 million principal amount of convertible notes, the holders are entitled to call for early redemption. |
The Company is party to a revolving line of credit agreement with Yutaka Niihara, M.D., M.P.H., 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 and employment taxes payable by him with respect to interest and tax gross-up paid to him in the previous year. As of June 30, 2022 and December 31, 2021, the outstanding principal balance under the agreement of $400,000 was reflected in revolving line of credit from related party on the condensed consolidated balance sheets. With the tax-gross up, the effective interest rate on the outstanding balance as of June 30, 2022, was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more information on related party transactions.
On February 9, 2021, the Company entered into a securities purchase agreement 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. The Company sold and issued approximately $14.5 million of the convertible promissory notes.
11
Commencing one year from the original issue date, the convertible promissory notes became 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 is subject to adjustment as of the end of each three-month period 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. As of June 30, 2022, the conversion price was $0.37 per share.
The convertible promissory notes bear interest at the stated rate of 2% per year (10% in the event of a default), 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, unless earlier converted or prepaid. The convertible promissory notes are redeemable in whole or in part at the election of the holders. The Company is entitled to prepay up to 50% of the principal amount of the convertible promissory notes at any time on or before February 28, 2023 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 is 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 the condensed consolidated statements of operations. The following table sets forth the fair value of the conversion feature liability as of June 30, 2022 and December 31, 2021 (in thousands):
|
Convertible promissory notes |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Balance, beginning of period |
|
$ |
7,507 |
|
|
$ |
— |
|
|
Fair value at issuance date |
|
|
— |
|
|
|
5,594 |
|
|
Change in fair value included in the statement of operations |
|
|
615 |
|
|
|
1,913 |
|
|
Balance, end of period |
|
$ |
8,122 |
|
|
$ |
7,507 |
|
The fair value and any change in fair value of conversion feature liability are determined using a binominal 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 June 30, 2022 and December 31, 2021was based upon following assumptions:
|
Convertible promissory notes |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Stock price |
|
$ |
0.45 |
|
|
$ |
1.67 |
|
|
Conversion price |
|
$ |
0.37 |
|
|
$ |
1.48 |
|
|
Selected yield |
|
|
27.60 |
% |
|
|
21.99 |
% |
|
Expected volatility |
|
|
50 |
% |
|
|
50 |
% |
|
Time until maturity (in years) |
|
|
1.66 |
|
|
|
2.16 |
|
|
Dividend yield |
|
— |
|
|
— |
|
|
Risk-free rate |
|
|
2.88 |
% |
|
|
0.77 |
% |
In June 2022, we entered into a Business Loan and Security Agreement and Addenda with a third-party lender pursuant to which the lender loaned to us $1,800,000, which we refer to as the “loan amount,” of which we received net proceeds of approximately $1,666,000 after deduction of the lender’s origination fee but without deduction for other transaction expenses. The loan amount, together with interest of $738,000, is payable in over the 40-week loan term in weekly installments of $31,725 for the first eight weeks and $71,381 for the remaining 32 weeks. The loan amount and interest may be prepaid by us at any time within 90 days from the disbursement date for a repayment amount of $2,250,000, less all prior payments on the loan, unless an event of default has occurred under the Business Loan and Security Agreement. Repayment of the loan is secured by a security interest in all or substantially all our assets and all assets of our U.S. subsidiaries and is personally guaranteed by Yutaka Niihara, M.D., M.P.H., our Chairman and Chief Executive Officer and principal stockholder, and his wife and Hope Hospice International, Inc., which is wholly owned by Dr. Niihara and his wife. The personal guarantee is secured by a deed of trust on certain real property of Dr. Niihara and his wife.
The Business Loan and Security Agreement contains representations and warranties of the parties and restrictive covenants against incurring additional indebtedness, subject to certain exceptions, granting liens or security interests in our or our subsidiaries assets, and similar matters. In the event of a breach of our representations and warranties or the restrictive covenants or other covenants, the lender would be entitled to accelerate the repayment of the loan and, in certain events, require us to pay an additional fee equal to 10% of the loan amount, or $180,000.
12
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 GPB Warrant is separately recognized under ASC 815-40 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 the condensed consolidated statements of operations and comprehensive income.
The following table presents the change in fair value of the GPB Warrant as of June 30, 2022 and December 31, 2021 (in thousands):
|
Warrant Liability—GPB |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Balance, beginning of period |
|
$ |
40 |
|
|
$ |
83 |
|
|
Change in fair value included in the statement of operations |
|
|
(40 |
) |
|
|
(43 |
) |
|
Balance, end of period |
|
$ |
— |
|
|
$ |
40 |
|
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model. The fair value as of June 30, 2022, and December 31, 2021 was based upon the following assumptions:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
Adjusted exercise price |
|
$ |
10.28 |
|
|
$ |
10.28 |
|
|
Common stock fair value |
|
$ |
0.45 |
|
|
$ |
1.67 |
|
|
Risk‑free interest rate |
|
|
2.80 |
% |
|
|
0.56 |
% |
|
Volatility |
|
|
121.00 |
% |
|
|
104.00 |
% |
|
Time until expiration (years) |
|
|
1.00 |
|
|
|
1.50 |
|
|
Expected dividend yield |
|
— |
|
|
— |
|
|
Number outstanding |
|
|
252,802 |
|
|
|
252,802 |
|
Extension 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 of the convertible promissory note to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12%. In conjunction with the extension, the Company issued to the note holder a five-year warrant to purchase up to 1,250,000 shares (500,000 shares if the related convertible promissory note was repaid by June 15, 2022) of the Company common stock at an exercise price of $2.05 a share. Under ASC 815-40, the warrant is 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 change in the fair value of liability is recorded in earnings. Since the loan was not repaid before June 15, 2022, the warrant was reclassified as equity.
The following table presents the fair value and the change in fair value of the warrants as of June 15, 2022 and December 31, 2020 (in thousands):
|
Warrant liability—Convertible Promissory Note |
|
June 15, 2022 |
|
|
December 31, 2021 |
|
|
Balance, beginning of period |
|
$ |
1,463 |
|
|
$ |
988 |
|
|
Change in fair value included in the statement of operations |
|
|
(1,250 |
) |
|
|
475 |
|
|
Reclassification to equity |
|
|
(213 |
) |
|
|
— |
|
|
Balance, end of period |
|
$ |
— |
|
|
$ |
1,463 |
|
13
The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model based upon following assumptions:
|
|
|
June 15, 2022 |
|
|
December 31, 2021 |
|
|
Exercise price |
|
$ |
2.05 |
|
|
$ |
2.05 |
|
|
Stock price |
|
$ |
0.36 |
|
|
$ |
1.67 |
|
|
Risk‑free interest rate |
|
|
3.35 |
% |
|
|
1.04 |
% |
|
Expected volatility (peer group) |
|
|
126.00 |
% |
|
|
117.00 |
% |
|
Expected life (in years) |
|
|
3.00 |
|
|
|
3.46 |
|
|
Expected dividend yield |
|
— |
|
|
— |
|
|
Number outstanding |
|
|
1,250,000 |
|
|
|
1,250,000 |
|
A summary of outstanding warrants as of June 30, 2022 and December 31, 2021 is presented below:
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
|
|
Number of
Warrants |
|
|
Weighted‑
Average
Exercise
Price |
|
|
Number of
Warrants |
|
|
Weighted‑
Average
Exercise
Price |
|
|
Warrants outstanding, beginning of period |
|
|
8,236,017 |
|
|
$ |
5.78 |
|
|
|
8,439,480 |
|
|
$ |
6.09 |
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Cancelled, forfeited or expired |
|
|
(1,365,189 |
) |
|
$ |
4.76 |
|
|
|
(203,463 |
) |
|
$ |
4.36 |
|
|
Warrants outstanding, end of period |
|
|
6,870,828 |
|
|
$ |
5.45 |
|
|
|
8,236,017 |
|
|
$ |
5.78 |
|
|
Warrnts exercisable end of period |
|
|
6,870,828 |
|
|
$ |
5.45 |
|
|
|
7,486,017 |
|
|
$ |
6.12 |
|
As of June 30, 2022, the weighted-average remaining contractual life of outstanding warrants was 2.1 years.
Stock options—The Company’s former Amended and Restated 2011 Stock Incentive Plan expired on May 3, 2021, and no further awards may be made under the 2011 Plan. The expiration of the 2011 Plan did not affect outstanding stock awards thereunder.
The Company also previously maintained an Amended and Restated 2012 Omnibus Incentive Compensation Plan, which was terminated in September 2021 in connection with the adoption of the 2021 Stock Incentive Plan described below.
On September 29, 2021, the Board of Directors of the Company adopted the Emmaus Life Sciences, Inc. 2021 Stock Incentive Plan upon the recommendation of the Compensation Committee of the Board. The 2021 Stock Incentive Plan was approved by stockholders on November 23, 2021. No more than 4,000,000 shares of common stock may be issued pursuant to awards under the 2021 Stock Incentive Plan. The number of shares available for Awards, as well as the terms of outstanding awards, is subject to adjustment as provided in the Stock Incentive Plan for stock splits, stock dividends, reverse stock splits, recapitalizations and other similar events. As of June 30, 2022 and December 31, 2021, no awards were outstanding under the 2021 Stock Incentive Plan.
A summary of outstanding stock options as of June 30, 2022 and December 31, 2021 is presented below.
|
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
|
|
Number of
Options |
|
|
Weighted‑
Average
Exercise
Price |
|
|
Number of
Options |
|
|
Weighted‑
Average
Exercise
Price |
|
|
Options outstanding, beginning of period |
|
|
5,968,338 |
|
|
$ |
4.78 |
|
|
|
7,110,025 |
|
|
$ |
4.63 |
|
|
Granted or deemed granted |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Exercised |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Cancelled, forfeited and expired |
|
|
(1,055,399 |
) |
|
$ |
3.45 |
|
|
|
(1,141,687 |
) |
|
$ |
3.82 |
|
|
Options outstanding, end of period |
|
|
4,912,939 |
|
|
$ |
5.07 |
|
|
|
5,968,338 |
|
|
$ |
4.78 |
|
|
Options exercisable, end of period |
|
|
4,892,438 |
|
|
$ |
5.09 |
|
|
|
5,937,837 |
|
|
$ |
4.80 |
|
|
Options available for future grant |
|
|
4,000,000 |
|
|
|
|
|
|
|
4,000,000 |
|
|
|
|
|
During the three months ended June 30, 2022 and June 30, 2021, the Company recognized $5,000 and $274,000 , respectively of share-based compensation expense. During the six months ended June 30, 2022 and June 30, 2021 the Company recognized $10,000 and $450,000, respectively, of share-based compensation expense. As of June 30, 2022, there was approximately
14
$11,000 of unrecognized share-based compensation expense related to unvested stock options which is expected to be recognized over the weighted-average remaining vesting period of 1.0 year.
Collaborative Research and Development Agreement with Kainos Medicine, Inc—On February 26, 2021, the Company entered into a collaborative research and development 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 Kainos’s research and development activities. 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 collaborative research and development agreement, the Company paid and issued to Kainos $500,000 in cash and 324,675 shares of common stock of the Company equivalent to $500,000 in additional consideration, which amounts were recorded as research and development expenses in the statement of operations and comprehensive income (loss) for each of the periods ended June 30, 2021 and December 31, 2021. The Company, in turn, was 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.
On October 7, 2021, the Company entered into a license agreement 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 paid Kainos a six-figure upfront fee in cash and agreed to make additional cash payments upon the achievement of specified milestones totaling in the mid-eight figures and pay a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.
During the six months ended June 30, 2021, the Company incurred $1.0 million of research and development expenses related to the Kainos collaboration and license agreement. The Company incurred no such expenses in the six months ended June 30, 2022.
Amended and Restated Warrants – The Company evaluated its outstanding amended and restated warrants to purchase up to 4,038,200 shares of common stock under ASC 815-40 and concluded that the warrants should be accounted for equity.
In June 2022, the exercise price of outstanding amended and restated warrants was reduced to $0.446 per share pursuant to the anti-dilution adjustment provisions of the warrants triggered by the Company’s issuance of restricted shares of common stock for professional relations and consulting services discussed below. The warrants were valued using the Black-Scholes Merton model and the $446,000 change in fair value was recorded as additional paid-in capital and accumulated loss.
Stock issued for services – In June 2022, the Company issued 246,637 shares of restricted share of common stock, with an estimated fair value of $110,000 for professional relations and consulting services to be rendered over the six-month period beginning July 1, 2022. The value of the shares issued in connection with this agreement was recorded in prepaid expenses and other current assets in the condensed consolidated balance sheet as of June 30, 2022 and will be amortized over the six-month period.
NOTE 9 — INCOME TAX
The quarterly provision for or benefit from income taxes is computed based upon the estimated annual effective tax rate and the year-to-date pre-tax income (loss) and other comprehensive income.
For the three and six months ended June 30, 2022, the Company recorded an income tax provision of $182,000 and $79,000, respectively. For three and six month ended June 30, 2021, the Company recorded an income tax benefit of $192,000 and $174,000, 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 June 30, 2022 or June 30, 2021.
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. In addition, the Company leases 1,163 square feet of office space in Dubai, United Arb Emirates, which lease will expire on June 19, 2023.During six month ended June 30, 2020, the Company terminated leases of office space in New York, New York and Tokyo, Japan. Upon termination of New York lease, the Company recognized $31,000 of loss on leased assets.
15
The rent expense during the three months ended June 30, 2022 and 2021 was approximately $294,000 and $288,000, respectively, and during the six months ended June 30, 2022 and June 30, 2021 was approximately $597,000 and $589,000, respectively.
Future minimum lease payments under the lease agreements were as follows as of June 30, 2022 (in thousands):
|
|
|
Amount |
|
|
2022 (six months) |
|
$ |
523 |
|
|
2023 |
|
|
1,049 |
|
|
2024 |
|
|
1,063 |
|
|
2025 |
|
|
1,092 |
|
|
2026 |
|
|
836 |
|
|
Total lease payments |
|
|
4,563 |
|
|
Less: Interest |
|
|
991 |
|
|
Present value of lease liabilities |
|
$ |
3,572 |
|
As of June 30, 2022, the Company had an operating lease right-of-use asset of $3.1 million and lease liability of $3.6 million reflected on the condensed consolidated balance sheet. The weighted average remaining term of the Company’s leases as of June 30, 2022 was 4.2 years and the weighted-average discount rate was 12.9%.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “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 API Supply Agreement (the “revised API Agreement”). The revised API Agreement is effective for a term of five years and will renew automatically for ten successive one-year renewal periods, except as either party may determine. In the revised API agreement, the Company has agreed to purchase a cumulative total of $47.0 million, over the term of the agreement. The revised API Agreement provided for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure the Company’s obligations under the API Supply Agreement and the revised API 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. The PGLG raw material purchased from Telcon is recorded in inventory at net realized value and the excess purchase price is recorded against deferred trade discount. Refer to Notes 5 and 6 for more information.
16
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 six months ended June 30, 2022 (in thousands):
|
Class |
Lender |
|
Interest
Rate |
|
|
Date of
Loan |
|
Term of Loan |
|
Principal Amount Outstanding at June 30, 2022 |
|
|
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% |
|
|
12/7/2021 |
|
Due on Demand |
|
|
700 |
|
|
|
700 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Soomi Niihara (1) |
|
12% |
|
|
1/18/2022 |
|
Due on Demand |
|
|
300 |
|
|
|
300 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Yasushi Nagasaki (2) |
|
10% |
|
|
2/9/2022 |
|
Due on Demand |
|
|
50 |
|
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Hope International Hospice, Inc. (1) |
|
10% |
|
|
2/9/2022 |
|
Due on Demand |
|
|
350 |
|
|
|
350 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Hope International Hospice, Inc. (1) |
|
10% |
|
|
2/15/2022 |
|
Due on Demand |
|
|
210 |
|
|
|
210 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Soomi Niihara (1) |
|
10% |
|
|
2/15/2022 |
|
Due on Demand |
|
|
100 |
|
|
|
100 |
|
|
|
— |
|
|
|
— |
|
|
|
|
George Sekulich (2) |
|
10% |
|
|
2/16/2022 |
|
Due on Demand |
|
|
26 |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Soomi Niihara (1) |
|
10% |
|
|
3/7/2022 |
|
Due on Demand |
|
|
200 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Osato Medical Clinic (3) |
|
12% |
|
|
3/11/2022 |
|
Due on Demand |
|
|
250 |
|
|
|
250 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Alfred Lui (2) |
|
12% |
|
|
3/11/2022 |
|
Due on Demand |
|
|
— |
|
|
|
50 |
|
|
|
50 |
|
|
|
1 |
|
|
|
|
Hope International Hospice, Inc. (1) |
|
12% |
|
|
3/15/2022 |
|
Due on Demand |
|
|
150 |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Hope International Hospice, Inc. (1) |
|
12% |
|
|
3/30/2022 |
|
Due on Demand |
|
|
150 |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Wei Pei Zen (2) |
|
10% |
|
|
3/31/2022 |
|
Due on Demand |
|
|
200 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Willis Lee (2) |
|
10% |
|
|
4/14/2022 |
|
Due on Demand |
|
|
45 |
|
|
|
45 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Hope International Hospice, Inc. (1) |
|
10% |
|
|
5/25/2022 |
|
Due on Demand |
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
2,871 |
|
|
$ |
2,921 |
|
|
$ |
50 |
|
|
$ |
1 |
|
|
|
Revolving line of credit agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (2) |
|
5.25% (4) |
|
|
12/27/2019 |
|
Due on Demand |
|
|
400 |
|
|
|
400 |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
400 |
|
|
|
400 |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,271 |
|
|
$ |
3,321 |
|
|
$ |
50 |
|
|
$ |
11 |
|
|
17
The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2021:
|
Class |
Lender |
|
Interest
Rate |
|
|
Date of
Loan |
|
Term of Loan |
|
Principal Amount Outstanding at December 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 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
Soomi Niihara (1) |
|
12% |
|
|
1/20/2021 |
|
Due on Demand |
|
|
— |
|
|
|
700 |
|
|
|
700 |
|
|
|
13 |
|
|
|
|
Soomi Niihara (1) |
|
12% |
|
|
9/15/2021 |
|
Due on Demand |
|
|
— |
|
|
|
300 |
|
|
|
300 |
|
|
|
3 |
|
|
|
|
Soomi Niihara (1) |
|
12% |
|
|
12/7/2021 |
|
Due on Demand |
|
|
700 |
|
|
|
700 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
800 |
|
|
$ |
1,800 |
|
|
$ |
1,000 |
|
|
$ |
16 |
|
|
|
Revolving line of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yutaka Niihara (1) |
|
5.25% (4) |
|
|
12/27/2019 |
|
Due on Demand |
|
|
400 |
|
|
|
800 |
|
|
|
400 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
400 |
|
|
|
800 |
|
|
|
400 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,200 |
|
|
$ |
2,600 |
|
|
$ |
1,400 |
|
|
$ |
51 |
|
|
|
(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. |
(3)Dr. Osato, a director of Emmaus, and his wife are the sole owner of Osato Medical Clinic.
(4)The rate varies with changes in the prime rate and does not give effect to the “tax gross-up” described in Note 7.
See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr. Niihara and Note 13 for information regarding a recent related party loan.
Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the Emmaus common stock, or approximately 8.4% of the common stock outstanding as of June 30, 2022. As of June 30, 2022, the Company held a Telcon convertible bond in the principal amount of approximately $20.6 million as discussed in Note 5.
NOTE 13 — SUBSEQUENT EVENTS
Subsequent to June 30, 2022, the Company received $1.0 million of proceeds from loans from related and unrelated parties to augment its working capital.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion, the terms, “we,” “us,” “our,” “Emmaus” or the “Company” refer to Emmaus Life Sciences, Inc. and its direct and indirect subsidiaries.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (the “Annual Report”).
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including those set forth in the “Risk Factors” section of the Annual Report, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. Our lead product, Endari® (prescription-grade L-glutamine oral powder) is approved by the U.S. Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“SCD”), in adult and pediatric patients five years of age and older. In April 2022, Endari® was approved by the Ministry of Health and Prevention in the United Arab Emirates, or U.A.E, in adults and pediatric patients five years of age and older. The approval of Endari® in the U.A.E. was the first granted outside the U.S. Applications for marketing authorization are pending in the Kingdom of Saudi Arabia, Bahrain, and other Gulf Cooperation Council, or GCC, countries, as well. While the applications are pending, the FDA approval of Endari® can be referenced to allow access to Endari® on a named-patient basis.
Endari® is marketed and sold in the U.S. by our internal commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs. Endari® is also reimbursable by many commercial payors. We have agreements in place with the nation’s leading distributors as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected retail and specialty pharmacies nationwide. In April 2022 we launched an innovative telehealth solution to afford SCD patients’ direct access to Endari® remotely through a web portal managed by our strategic partners, including Asembia LLC, US Bioservices Corporation and UpScript IP Holdings, LLC.
As of June 30, 2022, our accumulated deficit was $252.1 million and we had cash and cash equivalents of $1.0 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and begin to realize revenues in the U.A.E. and perhaps other GCC countries. Until we can generate sufficient net revenues from Endari® sales, our future cash requirements are expected to be financed through public or private sales of equity or debt securities and, loans, including loans from related parties, or possible corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
Financial Overview
Revenues, net
We realize net revenues primarily from sales of Endari® to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These
19
various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration.
Management estimates variable consideration using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Under the Accounting Standards Codification (“ASC”) 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligations.
Sales Discounts: We provide our customers prompt payment discounts and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to bulk discounts offered by us increased in 2021 and adversely affected sales in the first quarter of 2022.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping, and distribution of Endari®.
Research and Development Expenses
Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future
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collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approvals of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of our Business and Compliance with Law.”
General and Administrative Expense
General and administrative expense consists principally of salaries and related employee costs, including share-based compensation for our directors, officers, and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel involved in the promotion, sale, and marketing of Endari®. Other selling cost include advertising, third party consulting costs, the cost of in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional personnel to support the commercialization of Endari® in the U.S. and abroad.
COVID-19
In retrospect, we believe our business and net revenues were adversely affected in 2020 and 2021 by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors’ offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care. We do not expect the ongoing epidemic to have a material adverse affect on our business or results of operation, but intend to consider future changes to our business to adapt to the new post-pandemic environment, including an increased focus on our telehealth solution.
Inflation
Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.
Environmental Expenses
The cost of compliance with environmental laws has not been material over the past two years and is not expected to have a material effect for the foreseeable future. Any such costs are included in general and administrative costs.
Inventories
Inventories consist of raw materials, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or net realizable value. Substantially all raw materials purchased during each of the six months ended June 30, 2022 and 2021 were supplied by one vendor.
Results of Operations:
Three months ended June 30, 2022 and 2021
Net revenues. Net revenues decreased by $2.2 million, or 34%, to $4.3 million for the three months ended June 30, 2022, compared to $6.5 million for the three months ended June 30, 2021. The decrease was primarily attributable to lower bulk order purchases in 2022 compared to the same period in 2021.
Cost of Goods Sold. Cost of goods sold remained consistent at $0.4 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
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Research and Development Expenses. Research and development expenses decreased by $0.5 million, or 60%, to $0.3 million for the three months ended June 30, 2022, compared to $0.8 million for the three months ended June 30, 2021. The decrease was primarily due to reduced costs associated with a pharmacokinetic characteristic and safety study for Endari® in the U.S. and a clinical study in Europe. We expect our research and development costs to increase in the remainder of 2022 as the studies progress or other studies are undertaken.
Selling Expenses. Selling expenses increased by $0.5 million, or 34%, to $2.0 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021. The increase was primarily due to increases in consulting fees and in travel expenses of our in-house commercial team.
General and Administrative Expenses. General and administrative expenses decreased by $0.3 million, or 9% to $3.1 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021. The decrease was primarily due to a decrease of $0.5 million in professional fees, partially offset by total of $0.2 million in increased payroll expenses and travel expenses.
Other Income (Expense). Total other expenses increased by $9.1 million, or 501%, to $7.3 million for the three months ended June 30, 2022, compared to $1.8 million of other income for the three months ended June 30, 2021. The increase was primarily due to a decrease of $6.3 million in change in fair value of embedded conversion option and an increase of $2.4 million in foreign exchange loss.
Net Income (Loss). Net loss for the three months ended June 30, 2022, increased by $11.4 million, or 457%, to a net loss of $8.9 million for the three months ended June 30, 2022, compared to net income of $2.5 million for the three months ended June 30, 2021. The increase of net loss was primarily a result of an increase of $9.1 million in other expense and a decrease of $1.9 million in income from operations as discussed above.
Six months ended June 30, 2022 and 2021
Net revenues. Net revenues decreased by $4.3 million, or 36%, to $7.5 million for the six months ended June 30, 2022, compared to $11.8 million for the six months ended June 30, 2021. The decrease was primarily attributable to lower bulk orders in 2022 compared to the same period in 2021.
Cost of Goods Sold. Cost of goods sold increased by $0.5 million, or 62% to $1.4 million for six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was primarily due to $0.7 million of additional reserves relating to Endari® inventory with a shelf-life of less than two years.
Research and Development Expenses. Research and development expenses decreased by $1.8 million, or 70%, to $0.8 million for the six months ended June 30, 2022, compared to $2.6 million for the six months ended June 30, 2021. The decrease was primarily due to $0.5 million in cash and $0.5 million in shares of the common stock issued under the agreement with Kainos Medicine, Inc. (“Kainos”) to lead the clinical development of Kainos’ patented IRAK4 inhibitor and a decrease of $0.5 million relates to a pharmacokinetic characteristic and safety study for Endari® in the U.S. and a clinical study in Europe. We expect our research and development costs to increase in the remainder of 2022 as the studies progress or new studies are undertaken.
Selling Expenses. Selling expenses increased by $0.7 million, or 25%, to $3.4 million for the six months ended June 30, 2022, compared to $2.7 million for the six months ended June 30, 2021. The increase was primarily due to increases in the consulting fees and in travel expenses of in-house sales team.
General and Administrative Expenses. General and administrative expenses decreased slightly by $0.3 million, or 5%, to $6.5 million for the six months ended June 30, 2022, compared to $6.8 million for the six months ended June 30, 2021. The decrease was primarily due to decreases of $0.7 million in professional fees partially offset by $0.2 million in increased payroll expenses and travel expenses.
Other Income (Expense). Total other expense increased by $0.9 million, or 18%, to $5.8 million for the six months ended June 30, 2022, compared to $5.0 million for the six months ended June 30, 2021. The increase was primarily due to increases of $2.5 million in loss in foreign exchange and $0.8 million in change in fair value of conversion feature derivative.
Net Income (Loss). Net loss for the six months ended June 30, 2022 increased by $4.5 million, or 76% to $10.4 million for the six months ended June 30, 2022, compared to $5.9 million for the six months ended June 30, 2021. The increase was primarily a result of increases of $0.9 million in other expense and $3.4 million in loss from operations as discussed above.
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Liquidity and Capital Resources
Based on our losses to date, current liabilities, anticipated future net revenues and operating expenses, debt repayment obligations, planned funding to EJ Holdings and cash and cash equivalents balance of $1.0 million as of June 30, 2022, we do not have sufficient capital for our business without raising additional capital. We realized a net loss of $10.0 million for the six months ended June 30, 2022 and anticipate that we will continue to incur net losses for the foreseeable future and until we can generate increased net revenues from Endari® sales. While we anticipate increased net revenues as we expand our commercialization of Endari® in the U.S. through telehealth and other initiatives, as well as in the U.A.E. and perhaps other GCC countries, there is no assurance that we will be able to significantly increase our Endari® sales or attain sustainable profitability or that we will have sufficient capital resources to fund our operations until we are able to generate sufficient cash flow from operations. If we are unable to raise needed capital, we may need to suspend all or substantially all business activities except those essential to support our Endari sales while we seek to restructure or refinance our existing indebtedness and other current liabilities.
Our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, is party a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 75% of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable.
Liquidity represents our ability to pay our liabilities when they become due, fund our business operations, fund the operations and retrofitting of EJ Holdings’ amino acid production plant in Ube, Japan, and meet our contractual obligations, including our obligations to purchase API under our supply arrangements with Telcon, and execute our business plan. Our primary sources of liquidity are our cash balances at the beginning of each period, proceeds from our accounts receivable factoring arrangement with Prestige Capital and proceeds from related-party loans and other financing activities. Our short-term and long-term cash requirements consist primarily of working capital requirements, general corporate needs, our contractual obligations to purchase API from Telcon, debt service under our convertible notes payable and notes payable and planned ongoing loan funding to sustain EJ Holdings’ operations. We have no contractual commitment to provide funding to EJ Holdings, but plan to continue to do so in the foreseeable to the extent we have cash available for this purpose.
As of June 30, 2022, we had outstanding $17.6 million principal amount of convertible promissory notes and $9.7 million principal amount of other notes payable. Our minimum lease payment obligations were $3.6 million, of which $0.6 million was payable within 12 months. We are in discussions with the holders of the convertible promissory notes to possibly restructure the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.
Of our outstanding convertible promissory notes, $14.5 million principal amount of the notes bear interest at the stated rate of 2% per year (10% in the event of a default), 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, unless earlier converted or prepaid. We are in discussions with the holders of these convertible promissory notes to possibly restructure our obligations under the notes, but there can be no assurance whether, or to what extent, or on what terms the notes may be restructured.
Our API Supply Agreement and revised API Agreement with Telcon provide for an annual API purchase target of $5 million and a target “profit” (i.e., gross margin) to Telcon of $2.5 million. To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the target shortfall in cash or to settle the target shortfall in exchange for principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as collateral to secure our obligations. In February 2022 we agreed with Telcon to settle the target shortfall for 2020 and 2021 in exchange for a reduction in principal and accrued interest on our Telcon convertible bond and cash proceeds thereof as described in Note 5 of the Notes to condensed consolidated financial statements.
Due to uncertainties regarding our ability to meet our current liabilities and future operating expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the “Risk Factors” section of this Quarterly Report and Note 2 of the Notes to condensed consolidated financial statements included herein.
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Cash flows for the six months ended June 30, 2022 and June 30, 2021
Net cash used in operating activities
Net cash used in operating activities increased by $2.0 million, or 54%, to $5.8 million for the six months ended June 30, 2022 from $3.8 million for the six months ended June 30, 2021. This increase was primarily due to an increase of $3.3 million in loss from operations.
Net cash used in investing activities
Net cash used in investing activities decreased by $3.5 million, or 89%, to $0.4 million for the six months ended June 30, 2022 from $4.0 million for the six months ended June 30, 2021. This decrease was primarily due to deemed proceeds of $2.9 million sales of convertible bonds resulting from the offset target shortfalls against principal and interest of our Telcon convertible note against our trade discount.
Net cash from financing activities
Net cash from financing activities decreased by $2.0 million, or 29%, to $4.9 million for the six months ended June 30, 2022 from net cash provided by financing activities of $6.9 million for the six months ended June 30, 2021. This decrease was the result of $14.5 million in proceeds from the convertible promissory notes payable issued in 2021, partially offset by a $6.2 million used to prepay our outstanding Amended and Restated10% Senior Secured Convertible Debenture in the same period and $5.0 million of proceeds from note payable issued in 2022.
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the six months ended June 30, 2022.