EMMAUS LIFE SCIENCES, INC. In the following discussion, the terms, "we," "us," "our," "Emmaus" or the
"Company" refer to
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the audited consolidated financial
statements and the related notes included in our Annual Report on Form 10-K for
the year ended
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words "anticipate," "believe," "expect," "plan," "intend," "seek," "estimate," "project," "could," "may" and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management's current views with respect to future events and financial performance and involve risks and uncertainties, including those set forth in the "Risk Factors" section of the Annual Report, many of which are beyond our control.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove to be incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
Consequently, all forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements. We undertake no duty to amend or
update these statements beyond what is required by
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery,
development, marketing and sale of innovative treatments and therapies,
primarily for rare and orphan diseases. Our lead product, Endari®
(prescription-grade L-glutamine oral powder) is approved by the
Endari® is marketed and sold in the
As of
Financial Overview
Revenues, net
We realize net revenues primarily from sales of Endari® to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These
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various discounts, rebates, and chargebacks are referred to as "variable consideration." Revenue from product sales is recorded net of variable consideration.
Management estimates variable consideration using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Under the Accounting Standards Codification ("ASC") 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligations.
Sales Discounts: We provide our customers prompt payment discounts and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to bulk discounts offered by us increased in 2021 and adversely affected sales in the first quarter of 2022.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping, and distribution of Endari®.
Research and Development Expenses
Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations ("CRO") that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and activities related to regulatory filings, manufacturing development costs and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future
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collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the
interpretation of the regulatory requirements, we are unable to estimate the
amount of costs of obtaining regulatory approvals of Endari® outside of the
General and Administrative Expense
General and administrative expense consists principally of salaries and related employee costs, including share-based compensation for our directors, officers, and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel
involved in the promotion, sale, and marketing of Endari®. Other selling cost
include advertising, third party consulting costs, the cost of in-house sales
personnel and travel-related costs. We expect selling expenses to increase as we
acquire additional personnel to support the commercialization of Endari® in the
COVID-19
In retrospect, we believe our business and net revenues were adversely affected in 2020 and 2021 by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors' offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care. We do not expect the ongoing epidemic to have a material adverse affect on our business or results of operation, but intend to consider future changes to our business to adapt to the new post-pandemic environment, including an increased focus on our telehealth solution.
Inflation
Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.
Environmental Expenses
The cost of compliance with environmental laws has not been material over the past two years and is not expected to have a material effect for the foreseeable future. Any such costs are included in general and administrative costs.
Inventories
Inventories consist of raw materials, finished goods and work-in-process and are
valued on a first-in, first-out basis and at the lower of cost or net realizable
value. Substantially all raw materials purchased during each of the six months
ended
Results of Operations:
Three months ended
Net revenues. Net revenues decreased by
Cost of Goods Sold. Cost of goods sold remained consistent at
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Research and Development Expenses. Research and development expenses decreased
by
Selling Expenses. Selling expenses increased by
General and Administrative Expenses. General and administrative expenses
decreased by
Other Income (Expense). Total other expenses increased by
Net Income (Loss). Net loss for the three months ended
Six months ended
Net revenues. Net revenues decreased by
Cost of Goods Sold. Cost of goods sold increased by
Research and Development Expenses. Research and development expenses decreased
by
Selling Expenses. Selling expenses increased by
General and Administrative Expenses. General and administrative expenses
decreased slightly by
Other Income (Expense). Total other expense increased by
Net Income (Loss). Net loss for the six months ended
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Liquidity and Capital Resources
Based on our losses to date, current liabilities, anticipated future net
revenues and operating expenses, debt repayment obligations, planned funding to
Our subsidiary,
Liquidity represents our ability to pay our liabilities when they become due,
fund our business operations, fund the operations and retrofitting of
As of
Of our outstanding convertible promissory notes,
Our API Supply Agreement and revised API Agreement with Telcon provide for an
annual API purchase target of
Due to uncertainties regarding our ability to meet our current liabilities and future operating expenses, there is substantial doubt about our ability to continue as a going concern for 12 months from the date of this filing as referred to in the "Risk Factors" section of this Quarterly Report and Note 2 of the Notes to condensed consolidated financial statements included herein.
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Cash flows for the six months ended
Net cash used in operating activities
Net cash used in operating activities increased by
Net cash used in investing activities
Net cash used in investing activities decreased by
Net cash from financing activities
Net cash from financing activities decreased by
Off-Balance-Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in
Refer to "Critical Accounting Policies" in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Annual Report for our critical accounting policies. There have been no material
changes in any of our critical accounting policies during the six months ended
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