What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-12 compared with 2021-09-01 · 224 added, 174 removed, 451 unchanged (47% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

March 31, 2021

September 30, 2021

December 31, 2020

28 unchanged sentences

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, 49,311,864 and 48,987,189 shares issued and outstanding at March 31, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

2 unchanged sentences

Total stockholders’ deficit

Total liabilities & stockholders’ deficit

Total liabilities and stockholders’ deficit

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

2 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,

REVENUES, NET

10 unchanged sentences

Net gain on investment in marketable securities

Net losses on equity method investment

Net loss on equity method investment

Foreign exchange gain (loss)

3 unchanged sentences

INCOME (LOSS) BEFORE INCOME TAXES

INCOME TAXES PROVISION

NET INCOME (LOSS)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

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

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

Foreign currency translation adjustments

Other comprehensive income (loss)

Other comprehensive loss

COMPREHENSIVE INCOME (LOSS)

14 unchanged sentences

Foreign currency translation effect

Balance, March 31, 2021

Balance at March 31, 2021

Share-based compensation

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

Foreign currency translation effect

Balance at June 30, 2021

Share-based compensation

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

Foreign currency translation effect

Balance at September 30, 2021

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

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share and per share amounts)

Additional Paid-In

6 unchanged sentences

Foreign currency translation effect

Balance, March 31, 2020

Balance at March 31, 2020

Share-based compensation

Foreign currency translation effect

Balance at June 30, 2020

Fair value of warrants including down-round protection adjustments

Share-based compensation

Foreign currency translation effect

Balance at September 30, 2020

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

2 unchanged sentences

(In thousands)

Three Months Ended March 31,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) income

Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities

Net income (loss)

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

Depreciation and amortization

2 unchanged sentences

Foreign exchange adjustments

Tax benefit recognized on unrealized gain on debt securities

Net gain on investment in marketable securities

Loss on equity method investment

Loss on equity method investment, net

Loss on debt extinguishment

12 unchanged sentences

Other long-term liabilities

Net cash flows (used in) provided by operating activities

Net cash flows used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Sale of marketable securities

Purchases of property and equipment

Loan to equity method investee

Net cash flows used in investing activities

Net cash flows (used in) provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

6 unchanged sentences

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

Cash, cash equivalents and restricted cash, end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

1 unchanged sentence

Income taxes paid

NON-CASH INVESTING AND FINANCING ACTIVITIES

NON-CASH INVESING AND FINANCING ACTIVITIES

Debt discount due to conversion features derivative

4 unchanged sentences

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited 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”).

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.

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 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 months ended March 31, 2021, are not necessarily indicative of the results to be expected for the full year or any future interim period.

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, 2020 has been derived from the audited consolidated balance sheet at December 31, 2020 contained in the Annual Report.

The results of operations for the three and nine months ended September 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

11 unchanged sentences

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

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 outstanding as of March 31, 2021.

For three month ended March 31, 2021, the Company incurred approximately $ 31,000 of factoring fees.

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, 2021 and March 31, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 24,515,738 shares and 16,698,829 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 March 31, 2020 and were anti-dilutive for period ended March 31, 2021.

NOTE 3 — REVENUES

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

Three Months Ended March 31,

Restricted cash — Restricted cash as of September 30, 2020 includes proceeds received from the sale of 6,643,559 shares of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc.

and herein “Telcon”) which were earmarked for the purchase of a Telcon convertible bond, described in Note 5.

Reconciliation of cash, cash equivalent and restricted cash in the condensed consolidated statements of cash flows is as follows:

As of September 30,

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash

Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, entered into a purchase and sales 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 $ 7.5 million 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 obligation s 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, Emmaus guarantees Emmaus Medical’s obligations under the purchase and sale agreement.

At September 30, 2021, accounts receivable included approximately $ 472,000 of factoring accounts receivable and other current liabilities included approximately $ 9,000 related to factoring.

For three and nine month s ended September 3 0 , 2021, the Company incurred approximately $ 106,000 and $ 181,000 , respectively, of factoring fees.

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

Diluted earnings (loss) per share is computed in a manner similar to basic earnings (net loss) per common share except that the denominator is increased to include the number of additional common shares issuable under securities exercisable for or convertible into common shares had been issued if the additional common shares would be dilutive.

As of September 30, 2021 and September 30, 2020, the Company had outstanding potentially dilutive securities exercisable for or convertible into 23,276,594 shares and 19,276,395 shares, respectively, of the Company’s common stock.

No potentially dilutive securities were included in the calculation of diluted earnings (net loss) per share since the potential dilutive securities were anti-dilutive for three and nine months ended September 30, 2021, and 2020.

NOTE 3 — REVENUES, NET

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

Three Months Ended September 30,

Nine Months Ended September 30,

Revenues, net

The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2021 and March 31, 2020 (in thousands):

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

Trade Discounts, Allowances and Chargebacks

4 unchanged sentences

Credit and payments made

Balance as of March 31, 2021

Balance as of September 30, 2021

Balance as of December 31, 2019

2 unchanged sentences

Credit and payments made

Balance as of March 31, 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 March 31,

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.

Balance as of September 30, 2020

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

Three Months Ended September 30,

Nine Months Ended September 30,

The Company is party to a distributor agreement with Telcon pursuant to which the Company 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 the Company specified minimum quantities of the PGLG.

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 March 31, 2021 and December 31, 2020.

Refer to Note 11 for additional details.

The upfront fee of $ 10 million is included in other long-term liabilities as unearned revenue as of September 30, 2021 and December 31, 2020.

Refer to Note 11 and for additional details.

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

Inventories consisted of the following (in thousands):

March 31, 2021

September 30, 2021

December 31, 2020

4 unchanged sentences

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

March 31, 2021

September 30, 2021

December 31, 2020

1 unchanged sentence

Prepaid expenses

Due from EJ Holdings

Due from equity method investee

Other current assets

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

March 31, 2021

September 30, 2021

December 31, 2020

4 unchanged sentences

Property and equipment, net

During the three months ended March 31, 2021 and March 31, 2020, depreciation expense was approximately $ 11,000 and $ 12,000 , respectively.

During the three months ended September 30, 2021 and 2020, depreciation expenses were approximately $ 11,000 and $ 12,000 , respectively.

During the nine months ended September 30, 2021 and 2020, depreciation expenses were approximately $ 34,000 and $ 35,000 , respectively.

NOTE 5 — INVESTMENTS

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.

Investment in convertible bond - 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 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 is entitled on a quarterly basis to call for early redemption 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 KRW 9,232 , or approximately $ 8.00 , per share.

The initial conversion price is subject to downward adjustment on a monthly based on the volume-weighted average market price of Telcon shares as reported on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon share.

The conversion price also is subject to customary antidilution adjustments upon a merger or other reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event.

The conversion price as of September 30, 2021 is set forth in the “Investment in convertible bond” table below.

The convertible bond and any proceeds therefrom, including proceeds from any exercise of the holder’s early redemption right or Telcon’s 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.

4 unchanged sentences

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 March 31, 2021, and December 31, 2020 (in thousands):

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

Investment in convertible bond

March 31, 2021

September 30, 2021

December 31, 2020

1 unchanged sentence

Fair value at issuance date

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

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

Balance, end of period

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

March 31, 2021

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

September 30, 2021

December 31, 2020

8 unchanged sentences

Conversion price

KRW 4,110 (US$3.47)

KRW 6,028 (US$5.54)

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.

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

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

In October 2020, the Company entered into a loan agreement with EJ Holdings pursuant to which it agrees to loan to EJ Holdings a total of approximately $ 6.5 million in monthly instalments through March 2021.

The loans are unsecured general obligations of EJ Holdings, bear interest at a nominal annual rate payable on September 30 of each year beginning in 2021 and are due and payable in a lump sum at maturity on September 30, 2028 .

The proceeds of the loans are used by EJ Holdings to fund its activities and operations at its Ube facility.

The parties contemplate 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’ three-person board of directors, one of whom is a designee of the Company and two of who are representatives of JIP, in consultation with the Company.

As of March 31, 2021, and December 31, 2020, the loans receivable from EJ Holdings were approximately $ 19.0 million and $ 18.6 million, respectively .

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

The parties also contemplated that t 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 the Company’s 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, 2021, the Company made additional $ 3.6 million

of loans to EJ Holdings.

As of September 3 0 , 202 1 , and December 31, 20 20 , the loan s receivable from EJ Holdings w ere approximately $ 22.2 million and $ 18.6 million, respectively .

EJ Holdings is engaged in phasing in the Ube facility, which will include eventually 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 to fund its activities there and that the EJ Holdings activities 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.

Accordingly, the Company accounts for its variable interest in EJ Holdings under the equity method.

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, 2021 and March 31, 2020 (in thousands):

Three months ended March 31,

The Company’s share of the losses of EJ Holdings are classified as net loss on equity method investment.

The investment is evaluated for impairment 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 and nine months ended September 30, 2021 and 2020 (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 March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021

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

September 30, 2021

December 31, 2020

11 unchanged sentences

Government rebates and other rebates

Due to EJ Holdings

Due to equity method investee

Other accrued expenses

1 unchanged sentence

Total accounts payable and accrued expenses

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

March 31, 2021

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

September 30, 2021

December 31, 2020

2 unchanged sentences

Total other current liabilities

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

March 31, 2021

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

September 30, 2021

December 31, 2020

3 unchanged sentences

Total other long-term liabilities

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 a specific portion of the Company’s estimated annual targets for bulk containers of PGLG.

The Company did no t purchase PGLG from Telcon in the three months ended March 31, 2021 and purchased $ 2.0 million of PGLG in the three months ended March 31, 2020.

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

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 purchased $ 250,000 and $ 2.0 million of PGLG from Telcon in the nine months ended September 30, 2021, and September 30, 2020, respectively.

As of September 30, 2021, and December 31, 2020, respectively, accounts payable to Telcon were $ 250,000 and $ 208,000 .

See Note 11 for additional details.

NOTE 7 — NOTES PAYABLE

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

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

Interest Rate

Term of Notes

Outstanding March 31, 2021

Discount March 31, 2021

Amount March 31, 2021

Underlying March 31, 2021

Outstanding September 30, 2021

Unamortized Discount September 30, 2021

Amount September 30, 2021

Underlying Shares

September 30, 2021

Notes payable

Due on demand

Due on demand - 2 years

Notes payable - related parties

Due on demand

Convertible notes payable

12 unchanged sentences

Convertible note payable

The notes are convertible to Emmaus Life Sciences, Inc.

The notes are convertible to EMI Holding, Inc.

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

The weighted-average annual effective annual interest rate of notes payable as of March 31, 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 March 31, 2021, future contractual principal payments due on notes payable were as follows:

2021 (nine 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 notes are convertible into Emmaus Life Sciences, Inc.

The notes are convertible into EMI Holding, Inc.

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

The weighted-average effective annual interest rate of notes payable as of September 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 September 30, 2021, future contractual principal payments due on notes payable were as follows:

2021 (three months)

In March 2021, the Company prepaid in full its outstanding Amended and Restated 10 % Senior Secured Convertible Debentures and recognized $ 1.2 million of loss on debt extinguishment relating to 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.

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 March 31, 2021 and December 31, 2020 (in thousands):

Three Months Ended

The following table sets forth the fair value of the conversion feature liabilities as of September 3 0 , 202 1 and December 31, 20 20 (in thousands):

Nine Months Ended

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

March 31, 2021

September 30, 2021

December 31, 2020

1 unchanged sentence

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

17 unchanged sentences

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 balance under the revolving line of credit agreement of $ 800,000 as of March 31, 2021 and December 31, 2020 was reflected in revolving line of credit, related party on the Consolidated Balance Sheets.

With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of March 31, 2021 was 10.4 %.

The outstanding balance under the revolving line of credit agreement of $ 600,000 as of September 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 September 30, 2021, was 10.4 %.

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

2 unchanged sentences

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 is evidenced by 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.

3 unchanged sentences

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 condensed c onsolidated b alance s heet s at March 31, 2021 and December 31, 2020 .

The PPP loan was included in notes payable on the condensed consolidated balance sheets at September 30, 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 March 31, 2021, we had sold approximately $ 14.4 million of the convertible promissory notes.

As of September 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.

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.

5 unchanged sentences

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 March 31, 2021(in thousands) :

Three Months Ended

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

Convertible promissory notes

March 31, 2021

September 30, 2021

Balance, beginning of period

4 unchanged sentences

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

The fair value as of March 31, 2021 and at issuance date was based upon following assumptions:

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

Convertible promissory notes

March 31, 2021

At issuance date

September 30, 2021

Issuance Date

Conversion price

6 unchanged sentences

Purchase Agreement with GPB —On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $ 13 million senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of $ 12.5 million, reflecting a 4.0 % original issue discount.

The GPB Note was repaid in February 2018 .

In connection with the issuance of GPB Note, the Company issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,764 of common stock at an exercise price of $ 10.80 per share, with customary adjustments for stock splits, stock dividends and other recapitalization events.

2 unchanged sentences

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, 2021 and December 31, 2020 (in thousands):

Three Months Ended

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

Nine Months Ended

Warrant Liability—GPB

March 31, 2021

September 30, 2021

December 31, 2020

Balance, beginning of period

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

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

March 31, 2021

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

September 30, 2021

December 31, 2020

2 unchanged sentences

Risk‑free interest rate

Time until expiration (in years)

Time until expiration (years)

Expected dividend yield

3 unchanged sentences

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 condensed consolidated balance sheets.

The net proceeds of the sale of the debentures and warrants were used to fund the original $ 13.2 million loan to EJ Holdings, Inc.

in October 2018 reflected on the Company’s consolidated balance sheets.

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

4 unchanged sentences

Upon completion of the Merger, the amended and restated warrants became exercisable for shares of the Company common stock and the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon exchange ratio in the Merger.

The exercise price of the amended and restated warrants was subsequently adjusted in accordance

with their terms to $ 5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger .

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.

1 unchanged sentence

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.

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

1 unchanged sentence

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.

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.

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, then reduced to $ 1.54 per share in March 2021 pursuant to the anti-dilution adjustment provisions of the warrants and the warrants were valued using Black-Scholes-Merton model.

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 continued on the first day of each month thereafter commencing October 1, 2020.

The remaining principal balance of the Debentures was 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:

7 unchanged sentences

Expected life (in years)

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 % 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 notes should be recognized at fair value as a liability.

Purchase agreement with Holder of 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 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 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 March 31, 2021 and December 31, 2020 (in thousands):

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

Nine Months Ended

Warrant liability—Wealth Threshold

March 31, 2021

September 30, 2021

December 31, 2020

4 unchanged sentences

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

March 31, 2021

September 30, 2021

December 31, 2020

5 unchanged sentences

Number outstanding

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

March 31, 2021

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

September 30, 2021

December 31, 2020

2 unchanged sentences

Warrants outstanding, end of period

A summary of outstanding warrants by year issued and exercise price as of March 31, 2021 is presented below:

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

Year issued and Exercise Price

5 unchanged sentences

At December 31, 2020

At March 31, 2021

At September 30, 2021

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

The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock .

The 2011 Stock Incentive Plan permitted grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants for up to 9,000,000 shares of common stock .

Options granted under the 2011 Stock Incentive Plan expire ten years after grant.

Options granted to directors vest in equal quarterly installments and all other option grants vest over a minimum period of three years , in each case, subject to the optionee’s all based on continuous service with the Company.

Each stock option outstanding under the 2011 Stock Incentive Plan at the effective time of the Merger was automatically

converted into a 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 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, 2021, the Company did no t issue any stock options.

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 ha d 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 u nder the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the M erger and the Company intends not to make any further awards under thereunder .

Stock options —During the nine months ended September 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, 2021 and December 31, 2020 is presented below.

March 31, 2021

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 .

In September 2021, the 2012 Omnibus Incentive Compensation Plan was terminated.

The termination of the Plan did not affect outstanding awards under the Plan.

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

September 30, 2021

December 31, 2020

5 unchanged sentences

Options available for future grant

The Company recognized approximately $ 0.2 million of share-based compensation expense for both three months ended March 31, 2021 and March 31, 2020.

As of March 31, 2021, there was approximately $ 294,000 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 years.

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.

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).

Concurrently with the execution of the Purchase Agreement on February 28, 2020, the Company entered into a Registration Rights Agreement pursuant to which the Company agreed to file a prospectus supplement pursuant to Rule 424(b) relating to the sale shares of common stock to be issued and sold to LPC under the Purchase Agreement under our effective shelf registration statement or a new registration statement and to use our reasonable best efforts to keep such registration statement effective during the term of the Purchase Agreement.

The Purchase Agreement contains customary representations, warranties, indemnification rights and other obligations and agreements of the company and LPC.

There are no limitations and conditions to completing future transactions other than a prohibition against entering into a “Variable Rate Transaction” as defined in the Purchase Agreement.

There is no upper 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.

As consideration for LPC’s commitments under the Purchase Agreement, the Company issued to LPC 415,743 shares of common stock , which valued at $ 750,000 , recorded as an addition to equity for common stock and reduction for cost of capital raised .

As of the date of filing of this Quarterly Report, the Company was out of compliance with certain terms and conditions of the Purchase Agreement and unable to utilize the Purchase Agreement.

The Company may seek to bring itself into compliance or seek an appropriate waiver from LPC to regain the ability to utilize the Purchase Agreement, but there can be no assurance when or whether the Company may be able to do so.

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.

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

During the three months ended September 30, 2021 and September 30, 2020, the Company recognized $ 93,000 and $ 121,000 , respectively of share-based compensation expense.

During the nine months ended September 30, 2021 and September 30, 2020, the Company recognized $ 548,000 and $ 549,000 of share-based compensation expenses, respectively.

As of September 30, 2021, there was approximately $ 26,000 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 1.5 year.

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

5 unchanged sentences

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.

Refer to Note 13 for additional information.

NOTE 9 — INCOME TAX

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 months ended March 31, 2021 and March 2020, the Company recorded income tax provision of $ 18,000 and $ 0.3 million, respectively.

For the three and nine months ended September 30, 2021, the Company recorded income tax provision of $ 232,000 and $ 58,000 , respectively.

For three and nine month ended September 30, 2020, the Company recorded income tax provision of $ 293,000 and $ 80,000 .

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 March 31, 2021 and 2020.

Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of September 3 0 , 2021 and 2020.

NOTE 10 — LEASES

3 unchanged sentences

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, United Arab Emirates, which lease will expire on June 19, 2023.

The rent expense during the three months ended March 31, 2021 and March 31, 2020 amounted to approximately $ 301,000 and $ 311,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of March 31, 2021 (in thousands):

2021 (nine months)

The rent expense during the three months ended September 30, 2021 and 2020 amounted to approximately $ 300,000 and $ 286,000 , respectively, and during the nine months ended September 30, 2021 and 2020 amounted to approximately $ 889,000 and $ 895,000 , respectively.

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

2021 (three months)

2025 and thereafter

1 unchanged sentence

Present value of lease liabilities

As of March 31, 2021, the Company had an operating lease right-of-use asset of $ 3.9 million and lease liability of $ 4.5 million in the condensed consolidated balance sheet.

The weighted average remaining term of the Company’s leases as of March 31, 2021 was 5.3 years and the weighted-average discount rate was 11.4 %.

As of September 30, 2021, the Company had an operating lease right-of-use asset of $ 3.6 million and lease liability of $ 4.2 million in the balance sheet.

The weighted average remaining term of the Company’s leases as of September 30, 2021 was 4.8 years and the weighted-average discount rate was 11.6 %.

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.

There has been no changes to the price through September 30, 2021.

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 loans from related parties outstanding on or at any time during the three months ended March 31, 2021 (in thousands):

Principal Amount Outstanding at March 31, 2021

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

Principal Amount Outstanding at September 30, 2021

Current, Promissory note payable to related parties:

1 unchanged sentence

Due on Demand

Soomi Niihara (1)

Due on Demand

Revolving line of credit agreement

23 unchanged sentences

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.

See 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 March 31, 2021.

As of March 31, 2021, the Company held a Telcon convertible bond in the principal amount of approximately $ 27.9 million as discussed in Note 5 .

Current or former officer.

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 September 30, 2021.

As of September 30, 2021, the Company held a Telcon convertible bond in the principal amount of approximately $ 25.7 million as discussed in Note 5 .

NOTE 13 — SUBSEQUENT EVENTS

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.

On October 7, 2021, the Company entered into a License Agreement, effective as of October 6, 2021, with Kainos, under which Kainos granted the Company an exclusive license in the territory encompassing the U.S., the U.K.

and the EU to patent rights, know-how and other intellectual property relating to Kainos’s novel IRAK4 inhibitor, referred to as KM10544, for the treatment of cancers, including leukemia, lymphoma and solid tumor cancers.

In consideration of the license, the Company has agreed in the License Agreement to pay Kainos a six-figure upfront fee in cash within 90 days from the effective date of the License Agreement, cash payments upon the achievement of specified milestones totaling in the mid-eight figures, a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.

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