What changed in this filing

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Item 1. Financial Statements

2021-08-26 compared with 2021-08-26 · 212 added, 350 removed, 482 unchanged (54% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

June 30, 2020

September 30, 2020

December 31, 2019

14 unchanged sentences

Accounts payable and accrued expenses

Operating lease liabilities

Operating lease liabilities, current portion

Other current liabilities

10 unchanged sentences

Convertible note payable

Total long-term liabilities

Total liabilities

1 unchanged sentence

Preferred stock — par value $ 0.001 per share, 15,000,000 shares authorized, none issued or outstanding

Common stock — par value $ 0.001 per share, 250,000,000 shares authorized, 48,987,189 shares and 48,471,446 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Common stock — par value $ 0.001 per share, 250,000,000 shares authorized, 48,987,189 shares and 48,471,446 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

7 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended June 30,

Six months ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

REVENUES, NET

9 unchanged sentences

Change in fair value of embedded conversion option

Net gains (losses) on investment in marketable securities and long-term investment

Loss on equity method investment

Net gain (loss) on investment in marketable securities

Gain (loss) on equity method investment

Miscellaneous reverse merger costs

Notes conversion costs

Interest and other income

Interest expense

Total other expenses

LOSS BEFORE INCOME TAXES

INCOME TAXES (BENEFIT)

Total other income (expense)

INCOME (LOSS) BEFORE INCOME TAXES

NET INCOME (LOSS)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

1 unchanged sentence

Other comprehensive income (loss)

COMPREHENSIVE LOSS

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

COMPREHENSIVE INCOME (LOSS)

NET INCOME (LOSS) PER COMMON SHARE - BASIC and DILUTED

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

1 unchanged sentence

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

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

(In thousands, except share and per share amounts)

Additional Paid-In

Accumulated Other Comprehensive

Income (Loss)

Total Stockholders'

Balance, January 1, 2020

7 unchanged sentences

Balance, June 30, 2020

Additional Paid-In

Fair value of warrants including down-round protection adjustments

Share-based compensation

Foreign currency translation effect

Balance, September 30, 2020

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

EMMAUS LIFE SCIENCES, INC.

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

(In thousands, except share and per share amounts)

Accumulated Other Comprehensive

Total Stockholders'

Balance, January 1, 2019, as restated

Balance, January 1, 2019

Cumulative effect adjustment on adoption of ASC 842

1 unchanged sentence

Exercise of warrants

Stock issued for cash (net of issuance cost)

Stock issued for cash

Conversion of notes payable to common stock

Share-based compensation

Exercise of stock options

Exercise of common stock options

Foreign currency translation effect

2 unchanged sentences

Exercise of warrants

Stock issued for cash (net of issuance cost)

Stock issued for cash

Share-based compensation

1 unchanged sentence

Balance, June 30, 2019

Stock issued for cash (net of issuance cost)

Conversion of convertible note and promissory notes payable to common stock

Conversion note inducement

Reclassification of warrant liability to permanent equity

Exchange of common stock in connection with merger

Share-based compensation

Fair value of replacement equity awards

Foreign currency translation effect

Balance, September 30, 2019

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

2 unchanged sentences

(In thousands)

Six months ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net loss to net cash flows used in operating activities

Net income (loss)

Adjustments to reconcile net loss to net cash flows from operating activities

Depreciation and amortization

3 unchanged sentences

Foreign exchange adjustments on convertible notes and notes payable

Net losses (gains) on equity investment in marketable securities

Loss on equity method investee

Loss on debt settlement

Share-based compensation

Net (gain) loss on investment in marketable securities

Loss on equity method investment

Loss on debt extinguishment

Share-based compensation and fair value of replacement equity award

Notes conversion costs

Change in fair value of warrant derivative liabilities

12 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Cash paid in connection with the Merger

Sale of marketable securities

Purchases of property and equipment

Loans to equity method investee

Net cash flows provided by investing activities

Loan made to equity investee

Net cash flows provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

4 unchanged sentences

Proceeds from issuance of common stock

Proceeds from conversion of notes payable to common stock

Net cash flows provided by (used in) financing activities

Effect of exchange rate changes on cash

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

6 unchanged sentences

Beneficial conversion feature relating to convertible notes

Common stocks issued on exercise of warrants

Conversion of notes payable and accrued interest to common stock

Warrant liabilities reclassified to equity

Conversion of notes payable to common stock

Conversion of accrued interest payable to common stock

Initial recognition of right to use assets

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

6 unchanged sentences

The Company’s unaudited condensed consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows.

The consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021.

The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on August 10, 2021.

The accompanying condensed consolidated balance sheet at December 31, 2019 has been derived from the audited consolidated balance sheet at December 31, 2019 contained in the Form 10-K/A.

The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the results to be expected for the full year or any future interim period.

The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year or any future interim period.

Organization and Nature of Operations

1 unchanged sentence

On July 17, 2019, we completed a merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc.

(“EMI”), into a subsidiary of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary.

(“EMI”), into a subsidiary of the Company (the “Merger”), with EMI surviving the Merger as a wholly owned subsidiary of the Company.

Immediately after completion of the Merger, we changed our name to “Emmaus Life Sciences, Inc.”

10 unchanged sentences

Actual results could differ materially from those estimates.

Restatement of Prior Period Amounts — In connection with the preparation of our December 31, 2019 consolidated financial statements, we identified the following material errors in our condensed consolidated financial statements as of and for the three months and six months ended June 30, 2019.

The misclassification as equity of warrants issued by EMI in October of 2018, which warrants should have been accounted for as liabilities based upon fair value;

The erroneous consolidation as a variable interest entity, or VIE, of EMI’s interest in EJ Holdings, Inc., which should have been accounted for based upon the equity method.

The misstatement of the fair value of cashless exercise warrants originally recorded in the Consolidated Statements of Operations and Comprehensive Loss, which fair value should have been recorded in additional paid-in capital in the Consolidated Balance Sheets.

In addition to the errors described above, the restated financial statements also include adjustments to correct certain immaterial errors identified during the audit of the Company’s financial statements for the year ended December 31, 2019.

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

As of June 30, 2019

Previously Reported

CURRENT ASSETS

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Investment in marketable securities

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Equity method investment

Right of use assets

Deposits and other assets

Total other assets

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES

Accounts payable and accrued expenses

Operating lease liabilities, current portion

Other current liabilities

Warrant derivative liabilities

Notes payable, net of discount

Notes payable to related parties

Convertible notes payable, net of discount

Convertible notes payable to related parties, net of discount

Total current liabilities

Operating lease liabilities, less current portion

Other long-term liabilities

Warrant derivative liabilities

Notes payable, net of discount, less current portion

Convertible notes payable, net of discount, less current portion

Total liabilities

STOCKHOLDERS’ DEFICIT

Preferred stock — par value $ 0.001 per share, 20,000,000 shares authorized, none issued or outstanding

Common stock — par value $ 0.001 per share, 250,000,000 shares authorized, 37,880,211 shares outstanding at June 30, 2019

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated deficit

Total stockholders’ deficit

Noncontrolling interest

Total liabilities & stockholders’ deficit

(a) EJ Holdings adjustments:

the correction of this misstatement resulted in increases of $ 13.4 million in equity method investment, $ 172,000 in accounts payable and accrued expenses, and $ 785,000 in non-controlling interest and decreases of $ 12.2 million in cash and cash equivalent and $ 187,000 in prepaid expenses and other current assets .

(b) Warrant adjustments:

the correction of this misstatement resulted in increases of $ 7.8 million in warrant derivative current liabilities, and $ 90,000 in short-term note payable and decreases of $ 703,000 in long-term notes payable and $ 9.7 million in additional paid-in capital.

period adjustment and reclassification of variable consideration resulted in an increase of $ 301,000 in accounts receivable and a decrease of $ 110,000 in accounts payable and accrued expenses, a decrease of $ 10,000 in income tax receivable and an increase of $ 24,000 in income tax payable;

a reclassification of GPB warrants resulted an increase of short-term warrant liability and a decrease of long-term warrant liability of $ 1.2 million;

and correction of tax provision resulted an increase of $ 90,000 in income tax receivable and a decrease of $ 24,000 in income tax payable.

(d) Retrospective adjustments made to common stock resulted from recapitalization transaction in July 2019.

(e) Carryforward impact on 2018 restatement adjustments, including cashless warrant adjustments which resulted in an increase in additional paid-in capital and a decrease in retained earnings of $ 18.3 million.

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amount)

Three months ended June 30, 2019

Six months ended June 30,2019

Previously Reported

REVENUES, NET

COST OF GOODS SOLD

OPERATING EXPENSES

Research and development

General and administrative

Total operating expenses

INCOME (LOSS) FROM OPERATIONS

OTHER INCOME (EXPENSE)

Change in fair value of warrant derivative liabilities

Net losses on investment in marketable securities and long-term investment

Losses on equity method investment

Interest and other income (loss)

Interest expense

Total other income (expenses)

LOSS BEFORE INCOME TAXES

INCOME TAXES (BENEFIT)

NET LOSS INCLUDING NONCONTROLLING INTERESTS

Net (income) loss attributable to noncontrolling interests

NET LOSS ATTRIBUTABLE TO THE COMPANY

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

Foreign currency translation adjustments

Other comprehensive income (loss)

COMPREHENSIVE INCOME (LOSS)

Amounts attributable to noncontrolling interest:

Net (income) loss attributable to noncontrolling interest

Foreign currency translation adjustments

Comprehensive (income) loss attributable to noncontrolling interest

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

(a) EJ Holdings adjustments:

the correction of this misstatement resulted in increases of $ 33,000 in interest income and $ 15,000 in foreign currency translation adjustments and decreases of $ 1.1 million in general and administrative expenses, $ 458,000 in loss on equity method investment, and $ 688,000 in net loss attributable to noncontrolling interest for three months ended June 30, 2019.

The correction of this misstatement resulted in increases of $ 67,000 in interest income and $ 14,000 in foreign currency translation adjustments and decreases of $ 1.1 million in general and administrative expense, $ 449,000 in loss on equity method investment, and $ 674,000 in net loss attributable to noncontrolling interest for six months ended June 30, 2019.

(b) Warrant adjustments:

the correction of this misstatement resulted in increases of $ 647,000 in interest expense and $ 607,000 in change in fair value of warrant derivative liabilities for the three months ended June 2019.

The correction of this misstatement resulted in an increase of $ 335,000 in interest expense and a decrease of $ 283,000 in change in fair value of warrant derivative liabilities for six months ended June 30, 2019.

( c ) Corrections of other misstatement:

period adjustment of variable consideration resulted in a decrease of $ 376,000 in revenue s , net;

and reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $ 69,000 in cost of sales and decreases of $ 12,000 and $ 58,000 in selling expense and general and administrative expense, respectively .

Corrections of other misstatement for the six months ended June 30, 2019 :

period adjustment of variable consideration resulted in a decrease of $ 976,000 in revenues, net ;

reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $ 128,000 in cost of sales and decreases of $ 18,000 and $ 110,000 in selling expense and general and administrative expense, respectively;

correction of stock modification accounting resulted in a decrease of $ 52,000 in general and administrative expense;

correction of accounting treatment for convertible notes resulted in an increase of $ 1.3 million in interest expense ;

and correction of income tax provision resulted in an decrease of $ 113,000 in income tax provision .

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six Months Ended June 30, 2019

Previously Reported

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net loss to net cash flows from operating activities

Depreciation and amortization

Impairment loss on long-term investment

Amortization of discount of convertible notes and notes payable

Foreign exchange adjustments on convertible notes and notes payable

Net losses (gains) on equity investment in marketable securities

Loss on equity method investments

Share-based compensation

Change in fair value of warrant derivative liabilities

Net changes in operating assets and liabilities

Accounts receivable

Prepaid expenses and other current assets

Other non-current assets

Accounts payable and accrued expenses

Income tax receivable and payable

Deferred revenue

Deferred rent

Other current liabilities

Other long-term liabilities

Net cash flows provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment

Sales of marketable securities

Purchase of marketable securities and investment at cost

Net cash flows provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Payments of convertible notes

Proceeds from exercise of warrants

Proceeds from issuance of common stock

Proceeds from conversion of notes payable to common stock

Net cash flows provided by (used in) financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

Interest paid

Income taxes paid

NON-CASH INVESTING AND FINANCING ACTIVITIES

Beneficial conversion feature relating to convertible notes

Common stocks issued on exercise of warrants

Conversion of notes payable and acrued interest to common stock

Initial recognition of right-of-use lease asset

Refer to the descriptions of the adjustments in the Condensed Consolidated Balance Sheets and Statements of Comprehensive Loss as of and for the three months ended June 30, 2019 and their impact on net loss above.

In addition, a cash flow classification adjustment related to EJ Holdings resulted in a net decrease to cash flows used by operating activities of $ 953,000 for the six months ended June 30, 2019.

Reclassification of prior year presentation —Certain reclassifications have been made to the prior period amounts to confirm with the current year presentation.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1 unchanged sentence

There have been no material changes in these policies or their application.

Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements and believes that these recent pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.

Management has considered all recent accounting pronouncements will not have a material effect on the Company’s condensed consolidated financial statements.

Refer to the Amended Annual Report for a summary of significant accounting policies.

There were no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2020.

Restricted cash — Restricted cash includes proceeds received from the sales of shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc.

2 unchanged sentences

Reconciliation of cash, cash equivalent and restricted cash are as follows:

Six Month Ended June 30

Nine Months Ended September 30,

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows

Net loss per share — In accordance with ASC 260, “Earnings per Share, ” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding.

Dilutive loss per share is computed in a manner similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

As of June 30, 2020 and June 30, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 17,288,829 shares and 17,996,931 shares, respectively, of the Company’s common stock.

No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all period presented.

As of September 30, 2020 and September 30, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 19,276,395 shares and 13,457,963 shares, respectively, of Company common stock.

No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all periods presented.

NOTE 3 — REVENUES

Revenues disaggregated by category were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Revenues, net

The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2020 and 2019 (in thousands):

The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 2020 and 2019 (in thousands):

Trade Discounts, Allowances and Chargebacks

4 unchanged sentences

Credit and payments made

Balance as of June 30, 2020

Balance as of September 30, 2020

Balance as of December 31, 2018

1 unchanged sentence

Credit and payments made

Balance as of June 30, 2019, restated

Balance as of September 30, 2019

The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our total revenues (as a percentage of total revenues):

Three Months Ended June 30,

Six Months Ended June 30,

The Company is party to a distributor agreement with Telcon pursuant to which it granted Telcon exclusive rights to the Company’s prescription 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.

Three Months Ended September 30,

Nine Months Ended September 30,

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 June 30, 2020 and December 31, 2019.

Refer Note 11 and Note 13 for additional transaction details.

The upfront fee of $ 10 million is included in other long-term liabilities as unearned revenue as of September 30, 2020 and December 31, 2019.

See Note 1 0 for additional details.

The Company received an upfront payment 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.

1 unchanged sentence

The upfront payment of $ 500,000 is included in other long-term liabilities as unearned revenue as of December 31, 2019.

In June 2020, the distribution agreement was terminated and $ 500,000 up front payment was recognized as other income.

During the nine months ended September 30, 2020, the distribution agreement was terminated, and the Company recognized the $ 500,000 up front payment as other income in the Consolidated Comprehensive Statements of Income (Loss).

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

Inventories consisted of the following (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

Prepaid expenses and other current assets consisted of the following (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

2 unchanged sentences

Property and equipment consisted of the following (in thousands):

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

Property and equipment, net

During the three months ended June 30, 2020 and 2019 , depreciation expense s w ere approximately $ 11,000 and $ 14,000 , respectively.

During the six months ended June 30, 2020 and 2019 , depreciation expenses w ere approximately $ 23,000 and $ 28,000 , respectively.

During the three months ended September 30, 2020 and 2019, depreciation expenses were approximately $ 12,000 and $ 16,000 , respectively.

During the nine months ended September 30, 2020 and 2019, depreciation expenses were approximately $ 35,000 and $ 44,000 , respectively.

NOTE 5 — INVESTMENTS

Equity securities— As of June 30, 2020 and December 31, 2019, the Company held 6,222,837 shares and 6,643,559 shares, respectively, 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 June 30, 2020, and December 31, 2019, the closing prices per Telecon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were approximately $ 4.34 and $ 4.20 , respectively.

Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligations under the revised API agreement with Telcon.

Equity securities— As of December 31, 2019, the Company held 6,643,559 shares of capital stock of Telcon which were acquired in July 2017 for approximately $ 31.8 million.

As of December 31, 2019, the closing price of Telecon shares on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was approximately $ 4.20 .

As of December 31, 2019, the fair value of the shares of $ 27.9 million was recorded in investment in marketable securities as of December 31, 2019.

The net unrealized losses on available-for sale marketable securities held as of December 31, 2019 and since the adoption of ASU 2016-01 as of January 1, 2018 was $ 43.2 million.

Prior to December 2019, all shares of Telcon common stock were pledged to secure the Company’s obligation under the revised API agreement with Telcon.

In December 2019, the API agreement was amended to permit the release of 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 approximately $ 26.1 million to be substituted for the Telcon shares pledged to Telcon to secure the Company’s obligations under the revised API agreement between the Company and Telcon.

During the six months ended June 30, 2020, the Company sold 420,772 shares for $ 2.1 million.

During the nine months ended September 30, 2020, the Company sold all of the Telcon shares for total net proceeds of $ 35.6 million.

Refer to Note 6, 11 and 13 for more information regarding this arrangement.

6 unchanged sentences

When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value.

For the six months ended June 30, 2019, the Company recognized approximately $ 524,000 in impairment loss on equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.

As of June 30, 2020 and December 31, 2019, the carrying values of equity securities were included in the following line items in our consolidated balance sheets (in thousands):

June 30, 2020

December 31, 2019

Fair Value with Changes Recognized in Income

Marketable securities

Total equity securities

Net unrealized loss on marketable securities available-for-sale at June 30, 2020 and June 30, 2019 was approximately $ 0.8 million and approximately $ 16.5 million, respectively.

For the nine months ended September 30, 2019, the Company recognized approximately $ 524,000 in impairment loss for equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.

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.

2 unchanged sentences

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 $ 13.2 million.

The loan was valued at $ 13.9 million and $ 13.8 million as of June 30, 2020 and December 31, 2019, respectively.

The loan proceeds were used by EJ Holdings to purchase the Ube facility in December 2019 and pay related taxes.

The loan matures on September 30, 2028 and bears interest at the rate of 1 % per annum payable annually.

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, in consultation with the Company.

During the six months ended June 30, 2020, the Company had made additional loans to EJ Holdings of $ 561,000 and at June 30, 2020 had loans receivable from EJ Holdings valued at $ 14.5 million.

EJ Holdings is engaged in phasing in the Ube facility, including obtaining FDA and other regulatory approvals for the manufacture of PGLG in accordance with cGMP.

The parties also contemplated that the Ube facility will eventually supply the Company with the facility’s output of amino acids and 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, in consultation with the Company.

During the nine months ended September 30, 2020, the Company made additional loans of $ 2.6 million to EJ Holdings.

As of September 30, 2020 and December 31, 2019, the loans receivable were approximately $ 14.5 million and $ 13.8 million, respectively.

EJ Holdings is engaged in phasing in the Ube facility, including obtaining regulatory approvals for the manufacture of PGLG in accordance with cGMP.

EJ Holdings has had no significant revenues since its inception, has depended on loans from the Company to acquire the Ube facility and fund its operations and will continue to 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 has 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 the EJ Holdings activities at the facility are principally for the Company’s benefit .

The Company has 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 EJ Holdings’ activities at the facility are principally for the Company’s benefit.

JIP, however, owns 60% of EJ Holdings and is entitled to designate a majority of EJ Holdings’ board of directors and its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings.

2 unchanged sentences

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.

The following table sets forth certain financial information of EJ Holdings for the three months ended and the six months ended June 30, 2020 and 2019 (in thousands).

Three Months Ended June 30,

Six Months Ended June 30,

The following table sets forth certain financial information of EJ Holdings for three months and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

REVENUES, NET

NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES

Accounts payable and accrued expenses consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

Accounts payable and accrued expenses consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

December 31, 2019

15 unchanged sentences

Total accounts payable and accrued expenses

Other long-term liabilities consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020

Other long-term liabilities consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

December 31, 2019

4 unchanged sentences

On June 12, 2017, the Company entered into an API Supply Agreement, as subsequently amended (as so amended, the “API agreement”), with Telcon pursuant to which Telcon advanced to the Company approximately $ 31.8 million as an advance trade discount in consideration of the Company’s agreement to purchase from Telcon the Company’s requirements for bulk containers of PGLG.

The Company purchased $ 2.0 million and $ 2.3 million of PGLG from Telcon in the six months ended June 30, 2020 and June 30, 2019, respectively.

As of June 30, 2020 and December 31, 2019, accounts payable to Telcon were $ 3.7 million.

The Company purchased $ 2 million and $ 3.5 million of PGLG from Telcon in the nine months ended September 30, 2020 and September 30, 2019, respectively.

As of September 30, 2020 and December 31, 2019, accounts payable to Telcon were zero and $ 3.3 million, respectively.

See Note 11 for additional details.

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

Notes payable consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

Interest Rate

Term of Notes

Outstanding June 30, 2020

Amount June 30, 2020

Underlying June 30, 2020

Outstanding September 30, 2020

Amount September 30, 2020

Underlying September 30, 2020

Notes payable

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Due on demand

Convertible debentures

Convertible notes payable

Convertible note payable

Interest Rate

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Convertible debentures

Convertible notes payable

The notes are convertible to Emmaus Life Sciences, Inc.

The notes are convertible to EMI Holding, Inc.

The weighted-average stated interest rate of notes payable was 10 % as of June 30, 2020 and December 31, 2019.

The weighted-average effective annual interest rate of notes payable as of June 30, 2020 and December 31, 2019 was 34 % and 66 %, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.

As of June 30, 2020, future contractual principal payments due on notes payable were as follows:

2020 (six months)

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.

Convertible note payable

(a) These debentures are convertible into Emmaus Life Sciences, Inc.

(b) This note is convertible into EMI Holding, Inc.

The weighted-average stated interest rate of notes payable was 10 % as of September 30, 2020 and December 31, 2019.

The weighted-average effective annual interest rate of notes payable as of September 30, 2020 and December 31, 2019 was 35 % and 66 %, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.

As of September 30, 2020, future contractual principal payments due on notes payable were as follows:

2020 (three months)

Immediately prior to the completion of the Merger, all but one of the convertible notes payable (excluding the 10% Senior Secured Debentures of EMI discussed below) 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 is convertible into shares of common stock of EMI at conversion price of $ 10.00 per share and included in convertible notes payable .

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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 as of June 30, 2020 and December 31, 2019 (in thousands):

Six Months Ended

Conversion feature liabilities - Amended and Restated 10% Senior Convertible Debentures

June 30, 2020

The following table sets forth the fair value of the conversion feature liabilities as of September 30, 2020 and December 31, 2019 (in thousands):

Nine Months Ended

Conversion feature liabilities - Amended and Restated 10% Senior Secured Convertible Debentures

September 30, 2020

December 31, 2019

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Fair value at debt modification date

Change in fair value included in the statement of comprehensive income (loss)

Change in fair value included in the statement of comprehensive loss

Balance, end of period

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The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.

The fair values as of June 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:

June 30, 2020

The fair values as of September 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:

September 30, 2020

February 21, 2020

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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.

The outstanding balances under the revolving line of credit agreement of $ 600,000 as of June 30, 2020 and December 31, 2019 were reflected in revolving line of credit, related party on the Consolidated Balance Sheet.

With the tax-gross up, the effective annual interest rate on the outstanding balance as of June 30, 2020 was 10.4 %.

The outstanding balances under the revolving line of credit agreement of $ 800,000 and $ 600,000 as of September 30, 2020 and December 31, 2019, respectively were reflected in revolving line of credit, related party on the Consolidated Balance Sheet.

With the tax-gross up, the effective annual interest rate on the outstanding balance as of September 30, 2020 was 10.4 %.

The revolving line of credit agreement will expire on November 22, 2022 .

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The PPP, established as part of the 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 loan, which is in the form of a Promissory Note dated April 29, 2020 , matures on April 29, 2022 and bears interest at a rate of 1 % per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment or the loan forgiveness process has commenced.

The loan, which was in the form of a Promissory Note dated April 29, 2020 , matures on April 29, 2022 and bears interest at a rate of 1 % per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment.

The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

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The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period.

The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheet.

The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheets.

NOTE 8 — STOCKHOLDERS’ DEFICIT

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The GPB Warrant became exercisable six months after issuance and has a term of five years from the initial exercise date.

The Company determined that under ASC 815-40, GPB Warrant should be separately recognized at fair value as a liability.

The Company determined that under ASC 815-40, the GPB Warrant should be separately recognized at fair value as a liability.

The warrant liability is remeasured at fair value on a recurring basis using Level 3 inputs and any change in the fair value of the liability is recorded in earnings.

The following table presents the change in fair value of the GPB Warrant as of June 30, 2020 and December 31, 2019 (in thousands):

Six Months Ended

June 30, 2020

The following table presents the change in fair value of the GPB Warrant as of September 30, 2020 and December 31, 2019 (in thousands):

Nine Months Ended

Warrant Derivative Liabilities—GPB

September 30, 2020

December 31, 2019

Warrant Liability - GPB

Balance, beginning of period

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Balance, end of period

The fair value of the warrant derivative liability was determined using the Black-Scholes option pricing model.

The fair value of the warrant derivative liability was determined using the Black-Scholes-Merton option pricing model.

The value as of the dates set forth in the table above was based on upon following assumptions:

June 30, 2020

September 30, 2020

December 31, 2019

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The exercise price of the amended and restated warrants was subsequently adjusted in accordance with their terms to $ 5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.

Pursuant to the terms of a securities amendment agreement entered into on February 21, 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 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.

Pursuant to the terms of a securities amendment agreement entered into in February 2020 he 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 thereof to $ 3.00 per share from $ 9.52 per share.

The related amended and restated 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 the Purchase Agreement with Lincoln Park Capital LLC described below and were subsequently reduced again as described in Note 13.

On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of the Amended and Restated 10 % Senior Secured Convertible Debentures described above.

The September 2020 Amendment amended in certain respects the securities purchase agreement among EMI and the Debenture holders originally entered into on September 8, 2018, as amended by the February 2020 Amendment, and provides that the Debentures are to be amended in certain respects as set forth in the form of Allonge Amendment No.

1 to the debentures included in the September 2020 Agreement (the “Allonge”).

Pursuant to the Allonge, the aggregate monthly redemption payments under the Debentures were reduced to $ 500,000 from $ 1,000,000 in principal amount and the maturity date of the Debentures was extended from April 21, 2021 to August 31, 2021 .

The monthly redemption payments resumed in September 2020 and will continue on the first day of each month thereafter commencing October 1, 2020.

The remaining principal balance of the Debentures will be due and payable upon maturity, subject to mandatory prepayment in connection with certain “Capital Events” as defined.

In consideration of the Debenture holder’s financial accommodations to the Company, the Company issued to the holders, pro rata based upon the relative principal amounts of their Debentures, five-year common stock purchase warrants to purchase a total of up to 1,840,000 shares of the Company common stock at an exercise price of $ 2.00 a share.

The warrants provide for so-called full-

ratchet anti-dilution adjustments in the event the Company sells or issues shares of common stock or common stock equivalents at an effective price per share less than the exercise price of the warrants, subject to certain exceptions.

The exercise price also remains subject to adjustment for stock splits and other customary events.

In October 2018, the Company granted to T.R.

Winston and its affiliates for services relating to the September 2020 Amendment common stock purchase warrants to purchase up to 75,000 shares of the Company common stock at an exercise price of $ 2.10 a share and otherwise on terms identical to the warrants issued to the debenture holders described above.

In March 2021, the conversion price of the Debentures, and the exercise price of the these and the other warrants related to the Debentures was reduced to $ 1.54 in connection with our issuance of shares of common stock to Kainos Medicine, Inc.

See Note 12 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 a recurring basis using Level 3 input and any changes in fair value

is recorded in earnings.

In 2019, the D ebentures 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 Notes - 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 % per annum.

In conjunction with this amendment, the Company issued to the holder of note five-year contingent 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, subject to certain conditions.

Under ASC 815-40, the Company concluded that the warrants issued to the note holder should be recognized at fair value as a liability.

The liability is remeasured at fair value on a recurring basis using Level 3 input and 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 Notes - On June 15, 2020, the holder of a convertible promissory note of EMI 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 % per annum.

In conjunction with this amendment, the Company issued to the holder of note 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.

Under ASC 815-40, the Company concluded that the warrants issued to the holder of the note 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 June 30, 2020 (in thousands):

Six Months Ended

The following table presents the change in fair value of the warrants as of September 30, 2020 (in thousands):

Warrants Derivative Liabilities - convertible promissory note

June 30, 2020

September 30, 2020

Balance, beginning of period

2 unchanged sentences

Balance, end of period

The fair value of the warrant derivative liabilities was determined using the Black-Scholes Merton model and was

based upon following assumptions:

June 30, 2020

The fair value of the warrant derivative liabilities was determined using the Black-Scholes-Merton option pricing model based on upon following assumptions:

September 30, 2020

June 15, 2020 (modification date)

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Warrant shares

A summary of outstanding warrants as of June 30, 2020 and December 31, 2019 is presented below:

June 30, 2020

A summary of outstanding warrants as of September 30, 2020 and December 31, 2019 is presented below:

September 30, 2020

December 31, 2019

3 unchanged sentences

Warrants outstanding, end of period

A summary of outstanding warrants by year issued and exercise price as of June 30, 2020 is presented below:

A summary of outstanding warrants by year issued and exercise price as of September 30, 2020 is presented below:

Year issued and Exercise Price

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At December 31, 2019

At June 30, 2020

At September 30, 2020

Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company.

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The Company also has an Amended and Restated 2012 Omnibus Incentive Compensation Plan under which the Company may grant stock options and other stock awards to selected employees including officers, and to non-employee consultants and non-employee directors.

All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger and the Company intends not to make any further awards thereunder.

Stock options —During the six months ended June 30, 2020, the Company granted options to purchase 90,000 shares of common stock.

All outstanding stock award under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the Merger.

Stock options — During the nine months ended September 3 0 , 20 20 , the Company granted options to purchase 90,000 shares of common stock .

During the year ended December 31, 201 9 , the Company granted stock options to purchase 50,000 shares of Company common stock .

All the options are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows:

as to one‑third of the shares on the first anniversary of the grant date, and as to the remaining two‑thirds shares in twenty‑four approximately equal monthly installments over a period of two years thereafter .

All the option s are exercisable for ten years from the date of grant and will vest and become exercisable with respect to the underlying shares as follows:

as to one‑third of the share s on the first anniversary of the grant date, and as to the remaining two‑thirds shares in twenty ‑four approximately equal monthly installments over a period of two years thereafter .

Management has valued stock options at their date of grant utilizing the Black‑Scholes‑Merton option pricing model.

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The following table presents the assumptions used on recent dates on which options were granted by the Company.

June 29, 2020

June 19, 2019

Exercise Price

Risk-Free Rate

0.28% - 0.38%

Dividend Yield

78.91%-80.49%

A summary of outstanding stock options as of June 30, 2020 and December 31, 2019 is presented below.

June 30, 2020

A summary of outstanding stock options as of September 30, 2020 and December 31, 2019 is presented below:

September 30, 2020

December 31, 2019

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Upon the Merger, the exercise prices of outstanding EMI options and number of shares of the Company common stock underlying the options were adjusted based upon the exchange ratio in the Merger.

During the three months ended June 30, 2020 and June 30, 2019, the Company recognized $ 0.2 million and $ 0.4 million, respectively, of share-based compensation expense.

During the six months ended June 30, 2020 and June 30, 2019, the Company recognized approximately $ 0.4 million and $ 1.0 million, respectively, of share-based compensation expense.

As of June 30, 2020, there was approximately $ 1.1 million of total unrecognized compensation expense related to unvested share-based compensation which is expected to be recognized over the weighted-average remaining vesting period of 1.4 years.

During the three months ended September 30, 2020 and September 30, 2019, the Company recognized $ 0.1 million and $ 3.5 million, respectively, of share-based compensation expense.

During the nine months ended September 30, 2020 and September 30, 2019, the Company recognized approximately $ 0.5 million and $ 4.6 million, respectively, of share-based compensation expense.

During the three months and nine months ended September 30, 2019, $ 1.9 million of one-time adjustments resulting from the Merger is included in the share-based compensation expense.

As of September 30, 2020, there was approximately $ 0.7 million of total unrecognized compensation expense related to unvested share-based compensation.

That expense is expected to be recognized over the weighted-average remaining vesting period of 1.0 year.

Purchase Agreement with Lincoln Park Capital Fund, LLC — On February 28, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company may elect to sell to LPC up to $ 25,000,000 in shares of its common stock, subject to certain limitations and conditions set forth in the Purchase Agreement, including 100,000 initial shares that the Company sold to LPC at a price of $ 2.00 per share.

amount is subject to increase under certain circumstances based upon increases in the market price of its common stock.

Pursuant to the Purchase Agreement, on any business day over the 36-month term of the Purchase Agreement the Company has the right at its discretion and subject to certain conditions to direct LPC to purchase up to 20,000 shares of common stock, which amount is subject to increase under certain circumstances based upon increases in the market price of its common stock.

The purchase price of the common stock will be based upon the prevailing market price of common stock at the time of the purchase without any fixed discount.

In addition, the Company may direct LPC to purchase additional amounts as accelerated purchases and additional accelerated purchases under certain circumstances.

Apart from the initial sale of shares described above, the Company is not obliged to sell any shares of common stock pursuant 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 in any single regular purchase (excluding accelerated or additional accelerated purchases).

sales, but in no event will LPC be required to purchase more than $ 1,000,000 of common stock in any single regular purchase (excluding accelerated or additional 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.

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The quarterly provision for or benefit from income taxes is computed at an estimated annual effective tax rate to the year-to-date pre-tax income (loss).

For the three months and six months ended June 30, 2020, the Company recorded an income tax benefit of $ 0.5 million and $ 0.2 million, respectively.

For the three months and six months ended June 30, 2019, the Company recorded a provision for income taxes of $ 51,000 and $ 103,000 , respectively.

The provisions for income taxes for the three and six months ended June 30, 2020 and 2019, were primarily related to state tax on the Company pre-tax book income.

The Company did no t record a provision for federal income tax due to its net operating loss carryforwards.

The Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of June 30 2020 or 2019.

For the three months and nine months ended September 30, 2020, the Company recorded a provision for income tax for $ 0.3 million and $ 80,000 , respectively.

For the three months and nine months ended September 30, 2019, the Company recorded a provision for income tax of approximately $ 56,000 and $ 159,000 , respectively.

The provisions for income taxes for the three and nine months ended September 30, 2020 and 2019 were primarily related to state tax on the Company’s pre-tax book income.

The Company did not record a provision for federal income tax due to its net operating loss carryforwards.

The Company established a full valuation allowance against its federal and state deferred tax assets and there was no unrecognized tax benefit as of September 30, 2020 or 2019.

NOTE 10 — LEASES

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The Company also leased an additional 1,850 square feet office space in New York, New York, at a base rent of $ 8,479 , which leases will expire on January 31, 2023 .

In addition, the Company leased 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $ 3,000 , which the lease will expire on September 30, 2020 .

The rent expense during the three months ended June 30, 2020 and 2019 amounted to approximately $ 298,000 and $ 219,000 , respectively, and during the six months ended June 30, 2020 and 2019 amounted approximately $ 609,000 and $ 419,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of June 30, 2020 (in thousands):

2020 (six months)

In addition, the Company leased 1,322 square feet of office space in Tokyo, Japan, at a base rent of approximately $ 3,000 , which the lease was expired on September 30, 2020 .

Upon the expiration of the lease, the lease was renewed and the new lease will expire on September 30, 2022 .

The rent expense during the three months ended September 30, 2020 and 2019 amounted to approximately $ 286,000 and $ 280,000 , respectively, and during the nine months ended September 30, 2020 and 2019 amounted approximately $ 895,000 and $ 705,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of September 30, 2020 (in thousands):

2020 (three months)

2024 and thereafter

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The Company adopted Accounting Standard Update (“ASU”) 2016-02 – Lease (“Topic 842”) 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.

1 unchanged sentence

The Company also recorded a $ 29,000 cumulative effect increased on our accumulated deficit as of January 1, 2019.

As of June 30, 2020, the Company had an operating lease right-of-use asset of $ 4.3 million and lease liability of $ 4.8 million in the balance sheet.

The weighted average remaining term of the Company’s leases as of June 30, 2020 was 6.0 years and the weighted-average discount rate was 12.4 %.

As of September 30, 2020, the Company had an operating lease right-of-use asset of $ 4.1 million and lease liability of $ 4.7 million in the balance sheet.

The weighted-average remaining term of the Company’s leases as of September 30, 2020 was 5.7 years and the weighted-average discount rate was 12.75 %.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

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(“Ajinomoto”), the producer of the PGLG, 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.

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 September 30, 2020, with the price payable after September 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.

1 unchanged sentence

NOTE 12 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related persons outstanding as of June 30, 2020 and interest paid during the six months ended June 30, 2020 (in thousands):

Principal Amount Outstanding at June 30, 2020

The following table sets forth information relating to our loans from related persons outstanding as of September 30, 2020 and any interest paid during the nine months ended September 30, 2020 (in thousands):

Principal Amount Outstanding at September 30, 2020

Current, Promissory note payable to related parties:

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Due on Demand

Hope International Hospice, Inc.

Due on Demand

Hope International Homecare, Inc.

Due on Demand

Soomi Niihara

Due on Demand

Revolving line of credit

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Due on Demand

Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also a director and the Chief Executive Officer of Hope International Hospice, Inc.

Niihara, the Chairman and Chief Executive Officer of the Company, and his wife, Soomi Niihara, are the co-owners and directors of Hope International Hospice, Inc., of which Dr.

Niihara is the Chief Executive Officer.

Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.

See Note 7 for a discussion of the Company’s revolving line of credit agreement with Dr.

See Notes 6 and 11 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.6 % of the common stock outstanding as of June 30, 2020.

As of June 30, 2020, the Company held 6,222,837 shares of Telcon stock as discussed in Note 5.

See Notes 6, 11 and 13 for a discussion of the Company’s distribution and supply agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.6 % of the common stock outstanding as of September 30, 2020.

NOTE 13 — SUBSEQUENT EVENTS

On September 22, 2020, the Company and EMI entered into a securities amendment agreement (the “September 2020 Amendment”) with the holders of our outstanding 10 % Senior Secured Convertible Debentures described above.

1 to the debentures included in the September 2020 Agreement (the “Allonge”).

The monthly redemption payments resumed in September 2020 and will continue on the first day of each month thereafter commencing October 1, 2020.

The remaining principal balance of the Debentures will be due and payable upon maturity, subject to mandatory prepayment in connection with certain “Capital Events” as defined.

The warrants provide for so-called full-ratchet anti-dilution adjustments in the event the Company sells or issues shares of common stock or common stock equivalents at an effective price per share less than the exercise price of the warrants, subject to certain exceptions.

The exercise price also remains subject to adjustment for stock splits and other customary events.

In October 2018, the Company granted to T.R.

referred to below in this Note 13.

In March 2021, we prepaid the Debentures in full in accordance with their terms.

On September 28, 2020, the Company entered into a convertible bond purchase agreement with Telcon pursuant to which it purchased on October 16, 2020 at face value a convertible bond of Telcon in the principal amount of $ 26.1 million, on the terms described in the purchase agreement.

The Company purchased the convertible bond with a portion of the net proceeds from the sale of Telcon common shares owned by us.

The Company purchased the convertible bond with a portion of the net proceeds from the sale of Telcon shares owned by the Company.

The sale of the Telcon shares and purchase of the Telcon convertible bond was in accordance with our December 23, 2019 agreement with Telcon.

As contemplated by the December 23, 2019 agreement, the convertible bond and any proceeds therefrom, including proceeds from any exercise of the call option or early redemption right described below, replace the Company’s former Telcon shares and proceeds therefrom as collateral under the revised API Supply Agreement with Telcon.

The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1 % a year, payable quarterly.

The Telcon convertible bond matures on October 16, 2030 and bears interest at the rate of 2.1 % per annum payable quarterly.

Beginning on October 16, 2021, the holder of the convertible bond will be entitled on a quarterly basis to call for early redemption of all or any portion of the principal amount of the convertible bond.

9 unchanged sentences

As of April 5, 2021, the Company had sold approximately $ 14.5 million of the convertible promissory notes.

Of the net proceeds from the sale of the convertible promissory notes, $ 6.2 million was used to prepay the outstanding Amended and Restated 10 % Senior Secured Convertible Debentures as described above.

Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of the Company 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.

Of the net proceeds from the sale of the convertible promissory notes, $ 6.2 million was used to prepay in full the outstanding Amended and Restated 10 % Senior Secured Convertible Debentures in March 2021.

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 the Company common stock on the effective date.

The initial conversion price will be adjusted 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.

1 unchanged sentence

The convertible promissory notes bear interest at the rate of 2 % per annum payable semi-annually on the last 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 or after February 28, 2022 if our common shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined).

The Company will be entitled to prepay up to 50 % of the principal amount of the convertible promissory notes at any time after the first anniversary and on or before the second anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50 % of such principal amount.

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 stock shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined).

The Company will be entitled to prepay up to 50 % of the principal amount of the convertible promissory notes at any time after the 1st anniversary and on or before the 2 nd anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50 % of such principal amount.

The convertible promissory notes are general, unsecured obligations of the Company.

5 unchanged sentences

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What changed 10-Q

Item 1. Financial Statements