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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission File No.:  000-53072

 


 

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 


 

Delaware

 

41-2254389

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

21250 Hawthorne Boulevard, Suite 800
Torrance, California

 

90503

(Address of principal executive offices)

 

(Zip code)

 

(310) 214-0065

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company x

Emerging growth company o

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The registrant had 34,873,611 shares of common stock, par value $0.001 per share, outstanding as of November 10, 2017.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

Part I Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

(a) 

Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016

1

 

 

 

 

 

(b) 

Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2017 and 2016 (Unaudited)

2

 

 

 

 

 

(c) 

Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months ended September 30, 2017 (Unaudited)

3

 

 

 

 

 

(d) 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016 (Unaudited)

4

 

 

 

 

 

(e) 

Notes to Consolidated Financial Statements as of and for the Nine Months ended September 30, 2017 (Unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II Other Information

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

31

 

 

 

Signatures

32

 



Table of Contents

 

Item 1. Financial Statements

 

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

As of

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

4,415,308

 

$

1,317,340

 

Accounts receivable

 

10,351

 

14,221

 

Inventories, net

 

395,810

 

166,209

 

Investment in marketable securities

 

28,153,107

 

10,917,301

 

Marketable securities, pledged to creditor

 

169,168

 

179,765

 

Prepaid expenses and other current assets

 

236,994

 

129,204

 

Total current assets

 

33,380,738

 

12,724,040

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, Net

 

114,581

 

53,730

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Deposits

 

109,120

 

214,808

 

Total other assets

 

109,120

 

214,808

 

Total Assets

 

$

33,604,439

 

$

12,992,578

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

4,079,230

 

$

3,201,154

 

Deferred rent

 

 

26,507

 

 

15,840

 

Other current liabilities

 

36,874,999

 

 

Warrant derivative liabilities

 

26,804,000

 

 

Notes payable, net

 

7,889,833

 

4,094,429

 

Notes payable to related parties, net

 

2,466,261

 

1,924,850

 

Convertible notes payable, net

 

10,573,853

 

9,205,007

 

Convertible notes payable to related parties, net

 

474,000

 

474,000

 

Total current liabilities

 

89,188,683

 

18,915,280

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Deferred rent

 

19,240

 

41,241

 

Warrant derivative liabilities

 

 

10,600,000

 

Convertible notes payable, net

 

281,761

 

997,957

 

Total long-term liabilities

 

301,001

 

11,639,198

 

Total Liabilities

 

89,489,684

 

30,554,478

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock — par value $0.001 per share, 100,000,000 shares authorized, 34,873,611 shares and 34,701,219 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

34,874

 

34,701

 

Additional paid-in capital

 

104,456,879

 

92,614,801

 

Accumulated other comprehensive loss

 

(18,079,132

)

(3,450,746

)

Accumulated deficit

 

(142,297,866

)

(106,760,656

)

Total stockholders’ deficit

 

(55,885,245

)

(17,561,900

)

Total Liabilities and Stockholders’ Deficit

 

$

33,604,439

 

$

12,992,578

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

REVENUES, net

 

$

140,314

 

$

61,828

 

$

366,432

 

$

313,908

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

128,618

 

20,997

 

222,130

 

132,069

 

GROSS PROFIT

 

11,696

 

40,831

 

144,302

 

181,839

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Research and development

 

379,344

 

368,580

 

2,331,702

 

1,455,576

 

Selling

 

214,309

 

103,680

 

405,608

 

282,314

 

General and administrative

 

3,223,338

 

2,655,879

 

9,536,680

 

7,204,307

 

 

 

3,816,991

 

3,128,139

 

12,273,990

 

8,942,197

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(3,805,295

)

(3,087,308

)

(12,129,688

)

(8,760,358

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Gain on debt extinguishment

 

 

1,019

 

 

1,019

 

Loss on debt settlement

 

 

(266,736

)

 

(266,736

)

Change in fair value of warrant derivative liabilities

 

(10,542,000

)

132,000

 

(16,204,000

)

75,110

 

Convertible note inducement expense

 

 

(1,444,863

)

 

(1,444,863

)

Interest and other income (loss)

 

(15,051

)

3,318

 

(36,992

)

(56,153

)

Interest expense

 

(2,904,336

)

(1,595,625

)

(7,164,130

)

(3,406,180

)

 

 

(13,461,387

)

(3,170,887

)

(23,405,122

)

(5,097,803

)

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

(17,266,682

)

(6,258,195

)

(35,534,810

)

(13,858,161

)

INCOME TAXES

 

 

 

2,400

 

2,400

 

NET LOSS

 

(17,266,682

)

(6,258,195

)

(35,537,210

)

(13,860,561

)

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on marketable securities

 

(14,203,879

)

7,065

 

(14,616,291

)

6,280

 

Unrealized foreign currency translation income (loss)

 

(1,090

)

18,899

 

(12,095

)

46,512

 

 

 

(14,204,969

)

25,964

 

(14,628,386

)

52,792

 

COMPREHENSIVE LOSS

 

$

(31,471,651

)

$

(6,232,231

)

$

(50,165,596

)

$

(13,807,769

)

NET LOSS PER COMMON SHARE

 

$

(0.50

)

$

(0.22

)

$

(1.02

)

$

(0.48

)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

34,842,353

 

29,031,346

 

34,762,315

 

28,688,376

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(UNAUDITED)

 

 

 

Common stock — par value $0.001

 

 

 

 

 

 

 

 

 

 

 

per share, 100,000,000

 

 

 

Accumulated

 

 

 

 

 

 

 

shares authorized

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Paid-in

 

Comprehensive

 

Accumulated

 

Total Stockholders’

 

 

 

Shares

 

Stock

 

Capital

 

Loss

 

Deficit

 

Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

34,701,219

 

$

34,701

 

$

92,614,801

 

$

(3,450,746

)

$

(106,760,656

)

$

(17,561,900

)

Stock issued for cash

 

144,750

 

145

 

1,141,455

 

 

 

1,141,600

 

Beneficial conversion feature relating to convertible and promissory notes payable

 

 

 

6,739,201

 

 

 

6,739,201

 

Share-based compensation

 

 

 

3,751,371

 

 

 

3,751,371

 

Conversion of notes payable to common stock

 

27,642

 

28

 

210,051

 

 

 

210,079

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

(14,616,291

)

 

(14,616,291

)

Foreign currency translation effect

 

 

 

 

(12,095

)

 

(12,095

)

Net loss

 

 

 

 

 

(35,537,210

)

(35,537,210

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

34,873,611

 

$

34,874

 

$

104,456,879

 

$

(18,079,132

)

$

(142,297,866

)

$

(55,885,245

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(35,537,210

)

$

(13,860,561

)

Adjustments to reconcile net loss to net cash flows used in operating activities

 

 

 

 

 

Depreciation and amortization

 

18,593

 

11,210

 

Amortization of discount of convertible notes

 

5,695,652

 

1,807,592

 

Foreign exchange adjustments on convertible notes and notes payable

 

77,429

 

377,288

 

Gain on debt extinguishment

 

 

(1,019

)

Loss on debt settlement

 

 

266,736

 

Share-based compensation

 

3,751,371

 

2,259,834

 

Convertible note inducement expense

 

 

1,444,863

 

Change in fair value of warrant derivative liabilities

 

16,204,000

 

(75,110

)

Net changes in operating assets and liabilities

 

 

 

 

 

Investment capital reserve

 

(31,841,500

)

(14,000,000

)

Accounts receivable

 

4,141

 

88,396

 

Inventories

 

(226,934

)

(22,892

)

Prepaid expenses and other current assets

 

(89,282

)

76,180

 

Deposits

 

106,879

 

18,419

 

Accounts payable and accrued expenses

 

1,639,275

 

1,753,171

 

Other current liabilities

 

36,841,500

 

11,704

 

Deferred rent

 

(11,349

)

(1,320

)

Net cash flows used in operating activities

 

(3,367,435

)

(19,845,509

)

 

 

 

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property and equipment

 

(86,215

)

(1,897

)

Net cash flows used in investing activities

 

(86,215

)

(1,897

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from notes payable issued

 

4,503,751

 

2,754,700

 

Proceeds from convertible notes payable issued

 

1,200,000

 

2,461,710

 

Payments of notes payable

 

(344,339

)

(453,077

)

Payments of convertible notes

 

 

(976,488

)

Proceeds from issuance of common stock

 

1,141,600

 

22,138,494

 

Net cash flows provided by financing activities

 

6,501,012

 

25,925,339

 

Effect of exchange rate changes on cash

 

50,606

 

78,017

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,097,968

 

6,155,950

 

Cash and cash equivalents, beginning of period

 

1,317,340

 

472,341

 

Cash and cash equivalents, end of period

 

$

4,415,308

 

$

6,628,291

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

Interest paid

 

$

567,093

 

$

599,038

 

Income taxes paid

 

$

2,400

 

$

2,400

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION

 

 

 

 

 

Conversion of notes payable to common stock

 

$

200,000

 

$

4,600,930

 

Conversion of accrued interest payable to common stock

 

$

10,079

 

$

289,175

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited consolidated interim financial statements of Emmaus Life Sciences, Inc. and subsidiaries (collectively, the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions have been eliminated. The Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows.

 

Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2017 (the “Annual Report”). Interim results for the periods presented herein are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

 

The preparation of the consolidated financial statements requires the use of management estimates. Actual results could differ materially from those estimates.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Refer to the Annual Report for a summary of significant accounting policies. There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2017. Below are disclosures of certain interim balances, transactions, and significant assumptions used in computing fair value as of and for the nine months ended September 30, 2017 and comparative amounts from the prior fiscal periods:

 

Inventories — All of the raw material purchased during the nine months ended September 30, 2017 and for the year ended December 31, 2016 was from one vendor. The below table presents inventory by category:

 

Inventory by category

 

September 30, 2017

 

December 31, 2016

 

Work-in-process

 

$

185,304

 

$

34,462

 

Finished goods

 

210,506

 

131,747

 

 

 

$

395,810

 

$

166,209

 

 

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the three months ended September 30, 2017 and 2016 were $18,201 and $9,101, respectively. Advertising costs for the nine months ended September 30, 2017 and 2016 were $35,399 and $24,540, respectively.

 

Marketable securities — The Company’s marketable securities consist of four securities; (a) 39,250 shares of capital stock of CellSeed, Inc. (“CellSeed”) which are part of 147,100 shares acquired in January 2009 for ¥100,028,000 Japanese Yen (JPY) (equivalent to $1.1 million USD), at ¥680 JPY per share; (b) 849,744 shares of capital stock of KPM Tech Co., Ltd. (“KPM”) which were acquired in October 2016 for ₩14,318,186,400 South Korean Won (KRW) (equivalent to $13 million USD) at ₩16,850 KRW per share; (c) 271,950 shares of capital stock of Hanil Vacuum Co., Ltd. (“Hanil”) which were acquired in October 2016 for ₩1,101,397,500 KRW (equivalent to $1 million USD) at ₩4,050 KRW per share; and (d) 6,643,559 shares of capital stock of Telcon, Inc. (“Telcon”) which were acquired in July 2017 for ₩36,001,446,221 KRW (equivalent to $31.8 million USD) at ₩5,419 KRW per share. As of September 30, 2017 and December 31, 2016, the closing price per share for CellSeed on the Tokyo Stock Exchange was ¥486 JPY ($4.31 USD) and ¥536 JPY ($4.58 USD), respectively, the closing price per share for KPM on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was ₩1,335 KRW ($1.16 USD) after 1-for-5 reverse stock split effective June 28, 2017 and ₩14,600 KRW ($12.08 USD), respectively, the closing price per share for Hanil on KOSDAQ was ₩2,090 KRW ($1.82 USD) and ₩2,895 KRW ($2.40 USD), respectively. As of September 30, 2017, the closing price per share for Telcon on KOSDAQ was ₩3,920 KRW ($3.42 USD).

 

5



Table of Contents

 

As of September 30, 2017, the shares of CellSeed common stock were pledged to secure a $300,000 convertible note of the Company issued to Mitsubishi UFJ Capital III Limited Partnership that is due on demand and were classified as current assets, as marketable securities, pledged to creditor.

 

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

December 31, 2016

 

Prepaid insurance

 

$

92,806

 

$

100,060

 

Other prepaid expenses and current assets

 

144,188

 

29,144

 

 

 

$

236,994

 

$

129,204

 

 

Other current liabilities — Included in the balance of other current liabilities as of September 30, 2017 is the $31.8 million received from Telcon related to an API supply agreement, disclosed in more detail at Note 7, and the upfront payment of $5 million received from Telcon for the distribution agreement.

 

Fair value measurements — The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2017 and the year ended December 31, 2016:

 

 

 

Period ended

 

Warrant Derivative Liabilities—Stock Purchase Warrants

 

September 30, 2017

 

December 31, 2016

 

Balance, beginning of period

 

$

10,600,000

 

$

7,863,000

 

Change in fair value included in consolidated statements of comprehensive loss

 

16,204,000

 

2,737,000

 

Balance, end of period

 

$

26,804,000

 

$

10,600,000

 

 

The value of the liability classified warrants, the value of warrant derivative liabilities and the change in fair value of the liability classified warrants and warrant derivative liabilities were determined using a Binomial Monte-Carlo Cliquet (aka “Ratchet”) Option Pricing Model. The model is similar to traditional Black-Scholes-type option pricing models, except that the exercise price resets at certain dates in the future. The values as of September 30, 2017 and December 31, 2016 and the initial value as of September 11, 2013 were calculated based on the following assumptions:

 

 

 

September 30, 2017

 

December 31, 2016

 

Initial Value

 

Stock price

 

$

11.50

 

$

6.00

 

$

3.60

 

Risk-free interest rate

 

1.30

%

1.09

%

1.72

%

Expected volatility (peer group)

 

55.70

%

68.30

%

72.40

%

Expected life (in years)

 

0.95

 

1.70

 

5.00

 

Number outstanding

 

3,320,501

 

3,320,501

 

3,320,501

 

Balance, end of period:

 

 

 

 

 

 

 

Liability classified warrants

 

$

 

$

 

$

7,541,000

 

Warrant derivative liabilities

 

$

26,804,000

 

$

10,600,000

 

$

 

 

Debt and related party debt — The following table presents the effective interest rates on loans originated and refinanced in the respective periods that either had a beneficial conversion feature or an attached warrant:

 

 

 

 

 

Stated

 

Original

 

 

 

Beneficial

 

Warrants

 

 

 

Warrant

 

Effective

 

 

 

 

 

Annual

 

Loan

 

 

 

Conversion

 

Issued

 

 

 

FMV

 

Interest Rate

 

 

 

Term of

 

Interest

 

Principal

 

Conversion

 

Discount

 

with

 

Exercise

 

Discount

 

Including

 

Type of Loan

 

Loan

 

Rate

 

Amount

 

Rate

 

Amount

 

Notes

 

Price

 

Amount

 

Discounts

 

2016 convertible notes payable

 

Due on demand - 2 years

 

10

%

$

10,866,291

 

$3.50 - $4.50

 

$

3,196,544

 

75,000

 

$

4.70

 

$

161,658

 

14% - 102%

 

2017 convertible notes payable

 

Due on demand - 2 years

 

10

%

8,622,305

 

$3.50 - $7.60

 

6,739,199

 

 

 

 

10% - 110%

 

Total

 

 

 

 

 

$

19,488,596

 

 

 

$

9,935,743

 

75,000

 

 

 

$

161,658

 

 

 

 

Related party notes are disclosed as separate line items in the Company’s consolidated balance sheets.

 

6



Table of Contents

 

Net loss per share — As of September 30, 2017 and 2016, respectively, potentially dilutive securities exercisable or convertible into 15,617,245 and 14,859,090 shares of Company common stock were outstanding. No potentially dilutive securities were included in the calculation of diluted loss per share since their effect would be anti-dilutive for all periods presented.

 

Recent accounting pronouncements— In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments applicable to the Company in this Update (1) supersede the guidance to classify equity securities, except equity method securities, with readily determinable fair values into trading or available-for-sale categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income, (2) allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment, (3) require assessment for impairment of equity investments without readily determinable fair values qualitatively at each reporting period, (4) eliminate the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the Update. The impact of the adoption of the amendments in this Update will depend on the amount of equity securities and financial instruments subject to the amendments in this Update held by the Company at the time of adoption.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in this Update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of the amendments in this Update on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have a material lease with a term of greater than twelve months.

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this Update simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This Update is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify identification of performance obligations and licensing implementation. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606: For public companies, this Update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact that the implementation of ASU 2016-10 will have on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2016-15 will have on its financial statements.

 

7



Table of Contents

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company is currently in the process of evaluating the impact the adoption of this new Update will have on its consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation — Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2017-09 will have on its consolidated financial statements.

 

NOTE 3 — PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

 

 

September 30, 2017

 

December 31, 2016

 

Equipment

 

$

225,609

 

$

175,410

 

Leasehold improvements

 

61,054

 

30,804

 

Furniture and fixtures

 

74,090

 

74,760

 

Subtotal

 

360,753

 

280,974

 

Less: accumulated depreciation

 

(246,172

)

(227,244

)

Total

 

$

114,581

 

$

53,730

 

 

During the three months ended September 30, 2017 and 2016, depreciation expense was $9,236 and $3,808, respectively. During the nine months ended September 30, 2017 and 2016, depreciation expense was $18,593 and $11,210, respectively.

 

NOTE 4 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following at:

 

 

 

September 30, 2017

 

December 31, 2016

 

Accounts payable

 

 

 

 

 

Clinical and regulatory expenses

 

$

131,878

 

$

145,239

 

Legal expenses

 

91,054

 

43,700

 

Consulting fees

 

233,171

 

99,800

 

Accounting fees

 

350,893

 

65,267

 

Selling expenses

 

145,686

 

60,724

 

Investor relations and public relations expenses

 

43,400

 

19,931

 

Other vendors

 

276,010

 

41,640

 

Total accounts payable

 

1,272,092

 

476,301

 

Accrued interest payable, related parties

 

289,609

 

274,851

 

Accrued interest payable

 

1,533,530

 

1,441,450

 

Accrued expenses

 

692,333

 

716,886

 

Deferred salary

 

291,666

 

291,666

 

Total accounts payable and accrued expenses

 

$

4,079,230

 

$

3,201,154

 

 

8



Table of Contents

 

NOTE 5 — NOTES PAYABLE

 

Notes payable consisted of the following at September 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

 

 

Principal

 

Discount

 

Carrying

 

Underlying

 

Principal

 

Discount

 

Carrying

 

Underlying

 

 

 

 

 

 

 

 

 

Outstanding

 

Amount

 

Amount

 

Notes September

 

Outstanding

 

Amount

 

Amount

 

Notes

 

Year

 

Interest Rate

 

 

 

Conversion

 

September 30,

 

September 30,

 

September 30,

 

30,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

Issued

 

Range

 

Term of Notes

 

Price

 

2017

 

2017

 

2017

 

2017

 

2016

 

2016

 

2016

 

2016

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

Due on demand

 

 

$

887,000

 

$

 

$

887,000

 

 

$

854,900

 

$

 

$

854,900

 

 

2015

 

10%

 

Due on demand

 

 

10,000

 

 

10,000

 

 

2,406,194

 

 

2,406,194

 

 

2016

 

10% - 11%

 

Due on demand

 

 

843,335

 

 

843,335

 

 

833,335

 

 

833,335

 

 

2017

 

5% - 11%

 

Due on demand

 

 

6,149,498

 

 

6,149,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,889,833

 

$

 

$

7,889,833

 

 

$

4,094,429

 

$

 

$

4,094,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

7,889,833

 

$

 

$

7,889,833

 

 

$

4,094,429

 

$

 

$

4,094,429

 

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

Notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

8%

 

Due on demand

 

 

$

300,000

 

$

 

$

300,000

 

 

$

500,000

 

$

 

$

500,000

 

 

2013

 

8%

 

Due on demand

 

 

 

 

 

 

50,000

 

 

50,000

 

 

2015

 

10% - 11%

 

Due on demand

 

 

400,000

 

 

400,000

 

 

514,340

 

 

514,340

 

 

2016

 

10% - 11%

 

Due on demand

 

 

850,510

 

 

850,510

 

 

860,510

 

 

860,510

 

 

2017

 

10%

 

Due on demand

 

 

915,751

 

 

915,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,466,261

 

$

 

$

2,466,261

 

 

$

1,924,850

 

$

 

$

1,924,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

2,466,261

 

$

 

$

2,466,261

 

 

$

1,924,850

 

$

 

$

1,924,850

 

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

10%

 

5 years

 

$3.05

 

$

300,000

 

$

 

$

300,000

 

98,285

 

$

300,000

 

$

 

$

300,000

 

98,285

 

2014

 

10%

 

Due on demand - 2 years

 

$3.05 - $3.60

 

480,747

 

 

480,747

 

165,647

 

452,168

 

 

452,168

 

152,986

 

2015

 

10%

 

2 years

 

$4.50

 

881,070

 

649

 

880,421

 

234,200

 

2,904,800

 

104,389

 

2,800,411

 

889,115

 

2016

 

10%

 

1 - 2 years

 

$3.60 - $4.50

 

3,720,174

 

145,837

 

3,574,337

 

967,687

 

8,126,129

 

1,475,744

 

6,650,385

 

2,193,687

 

2017

 

10%

 

Due on demand - 2 years

 

$3.50 - $7.60

 

8,097,305

 

2,477,196

 

5,620,109

 

2,241,804

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,479,296

 

$

2,623,682

 

$

10,855,614

 

3,707,623

 

$

11,783,097

 

$

1,580,133

 

$

10,202,964

 

3,334,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

12,802,744

 

$

2,228,891

 

$

10,573,853

 

3,509,426

 

$

10,499,303

 

$

1,294,296

 

$

9,205,007

 

2,984,161

 

 

 

 

 

Non-current

 

 

 

$

676,552

 

$

394,791

 

$

281,761

 

198,197

 

$

1,283,794

 

$

285,837

 

$

997,957

 

349,912

 

Convertible notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

10%

 

Due on demand

 

$3.30

 

$

254,000

 

$

 

$

254,000

 

82,747

 

$

254,000

 

$

 

$

254,000

 

94,532

 

2015

 

10%

 

2 years

 

$4.50

 

220,000

 

 

220,000

 

58,118

 

220,000

 

 

220,000

 

54,463

 

 

 

 

 

 

 

 

 

$

474,000

 

$

 

$

474,000

 

140,865

 

$

474,000

 

$

 

$

474,000

 

148,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

474,000

 

$

 

$

474,000

 

140,865

 

$

474,000

 

$

 

$

474,000

 

148,995

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

 

 

 

 

Grand Total

 

 

 

$

24,309,390

 

$

2,623,682

 

$

21,685,708

 

3,848,488

 

$

18,276,376

 

$

1,580,133

 

$

16,696,243

 

3,483,068

 

 

9



Table of Contents

 

The weighted-average stated interest rate of notes payable as of September 30, 2017 and December 31, 2016 was 9%. The weighted-average effective interest rate of notes payable for the nine-month period ended September 30, 2017 and the year ended December 31, 2016 was 31% and 27%, respectively, after giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into Company common stock at the stated conversion price during the term of their convertible notes. Conversion prices on these convertible notes payable range from $3.05 to $7.60 per share. Certain notes with a $4.50 or a $7.60 stated conversion price in the second year of their two-year term are subject to automatic conversion into shares of Company common stock at a conversion price equal to 80% of the initial public offering price at the time of a qualified public offering. All notes due on demand are treated as current liabilities.

 

Contractual principal payments due on notes payable are as follows:

 

Year Ending

 

September 30, 2017

 

2017

 

$

21,796,787

 

2018

 

$

1,957,012

 

2019

 

$

555,591

 

Total

 

$

24,309,390

 

 

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the note proceeds. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of Company common stock as of the date of issuance (see Note 2). The fair value of the warrants issued in conjunction with notes was determined using the Black Scholes Merton Option Pricing Model with the following inputs for the periods ended December 31, 2016. The Company did not issue any warrants in conjunction with notes in the nine months ended September 30, 2017.

 

 

 

December 31, 2016

 

Stock price

 

$

5.00

 

Exercise price

 

$

4.50 - 4.70

 

Term

 

5 years

 

Risk-free interest rate

 

1.01 - 1.28%

 

Expected dividend yield

 

 

Expected volatility

 

65.4 - 69.6%

 

 

In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds were allocated to the warrants and beneficial conversion feature based on their respective pro rata fair values.

 

NOTE 6 — STOCKHOLDERS’ DEFICIT

 

Private placement — On September 11, 2013, the Company issued an aggregate of 3,020,501 units at a price of $2.50 per unit (the “Private Placement”). Each unit consisted of one share of common stock and one common stock warrant for the purchase of an additional share of common stock. The aggregate purchase price for the units was $7,551,253. In addition, 300,000 warrants for the purchase of a share of common stock were issued to a broker under the same terms as the warrants issued in the Private Placement (the “Broker Warrants”).

 

The warrants issued in the Private Placement and the Broker Warrants entitle the holders thereof to purchase, at any time on or prior to September 11, 2018, shares of common stock of the Company at an exercise price of $3.50 per share. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as liabilities, were originally recorded at fair value, and are adjusted to fair market value each reporting period. Because the shares of common stock underlying the Private Placement warrants and Broker Warrants were not effectively registered for resale by September 11, 2014, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2017. The availability to warrant holders of the cashless exercise feature as of September 11, 2014 caused the then-outstanding 2,225,036 Private Placement warrants and Broker Warrants with fair value of $7,068,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period. On June 10, 2014, certain warrant holders exercised 1,095,465 warrants issued in the Private Placement for the exercise price of $3.50 per share, resulting in the Company receiving aggregate exercise proceeds of $3.8 million and issuing 1,095,465 shares of common stock. Prior to exercise, these Private Placement warrants were accounted for at fair value as liability classified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value immediately prior to exercise of $1.8 million,

 

10



Table of Contents

 

representing their intrinsic value, with this adjusted carrying value of $1.8 million being transferred to additional paid-in capital. Also on June 10, 2014, based on an offer made to holders of Private Placement warrants in connection with such exercises, the Company issued an aggregate of 1,095,465 replacement warrants to holders exercising Private Placement warrants, which replacement warrants have terms that are generally the same as the exercised warrants, including an expiration date of September 11, 2018 and an exercise price of $3.50 per share.

 

The replacement warrants are treated for accounting purposes as liability classified warrants, and their issuance gave rise to a $3.5 million warrant exercise inducement expense based on their fair value as of issuance as determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. Because the shares of common stock underlying the replacement warrants were not effectively registered for resale by June 10, 2015, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2017. The availability to warrant holders of the cashless exercise feature as of June 10, 2015 caused the then-outstanding 1,095,465 replacement warrants with fair value of $2,545,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period.

 

As of September 30, 2017, the aggregate fair value of the Private Placement warrants, replacement warrants and the Broker Warrants was $26,804,000 (see Note 2). For further details regarding registration rights associated with the Private Placement warrants, replacement warrants and Broker Warrants, see the Registration Rights section below in this footnote.

 

A summary of outstanding warrants as of September 30, 2017 and December 31, 2016 is presented below:

 

 

 

September 30, 2017

 

December 31, 2016

 

Warrants outstanding, beginning of period

 

5,024,668

 

3,530,918

 

Granted

 

 

1,493,750

 

Exercised

 

 

 

Cancelled, forfeited or expired

 

 

 

Warrants outstanding, end of period

 

5,024,668

 

5,024,668

 

 

A summary of outstanding warrants by year issued and exercise price as of September 30, 2017 is presented below:

 

 

 

Outstanding

 

Exercisable

 

Exercise Price

 

Number of
Warrants
Issued

 

Weighted
Average
Remaining
Contractual Life
(Years)

 

Weighted
Average
Exercise Price

 

Total

 

Weighted
Average
Exercise Price

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3.30

 

50,000

 

0.58

 

$

3.30

 

50,000

 

$

3.30

 

 

 

$

3.50

 

2,225,036

 

0.95

 

$

3.50

 

2,225,036

 

$

3.50

 

 

 

2013 total

 

2,275,036

 

 

 

 

 

2,275,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3.50

 

1,145,465

 

0.98

 

$

3.50

 

1,145,465

 

$

3.50

 

 

 

2014 total

 

1,145,465

 

 

 

 

 

1,145,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4.90

 

110,417

 

2.43

 

$

4.90

 

110,417

 

$

4.90

 

 

 

2015 total

 

110,417

 

 

 

 

 

110,417

 

 

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4.50

 

118,750

 

3.75

 

$

4.50

 

118,750

 

$

4.50

 

 

 

$

4.70

 

75,000

 

3.59

 

$

4.70

 

75,000

 

$

4.70

 

 

 

$

5.00

 

1,300,000

 

3.61

 

$

5.00

 

1,300,000

 

$

5.00

 

2016 Total

 

1,493,750

 

 

 

 

 

1,493,750

 

 

 

September 30, 2017 Total

 

5,024,668

 

 

 

 

 

5,024,668

 

 

 

 

11



Table of Contents

 

Stock options — During the nine months ended September 30, 2017, no options were granted by the Company. During the year ended December 31, 2016, the Company granted 2,596,200 options to its officers, directors and employees. Of these options, 300,000 granted to directors of the Company will vest in equal one-third installments on each of the first three anniversaries of the grant date, have an exercise price of $4.70 per share and are exercisable through 2026. The remaining 2,296,200 options will vest one-third on the first anniversary of the grant date and two-thirds in 24 approximately equal monthly installments thereafter. These options have an exercise price of $5.00 per share and are exercisable through 2026. As of September 30, 2017, there were 6,744,089 options outstanding under the Company’s 2011 Stock Incentive Plan.

 

Summaries of outstanding options as of September 30, 2017 and December 31, 2016 are presented below.

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Options outstanding, beginning of period

 

6,955,200

 

$

4.10

 

4,753,335

 

$

3.60

 

Granted or deemed issued

 

 

$

 

2,596,200

 

$

4.97

 

Exercised

 

 

$

 

(15,866

)

$

3.60

 

Cancelled, forfeited and expired

 

(211,111

)

$

5.00

 

(378,469

)

$

3.91

 

Options outstanding, end of period

 

6,744,089

 

$

4.07

 

6,955,200

 

$

4.10

 

Options exercisable, end of period

 

5,432,373

 

$

3.85

 

4,372,667

 

$

3.59

 

Options available for future grant, end of period

 

2,255,911

 

 

 

2,044,800

 

 

 

 

During the nine months ended September 30, 2017 and 2016, the Company recognized $3.8 million and $2.3 million, respectively, of share-based compensation expense arising from stock options. As of September 30, 2017, there was $4.5 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s 2011 Stock Incentive Plan. That expense is expected to be recognized over the weighted-average remaining period of 1.5 years.

 

Registration rights — Pursuant to the Subscription Agreements relating to the Private Placement and certain warrants, as well as the replacement warrants issued on June 10, 2014, the Company agreed to use its commercially reasonable best efforts to have on file with the SEC, by September 11, 2014 and at the Company’s sole expense, a registration statement to permit the public resale of 4,115,966 shares of Company common stock and 3,320,501 shares of common stock underlying warrants (collectively, the “Registrable Securities”). In the event such registration statement includes securities to be offered and sold by the Company in a fully underwritten primary public offering pursuant to an effective registration under the Securities Act of 1933, as amended (the “Securities Act”), and the Company is advised in good faith by any managing underwriter of securities being offered pursuant to such registration statement that the number of Registrable Securities proposed to be sold in such offering is greater than the number of such securities which can be included in such offering without materially adversely affecting such offering, the Company will include in such registration the following securities in the following order of priority: (i) any securities the Company proposes to sell, and (ii) the Registrable Securities, with any reductions in the number of Registrable Securities actually included in such registration to be allocated on a pro rata basis among the holders thereof. The registration rights described above apply until all Registrable Securities have been sold pursuant to Rule 144 under the Securities Act or may be sold without registration in reliance on Rule 144 under the Securities Act without limitation as to volume and without the requirement of any notice filing. If the shares of common stock underlying these warrants to purchase 3,320,501 shares are not registered for resale at the time of exercise, and the registration rights described above then apply with respect to the holder of such warrants, such holder may exercise such warrants on a cashless basis. In such a cashless exercise of all the shares covered by the warrant, the warrant holder would receive a number of shares equal to the quotient of (i) the difference between the fair market value of the common stock, as defined, and the $3.50 exercise price, as adjusted, multiplied by the number of shares exercisable under the warrant, divided by (ii) the fair market value of the common stock, as defined. As of September 30, 2017, based on a fair market value of a share of Company common stock of $11.50 and 3,320,501 warrants issued and outstanding and eligible for cashless exercise, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, is 2,309,914  shares. If the fair market value of a share of Company common stock were to increase by $1.00 from $11.50 to $12.50, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, would increase to 2,390,761 shares as of September 30, 2017.

 

The Company has not yet filed a registration statement with respect to the resale of the Registrable Securities. The Company believes that it has used commercially reasonable efforts to file a registration statement with respect to the resale of Registrable Securities.

 

12



Table of Contents

 

Korean Private Placement — On September 12, 2016, the Company entered into Letter of Agreement with KPM and Hanil Vacuum, both Korean-based public companies whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In the Letter of Agreement, the parties agreed that KPM and Hanil would purchase by September 30, 2016 $17 million and $3 million, respectively, of shares of the Company’s common stock at a price of $4.50 per share. In exchange, the Company agreed to invest $13 million and $1 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. The Letter of Agreement contemplates that KPM and Hanil may purchase additional shares of the Company common stock in a second transaction to be mutually agreed upon by the parties. In connection with the Letter of Agreement, KPM and Hanil entered into the Company’s standard form subscription agreement with respect to their purchase of shares which contains customary representations and warranties of the parties.

 

On September 29, 2016, KPM and Hanil purchased and acquired from the Company 3,777,778 shares and 666,667 shares, respectively, of common stock at a price of $4.50 a share for $17 million and $3 million, respectively, for a gross total of $20 million. The Company recognized $720,000 as a reduction to its additional paid-in-capital for fees and commissions payable by the Company in connection with the transaction.

 

Pursuant to the terms of the Letter of Agreement dated September 12, 2016, the Company invested $13 million and $1 million in capital increases by KPM and Hanil, respectively, at $15.32 and $3.68, respectively, per capital share.

 

Pursuant to the terms of a subscription agreement dated as of September 11, 2013 among the Company and certain purchasers of shares of the Company’s common stock and warrants to purchase shares of common stock, the purchasers are entitled to participation rights with respect to the sale of shares pursuant to the Letter of Agreement. To the extent the purchasers exercise their participation rights, the Company may be obliged to sell to them a specified number of shares of common stock at the price per share and other terms set forth in the Letter of Agreement. There can be no assurance that any purchaser will exercise its participation rights or that any shares of the Company’s common stock will be issued to any purchaser.

 

NOTE 7 — COMMITMENTS AND CONTINGENCIES

 

Distribution contract — Cardinal Health Specialty Pharmacy Services has been contracted to distribute NutreStore to other wholesale distributors and some independent pharmacies since April 2008. For these services, the Company pays a monthly commercialization management fee of $4,500.

 

On August 29, 2017, the Company signed a distributor agreement, effective as of August 23, 2017, with Megapharm Ltd., an Israeli Corporation (“Megapharm”), under which the Company granted Megapharm the exclusive rights to distribute its FDA approved product Endari™ (L-glutamine oral powder) in Israel and the Palestinian Authority, or the territories.

 

The term of the distributor agreement is for seven years from the product registration approval in the territories, unless earlier terminated as provided therein, and will renew automatically for successive one-year terms unless terminated by either party by written notice to the other party no less than 60 days prior to the date the term would renew.

 

In the distributor agreement, Megapharm agrees to use its reasonable best efforts to actively and diligently promote the sale of Endari in the territories and to maintain a competent and experienced sales force to serve each of the territories. Megapharm also agrees in the distributor agreement to purchase from the Company specified annual minimum quantities of Endari during each of the first five years of the term. The distributor agreement contains customary representations and warranties of the parties and customary mutual indemnification provisions.

 

Operating leases — The Company leases its office space under operating leases with unrelated entities. The rent expense during the three months ended September 30, 2017 and 2016 amounted to $134,585 and $151,958, respectively. The rent expense during the nine months ended September 30, 2017 and 2016 amounted to $427,687 and $443,921, respectively.

 

Future minimum lease payments under the agreements are as follows as of September 30, 2017:

 

Year

 

Amount

 

2017 (three months)

 

$

137,206

 

2018

 

537,731

 

2019

 

150,755

 

2020

 

2,240

 

 

 

$

827,932

 

 

13



Table of Contents

 

Management Control Acquisition AgreementAs previously reported in its Form 8-K filed on June 19, 2017 and Form 10-Q filed on August 17, 2017, that on June 12, 2017, the Company entered into a Management Control Acquisition Agreement (the “MCAA”) with Telcon Holdings, Inc. (“Telcon Holdings”), a Korean corporation, and Telcon (“Telcon”), a Korean-based public company whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In accordance with the MCAA, the Company invested ₩36.0 billion KRW (approximately $31.8 million USD) to purchase 6,643,559 shares of Telcon’s common stock shares at a purchase price of ₩5,419 KRW (approximately $4.79 USD) per share. Upon consummation of the MCAA, the Company became Telcon’s largest shareholder owning approximately 10.3% of Telcon’s outstanding common stock shares and received representation on its board of directors.

 

Subsequent to entering into the MCAA, the Company held discussions with Telcon Holdings and Telcon to re-negotiate and clarify certain of the terms in the MCAA. On September 29, 2017, the Company executed a revised agreement with Telcon Holdings and Telcon which called for the Company’s representatives on Telcon’s board of directors to resign effective as of September 29, 2017 and granted the voting rights of the Company’s shares of Telcon’s common stock to Telcon Holdings to change the composition of the board of directors of Telcon. In addition, the revised agreement contains a provision for Telcon Holdings or any persons designated by Telcon Holdings to lend to the Company a bridge loan for $3.5 million. The Company shall repay the loan in full along with any interest accrued at 5% per annum immediately upon receipt of the $10 million due by December 31, 2017 under the distribution agreements for diverticulosis treatment for the geographical regions of Korea, Japan, China, and Australia. The loan is collateralized by a $5 million security interest in the amount due to the Company for the aforementioned distribution agreements as well as by shares of Telcon and KPM held by the Company pledged as additional security interest for the loan.

 

API Supply Agreement — The Company had previously reported in its Form 8-K filed on June 19, 2017, that on June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately ₩36 billion KRW (approximately $31.8 million USD) in consideration of the right to supply 25% of the Company’s requirements for bulk containers of pharmaceutical grade L-glutamine for a fifteen-year term. Due to unforeseen circumstances, the Company and Telcon held new discussions to re-negotiate certain terms of the API Agreement. The Company and Telcon made significant changes to critical terms of the API Agreement, which resulted in the Company and Telcon signing a Raw Material Supply Agreement (“Revised API Agreement”) on July 12, 2017. The Revised API Agreement is effective for a term of five years with 10 one-year renewal periods for a maximum of 15 years and the agreement will automatically renew unless terminated by either party in writing. The Revised API Agreement does not include yearly purchase commitments or margin guarantees, but revises the API Agreement such that a unit price is established for 940,000 kilograms of pharmaceutical grade L-glutamine at $50 USD per kilogram for a total of $47 million over the 15 years. The Revised API Supply Agreement is silent on yearly purchase commitments and margin guarantees on purchases of $5 million and $2.5 million, respectively.

 

14



Table of Contents

 

NOTE 8 — RELATED PARTY TRANSACTIONS

 

The following table sets forth information relating to the Company’s loans from related parties outstanding as of September 30, 2017:

 

Class

 

Lender

 

Annual
Interest
Rate

 

Date
of
Loan

 

Term
of
Loan

 

Principal
Amount
Outstanding
at
September 30,
2017

 

Highest
Principal
Outstanding

 

Amount
of
Principal
Repaid or
Converted
into Stock

 

Amount
of
Interest
Paid

 

Conversion
Rate

 

Shares
Underlying
Notes at
September
30,
2017

 

Notes payable to related parties—current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hope Hospice(1)

 

8

%

1/17/2012

 

Due on demand

 

$

 

$

200,000

 

$

200,000

 

$

7,331

 

$

 

 

 

 

Hope Hospice(1)

 

8

%

6/14/2012

 

Due on demand

 

200,000

 

200,000

 

 

8,000

 

 

 

 

 

Hope Hospice(1)

 

8

%

6/21/2012

 

Due on demand

 

100,000

 

100,000

 

 

4,000

 

 

 

 

 

Hope Hospice(1)

 

8

%

2/11/2013

 

Due on demand

 

 

50,000

 

50,000

 

1,559

 

 

 

 

 

Hope Hospice(1)

 

10

%

1/7/2015

 

Due on demand

 

100,000

 

100,000

 

 

 

 

 

 

 

Yutaka Niihara(2)(3)

 

10

%

5/21/2015

 

Due on demand

 

 

826,105

 

94,339

 

61,829

 

 

 

 

 

Masaharu & Emiko Osato(3)

 

11

%

12/29/2015

 

Due on demand

 

300,000

 

300,000

 

 

 

 

 

 

 

Lan T. Tran(2)

 

11

%

2/10/2016

 

Due on demand

 

130,510

 

130,510

 

 

 

 

 

 

 

Masaharu & Emiko Osato(3)

 

11

%

2/25/2016

 

Due on demand

 

400,000

 

400,000

 

 

 

 

 

 

 

Hope Hospice(1)

 

10

%

4/4/2016

 

Due on demand

 

50,000

 

50,000

 

 

 

 

 

 

 

Lan T. Tran(2)

 

10

%

4/29/2016

 

Due on demand

 

20,000

 

20,000

 

 

 

 

 

 

 

Hope Hospice(1)

 

10

%

6/3/2016

 

Due on demand

 

250,000

 

250,000

 

 

 

 

 

 

 

Lan T. Tran(2)

 

10

%

2/9/2017

 

Due on demand

 

12,000

 

12,000

 

 

 

 

 

 

 

Yutaka Niihara(2)(3)

 

10

%

9/14/2017

 

Due on demand

 

903,751

 

903,751

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub total

 

$

2,466,261

 

$

3,542,366

 

$

344,339

 

$

82,719

 

$

 

 

Convertible notes payable to related parties—current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yasushi Nagasaki(2)

 

10

%

6/29/2012

 

Due on demand

 

$

254,000

 

$

388,800

 

$

134,800

 

$

57,886

 

$

3.30

 

82,747

 

 

 

Charles & Kimxa Stark(2)

 

10

%

10/1/2015

 

2 years

 

20,000

 

20,000

 

 

 

4.50

 

5,333

 

 

 

Yutaka & Soomi Niihara(2)(3)

 

10

%

11/16/2015

 

2 years

 

200,000

 

200,000

 

 

 

4.50

 

52,785

 

 

 

 

 

 

 

 

 

Sub total

 

$

474,000

 

$

608,800

 

$

134,800

 

$

57,886

 

 

140,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,940,261

 

$

4,151,166

 

$

479,139

 

$

140,605

 

 

140,865

 

 


(1) Dr. Niihara, the Chairman and Chief Executive Officer of the Company, is also the Chief Executive Officer of Hope Hospice.

 

(2) Officer and/or Management.

 

(3) Director.

 

15



Table of Contents

 

The following table sets forth information relating to the Company’s loans from related parties outstanding as of December 31, 2016.

 

Class

 

Lender

 

Annual
Interest
Rate

 

Date
of
Loan

 

Term
of
Loan

 

Principal
Amount
Outstanding
at
December 31,
2016

 

Highest
Principal
Outstanding

 

Amount
of
Principal
Repaid or
Converted
into Stock

 

Amount
of
Interest
Paid

 

Conversion
Rate

 

Shares
Underlying
Notes at
December 31,
2016

 

Notes payable to related parties—current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hope Hospice(1)

 

8

%

1/17/2012

 

Due on demand

 

$

200,000

 

$

200,000

 

$

 

$

20,000

 

$

 

 

 

 

Hope Hospice(1)

 

8

%

6/14/2012

 

Due on demand

 

200,000

 

200,000

 

 

20,000

 

 

 

 

 

Hope Hospice(1)

 

8

%

6/21/2012

 

Due on demand

 

100,000

 

100,000

 

 

10,000

 

 

 

 

 

Hope Hospice(1)

 

8

%

2/11/2013

 

Due on demand

 

50,000

 

50,000

 

 

5,000

 

 

 

 

 

Hope Hospice(1)

 

10

%

1/7/2015

 

Due on demand

 

100,000

 

100,000

 

 

 

 

 

 

 

Lan T. Tran(2)

 

10

%

2/9/2015

 

Due on demand

 

10,000

 

10,000

 

 

 

 

 

 

 

IRA Service Trust Co. FBO Peter B. Ludlum(2)

 

10

%

2/20/2015

 

Due on demand

 

10,000

 

10,000

 

 

 

 

 

 

 

Yutaka Niihara(2)(3)

 

10

%

5/21/2015

 

Due on demand

 

94,340

 

826,105

 

731,765

 

47,822

 

 

 

 

 

Masaharu & Emiko Osato(3)

 

11

%

12/29/2015

 

Due on demand

 

300,000

 

300,000

 

 

 

 

 

 

 

Lan T. Tran(2)

 

11

%

2/10/2016

 

Due on demand

 

130,510

 

130,510

 

 

 

 

 

 

 

Hideki & Eiko Uehara(4)

 

11

%

2/15/2016

 

Due on demand

 

 

133,333

 

133,333

 

12,226

 

 

 

 

 

Masaharu & Emiko Osato(3)

 

11

%

2/25/2016

 

Due on demand

 

400,000

 

400,000

 

 

 

 

 

 

 

Hope Hospice(1)

 

10

%

4/4/2016

 

Due on demand

 

50,000

 

50,000

 

 

 

 

 

 

 

Willis C. Lee(2)(3)

 

10

%

4/8/2016

 

Due on demand

 

 

79,700

 

79,700

 

1,288

 

 

 

 

 

Lan T. Tran(2)

 

10

%

4/29/2016

 

Due on demand

 

20,000

 

20,000

 

 

 

 

 

 

 

IRA Service Trust Co. FBO Peter B. Ludlum(2)

 

10

%

5/5/2016

 

Due on demand

 

10,000

 

10,000

 

 

 

 

 

 

 

Hope Hospice(1)

 

10

%

6/3/2016

 

Due on demand

 

250,000

 

250,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub total

 

$

1,924,850

 

$

2,869,648

 

$

944,798

 

$

116,336

 

$

 

 

Convertible notes payable to related parties—current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yasushi Nagasaki(2)

 

10

%

6/29/2012

 

Due on demand

 

$

254,000

 

$

388,800

 

$

134,800

 

$

27,824

 

$

3.30

 

94,532

 

 

 

Charles & Kimxa Stark(2)

 

10

%

10/1/2015

 

2 years

 

20,000

 

20,000

 

 

 

4.50

 

5,002

 

 

 

Yutaka & Soomi Niihara(2)(3)

 

10

%

11/16/2015

 

2 years

 

200,000

 

200,000

 

 

 

4.50

 

49,461

 

 

 

 

 

 

 

 

 

Sub total

 

$

474,000

 

$

608,800

 

$

134,800

 

$

27,824

 

 

148,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,398,850

 

$

3,478,448

 

$

1,079,598

 

$

144,160

 

 

148,995

 

 


(1)         Dr. Niihara, the Company’s Chairman and Chief Executive Officer, is also the CEO of Hope Hospice.

(2)         Officer and/or Management.

(3)         Director.

(4)         Family of Officer/Director.

 

16



Table of Contents

 

NOTE 9 — GEOGRAPHIC INFORMATION

 

For the nine months ended September 30, 2017 and 2016, the Company earned revenue from countries outside of the United States as set forth in the table below:

 

Country

 

Revenues for
the Nine Months Ended
September 30, 2017

 

% of Total Revenue for the
Nine Months Ended
September 30, 2017

 

Revenues for the
Nine Months Ended
September 30, 2016

 

% of Total Revenue for the
Nine Months Ended
September 30, 2016

 

Japan

 

$

119,033

 

32

%

$

120,280

 

38

%

Taiwan

 

180,854

 

49

%

138,313

 

44

%

 

For the three months ended September 30, 2017 and 2016, the Company earned revenue from countries outside of the United States as set forth in the table below:

 

Country

 

Revenues for
the Three Months Ended
September 30, 2017

 

% of Total Revenue for the
Three Months Ended
September 30, 2017

 

Revenues for the
Three Months Ended
September 30, 2016

 

% of Total Revenue for the
Three Months Ended
September 30, 2016

 

Japan

 

$

48,185

 

34

%

$

39,185

 

63

%

Taiwan

 

67,087

 

48

%

4,046

 

7

%

 

The Company did not have any significant currency translation or foreign transaction adjustments during the nine months ended September 30, 2017 or 2016.

 

NOTE 10 — SUBSEQUENT EVENTS

 

Subsequent to September 30, 2017, the Company issued the following:

 

Notes issued after September 30, 2017

 

Amount

 

Annual Interest
Rate

 

Term of Note

 

Conversion Price

 

Convertible notes

 

$

5,200,000

 

10

%

1 - 2 Years

 

$

10.00

 

Total

 

$

5,200,000

 

 

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

With respect to the following discussion, the terms, “we,” “us,” “our” or the “Company” refer to Emmaus Life Sciences, Inc., and its wholly-owned subsidiary Emmaus Medical, Inc., a Delaware corporation, which we refer to as Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, a Delaware corporation, which we refer to as Newfield Nutrition, Emmaus Medical Japan, Inc., a Japanese corporation, which we refer to as EM Japan, Emmaus Life Sciences Korea, a Korean corporation which we refer to as ELSK and Emmaus Medical Europe Ltd., a U.K. corporation, which we refer to as EM Europe.

 

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 for the year ended December 31, 2016 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017 (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, without limitation, our ability to raise additional capital to fund our operations, obtaining the U.S. Food and Drug Administration (“FDA”) and other regulatory authorization to market our drug and biological products, successful completion of our clinical trials, our ability to commercialize Endari™ (pharmaceutical grade L-glutamine oral powder), our reliance on third-party manufacturers for our drug products, market acceptance of our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, development of a public trading market for our securities, and various other matters, 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 of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements.

 

Company Overview

 

We are a biopharmaceutical company engaged in the discovery, development and commercialization of innovative treatments and therapies primarily for rare and orphan diseases. We are currently focusing on sickle cell disease (“SCD”), a genetic disorder and a significant unmet medical need. Our lead product Endari is an oral pharmaceutical grade L-glutamine treatment that demonstrated positive clinical results in our completed Phase 3 clinical trial for sickle cell anemia and sickle ß0-thalassemia, two of the most common forms of SCD.

 

In the Phase 3, double-blind, placebo-controlled, parallel-group, multi-center clinical trial which enrolled a total of 230 adult and pediatric patients as young as five years of age, at 31 sites in the United States, Endari was administered up to 30 grams per day and demonstrated a 25% decrease in the median frequency of sickle cell crises and 33% decrease in the median number of hospitalizations, as compared to placebo. Based on an analysis, utilizing pre-specified statistical methods, the difference between groups was statistically significant; p=0.0052 and p=0.0045, respectively. Other clinically relevant endpoints showed similar results such as a 66% lower incidence of acute chest syndrome (p=0.0028), 41% less cumulative days in hospital (p=0.022) and 56% delay in onset of the first sickle cell crisis (p=0.0152). The safety data collected demonstrated a safety profile similar to that of placebo.

 

Based on the results of the Phase 3 clinical trial and other supportive studies, Endari was approved for marketing by the FDA on July 7, 2017. Endari represents the first treatment for pediatric patients with SCD, and the first new treatment in nearly 20 years for adult patients.

 

Endari has received Orphan Drug designation from both the FDA and the European Commission (“EC”). We intend to market Endari in the U.S. by building our own targeted sales force and to utilize strategic partnerships to market Endari in any foreign jurisdictions in which we are able to obtain marketing approval.

 

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We have extensive experience in the field of SCD, including the development, outsourced manufacturing and conduct of clinical trials of Endari. Our Chairman of the Board and Chief Executive Officer, Yutaka Niihara, M.D., M.P.H., is a leading hematologist in the field of SCD. Dr. Niihara is licensed to practice medicine in both the United States and Japan and has been actively engaged in SCD research and the care of patients with SCD for over 20 years, primarily at the University of California Los Angeles and the Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center (“LA BioMed”), a nonprofit biomedical research institute.

 

To a lesser extent, we are also engaged in the sale of NutreStore, L-glutamine powder for oral solution, which has received FDA approval as a treatment for short bowel syndrome (“SBS”) in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Our indirect wholly owned subsidiary, Newfield Nutrition, sells L-glutamine as a nutritional supplement under the brand name AminoPure through retail stores in multiple states in the United States and via importers and distributors in Japan, Taiwan and South Korea. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore and AminoPure.

 

In May 2006, we formed Newfield Nutrition, a wholly-owned subsidiary of Emmaus Medical, that distributes L-glutamine as a nutritional supplement under the brand name AminoPure.

 

In October 2010, we formed EM Japan, a wholly-owned subsidiary of Emmaus Medical, that markets and sells AminoPure in Japan and other countries in Asia. EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future.

 

In November 2011, we formed EM Europe, a wholly-owned subsidiary of Emmaus Medical, whose primary focus is expanding our business in Europe.

 

In December 2016, we formed Emmaus Life Sciences Korea (“ELSK”), a wholly owned subsidiary of Emmaus Medical, whose primary focus is expanding our business in Korea.

 

Our corporate structure is illustrated below:

 

 

Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC undertook a reorganization and merged with Emmaus Medical, which was originally incorporated in September 2003.

 

Pursuant to an Agreement and Plan of Merger dated April 21, 2011, which we refer to as the Merger Agreement, by and among us, AFH Merger Sub, Inc., our wholly-owned subsidiary, which we refer to as AFH Merger Sub, AFH Advisory and Emmaus Medical, Emmaus Medical merged with and into AFH Merger Sub on May 3, 2011 with Emmaus Medical continuing as the surviving entity, which we refer to as the Merger. Upon the closing of the Merger, we changed our name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” Subsequently, on September 14, 2011, we changed our name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.”

 

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Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: our success in commercializing Endari in the U.S. or elsewhere; the duration and results of the clinical trials for our other product candidates; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; current and future unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of any future litigation; and further arrangements, if any, with collaborators.

 

Until we can generate a sufficient amount of product revenue, future cash requirements are expected to be financed through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. As of September 30, 2017, our accumulated deficit was $142.3 million and we had cash and cash equivalents of $4.4 million. Since inception we have had minimal revenues and have been required to rely on funding from sales of equity securities and debt financings and loans, including loans from related parties.

 

We also own a minority interest of less than 1% in CellSeed, a Japanese company listed on the Tokyo Stock Exchange, which is engaged in research and development of regenerative medicine products and the manufacture and sale of temperature-responsive cell culture equipment. In collaboration with CellSeed, we are engaged in research and development of cell sheet engineering regenerative medicine products.

 

On September 12, 2016, we entered into a Letter of Agreement with KPM and Hanil. In the Letter of Agreement, the parties agreed that KPM and Hanil would purchase $17 million and $3 million, respectively, of shares of our common stock at a price of $4.50 per share by September 30, 2016. In exchange, we agreed to invest $13 million and $1 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. The purchases of Emmaus shares by KPM and Hanil were completed in 2016.

 

Subsequent to the receipt of investments from KPM and Hanil, we completed the cross-investments with KPM and Hanil in which we purchased for an aggregate of $14 million a minority interest of 8.2% in KPM and of 0.8% in Hanil. KPM is principally engaged in the manufacture and distribution of surface treatment chemicals. Hanil is principally engaged in the design, manufacture and sale of vacuum coating systems. Both KPM and Hanil plan to expand their biopharma business.

 

On June 12, 2017, we entered into the MCAA with Telcon Holdings and Telcon. In accordance with the MCAA, the Company invested ₩36.0 billion KRW (approximately $31.8 million USD) to purchase 6,643,559 shares of Telcon’s common stock at a purchase price of ₩5,419 KRW (approximately $4.79 USD) per share. Upon consummation of the MCAA, the Company became Telcon’s largest shareholder owning approximately 10.3% of Telcon’s outstanding common shares.

 

Financial Overview

 

Revenue

 

Since our inception in 2000, we have had limited revenue from the sale of NutreStore, an FDA-approved prescription drug to treat SBS and AminoPure, a nutritional supplement. We have funded operations principally through the private placement of equity securities and debt financings. Our operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing and sponsoring clinical trials of Endari for SCD, manufacturing products and maintaining and improving our patent portfolio.

 

Currently, we generate revenue through the sale of NutreStore, L-glutamine powder for oral solution, as a treatment for SBS as well as AminoPure, a nutritional supplement. Management expects that any revenues generated from the sale of NutreStore and AminoPure will fluctuate from quarter to quarter based on the timing of orders and the amount of products sold.

 

Cost of Goods Sold

 

Cost of goods sold includes the raw materials, packaging, shipping and distribution costs of NutreStore and AminoPure.

 

Research and Development Expenses

 

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to the contract research organization (“CRO”) that conducts the 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 supplies. The costs of later-stage clinical studies, such as Phase 2 and 3 trials, are generally higher than those of earlier stages of development, such as preclinical studies and Phase 1 trials. This is primarily due to the increased size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.

 

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Table of Contents

 

The most significant clinical trial expenditures in prior years have been related to the CRO costs and the payments to study sites. The contract with the CRO is based on time and material expended, whereas the study site agreements are based on per patient costs as well as other pass-through costs, including, but not limited to, 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 forecast with any degree of certainty which product candidates may be subject to future 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.

 

At this time, due to the inherently unpredictable nature of the process for developing drugs, biologics and cell-based therapies and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in obtaining regulatory approval of Endari outside the U.S. and the continued 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 Development of our Product Candidates,” “Risk Factors—Risks Related to our Reliance on Third Parties,” and “Risk Factors—Risks Related to Regulatory Approval of our Product Candidates and Other Legal Compliance Matters.”

 

General and Administrative Expenses

 

General and administrative expenses consist principally of salaries and related costs, including share-based compensation, for personnel in executive, finance, business development, information technology, marketing and legal functions. Other general and administrative expenses include facility costs, patent filing costs and professional fees and expenses for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years.

 

Environmental Expenses

 

The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.

 

Inventories

 

Inventories consist of finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or market value. All of the raw material purchased during three months and nine months ended September 30, 2017 and 2016 was from one vendor.

 

Results of Operations

 

Three months ended September 30, 2017 and 2016

 

Net Losses. Net losses increased by $11.0 million, or 176%, to $17.3 million from $6.3 million for the three months ended September 30, 2017 and 2016, respectively. The increase in losses is primarily a result of increased other expenses and operating expenses, in each case as discussed below. We anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit.

 

Revenues, Net. Net revenues increased by $78,000, or 127%, to $140,000 from $62,000 for the three months ended September 30, 2017 and 2016. Combined revenues from our AminoPure, L-glutamine nutritional supplement product, and our NutreStore, L-glutamine powder for oral solution for treatment of SBS, increased due to higher demands during these periods.

 

Cost of Goods Sold. Cost of goods sold increased by $108,000, or 513%, to $129,000 from $21,000 for the three months ended September 30, 2017 and 2016. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the three months ended September 30, 2017 and 2016 was from one vendor. Cost of goods sold increased due to increased sales of AminoPure in Taiwan and a $62,000 increase in inventory reserve for AminoPure.

 

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Table of Contents

 

Research and Development Expenses. Research and development expenses stayed approximately the same at around $0.4 million for the three months ended September 30, 2017 and 2016. We expect continued research and development costs in the rest of 2017 to support work on marketing approvals outside the U.S.

 

Selling Expenses. Selling expenses increased by $110,000, or 107%, to $214,000 from $104,000 for the three months ended September 30, 2017 and 2016. Selling expenses include the costs for marketing of Endari, distribution and freight for NutreStore, as well as advertisement, travel and salaries and wages for AminoPure. The increase was primarily due to an increase in the marketing expense for Endari.

 

General and Administrative Expenses. General and administrative expenses increased by $0.6 million, or 21%, to $3.2 million from $2.6 million for the three months ended September 30, 2017 and 2016. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. This increase was primarily due to an increase of $0.9 million in professional fees, and a $0.1 million increase in travel expenses, offset by a $0.3 million decrease in share-based compensation expense and a $0.1 million decrease in fundraising fees.

 

Other Income and Expense. Total other expense increased by $10.3 million, or 325%, to $13.5 million expense for the three months ended September 30, 2017, compared to $3.2 million in other expense for the three months ended September 30, 2016. The increase was primarily due to a negative change in the fair value of the warrant derivative liabilities of $10.7 million and an increase in interest expense of $1.3 million, offset by a decrease in convertible note inducement expense of $1.4 million and an absence of litigation settlement expense of $0.3 million.

 

We anticipate that our operating expenses will increase for, among others, the following reasons:

 

·                  to build a sales and marketing team to commercialize Endari in the U.S.;

 

·                  as a result of increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company; and

 

·                  to support research and development activities, which we expect to expand as we undertake to obtain marketing approval for Endari outside the U.S. and as development of our product candidates continues.

 

Nine months ended September 30, 2017 and 2016

 

Net Losses. Net losses increased by $21.7 million, or 156%, to $35.5 million from $13.8 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in losses is primarily a result of increased other expenses and operating expenses, in each case as discussed below. We anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit.

 

Revenues, Net. Net revenues increased by $52,000, or 17%, to $366,000 from $314,000 for the nine months ended September 30, 2017 and 2016. Combined revenues from our AminoPure, L-glutamine nutritional supplement product, and our NutreStore, L-glutamine powder for oral solution for treatment of SBS, increased during these periods.

 

Cost of Goods Sold. Cost of goods sold increased by $90,000, or 68%, to $222,000 from $132,000 for the nine months ended September 30, 2017 and 2016. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the nine months ended September 30, 2017 and 2016 was from one vendor. Cost of goods sold increased due to increased sales as well as a $62,000 increase in inventory reserve associated with AminoPure.

 

Research and Development Expenses. Research and development expenses increased by $0.9 million, or 60%, to $2.3 million from $1.4 million for the nine months ended September 30, 2017 and 2016. This increase was primarily due to an increase in the regulatory consulting expenses incurred in preparation for the meeting with the FDA Advisory Committee on May 24, 2017. We expect continued research and development costs in 2017 to support work on marketing approvals outside the U.S.

 

Selling Expenses. Selling expenses increased slightly by $123,000, or 44%, to $406,000 from $283,000 for the nine months ended September 30, 2017 and 2016. Selling expenses include the costs for marketing of Endari, distribution and freight for NutreStore, as well as advertisement, travel and salaries and wages for AminoPure. The increase was primarily due to an increase in marketing expense for Endari.

 

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Table of Contents

 

General and Administrative Expenses. General and administrative expenses increased by $2.3 million, or 32%, to $9.5 million from $7.2 million for the nine months ended September 30, 2017 and 2016. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. This increase was primarily due to an increase of $1.5 million in share-based compensation expense and an increase of $0.7 million in professional fees.

 

Other Income and Expense. Total other expense increased by $18.3 million, or 359%, to $23.4 million expense for the nine months ended September 30, 2017, compared to $5.1 million in other expense for the nine months ended September 30, 2016. The increase was primarily due to a negative change in the fair value of the warrant derivative liabilities of $16.2 million and an increase in interest expense of $3.8 million, offset by a decrease in convertible note inducement expense of $1.4 million and an absence of litigation settlement expense of $0.3 million.

 

We anticipate that our operating expenses will increase for, among others, the following reasons:

 

·                  to build a sales and marketing team to commercialize Endari in the U.S.;

 

·                  as a result of increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company; and

 

·                  to support research and development activities, which we expect to expand as we undertake to obtain marketing approval for Endari outside the U.S. and as development of our product candidates continues.

 

Liquidity and Capital Resources

 

Based on our losses to date, anticipated future revenue and operating expenses, debt repayment obligations and cash and cash equivalents balance of $4.4 million as of September 30, 2017, we do not have sufficient operating capital for our business without raising additional capital. We incurred a net loss of $35.5 million for the nine months ended September 30, 2017 and had an accumulated deficit at September 30, 2017 of $142.3 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of Endari in the U.S., NDA submission activities for Endari outside the U.S., research costs for the corneal cell sheets using Cultured Autologous Oral Mucosal Epithelial Cell Sheet (“CAOMECS”) technology and the expansion of corporate infrastructure, including costs associated with being a public reporting company and additional expenses that may be associated with pursuing a possible initial public offering. We have previously relied on unregistered equity offerings, debt financings and loans, including loans from related parties. As part of this effort, we have received various loans from officers, stockholders and other investors as discussed below. As of September 30, 2017, we had outstanding notes payable in an aggregate principal amount of $24.3 million, consisting of $10.3 million of non-convertible promissory notes and $14.0 million of convertible notes. Of the $24.3 million aggregate principal amount of notes outstanding as of September 30, 2017, approximately $23.6 million is either due on demand or will become due and payable within the next twelve months. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies, including the commercialization of Endari and the development in the United States of CAOMECS-based cell sheet technology.

 

We have had recurring operating losses, have a significant amount of notes payable and other obligations due within the next years and projected operating losses including the expected costs relating to the commercialization of Endari that exceed both the existing cash balances and cash expected to be generated from operations for at least the next year. In order to meet our expected obligations, management intends to raise additional funds through equity or debt financings. In addition, we may seek to raise additional funds through collaborations with other companies and financing from other sources and a possible initial public offering. Additional funding may not be available in amounts or on terms which are acceptable to us, if at all. Due to the uncertainty of our ability to meet our current operating and capital expenses, there is substantial doubt about our ability to continue as a going concern.

 

Our cash burn rate for the first nine months ended September 30, 2017 was approximately $0.4 million per month.

 

Our cash flow from operations is not adequate and our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: our success in commercializing Endari in the U.S.; the number, duration and results of the clinical trials for our other product candidates; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business and commercialization strategies; the outcome of any future litigation; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure and NutreStore. Revenues from both products are currently not significant and we are unsure whether sales of these products will increase. Until we can generate a sufficient amount of product revenue, future cash needs are expected to be financed through public or private equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to us or at all.

 

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Table of Contents

 

For the nine months ended September 30, 2017 and during the year ended December 31, 2016, we borrowed $5.7 million and $7.4 million, respectively, pursuant to convertible notes and non-convertible promissory notes, of which $0.9 million and $2.2 million, respectively, have been issued to related parties. As of September 30, 2017 and December 31, 2016, the aggregate principal amounts outstanding under convertible notes and non-convertible promissory notes totaled $24.3 million and $18.3 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 5% to 11% and, except for the 2011 convertible note listed below in the principal amount of $0.3 million, are unsecured. The net proceeds of the loans were used for working capital purposes.

 

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Table of Contents

 

The table below lists our outstanding notes payable as of September 30, 2017 and December 31, 2016 and the material terms of our outstanding borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

 

 

Principal

 

Discount

 

Carrying

 

Underlying

 

Principal

 

Discount

 

Carrying

 

Underlying

 

 

 

 

 

 

 

 

 

Outstanding

 

Amount

 

Amount

 

Notes September

 

Outstanding

 

Amount

 

Amount

 

Notes

 

Year

 

Interest Rate

 

 

 

Conversion

 

September 30,

 

September 30,

 

September 30,

 

30,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

Issued

 

Range

 

Term of Notes

 

Price

 

2017

 

2017

 

2017

 

2017

 

2016

 

2016

 

2016

 

2016

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

Due on demand

 

 

$

887,000

 

$

 

$

887,000

 

 

$

854,900

 

$

 

$

854,900

 

 

2015

 

10%

 

Due on demand

 

 

10,000

 

 

10,000

 

 

2,406,194

 

 

2,406,194

 

 

2016

 

10% - 11%

 

Due on demand

 

 

843,335

 

 

843,335

 

 

833,335

 

 

833,335

 

 

2017

 

5% - 11%

 

Due on demand

 

 

6,149,498

 

 

6,149,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,889,833

 

$

 

$

7,889,833

 

 

$

4,094,429

 

$

 

$

4,094,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

7,889,833

 

$

 

$

7,889,833

 

 

$

4,094,429

 

$

 

$

4,094,429

 

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

Notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

8%

 

Due on demand

 

 

$

300,000

 

$

 

$

300,000

 

 

$

500,000

 

$

 

$

500,000

 

 

2013

 

8%

 

Due on demand

 

 

 

 

 

 

50,000

 

 

50,000

 

 

2015

 

10% - 11%

 

Due on demand

 

 

400,000

 

 

400,000

 

 

514,340

 

 

514,340

 

 

2016

 

10% - 11%

 

Due on demand

 

 

850,510

 

 

850,510

 

 

860,510

 

 

860,510

 

 

2017

 

10%

 

Due on demand

 

 

915,751

 

 

915,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,466,261

 

$

 

$

2,466,261

 

 

$

1,924,850

 

$

 

$

1,924,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

2,466,261

 

$

 

$

2,466,261

 

 

$

1,924,850

 

$

 

$

1,924,850

 

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

10%

 

5 years

 

$3.05

 

$

300,000

 

$

 

$

300,000

 

98,285

 

$

300,000

 

$

 

$

300,000

 

98,285

 

2014

 

10%

 

Due on demand - 2 years

 

$3.05 - $3.60

 

480,747

 

 

480,747

 

165,647

 

452,168

 

 

452,168

 

152,986

 

2015

 

10%

 

2 years

 

$4.50

 

881,070

 

649

 

880,421

 

234,200

 

2,904,800

 

104,389

 

2,800,411

 

889,115

 

2016

 

10%

 

1 - 2 years

 

$3.60 - $4.50

 

3,720,174

 

145,837

 

3,574,337

 

967,687

 

8,126,129

 

1,475,744

 

6,650,385

 

2,193,687

 

2017

 

10%

 

Due on demand - 2 years

 

$3.50 - $7.60

 

8,097,305

 

2,477,196

 

5,620,109

 

2,241,804

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,479,296

 

$

2,623,682

 

$

10,855,614

 

3,707,623

 

$

11,783,097

 

$

1,580,133

 

$

10,202,964

 

3,334,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

12,802,744

 

$

2,228,891

 

$

10,573,853

 

3,509,426

 

$

10,499,303

 

$

1,294,296

 

$

9,205,007

 

2,984,161

 

 

 

 

 

Non-current

 

 

 

$

676,552

 

$

394,791

 

$

281,761

 

198,197

 

$

1,283,794

 

$

285,837

 

$

997,957

 

349,912

 

Convertible notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

10%

 

Due on demand

 

$3.30

 

$

254,000

 

$

 

$

254,000

 

82,747

 

$

254,000

 

$

 

$

254,000

 

94,532

 

2015

 

10%

 

2 years

 

$4.50

 

220,000

 

 

220,000

 

58,118

 

220,000

 

 

220,000

 

54,463

 

 

 

 

 

 

 

 

 

$

474,000

 

$

 

$

474,000

 

140,865

 

$

474,000

 

$

 

$

474,000

 

148,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

474,000

 

$

 

$

474,000

 

140,865

 

$

474,000

 

$

 

$

474,000

 

148,995

 

 

 

 

 

Non-current

 

 

 

$

 

$

 

$

 

 

$

 

$

 

$

 

 

 

 

 

 

Grand Total

 

 

 

$

24,309,390

 

$

2,623,682

 

$

21,685,708

 

3,848,488

 

$

18,276,376

 

$

1,580,133

 

$

16,696,243

 

3,483,068

 

 

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Cash flows for the nine months ended September 30, 2017 and September 30, 2016

 

Net cash used in operating activities

 

Net cash flows used in operating activities decreased by $16.4 million, or 83%, to $3.4 million from $19.8 million for the nine months ended September 30, 2017 and 2016, respectively. This decrease was primarily due to a $18.5 million increase of working capital and a $19.6 million increase in the non-cash adjustments to net loss, partially offset by a $21.7 million increase in net loss. The increase in non-cash adjustments to net loss was primarily attributable to: $16.2 million for the change in the fair value of warrant derivative liabilities, a $3.9 million increase in amortization of discount of convertible notes and a $1.5 million increase in share-based compensation, offset by a $1.4 million decrease in convertible note inducement expense. The increase of working capital primarily consisted of $36.8 million increase in other current liabilities for the funds received related to an API supply agreement and the upfront payment for a distribution agreement, offset by $17.8 million decrease in investment capital reserve which we reserved to finance our reciprocal investments in Telcon, KPM and Hanil common shares (see Note 7).

 

Net cash used in investing activities

 

Net cash flows used in investing activities increased to $0.1 million from $0 for the nine months ended September 30, 2017 and 2016, respectively. Net cash used in investing activities included purchases of property and equipment.

 

Net cash from financing activities

 

Net cash flows from financing activities decreased by $19.4 million, or 75%, to $6.5 million from $25.9 million for the nine months ended September 30, 2017 and 2016, respectively, as a result of a $21.0 million decrease in proceeds of issuance of common stock and a $1.3 million decrease in proceeds from issuance of convertible promissory notes, partially offset by a $1.8 million increase in proceeds from non-convertible notes payable issued and a $1.1 million decrease in repayment of convertible and non-convertible promissory notes.

 

Off-Balance-Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies

 

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 U.S. generally accepted accounting principles (“GAAP”), on the basis that the Company will continue as a going concern. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of 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 nine months ended September 30, 2017.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures.

 

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As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our DCP (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation and due to the material weaknesses in our internal control over financial reporting as of December 31, 2016 described below, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s DCP are not effective. Our management is working at remediating the material weaknesses in our internal controls over financial reporting. However, we have not yet completed a full annual accounting cycle since December 31, 2016 to fully validate the remediation of the material weaknesses in our internal controls and the effectiveness of the Company’s DCP.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2017 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Material Weakness and Plan of Remediation

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

We conducted an evaluation pursuant to Rule 13a-15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2016. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have identified the following control deficiencies that constituted material weaknesses in the Company’s internal control over financial reporting as of September 30, 2017, the first of which they have also determined to exist as of December 31, 2015 and 2016:

 

·            We did not design and maintain effective controls over our DCP. Specifically, because of the continuance of a material weakness in our internal control over financial reporting, initially identified in our evaluations of the effectiveness of our internal control over financial reporting as of December 31, 2013 and 2014, we did not design and maintain effective controls related to the application of GAAP on certain complex transactions, nor did we maintain effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions and internal communication of significant transactions.

 

·            We did not design and maintain effective controls over the identification and evaluation of accounting matters that may result from the Company entering into material agreements. Specifically, the internal communication process among members of management was determined to be insufficient to ensure that all agreements and significant terms and conditions are being properly communicated in a timely manner.

 

Our management and Board of Directors are committed to the remediation of the material weakness, as well as the continued improvement of our overall system of DCP. We are in the process of implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, which primarily include engaging additional and supplemental internal and external resources with the technical expertise in GAAP, as well as to implement new policies and procedures to provide more effective controls to track, process, analyze, and consolidate the financial data and reports.

 

We believe these measures, once implemented, will remediate the control deficiencies that gave rise to the material weaknesses. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remedial measures are required.

 

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Table of Contents

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

Not applicable.

 

Item 1A. Risk Factors

 

Risks Related to Commercialization of Endari

 

We are at an early stage in the commercialization of Endari, and have limited sales experience. We cannot predict if or when we will generate sufficient revenues to become profitable.

 

On July 7, 2017, Endari for treatment of SCD was approved for sale by the U.S. Food and Drug Administration ( “FDA”). We have limited experience in commercializing products. As a result, there is not enough historical basis upon which to assess how we will respond to regulatory, competitive or other challenges to our ability to sell Endari on a profitable basis, and it is difficult to predict the amount of revenues or profits, if any, that we will generate from the sale of Endari.

 

Our ability to generate sufficient revenues from Endari and to transition to profitability and generate positive cash flow will depend on numerous factors described in the following risk factors, and we may continue to incur losses and negative cash flow and may never transition to profitability or positive cash flow. In particular, we expect our operating expenses to continue to increase in the near-term as we seek to commercialize Endari, and we may not be able to generate sufficient revenues to offset this anticipated increase in expenses. If we are unable to transition to profitability and generate positive cash flow over time, our business, results of operations and financial condition would be materially and adversely affected, which could result in our inability to continue operations.

 

We are dependent on the commercial success of our approved product, Endari, and, although we expect to generate revenue from sales of Endari, we may never become profitable.

 

In the near term, our ability to become profitable will depend upon the commercial success of our approved product, Endari, which we anticipate launching in the fourth quarter of 2017. In addition to the risks discussed elsewhere in this section, our ability to generate future revenues from the sale of Endari will depend on a number of factors, including, but not limited to:

 

·                                          achievement of broad market acceptance and coverage by third-party payors for Endari;

 

·                                          the effectiveness of our efforts in marketing and selling Endari;

 

·                                          our and our contract manufacturers’ ability to successfully manufacture commercial quantities of Endari at acceptable cost levels and in compliance with regulatory requirements;

 

·                                          our ability to maintain a cost-efficient commercial organization and, to the extent we seek to do so, successfully partner with additional third parties;

 

·                                          our ability to successfully expand and maintain intellectual property protection for Endari;

 

·                                          our ability to effectively work with physicians to ensure that patients are treated to an effective dose of Endari;

 

·                                          the efficacy and safety of Endari; and

 

·                                          our ability to comply with ongoing regulatory requirements.

 

Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict the extent to which we will generate revenues from Endari or the timing for when or the extent to which we will become profitable, if ever. Even if we do achieve significant revenues from Endari and become profitable, we may not be able to sustain our revenues or maintain or increase profitability on an ongoing basis.

 

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If Endari does not achieve broad market acceptance or coverage by third-party payors, the revenues that we generate from that product will be limited.

 

The commercial success of Endari will depend upon the acceptance of the product by physicians, patients, healthcare payors and the medical community. Coverage and reimbursement for the product by third-party payors is also necessary for commercial success. The degree of market acceptance of Endari will depend on a number of factors, including:

 

·                                          acceptance by physicians and patients of the product as a safe and effective treatment;

 

·                                          the relative convenience and ease of administration;

 

·                                          the prevalence and severity of adverse side effects;

 

·                                          limitations or warnings contained in Endari’s FDA-approved labeling;

 

·                                          availability and perceived advantages of alternative treatments;

 

·                                          any negative publicity related to Endari or our competitors’ products;

 

·                                          the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies;

 

·                                          pricing and cost effectiveness;

 

·                                          our ability to obtain sufficient third-party payor coverage and reimbursement;

 

·                                          the willingness of patients to pay out of pocket in the absence of third-party payor coverage; and

 

·                                          our ability to maintain compliance with regulatory requirements.

 

Our efforts to educate the medical community and third-party payors on the benefits of Endari and gain broad market acceptance may require significant resources and may never be successful. If Endari does not achieve an adequate level of acceptance by physicians, third-party payors and patients, we may not generate sufficient revenue from that product to become or remain profitable.

 

In addition, SCD treatments can be costly to third-party payors and patients. Accordingly, hospitals and physicians may resist prescribing Endari and third-party payors, and patients may not purchase Endari due to cost.

 

We have no internal manufacturing capabilities; we will be dependent on third parties in our supply chain for the commercial supply of Endari; and if we fail to maintain our supply and manufacturing relationships with these third parties or develop new relationships with other third parties, we may be unable to commercialize Endari.

 

We will rely on third parties for the commercial supply of Endari. Our ability to commercially supply Endari will depend, in part, on our ability to successfully outsource most, if not all, of the aspects of its manufacturing at competitive costs, in accordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. If we fail to develop and maintain supply relationships with these third parties, we may be unable to continue to commercialize Endari.

 

We will purchase pharmaceutical grade L-glutamine utilized in connection with Endari from third parties. Our ability to obtain pharmaceutical grade L-glutamine in sufficient quantities and quality, and on a timely basis, is critical to our commercialization of Endari. There is no assurance that these suppliers will produce pharmaceutical grade L-glutamine in the quantities and quality and at the times it is needed, if at all. Moreover, the replacement of any of these suppliers could lead to significant delays and increases in our costs.

 

The manufacture of pharmaceutical products generally requires significant expertise and capital investment, often including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems can include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Additionally, our manufacturers may experience difficulties due to resource constraints, labor disputes, unstable political environments or natural disasters. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations for any reason, our ability to commercially supply Endari could be jeopardized. Any delay or interruption in our ability to commercially supply Endari will result in the loss of potential revenues and could adversely affect the market’s acceptance of that product.

 

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Table of Contents

 

Manufacturers and suppliers are subject to regulatory requirements including current Good Manufacturing Practices (“cGMPs”), which cover, among other things, manufacturing, testing, quality control and recordkeeping relating to Endari, and are subject to ongoing inspections by FDA and other regulatory agencies. We do not control the manufacturing processes of third-party manufacturers, and we will be currently completely dependent on them. If any of our third-party manufacturers cannot successfully manufacture product that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of Endari or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to commercially supply Endari.

 

We may not be successful in executing sales and marketing strategies for Endari.

 

We plan to launch Endari in the fourth quarter of 2017. In order to do so, we must build a commercial organization including sales, marketing, trade and distribution functions. We do not currently have any commercial organization, and therefore we cannot provide any assurance that we will be able to build an organization that is successful at marketing and selling Endari. Our competitors currently have sales and marketing organizations and significantly greater experience than we do in selling, marketing and distributing pharmaceuticals, and we may not be able to compete successfully with them.

 

If our third-party manufacturers or suppliers fail to deliver the required commercial quantities of Endari and its sub-components and starting materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers or suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, the commercialization of Endari would be impeded, delayed, limited or prevented, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Please refer to the additional risk factors disclosed in the “Risk Factors” section of the Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On July 18, 2017, the Company refinanced a convertible note payable to a third party in the original principal amount of $662,524 with a new convertible note in the principal amount of $795,028 which bears interest at 10% per annum. The note is due on demand up to two years from the date of issuance. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.50 per share at any time during the term of the note upon the election of the holder.

 

On August 23, 2017, the Company refinanced a convertible note payable to a third party in the original principal amount of $525,000 with a new convertible note in the principal amount of $551,250 which bears interest at 10% per annum. The note has a six-month term with an option on the part of the holder to renew for up to twelve months. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.50 per share at any time during the term of the note upon the election of the holder.

 

All such securities noted above were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), or Regulation D under the Securities Act or, in the case of refinancings and conversions, upon the exemption from registration provided by Section 3(a)(9) of the Securities Act. These securities qualified for exemption under Section 4(a)(2) of the Securities Act or Regulation D because the issuances did not involve a “public offering.” The issuances were not a public offering based upon the following factors: (i) a limited number of securities were issued to a limited number of investors; (ii) there was no public solicitation; (iii) each investor was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the investors. No broker-dealers were used in connection with such sales of unregistered securities.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Table of Contents

 

Item 6. Exhibits

 

(a)           Exhibits

 

Exhibit
Number

 

Description of Document

 

 

 

4.1

 

Convertible Promissory Note dated July 18, 2017 issued by the registrant to The Takemoto Family.

 

 

 

4.2

 

Convertible Promissory Note dated August 23, 2017 issued by the registrant to The Shitabata Family Trust.

 

 

 

10.1

 

Promissory Note dated September 14, 2017 issued by the registrant to Dr. Yutaka Niihara.

 

 

 

10.2

 

Promissory Note dated September 29, 2017 issued by the registrant to KPM Investment.

 

 

 

10.3

 

Revised Management Control Acquisition Agreement dated September 29, 2017 by and among the registrant, Telcon Holdings, Inc. and Telcon, Inc.

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*

 

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Emmaus Life Sciences, Inc.

 

 

 

Dated: November 14, 2017

By:

/s/ Yutaka Niihara

 

Name:

Yutaka Niihara, M.D., M.P.H.

 

Its:

Chief Executive Officer

 

 

(principal executive officer and duly authorized officer)

 

 

 

 

 

 

 

By:

/s/ Willis C. Lee

 

Name:

Willis C. Lee

 

Its:

Chief Financial Officer

 

 

(principal financial and accounting officer)

 

32