What changed in this filing

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Item 1. Financial Statements

2021-09-01 compared with 2021-08-26 · 334 added, 430 removed, 326 unchanged (70% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

March 31, 2020

June 30, 2021

December 31, 2020

3 unchanged sentences

Inventories, net

Investment in marketable securities

Prepaid expenses and other current assets

3 unchanged sentences

Right of use assets

Deposits and other assets

Investment in convertible bond

LIABILITIES AND STOCKHOLDERS’ DEFICIT

2 unchanged sentences

Operating lease liabilities, current portion

Conversion feature derivative, notes payable

Other current liabilities

Revolving line of credit to related parties

Revolving line of credit from related party

Warrant derivative liabilities

Notes payable

Notes payable, current portion

Notes payable to related parties

Convertible debentures, net of discount, current portion

Convertible note payable, net of discount

Convertible debentures, net of discount

Total current liabilities

1 unchanged sentence

Other long-term liabilities

Convertible debentures, net of discount, less current portion

Notes payable, less current portion

Convertible notes payable

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 March 31, 2020 and December 31, 2019, respectively

Common stock, par value $ 0.001 per share, 250,000,000 shares authorized, 49,311,864 and 48,987,198 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated other comprehensive income

Accumulated deficit

5 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended March 31,

Three months ended June 30,

Six Months Ended June 30,

REVENUES, NET

6 unchanged sentences

OTHER INCOME (EXPENSE)

Loss on debt extinguishment

Change in fair value of warrant derivative liabilities

Change in fair value of embedded conversion option

Net gains (losses) on investment in marketable securities

Gain (loss) on equity method investment

Interest and other income (loss)

Change in fair value of conversion feature derivative, notes payable

Net gain on investment in marketable securities

Net losses on equity method investment

Foreign exchange loss

Interest and other income

Interest expense

1 unchanged sentence

INCOME (LOSS) BEFORE INCOME TAXES

INCOME TAXES (BENEFIT)

NET INCOME (LOSS)

COMPONENTS OF OTHER COMPREHENSIVE INCOME

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

Unrealized gain on debt securities available for sale (net of tax)

Foreign currency translation adjustments

Other comprehensive income

Other comprehensive income (loss)

COMPREHENSIVE INCOME (LOSS)

3 unchanged sentences

EMMAUS LIFE SCIENCES, INC.

CONDESED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share and per share amounts)

1 unchanged sentence

Accumulated Other Comprehensive

Total Stockholder's

Total Stockholders'

Balance at January 1,2021

Common stock issued for cash (net of issuance cost)

Fair value of warrants including down-round protection adjustments

Common stock issued for services

Share-based compensation

Unrealized gain on debt securities available for sale (net of tax)

Foreign currency translation effect

Balance, March 31, 2021

Share-based compensation

Unrealized gain on debt securities available for sale (net of tax)

Foreign currency translation effect

Balance, June 30, 2021

Additional Paid-In

Accumulated Other Comprehensive

Total Stockholder's

Balance at January 1, 2019, as restated

Cumulative effect adjustment on adoption of ASC 842

Beneficial conversion feature relating to convertible notes

Exercise of warrants

Stock issued for cash (net of issuance cost)

Conversion of notes payable to common stock

Total Stockholders'

Balance at January 1, 2020

Fair value of warrants including down-round protection adjustments

Common stock issued for cash (net of issuance cost)

Share-based compensation

Exercise of stock options

Foreign currency translation effect

Balance, March 31, 2019, as restated

Balance, March 31, 2020

Share-based compensation

Foreign currency translation effect

Balance, June 30, 2020

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

EMMAUS LIFE SCIENCES, INC.

EM MAUS LIFE SCIENCES , INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (loss)

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

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

Depreciation and amortization

Inventory reserve

Amortization of discount of notes payable and convertible notes payable

Foreign exchange adjustments

Net (gain) loss on investment in marketable securities

Loss (gain) on equity method investment

Tax benefit recognized on unrealized gain on debt securities

Net gain on investment in marketable securities

Loss on equity method investment

Loss on debt extinguishment

Gain on disposal of property and equipment

Share-based compensation

Shares issued for services

Change in fair value of warrant derivative liabilities

Change in fair value of embedded conversion option

Change in fair value of conversion feature derivative, notes payable

Net changes in operating assets and liabilities

4 unchanged sentences

Accounts payable and accrued expenses

Deferred revenue

Deferred rent

Other current liabilities

Other long-term liabilities

Net cash flows provided by (used in) operating activities

Net cash flows used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Sale of marketable securities

Purchases of property and equipment

Net cash flows used in investing activities

Loan to equity method investee

Net cash flows provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from notes payable issued, net of issuance cost and discount

Proceeds from convertible notes payable issued, net of issuance cost and discount

Payments of notes payable

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 used in financing activities

Proceeds from issuance of common stock, net of issuance cost

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

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

2 unchanged sentences

Interest paid

NON-CASH INVESTING AND FINANCING ACTIVITIES

Warrants issued

Beneficial conversion feature relating to convertible notes

Initial recognition of right to use assets

Conversion of notes payable to common stock

Income taxes paid

NON-CASH INVESING AND FINANCING ACTIVITIES

Debt discount due to conversion features derivative

Debt discount due to warrant issued with debt

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

EMMAUS LIFE SCIENCES, INC.

EM M AUS LIFE SCIENCES , INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated interim financial statements of Emmaus Life Sciences, Inc., (formerly, “MYnd Analytics, Inc.”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us,” the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern.

The accompanying unaudited condensed consolidated interim financial statements of Emmaus Life Sciences, Inc., (“Emmaus”) and its direct and indirect consolidated subsidiaries (collectively, “we,” “our,” “us” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

All significant intercompany transactions have been eliminated.

1 unchanged sentence

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 From 10-K/A.

The results of operations for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for the full year or any future interim period.

The accompanying condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated balance sheet at December 31, 2020 contained in the Form 10-K/A.

The results of operations for the three and six months ended June 30, 2021, are not necessarily indicative of the results to be expected for the full year or any future interim period.

Organization and Nature of Operations

3 unchanged sentences

Immediately after completion of the Merger, we changed our 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.

For accounting purposed, EMI was considered to have acquired us.

The Merger is intended to qualify as a tax-free reorganization for U.S.

federal income tax purposes.

In connection with and prior to the Merger, we contributed and transferred to Telemynd, Inc.

(“Telemynd”), a newly formed, wholly owned subsidiary of the Company, all or substantially all our historical business, assets and liabilities and our board of directors declared a stock dividend of one share of the Telemynd common stock held by the Company for each outstanding share of our common stock after giving effect to a 1-for-6 reverse stock split of our outstanding shares of common stock.

As a result of the spin-off and the Merger, our ongoing business became EMI’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.

Principles of consolidation —The consolidated financial statements include the accounts of the Company, EMI and EMI’s wholly‑owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical, Inc.’s wholly‑owned subsidiaries.

Principles of consolidation —The consolidated financial statements include the accounts of Emmaus and its direct and indirect consolidated subsidiaries.

All significant intercompany transactions have been eliminated.

1 unchanged sentence

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 ended March 31, 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 mistreatment 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 March 31, 2019

Previously Reported

CURRENT ASSETS

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Investment in marketable securities

Marketable securities, pledged to creditor

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Long-term investment at cost

Equity method investment

Right of use assets

Deposits and 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 debentures, 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, 37,750,424 shares were issued and outstanding at March 31, 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 $ 13.5 million in equity method investment, $ 114,000 in accounts payable and accrued expenses, and $ 82,000 in non-controlling interest and decreases of $ 13.1 million in cash and cash equivalent and $ 205,000 in prepaid expenses and other current assets.

(b) Warrant adjustments:

the correction of this misstatement resulted in increases of $ 8.5 million in warrant derivative current liabilities and $ 806,000 in short-term note payable and decreases of $ 771,000 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 $ 486,000 in accounts payable and accrued expenses, a decrease of $ 10,000 in income tax receivable and an increase of $ 23,000 in income tax payable;

a correction of accounting treatment for convertible notes resulted in an increase of $ 1.3 million in additional paid-in capital;

a reclassification of GPB warrants resulted an increase of short-term warrant liabilities and a decrease of long-term warrant liabilities of $ 1.4 million;

and a correction of tax provision resulted in an increase of $ 52,000 in income tax payable.

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

(e) Balance includes 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 amounts)

Three months ended March 31, 2019

Previously Reported

REVENUES, NET

COST OF GOODS SOLD

OPERATING EXPENSES

Research and development

General and administrative

Total operating expenses

LOSS FROM OPERATIONS

OTHER INCOME (EXPENSE)

Change in fair value of warrant derivative liabilities

Net gains (losses) on equity investment in marketable securities

Gain on equity method investment

Interest and other income (loss)

Interest expense

Total other income (expenses)

LOSS BEFORE INCOME TAXES

NET LOSS INCLUDING NONCONTROLLING INTERESTS

Net (income) loss attributable to noncontrolling interest

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 $ 55,000 in general and administrative expenses, $ 9,000 in loss on equity method investment and $ 34,000 in interest income and decreases of $ 14,000 in net income attributable to noncontrolling interest and $ 1,000 in foreign currency translation adjustments.

(b) Warrant adjustments:

the correction of this misstatement resulted in an increase of $ 312,000 in interest expense and a decrease of $ 890,000 in change in fair value of warrant derivative liabilities.

period adjustment of variable consideration resulted in a decrease of $ 600,000 in revenues, net;

reclassification of shipping cost and royalty expense to cost of sales resulted in an increase of $ 59,000 in cost of sales and decreases of $ 6,000 and $ 53,000 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;

a correction of tax provision resulted in an increase of $ 52,000 in tax provision

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three months ended March 31,2019

Previously Reported

CASH FLOWS FROM OPERATING ACTIVITIES

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

Depreciation and amortization

Amortization of discount of convertible notes

Foreign exchange adjustments

Net losses (gains) on equity investment in marketable securities

Gain on equity method investment

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

Deferred revenue

Deferred rent

Other current liabilities

Other long-term liabilities

Net cash flows (used in) provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment

Net cash flows 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 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

NON-CASH INVESTING AND FINANCING ACTIVITIES

Exercised of warrants and options on cashless basis

Conversion of notes payable 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 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 $ 105,000 .

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.

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

and herein “Telcon”) earmarked for the purchase of Telcon convertible bond per the December 23, 2019 agreement with Telcon.

See Note 5 for the additional details.

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

As of June 30,

Cash and cash equivalents

Restricted cash

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

Factoring accounts receivables — The Company entered into a factoring agreement with Prestige Capital Finance, LLC on February 22, 2021.

Under the agreement, the Company may factor its accounts receivables of up to 70 % of the face value with maximum outstanding balance of $ 7.5 million and the fee ranges between 2.25 % and 7.25 % depending on the period when customers pay the outstanding accounts receivables.

The Company had no factoring accounts receivables balance outstanding as of June 30,

For three month s and six month s ended June 3 0 , 2021, the Company incurred approximately $ 44,000 and $ 75,000 of factoring fees , respectively .

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 March 31, 2020 and March 31, 2019, the Company had outstanding potentially dilutive securities exercisable for or convertible into 16,698,829 shares and 17,995,514 shares, respectively, of the Company’s common stock.

No potentially dilutive securities were included in the calculation of diluted net income per share since the potential dilutive securities were out of the money for the period ended March 31, 2020 and were anti-dilutive for period ended March 31, 2019.

As of June 30, 2021 and June 30, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 23,326,667 shares and 17,288,829 shares, respectively, of the Company’s common stock.

No potentially dilutive securities were included in the calculation of diluted net income per share since the potential dilutive securities were out of the money for the period ended June 30, 2020 and were anti-dilutive for period ended June 30, 2021.

NOTE 3 — REVENUES

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Revenues, net

The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2020 and 2019 (in thousands):

The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2021 and June 30, 2020 (in thousands):

Trade Discounts, Allowances and Chargebacks

4 unchanged sentences

Credit and payments made

Balance as of March 31, 2020

Balance as of June 30, 2021

Balance as of December 31, 2019

Provision related to sales in the current year

Adjustments related prior period sales

Credit and payments made

Balance as of March 31, 2019, as restated

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 March 31,

Balance as of June 30, 2020

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 net 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.

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, 2021 and December 31, 20 2 0.

Refer to Note 11 and for additional transaction details.

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

Inventories consisted of the following (in thousands):

March 31, 2020

June 30, 2021

December 31, 2020

4 unchanged sentences

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

March 31, 2020

June 30, 2021

December 31, 2020

Prepaid insurance

Other prepaid expenses and current assets

Prepaid expenses

Due from EJ Holdings

Other current assets

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

March 31, 2020

June 30, 2021

December 31, 2020

4 unchanged sentences

Property and Equipment, net

During the three months ended March 31, 2020 and 2019, depreciation expense was approximately $ 12,000 and $ 14,000 , respectively.

During the three months ended June 30, 2021 and 2020, depreciation expense was approximately $ 12,000 and $ 11,000 respectively.

During the six months ended June 30, 2021 and 2020, depreciation expense were approximately $ 23,000 for both period.

NOTE 5 — INVESTMENTS

Equity securities— As of March 31, 2020 and December 31, 2019, the Company held 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 March 31, 2020, and December 31, 2019, the closing prices per Telecon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were approximately $ 5.23 and $ 4.20 , respectively.

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 $ 31.8 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.

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

The Company measures all equity investments that do not result in consolidation and are not accounted for under the equity method, at fair value and recognizes any changes in such fair value 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 three months ended March 31, 2020 and March 31, 2019, respectively, no impairment loss was recognized.

For the year ended December 31, 2019, the Company recognized approximately $ 515,000 in impairment loss on equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd.

As of March 31, 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):

March 31, 2020

Investment in convertible bonds - On September 28, 2020, the Company entered into a convertible bond purchase agreement pursuant to which it purchased at face value a convertible bond of Telcon RF Pharmaceutical, Inc., or Telcon in the principal amount of approximately $ 26.1 million which matures on October 16, 2030 and bears interest at the rate of 2.1 % per year, payable quarterly.

Beginning on October 16, 2021, the Company 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.

The convertible bond is convertible at the holder’s option at any time and from time to 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 the event of the issuance of Telcon shares or share equivalents at a price below the market 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 early 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 described in Note 6 and Note 11.

In connection with the purchase of the convertible bond, the Company entered into a call option agreement dated September 28, 2020 with Telcon pursuant to which Telcon or its designee is entitled to repurchase, at par, up to 50 % in principal amount of the 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 the fair value option method to measure the investment in the Telcon convertible bond.

The investment is classified as an available for sale security 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 change in fair value of the

convertible bond is determined using a convertible bond lattice model.

The model produces an estimated fair value based on changes in the market price of the underlying common stock.

The following table sets forth the fair value and changes in fair value of the investment in convertible bonds as of June 30, 2021 and December 31, 2020 (in thousands):

Investment in convertible bond

June 30, 2021

December 31, 2020

Fair Value with Changes Recognized in Income

Marketable securities

Total equity securities

Net unrealized gain on marketable securities available-for-sale at March 31, 2020 was approximately $ 6.8 million and net unrealized loss on marketable securities available-for-sale at March 31, 2019 was approximately $ 6.5 million.

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.

Balance, beginning of period

Fair value at issuance date

Change in fair value included in the statement of other comprehensive income

Balance, end of period

The fair value as of June 30, 2021 and December 31, 2020 was based upon following assumptions:

June 30, 2021

December 31, 2020

Principal outstanding (South Korean won)

KRW 30 billion

Expected life (in years)

Selected yield

Expected volatility (Telcon common stock)

Risk-free interest rate (South Korea government bond)

Expected dividend yield

Conversion price

Equity method investment – During 2018, the Company and Japan Industrial Partners, Inc., or JIP, formed EJ Holdings, Inc., or EJ Holdings, to acquire, own and operate an amino acids manufacturing facility in Ube, Japan.

In connection with 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 $ 13.2 million.

The loan was valued at $ 13.9 million and $ 13.8 million as of March 31, 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.

EJ Holdings is engaged in reestablishing operations at the Ube facility, including obtaining regulatory approvals for the manufacture of prescription grade L-glutamine (“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 loan matures on September 30, 2028 and bears interest at the rate of 1 % per year, payable annually.

The parties also contemplated that he 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 six months ended June 30, 2021, the Company made additional $4.0 million of loans to EJ Holdings.

As of June 30, 2021, and December 31, 2020, the loans receivable from EJ Holdings were approximately $ 21.1 million and $ 18.6 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 the Company 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.

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Accordingly, the 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 Company’s share of the losses of EJ Holdings are classified as net losses on 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.

The following table sets forth certain financial information of EJ Holdings for the three months ended March 31, 2020 and 2019 (in thousands):

Three months ended March 31,

The following table sets forth certain financial information of EJ Holdings for the three and six months ended June 30, 2021 and 2020 (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

REVENUES, NET

NET INCOME (LOSS)

NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES

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

March 31, 2020

Accounts payable and accrued expenses consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

June 30, 2021

December 31, 2020

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Total accounts payable and accrued expenses

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

March 31, 2020

Other current liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

June 30, 2021

December 31, 2020

Trade discount

Other current liabilities

Total other current liabilities

Other long-term liabilities consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

June 30, 2021

December 31, 2020

Trade discount

Unearned revenue

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Total other long-term liabilities

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 $ 1.8 million of PGLG from Telcon in the three months ended March 31, 2020 and March 31, 2019, respectively.

As of March 31, 2020, and December 31, 2019, respectively, accounts payable to Telcon were $ 5.8 million and $ 3.7 million.

On June 12, 2017, the Company and Telcon entered into an API Supply Agreement, as subsequently amended (so as amended, the “API agreement”), 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 estimated annual targets for bulk containers of PGLG.

The Company did no t purchase PGLG from Telcon in the six months ended June 30, 2021 and purchased $ 2.0 million of PGLG in the six months ended June 30, 2020.

As of June 30, 2021, and December 31, 2020, respectively, accounts payable to Telcon were zero and $ 208,000 , respectively.

See Note 11 for additional details.

NOTE 7 — NOTES PAYABLE

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

Notes payable consisted of the following at June 30, 2021 and December 31, 2020 (in thousands except for number of shares):

Interest Rate

Term of Notes

Outstanding March 31, 2020

Amount March 31, 2020

Underlying March 31, 2020

Outstanding June 30, 2021

Unamortized Discount June 30, 2021

Amount June 30, 2021

Underlying June 30, 2021

Notes payable

Due on demand

Due on demand - 6 months

Due on demand

Due on demand - 2 years

Notes payable - related parties

Due on demand

Convertible debentures

Convertible note payable

Convertible notes payable

Interest Rate

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Due on demand

Due on demand - 6 months

Due on demand

Due on demand - 2 years

Notes payable - related parties

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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 March 31, 2020 and December 31, 2019.

The average effective annual interest rate of notes payable as of March 31, 2020 and December 31, 2019 was 58 % and 66 %, respectively, after giving effect to discounts relating to conversion feature, warrants and deferred financing cost in connection with these notes.

As of March 31, 2020, future contractual principal payments due on notes payable were as follows:

2020 (nine 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.

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 .

The Company estimates 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 are allocated to the beneficial conversion feature and the warrants based on their relative fair values.

The 10 % Senior Secured Debentures of EMI 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 adjustments in the conversion shares issuable upon conversion of the Debentures and the conversion price in the event of a merger, 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.

See Note 8 for additional information regarding this arrangement.

The notes are convertible to EMI Holdings, Inc.

The weighted-average stated annual interest rate of notes payable was 5 % and 10 % as of June 30, 2021 and December 31, 2020, respectively.

The weighted-average effective annual interest rate of notes payable as of June 30, 2021 and December 31, 2020 was 14 % and 37 %, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.

As of June 30, 2021, future contractual principal payments due on notes payable were as follows:

2021 (six months)

On March 8, 2021, the Company prepaid in full outstanding Amended and Restated 10 % Senior Secured Convertible Debentures and recognized $ 1.2 million of loss on debt extinguishment due to recognize the remaining unamortized discount.

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 March 31, 2020 and December 31, 2019 (in thousands):

Three Months Ended

Upon prepayment of the Debentures, the outstanding liability was recognized in change in fair value in earnings.

The following table sets forth the fair value of the conversion feature liabilities as of June 30, 2021 and December 31, 2020 (in thousands):

Six Months Ended

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

March 31, 2020

June 30, 2021

December 31, 2020

Balance, beginning of period

Fair value at issuance date

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 income

Balance, end of period

The value and any change in fair value of conversion feature liabilities are determined using a binomial 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 fair values as of March 31, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:

March 31, 2020

February 21, 2020

(Modification date)

The fair value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model.

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

The fair value as of December 31, 2020 was based upon following assumptions:

December 31, 2020

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Term structure

See Note 13 for information regarding the prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures.

The Company is party to a revolving line of credit agreement with Dr.

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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 March 31, 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 March 31, 2020 was 10.4 %.

The outstanding balance under the revolving line of credit agreement of $ 600,000 as of June 30, 2021 and December 31, 2020 were reflected in revolving line of credit, related party on the condensed consolidated balance sheets.

With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of June 30, 2021, 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.

Refer to Note 12 for related party information.

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 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 Note may 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 on October 30, 2020 .

There is no assurance that the loan will be forgiven.

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

The PPP loan wa s included in note s payable on the c ondensed c onsolidated b alance s heet s at June 3 0 , 2021 and December 31, 2020 .

On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $ 17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof.

As of June 30, 2021, we 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’s common stock at an initial conversion price of $ 1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s 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.

There is no floor on the conversion price.

The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.

The convertible promissory notes bear interest at the rate of 2 % per year, 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 the Company’s 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 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 are general, unsecured obligations of the Company.

The conversion feature of the convertible promissory notes was separately accounted for at fair value as a derivative liability 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 liability recorded in earnings.

The following table sets forth the fair value of the conversion feature liability as of June 30, 2021 (in thousands) :

Six Months Ended

Convertible promissory notes

June 30, 2021

Balance, beginning of period

Fair value at issuance date

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

Balance, end of period

The fair value and any change in fair value of conversion feature liability are determined using a convertible bond lattice model.

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

The fair value as of June 30, 2021 and at issuance date was based upon following assumptions:

Convertible promissory notes

June 30, 2021

Issuance Date

Conversion price

Selected yield

Expected volatility

Time until maturity (in years)

Dividend yield

Risk-free rate

NOTE 8 — STOCKHOLDERS’ DEFICIT

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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 March 31, 2020 and December 31, 2019 (in thousands):

Three Months Ended

The following table presents the change in fair value of the GPB Warrant as of June 30, 2021 and December 31, 2020 (in thousands):

Six Months Ended

Warrant Liability—GPB

March 31, 2020

June 30, 2021

December 31, 2020

Balance, beginning of period

Change in fair value included in the statement of comprehensive loss

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

Balance, end of period

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

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

March 31, 2020

The fair value as of June 30, 2021, and December 31, 2020 set forth in the table above was based on upon following assumptions:

June 30, 2021

December 31, 2020

Adjusted exercise price

Common stock fair value

Risk‑free interest rate

Expected volatility (peer group)

Expected life (in years)

Time until expiration (years)

Expected dividend yield

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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 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 Merger.

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 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 o n the Company’s consolidated balance sheets .

The Debentures were amended and restated in their entirety in conjunction with the Merger.

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.

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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.

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.

See Note 7 for information regarding our recent prepayment of the Debentures.

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The warrants also were amended and restated in their entirety in connection with the Merger.

The exercise price of the amended and restated warrants was reduced to $ 2.00 per share in February 2020 pursuant to the anti-dilution adjustment provisions of the warrants and were valued using Black-Scholes-Merton model.

The fair values as of agreement date and the anti-dilution adjustments date were based upon following assumptions:

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 .

The exercise price of the amended and restated warrants was reduced to $ 2.00 per share in February 2020 and to $ 1.54 per share in March 2021 pursuant to the anti-dilution adjustment provisions of the warrants.

The warrants were valued using Black-Scholes-Merton model.

The fair value as of agreement date and the anti-dilution adjustment dates was based upon following assumptions:

March 2, 2021 (Anti-dilution adjustment date)

February 28, 2020 (Anti-dilution adjustment date)

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Common stock fair value

101.00%-120.00%

Risk-free rate

Expected life (in years)

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

March 31, 2020

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 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 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 fair value and the change in fair value of the warrants as of June 30, 2021 and December 31, 2020 (in thousands):

Warrant liability—Wealth Threshold

June 30, 2021

December 31, 2020

Balance, beginning of period

Fair value at issuance date

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

Balance, end of period

The fair value of the warrant derivative liability was determined using the Black-Scholes Merton model and was based upon following assumptions:

June 30, 2021

December 31, 2020

Exercise price

Risk‑free interest rate

Expected volatility (peer group)

Expected life (in years)

Expected dividend yield

Number outstanding

A summary of outstanding warrants as of June 30, 2021 and December 31, 2020 is presented below:

June 30, 2021

December 31, 2020

Warrants outstanding, beginning of period

Assumed as part of Merger

Cancelled, forfeited or expired

Warrants outstanding, end of period

A summary of outstanding warrants by year issued and exercise price as of March 31, 2020 is presented below:

A summary of outstanding warrants by year issued and exercise price as of June 30, 2021 is presented below:

Year issued and Exercise Price

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At December 31, 2020

At March 31, 2020

At June 30, 2021

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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Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically converted into a stock option to purchase a number of shares of the Company’s common stock and at an exercise price calculated based on the exchange ratio in the Merger.

The 2011 Stock Incentive Plan expired in May 2021, after which no further awards may be made under the Plan.

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 under thereunder.

Stock options —During the three months ended March 31, 2020, the Company did no t issue any stock options.

During the year ended December 31, 2019, the Company granted stock options to purchase 50,000 shares of Company common stock.

Stock options —During the six months ended June 30, 2021, the Company did no t issue any stock options.

During the year ended December 31, 2020, the Company granted stock options to purchase 90,000 shares of 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 .

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

March 31, 2020

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

A summary of outstanding stock options as of June 30, 2021 and December 31, 2020 is presented below.

June 30, 2021

December 31, 2020

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Options available for future grant

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 March 31, 2020 and March 31, 2019, the Company recognized approximately $ 0.2 million and $ 0.6 .

million, respectively, of share-based compensation expense.

As of March 31, 2020, there was approximately $ 1.9 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 1.5 years.

Option plans were expired and therefore no options available for future grants.

During the three months ended June 30, 2021 and June 30, 2020, the Company recognized $ 0.3 million and $ 0.2 million of share-based compensation expense, respectively.

During each of the six months ended June 30, 2021 and June 30, 2020, the Company recognized $0.5 million and $0.4 million of share-based compensation expense, respectively.

As of June 30, 2021, there was approximately $ 119,000 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 0.6 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 from time to time 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.

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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 limit 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.

There is no upper limit 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 no cost or penalty.

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If the Company is 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 factors to be determined by the Company from time to time, including, among others, its net revenue and other results of operations, its working capital and other funding needs, the prevailing market prices of the Company’s common stock and the availability of other sources of funding.

Collaborative Research and Development Agreement with Kainos Medicine, Inc — On February 26, 2021, the Company entered into an agreement with Kainos Medicine, Inc.

(“Kainos”) to lead the preclinical development of Kainos’ patented IRAK4 inhibitor (“KM10544”) as an anti-cancer drug and further advance the research and development activity currently underway at Kainos.

With this agreement in place, Kainos plans to complete the study of the therapeutic mechanism of action ("MOA") of KM10544 in solid cancers, blood cancers and lymphoma.

The Company will be responsible for the investigation and proof of target disease selection, efficacy and safety.

The companies also entered into a letter of intent regarding possible future joint development of small molecule therapeutics and other pharmaceutical assets.

Pursuant to the agreement, the Company paid $ 500,000 in cash and issued 324,675 of the Company’s shares equivalent to $ 500,000 in consideration for entering into the agreement, which were recorded as research and development expenses in the condensed consolidated statements of operations and comprehensive income (loss).

The Company, in turn, has been granted rights of first negotiation and first refusal for an exclusive license regarding the development and commercialization of products based on the intellectual property resulting from the agreement.

NOTE 9 — INCOME TAX

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 ended March 31, 2020, the Company recorded a provision for income tax of $ 0.3 million.

For the three months ended March 31, 2019, the Company recorded a provision for income tax of $ 52,000 .

The provisions for income taxes for the three months ended March 31, 2020, and 2019 were primarily related to state tax.

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 asset and there was no unrecognized tax benefit as of March 31 2020 or 2019.

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

For the three and six months ended June 30, 2021, the Company recorded income tax benefit of $ 192,000 and $ 174,000 million respectively.

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

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, 2021 and 2020.

NOTE 10 — LEASES

Operating leases — The Company leases its office space under operating leases with unrelated entities.

The Company leased 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $ 78,543 per month, which lease will expire on September 30, 2026 .

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, which the lease will expire on September 30, 2020 .

The rent expense during the three months ended March 31, 2020 and 2019 amounted to approximately $ 311,000 and $ 201,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of March 31, 2020 (in thousands):

2020 (nine months)

The Company leases 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $ 80,886 per month, which lease will expire on September 30, 2026 .

The Company also leases an additional 1,850 square feet office space in New York, New York, at a base rent of $ 8,691 , which lease will expire on January 31, 2023 .

In addition, the Company leases 1,322 square feet of office space in Tokyo, Japan, which lease will expire on September 30, 2022 and 1,163 square feet of office space in Dubai,m United Arb Emirates, which lease will expire on June 19, 2023.

The rent expense during the three months ended June 30, 2021 and 2020 amounted to approximately $ 288,000 and $ 298,000 , respectively, and during the six months ended June 30, 2021 and June 30, 2020 amounted to approximately $ 589,000 and $ 609,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of June 30, 2021 (in thousands):

2021 (six months)

2025 and thereafter

1 unchanged sentence

Present value of lease liabilities

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.

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 March 31, 20 20 , the Company had an operating lease right-of-use asset of $ 4.3 million and lease liability of $ 4.9 million in the balance sheet.

The weighted average remaining term of the Company’s leases as of March 31, 20 20 was 6.3 years and the weighted-average discount rate was 12.8 %.

As of June 30, 2021, the Company had an operating lease right-of-use asset of $ 3.8 million and lease liability of $ 4.3 million in the balance sheet.

The weighted average remaining term of the Company’s leases as of June 30, 2021 was 5.0 years and the weighted-average discount rate was 11.5 %.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

7 unchanged sentences

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.

The PGLG 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 6 for more information.

NOTE 12 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related persons outstanding as of March 31, 2020 and interest paid during the three months ended March 31, 2020 (in thousands):

Principal Amount Outstanding at March 31, 2020

The following table sets forth information relating to loans from related parties outstanding on or at any time during the six months ended June 30, 2021 (in thousands):

Principal Amount Outstanding at June 30, 2021

Current, Promissory note payable to related parties:

Due on Demand

Willis Lee (2)

Due on Demand

2 unchanged sentences

Due on Demand

The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2019:

The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2020:

Principal Amount Outstanding at December 31, 2020

1 unchanged sentence

Due on Demand

Hope International Hospice, Inc.

Due on Demand

Yutaka Niihara (2)(3)

Hope Int'l Hospice (1)

Due on Demand

Hope Int'l Homecare (1)

Due on Demand

Soomi Niihara (1)

Due on Demand

Current, Convertible notes payable to related parties:

Yasushi Nagasaki (2)

Soomi Niihara (1)

Due on Demand

Yutaka & Soomi Niihara (2)(3)

Wei Peu Zen (3)

Profit Preview International Group, Ltd.

Revolving line of credit agreement

Willis Lee (2)

Due on Demand

Willis Lee (2)

Due on Demand

Revolving line of credit

Yutaka Niihara (2)

1 unchanged sentence

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.

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

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 March 31, 2020.

As of March 31, 2020, the Company held 6,643,559 shares of Telcon stock as discussed in Note 5.

S ee Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the Company common stock, or approximately 8.4 % of the common stock outstanding as of June 30, 2021.

As of June 30, 2020, the Company held a Telcon convertible bond in the principal amount of approximately $ 27.9 million as discussed in Note 5 .

NOTE 13 — SUBSEQUENT EVENTS

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 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 forgiveness process has commenced or 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.

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

The Company believes it has used the entire loan amount for purposes consistent with the PPP and has applied for forgiveness of the loan on October 30, 2020.

T here is no assurance that the loan will be forgiven.

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 .

The interest for the note was increased from 11 % to 12 %.

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.

In March 2021, the conversion price of the Debentures, which have since been retired 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.

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 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.

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.

To the extent not previously redeemed, the principal amount of the bond will be due upon maturity.

The convertible bond is convertible at the holder’s option at any time and from time to time into

common shares of Telcon at an initial conversion price of approximately $ 8.00 per share.

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.

On October 28, 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agreed to loan to EJ Holdings a total of approximately $ 6.5 million, in monthly installments through March 2021, including approximately $ 4.0 million, loaned through December 31, 2020.

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, 2028.

The proceeds of the loans will be used by EJ Holdings to fund its activities and operations at its Ube facility as described under “Equity method investment” in Note 5 above.

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 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.

The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.

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

Effective February 22, 2021, the Company’s 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 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 accounts receivable and all or substantially all other assets of Emmaus Medical.

In connection with the purchase and sale agreement, the Company agreed to guarantee Emmaus Medical’s obligations under the purchase and sale agreement.

The Company’s obligations under the guarantee are unsecured.

The Company evaluated events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements