| ●• | Physician Self-Referral Laws. There is a federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits a physician from referring Medicare patients to an entity providing “designated health services” if the physician or a member of such physician’s immediate family has a “financial relationship” with the entity, unless an exception applies. We do not believe the Company’s operations, including those of Arcadian, implicate the Stark Law, because neither the Company nor Arcadian nor the Providers acting pursuant to the Services Agreements offer or provide any services that would be considered designated health services under the Stark Law. As with the anti-kickback laws, however, physician self-referral prohibitions exist at the state level and which, like the Stark Law, apply civil penalties to violations of their terms. These state physician self-referral laws are often similar to the Stark Law, but may apply to different services than the Stark Law and may have different exceptions. The Company does not believe it is noncompliant with any state physician self-referral laws, but these laws are often vague, subject to amendment and lacking in court precedent or regulatory guidance. It is possible, therefore, that now or in the future the Company could be found to be out of compliance with one or more state physician self-referral laws. Any such noncompliance could have a material adverse effect on our business, financial condition and results of operations; |
| ● | Federal and State False Claims Statutes. The federal False Claims Act imposes civil and criminal liability onfalse claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities thatfrom knowingly submitpresenting, or causing to be presented, false or fraudulent claims for payment from Medicare, Medicaid, or other third-party payors; |
| • | the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
| • | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and its implementing regulations, which imposes certain requirements relating to the government or knowingly making, or causing to be made, aprivacy, security and transmission of individually identifiable health information; and |
| • | state law equivalents of each of the above federal laws, such as anti-kickback and false statement to have a false claim paid, includingqui tam or whistleblower suits. Some states haveclaims laws similar to the False Claims Act. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Some state fraud and abuse lawswhich may apply to items or services reimbursed by any third-party payor, including commercial insurers, not just those reimbursed by a government funded healthcare program; |
| ● | Other Healthcare Anti-Fraud Laws. The criminal healthcare fraud provisions of HIPAA and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation; |
| ● | Beyond HIPAA, additional risks include reassignment of payment rules that prohibit certain types of billing and collection practices in connection with claims payable by Medicare or Medicaid programs; and |
| ● | a provision of the Social Security Act that imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments. |
Finally, in the operations of our Company and our Providers, we must comply with additional restrictions, including the following:
| ● | Reassignment Rules. Payment reassignment rules prohibit certain types of billing and collection practices in connection with claims payable by the Medicare or Medicaid programs; |
| ● | Debt Collection Laws. Laws that regulate debt collection practices may be applied to our debt collection practices; |
| ● | Refund Disclosures. A provision of the Social Security Act imposes criminal penalties on healthcare providers who fail to disclose or refund known overpayments; |
| ● | Billing Requirements. Federal and state laws prohibit providersgoverning the privacy and security of health information in certain circumstances, many of which differ from billingeach other in significant ways and receiving payment from Medicare and Medicaid for services unless the servicesoften are medically necessary, adequately and accurately documented, and billed using codes that accurately reflect the type and level of services rendered; andnot preempted by HIPAA, thus complicating compliance efforts. |
| ● | Certification and Accreditation Requirements. Federal and state laws and policies that require healthcare providers to maintain licensure, certification or accreditation to enroll and participate in the Medicare and Medicaid programs, to report certain changes in their operations to the agencies that administer these programs. |
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with theseIf we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may prove costly. Failurebe subject to comply with these laws and other laws can result inpenalties, including civil and criminal penalties, such asdamages, fines, damages, overpayment recoupment loss of enrollment status and exclusion from participation in U.S. federal or state health care programs, and the Medicarecurtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and Medicaid programs. our financial results. The FDA provides guidelines with respect to appropriate promotion and continuing medical and health education activities. Although we endeavor to follow these guidelines, the FDA or the Office of the Inspector General: U.S. Department of Health and Human Services may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In addition, management’s attention could be diverted, and our reputation could be damaged. Although compliance programs can mitigate the risk of our being found in violationinvestigation and prosecution for violations of these laws, and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business.risks cannot be eliminated entirely. Any action against us for violation of these laws, or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our businessbusiness. Moreover, achieving and result in adverse publicity. To enforcesustaining compliance with theapplicable federal and state privacy, security and fraud laws may prove costly.
Even though we have obtained Orphan Drug designation for Endari®, we may not be able to maintain Orphan Drug marketing exclusivity for this product candidate or any of our other product candidates. Regulatory authorities in some jurisdictions, including the U.S. Department of Justice and the OIG,European Union, may designate therapeutic products under development for relatively small patient populations as “orphan drugs”. Under the Orphan Drug Act, the FDA may designate a therapeutic product as an Orphan Drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the U.S. We have recently increased their scrutiny of healthcare providers,obtained Orphan Drug designation from the FDA and Orphan Medicinal designation from the EC for L-glutamine treatment for SCD, and we may seek Orphan Drug designation for our other product candidates. Generally, if a product candidate with an Orphan Drug designation subsequently receives the first marketing approval for the indication for which it has ledbeen granted such designation, the drug is entitled to a numberperiod of investigations, prosecutions, convictions and settlementsmarketing exclusivity, which precludes the FDA or EC, as applicable, from approving another marketing application for the same product candidate prior to the expiration of that time period. The applicable period is seven years in the healthcare industry. Dealing with investigationsU.S. and ten years in the EU. The exclusivity period in the EU can be time-reduced to six years if the product no longer meets the criteria for Orphan Medicinal designation or if its commercialization is sufficiently profitable so that market exclusivity is no longer justified. Orphan Drug and resource-consumingOrphan Medicinal exclusivity may be lost if the FDA or EC determines that the request for designation was materially defective or if the manufacturer is unable to ensure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. In the U.S., Orphan Drug exclusivity may be lost if another L-glutamine product for the same indication demonstrates clinical superiority, such as a better safety or efficacy profile, in which case the FDA would be permitted to approve the third-party product. Orphan Drug exclusivity does not bar the FDA from approving another L-glutamine product for any other indication. Nor does Orphan Drug designation bar the FDA from granting Orphan 36
Drug designation and can divert management’s attentionapproving another product such as Oxbryta, from Global Blood Therapeutics, Inc. for treating SCD, for the same orphan disease or condition. Any product candidate for which we obtain marketing approval would be subject to post-marketing regulatory requirements and limitations and could be subject to recall or withdrawal from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damagesmarket, and mandatory minimum penalties of $5,500 to $11,000 per false claim or statement, healthcare providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages thatwe may be awardedsubject to penalties if we fail to comply with such regulatory requirements or if we experience unanticipated problems in litigation proceedings. Such settlements often contain additional compliancecommercializing any of our product candidates, when and if any of them are approved by regulators. Any product candidate for which we obtain marketing approval, along with the collection and reporting of post-approval clinical data, manufacturing processes, labeling, advertising and promotional activities for the resulting product, will be subject to continual requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ compliance with the healthcare reimbursement rules and fraud and abuse laws. The laws, regulations and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations or standards will not materially adversely affect our business. We cannot assure you that a review of our business by judicial, law enforcement, regulatory or accreditation authorities will not result in a determination that could adversely affect our operations.
In addition, the FDA regulates development, testing, labeling, manufacturing, marketing, promotion, distribution, record-keeping and reporting requirements for prescription drugs. Compliance with laws and regulations enforced by the FDA and other regulatory agenciesauthorities. These requirements include submissions of safety and other post-marketing information and reports, establishment registration and product listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if the FDA or other regulators outside the U.S. grant marketing approval to any of our product candidates, the approval may be required in relationsubject to future productslimitations on the indicated uses for which it may be marketed as a product or services developed or used by us, in addition to the regulatory processconditions of approval, including the requirement to implement a risk evaluation and dialogue inmitigation strategy (“REMS”). If any of our product candidates receives marketing approval, the labeling (including the package insert) that must accompany its distribution as a product may limit its approved use, which we are now engagedcould limit the total number of prescriptions written for such products.
In consultation with the FDA, (for more information, please seeEmmaus is designing clinical studies to generate data in stages to fulfill the risk factor entitled “Thepost-marketing commitment for the current SCD indication of Endari®. These studies will require additional funding and are designed to include dosing and safety, particularly in those populations not yet given Endari®. On any future products, the FDA believesmay also require additional costly post-marketing studies or clinical trials or surveillance to monitor the safety or effectiveness of any other approved product. The FDA closely regulates the post-approval marketing and promotion of therapeutic products to ensure they are marketed for the approved indications and in accordance with the provisions of the approved labeling, and that rEEGany marketing claims or communications by a person or company responsible for the manufacture and potentially,distribution of the product regarding off-label use are truthful and not misleading. If we market any of our PEER Online service, constituteproducts for indications that have not been approved in a medical device, whichmanner that is considered misleading or not truthful, we may be subject to regulation by the FDA. As we continue to market our PEER Online service, there is risk that the FDA will commence an enforcement action against us. The FDA has informed us that our marketingfor misbranding the product. Violations of the FDC&A relating to the promotion of prescription products may lead to investigations alleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws. In recent years, several pharmaceutical companies have been or settled lawsuits for fined significant amounts for such violations. In addition, later discovery of previously unknown adverse events or other problems with any of our rEEG services without prior approvalproduct candidates that are approved for marketing as products, the contract manufacturers from which we obtain supplies of these products, the manufacturing processes they use to manufacture these products, or re-classificationour or their failure to comply with regulatory requirements, may have negative consequences, including: | • | restrictions on the manufacturers or manufacturing processes for such products; |
| • | restrictions on the labeling or marketing of such products; |
| • | restrictions on distribution or use of such products; |
| • | requirements to conduct post marketing studies or clinical trials; |
| • | recall or withdrawal of such products from the market; |
| • | refusal to approve pending applications or supplements to approved marketing applications that we submit; |
| • | clinical holds on clinical studies of such products; |
| • | fines, restitution or disgorgement of revenue or profit generated by sales of such products; |
| • | suspension or withdrawal of the marketing approvals of such products; |
| • | refusal to permit the import or export of such products; |
| • | seizure of such products; |
| • | injunctions prohibiting the manufacture, marketing, sale, distribution, or related action in respect of such products; |
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| • | the imposition of civil or criminal penalties; and/or |
| • | debarment of our company and any of our officers or other employees responsible for such problems from future dealings with the FDA. |
Noncompliance with applicable regulatory requirements regarding safety monitoring, also called pharmacovigilance, and with requirements related to the FDA constitutes a violationdevelopment of therapeutics for the Federal Food, Drug and Cosmetic Act”). Failurepediatric population, can also result in significant financial penalties. Similarly, failure to comply with applicable lawsregulatory requirements regarding the protection of personal information can also lead to significant penalties and regulationssanctions. Recently enacted and future legislation may result in various adverse consequences, including withdrawalincrease the difficulty and cost for us to obtain marketing approval of our product candidates and then commercialize them as products and services fromaffect the market,prices we may obtain. In the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or the impositiondelay marketing approval of civilour product candidates, restrict or criminal sanctions.regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. The impact of healthcare reform legislationAmong policy makers and other changespayors in the healthcare industryU.S. and elsewhere, there is significant interest in healthcare spending on us is currently unknown, but may adversely affect our business, financial condition and results of operations.
Our revenue is dependent on the healthcare industry and could be affected bypromoting changes in healthcare spendingsystems with the stated goals of containing healthcare costs, improving quality and policy. The healthcareexpanding access. In the U.S., the pharmaceutical industry is subject to changing political, regulatoryhas been a particular focus of these efforts and other influences. Thehas been significantly affected by major legislative initiatives. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act or PPACA made major changes in how healthcare is delivered and reimbursed, and increased(“PPACA”), which intended to broaden access to health insurance, benefits toreduce or constrain the uninsured and underinsured populationgrowth of the United States.
The PPACA, among other things, increased the number of individuals with Medicaid and private insurance coverage, implemented reimbursement policies that tie payment to quality, facilitated the creation of accountable care organizations that may use capitation and other alternative payment methodologies, strengthened enforcement ofhealthcare spending, enhance remedies against fraud and abuse, lawsadd new transparency requirements for the healthcare and encouragedhealth insurance industries, impose new taxes and fees on the use of information technology. The future ofhealth industry and impose additional health policy reforms.
Among the PPACA is uncertain and the PPACA remains in a state of near-constant change. Several of these changes require implementing regulations which have not yet been drafted or have been released only as proposed rules. Such changes in the regulatory environment may also result in changes to our payor mix that may affect our operations and revenue.
In addition, certain provisions of the PPACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician servicesimportance to us are:
| • | an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs; |
| • | an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively; |
| • | expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance; |
| • | a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point of sale discounts off negotiated prices of applicable brand medicines to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s medicines purchased outside a hospital setting to be covered under Medicare Part D; |
| • | extension of a manufacturer’s Medicaid rebate liability to covered medicines dispensed to individuals who are enrolled in Medicaid managed care organizations; |
| • | expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding a new eligibility category for certain individuals with income at or below 133% of the federal poverty level beginning in 2014, thereby potentially increasing a manufacturer’s Medicaid rebate liability; |
| • | expansion of the entities eligible for discounts under the 340B Public Health Service pharmaceutical pricing program; |
| • | the new requirements under the federal Open Payments program and its implementing regulations; |
| • | a new requirement to annually report samples of medicines that manufacturers and distributors provide to physicians; and |
| • | a new Patient Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. |
In addition, other legislative changes have been proposed and postacute services for episodes of hospital care. Further,adopted since the PPACA may adversely affect payors by increasing medical costs generally,was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. On March 1, 2013, the President signed an executive order implementing the 2% Medicare payment reductions, and on April 1, 2013, these 38
reductions went into effect. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, could have an effect onamong other things, reduced Medicare payments to several providers and increased the industry and potentially impact our business and revenue as payors seekstatute of limitations period for the government to offset these increases by reducing costs in other areas. The full impact of these changes on us cannot be determined at this time. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and other third-party payors will pay for healthcare products and services, which could adversely affect our business, financial condition and results of operations.
The emergence ofrecover overpayments to providers from three to five years. These new technologies may require us to expend significant resources in order to remain competitive.
The U.S. healthcare industry is massive, with a number of large market participants with conflicting agendas, is subject to significant government regulation and is currently undergoing significant change. Changes in our industry, for example, away from high-deductible health plans, or the emergence of new technologies as more competitors enter our market, could result in our solution being less desirable or relevant.
If healthcare benefits trends shift or entirely new technologies are developed that replace existing solutions, our existing or future solutions could be rendered obsolete and our business could be adversely affected. In addition, we may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new applications and enhancements.
Any future litigation against us could be costly and time-consuming to defend.
We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims in connection with commercial disputes or employment claims made by our current or former associates. Litigationlaws may result in substantial costsadditional reductions in Medicare and may divert management’s attention and resources,other healthcare funding, which may substantially harm our business, financial condition and results of operations. Insurance may not cover such claims, may not provide sufficient payments to cover all of the costs to resolve one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our revenue and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our stock.
We may be subject to regulatory and investigative proceedings, which may find that our policies and procedures do not fully comply with complex and changing healthcare regulations.
While we have established policies and procedures that we believe will be sufficient to ensure that we operate in substantial compliance with applicable laws, regulations and requirements, the criteria are often vague and subject to change and interpretation. We may become the subject of regulatory or other investigations or proceedings, and our interpretations of applicable laws and regulations may be challenged. The defense of any such challenge could result in substantial cost and a diversion of management’s time and attention. Thus, any such challenge could have a material adverse effect on our business, regardlesscustomers for any of whether it ultimately is successful. If we fail to comply with any applicable laws, or a determination is made that we have failed to comply with these laws, our financial condition and results of operations could be adversely affected.
Failure to comply with the Federal Trade Commission Act or similar state laws could result in sanctions or limit the claims we can make.
Our promotional activities and materials, including advertising to consumers and physicians, and materials provided to third parties for their use in promoting our products, and, services, are regulated byaccordingly, our financial operations. Further, there have been multiple attempts through legislative action and legal challenge to repeal or amend the Federal Trade Commission (FTC) underPPACA, and we cannot predict the FTC Act, which prohibits unfair and deceptive acts and practices, including claims which are false, misleadingimpact that such a repeal or inadequately substantiated. The FTC typically requires competent and reliable scientific tests or studies to substantiate express or implied claims that a product or service is effective. If the FTC were to interpret our promotional materials as making express or implied claims that our products and services are effective for the treatment of mental illness, it may find that we do notamendment would have adequate substantiation for such claims. Failure to comply with the FTC Act or similar laws enforced by state attorneys general and other state and local officials could result in administrative or judicial orders limiting or eliminating the claims we can make about our products and services, and other sanctions including fines.
Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base, membership basebusiness and revenue.operations.
Numerous state and federal laws and regulations governOn November 20, 2020, the collection, dissemination, use, privacy, confidentiality, security, availability and integrity of PII, including protected health information. These laws and regulations include HIPAA. HIPAA establishes a set of basic national privacy and security standards for the protection of protected health information, or PHI, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services, which includes us.
HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.
HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $100 per violation and are not to exceed $50,000 per violation, subject to a cap of $1.5 million for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts will be able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HIPAA mandates that the SecretaryU.S. Department of Health and Human Services published a Final Rule entitled “Removal of Safe Harbor Protection for Rebates to Plans or HHS conduct periodic compliance auditsPBMs Involving Prescription Pharmaceuticals and Creation of HIPAA covered entitiesNew Safe Harbor Protection,” referred to as the Rebate Rule, which amends the discount safe harbor by eliminating protection for price concessions, including rebates, that are offered by pharmaceutical manufacturers to plan sponsors, or business associates for compliancepharmacy benefit managers under contract with them, under the HIPAA PrivacyMedicare Part D program and Security Standards. It also tasks HHS with establishing a methodology whereby harmed individuals who wereMedicare Advantage Plans, unless the victims of breaches of unsecured PHI may receive a percentageprice reduction is one required by law. Effective January 1, 2022, in advance of the Civil Monetary Penalty finecalendar year 2022 Part D plan year, safe harbor protection will be eliminated for manufacturer rebates paid directly (or indirectly through a pharmacy benefit manager) to Part D prescription drug plans and Medicare Advantage prescription drug plans. Effective December 30, 2020, the Rebate Rule will establish two new safe harbors. The first new safe harbor will protect price reductions paid by manufacturers to prescription drug plans (including prescription drug plans offered by Medicare Advantage organizations) and Medicaid managed care organizations, which are fully reflected at the violator.point-of-sale. The second new safe harbor will protect fair-market-value service fees paid to pharmacy benefit managers by manufacturers. This new rule could result in a change in incentives for health plans and PBMs in negotiating rebates and discounts with manufactures for preferred formulary placement. Because the rule is not yet in effect, at this time we cannot predict how these changes would impact our business and operations.
We expect that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any of our products. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize any of our products. HIPAA further requires that patientsLegislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for prescription medicines. We cannot be notified of any unauthorized acquisition, access, usesure whether additional legislative changes will be enacted, or disclosure of their unsecured PHI that compromiseswhether the privacyFDA regulations, guidance or securityinterpretations will be changed, or what the impact of such information, with certain exceptions related to unintentional or inadvertent use or disclosurechanges on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by employees or authorized individuals. HIPAA specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discoverythe U.S. Congress of the breach.” If a breach affects 500 patientsFDA’s approval process may significantly delay or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.
Numerous other federal and state laws protect the confidentiality, privacy, availability, integrity and security of personally identifiable information, or PII, including PHI. These laws in many cases are more restrictive than, and may not be preempted by, the HIPAA rules and may beprevent marketing approval, as well as subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our clients and potentially exposing us to additional expense, adverse publicitymore stringent product labeling and liability.post-marketing testing and other requirements.
Risks Related to Our Investment in EJ Holdings, Inc. New health information standards, whether implemented pursuantEJ Holdings has no revenues and is dependent on us to HIPAA, congressional actionfund its business and operations, and there is no assurance that we can continue to provide needed funding or otherwise, could have a significant effect on the manner in which we must handle healthcare related data, and the cost of complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil sanctions.
Because of the extreme sensitivity of the PII we store and transmit, the security features of our technology platform are very important. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons maythat EJ Holdings will be able to obtain access to sensitive clientcontinue its activities.
EJ Holdings, Inc., or EJ Holdings, a Japanese corporation 40% owned by us, is engaged in phasing in its amino acid manufacturing plant in Ube, Japan and patient data, including HIPAA PHI. As a result, our reputation could be severely damaged, adversely affecting client and patient confidence. Patients may curtail their use of or stop using our services or our client base could decrease, which would cause our business to suffer. In addition, we could face litigation, damages for contract breach, penalties andobtaining regulatory actions for violation of HIPAAclearances from the FDA and other applicable laws or regulationsregulatory agencies for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no revenues since its inception, has depended on loans from us to acquire the Ube plant and significant costs for remediation, notificationfund its operations and will continue to individuals and for measures to prevent future occurrences. Any potential security breach could also result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to clientsbe dependent on loans from us or other business partnersfinancing unless and until its plant is activated and it can secure customers, including us, for its products. There is no assurance that we can continue to provide needed funding to EJ Holdings, or that needed funding will be available from other sources. EJ Holdings has no commitments or understandings regarding any additional funding. If EJ Holdings fails to obtain needed funding, it may need to suspend activities at the Ube plant. Under the asset purchase agreement by which EJ Holdings purchased the Ube plant, the seller has the right to repurchase the plant at the purchase price, plus certain taxes, paid by EJ Holdings if the plant does not become operational within a reasonable period of time (not to exceed five years). In that event, it is likely that we would lose some or all of our investment in an effort to maintain our business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. While we maintain insurance covering certain security and privacy damages and claim expenses in the amount of $100,000 per claim, we may not carry insurance or maintain coverage sufficient to compensate for all liability and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
We outsource important aspects of the storage and transmission of client and patient information, and thus rely on third parties to manage functions that have material cyber-security risks. We attempt to address these risks in part by requiring outsourcing subcontractors who handle client and patient information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard personal health data to the same extent that applies to us. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of client and patients’ proprietary and protected health information.EJ Holdings.
We also publish statements to patients that describe how we handle and protect personal information. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders.
We also send short message service, or SMS text messages to potential end users who are eligible to use our service through certain customers and partners. While we obtain consent from or on behalf of these individuals to send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our SMS texting practices, are not adequate. These SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in the past year against companies who conduct SMS texting programs, with many resulting in multi-million dollar settlements to the plaintiffs. Any future such litigation against us could be costly and time-consuming to defend.
We may be subject to healthcare anti-fraud initiatives, which may lead to penalties and adversely affect our business.
State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers, taking an expansive definition of fraud that includes receiving fees in connection with a healthcare business that is found to violate any of the complex regulations described above. While to our knowledge we have not been the subject of any anti-fraud investigations, if such a claim were made defending our business practices could be time consuming and expensive, and an adverse finding could result in substantial penalties or require us to restructure our operations, which weEJ Holdings may not be able to do successfully.
Our operating results may fluctuate significantlyobtain needed financing or repay our loans, and our stock price could decline or fluctuate if our results do not meet the expectation of analysts or investors.
Management expects that we will experience substantial variationsownership interest in our operating results from quarter to quarter. We believe that the factors which influence this variability of quarterly results include, without limitation:
| ● | the use of and demand for telebehavioral health services and our PEER Reports, and other solutions and/or services that we may offer in the future that are based on our patented methodology; |
| ● | inconclusive or negative result from our clinical trials; |
| ● | our inability to enroll patients into our clinical trials; |
| ● | the effectiveness of new marketing and sales programs; |
| ● | turnover among our employees; |
| ● | the introduction of solutions or services that are viewed in the marketplace as substitutes for the services we provide; |
| ● | communications published by industry organizations or other professional entities in the psychiatric and physician community that are unfavorable to our business; |
| ● | the introduction of regulations which impose additional costs on or impede our business; and |
| ● | the timing and amount of our expenses, particularly expenses associated with the marketing and promotion of our services, the training of physicians and psychiatrists in the use of our PEER Reports and research and development. |
EJ Holdings may be diluted by additional financing. As of December 31, 2020, we had loaned EJ Holdings a resulttotal of fluctuations in$18.6 million, including $4.0 million of loans made pursuant to our revenue and operating expenses that may occur, managementwritten commitment dated October 28, 2020 to loan EJ Holdings a total of up to $6.5 million through the period ending March 31, 2021. Management of EJ Holdings believes that period-to-period comparisonssuch loans will be sufficient to fund its planned activities at the 39
Ube plant through the first quarter of our results of operations are not a good indication of our future performance.2021. It is possible, however, that EJ Holdings will need to secure additional debt financing or issue capital stock to fund such activities. We also anticipate that EJ Holdings will need to incur substantial debt or equity financing to fund the plant’s operations once phase in some future quarteris completed, including, but not limited to, maintaining the physical plant and maintaining regulatory approvals for the manufacture of its products. To the extent EJ Holdings raises additional debt or quarters, our operating results will be below the expectations of securities analysts or investors. In that case, our common stock price could fluctuate significantly or decline. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations onequity financing, its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% ofrepay our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of September 30, 2017, the Company had Federal net operating loss carryforwards of approximately $51.4 million and State net operating loss carryforwards of approximately $39.8 million. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2017 respectively. Our ability to utilize net operating loss carryforwardsloans may be limited due to changes inadversely affected or our ownership as defined in the Internal Revenue Code.
In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. We have recorded a full valuation allowance against the deferred tax assets attributable to our NOLs.
We may fail to successfully manage and maintain the growth of our business, which could adversely affect our results of operations.
As we continue expanding our commercial operations, this expansion could place significant strain on our management, operational and financial resources. To manage future growth, we will need to continue to hire, train, and manage additional employees, particularly a specially-trained sales force to market our PEER Reports.
Confidentiality agreements with employees, licensees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
In order to protect our proprietary technology and processes, we rely in part on confidentiality provisions in our agreements with employees, licensees, treating physicians, psychiatrists and behavioral health professionals. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Moreover, policing compliance with our confidentiality agreements and nondisclosure agreements and detecting unauthorized use of our technology is difficult and we may, therefore, be unable to determine whether piracy of our technology has actually occurred. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
The liability of our directors and officers is limited.
The applicable provisions of the Delaware General Corporation Law and our Certificate of Incorporation and By-laws limit the liability of our directors to us and our stockholders for monetary damages for breaches of their fiduciary duties, with certain exceptions, and for other specified acts or omissions of such persons. In addition, the applicable provisions of the Delaware General Corporation Law and of our Certificate of Incorporation and Bylaws, as well as indemnification agreements we have entered into with our directors, and officers, provide for indemnification of such persons under certain circumstances. In the event we are required to indemnify any of our directors or any other person, our financial strengthinterest may be harmed, which may in turn lower our stock price.diluted.
If we do not retain our senior managementEJ Holdings fails to reactivate its plant and other key employees, weobtain customers, it may not be able to successfully implementsell its plant and property and we may lose our business strategy.investment. If EJ Holdings fails to reactivate the Ube plant or to secure customers for its products, it may need to sell its plant and property. There is no assurance that it will be able to do so at an attractive price or at all. Our future success dependsloans to EJ Holdings are general unsecured obligations of EJ Holdings and we have no mortgage or other security interest in the plant or other property of EJ Holdings. Depending on the ability, experienceprice at which the plant and performanceproperty can be sold if it becomes necessary, EJ Holdings may be unable to repay our loans and its other secured or unsecured obligations, and we may lose some or all of our senior managementinvestment in EJ Holdings. EJ Holdings is subject to risks inherent in a new business and may not be successful. EJ Holdings was formed in February 2017 for the purpose of acquiring, owning and operating Kyowa’s phased-out amino acid manufacturing plant in Ube, Japan. EJ Holdings is engaged in phasing in the plant and obtaining regulatory clearances to reactivate the plant, including FDA and other regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has no operating history, andthere is no assurance that it will be successful in bringing the plant online on a timely basis, or at all, or if it does so that it will be able to secure customers for its products or successfully implement its business plan. We do not control EJ Holdings, and EJ Holdings may engage in activities contrary to our key professional personnel. Our success therefore dependsbest interests. JIP owns 60% of EJ Holdings and is entitled to designate a significant extent on retaining the servicesmajority of George Carpenter, ourEJ Holdings’ board of directors, its Chief Executive Officer our senior product development and clinical managersoutside auditors, and, others. Becauseas such, controls the management, business and operations of their ability and experience, if we lose oneEJ Holdings. It is possible that EJ Holdings will engage in actions or more of the members of our senior management or other key employees, our ability to successfully implement our business strategy could be seriously harmed. Whileactivities that we believe are inconsistent with the MOU and not in our relationships with our executives are goodbest interests and do not anticipate any of them leaving in the near future, the loss of the services of any of our senior management couldthat may have a materialan adverse effect on the economic or strategic value of our abilityownership interest in EJ Holdings. EJ Holdings retains discretion over its use of any funds that we provide to manage our business. it. We do not carry key-man life insurance oncontrol EJ Holdings’ day-to-day operations. Accordingly, funds provided by us to EJ Holdings may be used by it in any manner its management deems appropriate, including making capital expenditures and paying of salaries and other compensation of its officers and other employees. There is no assurance that EJ Holdings will use our funds in a manner that will enhance the value of our key employees.ownership interest in EJ Holdings. The audit report of our independent public accounting firm contains a qualification regarding losses attributable to our interest in EJ Holdings. If we do not attract and retain skilled personnel, we may not be ableIn the course of their audit of our financial statements for the year ended December 31, 2020, our independent registered public accounting firm wasunable to expandobtain audited financial statements or other audit support for the losses attributable to our business.
Our solutions and services are based onequity interest in EJ Holdings included in our net income for the year ended December 31, 2020 as described in Note 5 to the financial statements included in this Annual Report. As a complex database of information. Accordingly, we require skilled medical, scientific and administrative personnelresult, their audit report contains a qualification in this regard. We intend to sell and supportseek EJ Holdings’ cooperation in enhancing the accounting for our solutions and services. Our future success will depend largely on our ability to continue to hire, train, retain and motivate additional skilled personnel, particularly sales representatives who are responsible for customer education and training and customer support. If we are not able to attract and retain skilled personnel,equity interest in EJ Holdings but there is no assurance that we will not be ableab le to continue our development and commercialization activities.avoid the same or similar accounting issues in the future.
Risks Related to Our Securities We are subject to evolving and expensive corporate governance regulations and requirements. Management has determined that there is a material weaknesshave been delinquent in our internal controlsSEC reporting obligations, which has adversely affected the ability of our security holders and procedures underprospective investors to have current information regarding our financial statements and status of our business and operations and could lead to the standardsdisqualification of our common stock for quotation on the OTC Markets Group, Inc. We were unable to file with the SEC our Annual Report on Form 10-K for the year ended December 31, 2019 until January 2021 and this Annual Report is being filed after the SEC filing deadline. We also have yet to file our Quarterly Reports on Form 10-Q for 2020 but expect to do so soon and to file our Quarterly Report for the quarter ended March 31, 2021 40
by the SEC’s filing deadline, as it may be extended as provided in Rule 12b-25 of the Public Company Accounting Oversight Board, or PCAOB.Securities Exchange Act of 1934. Our failure to adequately adhere to these requirements ortimely file our periodic SEC reports has adversely affected the failure or circumventionability of our internal controlssecurity holders and procedures could seriously harmprospective investors to have current information regarding our business. Because we are a publicly traded company we are subject to certain federal, statefinancial statements and other rules and regulations, including applicable requirementsstatus of the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.
As of September 30, 2017, management assessedoperations and is likely to have adversely affected the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting. The matter involving internal controlsliquidity and procedures that our management considered to be a material weakness under the standards of the Public Company Accounting Oversight Board was a lack of a sufficient complement of personnel with a level of accounting expertise that is commensurate with our financial reporting requirements. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Failure to provide effective internal controls may cause investors to lose confidence in our financial reporting and may negatively affect the pricetrading prices of our common stock. Moreover, effective internal controls are necessary to produce accurate, reliable financial reports and to prevent fraud. If we have deficiencies inUnder applicable rules of the Financial Industry Regulatory Authority, or FINRA, our internal controls over financial reporting, these deficiencies may negatively impact our business and operations.
Our senior management’s limited recent experience managing a publicly traded company may divert management’s attention from operations and harm our business.
Our management team has relatively limited experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do sotimely our periodic reports with the SEC could lead toresult in the imposition of fines and penalties and harm our business.
The estimates of market opportunity and forecasts of market growth included in this Form 10-K may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this Form 10-K relating to the size and expected growth of the telehealth and predictive medicine markets may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.
Risks Related To An Investment In Our Common Stock
Although our shares of common stock are now listed on the NASDAQ Capital Market, we currently have a limited trading volume, which results in higher price volatility for, and reduced liquiditydisqualification of our common stock.
Although our shares of common stock are now listedfor quotation on the NASDAQ Capital Market under the symbol “MYND,” trading volume in our common stock has been limited and an active trading market for our shares of common stock may never develop or be maintained. The absence of an active trading market increases price volatility and reduces the liquidity of our common stock. As long as this condition continues, the sale of a significant number of shares of common stock at any particular time could be difficult to achieve at the market prices prevailing immediately beforeOTC Markets Group, Inc. In such shares are offered.
If we cannot continue to satisfy NASDAQ’s continuing listing criteria, NASDAQ may subsequently delist our Common Stock.
NASDAQ requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock. Generally, we must maintain a minimum amount of stockholders equity (generally $2.5 million) and a minimum number of holders of our securities (generally 300 round lot holders). If we fail to meet any of the continuing listing requirements, our Common Stock may be subject to delisting. If our Common Stock is delisted and we are not able to list our Common Stock on another national securities exchange, we expect our securitiesevent, there would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our Common Stock will develop or be sustained.
If and when a largerestablished trading market for our common stock develops,unless and until we are in compliance with our SEC reporting obligations and our common stock once again becomes eligible for quotation on the OTC Market Group, Inc. or is listed on a national securities exchange.
We have experienced, and may continue to experience, significant volatility in our stock price. The trading price for our common stock has historically been volatile and traded at higher or lower prices that are seemingly uncorrelated with our results of operations, financial condition or prospects. Between January 1, 2020 and March 31, 2021, the closing sale price of our common stock as reported on the OTC Markets Group, Inc. ranged from a low of $0.72 to a high of $2.16 and may continue to exhibit volatility. Factors such as the following may affect the volatility in our stock price: | | | | ● | Our ability or inability to timely file periodic reports with the SEC; | | ● | our quarterly operating results; |
| | | | ● | marketing approvals or other developments regarding Endari® or competing products; |
| | | | ● | announcements of regulatory developments or technological innovations by us or our competitors; |
| | | | ● | changes in our relationship with our vendors, distributors or other strategic partners; |
| | | | ● | government regulation of drug pricing; and |
| | | | ● | developments in patent or other technology ownership rights; |
Other factors which may affect our stock price include general economic conditions or changes in the economy, the financial markets or the pharmaceutical or biotechnology industries driven by extraordinary events such as the COVID-19 pandemic. We may be particularly vulnerable to volatility caused by these conditions or events, as we have only a single approved product and have relatively thin trading volume in our stock. Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our security holders to resell their common stock. Until July 31, 2020 our common stock was quoted on the OTCQB tier of the OTC Markets Group, Inc. On August 3, 2020, our common stock was relegated to the OTC Pink tier of the OTC Markets Group, Inc. pending the filing of this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and posting of our OTCQB Certification and verification of the company profile through OTCIQ.com. Trading in securities quoted on the OTC Markets is likely to be highly volatileoften thin and subject tocharacterized by wide fluctuations and youin trading prices due to many factors, some of which may be unablehave little to resell your shares atdo with our operations or abovebusiness prospects. This volatility could depress the price at which you acquired them. The market price of our common stock is likelyfor reasons unrelated to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:
| ● | quarterly variations in our revenues and operating expenses; |
| ● | developments in the financial markets and worldwide or regional economies; |
| ● | announcements of innovations or new products, solutions or services by us or our competitors; |
| ● | announcements by the government relating to regulations that govern our industry; |
| ● | significant sales of our common stock or other securities in the open market; |
| ● | variations in interest rates; |
| ● | changes in the market valuations of other comparable companies; and |
| ● | changes in accounting principles. |
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond toor operating performance. Moreover, the litigation, which could harm our business.
RecentOTC Markets is not a stock exchange, and future salestrading of securities by us in equityon the OTC Markets is often more sporadic than the trading of securities listed on a quotation system such as The Nasdaq Capital Market or debt financings coulda stock exchange like the NYSE American. These factors may result in substantialinvestors having difficulty purchasing and reselling shares of our common stock.
Our outstanding warrants may result in further dilution to our existing stockholders and have a material adverse effect on our earnings.stockholders. Recent and future salesCertain of our outstanding warrants to purchase a total of up to approximately 3,607,200 shares of our common stock provided for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or derivative securitiescommon stock equivalents at an effective price less than the then exercise price of such warrants, subject to certain exceptions. These anti-dilution adjustments resulted in a reduction in the conversion price of the debentures and the exercise price of such warrants to $1.54 per share based upon our issuance in February 2021 of $500,000 of shares of our common stock valued at $1.54 per share. We also have outstanding approximately $14.5 million principal amount of convertible promissory notes which are convertible into shares of our common stock at a conversion price of $1.48 per share that is
41
subject to possible future reductions on a quarterly basis in the event the prevailing trading prices of our common stock is less than the then-conversion price. The anti-dilution adjustments our outstanding warrants would be triggered by future issuances by us in private placements or public offerings could result in substantial dilution toof shares of our existing stockholders. For example, thecommon stock upon conversion of our $6 million in securedthe convertible debtpromissory notes, or otherwise, at $5.00a price per share plusbelow the interest thereon,then-exercise price of such warrants, which we privately placed between September 2014 and August 2016, resulted in the issuance of 1,263,406 additional shares. In addition,adjustments would have a further dilutive effect on our business strategy may include expansion through internal growth, by acquiring complementary businesses, by acquiring or licensing additional solutions and services, or by establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations.stockholders. The saleStockholders may experience future dilution as a result of our Common Stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of Common Stock acquired by Aspire Capital could cause the price of our Common Stock to decline.future equity offerings.
Pursuant to the terms of the Purchase Agreement, we have registered for sale the Commitment Shares that we have issued andTo raise additional shares that we have already, or maycapital in the future we may sell to Aspire Capital underand issue additional shares of our common stock or securities convertible into or exchangeable for our common stock, which sales would have a dilutive effect on the Purchase Agreement. It is anticipated that the shares thereby registered will be sold over a periodpercentage ownership of up to approximately thirty months from the date of the related prospectus. Theour existing stockholders.
A substantial number of shares ultimately offeredof common stock may be sold in the market, which may depress the market price for sale by Aspire Capital under such prospectus will be dependent upon the number of shares we elect to sell to Aspire Capital under the Purchase Agreement. Depending on a variety of factors, including market liquidity of our Common Stock, the sale of shares under the Purchase Agreement may cause the trading price of our Common Stock to decline.common stock. As of December 27, 2017, Aspire Capital has purchased $145,000 of Common Stock under the Purchase Agreement. Aspire Capital may ultimately purchase all, some or none of the remaining $9.9 million of Common Stock that, together with the Commitment Shares, we have registered. Aspire Capital may sell all, some or none of our shares that it holds or comes to hold under the Purchase Agreement. Sales by Aspire Capital of shares acquired pursuant to the Purchase Agreement under an effective registration statement, may result in dilution to the interests of other holders of our Common Stock. The sale of a substantial number of shares of our Common Stock by Aspire Capital,common stock in the public market, or anticipationthe possibility such sales upon the exercise or conversion of such sales,our outstanding warrants or convertible promissory notes, could cause the tradingmarket price of our Common Stock to decline or make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise desire. However, we have the right under the Purchase Agreement to control the timing and amount of sales of our shares to Aspire Capital, and the Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.
Were our common stock to be considered penny stock, and therefore become subjectdecline or serve to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock.
The U.S. Securities and Exchange Commission (the “SEC”) has adopted a number of rules to regulate “penny stock” that may restrict transactions involving shares of our common stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our securities have in the past constituted “penny stock” within the meaning of the rules. Were our common stock to again be considered penny stock, and therefore become subject to the penny stock rules, the additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.
A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared in accordance with SEC standards relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks.
Stockholders should be aware that, according to SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities in the event our common stock were to again be considered a penny stock and therefore become subject to penny stock rules.
Other than a dividend of warrants each exercisable for one share of common stock that was distributed on July 27, 2017, we have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.
Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders.
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively control approximately 39.32% of our issued and outstanding common stock and 20.00% on a fully diluted basis. As a result, these stockholders are able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. This concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect ondepress the market price of our common stock. It could also prevent our stockholders from realizing a premium overA substantial majority of the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
Transactions involving our common stock engaged in by our largest stockholders, directors or executive officers may have an adverse effect on the price of our stock.
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively control approximately 39.32%of our issued and outstanding common stock and 20.00% on a fully diluted basis. Subsequent sales of our shares by these stockholders could have the effect of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders, or the adoption of significant short positions by hedge funds or other significant investors, could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline.
From time to time our directors and executive officers may sell shares of our common stock are, and the shares of common stock issuable upon the exercise of our outstanding warrants and other convertible securities, or shares which may be sold in future offerings by us, will be, freely tradable without restriction or further registration under the Securities Act.
Out common stock is not traded on a national securities exchange, which may adversely affect our ability to raise needed financing. The OTC Markets Group, Inc. is not a national securities exchange within the meaning of federal and state securities laws, so our common stock is not eligible for the exemption from state securities, or “blue sky,” laws for “covered securities” within the meaning of the National Securities Markets Improvement Act of 1996, which may adversely affect our ability to sell our securities to raise needed financing and increase transactions costs of such financing. As long as our common stock is quoted on the open market. These sales will be publicly disclosed in filings made with the SEC. In the future,OTC Markets, our directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business. Our stockholders may perceive these sales as a reflectionface significant restrictions on management’s view of the business and result in some stockholders selling their sharesresale of our common stock due to state “blue sky” laws. Each state has its own securities laws, often called “blue sky” laws, which limit sales of securities to a state’s residents, unless the securities are registered in that state or qualify for an exemption from registration and govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must also be registered in that state. As long as our common stock is quoted on the OTC Pink tier or the OTCQB tier, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market-makers for our common stock. These sales could cause the price of our stock to drop. Anti-takeover provisionsThere may limitbe significant state blue sky law restrictions on the ability of another partyinvestors to acquire us, which could causesell, and on purchasers to buy, our common stock. You should therefore consider the resale market for our common stock pricewarrants to decline.
Delaware law contains provisions that could discourage, delay or prevent a third party from acquiring us, even if doing sobe limited, as you may be beneficialunable to our stockholders, which could cause ourresell your common stock price to decline. In addition, these provisions could limitwithout the price investors would be willing to paysignificant expense of state registration or qualification.
We may issue preferred stock in the future, for sharesand the terms of the preferred stock may reduce the value of our common stock. Non-U.S. investors may have difficulty effecting service of process against us or enforcing judgments against us in courts of non-U.S. jurisdictions.
We are a company incorporated underauthorized to issue up to 15,000,000 shares of preferred stock in one or more series. Our board of directors may determine the lawsterms of future preferred stock offerings without further action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the State of Delaware. Allvalue of our directorsoutstanding common stock. In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and officers reside inliquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Not applicable. We lease office space under operating leases from unrelated entities. The rent expense during the United States. It may not be possible for non-U.S. investors to effect serviceyears ended December 31, 2020 and 2019 was approximately $1,201,000 and $926,000, respectively. 42
We lease 21,293 square feet of process within their own jurisdictions upon our company and our directors and officers. In addition, it may not be possible for non-U.S. investors to collect from our company, its directors and officers, judgments obtained in courts in such non-U.S. jurisdictions predicated on non-U.S. legislation.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading marketoffice space for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If anyheadquarters in Torrance, California, at a base rental of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
The Company’s Headquarters and Neurometric Services business is located at 26522 La Alameda, Suite 290, Mission Viejo, CA 92691, which is 2,290 sqft in size. The lease period commenced on February 1, 2016 and terminates on January 31, 2018. The rent for the first four months is $2,290$79,375 per month, which is abated by 50%; for months 5 through 12, the rent increases to $4,580 per month and for the final 12 months the rentlease will increase by 5% to $4,809 per month. On October 31, 2017, the Company signedexpire on September 30, 2026. We also leased an extension to the existing lease for a period of twelve months and shall commence on February 1, 2018, and shall terminate on January 31, 2019. The base rent will increase to $5,267 per month effective February 1, 2018.
On February 2, 2016, we signed a 23.5 months lease for 1,092 sqft ofadditional 1,850 square feet office space to house our EEG testing center. The premises are located at 25201 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on February 15, 2016 and terminates on January 31, 2018. The rent for first half month of February was prorated at $928; for the next 11 months the rent is $1,856 per month, and for the remaining twelve months the rent will increase by 3% to $1,911 per month. On November 10, 2017, the company signed an extension to the existing lease for a period of twelve months, and shall commence on February 1, 2018, and shall terminate on January 31, 2019. The base rent will increase to $2,129 per month, effective February 1, 2018. The company also expanded their premises at 25201 Paseo De Alicia, which is 1,595 sqft in size. On November 10, 2017, the company signed an extension for a period of fourteen months, which commenced on December 1, 2017, and shall terminate on January 31, 2019. The base rent is $3,269 per month effective December 1, 2017.
On August 1, 2017, we signed a four month lease for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 350, New York, New York, 10170. The lease period commenced on August 1, 2017 and terminates on December 31, 2017, and will not be renewed. Theat a base rent is $4,500of $8,691 per month, with firstwhich the lease will expire on January 31, 2023.
In addition, we lease 1,322 square feet of office space in Tokyo, Japan, 465 square feet of office space in Seoul, Korea, and last monthly lease fee1,163 square feet of $9,000 on effective date. On September 14, 2017, we signed a three year lease for 1,180 square feet. The premises are located at 8000 Westpark Drive, Suite 125, Tysons, Virginia 22102. The lease period commenced on September 15, 2017 and terminatesoffice space in Dubai, UAE, which leases will expire on September 30, 2020. The rent2022, November 29, 2021, and June 19, 2023, respectively.
We believe our existing facilities are adequate for September 15, 2017 through September 30, 2018 is prorated at $2,507,our current and planned future operations, and we expect to be able to renew the next 12 months the rent is prorated at $2,576.46; and for the remaining twelve months the rent is prorated at $2,647. The landlord abated one hundred percent of the base rent for the first two full calendar months of the term: October and November 2017.leases on commercially reasonable terms. Not applicable. ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable. The Company incurred rent expense from operations of $84,406 and $64,900 for the fiscal years ended September 30, 2017 and 2016, respectively.
On November 13, 2017, Arcadian assumed a sublease a three year term for 2250 square feet. The premises are located at 7241 Hollywood Road, Fort Washington, Pennsylvania 19034. The lease terminates on December 31, 2017 and the rent is $2,500.00 a month.
ITEM 3. Legal Proceedings
The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART II ITEM 5. | MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Information Our common stock has been listed on The NASDAQ Capital Market under the symbol “MYND” since July 14, 2017. Prior thereto, our common stock wasis quoted under the symbol “MYAN” (and previously “CNSO”) on the OTCQB marketplace. OTC Pink tier of the OTC Markets Group, Inc. The following table sets forth, for the periods indicated, the high and low bid information for our common stock as determined from sporadic quotations on the OTCQB marketplace (prior to July 14, 2017) and the high and low sales prices of our common stock as reported on the NASDAQ Capital Market (subsequent to July 14, 2017). The OTCQB marketplace quotations OTC Pink tier reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. | | | High | | | Low | | | High | | | | Low | | | Fiscal Year Ended September 30, 2016 | | | | | | | | | | Year Ended December 31, 2020 | | | | | | | | | | | | First Quarter | | $ | 12.00 | | | $ | 4.00 | | | $ | 2.14 | | | | $ | 0.85 | | | Second Quarter | | $ | 8.00 | | | $ | 4.00 | | | $ | 1.99 | | | | $ | 1.08 | | | Third Quarter | | $ | 5.00 | | | $ | 3.00 | | | $ | 2.16 | | | | $ | 0.85 | | | Fourth Quarter | | $ | 6.00 | | | $ | 4.00 | | | $ | 1.36 | | | | $ | 0.72 | | | | | | | | | | | | | | Fiscal Year Ended September 30, 2017 | | | | | | | | | | | First Quarter | | $ | 9.89 | | | $ | 6.00 | | | | Second Quarter | | $ | 9.25 | | | $ | 5.90 | | | | Third Quarter | | $ | 7.00 | | | $ | 5.75 | | | | Fourth Quarter | | $ | 6.71 | | | $ | 3.39 | | | Year Ended December 31, 2021 | | | | | | | | | | | First Quarter (through March 31, 2021) | | | $ | 1.83 | | | | $ | 1.19 | |
On December 28, 2017, the closing sales price of our common stock as reported on The NASDAQ Capital Market was $3.34 per share. As of December 28, 2017, there were 286 record holders of our common stock. The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.Holders
Dividend RightsAs of April 7, 2021, we had approximately 396 stockholders of record.
Dividends Other than the warrant dividend described in the following paragraph weWe have notnever paid or declared cash distributions or other dividends on our common stock and we do not intendexpect to do so in the foreseeable future. The decision whether to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain all earnings, if and when generated, to finance our operations. The declaration of cash dividends in the future will be determinedmade by our board of directors in its discretion and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors based upon our earnings, financial condition, capital requirements and other relevant factors.
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.
The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing.
Securities Authorized For Issuance Under Equity Compensation Plans
For information relating to the Securities Authorized for Issuance under Equity Compensation Plans, please see “Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholders Matters.”considers relevant.
Recent Sales of Unregistered Securities The information required to be disclosed pursuant to Item 701 of Regulation S-K is incorporated herein by reference to our Company’s current reports on Form 8-K.
None of the sales of securities referred to in such section was registered under the Securities Act of 1933, as amended (the “Securities Act”). Each of the purchasers represented to us that he/she/it was an “accredited investor” as that term is defined in Regulation D under the Securities Act. In addition, no general solicitation or advertising was used in connection with the sales. In making the sales without registration under the Securities Act, the Company relied upon the exemptions from registration contained in Sections 4(a)(2) of the Securities Act,February and in Regulation D promulgated under the Securities Act.
ITEM 6. Selected Financial Data
Not applicable.
ITEM 7. Management’s DiscussionMarch 2021, we sold and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes provided under Part II, Item 8 of this annual report on Form 10-K. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of MYnd Analytics, Inc. for the fiscal years ended September 30, 2017 and 2016. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “forecasts,” “goal,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See “Risk Factors” elsewhere in this annual report on Form 10-K for a discussion of certain risks associated with our business. We disclaim any obligation to update forward-looking statements for any reason.
Overview
MYnd employs a clinically validated scalable technology platform to support personalized care for mental health patients. The Company utilizes its patented machine learning, artificial intelligence, data analytics platform for the delivery of telebehavioral health services and its PEER predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian. Arcadian manages the delivery of telepsychiatry and telebehavioral health services through a nationwide network of licensed and credentialed psychiatrists and master-level therapists. The Company is commercializing its PEER predictive analytics tool to help physicians reduce trial and error treatment in mental health. MYnd’s patented clinically validated technology platform (“PEER Online”) utilizes complex algorithms to analyze electroencephalograms to generate PEER Reports to predict individual response to a range of medications prescribed for the treatment of behavioral disorders including depression, anxiety, bipolar disorder, post-traumatic stress disorder and other non-psychotic disorders.
Since our inception, we have never been profitable and we have generated significant net losses. As of September 30, 2017, we had an accumulated deficit ofissued approximately $75.65 million; and as of September 30, 2016, we had an accumulated deficit of approximately $68.53 million. We incurred operating losses of $7.10 million and $3.77 million for the fiscal years ended September 30, 2017 and 2016, respectively, and incurred net losses of $7.12 million and $5.94 million for those respective periods.
For the twelve months ended September 30, 2017, other expenses were $6,600. For the twelve months ended September 30, 2016, our net loss was exacerbated by net non-cash, other expense charges in the aggregate amount of $1.9 million as a result of non-cash interest charges, accounting for the extinguishment of debt and derivative liability transactions resulting conversion of $6 million of convertible debt and the cancellation of all warrants that had been issued in association with the convertible debt.
We anticipate that a substantial portion of our capital resources and efforts would be focused on conducting our clinical trials, the scale-up of our commercial sales organization, further research, product development and other general corporate purposes, including accrued but unpaid expenses. We also anticipate that some future research and development projects would be funded by grants or third-party sponsorship, along with funding by the Company.
As of September 30, 2017, our current assets of approximately $5.69 million exceeded our current liabilities of approximately $1.55 million by approximately $4.15 million. During fiscal year 2017 we raised gross cash proceeds of $2.98 million from private placements of Common Stock at $6.25 per share. For details of these financings see “Private Placement Transactions―Private Placement of Common Stock ” below.
On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Aspire Purchase Agreement, Aspire Capital purchased 20,000 shares of its Common Stock, at a per share price of $7.25, resulting in gross cash proceeds to the Company of $145,000.
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million.
During fiscal year 2016, we raised $2.95$14.5 million in the private placement of secured convertible debt convertible at $10.00 per share.For details of these financings see “Private Placement Transactions―Private Placement of Common Stock” below.
On December 6, 2016, the Company, entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. For details of the Purchase Agreement financing see “Private Placement Transactions―The Aspire Capital Equity Line” below.
We will need additional funding to conduct the planned clinical trials and to conduct a marketing campaign to significantly increase the demand for our PEER Online services. We are actively exploring additional sources of capital. However, we cannot offer assurances that additional funding will be available on acceptable terms, or at all. Even if we were to raise additional funds, any additional equity funding may result in significant dilution to existing stockholders, and, if we incur additional debt financing, a substantial additional portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting the funds available for our business activities. If adequate funds are not available, it will likely force us to cease operations or would otherwise have a material adverse effect on our business, financial condition and/or results of operations.
Private Placement Transactions
Private Placement and Conversion of Convertible Notes; Cancellation of Warrants
On September 19, 2016, the Company entered into the Second Omnibus Amendment (the “Second Omnibus Amendment”), with a majority of over 80% of the holders of certain convertible notes issued between September 22, 2014 and August 16, 2016 in the aggregate principal amount of $6,000,000 (the “Notes”), thereby amending: (i) the Notes, (ii) that certain second amended and restated note and warrant purchase agreement dated asconvertible promissory notes to a limited number of December 23, 2015, as thereafter amended and (iii) the warrants (“Warrants”) issued in connection with the Notes. Pursuant to the Second Omnibus Amendment, the Company had the option, exercisable at any time after September 1, 2016, to mandatorily convert all Notes into shares of Common Stock at $5.00 per share. The Company exercised its mandatory conversion right on September 19, 2016 and, on September 21, 2016, (i) converted the entire outstanding $6,000,000 principal balance of the Notes, plus accrued interest of $317,000 thereon, into an aggregate of 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share, and (ii) canceled all Warrants. Of the $6.0 million Notes sold by the Company, $5.3 million were purchased by directors, an officer and greater than 5% shareholders of the Company.
Private Placement of Common Stock
On November 30, 2016, the Company sold and issued an aggregate of 160,000 shares of its Common Stock, at a per share price of $6.25,accredited investors in a private placement to six accredited investors, for which it received gross cash proceeds to the Company of $1,000,000. Three of the six accredited investors were affiliates who represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust, of which our Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. In connection with this private placement, certain investors (comprised of our executive officers and current and former directors) agreed to a 180-day “lock-up”, commencing on November 30, 2016, with respect to shares of Common Stock and other of our securities that they beneficially own, including securities that are convertible into shares of Common Stock and securities that are exchangeable or exercisable for shares of Common Stock. As a result, subject to certain exceptions, for a period of 180 days following November 30, 2016, such persons may not offer, sell, pledge or otherwise dispose of these securities without the Company’s prior written consent. The “lock-up” period expired without any persons requesting the Company’s consent or dispose of these securities.
On December 21, 2016, the Company sold and issued a further 48,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to four accredited investors who were new to the Company, for which it received gross cash proceeds to the Company of $300,000.
On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
These private placements were made pursuant to an exemption from registration afforded by SectionRule 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”), and Regulation D thereunder.
Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of our common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of our common stock on the effective date. The Aspire Capital Equity Lineinitial conversion price is subject to adjustment as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. The conversion price is subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes. On December 6, 2016,The convertible promissory notes bear interest at the Company, entered intorate of 2% per annum payable semi-annually on the Purchase Agreement with Aspirelast business day of August and January of each year and will mature on the 3rd anniversary of the original issue date. The convertible promissory notes will become prepayable in whole or in part at the election of the holders on and after February 28, 2022 if our common shall not have been approved for listing on the NYSE American, the Nasdaq Capital which provides that, upon the terms and subjectMarket or other “Trading Market” (as defined). We will be entitled to the conditions and limitations set forth therein, Aspire Capital is committed to purchaseprepay up to an aggregate of $10.0 million of shares50% of the Company’s common stock over the 30-month termprincipal amount of the Purchase Agreement. In consideration for entering intoconvertible promissory notes at any time after the Purchase Agreement, concurrently with1st anniversary and on or before the execution2nd anniversary of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock. SeeNote 5. Stockholders’ Equity”,Consolidated Financial Statementsoriginal issue date for additional detail.
Under the Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase priceprepayment amount equal to the lesser of:
| 1) | the lowest sale price of Common Stock on the purchase date; or |
| 2) | the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date. |
The Company has the right, in its sole discretion, to present Aspire Capital withprincipal amount being prepaid, accrued and unpaid interest thereon and a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stockprepayment premium equal to up to 30%50% of such principal amount. The convertible promissory notes are general, unsecured obligations of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.company.
The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the termnet proceeds of the Purchase Agreement, so long as the most recent purchase has been completed. The Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Purchase Agreement, and the Companyconvertible promissory notes will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “Commitment Shares”). The Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the Purchase Agreement are expected to be used for working capital and general corporate purposes.purposes, which may include repayment of indebtedness.
The issuance44
Additional Information Copies of our annual reports, quarterly reports, current reports, and any amendments to those reports are available free of charge on the Internet at www.sec.gov and on our website at www.emmausmedical.com. Such reports are not part of this Annual Report or incorporated by reference herein. All statements made in any of our reports, including all forward‑looking statements, are made as of the Commitment Sharesdate of such reports and all other shareswe do not assume or undertake any obligation to update any of Common Stock that may be issued from time to time to Aspire Capital under the Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemptionthose statements or documents, except as required by law. ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
Not required for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.a smaller reporting company 45
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward‑Looking Statements On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Purchase Agreement, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds of $145,000.
Capitalization
At our annual meeting of stockholders held on October 28, 2015 (the “2015 Stockholder Meeting”), our stockholders approved a proposal to amend the Company’s Certificate of Incorporation in order to increase the number of shares of Common Stock authorized for issuance under our Charter from 180,000,000 to 500,000,000.
Also at our 2015 Stockholder Meeting, our stockholders approved an amendment to amend the Company’s Charter for the purposes of effecting a reverse stock-splitThe following discussion of our Common Stock at a later timefinancial condition and at any time until the next meetingresults of the Company’s stockholders which are entitled to vote on such actions, by a ratio of not less than 1-for-10 and not more than 1-for-200, and to authorize the Board of Directors (“Board”) to determine, at its discretion, the timing of the amendmentoperations should be read in conjunction with our financial statements and the specific ratiorelated notes, and the other financial information included in this Annual Report. This discussion contains forward‑looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward‑looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report.
Company Overview We are a commercial-stage biopharmaceutical company engaged in the reverse stock-split. discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. On August 24, 2016,July 7, 2017, the BoardU.S. Food and Drug Administration, or FDA, approved a 1-for-200 reverse stock-split which was effected on September 21, 2016. On September 19, 2016, pursuant to the Second Omnibus Amendment, the Company exercised the Mandatory Conversion and, on September 21, 2016, (i) converted the entire outstanding principal balance of $6,000,000, plus accrued interest of $317,000 on all of the Notes into 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share and (ii) canceled all 600,000 Warrants.
At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”)our lead product, Endari® (prescription-grade L-glutamine oral powder), held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s certificate of incorporation (the “Charter”) to reduce the numbersevere complications of sharessickle cell disease (“SCD”) in adult and pediatric patients five years of Common Stock authorizedage and older. Endari® has received Orphan Drug designation from the FDA and Orphan Medical designation from the European Commission, which designations afford marketing exclusivity for issuance underEndari® for a seven-year period in the Charter from 500,000,000 to 250,000,000. The certificate evidencingU.S. and ten-year period in the resolution reducingEuropean Union, respectively, following marketing approval.
We commenced commercialization of Endari® in the shares will be filedU.S. in January 2018 in collaboration with Delaware Secretary ofa contract sales organization. Effective January 2020, we have relied upon our in-house commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state shortly after these financial statements are issued. | | | Shares | | | Shares of Common Stock Authorized | | | 500,000,000 | | | Shares of Preferred stock Authorized (none issued and outstanding) | | | 15,000,000 | | | Total Authorized Shares | | | 515,000,000 | | | | | | | | | Shares of Common Stock Issued and Outstanding at September 30, 2017 | | | 4,299,311 | | | Common Stock issuable upon the exercise of outstanding stock options at September 30, 2017 | | | 554,083 | (1) | | Common Stock issuable upon the exercise of outstanding warrants at September 30, 2017 | | | 4,567,672 | (1) | | | | | | | | Total securities outstanding and reserved for issuance at September 30, 2017 | | | 9,421,066 | |
1) For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 5. Stockholders’ Equity to the Consolidated Financial Statements.
Warrants
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rataprovides coverage for Endari® for outpatient prescriptions to all holders of common stock on the record date. These warrants will be exercisable (in accordance witheligible Medicaid enrollees within their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017state Medicaid programs. Endari® is also reimbursable by many commercial payors. We have distribution date and will expire five years thereafter.
The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation modelagreements in place with the following assumptions: market pricenation’s leading distributors as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected pharmacies nationwide.
Until we began marketing and selling Endari® in the U.S. in early 2018, we had minimal revenues and relied upon funding from sales of the stock of $6.55 per share, timeequity securities and debt financings and loans, including loans from related parties to maturity of 5 years, volatility of 211.6%, zero expected dividend ratefund our business and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing. On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering. The public offering warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the public offering warrant at issuance date to be $10,802,728 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
operations. As part of the underwritten public offering on July 19, 2017, the Company issued Common Stock warrants to purchase 134,000 shares of common stock to the underwriters as part of the services performed by them in connection with the underwritten public offering. The underwriter warrant has an exercise price of $6.04 and expires on July 19, 2022. We estimated the fair value of the underwriter warrant at issuance date to be $863,225 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. On August 23, 2017, the Company issued common stock warrants to purchase 213,800 shares of common stock to the underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. The overallotment warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the overallotment warrant at issuance date to be $880,710 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $4.20 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
1)For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 5. Stockholders’ Equity to the Consolidated Financial Statements.
Prior Year Revision
During the quarter ended June 30, 2017, we revised our consolidated balance sheets as of September 30, 2016, December 31, 2016, and March 31, 2017 to correct the accounting for certain common stock awards granted in 2015 and 2016 to board members. Previously, certain stock grant compensation was presented as prepaid common stock when the compensation should have been recognized ratably as the stock awards vested. The revision, which we determined is not a material error, had no impact on loss from operations, or cash flows.
The impact on the individual line items of our consolidated balance sheets as of September 30, 2016, December 31, 2016, and March 31, 2017 from the adjustment was as follows:
Consolidated Balance Sheet as of September 30, 2016:
| | | Previously Reported | | | Adjustments | | | Revised | | | Prepaid Common Stock | | $ | 808,000 | | | $ | (808,000 | ) | | $ | — | | | Additional Paid in Capital | | $ | 68,275,400 | | | $ | (808,000 | ) | | $ | 67,467,400 | |
Consolidated Balance Sheet as of December 31, 2016:2020, our accumulated deficit was $225.3 million, and we had cash and cash equivalents of $2.5 million. We expect net revenues to increase as we expand our commercialization of Endari® in the U.S. and expand or commence early access programs and eventual marketing and commercialization abroad.
| | | Previously Reported | | | Adjustments | | | Revised | | | Prepaid Common Stock | | $ | 588,100 | | | $ | (588,100 | ) | | $ | — | | | Additional Paid in Capital | | $ | 70,056,100 | | | $ | (588,100 | ) | | $ | 69,468,000 | |
Until we can generate sufficient net revenues, our future cash requirements are expected to be financed through public or private equity or debt financings, loans or corporate collaboration and licensing arrangements. While our operating loss declined significantly to $32,000 in 2020 compared to $4.5 million in 2019, we are unable to predict if or when we will become profitable. Consolidated Balance SheetAs reported in more detail in our Current Report on Form 8-K filed with the SEC on July 22, 2019, as amended by our Form 8-K/A filed on August 14, 2019, on July 17, 2019, we completed our merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of March 31, 2017:
| | | Previously Reported | | | Adjustments | | | Revised | | | Prepaid Common Stock | | $ | 368,300 | | | $ | (368,300 | ) | | $ | — | | | Additional Paid in Capital | | $ | 71,950,300 | | | $ | (368,300 | ) | | $ | 71,582,000 | |
Financial Operations Overview
Revenues
Our neurometric services revenues are derived from the saleJanuary 4, 2019, among us, Athena Merger Subsidiary, Inc., and EMI, as amended by Amendment No. 1 thereto, dated as of PEER ReportsMay 10, 2019, which we refer to physicians. Physicians are generally billed upon delivery of a PEER Report. The list price of our PEER Reports to physicians is $400 per report which excludes the cost of conducting the EEG.
Cost of Revenues
Cost of revenues are for neurometric services and represent the cost of direct labor, the costs associated with external processing, analysis and consulting services necessary to render an individualized test result and any miscellaneous support expenses. Costs associated with performing our tests are expensed as the tests are performed. We continually evaluatemerger agreement. Pursuant to the feasibility of hiringmerger agreement, Athena Merger Subsidiary, Inc. merged into EMI, with EMI surviving as our own personnel to perform mostwholly owned subsidiary. On July 17, 2019, immediately after completion of the processing and analysis necessarymerger, we changed our name to render“Emmaus Life Sciences, Inc.”
The merger was treated as a PEER Report.reverse recapitalization transaction under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposes, EMI is considered to have acquired us. The merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. Research and Product Development
Research and Product development expenses are associated with our neurometric services and primarily represent costs incurred to design and conduct clinical studies, to recruit patients into the studies, to improve PEER Report processing, to add data to the MYND Database, to improve analytical techniques and advance application of the methodology. We charge all research and development expenses to operations as they are incurred.
Sales and Marketing
For our neurometric services, our selling and marketing expenses consist primarily of personnel, media, support and travel costs to inform user organizations and consumers of our products and services. Additional marketing expenses are the costs of educating physicians, laboratory personnel, other healthcare professionals regarding our products and services.
General and Administrative
Our general and administrative expenses consist primarily of personnel, occupancy, legal, audit, consulting and administrative support costs for our neurometric services.
Critical Accounting Policies and Significant Judgments and Estimates This management’sManagement’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires managementus to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. Weexpenses. On an ongoing basis, we evaluate ourthese estimates and judgments, on an ongoing basis.including those described below. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements included elsewhere in this report. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
We have generated limited revenues since our inception. Revenues for our Neurometric Service product are recognized when a PEER Report is delivered to a Client-Physician.
Stock-based Compensation Expense
Stock-based compensation expense, which is a non-cash charge, results from stock option grants. Compensation cost is measured at the grant date based on the calculated fair value of the award. We recognize stock-based compensation expense on a straight-line basis over the vesting period of the underlying option. The amount of stock-based compensation expense expected to be amortized in future periods may decrease if unvested options are subsequently cancelled or may increase if future option grants are made.
Long-Lived Assets and Intangible Assets
Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible assets with finite lives are amortized on a straight-line basis over their useful lives of ten years.
Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. The Company will begin amortizing the software over its estimated economic life once it has been placed into service.
Derivative accounting for convertible debt and warrants
The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of September 30, 2017, the Company had no financial instruments that contain embedded derivative features.
Results of Operations for the Fiscal Years Ended September 30, 2017 and 2016
MYnd Analytics is focused on research and the commercialization of its PEER Reports through its Neurometric Services. The Company has commenced a clinical trial with the Canadian Armed Forces and a second clinical trial with a large provider group, with additional clinical trials and pilot studies being planned. Currently the Company is delivering PEER Reports to a core group of physicians. The PEER Report enables psychiatrists and other physician/prescribers to make more informed, patient-specific decisions when treating individual patients for behavioral (psychiatric and/or addictive) disorders based on the patient’s own physiology
The following table presents consolidated statement of operations data for each of the periods:
Revenues
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Service Revenues | | $ | 128,500 | | | $ | 85,100 | | | $ | 43,400 | |
With respect to our Neurometric Services business, the number of third party non-study related, paid PEER Reports delivered increased by 91, to 295 reports for the fiscal year ended September 30, 2017 compared to 204 reports for the fiscal year ended September 30, 2016. The average revenue was $435 per report for the 2017 period; in the prior year the revenue per report was $417. The total numbers of free PEER Reports processed were 160 and 29 for the 2017 and 2016 fiscal years, respectively. These free PEER Reports are used for training, database-enhancement and compassionate-use purposes.
Cost of Revenues
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services Cost of Revenues | | $ | 53,500 | | | $ | 5,500 | | | $ | 48,000 | |
Neurometric Services cost of revenues consists of payroll costs (including stock-based compensation), consulting costs, and other miscellaneous charges were as follows:
| | | | | | Fiscal Year ended September 30, | | | | | | Key Expense Categories | | 2017 | | | 2016 | | | Change | | | | (1) | | | Consulting fees, misc costs | | | 53,500 | | | | 5,500 | | | | 48,000 | | | | | | | Total Costs of Revenues | | $ | 53,500 | | | $ | 5,500 | | | $ | 48,000 | |
(1) Consulting fees increased by $48,000 for the 2017 period, as we are using additional consultants to process EEG readings for patients.
Research
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services Research | | $ | 123,900 | | | $ | 53,700 | | | $ | 70,200 | |
Research expenses consist of payroll costs (including stock-based compensation), consulting fees, travel, conference and other miscellaneous costs which were as follows:
| | | | | | Fiscal Year ended September 30, | | | | | | Key Expense Categories | | 2017 | | | 2016 | | | Change | | | | (1) | | | Salaries and benefit costs | | $ | 11,000 | | | $ | 41,600 | | | $ | (30,600 | ) | | | (2) | | | Consulting fees | | | 103,500 | | | | 3,000 | | | | 100,500 | | | | (3) | | | Other miscellaneous costs | | | 9,400 | | | | 9,100 | | | | 300 | | | | | | | Total Research | | $ | 123,900 | | | $ | 53,700 | | | $ | 70,200 | |
Comparing the fiscal year ended September 30, 2017, with the corresponding period in 2016:
| (1) | Salary and benefit costs, which are solely comprised of stock-based compensation decreased for the 2017 and 2016 periods primarily due to certain stock-based compensation fully vested; and |
| (2) | Consulting costs increased in the 2017 period as a result of a new consulting agreement with our Medical Officer for the monitoring of the clinical trials and the training of clinical trial investigators and new PEER Online users. Additionally, our Medical Officer is advising the Company on clinical trial design and product development. The Company also entered into a consulting agreement with a second physician to assist with the training of clinical trial investigators on the PEER Report allowing them to participate in the SMART-MD trial, and consult with other physicians in the use and interpretation of the PEER Report; and |
| (3) | Other miscellaneous costs for the 2017 and 2016 periods were substantially unchanged. |
Product Development
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services Product Development | | $ | 1,237,200 | | | $ | 740,500 | | | $ | 496,700 | |
Product Development expenses consist of payroll costs (including stock-based compensation), consulting fees, system development costs, conference, travel and miscellaneous costs which were as follows:
| | | | | | Fiscal Year ended September 30, | | | | | | Key Expense Categories | | 2017 | | | 2016 | | | Change | | | | (1) | | | Salaries and benefit costs | | $ | 803,800 | | | $ | 465,500 | | | $ | 338,300 | | | | (2) | | | Consulting fees | | | 203,000 | | | | 154,300 | | | | 48,700 | | | | (3) | | | System development costs | | | 146,700 | | | | 54,500 | | | | 92,200 | | | | (4) | | | Conference & Travel | | | 32,500 | | | | 18,900 | | | | 13,600 | | | | (5) | | | Other miscellaneous costs | | | 51,200 | | | | 47,300 | | | | 3,900 | | | | | | | Total Product Development | | $ | 1,237,200 | | | $ | 740,500 | | | $ | 496,700 | |
Comparing the fiscal year ended September 30, 2017, with the corresponding period in 2016:
| (1) | Salaries and benefits increased by $338,300 for the fiscal year ended September 30, 2017, due to $312,700 of which was related to stock-based compensation of new stock options which were granted in October 2016. The remainder was additional staff and paid time off taken during this period; and |
| (2) | Consulting fees increased by $48,700 for the fiscal year ended September 30, 2017, for services relating to the upgrade of the Company’s cloud based sales platform and for a data science project to improve the Company’s algorithms for the production of an enhanced PEER report; and |
| (3) | System development and maintenance costs increased by $92,200 during the 2017 period as we used more time with our contract system programmers for work on quality management initiatives, research support and transitioning to file sharing and media management; and |
| (4) | Conference and travel costs increased by $13,600 during the 2017 period due to travel for the Canadian Armed Forces Trial and to initiate the SMART-MD trial with Carolina Partners; and |
| (5) | Other miscellaneous costs increased slightly by $3,900 in the 2017 period. |
Sales and marketing
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services Sales and Marketing | | $ | 1,226,700 | | | $ | 522,000 | | | $ | 704,700 | |
Sales and marketing expenses associated with our Neurometric Services business consist primarily of payroll and benefit costs, including stock-based compensation, advertising and marketing, consulting fees and miscellaneous expenses. The reason for the change in these expenses is discussed below.
| | | | | | Fiscal Year ended September 30, | | | | | | Key Expense Categories | | 2017 | | | 2016 | | | Change | | | | (1) | | | Salaries and benefit costs | | $ | 543,200 | | | $ | 137,700 | | | $ | 405,500 | | | | (2) | | | Consulting fees | | | 422,700 | | | | 177,100 | | | | 245,600 | | | | (3) | | | Advertising and marketing costs | | | 152,000 | | | | 156,800 | | | | (4,800 | ) | | | (4) | | | Conferences and travel costs | | | 19,800 | | | | 700 | | | | 19,100 | | | | (5) | | | Other miscellaneous costs | | | 89,000 | | | | 49,700 | | | | 39,300 | | | | | | | Total Sales and marketing | | $ | 1,226,700 | | | $ | 522,000 | | | $ | 704,700 | |
Comparing the fiscal year ended September 30, 2017, with the same period in 2016:
| (1) | Salaries and benefits for the 2017 period increased by $405,500 from the 2016 period; of this amount $145,100 was due to stock-based compensation and the hiring of a new marketing sales staff which increased salaries; and |
| (2) | Consulting fees for the 2017 period increased by $245,600. This difference was primarily due to the reduction of $68,600 from renegotiating our contract with a consultant to $3,000 per month; offset by increases with marketing consultants. An increase of $40,000 was related to hiring a consultant to assist the Company with engaging with payers, health systems, provider networks, and strategic partners; an increase of $35,400 from the prior period was related to a media consultant managing our Facebook advertising, and a consultant with public relations. The remaining $238,700 increase relates to consultants directly related to the operations support; and |
| (3) | For advertising and marketing expenses, we had minimal change between periods. |
| (4) | Conference and travel expenditures for the 2017 period increased by $19,100, primarily due to hiring a marketing sales staff for the Southeast Region to work on revenue generating sales and account management activities with physicians, health systems and providers in the following states; North Carolina, South Carolina, and Georgia. The costs associated were generally for travel to and from North Carolina and Corporate Office in California; and |
| (5) | Miscellaneous expenditures for the 2017 period increased by $39,300, primarily due to the Company opening PEER Centers in New York and Washington DC. Additional costs were incurred for rent and office supplies. |
General and administrative
| | | Fiscal Year ended September 30, | | | | | 2017 | | | 2016 | | | Change | | | General and administrative Neurometric Services | | $ | 4,590,800 | | | $ | 2,530,200 | | | $ | 2,060,600 | |
General and administrative expenses for our Neurometric Services business are largely comprised of payroll and benefit costs, including stock based compensation, legal fees, patent costs, other professional and consulting fees, general administrative and occupancy costs, dues and subscriptions, conference and travel costs. The reason for the change in these expenses are discussed below.
| | | | | | Fiscal Year ended September 30, | | | | | | Key Expense Categories | | 2017 | | | 2016 | | | Change | | | | (1) | | | Salaries and benefit costs | | $ | 2,451,800 | | | $ | 1,643,800 | | | $ | 808,000 | | | | (2) | | | Consulting fees | | | 590,100 | | | | 44,500 | | | | 545,600 | | | | (3) | | | Legal fees | | | 408,800 | | | | 160,800 | | | | 248,000 | | | | (4) | | | Other professional fees | | | 210,800 | | | | 118,000 | | | | 92,800 | | | | (5) | | | Patent costs | | | 114,500 | | | | 115,400 | | | | (900 | ) | | | (6) | | | Marketing and investor relations costs | | | 173,000 | | | | 28,500 | | | | 144,500 | | | | (7) | | | Conference and travel costs | | | 172,300 | | | | 83,400 | | | | 88,900 | | | | (8) | | | Dues & subscriptions fees | | | 115,300 | | | | 94,300 | | | | 21,000 | | | | (9) | | | General admin and occupancy costs | | | 354,200 | | | | 241,500 | | | | 112,700 | | | | | | | Total General and administrative costs | | $ | 4,590,800 | | | $ | 2,530,200 | | | $ | 2,060,600 | |
Comparing the fiscal year ended September 30, 2017, with the same period in 2016:
| (1) | Salaries and benefit expenses increased by $808,000 for the 2017 period. This increase was primarily due to $649,800 which were related to the vesting of stock based compensation granted in September 2016 and July 2017 to Directors and Officers; the remaining balance relates to the increase of additional staff and paid time off; and |
| (2) | Consulting fees increased by $545,600 for the 2017 period. Of this increase, $145,500 was related to operations consulting fees; $243,000 for director fees with the remaining $157,100 for accounting and growth consulting fees; and |
| (3) | Legal fees for the 2017 period increased by $248,000 for the 2017 period. Of this amount, $110,600 was for the review of cooperative research and development institutions; $94,400 was for public filing reviews and $43,000 was for regulatory and compliance analysis; and |
| (4) | Other professional fees increased by $92,800 for the 2017 period. The majority of the increase was due to additional audit fees; and |
| (5) | Patent costs decreased by $900 due to the timing and volume of patent and trademark applications and maintenance costs; and |
| (6) | Marketing and investor relations costs increased by a net $144,500 for the 2017 period as we engaged public relations firms to enhance the Company’s presence in the media; and |
| (7) | Conference and travel costs increased by a net $88,900 for the 2017 period. The increase was primarily due to conferences attended, increased travel by our executive management for meetings with investors, healthcare payers and providers on the East Coast; and |
| (8) | Dues and subscription costs increased by $21,000 for the 2017 period. |
| (9) | General administrative and occupancy costs increased by $112,700 for the 2017 period. The increase was primarily due to $24,700 due to amortization of our Patient Reported Outcomes application which was capitalized during development as an intangible asset and is now being amortized over a 36-month period; $53,500 relates to franchise tax fees; $16,800 related to depreciation of additional EEG machines purchased; the remainder increase relates to increased operating cost. |
Other income (expense)
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services (expense), net | | $ | (6,600 | ) | | $ | (2,172,100 | ) | | $ | 2,165,500 | |
For the fiscal years ended September 30, 2017 and 2016, net other non-operating income (expenses) for Neurometric Services were as follows:
| ● | For the fiscal year ended September 30, 2017, the Company incurred $6,600 for actual net interest paid in cash during that period. The Company had no non-cash charges in September 30, 2017. |
For the fiscal year ended September 30, 2016, we incurred non-cash interest charges totaling $2,721,500 of which $217,300 was accrued interest on our convertible promissory notes at 5% per annum. The remaining balance was comprised of $1,134,800 of beneficial conversion discount amortization on the convertible promissory notes and $1,365,200 for the valuation of warrants; and only $4,200 was for actual net interest paid in cash during that period.
| ● | For the fiscal year ended September 30, 2017, we had no finance fees. For the fiscal year ended September 30, 2016, we incurred finance fees totaling $20,000 in association with our private placement of convertible notes. |
| ● | Under ASC 815, all derivative instruments are required to be measured periodically at fair value and the change in fair value of non-hedging derivative instruments are to be recognized in current earnings. For the fiscal year ended September 30, 2017, we had no derivative instruments. For the fiscal year ended September 2016 we booked a loss of $34,600 on the elimination of our derivative instruments when all Notes were converted to equity. |
| ● | For the fiscal year ended September 30, 2017, we had no non cash gains or losses. For the fiscal year ended September 30, 2016 we booked a non-cash gain of $572,300 related to the Mandatory conversion on September 19, 2016 of all outstanding convertible notes and the cancellation of all warrants pursuant to the Second Omnibus Amendment of the Amended Note and Warrant Agreement which we entered into with a majority of the noteholders(for more detail refer to Note 3. Convertible Debt and Equity Financing of the Consolidated Financial Statements). |
Net Loss
| | | Fiscal Year ended September 30, | | | Change | | | | | 2017 | | | 2016 | | | | | | Neurometric Services Loss, net | | $ | (7,112,800 | ) | | $ | (5,940,900 | ) | | $ | (1,171,900 | ) |
The net loss for our Neurometric Services business of $7.11 million for the year ended September 30, 2017, compared to the approximately $5.94 million loss in the corresponding prior year is due to an increase in the Company’s total operating expenses.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern.
Since our inception, we have never been profitable and we have generated significant losses. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.
As of September 30, 2017, we had an accumulated deficit of approximately $75.65 million compared to our accumulated deficit as of September 30, 2016, which was approximately $68.53 million. Our management expects that with our proposed clinical trials, sales and marketing and general and administrative costs, our expenditures will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. The Company continues to explore additional sources of capital but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations.
As of September 30, 2017, we had $5.45 million in cash and cash equivalents and a working capital surplus of approximately $4.15 million. This is compared to our cash position of $318,200 in cash and cash equivalents as of September 30, 2016, and a working capital deficit of $1.14 million.
The Company has been funded through multiple rounds of private placements, primarily from members of our Board or our affiliates. For details please refer toItem 2. Private Placement Transactions andNotes 3, 7 and 11 to the Consolidated Financial Statements.
On November 30, 2016, and December 21, 2016 the Company sold and issued an aggregate of 208,000 shares of its Common Stock, at a per share price of $6.25, in private placements to a total of ten accredited investors, for which it received gross cash proceeds to the Company of $1,300,000. Three of the ten accredited investors were affiliates who represented 38.5% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. Also on December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
On December 6, 2016, the Company, entered into a Common Stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million.
Working Capital, Operating Capital and Capital Expenditure Requirements
As of September 30, 2017, we had approximately $5.45 million in cash and $9.9 million remaining available for stock sales under the terms of the Purchase Agreement with Aspire Capital, compared to $0.3 million of cash as of September 30, 2016.
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million.
Our recurring net losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Management’s assessment of substantial doubt of going concern is based on current estimates and assumptions regarding our programs and business needs. Actual working capital requirements could differ materially from the above working capital projection. We may explore strategic opportunities including partnerships, licensing and acquisitions of other entities, assets or products.
Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I Item 1A and elsewhere in our Annual Report on Form 10-K and in other reports we file with the SEC.
The amount of capital we will need to conduct our operations and the time at which we will require such capital may vary significantly depending upon a number of factors, such as:
| ● | the amount and timing of costs we incur in connection with our clinical trials and product development activities, including enhancements to our PEER Online database and costs we incur to further validate the efficacy of our technology; |
| ● | whether we can include our Arcadian business revenue adequately to cover our costs; |
| ● | the amount and timing of costs we incur in connection with the expansion of our commercial operations, including our sales and marketing efforts; |
| ● | whether we incur additional consulting and legal fees in our efforts in conducting Non-Significant Risk trials within FDA requirements, which will enable us to obtain a 510(k) clearance from the FDA; and |
| ● | if we expand our business by acquiring or investing in complimentary businesses. |
Sources of Liquidity
Since our inception, substantially all of our operations have been financed from equity and debt financings.
Private Placement of Common Stock
Between November 2016 through March 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to thirteen accredited investors, for which it received gross cash proceeds to the Company of $2,981,300, of which five are affiliated with the Company.
The Aspire Capital Equity Line of Credit
On December 6, 2016, the Company, entered into a common stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock.
On February 23, 2017, pursuant to a purchase notice issued by the Company to Aspire Capital pursuant to the Purchase Agreement, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds of $145,000.
The issuance of shares of common stock that may be issued from time to time to Aspire Capital under the Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.
Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
Cash Flows
Net cash used in operating activities was $4,792,100 for the year ended September 30, 2017, compared to $2,978,400 for the same period in 2016. The $1.81 million net increase in cash used for operations was primarily due to: consulting fees increased by approximately $981,385, salaries increased by $306,851, and legal costs of $248,000, the remaining relates to other operating costs.
During the twelve months ended ended September 30, 2017, the Company spent $479,500 in investing activities, including $127,900 in the purchase of computer equipment and expenditures on our Patient Reported Outcomes application and $190,000 investment in Arcadian.
Net Cash provided by financing activities for the year ended September 30, 2017 were $10.40 million. In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising net proceeds of approximately $7.5 million; $2.98 million cash proceeds received from private placements of equity from 13 accredited investors, of which five are affiliated with the Company. During the twelve months ended September 30, 2016, financing activities were $2.95 million, which consisted of $2.95 million in cash proceeds received from private placements pursuant to the Second Amended Note & Warrant Purchase Agreement from nine accredited investors of which seven are affiliated with the Company.
Contractual Obligations and Commercial Commitments
For details of Contractual Obligations and Commercial Commitments please the Lease Commitments section of “Note 9. Commitments and Contingent Liabilities” of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or financing activities with special purpose entities.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable
ITEM 8. Financial Statements and Supplementary Data
Index to financial statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of MYnd Analytics, Inc.
We have audited the accompanying consolidated balance sheet of MYnd Analytics, Inc. (the Company) as of September 30, 2017 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MYnd Analytics, Inc., as of September 30, 2017, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had recurring net losses and negative cash flows from operations that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum LLP
Irvine, California
December 29, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
MYnd Analytics, Inc.
26522 La Alameda, Suite 290
Mission Viejo, CA 92691
We have audited the accompanying consolidated balance sheet of MYnd Analytics, Inc. (the “Company”)(Formerly CNS Response, Inc.) and their subsidiaries as of September 30, 2016, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2016 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has recurring losses from operations and a net capital deficiency. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia, LLP
Newport Beach, California
December 22, 2016
MYND ANALYTICS, INC.
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2017 and 2016
| | | September 30, | | | | | 2017 | | | 2016 | | | ASSETS | | | | | | | | CURRENT ASSETS: | | | | | | | | | | Cash | | $ | 5,449,000 | | | $ | 318,200 | | | Accounts receivable (net of allowance for doubtful accounts of $1,000 and $1,200 as of September 30, 2017, and September 30, 2016, respectively) | | | 6,500 | | | | 5,100 | | | Prepaid insurance | | | 57,200 | | | | 59,800 | | | Note Receivable -Plotkin | | | 159,500 | | | | — | | | Prepaid other assets | | | 22,000 | | | | 18,800 | | | Total current assets | | | 5,694,200 | | | | 401,900 | | | Property and equipment, net | | | 120,700 | | | | 9,500 | | | Intangible assets, net | | | 60,200 | | | | 87,100 | | | Investment in Arcadian | | | 195,900 | | | | — | | | Other assets | | | 25,100 | | | | 13,600 | | | TOTAL ASSETS | | $ | 6,096,100 | | | $ | 512,100 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT): | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | | | Accounts payable (including $36,200 and $10,000 to related parties as of September 30, 2017, and September 30, 2016, respectively) | | $ | 736,900 | | | $ | 426,600 | | | Accrued liabilities | | | 55,200 | | | | 61,000 | | | Accrued compensation | | | 466,000 | | | | 587,200 | | | Accrued compensation – related parties | | | 204,600 | | | | 358,400 | | | Accrued interest | | | 3,900 | | | | 3,900 | | | Deferred revenue - grant funds | | | 45,900 | | | | 45,900 | | | Current portion of note payable | | | 31,500 | | | | 56,300 | | | Current portion of capital lease | | | 1,300 | | | | 1,200 | | | Total current liabilities | | | 1,545,300 | | | | 1,540,500 | | | | | | | | | | | | | LONG-TERM LIABILITIES | | | | | | | | | | Long term portion of note payable | | | — | | | | 31,400 | | | Long term portion of capital lease | | | 3,400 | | | | 4,700 | | | Total long-term liabilities | | | 3,400 | | | | 36,100 | | | TOTAL LIABILITIES | | | 1,548,700 | | | | 1,576,600 | | | STOCKHOLDERS’ EQUITY (DEFICIT): | | | | | | | | | | Preferred stock, $0.001 par value; authorized 15,000,000 shares, 0 shares issued and outstanding as of September 30, 2017 and September 30, 2016, respectively | | | — | | | | — | | | Common stock, $0.001 par value; authorized 500,000,000 shares and 500,000,000 shares as of September 30, 2017 and September 30, 2016, respectively; Issued and outstanding 4,299,311 shares and 1,941,061 shares as of September 30, 2017 and September 30, 2016, respectively | | | 4,300 | | | | 1,900 | | | Additional paid-in capital | | | 80,189,700 | | | | 67,467,400 | | | Accumulated deficit | | | (75,646,600 | ) | | | (68,533,800 | ) | | Total stockholders’ equity (deficit) | | | 4,547,400 | | | | (1,064,500 | ) | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | $ | 6,096,100 | | | $ | 512,100 | |
See Accompanying Notes to the Consolidated Financial Statements
MYND ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, 2017 AND 2016
| | | 2017 | | | 2016 | | | REVENUES | | | | | | | | | | Neurometric Services | | $ | 128,500 | | | $ | 85,100 | | | OPERATING EXPENSES | | | | | | | | | | Cost of neurometric services revenue | | | 53,500 | | | | 5,500 | | | Research | | | 123,900 | | | | 53,700 | | | Product development | | | 1,237,200 | | | | 740,500 | | | Sales and marketing | | | 1,226,700 | | | | 522,000 | | | General and administrative | | | 4,590,800 | | | | 2,530,200 | | | | | | | | | | | | | Total operating expenses | | | 7,232,100 | | | | 3,851,900 | | | | | | | | | | | | | OPERATING LOSS | | | (7,103,600 | ) | | | (3,766,800 | ) | | | | | | | | | | | | OTHER INCOME (EXPENSE): | | | | | | | | | | Interest expense, net | | | (6,600 | ) | | | (2,721,500 | ) | | Gain (loss) on extinguishment of debt | | | — | | | | 572,300 | | | (Loss) gain on derivative liabilities | | | — | | | | (34,600 | ) | | Finance fees | | | — | | | | (20,000 | ) | | Other miscellaneous income | | | — | | | | 306,700 | | | Legal settlement expense | | | — | | | | (275,000 | ) | | Total other expense | | | (6,600 | ) | | | (2,172,100 | ) | | LOSS BEFORE PROVISION FOR INCOME TAXES | | | (7,110,200 | ) | | | (5,938,900 | ) | | Provision for income taxes | | | 2,600 | | | | 2,000 | | | NET LOSS | | $ | (7,112,800 | ) | | $ | (5,940,900 | ) | | | | | | | | | | | | BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS: | | $ | (2.52 | ) | | $ | (9.26 | ) | | | | | | | | | | | | WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | | | | | Basic and Diluted | | | 2,817,415 | | | | 641,844 | |
See Accompanying Notes to the Consolidated Financial Statements
MYND ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, 2017 AND 2016
| | | Common Stock | | | Additional
Paid-in | | | Accumulated | | | | | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2015 | | | 512,405 | | | $ | 500 | | | $ | 57,755,900 | | | $ | (62,592,900 | ) | | $ | (4,836,500 | ) | | | | | | | | | | | | | | | | | | | | | | | | Stock-based compensation | | | — | | | | — | | | | 758,400 | | | | — | | | | 758,400 | | | Extension Warrants issued to note holders | | | | | | | | | | | 1,196,000 | | | | | | | | 1,196,000 | | | Note Warrants issued to note holders | | | | | | | | | | | 1,365,200 | | | | | | | | 1,365,200 | | | Stock issued to vendor | | | 1,500 | | | | — | | | | 6,900 | | | | | | | | 6,900 | | | Restricted stock compensation | | | 163,750 | | | | 100 | | | | 69,300 | | | | — | | | | 69,400 | | | Conversion of notes | | | 1,263,406 | | | | 1,300 | | | | 6,315,700 | | | | | | | | 6,317,000 | | | Net loss for the fiscal year ended September 30, 2016 | | | — | | | | — | | | | — | | | | (5,940,900 | ) | | | (5,940,900 | ) | | Balance at September 30, 2016 | | | 1,941,061 | | | $ | 1,900 | | | $ | 67,467,400 | | | $ | (68,533,800 | ) | | $ | (1,064,500 | ) | | | | | | | | | | | | | | | | | | | | | | | | Stock-based compensation | | | | | | | — | | | | 2,086,000 | | | | — | | | | 2,086,000 | | | Stock issued for private placement of shares | | | 477,000 | | | | 500 | | | | 2,980,800 | | | | — | | | | 2,981,300 | | | Stock issued for purchase agreement to Aspire Capital | | | 20,000 | | | | | | | | 145,000 | | | | — | | | | 145,000 | | | Commitment shares issued to Aspire Capital pursuant to Purchase Agreement | | | 80,000 | | | | 100 | | | | (100 | ) | | | — | | | | — | | | Stock issued to vendor for services | | | 26,250 | | | | | | | | 173,000 | | | | — | | | | 173,000 | | | Restricted Stock compensation | | | 79,000 | | | | 100 | | | | (100 | ) | | | — | | | | — | | | Common Stock issued to Arcadian | | | 1,000 | | | | | | | | 5,900 | | | | — | | | | 5,900 | | | Common Stock - public offering | | | 1,675,000 | | | | 1,700 | | | | 7,480,400 | | | | — | | | | 7,482,100 | | | Offering costs - legal fees Aspire | | | | | | | | | | | (148,600 | ) | | | — | | | | (148,600 | ) | | Net loss | | | | | | | | | | | | | | | (7,112,800 | ) | | | (7,112,800 | ) | | Balance at September 30, 2017 | | | 4,299,311 | | | $ | 4,300 | | | $ | 80,189,700 | | | $ | (75,646,600 | ) | | $ | 4,547,400 | |
See Accompanying Notes to the Consolidated Financial Statements
MYND ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, 2017 AND 2016
| | | 2017 | | | 2016 | | | OPERATING ACTIVITIES: | | | | | | | | | | Net loss | | $ | (7,112,800 | ) | | $ | (5,940,900 | ) | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | Depreciation and amortization | | | 48,700 | | | | 7,200 | | | Gain on derivative liability valuation | | | — | | | | 34,600 | | | Stock based compensation | | | 2,086,000 | | | | 834,700 | | | Non-cash common stock to vendors for services | | | 173,000 | | | | — | | | Loss on extinguishment of debt | | | — | | | | (572,300 | ) | | Financing expenses | | | — | | | | 2,717,300 | | | Note issued for litigation settlement | | | — | | | | 50,000 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | (1,400 | ) | | | 6,700 | | | Prepaid other assets | | | (12,100 | ) | | | 25,700 | | | Accounts payable and accrued liabilities | | | 301,500 | | | | (182,900 | ) | | Security deposits | | | — | | | | (9,500 | ) | | Accrued compensation | | | (275,000 | ) | | | 51,000 | | | Net cash used in operating activities | | | (4,792,100 | ) | | | (2,978,400 | ) | | INVESTING ACTIVITIES: | | | | | | | | | | Purchase of property and equipment | | | (127,900 | ) | | | (4,000 | ) | | Investment in Arcadian | | | (190,000 | ) | | | — | | | Loan Advance- Plotkin | | | (159,500 | ) | | | — | | | Purchase of Intangible assets | | | (2,100 | ) | | | (78,300 | ) | | Net cash used in investing activities | | | (479,500 | ) | | | (82,300 | ) | | FINANCING ACTIVITIES: | | | | | | | | | | Repayment of a capital lease | | | (1,200 | ) | | | (3,200 | ) | | Repayment of a Notes payable | | | (56,200 | ) | | | — | | | Net Proceeds from issuance of common stock | | | 2,981,300 | | | | — | | | Net Proceeds from Public Offering | | | 7,482,100 | | | | — | | | Proceeds from Aspire Line | | | 145,000 | | | | — | | | Offering costs- Aspire Line | | | (148,600 | ) | | | — | | | Net proceeds from issuance of secured convertible debt | | | — | | | | 2,950,000 | | | Net cash provided by financing activities | | | 10,402,400 | | | | 2,946,800 | | | NET INCREASE (DECREASE) IN CASH | | | 5,130,800 | | | | (113,900 | ) | | CASH- BEGINNING OF YEAR | | | 318,200 | | | | 432,100 | | | CASH- END OF YEAR | | $ | 5,449,000 | | | $ | 318,200 | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | Cash paid during the period for: | | | | | | | | | | Interest | | $ | 6,600 | | | $ | 4,200 | | | Finance Fees | | | — | | | | 20,000 | | | Income taxes | | $ | 2,600 | | | $ | 2,000 | | | Non-cash financing and investing activities | | | | | | | | | | Investment in Arcadian 1,000 shares @ $5.90 per share of common stock | | | 5,900 | | | | — | | | Conversion of convertible notes to common stock | | | — | | | | 6,266,800 | | | Conversion of Brandt litigation settlement convertible note to common stock | | | — | | | | 50,200 | |
See Accompanying Notes to the Consolidated Financial Statements
MYND ANALYTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2017
Special Note Regarding Reverse Stock-split
UNLESS OTHERWISE INDICATED, ALL STOCK-BASED AMOUNTS APPEARING IN THIS ANNUAL REPORT (INCLUDING HISTORICAL AMOUNTS) HAVE BEEN ADJUSTED TO GIVE EFFECT TO THE 1-FOR-200 REVERSE STOCK-SPLIT EFFECTED SEPTEMBER 21, 2016.
Organization and Nature of Operations
MYnd Analytics, Inc. (“MYnd,” “CNS,” “we,” “us,” “our,” or the “Company”), formerly known as CNS Response Inc., was incorporated in Delaware on March 20, 1987, under the name Age Research, Inc. Prior to January 16, 2007, the Company (then called Strativation, Inc.) was a “shell company” with nominal assets and our sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On January 16, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response, Inc., a California corporation formed on January 11, 2000 (“CNS California”), and CNS Merger Corporation, a California corporation and the Company’s wholly-owned subsidiary (“MergerCo”) pursuant to which the Company agreed to acquire CNS California in a merger transaction wherein MergerCo would merge with and into CNS California, with CNS California being the surviving corporation (the “Merger”). On March 7, 2007, the Merger closed, CNS California became a wholly-owned subsidiary of the Company, and on the same date the corporate name was changed from Strativation, Inc. to CNS Response, Inc. At the annual meeting held on October 28, 2015, shareholders approved a change in our name from CNS Response, Inc. to MYnd Analytics, Inc. On November 2, 2015, the Company filed an amendment to its Articles of Incorporation which, among other things, effected the name change to MYnd Analytics, Inc.
The Company is a predictive analytics company that has developed a decision support tool to help physicians reduce trial and error treatment in mental health and provide more personalized care to patients. The Company provides objective clinical decision support to healthcare providers for the personalized treatment of behavioral disorders, including depression, anxiety, bipolar disorder, post-traumatic stress disorder (“PTSD”) and other non-psychotic disorders. The Company uses its proprietary neurometric platform, PEER Online, to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict the likelihood of response by an individual to a range of medications prescribed for the treatment of behavioral disorders. The Company continues to be focused on military personnel and their family members who are suffering from depression, PTSD and other disorders through the military, Veterans Administration, and Canadian Forces. Commercial expansion is focused on payer and self-insured markets, provider direct sales to multi-physician and multi-practice provider groups, and patient direct referrals to these groups. The Company continues to expand its database, including younger adults and adolescents.
The Company acquired the Neuro-Therapy Clinic, Inc. (“NTC”) on January 15, 2008, to provide behavioral health care services. NTC’s operations were discontinued effective September 30, 2012.
Private Placements
Between September 30, 2016, and March 20, 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in private placements to 13 accredited investors, for which it received gross cash proceeds of $2,981,300. Five of the 13 accredited investors were affiliates of the Company which represented 70% of such cash proceeds.
Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.
The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During the year ended September 30, 2017, the Company incurred a net loss of $7.1 million and used $4.8 million of net cash in operating activities. As of September 30, 2017, the Company’s accumulated deficit was $75.6 million. In connection with these consolidated financial statements, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they become due for the next twelve months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.
To date, the Company has financed its cash requirements primarily from debt and equity financings. The Company will need to raise additional funds immediately to continue its operations and needs to raise substantial additional funds before the Company can increase demand for its PEER Online services. Until it can generate a sufficient amount of revenues to finance its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in this Annual Report on Form 10-K. The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. As of December 27, 2017, approximately $9.9 million under the Purchase Agreement remains available for sale to Aspire Capital. See Note 5. Stockholders Equity
There is no assurance that the Company will be able to obtain additional funds on commercially favorable terms or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.
The Aspire Capital Equity Line of Credit
On December 6, 2016, the Company, entered into a common stock Purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement.
As of September 30, 2017, approximately $9.9 million under the Purchase Agreement remains available for sale to Aspire Capital. (See Note 5 for additional details on the equity financing).
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and are in accordance with accounting principles generally accepted in the United States of America.
Prior Year Revision
During the year ended September 30, 2017, we revised our consolidated balance sheets as of September 30, 2016 to correct the accounting for certain common stock awards granted in 2015 and 2016 to board members. Previously, certain stock grant compensation was presented as prepaid common stock when the compensation should have been recognized ratably as the stock awards vested. The revision, which we determined is not a material error, had no impact on loss from operations, or cash flows.
The impact on the individual line items of our consolidated balance sheet as of September 30, 2016 from the adjustment was as follows:
Consolidated Balance Sheet as of September 30, 2016:
| | | Previously Reported | | | Adjustments | | | Revised | | | Prepaid Common Stock | | $ | 808,000 | | | $ | (808,000 | ) | | $ | — | | | Additional Paid in Capital | | $ | 68,275,400 | | | $ | (808,000 | ) | | $ | 67,467,400 | |
Basis of Consolidation
The audited consolidated financial statements include the accounts of the Company. There were no intercompany transactions to be eliminated on consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, doubtful accounts, intangible assets, income taxes, valuation of equity instruments, accrued liabilities, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believedwe believe to be
46
reasonable under the circumstances, the results of whichpresent 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 of the Notes to Financial Statements included in this Annual Report, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements. Financial Overview Revenues, net Since January 2018, we have generated net revenues primarily through the sale of Endari® as a treatment for SCD. Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we have entered into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration. Under the Accounting Standards Codification (“ASC”) 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company’s performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of sales discounts, returns, government rebates, chargebacks and commercial discounts. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from the Company's estimates. If actual results vary from the Company's estimates, the Company adjusts the variable consideration in the period such variances become known, which would affect net revenues in that period. The following are our significant categories of variable consideration: Sales Discounts: We provide our customers prompt payment and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to one-time discounts offered by us increased in 2020 over 2019 and may adversely affect sales in subsequent periods. Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale. Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues. 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 47
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 collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements. Due to the inherently unpredictable nature of the drug approval process and the interpretation of the regulatory requirements, we are unable to estimate the amount of costs of obtaining regulatory approval of Endari® outside of the U.S. or the development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in this Annual Report under the headings “Risk Factors—Risks Related to Our Business” and “Risk Factors—Risks Related to Regulatory Oversight of our Business and Compliance with Law.” General and Administrative Expense General and administrative expense consists principally of salaries and related employee costs, including share‑based compensation for our directors, executive officers and employees. Other general and administrative expense includes facility costs, patent filing costs, and professional fees and expenses for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expense over the past two years. Selling Expenses Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion, sales and marketing of our products. Other selling cost include advertising, third party consulting costs, the cost of contracted and in-house sales personnel and travel-related costs. We expect selling expenses to increase as we acquire additional sales personnel to support the commercialization of Endari® in the U.S. and abroad. Environmental Expenses The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs. Inventories Inventories consist of 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 the years ended December 31, 2020 and 2019 were supplied by one vendor. 48
Notes Payable, Convertible Notes Payable and Warrants From time to time, we obtain financing in the form of notes payable or promissory notes with detachable warrants, some of which are convertible into shares of our common stock and some of which are issued to related parties. We analyze all of the terms of our notes payable and promissory notes issued with warrants to determine the appropriate accounting treatment, including determining whether conversion features are required to be bifurcated and treated as a discount, allocation of fair value of the issuance to the debt instrument, detachable stock purchase warrant, and any beneficial conversion features, and the applicable classification of the notes payable and warrants as debt, derivative liabilities, equity or temporary equity (i.e., mezzanine capital). We allocate the proceeds from the issuance of debt instruments with detachable stock purchase warrants to the two elements based on the relative fair values of the debt instruments without the warrants and of the warrants themselves at the time of issuance. We account for the portion of the proceeds allocated to warrants in additional paid‑in capital and the remaining proceeds are allocated to the debt instruments. The allocation to warrants results in a discount to notes payable which is amortized using the effective interest method to interest expense over the expected term of the note. We also include the intrinsic value of the embedded conversion feature of convertible debentures and promissory notes in the discount to notes payable, which is amortized and charged to interest expense over the expected term of the debentures and promissory notes. We also estimate the total value of any beneficial conversion feature and accompanying warrants in allocating debt proceeds. The proceeds allocated to the beneficial conversion feature are determined by taking the estimated fair value of shares issuable under the convertible debentures and promissory notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of our common stock as of the date of issuance. In situations where the debt includes both a beneficial conversion feature and a warrant, the proceeds are allocated to the warrants and beneficial conversion feature based on the pro‑rata fair value. We used the Binomial Monte‑Carlo Cliquet (aka Ratchet) Option Pricing Model option pricing model to determine the fair value of our warrants prior to the Merger and Black-Scholes after the Merger. Notes payable to related parties, interest expense and accrued interest to related parties are separately identified in our consolidated financial statements. We also disclose significant terms of all transactions with related parties. Share‑based Compensation We recognize compensation expense for share‑based compensation awards during the service term of the recipients of the awards. The fair value of share‑based awards 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 calculated using the simplified method allowed under the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Nos. 107 and 110. The risk‑free rate used to value an award is based on the U.S. Treasury rate as of the date of the award that corresponds to the vesting period of the award. Until July 2019, as the accounting acquirer in the Merger, our common stock was not publicly traded and we lacked company specific historical and implied volatility information for our common stock. Therefore, the expected volatility was based on the historical volatility of the common stock of comparable publicly traded companies. Fair Value Measurements We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in accordance with ASC 820. We measure fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Inputs to the valuation methodology include: | • | Quoted prices for similar assets or liabilities in active markets; |
| • | Quoted prices for identical or similar assets or liabilities in inactive markets; |
| • | Inputs other than quoted prices that are observable for the asset or liability; and |
| • | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3: Inputs to the valuation methodology that are unobservable and significant to the fair value measurement. An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of marketable securities is determined based upon quoted prices on nationally recognized securities exchanges and are classified as Level 1 investments at December 31, 2019. The fair value of our debt instruments is not materially different from their carrying values as presented. The fair value of our 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 7 to our consolidated financial statements. Certain of our outstanding warrants contain net cash settlement provision and, consequently, are accounted for as liabilities that are remeasured at fair value on a recurring basis using Level 3 inputs. The Level 3 inputs in the valuation of warrants include expected term and expected volatility. Marketable Securities Marketable securities are recorded at fair value using the quoted market prices and changes in fair value are recorded as net realized gains or losses in comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values as necessary.
Financial Highlights | | Twelve Months Ended December 31, | | | | 2020 | | | 2019 | | CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) | | REVENUES, NET | | $ | 23,167 | | | $ | 22,752 | | COST OF GOODS SOLD | | | 2,248 | | | | 1,094 | | GROSS PROFIT | | | 20,919 | | | | 21,658 | | OPERATING EXPENSES | | | | | | | | | Research and development | | | 2,408 | | | | 2,183 | | Selling | | | 4,865 | | | | 6,975 | | General and administrative | | | 13,678 | | | | 17,012 | | Total operating expenses | | | 20,951 | | | | 26,170 | | LOSS FROM OPERATIONS | | | (32 | ) | | | (4,512 | ) | OTHER INCOME (EXPENSE) | | | | | | | | | Loss on debt extinguishment | | | (1,425 | ) | | | (438 | ) | Change in fair value of warrant derivative liabilities | | | 392 | | | | 3,545 | | Change in fair value of embedded conversion option | | | 112 | | | | 131 | | Net gain (losses) on investment in marketable securities | | | 7,672 | | | | (21,947 | ) | Net losses on equity method investment | | | (2,314 | ) | | | (414 | ) | Miscellaneous reverse merger costs | | | — | | | | (309 | ) | Notes conversion costs | | | — | | | | (3,341 | ) | Interest and other income | | | 2,303 | | | | 232 | | Interest expense | | | (5,989 | ) | | | (27,625 | ) | Total other income (expenses) | | | 751 | | | | (50,166 | ) | INCOME (LOSS) BEFORE INCOME TAXES | | | 719 | | | | (54,678 | ) | INCOME TAXES (BENEFIT) | | | (381 | ) | | | 164 | | NET INCOME (LOSS) | | $ | 1,100 | | | $ | (54,842 | ) | EARNINGS (NET LOSS) PER COMMON SHARE | | $ | 0.02 | | | $ | (1.30 | ) | WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | 48,897,004 | | | | 42,259,460 | |
Years ended December 31, 2020 and 2019 Net Income (Loss). Net income was $1.1 million for the year ended December 31, 2020 compared to a net loss of $54.8 million for the year ended December 31, 2019, representing an increase of $55.9 million, or 102%. The increase in net income was primarily a $50.9 million increase in other income, and a $5.2 million decrease in operating expenses, as discussed below. As of December 31, 2020, we had an accumulated deficit of approximately $225.3 million. Our net income for the year ended December 31, 2020 included approximately $2.3 million of losses attributable to our equity interest in EJ Holdings, a variable interest entity, or VIE. Our independent registered public accounting firm was unable to obtain audited financial statements or other audit support for such losses as described in Note 5 to Notes to Financial Statements included in this Annual Report. As a result, their audit report included in this Annual Report contains a qualification in this regard. The losses attributable to our equity interest in EJ Holdings for the year ended December 31, 2019 were insignificant. Revenues, Net. Net revenues increased by $0.4 million, or 2% to $23.2 million for the year ended December 31, 2020 compared to 2019. Substantially all net revenues were attributable to Endari® sales. The increase was due to higher volume sales of Endari® in 2020 partially offset by a higher level of price discounts related to large volume orders in 2020 than in 2019. We expect net revenues to increase as we expand commercialization of Endari® in the U.S. and abroad. Cost of Goods Sold. Cost of goods sold increased by $1.2 million, or 105% to $2.2 million for the year ended December 31, 2020 compared to 2019 as net revenues increased and we established a reserve relating to Endari® inventory with a shelf-life less than two years. Research and Development Expenses. Research and development expenses increased by $0.2 million, or10%, to $2.4 million for the year ended December 31, 2020 compared to 2019. This increase was primarily due to an increase in 51
expenses related to our Pilot/Phase 1 diverticulosis study. We expect our research and development costs to increase as the study progresses and as we undertake additional studies. Selling Expenses. Selling expenses decreased by $2.1 million, or 30%, to $4.9 million for the year ended December 31, 2020 compared to 2019. The decrease was primarily due to a decrease of $4.2 million in contract sales organization fees and $0.5 million in other marketing activities including consulting expenses, public relations, and sponsorships for Endari® partially offset by an increase of $2.7 million in in-house sales team compensation as we have relied on our in-house commercial team for marketing and sales of Endari® in the US since January 2020. General and Administrative Expenses. General and administrative expense decreased $3.3 million, or 20%, to $13.7 million for the year ended December 31, 2020 compared to 2019. The decrease was primarily due to a decrease of $3.0 million in stock compensation expense, including $2.4 million of one-time expenses attributable to stock option modifications relating to the merger transaction in 2019. We expect on-going general and administrative expenses to remain substantially the same for the foreseeable future. Other Income and Expense. Total other income increased by $50.9 million, or 101%, to $0.8 million for the year ended December 31, 2020 compared to total other expenses of $50.2 million in 2019. The increase was primarily due to a $21.6 million decrease in interest expense in 2020, a net gain on investment in marketable securities of $7.6 million in 2020 compared to net loss of $21.9 million in 2019 and a $2.1 million increase in interest and other income. Seasonality There may be seasonal variations in our Endari® sales due to factors such as year-end holidays, severe winter weather conditions in certain regions of the U.S., seasonal conditions that may affect medical practices and provider activity, including influenza or the recent Covid-19 outbreaks that may inhibit patients from seeking treatment for their SCD or filling or refilling prescriptions for Endari® and possibly other factors relating to the timing of patient deductibles and co-insurance limits. Inflation We do not believe that inflation and changing prices have had a significant impact on our results of operations. COVID-19 We do not believe that the COVID-19 pandemic and related governmental response have had a significant impact on our financial condition or results of operations. Liquidity and Capital Resources Although we realized net income of $1.1 million for the year ended December 31, 2020, the majority of net income was driven by non-operating activities. We anticipate that we will incur net losses for the foreseeable future until we can generate increased net revenues from Endari® sales. Based on anticipated future revenues and operating expenses, cash and cash equivalents of $2.5 million as of December 31, 2020, and the remaining net proceeds from the recent sale of convertible promissory notes, we believe our working capital is sufficient to meet our needs through at least the second quarter of 2022. If future revenues are less than anticipated or we incur more expenses than we anticipate, we may not have sufficient operating capital for our business without curtailing certain operations or raising additional capital. Except as described below, we have no understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us or at all. On February 28, 2020, we entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we may elect to sell to LPC up to $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement from time to time over the 36-month term of the Purchase Agreement. As of the date of filing of this Quarterly Report, we are out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement. We intend to seek to bring the Company into compliance or seek an appropriate waiver from LPC to regain our ability to utilize the Purchase Agreement, but there can be no assurance when or whether we may be able to do so. Effective February 22, 2021, our subsidiary, Emmaus Medical, Inc., or Emmaus Medical, entered into a purchase and sale agreement with Prestige Capital Finance, LLC, or Prestige Capital, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. The balance of the face amount of the accounts receivable will be reserved by Prestige Capital and 52
paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. In March 2021, we completed our first transaction under the purchase and sale agreement. Cash Flows Net cash used in operating activities Net cash used in operating activities decreased by $2.1 million, or 45.8% to $ 2.5 million for the year ended December 31, 2020 from $4.5 million for the year ended December 31, 2019. The decrease was primarily due to decrease in loss from operations from $4.5 million to $32,000 which was partially offset by increases in non-cash expenses included in the loss from operations. Net cash provided by (used in) investing activities Net cash provided by investing activities increased by $7.0 million, or 469%, to a positive $5.5 million for the year ended December 31, 2020 from a negative $1.5 million for the year ended December 31, 2019. The increase was primarily due to $35.6 million of proceeds from the sale of Telcon shares partially offset by a decrease of $26.1 million of purchase of a Telcon convertible bond and $4.0 million of additional loans made to EJ Holding, our equity method investee. Net cash from financing activities Net cash from financing activities decreased by $6.2 million, or 160%, to a negative $2.3 million for the year ended December 31, 2020 from a positive $3.9 million for the year ended December 31, 2019 primarily as a result of a $8.4 million decrease in cash proceeds from the issuance of common stock and a $1.8 million decrease in cash used for repayment of convertible notes. Off‑Balance‑Sheet Arrangements We had no off-balance sheet arrangements in the periods presented. 53
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for a smaller reporting company. ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this Item 8 is incorporated by reference to the information that begins on Page F‑1 of this Annual Report. ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures We are responsible for establishing and maintaining disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. In designing and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives. We conducted an evaluation pursuant to Rule 13a‑15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2020. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Interim Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our DCP were not effective as of December 31, 2020, because of the continuance of a material weakness (the “Material Weakness”) in our internal control over financial reporting due to inadequate application of generally accepted accounting principles (GAAP) in the United States of America on certain complex transactions, inadequate financial closing process, timely filing of periodic and annual financial statements, segregation of duties including access control of information technology especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account process and insufficient entity risk assessment process. Notwithstanding the Material Weakness, our management concluded that our consolidated financial statements for the periods covered by and included in this Annual Report are fairly stated in all material respects in accordance with GAAP for each of the periods presented in this Annual Report. We committed to remediating the control deficiencies that constituted the Material Weakness by implementing changes to our internal control over financial reporting. In 2018, we began to implement measures designed to remediate the underlying causes of the control deficiencies that gave rise to the Material Weakness, including, without limitation: | • | engaging third‑party accounting consulting firms to assist us in the review of our application of GAAP on complex debt financing transactions and revenue recognition under ASC 606; |
| • | using of GAAP Disclosure and SEC Reporting Checklists; |
| • | increasing the continuing professional training and academic education on accounting subjects for accounting staff; |
| • | enhancing the level of the precision of review controls related to our financial close and reporting; and |
| • | engaging other supplemental internal and external resources. |
Our management concluded that, as of December 31, 2020, we had not completed all the corrective measures that are necessary to remediate entirely the Material Weakness. Management’s Plan for Remediation Our management and board of directors are committed to the remediation of the Material Weakness, as well as the continued improvement of our overall system of internal control over financial reporting. We are in the process of implementing measures to remediate the underlying causes of the control deficiency that gave rise to the Material Weakness, which primarily include engaging additional and supplemental internal and external resources with the technical expertise in GAAP to ensure the appropriate accounting treatment for complex and unusual transactions involving options, convertible securities and other financial instruments and intend to seek to hire a permanent Chief Financial Officer with expertise and experience in GAAP to support our financial department, as well as to implement new policies and procedures to provide more effective controls to track, process, analyze, and consolidate the financial data and reports. We also intend to consider upgrading our financial accounting systems and software as our finances permit. Further, we are in the process of reviewing plans to establish a Disclosure Committee to ensure more effective internal communication of significant transactions. We believe these measures will remediate the control deficiencies that gave rise to a Material Weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional measures may be required. We are committed to maintaining a strong internal control environment and believe that these remediation actions will represent improvements in our internal control over financial reporting when they are fully implemented. The Material Weakness will not be considered fully remediated until controls have been designed and implemented for a sufficient period of time for our management to conclude that the control environment is operating effectively. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting and DCP. As we continue to evaluate and work to remediate the Material Weakness and enhance our internal control over financial reporting and DCP, we may determine that we need to modify or otherwise adjust the remediation measures described above. As a result, we cannot assure you that our remediation efforts will be successful or that our internal control over financial reporting or DCP will be effective. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a‑15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and our dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2020. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In conducting our review of our internal control over financial reporting, we identified the continuing Material Weakness described above. 55
Attestation Report This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We are not subject to the attestation requirement because we are a non-accelerated filer. Changes in Internal Control Over Financial Reporting Except as described above, 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 December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. | OTHER INFORMATION |
Compensatory Arrangement with CEO On April 21, 2021, at the recommendation of the Compensation Committee of our board of directors, our board approved a one-year extension of a warrant to purchase 1,365,189 shares of our common stock at an exercise price of $4.76 a share held by Yutaka Niihara, M.D., M.P.H, our Chairman and Chief Executive Officer. No other changes were made to the warrant, which was granted to Dr. Niihara in 2016 and would have expired on May 9, 2021 absent the amendment.
PART III ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers The following individuals constitute our board of directors and executive officers: Name | | Age | | | Position | Yutaka Niihara, M.D., M.P.H. | | | 61 | | | Chairman and Chief Executive Officer | Willis C. Lee | | | 60 | | | Chief Operating Officer | Yasushi Nagasaki, C.P.A. | | | 53 | | | Interim Chief Financial Officer | Ian Zwicker | | | 73 | | | Director | Masaharu Osato, M.D. | | | 66 | | | Director | Wei Peu Zen | | | 68 | | | Director | Robert Dickey IV | | | 65 | | | Director | Jane Pine Wood | | | 58 | | | Director |
Background of Officers and Directors The following is a summary of the background of each of our directors and executive officers. Except as noted in their respective biographies below, each of our directors and officers became a director or officer as of the completion of our merger transaction with EMI Holding, Inc., or EMI Holding, on July 17, 2019. All directors serve until the next annual meeting of stockholders at which their successor is elected or their earlier resignation or removal as a director. One or more of our directors or officers also serve as directors or officers of one or more of our wholly owned subsidiaries. Yutaka Niihara, M.D., M.P.H.served as Chairman and Chief Executive Officer since January 2016, as Chief Scientific Officer from April 2015 until December 2015, as President and Chief Executive Officer from April 2011 to April 2015 and as a director since April 2011 of EMI Holding, and as a director of EMI Holding’s predecessor, Emmaus Medical, from 2003 to April 2011. Since May 2005, Dr. Niihara has also served as the President, Chief Executive Officer and Medical Director of Hope International Hospice, Inc., or Hope Hospice, a Medicare-certified hospice program. From June 1992 to October 2009, Dr. Niihara served as a physician specialist for Los Angeles County. Dr. Niihara is the principal inventor of the patented L-glutamine treatment for SCD. Dr. Niihara has been involved in patient care and research for sickle cell disease during most of his career and is a widely published author in the area of sickle cell disease. Dr. Niihara is board-certified by the American Board of Internal Medicine/Medical Oncology and by the American Board of Internal Medicine/Hematology. He is licensed to practice medicine in both the United States and Japan. Dr. Niihara is a Professor of Medicine at the David Geffen School of Medicine at UCLA. Dr. Niihara a holds B.A. degree in Religion from Loma Linda University, a M.D. degree from the Loma Linda University School of Medicine and a M.P.H. degree from Harvard School of Public Health. We believe Dr. Niihara is qualified to serve as a director due to his critical involvement in the research and development of Endari® and extensive knowledge and experience in treating sickle cell disease in the primary care setting. Willis C. Lee, M.S.served as Chief Operating Officer since May 2011, as a director since December 2015, as Vice-Chairman of the board of directors since January 2016 and as Chief Financial Officer from October 2016 to July 2018 of EMI Holding. Mr. Lee also previously served as a director of EMI Holding from May 2011 to May 2014 and again from to December 2015 to January 2016. Mr. Lee served as the Co-Chief Operating Officer and Chief Financial Officer and as a director of Emmaus Medical from March 2010 to May 2011. Prior to that time, he was the Controller at Emmaus Medical from February 2009 to February 2010. From 2004 to 2010, Mr. Lee led worldwide sales and business development of Yield Dynamics product group at MKS Instruments, Inc., a provider of instruments, subsystems, and process control solutions for the semiconductor, flat panel display, solar cell, data storage media, medical equipment, pharmaceutical manufacturing, and energy generation and environmental monitoring industries. Prior to that time, Mr. Lee held various managerial and senior positions at various public and private companies in the semiconductor and other industries. Mr. Lee received his B.S. degree and a M.S. degree in Physics from University of Hawaii and University of South Carolina, respectively. We believe Mr. Lee is qualified to serve as a director due to his extensive knowledge and experience, as well as his intimate knowledge of the company through his service as an executive officer of the company and Emmaus Medical. Yasushi Nagasaki, C.P.A. has served as our Interim Chief Financial Officer since September 1, 2020 and as Senior Vice President Finance from July 2019 to August 2020. Mr. Nagasaki also served as Senior Vice President Finance from April 2012 to July 2019 and as Chief Financial Officer from May 2011 to April 2012 of EMI Holding. From September 2005 until joining EMI Holding, Mr. Nagasaki was the Chief Financial Officer of Hexadyne Corporation, an aerospace and 57
defense supplier. Mr. Nagasaki also served on the board of directors at Hexadyne Corporation from September 2005 to April 2011. From May 2003 to August 2005, Mr. Nagasaki was the Controller at Upsilon Intertech Corporation, an international distributor of defense and aerospace parts and sub systems. Mr. Nagasaki is a Certified Public Accountant and received a B.A. in Commerce from Waseda University and a M.A. in International Policy Studies from the Monterey Institute of International Studies, a graduate school of Middlebury College. Ian Zwickeris the founder of Zwicker Advisory Group and has been its Chief Executive Officer since 2014. From 1981 to 1990, Mr. Zwicker served as Managing Director and held a variety of management positions at the investment banking firms of SG Cowen and Hambrecht & Quist. From 1990 to 1999, Mr. Zwicker served as Managing Director and head of worldwide technology investment banking for Donaldson, Lufkin & Jenrette Securities Corporation, and from 2000 to 2001 as the President of WR Hambrecht + Co (WRH). He was a member of the board of directors of Stirling Energy Systems, Inc. from 2006 to 2012. Mr. Zwicker was a Partner at WRH and was also Head of Capital Markets from 2013 to 2014. We believe Mr. Zwicker is qualified to serve as a director due to his executive experience and business expertise in the investment banking industry and as a former director of a public company. Masaharu Osato, M.D.has been practicing gastroenterology and internal medicine (“GI”) at his private practice, the Osato Medical Clinic, Inc. in Torrance, CA, since 2001. Between 1998 and 2001 he completed a GI Fellowship at the Harbor-UCLA Medical Center. Between 1993 and 1997 and 1988 and 1993, respectively, Dr. Osato served as General Internist and Director of Health Screening Center at the Tokyo Adventist Hospital in Tokyo, Japan, and at the Kobe Adventist Hospital in Kobe, Japan. He attended the Loma Linda University School of Medicine in California between 1979 and 1983 and completed an internal medicine residency at the Kettering Memorial Medical Center at Wright State University between 1983 and 1986. Between 1986 and 1988 he completed a pediatric residency at the Loma Linda University Medical Center. We believe Dr. Osato is qualified to serve as a director due to his extensive knowledge of and experience in the
GI sector. Wei Peu Zenis Vice Chairman and Chief Executive Officer of Wai Kee Holdings Limited, a Hong Kong-based construction and infrastructure company whose shares are listed on the Main Board of Hong Kong Stock Exchange. He is also the Chairman, Chief Executive Officer and Managing Director of Build King Holdings Limited, a subsidiary of Wai Kee Holdings Limited. In addition, he is the Co-Chairman of Road King Infrastructure Limited, an associated corporation of Wai Kee Holdings Limited. The shares of both Build King Holdings Limited and Road King Infrastructure Limited are listed on the Main Board of Hong Kong Stock Exchange. Mr. Zen has over 40 years of experience in civil engineering and is responsible for the overall management of Wai Kee Group and oversees the operations of Wai Kee Group. Mr. Zen holds a B.Sc. degree in Engineering from The University of Hong Kong and a M.B.A. degree from The Chinese University of Hong Kong and is a member of both the Institution of Civil Engineers and the Hong Kong Institution of Engineers and a fellow member of the Institute of Quarrying, UK. He is a past Honorary Treasurer of Hong Kong Construction Association and a member of HKTDC Infrastructure Development Advisory Committee. He is also the President of Hong Kong Contract Bridge Association. We believe Mr. Zen is qualified to serve as a director due to his executive experience and business expertise. Mr. Zen also brings to the board of directors his diverse experience as a foreign national and board member and executive officer of Hong Kong-based publicly traded companies. Robert Dickey IVhas served as Managing Director at Foresite Advisors since March 2020 and was previously a Managing Director at Danforth Advisors from August 2018 to March 2020. Foresite Advisors provides finance support and strategy for life science companies, including CFO advisory, financial analysis, capital raising, and transactional support/execution for public offerings and M&A. Mr. Dickey served as a member on the board of directors at Sanuthera, Inc., a privately held medical device company, from 2013 to 2017, and was employed as Chief Financial Officer of Motif Bio Plc., a NASDAQ and London AIM exchange-listed antibiotics company, from January 2017 to February 2018. He also previously was employed with several other biotechnology companies, including as the Chief Financial Officer of Tyme Technologies, Inc. from May 2015 to January 2017, the Chief Financial Officer of NeoStem, Inc. from August 2013 to January 2015 and the Senior Vice President of Hemispherx Biopharma, Inc. from November 2008 to August 2013. Prior to that time, among other things, Mr. Dickey served as a Managing Director at Legg Mason Wood Walker, Inc. and as a Senior Vice President at Lehman Brothers. He received his undergraduate degree from Princeton University and an M.B.A. from The Wharton School of the University of Pennsylvania. We believe Mr. Dickey is qualified to serve as a director due to his experience as Chief Financial Officer of stock exchange listed life sciences company and other experiences in the life sciences industry, including as a former investment banker. Jane Pine Wood was appointed as a director on March 25, 2020. She has served since October 3, 2016 as Chief Legal Counsel of BioReference Laboratories, Inc., Elmwood Park, New Jersey, a wholly owned subsidiary of OPKO Health, Inc. (NASDAQ: OPK), a diversified healthcare company. BioReference Laboratories, Inc. is the nation’s third-largest clinical laboratory with a core genetic testing business and 400-person sales and marketing team. Ms. Wood has over 30 years of experience representing clinical and anatomic laboratories, physicians, imaging centers, home health agencies, mental health 58
providers, hospitals, other healthcare providers, and professional societies in corporate, regulatory, reimbursement, contractual, and other matters. She holds a B.A. degree, summa cum laude, from Texas A&M University and a J.D. degree from Vanderbilt University School of Law and is a member of the State Bars of New Jersey, Massachusetts, Ohio, and Tennessee. Ms. Wood is well suited to serve as a director in light of her extensive education and experiences in legal and regulatory affairs in the life science industry, including in advising a broad range of physicians and other healthcare providers and commercial healthcare companies. She adds her unique perspective as an expert in federal and state regulatory affairs and the only female director of the company. Family and Other Relationships There are no family relationships among any of our officers or directors. Mr. Zen was originally appointed to the board of directors of EMI Holding on June 18, 2018 pursuant to the terms of outstanding convertible promissory notes dated November 6, 2017 and January 15, 2018 held by Mr. Zen and Wealth Threshold Limited, respectively, which entitled the note holders to designate one director if the aggregate investment in EMI Holding by the note holders and related note holders exceeded $20 million. Board of Directors and Committees and Director Independence Our board of directors currently consists of seven members. Our board of directors has determined that each of Ian Zwicker, Masaharu Osato, Wei Peu Zen, Robert Dickey IV and Jane Pine Wood is an “independent” director as defined by The NASDAQ Marketplace Rules currently in effect and all applicable rules and regulations of the SEC. All members of the Audit, Compensation, and Governance and Nominations Committees satisfy the “independence” standards of The NASDAQ Marketplace Rules applicable to members of such committees. The board of directors made this affirmative determination regarding these directors’ independence based on discussions with the directors and its review of the directors’ responses to a standard questionnaire regarding employment and compensation history, affiliations, family and other relationships and transactions between each director or any member of his or her immediate family and the Company depositsor its subsidiaries or affiliates. Audit Committee Our Audit Committee consists of Mr. Dickey, Mr. Zwicker, Dr. Osato and Ms. Wood, each of whom is an independent director as defined by The NASDAQ Marketplace Rules. Mr. Dickey serves as Chairman of the Audit Committee and qualifies as an “audit committee financial expert” as defined under Item 407(d) of Regulation S‑K. The purpose of the Audit Committee is to represent and assist our board of directors in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal control and audit functions. The Audit Committee’s primary responsibilities and duties are to: | • | Serve as an independent and objective party to monitor the Company’s financial reporting process, internal control system and disclosure control system. |
| • | Review and appraise the audit efforts of the company’s independent accountants. |
| • | Assume direct responsibility for the appointment, compensation, retention and oversight of the work of the outside auditors and for the resolution of disputes between the outside auditors and the company’s management regarding financial reporting issues, |
| • | Provide an open avenue of communication among the independent accountants, financial and senior management and the board of directors. |
The board of directors has adopted a written charter for the Audit Committee. A copy of the Audit Committee Charter is available on our website at www.emmausmedical.com. 59
Governance and Nominations Committee The purpose of the Governance and Nominations Committee is to: | • | Assist the board of directors by identifying qualified candidates for director, and to recommend to the board the director nominees for the next annual meeting of stock holders |
| • | To lead the board in its annual review of the board’s performance. |
| • | To recommend to the board nominees for each board Committee. |
| • | To develop and recommend to the board corporate governance guidelines applicable to the company. |
The Governance and Nominations Committee also currently consists of Mr. Dickey, Mr. Zwicker, Dr. Osato and Ms. Wood. Mr. Zwicker serves as Chairman of the Governance and Nominations Committee. A copy of the Governance and Nominations Committee Charter is available on our website at www.emmausmedical.com. Compensation Committee The purpose of the Compensation Committee is to review and approve of the company’s compensation and benefit programs. The Compensation Committee also currently consists of Mr. Dickey, Mr. Zwicker, Dr. Osato and Ms. Wood. Mr. Zwicker serves as Chairman of the Compensation Committee. A copy of the Compensation Committee Charter is available on our website at www.emmausmedical.com. Section 16(a) Beneficial Ownership Reporting Compliance Our common stock is currently registered under Section 12 of the Securities Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a‑2, our directors and officers and beneficial owners of 10% or more of our common stock are currently required to file statements of beneficial ownership with respect to their ownership of our equity securities under Sections 13 or 16 of the Exchange Act. Based on a review of written representations from our executive officers and directors and a review of Forms 3, 4 and 5 furnished to us, we believe that during the fiscal year ended December 31, 2020 our directors and, officers and owners of more than 10% of our common stock filed, on a timely basis, all reports required by Section 16(a) of the Exchange Act, except thatJane Pine Wood’s initial statement of beneficial ownership of securities was filed late due to delays on our part in obtaining SEC filer codes on her behalf related to stay at home orders affecting our employees and her. Code of Conduct and Ethics Our board of directors has approved a Code of Conduct and Ethics, which we refer to as the Code of Ethics, which applies to our directors, officers and employees. The Code of Ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations, and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the Code of Ethics. A copy of the Code of Ethics is available on our website at www.emmausmedical.com. Requests for copies of the Code of Ethics should be sent to Emmaus License Sciences, Inc., Attention: Secretary, 21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503. ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table The following table sets forth information concerning the compensation earned by our Chief Executive Officer, and our two other most highly compensated executive officers, whom we refer to as our “named executive officers,” for the fiscal years ended December 31, 2020 and 2019:
Name and Position | | Year ended December 31 | | Salary | | | Bonus | | Stock Awards | | Option Awards | | All Other Compensation | | Total | | Yutaka Niihara, M.D., MPH | | 2020 | | | 385,000 | | | — | | — | | — | | — | | | 385,000 | | Chairman and Chief Executive Officer | | 2019 | | | 385,000 | | | — | | — | | — | | — | | | 385,000 | | Willis C. Lee | | 2020 | | | 240,000 | | | — | | — | | — | | — | | | 240,000 | | Chief Operating Officer | | 2019 | | | 240,000 | | | — | | — | | — | | — | | | 240,000 | | Yasushi Nagasaki | | 2020 | | | 240,000 | | | — | | — | | — | | — | | | 240,000 | | Interim Chief Financial Officer (1) | | 2019 | | | 235,000 | | | — | | — | | — | | — | | | 235,000 | |
| (1) | Mr. Sherwood stepped down as Chief Financial Officer effective September 1, 2020. |
The compensation of Dr. Niihara and Mr. Lee does not reflect annual performance bonuses provided for in their respective employment agreements. We did not grant such performance bonuses in 2020 or 2019, in part, to preserve available capital to fund operating expenses. Additionally, no specific performance criteria were established for our executive officers for 2020 or 2019. As of the filing of this Annual Report, the Compensation Committee has made no determination regarding any discretionary cash bonuses for 2020. Outstanding Equity Awards at 2020 Fiscal Year End The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2020: Name | | Number of Securities Underlying Unexercised Awards Exercisable | | | Number of Securities Underlying Unexercised Awards Unexercisable | | | Exercise Price | | | Expiration Date | Yutaka Niihara, M.D., MPH | | | 262,536 | | | | — | | | $ | 3.42 | | | 4/1/2022 | | | | 525,072 | | | | — | | | $ | 3.42 | | | 2/28/2023 | | | | 315,043 | | | | — | | | $ | 4.76 | | | 5/10/2026 | | | | 1,365,189 | | | | — | | | $ | 4.76 | | | 5/9/2021 | Willis C. Lee | | | 262,536 | | | | — | | | $ | 3.42 | | | 4/1/2022 | | | | 525,072 | | | | — | | | $ | 3.42 | | | 2/28/2023 | | | | 315,043 | | | | — | | | $ | 4.76 | | | 5/10/2026 | Yasushi Nagasaki | | | 262,536 | | | | — | | | $ | 3.42 | | | 4/1/2022 | | | | 525,072 | | | | — | | | $ | 3.42 | | | 2/28/2023 | | | | 315,043 | | | | — | | | $ | 4.76 | | | 5/10/2026 |
Employment Agreements On April 5, 2011, we entered into employment agreements with Dr. Niihara and Mr. Lee. Each of the Employment Agreements had an initial two-year term, which renews automatically for consecutive one-year periods unless we or the officer provides notice of non-renewal at least 60 days prior to the expiration of the then current term. Base Salary, Bonus and Other Compensation. Dr. Niihara’s, and Mr. Lee’s current base salaries are $385,000 and $240,000 per year, respectively, which will be reviewed at least annually. In addition to the base salary, each officer may be entitled to receive an annual performance bonus based on the officer’s performance. The Employment Agreements provide that the respective officer’s performance will be measured against a set of targets and goals as mutually established by us and the officer. Historically, our board of directors and the Compensation Committee of the board have evaluated each officer’s performance on an overall basis related to our progress on major milestones, without reliance on specific position by position pre-established targets and goals. The officers are also eligible to receive paid vacation and to participate in health and other benefit plans and to be reimbursed for reasonable and necessary business expenses on the same basis as our other employees. 61
Equity Compensation. The Employment Agreements provide that on December 31 of each calendar year, or as soon as reasonably practicable after such date (each a “Grant Date”), we will grant non-qualified 10-year stock options with a Black-Scholes-Merton value of $100,000 to Dr. Niihara, and $50,000 to Mr. Lee in each case with an exercise price per share equal to the “Fair Market Value” (as such term is defined in our 2011 Stock Incentive Plan) on the applicable Grant Date. The options are to vest as to one-third of the option shares on each of the first three anniversaries of the Grant Date. Any unvested options are to vest immediately upon a change in control (as defined below), termination of the officer’s employment other than a voluntary termination by the officer or our termination of the officer for cause. In the event the officer is terminated for any reason other than cause, death or disability or retirement, each option, to the extent that it is exercisable at the time of such termination, shall remain exercisable for the 90-day period following such termination, but in no event following the expiration of its term. In the event the officer’s employment terminates on account of death, disability or, with respect to any non-qualified stock option, retirement, each option granted that is outstanding and vested as of the date of such termination shall remain exercisable by such officer (or the officer’s legal representatives, heirs or legatees) for the one-year period following such termination, but in no event following the expiration of its term. No such stock option grants were made for either of the years ended December 31, 2020 or 2019. Severance Compensation. If Dr. Niihara’s or Mr. Lee’s employment is terminated for any reason during the term of his Employment Agreement, other than for cause or without good reason, he will be entitled to receive his or her base salary prorated through the termination date, any expense reimbursement due and owing for reasonable and necessary business expenses, and unpaid vacation benefits (the “Voluntary Termination Benefits”). If Dr. Niihara’s or Mr. Lee’s employment is terminated due to his death or disability during the term of his employment agreement, he will also receive an amount equal to his target annual performance bonus, if any, and in the case of a termination due to disability, six additional months of his base salary to be paid out over a six-month period and payment of COBRA benefits for six months following the termination. If Dr. Niihara’s employment is terminated without cause or he resigns with good reason (but not within two years following a change in control), he will receive the Voluntary Termination Benefits and, subject to his signing a Release of all claims relating to his employment, a severance package equal to one year’s base salary to be paid out over a 12-month period, a pro rata amount of the annual performance bonus for the calendar year in which the termination date occurs based on the achievement of any applicable performance terms or goals for the year, and payment of COBRA benefits for 12 months following the termination. If Mr. Lee’s employment is terminated without cause or he resigns with good reason (but not within two years following a change in control) during the term of his employment agreement, he will receive the Voluntary Termination Benefits and, subject to his signing a Release if all claims relating to his employment, a severance package equal to six months’ base salary to be paid out over a six-month period, an amount equal to half of the targeted annual performance bonus, if any, and payment of COBRA benefits for six months following the termination. Termination with cause includes a proven act of dishonesty, fraud, embezzlement or misappropriation of company proprietary information; a conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude; willful misconduct which cannot be cured on reasonable notice to the officer; or the officer’s habitual failure or refusal to perform his duties if such failure or refusal is not cured within 20 days after receiving written notice thereof from the board of directors. Good reason includes a reduction of more than 10% to the officer’s base salary or other compensation (except as part of a general reduction for all executive employees); a material diminution of the officer’s authority, responsibilities, reporting or job duties (except for any reduction for cause); the company’s material breach of the Employment Agreement; or a relocation of the business requiring the officer to move or drive to work more than 40 miles from the location of our former offices. The officer may terminate the Employment Agreement for good reason if he provides written notice to the Company within 90 days of the event constituting good reason and the Company fails to cure the good reason within 30 days after receiving such notice. Change of Control. The Employment Agreements will not be terminated upon a “change of control,” which means any merger or reorganization where the holders of the company’s capital stock prior the transaction own fewer than 50% of the shares of capital stock after the transaction, an acquisition of 50% of the voting power of the company’s outstanding securities by another entity, or a transfer of at least 50% of the fair market value of the company’s assets. Upon Dr. Niihara’s termination without cause or good reason that occurs within two years after a change of control, he will be entitled to receive the Voluntary Termination Benefits and, subject to his signing a Release of all claims relating to his employment, a severance package equal to two years’ base salary to be paid out over a 12-month period, an amount equal to double his targeted annual performance bonus, if any, payment of COBRA benefits for 18 months following the termination, and a one-time cash payment of $3.0 million. Upon Mr. Lee’s termination without cause or good reason that occurs within two years after a change of control, he will be entitle to receive the Voluntary Termination Benefits and, subject to his signing a Release of all claims relating to his employment, a severance package equal to one year’s base salary to be paid out over a 12-month period, an amount equal to the full-year targeted annual performance bonus, payment of COBRA benefits for 12 months following the termination, and a one-time cash payment of $200,000. In addition, each officer’s unvested equity awards shall vest upon such termination and the officer will have 36 months in which to sell or exercise such awards (subject to expiration of the term of such options). The 62
officer will also be free from all lock-up or other contractual restrictions upon the free sale of shares that are subject to waiver by the company upon such termination. Director Compensation The following is a summary of the current compensation of our non-employee directors: | • | $100,000 per year cash compensation, payable in quarterly instalments; |
| • | $1,000 per ad hoc board meeting attended in person or telephonically; and |
| • | possible awards of stock options to be determined by the Compensation Committee. |
The following table sets forth information regarding the compensation earned by our non-employee directors for the fiscal year ended December 31, 2020. Ms. Wood became a director on March 25, 2020. Our employee directors, Dr. Niihara, and Mr. Lee, are not compensated for their services as directors. Name | | Fees Earned or Paid in Cash | | | Option Awards | | | Total | | Ian Zwicker | | $ | 100,000 | | | $ | — | | | $ | 100,000 | | Masaharu Osato, M.D. | | | 100,000 | | | | — | | | | 100,000 | | Wei Peu Zen | | | 100,000 | | | | — | | | | 100,000 | | Robert Dickey IV | | | 100,000 | | | | — | | | | 100,000 | | Jane Pine Wood (1) | | | 75,000 | | | | — | | | | 75,000 | | Total | | $ | 475,000 | | | $ | — | | | $ | 475,000 | | _____________ | | | | | | | | | | | | |
| (1) | Ms. Wood became a director on March 25, 2020. |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information as of March 31, 2021 with respect to beneficial ownership of our common stock based on issued and outstanding shares of common stock owned by: | • | Each person known to be the beneficial owner of 5% or more of our outstanding common stock; |
| • | Each named executive officer; |
| • | All our executive officers and directors as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options, warrants and convertible notes held by that person that are currently exercisable or become exercisable within 60 days of March 31, 2021 are deemed outstanding even if they have not actually been exercised. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name, subject to community property laws, where applicable. Unless otherwise indicated in the table or footnotes, the address of each 5% or more owner is c/o Emmaus Life Sciences, Inc., 21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503.
Name of Beneficial Owner | | Title | | Amount and Nature of Beneficial Ownership of Shares of Common Stock | | | Percent of Class (1) | | Directors and Executive Officers | | | | | | | | | | | Yutaka Niihara, M.D., M.P.H. | | Chairman and Chief Executive Officer | | | 13,332,380 | | (2) | | 25.7 | % | Willis C. Lee | | Chief Operating Officer | | | 1,434,636 | | (3) | | 2.8 | % | Yasushi Nagasaki | | Interim Chief Financial Officer | | | 1,169,753 | | (4) | | 2.3 | % | Robert Dickey IV | | Director | | | — | | | * | | Masaharu Osato, M.D. | | Director | | | 735,396 | | (5) | | 1.5 | % | Jane Pine Wood | | Director | | | — | | | * | | Wei Peu Zen | | Director | | | 2,278,048 | | (6) | | 4.6 | % | Ian Zwicker. | | Director | | | 217,029 | | | * | | Officers and Directors as a Group (8 persons) | | | | | 19,167,242 | | (7) | | 35.2 | % | | | | | | | | | | | | 5% or More Owners | | | | | | | | | | | Telcon RF Pharmaceutical, Inc. | | | | | 4,147,491 | | (8) | | 8.4 | % | __________ | | | | | | | | | | | * Represents beneficial ownership of less than one percent (1%). | | | | | | | | | (1) Based on 49,311,864 shares of common stock issued and outstanding as of March 31, 2021. | | (2) Includes 10,864,540 shares of common that are held jointly by Dr. Niihara and Soomi Niihara, his wife. Also includes 63,000 shares held by Soomi Niihara and 92,794 shares owned by Hope International Hospice, Inc., or Hope Hospice. Dr. Niihara is the chief executive officer and a co-director of Hope Hospice and shares voting and investment power over such shares. Also includes 1,102,651 shares underlying stock options and 1,365,189 shares underlying warrants." | | (3) Includes 1,102,651 shares underlying stock options. | | (4) Includes 1,102,651 shares underlying stock options. | | (5) Includes 516,152 shares held by Osato Medical Clinic and its pension plan. Also includes 217,029 shares underlying stock options. | | (6) Includes 1,270,214 shares owned by Profit Preview International Group Limited, a Hong Kong limited company wholly owned by Mr. Zen. Excludes 521,827 shares owned by Smart Start investments Limited, a Hong Kong corporation and wholly owned subsidiary of Build King Holdings Limited, a Hong Kong stock exchange listed company, of which the Mr. Zen is a director and 9.96% shareholder, and 350,048 shares owned by Wealth Threshold Limited, a British Virgin Islands limited company and wholly owned subsidiary of Wai Kee Holdings Limited, a Hong Kong stock exchange listed company of which Mr. Zen is a director and 31.45% shareholder, as to which shares Mr. Zen disclaims beneficial ownership. | | (7) Includes 4,844,662 shares underlying stock options and 1,365,189 shares underlying warrants. | | (8) The information regarding Telcon RF Pharmaceutical, Inc. is based solely on its Schedule 13/G filed with the SEC on August 26, 2019. The address for the stockholder is S-Tower 14th Floor 439 Bongunsa-ro, Gangnam-gu, Seoul, South Korea. | |
Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2020 regarding compensation plans, including any individual compensation arrangements, under which our equity securities are authorized for issuance: Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans | | Equity compensation plans approved by security holders | | | 7,110,025 | | | $ | 4.63 | | | | 2,302,475 | |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Except as described below in this section, since the beginning of our last fiscal year, there has not been, nor is there currently proposed, there has not been any transaction or series of similar transactions to which we were a party: | ● | in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and |
| ● | in which any director, executive officer, or other stockholder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. |
Loans by Related Persons In January 2020, we entered into revolving line of credit agreement with Dr. Yutaka Niihara. Under the agreement, at our request from time to time, Dr. Niihara may, but is not obligated to, loan or re-loan to us up to $1,000,000, including $600,000 loaned to us in December 2019. Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3%. In addition to the payment of interest, we agreed to pay Dr. Niihara an amount, which we refer to as a “tax gross-up,” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him the previous year. As of December 31, 2020, the outstanding balance under the revolving line of credit agreement of $800,000 was reflected on our consolidated balance sheet. With the tax-gross up, the effective interest rate on the outstanding balance as of December 31, 2020 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. The following table sets forth information relating to loans from related parties evidenced by promissory notes payable and convertible promissory notes payable to related persons outstanding at any time during the fiscal year ended December 31, 2020 (amounts in thousands). Class | Lender | | Interest Rate | | | Date of Loan | | Term of Loan | | Principal Amount Outstanding at December 31, 2020 | | | Highest Principal Outstanding | | | Amount of Principal Repaid | | | Amount of Interest Paid | | Current, Promissory note payable to related parties: | | | | | | | | | | | | | | | | | | Lan T. Tran (2) | | 10% | | | 4/29/2016 | | Due on Demand | | | 20 | | | | 20 | | | | — | | | | — | | | Lan T. Tran (2) | | 11% | | | 2/10/2018 | | Due on Demand | | | — | | | | 159 | | | | 159 | | | | 35 | | | Lan T. Tran (2) | | 10% | | | 2/9/2019 | | Due on Demand | | | 14 | | | | 14 | | | | — | | | | — | | | Hope Int'l Hospice (1) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 194 | | | | 194 | | | | 2 | | | Hope Int'l Homecare (1) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 189 | | | | 189 | | | | 1 | | | Soomi Niihara | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 98 | | | | 98 | | | | 4 | | | Soomi Niihara | | 12% | | | 10/28/2020 | | Due on Demand | | | — | | | | 395 | | | | 395 | | | | 12 | | | Willis Lee (2) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 685 | | | | 685 | | | | 1 | | | Willis Lee (2) | | 12% | | | 10/29/2020 | | Due on Demand | | | 100 | | | | 100 | | | | 100 | | | | — | | | | | | | | | | | Subtotal | | $ | 134 | | | $ | 1,854 | | | $ | 1,820 | | | $ | 55 | | Revolving line of credit | | | | | | | | | | | | | | | | | | Yutaka Niihara (2) | | 5% | | | 12/27/2019 | | Due on Demand | | | 800 | | | | 800 | | | | 200 | | | | 37 | | | | | | | | | | | Subtotal | | $ | 800 | | | $ | 800 | | | $ | 200 | | | $ | 37 | | | | | | | | | | | Total | | $ | 934 | | | $ | 2,654 | | | $ | 2,020 | | | $ | 92 | |
(1) | Dr. Niihara, our Chairman and Chief Executive Officer, is the Chief Executive Officer, and he and his wife, Soomi Niihara, are co-owners and directors, of Hope International Hospice, Inc. |
(2) | Officer or former officer. |
The proceeds of the above loans were used working capital purposes. Prior to the reverse capitalization transaction completed in July 2019, there were outstanding approximately $34.5 million principal amount of promissory notes convertible into shares of common stock of EMI Holding at conversion prices ranging from $3.05 to $10.00 per share. None of the convertible promissory notes originally provided for their conversion into Emmaus common stock or assumption by Emmaus connection with the reverse capitalization transaction. In order to facilitate the transaction and to satisfy its covenants in the merger agreement, EMI entered into negotiations with the holders of the convertible promissory notes to amend the terms thereof to provide that they would be converted automatically into shares of EMI common stock at their respective conversion prices immediately prior to the effective time of the reverse capitalization transaction, which shares would be outstanding immediately prior to the reverse capitalization transaction and would be converted into shares of Emmaus common stock in the same manner as other outstanding shares of EMI common stock based the exchange ratio. In connection with such amendments, the conversion price of approximately $15.1 million principal amount of EMI convertible promissory notes, including $14.4 million principal amount of EMI convertible promissory notes held by Wei Peu Zen, an Emmaus director and a note holder affiliated with Mr. Zen, were reduced from $10 a share to $8.25 a share. Also, in conjunction with the reverse capitalization transaction, approximately $357,000 principal amountand accrued interestunder a promissory note held by Dr. Niihara was converted into shares of Emmaus commons stock at a conversion price of $10 per share. Policy for Approval of Related Party Transactions The Audit Committee of our Board of Directors is responsible for reviewing and approving all related party transactions. Board Independence Our board of directors has determined that each of Ian Zwicker, Masaharu Osato, M.D., Wei Peu Zen, Robert Dickey IV and Jane Pine Wood is an “independent” director as defined by The NASDAQ Marketplace Rules currently in effect and all applicable rules and regulations of the SEC. ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table presents all fees, including reimbursements for expenses, billed for professional services rendered by Baker Tilly US, LLP (“Baker Tilly”), our independent registered public accounting firm for the years ended December 31, 2020 and 2019 (in thousands): | | 2020 | | | 2019 | | Audit Fees | | $ | 141 | | | $ | 156 | | Audit–Related Fees | | | — | | | | — | | Tax Fees | | | — | | | | — | | All Other Fees | | | — | | | | — | | Total | | $ | 141 | | | $ | 156 | |
The engagement of Baker Tilly was approved by the Audit Committee of our Board of Directors on September 10, 2020. The Audit Committee has adopted a formal policy on auditor independence requiring the advance approval by the Audit Committee of all audit and non-audit services provided by our independent registered public accounting firm. In determining whether to approve any services by our independent registered public accounting firm, the Audit Committee reviews the scope of and estimated fees for the services and considers whether the proposed services may adversely affect the 66
firm’s independence. On an annual basis, our management reports to the Audit Committee all audit services performed during the previous 12 months and all fees billed by our independent registered public accounting firm for such services. In fiscal 2020 and 2019, all audit services and the corresponding fees were approved by the Audit Committee.
PART IV ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| 1. | Financial Statements: See “Index to Consolidated Financial Statements” on page F‑1 of this Annual Report. |
| 2. | Financial Statement Schedule: See Notes to Consolidated Financial Statements starting on page F‑8 of this Annual Report. |
| 3. | Exhibits: The exhibits listed in the following “Exhibit Index” are filed or incorporated by reference as part of this Annual Report. |
Exhibit Index | | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 1.1 | Purchase Agreement dated as of February 28, 2020 between Emmaus Life Sciences, Inc. and Lincoln Park Capital Fund, LLC. | 8-K | 001-35527 | 1.1 | March 3, 2020 | | 2.1 | Agreement and Plan of Merger and Reorganization dated as of January 4, 2019 by and among MYnd Analytics, Inc., Athena Merger Subsidiary, Inc. and Emmaus Life Sciences, Inc., as amended by Amendment No, 1 dated as of May 27, 2019. | 424B3 | 333-229660 | Annex A | June 14, 2019 | | 3.1 | Restated Certificate of Incorporation. | 10-K | 001-35527 | 3.1 | January 25, 2021 | | 3.2 | Amended and Restated By-Laws. | 8-K | 001-35527 | 3.4 | July 22, 2019 | | 4.1 | Specimen Common Stock Certificate. | 10-K | 001-35527 | 4.1 | January 25, 2021 | | 4.2+ | MYnd Analytics, Inc. Amended and Restated 2012 Omnibus Incentive Compensation Plan | DEF14A | 001-35527 | Appendix A | November 2, 2018 | | 4.3+ | Form of Restricted Share Agreement under Amended and Restated 2012 Omnibus Incentive Compensation Plan. | 10-K | 001-35527 | 4.4 | December 22, 2016 | | 4.4+ | Form of ISO Stock Option Award Certificate under Amended and Restated 2012 Omnibus Incentive Compensation Plan. | 10-K | 001-35527 | 4.5 | December 22, 2016 | | 4.5+ | Form of NQSO Stock Option Award Certificate under Amended and Restated 2012 Omnibus Incentive Compensation Plan. | 10-K | 001-35527 | 4.6 | December 22, 2016 | | 4.6 | Form of Warrant to Purchase Shares of Common Stock issued to the persons indicated in Schedule A thereto. | 10-Q | 000-142031 | 4.5 | May 20, 2015 | | 4.7 | Warrant to Purchase Stock. | 10-Q | 000-142031 | 4.3 | August 19, 2016 | | 4.8 | Warrant to Purchase Shares of Common Stock. | 10-Q | 000-142031 | 4.4 | August 19, 2016 | | 4.9 | Warrant to Purchase Shares of Common Stock. | 10-Q | 000-142031 | 4.3 | November 14, 2016 | | 4.10 | Common Stock Purchase Warrant dated December 29, 2017. | 10-K | 000-142031 | 4.32 | April 16, 2018 | |
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| | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 4.11 | Convertible Promissory Note dated January 15, 2018. | 10-Q | 000-142031 | 4.1 | May 15, 2018 | | 4.12+ | Emmaus Life Sciences, Inc. Amended and Restated 2011 Equity Incentive Plan. | DEF14A | 000-53072 | Annex A | September 19, 2014 | | 4.13+ | Form of Incentive Stock Option Agreement (Time-Based and Performance-Based Vesting) under 2011 Stock Incentive Plan. | 8-K | 000-142031 | 10.3a | May 4, 2011 | | 4.14+ | Form of Incentive Stock Option Agreement (Time-Based Vesting) under 2011 Equity Incentive Plan. | 8-K | 000-142031 | 10.3b | May 4, 2011 | | 4.15+ | Form of Non-Qualified Stock Option Agreement (Time-Based and Performance-Based Vesting) under 2011 Equity Incentive Plan. | 8-K | 000-142031 | 10.3c | May 4, 2011 | | 4.16+ | Form of Non-Qualified Stock Option Agreement (Time-Based Vesting) under 2011 Equity Incentive Plan. | 8-K | 000-142031 | 10.3d | May 4, 2011 | | 4.17+ | Form of the Restricted Stock Agreement (Time-Based and Performance-Based Vesting) under 2011 Equity Incentive Plan. | 8-K | 000-142031 | 10.3e | May 4, 2011 | | 4.18+ | Form of Restricted Stock Agreement (Time-Based Vesting) under 2011 Equity Incentive Plan. | 8-K | 000-142031 | 10.3f | May 4, 2011 | | 4.19 | Form of Warrant to Purchase Shares of Common Stock dated as of September 24, 2018 by and between MYnd Analytics, Inc. and the holder party thereto. | 10-K | 001-35527 | 10.14 | December 11, 2018 | | 4.20 | Amendment dated June 28, 2019 to Warrant Agreements, dated July 19, 2017 and July 25, 2017, respectively, between MYnd Analytics, Inc. and American Stock Transfer & Trust Company, LLC. | 8-K | 001-35527 | 4.1 | January 28, 2019 | | 4.21 | Form of Warrant dated as of March 29, 2018 by and between MYnd Analytics, Inc. and the holder signatory thereto. | 8-K | 001-35527 | 10.2 | April 3, 2018 | | 4.22 | Form of Second Amended and Restated 10% Senior Secured Convertible Debenture Due April 21, 2021 of EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) | 8-K | 001-35527 | 4.1 | February 27, 2020 | | 4.23 | Form of Second Amended and Restated Common Stock Purchase Warrant. | 8-K | 001-35527 | 4.2 | February 27, 2020 | | 4.24 | Contingent Common Stock Purchase Warrant | | | | | * | 4.25 | Form of July 31, 2020 Common Stock Purchase Warrants | | | | | * |
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| | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 4.26 | Form of September 22, 2020 Common Stock Purchase Warrants | 8-K | 001-35527 | 10.1 | September 24, 2020 | | 4.27 | Form of October 8, 2020 Common Stock Purchase Warrants | | | | | * | 10.1 | Form of Registration Rights Agreement dated as of March 28, 2018 by and between MYnd Analytics, Inc. and the holder(s) signatory thereto. | 8-K | 001-35527 | 10.1 | April 3, 2018 | | 10.2 | Amended and Restated Separation Agreement dated as of March 27, 2019 by and among MYnd Analytics, Inc., a Delaware corporation, and MYnd Analytics, Inc., a California corporation. | 424B3 | 333-229660 | Annex B | June 14, 2019 | | 10.3 | Loan Agreement dated as October 3, 2018 between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and EJ Holdings, Inc. | 10-Q | 001-35527 | 10.7 | November 13, 2019 | | 10.4+ | Executive Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., M.P.H. | 8-K | 000-142031 | 10.12 | May 4, 2011 | | 10.5+ | Executive Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Willis Lee. | 8-K | 000-142031 | 10.13 | May 4, 2011 | | 10.6+ | Executive Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Lan T. Tran, M.P.H. | 8-K | 000-142031 | 10.14 | May 4, 2011 | | 10.7+ | Form of Indemnification Agreement between Emmaus Life Sciences, Inc. (formerly EMI Holding, Inc.) and its former and current directors and officers. | 8-K | 000-142031 | 10.20 | May 4, 2011 | | 10.8 | Letter of Intent by and between Ajinomoto Aminoscience LLC and Emmaus Medical, Inc. | 8-K/A | 000-142031 | 10.24 | July 5, 2011 | | 10.9 | Form of Promissory Note issued to the persons indicated on Schedule A thereto. | 10-Q | 000-142031 | 10.1 | August 19, 2016 | | 10.10 | Promissory Note dated February 10, 2018. | 10-Q | 000-142031 | 10.1 | May 15, 2018 | | 10.11 | Promissory Note dated April 24, 2019. | 10-K | 001-35527 | 10.11 | January 25, 2021 | | 10.12 | Promissory Note dated May 26, 2019. | 10-K | 001-35527 | 10.12 | January 25, 2021 | | 10.13 | Securities Purchase Agreement entered into October 1, 2018 among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and the Purchasers thereunder. | 8-K | 000-142031 | 10.1 | September 17, 2018 | |
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| | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 10.14 | Second Amendment to Securities Purchase Agreement entered into October 1, 2018 among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and the Purchasers thereunder. | 8-K/A | 000-142031 | 10.6 | October 5, 2018 | | 10.15 | Form of Security Agreement among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.), Emmaus Medical, Inc., Newfield Nutrition Corporation and the holders of 10% Senior Secured Debentures. | 8-K | 000-142031 | 10.2 | September 17, 2018 | | 10.16 | Form of Subsidiary Guarantee among Emmaus Medical, Inc., Newfield Nutrition Corporation and the holders of 10% Senior Secured Debentures. | 8-K | 000-142031 | 10.3 | September 17, 2018 | | 10.17 | Security Amendment Agreement dated as of March 5, 2019 among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and the Holders thereunder. | 8-K | 000-142031 | 10.1 | March 11, 2019 | | 10.18 | Securities Amendment Agreement dated as of February 21, 2020 among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and the Holders thereunder, including Exhibits. | 8-K | 000-142031 | 10.1 | February 27, 2020 | | 10.19 | Securities Amendment Agreement dated as of September 22, 2020 among EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and the Holders thereunder, including Exhibits. | 8-K | 001-35527 | 10.1 | September 24, 2020 | | 10.20 | Office Lease dated October 20, 2014 by and between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and Bixby Torrance LLC. | 10-K | 001-35527 | 10.23(F) | March 31, 2015 | | 10.21 | First Amendment to Office Lease Agreement dated February 1, 2018 between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and RREF Pacific Center LLC. | 10-K | 000-142031 | 10.24a | March 21. 2019 | | 10.22 | Second Amendment to Office Lease Agreement dated December , 2018 between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and RREF Pacific Center LLC. | 10-K | 000-142031 | 10.24b | March 21. 2019 | | 10.23 | Third Amendment to Office Lease Agreement dated September 10, 2019 between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) and RREF Pacific Center LLC. | 10-K | 001-35527 | 10.23 | January 25, 2021 | |
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| | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 10.24 | Revised Management Control Acquisition Agreement dated September 29, 2017 by and among the registrant, Telcon Holdings, Inc. and Telcon, Inc. (now known as Telcon RF Pharmaceutical Inc.) | 10-Q | 000-142031 | 10.3 | November 14, 2017 | | 10.25 | Distributor agreement entered into as of June 15, 2017 between Telcon Inc. (now known as Telcon RF Pharmaceutical Inc.) and Emmaus Life Sciences, Inc. (now known as EMI Holding, Inc.) | 10-K | 001-35527 | 10.25 | January 25, 2021 | | 10.26 | Amendment for Distributor Agreement entered into as of January 11, 2018 between Telcon Inc. (now known as Telcon RF Pharmaceutical Inc.) and Emmaus Life Sciences, Inc. (now known as EMI Holding, Inc.) | 10-K | 001-35527 | 10.26 | January 25, 2021 | | 10.27 | Raw Material Supply Agreement dated July 12, 2017 between Telcon Inc. (now known as Telcon RF Pharmaceutical Inc.) and Emmaus Life Sciences, Inc. (now known as EMI Holding, Inc.) | 10-K | 001-35527 | 10.27 | January 25, 2021 | | 10.28 | API Supply Agreement made as of June 16, 2017 between Telcon Inc. (now known as Telcon RF Pharmaceutical Inc.) and Emmaus Life Sciences, Inc. (now known as EMI Holding, Inc.) | 10-K | 001-35527 | 10.28 | January 25, 2021 | | 10.29 | Additional Agreement made as of July 2, 2018 between Telcon Inc. (now known as Telcon RF Pharmaceutical Inc.) and Emmaus Life Sciences, Inc. (now known as EMI Holding, Inc.) and add asterixis in Filed/Furnished column. | 10-K | 001-35527 | 10.29 | January 25, 2021 | | 10.30 | Agreement dated December 23, 2019 between Telcon RF Pharmaceutical Inc. and Emmaus Life Sciences, Inc. | 10-K | 001-35527 | 10.30 | January 25, 2021 | | 10.31 | Registration Rights Agreement dated as of February 28, 2020 between Emmaus Life Sciences, Inc. and Lincoln Park Capital Fund, LLC. | 8-K | 001-35527 | 10.1 | March 3, 2020 | | 10.32 | Letter of Commitment dated December 23, 2019 between EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc) and Telcon RF Pharmaceutical, Inc. | 10-K | 001-35527 | 10.33 | January 25, 2021 | | 10.33 | Convertible Bond Purchase Agreement between Emmaus Life Sciences, Inc. and Telcon RF Pharmaceutical, Inc. | 10-K | 001-35527 | 10.34 | January 25, 2021 | | 10.34 | Right to Sell (Call Option) Agreement between Emmaus Life Sciences, Inc. and Telcon RF Pharmaceutical, Inc. | 10-K | 001-35527 | 10.35 | January 25, 2021 | |
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| | Incorporated by Reference | | Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed/
Furnished | 10.35 | Loan Agreement Dated October 28, 2020 Between Emmaus Life Sciences, Inc. and EJ Holdings, Inc. | 8-K | 001-35527 | 10.1 | November 13, 2020 | | 10.36+ | Credit Access and Loan Agreement dated as of January 10, 2020 by and between Emmaus Life Sciences, Inc. and Yutaka Niihara, M.D., M.P.H. | 10-K | 001-35527 | 10.37 | January 25, 2021 | | 10.37 | Amendment No. 2 to Convertible Promissory Note of EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) dated as of January 15, 2020 | | | | | * | 10.38 | Amendment No. 3 to Convertible Promissory Note as of June 15, 2020 of EMI Holding, Inc. (formerly, Emmaus Life Sciences, Inc.) | | | | | * | 21.1 | List of Subsidiaries. | 10-K | 001-35527 | 21.1 | January 25, 2021 | | 23.1 | Consent of Independent Registered Public Accounting Firm Baker Tilly US, LLP | | | | | * | 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 of 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 Chief Executive Office 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 | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document | | | | | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | | | | |
+ Management contract or compensatory plan, contract or arrangement 73
* Filed herewith.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Torrance, California, on May 3, 2021. | Emmaus Life Sciences, Inc. | | | | By: | | /s/ Yutaka Niihara | | | | Name: | Yutaka Niihara, M.D., M.P.H. | | | | Title: | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. SIGNATURE | | TITLE | | DATE | | | | | | /s/ Yutaka Niihara Yutaka Niihara, M.D., M.P.H. | | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | | May 3, 2021 | | | | | | /s/ Yasushi Nagasaki | | Interim Chief Financial Officer (Principal Financial and | | May 3, 2021 | Yasushi Nagasaki | | Accounting Officer) | | | /s/ Willis C. Lee | | Director | | May 3, 2021 | Willis C. Lee | | | | | | | | | | /s/ Robert Dickey IV | | Director | | May 3, 2021 | Robert Dickey IV | | | | | | | | | | /s/ Masaharu Osato | | Director | | May 3, 2021 | Masaharu Osato, M.D. | | | | | | | | | May 3, 2021 | /s/ Wei Peu Zen | | Director | | | Wei Peu Zen | | | | | | | | | | /s/ Ian Zwicker | | Director | | May 3, 2021 | Ian Zwicker | | | | | | | | | | /s/ Jane Pine Wood | | Director | | May 3, 2021 | Jane Pine Wood | | | | |
INDEX TO FINANCIAL STATEMENTS EMMAUS LIFE SCIENCES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Emmaus Life Sciences, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Emmaus Life Sciences, Inc. and its subsidiaries ( the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in stockholders' deficit, and cash flows, for the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, except for the effects of the adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding the foreign affiliate earnings, as described below, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with majoraccounting principles generally accepted in the United States of America. We were unable to obtain audited financial statements supporting the Company's equity in losses in a foreign affiliate of $2,314,000, which is included in net income for the year ended December 31, 2020 as described in Note 5 to the financial statements; nor were we able to satisfy ourselves as to the equity in losses in a foreign affiliate by other auditing procedures. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Except as discussed above, we conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Company’s Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. REVENUE RECOGNITION - VARIABLE CONSIDERATION Critical Audit Matter Description
As described in Note 2 to the financial statements, the Company’s records revenue at the transaction price, net of estimates for variable consideration consisting primarily of chargebacks, discounts, and returns. Variable considerations are estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from estimates. If actual results vary materially from estimates, the Company will adjust these estimates, which will affect net sales of the products and results from operations in the period such estimates are adjusted. We identified the determination of variable consideration as a critical audit matter. Significant judgment is exercised by the Company in estimating variable consideration when determining the amount of revenue to recognize. Given these factors, the related audit effort in evaluating management’s judgments in determining the amount of variable consideration used to determine the transaction price was extensive and required a high degree of auditor judgment. How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: | ▪ | Evaluated management’s accounting policies related to the determination of variable consideration in the calculation of the transaction price. |
| ▪ | Evaluated the reasonableness of management’s estimate of variable consideration in accordance with their accounting policies based on contractual terms and historical data and variable consideration estimates. |
| ▪ | Tested variable consideration amounts on a sample basis by recalculating recorded amounts based on contractual terms. |
| ▪ | Tested the mathematical accuracy of management’s calculations of net revenue and the associated timing of net revenue recognized in the financial statements. |
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INVESTMENT IN CONVERTIBLE BOND – DETERMINATION OF FAIR VALUE Critical Audit Matter Description As described in note 5 to the financial statements, the Company purchased a convertible bond and elected the fair value option. The fair value was determined using the Lattice pricing model and the change in value was recorded as part of other comprehensive income (loss). We identified the determination of the fair value of the convertible bond as a critical audit matter. Significant judgment is exercised by the Company in determining the fair value of the convertible bond. Given these factors, the related audit effort in evaluating management’s judgments in determining the fair value of the convertible bond was complex and required a high degree of auditor judgment. How We Addressed the Matter in Our Audit The primary procedures we performed to address this critical audit matter included: | ▪ | Obtained an understanding of the Company’s process of accounting for convertible bonds. |
| ▪ | Evaluated the methods and significant assumptions used by the Company’s valuation professional. |
| ▪ | Tested the accuracy and the completeness of the underlying data and the mathematical accuracy of the valuation report. |
| ▪ | Engaged auditor’s valuation professional to assist in the evaluation of the methodology used by the Company and assumptions included in determining the fair value of the convertible bond. |
| ▪ | Evaluated the related disclosures in the financial statements. |
/s/ BAKER TILLY US, LLP We have served as the Company's auditor since 2020. San Diego, California May 3, 2021
Emmaus Life Sciences, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts) | | As of | | | | December 31, 2020 | | | December 31, 2019 | | ASSETS | | | | | | | | | CURRENT ASSETS | | | | | | | | | Cash and cash equivalents | | $ | 2,487 | | | $ | 1,769 | | Accounts receivable, net | | | 198 | | | | 2,150 | | Inventories, net | | | 7,087 | | | | 7,971 | | Investment in marketable securities | | | — | | | | 27,929 | | Prepaid expenses and other current assets | | | 1,485 | | | | 1,402 | | Total current assets | | | 11,257 | | | | 41,221 | | Property and equipment, net | | | 120 | | | | 151 | | Equity method investment | | | 15,664 | | | | 13,325 | | Right of use assets | | | 4,072 | | | | 4,474 | | Investment in convertible bond | | | 27,866 | | | | — | | Other assets | | | 296 | | | | 285 | | Total assets | | $ | 59,275 | | | $ | 59,456 | | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | Accounts payable and accrued expenses | | $ | 7,460 | | | $ | 11,498 | | Operating lease liabilities, current portion | | | 1,143 | | | | 991 | | Other current liabilities | | | 2,706 | | | | 5,748 | | Revolving line of credit from related party | | | 800 | | | | 600 | | Warrant derivative liabilities | | | 1,071 | | | | 38 | | Notes payable | | | 4,588 | | | | 3,749 | | Notes payable to related parties | | | 134 | | | | 193 | | Convertible debentures, net of discount | | | 5,480 | | | | 7,015 | | Convertible notes payable, net of discount | | | — | | | | 2,995 | | Total current liabilities | | | 23,382 | | | | 32,827 | | Operating lease liabilities, less current portion | | | 3,470 | | | | 3,932 | | Other long-term liabilities | | | 34,470 | | | | 33,750 | | Notes payable, less current portion | | | 222 | | | | — | | Convertible notes payable | | | 3,150 | | | | — | | Total liabilities | | | 64,694 | | | | 70,509 | | STOCKHOLDERS’ DEFICIT | | | | | | | | | Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, 0ne issued and outstanding | | | — | | | | — | | Common stock — par value $0.001 per share, 250,000,000 shares authorized, shares 48,987,189 and 48,471,446 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively | | | 49 | | | | 48 | | Additional paid-in capital | | | 218,728 | | | | 215,207 | | Accumulated other comprehensive Income (loss) | | | 1,137 | | | | (79 | ) | Accumulated deficit | | | (225,333 | ) | | | (226,229 | ) | Total stockholders’ deficit | | | (5,419 | ) | | | (11,053 | ) | Total liabilities & stockholders’ deficit | | $ | 59,275 | | | $ | 59,456 | |
The accompanying notes are an integral part of these consolidated financial statements.
Emmaus Life Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except share and per share amounts) | | Twelve Months Ended December 31, | | | | 2020 | | | 2019 | | REVENUES, NET | | $ | 23,167 | | | $ | 22,752 | | COST OF GOODS SOLD | | | 2,248 | | | | 1,094 | | GROSS PROFIT | | | 20,919 | | | | 21,658 | | OPERATING EXPENSES | | | | | | | | | Research and development | | | 2,408 | | | | 2,183 | | Selling | | | 4,865 | | | | 6,975 | | General and administrative | | | 13,678 | | | | 17,012 | | Total operating expenses | | | 20,951 | | | | 26,170 | | LOSS FROM OPERATIONS | | | (32 | ) | | | (4,512 | ) | OTHER INCOME (EXPENSE) | | | | | | | | | Loss on debt extinguishment | | | (1,425 | ) | | | (438 | ) | Change in fair value of warrant derivative liabilities | | | 392 | | | | 3,545 | | Change in fair value of embedded conversion option | | | 112 | | | | 131 | | Net gain (losses) on investment in marketable securities | | | 7,672 | | | | (21,947 | ) | Net losses on equity method investment | | | (2,314 | ) | | | (414 | ) | Miscellaneous reverse merger costs | | | — | | | | (309 | ) | Notes conversion costs | | | — | | | | (3,341 | ) | Interest and other income | | | 2,303 | | | | 232 | | Interest expense | | | (5,989 | ) | | | (27,625 | ) | Total other income (expense) | | | 751 | | | | (50,166 | ) | INCOME (LOSS) BEFORE INCOME TAXES | | | 719 | | | | (54,678 | ) | INCOME TAXES (BENEFIT) | | | (381 | ) | | | 164 | | NET INCOME (LOSS) | | | 1,100 | | | | (54,842 | ) | | | | | | | | | | COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | | | Unrealized gain on debt securities available for sale (net of tax) | | | 1,280 | | | | — | | Foreign currency translation adjustments | | | (64 | ) | | | (10 | ) | Other comprehensive income (loss) | | | 1,216 | | | | (10 | ) | COMPREHENSIVE INCOME (LOSS) | | $ | 2,316 | | | $ | (54,852 | ) | EARNINGS (NET LOSS) PER COMMON SHARE - BASIC and DILUTED | | $ | 0.02 | | | $ | (1.30 | ) | WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | 48,897,004 | | | | 42,259,460 | |
The accompanying notes are an integral part of these consolidated financial statements.
Emmaus Life Sciences, Inc. Consolidated Statements ofchanges IN stockholders’ deficit (In thousands, except share and per share amounts) | Common Stock | | | | | | | | | | | | | | | | | | | Shares | | | Amount | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Income (Loss) | | | Accumulated Deficit | | | Total Stockholders' Equity / (Deficit) | | Balance, December 31, 2018, as restated | | 37,341,393 | | | $ | 37 | | | $ | 149,682 | | | $ | (69 | ) | | $ | (171,358 | ) | | $ | (21,708 | ) | Cumulative effect adjustment on adoption of ASC 842 | | — | | | | — | | | | — | | | | — | | | | (29 | ) | | | (29 | ) | Beneficial conversion feature relating to convertible notes payable | | — | | | | — | | | | 8,765 | | | | — | | | | — | | | | 8,765 | | Common stock issued for cash (net of issuance cost) | | 1,677,013 | | | | 2 | | | | 8,587 | | | | — | | | | — | | | | 8,589 | | Common stock issued in merger | | 2,330,548 | | | | 2 | | | | (1,647 | ) | | | — | | | | — | | | | (1,645 | ) | Conversion of convertible notes payable and notes payable to common stock | | 7,068,760 | | | | 7 | | | | 39,492 | | | | — | | | | — | | | | 39,499 | | Exercise of stock options | | 175 | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | Exercise of warrants | | 53,557 | | | | — | | | | 186 | | | | — | | | | — | | | | 186 | | Warrant and conversion feature reclassified to equity | | — | | | | — | | | | 6,336 | | | | — | | | | — | | | | 6,336 | | Fair value of replacement equity awards | | — | | | | — | | | | 2,438 | | | | — | | | | — | | | | 2,438 | | Foreign currency translation effect | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | (10 | ) | Share-based compensation | | — | | | | — | | | | 1,367 | | | | — | | | | — | | | | 1,367 | | Net loss | | — | | | | — | | | | — | | | | — | | | | (54,842 | ) | | | (54,842 | ) | Balance, December 31, 2019 | | 48,471,446 | | | $ | 48 | | | $ | 215,207 | | | $ | (79 | ) | | $ | (226,229 | ) | | | (11,053 | ) | Common stock issued for cash (net of issuance cost) | | 515,743 | | | | 1 | | | | 141 | | | | — | | | | — | | | | 142 | | Fair value of warrants including down-round protection adjustments | | — | | | | — | | | | 2,641 | | | | — | | | | (204 | ) | | | 2,437 | | Unrealized gain on debt securities available for sale (net of tax) | | — | | | | — | | | | — | | | | 1,280 | | | | — | | | | 1,280 | | Foreign currency translation effect | | — | | | | — | | | | — | | | | (64 | ) | | | — | | | | (64 | ) | Share-based compensation | | — | | | | — | | | | 739 | | | | — | | | | — | | | | 739 | | Net income | | — | | | | — | | | | — | | | | — | | | | 1,100 | | | | 1,100 | | Balance, December 31, 2020 | | 48,987,189 | | | $ | 49 | | | $ | 218,728 | | | $ | 1,137 | | | $ | (225,333 | ) | | $ | (5,419 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Emmaus Life Sciences, Inc. Consolidated Statements of Cash Flows (In thousands) | | Twelve Months Ended December 31, | | | | | | | | | | | | | 2020 | | | 2019 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | Net Income (loss) | | $ | 1,100 | | | $ | (54,842 | ) | Adjustments to reconcile net loss to net cash flows from operating activities | | | | | | | | | Depreciation and amortization | | | 60 | | | | 73 | | Impairment loss on long-term investment | | | — | | | | 515 | | Inventory reserve | | | 1,134 | | | | — | | Amortization of discount of notes payable and convertible notes payable | | | 4,027 | | | | 23,781 | | Foreign exchange adjustments | | | (679 | ) | | | (115 | ) | Tax benefit recognized on unrealized gain on debt securities | | | (427 | ) | | | — | | Net (gain) losses on investment in marketable securities | | | (7,672 | ) | | | 21,432 | | Loss on equity method investment | | | 2,314 | | | | 414 | | Loss on debt extinguishment | | | 1,425 | | | | 438 | | Share-based compensation and fair value of replacement equity award | | | 739 | | | | 3,805 | | Notes conversion costs | | | — | | | | 3,341 | | Change in fair value of warrant derivative liabilities | | | (392 | ) | | | (3,545 | ) | Change in fair value of embedded conversion option | | | (112 | ) | | | (131 | ) | Net changes in operating assets and liabilities | | | | | | | | | Accounts receivable | | | 1,953 | | | | (361 | ) | Inventories | | | (245 | ) | | | (3,267 | ) | Prepaid expenses and other current assets | | | 33 | | | | (720 | ) | Other non-current assets | | | 380 | | | | (4,364 | ) | Income tax receivable and payable | | | (100 | ) | | | (64 | ) | Accounts payable and accrued expenses | | | (3,345 | ) | | | 6,527 | | Deferred rent | | | — | | | | (317 | ) | Other current liabilities | | | (3,052 | ) | | | 426 | | Other long-term liabilities | | | 408 | | | | 2,451 | | Net cash flows used in operating activities | | | (2,451 | ) | | | (4,523 | ) | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | Cash paid in connection with the Merger | | | — | | | | (1,645 | ) | Sale of marketable securities | | | 35,601 | | | | 221 | | Purchases of property and equipment | | | (15 | ) | | | (60 | ) | Purchase of convertible bonds | | | (26,160 | ) | | | — | | Loan to equity method investee | | | (3,956 | ) | | | — | | Net cash flows provided by (used in) investing activities | | | 5,470 | | | | (1,484 | ) | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | Proceeds from notes payable issued, net of issuance cost and discount | | | 2,765 | | | | 600 | | Payments of notes payable | | | (1,717 | ) | | | (143 | ) | Payments of convertible notes | | | (3,500 | ) | | | (5,348 | ) | Proceeds from exercise of warrants | | | — | | | | 186 | | Proceeds from issuance of common stock, net of issuance cost | | | 142 | | | | 8,589 | | Net cash flows provided by (used in) financing activities | | | (2,310 | ) | | | 3,884 | | Effect of exchange rate changes on cash | | | 9 | | | | (13 | ) | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 718 | | | | (2,136 | ) | Cash, cash equivalents and restricted cash, beginning of period | | | 1,769 | | | | 3,905 | | Cash, cash equivalents and restricted cash, end of period | | $ | 2,487 | | | $ | 1,769 | | SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES | | | | | | | | | Interest paid | | $ | 1,481 | | | $ | 1,543 | | Income taxes paid | | $ | 144 | | | $ | 227 | | NON-CASH INVESTMENT AND FINANCING ACTIVITIES | | | | | | | | | Warrant liabilities reclassified to equity | | $ | — | | | $ | 6,337 | | Conversion of convertible notes and notes payable to common stock | | $ | — | | | $ | 33,777 | | Conversion of accrued interest payable to common stock | | $ | — | | | $ | 5,722 | | Initial recognition of right-of-use lease asset | | $ | — | | | $ | 2,922 | |
The accompanying notes are an integral part of these consolidated financial statements.
Emmaus Life Sciences, Inc. Notes to consolidated financial statements NOTE 1—DESCRIPTION OF BUSINESS Organization—On July 17, 2019 Emmaus Life Sciences, Inc. (formerly, “MYnd Analytics, Inc.” and herein the “Company” or “Emmaus”) completed its merger transaction (the “Merger”) with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”) a wholly owned subsidiary of the Company merged into EMI Holding, with EMI Holding surviving the Merger as a wholly owned subsidiary. Immediately after completion of the Merger, the Company changed its name to “Emmaus Life Sciences, Inc.” The Merger was treated as a reverse recapitalization under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. (“GAAP”) For accounting purposed, EMI Holding was considered to have acquired the Company. In connection with and prior to the Merger, the Company contributed and transferred to Telemynd, Inc. (“Telemynd”), a newly formed, subsidiary of the Company, all or substantially all of the Company’s historical business, assets and liabilities and the Company’s board of directors declared a stock dividend of 1 share of the Telemynd common stock held by the Company for each outstanding share of Company common stock after giving effect to a 1-for-6 reverse stock of the Company’s outstanding shares of common stock. The dividend, together with the contribution and transfer of the Company’s historical business, assets, and liabilities described above, is referred to as the spin-off. As a result of the spin-off and the Merger, the Company’s ongoing business became EMI Holding’s business, which is that of a commercial-stage biopharmaceutical company focused on the development, marketing and sale of innovative treatments and therapies, including those in the rare and orphan disease categories. References herein to the “Company” or “Emmaus” means Emmaus Life Sciences, Inc. and its direct and direct subsidiaries. Nature of Business—The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies, primarily for rare and orphan diseases. On July 7, 2017, the U.S. Food and Drug Administration, or FDA, approved our lead product Endari® (prescription grade L-glutamine oral powder), to reduce the severe complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older. Endari® has received Orphan Drug designation from the FDA and Orphan Medicinal designation from the European Commission, or EC, which designations generally afford marketing exclusivity for Endari® for a seven-year period in the U.S. and for a ten-year period in the EU, respectively, following marketing approval. Endari® also will be entitled to an additional two years of marketing exclusivity in the EU based on Emmaus’ accepted pediatric investigation plan. The Company commenced commercialization of Endari® in the U.S. in January 2018 in collaboration with a contract sales organization. Since January 2020, the Company has relied upon our in-house commercial sales team. Endari® is reimbursable by the Centers for Medicare and Medicaid Services, and every state provides coverage for Endari® for outpatient prescriptions to all eligible Medicaid enrollees within their state Medicaid programs. Endari® is also reimbursable by many commercial payors. The Company has distribution agreements in place with the nation’s leading distributors, as well as physician group purchasing organizations and pharmacy benefits managers, making Endari® available at selected pharmacies nationwide.Prior to 2018,the Company had minimal revenues and relied upon funding from sales of equity securities and debt financings and loans, including loans from related parties to fund our business and operations. On July 4, 2018, the FDA acknowledged receipt of the Company’s investigational new drug application, or IND, for the treatment of diverticulosis using the same prescription-grade L-glutamine oral powder used in Endari®. The Company subsequently received a “Study May Proceed” letter from the FDA, and in July 2019 the Company successfully enrolled 1st subject in a Pilot/Phase 1 study of the safety and efficacy of prescription-grade L-glutamine oral powder and expects to enroll 10 to 15 patients at multiple study sites. The study will evaluate the change in the number and size of colonic diverticula and assess safety.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation—The accompanying consolidated financial statements have been prepared in accordance with GAAP codified in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Going concern—In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are certain conditions and event, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company had net income of $1.1 million and net loss of $54.8 million for the years ended December 31, 2020 and 2019, respectively. The Company had $7.2 million of convertible debentures due within the next twelve months. However, the Company raised approximately $14.5 million in the first quarter of 2021 and paid off the entire debenture balance. In addition, the Company entered into a purchase and sale agreement with Prestige Capital Finance, LLC, pursuant to which Emmaus Medical may offer and sell to Prestige Capital from time to time eligible accounts receivable in exchange for Prestige Capital’s down payment, or advance, to Emmaus Medical of 70% (subject to increase to 75%) of the face amount of the accounts receivable, subject to a $7,500,000 cap on advances at any time. After the Company becomes current with its SEC filing requirements, it could activate the Equity Purchase Agreement with Lincoln Park Capital Fund, LLC. (See Note 13), which could provide additional equity funding as necessary. Therefore, management concluded due to the improvement of the Company’s ability to meet its current operating and capital expenses, there is no substantial doubt about the Company’s ability to continue as a going concern. Principles of consolidation—The consolidated financial statements include the accounts of the Company and EMI and its wholly‑owned subsidiary, Emmaus Medical Inc., and Emmaus Medical, Inc’s wholly‑owned subsidiaries. All significant intercompany transactions have been eliminated. Estimates—Financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant assumptions made by management include those relating to revenue recognition on product sales, the estimated useful lives of equipment, impairment of assets, the variables used to calculate the valuation of conversion features, stock options and warrants, and estimated accruals on an ongoing basis. The Company’ base’s its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. To the extent there are material differences between these estimates and actuals, the Company’s financial statements will be affected. Revenue recognition— Net revenues from Endari® sales are recognized upon transfer to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and clinics. In addition to agreements with these distributors, we 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 Endari®. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenue from product sales is recorded net of variable consideration. Under ASC 606, the Company recognizes revenue when its customers obtain control of the Company's product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the Company’s performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the relevant performance obligations. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of sales discounts, returns, government rebates, chargebacks and commercial discounts. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from the Company's estimates. If actual results vary from the Company's estimates, the Company adjusts the variable consideration in the period such variances becomes known, which F-10
would affect net revenues in that period. The following are our significant categories of variable consideration: Sales Discounts: The Company provides its customers prompt payment discounts and from time to time offers additional one-time discounts for bulk orders that are recorded as a reduction of revenues in the period the revenues are recognized. Product Returns: The Company offers its distributors a right to return product purchased directly from the Company, which is principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired products. Product return allowances are estimated and recorded at the time of sale. Government Rebates: The Company is subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. The Company’s management estimates 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 an accounts payable and accrued expenses in the balance sheet. The 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 the Company for the difference between what they pay for the products and the Company’s 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 products by the distributors. Leases — The Company adopted ASU 2016-02 – Leases (Topic 842) (“ASC 842”) as of January 1, 2019. Pursuant to ASC 842, all of the Company’s leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASC 842, the Company recorded a right-of-use asset and an operating lease liability on our balance sheet. Right-of-use assets represent our right to use the underlying asset during the lease term and the operating lease liabilities represent the Company commitment to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities were recognized based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at our adoption date in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and other operating costs are expensed as incurred. For all lease agreements, we combine lease and non-lease components. No right-of-use asset and related lease liability are recorded for leases with an initial term of 12 months or less. Cash and cash equivalents—Cash and cash equivalents include short‑term securities with original maturities of less than ninety days. The Company maintains its cash and cash equivalents at insured financial institutions, andthe balances of which may, at times, exceed the federally insured limit of $250,000. At September 30, 2017 cash exceeds the federally insured limit by $5,199,000. The Companylimits. Management believes that the risk of loss due to the concentrations is minimal. To date, Accounts Receivable— Accounts receivables are primarily due from product sales to customers. The Company makes judgements as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the quality and age of those invoices. The Company believes the credit risks associated with its customers are not significant. Inventories—Inventories consist of raw materials, finished goods and work-in-process and are valued on a first‑in, first‑out basis at the lesser of cost or net realizable value. Work‑in‑process inventories consist of L‑glutamine for the Company’s products that has not experienced any losses related to cash deposits with financial institutions. yet been packaged and labeled for sale. Substantially all raw materials purchase during the years ended December 31, 2020 and 2019 were supplied by 1 vendor. Derivative LiabilitiesPrepaid expenses and other current assets— Prepaid expenses and other current assets consist primarily of cost paid for future services or refunds from vendors which will occur within a year. Prepaid expenses include prepayment in
F-11
The Company evaluates all of its agreements to determine if such instruments have derivativesinsurance, subscription services, consulting and other services which are being amortized over the contract terms or contain features that qualify as embedded derivatives. For derivative financial instruments thatrecognized upon services are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
ASC 825-10 - Recognition and Measurement of Financial Assets and Financial Liabilities defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.
The Company also analyzes all financial instruments with features of both liabilities and equity under ASC 480-10, ASC 815-10 and ASC 815-40.
The Company adopted ASC 820-10 on January 1, 2008. ASC 820-10 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments; and |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company used Level 3 inputs for its valuation methodology in determining the fair value using the Black-Scholes option-pricing model with the following assumption inputs:
The detailed roll-forward of derivative liabilities classified as Level 1, 2 or 3,please refer to the table in Note 4, Derivative Liabilities.
The net changes in Derivative Liabilities for transactions which were booked to other income resulted in a net loss on derivative liabilities of $0 for the fiscal year ended September 30, 2017 and a net gain of $34,600 for the fiscal year ended September 30, 2016.
The net changes in Extinguishment of Debt for transactions which were booked to other income resulted in a net gain on extinguishment of debt of $0 for the fiscal year ended September 30, 2017 and a net gain of $572,300 for the fiscal year ended September 30, 2016.
Accounts Receivable
The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer. Allowances are provided for specific receivables deemed to be at risk for collection which as of September 30, 2017 and 2016 are $1,000 and $1,200 respectively.performed.
Property and equipment— Equipment, Property Furniture and Equipment, whichfixtures are recorded at historical cost consist of office furniture and equipment, which are depreciated,amortized on a straight‑line basis over their estimated useful lives of five to seven years. Leasehold improvements are recorded at historical cost and amortized on a straight-line basis. Thestraight‑line basis over the shorter of their estimated useful lives of these assets is estimated to be between threeor the lease terms. Maintenance and ten years. Depreciation for the years ended September 30, 2017repairs are expensed as incurred, while major additions and 2016 was $19,700improvements are capitalized. Gains and $2,900 respectively. Accumulated depreciation at September 30, 2017 and 2016 was $84,200 and $64,500, respectively. losses on disposition are included in other income (expenses), if any.
Long-Lived Assets
As required by ASC 350-30 - Intangibles — Goodwill and Other (formerly SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets), thelong‑lived assets—The Company reviewsevaluates the carrying value of its long-livedlong‑lived assets at least annually orfor impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Management uses its best judgment based on the historical cost-carrying value of an asset may no longer be appropriate. Thecurrent facts and circumstances relating to the Company’s business when determining whether any significant impairment factors exist.
If the Company assesses recoverability ofdetermines that the carrying valuevalues of long‑lived assets may not be recoverable based upon the asset by estimatingexistence of one or more indicators of impairment, the future netCompany performs an undiscounted cash flows expectedflow analysis to result fromdetermine if impairment exists. If impairment exists, the asset, including eventual disposition. IfCompany measures the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal tobased on the difference between the asset’s carrying amount and its fair value, and fair value. Nothe impairment loss was recordedis charged to the consolidated statement of operations in the period in which the long‑lived asset impairment is determined to have occurred. NaN impairment existed as of December 31, 2020 and 2019. Research and development—Research and development consists of expenditures for the years ended September 30, 2017research and 2016. The Company adopted Accounting standards update (“ASU”) 2012-2, Intangibles—Goodwilldevelopment of new products and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The new guidance is intended to reduce the complexitytechnologies, which primarily involve contract research, payroll‑related expenses and costs of the annual impairment test for indefinite-lived intangible assets by allowing companies to make a qualitative evaluation about the likelihood of impairment to determine whether it should perform a quantitative impairment test.
Intangible Assets
Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized softwareother related supplies. Research and development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. At September 30, 2017, the Company had $80,500 in software development costs all of which was capitalized during the fiscal year ended September 30, 2016. Amortization for the fiscal year ended September 30, 2017 and 2016 was $26,900 and $2,200 respectively.
On November 23, 2011, the Company acquired intellectual property in the form of transcranial magnetic stimulation (TMS) biomarkers at a cost of $21,200 which was recorded at cost and is being amortized over its estimated useful life of 10 years on a straight-line basis. Amortization for the fiscal years ended September 30, 2017 and 2016 was $2,100 for both periods. Accumulated depreciation on the intellectual property at was $12,400 and $10,200 at the fiscal years ended September 30, 2017 and 2016 respectively.
Accrued Compensation
AccruedShare‑based compensation consists of accrued vacation pay, accrued bonuses granted by the Board but not paid, and accrued pay due to former staff members. The balance also includes $125,400 accrued for two managers and $108,400 accrued for one officer who voluntarily reduced the cash portion of their salaries to help the Company conserve funds from February through July 2015.
Deferred Revenue
Deferred revenue represents revenue collected but not earned as of September 30, 2017 or 2016. This represents a philanthropic grant for the payment of PEER Reports ordered in a clinical trial for a member of the U.S. Military, a veteran or a family member, the cost of which is not covered by other sources. These deferred revenue grant funds total $45,900 as of September 30, 2017 and 2016.
Revenues
—The Company recognizes revenue on services, in accordance with the Financial Accounting Standards Board (“FASB”) ASC No. 605, “Revenue Recognition” on delivery of PEER Reports to medical providers. In all cases, revenue is recognized when we have persuasive evidence of an arrangement, a determinable fee, when collection is considered to be reasonable assured and the services are delivered. Research and Development Expenses
The Company charges research and development expenses to operations as incurred.
Advertising Expenses
The Company charges all advertising expenses to operations as incurred. For the years ended September 30, 2017 and 2016 advertising expenses were $152,000 and $148,600 respectively.
Stock-Based Compensation
The Company has adopted ASC 718-20 and related interpretations which establish the accounting for equity instruments exchanged for employee services. Under ASC 718-20, share-based compensation cost for share‑based compensation awards over 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 option grantee, being employees, directorsexercise, which greatly affect the calculated values. The expected term of awards granted is calculated using the simplified method allowed under the Securities and consultants,Exchange Commission (“SEC”) Staff Accounting Bulletin Nos. 107 and 110. The risk‑free rate selected to value any grant is measured atbased on the U.S. Treasury rate on the grant date that corresponds to the expected term of the award. Prior to the Merger, the Company common stock was not publicly traded. Therefore, the expected volatility was based on the calculated fair valuehistorical volatility of the award. The expense is recognized over the option grantees’ requisite service period, generally the vesting periodcommon stock of the award.
comparable publicly traded companies. Income Taxes taxes—The Company accounts for income taxes under the asset and liability method. Deferredmethod, 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 thethose 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 that includes the enactment date. Valuation allowances are recorded, when necessary, to reduceoccurs. 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 the generation of future taxable income for the related jurisdictions. 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 expected to be realized. As a result of the implementationposition that would be ultimately sustained. The benefit of certain provisions of ASC 740, Income Taxes,a tax position is recognized in the financial statements in the period during which, clarifiesbased on all available evidence, management believes it is more likely than not that the accounting and disclosure for uncertainty in tax positions. ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company adopted the provisions of ASC 740 and have analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified the U.S. Federal and California as our “major” tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2013 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2012 through 2016 California Franchise Tax Returns. However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing positions and deductionsposition will be sustained on audit and doupon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not anticipate any adjustmentsoffset or aggregated with other positions. Tax positions that will result in a material change to our financial position. Therefore, no reserves for uncertain incomemeet the more‑likely‑than‑not recognition threshold are recorded at the largest amount of tax benefit that is more than 50 percent likely of being realized upon examination by the applicable taxing authority. The portion of the benefits associated with tax positions have been recorded pursuant to ASC 740. Our policytaken that exceeds the amount measured as described above is reflected as a liability for recordingunrecognized tax benefits along with any associated interest and penalties associated with income-basedthat would be payable to the taxing authorities upon examination.
As of December 31, 2020 and December 31, 2019, the Company had 0 unrecognized tax auditsbenefits, and the Company had no positions which, in the opinion of management, would be reversed if challenged by a taxing authority. In F-12
the event the Company is to recordassessed interest and/or penalties, such itemsamounts will be classified as a component of income taxes.tax expense in the financial statements.
Comprehensive Income (Loss) ASC 220-10 requires disclosure of all components ofincome (loss)—Comprehensive income (loss) includes net loss and other comprehensive income (loss) relating to foreign translation adjustments of the Company’s subsidiaries.
Marketable securities— The Company measures equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an annualindividual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. Equity method investment – The Company owns 40% of the capital shares of EJ Holdings. A variable interest entity (“VIE”) such as EJ Holdings is to be consolidated by its primary beneficiary if the Company has both a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and interim basis. Comprehensiveb) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company determined that it does not meet the power criterion for consolidating EJ Holdings and, accordingly, accounts for its variable interest in EJ Holdings under the equity method. See Note 5 for additional details. Investment in convertible bond – The Company has elected the fair value option measuring investment in convertible bond. The convertible bond is classified as available for sales and the changes in fair value are reported in other comprehensive income (loss)for each reporting period. Foreign currency translation—The Company’s reporting currency is definedthe U.S. dollar. The functional currencies of its foreign subsidiaries are the primary currencies within the counties in which they operate. Assets and liabilities of their operations are translated into U.S. dollars at period‑end exchange rates, and revenues, if any, and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation are reported in other comprehensive income or loss. Financial instruments—Financial instruments included in the financial statements are comprised of cash and cash equivalents, restricted cash, investment in marketable securities, marketable securities pledged to creditor, long-term investment at cost, investment in convertible bond, accounts receivable, note receivable, warrant derivative liabilities, accounts payable, certain accrued liabilities, convertible notes payable, notes payable, conversion feature liabilities and other contingent liabilities. Fair value measurements—The Company defines fair value as the changeprice that would be received to sell an asset or paid to transfer a liability in equityan 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 a business enterprise during a period from transactions andthe fair value hierarchy are described as follows: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other events and circumstances from non-owner sources. The Company’s comprehensive income (loss) is the same as its reported net income (loss)than quoted prices that are observable for the years ended September 30, 2017asset or liability; F-13
Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 inputs must be observable for substantially the full term of the asset or liability. Level 3: Inputs to the valuation methodology are unobservable and 2016.significant to the fair value measurement. An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The carrying values of cash and cash equivalents, accounts receivables, other current assets, account payable and accrued expenses and revolving line of credit approximate fair value due to the short-term maturity of those instruments. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges and are classified as Level 1 investments as of December 31, 2019. 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 7. Beneficial conversion features of convertible notes payable - The convertible feature of certain notes payable provides for a conversion rate that is below market value. Such feature is normally characterized as a Beneficial Conversion Feature or BCF. The Company measures the estimated intrinsic value of the BCF when the conversion feature is not required to be separately accounted from the notes payable. The value of BCF is recorded as a discount from the face amount of the notes and amortized to interest expense over the term of the notes. Net loss per share—In accordance with ASC 260, “Earnings (Loss) per Share, Basic earnings (loss)” the basic loss per common share areis computed by dividing income (loss)net loss available to common stockholders by the weighted averageweighted-average number of common shares outstanding during the period. Diluted earnings (loss)outstanding. Dilutive loss per share takes into accountis computed in a manner similar to the basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential dilution that could occurcommon shares had been issued and if the additional common shares were dilutive. As of December 31, 2020 and 2019, there were 18,449,925 shares and 12,933,664 shares, respectively of potentially dilutive securities or other contracts to issue Common Stockoutstanding. None of the potentially dilutive securities were exercised and converted into Common Stock.included in the calculation of diluted loss per share since their effect would be anti‑dilutive for all periods presented.
Warrant Accounting
Segment reporting—The Company classifies warrants to purchase shares of its common stock as equity on its consolidated balance sheets as these warrants are free-standing financial instruments which only require the Company to transfer common stock upon exercise. Each warrant is initially recorded at fair value on date of grant using the Black-Scholes model and net of issuance costs, and is not subsequently re-measured to fair value at each subsequent balance sheet date. The Company allocates the fair value of the warrants based on the relative fair value approach if issued with another equity instrument. The Company did not classify any warrants to purchase shares of its common stock as a liability on its consolidated balance sheets as the warrants did not require the Company to transfer consideration upon exercise. operates in 1 reportable segment. Recent Accounting Pronouncements Apart from the below-mentioned recent accounting pronouncements there are no new accounting pronouncements that are currently applicable to the Company.
— In FebruaryJune 2016, the FASB issued ASU 2016-02, Leases2016-13—Financial Instruments – Credit Losses (Topic 842). This ASU requires326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a lessee recognize lease assets and lease liabilities for those leases classified as operating leases. Thesecurity has been in an unrealized loss position. This guidance iswas effective for interim and annual reporting periods beginning after December 15, 2023 for small reporting companies, including interim periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2019-12 may have on the Company’s financial position and results of operations. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820. The amendments in this Update removes some disclosures, modifies others, and will be applied at theadd some new disclosure requirements. The amendments in this ASU are effective for all entities for fiscal years, and interim period within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The adoption of the earliest period presented using a modified retrospective approach. This ASU may2018-13 did not have a material impact on the Company’s financial statements. The impact on the Company’sposition and results of operations is currently being evaluated.. In May 2014,October 2018, the FASB issued ASU 2014-09 – Revenue from Contracts with CustomersNo. 2018-17, Consolidation (Topic 606)810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). The amendment outlinesupdate is intended to improve general purpose financial reporting by considering indirect interests held through related parties in common control arrangements on a single comprehensive modelproportional basis for entitiesdetermining whether fees paid to use in accounting for revenue arising from contracts with customersdecision makers and supersedes most current revenue recognition guidance, including industry-specific guidance.service providers are variable interests. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when the entity satisfies a performance obligation. ASU 2014-09 also includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers. In addition, the FASB issued ASU 2015-14 – Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (issued August 2015); ASU 2016-08 – Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (issued March 2016); ASU 2016-10 – Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing (issued April 2016); ASU 2016-12 – Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients (issued May 2016); ASU 2016-20 – Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (issued December 2016); and ASU 2017-13 - Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (issued September 2017), which deferred the effective date of ASU 2014-09 for all entities by one year and clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract costs, disclosure of performance obligations, and provided additional implementation guidance. Public business entities should apply the guidanceamendments in ASU 2014-09 to annual reporting periods2018-17 will be effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. As of September 30, 2017, and subject to the potential effects of any new related ASUs issued by the FASB, as well as the Company’s ongoing evaluation of transactions and contracts, the Company is still evaluating the impact of this amendment on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, and classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016,2019, with early adoption permitted. The guidance will be applied prospectively, retrospectively, or by means of a cumulative-effect adjustment to equity as ofCompany is currently evaluating the beginning ofpotential impact that the period in which the guidance is adopted, dependent upon the specific amendment that is adopted within the ASU. The adoption of this new guidance did notASU 2019-12 may have a material effect on the consolidatedCompany’s financial position and results of operations, cash flows, and financial position.operations.
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In December 2016,2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230). Restricted Cash: this update clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash flowsfor Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the related cashgeneral principles in Topic 740 and cash equivalentsclarifies and restricted cash captions in the balance sheet. The new standardamends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 20172020, with early adoption permitted. The Company is currently evaluating the effectpotential impact that the updated standard willadoption of ASU 2019-12 may have on ourthe Company’s financial statements.position and results of operations. In January 2017,August 2020, the FASB issued Accounting Standards UpdateASU No. 2017-04, Intangibles – Goodwill2020-06, Debt—Debt with Conversion and Other (Topic 350)Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): SimplifyingAccounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 simplify the Testaccounting for Goodwill Impairment. The update removes Step 2 from the goodwill impairment test.certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Under ASU 2020-06, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated under previously existing guidance. The new guidance also requires the if-converted method to be applied for all convertible instruments. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, although early2021. Early adoption is permitted. The Company is currently evaluating the effectimpact that the updated standard will have on our financial statements. In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. This guidance narrows the definition of a business. This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. This guidance must be applied prospectively to transactions occurring within the period of adoption. The Company does not expect the adoption of this guidance toASU 2020-06 may have a material impact on itsthe Company’s financial position and results of operationsoperation.
NOTE 3—REVENUES Revenues by category were as follows (in thousands): | | Year ended December 31, | | | | 2020 | | | 2019 | | Endari® | | $ | 22,564 | | | | 22,311 | | Other | | | 603 | | | | 441 | | Revenues, net | | $ | 23,167 | | | $ | 22,752 | |
The following table summarizes the revenue allowance and accrual activities for the years ended December 31, 2020 and 2019 (in thousands): | | Trade Discounts, Allowances and Chargebacks | | | Government Rebates and Other Incentives | | | Returns | | | Total | | Balance as of December 31, 2018 | | $ | 84 | | | $ | 798 | | | $ | 99 | | | | 981 | | Provision related to sales in the current year | | | 1,393 | | | | 3,082 | | | | 216 | | | | 4,691 | | Credit and payments made | | | (1,249 | ) | | | (2,526 | ) | | | — | | | | (3,775 | ) | Balance as of December 31, 2019 | | | 228 | | | | 1,354 | | | | 315 | | | | 1,897 | | Provision related to sales in the current year | | | 2,686 | | | | 3,752 | | | | 245 | | | | 6,683 | | Adjustments related to prior period sales | | | 16 | | | | (44 | ) | | | (87 | ) | | | (115 | ) | Credit and payments made | | | (2,796 | ) | | | (2,943 | ) | | | — | | | | (5,739 | ) | Balance as of December 31, 2020 | | | 134 | | | | 2,119 | | | | 473 | | | | 2,726 | |
The following table sets forth information regarding customers that accounted for 10% or cash flows.more of net revenues: | | Revenue for year ended December 31, | | | | | 2020 | | | 2019 | | | Customer A | | | 60 | % | | | 60 | % | | Customer B | | | 20 | % | | | 24 | % | |
The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s pharmaceutical grade L-glutamine (“PGLG”) oral powder for the treatment of diverticulosis in South Korea, Japan and China in exchange for Telcon’s payment of a $10 million upfront fee and agreement to purchase from us specified minimum quantities of the finished product. In a related license agreement with Telcon, the Company agreed to use commercially reasonable best efforts to obtain product registration in these territories within three years of obtaining FDA marketing authorization for PGLG in this indication. Telcon has the right to terminate the distributor agreement in certain circumstances for failure to obtain such product registrations, in which event the Company would be obliged to return to Telcon the $10 million upfront fee. The upfront fee of $10 million is included in other long-term liabilities as unearned revenue as of December 31, 2020 and 2019. Refer Note 12 for related party transaction details. The Company received a non refundable deposit of $500,000 in connection with entering into a distribution agreement with a strategic partner in 2018 to distribute Endari® in the Middle East and North Africa region. The payment was recorded as unearned revenue and included in other long-term liabilities to be recognized as revenue when the performance obligations are satisfied. During 2020, the agreement was terminated and the Company recognized the upfront payment of $500,000 in other income. NOTE 4—SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS Inventories consisted of the following (in thousand): | As of December 31, | | | 2020 | | | 2019 | | Raw materials and components | $ | 1,486 | | | $ | 1,187 | | Work-in-process | | 721 | | | | 1,629 | | Finished goods | | 6,064 | | | | 5,204 | | Inventory reserve | | (1,184 | ) | | | (49 | ) | Total | $ | 7,087 | | | $ | 7,971 | |
Prepaid expenses and other current assets consisted of the following (in thousands): | As of December 31, | | | 2020 | | | 2019 | | Other prepaid expenses and current assets | | 1,097 | | | | 667 | | Prepaid insurance | $ | 388 | | | $ | 735 | | Total | $ | 1,485 | | | $ | 1,402 | |
Property and equipment consisted of the following (in thousands): | As of December 31, | | | 2020 | | | 2019 | | Equipment | $ | 347 | | | $ | 335 | | Leasehold improvements | | 39 | | | | 77 | | Furniture and fixtures | | 99 | | | | 95 | | Total property and equipment | | 485 | | | | 507 | | Less: accumulated depreciation | | (365 | ) | | | (356 | ) | Property and Equipment, net | $ | 120 | | | $ | 151 | |
For the years ended December 31, 2020 and 2019, depreciation expense was approximately $46,000 and $47,000, respectively. In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. For all entities, including emerging growth companies, the standard is effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. NOTE 5 — INVESTMENTS
Equity securities— The Company does not expectheld 6,643,559 shares of capital stock of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “Telcon”), which were acquired in July 2017 for approximately $31.8 million. As of December 31, 2019, the adoptionclosing prices per Telecon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was approximately $4.20. The balance measured at fair value was $27.9 million recorded in investment in marketable securities and net unrealized losses on available-for sale marketable securities held as of this guidance to have a material impact on its financial position, results of operations or cash flows.December
| 3. | CONVERTIBLE DEBT AND EQUITY FINANCINGS |
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31, 2019 was $43.2 million. BetweenPrior to December 31, 2019, all shares of Telcon common stock were pledged to secure our obligation under the revised API agreement with Telcon. In December 2019, the API agreement was amended to permit the release the Telcon shares from the pledge and to permit the Company to sell the shares in exchange for a portion of the net sale proceeds to be used to purchase a 10-year convertible bond of Telcon in the principal amount of KRW30 billion, or approximately $26.1 million to be substituted for the Telcon shares and pledged to Telcon to secure the Company’s obligations under the revised API Agreement between the Company and Telcon. During the year ended December 31, 2020, the Company sold all shares for $35.6 million. Refer Note 12 for more information regarding this agreement.
The Company measures equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. For the year ended December 31, 2019, the Company recognized approximately $515,000 in impairment loss for equity securities without readily determinable fair value attributable to an investment in KPS Co., Ltd. Investment in convertible bonds -On September 22, 2014, and July 20, 2015,28, 2020, the Company entered into a Note Purchase Agreement (the “Original Note Purchase Agreement”)convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon in connection with a bridge financing, with nine accredited investors, including lead investor RSJ Private Equity investiční fond s proměnným základním kapitálem (“RSJ PE”). Pursuant to the Original Note Purchase Agreement, the Company issued fifteen secured convertible promissory notes (each, a “September 2014 Note”) in the aggregate principal amount of $2.29 million. Of this amount, RSJ PE purchasedapproximately $26.1 million which matures on October 16, 2030 and bears interest at the rate of 2.1% a September 2014 Noteyear, payable quarterly. Beginning on October 16, 2021, the Company will be entitled on a quarterly basis to call for $750,000. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, subsequently joined our Board on July 30, 2015. The September 2014 Notes were also purchased by four additional affiliatesearly redemption of all or any portion of the Company(refer to the Note Issuance and Conversion Table below). The Original Note Purchase Agreement provided for the issuance and sale of the September 2014 Notes in the aggregate principal amount of upthe convertible bond. The convertible bond is convertible at the holder’s option at any time and from time to $2.5 million,time into common shares of Telcon at an initial conversion price of approximately $8.00, per share. The conversion price is subject to antidilution adjustments in one or more closings to occur over a six-month period beginning September 22, 2014. The Original Note Purchase Agreement also provided that the Company and the holdersevent of the September 2014 Notes enter intoissuance of Telcon shares or share equivalents at a registration rights agreement coveringprice below the registrationmarket price of Telcon shares, a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event. The convertible bond and any proceeds therefrom, including proceeds from any exercise of the resaleearly redemption right or the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with Telcon.
In connection with the purchase of the shares of the Common Stock underlying the September 2014 Notes. On April 14, 2015,convertible bond, the Company entered into Amendment No. 1 to the Original Note Purchase Agreementa call option agreement dated September 28, 2020 with the majority of the noteholders in principal, dated as of April 14, 2015 (“Amendment No. 1”),Telcon pursuant to which: (i) the aggregatewhich Telcon or its designee is entitled to repurchase, at par, up to 50% in principal amount of notes providedthe convertible bond commencing October 16, 2021 and prior to maturity. If the Company transfers the convertible bond, it will be obliged under the call option agreement to see to it that the transferee is bound by such call option.
The Company has elected fair value option to measure the investment in convertible bond. The investment in convertible bonds is classified available for issuance was increasedsale securities and remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value option recorded in other comprehensive income. The fair value and any changes in fair value in convertible bonds are determined using a binominal lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time. The following table sets forth the fair value of the investment in convertible bonds as of December 31, 2020 and 2019 (in thousands): Investment in convertible bonds | | December 31, 2020 | | Balance, beginning of period | | $ | — | | Fair value at issuance date | | | 22,059 | | Change in fair value included in the statement of other comprehensive income (loss) | | | 5,827 | | Balance, end of period | | $ | 27,886 | |
The fair values as of October 16, 2020 and December 31, 2020 were based upon following assumptions:
| | December 31, 2020 | | | At Issuance | | Principal outstanding (South Korean won) | | KRW 30 billion | | | KRW 30 billion | | Stock price | | KRW 6,060 | | | KRW 7,210 | | Expected life (in years) | | | 9.79 | | | | 10.00 | | Selected yield | | | 10.50 | % | | | 13.00 | % | Expected volatility (Telcon common stock) | | | 85.80 | % | | | 86.90 | % | Risk-free interest rate (South Korea government bond) | | | 1.72 | % | | | 1.50 | % | Expected dividend yield | | | 0.00 | % | | | 0.00 | % | Conversion price | | KRW 6,028 | | | KRW 9,232 | |
Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings to acquire, own and operate an amino acids manufacturing facility in Ube, Japan. As part of the formation, the Company invested approximately $32,000 in exchange for 40% of EJ Holdings voting shares. JIP owns 60% of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $13.6 million. The loan matures on September 30, 2028 and bears interest at the rate of 1% payable annually. The loan proceeds were used by $0.5 millionEJ Holdings to purchase the Ube facility in December 2019 and pay related taxes. In October 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agrees to loan to EJ Holdings a total of $3.0approximately $6.5 million, in monthly instalments through March 2021. The loans will be unsecured general obligations of EJ Holdings, will bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and will be due and payable in a lump sum at maturity on September 30, 2020. The proceeds of the loans will be used by EJ Holdings to fund its activities and operations at its Ube facility. The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids, that the operation of the facility will be principally for our benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility will be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP. During the year ended December 31, 2020, the Company made additional $4.0 million loans to EJ Holdings. As of December 31, 2020, and 2019, the loan receivables were approximately $18.6 million and (ii)$13.8 million, respectively. EJ Holdings is engaged in phasing in the periodUbe facility, including obtaining FDA and other regulatory approvals for the manufacture of PGLG in accordance with cGMP. EJ Holdings has had no revenues since its inception, has depended on loans from the Company to raiseacquire the $3.0 million was extendedUbe facility and fund its operations and will continue to September 30, 2016. be dependent on loans from us or other financing unless and until the Ube facility is activated and EJ Holdings can secure customers for its products. The Company subsequently amendedhas determined that EJ Holdings is a variable interest entity, or VIE, based upon the facts that the Company provided the loan financing to acquire the Ube facility and restated the Original Note Purchase Agreement solely to updateEJ Holdings activities at the facility are principally for the changes made pursuantCompany’s benefit. JIP, however, owns 60% of EJ Holdings and is entitled to Amendment No. 1 (such amendeddesignate a majority of EJ Holdings’ board of directors and restated agreement, together withits Chief Executive Officer and outside auditors, and, as such, controls the Original Note Purchase Agreement,management, business and operations of EJ Holdings. Accordingly, the “Note Purchase Agreement”). Company accounts for its variable interest in EJ Holdings under the equity method. The Company’s share of the losses reported by EJ Holdings are classified as net losses from equity method investment. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded. F-18
The following table sets forth certain unaudited financial information of EJ Holdings for years ended December 31, 2020 and 2019 (in thousands): | As of December 31, | | | 2020 | | | 2019 | | ASSETS | | | | | | | | CURRENT ASSETS | $ | 1,136 | | | $ | 2,310 | | OTHER ASSETS | | 11,170 | | | | 10,654 | | Total assets | $ | 12,306 | | | $ | 12,964 | | LIABILITIES | | | | | | | | CURRENT LIABILITIES | $ | 987 | | | $ | 296 | | LONG-TERM LIABILITIES | | 18,560 | | | | 13,870 | | Total liabilities | $ | 19,547 | | | $ | 14,166 | | NONCONTROLLING INTEREST | $ | (4,345 | ) | | $ | (721 | ) | | | | | | | | | | Year Ended December 31, | | | 2020 | | | 2019 | | REVENUES, NET | $ | 261 | | | $ | 229 | | NET LOSS | $ | (5,786 | ) | | $ | (1,035 | ) |
NOTE 6—SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES Accounts payable and accrued expenses consisted of the following (in thousands): | | December 31, 2020 | | | December 31, 2019 | | Accounts payable: | | | | | | | | | Clinical and regulatory expenses | | $ | 262 | | | $ | 232 | | Professional fees | | | 252 | | | | 1,183 | | Selling expenses | | | 395 | | | | 1,303 | | Manufacturing cost | | | 596 | | | | 4,541 | | Other vendors | | | 518 | | | | 18 | | Total accounts payable | | | 2,023 | | | | 7,277 | | Accrued interest payable, related parties | | 41 | | | | 42 | | Accrued interest payable | | | 627 | | | | 991 | | Accrued expenses: | | | | | | | | | Payroll expenses | | | 1,053 | | | | 891 | | Government rebates and other rebates | | | 2,659 | | | | 1,355 | | Due to EJ Holdings | | | 545 | | | | 238 | | Other accrued expenses | | | 512 | | | | 704 | | Total accrued expenses | | | 4,769 | | | | 3,188 | | Total accounts payable and accrued expenses | | $ | 7,460 | | | $ | 11,498 | |
Other long-term liabilities consisted of the following (in thousands): | As of December 31, | | | 2020 | | | 2019 | | Trade discount | $ | 24,453 | | | $ | 23,242 | | Unearned revenue | | 10,000 | | | | 10,500 | | Other long-term liabilities | | 17 | | | | 8 | | Total other long-term liabilities | $ | 34,470 | | | $ | 33,750 | |
On September 14, 2015,June 12, 2017, the Company entered into an Omnibus Amendment (the “Omnibus Amendment”API Supply Agreement, as subsequently amended (as so amended, the “API Agreement”), with Telcon pursuant to which Telcon advanced to the Note Purchase Agreement and the notes purchased and sold pursuant thereto, with the majorityCompany approximately $31.8 million as an advance trade discount in consideration of the noteholdersCompany’s agreement to fixpurchase from Telcon the ConversionCompany’s requirements for bulk containers of PGLG. The Company purchased $2.2 million and $4.5 million of PGLG from Telcon during years ended December 31, 2020, and 2019, respectively, of which $208,000 and $3.7 million were reflected in accounts payable as of December 31, 2020 and 2019, respectively. See Note 11 for additional details.
NOTE 7—NOTES PAYABLE Notes payable consisted of the following at December 31, 2020 and 2019 (in thousands except for conversion price and shares): Year Issued | | Interest Rate Range | | | Term of Notes | | Conversion Price | | | Principal Outstanding December 31, 2020 | | | Discount Amount December 31, 2020 | | | Carrying Amount December 31, 2020 | | | Shares Underlying Notes December 31, 2020 | | | Principal Outstanding December 31, 2019 | | | Discount Amount December 31, 2019 | | | Carrying Amount December 31, 2019 | | | Shares Underlying Notes December 31, 2019 | | Notes payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2013 | | 10% | | | Due on demand | | | — | | | $ | 969 | | | $ | — | | | $ | 969 | | | | — | | | $ | 920 | | | $ | — | | | $ | 920 | | | | — | | 2019 | | 11% | | | Due on demand | | | — | | | | 2,899 | | | | — | | | | 2,899 | | | | — | | | | 2,829 | | | | — | | | | 2,829 | | | | — | | 2020 | | 11% | | | Due on demand | | | — | | | | 942 | | | | — | | | | 942 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | $ | 4,810 | | | $ | — | | | $ | 4,810 | | | | — | | | $ | 3,749 | | | $ | — | | | $ | 3,749 | | | | — | | | | | | | | Current | | | | | | $ | 4,588 | | | $ | — | | | $ | 4,588 | | | | — | | | $ | 3,749 | | | $ | — | | | $ | 3,749 | | | | — | | | | | | | | Non-current | | | | | | $ | 222 | | | $ | — | | | $ | 222 | | | | — | | | $ | — | | | $ | — | | | $ | — | | | | — | | Notes payable - related party | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | 10% - 11% | | | Due on demand | | | — | | | $ | 20 | | | $ | — | | | $ | 20 | | | | — | | | $ | 20 | | | | — | | | $ | 20 | | | | — | | 2018 | | 11% | | | Due on demand | | | — | | | | — | | | | — | | | | — | | | | — | | | | 159 | | | | — | | | | 159 | | | | — | | 2019 | | 10% | | | Due on demand | | | — | | | | 14 | | | | — | | | | 14 | | | | — | | | | 14 | | | | — | | | | 14 | | | | — | | 2020 | | 12% | | | Due on demand | | | — | | | | 100 | | | | — | | | | 100 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | $ | 134 | | | $ | — | | | $ | 134 | | | | — | | | $ | 193 | | | $ | — | | | $ | 193 | | | | — | | | | | | | | Current | | | | | | $ | 134 | | | $ | — | | | $ | 134 | | | | — | | | $ | 193 | | | $ | — | | | $ | 193 | | | | — | | Convertible debentures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 10% | | | 18 months | | $2.00-$9.52 | | | $ | 7,200 | | | $ | 1,720 | | | $ | 5,480 | | | | 3,630 | | (a) | $ | 10,200 | | | $ | 3,185 | | | $ | 7,015 | | | | 1,080,415 | | | | | | | | | | | | | | $ | 7,200 | | | $ | 1,720 | | | $ | 5,480 | | | | 3,630 | | | $ | 10,200 | | | $ | 3,185 | | | $ | 7,015 | | | | 1,080,415 | | | | | | | | Current | | | | | | $ | 7,200 | | | $ | 1,720 | | | $ | 5,480 | | | | | | | $ | 10,200 | | | $ | 3,185 | | | $ | 7,015 | | | | — | | Convertible notes payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | 6% - 10% | | | Due on demand - 2 years | | $ | 10.00 | | | | 3,150 | | | $ | — | | | | 3,150 | | | | 316,723 | | (b) | | 3,000 | | | | 5 | | | | 2,995 | | | | 363,876 | | | | | | | | | | | | | | $ | 3,150 | | | $ | — | | | $ | 3,150 | | | | 316,723 | | | $ | 3,000 | | | $ | 5 | | | $ | 2,995 | | | | 363,876 | | | | | | | | Non-current | | | | | | $ | 3,150 | | | $ | — | | | $ | 3,150 | | | | — | | | $ | — | | | $ | — | | | $ | — | | | | — | | | | | | | | Grand Total | | | | | | $ | 15,294 | | | $ | 1,720 | | | $ | 13,574 | | | $ | 320,353 | | | $ | 17,142 | | | $ | 3,190 | | | $ | 13,952 | | | $ | 1,444,291 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (a) The notes are convertible into Emmaus Life Sciences, Inc. shares. | | | | | | | | | | | | | | | | | | | | | | | | | | (b) This note is convertible into EMI Holdings Inc. shares. | | | | | | | | | | | | | | | | | | | | | | | | | |
The average stated interest rate of notes payable was 10% for the years ended December 31, 2020 and 2019. The average effective interest rate of notes payable for the years ended December 31, 2020 and 2019 was 37% and 66%, respectively, after giving effect to discounts relating to warrants, beneficial conversion features and deferred financing cost in connection with these notes. As of December 31, 2020, future contractual principal payments due on notes payable were as follows (in thousands): Year Ending | December 31, 2020 | | 2021 | $ | 11,922 | | 2022 | | 222 | | 2023 | | 3,150 | | Total | $ | 15,294 | |
Immediately prior to the completion of the Merger, all but one of the convertible notes payable were converted into shares of EMI common stock at their respective conversion prices. Upon completion of the Merger, the conversion shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable of EMI is convertible into shares of common stock of EMI at conversion price of $10.00 per share (as adjustedand included in convertible notes payable. The Company estimated the total fair value of any beneficial conversion feature and any accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance. In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds were allocated to the beneficial conversion feature and the warrants based on the pro‑rata fair value. The 10% Senior Secured Debentures were amended and restated immediately prior to the Merger to, among other things, make them convertible into shares of common stock of EMI and to provide for stock splits, stock dividends, combinations oradjustments in the like affectingconversion shares issuable upon conversion of the Common Stock) (the “Fixed Conversion Price”) (i) automatically,Debentures and the conversion price in the event of a qualified financingmerger, reorganization and similar events. Accordingly, upon completion of the Merger the Amended and Restated 10% Senior Secured Convertible Debentures became convertible into shares of common stock of the Company and included in convertible notes payable. The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. The following table sets forth the fair value of the conversion feature liabilities, which is included in the other current liabilities as of December 31, 2020 and 2019 (in thousands): Conversion feature liabilities—Amended and Restated 10% Senior Secured Convertible Debentures | | December 31, 2020 | | | December 31, 2019 | | Balance, beginning of period | | $ | 1 | | | $ | — | | Fair value at issuance date | | | — | | | | 132 | | Fair value at modification date | | | 118 | | | | — | | Change in fair value | | | (112 | ) | | | (131 | ) | Balance, end of period | | $ | 7 | | | $ | 1 | |
The fair value and any changes in fair value of conversion feature liabilities are determined using a binominal lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time. F-22
The fair values as of December 31, 2020, the February 21, 2020 modification date and December 31, 2019 and as of the Merger date were based upon following assumptions: | | December 31, 2020 | | | February 21, 2020 (Modification date) | | | December 31, 2019 | | Stock price | | $ | 1.23 | | | $ 1.89 | | | $ | 1.97 | | Conversion price | | $ | 2.00 | | | $ 3.00 | | | $ | 9.52 | | Selected yield | | | 10.48 | % | | | 19.12 | % | | | 16.77 | % | Expected volatility (peer group) | | | 95.00 | % | | | 65.00 | % | | | 50.00 | % | Expected life (in years) | | | 0.67 | | | 1.16 | | | | 0.81 | | Expected dividend yield | | — | | | — | | | — | | Risk-free rate | | Term structure | | | Term structure | | | Term structure | |
See Note 14 for information regarding the recent prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures. The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time, Dr. Niihara may, but is not less than $5 million,obligated to, loan or (ii) voluntarily, within 15 days priorre-loan to the maturity dateCompany up to $1,000,000. Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3%. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year. As of December 31, 2020, and 2019, the outstanding balances of $800,000 and $600,000 were reflected in revolving line of credit, related party on the consolidated balance sheet. With the tax-gross up, the effective interest rate on the outstanding balance as of December 31, 2020 and 2019 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more information regarding this arrangement. On May 8, 2020, the Company received a loan in the amount of $797,840 under the Small Business Administration Paycheck Protection Program (“PPP”). The PPP, established as part of the note.Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The Omnibus Amendment also amendedloan, which is in the form of note attached to thea Promissory Note Purchase Agreement to reflect the Fixed Conversion Price. Subsequently thereto,dated April 29, 2020, matures on September 14, 15April 29, 2022 and 24, 2015, the Company entered into a Note Purchase Agreement, as amended by the Omnibus Amendment, with each of six accredited investors, in connection with a bridge financing. Pursuant to these Note Purchase Agreements, the Company issued an aggregate principal amount of $710,000 of secured convertible promissory notes (collectively, the “September 2015 Notes,” and together with the September 2014 Notes and all other notes purchased and sold pursuant to the Note Purchase Agreement, the “Notes”), which amount also represents the gross proceeds to the Company from the September 2015 Notes. Four of the six September 2015 Notes were purchased by affiliates of the Company, or an entity under such affiliate’s control(refer to the Note Issuance and Conversion Table below).
Through December 23, 2015, and prior to further amendments to the Notes, all of the Notes were scheduled to mature on March 21, 2016, (subject to earlier conversion or prepayment), and earnedbears interest at a rate of 5%1% per annum, with interest payable at maturity. The Notes could not be prepaid without the prior written consent of the holder of such Notes. The Notes were secured by a security interest in the Company’s intellectual property, as detailed in a security agreement. Upon a change of control of the Company, the holder of a Note will have the option to have the Note repaid with a premium equal to 50% of the outstanding principal.
On December 23, 2015, the Company entered into a Second Amended and Restated Note and Warrant Purchase Agreement (which further amended and restated the Note Purchase Agreement, as modified by the Omnibus Amendment) (the “Second Amended Note & Warrant Agreement”) with each of 16 accredited investors, pursuant to which (i) the aggregate principal amount of Notes available for issuance was increased from $3.0 million to up to $6.0 million, (ii) the maturity date of the Notes outstanding prior to such amendment was extended from March 21, 2016 to December 31, 2017; (iii) the time during which Notes may be issued was extended and (iv) certain warrants were issued to holders of both previously issued and Notes issued under the Second Amended Note & Warrant Agreement.
Pursuant to the Second Amended Note & Warrant Agreement,monthly commencing on December 23 and December 28, 2015,8, 2020 unless the Company issued to the two purchasers thereof, who are both affiliates(refer to the Note Issuance and Conversion Table below) of the Company, (i) an aggregate principal amount of $1,000,000 of secured convertible promissory notes (each, a “December 2015 Note”), which amount also represents the gross proceeds to the Company from the December 2015 Notes, and (ii) a warrant to each holder of December 2015 Notes to purchase the Company’s Common Stock, in an amount equal to 100% of the shares underlying their December 2015 Note (each, a “Note Warrant”). Each Note Warrant was exercisable, in whole or in part, during the period beginning on the date of its issuance, and ending on the earlier of (i) December 31, 2020 and (ii) the date that was forty-five (45) days following the date on which the daily closing price of shares of the Company’s Common Stock quoted on the OTCQB Venture Marketplace (or other bulletin board or exchange on which the Company’s Common StockPPP loan is traded or listed) exceeded $50.00 for at least ten (10) consecutive trading days. The Note Warrants were subsequently cancelled. For additional details on cancellation of the Note Warrants, see “—Note Conversion and Warrant Cancellation” below.
Also on December 23, 2015, in consideration for the agreement to extend the maturity date of the Notes, the Company issued to holders of all Notes outstandingforgiven prior to the date of the Second Amendedfirst monthly payment or the loan forgiveness process has commenced. The Note & Warrantmay be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period.The PPP loan amount of $797,840 was included in note payable on the consolidated balance sheet.
NOTE 8—STOCKHOLDERS’ DEFICIT Purchase Agreement warrantswith GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to purchase an aggregate of 300,000 shares of Common Stock (the “Extension Warrants”, together with the Note Warrants, the “Warrants”). All Warrants had identical terms. Each such holder was issued an Extension Warrant to purchase Common Stock in an amount equal to 100% of the shares underlying each such holder’s previously outstanding Notes. Extension Warrants were issued to affiliates(refer to the Note Issuance and Conversion Table below). All Note Warrants and Extension Warrants were subsequently cancelled upon conversion of the Notes. or additional details on cancellation of the Warrants, see “—Note Conversion and Warrant Cancellation” below. Between February 23, 2016 and June 30, 2016,which the Company issued to seven accredited investor purchasers thereof (i)GPB a $13 million principal amount senior secured convertible promissory note (the “GPB Note”) for an aggregate principal amountpurchase price of $1,100,000 in eight separate Notes and (ii)$12.5 million, reflecting a 4.0% original issue discount.
In connection with the issuance of GPB Note, the Company also issued to GPB a warrant to each holder of such Notes to purchase the Company’s Common Stock, in an amount equal to 100% of the shares underlying their respective Note (each, also a “Note(the “GPB Warrant”). A total of 110,000 shares of Common Stock in the aggregate were underlying these Note Warrants. Five of the purchasers were affiliates of the Company(refer to the Note Issuance and Conversion Table below). The Note Warrants were subsequently cancelled. For additional details on cancellation of the Note Warrants, see “Note Conversion and Warrant Cancellation” below. On August 15, 2016, the Company entered into an Amendment No. 1 to the Second Amended Note and Warrant Agreement with the investors party thereto to extend the time during which the Notes and the Warrants could be issued under the Second Amended Note and Warrant Agreement from August 11, 2016 to September 1, 2016.
On September 19, 2016, the Company entered into a Second Omnibus Amendment (the “Second Omnibus Amendment”), with a majority of over 80% of the noteholders, thereby amending: (i) the Notes, (ii) the Second Amended Note and Warrant Agreement, as amended and (iii) the Warrants. Pursuant to the Second Omnibus Amendment, the Company had the option, exercisable at any time after September 1, 2016, to mandatorily convert all Notes into shares of the Company’s common stock at $5.00 per share (the “Mandatory Conversion”).
Note Conversion and Warrant Cancellation
On September 19, 2016, pursuant to the Second Omnibus Amendment, the Company exercised the Mandatory Conversion and, on September 21, 2016, (i) converted the entire outstanding principal balance of $6,000,000, plus accrued interest of $317,000 on all of the Notes into 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share and (ii) cancelled all Warrants(refer to the Note Issuance and Conversion Table below).
The below table sets forth details regarding the shares issued to certain related parties upon the Company’s exercise of the Mandatory Conversion:
Note Issuance and Conversion Table:
| Note Holder | | | | | Principal Amount | | | 2016 Discount | | | Carrying Value
September 30, 2016 | | | Accrued Interest
at Conversion | | | Shares issued on
Conversion | | | Original Note Purchase Agreement | | | | | | | | | | | | | | | | | | | | | | | | | | Note Date Range Sept 22, 2014 to July 20, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | RSJ Private Equity | | | (1) | | | $ | 750,000 | | | $ | 21,300 | | | $ | 728,700 | | | $ | 76,200 | | | | 165,246 | | | John Pappajohn | | | (2) | | | | 200,000 | | | | 8,100 | | | | 191,900 | | | | 20,400 | | | | 44,089 | | | John Pappajohn | | | (5) | | | | 200,000 | | | | 3,000 | | | | 197,000 | | | | 14,200 | | | | 42,820 | | | Tierney Family Trust | | | (3) | | | | 540,000 | | | | 16,000 | | | | 524,000 | | | | 46,000 | | | | 117,199 | | | Follman Family Trust | | | (4) | | | | 100,000 | | | | 3,000 | | | | 97,000 | | | | 7,700 | | | | 21,538 | | | Oman Ventures | | | (6) | | | | 200,000 | | | | 8,100 | | | | 191,900 | | | | 20,400 | | | | 44,089 | | | 4 Accredited Investors | | | | | | | 300,000 | | | | 9,100 | | | | 290,900 | | | | 30,600 | | | | 66,112 | | | Subtotal for First Round | | | | | | $ | 2,290,000 | | | $ | 68,600 | | | $ | 2,221,400 | | | | | | | | | | | Omnibus Amendment Sept 14, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | Note Date Range Sept 14, 2015 to September 24, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | RSJ Private Equity | | | (1) | | | $ | 350,000 | | | $ | 85,400 | | | $ | 264,600 | | | | 17,300 | | | | 73,462 | | | Robin Smith | | | (2) | | | | 60,000 | | | | 7,100 | | | | 52,900 | | | | 3,100 | | | | 12,611 | | | John Pappajohn | | | (2) | | | | 100,000 | | | | 24,400 | | | | 75,600 | | | | 5,100 | | | | 21,015 | | | Follman Family Trust | | | (4) | | | | 150,000 | | | | 36,500 | | | | 113,500 | | | | 7,600 | | | | 31,522 | | | 2 Accredited Investors | | | | | | | 50,000 | | | | 12,200 | | | | 37,800 | | | | 2,500 | | | | 10,508 | | | Subtotal for Second Round | | | | | | $ | 710,000 | | | $ | 165,600 | | | $ | 544,400 | | | | | | | | | | | Balances at September 30, 2015 | | | | | | $ | 3,000,000 | | | $ | 234,200 | | | $ | 2,765,800 | | | | | | | | | | | Second Amended Note December 23 & 28, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | RSJ Private Equity | | | (1) | | | $ | 750,000 | | | | | | | | | | | | 27,300 | | | | 155,465 | | | John Pappajohn | | | (2) | | | | 250,000 | | | | | | | | | | | | 9,300 | | | | 51,856 | | | Subtotal for Third Round | | | | | | $ | 1,000,000 | | | | | | | | | | | | | | | | | | | Note Date Range Feb 23, 2016 to August 16, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | RSJ Private Equity | | | (1) | | | $ | 250,000 | | | | | | | | | | | | 1,400 | | | | 50,281 | | | Robin Smith | | | (2) | | | | 40,000 | | | | | | | | | | | | 800 | | | | 8,165 | | | John Pappajohn | | | (2) | | | | 850,000 | | | | | | | | | | | | 14,000 | | | | 172,802 | | | Tierney Family Trust | | | (3) | | | | 100,000 | | | | | | | | | | | | 600 | | | | 20,129 | | | Follman Family Trust | | | (4) | | | | 300,000 | | | | | | | | | | | | 5,100 | | | | 61,014 | | | Carpenter, George & Jill | | | (7) | | | | 100,000 | | | | | | | | | | | | 1,300 | | | | 20,254 | | | Harris, Geoffrey | | | (2) | | | | 10,000 | | | | | | | | | | | | 300 | | | | 2,058 | | | 2 Accredited Investors | | | | | | | 300,000 | | | | | | | | | | | | 5,600 | | | | 61,124 | | | Brandt Ventures | | | (8) | | | | 50,000 | | | | | | | | | | | | 200 | | | | 10,047 | | | Subtotal for Final Round | | | | | | $ | 2,000,000 | | | | | | | | | | | | | | | | | | | Balances Converted September 19, 2016 | | | | | | $ | 6,000,000 | | | | | | | | | | | $ | 317,000 | | | | 1,263,406 | |
| (1) | RSJ PE is a greater than 5% shareholder. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, subsequently joined our Board on July 30, 2015. |
| (3) | Thomas Tierney is a trustee of the Tierney Family Trust. Mr. Tierney originally joined the Board in February 25, 2013 and served as Chairman of the Board from March 26, 2013 till May 22, 2015 when he resigned from the Board. On September 29, 2016 Mr. Tierney rejoined the Board. The Tierney Family Trust is a greater than 5% shareholder of the Company. Mr. Tierney resigned from the board on July 14, 2017. |
| (4) | Robert Follman is a trustee of the Follman Family Trust and is a member of the Board. Mr. Follman resigned from the board on July 14, 2017. |
| (5) | John Pappajohn is a member of the Board. He purchased $200,000 of Notes, which on September 6, 2015, were assigned to four accredited investors. Approximately $10,400 of interest was attributable to such transferred Notes, resulting in an aggregate of 42,084 shares being issued upon the Mandatory Conversion of such transferred Notes. |
| (6) | Mark & Jill Oman are the beneficial owners of Oman Ventures and were greater than 5% shareholders of the Company. |
| (7) | George Carpenter is the CEO of the Company. |
| (8) | Brandt Ventures was issued this note as part of the Company’s settlement of its litigation with Leonard Brandt and Brandt Ventures(refer to Note 9. Commitments and Contingent Liabilities). |
Warrants
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. Direct costs associated with the offering amount to $1,313,800 plus the warrants issued to the under writers as discussed below.
The public offering warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the public offering warrant at issuance date to be $10,802,728 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering. The underwriter warrant has an exercise price of $6.04 and expires on July 19, 2022. We estimated the fair value of the underwriter warrant at issuance date to be $863,225 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. Gross proceeds amounted to $2,100. The overallotment warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the overallotment warrant at issuance date to be $880,710 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $4.20 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
Stock Dividend Warrants
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share240,764 of common stock at an exercise price of $5.25$10.80 per share.share, with customary adjustments for stock splits, stock dividends and other recapitalization events and anti-dilution provisions set forth in the GPB Warrant. The warrants will becomeGPB Warrant became exercisable commencing not less than 12six months following their July 27, 2017 distribution dateafter issuance and will expirehas a term of five years thereafter.from the initial exercise date.
The dividendCompany determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability upon issuance. The warrant has an exercise price of $5.25liability is remeasured at fair value on a recurring basis using Level 3 inputs and expires on July 26, 2022. We estimatedany change in the fair value of the dividendliability is recorded in earnings. The following table sets forth the fair values of the warrants as of December 31, 2020 and 2019 (in thousands): Warrant liability—GPB | | December 31, 2020 | | | December 31, 2019 | | Balance, beginning of period | | $ | 38 | | | $ | 1,399 | | Change in fair value included in the statement of operations | | | 45 | | | | (1,361 | ) | Balance, end of period | | $ | 83 | | | $ | 38 | |
Prior to the Merger, the value of warrant at issuance date to be $16,375,394derivative liabilities and any change in fair value were determined using a Binominal Monte-Carlo Cliquet Option Pricing Model. After the Merger, the fair value of the warrant derivative liabilities was determined using the Black-Scholes option valuation modelpricing models. The value as of the dates set forth the in the table below, were based on upon following assumptions: | | December 31, 2020 | | | December 31, 2019 | | Stock price | | $ | 1.23 | | | $ | 1.97 | | Risk‑free interest rate | | | 0.15 | % | | | 1.64 | % | Expected volatility (peer group) | | | 120.00 | % | | | 60.00 | % | Expected life (in years) | | | 2.50 | | | | 3.50 | | Expected dividend yield | | | — | | | | — | | Number outstanding | | | 252,802 | | | | 252,802 | |
Purchase Agreement with Holders of 10% Senior Secured Debentures—In October 2018, EMI sold and issued $12.2 million principal amount of 10% Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors. EMI’s obligations under the Debentures were secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S. subsidiaries. The net proceeds of the sale of the debentures and warrants were used to fund EMI’s original $13.2 million loan to EJ Holdings, Inc. in October 2018 reflected on the Company’s consolidated balance sheets. As described in Note 7 above, the Debentures were amended and restated in their entirety in conjunction with the following assumptions: marketMerger. The common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger. The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $10.00 per share. The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of $6.55the Merger. Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger. The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $5.87 per share time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocationbased upon the VWAP of the fair value of these warrants was included in additional paid-in capitalCompany common stock on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing. At September 30, 2015, the Notes totaled $3.0 million and the derivative liability value was determined to be $833,000. For the fiscal year ended September 30, 2015, gains on derivatives liabilities totaled $162,800. At September 30, 2016, all Notes had been converted to equity, and consequently, there were no derivative liabilities outstanding. For the fiscal year ended September 30, 2016, there was a derivative liability expense of $34,600.
On December 23, 2015, the Company entered into the Second Amended Note & Warrant Agreement, with each of 16 accredited investors, pursuant to which (i) the aggregate principal amount of Notes available for issuance was increased from $3.0 million to up to $6.0 million, (ii) the maturity date of currently outstanding Notes was extended from March 21, 2016 to December 31, 2017; (iii) the time during which Notes may be issued was extended and (iv) certain warrants were issued to holders of both previously issued and newly issued Notes. Consequently, the existing notes totaling $3 million, plus $121,900 of accrued interest thereon, for an aggregate total debt of $3,121,900 was revalued on December 23, 2015, and on the prior trading day December 22, 2015, to determine the impact on derivative valuation. On December 22, 2015, the derivative liabilityfollowing completion of the aggregate debt was determined to be $60,200, which resulted in a write down of $772,800 from the derivative liability balance of $833,000 at September 30, 2015, which resulted in a Gain on Derivative Liabilities of $772,800.
On December 23, 2015, all the Notes were revalued with the maturity date extended to December 31, 2017. The derivative liability value was determined to be $1,022,400 and the offset was booked to other income as a Loss on Extinguishment of Debt, adjustment amount of $962,300.
On June 30, 2016, the derivative liability of the issued notes was revalued; due to a lower stock price, the derivative valuation was reduced by $263,100.
Merger. Pursuant to the Secondterms of a securities amendment agreement entered into in February 2020, the Amended and Restated 10% Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price of thereof to $3.00 per share from $9.52 per share. The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $3.00 per share from $5.87 per share. The newly Amended and Restated 10% Senior Secured Convertible Debentures and related newly amended and restated warrants provide for so-called full-ratchet anti-dilution adjustments in the event we sell or issue shares of common stock or common stock equivalents at an effective price per share less than the conversion price of the debentures or the exercise price of the warrants, subject to certain exceptions. The conversion price of the Amended and Restated 10% Senior Secured Convertible Debentures and the exercise price of the related amended and restated warrants were reduced to $2.00 a share as a result of the Company’s sale of 100,000 shares of common stock at a price of $2.00 a share under F-24
the Purchase Agreement with Lincoln Park Capital LLC described below and were subsequently reduced again as described in Note & Warrant Agreement,14. See Note 14 for information regarding our recent prepayment of the Debentures. The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the 10% Senior Secured Debentures in October 2018 under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability. The liability is remeasured at fair value on December 23a recurring basis using Level 3 input and December 28, 2015,any changes in fair value is recorded in earnings. In 2019, the Debentures were amended and restated to be convertible into common stock of EMI immediately prior to completion of the Merger, which resulted in the related warrants being reclassified to equity. Purchase agreement with Holder of a Convertible Promissory Note - On June 15, 2020, the holder of a convertible promissory note in the principal amount of $3,150,000 agreed to an extension of the maturity date to June 15, 2023 in exchange for an increase in the interest rate on the note from 11% to 12%. In conjunction with this amendment, the Company issued to the two purchasersholder of December 2015 Notesnote five-year common stock purchase warrants to purchase a total of up to 1,250,000 shares of the Company common stock at an exercise price of $2.05 a share. The modification of debt was considered as debt extinguishment and $1.4 million of loss on debt extinguishment was recognized in the aggregate principal amountconsolidated statement of $1,000,000 of secured convertible promissory notes. Between February 23, 2016 and August 16, 2016,comprehensive income. Under ASC 815-40, the Company concluded that the warrants issued 15 Notes to 10 investors in the aggregate principal amount of $2,000,000 of secured convertible promissory notes. The derivative liability created by the conversion featureholder of the notes should be recognized at fair value as a liability. The warrant liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in the fair value of liability is recorded in earnings. The following table presents the change in fair value of the warrants as of December 31, 2020 (in thousands): Warrant liability—Wealth Threshold | | December 31, 2020 | | Balance, beginning of period | | $ | — | | Fair value at issuance date | | | 1,425 | | Change in fair value included in the statement of comprehensive income (loss) | | | (437 | ) | Balance, end of period | | $ | 988 | |
The fair value of the warrant derivative liabilities was determined using the Black-Scholes Merton model and was based upon origination was $1,079,800.following assumptions: | | December 31, 2020 | | | At Issuance | | Exercise price | | $ | 2.05 | | | $ | 2.05 | | Stock price | | $ | 1.68 | | | $ | 1.23 | | Risk‑free interest rate | | | 0.31 | % | | | 0.33 | % | Expected volatility (peer group) | | | 101.00 | % | | | 94.00 | % | Expected life (in years) | | | 4.46 | | | | 5.00 | | Expected dividend yield | | — | | | — | | Number outstanding | | | 1,250,000 | | | | 1,250,000 | |
A summary of the Company’s warrants activity for the years ended December 31, 2020 and 2019 is presented below: | December 31, 2020 | | | December 31, 2019 | | | Warrants outstanding, beginning of period | | 4,931,099 | | | | 3,436,431 | | | Assumed as part of Merger | | — | | | | 1,044,939 | | | Deemed Granted | | 3,625,000 | | | | 500,729 | | (a) | Exercised | | — | | | | (51,000 | ) | | Cancelled, forfeited and expired | | (116,619 | ) | | | — | | | Warrants outstanding, end of period | | 8,439,480 | | | | 4,931,099 | | |
On September 19, 2016,
(a) | Represents warrant shares issuable upon the Merger by reason of antidilution adjustments under former EMI warrants. |
A summary of outstanding warrants by year issued and exercise price as of December 31, 2020 is presented below. | | | | Outstanding | | | Exercisable | | Year issued | Exercise Price | | Number of Warrants Issued | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Total | | | Weighted Average Exercise Price | | Prior to January 1, 2019 | | | | | | | | | | | | | | | | | | | | | | $4.29-$10.28 | | | 3,439,007 | | | | 1.66 | | | $ | 4.38 | | | | 3,439,007 | | | $ | 4.38 | | | Total | | | 3,439,007 | | | | | | | | | | | | 3,439,007 | | | | | | At December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | $ | 6.12 | | | 32,391 | | | | 4.41 | | | $ | 6.12 | | | | 32,391 | | | $ | 6.12 | | | $ | 12.00 | | | 76,575 | | | | 3.73 | | | $ | 12.00 | | | | 76,575 | | | $ | 12.00 | | | $ | 14.04 | | | 174,999 | | | | 3.24 | | | $ | 14.04 | | | | 174,999 | | | $ | 14.04 | | | $ | 31.50 | | | 737,975 | | | | 2.57 | | | $ | 31.50 | | | | 737,975 | | | $ | 31.50 | | | $ | 36.24 | | | 22,333 | | | | 2.57 | | | $ | 36.24 | | | | 22,333 | | | $ | 36.24 | | | $ | 5.87 | | | 256,200 | | | | 3.83 | | | $ | 5.87 | | | | 256,200 | | | $ | 5.87 | | | $ | 7.68 | | | 75,000 | | | | 4.55 | | | $ | 7.68 | | | | 75,000 | | | $ | 7.68 | | | 2019 Total | | | 1,375,473 | | | | | | | | | | | | 1,375,473 | | | | | | At December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | $ | 2.10 | | | 75,000 | | | | 4.73 | | | $ | 2.10 | | | | 75,000 | | | $ | 4.70 | | | $ | 2.05 | | | 1,250,000 | | | | 4.46 | | | $ | 2.05 | | | | — | | | $ | — | | | $ | 2.00 | | | 2,300,000 | | | | 4.70 | | | $ | 2.00 | | | | 2,300,000 | | | $ | 4.70 | | | 2020 Total | | | 3,625,000 | | | | | | | | | | | | 2,375,000 | | | | | | | Grand Total | | | 8,439,480 | | | | | | | | | | | | 7,189,480 | | | | | |
Stock Options – Upon completion of the Company enteredMerger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock. Options granted under the 2011 Stock Incentive Plan expire ten years after grant. Options granted to directors vest in quarterly installments and all other option grants vest over a minimum period of three years, in each case, subject to continuous service with the Company. Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a Second Omnibus Amendment (the “Second Omnibus Amendment”), with a majority of over 80% of the noteholders, thereby amending: (i) the Notes, (ii) the Second Amended Note and Warrant Agreement, as amended and (iii) the Warrants. Pursuant to the Second Omnibus Amendment, the Company had thestock option exercisable at any time after September 1, 2016, to mandatorily convert all Notes intofor a number of shares of the Company’s common stock and at $5.00 per share. an exercise price calculated based on the exchange ratios in the Merger. The Company exercised this Mandatory Conversion on September 19, 2016also had an Amended and on September 21, 2016, (i) convertedRestated 2012 Omnibus Incentive Compensation Plan under which the entireCompany may grant incentive stock options to selected employees including officers, non-employee consultants and non-employee directors. All outstanding principal balancestock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger and the Company intends not to make any further award under thereunder. Management has valued stock options at their date of $6,000,000, plus accrued interest of $317,000 on allgrant utilizing the Black‑Scholes‑Merton Option pricing model. The fair value of the Notes into 1,263,406underlying shares was determined by the market value of stock of similar companies and recent arm’s length transactions involving the sale of the Company’s common stock atstock. Prior the Merger, the Company lacked company-specific historical and implied volatility information for its common stock. Therefore, the expected volatility was calculated using the historical volatility of a conversion price of $5.00 per share and (ii) cancelled all Warrants.comparative public traded companies. The following table presents the assumptions used on recent dates on which options were granted by the Company. | | June 29, 2020 | | | June 19, 2019 | | Stock Price | | $ | 1.67 | | | $ | 10.30 | | Exercise Price | | $ | 2.05 | | | $ | 10.30 | | Term | | 5.5-6 years | | | 6 years | | Risk-Free Rate | | 0.28% - 0.38% | | | 1.83% | | Dividend Yield | | — | | | — | | Volatility | | 78.91%-80.49% | | | | 67.16 | % |
Consequently, the existing notes totaling $6 million, plus $316,965 of accrued interest thereon, for an aggregate total debt of $6,316,965 was revalued on September 19, 2016, and on the prior trading day September 16, 2016, to determine the impact on derivative valuations. On September 16, 2016, the derivative liability of the aggregate debt was determined to be $2,909,700, which resulted in an increase in the derivative liability of $1,070,500. After the modification of the notes following the Second Omnibus Amendment the derivative liability balance increased to $6,322,000 resulting in a further increase in derivative liability by $3,412,300. Upon the Mandatory Conversion of all the notes, which eliminated all the debt and consequently, the derivative liability was also eliminated; therefore the $6,322,000 derivative liability was booked as an extinguishment of debt.
The following tables includerisk‑free interest rate is based on the implied yield available on U.S. Treasury issues with a roll-forwardterm approximating the expected life of liabilities classified within Levels 1, 2the options depending on the date of the grant and 3:expected life of the respective options. During the year ended December 31, 2020, the Company granted options to purchase up to 90,000 shares of common stock. The options have an exercise prices of $2.05 per share. December 31, 2019, the Company granted options to purchase 50,000 shares of common stock. The options have an exercise price of $10.30 per share. All of the options are exercisable with respect to one‑third (1/3) of the underlying shares on the first anniversary of the grant date and as to the remaining two‑thirds (2/3) of shares in twenty‑four (24) approximately equal monthly installments over a period of two years thereafter. | | | Level 1 | | | Level 2 | | | Level 3 | | | Stock warrant and other derivative liabilities at September 30, 2014 | | | | | | | | | | $ | 153,100 | | | Change in fair value | | | | | | | | | | | (153,100 | ) | | Stock warrant and other derivative liabilities at September 30, 2015 | | | | | | | | | | | 833,000 | | | Total derivative liabilities at September 30, 2015 | | | | | | | | | | $ | 833,000 | | | $3M of convertible debt prior to amendment 12/22/15 | | | | | | | | | | | (772,800 | ) | | $3M of convertible debt as amended 12/23/15 | | | | | | | | | | | 962,300 | | | Change in fair value as of 06/30/26 | | | | | | | | | | | (263,100 | ) | | Derivative liabilities upon Note origination 12/23/15 through 8/16/16 | | | | | | | | | | | 1,079,800 | | | $6M of convertible debt prior to amendment 09/16/16 | | | | | | | | | | | 1,070,500 | | | $6M of convertible debt as amended 09/19/16 | | | | | | | | | | | 3,412,300 | | | Elimination of derivative liabilities on Note conversion to Common Stock | | | | | | | | | | | (6,322,000 | ) | | Total derivative liabilities at September 30, 2016 | | | | | | | | | | $ | — | |
A summary of the Company’s stock option activity for the years ended December 31, 2020 and 2019 is presented below: | | December 31, 2020 | | | December 31, 2019 | | | | Number of Options | | | Weighted‑ Average Exercise Price | | | Number of Options | | | Weighted‑ Average Exercise Price | | Options outstanding, beginning of period | | | 7,245,350 | | | $ | 4.68 | | | | 6,642,200 | | | $ | 4.40 | | Granted or deemed issued | | | 90,000 | | | $ | 2.05 | | | | 636,683 | | (a) | $ | 10.10 | | Exercised | | | — | | | | — | | | | (167 | ) | | $ | 5.00 | | Cancelled, forfeited and expired | | | (225,325 | ) | | $ | 5.08 | | | | (33,366 | ) | | $ | 11.29 | | Options outstanding, end of period | | | 7,110,025 | | | $ | 4.63 | | | | 7,245,350 | | | $ | 4.68 | | Options exercisable at end of year | | | 6,986,268 | | | $ | 4.47 | | | | 7,001,680 | | | $ | 4.47 | | Options available for future grant | | | 2,302,475 | | | | | | | | 2,167,150 | | | | | |
| (a) | Upon the Merger, the exercise prices of outstanding EMI options were adjusted and additional options were deemed issued based upon the exchange ratio in the Merger. |
The net changes in Derivative Liabilities for transactions which were bookedDuring the years ended December 31, 2020 and 2019, the Company recognized $0.7 million and $3.7 million, respectively, of share‑based compensation cost arising from stock option grants. As of December 31, 2020, there was approximately $474,000 of total unrecognized compensation cost related to other income resulted in a net loss on derivative liabilitiesunvested share‑based compensation arrangements granted under the 2011 Stock Incentive Plan. That cost is expected to be recognized over the weighted-average remaining period of $34,600 for the fiscal year ended September 30, 2016.0.8 years.
The net changes in Extinguishment of Debt for transactions which were booked to other income resulted in a net gain on extinguishment of debt of $572,300 for the fiscal year ended September 30, 2016.
The AspirePurchase Agreement with Lincoln Park Capital Equity Line
Fund, LLC—On December 6, 2016,February 28, 2020, the Company entered into a common stock purchase agreement (the “Purchase Agreement”)Purchase Agreement with AspireLincoln Park Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the Purchase Agreement. Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”LPC”), pursuant to which the Company maintains an effective registration statement registering the sale of themay elect to sell to LPC up to $25,000,000 in shares of Common Stock that haveits common stock, subject to certain limitations and may be issued to Aspire underconditions set forth in the Purchase Agreement. UnderAgreement, including 100,000 initial shares that the Company sold to LPC at a price of $2.00 per share. Pursuant to the Purchase Agreement, on any tradingbusiness day selected byover the Company on which36-month term of the closing sale price of its Common Stock is equal to or greater than $0.50 per share,Purchase Agreement the Company has the right inat its sole discretion and subject to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal)certain conditions to direct LPC to purchase up to 50,00020,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock, which amount is subject to increase under certain circumstances based upon increases in the aggregate at a per share purchase price equal to the lesser of: | a) | the lowest sale price of Common Stock on the purchase date; or |
| b) | the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date. |
In addition, on any date on which the Company submits a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing salemarket price of its Common Stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted averagecommon stock. The purchase price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate sharescommon stock will be based upon the prevailing market price of Common Stock traded on its principal market oncommon stock at the next trading day (the “VWAP Purchase Date”), subject to a maximum numbertime of sharesthe purchase without any fixed discount. In addition, the Company may determine. Thedirect LPC to purchase price per share pursuant to such VWAP Purchase Notice is generally 95%additional amounts as accelerated purchases and additional accelerated purchases under certain circumstances. Apart from the initial sale of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.
The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
The Purchase Agreement provides thatshares described above, the Company and Aspire Capital willis not effectobliged to sell any sales under the Purchase Agreement on any purchase date where the closing sale priceshares of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions underpursuant to the Purchase Agreement, and the Company will control the timing and amount of any such sales, but in no event will LPC be required to purchase more than $1,000,000 of Common Stock to Aspire Capital. Aspire Capital has no right to requirecommon stock in any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financialsingle regular purchase (excluding accelerated or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrentlyadditional accelerated purchases).
Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement. The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC. There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement. There is no upper limitF-27
on the price per share that LPC could be obligated to pay for common stock, but shares will only be sold to LPC on a day the Company’s closing price is less than the floor price as set forth in the Purchase Agreement and if the sale of the shares would not result in LPC and its affiliates having beneficial ownership of more than 4.99% of the Company’s total outstanding shares of common stock. The Company has the right to terminate the Purchase Agreement at any time, at 0 cost or penalty. As consideration for LPC’s commitments under the Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “Commitment Shares”). The Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $100,000 per business day. On February 23, 2017, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds to the Company of $145,000.
The issuance ofLPC 415,743 shares of common stock, that may be issued from timewhich valued at $750,000, recorded as an addition to time to Aspire Capital under the Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemptionequity for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.
Common and Preferred Stock
Reverse Stock Split
At the Company’s annual stockholders meeting held on October 28, 2015, (“2015 Stockholders Meeting”) stockholders approved to amend the Company’s Articles of Incorporation to increase the number of shares of Common Stock authorized for issuance from 180,000,000 to 500,000,000 shares.
Also at our 2015 Stockholder Meeting, our stockholders approved an amendment to amend the Company’s Charter for the purposes of effecting a reverse stock-split of our Common Stock at a later time and at any time until the next meeting of the Company’s stockholders which are entitled to vote on such actions, by a ratio of not less than 1-for-10 and not more than 1-for-200, and to authorize the Board of Directors (“Board”) to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock-split. On August 24, 2016, the Board approved a 1-for-200 reverse stock-split which was effected on September 21, 2016.
On September 20, 2016, the Company announced that on September 21, 2016 it had filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation (the “Amendment”) to (i) effect a 1-for-200 reverse stock-split (“reverse split”) of its common stock effective at 8:00 a.m. Eastern Time on September 21, 2016 (the “Effective Time”). Because the Amendment did not reduce the numberand reduction for cost of authorized shares of Common Stock, the effect of the Amendment was to increase the number of shares of Common Stock available for issuance relative to the number of shares issued and outstanding.
At the Effective Time, immediately and without further action by the Company’s stockholders, every 200 shares of the Company’s Common Stock issued and outstanding immediately prior to the Effective Time were automatically combined into one share of Common Stock. In the event the reverse split left a stockholder with a fraction of a share, the number of shares due to that stockholder was rounded up. Further, any options, warrants and rights outstanding as of the Effective Time that were subject to adjustment were adjusted in accordance with the terms thereof. These adjustments included, without limitation, changes to the number of shares of Common Stock that would be obtained upon exercise or conversion of such securities, and changes to the applicable exercise or purchase price. capital raised.
As of September 30, 2016,the date of filing of this Annual Report, we are out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement. We intend to seek to bring the Company is authorizedinto compliance or seek an appropriate waiver from LPC to issue 515,000,000regain our ability to utilize the Purchase Agreement, but there can be no assurance when or whether we may be able to do so. If we are able to utilize the Purchase Agreement, whether or to what extent the Company sells shares of common stock to LPC under the Purchase Agreement will depend on a variety of which 500,000,000 are Common Stock;factors to be determined by the remaining 15,000,000 shares, with a par value of $0.001 per shares are blank-check preferred stock which the Board is expressly authorizedcompany from time to issue without stockholder approval, for one or more series of preferred stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optionaltime, including, among others, its net revenue and other special rightsresults of each series of preferred stock,operations, its working capital and other funding needs, the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”), held on August 21, 2017 (the “2017 Annual Meeting”), the holdersprevailing market prices of the Company’s common stock votedand the availability of other sources of funding.
NOTE 9—INCOME TAXES The provision for income taxes consists of the following for the years ended December 31, 2020 and 2019 (in thousands): | | 2020 | | | 2019 | | Current U.S. | | $ | 46 | | | $ | 164 | | International | | | — | | | | — | | Deferred U.S. | | | (427 | ) | | | — | | International | | | — | | | | — | | | | $ | (381 | ) | | $ | 164 | |
Deferred tax assets consist of the following as of December 31, 2020 and 2019 (in thousands): | | 2020 | | | 2019 | | Net operating loss carryforward | | $ | 17,090 | | | $ | 16,773 | | General business tax credit | | | 10,490 | | | | 9,888 | | Stock options | | | 5,924 | | | | 5,723 | | Charitable contribution | | | 82 | | | | 81 | | Accrued expenses | | | 276 | | | | 166 | | Unearned revenue | | | 2,425 | | | | 2,373 | | Allowance for bad AR | | | 1 | | | | 175 | | Unrealized gain on long term investment | | | 472 | | | | 1,400 | | Other | | | 1,964 | | | | 1,629 | | Total gross deferred tax assets | | | 38,724 | | | | 38,208 | | Less valuation allowance | | | (37,491 | ) | | | (38,019 | ) | Net deferred tax assets | | $ | 1,233 | | | $ | 189 | |
Deferred tax liabilities consist of the following as of December 31, 2020 and 2019 (in thousands): | | 2020 | | | 2019 | | Unrealized loss on foreign exchange translation and others | | $ | (347 | ) | | $ | (185 | ) | Unrealized gain on available-for-sale securities | | | (427 | ) | | | — | | Other | | | (459 | ) | | | (4 | ) | Total deferred tax liabilities | | $ | (1,233 | ) | | $ | (189 | ) |
A valuation allowance for the net deferred tax assets is recorded when it is more likely than not that the Company will not realize these assets through future operations. The valuation allowance decreased by approximately $0.5 million for the years ended December 31, 2020, while it increased $3.8 million for the years ended December 31, 2019. F-28
As of December 31, 2020 and December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of approximately $63.1 million and $62.9 million, respectively, available to amendoffset future federal taxable income, if any. Net operating loss generated in 2017 and prior years expire in various years through 2037. Net operating losses for federal income tax purpose generated in 2018 and after will be available indefinitely. In addition, the Company had net operating loss carryforwards for state income tax purposes of approximately $57.6 million and $55.9 million respectively, which expire in various years through 2040. As of December 31, 2020 and December 31, 2019, the Company has general business tax credits of $10.5 million and $9.9 million, respectively, for federal income tax purposes. The tax credits are available to offset future tax liabilities, if any, through 2040. The Company’s certificateutilization of incorporation (the “Charter”)net operating loss carryforwards could be subject to reduce the numberan annual limitation as a result of shares of Common Stock authorized for issuancecertain past or future events, such as stock sales or other equity events constituting a “change in ownership” under the Charterprovisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations could result in the expiration of net operating loss carryforwards and tax credits before they can be utilized. The income tax provision differs from 500,000,000that computed using the statutory federal tax rate of 21% due to 250,000,000. The certificate evidencing the resolution reducing the shares will be filed with Delaware Secretary of state, shortly after these financial statements are issued.following factors (in thousands): | | 2020 | | | 2019 | | Tax benefit at statutory federal rate | | $ | 134 | | | $ | (11,365 | ) | State taxes, net of federal tax benefit | | | 183 | | | | (666 | ) | Increase in valuation allowance | | | (455 | ) | | | 3,411 | | Permanent items | | | 859 | | | | 5,710 | | General business tax credit | | | (602 | ) | | | (545 | ) | Other | | | (500 | ) | | | 3,619 | | | | $ | (381 | ) | | $ | 164 | |
As of September 30,December 31, 2020 and December 31, 2019, the Company had no unrecognized tax benefits or position which, in the opinion of management, would be reversed if challenged by a taxing authority. In the event the Company is assessed interest or penalties, such amounts would be classified as income tax expense. As of December 31, 2020, all federal tax returns since 2017 4,299,311 sharesare subject to audit. The expiration of Common Stock were issuedthe state returns varies by state, but the 2016 and outstanding.subsequent years’ returns generally are subject to audit. No shares of preferred stock were issued or outstanding.tax returns are currently being examined by taxing authorities. NOTE 10—LEASES Operating leases — During the years ended December 31, 2020 and 2019, the Company leased its office space under operating leases with unrelated entities. The Company leased 21,293 square feet of office space for its headquarters in Torrance, California, at a base rental of $79,375 per month, which the lease will expire on September 30, 2026, and leased an additional 1,850 square feet office space in New York, New York, at a base rent of $8,691, which leases expired on January 31, 2023. The Company leased 1,322 square feet of office space in Tokyo, Japan, which the lease expired on September 30, 2022 and 1,163 square feet of office space in Dubai, United Arab Emirates. The rent expense for the years ended December 31, 2020 and 2019 amounted to approximately $1.2 million and $926,000, respectively. Future minimum lease payments were as follows as of December 31, 2020 (in thousands): | | Amount | | 2021 | | $ | 1,143 | | 2022 | | | 1,166 | | 2023 | | | 1,050 | | 2024 | | | 1,059 | | 2025 and thereafter | | | 1,925 | | Total lease payments | | | 6,343 | | Less: Interest | | | (1,730 | ) | Operating lease liabilities | | $ | 4,613 | |
The Company adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach and elected the transition method and the practical expedients permitted under the transition guidance, which allowed to carryforward the historical lease classification and our assessment on whether a contract is or contains a lease. The Company also elected to combine lease and non-lease components, such as common area maintenance charges, as single lease, and elected to use the short-term lease exception permitted by the standard as noted in Note 2. As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded a $3.0 million in operating right-of-use asset and $3.3 million in lease liability and derecognized $287,000 of deferred rent as of the adoption date. These were calculated using the present value of the Company’s remaining lease payments using an estimated incremental borrowing rate. The Company also recorded a $29,000 cumulative effect increase on our accumulated deficit as of January 1, 2019. As of December 31, 2020, and 2019, the Company had an operating lease right-of-use asset of $4.1 million $4.5 million, respectively and lease liability of $4.6 million and $4.9 million, respectively in the balance sheet. The weighted average remaining term of the Company’s leases as of December 31, 2020 was 5.5 years and the weighted-average discount rate was 11.4%. NOTE 11—COMMITMENTS AND CONTINGENCIES
API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $31.8 million in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”). The revised API agreement is effective for a term of five years and will renew automatically for 10 successive one-year renewal periods, except aseither party may determine. In the revised API agreement, the Company has agreed to purchase a total of 940,000 kilograms of PGLG at $50 USD per kilogram, or a total of $47.0 million, over the term of the agreement. In September 2018, the Company entered into an agreement with Ajinomoto and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the revised API agreement. On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the revised API agreement from $50 per kilogram of PGLG to $100 per kilogram from July 1, 2019 through June 30, 2020, with the price payable after June 30, 2020 to be subject to agreement between the parties. The PGLG raw material purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount. Refer to Note 12 for related party transaction details. F-30
NOTE 12—RELATED PARTY TRANSACTIONS The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2020 (in thousands except for conversion rate and share information). Class | Lender | | Interest Rate | | | Date of Loan | | Term of Loan | | Principal Amount Outstanding at December 31, 2020 | | | Highest Principal Outstanding | | | Amount of Principal Repaid or Converted into Stock | | | Amount of Interest Paid | | Current, Promissory note payable to related parties: | | | | | | | | | | | | | | | | | | Lan T. Tran (2) | | 10% | | | 4/29/2016 | | Due on Demand | | $ | 20 | | | $ | 20 | | | $ | — | | | $ | — | | | Lan T. Tran (2) | | 11% | | | 2/10/2018 | | Due on Demand | | | — | | | | 159 | | | | 159 | | | | 35 | | | Lan T. Tran (2) | | 10% | | | 2/9/2019 | | Due on Demand | | | 14 | | | | 14 | | | | — | | | | — | | | Hope Int'l Hospice (1) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 194 | | | | 194 | | | | 2 | | | Hope Int'l Homecare (1) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 189 | | | | 189 | | | | 1 | | | Soomi Niihara | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 98 | | | | 98 | | | | 4 | | | Soomi Niihara | | 12% | | | 10/28/2020 | | Due on Demand | | | — | | | | 395 | | | | 395 | | | | 12 | | | Willis Lee (2) | | 12% | | | 9/1/2020 | | Due on Demand | | | — | | | | 685 | | | | 685 | | | | 1 | | | Willis Lee (2) | | 12% | | | 10/29/2020 | | Due on Demand | | | 100 | | | | 100 | | | | 100 | | | | — | | | | | | | | | | | Subtotal | | $ | 134 | | | $ | 1,854 | | | $ | 1,820 | | | $ | 55 | | Revolving line of credit | | | | | | | | | | | | | | | | | | Yutaka Niihara (2) | | 5.25% | | | 12/27/2019 | | Due on Demand | | $ | 800 | | | $ | 800 | | | $ | 200 | | | $ | 37 | | | | | | | | | | | Subtotal | | $ | 800 | | | $ | 800 | | | $ | 200 | | | $ | 37 | | | | | | | | | | | Total | | $ | 934 | | | $ | 2,654 | | | $ | 2,020 | | | $ | 92 | |
The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2019 (in thousands except for conversion rate and share information). Class | Lender | | Interest Rate | | | Date of Loan | | Term of Loan | | Principal Amount Outstanding at December 31, 2019 | | | Highest Principal Outstanding | | | Amount of Principal Repaid or Converted into Stock | | | Amount of Interest Paid | | | Conversion Rate | | Current, Promissory note payable to related parties: | | | | | | | | | | | | | | | | | | | | | | Lan T. Tran (2) | | 10% | | | 4/29/2016 | | Due on Demand | | $ | 20 | | | $ | 20 | | | $ | — | | | $ | — | | | | — | | | Hope Int'l Hospice (1) | | 10% | | | 6/3/2016 | | Due on Demand | | | — | | | | 250 | | | | 250 | | | | 78 | | | | — | | | Lan T. Tran (2) | | 10% | | | 2/9/2017 | | Due on Demand | | | — | | | | 12 | | | | — | | | | 2 | | | | — | | | Yutaka Niihara (2)(3) | | 10% | | | 9/14/2017 | | Due on Demand | | | — | | | | 904 | | | | 27 | | | | 2 | | | | — | | | Lan T. Tran (2) | | 11% | | | 2/10/2018 | | Due on Demand | | | 159 | | | | 159 | | | | — | | | | — | | | | — | | | Lan T. Tran (2) | | 10% | | | 2/9/2019 | | Due on Demand | | | 14 | | | | 14 | | | | — | | | | — | | | | — | | | | | | | | | | | Subtotal | | $ | 193 | | | $ | 1,359 | | | $ | 277 | | | $ | 82 | | | | | | Current, Convertible notes payable to related parties: | | | | | | | | | | | | | | | | | | | | | | Yasushi Nagasaki (2) | | 10% | | | 6/29/2012 | | Due on Demand | | $ | — | | | $ | 200 | | | $ | 200 | | | $ | 56 | | | $ | 3.30 | | | Yutaka & Soomi Niihara (2)(3) | | 10% | | | 11/16/2015 | | 2 years | | | — | | | | 200 | | | | 200 | | | | 73 | | | $ | 4.50 | | | Wei Peu Zen (3) | | 10% | | | 11/6/2017 | | 2 years | | | — | | | | 5,000 | | | | 5,000 | | | | 597 | | | $ | 10.00 | | | Profit Preview International Group, Ltd. (4) | | 10% | | | 2/1/2018 | | 2 years | | | — | | | | 4,037 | | | | 4,037 | | | | 385 | | | $ | 10.00 | | | Profit Preview International Group, Ltd. (4) | | 10% | | | 3/21/2018 | | 2 years | | | — | | | | 5,363 | | | | 5,363 | | | | 442 | | | $ | 10.00 | | | | | | | | | | | Subtotal | | $ | — | | | $ | 14,800 | | | $ | 14,800 | | | $ | 1,553 | | | | | | Revolving line of credit | | | | | | | | | | | | | | | | | | | | | | Yutaka Niihara (2) | | 5% | | | 12/27/2019 | | Due on Demand | | $ | 600 | | | $ | 600 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | Subtotal | | $ | 600 | | | $ | 600 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | Total | | $ | 793 | | | $ | 16,759 | | | $ | 15,077 | | | $ | 1,635 | | | | | |
(1) | Dr. Niihara, the Chairman of the Board and Chief Executive Officer of the Company, is co-owner with his wife Soomi Niihara, a director and the Chief Executive Officer of Hope International Hospice, Inc. |
(4) | Mr. Zen, a director of the Company, is the sole owner of Profit Preview International Group, Ltd. |
See “--2012 Omnibus Incentive Compensation Plan” belowNote 7 for a discussion of equity based awards granted under the Company’s incentive compensation plan.revolving line of credit agreement with Dr. Niihara. | See Notes 6 and 11 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,844,622 shares of the Company common stock, or approximately 8.5% of the common stock outstanding as of December 31, 2020. The Company also purchased a convertible bond of Telcon in the principal amount of KRW 30 billion, or approximately $27.9 million which matures on October 16, 2030 and bears interest at 2.1% a year, payable quarterly.
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Conversion
NOTE 13—DEFINED CONTRIBUTION PLAN The Company has a defined contribution plan (the “401(k) Plan”) covering substantially all of Notes and Cancellationthe Company’s employees. The Emmaus 401(k) Plan is a tax-qualified retirement saving plan, pursuant to which all employees are able to contribute the lesser of Warrants90% of their eligible annual compensation (as defined) or the limit prescribed by the Internal Revenue Service (the “IRS”) to the 401(k) Plan on a before-tax basis. Since January 1, 2020, the Company matches 50% of employee contributions to the Company’s 401(k) Plan based on each participant’s contribution during the plan year, up to 4.0% of each participant’s annual compensation. For the years ended December 31, 2020, the Company made matching contributions to the Company’s 401(k) Plans of $71,000. NOTE 14—SUBSEQUENT EVENTS Subsequent to the year ended December 31, 2020, the Company issued the following securities: | | Dollar Amount | | | Number of Shares Issued | | Common stock | | $ | 500,000 | | | | 324,675 | |
On September 19, 2016,February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Second Omnibus Amendment (the “Second Omnibus Amendment”), withCompany has agreed to sell and issue to the purchasers thereunder in a majorityprivate placement a total of over 80% of the holders of certain convertible notes issued between September 2014 and August 2016up to $17 million in aggregate principal amount of $6,000,000 (the “Notes”), thereby amending: (i)convertible promissory notes of the Notes, (ii) that certain second amended and restated note and warrantcompany for a purchase agreement dated as of December 23, 2015, as thereafter amended and (iii) the warrants (“Warrants”) issued in connection with the Notes. Pursuantprice equal to the Second Omnibus Amendment,principal amount thereof. On April 4, 2021, the Company had completed the transaction and sold approximately $14.5 million of the convertible promissory notes. the net proceeds from the sale of the convertible promissory notes, $6.2 million was used to prepay the outstanding 10% Senior Secured Convertible Debentures as described Note 7 and 8. Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option exercisable at any time after September 1, 2016, to mandatorily convert all Notesof the holder into shares of the Company’s common stock at $5.00an initial conversion price of $1.48 per share. The Company exercised its mandatory conversion right on September 19, 2016 and, on September 21, 2016, (i) converted the entire outstanding $6,000,000 principal balance of the Notes, plus accrued interest of $317,000 thereon, into an aggregate of 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share, and (ii) cancelled all Warrants(for details refer to Note 3. The Convertible Debt and Equity Financing of Form 10-K filed with the SEC on December 22, 2016). Private Placement of Common Stock
On November 30, 2016, the Company sold and issued an aggregate of 160,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to six accredited investors, for which it received gross cash proceeds of $1,000,000. Three of the six accredited investors are affiliates of the Company, and represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust, of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000.
On December 21, 2016, the Company sold and issued an additional 48,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to fourteen accredited investors, for which it received gross cash proceeds of $300,000.
On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.
Stock Dividend Warrants
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.
The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of five years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing.
Underwritten Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering.
On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. Gross proceeds amounted to $2,100.
Stock-Option Plans
2006 Stock Incentive Plan
On August 3, 2006, CNS California adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the Board. A total of 3,339 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of September 30, 2017, 355 options were exercised and there were 1,537 option shares outstanding under the amended 2006 Plan. The outstanding options have exercise prices to purchase shares of Common Stock ranging from $2,400 to $5,760 per share.
2012 Omnibus Incentive Compensation Plan
On March 22, 2012, our Board approved the MYnd Analytics, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 1,667 shares of stock for issuance and on December 10, 2012, the Board approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 1,667 shares to 27,500 shares. On March 26, 2013, the Board further approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 27,500 shares to 75,000 shares. The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.
On April 5, 2016, the Board approved a further amendment of the 2012 Plan to increase the Common Stock authorized for issuance from 75,000 shares to 200,000 shares.
On September 22, 2016 the Board amended the 2012 Plan to: (i) increase the total number of shares of Common Stock available for grant under the 2012 Plan from 200,000 shares to an aggregate of 500,000 shares, (ii) add an “evergreen” provision which, on January 1st of each year through 2022, automatically increases the number of shares subject to the 2012 Plan by the lesser of: (a) a number equal to 10% of the shares of Common Stock authorized under the 2012 Plan as of the preceding December 31st, or (b) an amount, or no amount, as determined by the Board, but in no event may the number of shares of Common Stock authorized under the 2012 Plan exceed 885,781 and (iii) increase the annual individual award limits under the 2012 Plan to 100,000 shares of Common Stock, subject to adjustment in accordance with the 2012 Plan. Per the abovementioned “evergreen” provision, an additional 50,000 shares were automatically allocated for distribution under the 2012 Plan as of January 1, 2017.
At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”), held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”) to increase: (i) the total number of shares of common stock, par value $0.001 per share (“Common Stock”), available for grant under the 2012 Plan (subject to the overall limits described in clause (ii) below) from 550,000 shares to an aggregate of 975,000 shares; (ii) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 885,781 shares to 1,570,248 shares and (iii) the annual individual award limits under the 2012 Plan to 150,000 shares of Common Stock (subject to adjustment in accordance with the 2012 Plan);
On September 22, 2016, the Board granted options to purchase 144,000 shares of Common Stock under the 2012 Plan at an exercise price of $6.00 to certain directors and officers as follows:
our Chairman Dr. Smith was granted options to purchase 40,000 shares of Common Stock which vested in accordance with certain specified performance criteria;
our CEO, George Carpenter, was granted options to purchase 32,000 shares of Common Stock which vested in accordance with certain specified performance criteria;
our former CFO, Paul Buck, was granted options to purchase 32,000 shares of Common Stock which vested in accordance with certain specified performance criteria;
two of our outgoing directors, Mr. McAdoo and Mr. Sassine, were each granted 20,000 fully vested options to purchase Common Stock, which expired on November 1, 2017, and were never exercised.
On September 22, 2016, pursuant to the 2012 Plan, the Board granted shares of Common Stock to Board members as follows: 40,000 shares to our Chairman, Dr. Smith, and 20,000 shares to each of our directors, Messrs. Pappajohn, Follman, Harris and Votruba. Mr. Votruba’s shares are assigned to RSJ. These shares, were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $720,000. Our outgoing directors, Mr. McAdoo and Mr. Sassine were offered stock, however, elected to each receive 20,000 fully vested options to purchase shares of Common Stock.
On September 29, 2016, pursuant to the 2012 Plan, the Board granted 20,000 shares of Common Stock to Thomas Tierney who upon his appointment to the Board. These shares were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $120,000.
On October 2, 2016, the Compensation Committee of the Board granted options to purchase 102,000 shares of the Company’s Common Stock under the 2012 Plan to staff members. These options vest pro-rata over 12 months starting on the date of grant. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $6.00 per share.
On July 27, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $7.25 per share.
On March 31, 2017, the Compensation Committee of the Board granted options to our Chief Financial Officer Mr. D’Ambrosio to purchase 18,000 shares of the Company’s common stock at an exercise price of $5.90 per share, which was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant, with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares which vested upon the Company’s successful listing of its common stock on a national securities exchange.
On May 30, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $6.00 per share, as of September 30, 2017, 2,000 options are fully vested.
On July 14, 2017, the Company entered into a Chairman Services Agreement (the “Agreement”) with Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”). Pursuant to the Agreement, Dr. Smith is also entitled to receive the following equity awards: (a) on the Effective Date, a grant of 25,000 shares of restricted stock (vesting immediately) under the Company’s 2012 Omnibus Incentive Compensation Plan (the “Plan”); (b) on the Effective Date, options to purchase 75,000 shares of Common Stock under the Plan; and (c) on the date of the Company’s 2017 annual meeting of stockholders, an award of options to purchase 50,000 shares of Common Stock (the “2017 Option Award”) was granted. In addition, at each annual meeting of stockholders of the Company thereafter beginning in 2018 during the Term, Dr. Smith will be entitled to receive a grant of 25,000 shares of restricted stock (vesting immediately) under the Plan and options to purchase 75,000 shares of Common Stock under the Plan. Other than the 2017 Option Award, all options granted under the Agreement will vest 1/3 on the date of grant, 1/3 on the six month anniversary of the date of grant and 1/3 on the twelve month anniversary of the date of grant. The 2017 Option Award will vest on December 1, 2018. Pursuant to the Agreement, all options owned by Dr. Smith will remain exercisable for a period of 10 years from the date of grant, even if Dr. Smith is no longer with the Company.
On July 26, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.15 per share.
On July 31, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $3.81 per share.
On August 21, 2017, The award (“Option Grant 2”) was granted, and approved by the board of directors of the Registrant, subject to stockholder approval of an amendment to a provision of the Registrant’s Plan, pursuant to the Agreement. The Registrant’s stockholders approved the amendment to the provision of the Plan granted options to purchase 50,000 shares of Common Stock under the 2012 Plan at an exercise price of $4.16 per share to Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”).
On August 22, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.10 per share.
On September 19, 2017, the Board granted (i) 12,000 shares of restricted common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) 18,000 shares of restricted common stock under the 2012 Plan to to Mr. Harris, who serves as the Audit Committee chairperson. Mr. Votruba’s shares of restricted common stock are assigned to RSJ.
On September 19, 2017, the Board granted (i) options to purchase 12,000 shares of common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) options to purchase 18,000 shares of common stock under the 2012 Plan to Mr. Harris, who serves as the Audit Committee chairperson. All such options have an exercise price of $3.60, which was the closing price on the date of grant of our common stock on the Nasdaq Capital Market. Mr. Votruba’s options are assigned to RSJ.
As of September 30, 2017, options to purchase 552,546 shares of Common Stock were outstanding under the 2012 Plan with exercise prices ranging from $3.60 to $600, with a weighted average exercise price of $6.95. Additionally, 222,750 restricted shares of Common Stock have been issued under the 2012 Plan, leaving 199,704 shares of Common Stock available to be awarded.
Stock-based compensation expenses are generally recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying statements of operations for the years ended September 30, 2017 and 2016 is as follows:
| | | September 30 | | | | | 2017 | | | 2016 | | | | | | Stock-based compensation Expense non-Restricted Shares | | | | Stock-based compensation Expense Restricted Shares | | | | Stock-based compensation Expense non-Restricted Shares | | | | Stock-based compensation Expense Restricted Shares | | | Research | | $ | 10,900 | | | | — | | | $ | 41,600 | | | $ | — | | | Product development | | | 360,600 | | | | — | | | | 47,900 | | | | — | | | Sales and marketing | | | 175,300 | | | | — | | | | 30,200 | | | | — | | | General and administrative | | | 647,200 | | | | 892,000 | | | | 554,950 | | | | 83,750 | | | Total | | $ | 1,194,000 | | | $ | 892,000 | | | $ | 674,650 | | | $ | 83,750 | |
Total unrecognized compensation of September 30, 2017 amounted to $1,066,773.
The following table sets forth the Company’s unrecognized stock-based compensation expense, net of estimated forfeitures, by type of award and the weighted-average period over which that expense is expected to be recognized:
| | | September 30 | | | | | 2017 | | | 2016 | | | Type of Award: | | Unrecognized Expense, | | | Weighted average Recognition Period (in years) | | | Unrecognized Expense, | | | Weighted average Recognition Period (in years) | | | Stock Options | | $ | 860,915 | | | | 3.54 | | | $ | 104,400 | | | | 6.63 | | | Restricted Stock | | $ | 205,858 | | | | 1.00 | | | $ | 1,123,365 | | | | 1.00 | | | Total | | $ | 1,066,773 | | | | 3.05 | | | $ | 1,227,765 | | | | 1.48 | |
A summary of stock option activity is as follows:
| | | Number of
Shares | | | Weighted
Average
Exercise
Price | | | Weighted- Average Remaining Contractual Term (in years) | | | Intrinsic Value | | | Outstanding at September 30, 2015 | | | 71,183 | | | $ | 150.00 | | | | 7.48 | | | $ | 819,137 | | | Granted | | | 152,250 | | | | 5.95 | | | | | | | | | | | Exercised | | | — | | | | — | | | | | | | | | | | Forfeited | | | (313 | ) | | | 3.60 | | | | | | | | | | | Outstanding at September 30, 2016 | | | 223,120 | | | $ | 50.98 | | | | 6.63 | | | $ | 7,425 | | | Granted | | | 334,000 | | | | 4.85 | | | | | | | | | | | Exercised | | | — | | | | — | | | | | | | | | | | Forfeited or expired | | | (3,037 | ) | | | 1,335.06 | | | | | | | | | | | Outstanding at September 30, 2017 | | | 554,083 | | | $ | 16.14 | | | | 3.54 | | | $ | 11,340 | |
There are 249,284 shares of options vested and 304,799 unvested as of September 30, 2017; there are 157,524 shares of options vested and 65,596 unvested as of September 30, 2016; There are 58,613 shares of options vested and 12,570 unvested as of September 30, 2015;
Following is a summary of the status of options outstanding at September 30, 2017:
Exercise
Price ($) | | | Number
of Shares | | | Expiration
Date | | | Weighted Average
Exercise Price ($) | | 2012 Omnibus Incentive Compensation Plan | | | | | | | | | | | | | | | $ | 3.60 | | | | 54,000 | | | | 09/2027 | | | $ | 3.60 | | | | 3.81 | | | | 10,000 | | | | 07/2027 | | | | 3.81 | | | | 4.10 | | | | 5,000 | | | | 08/2027 | | | | 4.10 | | | | 4.15 | | | | 5,000 | | | | 07/2027 | | | | 4.15 | | | | 4.16 | | | | 50,000 | | | | 08/2027 | | | | 4.16 | | | | 4.33 | | | | 75,000 | | | | 07/2027 | | | | 4.33 | | | | 5.10 | | | | 8,250 | | | | 04/2026 | | | | 5.10 | | | | 5.90 | | | | 18,000 | | | | 03/2027 | | | | 5.90 | | | | 6.00 | | | | 256,000 | | | | 09/2026 | | | | 6.00 | | | | 7.25 | | | | 5,000 | | | | 02/2027 | | | | 7.25 | | | | 9.44 | | | | 43,978 | | | | 12/2022 – 01/2023 | | | | 9.44 | | | | 11.00 | | | | 8,750 | | | | 08/2025 | | | | 11.00 | | | | 50.00 | | | | 11,227 | | | | 03/2023 – 01/2025 | | | | 50.00 | | | | 52.00 | | | | 2,125 | | | | 07/2024 | | | | 52.00 | | | $ | 600.00 | | | | 216 | | | | 03/2022 | | | | 600.00 | | | | Sub-Total | | | | 552,546 | | | | Weighted Average | | | $ | 6.95 | | | 2006 Stock Incentive Plan | | | | | | | | | | | | | | | $ | 2,400.00 | | | | 144 | | | | 03/2019 – 07/2020 | | | $ | 2,400.00 | | | | 2,820.00 | | | | 51 | | | | 03/2021 | | | | 2,820.00 | | | | 3,060.00 | | | | 7 | | | | 09/2018 | | | | 3,060.00 | | | | 3,300.00 | | | | 1,250 | | | | 03/2020 | | | | 3,300.00 | | | | 4,800.00 | | | | 24 | | | | 12/2017 | | | | 4,800.00 | | | $ | 5,760.00 | | | | 61 | | | | 04/2018 | | | | 5,760.00 | | | | Sub-Total | | | | 1,537 | | | | Weighted Average | | | $ | 3,319.71 | | | | Total | | | | 554,083 | | | | Weighted Average | | | $ | 16.14 | |
Following is a summary of the status of restricted shares outstanding at September 30, 2017:
| | | | Number of
Shares | | | Weighted
Average
Grant
Date Fair
Value | | | Amount | | | September 30, 2015 | | | | 3,750 | | | $ | 11.00 | | | $ | 41,250 | | | Granted | | | | 140,000 | | | | 6.00 | | | | 840,000 | | | Forfeited | | | | — | | | | — | | | | — | | | Outstanding at September 30, 2016 | | | | 143,750 | | | $ | 6.13 | | | $ | 881,250 | | | Granted | | | | 79,000 | | | | 3.83 | | | | 302,650 | | | Forfeited | | | | — | | | | — | | | | | | | Outstanding at September 30, 2017 | | | | 222,750 | | | $ | 5.31 | | | $ | 1,183,900 | |
The range of Black-Scholes option-pricing model assumption inputs for all the valuation dates are in the table below:
| | | September 30, 2016 through
to September 30, 2017 | | | | | Low | | | High | | | Annual dividend yield | | | — | % | | | — | % | | Expected life (years) | | | 5 | | | | 5 | | | Risk-free interest rate | | | 1.14 | % | | | 1.93 | % | | Expected volatility | | | 196.77 | % | | | 234.54 | % |
| | | September 30, 2015 through
to September 30, 2016 | | | | | Low | | | High | | | Annual dividend yield | | | — | % | | | — | % | | Expected life (years) | | | 2.5 | | | | 5 | | | Risk-free interest rate | | | 0.56 | % | | | 1.81 | % | | Expected volatility | | | 191.05 | % | | | 273.10 | % |
Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Expected Life. The Company elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term.
Expected Volatility. The expected volatility rate used to value stock option grants is based on the historical volatilities of the Company’s common stock.
Risk-free Interest Rate. The risk-free interest rate assumption was based on U.S. Treasury Bill instruments that had terms consistent with the expected term of the Company’s stock option grants.
Warrants to Purchase Common Stock
The warrant activity for the year ending September 30, 2017 and 2016, is described as follows:
| | | | Number of
Shares | | | Weighted
Average
Exercise
Price | | | Outstanding at September 30, 2015 | | | | 3,912 | | | $ | 106.00 | | | Granted | | | | 604,000 | | | | 10.00 | | | Exercised | | | | — | | | | — | | | Expired | | | | (752 | ) | | | 200.00 | | | Forfeited | | | | (600,000 | ) | | | 10.00 | | | Outstanding at September 30, 2016 | | | | 7,160 | | | $ | 50.41 | | | Granted | | | | 4,561,861 | | | | 5.27 | | | Exercised | | | | — | | | | — | | | Expired | | | | (1,349 | ) | | | 185.61 | | | Forfeited | | | | — | | | | — | | | Outstanding at September 30, 2017 | | | | 4,567,672 | | | $ | 5.30 | |
Following is a summary of the status of warrants outstanding at September 30, 2017:
Exercise
Price | | | Number
of Shares | | | | | Expiration
Date | | | Weighted Average
Exercise Price | | | | 5.25 | | | | 2,539,061 | | (1 | ) | | | 07/2022 | | | | 5.25 | | | | 5.25 | | | | 1,675,000 | | (2 | ) | | | 07/2022 | | | | 5.25 | | | $ | 5.25 | | | | 213,800 | | (3 | ) | | | 07/2022 | | | $ | 5.25 | | | | 6.04 | | | | 134,000 | | (4 | ) | | | 07/2022 | | | | 6.04 | | | | 9.44 | | | | 191 | | | | | | 03/2018 | | | | 9.44 | | | | 10.00 | | | | 4,000 | | (5 | ) | | | 06/2021 | | | | 10.00 | | | | 55.00 | | | | 1,620 | | | | | | 06/2018 – 03/2019 | | | | 55.00 | | | | Total | | | | 4,567,672 | | | | | | | | | $ | 5.30 | |
| (1) | On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter. |
| (2) | On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering. |
| (3) | As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering. |
| (4) | On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. |
| (5) | On June 10, 2016, we issued two warrants, pursuant to a Finder’s Fee Agreement with Maxim Group LLC, to purchase in aggregate 4,000 shares of Common Stock following the introduction of an accredited investor who entered into a Second Amended Note and Warrant Purchase Agreement in the principal amount of $200,000. Each warrant is exercisable, in whole or in part, during the period beginning on the date of its issuance, and ending on the earlier of (i) December 31, 2020 and (ii) the date that is forty-five (45) days following the date on which the daily closing price of shares of the Company’s Common Stock quoted on the OTCQB Venture Marketplace (or other bulletin board or exchange on which the Company’s Common Stock is traded or listed) exceeds $50.00 for at least ten (10) consecutive trading days. In connection therewith, the Company will promptly notify the Note Warrant holders in the event that the daily closing price of the Company’s shares of Common Stock exceeds $50.00 for at least ten (10) consecutive trading days. Pursuant to the Finder’s Fee Agreement, Maxim was also paid $20,000 cash for their efforts. |
At September 30, 2017, there were warrants outstanding to purchase 4,567,672 shares of the Company’s Common Stock. The exercise prices of the outstanding warrants range from $5.25 to $55 with a weighted average exercise price of $5.30. The warrants expire at various times starting 2018 through 2022.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to 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 the 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 that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company adopted the provisions of ASC 740 and have analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified the U.S. Federal and California as our “major” tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2012 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2011 through 2015 California Franchise Tax Returns. However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
The following is a reconciliation of the provision (benefit) for income taxes to the amount compiled by applying the statutory federal income tax rate to profit (loss) before income taxes is as follows for each of the fiscal years ended September 30, 2017.
| | | 2017 | | | 2016 | | | Federal income tax (benefit) at statutory rates | | | (34.0 | )% | | | (34.0 | )% | | Stock-based compensation | | | 3.46 | % | | | 1.35 | % | | Extinguishment of debt | | | — | | | | — | | | Change in valuation allowance | | | 29.29 | % | | | 79.92 | % | | True-ups and other adjustments | | | 1.27 | % | | | (47.26 | )% | | State tax benefit | | | 0.02 | % | | | 0.02 | % | | Total | | | 0.04 | % | | | 0.03 | % | | | | | | | | | | |
Temporary differences between the financial statement carrying amounts and bases of assets and liabilities that give rise to significant portions of deferred taxes relate to the following at September 30, 2017 and 2016:
| | | 2017 | | | 2016 | | | Deferred income tax assets: | | | | | | | | | | Net operating loss carryforward | | $ | 19,024,793 | | | $ | 17,492,350 | | | Deferred interest, consulting and compensation liabilities | | | 3,850,567 | | | | 3,974,100 | | | Deferred income tax assets – other | | | 118,793 | | | | 5,486 | | | | | | 22,994,153 | | | | 21,471,936 | | | Deferred income tax liabilities—other | | | — | | | | — | | | Deferred income tax asset—net before valuation allowance | | | 22,994,153 | | | | 21,471,936 | | | Valuation allowance | | | (22,994,153 | ) | | | (21,471,936 | ) | | Deferred income tax asset—net | | $ | — | | | $ | — | |
Current and non-current deferred taxes have been recorded on a net basis in the accompanying balance sheet. As of September 30, 2017, the Company had Federal net operating loss carryforwards of approximately $51.4 million and State net operating loss carryforwards of approximately $39.8 million. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2017 respectively. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future.
The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.
| 7. | RELATED PARTY TRANSACTIONS |
Notes: Conversion of Notes
Between September 22, 2014, and August 16, 2016, the Company raised an aggregate principal amount of $6.0 million in Notes, which along with $317,000 of interest thereon, were converted on September 21, 2016 into 1,263,406 shares of Common Stock at $5.00 per share. Of the $6.0 million of Notes sold by the Company, $5.3 million were purchased by directors, an officer and greater than 5% shareholders of the Company and converted into shares as follows.
| | | Principal Investment in Convertible Notes | | Interest Earned At conversion | | Shares Issued on conversion | | RSJ | (1) | $ | 2,100,000 | | | 122,200 | | | 444,454 | | | John Pappajohn | (2) | | 1,600,000 | | | 52,500 | | | 290,498 | | | Tierney Family Trust | (3) | | 640,000 | | | 46,600 | | | 137,328 | | | Follman Family Trust | (4) | | 550,000 | | | 20,400 | | | 114,074 | | | Robin Smith MD | (5) | | 100,000 | | | 3,900 | | | 20,776 | | | Geoffrey Harris | (6) | | 10,000 | | | 300 | | | 2,058 | | | George Carpenter | (7) | | 100,000 | | | 1,300 | | | 20,254 | | | Oman Ventures | (8) | | 200,000 | | | 20,400 | | | 44,089 | | | | | $ | 5,300,000 | | | 267,600 | | | 1,073,531 | |
| (1) | RSJ is a greater than 10% shareholder. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, joined our Board on July 30, 2015. |
| (2) | John Pappajohn is a member of the Board. He purchased $1,600,000 of Notes of which $200,000 were assigned to four accredited investors on September 6, 2015. Approximately $10,400 of the total interest was attributable to such transferred Notes, resulting in an aggregate of 42,084 shares being issued upon the conversion of such transferred Notes. |
| (3) | Thomas Tierney is a trustee of the Tierney Family Trust. Mr. Tierney was a member of our Board between September 2016 and July 2017, and prior to that, between February 2013 and May 2015. The Tierney Family Trust is a greater than 5% shareholder of the Company. |
| (4) | Robert Follman is a trustee of the Follman Family Trust and was a member of the Board through July 2017. |
| (5) | Dr. Robin Smith is the Chairman of the Board. |
| (6) | Geoffrey Harris is a member of the Board and Chairman of the Audit Committee. |
| (7) | George Carpenter is the CEO of the Company. |
| (8) | Mark & Jill Oman are the beneficial owners of Oman Ventures and were greater than 5% shareholders of the Company. |
Cancellation of Warrants
In connection with the issuance of Notes, the Company also issued Warrants to the purchasers of the Notes, including the affiliates referenced above under “—Notes; Conversion of Notes “. Upon conversion of the Notes on September 21, 2016, the Company also cancelled all Warrants issued in connection with such Notes. SeeNote 3, Stockholders Equity—Common and Preferred Stock— Conversion of Notes and Cancellation of Warrants”, for additional detail.
Transactions with RSJ, Greater than 5% Stockholder
RSJ participated in the Convertible Debt Financing. Please see “—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
On March 20, 2017, the Company entered into a subscription agreement (the “Subscription Agreement”) pursuant to which it sold and issued an aggregate of 160,000 shares of Common Stock, at a price of $6.25 per share, in a private placement to RSJ, for which the Company received gross cash proceeds of $1,000,000. RSJ is a greater than 10% shareholder. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, joined our Board on July 30, 2015. Pursuant to the Subscription Agreement, the private placement is not subject to a minimum or maximum amount, and the Company cannot provide any assurances that it will receive any additional amount of proceeds in the private placement. The subscription also provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
Transactions with John Pappajohn, Director
Mr. Pappajohn participated in the Convertible Debt Financing. Please see “—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
On November 30, 2016, December 29, 2016, February 10, 2017 and March 21, 2017 the Company sold and issued in aggregate 120,000 shares of its Common Stock, at a per share price of $6.25, in private placements to Mr. Pappajohn, who purchased common stock for $200,000, $100,000, $200,000 and $250,000 respectively resulting in gross cash proceeds to the Company of $750,000.
Transactions with George Carpenter, President and Chief Executive Officer
Mr. Carpenter participated in the Convertible Debt Financing. Please see “—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
On September 25, 2013, the Board approved a consulting agreement effective May 1, 2013, for marketing services provided by Decision Calculus Associates (“DCA”), an entity operated by Mr. Carpenter’s spouse, Jill Carpenter. Effective August 2015, DCA was engaged at a fee of $10,000 per month, from August 2015 through February 2017. Effective March 1, 2017, DCA’s contract was renewed at $3,000 a month. For the fiscal years ended September 30, 2017 and 2016 DCA was paid $71,000 and $120,000 respectively.
Transactions with Tierney Family Trust, Greater than 5% Stockholder
The Tierney Family Trust participated in the Convertible Debt Financing. Please see “—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
Mr. Tierney resigned from the Board as a Director in July 2017. Mr. Tierney is a trustee of the Thomas T. and Elizabeth C. Tierney Family Trust (the “Tierney Family Trust”), which is a greater than 5% stockholder.
On November 30, 2016, the Company sold and issued 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to the Tierney Family Trust, resulting in gross cash proceeds of $200,000.
Transactions with Robin L. Smith MD, Chairman of the Board
Dr. Smith participated in the Convertible Debt Financing. Please see “—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
On November 30, 2016, the Company sold and issued a 16,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to Dr. Smith resulting in gross cash proceeds of $100,000.
Transactions with Geoffrey E. Harris, Director
Mr. Harris participated in the Convertible Debt Financing. Please see“—Issuance and Mandatory Conversion of Senior Convertible Notes” and “—Cancellation of Warrants” above for more information.
On March 3, 2017, the Company sold and issued a 5,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to Mr. Harris resulting in gross cash proceeds of $31,250.
Hooper Holmes Agreement
In 2016, we entered into an agreement with Hooper Holmes Inc, in which Dr. Smith, our Chairman of the Board, became an advisory member of its board as of March 16, 2017, and in which Mr. Pappajohn, our director, has participated in equity raises to become the beneficial owner of a greater than 10% interest. Hooper Holmes performs EEG’s nationwide to patients who wish to obtain a PEER report. The Company paid $20,300 and $0 for these services during the fiscal years September 30, 2017 and 2016 respectively.
Investment in Arcadian
On April 1, 2017, the Company entered into a Master Purchase and Option Agreement with Arcadian Telepsychiatry LLC (“Arcadian”), a Pennsylvania based Limited Liability Company and Mr. Robert Plotkin. Consideration paid for a 10% equity interest in Arcadian was in the form of (i) a $100,000 capital contribution to Arcadian and (ii) the issuance of 1,000 shares of Common Stock to Mr. Plotkin. On June 19, 2017, the Company made an additional $20,000 capital contribution to Arcadian. From July 6, 2017 through September 30, 2017 the Company made an additional $70,000 capital contribution to Arcadian. As of September 30, 2017 the Company’s cumulative equity interest in Arcadian is 19%.
Loan to Mr. Plotkin
As of September 30, 2017, Mr. Plotkin, President of Arcadian Telepsychiatry, had a personal loan with the Company with an outstanding balance of $297,000. Upon the subsequent acquisition of Arcadian on November 13, 2017, the loan was forgiven in its entirety.
In accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per Share”), basic net income (loss) per share is computed by dividing the net income (loss) to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the fiscal years ended September 30, 2017 and 2016, the Company has excluded all common equivalent shares from the calculation of diluted net loss per share as such securities are anti-dilutive.
A summary of the net income (loss) and shares used to compute net income (loss) per share for the fiscal years ended September 30, 2017 and 2016 is as follows:
| | | 2017 | | | 2016 | | | Net Loss for computation of basic and diluted net loss per share: | | | | | | | | | | Net loss | | $ | (7,112,800 | ) | | $ | (5,940,900 | ) | | Basic and Diluted net loss per share: | | | | | | | | | | Basic net loss per share | | $ | (2.52 | ) | | $ | (9.26 | ) | | | | | | | | | | | | Basic and Diluted weighted average shares outstanding | | | 2,817,415 | | | | 641,844 | | | | | | | | | | | | | Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share: | | | | | | | | | | Convertible debt | | | — | | | | 1,441,344 | | | Warrants | | | 957,198 | | | | 3,484 | | | Restricted Common Stock | | | 4,500 | | | | — | | | Options | | | 359,704 | | | | 74,588 | |
| 9. | COMMITMENTS AND CONTINGENT LIABILITIES |
Litigation
The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.
Convertible Debt and Equity Financing
On September 19, 2016, the Company entered into a Second Omnibus Amendment, with a majority of over 80% of the noteholders, thereby amending: (i) the Notes, (ii) the Second Amended Note and Warrant Agreement, as amended and (iii) the Warrants. Pursuant to the Second Omnibus Amendment, the Company had the option, exercisable at any time after September 1, 2016, to mandatorily convert all Notes into shares of the Company’s common stock at $5.00 per share and cancel all Warrants. The Company exercised the its Mandatory Conversion on September 19, 2016 and, on September 21, 2016, converted the entire outstanding principal balance of $6,000,000, plus accrued interest of $317,000 on all of the Notes into 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share and (ii) cancelled all Warrants. The $50,000 Note issued to Brandt Ventures and interest on the Note was converted into 10,047 shares of Common Stock. (refer to Note 3. Convertible Debt and Equity Financing).
Lease Commitments
The Company’s policy is to account for the lease expense on the straight–line method.
The Company’s Headquarters and Neurometric Services business is located at 26522 La Alameda, Suite 290, Mission Viejo, CA 92691, which is 2,290 sqft in size. The lease period commenced on February 1, 2016 and terminates on January 31, 2018. The rent for the first four months is $4,809 per month, which is abated by 50%; for months 5 through 12 the rent increases to 4,580 per month and for the final 12 months the rent will increase by 5% to 4,809 per month.
On February 2, 2016, we signed a 23.5 months lease for 1,092 sqft of office space to house our EEG testing center. The premises are located at 25201 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on February 15, 2016 and terminates on January 31, 2018. The rent for first half month of February was prorated at $928; for the next 11 months the rent is $1,856 per month, and for the remaining twelve months the rent will increase by 3% to $1,911 per month.
On August 1, 2017, we signed a four month lease for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 350, New York, New York 10170. The lease period commenced on August 1, 2017 and terminates on December 31, 2017. The rent for will be for $4,500 per month, with first and last monthly lease fee of $9,000 on effective date.
On September 14, 2017, we signed a three year lease for 1,180 square feet. The premises are located at 8000 Westpark Drive, Suite 125, Tysons, Virginia 22102. The lease period commenced on September 15, 2017 and terminates on September 30, 2020. The rent for September 15, 2017 through September 30, 2018 prorated at $2,508, the next 12 months the rent is prorated at $2,576; and for the remaining twelve months the rent prorated at $2,647, the landlord will abate one hundred percent of the base rent for the first two full calendar months of the term October and November 2017.
The Company incurred rent expense from operations of $84,406 and 64,900 for the fiscal years ended September 30, 2017 and 2016, respectively.
| | | Payments due by period | | | Contractual Obligations | | Total | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Operating Lease Obligations | | $ | 128,100 | | | $ | 65,400 | | | $ | 30,900 | | | | 31,800 | | | | — | | | Total | | $ | 128,100 | | | $ | 65,400 | | | $ | 30,900 | | | | 31,800 | | | | — | |
For the fiscal year ended September 30, 2017, four customers accounted for 50% of Neurometric Services revenue and three customers accounted for 72% of accounts receivable at September 30, 2017.
For the fiscal year ended September 30, 2016, four customers accounted for 55% of Neurometric Services revenue and three customers accounted for 69% of accounts receivable at September 30, 2016.
Awards of Restricted Stock
On November 13, 2017 George C. Carpenter IV, President and Chief Executive Officer of the Company; Donald D’Ambrosio, Chief Financial Officer and the Chairman Robin L. Smith were each granted 7,500 shares of restricted common stock as satisfaction of certain performance criteria.
Equity Purchase Agreement
On November 13, 2017, the Company entered into an equity purchase agreement (the “Arcadian Agreement”) with Arcadian Telepsychiatry Services LLC (“Arcadian”) and Mr. Robert Plotkin, pursuant to which the Company acquired all of the issued and outstanding membership interests (the “Equity Interests”) of Arcadian from Mr. Plotkin. Consideration for the Equity Interests consisted of the assumption of debt and cancellation of Arcadian’s warrants given to a third party of approximately $960,000 and the forgiveness of the note due from Mr. Plotkin of approximately $297,000, for a total purchase price of $1,277,000.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management conducted an evaluation, with the participation of our President and Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report on Form 10-K. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that as a result of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of September 30, 2017.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for the preparation of our financial statements and related information. Management uses its best judgment to ensure that the financial statements present fairly, in all material respects, our financial position and results of operations in conformity with generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Exchange Act. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Under the supervision of management, including our President and Chief Executive Officer and our Chief Financial Officer, following the end of the quarter ended September 30, 2017, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework). Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of September 30, 2017 for the reasons discussed below.
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness in its assessment of the effectiveness of internal control over financial reporting as of September 30, 2017: The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise that is commensurate with our financial reporting requirements. This material weakness resulted in, among other things, our failure to include all necessary disclosures in the draft financial statements provided to our outside auditing firm. The Company recognizes that as it has engaged in significant expansion during 2017, it requires additional personnel with knowledge and experience to assist in the preparation, review and completion of its financial statements and other reports required under the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company intends to hire additional employees with experience preparing reports for filing with the SEC and will continue to work with outside experts who can assist in the review and analysis of its financial reports before such drafts are delivered to its auditors for review and who can also assist in the evaluation and remediation of its internal controls over financial reporting. The Company does not believe that the material weakness has resulted in any material inaccuracies in the financial statements included in its Annual Report on Form 10-K for the year ended September 30, 2017 or any prior periods.
Our management, including our President and Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Commission that permit us to provide only management’s report in this annual report on Form 10-K.
Changes in Internal Controls over Financial Reporting
Other than the material weakness in our internal control over financial reporting described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth quarter of the fiscal year ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age and position of each of our directors and executive officers as of December 29, 2017.
Name | | Age | | Position | Robin L. Smith, M.D. | | 53 | | Chairman of the Board | Geoffrey E. Harris | | 55 | | Director | John Pappajohn | | 89 | | Director | Peter Unanue | | 50 | | Director | Michal Votruba | | 52 | | Director | George C. Carpenter IV | | 59 | | President and Chief Executive Officer | Donald D’Ambrosio | | 54 | | Chief Financial Officer |
Directors
Robin L. Smith M.D., Chairman of the Board of Directors
Robin L. Smith, M.D. joined our Board of Directors as its Chairman on August 20, 2015. Dr. Robin L. Smith is a global thought leader in the regenerative medicine industry, one of the fastest growing segments of modern-day medicine. She received her M.D. from Yale University and an M.B.A. from the Wharton School of Business. During her tenure as CEO of the Caladrius Biosciences, Inc. (formerly NeoStem Inc.) (NASDAQ: CLBS), which she led from 2006 to 2015, she pioneered the company’s innovative business model, combining proprietary cell therapy development with a successful contract development and manufacturing organization. Dr. Smith raised over $200 million, completing six acquisitions and one divestiture while the company won an array of industry awards and business recognition including a #1 ranking in the Tri-State region (for two years in a row), and #11 nationally, on Deloitte’s Technology Fast 500™, and Frost & Sullivan’s North American Cell Therapeutics Technology Innovation Leadership Award.
In 2007, Dr. Smith founded The Stem for Life Foundation (SFLF), a nonpartisan, 501(c)(3) educational organization devoted to fostering global awareness of the potential for regenerative medicine to treat and cure a range of deadly diseases and debilitating medical conditions, as opposed to merely treating their symptoms. In 2010, in order to bring the charity’s mission to a global audience, Dr. Smith forged a historic, first-of-its-kind partnership with The Vatican. As part of this relationship, The Vatican and SFLF collaborate to create high-profile initiatives that help catalyze interest and development of cellular therapies that could ultimately reduce human suffering on a global scale. Dr. Smith has served as Chairman of the Board and President of the Stem for life Foundation since its inception and is expanding its mission further under the Cura brand (to bring resources to fund cell therapy clinical trials and assist in accelerating enrollment and completion).
Dr. Smith was appointed as Clinical Associate Professor, Department of Medicine at the Rutgers, New Jersey Medical School in 2017. Shemaintains a regular column on these topics forThe Huffington Post. She is a winner of the 2014 Brava! Award, which recognizes top women business leaders in the Greater New York area. She was also a finalist for the 2014 EY Entrepreneur of The Year award for the New York area, recognizing entrepreneurs who demonstrate excellence and success in the areas of innovation, financial performance and personal commitment to their businesses and communities.
In addition, Dr. Smith has extensive experience serving in executive and board level capacities for various medical enterprises and healthcare-based entities. She currently serves on the Board of Directors of Rockwell Medical (NASDAQ: RMTI),Prolung DX, the advisory board of Hooper Holmes (OTCQX: HPHW) and is co-chairman of the Life Sci advisory board on gender diversity. She is Vice President and member of the Board of Directors of the Science and Faith STOQ Foundation in Rome and serves on Sanford Health’s International Board and the Board of Overseers at the NYU Langone Medical Center in NYC. She previously served on the Board of Trustees of the NYU Langone Medical Center and, is a past Chairrnan of the Board of Directors for the New York University Hospital for Joint Diseases and was on the board of directors of Signal Genetics (NASDAQ: SGNL) and BioXcel Corporation.
As a business leader, entrepreneur, doctor and philanthropist, Dr. Smith is uniquely positioned to lead the global healthcare industry into the cellular future, where the cells of our bodies will stand as the foundation for a wide array of cures.
Geoffrey E. Harris, Director
Geoffrey E. Harris joined our Board of Directors on July 30, 2015. Mr. Harris is a portfolio manager and managing partner at c7 Advisors, a money management and healthcare advisory firm focused on small-to-middle market healthcare companies. Prior to his position with c7 Advisors, Mr. Harris served as Managing Director and co-head of the Cantor Fitzgerald Healthcare Investment Banking Group from 2011 to 2014, and was a Healthcare Investment Banker with Gleacher & Company from 2009 to 2011. Mr. Harris has over thirty years combined experience as a healthcare analyst and portfolio manager for healthcare companies. Mr. Harris graduated from MIT’s Sloan School of Management with an MS in Finance Management. Mr. Harris serves as a director on the boards of Cancer Genetics, Inc. (NASDAQ: CGIX) a molecular diagnostics company, and two privately held companies, Connect RN, a healthcare workforce management company, and PointRight, a healthcare data analytics company. Mr. Harris also serves on the Audit Committee of Cancer Genetics, Inc. Mr. Harris was selected to serve on our Board of Directors for his significant healthcare, finance and transactional experience. Furthermore, his financial, analytical and audit committee experience make him well suited to Chair our Audit Committee.
John Pappajohn, Director
John Pappajohn joined our Board of Directors on August 26, 2009. Since 1969, Mr. Pappajohn has been the President and sole owner of Pappajohn Capital Resources, a venture capital firm, and President and sole owner of Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines, Iowa. Mr. Pappajohn currently serves as Chairman of the Board of Cancer Genetics, Inc. (NASDAQ: CGIX), a molecular diagnostics company. Mr. Pappajohn was chosen to serve as a director of our company because of his unparalleled experience serving as a director of more than 40 public companies and the substantial insight he has gained into the life sciences and healthcare industries by actively investing in the industries for more than 40 years, and by founding and supporting several public healthcare companies.
Peter Unanue, Director
Peter Unanue joined our Board of Directors on September 19, 2017. Mr. Unanue has over 25 years of senior business experience, leveraging data and applied sciences to enhance business operations. Mr. Unanue currently serves as Executive Vice President of Goya Foods, Inc., one of the leading food companies in the U.S. with over a billion dollars in annual sales. While at Goya, Mr. Unanue oversaw the nationwide expansion of the company’s facilities, managed distribution and logistics, consolidated redundant operations resulting in significant cost savings, and led the implementation of new software and technology to streamline and enhance operations and profitability. Mr. Unanue has held key operational and analytic roles with Merck Medco Health Solutions, Baxter Healthcare and Growmark, Inc. He currently serves on the boards of the Meadowlands Regional Chamber of Commerce, the Meadowlands Regional “2040 Foundation,” and is a Council of Regents Member at Felician University and St Thomas Aquinas College. He was also an employer trustee for a local UFCW Health and Welfare Fund. He is the recipient of numerous awards and is a regular speaker on various topics including supply chain management. Mr. Unanue holds a Master of Science in operations research from George Washington University and a Bachelor of Science from St. Thomas Aquinas College. Mr. Unanue was selected to serve on the Board of Directors because of his years in operations and analytics as well as his previous board experience for other companies.
Michal Votruba, Director
Michal Votruba joined our Board of Directors on July 30, 2015. Since 2013, Mr. Votruba has been the Director of the Gradus/RSJ Life Sciences Fund, the largest dedicated fund in Central Europe with a portfolio of companies in Europe and the United States. Since 2010, he has served as a member of the board of PrimeCell Therapeutics a.s. as the Director of Global Business Development overseeing the expansion of the largest regenerative medicine company operating in Central Europe. In 2009, the Czech Academy of Sciences solicited Mr. Votruba’s expertise for the first successful privatization project of the Institute of Experimental Medicine in Prague: the newly created protocol established a precedent for future privatization projects in the Czech Republic. Mr. Votruba graduated as a Clinical Psychiatrist from the Medical Faculty of Charles University in Prague in 1989. Shortly thereafter, he emigrated from Czechoslovakia and developed his professional career in Canada and the USA. Since 2005, Mr. Votruba combined his theoretical and clinical experience in the field of Competitive Intelligence serving the global pharmaceutical industry for eight years as an industry analyst advising senior leaders of companies including Amgen, Novartis, Eli Lilly, Allergan, EMD, Serono and Sanofi.Mr. Votruba brings valuable expertise to the Board of Directors as a clinical psychiatrist and broad experience in the international marketing of innovative medical technologies.
Executive Officers
George C. Carpenter IV, President and Chief Executive Officer
George C. Carpenter IV has been serving as our Chief Executive Officer since April 10, 2009, served as our President from October 1, 2007 until April 10, 2009 and was reappointed our President on April 29, 2011. As President until 2009, Mr. Carpenter’s primary responsibility involved developing strategy and commercializing our PEER technology. Mr. Carpenter also served as a director from April 2009 until November 2012. From 2002 until he joined MYnd Analytics in October 2007, Mr. Carpenter was the President and CEO of WorkWell Systems, Inc., a national physical medicine firm that manages occupational health programs for Fortune 500 employers. Prior to his position at WorkWell Systems, Mr. Carpenter founded and served as Chairman and CEO of Core, Inc., a company focused on integrated disability management and work-force analytics. He served in those positions from 1990 until Core was acquired by Assurant, Inc. in 2001. From 1984 to 1990, Mr. Carpenter was a Vice President of Operations with Baxter Healthcare, served as a Director of Business Development and as a strategic partner for Baxter’s alternate site businesses. Mr. Carpenter began his career at Inland Steel where he served as a Senior Systems Consultant in manufacturing process control. Mr. Carpenter holds an M.B.A. in Finance from the University of Chicago and a B.A. with Distinction in International Policy & Law from Dartmouth College.
Donald D’Ambrosio, Chief Financial Officer
Donald E. D’Ambrosio was appointed to the position of Chief Financial Officer on March 31, 2017. Prior to joining MYnd Analytics, from 1996 to 2007 Mr. D’Ambrosio served as Senior Vice President, Controller and, ultimately, Chief Financial Officer of BNC Mortgage, Inc. (NASDAQ: BNCM). As BNC’s CFO Mr. D’Ambrosio played a key role in the company’s IPO, raising $35 million, and its listing on the NASDAQ on March 10, 1998 which was underwritten by CIBC Oppenheimer and Piper Jaffray, Inc. Subsequently, Mr. D’Ambrosio was also intimately involved in taking the company private through a $52 million management acquisition by Lehman Brothers. On September 15, 2008, Lehman Brothers Holdings Inc. (“LBHI”) and 22 of its affiliates (collectively, the “Debtors”) filed petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under chapter 11 of the United States Bankruptcy Code. The Debtors’ chapter 11 plan (the “Plan”) was confirmed by the Bankruptcy Court on December 6, 2011 and became effective on March 6, 2012. The Debtors have commenced making distributions to holders of allowed claims and will continue to make distributions in accordance with the Plan until the liquidation of their assets is complete. Mr. D’Ambrosio played a key role in BNC Mortgage Inc’s acquisition of certain assets and liabilities and the origination platform of America’s Lender, Inc. From 2007 through to February 2017 Mr. D’Ambrosio founded and built Oxygen Funding, Inc., an asset-based lending company that specialized in providing working capital to small businesses, where he served as its President, CEO and CFO. Oxygen Funding grew to fund over $100 million of client receivables. Mr. D’Ambrosio was a featured speaker for the Small Business Association and a writer for the Commercial Factor magazine. Mr. D’Ambrosio holds a Bachelor of Business Administration degree with an emphasis in accounting from Temple University. Mr. D’Ambrosio joins the Company with his skill and experience as a Chief Financial Officer along with his IPO and NASDAQ up-listing experience.
Board Composition, Committees and Director Independence
Our Board of Directors currently consists of five members: Robin L. Smith, M.D., Geoffrey E. Harris, John Pappajohn, Michal Votruba and Peter Unanue. All members, other than Mr. Unanue, were elected at our annual meeting of stockholders held on August 21, 2017. Mr. Unanue was appointed to the Board on September 19, 2017. All members will serve until our next annual meeting or until his or her successor is duly elected and qualified.
Our board has determined that all of our board members are independent directors in accordance with the listing requirements of the NASDAQ Capital Market, except for Dr. Robin L. Smith, M.D., our Chairman of the Board. The NASDAQ independence definition includes a series of objective tests, including that the board member is not, and has not been for at least three years, one of our employees and that neither the board member nor any of his family members has engaged in various types of business dealings with us. In addition, as required by NASDAQ rules, our board has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a board member. In making these determinations, our board reviewed and discussed information provided by the members of the board and us with regard to each board member’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of the members of our board or our executive officers. In addition, all members of the audit committee meet the independence requirements contemplated by Rule 10A-3 under the Exchange Act. In addition to our current Board members, former Board members Robert J. Follman and Thomas T. Tierney were both independent directors in accordance with the listing requirements of the NASDAQ Capital Market during the fiscal year ended September 30, 2017.
Board Committees
Our Board of Directors established an audit committee and a compensation committee at a Board meeting held on March 3, 2010, and a governance and nominations committee at a Board meeting held on March 22, 2012. Each committee has its own charter, which is available on our website at www.myndanalytics.com. Information contained on our website is not incorporated herein by reference. Each of the Board committees has the composition and responsibilities described below.
Audit Committee
We have a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act of 1934, as amended (the “Exchange Act”). Geoffrey Harris (Chair), John Pappajohn, and Michal Votruba are the members of the audit committee. The audit committee is composed of members who are “independent” within the meaning of Rule 10A-3 under the Exchange Act and the NASDAQ Stock Market Rules. Our Board has determined that Mr. Harris serves as the “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K. In his roles as Audit Committee Chair of another public company, as Managing Partner of a money management and healthcare advisory firm, as a senior investment banker, portfolio manager and health care research analyst, Mr. Harris has gained over 33 years of experience analyzing the financial statements of public companies, assessing the use of accounting methods employed by those companies and the financial acumen of their management.
The audit committee oversees our accounting and financial reporting processes and oversees the audit of our financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this committee include:
| ● | selecting and recommending to our Board of Directors the appointment of an independent registered public accounting firm and overseeing the engagement of such firm; |
| ● | approving the fees to be paid to the independent registered public accounting firm; |
| ● | helping to ensure the independence of our independent registered public accounting firm; |
| ● | overseeing the integrity of our financial statements; |
| ● | preparing an audit committee report as required by the SEC to be included in our annual proxy statement; |
| ● | reviewing major changes to our auditing and accounting principles and practices as suggested by our company’s independent registered public accounting firm, internal auditors (if any) or management; |
| ● | reviewing and approving all related party transactions; and |
| ● | overseeing our compliance with legal and regulatory requirements. |
Compensation Committee
Our compensation committee assists the Board of Directors in the discharge of its responsibilities relating to the compensation of the Board of Directors and our executive officers. John Pappajohn (Chair), Geoffrey Harris and Peter Unanue are the members of our compensation committee. The Board has determined that they are “independent” within the meaning of the NASDAQ Stock Market Rules and both members qualify as “non-employee directors” under Rule 16b-3 of the Exchange Act.
The committee’s compensation-related responsibilities include:
| ● | assisting our Board of Directors in developing and evaluating potential candidates for executive positions and overseeing the development of executive succession plans; |
| ● | reviewing and approving, on an annual basis, the corporate goals and objectives with respect to compensation for our chief executive officer; |
| ● | reviewing, approving and recommending to our Board of Directors on an annual basis the evaluation process and compensation structure for our other executive officers; |
| ● | providing oversight of management’s decisions concerning the performance and compensation of other company officers, employees, consultants and advisors; |
| ● | reviewing our incentive compensation and other stock-based plans and recommending changes in such plans to our Board of Directors as needed, and exercising all the authority of our Board of Directors with respect to the administration of such plans; |
| ● | reviewing and recommending to our Board of Directors the compensation of independent directors, including incentive and equity-based compensation; and |
| ● | selecting, retaining and terminating such compensation consultants, outside counsel and other advisors as it deems necessary or appropriate. |
Governance and Nominations Committee
The purpose of the governance and nominations committee is to recommend to the Board nominees for election as directors and persons to be elected to fill any vacancies on the Board, develop and recommend a set of corporate governance principles and oversee the performance of the Board. Michal Votruba (Chair), John Pappajohn, and Geoffrey Harris are the members of our governance and nominations committee. The Board has determined that the members of the committee are “independent” within the meaning of the NASDAQ Stock Market Rules.
The committee’s responsibilities include:
| ● | Selecting director nominees. The governance and nominations committee recommends to the Board of Directors nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the Board. The governance and nominations committee would consider candidates proposed by stockholders and will apply the same criteria and follow substantially the same process in considering such candidates as it does when considering other candidates. The governance and nominations committee may adopt, at its discretion, separate procedures regarding director candidates proposed by our stockholders. Director recommendations by stockholders must be in writing, include a resume of the candidate’s business and personal background and include a signed consent that the candidate would be willing to be considered as a nominee to the Board and, if elected, would serve. Such recommendation must be sent to the Company’s Secretary at the Company’s executive offices. When it seeks nominees for directors, our governance and nominations committee takes into account a variety of factors including (a) ensuring that the Board, as a whole, is diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise (including expertise that could qualify a director as a “financial expert,” as that term is defined by the rules of the SEC), local or community ties and (b) minimum individual qualifications, including strength of character, mature judgment, familiarity with the company’s business and industry, independence of thought and an ability to work collegially. The Company is of the view that the continuing service of qualified incumbents promotes stability and continuity in the Board room, contributing to the ability of the Board of Directors to work as a collective body, while giving the Company the benefit of the familiarity and insight into the Company’s affairs that its directors have accumulated during their tenure. Accordingly, the process of the governance and nominations committee for identifying nominees reflects the Company’s practice of re-nominating incumbent directors who continue to satisfy the committee’s criteria for membership on the Board of Directors, whom the committee believes continue to make important contributions to the Board of Directors and who consent to continue their service on the Board of Directors. The Board has not adopted a formal policy with respect to its consideration of diversity and does not follow any ratio or formula to determine the appropriate mix; rather, it uses its judgment to identify nominees whose backgrounds, attributes and experiences, taken as a whole, will contribute to the high standards of Board service. The governance and nominations committee may adopt, and periodically review and revise as it deems appropriate, procedures regarding director candidates proposed by stockholders. |
| ● | Reviewing requisite skills and criteria for new Board members and Board composition. The governance and nominations committee reviews with the entire Board of Directors, on an annual basis, the requisite skills and criteria for Board candidates and the composition of the Board as a whole. |
| ● | Hiring of search firms to identify director nominees. The governance and nominations committee has the authority to retain search firms to assist in identifying Board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee. |
| ● | Selection of committee members. The governance and nominations committee recommends to the Board of Directors, on an annual basis, the directors to be appointed to each committee of the Board of Directors. |
| ● | Evaluation of the Board of Directors. The governance and nominations committee will oversee an annual self-evaluation of the Board of Directors and its committees to determine whether it and its committees are functioning effectively. |
| ● | Development of Corporate Governance Guidelines. The governance and nominations committee will develop and recommend to the Board a set of corporate governance guidelines applicable to the Company. |
The governance and nominations committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The governance and nominations committee is authorized to retain independent legal and other advisors, and conduct or authorize investigations into any matter within the scope of its duties.
Committee Memberships and Meetings
The following table below sets forth the current membership of each Committee:
Name of Director | | Audit Committee | | Compensation Committee | | Governance and
Nominations
| Robin L. Smith, M.D. | | | | | | | Geoffrey E. Harris | | Chair | | Member | | Member | John Pappajohn | | Member | | Chair | | Member | Michal Votruba | | Member | | | | Chair | Peter Unanue | | | | Member | | |
Board Meetings
During the fiscal year ended September 30, 2017, the Board held eight meetings. the Audit Committee held ten meetings, the Compensation Committee held two meetings, and the Governance and Nominations Committee did not hold any meetings (but acted once by unanimous written consent). Each incumbent director attended 75% or more of the total number of meetings of the Board and the Board Committees of which they were a member during the period they served as a director in fiscal year 2017.
The Company has not yet established a policy with respect to Board members’ attendance at its annual meetings. All incumbent directors attended last year’s annual meeting other than Mr. Unanue, who was not a member of the Board on the date of last year’s annual meeting.
Board Leadership Structure
To assure effective and independent oversight of management, our Board of Directors operates with the roles of Chief Executive Officer and Chairman of the Board separated in recognition of the differences between these two roles in the management of the Company. The Chairman of the Board is a non-management role.
Our Board of Directors believes that this leadership structure provides the most effective leadership model for our Company. By permitting more effective monitoring and objective evaluation of the Chief Executive Officer’s performance, this structure increases the accountability of the Chief Executive Officer. A separation of the Chief Executive Officer and Chairman roles also prevents the former from controlling the Board’s agenda and information flow, thereby reducing the likelihood that the Chief Executive Officer would abuse his power.
Board Oversight of Risk Management
Our Board of Directors believes that overseeing how management manages the various risks we face is one of its most important responsibilities to the Company’s stakeholders. Our Board believes that, in light of the interrelated nature of the Company’s risks, oversight of risk management is ultimately the responsibility of the full Board; however, it has delegated this responsibility to the audit committee with respect to financial risk. The audit committee meets before each quarterly filing on Form 10-Q or the annual filing on Form 10-K with management and the independent registered public accounting firm to review the Company’s major financial risk exposures and the steps taken to monitor and control such exposures. Our Board meets regularly to discuss the strategic direction and the issues and opportunities facing our Company. Throughout the year, our Board provides guidance to management regarding our strategy and helps to refine our plans to implement our strategy. The involvement of the Board in setting our business strategy is critical to the determination of the types and appropriate levels of risk undertaken by the Company.
Stockholder Communications
Interested parties may communicate with any and all members of our Board of Directors by transmitting correspondence addressed to one or more directors by name at the address appearing on the cover page of this annual report on Form 10-K. Communications from our stockholders to one or more directors will be collected and organized by our Corporate Secretary and will be forwarded to the Chairman of the Board of Directors or to the identified director(s) as soon as practicable. If multiple communications are received on a similar topic, the Corporate Secretary may, at his or her discretion, forward only representative correspondence. The Chairman of the Board of Directors will determine whether any communication addressed to the entire Board of Directors should be properly addressed by the entire Board of Directors or a committee thereof. If a communication is sent to the Board of Directors or a Committee, the Chairman of the Board of Directors or the Chairman of that committee, as the case may be, will determine whether a response to the communication is warranted.
Conflicts of Interest
We are not aware of any current conflicts of interest between our officers and directors, and us. However, certain potential conflicts of interests may arise in the future.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate or may own and operate in the future. These persons may continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among our interests and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our stockholders will have any right to require participation in such other activities.
Further, because we may transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and the holders of more than 10% of our Common Stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities. Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the fiscal year ended September 30, 2017, all of our executive officers, directors and the holders of 5% or more of our Common Stock complied with all Section 16(a) filing requirements, except for: (1) RSJ, which did not timely file a Form 4 reporting two transactions (2) John Pappajohn, who did not timely file a Form 4 reporting one transaction; (3) George Carpenter who did not timely file two Form 4s reporting two transactions; (4) Robin Smith, who did not timely file two Form 4s reporting two transactions; and (5) Donald D’Ambrosio who did not timely file a Form 4 reporting one transaction.
Code of Ethics
Our Board of Directors has adopted a Code of Conduct and Ethics (the “Code of Conduct”) which constitutes a “code of ethics” as defined by applicable SEC rules and a “code of conduct” as defined by applicable NASDAQ rules. We require all employees, directors and officers, including our principal executive officer and principal financial officer to adhere to the Code of Conduct in addressing legal and ethical issues encountered in conducting their work. The Code of Conduct requires that these individuals avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest. The Code of Conduct contains additional provisions that apply specifically to our Chief Executive Officer, Chief Financial Officer and other finance department personnel with respect to full and accurate reporting. The Code of Conduct is available on our website atwww.myndanalytics.com. The Company will post any amendments to the Code of Conduct, as well as any waivers that are required to be disclosed by the rules of the SEC on such website.
Item 11. Executive Compensation
Compensation Structure
Unless otherwise indicated, all stock-based amounts (including historical amounts) appearing in this annual report have been adjusted to give effect to the 1-for-200 reverse stock-split effective September 21, 2016.
Overview of Compensation Practices
Our executive compensation program is administered by the compensation committee.
Compensation Philosophy
Generally, we compensate our executive officers with a compensation package that is designed to drive Company performance to maximize stockholder value while meeting our needs and the needs of our executives. The following are objectives we consider:
| ● | Alignment — to align the interests of executives and stockholders through equity-based compensation awards; |
| ● | Retention — to attract, retain and motivate highly qualified, high performing executives to lead our growth and success; and |
| ● | Performance — to provide, when appropriate, compensation that is dependent upon the executive’s achievements and the Company’s performance. |
| ● | In order to achieve the above objectives, our executive compensation philosophy is guided by the following principles: |
| ● | Rewards under incentive plans are based upon our short-term and longer-term financial results and increasing stockholder value; |
| ● | Executive pay is set at sufficiently competitive levels to attract, retain and motivate highly talented individuals who are necessary for us to achieve our goals, objectives and overall financial success; |
| ● | Compensation of an executive is based on such individual’s role, responsibilities, performance and experience; and |
| ● | Annual performance of the Company and the executive are taken into account in determining annual bonuses with the goal of fostering a pay-for-performance culture. |
Compensation Elements
We compensate our executives through a variety of components, which may include a base salary, annual performance-based incentive bonuses, equity incentives, and benefits and perquisites, in order to provide our executives with a competitive overall compensation package. The mix and value of these components are impacted by a variety of factors, such as responsibility level, individual negotiations and performance and market practice. The purpose and key characteristics for each component are described below.
Base Salary
Base salary provides executives with a steady income stream and is based upon the executive’s level of responsibility, experience, individual performance and contributions to our overall success, as well as negotiations between the Company and such executive officer. Competitive base salaries, in conjunction with other pay components, enable us to attract and retain talented executives. The Board typically sets base salaries for our executives at levels that it deems to be competitive, with input from our Chief Executive Officer.
Annual Incentive Bonuses
Annual incentive bonuses are a variable performance-based component of compensation. The primary objective of an annual incentive bonus is to reward executives for achieving corporate and individual goals and to align a portion of total pay opportunities for executives to the attainment of our Company’s performance goals. Annual incentive awards, when provided, act as a means to recognize the contribution of our executive officers to our overall financial, operational and strategic success.
Equity Incentives
Equity incentives are intended to align executive and stockholder interests by linking a portion of executive pay to long-term stockholder value creation and financial success over a multi-year period. Equity incentives may also be provided to our executives to attract and enhance the retention of executives and to facilitate stock ownership by our executives. The Board considers individual and Company performance when determining long-term incentive opportunities.
Health and Welfare Benefits
The executive officers participate in health and welfare and paid time-off benefits which we believe are competitive in the marketplace. Health and welfare and paid time-off benefits help ensure that we have a productive and focused workforce.
Severance and Change of Control Arrangements
We do not have a formal plan for severance or separation pay for our employees, but we typically include a severance provision in the employment agreements of our executive officers that have written employment agreements with us. Generally, such provisions are triggered in the event of involuntary termination of the executive without cause or in the event of a change in control. Please see the description of our employment agreements with each of George Carpenter, Donald D’Ambrosio and our former Chief Financial Officer, Paul Buck, below for further information.
Other Benefits
In order to attract and retain highly qualified executives, we may provide our executive officers with automobile allowances, consistent with current market practices.
Accounting and Tax Considerations
We consider the accounting and tax implications of all aspects of our executive compensation strategy and, so long as doing so does not conflict with our general performance objectives described above, we strive to achieve the most favorable accounting and tax treatment possible to the Company and our executive officers.
Process for Setting Executive Compensation; Factors Considered
When making pay determinations for named executive officers, the Board considers a variety of factors including, among others: (1) actual Company performance as compared to pre-established goals, (2) individual executive performance and expected contribution to our future success, (3) changes in economic conditions and the external marketplace, (4) prior years’ bonuses and long-term incentive awards, and (5)stock split, reverse stock split or certain other events specified in the caseconvertible promissory notes. The convertible promissory notes will bear interest at the rate of executive officers, other than Chief Executive Officer,2% per annum payable semi-annually on the recommendationlast business day of our Chief Executive Officer,August and inJanuary of each year and will mature on the case of our Chief Executive Officer, his negotiations with our Board. No specific weighting is assigned to these factors nor are particular targets set for any particular factor. Ultimately, the Board uses its judgment and discretion when determining how much to pay our executive officers and sets the pay for such executives by element (including cash versus non-cash compensation) and in the aggregate, at levels that it believes are competitive and necessary to attract and retain talented executives capable of achieving the Company’s long-term objectives.
Summary Compensation Table-Fiscal Year Ending September 30, 2017
The following table provides disclosure concerning all compensation paid for services to us in all capacities for our fiscal years ending September 30, 2017 and 2016 provided by (i) each person serving as our principal executive officer (“PEO”) or acting in a similar capacity during our fiscal year ended September 30, 2017; (ii) our two most highly compensated executive officers other than our PEO who were serving as executive officers on September 30, 2017 and whose total compensation exceeded $100,000 and (iii) up to two additional individuals for whom disclosure would have been provided under (ii) but for the fact that the individual was not serving as an executive officer as of September 30, 2017. The persons covered by (i), (ii), and (iii)3rd anniversary of the preceding sentence are collectively referred to as the “named executive officers” in this “Executive Officers and Executive Compensation” section. original issue date.
Name and Principal Position | | Fiscal Year Ended September 30, | | Salary ($)(1) | | | Bonus ($)(2) | | | Stock Awards
($)(3) | | | Option Awards
($)(4) | | | All Other Compensation
($)(5) | | | Total ($) | | | George C. Carpenter IV | | 2017 | | 270,000 | | | 25,000 | | | — | | | — | | | 21,035 | | | 316,035 | | | (President and Chief Executive Officer) | | 2016 | | 270,000 | | | — | | | 25,500 | | | 189,400 | | | 21,000 | | | 505,900 | | | Donald D’Ambrosio | | 2017 | | 117,296 | | | 20,000 | | | — | | | 104,600 | | | 8,289 | | | 180,493 | | | (Chief Financial Officer) | | 2016 | | — | | | — | | | — | | | — | | | — | | | — | | | Paul Buck | | 2017 | | 209,333 | | | — | | | — | | | — | | | — | | | 209,333 | | | (Former Chief Financial Officer and Secretary) | | 2016 | | 208,000 | | | — | | | 25,500 | | | 189,400 | | | 8,500 | | | 431,400 | |
| (1) | Salaries for the fiscal years ended September 30, 2017 and 2016 which were accrued and paid as follows: |
| ● | Mr. Carpenter’s salary for fiscal year 2017 and 2016 was $270,000 all of which was paid out. |
| ● | Mr. D’Ambrosio’s pro-rated salary for fiscal year 2017 (based on actual number of days employed) was $117,296 all of which was paid out. Mr. D’Ambrosio joined the Company as its Chief Financial Officer effective March 31, 2017. |
| ● | Mr. Buck’s salary for fiscal year 2017 was $209,333 all of which was paid out. Mr. Buck retired as the Company’s Chief Financial Officer and Secretary effective March 31, 2017. Mr. Buck remained with the Company as a consultant through September 30, 2017 pursuant to the terms of a separation agreement. |
| (2) | On September 18, 2017, the Compensation Committee approved cash Management Bonuses for Messrs. Carpenter and D’Ambrosio in the amounts of $25,000 and $20,000 respectively. |
| (3) | On April 15, 2016, the Board approved grants of restricted Common Stock to each of Messrs. Carpenter and Buck of 5,000 shares valued at $25,500. 50% of the shares issued to each vested on the date of grant and 50% vested pro-rata over 12 months starting on the date of grant. The shares were valued at $5.10 each, which was the closing price of the Company’s stock quoted on the OTCQB on the date of grant. |
| (4) | On March 14, 2017, Mr. D’Ambrosio was granted an option to purchase 18,000 shares of the Company’s common stock valued at $104,600 using the Black Scholes Model. The options have an exercise price of $5.90 per share (the closing price of the Company’s common stock on March 31, 2017), with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares vesting upon the achievement of a performance based metric which has been met.The vesting of such grants is also subject to acceleration upon the occurrence of certain pre-determined events. |
On SeptemberEffective February 22, 2016, the Board granted each of Messrs. Carpenter and Buck an option to purchase 32,000 shares of Common Stock valued at $189,400 each using the Black Scholes Model. The options were granted pursuant to the 2012 Plan, as amended and approved at the Annual Meeting of Stockholders held on November 1, 2016. The exercise price of the options is $6.00 per share. 25% vested on the date of grant and the remainder vested upon the achievement of various performance based metrics (all of which have been met).
| (5) | Relates to healthcare insurance premiums and Health Savings Account contributions paid on behalf of executive officers of the Company for fiscal years 2017 and 2016, respectively. |
| ● | For Mr. Carpenter health care benefits were $21,035 and $21,000 for fiscal years 2017 and 2016, respectively. |
| ● | For Mr. D’Ambrosio health care benefits were $8,289 for the fiscal year 2017. |
| ● | For Mr. Buck healthcare benefits were $0 and $8,500 for fiscal years 2017 and 2016, respectively. |
Narrative Disclosure to Summary Compensation Table
On September 22, 2016, the Board granted each of Messrs. Carpenter and Buck an option to purchase 32,000 shares of Common Stock, valued at $189,400 each using the Black Scholes Model. The options were granted pursuant to the 2012 Plan, as amended and approved at the Annual Meeting of Stockholders held on November 1, 2016. The exercise price of the options is $6.00 per share and the options vested in 25% tranches as described in Footnote 4 to the “Summary Compensation Table”.
On September 18, 2017, the Compensation Committee approved cash Management Bonuses for Messrs. Carpenter and D’Ambrosio in the amount of $25,000 and $20,000 respectively. Since the Company had limited cash and cash equivalent resources as of September 30, 2016, no bonuses were paid2021, Emmaus Medical, Inc., or accrued for our executive officers during the fiscal year ended September 30, 2016.
Please refer to the footnotes to the “Summary Compensation Table” above for a description of the components of “Stock Awards” and “All Other Compensation” received by the named executive officers.
The following are summaries of employment agreements that we haveEmmaus Medical, entered into with respect to our named executive officers. These summaries include, where applicable, a description of all payments the Company is required to make to such named executive officers at, following or in connection with the resignation, retirement or other termination of such named executive officers, or a change in control of our company or a change in the responsibilities of such named executive officers following a change in control.
Employment Agreements
George Carpenter
On October 1, 2007, we entered into an employmentpurchase and sale agreement with George CarpenterPrestige Capital Finance, LLC, or Prestige Capital, pursuant to which Mr. Carpenter began serving as our President. During the period of his employment, Mr. Carpenter received a base salary of no less than $180,000 per annum, which was subjectEmmaus Medical may offer and sell to upward adjustment at the discretion of the Chief Executive Officer or our Board of Directors. Mr. Carpenter is entitled to four weeks’ vacation per annum, health and dental insurance coverage for himself and his dependents, and other fringe benefits that we offer our employeesPrestige Capital from time to time.
Mr. Carpenter’s employment is on an “at-will” basis, and Mr. Carpenter may terminate his employment with ustime eligible accounts receivable in exchange for any reasonPrestige Capital’s down payment, or for no reason. Similarly, we may terminate Mr. Carpenter’s employment with or without cause. If we terminate Mr. Carpenter’s employment without cause or Mr. Carpenter involuntarily terminates his employment with us (an involuntary termination includes changes, without Mr. Carpenter’s consent or pursuantadvance, to a corporate transaction, in Mr. Carpenter’s title or responsibilities so that he is no longer the PresidentEmmaus Medical of our company), Mr. Carpenter shall be eligible70% (subject to receive as severance his salary and benefits for a period equalincrease to six months payable in one lump sum upon termination. If Mr. Carpenter is terminated by us for cause, or if Mr. Carpenter voluntarily terminates his employment, he will not be entitled to any severance.
Donald D’Ambrosio
On March 14, 2017, the Company and Mr. D’Ambrosio entered into a letter agreement of employment setting forth Mr. D’Ambrosio’s compensation and certain other employment terms. Pursuant to this letter agreement, Mr. D’Ambrosio will be paid an annual base salary of $215,020, will be eligible to participate in the Company’s benefit plans, and received a signing bonus of $8,959 which was paid on March 31, 2017. In addition, pursuant to the letter agreement, Mr. D’Ambrosio was granted an option to purchase 18,000 shares75%) of the Company’s common stock at an exercise price of $5.90 per share (the closing price of the Company’s common stock on March 31, 2017), with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares vesting upon the Company’s successful listing of its common stock on a national securities exchange. The vesting of such grants is also subject to acceleration upon the occurrence of certain pre-determined events. Pursuant to the letter agreement, Mr. D’Ambrosio’s employment is “at-will”, and may be terminated by either party for any reason, or no reason at all. If the Company terminates Mr. D’Ambrosio without “cause” (as defined in the agreement), or Mr. D’Ambrosio “involuntarily terminates” (as defined in the agreement) the agreement, Mr. D’Ambrosio will be entitled to receive severance in the form of salary and benefits for a period equal to one-month, with an additional month of salary for each completed year of service up to a limit of six-months, in each case, subject to Mr. D’Ambrosio providing a release of claims satisfactory to the Company. In the event the Company terminates Mr. D’Ambrosio for “cause” or Mr. D’Ambrosio voluntarily terminates his employment, Mr. D’Ambrosio will not be entitled to any severance.
Paul Buck
Paul Buck, the Company’s former Chief Financial Officer and Secretary retired as Chief Financial Officer and Secretary of the Company effective March 31, 2017. The Company entered into a Confidential Employment Separation and Release Agreement (the “Separation Agreement”) with Mr. Buck on April 24, 2017 and; as part of the Separation Agreement Mr. Buck agreed to remain with the Company as a consultant through September 30, 2017.
Paul Buck’s Employment Agreement
On February 18, 2010, we entered into an employment agreement with Paul Buck pursuant to which Mr. Buck began serving as our Chief Financial Officer on an “at will” basis and was to be paid a salary of no less than $208,000 per annum, which was subject to upward adjustment at the discretion of the Chief Executive Officer or the Board of Directors of our company. Mr. Buck was entitled to four weeks’ vacation per annum, health and dental insurance coverage for himself and his dependents, and other fringe benefits that we offered our employees from time to time. As Mr. Buck’s employment was on an “at-will” basis, he could terminate his employment with us for any reason or for no reason. Similarly, we could terminated Mr. Buck’s employment with or without cause. If we terminated Mr. Buck’s employment without cause or Mr. Buck involuntarily terminated his employment with us, Mr. Buck was eligible to receive as severance his salary and benefits for a period equal to six months payable in one lump sum upon termination. If Mr. Buck was terminated by us for cause, or if Mr. Buck voluntarily terminated his employment, he would not be entitled to any severance.
Paul Buck’s Separation Agreement
Pursuant to the Separation Agreement, the Company agreed to pay Mr. Buck an aggregate amount of $105,333, which consists of $32,000 in accrued paid time off (“PTO”) and $73,333 (less lawful deductions) in accrued pay (“Deferred Pay”) that was voluntarily deferred by Mr. Buck between February 16, 2015 and July 31, 2015. Mr. Buck agreed to remain with the Company as a consultant on an as-needed basis, and his last day with the Company was September 30, 2017. From April 1, 2017 through May 31, 2017, Mr. Buck used his accrued PTO as total and complete compensation for such period. Thereafter and through September 30, 2017 (the “Consulting Period”), Mr. Buck received the Deferred Pay in equal semi-monthly installments on the Company’s established pay dates via the Company’s regular payroll system, beginning on the next established pay date following May 31, 2017. Certain options to purchase common stock of the Company granted to Mr. Buck under the Company’s Amended and Restated 2012 Omnibus Incentive Compensation Plan continued to vest through the Consulting Period and will be exercisable by Mr. Buck for a period of 12 months from September 30, 2017 in accordance with their terms. During the Consulting Period, Mr. Buck, to the extent requested by the Company, agreed to serve as a consultant and provide reasonable assistance to the Company on an as-needed basis. In exchange for the payments described above, Mr. Buck agreed to release any and all claims, as defined and subject to the limitations set forth in the Separation Agreement, against the Company related to Mr. Buck’s employment with, and separation from, the Company. The Separation Agreement also contains confidentiality and other customary restrictive covenants.
Outstanding Equity Awards at Fiscal Year-End------Fiscal Year Ending September 30, 2017
The following table presents information regarding outstanding options held by our named executive officers as of September 30, 2017.
| | | Option Awards | | | | Number of Securities Underlying Unexercised Options (#) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price ($) | | Option Expiration Date | | Name | | Exercisable | | Unexercisable | | | | | | | | George Carpenter(1) | | 32,000 | | — | | — | | 6.00 | | 09/26/2022 | | | | 2,175 | | — | | — | | 50.00 | | 10/08/2023 | | | | 6,125 | | — | | — | | 9.44 | | 12/10/2022 | | | | 667 | | — | | — | | 3,300.00 | | 03/02/2020 | Donald D’Ambrosio(2) | | 5,917 | | 12,083 | | | | 5.90 | | 03/31/2027 | Paul Buck(3) | | 7,000 | | — | | | | 9.44 | | 12/09/2022 | | | | 32,000 | | — | | | | 6.00 | | 09/26/2022 |
| (1) | On September 22, 2016, the Board granted Mr. Carpenter options to purchase 32,000 shares of Common Stock. 25% of the options vested on the date of grant and the remainder vested in 25% increments upon the achievement of various performance-based milestones. As of September 30, 2017, all of the options are fully vested. |
On October 8, 2013, Mr. Carpenter was granted options to purchase 2,175 shares of Common Stock. The options are exercisable at $50.00 per share and vested evenly over 12 months starting from the date of grant. Mr. Carpenter agreed to forego $98,000 of his salary in fiscal year 2014 pursuant to the Employment Compensation Forfeiture and Exchange Agreement dated December 16, 2013. Mr. Carpenter was paid out of accrued salary earned, but not paid, during fiscal years 2013 and 2012. The accrued salary paid out was equivalent to the fiscal year 2014 salary that he had agreed to forego in lieu of receiving the options.
On December 10, 2012, Mr. Carpenter was granted options to purchase 6,000 shares of Common Stock. The options are exercisable at $9.44 per share and vested in increments of 12.5% at the beginning of each quarter starting from the date of grant. Mr. Carpenter was also granted 125 fully vested shares of Common Stock for his prior services on the Board. These options are also exercisable at a price of $9.44 per share.
On March 3, 2010, Mr. Carpenter was granted options to purchase 667 shares of Common Stock. The options are exercisable at $3,300.00 per share and vested equally over 48 months starting on March 3, 2010.
| (2) | On March 31, 2017, the Compensation Committee of the Board granted options to Mr. D’Ambrosio to purchase 18,000 shares of the Company’s common stock at an exercise price of $5.90 per share, which was the closing price on the OTCQB of the Company’s Common Stock on the date of grant, with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares vesting upon the achievement of a performance milestone, which had been met as of September 30, 2017. |
| (3) | On September 22, 2016, the Board granted Mr. Buck an option to purchase 32,000 shares of Common Stock of which 25% of the options vested on the date of grant and the remainder vested in 25% increments upon the achievement of various performance-based milestones. As of September 30, 2017, all of the options are fully vested. |
On December 10, 2013, Mr. Buck was granted options to purchase 7,000 shares of Common Stock. The options are exercisable at $9.44 per share and vested in increments of 12.5% at the beginning of each quarter starting from the date of grant.
Director Compensation---Fiscal Year Ending September 30, 2017
During our fiscal year ended September 30, 2017, non-employee directors received cash compensation, as well as grants of Common Stock, Restricted Stock and options to purchase Common Stock for their service on our Board of Directors or committees thereof. The values of the option and restricted share grants were determined using the Black-Scholes Model and the closing price of the stock on the day of grant.
Non-Employee Director Compensation
| Name | | Fees Earned or Paid in Cash ($) | Option Awards ($) | | Stock Awards ($) | | All Other
Compensation ($) | | Total ($) | | Robin Smith (1) | | 225,000 | 520,300 | | 108,250 | | 364,537 | | 1,218,087 | | John Pappajohn (2) | | 363 | 42,360 | | 43,200 | | — | | 85,923 | | Thomas T. Tierney (3) | | — | — | | — | | — | | — | | Robert J. Follman (4) | | — | — | | — | | — | | — | | Geoffrey Harris (5) | | 544 | 63,540 | | 64,800 | | — | | 128,884 | | Michal Votruba (6) | | 363 | 42,360 | | 43,200 | | — | | 85,923 | | Peter Unanue (7) | | 363 | 42,360 | | 43,200 | | — | | 85,923 |
| (1) | On July 14, 2017, the Board approved the Chairman Services Agreement (the “Agreement”) with Robin L. Smith, M.D. which became effective on that date (the “Effective Date”) and will remain in effect until the earlier of: (a) termination of the Agreement by mutual agreement of Dr. Smith and the Company, and (b) the eighteen (18) month anniversary of the Effective Date (the “Initial Period”); provided that the Agreement may be automatically extended for additional one year periods thereafter (such period, the “Term”). During the Term, and subject to the terms and conditions of the Agreement, Dr. Smith will provide non-exclusive advisory and management services to the Company, which may include advice and assistance concerning: strategic vision and planning; identification of growth and expansion opportunities; financial planning; and corporate partnering and business development (collectively, the “Services”). |
Under the Agreement, Dr. Smith will be entitled to an annual cash fee of $300,000 (the “Annual Fee”), payable in equal monthly installments. For the 2017 calendar year, Dr. Smith will be entitled to be paid the fullface amount of the Annual Fee. Dr. Smith will remain eligibleaccounts receivable, subject to receive additional cash bonus awards as determined by the compensation committeea $7,500,000 cap on advances at any time. The balance of the Board. The Company will pay the associated taxes, federal and state, for certain awards of restricted shares issued to Dr. Smith. As of September 30, 2017, Dr. Smith had earned $225,000face amount of the Annual Fee, which is includedaccounts receivable will be reserved by Prestige Capital and paid to Emmaus Medical, less discount fees of Prestige Capital ranging from 2.25% to 7.25% of the face amount, as and when Prestige Capital collects the entire face amount of the accounts receivable. Emmaus Medical’s obligations to Prestige Capital under the purchase and sale agreement are secured by a security interest in the “Fees Earnedaccounts receivable and all or Paid in Cash” columnsubstantially all other assets of the above table.
Pursuant to the Agreement, Dr. Smith has received, or will be entitled to receive, the following equity awards:
- on the Effective Date, a grant of 25,000 shares (vesting immediately) of restricted common stock valued at $108,250 using a $4.33 share price, which was the closing price on The Nasdaq Capital Market of the Company’s Common Stock on the Effective Date, under the Company’s 2012 Omnibus Incentive Compensation Plan (the “Plan”). This award included a tax gross up of $113,313, which was paid in fiscal year 2017, and which is reported in the “All Other Compensation” column of the above table;
- on the Effective Date, options to purchase 75,000 shares of common stock valued at $316,130 using a $4.33 share price, which was the closing price on The Nasdaq Capital Market of the Company’s Common Stock on the Effective Date, under the Plan; and
- on the date of the Company’s 2017 annual meeting of stockholders, an award of options to purchase 50,000 shares of common stock valued at $204,197, using a $4.18 share price, which was the closing price on The Nasdaq Capital Market of the Company’s Common Stock on the date of the Company’s 2017 annual meeting (the “2017 Option Award”).
Dr. Smith is also entitled to the following awards, which have not been included in the above table: at each annual meeting of stockholders of the Company beginning in 2018 during the Term, Dr. Smith will be entitled to receive a grant of 25,000 shares of restricted stock (vesting immediately) under the Plan and options to purchase 75,000 shares of common stock under the Plan. Other than the 2017 Option Award, all options granted under the Agreement will vest 1/3 on the date of grant, 1/3 on the six month anniversary of the date of grant and 1/3 on the twelve month anniversary of the date of grant. The 2017 Option Award will vest on December 1, 2018. Pursuant to the Agreement, all options owned by Dr. Smith will remain exercisable for a period of 10 years from the date of grant.
Pursuant to the Agreement, we will reimburse Dr. Smith for certain travel and other expenses. The Agreement contains certain other provisions related to confidentiality and non-disclosure obligations and indemnification.
On September 22, 2016, the Board granted Dr. Smith 40,000 shares of restricted common stock, which are fully vested. The stock, valued at $240,000, was granted with a tax gross-up of $251,224 which was paid in fiscal year 2017 and which is reported in the “All Other Compensation” column of the above table.
The aggregate number of option awards outstanding for Dr. Smith at September 30, 2017 was 166,250 shares. Of these, options to purchase 1,250 shares have an exercise price of $11.00 per share, options to purchase 40,000 shares have an exercise price of $6.00 per share, options to purchase 75,000 shares have an exercise price of $4.33 per share, options to purchase 50,000 shares have an exercise price of $4.16 per share.
| (2) | Mr. Pappajohn joined our Board on August 26, 2009. |
On September 19, 2017 the Board agreed to pay Mr. Pappajohn a Board fee of $12,000 to be paid in four equal quarterly payments of $3,000 on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018, subject to continued Board service. As of September 30, 2017, Mr. Pappajohn had earned $363 of the Board Fee.
On September 19, 2017, the Board also granted Mr. Pappajohn, subject to continued Board service: (i) 12,000 shares of restricted common stock, vesting in four quarterly installments of 3,000 shares on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018 and (ii) options to purchase 12,000 shares of common stock with an exercise price of $3.60, vesting in four equal quarterly installments of 3,000 options on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018. The value as of the grant date for stock options is recognized over the number of days of service required for the stock option to vest in full.
The aggregate number of option awards outstanding for Mr. Pappajohn at September 30, 2017 was 13,250 shares. Of these, options to purchase 1,250 shares have an exercise price of $11.00 per share, options to purchase 12,000 shares have an exercise price of $3.60 per share.
| (3) | Mr. Tierney resigned from our Board effective July 14, 2017. |
| (4) | Mr. Follman resigned from our Board effective July 14, 2017. |
| (5) | Mr. Harris joined our Board on July 20, 2015. |
On September 19, 2017 the Board agreed to pay Mr. Harris a Board fee of $18,000 to be paid in in four equal quarterly payments of $4,500 on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018, subject to continued Board and Audit Committee service. As of September 30, 2017, Mr. Harris had earned $544 of the Board fee.
On September 19, 2017, the Board also granted Mr. Harris, subject to continued Board and Audit Committee service: (i) 18,000 shares of restricted common stock, vesting in four quarterly installments of 4,500 shares on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018 and (ii) options to purchase 18,000 shares of common stock with an exercise price of $3.60, vesting in four equal quarterly installments of 4,500 options on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018. The value as of the grant date for stock options is recognized over the number of days of service required for the stock option to vest in full.
The aggregate number of option awards outstanding for Mr. Harris at September 30, 2017 was 19,250 shares. Of these, options to purchase 1,250 shares have an exercise price of $11.00 per share, options to purchase 18,000 shares have an exercise price of $3.60 per share.
| (6) | Mr. Votruba joined our Board on July 20, 2015. |
On September 19, 2017 the Board agreed to pay Mr. Votruba a Board fee of $12,000 to be paid in four equal quarterly payments of $3,000 on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018, subject to continued Board service. As of September 30, 2017, Mr. Votruba had earned $363 of the Board fee.
On September 19, 2017, the Board also granted Mr. Votruba, subject to continued Board service: (i) 12,000 shares of restricted common stock, payments will vesting in four quarterly installments of 3,000 shares on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018 and (ii) options to purchase 12,000 shares of common stock with an exercise price of $3.60, vesting in four equal quarterly installments of 3,000 options on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018. The value as of the grant date for stock options is recognized over the number of days of service required for the stock option to vest in full.
The aggregate number of option awards outstanding for Mr. Votruba at September 30, 2017 was 13,250 shares. Of these, options to purchase 1,250 shares have an exercise price of $11.00 per share, options to purchase 12,000 shares have an exercise price of $3.60 per share.
| (7) | Mr. Unanue joined our Board on September 19, 2017. |
On September 19, 2017, the Board agreed to pay Mr. Unanue a Board fee of $12,000 to be paid in four equal quarterly payments of $3,000 on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018, subject to continued Board service. As of September 30, 2017, Mr. Unanue had earned $363 of the Board fee.
On September 19, 2017, the Board also granted Mr. Unanue, subject to continued Board service: (i) 12,000 shares of restricted common stock, payments vesting in four quarterly installments of 3,000 shares on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018 and (ii) options to purchase 12,000 shares of common stock with an exercise price of $3.60, vesting in four equal quarterly installments of 3,000 options on December 19, 2017, March 19, 2018, June 19, 2018 and September 19, 2018. The value as of the grant date for stock options is recognized over the number of days of service required for the stock option to vest in full.
The aggregate number of option awards outstanding for Mr. Votruba at September 30, 2017 was 13,250 shares. Of these, options to purchase 1,250 shares have an exercise price of $11.00 per share, options to purchase 12,000 shares have an exercise price of $3.60 per share.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding beneficial and other ownership of the shares of our Common Stock as of December 28, 2017:
| ● | Each person whom we know to be the beneficial owner of 5% or more of our outstanding Common Stock; |
| ● | Each of our executive officers; |
| ● | Each of our current directors; and |
| ● | All of our executive officers and directors as a group. |
Applicable percentage ownership interest as of December 28, 2017 is based on 4,360,561 shares of issued and outstanding Common Stock.
Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name, subject to community property laws, where applicable. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. For purposes of such calculation, shares of our Common Stock subject to options, warrants and convertible promissory notes issued by us (and convertible interest on those notes) that are currently exercisable or convertible, or exercisable or convertible within sixty days from December 28, 2017, are deemed to be outstanding and to be beneficially owned by the person holding the options, warrants or convertible promissory notes, as applicable, for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each of the executive officers and directors and 5% or more stockholders named below is c/o MYnd Analytics, Inc., 26522 La Alameda, Suite 290, Mission Viejo, CA 92691. There are no shares of any other class or series of stock issued and outstanding.
| | | Shares Beneficially Owned as of December 28, 2017 | | Name of Beneficial Owner | | Number of Shares Beneficially Owned | | Percentage of Shares Outstanding | | | Executive Officers and Directors: | | | | | George Carpenter(1) President and Chief Executive Officer | | 80,675 | | 1.83 | % | Don D’Ambrosio(2) Chief Financial Officer | | 15,292 | | 0.35 | % | Paul Buck(3) Chief Financial Officer and Secretary (retired) | | 39,000 | | 0.89 | % | Robin L. Smith(4) Chairman of the Board of Directors | | 214,120 | | 4.81 | % | John Pappajohn(5) Director | | 555,676 | | 12.74 | % | Michal Votruba(6) Director | | — | | — | % | Geoffrey E. Harris(7) Director | | 53,204 | | 1.22 | % | Peter Unanue(8) Director | | 103,200 | | 2.35 | % | | Directors and officers as a group (8 persons)(9) | | 1,061,167 | | 22.50 | % | | Non-Director 5%+ Stockholders: | | | | | RSJ(10) | | 638,798 | | 14.65 | % | | Tierney Family Trust(11) | | 238,325 | | 5.46 | % |
| (1) | Consists of (a) 39,708 shares of Common Stock, and (b) 40,967 shares of Common Stock issuable upon the exercise of vested and exercisable options. Mr. Carpenter has been our Chief Executive Officer since April 2009 and our President since April 29, 2011. |
| (2) | Consists of (a) 7,500 shares of Common Stock, and (b) 7,792 shares of Common Stock issuable upon the exercise of vested and exercisable options. Mr. D’Ambrosio has been our Chief Financial Officer since March 31, 2017. |
| (3) | Consists of 39,000 shares of Common Stock issuable upon the exercise of vested and exercisable options. Mr. Buck resigned from the Company as our Chief Financial Officer effective March 31, 2017. |
| (4) | Consists of (a) 123,026 shares of Common Stock, and (b) 91,094 shares of Common Stock issuable upon the exercise of vested options. Dr. Smith has been the Chairman of the Board since August 20, 2015. |
| (5) | Consists of (a) 553,290 shares of Common Stock, and (b) 2,386 shares of Common Stock issuable upon the exercise of vested and exercisable options. Mr. Pappajohn has been a member of the Board since August 26, 2009. |
| (6) | Mr. Votruba is a representative of RSJ. Refer to footnote (11) below, as all of Mr. Votruba’s grants of common stock and options to purchase common stock are assigned to RSJ. Mr. Votruba has been a member of the Board since July 30, 2015. |
| (7) | Consists of (a) 52,110 shares of Common Stock, and (b) 1,094 shares of Common Stock issuable upon the exercise of vested and exercisable options. Mr. Harris has been a member of the board since July 30, 2015. |
| (8) | Consists of (a) 65,100 shares of Common Stock, and (b) 38,100 shares of Common Stock issuable upon the exercise of warrants. Mr. Unanue has been a member of the Board since September 19, 2017. |
| (9) | Consists of (a) 840,734 shares of Common Stock, and (b) 143,333 shares of Common Stock issuable upon the exercise of vested and exercisable options and (c) 38,100 shares of Common Stock issuable upon the exercise of warrants. |
| (10) | Consists of 637,704 shares of Common Stock, and (b) 1,094 shares of Common Stock issuable upon the exercise of vested and exercisable options. The address of RSJ is Na Florenci 2116/15, 110 00 Prague 1, Czech Republic. |
| (11) | Consists of (a) 236,345 shares of Common Stock held in the name of the Thomas T. and Elizabeth C. Tierney Family Trust (the “Tierney Family Trust”), of which Mr. Tierney is a trustee, and (b) 20,000 shares of Common Stock held directly by Mr. Tierney, and (c) 1,980 shares of Common Stock issuable upon the exercise of vested and exercisable options held by the Tierney Family Trust. Mr. Tierney was a member and Chairman of the Board from February 25, 2013 until May 22, 2015, and rejoined the Board on September 29, 2016. Mr. Tierney resigned from the Board on July 14, 2017. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding our equity compensation plans as of September 30, 2017.
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (c) | | | 2006 Equity compensation plan approved by security holders | | 1,537 | | $ | 3,320 | | — | (1) | | 2012 Equity compensation plan approved by security holders | | 552,546 | | $ | 6.95 | | 253,704 | (2) | | Equity compensation plans not approved by security holders | | — | | | | — | | | Total | | 554,083 | | $ | 16.14 | | 253,704 | |
| (1) | The 2006 Stock Incentive Plan, as amended, has been frozen and replaced by the 2012 Plan. |
| (2) | Does not include options to purchase 20,000 shares of Common Stock granted to staff members and an advisor on November 5, 2017 issued under the 2012 Plan. The 2012 Plan includes an evergreen provision which, on January 1 of each year through 2022, automatically increases the number of shares subject to the 2012 Plan by the lesser of: (a) a number equal to 10% of the shares of Common Stock authorized under the 2012 Plan as of the preceding December 31 or (b) an amount, or no amount, as determined by our Board of Directors, but in no event may the number of shares of Common Stock authorized under the 2012 Plan exceed 1,570,248. |
As of September 30, 2017, options to purchase 552,546 shares of Common Stock were outstanding under the 2012 Plan, with a weighted average exercise price of $6.95.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Except as follows, since October 1, 2015, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we are or will be a party:
| ● | in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and |
| ● | in which any director, executive officer, or other stockholder of more than 5% of our Common Stock or any member of their immediate family had or will have a direct or indirect material interest. |
Issuance and Mandatory Conversion of Senior Convertible Notes
Between September 22, 2014 and September 19, 2016, as part of its $6.0 million private placement convertible debt round of financing (the “Convertible Debt Financing”), the Company entered into agreements with various accredited investors (including affiliates) pursuant to which the Company issued senior convertible notes (“Notes”) in an aggregate principal amount of $6.0 million. On September 21, 2016, the Company converted the entire outstanding principal balance of $6.0 million, plus accrued interest of $317,000 on all of the Notes, into 1,263,406 shares of Common Stock at a conversion price of $5.00 per share (the “Mandatory Conversion”).
Of the $6.0 million of Notes issued by the Company in the Convertible Debt Financing, $5.3 million were purchased by affiliates of the Company (including certain directors, an officer and certain greater than 5% shareholders) and were converted as follows into shares of Common Stock in the Mandatory Conversion:
| | | | | Principal Investment in Convertible Notes | | Interest Earned At conversion | | Shares Issued on conversion | | RSJ | | (1) | | $ | 2,100,000 | | $ | 122,200 | | 444,454 | | John Pappajohn | | (2) | | 1,600,000 | | 52,500 | | 290,498 | | Tierney Family Trust | | (3) | | 640,000 | | 46,600 | | 137,328 | | Follman Family Trust | | (4) | | 550,000 | | 20,400 | | 114,074 | | Robin Smith MD | | (5) | | 100,000 | | 3,900 | | 20,776 | | Geoffrey Harris | | (6) | | 10,000 | | 300 | | 2,058 | | George Carpenter | | (7) | | 100,000 | | 1,300 | | 20,254 | | Oman Ventures | | (8) | | 200,000 | | 20,400 | | 44,089 | | | | | | $ | 5,300,000 | | $ | 267,600 | | 1,073,531 |
| (1) | RSJ is a greater than 5% shareholder. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, joined our Board on July 30, 2015. |
| (2) | John Pappajohn is a member of the Board. Of the $1.6 million of Notes purchased by Mr. Pappajohn, $200,000 were assigned to four accredited investors on September 6, 2015. Approximately $10,400 of the total interest was attributable to such transferred Notes, resulting in an aggregate of 42,084 shares being issued upon the Mandatory Conversion of such transferred Notes. |
| (3) | Thomas Tierney is a trustee of the Tierney Family Trust. Mr. Tierney originally joined the Board on February 25, 2013 and served as Chairman of the Board from March 26, 2013 through his resignation on May 22, 2015. On September 29, 2016, Mr. Tierney rejoined the Board and served until his resignation from the Board on July 13, 2017. The Tierney Family Trust is a greater than 5% shareholder of the Company. |
| (4) | Robert Follman is a trustee of the Follman Family Trust and was a member of the Board. Mr. Follman resigned from the Board on July 13, 2017. |
| (5) | Dr. Robin Smith is the Chairman of the Board. |
| (6) | Geoffrey Harris is a member of the Board. |
| (7) | George Carpenter is the CEO of the Company. |
| (8) | Mark & Jill Oman are the beneficial owners of Oman Ventures and were greater than 5% shareholders of the Company. |
Cancellation of Warrants
Emmaus Medical. In connection with the Convertible Debt Financing,purchase and sale agreement, we agreed to guarantee Emmaus Medical’s obligations under the Company also issued warrants to purchasers ofpurchase and sale agreement. Our obligations under the Notes, including to the affiliates referenced above under “-Issuance and Mandatory Conversion of Senior Convertible Notes.” All such warrants were canceled upon the Mandatory Conversion for no value.guarantee are unsecured. F-33 Director and Officer Indemnification Agreement
On September 19, 2017 and September 22, 2017, the Company entered into indemnification agreements with each of its directors and executive officers. The agreements provide for, among other things: the indemnification of such persons by the Company to the fullest extent permitted by the laws of the State of Delaware; the advancement to such persons by the Company of certain expenses; related procedures and presumptions of entitlement; and other related matters.
Transactions with John Pappajohn, Director
Mr. Pappajohn participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
On May 13, 2016, and June 27, 2016, Mr. Pappajohn gifted in aggregate 32,692 of his shares of Common Stock to 12 outside parties including family and friends. The transfer of these shares was completed on September 16, 2016.
On November 30, 2016, December 29, 2016, February 10, 2017 and March 21, 2017, the Company sold and issued in aggregate 120,000 shares of its Common Stock, at a per share price of $6.25, in private placements to Mr. Pappajohn, who purchased common stock for $200,000, $100,000, $200,000 and $250,000 respectively resulting in gross cash proceeds to the Company of $750,000.
Transactions with George Carpenter, President and Chief Executive Officer
Mr. Carpenter participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
On September 25, 2013, the Board approved a consulting agreement effective May 1, 2013, for marketing services provided by Decision Calculus Associates, an entity operated by Mr. Carpenter’s spouse, Jill Carpenter. Effective August 2015, DCA was engaged at a fee of $10,000 per month. From August 2015 through December 31, 2016, DCA has been paid $155,000 with a further $15,000 balance due in accounts payable. The Decision Calculus Associates contract was renewed for 2017 and the fee was reduced to $3,000 per month.
Transactions with Robin Smith, M.D., Chairman of the Board
Dr. Smith participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
On November 30, 2016, the Company sold and issued a 16,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to Dr. Smith resulting in gross cash proceeds to the Company of $100,000.
On July 14, 2017, the Company entered into a Chairman Services Agreement with Dr. Smith, pursuant to which Dr. Smith is entitled to receive certain cash and other compensation. Please see “Executive Compensation - Director Compensation - Fiscal Year Ending September 30, 2017” above for more information.
Transactions with Geoffrey Harris, Director
Mr. Harris participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
On March 3, 2017, the Company sold and issued 5,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to Geoffrey Harris, a director of the Company, resulting in gross cash proceeds to the Company of $31,250.
Transactions with Robert J. Follman, Former Director
The Trust of Robert J. Follman and Carole A. Follman, dated August 14, 1979 (the “Follman Trust”), of which Robert J. Follman is a trustee, participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information. Mr. Follman resigned from our Board on July 13, 2017.
Transactions with Tierney Family Trust, Greater than 5% Stockholder
The Tierney Family Trust participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
Mr. Tierney resigned from the Board as a Director on July 13, 2017. Mr. Tierney is a trustee of the Thomas T. and Elizabeth C. Tierney Family Trust (the “Tierney Family Trust”), which is a greater than 5% stockholder.
On November 30, 2016, the Company sold and issued 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to the Tierney Family Trust, resulting in gross cash proceeds to the Company of $200,000.
Transactions with RSJ, Greater than 5% Stockholder
RSJ participated in the Convertible Debt Financing. Please see “-Issuance and Mandatory Conversion of Senior Convertible Notes” and “-Cancellation of Warrants” above for more information.
On March 20, 2017, the Company entered into a subscription agreement (the “Subscription Agreement”) pursuant to which it sold and issued an aggregate of 160,000 shares of Common Stock, at a price of $6.25 per share, in a private placement to RSJ, for which the Company received gross cash proceeds of $1,000,000. RSJ is a greater than 5% shareholder. Michal Votruba, a Director for Life Sciences for the RSJ/Gradus Fund, joined our Board on July 30, 2015. Pursuant to the Subscription Agreement, the private placement is not subject to a minimum or maximum amount, and the Company cannot provide any assurances that it will receive any additional amount of proceeds in the private placement.
Transactions with Mark and Jill Oman, Greater than 5% Stockholder
On September 22, 2014, Oman Ventures LLC, of which Mr. Oman, a greater than 5% stockholder, is the President, purchased a Note for $200,000. Pursuant to the Omnibus Amendment, such Notes were convertible into shares of Common Stock at $10.00 per share: (i) automatically, upon the closing of a qualified offering of not less than $5 million, or (ii) voluntarily, within 15 days prior to maturity.
Additionally, on December 23, 2015, in connection with the Second Amended and Restated Note & Warrant Purchase Agreement, Oman Ventures LLC was issued an Extension Warrant to purchase 20,000 shares of Common Stock at $10.00 per share. At this time Mr. and Mrs. Oman ceased being greater than 5% Stockholders.
Hooper Holmes Agreement
In 2016, we entered into an agreement with Hooper Holmes Inc, in which Dr. Smith, our Chairman of the Board, became an advisory member of its board as of March 16, 2017, and in which Mr. Pappajohn, our director, has participated in equity raises to become the beneficial owner of a greater than 10% interest. Hooper Holmes has been engaged to administer our EEG’s nationwide as we expand our commercial business.
Director Independence
The information required by Item 407(a) of Regulation S-K is incorporated herein by reference to “Directors, Executive Officers and Corporate Governance — Board Composition, Committees and Director Independence.”
Item 14. Principal Accounting Fees and Services
Audit Fees
The aggregate fees billed for professional services rendered by Anton & Chia, LLP, for professional services rendered for the audit of our annual financial statements and review of the financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2017 and 2016 were $116,750 and $110,000, respectively.
The aggregate fees billed for professional services rendered by Marcum LLP, for professional services rendered for the audit of our annual financial statements and review of the financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2017 were $81,561, respectively.
Audit-Related Fees
Anton & Chia, LLP, billed us $36,750 and $0 in fees for assurance and related services related to the performance of the audit or review of our financial statements for the fiscal years ended September 30, 2017 and 2016, respectively.
Marcum LLP, billed us $24,420 and $0 in fees for assurance and related services related to the performance of the audit or review of our financial statements for the fiscal years ended September 30, 2017 and 2016, respectively.
Tax Fees
The aggregate fees billed by Haskell & White LLP, for professional services rendered for tax compliance, tax advice, and tax planning during our fiscal year ended September 30, 2017, was $14,225.
All Other Fees
None.
Audit Committee Policies and Procedures
Our Audit Committee is directly responsible for interviewing and retaining our independent accountant, considering the accounting firm’s independence and effectiveness, and pre-approving the engagement fees and other compensation to be paid to, and the services to be conducted by, the independent accountant. During each of the fiscal years ended September 30, 2017 and 2016, respectively, our Audit Committee pre-approved 100% of the audit services as described above.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| (a) | 1. The information required by this item is included in Item 8 of Part II of this Annual Report. |
| | 2. The information required by this item is included in Item 8 of Part II of this Annual Report. |
| | 3. Exhibits: See Exhibit Index following the signature pages to this Annual Report, which is incorporated by reference in this Item. |
The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report.
| (b) | Exhibits. See Exhibit Index, which is incorporated by reference in this Item. The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report. |
Item 16. Form 10-K Summary.
None.
EXHIBIT INDEX
Exhibit
Number
| | Description | | | | 2.1 | | Agreement and Plan of Merger by and among Strativation, Inc., CNS Merger Corporation and CNS Response, Inc. dated as of January 16, 2007. Incorporated by reference to Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K filed on January 22, 2007 (File No. 000-26285). | | | | 2.2 | | Amendment No. 1 to Agreement and Plan of Merger by and among Strativation, Inc., CNS Merger Corporation, and CNS Response, Inc. dated as of February 28, 2007. Incorporated by reference to Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K filed on March 1, 2007 (File No. 000-26285). | | | | 3.1 | | Certificate of Incorporation, as amended.Incorporated by reference to Exhibit No. 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2017 (File No. 001-35527). | | | | 3.2 | | Bylaws. Incorporated by reference to Exhibit No. 3.1 to the Registrant’s Current Report on Form 8-K filed on March 28, 2012. | | | | 4.1† | | Amended and Restated 2006 Stock Incentive Plan. Incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2010. | | | | 4.2† | | Amended and Restated 2012 Omnibus Incentive Compensation Plan. Incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on July 27, 2017 (File No. 000-26285). | | | | 4.3* | | Sample Stock Certificate. | | | | 4.4 | | Form of Restricted Share Agreement under the MYnd Analytics, Inc. Amended and Restated 2012 Omnibus Incentive Compensation Plan.Incorporated by reference to Exhibit No. 4.4 to the Registrant’s Annual Report on Form 10-K filed on December 22, 2016 (File No. 001-35527). | | | | 4.5 | | Form of ISO Stock Option Award Certificate under the MYnd Analytics, Inc. Amended and Restated 2012 Omnibus Incentive Compensation Plan.Incorporated by reference to Exhibit No. 4.5 to the Registrant’s Annual Report on Form 10-K filed on December 22, 2016 (File No. 001-35527). | | | | 4.6 | | Form of NQSO Stock Option Award Certificate under the MYnd Analytics, Inc. Amended and Restated 2012 Omnibus Incentive Compensation Plan.Incorporated by reference to Exhibit No. 4.6 to the Registrant’s Annual Report on Form 10-K filed on December 22, 2016 (File No. 001-35527). |
4.7 | | Form of Warrant Agreement between MYnd Analytics, Inc. and American Stock Transfer & Trust Company LLC. Incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-217092) filed on July 13, 2017. | | | | 4.8 | | Form of Warrant Certificate pursuant to Warrant Agreement between MYnd Analytics, Inc. and American Stock Transfer & Trust Company LLC. Incorporated by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-217092) filed on July 13, 2017. | | | | 4.9 | | Warrant Agreement dated as of July 25, 2017, by and between MYnd Analytics, Inc. and American Stock Transfer & Trust Company LLC. Incorporated by reference to Exhibit 4.9 to the Registrant’s Quarterly Report on Form 10-Q(File No. 001-35527) filed on August 14, 2017. | | | | 10.1† | | Employment Agreement by and between the Registrant and George Carpenter dated October 1, 2007. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 5, 2007 (File No. 000-26285). | | | | 10.2 | | Stock Purchase Agreement by and among Colorado CNS Response, Inc., Neuro-Therapy, P.C. and Daniel A. Hoffman, M.D. dated January 11, 2008. Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed on January 13, 2009. | | | | 10.3† | | Employment Agreement by and between the Registrant and Paul Buck effective as of February 18, 2010. Incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-164613) filed on July 6, 2010. | | | | 10.4 | | Form of Placement Agent Warrant issued to Monarch Capital Group, LLC. Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on October 27, 2010 (File No. 000-26285). | | | | 10.5 | | Form of Agreement to Amend Placement Agent Warrants, dated as of June 3, 2011, between the Registrant and the holders of the Placement Agent Warrants issued pursuant to the September 30, 2010 and January 19, 2011 engagement agreements between the Registrant and Monarch Capital Group LLC and the April 15, 2011 engagement agreement between the Registrant and Antaeus Capital, Inc. Incorporated by reference to Exhibit 10.51 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-173934) filed on June 20, 2011. | | | | 10.6 | | Form of Agreement to Amend Warrants issued to staff members of Equity Dynamics for consulting and support services, dated as of June 8, 2011. Incorporated by reference to Exhibit 10.52 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-173934) filed on June 20, 2011. | | | | 10.7 | | Form of Amendment to Stock Option Agreement. Incorporated by reference to Exhibit 10.53 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-173934) filed on June 20, 2011. |
10.9 | | Form of Note Purchase Agreement. Incorporated by reference to Exhibit 10.89 to the Registrant’s Annual Report on Form 10-K filed on December 29, 2014. | | | | 10.10 | | Form of Security Agreement. Incorporated by reference to Exhibit 10.90 to the Registrant’s Annual Report on Form 10-K filed on December 29, 2014. | | | | 10.11 | | Form of Registration Rights Agreement made as of September 22, 2014, by and between the Company and the investor(s) signatory thereto. Incorporated by reference to Exhibit 10.91 to the Registrant’s Annual Report on Form 10-K filed on December 29, 2014. | | | | 10.12 | | Form of Secured Convertible Promissory Note. Incorporated by reference to Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K filed on December 29, 2014. | | | | 10.13 | | Form of Termination Agreement by and between the Company and Equity Dynamics, Inc. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 30, 2015. | | | | 10.14 | | Form of Termination Agreement by and between the Company and SAIL Capital Partners. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 30, 2015. | | | | 10.15 | | Form of Director and Officer Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 10, 2015. | | | | 10.16 | | Form of Amended and Restated Note Purchase Agreement. Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed on January 5, 2016. | | | | 10.17 | | Form of Omnibus Amendment to Amended and Restated Note Purchase Agreement. Incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K filed on January 5, 2016. | | | | 10.18 | | Form of Second Amended and Restated Note and Warrant Purchase Agreement. Incorporated by reference to Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q filed on February 17, 2016. | | | | 10.19 | | Form of Amended and Restated Secured Convertible Promissory Note. Incorporated by reference to Exhibit 10.28 to the Registrant’s Quarterly Report on Form 10-Q filed on February 17, 2016. | | | | 10.20 | | Form of Warrant to Purchase Shares. Incorporated by reference to Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q filed on February 17, 2016. | | | | 10.21 | | Form of Amended and Restated Security Agreement. Incorporated by reference to Exhibit 10.30 to the Registrant’s Quarterly Report on Form 10-Q filed on February 17, 2016. | | | | 10.22 | | Form of Amended and Restated Registration Rights Agreement. Incorporated by reference to Exhibit 10.31 to the Registrant’s Quarterly Report on Form 10-Q filed on February 17, 2016. | | | | 10.23 | | Amendment No. 1 to the Second Amended and Restated Note and Warrant Purchase Agreement.Incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed on December 22, 2016 (File No. 001-35527). | | | | 10.24 | | Settlement Agreement and Mutual General Release, dated as of August 8, 2016, among the Company, Leonard J. Brandt and Brandt Ventures, GP. Incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K (File No. 001-35527) filed on December 22, 2016. |
10.27 | | Common Stock Purchase Agreement, dated December 6, 2016, by and between MYnd Analytics, Inc. and Aspire Capital Fund, LLC. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 6, 2016. | | | | 10.28 | | Registration Rights Agreement, dated December 6, 2016, by and between MYnd Analytics, Inc. and Aspire Capital Fund, LLC. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on December 6, 2016. | | | | 10.29 | | Employment Agreement by and between the Company and Donald E. D’Ambrosio dated March 14, 2017. Incorporated by reference to Exhibit 10.30 to the Registrant’s Quarterly Report on Form 10-Q field on August 14, 2017 (File 001-35527). | | | | 10.30
| | Subscription Agreement, dated March 20, 2017, between the Company and RSJ. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 24, 2017. | | | | 10.31
| | Confidential Employment Separation and Release Agreement, dated April 24, 2017 between Paul Buck and the Company. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 25, 2017. | | | | 10.32
| | Chairman Services Agreement dated July 14, 2017 between MYnd Analytics, Inc. and Dr. Robin L. Smith. Incorporated by reference to Exhibit 10.29 to the Registrant’s Current Report on Form 8-K filed on July 14, 2017. | | | | 10.33
| | Form of Director and Officer Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 25, 2017. | | | | 10.34
| | Equity Purchase Agreement, dated as of November 13, 2017, by and among the Company, Arcadian Telepsychiatry Services, LLC and Mr. Robert Plotkin. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 15, 2017. | | | | 10.35
| | Guaranty of MYnd Analytics, Inc. dated November 13, 2017. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 15, 2017. | | | | 10.36 | | Employment Agreement, dated as of November 13, 2017 by and between the Company and Robert Plotkin. Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-35527) filed on November 15, 2017. |
| * | Filed herewith. | | † | Management compensatory plan, contract or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| MYND ANALYTICS, INC. | | | | By: | /s/ George Carpenter | | | George Carpenter | | | Chief Executive Officer | | | | Date: | December 29, 2017 |
POWER OF ATTORNEY
The undersigned directors and officers of MYnd Analytics, Inc. do hereby constitute and appoint George Carpenter and Donald D’Ambrosio with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in their name and behalf in their capacities as directors and officers and to execute any and all instruments for them and in their names in the capacities indicated below, which said attorneys and agents, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for them or any of them in their names in the capacities indicated below, any and all amendments hereto, and they do hereby ratify and confirm all that said attorneys and agents, or either of them, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date | | | | | | /s/George Carpenter | | Chief Executive Officer | | December 29, 2017 | George Carpenter | | (Principal Executive Officer) | | | | | | | | /s/Donald D’Ambrosio | | Chief Financial Officer | | December 29, 2017 | Donald D’Ambrosio | | (Principal Financial Officer and Principal Accounting Officer) | | | | | | | | /s/Robin Smith MD | | Chairman of the Board | | December 29, 2017 | Robin Smith MD | | | | | | | | | | /s/John Pappajohn | | Director | | December 29, 2017 | John Pappajohn | | | | | | | | | | /s/Michal Votruba | | Director | | December 29, 2017 | Michal Votruba
| | | | | | | | | | /s/Geoffrey Harris | | Director | | December 29, 2017 | Geoffrey Harris
| | | | | | | | | | /s/Peter Unanue | | Director | | December 29, 2017 | Peter Unanue
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