EMMAUS LIFE SCIENCES, INC. ForwardLooking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this Annual Report. This discussion contains forwardlooking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forwardlooking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this Annual Report.
Overview of Restatement
As previously disclosed in the company's Current Report on Form 8-K filed with
the
The restated financial statements correct the following errors:
1. Warrants issued by EMI inOctober 2018 and accounted for as equity should have been treated as derivative liabilities and accounted for at fair value with changes in fair value recorded in earnings. This error resulted in$7.8 million ,$8.6 million , and$7.5 million understatements of the fair value of warrant derivative liabilities as ofJune 30, 2019 ,March 31, 2019 andDecember 31, 2018 , respectively. It also resulted in understatements of stockholder's deficit of$5.6 million as ofSeptember 30, 2019 and$9.7 million as ofJune 30, 2019 ,March 31, 2019 andDecember 31, 2018 . This error also resulted in$0.2 million and$1.0 million understatements of net loss for the six months and three months endedJune 30 , andMarch 31, 2019 , respectively, and in a$2.4 million overstatement of net loss for the year endedDecember 31, 2018 . In connection with the completion of our merger transaction with EMI onJuly 17, 2019 , the exercise price of the warrants was adjusted and the warrants were reclassified to equity. 2. EMI's interest inEJ Holdings , which was consolidated as a Variable Interest Entity, should have been accounted for based upon the equity method. This error is resulted in$13.2 million and$0.2 million overstatements of cash and other current assets, respectively, and a$13.6 million understatement of the equity method investment as ofDecember 31, 2018 . The error also resulted in a$0.2 million overstatement of loss from operations and a$0.1 million overstatement of loss before income taxes for the year endedDecember 31, 2018 . 3. Fair value of cashless warrants exercised inSeptember 2018 upon expiration of warrants should have been recorded in additional paid-in capital. The error resulted in$18.3 million of an overstatement of change in fair value of warrant derivative liabilities and an understatement of additional paid-in cash for the year endedDecember 31, 2018 . 4. Other adjustments consist of the following:
Period adjustments of variable considerations resulted in
An error in accounting for on the financing of insurance premium resulted in
Adjustments of the stock modification accounting resulted in
An error in the accounting for conversion feature of securities resulted in
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An error in the classification of shipping cost and royalty expenses resulted in
a
An error in the debt modification accounting resulted in a
An error in the GPB warrant liability classification resulted in a
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery,
development, marketing and sale of innovative treatments and therapies,
primarily for rare and orphan diseases. On
We commenced commercialization of Endari® in the
Until we began marketing and selling Endari® in the
Until we can generate sufficient net revenues, our future cash requirements are expected to be financed through public or private equity or debt financings, loans or corporate collaboration and licensing arrangements. We are unable to predict if or when we will become profitable.
As reported in more detail in our Current Report on Form 8-K filed with the
The merger was treated as a reverse recapitalization transaction under the
acquisition method of accounting in accordance with accounting principles
generally accepted in the
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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 accounting principles generally accepted in
While our significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in this Annual Report, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Financial Overview Revenues, net
Since
Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we enter into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as "variable consideration." Revenue from product sales is recorded net of variable consideration.
Under the Accounting Standards Codification ("ASC") 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company's performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations.
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of sales discounts, returns, government rebates, chargebacks and commercial discounts. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from the Company's estimates. If actual results vary from the Company's estimates, the Company adjusts the variable consideration in the period such variances becomes known, which would affect net revenues in that period. The following are our significant categories of variable consideration:
Sales Discounts: We provide our customers prompt payment and large order discounts and from time to time offer additional discounts that are recorded as a reduction of revenue in the period the revenue is recognized. Sales attributable to one-time discounts offered by us increased in 2019 and may adversely affect sales in subsequent periods.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
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Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of raw materials, packaging, shipping and distribution of Endari®.
Research and Development Expenses
Research and development costs consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations ("CRO") that conduct clinical trials of our product candidates, payrollrelated 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 studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the
interpretation of the regulatory requirements, we are unable to estimate the
amount of costs of obtaining regulatory approval of Endari® outside of the
General and Administrative Expense
General and administrative expense consists principally of salaries and related costs, including sharebased compensation for our directors and executive officers, of our employees, including our in-house commercialization team. Other general and administrative expense includes 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 expense over the past two years.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel
involved in the launch, promotion, sales and marketing of our products. Other
selling cost include advertising, third party consulting costs, the cost of
contracted and in-house sales personnel and travel-related costs. We expect
selling expenses to increase as we acquire additional sales and administrative
personnel to support the commercialization of Endari® in the
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.
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Inventories
Inventories consist of raw material, finished goods and work-in-process and are
valued on a firstin, firstout basis and at the lower of cost or net realizable
value. Substantially all raw materials purchased during the years ended
Notes Payable, Convertible Notes Payable and Warrants
From time to time, we obtain financing in the form of notes payable and/or notes with detachable warrants, some of which are convertible into shares of our common stock and some of which are issued to related parties. We analyze all of the terms of our convertible debentures and promissory notes and debentures and promissory notes issued with warrants to determine the appropriate accounting treatment, including determining whether conversion features are required to be bifurcated and treated as a discount, allocation of fair value of the issuance to the debt instrument, detachable stock purchase warrant, and any beneficial conversion features, and the applicable classification of the convertible debentures and promissory and warrants as debt, derivative liabilities, equity or temporary equity (i.e., mezzanine capital).
We allocate the proceeds from the issuance of debt instruments with detachable stock purchase warrants to the two elements based on the relative fair values of the debt instruments without the warrants and of the warrants themselves at the time of issuance. We account for the portion of the proceeds allocated to warrants in additional paidin capital and the remaining proceeds are allocated to the debt instruments. The allocation to warrants results in a discount to notes payable which is amortized using the effective interest method to interest expense over the expected term of the note. We also include the intrinsic value of the embedded conversion feature of convertible debentures and promissory notes in the discount to notes payable, which is amortized and charged to interest expense over the expected term of the debentures and promissory notes.
We also estimate the total value of any beneficial conversion feature and accompanying warrants in allocating debt proceeds. The proceeds allocated to the beneficial conversion feature are determined by taking the estimated fair value of shares issuable under the convertible debentures and promissory notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of our common stock as of the date of issuance. In situations where the debt includes both a beneficial conversion feature and a warrant, the proceeds are allocated to the warrants and beneficial conversion feature based on the prorata fair value. We used the Binomial MonteCarlo Cliquet (aka Ratchet) Option Pricing Model option pricing model to determine the fair value of our warrants prior to the Merger and Black-Scholes after the Merger.
Notes payable to related parties, interest expense and accrued interest to related parties are separately identified in our consolidated financial statements. We also disclose significant terms of all transactions with related parties.
Sharebased Compensation
We recognize compensation expense for sharebased compensation awards during the
service term of the recipients of the awards. The fair value of sharebased
awards is calculated using the BlackScholesMerton pricing model. The
BlackScholesMerton model requires subjective assumptions regarding future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The expected term of awards granted is calculated using the
simplified method allowed under the
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Fair Value Measurements
We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in inactive
markets;
• Inputs other than quoted prices that are observable for the asset or
liability; and
• Inputs that are derived principally from or corroborated by observable
market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3: Inputs to the valuation methodology that are unobservable and significant to the fair value measurement.
The asset's or liability's fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs. The fair value of
marketable securities is determined based upon quoted prices on nationally
recognized securities exchanges and are classified as Level 1 investments at
Certain of our outstanding warrants contain net cash settlement provision and, consequently, are accounted for as liabilities that are remeasured at fair value on a recurring basis using Level 3 inputs. The Level 3 inputs in the valuation of warrants include expected term and expected volatility.
Marketable securities are recorded at fair value using the quoted market prices and changes in fair value are recorded as net realized gains or losses in comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values as necessary.
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Financial Highlights
Year Ended December 31,
2018
2019 (As Restated)CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands)
REVENUES, NET$ 22,752 $ 16,459 COST OF GOODS SOLD 1,094 993 GROSS PROFIT 21,658 15,466 OPERATING EXPENSES Research and development 2,183 1,723 Selling 6,975 4,733 General and administrative 17,012 17,464 Total operating expenses 26,170 23,920 LOSS FROM OPERATIONS (4,512 ) (8,454 ) OTHER INCOME (EXPENSE) Loss on debt extinguishment (438 ) (2,702 )
Change in fair value of warrant
derivative liabilities 3,545 4,476
Change in fair value of embedded
conversion option 131 -
Net losses on investment in
marketable securities and long-term
investment (21,947 ) (43,977 )
Net losses on equity method
investment (414 ) (97 ) Miscellaneous reverse merger costs (309 ) - Notes conversion costs (3,341 ) - Interest and other income 232 1,002 Interest expense (27,625 ) (22,796 ) Total other expense (50,166 ) (64,094 ) LOSS BEFORE INCOME TAXES (54,678 ) (72,548 ) INCOME TAXES 164 39 NET LOSS (54,842 ) (72,587 ) NET LOSS PER COMMON SHARE$ (1.30 ) $ (1.97 )
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 42,259,460 36,857,995
Years ended
Net Loss. Net loss was
Revenues, Net. Net revenues increased by
Cost of Goods Sold. Cost of goods sold increased by
Research and Development Expenses. Research and development expenses increased
by
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Selling Expenses. Selling expenses increased
General and Administrative Expense. General and administrative expense decreased
Other Income and Expense. Total other expense decreased by
Seasonality
There may be seasonal variations in our Endari® sales due to factors such
as year-end holidays, severe winter weather conditions in certain regions of the
Inflation
We do not believe that inflation and changing prices have had a significant impact on our results of operations.
COVID-19
We do not believe that the COVID-19 pandemic and related governmental response have had a significant impact on our financial condition or results of operations.
Liquidity and Capital Resources
Based on our losses to date, anticipated future net revenues and operating
expenses, debt repayment obligations, funding commitment to
We continue to incur expenses for the expanded commercialization of Endari®,
research costs for our pilot study of our prescription grade L-glutamine oral
powder in the treatment of diverticulosis and CAOMECS technology and expenses
relating to
Until we can generate sufficient revenue, our future cash requirements are expected to be financed through public or private equity or debt offerings, loans or corporate collaboration and licensing arrangements or other financing arrangements. We have no current understanding or arrangements with respect to future financings, and there can be no assurance that we can
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raise needed capital on terms acceptable to us (or at all). Due to the uncertainty of our ability to meet our current and future operating and capital expenses, there is substantial doubt about our ability to continue as a going concern.
Subsequent to the year ended
Common Shares Issued after December 31, 2019 Dollar Amount Number of Shares Issued Common shares$ 200,000 100,000 Cash Flows
Net cash used in operating activities
Net cash used in operating activities of
Net cash used in investing activities
Net cash used in investing activities decreased by
Net cash from financing activities
Net cash from financing activities increased by
OffBalanceSheet Arrangements
We had no off-balance sheet arrangements in the periods presented.
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