What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-13 compared with 2021-11-12 · 267 added, 359 removed, 316 unchanged (66% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30, 2021

March 31, 2022 (Unaudited)

December 31, 2021

19 unchanged sentences

Notes payable to related parties

Convertible debentures, net of discount

Convertible notes payable, net of discount

Total current liabilities

5 unchanged sentences

STOCKHOLDERS’ DEFICIT

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 48,987,198 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

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

Common stock — par value $ 0.001 per share, 250,000,000 shares authorized, shares 49,311,864 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Accumulated deficit

Total stockholders’ deficit

Total liabilities and stockholders’ deficit

Total liabilities & stockholders’ deficit

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

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

REVENUES, NET

4 unchanged sentences

Total operating expenses

INCOME (LOSS) FROM OPERATIONS

LOSS FROM OPERATIONS

OTHER INCOME (EXPENSE)

Loss on debt extinguishment

Loss on debt extinguishment, net

Change in fair value of warrant derivative liabilities

Change in fair value of conversion feature derivative, notes payable

Net gain on investment in marketable securities

Realized loss on investment on convertible bond

Net loss on equity method investment

Foreign exchange gain (loss)

Foreign exchange loss

Interest and other income

1 unchanged sentence

Total other income (expense)

INCOME (LOSS) BEFORE INCOME TAXES

INCOME TAXES PROVISION

NET INCOME (LOSS)

LOSS BEFORE INCOME TAXES

INCOME TAXES (BENEFIT)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

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

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

Reclassification adjustment for loss included in net income

Foreign currency translation adjustments

Other comprehensive loss

COMPREHENSIVE INCOME (LOSS)

EARNINGS (NET LOSS) PER COMMON SHARE - BASIC AND DILUTED

Other comprehensive income

COMPREHENSIVE LOSS

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

6 unchanged sentences

Total Stockholders'

Balance at January 1, 2021

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 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

Balance January 1, 2022

Share-based compensation

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

Reclassification adjustment for loss included in net income

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)

Balance March 31, 2022

Additional Paid-In

1 unchanged sentence

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

Foreign currency translation effect

Balance at March 31, 2020

Share-based compensation

Foreign currency translation effect

Balance at June 30, 2020

Balance January 1, 2021

Fair value of warrants including down-round protection adjustments

Common stock issued for services

Share-based compensation

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

Foreign currency translation effect

Balance at September 30, 2020

Balance March 31, 2021

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

2 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

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

3 unchanged sentences

Foreign exchange adjustments

Net gain on investment in marketable securities

Loss on equity method investment, net

Loss on debt extinguishment

Tax benefit recognized on unrealized gain on debt securities

Realized loss on investment on convertible bond

Net loss on equity method investment

Net loss on debt extinguishment

Gain on disposal of property and equipment

2 unchanged sentences

Change in fair value of warrant derivative liabilities

Change in fair value of conversion feature derivative, notes payable

Change in fair value of conversion feature derivative, note payable

Net changes in operating assets and liabilities

8 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Sale of marketable securities

Sale of convertible bond

Purchases of property and equipment

Loan to equity method investee

Net cash flows (used in) provided by investing activities

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

Proceeds from notes payable issued

Proceeds from convertible notes payable issued

Payments of notes payable

Payments of convertible notes

Proceeds from issuance of common stock, net of issuance cost

Net cash flows provided by (used in) financing activities

Net cash flows provided by financing activities

Effect of exchange rate changes on cash

Net decrease in cash, cash equivalents and restricted cash

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

Cash, cash equivalents and restricted cash, beginning of period

3 unchanged sentences

Income taxes paid

NON-CASH INVESING AND FINANCING ACTIVITIES

NON-CASH INVESTMENT 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.

2 unchanged sentences

NOTE 1 — BASIS OF PRESENTATION

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 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.

Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, market acceptance of Endari® , and achieving a profitable level of revenues.

The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022.

The accompanying condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated balance sheet at December 31, 2021 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

The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sales of innovative treatments and therapies, primarily for rare and orphan diseases.

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

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

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

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.

The preparation of the consolidated financial statements requires the use of management estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reported period.

Actual results could differ materially from those estimates.

The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year or any future interim period.

Nature of Operations

The Company is a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases.

The Company’s lead product, Endari ® (prescription grade L-glutamine oral powder), is approved by the U.S.

Food and Drug Administration, or FDA, to reduce the acute complications of sickle cell disease (“SCD”) in adult and pediatric patients five years of age and older.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K/A for the year ended December 31, 2020.

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10K for the year ended December 31, 2021.

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

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 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.

Going concern — The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.

The Company incurred a net loss of $ 1.5 million for the three months ended March 31, 2022, and had a working capital deficit of $ 28.1 million.

Management expects that the Company’s current liabilities, operating losses and expected capital needs, including the expected costs relating to the commercialization of Endari® in the Middle East North Africa region and elsewhere, will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future.

In order to meet the Company’s current liabilities and future obligations, the Company will need to raise additional funds through related-party loans, equity and debt financings or licensing or other strategic agreements.

The Company has no understanding or arrangement for any additional financing, and there can be no assurance that the Company will be able to complete any additional equity or debt financings on favorable terms, or at all, or enter into licensing or other strategic arrangements.

The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Management has considered all recent accounting pronouncements and has determined that there are no recent accounting pronouncements that are expected to have a material effect on the Company’s condensed consolidated financial statements.

Factoring accounts receivable — Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of Emmaus, is party to 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 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 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, Emmaus has guarantee d Emmaus Medical’s obligations under the purchase and sale agreement.

At March 3 1 , 202 2 , accounts receivable included no factoring accounts receivable and there were no liabilities related to factoring reflected in other current liabilities .

For three month s ended March 3 1 , 202 2 and March 31, 2021 , the Company incurred approximately $ 53,000 , and $ 31,000 , respectively, of factoring fees.

Net loss per share — In accordance with Accounting Standard Codification (“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.

Diluted net loss per share is computed in a manner similar to basic 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 March 31, 2022 and March 31, 2021, the Company had outstanding potentially dilutive securities exercisable for or convertible into 23,261,199 shares and 24,515,738 shares, respectively, of common stock.

No potentially dilutive securities were included in the calculation of diluted net loss per share since the potential dilutive securities were anti-dilutive for each of the three months ended March 31, 2022 and 2021.

NOTE 3 — REVENUES, NET

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Revenues, net

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

The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2022 and March 31, 2021 (in thousands):

Trade Discounts, Allowances and Chargebacks

4 unchanged sentences

Credit and payments made

Balance as of September 30, 2021

Balance as of March 31, 2022

Balance as of December 31, 2020

2 unchanged sentences

Credit and payments made

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.

Balance as of March 31, 2021

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) during the periods presented:

Three Months Ended March 31,

The Company is party to a distributor agreement with Telcon Pharmaceutical RF, Inc., or 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 $ 10 million in upfront fees 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 September 30, 2021 and December 31, 2020.

Refer to Note 11 and for additional details.

NOTE 4 — SELECTED FINANCIAL STATEMENT CAPTIONS - ASSETS

The upfront fees are included in other long-term liabilities as unearned revenue as of both March 31, 2022 and December 31, 2021.

Refer to Notes 6 and 11 for additional details.

NOTE 4 — SELECTED FINANCIAL STATEMENT - ASSETS

Inventories consisted of the following (in thousands):

September 30, 2021

March 31, 2022

December 31, 2021

4 unchanged sentences

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

September 30, 2021

March 31, 2022

December 31, 2021

1 unchanged sentence

Prepaid expenses

Due from equity method investee

Other current assets

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

September 30, 2021

March 31, 2022

December 31, 2021

1 unchanged sentence

Furniture and fixtures

Construction-in-progress

Total property and equipment

1 unchanged sentence

Property and equipment, net

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.

During each of the three months ended March 31, 2022 and 2021, depreciation expenses were approximately $ 11,000 .

NOTE 5 — INVESTMENTS

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.

Beginning October 16, 2021, the Company became 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 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.

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 bond as of September 30, 2021 and December 31, 2020 (in thousands):

The initial conversion price is subject to downward adjustment monthly based on the volume-weighted average market price of Telcon shares as reported on Korean Securities Dealers Automated Quotations Market and in the event of the issuance of Telcon shares or share equivalents at a price below the market price of Telcon shares or upon a merger or similar reorganization of Telcon or a stock split, reverse stock split, stock dividend or similar event.

The conversion price as of March 31, 2022 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 early redemption right described above or

the call option described below, are pledged as collateral to secure the Company’s obligations under the revised API Supply Agreement with T elcon described in Note 6 and Note 1 1 .

Concurrent with the purchase of the convertible bond, the Company entered into an 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 at any time and from time to time commencing October 16, 2021 and prior to maturity.

The Company has elected the fair value option method of accounting for the investment in convertible bond.

The investment in convertible bond 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 (loss).

The fair value and any changes in fair value in the convertible bond is determined using a binominal lattice model.

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

In February 2022, the Company and Telcon agreed to settle a “target shortfall” under the revised API agreement with Telcon for the years ended 2020 and 2021 by exchanging KRW 3.5 billion, or approximately US$ 2.9 million, principal amount and accrued and unpaid interest of the Telcon convertible bond and KRW 400 million, or approximately US$ 310,000 in cash proceeds of the convertible bond.

As a result, the Company realized net loss on investment convertible bond of $ 126,000 and other income of $ 41,000 , which are reflected in the statement of operations.

See Notes 6 and 11 for additional information on the “target shortfall”.

The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of March 31, 2022 and December 31, 2021 (in thousands):

Investment in convertible bond

September 30, 2021

March 31, 2022

December 31, 2021

Balance, beginning of period

Fair value at issuance date

Sales of convertible bond

Net loss on investment on convertible bond

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

Balance, end of period

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

September 30, 2021

The fair value as of March 31, 2022 and December 31, 2021 was based upon following assumptions:

March 31, 2022

December 31, 2021

10 unchanged sentences

KRW2,847 (US$2.39)

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.

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 a shuttered 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.

2 unchanged sentences

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 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.

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

The parties also contemplated that t he Ube facility would eventually supply the Company with the facility’s output of amino acids and that the operation of the facility would be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility would be made by EJ Holdings’ board of directors, a majority of which are representatives of JIP, in consultation with the Company.

During the three months ended March 31, 2022 , the Company made an additional $ 1.7 million of loans to EJ Holdings.

As of March 31, 2022 , and December 31, 2021 , the loans receivable from EJ Holdings were approximately $ 22.2 million and $ 22.6 million, respectively , as reflected in equity method investment on the consolidated balance sheets .

EJ Holdings is engaged in retrofitting the Ube facility in order to seek regulatory approvals for the manufacture of PGLG in accordance with cGMP.

EJ Holdings has had no substantial 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 loan financing provided by the Company to acquire the Ube facility and fund EJ Holdings’ activities, which 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 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,

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

The investment is evaluated for impairment 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, 2022 and 2021 (in thousands):

Three Months Ended March 31,

REVENUES, NET

NOTE 6 — SELECTED FINANCIAL STATEMENT CAPTIONS - LIABILITIES

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

September 30, 2021

NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES

Accounts payable and accrued expenses consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022

December 31, 2021

4 unchanged sentences

Manufacturing costs

Board member compensation

Other vendors

5 unchanged sentences

Government rebates and other rebates

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 September 30, 2021 and December 31, 2020 (in thousands):

September 30, 2021

Other current liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022

December 31, 2021

2 unchanged sentences

Total other current liabilities

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

September 30, 2021

Other long-term liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022

December 31, 2021

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 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.

On June 12, 2017, the Company entered into an API Supply 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 estimated annual target requirements for bulk containers of PGLG.

On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain items of the API Supply Agreement (the “revised API agreement”).

The Company purchased $ 200,000 and $ 2.0 million of PGLG from Telcon in the three months ended March 31, 2022 , and March 31, 2021, respectively, of which $ 200,000 and $ 378,000 were reflected in accounts payable as of March 31, 2022 and December 31, 2021, respectively.

The revised API agreement provided for an annual API purchase target of $ 5 million and a target “profit” ( i.e., gross margin) to Telcon of $ 2.5 million.

To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the “target shortfall,” or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure our obligations.

See Note 5 for information regarding a settlement in the three months ended March 31, 2022 of the target shortfall for 2020 and 2021.

NOTE 7 — NOTES PAYABLE

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

Notes payable consisted of the following at March 31, 2022 and December 31, 2021 (in thousands except for number of shares):

Interest Rate

Term of Notes

Outstanding September 30, 2021

Unamortized Discount September 30, 2021

Amount September 30, 2021

Outstanding March 31, 2022

Unamortized Discount March 31, 2022

Amount March 31, 2022

Underlying Shares

September 30, 2021

March 31, 2022

Notes payable

1 unchanged sentence

Due on demand - 2 years

Due on demand

Notes payable - related parties

1 unchanged sentence

Due on demand

Convertible notes payable

4 unchanged sentences

Due on demand

Due on demand - 2 years

2 unchanged sentences

Due on demand

Convertible debentures

Convertible note payable

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 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

September 30, 2021

December 31, 2020

Balance, beginning of period

Fair value at debt modification date

Change in fair value included in the statement of comprehensive loss

Balance, end of period

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

Conversion price

Selected yield

Expected volatility (peer group)

Expected life (in years)

Expected dividend yield

Risk-free rate

Term structure

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

Niihara, the Company’s Chairman and Chief Executive Officer.

Beginning February 28, 2022, the note holders became entitled to call for early redemption of the convertible notes payable, because the Company common stock was not approved for listing on the NYSE American, the Nasdaq Capital Market or other Trading Market (as defined in the agreement).

Accordingly, the notes were classified as current.

This note is convertible into shares of EMI Holding, Inc., a wholly owned subsidiary of Emmaus.

The weighted-average stated annual interest rate on notes payable was 6 % as of both March 31, 2022 and December 31, 2021.

The weighted-average effective annual interest rate of notes payable as of both March 31, 2022 and December 31, 2021 was 15 %, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.

As of March 31, 2022, future contractual principal payments due on notes payable were as follows (in thousands):

Includes $ 14.5 million principal amount of convertible notes is which, the holders are entitled to call for early redemption.

The Company is party to a revolving line of credit agreement with Yutaka Niihara, M.D., M.P.H., the Company’s Chairman and Chief Executive Officer.

Under the agreement, at the Company’s request from time to time Dr.

2 unchanged sentences

In addition to the payment of interest, the Company is obligated to pay Dr.

Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year.

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 %.

Niihara a “tax gross-up” intended to make him whole for federal and state income and employment taxes payable by him with respect to interest and tax gross-up paid to him in the previous year.

As of March 31, 2022 and December 31, 2021, the outstanding balance of $ 400,000 was reflected in revolving line of credit, related party on the condensed consolidated balance sheets.

With the tax-gross up, the effective interest rate on the outstanding balance as of March 31, 2022, was 10.4 %.

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

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 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.

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 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 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.

Refer to Note 12 for more related party information.

On February 9, 2021, the Company entered into a securities purchase agreement 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.

The Company sold and issued approximately $ 14.5 million of the convertible promissory notes.

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.

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 became redeemable in whole or in part at the election of the holders on or after February 28, 2022.

The Company is entitled to prepay up to 50 % of the principal amount of the convertible promissory notes at any time on or before February 28, 2023 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 September 30, 2021 (in thousands) :

The conversion feature of the convertible promissory notes is 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 the condensed consolidated statements of operations.

The following table sets forth the fair value of the conversion feature liability as of March 31, 2022, and December 31, 2021 (in thousands) :

Convertible promissory notes

September 30, 2021

March 31, 2022

December 31, 2021

Balance beginning of period

Fair value at issuance date

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

Change in fair value included in the statement of operations

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 fair value and any change in fair value of the 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 September 30, 2021 and at issuance date was based upon following assumptions:

The fair values as of March 31, 2022, and December 31, 2021 were based upon following assumptions:

Convertible promissory notes

September 30, 2021

Issuance Date

March 31, 2022

December 31, 2021

Conversion price

7 unchanged sentences

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.

other recapitalization events.

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

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

The 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 September 30, 2021 and December 31, 2020 (in thousands):

Nine Months Ended

The GPB Warrant is separately recognized under ASC 815-40 at fair value as a liability.

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

The following table presents the change in fair value of the GPB Warrant as of March 31, 2022 and December 31, 2021 (in thousands):

Warrant Liability—GPB

September 30, 2021

March 31, 2022

December 31, 2021

Balance beginning of period

Change in fair value included in the statement of comprehensive income

Change in fair value included in the statement of operations

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

September 30, 2021

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

The fair values as of March 31, 2022, and December 31, 2021 were based on upon following assumptions:

March 31, 2022

December 31, 2021

5 unchanged sentences

Number outstanding

Purchase Agreement with Holders of 10% Senior Secured Debentures— In October 2018, EMI sold and issued $ 12.2 million principal amount of 10 % Senior Secured Debentures and common stock purchase warrants to purchase an aggregate of up to 1,220,000 shares of EMI common stock to a limited number of accredited investors.

EMI’s obligations under the Debentures were secured by a security interest in substantially all EMI assets and guaranteed by EMI’s U.S.

subsidiaries.

The net proceeds of the sale of the debentures and warrants were used to fund 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.

Common stock purchase warrants issued in conjunction with the original Debentures also were amended and restated in their entirety in conjunction with the Merger.

The Amended and Restated 10% Senior Secured Convertible Debentures issued in conjunction with the Merger were convertible at the option of each holder into shares of EMI common stock immediately prior to the Merger at a conversion price of $ 10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events.

The related amended and restated warrants were exercisable immediately prior to the Merger for an aggregate of 1,460,000 shares of EMI common stock at an initial exercise price of $ 10.00 per share.

The exercise price of the warrants was subject to reduction in connection with a “going public event” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger.

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

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

Pursuant to the terms of a securities amendment agreement entered into on February 21, 2020, the Amended and Restated 10 % Senior Secured Convertible Debentures were once again amended and restated in their entirety to extend their maturity date to April 21, 2021 and reduce the conversion price thereof to $ 3.00 per share from $ 9.52 per share.

The related amended and restate common stock purchase warrants also were amended and restated again to reduce the exercise price thereof to $ 3.00 per share from $ 5.87 per share.

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.

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

The Company evaluated the common stock purchase warrants issued in connection with the original issuance of the 10 % Senior Secured Debentures in October 2018 under ASC 815-40 and concluded that the warrants should be separately recognized at fair value as a liability.

The liability is remeasured at fair value on a recurring basis using Level 3 input and any changes in fair value is recorded in earnings.

In 2019, the 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.

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:

March 2, 2021 (Anti-dilution adjustment date)

February 28, 2020 (Anti-dilution adjustment date)

February 21, 2020 (Amendment date)

Exercise price

Common stock fair value

101.00%-120.00%

Risk-free rate

Expected life (in years)

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 September 30, 2021 and December 31, 2020 (in thousands):

Nine Months Ended

Warrant liability—Wealth Threshold

September 30, 2021

Extension 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 of the convertible promissory note to June 15, 2023 in exchange for an increase in the interest rate on the note from 11 % to 12 %.

In conjunction with the extension, the Company issued to the note holder five-year 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 warrants are 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 the condensed consolidated statements of operations.

The following table presents the fair values and changes in fair value of the warrants as of March 31, 2022 and December 31, 2021 (in thousands):

Warrant liability— Convertible Promissory Note

March 31, 2022

December 31, 2021

Balance beginning of period

Fair value at issuance date

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

Change in fair value included in the statement of operations

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:

September 30, 2021

The fair values of the warrant derivative liability were determined using the Black-Scholes Merton model based upon following assumptions:

March 31, 2022

December 31, 2021

5 unchanged sentences

Number outstanding

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

September 30, 2021

A summary of outstanding warrants as of March 31, 2022 and December 31, 2021 is presented below:

March 31, 2022

December 31, 2021

2 unchanged sentences

Warrants outstanding end of period

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

A summary of all outstanding warrants by year issued and exercise price as of March 31, 2022 is presented below:

Year issued and Exercise Price

3 unchanged sentences

Prior to January 1, 2021

Prior to Jan 1, 2020 Total

At December 31, 2020

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 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 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 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

At March 31, 2022

Stock options – The Company’s former Amended and Restated 2011 Stock Incentive Plan expired on May 3, 2021, and no further awards may be made under the 2011 Plan.

The expiration of the 2011 Plan did not affect outstanding stock options thereunder.

The Company also previously maintained an Amended and Restated 2012 Omnibus Incentive Compensation Plan, which was terminated in September 2021 in connection with the adoption of the 2021 Stock Incentive Plan described below.

On September 29, 2021, the Board of Directors of the Company adopted the Emmaus Life Sciences, Inc.

2021 Stock Incentive Plan upon the recommendation of the Compensation Committee of the Board.

The 2021 Stock Incentive Plan was approved by stockholders on November 23, 2021.

No more than 4,000,000 shares of common stock may be issued pursuant to awards under the 2021 Stock Incentive Plan.

The number of shares available for Awards, as well as the terms of outstanding awards, is subject to adjustment as provided in the Stock Incentive Plan for stock splits, stock dividends, reverse stock splits, recapitalizations and other similar events.

As of March 31, 2022, no awards were outstanding under the 2021 Stock Incentive Plan.

A summary of the Company’s stock option activity for three months ended March 31, 2022 and for the year ended December 31, 2021 is presented below.

March 31, 2022

December 31, 2021

5 unchanged sentences

Options available for future grant

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.

(“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.

Refer to Note 13 for additional information.

During the three months ended March 31, 2022, and 2021, the Company recognized $ 5,000 and $ 182,000 , respectively, of share-based compensation expense.

As of March 31, 2022, there was approximately $ 16,000 of total unrecognized compensation expense related to unvested share-based compensation awards outstanding under the former Amended and Restated 2011 Stock Incentive Plan.

That expense is expected to be recognized over the weighted-average remaining vesting period of 1.1 years.

Collaborative Research and Development Agreement with Kainos Medicine, Inc — On February 26, 2021, the Company entered into a collaborative research and development 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 Kainos’s research and development activit ies .

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

Pursuant to the collaborative research and development agreement, the Company paid and issued to Kainos $ 500,000 in cash and 324,675 shares of common stock of the Company equivalent to $ 500,000 in additional consideration, which amounts were recorded as research and development expenses in the statement of operations and comprehensive income (loss) for each of the periods ended March 31, 2021 and December 31, 2021.

The Company, in turn, was 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.

On October 7, 2021, the Company entered into a license agreement 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 paid Kainos a six-figure upfront fee in cash and agreed to make additional cash payments upon the achievement of specified milestones totaling in the mid-eight figures and pay a single-digit percentage royalty based on net sales of the licensed products and a similar percentage of any sublicensing consideration.

During the three months ended March 31, 2021, the Company incurred $ 1.0 million of research and development expenses related to the Kainos collaboration and license agreement.

The Company incurred no such expenses in the three months ended March 31, 2022.

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

For the three months ended March 31, 2022 and 2021, the Company recorded an income tax benefit of $ 103,000 and a provision for state income tax of $ 18,000 , respectively.

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

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.

The Company established a full valuation allowance against its federal and state deferred tax asset and there was unrecognized tax benefit as of March 31, 2022 or March 31, 2021 .

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 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)

The rent expense during the three months ended March 31, 2022 and 2021 was $ 303,000 and $ 301,000 , respectively.

Future minimum lease payments were as follows as of March 31, 2022 (in thousands):

2022 (nine months)

2026 and thereafter

Total lease payments

Less imputed interest

Present value of lease liabilities

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 %.

As of March 31, 2022 , the Company had an operating lease right-of-use asset of $ 3.3 million and lease liability of $ 3.8 million.

The weighted average remaining term of the Company’s leases as of March 31, 2022 was 4.4 years and the weighted-average discount rate was 12.0 %.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon paid the Company approximately $ 31.8 million in consideration of the right to supply 25 % of the Company’s requirements for bulk containers of PGLG for a fifteen-year term.

API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $ 31.8 million in consideration of the right to supply 25 % of the Company’s requirements for bulk containers of PGLG for a fifteen-year term.

The amount was recorded as deferred trade discount.

On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the original API Supply Agreement (the “Revised API Agreement”) .

The Revised API Agreement is effective for a term of five years and will renew automatically for 10 successive one-year renewal periods, except as either party may determine.

In the Revised API Agreement, the Company has agreed to purchase a total of 940,000 kilograms of PGLG at $ 50 per kilogram, or a total of $ 47.0 million, over the term of the agreement.

In September 2018, the Company entered into an agreement with Ajinomoto Health and Nutrition North America, Inc.

(“Ajinomoto”), the producer of the PGLG, and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the Revised API Agreement.

On June 16, 2019, the Company entered into an agreement with Telcon to adjust the price payable to Telcon under the Revised API Agreement from $50 per kilogram of PGLG to $ 100 per kilogram from July 1, 2019 through June 30, 2020, with the price payable after June 30, 2020 to be subject to agreement between the parties.

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.

On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”) .

The revised API agreement is effective for a term of five years and will renew automatically for ten successive one-year renewal periods, except as either party may determine.

In the revised API agreement, the Company has agreed to purchase a cumulative total of $ 47.0 million of PGLG over the term of the agreement.

The revised API agreement provided for an annual API purchase target of $ 5 million and a target “profit” ( i.e., gross margin) to Telcon of $ 2.5 million.

To the extent these targets are not met, which management refers to as a “target shortfall,” Telcon may be entitled to payment of the shortfall, or to settle the target shortfall by exchange of principal and interest on the Telcon convertible bond and proceeds thereof that are pledged as a collateral to secure our obligations.

In September 2018, the Company entered into an agreement with Ajinomoto and Telcon to facilitate Telcon’s purchase of PGLG from Ajinomoto for resale to the Company under the revised API agreement.

The PGLG raw material purchased from Telcon is recorded in inventory at net realizable value and the excess purchase price is recorded against deferred trade discount.

Refer to Notes 5 and 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 nine months ended September 30, 2021 (in thousands):

Principal Amount Outstanding at September 30, 2021

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, 2022 (in thousands):

Principal Amount Outstanding at March 31, 2022

Current, Promissory note payable to related parties:

3 unchanged sentences

Due on Demand

Revolving line of credit agreement

Yutaka Niihara (1)

Soomi Niihara (1)

Due on Demand

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

Current, Promissory note payable to related parties:

Yasushi Nagasaki (2)

Due on Demand

Hope International Hospice, Inc.

Due on Demand

Hope International Hospice, Inc.

Due on Demand

Hope Int'l Hospice (1)

Soomi Niihara (1)

Due on Demand

Hope Int'l Homecare (1)

George Sekulich (2)

Due on Demand

1 unchanged sentence

Due on Demand

Soomi Niihara (1)

Osato Medical Clinic (3)

Due on Demand

Willis Lee (2)

Alfred Lui (2)

Due on Demand

Hope International Hospice, Inc.

Due on Demand

Hope International Hospice, Inc.

Due on Demand

Wei Pei Zen (2)

Due on Demand

Revolving line of credit agreement

Yutaka Niihara (1)

Due on Demand

The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2021:

Principal Amount Outstanding at December 31, 2021

Current, Promissory note payable to related parties:

Willis Lee (2)

Due on Demand

Soomi Niihara (1)

Due on Demand

Soomi Niihara (1)

Due on Demand

Soomi Niihara (1)

Due on Demand

Revolving line of credit

1 unchanged sentence

Due on Demand

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

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 .

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

Soomi Niihara is Dr.

Niihara’s wife.

Current officer or director.

Osato, a director of Emmaus and his wife are the sole owner of Osato Medical Clinic.

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

S ee Notes 6 and 11 for a discussion of the Company’s agreements with Telcon, which holds 4,147,491 shares of the Emmaus common stock, or approximately 8.4 % of the common stock outstanding as of March 31, 2022 and, as such, may be deemed to be an affiliate of the Company.

As of March 31, 2022, the Company held a Telcon convertible bond in the principal amount of approximately $ 23.5 million as discussed in Note 5 .

NOTE 13 — SUBSEQUENT EVENTS

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.

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.

Subsequent to March 31, 2022, the Company received $ 1.2 million of proceeds from loans from related and unrelated parties to augment its working capital .

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