Emmaus Life Sciences, Inc. 10-Q

Item 1. Financial Statements EMMAUS LIFE SCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) As of March 31, 2022 (Unaudited) December 31, 2021 ASSETS CURRENT ASSETS Cash and cash equivalents $ 813 $ 2,279 Accounts receivable, net 938 1,040 Inventories, net 3,453 4,392 Prepaid expenses and other current assets 1,244 1,380 Total current assets 6,448 9,091 Property and equipment, net 138 147 Equity method investment 17,771 17,616 Right of use assets 3,318 3,485 Investment in convertible bond 23,521 26,100 Other assets 297 295 Total assets $ 51,493 $ 56,734 LIABILITIES AND STOCKHOLDERS’ DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $ 9,718 $ 9,189 Operating lease liabilities, current portion 738 740 Conversion feature derivative, notes payable 4,427 7,507 Other current liabilities 2,822 4,404 Revolving line of credit from related party 400 400 Warrant derivative liabilities 755 1,503 Notes payable, current portion 2,286 2,399 Notes payable to related parties 2,836 800 Convertible notes payable, net of discount 10,569 10,158 Total current liabilities 34,551 37,100 Operating lease liabilities, less current portion 3,084 3,261 Other long-term liabilities 31,507 33,173 Notes payable, less current portion 1,500 1,500 Convertible notes payable 3,150 3,150 Total liabilities 73,792 78,184 STOCKHOLDERS’ DEFICIT 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 49 49 Additional paid-in capital 220,027 220,022 Accumulated other comprehensive income (loss) 433 ( 255 ) Accumulated deficit ( 242,808 ) ( 241,266 ) Total stockholders’ deficit ( 22,299 ) ( 21,450 ) Total liabilities & stockholders’ deficit $ 51,493 $ 56,734 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 EMMAUS LIFE SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share amounts) (Unaudited) Three Months Ended March 31, 2022 2021 REVENUES, NET $ 3,234 $ 5,335 COST OF GOODS SOLD 1,007 436 GROSS PROFIT 2,227 4,899 OPERATING EXPENSES Research and development 466 1,809 Selling 1,460 1,283 General and administrative 3,369 3,422 Total operating expenses 5,295 6,514 LOSS FROM OPERATIONS ( 3,068 ) ( 1,615 ) OTHER INCOME (EXPENSE) Loss on debt extinguishment, net — ( 1,172 ) Change in fair value of warrant derivative liabilities 748 ( 529 ) Change in fair value of conversion feature derivative, notes payable 3,080 ( 2,338 ) Realized loss on investment on convertible bond ( 133 ) — Net loss on equity method investment ( 566 ) ( 754 ) Foreign exchange loss ( 1,191 ) ( 1,132 ) Interest and other income 222 190 Interest expense ( 737 ) ( 1,054 ) Total other income (expense) 1,423 ( 6,789 ) LOSS BEFORE INCOME TAXES ( 1,645 ) ( 8,404 ) INCOME TAXES (BENEFIT) ( 103 ) 18 NET LOSS ( 1,542 ) ( 8,422 ) COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain on debt securities available for sale (net of tax) 350 58 Reclassification adjustment for loss included in net income 7 — Foreign currency translation adjustments 331 165 Other comprehensive income 688 223 COMPREHENSIVE LOSS $ ( 854 ) $ ( 8,199 ) NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ ( 0.03 ) $ ( 0.17 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 49,311,864 49,073,769 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 EMMAUS LIFE SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (In thousands, except share and per share amounts) (Unaudited) Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Deficit Balance January 1, 2022 49,311,864 $ 49 $ 220,022 $ ( 255 ) $ ( 241,266 ) $ ( 21,450 ) Share-based compensation — — 5 — — 5 Unrealized loss on debt securities available for sale (net of tax) — — — 350 — 350 Reclassification adjustment for loss included in net income — — — 7 — 7 Foreign currency translation effect — — — 331 — 331 Net loss — — — — ( 1,542 ) ( 1,542 ) Balance March 31, 2022 49,311,864 $ 49 $ 220,027 $ 433 $ ( 242,808 ) $ ( 22,299 ) Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders' Shares Amount Capital Income Deficit Deficit Balance January 1, 2021 48,987,189 $ 49 $ 218,728 $ 1,144 $ ( 225,079 ) $ ( 5,158 ) Fair value of warrants including down-round protection adjustments — — 241 — ( 241 ) — Common stock issued for services 324,675 — 500 — — 500 Share-based compensation — — 181 — — 181 Unrealized loss on debt securities available for sale (net of tax) — — — 58 — 58 Foreign currency translation effect — — — 165 — 165 Net loss — — — — ( 8,422 ) ( 8,422 ) Balance March 31, 2021 49,311,864 $ 49 $ 219,650 $ 1,367 $ ( 233,742 ) $ ( 12,676 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 EMMAUS LIFE SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 1,542 ) $ ( 8,422 ) Adjustments to reconcile net loss to net cash flows used in operating activities Depreciation and amortization 15 15 Inventory reserve 794 162 Amortization of discount of notes payable and convertible notes payable 411 669 Foreign exchange adjustments 1,205 1,180 Tax benefit recognized on unrealized gain on debt securities ( 117 ) ( 19 ) Realized loss on investment on convertible bond 133 — Net loss on equity method investment 566 754 Net loss on debt extinguishment — 1,172 Gain on disposal of property and equipment — ( 1 ) Share-based compensation 5 181 Shares issued for services — 500 Change in fair value of warrant derivative liabilities ( 748 ) 529 Change in fair value of conversion feature derivative, note payable ( 3,080 ) 2,338 Net changes in operating assets and liabilities Accounts receivable 102 ( 2,176 ) Inventories 143 180 Prepaid expenses and other current assets 103 158 Other non-current assets 160 122 Income tax receivable and payable 10 33 Accounts payable and accrued expenses 530 ( 1,295 ) Other current liabilities ( 2,980 ) 42 Other long-term liabilities ( 443 ) ( 123 ) Net cash flows used in operating activities ( 4,733 ) ( 4,001 ) CASH FLOWS FROM INVESTING ACTIVITIES Sale of convertible bond 2,919 — Purchases of property and equipment ( 2 ) — Loan to equity method investee ( 1,690 ) ( 1,769 ) Net cash flows provided by (used in) investing activities 1,227 ( 1,769 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable issued 2,056 700 Proceeds from convertible notes payable issued — 14,390 Payments of notes payable — ( 844 ) Payments of convertible notes — ( 7,200 ) Net cash flows provided by financing activities 2,056 7,046 Effect of exchange rate changes on cash ( 16 ) ( 4 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 1,466 ) 1,272 Cash, cash equivalents and restricted cash, beginning of period 2,279 2,487 Cash, cash equivalents and restricted cash, end of period $ 813 $ 3,759 SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES Interest paid $ 212 $ 319 Income taxes paid $ 4 $ 5 NON-CASH INVESTMENT AND FINANCING ACTIVITIES Debt discount due to conversion features derivative $ — $ 5,555 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 EMMAUS LIFE SCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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”) on the basis that the Company will continue as a going concern. 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. 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 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 for the year ended December 31, 2021. There have been no material changes in these policies or their application. 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. 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 for 12 months from the date of this filing. 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 5 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 March 31, 2022 2021 Endari® $ 3,048 $ 5,176 Other 186 $ 159 Revenues, net $ 3,234 $ 5,335 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 Government Rebates and Other Incentives Returns Total Balance as of December 31, 2021 $ 1,480 $ 3,134 $ 540 $ 5,154 Provision related to sales in the current year 428 435 30 893 Adjustments related prior period sales ( 10 ) 13 ( 47 ) ( 44 ) Credit and payments made ( 1,064 ) ( 453 ) ( 32 ) ( 1,549 ) Balance as of March 31, 2022 $ 834 $ 3,129 $ 491 $ 4,454 Balance as of December 31, 2020 $ 134 $ 2,119 $ 473 $ 2,726 Provision related to sales in the current year 575 864 57 1,496 Adjustments related prior period sales 14 2 ( 37 ) ( 21 ) Credit and payments made ( 281 ) ( 792 ) — ( 1,073 ) Balance as of March 31, 2021 $ 442 $ 2,193 $ 493 $ 3,128 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, 2022 2021 Customer A 1 % 63 % Customer B 46 % 17 % Customer C 15 % 9 % Customer D 16 % — Total 78 % 89 % 6 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 fees. 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): March 31, 2022 December 31, 2021 Raw materials and components $ 1,477 $ 1,439 Work-in-process 132 115 Finished goods 6,028 6,228 Inventory reserve ( 4,184 ) ( 3,390 ) Total $ 3,453 $ 4,392 Prepaid expenses and other current assets consisted of the following (in thousands): March 31, 2022 December 31, 2021 Prepaid insurance $ 466 $ 660 Prepaid expenses 399 326 Other current assets 379 394 Total $ 1,244 $ 1,380 Property and equipment consisted of the following (in thousands): March 31, 2022 December 31, 2021 Equipment $ 344 $ 342 Leasehold improvements 39 39 Furniture and fixtures 103 103 Construction-in-progress 57 57 Total property and equipment 543 541 Less: accumulated depreciation ( 405 ) ( 394 ) Property and equipment, net $ 138 $ 147 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 % a year, payable quarterly. 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 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 7 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 March 31, 2022 December 31, 2021 Balance, beginning of period $ 26,100 $ 27,866 Sales of convertible bond ( 2,919 ) — Net loss on investment on convertible bond ( 126 ) — Change in fair value included in the statement of other comprehensive income 466 ( 1,766 ) Balance, end of period $ 23,521 $ 26,100 The fair value as of March 31, 2022 and December 31, 2021 was based upon following assumptions: March 31, 2022 December 31, 2021 Principal outstanding (South Korean won) KRW 26.5 billion KRW 30 billion Stock price KRW2,410 KRW2,925 Expected life (in years) 8.55 8.79 Selected yield 11.00 % 10.50 % Expected volatility (Telcon common stock) 80.43 % 81.31 % Risk-free interest rate (South Korea government bond) 2.94 % 2.19 % Expected dividend yield — — Conversion price KRW2,140 (US$1.82) 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 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. JIP owns 60 % of EJ Holdings voting shares. In October 2018, the Company entered into a loan agreement with EJ Holdings under which the Company made an unsecured loan to EJ Holdings in the amount of $ 13.2 million. The loan 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 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. 8 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 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, 2022 (Unaudited) 2021 (Unaudited) REVENUES, NET $ 54 $ 59 NET LOSS $ ( 1,414 ) $ ( 1,886 ) 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 Accounts payable: Clinical and regulatory expenses $ 699 $ 534 Professional fees 817 477 Selling expenses 671 932 Manufacturing costs 283 378 Board member compensation 283 136 Other vendors 120 262 Total accounts payable 2,873 2,719 Accrued interest payable, related parties 142 91 Accrued interest payable 618 579 Accrued expenses: Payroll expenses 877 1,097 Government rebates and other rebates 4,461 4,371 Other accrued expenses 747 332 Total accrued expenses 6,085 5,800 Total accounts payable and accrued expenses $ 9,718 $ 9,189 Other current liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Trade discount $ 1,600 $ 3,000 Other current liabilities 1,222 1,404 Total other current liabilities $ 2,822 $ 4,404 Other long-term liabilities consisted of the following at March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Trade discount $ 21,480 $ 23,148 Unearned revenue 10,000 10,000 Other long-term liabilities 27 25 Total other long-term liabilities $ 31,507 $ 33,173 9 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 March 31, 2022 and December 31, 2021 (in thousands except for number of shares): Year Issued Interest Rate Range Term of Notes Conversion Price Principal Outstanding March 31, 2022 Unamortized Discount March 31, 2022 Carrying Amount March 31, 2022 Underlying Shares March 31, 2022 Notes payable 2013 10 % Due on demand — $ 821 $ — $ 821 — 2021 11 % Due on demand - 2 years — 2,945 — 2,945 — 2022 10 % Due on demand — 20 — 20 — $ 3,786 $ — $ 3,786 — Current $ 2,286 $ — $ 2,286 — Non-current $ 1,500 $ — $ 1,500 — Notes payable - related parties 2020 12 % Due on demand — $ 100 — 100 — 2021 12 % Due on demand — 700 — 700 — 2022 10-12% Due on demand — 2,036 — 2,036 — $ 2,836 $ — $ 2,836 — Current $ 2,836 $ — $ 2,836 — Convertible notes payable 2020 12 % 3 years $ 10.00 (b) 3,150 — 3,150 319,804 2021 2 % 3 years $ 1.48 (a) 14,490 3,921 10,569 9,806,850 $ 17,640 $ 3,921 $ 13,719 10,126,654 Current $ 14,490 $ 3,921 $ 10,569 9,806,850 Non-current $ 3,150 $ — $ 3,150 319,804 Total $ 24,262 $ 3,921 $ 20,341 10,126,654 10 Year Issued Interest Rate Range Term of Notes Conversion Price Principal Outstanding December 31, 2021 Unamortized Discount December 31, 2021 Carrying Amount December 31, 2021 Underlying Shares Notes December 31, 2021 Notes payable 2013 10 % Due on demand — $ 869 $ — $ 869 — 2021 11 % Due on demand - 2 years — 3,030 — 3,030 — $ 3,899 $ — $ 3,899 — Current $ 2,399 $ — $ 2,399 — Non-current $ 1,500 $ — $ 1,500 — Notes payable - related parties 2020 12 % Due on demand — $ 100 $ — $ 100 — 2021 12 % Due on demand — 700 — 700 — $ 800 $ — $ 800 — Current $ 800 $ — $ 800 — Convertible note payable 2020 12 % 3 years $ 10.00 (b) 3,150 — 3,150 316,756 2021 2 % 3 years $ 1.48 (a) 14,490 4,332 10,158 9,856,343 $ 17,640 $ 4,332 $ 13,308 10,173,099 Current $ 14,490 $ 4,332 $ 10,158 9,856,343 Non-current $ 3,150 $ — $ 3,150 316,756 Total $ 22,339 $ 4,332 $ 18,007 10,173,099 (a) The notes are convertible into Emmaus Life Sciences, Inc. shares. 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. (b) 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): Year Ending 2022 19,612 (a) 2023 4,650 Total $ 24,262 (a) 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. Niihara may, but is not obligated to, loan or re-loan to the Company up to $ 1,000,000 . Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3 %. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income 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 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. 11 Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price of $ 1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of such three-month period if such Average VWAP is less than the then-conversion price. There is no floor on the conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes. The convertible promissory notes bear interest at the rate of 2 % per year payable semi-annually on the last business day of August and January of each year and will mature on the 3rd anniversary of the original issue date, unless earlier converted or prepaid. 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 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 March 31, 2022 December 31, 2021 Balance beginning of period $ 7,507 $ — Fair value at issuance date — 5,594 Change in fair value included in the statement of operations ( 3,080 ) 1,913 Balance end of period $ 4,427 $ 7,507 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 values as of March 31, 2022, and December 31, 2021 were based upon following assumptions: Convertible promissory notes March 31, 2022 December 31, 2021 Stock price $ 1.00 $ 1.67 Conversion price $ 1.48 $ 1.48 Selected yield 23.42 % 21.99 % Expected volatility 50 % 50 % Time until maturity (in years) 1.91 2.16 Dividend yield — — Risk-free rate 2.22 % 0.77 % NOTE 8 — STOCKHOLDERS’ DEFICIT 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 12 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 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 March 31, 2022 December 31, 2021 Balance beginning of period $ 40 $ 83 Change in fair value included in the statement of operations ( 35 ) ( 43 ) Balance end of period $ 5 $ 40 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 Adjusted exercise price $ 10.28 $ 10.28 Common stock fair value $ 1.00 $ 1.67 Risk‑free interest rate 1.79 % 0.56 % Volatility 97.00 % 104.00 % Time until expiration (years) 1.25 1.50 Expected dividend yield — — Number outstanding 252,802 252,802 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 $ 1,463 $ 988 Change in fair value included in the statement of operations ( 713 ) 475 Balance end of period $ 750 $ 1,463 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 Exercise price $ 2.05 $ 2.05 Stock price $ 1.00 $ 1.67 Risk‑free interest rate 2.45 % 1.04 % Expected volatility (peer group) 117.00 % 117.00 % Expected life (in years) 3.21 3.46 Expected dividend yield — — Number outstanding 1,250,000 1,250,000 13 A summary of outstanding warrants as of March 31, 2022 and December 31, 2021 is presented below: March 31, 2022 December 31, 2021 Warrants outstanding beginning of period 8,236,017 8,439,480 Granted — — Exercised — — Cancelled, forfeited or expired — ( 203,463 ) Warrants outstanding end of period 8,236,017 8,236,017 A summary of all outstanding warrants by year issued and exercise price as of March 31, 2022 is presented below: Outstanding Exercisable Year issued and Exercise Price Number of Warrants Issued Weighted-Average Remaining Contractual Life (Years) Weighted-Average Exercise Price Total Weighted-Average Exercise Price Prior to January 1, 2021 $1.54-$36.24 8,236,017 1.98 $ 5.87 6,986,017 $ 5.87 At March 31, 2022 $ — — — $ — — $ — Total 8,236,017 Total 6,986,017 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 Number of Options Weighted‑ Average Exercise Price Number of Options Weighted‑ Average Exercise Price Options outstanding, beginning of period 5,968,338 $ 4.78 7,110,025 $ 4.63 Granted or deemed granted — $ — — $ — Exercised — $ — — $ — Cancelled, forfeited and expired ( 6 ) $ 3,600.00 ( 1,141,687 ) $ 3.82 Options outstanding, end of period 5,968,332 $ 4.78 5,968,338 $ 4.78 Options exercisable, end of period 5,942,831 $ 4.80 5,937,837 $ 4.80 Options available for future grant 4,000,000 4,000,000 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. 14 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 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. 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 Operating leases — The Company leases its office space under operating leases with unrelated entities. The Company leases 21,293 square feet of office space for our headquarters in Torrance, California, at a base rental of $ 83,365 per month, which lease will expire on September 30, 2026 . The Company also leases an additional 1,850 square feet office space in New York, New York, at a base rent of $ 8,908 , which lease will expire on January 31, 2023 . In addition, the Company leases 1,322 square feet of office space in Tokyo, Japan, which lease will expire on September 30, 2022 and 1,163 square feet of office space in Dubai, United Arab Emirates, which lease will expire on June 19, 2023 . 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): Amount 2022 (nine months) $ 880 2023 1,058 2024 1,063 2025 1,092 2026 and thereafter 836 Total lease payments 4,929 Less imputed interest 1,107 Present value of lease liabilities $ 3,822 15 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 (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately $ 31.8 million in consideration of the right to supply 25 % of the Company’s requirements for bulk containers of PGLG for a fifteen-year term. The amount was recorded as deferred trade discount. On July 12, 2017, the Company entered into a raw material supply agreement with Telcon which revised certain terms of the API supply agreement (the “revised API agreement”) . The revised API agreement is effective for a term of five years and will renew automatically for 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. 16 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, 2022 (in thousands): Class Lender Interest Rate Date of Loan Term of Loan Principal Amount Outstanding at March 31, 2022 Highest Principal Outstanding Amount of Principal Repaid Amount of Interest Paid Current, Promissory note payable to related parties: Willis Lee (2) 12 % 10/29/2020 Due on Demand 100 100 — — Soomi Niihara (1) 12 % 12/7/2021 Due on Demand 700 700 — — Soomi Niihara (1) 12 % 1/18/2022 Due on Demand 300 300 — — Yasushi Nagasaki (2) 10 % 2/9/2022 Due on Demand 50 50 — — Hope International Hospice, Inc. (1) 10 % 2/9/2022 Due on Demand 350 350 — — Hope International Hospice, Inc. (1) 10 % 2/15/2022 Due on Demand 210 210 — — Soomi Niihara (1) 10 % 2/15/2022 Due on Demand 100 100 — — George Sekulich (2) 10 % 2/16/2022 Due on Demand 26 26 — — Soomi Niihara (1) 10 % 3/7/2022 Due on Demand 200 200 — — Osato Medical Clinic (3) 12 % 3/11/2022 Due on Demand 250 250 — — Alfred Lui (2) 12 % 3/11/2022 Due on Demand 50 50 — — Hope International Hospice, Inc. (1) 12 % 3/15/2022 Due on Demand 150 150 — — Hope International Hospice, Inc. (1) 12 % 3/30/2022 Due on Demand 150 150 — — Wei Pei Zen (2) 10 % 3/31/2022 Due on Demand 200 200 — — Subtotal 2,836 2,836 — — Revolving line of credit agreement Yutaka Niihara (1) 5.25 % 12/27/2019 Due on Demand 400 400 — 3 Subtotal 400 400 — 3 Total $ 3,236 $ 3,236 $ — $ 3 17 The following table sets forth information relating to loans from related parties outstanding at any time during the year ended December 31, 2021: Class Lender Interest Rate Date of Loan Term of Loan Principal Amount Outstanding at December 31, 2021 Highest Principal Outstanding Amount of Principal Repaid Amount of Interest Paid Current, Promissory note payable to related parties: Willis Lee (2) 12 % 10/29/2020 Due on Demand $ 100 $ 100 $ — $ — Soomi Niihara (1) 12 % 1/20/2021 Due on Demand — 700 700 13 Soomi Niihara (1) 12 % 9/15/2021 Due on Demand — 300 300 3 Soomi Niihara (1) 12 % 12/7/2021 Due on Demand 700 700 — — Subtotal $ 800 $ 1,800 $ 1,000 $ 16 Revolving line of credit Yutaka Niihara (1) 5.25 % 12/27/2019 Due on Demand $ 400 $ 800 $ 400 $ 35 Subtotal $ 400 $ 800 $ 400 $ 35 Total $ 1,200 $ 2,600 $ 1,400 $ 51 (1) Dr. 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. (2) Current officer or director. (3) Dr. 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. Niihara. 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 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 . 18