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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 March 31, 2014

 

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)

 

 

 

 

(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 or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   o		Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company   x

 

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 26,724,057 shares of common stock, par value $0.001 per share, outstanding as of May 13, 2014.

 

 

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EMMAUS LIFE SCIENCES, INC.

FORM 10-Q

  For the Quarterly Period Ended March 31, 2014

INDEX

 

					Page
Part I	Financial Information
	Item 1.	Financial Statements
		(a)	Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013		1
		(b)	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		2
		(c)	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended March 31, 2014 (Unaudited)		3
		(d)	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		4
		(e)	Notes to Condensed Consolidated Financial Statements as of and for the Three Months Ended March 31, 2014 (Unaudited)		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			27
	Item 4.	Controls and Procedures			28
Part II	Other Information
	Item 1.	Legal Proceedings			29
	Item 1A.	Risk Factors			29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			29
	Item 3.	Defaults Upon Senior Securities			29
	Item 4.	Mine Safety Disclosures			29
	Item 5.	Other Information			29
	Item 6.	Exhibits			30
Signatures

 

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Item 1. Financial Statements

 

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		As of
		March 31, 2014			December 31, 2013
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,534,813		$	3,638,600
Accounts receivable		27,081			35,237
Inventories, net		252,939			239,009
Marketable securities		100,533			162,564
Prepaid expenses and other current assets		35,489			81,046
Total current assets		1,950,855			4,156,456
PROPERTY AND EQUIPMENT, Net		43,036			26,120
OTHER ASSETS
Marketable securities, pledged to creditor		424,293			686,090
Intangibles, net		1,053,571			1,107,143
Deposits		144,150			137,900
Total other assets		1,622,014			1,931,133
Total Assets		$	3,615,905		$	6,113,709
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	2,398,446		$	2,283,446
Due to related party		394,446			394,446
Dissenting stockholders payable		125,000			125,000
Notes payable, net		970,000			1,765,070
Notes payable to related parties, net		825,562			925,641
Convertible notes payable, net		5,608,970			4,802,472
Convertible notes payable to related parties		560,706			560,706
Total current liabilities		10,883,130			10,856,781
LONG-TERM LIABILITIES
Derivative liabilities		8,551,000			5,928,000
Notes payable		1,033,335			200,000
Notes payable to related parties		133,333			—
Convertible notes payable, net		2,262,503			2,966,588
Total long-term liabilities		11,980,171			9,094,588
Total Liabilities		22,863,301			19,951,369
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY (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, 29,228,306 and 29,228,306 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		29,228			29,228
Additional paid-in capital		37,322,860			35,669,291
Accumulated other comprehensive income (loss)		(60,259		)	262,683
Accumulated deficit		(56,539,225		)	(49,798,862		)
Total Stockholders’ Deficit		(19,247,396		)	(13,837,660		)
Total Liabilities & Stockholders’ Deficit		$	3,615,905		$	6,113,709

 

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

 

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EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

		Three Months Ended March 31,
		2014			2013 (1)
REVENUES, Net		$	84,689		$	89,560
COST OF GOODS SOLD		46,901			43,985
GROSS PROFIT		37,788			45,575
OPERATING EXPENSES
Research and development		605,040			615,253
Selling		125,931			127,353
General and administrative		2,985,914			2,312,255
		3,716,885			3,054,861
LOSS FROM OPERATIONS		(3,679,097		)	(3,009,286		)
OTHER INCOME (EXPENSE)
Gain on derecognition of accounts payable		—			341,361
Change in fair value of derivative liabilities		(2,623,000		)	—
Interest and other income (loss)		(18,405		)	5,642
Interest expense		(417,361		)	(604,527		)
		(3,058,766		)	(257,524		)
LOSS BEFORE INCOME TAXES		(6,737,863		)	(3,266,810		)
INCOME TAXES (BENEFIT)		2,500			(264,612		)
NET LOSS		(6,740,363		)	(3,002,198		)
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gain (loss) on securities available-for-sale		(323,828		)	424,609
Unrealized foreign translation		886			(1,818		)
COMPREHENSIVE LOSS		$	(7,063,305	)	$	(2,579,407	)
NET LOSS PER COMMON SHARE		$	(0.23	)	$	(0.12	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		29,228,306			24,888,018

 

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(1) See Note 2 to condensed consolidated financial statements.

 

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

 

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EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROM DECEMBER 31, 2013 TO MARCH 31, 2014

(UNAUDITED)

 

		Common stock — par value $0.001 per share, 100,000,000 shares authorized					Additional			Accumulated   Other
		Shares		Common  Stock			Paid-in   Capital			Comprehensive   Income			Accumulated Deficit			Total
Balance, December 31, 2013		29,228,306		$	29,228		$	35,669,291		$	262,683		$	(49,798,862	)	$	(13,837,660	)
Beneficial conversion feature relating to convertible and promissory notes payable		—		—			45,861			—			—			45,861
Share-based compensation		—		—			1,607,708			—			—			1,607,708
Unrealized loss on marketable securities, net of tax		—		—			—			(323,828		)	—			(323,828		)
Foreign currency translation effect		—		—			—			886			—			886
Net loss		—		—			—			—			(6,740,363		)	(6,740,363		)
Balance, March 31, 2014		29,228,306		$	29,228		$	37,322,860		$	(60,259	)	$	(56,539,225	)	$	(19,247,396	)

 

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

 

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EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Three Months ended March 31,
		2014			2013 (1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(6,740,363	)	$	(3,002,198	)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization		57,708			60,997
Interest expense accrued from discount of convertible note		132,129			343,549
Gain on derecognition of accounts payable		—			(341,361		)
Share-based compensation		1,607,708			838,832
Change in fair value of derivative liabilities		2,623,000			—
Tax benefit recognized on unrealized gain on marketable securities available-for-sale		—			(267,162		)
Net changes in operating assets and liabilities
Accounts receivable		8,286			35,406
Inventory		(11,711		)	34,469
Prepaid expenses and other current assets		46,967			31,776
Deposits		(6,104		)	46,457
Accounts payable and accrued expenses		110,366			789,692
Net cash flows used in operating activities		(2,172,014		)	(1,429,543		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(21,035		)	—
Net cash flows from (used in) investing activities		(21,035		)	—
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable issued		48,832			550,000
Proceeds from convertible notes payable issued		38,831			958,014
Payments of notes payable		—			(248,725		)
Payments of convertible notes payable		—			(100,000		)
Proceeds from issuance of common stock		—			10,800
Net cash flows from financing activities		87,663			1,170,089
Effect of exchange rate changes on cash		1,599			(6,670		)
Net increase in cash and cash equivalents		(2,103,787		)	(266,124		)
Cash and cash equivalents, beginning of period		3,638,600			402,823
Cash and cash equivalents, end of period		$	1,534,813		$	136,699
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid		$	48,713		$	27,774
Income taxes paid		$	2,500		$	2,550
Non-cash financing activities:
Stock issued as a payment of professional fee		$	—		$	29,999
Conversion of notes payable to common stock		$	—		$	50,000
Conversion of accrued interest payable to common stock		$	—		$	6,311

 

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(1) See Note 2 to condensed consolidated financial statements.

 

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

 

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EMMAUS LIFE SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

(UNAUDITED)

 

NOTE 1 — DESCRIPTION OF BUSINESS

 

Organization — Emmaus Life Sciences, Inc. (the “Company” or “Emmaus”), which is engaged in the discovery, development, and commercialization of treatments and therapies for rare diseases, was incorporated in the state of Delaware on September 24, 2007. Pursuant to an Agreement and Plan of Merger, dated April 21, 2011 (the “Merger Agreement”), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“AFH Merger Sub”), AFH Holding and Advisory, LLC, and Emmaus Medical, Inc. (“Emmaus Medical”), Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”). Upon the closing of the Merger, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” and became the parent company of Emmaus Medical. The Company changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

 

Emmaus Medical is a Delaware corporation originally incorporated on September 12, 2003. Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC conducted a reorganization and merged with Emmaus Medical. As a result of the merger, Emmaus Medical acquired the exclusive patent rights for a treatment for sickle cell disease.

 

In October 2010, the Company established Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”) by paying 97% of the initial capital. EM Japan is engaged in the business of trading in nutritional supplements and other medical products and drugs. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of formation. The aggregate formation cost was $52,500. Emmaus Medical acquired the additional 3% of the outstanding shares of EM Japan during the three months ended March 31, 2011 and is now the 100% owner of the outstanding share capital.

 

In November 2011, the Company formed Emmaus Medical Europe, Ltd. (“EM Europe”), a wholly-owned subsidiary of Emmaus Medical. EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe.

 

Emmaus, its wholly-owned subsidiary, Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe, are collectively referred to herein as the “Company.”

 

Nature of Business — The Company has undertaken the business of developing and commercializing cost-effective treatments and therapies for rare diseases. The Company’s primary business purpose is to commercialize its treatment for sickle cell disease (“SCD”).

 

To a lesser extent, the Company is also engaged in the marketing and sale of NutreStore®, which has received approval from the Food and Drug Administration, or FDA, 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. The Company’s indirect wholly-owned subsidiary, Newfield Nutrition Corporation, sells L-glutamine as a nutritional supplement under the brand name AminoPure® through retail stores in multiple states and via importers and distributors in Japan, Taiwan and South Korea. The Company also owns a minority interest in CellSeed, Inc., 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.

 

The Company also has certain rights to regenerative medicine products owned by CellSeed and is involved in research focused on providing innovative solutions for tissue-engineering through the development of novel cell harvest methods and 3-dimensional living tissue replacement products for “cell sheet therapy” and regenerative medicine and the commercialization of such products.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation — The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (‘‘GAAP’’) as found in the Accounting Standards Codification (‘‘ASC’’) and Accounting Standards Update (‘‘ASU’’) of the Financial Accounting Standards Board (‘‘FASB’’). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended March 31, 2014 and 2013.

 

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2013, and the notes thereto, which are included in the Company’s filings with the Securities and Exchange Commission, or SEC.

 

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Immaterial Corrections of Prior Year Amounts — During the preparation of its consolidated financial statements for the year ended December 31, 2013, the Company determined that it had incorrectly recognized share-based compensation expense prior to the grant date for stock options awarded to certain employees and consultants. The Company has corrected this immaterial error in its accompanying 2013 quarterly financial statements. The impact of this correction resulted in a $0.1 million reduction of share-based compensation expense for the three month period ended March 31, 2013.

 

The Company also determined that it had not recognized a tax benefit on the unrealized gain on marketable securities in other comprehensive income. The Company has corrected this immaterial error in its accompanying 2013 quarterly financial statements. The impact of this correction resulted in a $0.3 million adjustment to the tax benefit recognized on unrealized gain on marketable securities for the three month period ended March 31, 2013.

 

Going concern — The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company had losses for the three months ended March 31, 2014 totaling $6,740,363. In addition, the Company has a significant amount of notes payable and other obligations due within this year and is projecting that its operating losses and expected capital needs will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future, including the expected costs relating to the commercialization of the Company’s L-glutamine treatment for SCD. In order to meet the Company’s expected obligations, management intends to raise additional funds through equity and debt financings and partnership agreements. However, there can be no assurance that the Company will be able to complete any additional equity or debt financings or enter into partnership agreements. Therefore, 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company (and its wholly-owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe). All significant intercompany transactions have been eliminated.

 

Estimates — Financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the useful lives of equipment and other assets, along with the variables used to calculate the valuation of stock options and warrants using the Black-Scholes-Merton option valuation model. Actual results could differ from those estimates.

 

In addition, the initial value of warrants issued by the Company in a private placement are classified as a derivative liability as of September 11, 2013 and the change in fair value of the derivative liability as of subsequent quarterly periods, including as of March 31, 2014 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.

 

Inventories — Inventories as of March 31, 2014 are valued based on first-in, first-out and at the lesser of cost or market value. Work-in-process inventories consist of raw material L-glutamine for the Company’s AminoPure and NutreStore products that has not yet been packaged and labeled for sale.

 

There were no purchases of raw material during the three months ended March 31, 2014. All of the raw material purchased during 2013 was from two vendors.

 

Inventory by category		March 31, 2014			December 31, 2013
Raw material		$	—		$	20,700
Work-in-process		—			68,887
Finished goods		252,939			149,422
		$	252,939		$	239,009

 

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2014 and 2013 were $67,147 and $41,160, respectively.

 

Comprehensive income (loss) — Comprehensive income (loss) includes net loss and other comprehensive income (loss). The items of other comprehensive income (loss) for the Company are unrealized gains and losses on marketable securities classified as available-for-sale and foreign translation adjustments relating to its subsidiaries. When the Company realizes a gain or loss on securities available-for-sale for which an unrealized gain or loss was previously recognized, a corresponding reclassification adjustment is made to remove the unrealized gain or loss from accumulated other comprehensive income and reflect the realized gain or loss in current operations.

 

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Marketable securities — Investment securities as of March 31, 2014 and December 31, 2013 are as available-for-sale. Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gain or loss, net of taxes in accumulated other comprehensive income. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. CellSeed, Inc. securities are the only marketable security the Company currently carries on its books. The Company’s marketable securities consist of 48,550 shares of CellSeed stock which are part of 147,100 shares acquired in January 2009 for 100,028,000 Japanese Yen (equivalent to $1,109,819), at 680 Yen per share. CellSeed’s IPO ( Tokyo Stock Exchange symbol 7776) was completed on March 16, 2010. As of March 31, 2014 and December 31, 2013, the closing price per share was 1,114 Yen and 1,840 Yen, respectively.

 

In July 2013, based on an increase in market value of CellSeed shares, Mitsubishi UFJ Capital III Limited Partnership (Mitsubishi) released to the Company 34,300 shares of CellSeed stock. This was part of the 73,550 shares of CellSeed stock held by Mitsubishi as collateral to secure a $500,000 convertible note issued to Mitsubishi which is due in 2016. The note is now secured by the remaining 39,250 shares of CellSeed stock held by Mitsubishi as collateral.

 

During the fourth quarter of 2013, the Company sold 25,000 of the shares released by Mitsubishi in open market transactions. As of March 31, 2014, 9,300 shares of CellSeed stock are classified as a current asset, as they are available for sale by the Company. The remaining 39,250 shares of CellSeed stock are pledged to secure the Mitsubishi note and are classified as marketable securities, pledged to creditor. As of December 31, 2013, 9,300 shares of CellSeed stock are classified as a current asset and 39,250 shares of CellSeed stock that are pledged to secure the Mitsubishi note are classified as marketable securities, pledged to creditor.

 

Fair value measurements — The Company defines 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. The Company measures 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 that the Company has the ability to access.

 

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;

·                   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 inputs must be observable for substantially the full term of the asset or liability.

 

Level 3: Inputs to the valuation methodology 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 assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at March 31, 2014. The fair value of the Company’s debt instruments is not materially different from their carrying values as presented. The fair value of the Company’s convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6.

 

The Company issued stock purchase warrants in conjunction with its September 2013 private placement (see Note 7) that are accounted for as derivative instruments whose fair market value is determined using Level 3 inputs. These inputs include expected term and expected volatility.

 

7

 

The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2014 and the year ended December 31, 2013:

 

		Derivative Instruments — Stock Purchase Warrants
		March 31, 2014			December 31, 2013
Balance , beginning of period		$	5,928,000		$	—
Fair value at issuance date		—			6,860,000
Change in fair value included in the statement of comprehensive loss		2,623,000			(932,000		)
Balance, end of period		$	8,551,000		$	5,928,000

 

The initial value of the derivative liability as of September 11, 2013 and the change in fair value of the derivative liability as of March 31, 2014 and December 31, 2013 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. T he values as of September 11, 2013, December 31, 2013 and March 31, 2014 were calculated based on the following assumptions:

 

		March 31, 2014			December 31, 2013			Initial Value
Stock price		$	4.70		$	3.60		$	3.60
Risk-free interest rate		1.73		%	1.75		%	1.72		%
Expected volatility (peer group)		64.20		%	63.20		%	72.40		%
Expected life (in years)		4.45			4.70			5.00
Expected dividend yield		—			—			—
Number outstanding		3,020,501			3,020,501			3,020,501
Balance, end of period		$	8,551,000		$	5,928,000		$	6,860,000

 

Debt and Related Party Debt — The Company accounts for the proceeds from the issuance of convertible notes payable with detachable stock purchase warrants and embedded conversion features in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options. Under FASB ASC 470-20, the proceeds from the issuance of a debt instrument with detachable stock purchase warrants shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. The portion of the proceeds allocated to the warrants is accounted for as additional paid-in capital and the remaining proceeds are allocated to the debt instrument which resulted in a discount to debt which is amortized and charged as interest expense over the term of the note agreement. Additionally, pursuant to FASB ASC 470-20, the intrinsic value of the embedded conversion feature of the convertible notes payable is included in the discount to debt and amortized and charged to interest expense over the life of the note agreement. The following chart shows the effective interest rates on the original loan principal amount for loans originated in the respective periods:

 

Type of Loan		Term of Loan		Annual Interest Rate		Original Loan Principal Amount			Conv. Rate			Beneficial Conversion Discount Amount			Warrants		Exercise Price			Warrant FMV Discount Amount			Effective Interest Rate Including Discounts
2013 convertible notes payable		1 to 2 years		10%		$	3,079,666		$	3.30		$	396,801		50,000		$	3.30		$	116,831		19.1% to 61.6%
2014 convertible note payable		2 years		10%		254,320			$	3.05		45,861			—		—			—			28.0%
Total						$	3,333,986					$	442,662		50,000					$	116,831

 

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

 

Net loss per share — In accordance with FASB ASC Topic 260, “ Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Dilutive loss per share is computed similar to the basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of March 31, 2014 and 2013, there were 14,254,868 and 10,250,442 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the 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 February 2013, the FASB issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective for reporting periods beginning after December 15, 2012. Other than a change in presentation, the adoption of these amendments to the accounting guidance did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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NOTE 3 — PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

		March 31, 2014			December 31, 2013
Equipment		$	134,081		$	128,343
Leasehold improvements		30,329			23,054
Furniture and fixtures		60,379			52,269
Sub total		224,789			203,666
Less: accumulated depreciation		(181,753		)	(177,546		)
Total		$	43,036		$	26,120

 

During the three months ended March 31, 2014 and 2013, depreciation expense was $4,137 and $7,425, respectively.

 

NOTE 4 — INTANGIBLE ASSETS

 

The Company is licensed to market and sell NutreStore ®  [L-glutamine powder for oral solution] as a treatment for short bowel syndrome (“SBS”).

 

In April 2011, the Company entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, an addendum to the Research Agreement. Pursuant to the Individual Agreement, CellSeed granted the Company the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell Sheet (“CAOMECS”) for the cornea in the United States and agreed to disclose to us its accumulated information package for the joint development of CAOMECS. Under the Individual Agreement, the Company agreed to pay CellSeed $1.5 million, which it paid in February 2012. The technology acquired under the Individual Agreement is being used to support an ongoing research and development project and management believes the technology has alternative future uses in other future development initiatives.

 

Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products, and the future commercialization of such products. Under the Research Agreement, as supplemented by the addendum, the Company agreed to pay CellSeed $8.5 million within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the accumulated information package, as defined in the Research Agreement, to Emmaus and Emmaus providing written confirmation of its acceptance of the complete Package , which has not yet been completed as of March 31, 2014 .

 

The Company has estimated the economic life of the CAOMECS produced in connection with the CellSeed Research and Individual Agreement at seven years. The determination of this life is based in part on the Company’s estimate of economic useful life and the time period in which the Company may enjoy an advantage over competing technologies and techniques. Key reasons for a useful life shorter than the life of a patent include: (i) the patents related to this technology are yet to be approved, (ii) potential redundancy with similar medication/device due to changes in market preferences, (iii) uncertainty of regulatory approval and (iv) potential development of new treatments for the same disease.

 

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Intangible assets consisted of the following at:

 

		March 31, 2014			December 31, 2013
License fees and patent filing costs		$	2,250,000		$	2,250,000
Less: accumulated amortization		(1,196,429		)	(1,142,857		)
Total		$	1,053,571		$	1,107,143

 

During the three months ended March 31, 2014 and 2013, amortization expense was $53,572 and $53,571, respectively. As of March 31, 2014 estimated aggregate amortization expense for the next five years is as follows:

 

Periods ending December 31,		Amount
2014		$	160,714
2015		214,286
2016		214,286
2017		214,286
2018		214,286
Thereafter		35,713
Total		$	1,053,571

 

NOTE 5 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following at:

 

		March 31, 2014			December 31, 2013
Accounts payable
Clinical trial management expenses		$	121,512		$	270,694
Legal expenses		350,502			178,119
Other vendors		441,562			386,847
Subtotal		913,576			835,660
Accrued interest payable, related parties		186,936			195,051
Accrued interest payable		652,178			473,356
Accrued expenses		160,756			294,379
Deferred salary		485,000			485,000
Total accounts payable and accrued expenses		$	2,398,446		$	2,283,446

 

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NOTE 6 — NOTES PAYABLE

 

Notes payable consisted of the following at March 31, 2014:

 

Year Issued		Interest rate range		Term of Notes		Conv. Price		Principal Outstanding March 31, 2014			Discount Amount March 31, 2014			Carrying Amount March 31, 2014			Shares Underlying Principal as of March 31, 2014		Principal Outstanding December 31, 2013			Discount Amount December 31, 2013			Carrying Amount December 31, 2013			Shares Underlying Principal as of December 31, 2013
Convertible notes payable
2009		6.50%		5 years		$ 3.05		$	—		$	—		$	—		—		$	254,460		$	—		$	254,460		83,366
2010		0 ~ 6.0%		5 years		$ 3.05		74,000			7,029			66,971			24,244		74,000			8,308			65,692			24,248
2011		10%		5 years		$ 3.05		500,000			—			500,000			163,809		500,000			—			500,000			163,809
2012		10%		2 years		$ 3.30 ~$3.60		251,100			—			251,100			71,000		251,100			—			251,100			71,000
2013		10%		6 months ~ 2 years		$ 3.30 ~$3.60		6,607,601			112,666			6,494,935			1,913,214		6,913,606			215,798			6,697,808			1,998,215
2014		10%		Due on demand ~ 2 years		$ 3.05 ~$3.60		599,296			40,829			558,467			179,630		—			—			—			—
								$	8,031,997		$	160,524		$	7,871,473		2,351,897		$	7,993,166		$	224,106		$	7,769,060		2,340,638
				Current				$	5,679,119		$	70,149		$	5,608,970		1,636,874		$	4,955,868		$	153,396		$	4,802,472		1,438,033
				Non-current				$	2,352,878		$	90,375		$	2,262,503		715,023		$	3,037,298		$	70,710		$	2,966,588		902,605
Convertible notes payable - related party
2012		10%		Due on demand		$ 3.30		$	373,000		—			$	373,000		113,030		$	373,000		$	—		$	373,000		113,030
2013		10%		1 year		$ 3.30 ~$3.60		187,706			—			187,706			52,141		187,706			—			187,706			52,141
								$	560,706		$	—		$	560,706		165,171		$	560,706		$	—		$	560,706		165,171
				Current				$	560,706		$	—		$	560,706		165,171		$	560,706		$	—		$	560,706		165,171
Notes payable
2012		11%		2 years		NA		—			—			—			—		$	833,335		$	18,265		$	815,070		—
2013		2% ~ 10%		Due on demand ~ 2 years		NA		$	1,170,000		$	—		$	1,170,000		—		1,150,000			—			1,150,000			—
2014		11%		Due on demand ~ 2 years		NA		833,335			—			833,335			—		—			—			—			—
								$	2,003,335		$	—		$	2,003,335		—		$	1,983,335		$	18,265		$	1,965,070		—
				Current				$	970,000		$	—		$	970,000		—		$	1,783,335		$	18,265		$	1,765,070		—
				Non-current				$	1,033,335		$	—		$	1,033,335		—		$	200,000		$	—		$	200,000		—
Notes payable - related party
2012		8% ~ 11%		Due on demand		NA		$	656,730		—			$	656,730		—		$	880,062		$	4,421		$	875,641		—
2013		8%		Due on demand		NA		50,000			—			50,000			—		50,000			—			50,000			—
2014		11%		Due on demand ~ 2 years		NA		252,165			—			252,165			—		—			—			—			—
								$	958,895		—			$	958,895		—		$	930,062		$	4,421		$	925,641		—
				Current				$	825,562		$	—		$	825,562		—		$	930,062		$	4,421		$	925,641		—
				Non-current				$	133,333		$	—		$	133,333		—		$	—		$	—		$	—		—
				Grand Total				$	11,554,933		$	160,524		$	11,394,409		2,517,068		$	11,467,269		$	246,792		$	11,220,477		2,505,809

 

The average stated interest rate of notes payable as of March 31, 2014 and December 31, 2013 was 10%. The average effective interest rate of notes payable as of March 31, 2014 and December 31, 2013 was 16% and 15%, 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 the Company’s common stock at the stated conversion price at any time during the term of their convertible notes. Conversion prices on the convertible notes payable range from $3.05 to $3.60 per share. All due on demand notes are treated as current liabilities.

 

Contractual principal payments due on notes payable are as follows:

 

Year Ending		at March 31,
2014		$		7,076,419
2015		2,749,155
2016		1,729,359
Total		$	11,554,933

 

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