JUNE 30, 2012
(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 97.33% 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 continue its late-stage development of the amino acid L-glutamine as a prescription drug for the treatment of sickle cell disease (“SCD”). The Company’s current focus is to complete the Phase 3 clinical trial on SCD that involves over 30 research sites and at least 220 patients.
To a lesser extent, we are also engaged in the marketing and 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 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 JASDAQ NEO Growth market in Tokyo, 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Going concern
– The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has losses for the six months ended June 30, 2012 totaling $7,139,720 as well as an accumulated deficit since inception amounting to $28,724,114. Further, the Company appears to have inadequate cash and cash equivalents of $397,790 as of June 30, 2012 considering that revenues from operations since inception totaled only $933,399. As a result, the Company is
dependent upon funds from private investors and the support of certain stockholders.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.
Recapitalization and change in legal status of entity
– In October 2003, Emmaus Medical acquired substantially all of the assets of Emmaus Medical, LLC. The stockholders of Emmaus Medical were substantially the same as the members of Emmaus Medical, LLC. As such, the transaction was accounted for as a transfer of assets between entities under common control pursuant to accounting standards codification 805, Business Combinations.
For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set of assets is separated from the transferor, which include the ability to sustain a revenue stream by providing its outputs to customers. Emmaus Medical obtained the inputs and processes necessary for normal operations. The transaction has been accounted for as a recapitalization of Emmaus Medical, LLC. Accordingly, the assets were carried over to Emmaus Medical, Inc. at the historical carrying values and the historical operations of those assets owned by Emmaus Medical are presented in the accompanying financial statements as the historical operations of Emmaus Medical, Inc. for all periods presented.
The effect of the recapitalization was to retroactively present the stockholders’ equity of Emmaus Medical, Inc. (the surviving entity) to the earliest period presented in the financial statements. This recapitalization had no effect on results of operations for any period presented. Also, concurrent with the recapitalization, Emmaus Medical changed its legal status from a Limited Liability Company to a “C” Corporation. In connection with this change, deficits accumulated in the Limited Liability Company were transferred to additional paid in capital.
Pursuant to the Merger Agreement, 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 on May 3, 2011, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” The Company subsequently changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.
Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for
29.48548924976
shares of Company common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for
29.48548924976
shares of Company common stock; and (iii)
each outstanding convertible note of Emmaus
Medical
, which was converted for one share of Emmaus
Medical
common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of
Company
common stock
.
As a result of the Merger, security holders of Emmaus Medical received
20,628,305
shares of Company common stock, options and warrants to purchase an aggregate of
326,507
shares of Company common stock, and convertible notes to purchase an aggregate of
271,305
shares of Company common stock.
Four stockholders exercised their dissenters’ rights in connection with the Merger and returned an aggregate of 47,178 shares for an aggregate of $200,000. The shares were cancelled as of May 3, 2011, the closing date of the Merger.
For accounting purposes, the Merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of Emmaus Medical and its subsidiaries, with Emmaus Life Sciences, Inc. (the legal acquirer of Emmaus Medical and its subsidiaries) considered the accounting acquiree and Emmaus Medical whose management took control of Emmaus Life Sciences, Inc. (the legal acquiree of Emmaus Medical) considered the accounting acquirer.
Principles of consolidation –
The financial statements include the accounts of the Company (and its wholly-owned subsidiary, Emmaus Medical, Inc., and its wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe. All significant intercompany transactions have been eliminated.
Development stage company
– The Company is a development stage company as defined in accounting principles generally accepted in the United States of America. The Company is considered a development stage company because it devotes substantially all of its time to research and development for potential pharmaceutical products and to establish its business and operations. The minimal sales for the period from inception to June 30, 2012 are from NutreStore and the products of its wholly owned subsidiary Newfield Nutrition Corporation which is not considered to be a part of its principal operations.
Estimates –
Financial statements prepared in accordance with accounting principles generally accepted in the United States 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.
Cash and cash equivalents –
Cash and cash equivalents include all short-term securities with original maturities of less than ninety days. The Company maintains its cash and cash equivalents at insured financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentrations is minimal.
Inventories –
Inventories as of June 30, 2012 consisted of 82% finished goods and 18% work-in-process and 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.
All of the purchases during the six months ended June 30, 2012 were from one vendor and in 2011 were from two vendors.
Deposits
– Carrying value of amounts transferred to third parties for security purposes that are expected to be returned or applied towards payment after one year or beyond the operating cycle, if longer. Deposit amounts consist primarily of the 20% patient site enrollment deposit paid to the Company’s contract research organization for the FDA Phase III clinical trial activities.
Revenue recognition –
The Company recognizes revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in Financial Statements
(“SAB 101”), as amended by Staff Accounting Bulletin No. 104,
Revision of Topic 13
(“SAB 104”).
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.
With prior written approval of the Company, product is returnable only by our direct customers for a returned goods credit, if the product meets any of the following criteria:
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A.
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Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.
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B.
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Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.
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C.
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Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.
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D.
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Product that is discontinued, withdrawn, or recalled.
|
Credits will only be issued for full cartons only without any missing packets of product. No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company. No credit is issued for product destroyed by anyone other than the Company. Customers must return the product within 60 days of receiving the Company’s written approval for the return or the return will not be issued a credit. The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%. When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases. Credit memos expire one hundred eighty (180) days from date issued.
The Company estimates its sales returns based upon its prior sales and return history. Historically, sales returns have been very nominal. The Company continues to monitor its returns and will adjust its estimates based on its actual sales return experience. The Company records a 5% Sales Return Allowance for the NutreStore sales in the accompanying financial statements.
The Company is currently required to pay royalties to CATO Holding Company on an annual basis, which is recognized as an expense upon sale of the products, primarily NutreStore.
Allowance for doubtful accounts –
The Company provides an allowance for uncollectible accounts based upon prior experience and management’s assessment of the collectability of existing specific accounts.
Advertising cost –
Advertising costs are expensed as incurred. Advertising costs for the six months ended June 30, 2012 and 2011 were $100,217 and $33,817, respectively. Advertising costs from inception to June 30, 2012 were approximately $344,385.
Property and equipment
– Leaseholds, furniture, and fixtures are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of 5 to 7 years. Maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.
Intangibles –
The Company’s intangible assets include license issue fees and patent costs relating to a license agreement (Note 4). These intangible assets are amortized over a period of 3 to 7 years, the estimated legal life of the patents and economic life of the license agreements. The intangible assets are assessed by management, annually, for potential impairment. No impairment exists as of June 30, 2012 and December 31, 2011.
Impairment of long-lived assets
– In accordance with FASB ASC 360-10-5,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, the Company evaluates the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist. The Company considers the following factors or conditions, among others, that could indicate the need for an impairment review:
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significantly lower performance relative to expected historical or projected future operating results;
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market projections;
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its ability to obtain patents, including continuation patents, on technology;
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significant changes in its strategic business objectives and utilization of the assets;
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significant negative industry or economic trends, including legal factors;
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potential for strategic partnerships for the development of its patented technology; and
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changing or implementation of rules regarding manufacture.
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If the Company determines that the carrying values of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company’s management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, the Company measures the impairment based on the difference between the asset’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the long-lived asset impairment is determined by management.
Based on its analysis, the Company believes that no indicators of impairment of the carrying value of its long-lived assets existed at June 30, 2012 and 2011.
There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue or allow the Company to realize the value of its long-lived assets and prevent future impairment.
Research and development
– Research and development consist of expenditures for the research and development of new products and technologies, which primarily involve contract research, payroll-related expenses, and other related supplies. Research and development costs are expensed as incurred.
Share-based compensation –
The Company recognizes compensation cost for share-based compensation awards during the service term of the recipients of the share-based awards.
The fair value of share-based compensation is calculated using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton 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 derived from historical data on awards exercised and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate on the grant date that corresponds to the expected term of the award. The expected volatility is based on the historical volatility of the common stock of comparable publicly traded companies. These factors could change, affecting the determination of stock-based awards expense in future periods.
Income taxes
– The Company accounts for income taxes under the asset and liability method, wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
The Company’s short-term and long-term deferred tax liability is based on the calculation of the deferred taxes on the Company’s unrealized gain on available-for-sale securities using a 40% effective tax rate based on a 31% federal income tax rate (net of state tax deduction) combined with an 8.84% California state income tax rate. The Company recognizes a deferred tax asset (through changes in the valuation allowance) for the exact amount of the deferred tax liability. The classification of these deferred taxes is concurrent with the classification of investments for which the unrealized gain is derived. For balance sheet presentation, current deferred tax assets and liabilities have been offset and presented as a single amount and non-current deferred tax assets and liabilities within each tax jurisdiction have been offset and presented as a single amount.
When tax returns are filed, it is highly probable that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of June 30, 2012, the Company had no unrecognized tax benefits, and the Company had no positions which, in the opinion of management, would be reversed if challenged by a taxing authority. The Company’s evaluation of tax positions was performed for those tax years which remain open to audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.
As of June 30, 2012, all federal tax returns since 2008 and state tax returns since 2007 are still subject to adjustment upon audit. No tax returns are currently being examined by taxing authorities.
Comprehensive income (loss)
– Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). The items of other comprehensive income (loss) for the Company are unrealized gains and losses on securities classified as available-for-sale and foreign translation adjustments from its subsidiaries. When the Company realizes a gain or loss on available-for-sale securities for which an unrealized gain or loss was previously recognized, a corresponding reclassification adjustment is made to remove the unrealized gain or loss from other comprehensive income and reflect the realized gain or loss in current operations.
Marketable securities –
Investment securities as of June 30, 2012 and 2011 are classified 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 73,550 shares of CellSeed stock which is 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 (JASDAQ Growth symbol 7776) was completed on March 16, 2010. As of June 30, 2012 and 2011, the closing price per share was 814 Yen and 1,287 Yen, respectively. Historical JASDEQ closing prices can be found from
http://www.bloomberg.com/apps/quote?ticker=7776:JP
. The
Company’s security position in CellSeed is many times the average daily trading volume of the stock on the JASDAQ exchange. Any attempt to sell the Company’s position in a short period of time may have an adverse impact on the price of the stock.
As of June 30, 2012 and December 31, 2011, 100% of the investment in CellSeed is classified as a long term asset in the accompanying balance sheet as the investment is assigned as collateral on certain borrowings.
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:
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Quoted prices for similar assets or liabilities in active markets;
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Quoted prices for identical or similar assets or liabilities in inactive markets;
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●
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Inputs other than quoted prices that are observable for the asset or liability;
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●
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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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 are unobservable and significant to the fair value measurement.
The assets 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 are determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at June 30, 2012. 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.
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 basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2012 and 2011, there were 6,129,896 and 718,389 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 earnings per share since their effect would be anti-dilutive for that reporting period.
Recent accounting pronouncements
FASB Accounting Standards Update 2011-05, “Presentation of Comprehensive Income,” was issued in June 2011 to be effective for fiscal years beginning after December 15, 2011. Comprehensive income includes certain items that are recognized as “other comprehensive income” (“OCI”) and are excluded from net income. Examples include unrealized gains/losses on certain investments and gains/losses on derivative instruments designated as hedges. Under the provisions of the update, the components of OCI must be presented in one of two formats: either (i) together with net income in a continuous statement of comprehensive income or (ii) in a second statement of comprehensive income to immediately follow the income statement. An existing option to present the components of OCI as part of the statement of changes in stockholders’ equity is being eliminated. The Company has adopted this standard, as of January 1, 2012, and has elected to present net income in a continuous statement.
FASB Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” was issued in May 2011 to be effective for fiscal years beginning after December 15, 2011. The update changes the wording for certain measurement and disclosure requirements relating to fair value determinations under U.S. GAAP in order to make them more consistent with International Financial Reporting Standards (IFRS). While many of the modifications are not expected to change the application of U.S. GAAP, there are additional disclosure requirements relating to the use of Level 3 inputs in determining fair value. The Company has adopted this standard, as of January 1, 2012, and does not believe this standard will have a material effect on its current consolidated financial statements.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
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June 30, 2012
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December 31, 2011
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Equipment
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$
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116,944
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$
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111,655
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Leasehold improvements
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23,054
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23,054
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Furniture and fixtures
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52,269
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52,269
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192,267
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186,978
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Less: accumulated depreciation
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(140,811
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)
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(126,960
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)
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$
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51,456
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$
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60,018
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During the six months ended June 30, 2012 and 2011, the depreciation expense was $13,852 and $12,351, respectively. Depreciation expense from inception to June 30, 2012 was $140,812.
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”). The Company previously promoted Zorbtive
®
[somatropin (rDNA origin) for injection] prior to July 31, 2011. Subsequent to July 31, 2011, the Company has not promoted Zorbtive.
In April 2011, Emmaus Medical entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, an addendum to the agreements. 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. 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 its accumulated information package (the “Package”) for the joint development of CAOMECS to the Company. 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 Package to Emmaus and Emmaus providing written confirmation of its acceptance of the complete Package. Under the Individual Agreement, the Company agreed to pay CellSeed $1.5 million, which it paid in February 2012.
Intangible assets consisted of the following at:
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June 30, 2012
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December 31, 2011
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License fees and patent filing costs
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$
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2,250,000
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$
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750,000
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Less: accumulated amortization
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(821,429
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)
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(750,000
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)
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$
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1,428,571
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$
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-
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During the six months ended June 30, 2012 and 2011, the amortization expense was $71,429 and $85,974, respectively. Amortization expense from inception to June 30, 2012 was $821,429. Expected amortization expense for the year ended December 31, 2012 is estimated to be approximately $178,571.
As of June 30, 2012 estimated aggregate amortization expense for the next five years is as follows:
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Year ending December 31
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Amount
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2012
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$
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178,571
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2013
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214,286
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2014
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214,286
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2015
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214,286
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2016
|
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214,286
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Thereafter
|
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464,285
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$
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1,500,000
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NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at:
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Accounts payable
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|
June 30, 2012
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December 31, 2011
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CRO expenses
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$
|
491,055
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|
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$
|
237,202
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Public relations expenses
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|
30,577
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|
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40,862
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Miscellaneous vendors
|
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829,517
|
|
|
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221,265
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Subtotal
|
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1,351,149
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499,329
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Accrued expenses (Interest accrued for Convertible Notes)
|
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341,358
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96,719
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Accrued expenses (Deferred Salary)
|
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281,166
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|
|
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160,666
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Total accounts payable and accrued expenses
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$
|
1,973,673
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|
$
|
756,714
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There are no amounts due to related parties included in accounts payable. However, accrued expenses include accrued interest for the Convertible Notes issued to related parties. Amounts due to related parties have been separately presented on the balance sheet.
NOTE 6 – NOTES PAYABLE
Notes payable consisted of the following at:
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Original Principal
Loan Amount at
June 30, 2012
|
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Discount
Amount at
June 30, 2012
|
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Carrying
Amount at June
30, 2012
|
|
|
Carrying
Amount at
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans issue prior to 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a stockholder, due on demand, interest payable monthly at 6.5% per annum. Yutaka Niihara – Note 1*
|
|
$
|
272,800
|
|
|
$
|
-
|
|
|
$
|
272,800
|
|
|
$
|
350,000
|
|
|
Note payable to a stockholder, due on demand, interest payable monthly at 8% per annum. Yutaka Niihara – Note 3*
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
Note Payable to related parties, due 2013, interest payable quarterly at 8% per annum. Hope International Hospice, Inc.**
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
Note Payable to a financial institution, due in 2014, interest payable quarterly at 4.5% per annum.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
841,728
|
|
|
Convertible note payable to related party, due 2012, interest payable annually at 8% per annum. Yasushi Nagasaki*
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
272,267
|
|
|
Convertible note payable, due 2012, interest payable annually at 8% per annum
|
|
|
1,293,400
|
|
|
|
342,488
|
|
|
|
950,912
|
|
|
|
895,924
|
|
|
Convertible note payable to related parties, due 2012, interest payable annually at 8% per annum***
|
|
|
1,750,642
|
|
|
|
39,552
|
|
|
|
1,711,090
|
|
|
|
677,819
|
|
|
Convertible notes payable to stockholders, due 2015, 0% interest payable.
|
|
|
72,000
|
|
|
|
-
|
|
|
|
72,000
|
|
|
|
72,000
|
|
|
Convertible note payable to stockholder, originally due in 2011 but extended by the Lender until 2014, interest payable monthly at 6.5% per annum****
|
|
|
312,271
|
|
|
|
-
|
|
|
|
312,271
|
|
|
|
264,492
|
|
|
Convertible note payable to a bank, due in 2016, interest payable monthly at 10% per annum, beginning January 2012.
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Convertible notes payable to stockholders, due in 2015, interest payable monthly at 6% per annum.
|
|
|
2,000
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
New loans issued in 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable to related parties, due on demand, interest payable quarterly at 8% per annum. Hope International Hospice, Inc.**
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
Note payable to related party, due on demand, interest payable annually at 11% per annum. Lan Tran*
|
|
|
205,000
|
|
|
|
76,565
|
|
|
|
128,435
|
|
|
|
-
|
|
|
Convertible note payable to related party, due 2013, interest payable annually at 8% per annum
|
|
|
108,000
|
|
|
|
60,854
|
|
|
|
47,146
|
|
|
|
-
|
|
|
Note payable to related party, due on demand, interest payable annually at 11% per annum
|
|
|
966,668
|
|
|
|
363,311
|
|
|
|
603,357
|
|
|
|
-
|
|
|
Note Payable, due on demand, interest payable quarterly at 11% per annum
|
|
|
266,666
|
|
|
|
-
|
|
|
|
266,666
|
|
|
|
-
|
|
|
Convertible note payable to related and unrelated parties, due on demand, interest payable annually at 8% per annum
|
|
|
466,666
|
|
|
|
89,635
|
|
|
|
377,032
|
|
|
|
-
|
|
|
Convertible note payable, due on demand, interest payable annually at 8% per annum
|
|
|
150,005
|
|
|
|
30,359
|
|
|
|
119,646
|
|
|
|
-
|
|
|
Note payable to related parties, due 2012, interest payable maturity at 15% per annum
|
|
|
1,257,370
|
|
|
|
-
|
|
|
|
1,257,370
|
|
|
|
-
|
|
|
Convertible note payable to a stockholder, due 2013, interest paid annually at 10%
|
|
|
500,000
|
|
|
|
37,753
|
|
|
|
462,247
|
|
|
|
-
|
|
|
Convertible note payable to related party, due on demand, interest payable annually at 10% per annum. Yasushi Nagasaki*
|
|
|
388,800
|
|
|
|
35,149
|
|
|
|
353,651
|
|
|
|
-
|
|
|
Note Payable to related parties, due on demand, interest payable quarterly at 8% per annum. Hope International Hospice, Inc.**
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
Note payable to related parties, due 2013, interest payable maturity at 11% per annum
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
$
|
9,222,289
|
|
|
$
|
1,075,664
|
|
|
$
|
8,146,624
|
|
|
$
|
4,106,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due in one year
|
|
|
(8,336,018
|
)
|
|
|
|
|
|
|
(7,260,353
|
)
|
|
|
(2,226,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of notes payable
|
|
$
|
886,271
|
|
|
|
-
|
|
|
$
|
886,271
|
|
|
$
|
1,880,220
|
|
*Officers of the company
**Dr. Niihara is also the CEO of Hope International Hospice, Inc.
***Related Parties
****Original loan amount was $221,895. Carrying amount as of June 30, 2012 includes accrued interest of $46,628 and the foreign exchange effect of $43,748.
During the six months ended June 30, 2012, notes payable in the principal amount of $886,271, $888,800 and $3,768,713 were convertible, at option of the lender, into shares of the Company’s common stock at $3.05, $3.30 and $3.60 per share, respectively.
On June 9, 2011, the Company entered into a Loan Agreement and Pledge Agreement with Equities First Holdings, LLC, whereby the Company borrowed an aggregate of $841,728 in a non-recourse loan and pledged shares of third-party common stock as collateral. On May 31, 2012, the Company received notice from Equities First Holdings, LLC that there was a technical event of default based on a decrease of the fair market value of the pledged shares of third-party common stock below the loan to value ratio required pursuant to the terms of the Loan Agreement. On June 1, 2012, according to the terms of the Loan Agreement, the Company provided notice to EFH to terminate the Loan Agreement and Pledge Agreement. As a result of the termination, the Company forfeited the shares of third-party common stock assigned to EFH as collateral pursuant to the Pledge Agreement in full satisfaction of the Company’s obligations and recognized a realized gain of $275,822 since the cancelation of non-recourse loan exceeded the value of the securities available-for-sale.
In January 2012, the Company issued a promissory note in the amount of $200,000. The note bears interest at 8% per annum and all unpaid principal and interest are due upon demand at the lender’s option. In connection with the issuance of the note, the Company issued three-year warrants to purchase 55,556 shares of the Company’s common stock at a per share exercise price of $1.00.
In February 2012, the Company issued a promissory note in the amount of $205,000, which bears interest at 11% per annum and matures on the two year anniversary date of the note. The lender may, at any time after the six month anniversary date of the note, declare the entire unpaid principal and unpaid accrued interest immediately due and payable. In connection with the issuance of the note, the Company issued three-year warrants to purchase 56,945 shares of the Company’s common stock at a per share exercise price of $1.00.
In February 2012, the Company issued a one-year convertible note in the amount of $108,000, which bears interest at 8% per annum and matures on the anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase 30,000 shares of the Company’s common stock at a per share exercise price of $1.00.
In February 2012, the Company issued two promissory notes totaling $966,668 in aggregate principal amount. The notes each bear interest at 11% per annum and are due on demand by the lender. In connection with the issuance of the notes, the Company issued three-year warrants to purchase an aggregate of 268,519 shares of the Company’s common stock at a per share exercise price of $1.00.
In February 2012, the Company issued two promissory notes totaling $266,667 in aggregate principal amount. The notes each bear interest at 11% per annum. All unpaid principal and accrued interest is due upon the second anniversary date of each of the notes; however each lender may demand the entire unpaid principal and unpaid accrued interest immediately due and payable at any time after the six month anniversary date of each note.
In February 2012, the Company issued four convertible notes totaling $466,666 in aggregate principal amount, which bear interest at 8% per annum and mature on the one-year anniversary dates of the notes. Each lender may, after the three month anniversary date of its note, declare all unpaid principal and accrued unpaid interest immediately due and payable. The principal amount plus the unpaid accrued interest due under each of the convertible notes is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the notes, the Company issued three-year warrants to purchase a total of 32,406 shares of the Company’s common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise.
In March 2012, the Company issued a convertible note in the principal amount of $150,005, which bears interest at 8% per annum and matures on the one-year anniversary date of the note. The lender may, after the three month anniversary date of the note, declare all unpaid principal and accrued unpaid interest immediately due and payable. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase a total of 10,417 shares of the Company’s common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise.
In April 2012, the Company’s subsidiary issued a note in the amount of 100,000,000 yen which bears interest at 15% per annum. The loan is valued at $1,257,370 at June 30, 2012. The entire principal amount of the note and any outstanding accrued interest thereon is due on the six-month anniversary date of the note.
In May 2012, the Company issued a convertible note in the principal amount of $500,000, which bears interest at 10% per annum and matures on the one-year anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower.
In June 2012, the Company refinanced a convertible note in the amount of $360,000 with a new convertible note in the amount of $388,800 which bears interest at 10% per annum and is due upon demand. The principal amount and any unpaid interest due under the promissory note are convertible into shares of the Company’s common stock at $3.30 per share.
In June 2012, the Company issued promissory notes totaling $300,000 bearing interest at 8% per annum. The entire principal amount of each note and any outstanding accrued interest thereon is due on demand.
In June 2012, the Company issued a promissory note in the amount of $10,000 bearing interest at 11% per annum. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note.
The Company estimated the total fair value of the convertible note and warrant in allocating the debt proceeds. The proceeds were allocated to the warrant and convertible note based on the pro-rata fair value. The proceeds allocated to the beneficial conversion were determined by taking the estimated fair value of shares issuable under the convertible note less the fair value of the convertible note determined above. The fair value of options and warrants in the first quarter of 2012 was determined through the Black Scholes Option pricing model with the following inputs:
|
Stock Price
|
|
$
3.60
|
|
|
Exercise Price
|
|
$1.00 ~ 3.60
|
|
|
Term
|
|
2 ~ 3 years
|
|
|
Risk-Free Rate
|
|
0.30 ~ 0.43%
|
|
|
Dividend Yield
|
|
0%
|
|
|
Volatility
|
|
99.89 ~ 128.12%
|
|
NOTE 7 – STOCKHOLDERS’ EQUITY (
DEFICIT
)
Common stock –
During the six months ended June 30, 2012, the Company issued 10,111 shares of its common stock as a payment for professional fees.
During the year ended December 31, 2011, the Company issued a total of 24,393,461 shares of its common stock, which includes 20,628,305 shares issued to the former stockholders of Emmaus Medical pursuant to the Merger Agreement (excluding the 47,178 shares held by stockholders who exercised dissenter’s right in connection with the Merger), and 15,156 shares issued upon the exercise of warrants and options. As discussed in Note 2, in connection with the closing of the Merger, stockholders of the Company prior to the Merger cancelled an aggregate of 1,827,750 shares of common stock owned by them such that they held an aggregate of 3,750,000 shares of common stock upon the closing of the Merger. Pursuant to the Merger Agreement on May 3, 2011, four stockholders of Emmaus Medical exercised their dissenter’s rights and returned 47,178 shares for $200,000, which was outstanding as of June 30, 2012. The shares were cancelled as of May 3, 2011, the closing date of the Merger.
Stock warrants –
During the six months ended June 30, 2012, the Company issued warrants in connection with the issuance of convertible notes to purchase an aggregate of 42,823 shares of common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise. During this period, the Company also issued warrants to purchase a total of 1,911,020 shares of common stock at an exercise price of $1.00 per share.
A summary of outstanding warrants as of June 30, 2012 is presented below.
|
|
|
Six months ended
June 30, 2012
|
|
|
Warrants outstanding, beginning of period
|
|
|
941,202
|
|
|
Granted
|
|
|
1,953,843
|
|
|
Exercised
|
|
|
-
|
|
|
Cancelled, forfeited and expired
|
|
|
-
|
|
|
Warrants outstanding, end of period
|
|
|
2,895,045
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
Number of
Warrants
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Total
|
|
|
Weighted
Average
Exercise Price
|
|
|
During 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00
|
|
|
1,911,020
|
|
|
|
2.53
|
|
|
$1.00
|
|
|
|
411,020
|
|
|
$1.00
|
|
|
75% of FMV
|
|
|
42,823
|
|
|
|
2.65
|
|
|
75% of FMV
|
|
|
|
42,823
|
|
|
75% of FMV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00
|
|
|
311,038
|
|
|
|
2.18
|
|
|
$1.00
|
|
|
|
311,038
|
|
|
$1.00
|
|
|
75% of FMV
|
|
|
331,670
|
|
|
|
2.18
|
|
|
75% of FMV
|
|
|
|
331,670
|
|
|
75% of FMV
|
|
|
$3.05
|
|
|
5,898
|
|
|
|
2.73
|
|
|
$3.05
|
|
|
|
5,898
|
|
|
$3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.05
|
|
|
197,146
|
|
|
|
3.08
|
|
|
$3.05
|
|
|
|
197,146
|
|
|
$3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.05
|
|
|
95,450
|
|
|
|
2.18
|
|
|
$3.05
|
|
|
|
95,450
|
|
|
$3.05
|
|
Stock options
– Management has valued the options at their date of grant utilizing the Black-Scholes-Merton Option pricing model. Accordingly, the fair value of the underlying shares was determined based on recent transactions by the Company to sell shares to third parties and other factors determined by management to be relevant to the valuation of such shares. The expected volatility was calculated using the historical volatility of a similar public entity in the industry.
In making this determination and finding another similar company, the Company considered the industry, stage of life cycle, size and financial leverage of such other entities. Based on the development stage of the Company, similar companies with enough historical data are not available. The Company was able to find one entity that met the industry criterion and as a result has based its expected volatility off of this Company’s historical stock prices for a period similar to the expected term of the option.
The risk–free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options. The expected life of options used was based on the contractual life of the option granted.
The Company had 72,795 options outstanding held by directors of the Company as of December 31, 2011. Of these options 11,795 were vested as of June 30, 2012 and are exercisable at $3.05 per share through 2015 and 61,000 options will be vested in December 2012 at the exercise price of $3.60 per share. During the six months ended June 30, 2012, the Company issued 1,490,000 options to its directors, officers, employees and consultants. The fair value of these options issued is approximately $5 million. These options will be vested equally over 3 years, starting April 2, 2013 and are exercisable at $3.60 per share through 2022. The total outstanding options as of June 30, 2012 are 1,562,795.
Registration rights –
In connection with the consummation of the Merger, the Company entered into the Registration Rights Agreement for the benefit of certain pre-Merger Company stockholders. Pursuant to the Registration Rights Agreement, the such stockholders have certain “piggyback” registration rights on registration statements filed after the Merger is consummated other than registration statements (i) filed in connection with any employee stock option or other benefit plan, (ii) for an exchange offer or offering of securities solely to the Company’s existing stockholders, (iii) for an offering of debt that is convertible into equity securities of the Company; (iv) for a dividend reinvestment plan or (v) for an offering of equity securities of the Company underwritten by Aegis Capital Corp. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
NOTE 8 – 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 its service, Emmaus Medical pays a monthly commercialization management fee of $5,000 with discount.
Operating leases
– The Company leases its office space under an operating lease from an unrelated entity. The rent expense during the six months ended June 30, 2012 and 2011 amounted to $70,184 and $55,780, respectively.
The Company leases its approximately 4,540 square foot headquarters offices in Torrance, CA, at a base rental of $4,994 per month plus $320 per month as its share of common area expenses. The lease expires on November 30, 2012. In addition, the Company leases two office suites in Torrance, California at a base rent of $1,610 per month plus share of common area expenses of $90 per month, and at a base rent of $1,750 per month plus share of common area expenses of $90 per month. These leases will expire on August 19, 2013 and February 28, 2013, respectively
.
Approximately 490 square feet from one office and 1,079 square feet from the other office are currently subleased to an unaffiliated entity on a month to month basis. The Company does not expect to experience any difficulties in renewing its leases, or finding additional or replacement office and warehouse space, at its current or more favorable rates.
The Company also leases two office suites of approximately 512 square feet and 532 square feet, respectively, in Tokyo, Japan at a base rent of $1,678 per month each. These leases will expire on October 14, 2012 and September 15, 2013, respectively. The Company anticipates that the lease expiring on October 14, 2012 will be extended for another two years with the same terms.
Future minimum lease payments under the agreements are as follows:
|
2012
|
|
$
|
61,175
|
|
|
2013
|
|
|
30,033
|
|
|
|
|
$
|
91,208
|
|
Licensing agreement
- On April 8, 2011, pursuant to a Research Agreement, 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 Package (as defined in the Research Agreement) to the Company. Pursuant to the Individual Agreement, the Company agreed to pay $1.5 million to CellSeed within 30 days of CellSeed’s delivery of the Package to the Company and a royalty to be agreed upon by the parties. The Company made a payment of $1.5 million to CellSeed in February 2012, pursuant to the Individual Agreement. CellSeed may terminate these agreements with the Company if the Company is unable to make timely payments required under the agreements.
NOTE 9 – RELATED PARTY TRANSACTIONS
As of June 30, 2012 an aggregate of $6,878,885 in the principal amount of promissory notes from certain stockholders and officers was outstanding. The debt is unsecured and carries interest rates from 0% to 11%. An aggregate of $386,271, $897,488, and $2,312,565 in principal and unpaid accrued interest on the notes are convertible into shares of common stock at $3.05, $3.30 and $3.60 per share, respectively. Interest on 0% loans was imputed at the incremental borrowing rate of 6% per annum.
The Company had agreed to (i) pay AFH Holding and Advisory, LLC (“AFH Advisory”) $500,000 (the “Shell Cost”) to allow Emmaus Medical stockholders to acquire shares of common stock of the Company and become the majority owners in the aggregate of the Company and to achieve the desired post-merger capitalization of the Company and to (ii) reimburse AFH Advisory for its advancement of expenses on behalf of the Company related to the Merger and a public offering (the “Reimbursable Costs,” and collectively with the Shell Cost, the “Transaction Costs”). These Transaction Costs have been recorded as an expense in the accompanying statement of operations in the period in which they were incurred. As of June 30, 2012, AFH Advisory had advanced an aggregate of $288,893 in Reimbursable Costs on the Company’s behalf. During the year ended December 31, 2011, the Company paid $288,893 in cash to AFH Advisory for the Reimbursable Costs and $105,554 of the Shell Cost, therefore, as of June 30, 2012, owed AFH Advisory an aggregate of $394,446 for the Shell Cost. The Company does not anticipate that any further Transaction Costs will be advanced by AFH Advisory.
NOTE 10 –
GEOGRAPHIC INFORMATION
For the six months ended June 30, 2012 and 2011, the Company earned revenue from countries outside of the U.S. as outlined in the table below. The Company did not have any significant currency translation or foreign transaction adjustments during the six months ended June 30, 2012 and 2011.
|
Country
|
|
Sales six months ended
June 30, 2012
|
|
|
% of Total Revenue six
months ended June 30, 2012
|
|
|
Sales six months ended
June 30, 2011
|
|
|
% of Total Revenue six
months ended June 30, 2011
|
|
|
Japan
|
|
$
|
142,725
|
|
|
|
57
|
%
|
|
$
|
50,424
|
|
|
|
32
|
%
|
|
Taiwan
|
|
$
|
0
|
|
|
|
0
|
%
|
|
$
|
50,000
|
|
|
|
32
|
%
|
|
South Korea
|
|
$
|
46,000
|
|
|
|
18
|
%
|
|
$
|
0
|
|
|
|
0
|
%
|
NOTE 11 – SUBSEQUENT EVENTS
In July 2012, the Company issued four convertible notes totaling $64,840 in aggregate principal amount, which bear interest at 10% per annum and mature on the one-year anniversary dates of the notes. The principal amount plus the unpaid accrued interest due under each of the convertible notes is convertible into shares of the Company’s common stock at $3.30 per share.
In July 2012 the Company sold 11,000 shares of common stock at a price of $3.00 per share for gross proceeds of $33,000.
In July 2012, the Company refinanced an outstanding convertible note in the principal amount of $925,200 convertible note, and its unpaid accrued interest. Pursuant to the refinancing, the lender loaned the Company an additional $181,500 and the Company issued a new convertible note in the principal amount of $1,180,716, which bears interest at 10% per annum and matures on the one-year anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase 13,750 shares of common stock at a per share exercise price equal to 75% of the per-share fair market value of the common stock on the date of the holder’s delivery of the notice of exercise to the Company.
In August 2012, the Company refinanced an outstanding convertible note in the principal amount of $54,000 by paying down the principal by $4,500 and issuing a new convertible note in the amount of $49,500 which bears interest at 10% per annum and matures on the one-year anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share.
On July 19, 2012, the Company elected to terminate the offering contemplated by the Amended and Restated Letter of Intent dated September 30, 2011 by and between the Company and AFH Advisory (the “LOI”). Based on the Company’s termination of the Offering pursuant to the terms of the LOI and separate from the lawsuit filed by the Company against AFH Advisory and Mr. Heshmatpour, the Company is seeking to cancel certain shares of its common stock that were previously issued to AFH Advisory, Mr. Heshmatpour and their affiliates.
On July 23, 2012, the Company filed a complaint in Los Angeles Superior Court against AFH Holding & Advisory, LLC (“AFH Advisory”) and Amir F. Heshmatpour. Mr. Heshmatpour is a former officer of AFH Acquisition IV, Inc. (prior to the Merger) and former director of the Company and is the Managing Partner of AFH Advisory. Pursuant to the complaint, the Company seeks return of approximately $1.2 million in proceeds (the “Placement Proceeds”) raised in a private placement conducted by AFH Acquisition IV, Inc. in April 2011 prior to the Merger, which Placement Proceeds were not received by the Company at the time of the Merger.
The following discussion relates to a discussion of the financial condition and results of operations of Emmaus Life Sciences, Inc. (the “Company,” “Emmaus,” “we” or “us”) and its wholly-owned subsidiary Emmaus Medical, Inc., a Delaware corporation (“Emmaus Medical”), and Emmaus Medical’s wholly-owned subsidiaries Newfield Nutrition Corporation, a Delaware corporation (“Newfield”), Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”) and Emmaus Medical Europe, Ltd. (“EM Europe”).
Forward-Looking Statements
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements for the years ended December 31, 2011 and 2010 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 30, 2012 (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 “anticipated,” “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 FDA and other regulatory approval for our future drug and biologic products
, initiation, conduct and
successful completion of our clinical trials, our ability to achieve regulatory approval for our L-glutamine treatment for sickle cell disease (“SCD”), our ability to commercialize our L-glutamine treatment for SCD; our reliance on third party manufacturers for our drug products, market acceptance of or reimbursement for 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.
Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, or if any of the risks or uncertainties described elsewhere in this report or in the “Risk Factors” section included as a part of Item 2.01 of the Annual Report occur. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
Company Overview
We develop and commercialize treatments and therapies for rare diseases and are primarily focused on the late-stage development—currently in Phase III clinical trials with the FDA — of the amino acid L-glutamine as a prescription drug for the treatment of SCD. To a lesser extent, we are also engaged in the marketing and 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 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. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore® and AminoPure®. We also own a minority interest in CellSeed, Inc., a Japanese company listed on the JASDAQ Growth market in Tokyo, 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. In April 2011, we entered into a
Joint Research and Development Agreement (the “Research Agreement”) with CellSeed
regarding the future research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products.
Pursuant to an Individual Agreement between the Company and CellSeed executed in April 2011, CellSeed granted us the exclusive right to manufacture, sell, market and distribute
Cultured Autologous Oral Mucosal Epithelial Cell-Sheet (“CAOMECS”)
to be used on the cornea of appropriate patients residing in the United States. We intend to work on commercializing the CAOMECS for the cornea and to expand our relationship with CellSeed to develop cell sheets for other types of cells in the future
.
Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC undertook a reorganization and merged with Emmaus Medical, Inc., which was originally incorporated in September 2003.
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, Emmaus Medical merged with and into AFH Merger Sub on May 3, 2011 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.” Subsequently, on September 14, 2011, we changed our name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.”
Upon consummation of the Merger on May 3, 2011, (i) each outstanding share of Emmaus Medical common stock was exchanged for
29.48548924976
shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for
29.48548924976
shares of our common stock; and (iii)
each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock
. As a result of the Merger, holders of Emmaus Medical common stock, options, warrants and convertible notes received
20,628,305
shares of our common stock
(excluding 47,178 shares held by stockholders who exercised dissenters’ rights in connection with the Merger)
, options and warrants to purchase an aggregate of
326,508
shares of our common stock, and convertible notes to purchase an aggregate of
271,305
shares of our common stock. Securityholders of Emmaus Medical held 85% of our issued and outstanding common stock on a fully diluted basis upon the closing of the Merger. Immediately after the closing of the Merger, we had
24,378,305 (excluding 47,178 shares held by stockholders who exercised dissenters’ rights)
shares of common stock, no shares of preferred stock, options to purchase
23,590
shares of common stock, warrants to purchase
302,918
shares of common stock and convertible notes exercisable for
271,305
shares of common stock issued and outstanding.
Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including: the duration and results of the clinical trials for our various products going forward; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation, if any; 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 June 30, 2012, our accumulated deficit since inception is $28.7 million and we had cash and cash equivalents of $0.4 million. Since inception we have had minimal revenues and have been required to rely on funding from sales of equity securities and borrowings from officers and stockholders. Currently, we estimate we will need approximately $4.0 million to complete our Phase III clinical trial and $400,000 to obtain regulatory approval of L-glutamine as a therapy for SCD. In addition, we agreed to pay CellSeed an aggregate of $8.5 million pursuant to the Research Agreement with CellSeed, Inc., which is still payable, and we believe that we will need approximately $3.0 million for research and development to develop corneal cell sheet technology in the U.S. and $2.8 million to initiate the cardiac cell sheet work. In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and Good Manufacturing Practice (“GMP”) laboratory costs for regenerative medicine. We paid the $1.5 million we agreed to pay CellSeed pursuant to the Individual Agreement in February 2012.
Recent Highlights
In April 2009, the FDA authorized us to begin a large Phase III clinical trial directed to study L-glutamine as an experimental agent to reduce sickle cell crisis. Patient enrollment began in mid-2010 and as of July 31, 2012, we have signed contracts with 32 study sites across the United States and have enrolled over 180 patients. An interim analysis of a subset of data from the Phase III Clinical Trial was completed by an independent third party. The results of the interim analysis were then reported to the FDA by way of the independent third party in August 2012. We aim to complete the Phase III clinical trial enrollment by the end of 2012 and complete the trial in 2013.
In October 2010, we formed Emmaus Medical Japan, Inc. (“EM Japan”) which is now a wholly-owned subsidiary of Emmaus Medical that markets and sells AminoPure® in Japan and other neighboring regions. EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of its formation (see Note 10).
In December 2010, we were awarded a five-year contract by the U.S. Department of Veterans Affairs for our NutreStore® product. In October 2007, we became the exclusive sublicensee of
US Patent No. 5,288,703 (the “
SBS Patent”) covering an FDA-approved treatment for SBS
comprised of a man-made human growth hormone (hGH), namely Zorbtive® [somatropin (rDNA origin) for injection] in combination with NutreStore® [L-glutamine powder for oral solution] and a specialized diet,
for the U.S. market, pursuant to a sublicense agreement with Cato Holding Company (“Cato”), which agreement includes the rights to distribute the L-glutamine treatment for SBS under the trademark NutreStore® in the U.S. We commercially launched NutreStore® in June 2008. Internationally, we are in the last stages of seeking approval to market NutreStore® in Hong Kong and have received a Certificate of Free Sale from the FDA to export NutreStore® to Hong Kong. Previously we promoted Zorbtive® in the United States pursuant to a promotional rights agreement with EMD Serono, Inc. Subsequently we terminated the agreement effective July 31, 2011 and no longer promote Zorbtive®. We do not anticipate that the termination of the promotional rights agreement with EMD Serono will have a significant impact on the Company as we had generated no revenues from the promotion of Zorbtive® pursuant to the promotional rights agreement and we continue to sell NutreStore® and AminoPure®.
We sell L-glutamine as a nutritional supplement under the brand name AminoPure® through our wholly-owned subsidiary Newfield Nutrition Corporation. The product is currently sold online and through retail stores in multiple states and via importers and distributors in Japan, Taiwan, Ghana and South Korea. As part of the growth strategy, Newfield Nutrition is focused on adding additional distributors both domestically and internationally. In November 2010, we added a new distributor in Taiwan. In November 2011, we added a new distributor in South Korea for the distribution of AminoPure® and received our first order from this South Korean distributor in January 2012.
In November 2011, we formed EM Europe, a wholly owned subsidiary of Emmaus Medical. EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe. EM Europe submitted an application for orphan medicinal product designation with the European Medicines Agency (“EMA”) in January 2012. The EMA issued a positive opinion recommending orphan medicinal product designation by the EMA’s Committee for Orphan Medicinal Products (COMP) in May 2012 for our SCD treatment. The European Commission adopted the EMA’s decision and granted orphan medicinal product designation to the L-glutamine treatment for SCD in July 2012. The Company already has Orphan Drug status from the FDA.
On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the “Reverse Stock Split”), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of a contemplated public offering of our common stock. Our board of directors has not determined whether to effect the Reverse Stock Split or which exchange ratio to implement. If our board of directors elects to effect the Reverse Stock Split, it will set the ratio for the Reverse Stock Split as it determines is advisable after consulting with the underwriters and advisors and considering relevant market conditions at the time of the closing of the contemplated public offering. The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the Delaware Secretary of State. The par value and number of authorized shares of our common stock will remain unchanged.
Financial Overview
Revenue
As noted above, we are in the development stage. 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. Emmaus Medical’s operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing clinical trials for sickle cell treatment, establishing manufacturing for products and maintaining and improving its patent portfolio. In November 2011, we added a new distributor in South Korea for the distribution of AminoPure® and received our first order from this South Korean distributor in January 2012.
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. Pursuant to the sublicense agreement for the SBS Patent, we are required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore® to Cato, the sublicensor, In 2008 and 2009, we were required to make minimum royalty payments to Cato of $30,000 and $70,000, respectively, pursuant to the agreement. There was no required minimum royalty due in 2010 and any time thereafter; however, we are still required to pay Cato the annual royalty payment equal to 10% of our annual adjusted gross sales of NutreStore®. We made a royalty payment to Cato in the amount of $469 in October 2011 and $855 in May 2012 which represents the 10% royalty of the NutreStore® adjusted gross sales for 2010 and 2011, respectively. Management expects that any revenues generated from the sale of NutreStore® and AminoPure® will fluctuate from quarter to quarter as a result of the timing of orders and the amount of product sold.
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), payroll-related expenses, study site payments, consultants, activities related to regulatory filings, manufacturing development costs and other related supplies. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of late stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to complete the development of our most advanced product candidate, the amino acid L-glutamine as a prescription drug for the treatment of SCD.
Expenses related to the Phase III clinical trial are based on estimates of the services received and efforts expended pursuant to contracts with study sites and the CRO that conducts and manages the clinical trial on our behalf. We expect to incur increased research and development expenses as we continue to enroll patients in the Phase III clinical trial for sickle cell disease. The most significant clinical trial expenditures are 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 (IRB) 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. Management estimates the expenses based on the time period over which the services will be performed and the level of effort to be expended by the CRO in each period. Although we do not expect the estimate to be materially different from amounts actually incurred, our estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary and consequently, result in us reporting amounts that are higher or lower in any given period.
While we currently are focused on advancing the sickle cell clinical trials, future research and development expenses will depend on any new products or technologies that may be introduced in the pipeline. In addition, we cannot forecast with any degree of certainty which product candidate(s) 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 drug development process 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 the continued development of the sickle cell treatment and other clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. The current estimated cost to complete the Phase III clinical trial is $4.0 million, which is based on the assumptions that the total number of trial sites does not increase beyond our current estimates and that we remain on the projected timeline. Should the total number of trial sites need to be increased or should the timeline require extension, there will be a commensurate increase in costs associated with the additional time and effort required by the CRO and company staff.
The drug development process to obtain FDA approval is very costly and time consuming. Even with the granting of orphan drug status and fast track designation, the successful development of the L-glutamine treatment for SCD is uncertain and subject to a number of variables, in addition to other risks, some of which are described above under the caption “Risk Factors” included in the Annual Report.
The L-glutamine treatment for SCD is investigational in nature and has not yet received FDA approval. In order to grant marketing approval, the FDA must conclude that the clinical data establishes the safety and efficacy of the L-glutamine treatment for SCD and that the manufacturing processes and controls are adequate. Despite our efforts, the L-glutamine treatment for SCD may not be proven safe and effective in clinical trials, or meet applicable regulatory standards. We are focused on completing the Phase III clinical trial and submitting the new drug application (NDA) to the FDA for consideration. As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollment and the risks inherent in the development process, we are unable to determine with any degree of certainty the duration and completion of costs or when, and to what extent, we will generate revenues from the commercialization and sale of the L-glutamine treatment for SCD.
In connection with our agreements with CellSeed related to the development of corneal cell sheet technology in the U.S., we believe that the future cost to develop this technology is approximately $11.5 million, which includes the $8.5 million we have agreed to make to CellSeed pursuant to the Research Agreement which we have not yet paid, and $3.0 million in research and development costs. Such estimate includes the cost of obtaining FDA approval for the cornea cell sheets. We have assumed that we will need biologic approval of the FDA for the cornea cell sheets, rather than pharmaceutical approval, and that we will only have to run a small trial here in the U.S. to test the safety and efficacy of the corneal cell sheets because we believe that we will be able to submit, and the FDA will accept, the data regarding corneal cell sheets submitted to the European Medicines Agency (EMA). We estimate that we will need an additional $2.0 million to commercialize the corneal cell sheet technology. Based on the data available for cornea treatment using this technology, we anticipate it will be several years before we can commercialize this product in the U.S. In addition, we plan to participate in a multi-center international study involving cardiac cell sheets within the next two years. We estimate that we will need $2.8 million to initiate the cardiac cell sheet work. The total estimated costs and timeframe for commercialization and development of the cardiac cell sheets has not been determined. In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and GMP laboratory costs for regenerative medicine.
At this time, no research and development costs are associated with the SBS treatment.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs 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 for legal, consulting, auditing and tax services.
Inventories
Inventories consist of finished goods and work–in-process and are valued based on a first-in, first-out basis and at the lower of cost or market value. All of the purchases during the six months ended June 30, 2012 were from one vendor and in 2011 were from two vendors.
Results of Operations
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
From
December 20, 2000
(date of inception)
to June 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
109,312
|
|
|
$
|
100,101
|
|
|
$
|
263,039
|
|
|
$
|
159,569
|
|
|
$
|
976,694
|
|
|
Sales return & allowance
|
|
|
(2,196
|
)
|
|
|
(2,043
|
)
|
|
|
(10,756
|
)
|
|
|
(2,298
|
)
|
|
|
(43,295
|
)
|
|
Total revenues
|
|
|
107,116
|
|
|
|
98,058
|
|
|
|
252,283
|
|
|
|
157,271
|
|
|
|
933,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
29,185
|
|
|
|
45,588
|
|
|
|
49,773
|
|
|
|
70,689
|
|
|
|
407,911
|
|
|
Scrapped inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235,537
|
|
|
Total cost of goods sold
|
|
|
29,185
|
|
|
|
45,588
|
|
|
|
49,773
|
|
|
|
70,689
|
|
|
|
643,448
|
|
|
GROSS PROFIT
|
|
|
77,931
|
|
|
|
52,470
|
|
|
|
202,510
|
|
|
|
86,582
|
|
|
|
289,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
886,390
|
|
|
|
337,889
|
|
|
|
1,428,984
|
|
|
|
648,652
|
|
|
|
7,880,841
|
|
|
Selling
|
|
|
97,938
|
|
|
|
174,185
|
|
|
|
198,453
|
|
|
|
375,696
|
|
|
|
2,697,416
|
|
|
General and administrative
|
|
|
2,572,788
|
|
|
|
1,189,893
|
|
|
|
4,107,031
|
|
|
|
1,837,718
|
|
|
|
14,767,657
|
|
|
Transaction costs
|
|
|
-
|
|
|
|
788,893
|
|
|
|
-
|
|
|
|
788,893
|
|
|
|
788,893
|
|
|
|
|
|
3,557,116
|
|
|
|
2,490,860
|
|
|
|
5,734,468
|
|
|
|
3,650,959
|
|
|
|
26,134,810
|
|
|
LOSS FROM OPERATIONS
|
|
|
(3,479,186
|
)
|
|
|
(2,438,390
|
)
|
|
|
(5,531,958
|
)
|
|
|
(3,564,377
|
)
|
|
|
(25,844,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on securities available-for-sale
|
|
|
275,822
|
|
|
|
-
|
|
|
|
275,822
|
|
|
|
-
|
|
|
|
275,822
|
|
|
Interest income
|
|
|
7,535
|
|
|
|
10,169
|
|
|
|
14,612
|
|
|
|
16,614
|
|
|
|
130,339
|
|
|
Interest expense
|
|
|
(998,898
|
)
|
|
|
(18,864
|
)
|
|
|
(1,892,396
|
)
|
|
|
(30,675
|
)
|
|
|
(3,261,559
|
)
|
|
|
|
|
(715,541
|
)
|
|
|
(8,695
|
)
|
|
|
(1,601,962
|
)
|
|
|
(14,061
|
)
|
|
|
(2,855,398
|
)
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(4,194,727
|
)
|
|
|
(2,447,085
|
)
|
|
|
(7,133,920
|
)
|
|
|
(3,578,438
|
)
|
|
|
(28,700,257
|
)
|
|
INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
5,800
|
|
|
|
850
|
|
|
|
23,857
|
|
|
NET LOSS
|
|
$
|
(4,194,727
|
)
|
|
$
|
(2,447,085
|
)
|
|
$
|
(7,139,720
|
)
|
|
$
|
(3,579,288
|
)
|
|
$
|
(28,724,114
|
)
|
|
NET LOSS PER COMMON SHARE
|
|
$
|
(0.17
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
24,395,239
|
|
|
|
23,077,289
|
|
|
|
24,394,350
|
|
|
|
21,678,616
|
|
|
|
|
|
Three months ended June 30, 2012 and 2011
Net Losses
. Net losses increased by $1.75 million, or 71%, to $4.19 million from $2.45 million for the three months ended June 30, 2012 and 2011, respectively. The increase in losses is primarily a result of increased operating expenses resulting primarily from investing resources in our clinical trial resulting in higher research and development expenses and the increase in general and administrative expenses due to non-cash share compensation expense. As of June 30, 2012, we had an accumulated deficit of approximately $28.72 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization. As a result, 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, even if all of our products are commercialized.
Revenues
. Revenue increased 9%, to $0.11 million from $0.10 million for the three months ended June 30, 2012 and 2011, respectively.
Cost of Goods Sold
. Cost of goods sold decreased to $0.03 million from $0.05 million for the three months ended June 30, 2012 and 2011, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. No scrapped inventory expense was realized for the three months ended June 30, 2012 and for the three months ended June 30, 2011. The decrease in the cost of goods sold in 2012 can be attributed to the increase in international sales, which has a higher gross profit margin.
Research and Development Expenses
. Research and development expenses increased $0.55 million, or 162%, to $0.89 million from $0.34 million for the three months ended June 30, 2012 and 2011, respectively. This increase was primarily due to increases in our CRO costs and study site costs due to the increase in the patient enrollment for the Phase III clinical trial of our L-glutamine treatment for SCD. For the three months ended June 30, 2012, the CRO spent a significant amount of time with Phase III study related activities and a total of 32 clinical study sites were actively recruiting patients during 2012. Research and development costs increased as follows: $0.33 million for CRO costs; $0.14 million for study site expenses and $0.09 million for other costs including study site related costs such as start- up costs and IRB fees.
Selling Expenses
. We incurred selling expenses of $0.10 million and $0.17 million for each of the three months ended June 30, 2012 and June 30, 2011. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore®, Zorbtive®, and AminoPure®. Selling expenses decreased due to the downsizing of the sales force.
General and Administrative Expenses including Transaction Costs.
General and administrative expenses increased $0.59 million, or 30%, to $2.57 million from $1.98 million for the three months ended June 30, 2012 and 2011, respectively. The increase was largely due to share based compensation of $1.40 million incurred in 2012, compared to none in 2011 and payroll increase of $0.13 million, offset by a decrease in merger related consulting fees of $0.79 million and legal fees of $0.31 million.
We anticipate that general and administrative expenses will continue to increase for, among others, the following reasons:
|
|
●
|
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;
|
|
|
●
|
to support research and development activities, which the Company expects to expand as development of our product candidate(s) continue; and
|
|
|
●
|
to build a sales and marketing team before we receive regulatory approval of a product candidate in anticipation of commercial launch.
|
Six months ended June 30, 2012 and 2011
Net Losses
. Net losses increased by $3.56 million, or 99%, to $7.14 million from $ 3.58 million for the six months ended June 30, 2012 and 2011, respectively. The increase in losses is primarily a result of increased operating expenses resulting primarily from investing resources in our clinical trial resulting in higher research and development expenses and the increase in general and administrative expenses due to non-cash share compensation expense. As of June 30, 2012, we had an accumulated deficit of approximately $28.72 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization. As a result, 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, even if all of our products are commercialized.
Revenues
. Revenue increased $0.10 million, or 60%, to $0.25 million from $0.16 million for the six months ended June 30, 2012 and 2011, respectively. Sales increased primarily due to increases in the number of units sold of our AminoPure® product.
Cost of Goods Sold
. Cost of goods sold decreased to $0.05 million from $0.07 million for the six months ended June 30, 2012 and 2011, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. No scrapped inventory expense was realized for the six months ended June 30, 2012 and for the six months ended June 30, 2011.
Research and Development Expenses
. Research and development expenses increased $0.78 million, or 120%, to $1.43 million from $0.65 million for the six months ended June 30, 2012 and 2011, respectively. This increase was primarily due to increases in our CRO costs and study site costs due to the increase in the patient enrollment for the Phase III clinical trial of our L-glutamine treatment for SCD. For the six months ended June 30, 2012, the CRO spent a significant amount of time with Phase III study related activities and a total of 32 clinical study sites were actively recruiting patients during 2012. Research and development costs increased as follows: $0.44 million for CRO costs; $0.26 million for study site expenses and $0.08 million for other costs including study site related costs such as start- up costs and IRB fees.
Selling Expenses
. We incurred selling expenses of $0.20 million and $0.38 million for each of the six months ended June 30, 2012 and June 30, 2011. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore®, Zorbtive®, and AminoPure®. Selling expenses decreased due to the downsizing of the sales force.
General and Administrative Expenses including Transaction Cost.
General and administrative expenses increased $1.48 million, or 56%, to $4.11 million from $2.63 million for the six months ended June 30, 2012 and June 30, 2011, respectively. The increase was largely due to share based compensation of $1.77 million incurred in 2012, compared to none in 2011, offset by a decrease in merger related consulting fees of $0.79 million.
We anticipate that general and administrative expenses will continue to increase for, among others, the following reasons:
|
|
●
|
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;
|
|
|
●
|
to support research and development activities, which the Company expects to expand as development of our product candidate(s) continue; and
|
|
|
●
|
to build a sales and marketing team before we receive regulatory approval of a product candidate in anticipation of commercial launch.
|
Liquidity and Capital Resources
Based on our losses to date, anticipated future revenue and operating expenses and our cash and cash equivalents balance of $0.4 million as of June 30, 2012, the Company does not appear to have sufficient operating capital for its business without raising additional capital. We incurred losses of $7.1 million for the six months ended June 30, 2012 and $3.6 million for the six months ended June 30, 2011. We had an accumulated deficit since inception to June 30, 2012 of $28.7 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the development and commercialization of L-glutamine as a prescription drug for the treatment of sickle cell disease, the corneal cell sheets technology and the expansion of corporate infrastructure, including costs associated with being a public company. We have previously relied on private equity offerings, debt financings, and loans, including loans from related parties. As part of this effort, we have received numerous loans from stockholders as discussed below. Emmaus Medical raised approximately $1.2 million in a private offering of its common stock in March 2011. In addition, during 2011 the Company has raised about $1.8 million from the issuance of notes payable and $3.9 million from the issuance of convertible notes payable and in the six months ending June 30, 2012 raised $3.1 million from the issuance of notes payable and $1.6 million from the issuance of convertible notes payable. 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 development of cell sheet technology in the U.S.
Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the years ended December 31, 2011 and 2010, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and, finally, achieving a profitable level of operations.
In April 2011, Emmaus Medical entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, an addendum to the agreements. 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. Pursuant to the Individual Agreement, CellSeed granted us the exclusive right to manufacture, sell, market and distribute CAOMECS for the cornea in the United States and agreed to disclose its accumulated information package (the “Package”) for the joint development of CAOMECS to us. Under the Research Agreement, as supplemented by the addendum, we 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 Package to Emmaus and Emmaus providing written confirmation of its acceptance of the complete Package
. Pursuant to the Individual Agreement, the Company agreed to pay $1.5 million to CellSeed (the “Individual Agreement Payment”) within 30 days of CellSeed’s delivery of the Package to the Company and a royalty to be agreed upon by the parties.
The Company made the Individual Agreement Payment to CellSeed in February 2012. Pursuant to an addendum to the Research Agreement, CellSeed and the Company confirmed that the Company is obligated to make the Research Agreement Payment only after the Company provides its written confirmation of acceptance of the complete Package from CellSeed
We currently anticipate the delivery of the Package to Emmaus to be completed after we begin to generate revenues from the commercialization of our L-glutamine treatment for SCD and, therefore, we believe that we will be able to pay the $8.5 million that will be payable to CellSeed pursuant to the Research Agreement from revenue. If the Package is delivered prior to our generation of revenue from the commercialization of our L-glutamine SCD treatment, we will seek other funding sources, including the sale of additional equity or debt securities, in order to make the payment.
CellSeed may terminate these agreements with us if we are unable to make timely payments, which are required under the agreements
.
In addition to the Research Agreement Payment we have agreed to pay CellSeed pursuant to the Research Agreement, we currently estimate that we will need an additional $4.0 million to complete our Phase III clinical trial and $0.4 million to obtain FDA approval for our L-glutamine treatment for SCD. Our current cash burn rate is approximately $0.5 million per month. Our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: the number, duration and results of the clinical trials for our various products going forward; 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 development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure® for revenues, which we expect will increase. Revenues from NutreStore® are currently not significant and we are unsure whether sales of NutreStore® 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, and loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. If we do not receive adequate funding to complete our clinical trials or to obtain FDA approval for our L-glutamine treatment for SCD, we may be required to delay our trial. If we are required to delay our trial, we cannot enroll additional subjects, which will delay the approval of our L-glutamine treatment for SCD.
Our cash flow from operations is not adequate and our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including, but not limited to; the duration and results of the clinical trials for our various products going forward; 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 development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. Although we intend to fund our cash flow needs through public or private equity offerings, debt financings loans, and 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 (or at all) to the Company.
For the six months ended June 30, 2012 and during the year ended December 31, 2011, we borrowed varying amounts pursuant to promissory notes, the majority of which has been from our officers, stockholders and related parties. As of June 30, 2012 and December 31, 2011, the amounts outstanding under outstanding promissory notes totaled $9.2 million and $5.7 million, respectively. Of the $9.2 million of promissory notes outstanding as of June 30, 2012, $6.2 million was due to officers, stockholders and related parties and of the $5.7 million of promissory notes outstanding as of December 31, 2011, $3.0 million was due to officers, stockholders and related parties. The promissory notes carry interest from 0% to 15% and, except for a promissory note in the principal amount of $0.5 million, the debt is unsecured. Interest on 0% loans was imputed at the incremental borrowing rate of 6% per annum. The net proceeds of the loans were used for working capital.
The table below lists our outstanding convertible loans as of June 30, 2012 and the material terms of such loans:
|
Lender
|
|
Annual
Interest
Rate
|
|
|
Date of
Loan
|
|
Term of
Loan
|
|
Principal
Loan
Amount (1)
|
|
|
Conversion
Price
|
|
|
Amount
Outstanding as of
June 30, 2012 (1)
|
|
|
Number of Shares
Underlying Note as
of June 30, 2012
|
|
|
Shigeru Matsuda
|
|
6.5
|
%
|
|
|
1/12/2009
|
|
5 years
|
|
$
|
221,895
|
|
|
$
|
3.05
|
|
|
$
|
312,271
|
|
|
|
102,305
|
|
|
Nami Murakami
|
|
0
|
%
|
|
|
8/16/2010
|
|
5 years
|
|
|
18,000
|
|
|
$
|
3.05
|
|
|
|
18,000
|
|
|
|
5,898
|
|
|
Makoto Murakami
|
|
0
|
%
|
|
|
8/16/2010
|
|
5 years
|
|
|
18,000
|
|
|
$
|
3.05
|
|
|
|
18,000
|
|
|
|
5,898
|
|
|
Kazuo Murakami
|
|
0
|
%
|
|
|
8/16/2010
|
|
5 years
|
|
|
18,000
|
|
|
$
|
3.05
|
|
|
|
18,000
|
|
|
|
5,898
|
|
|
M’s Support Co. Ltd.
|
|
0
|
%
|
|
|
8/17/2010
|
|
5 years
|
|
|
18,000
|
|
|
$
|
3.05
|
|
|
|
18,000
|
|
|
|
5,898
|
|
|
Yumiko Takemoto
|
|
6
|
%
|
|
|
11/23/2010
|
|
5 years
|
|
|
2,000
|
|
|
$
|
3.05
|
|
|
|
2,000
|
|
|
|
656
|
|
|
Mitsubishi UFJ Capital III, Limited Partnership
|
|
10
|
%
|
|
|
3/14/2011
|
|
5 years
|
|
|
500,000
|
|
|
$
|
3.05
|
|
|
|
500,000
|
|
|
|
163,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew Wood
|
|
8
|
%
|
|
|
7/8/2011
|
|
1 year
|
|
|
3,240
|
|
|
$
|
3.60
|
|
|
|
3,498
|
|
|
|
972
|
|
|
Yung Min Suh
|
|
8
|
%
|
|
|
7/11/2011
|
|
1 year
|
|
|
925,200
|
|
|
$
|
3.60
|
|
|
|
998,180
|
|
|
|
277,272
|
|
|
Yumiko Nakamura
|
|
8
|
%
|
|
|
8/9/2011
|
|
1 year
|
|
|
54,000
|
|
|
$
|
3.60
|
|
|
|
57,912
|
|
|
|
16,087
|
|
|
Technoble Co., Ltd.
|
|
8
|
%
|
|
|
8/30/2011
|
|
1 year (2)
|
|
|
130,100
|
|
|
$
|
3.60
|
|
|
|
138,947
|
|
|
|
38,596
|
|
|
Delfan Co., Ltd.
|
|
8
|
%
|
|
|
8/30/2011
|
|
1 year (2)
|
|
|
130,100
|
|
|
$
|
3.60
|
|
|
|
138,947
|
|
|
|
38,596
|
|
|
Jun & Yumi Saito
|
|
8
|
%
|
|
|
8/31/2011
|
|
1 year
|
|
|
5,400
|
|
|
$
|
3.60
|
|
|
|
5,766
|
|
|
|
1,602
|
|
|
Sumiko Fujisawa
|
|
8
|
%
|
|
|
9/7/2011
|
|
1 year (2)
|
|
|
30,000
|
|
|
$
|
3.60
|
|
|
|
31,987
|
|
|
|
8,885
|
|
|
Hideki & Eiko Uehara
|
|
8
|
%
|
|
|
9/7/2011
|
|
1 year (2)
|
|
|
30,000
|
|
|
$
|
3.60
|
|
|
|
31,987
|
|
|
|
8,885
|
|
|
Dennis Y. Teranishi
|
|
8
|
%
|
|
|
9/9/2011
|
|
1 year (2)
|
|
|
108,000
|
|
|
$
|
3.60
|
|
|
|
115,104
|
|
|
|
31,973
|
|
|
Shitabata Family Trust
|
|
8
|
%
|
|
|
9/29/2011
|
|
1 year (2)
|
|
|
450,000
|
|
|
$
|
3.60
|
|
|
|
477,600
|
|
|
|
132,667
|
|
|
Shitabata Family Trust
|
|
8
|
%
|
|
|
10/3/2011
|
|
1 year (2)
|
|
|
1,050,000
|
|
|
$
|
3.60
|
|
|
|
1,113,467
|
|
|
|
309,296
|
|
|
MLPF&S Cust. FBO Willis C. Lee
|
|
8
|
%
|
|
|
10/5/2011
|
|
1 year
|
|
|
128,002
|
|
|
$
|
3.60
|
|
|
|
135,682
|
|
|
|
37,689
|
|
|
Tracey & Mark Doi
|
|
8
|
%
|
|
|
2/10/2012
|
|
1 year
|
|
|
108,000
|
|
|
$
|
3.60
|
|
|
|
111,408
|
|
|
|
30,947
|
|
|
Yukio Hasegawa
|
|
8
|
%
|
|
|
2/15/2012
|
|
1 year (2)
|
|
|
133,333
|
|
|
$
|
3.60
|
|
|
|
137,392
|
|
|
|
38,165
|
|
|
Robert and Megumi Jo
|
|
8
|
%
|
|
|
2/18/2012
|
|
1 year (2)
|
|
|
100,000
|
|
|
$
|
3.60
|
|
|
|
102,933
|
|
|
|
28,593
|
|
|
Hiroshi Iguchi
|
|
8
|
%
|
|
|
2/20/2012
|
|
1 year (2)
|
|
|
133,333
|
|
|
$
|
3.60
|
|
|
|
137,244
|
|
|
|
38,123
|
|
|
The Saito Family Trust
|
|
8
|
%
|
|
|
2/20/2012
|
|
1 year (2)
|
|
|
100,000
|
|
|
$
|
3.60
|
|
|
|
102,933
|
|
|
|
28,593
|
|
|
J.R. Downey
|
|
8
|
%
|
|
|
3/2/2012
|
|
1 year (2)
|
|
|
150,005
|
|
|
$
|
3.60
|
|
|
|
154,038
|
|
|
|
42,788
|
|
|
Paul Terasaki
|
|
10
|
%
|
|
|
5/1/2012
|
|
1 year
|
|
|
500,000
|
|
|
$
|
3.30
|
(3)
|
|
|
508,472
|
|
|
|
154,082
|
|
|
Yasushi Nagasaki
|
|
10
|
%
|
|
|
6/29/2012
|
|
Due on demand
|
|
|
388,800
|
|
|
$
|
3.30
|
|
|
|
389,016
|
|
|
|
117,884
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
$
|
5,453,408
|
|
|
|
|
|
|
$
|
5,778,785
|
|
|
|
|
|
|
(1)
|
Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as applicable, on each loan as of the dates indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
|
|
(2)
|
Lender may demand repayment of the note on or after the three-month anniversary of the loan date.
|
|
(3)
|
Convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower
|
The table below lists our outstanding non-convertible loans as of June 30, 2012 and the material terms of such loans:
|
Lender
|
|
Annual
Interest
Rate
|
|
Date of
loan
|
|
Term of Loan
|
|
Principal
Loan
Amount
(1)
|
|
|
Amount
Outstanding as of
June 30, 2012 (1)
|
|
|
Hope International Hospice, Inc.
|
|
8
|
%
|
|
1/12/2011
|
|
2 years
|
|
$
|
200,000
|
|
|
$
|
203,556
|
|
|
Yutaka Niihara
|
|
6.5
|
%
|
|
1/12/2009
|
|
Due on demand
|
|
|
272,800
|
|
|
|
273,736
|
|
|
Hope International Hospice, Inc.
|
|
8
|
%
|
|
1/17/2012
|
|
Due on demand
|
|
|
200,000
|
|
|
|
203,333
|
|
|
Lan T. Tran
|
|
11
|
%
|
|
2/10/2012
|
|
2 years (2)
|
|
|
205,000
|
|
|
|
213,895
|
|
|
Izumi Tanaka
|
|
11
|
%
|
|
2/16/2012
|
|
2 years (3)
|
|
|
133,333
|
|
|
|
136,389
|
|
|
Mariko Tejima
|
|
11
|
%
|
|
2/16/2012
|
|
2 years (3)
|
|
|
133,333
|
|
|
|
136,389
|
|
|
Hideki & Eiko Uehara
|
|
11
|
%
|
|
2/15/2012
|
|
Due on demand
|
|
|
133,333
|
|
|
|
135,207
|
|
|
Shigeru Matsuda
|
|
11
|
%
|
|
2/15/2012
|
|
Due on demand
|
|
|
833,335
|
|
|
|
845,048
|
|
|
Hope Hospice International
|
|
8
|
%
|
|
6/14/2012
|
|
Due on demand
|
|
|
200,000
|
|
|
|
200,756
|
|
|
Hope Hospice International
|
|
8
|
%
|
|
6/21/2012
|
|
Due on demand
|
|
|
100,000
|
|
|
|
100,474
|
|
|
Cuc T. Tran
|
|
11
|
%
|
|
6/27/2012
|
|
1 year
|
|
|
10,000
|
|
|
|
10,012
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
$
|
3,678,505
|
|
|
$
|
3,761,744
|
|
|
(1)
|
Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as applicable, on each loan as of the dates indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
|
|
(2)
|
Lender may demand repayment of the note in full at any time prior to maturity.
|
|
(3)
|
Lender may demand repayment of the note on or after the six-month anniversary of the loan date.
|
The loan to the Company from Hope International Hospice, Inc. made in 2011 is evidenced by a promissory note. Pursuant to the note, interest is payable quarterly with the principal being due and payable on the maturity date. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.
The loan to the Company from Dr. Niihara made in 2009 is evidenced by a promissory note. Pursuant to the note, interest is payable monthly with principal and any accrued unpaid interest being due upon demand by the holder. If we fail to make a payment within 10 days after the due date, we must pay an additional late fee equal to 2% of the late interest payment. If we fail to make any payment when due under the note, breach any condition relating to any security for the note (despite the fact that the note is unsecured), seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. Dr. Niihara loaned the Company an additional $100,000 on June 21, 2011; the Company made a $70,000 partial repayment of this note on August 29, 2011. Pursuant to the promissory note evidencing the loan, interest is payable monthly with principal and any accrued unpaid interest being due upon demand by the holder. If we fail to make any payment when due under the note or seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.
The loans to the Company from Nami Murakami, Makoto Murakami, Kazuo Murakami and M’s Support Co. Ltd. are evidenced by promissory notes. Pursuant to the notes, interest is payable quarterly with the principal being due and payable on the maturity date. The holder, at his option, may convert the principal amount of the note into shares of our common stock at a conversion price of $3.05 per share. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.
The loan to the Company from Mitsubishi UFJ Capital III, Limited Partnership is evidenced by a promissory note. Pursuant to the note, interest accrues at 10% per annum beginning on January 1, 2012. Interest only payments are due monthly with the principal being due and payable on the maturity date. The holder, at any time during the term of the note but no later than one month after the date our shares of common stock are traded on NASDAQ, may convert the principal amount and any accrued interest owing at the time of such conversion into shares of our common stock at $3.05 per share. Upon the conversion of the note, the holder will also receive a warrant to purchase shares of our common stock in an amount equal to 25% of the number of shares received upon the conversion of the note. The exercise price of the warrants will be $3.05 per share. The principal amount of the note is secured by 73,550 shares of common stock of CellSeed owned by Emmaus Medical. If we fail to make any payment when due under the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. In addition, the lender may require us to perform all obligations under the note in the event our shares are not traded on NASDAQ on or prior to December 31, 2011 or that any stockholder is engaged in any antisocial activities.
The loan to the Company from Shigeru Matsuda from January 2009 is evidenced by a promissory note. If requested by the lender, we must make quarterly interest only payments. The lender may also allow interest payments to accrue, pursuant to which the unpaid but accrued interest shall be added to the principal. The entire unpaid principal and any accrued interest thereon shall become immediately due and payable on demand by the holder. The holder, at any time during the term of the note, may convert the principal amount and any accrued interest owing at the time of such conversion into shares of our common stock at $3.05 per share. If we fail to make a payment within 10 days after the due date, we must pay an additional late fee equal to 2% of the late interest payment. Dr. Niihara and Daniel Kimbell, the former Chief Operating Officer of Emmaus Medical, agreed to be the primary guarantor and secondary guarantor on the note such that in the event we are unable to pay the note, Dr. Niihara and Mr. Kimbell, in that order, shall make payments due to the lender. If we or the guarantors fail to make any payment due under the terms of the note, or breach any condition relating to any security, security agreement, note, mortgage or lien granted as collateral security for the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership not vacated within 30 days, the entire balance of the note and any interest accrued thereon shall be immediately due and payable to the holder.
The loan to the Company from Yumiko Takemoto is evidenced by a promissory note. Pursuant to the note, interest is payable quarterly with the principal being due and payable on the maturity date. The holder, at his option, may convert the principal amount of the note into shares of our common stock at a conversion price of $3.05 per share. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
The loans to the Company from Jun & Yumi Saito, Andrew K. Wood and Yumiko Nakamura are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued Jun & Yumi Saito, Mr. Wood and Ms. Nakamura, three-year warrants to purchase 375,225 and 3,750 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from Yung Min Suh is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on the maturity date. The principal amount and any unpaid accrued interest due under the promissory note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Ms. Suh a three-year warrant to purchase 64,250 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment when due under the note, seek relief under the U.S. Bankruptcy Code, fail to deliver shares of common stock upon conversion of the note within the deadline specified in the note, suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, consent to the appointment of a receiver or similar official that is not vacated within 30 days, make a general assignment for the benefit of our creditors or admit in writing that we are generally unable to pay our debts as they become due, the entire balance of the note shall be due and payable to the holder. This loan was refinanced subsequent to June 30, 2012. In July 2012, the Company refinanced a $925,200 principal amount convertible note and its unpaid accrued interest (the “Original Note”). Pursuant to the refinancing, Ms. Suh loaned the Company an additional $181,500 and the Company and issued a new convertible note in the principal amount of $1,180,716 to Ms. Suh, which represented the additional funds loaned to the Company by Ms. Suh and the amount due to Ms. Suh under the Original Note as of July 11, 2012 (which included unpaid accrued interest). The new note bears interest at 10% per annum and matures on the one-year anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase 13,750 shares of common stock at a per share exercise price equal to 75% of the per-share fair market value of the common stock on the date of the holder’s delivery of the notice of exercise to the Company.
The loans to the Company from Technoble Co., Ltd., Delfan Co., Ltd., Hideki & Eiko Uehara, Sumiko Fujisawa, Dennis Teranishi and the Shitabata Family Trust are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued Technoble, Delfan, Hideki & Eiko Uehara, Ms. Fujisawa, Mr. Teranishi and the Shitabata Family Trust three-year warrants to purchase 9,035, 9,035, 2,083, 2,083, 7,500 and 208,333 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder. Dr. Niihara and Mr. Lee provided a guarantee on the promissory notes entered into with the Shitabata Family Trust.
The loan to the Company from
MLPF&S Cust. FBO Willis C. Lee
is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the maturity date of the note. The principal amount plus the unpaid accrued interest due under the promissory note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued three-year warrants to purchase 35,556 shares of our common stock at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from
Hope International Hospice, Inc.
is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on demand. In connection with the issuance of the note, we issued
Hope International Hospice, Inc.
three-year warrants to purchase 55,556 shares of our common stock, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loans to the Company from
Ms. Izumi Tanaka and Ms. Mariko Tejima
are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the six month anniversary of the loan date the holder demands earlier payment of the note. The Company must make quarterly interest payments under each note. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from Ms.
Lan T. Tran
is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on demand. In connection with the issuance of the note, we issued
Ms. Tran
three-year warrants to purchase 56,945 shares of our common stock, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loans to the Company from Mr. & Mrs. Uehara and Shigeru Matsuda from February 2012 are evidenced by promissory notes. The Company is required to make quarterly interest payments pursuant to the notes. The entire principal amount of each note and any outstanding accrued interest thereon is due upon demand of the holder. In connection with the issuance of the notes, we issued Mr. & Mrs. Uehara and Mr. Matsuda three-year warrants to purchase 37,037 and 231,482 shares of our common stock, respectively, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall immediately be due and payable to the holder.
The loan to the Company from Tracey & Mark Doi is evidenced by a promissory note. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of the note. The principal amount plus the unpaid accrued interest due under the note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mrs. & Mr. Doi three-year warrants to purchase 30,000 shares of our common stock at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from Yukio Hasegawa is evidenced by a promissory note. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mr. Hasegawa three-year warrants to purchase 9,259 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loans to the Company from The Saito Family Trust, J.R. Downey, Robert & Megumi Jo and Hiroshi Iguchi are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued The Saito Family Trust, J.R. Downey, Robert & Megumi Jo and Hiroshi Iguchi three-year warrants to purchase 6,944; 10,417; 6,944, and 9,259 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from Paul Terasaki is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on the maturity date. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower. If the Company fails to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes is due and payable to the holder. Dr. Niihara provided a guarantee on the promissory note entered into with Paul Terasaki.
The loan to the Company from Yasushi Nagasaki is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on demand The principal amount and any unpaid interest due under the promissory note are convertible into shares of our common stock at $3.30 per share. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
The loan to the Company from The Niihara Family is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the six-month anniversary date of the note. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
The loans to the Company from Hope International Hospice, Inc. are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on demand. If we fail to make any payment due under the terms of the notes, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loan to the Company from Cuc T. Tran is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
In July 2012, the Company issued four convertible notes totaling $64,840 in aggregate principal amount, which bear interest at 10% per annum and mature on the one-year anniversary dates of the notes. The principal amount plus the unpaid accrued interest due under each of the convertible notes is convertible into shares of the Company’s common stock at $3.30 per share.
In July 2012 the Company sold 11,000 shares of common stock at a price of $3.00 per share for gross proceeds of $33,000.
In July 2012, the Company refinanced a convertible note in the principal amount of $925,200 and its unpaid accrued interest. In connection with the refinancing, the holder of the note loaned the Company an additional $181,500 in connection with the refinancing and the Company issued a new convertible note in the principal amount of $1,180,716 to the lender, which bears interest at 10% per annum and matures on the one-year anniversary date of the new note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase 13,750 shares of common stock at a per share exercise price equal to 75% of the per-share fair market value of the common stock on the date of the holder’s delivery of the notice of exercise to the Company.
In August 2012, the Company is planning to refinance a convertible note in the principal amount of $54,000 by paying down the principal by $4,500 and issuing a new convertible note in the amount of $49,500 which bears interest at 10% per annum and matures on the one-year anniversary date of the new note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share.
Cash Flows
Net cash used in operating activities
Net cash flows used in operating activities increased by $0.7 million, or 35%, to $2.8 million from $2.1 million for the six months ended June 30, 2012 and 2011, respectively. This increase was primarily due to a $ 3.6 million increase in net loss offset by non-cash items included in the increased net loss We incurred a non-cash expense of $1.8 million related to our issuance of warrants and options to directors, officers, employees and consultants for their services rendered and non-cash interest expenses of $1.5 million, which were partially offset by a $0.3 million gain on termination of a secured debt.
Net cash used in investing activities
Net cash flows used in investing activities increased to $1.5 million from $0.001 million for the six months ended June 30, 2012 and 2011, respectively. The increase was mainly due to a partial payment the license fee to CellSeed for the corneal technology of $1.5 million during the six month ended June 30, 2012.
Net cash from financing activities
Net cash flows from financing activities increased by $2.0 million, or 83%, to $4.4 million from $2.2 million for the six months ended June 30, 2012 and 2011, respectively, primarily as a result a $3.1 million increase in the net proceeds from the issuance of notes payable and convertible notes payable, partially offset by a $1.1 million decrease in proceeds from the issuance of shares of our common stock. Since July 2011, the Company has mainly relied on the sale and issuance of convertible and non-convertible notes for its financial and working capital needs.
None of the convertible notes payable were converted into shares of our common stock during the six months ended June 30, 2012, compared to $0.1 million for the six months ended June 30, 2011.
Off-Balance-Sheet Arrangements
Since our inception, Emmaus has not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
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 the United States, or GAAP. 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.
While our significant accounting policies are more fully described in Note 2 to our financial statements which is provided in this Form 10-Q, 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.
Revenue recognition
We recognize revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in Financial Statements
(“SAB 101”), as amended by Staff Accounting Bulletin No. 104,
Revision of Topic 13
(“SAB 104”).
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured
With prior written approval of the Company, product is returnable only by our direct customers for a returned goods credit, provided the product meets any of the following criteria:
|
|
A.
|
Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.
|
|
|
B.
|
Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.
|
|
|
C.
|
Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.
|
|
|
D.
|
Product that is discontinued, withdrawn, or recalled.
|
Credits will only be issued for full cartons only without any missing packets of product. No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company. No credit is issued for product destroyed by anyone other than the Company. Customers must return the product within 60 days of receiving our written approval for the return or the return will not be issued a credit. The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%. When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases. Credit memos expire one hundred eighty (180) days from date issued.
We estimate our sales returns based upon our prior sales and return history. Historically, sales returns have been very nominal. We continue to monitor our returns and will adjust our estimates based on its actual sales return experience. The Company records a 5% Sales Return Allowance for the NutreStore sales in the accompanying financial statements.
We are required to pay royalties, which are recognized as an expense upon sale of the products. We are required to pay a royalty to Cato equivalent to 10% of our adjusted gross sales of NutreStore® calculated on an annual basis. The 10% royalty is calculated at the end of the year and accrued on an annual basis.
Share-based compensation
We recognize compensation cost for share-based compensation awards during the service term of the recipients of the share-based awards. The fair value of share-based is calculated using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton 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 derived from historical data on awards exercised and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the vesting period of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the common stock of comparable publicly traded companies. These factors could change, affecting the determination of stock-based awards expense in future periods.
Marketable securities
Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gains or losses, net of taxes in accumulated other comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values when necessary.
Item 3. Quantitative and Qualitative Disclosures About Market Ris
k
Not required for a smaller reporting company.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures 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 disclosure.
As of the end of the period covered by this Quarterly Report on 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 disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 of the Exchange Act, we believe that there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 23, 2012, the Company filed a complaint in Los Angeles Superior Court against AFH Holding & Advisory, LLC (“AFH Advisory”) and Amir F. Heshmatpour. Mr. Heshmatpour is a former officer of AFH Acquisition IV, Inc. (prior to the Merger) and former director of the Company and is the Managing Partner of AFH Advisory. Pursuant to the complaint, the Company seeks return of approximately $1.2 million in proceeds (the “Placement Proceeds”) raised in a private placement conducted by AFH Acquisition IV, Inc. in April 2011 prior to the Merger, which Placement Proceeds were not received by the Company at the time of the Merger.
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Annual Report.
Sales of Unregistered Equity Securities During the Three Months Ended June 30, 2012
On May 1, 2012, the Company issued a convertible note in the aggregate principal amount of $500,000 to Paul Terasaki, which bears interest at 10% per annum and matures on the one-year anniversary dates of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower. If the Company fails to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. Dr.Niihara provided a guarantee on the promissory note entered into with Paul Terasaki.
On June 29, 2012, the Company issued a convertible note in the aggregate principal amount of $388,800 to Yasushi Nagasaki which bears interest at 10% per annum. The entire principal amount of the note and any outstanding accrued interest is due on demand. The principal amount and any unpaid interest due under the promissory note are convertible into shares of our common stock at $3.30 per share. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
The convertible notes issued to the above-referenced security holders were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 promulgated thereunder. These securities qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuances of the securities by the Company 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 offerees; (ii) there was no public solicitation; (iii) each offeree was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offerees.
None.
Not applicable.
Issuances of Securities during the three months ended June 30, 2012
During the three months ended June 30, 2012, we issued the following convertible promissory notes to the following persons with the terms indicated below:
|
Noteholder
|
|
Type of Note
|
|
Interest Rate
|
|
Date of Note
|
|
Term
|
|
Principal Amount
|
|
|
Paul Terasaki
|
|
Convertible
|
|
10%
|
|
5/1/2012
|
|
1 year
|
|
$
|
500,000
|
|
|
Yasushi Nagasaki
|
|
Convertible
|
|
10%
|
|
6/29/2012
|
|
Due on demand
|
|
$
|
388,800
|
|
The loan to the Company from Paul Terasaki is evidence by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on the maturity date. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower. If the Company fails to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. Dr.Niihara provided a guarantee on the promissory note entered into with Paul Terasaki.
The loan to the Company from Yasushi Nagasaki is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on demand The principal amount and any unpaid interest due under the promissory note are convertible into shares of our common stock at $3.30 per share. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.
Issuance of Promissory Notes during the three months ended June 30, 2012
From April to June 2012, we issued non-convertible promissory notes to the following persons with the terms indicated below:
|
Noteholder
|
|
Type of Note
|
|
Interest Rate
|
|
Date of Note
|
|
Term of Note
|
|
Principal Amount
|
|
|
The Niihara Family
|
|
Non-convertible
|
|
15
|
%
|
|
4/5/2012
|
|
Six months
|
|
$
|
1,257,370
|
|
|
Hope International Hospice, Inc.
|
|
Non-convertible
|
|
8
|
%
|
|
6/14/2012
|
|
Due on demand
|
|
$
|
200,000
|
|
|
Hope International Hospice, Inc.
|
|
Non-convertible
|
|
8
|
%
|
|
6/21/2012
|
|
Due on demand
|
|
$
|
100,000
|
|
The loan to the Company from The Niihara Family is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
The loans to the Company from Hope International Hospice, Inc. are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note. If we fail to make any payment due under the terms of the notes, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.
Termination of Offering
On July 19, 2012, the Company elected to terminate the offering contemplated by the Amended and Restated Letter of Intent dated September 30, 2011 by and between the Company and AFH Advisory (the “LOI”). Based on the Company’s termination of the Offering pursuant to the terms of the LOI and separate from the lawsuit filed by the Company against AFH Advisory and Mr. Heshmatpour, the Company is seeking to cancel certain shares of its common stock that were previously issued to AFH Advisory, Mr. Heshmatpour and their affiliates.
The information included in this Item 5 is provided in accordance with Item 1.01, Item 2.03 Item 3.02 and Item 8.01 of Form 8-K.
(a) Exhibits
|
Exhibit
Number
|
|
Description of Document
|
|
|
|
|
|
4.1
|
|
Convertible Promissory Note dated June 29, 2012 issued by the registrant to Paul Terasaki.
|
|
|
|
|
|
4.2
|
|
Convertible Promissory Note dated June 29, 2012 issued by the registrant to Yasushi Nagasaki.
|
|
|
|
|
|
10.1
|
|
Form of Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A attached to the Form of Promissory Note.
|
|
|
|
|
|
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.
|
EMMAUS LIFE SCIENCES, INC.
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: August 14, 2012
|
|
/s/ Yutaka Niihara
|
|
|
By:
|
Yutaka Niihara, M.D., MPH
|
|
|
Its:
|
President and Chief Executive Officer
(principal executive officer and duly authorized officer)
|
|
|
|
|
|
|
|
/s/ Peter Ludlum
|
|
|
By:
|
Peter Ludlum
|
|
|
Its:
|
Chief Financial Officer
(principal financial and accounting officer)
|
41