What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-08-15 · 201 added, 170 removed, 458 unchanged (45% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

June 30, 2022

September 30, 2022

December 31, 2021

24 unchanged sentences

Notes payable, less current portion

Notes payable to related parties, net

Convertible notes payable

2 unchanged sentences

Preferred stock, par value $ 0.001 per share, 15,000,000 shares authorized, no ne issued or outstanding

Common stock, par value $ 0.001 per share, 250,000,000 shares authorized, 49,558,501 and 49,311,864 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Common stock, par value $ 0.001 per share, 250,000,000 shares authorized, 49,558,501 and 49,311,864 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

7 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

REVENUES, NET

4 unchanged sentences

Total operating expenses

INCOME (LOSS) FROM OPERATIONS

LOSS FROM OPERATIONS

OTHER INCOME (EXPENSE)

8 unchanged sentences

Total other income (expense)

INCOME (LOSS) BEFORE INCOME TAXES

INCOME TAXES (BENEFIT)

NET INCOME (LOSS)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

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

LOSS BEFORE INCOME TAXES

Income tax provision (benefit)

COMPONENTS OF OTHER COMPREHENSIVE LOSS

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

Reclassification adjustment for loss included in net income

Foreign currency translation adjustments

Other comprehensive income (loss)

COMPREHENSIVE INCOME (LOSS)

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

Other comprehensive loss

COMPREHENSIVE LOSS

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

20 unchanged sentences

Balance, June 30, 2022

Share-based compensation

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

Foreign currency translation effect

Balance, September 30, 2022

EMMAUS LIFE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share and per share amounts)

Additional paid-in

13 unchanged sentences

Balance, June 30, 2021

Share-based compensation

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

Foreign currency translation effect

Balance at September 30, 2021

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

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

4 unchanged sentences

Foreign exchange adjustments

Tax benefit recognized on unrealized gain on debt securities

Net gain on investment in marketable securities

1 unchanged sentence

Loss on debt extinguishment

Loss on disposal of property and equipment

Gain on disposal of property and equipment

Loss on leased assets

18 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES

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

Proceeds from notes payable issued, net of issuance cost

Proceeds from notes payable issued, net of issuance cost, related party

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

10 unchanged sentences

NON-CASH INVESING AND FINANCING ACTIVITIES

Debt discount due to conversion features derivative

Debt discount due to embedded derivative

Debt discount due to deferred financing cost

Debt discount due to warrants

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

5 unchanged sentences

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

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

Due to the uncertainty of the Company’s ability to meet its current liabilities and operating expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and any expansion of its business is dependent upon obtaining 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 and Quarterly Report on Form 10-Q filed with the SEC on May 13, 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 six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full year or any future interim period.

The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future interim period.

Nature of Operations

3 unchanged sentences

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.

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Annual Report.

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 $ 10.4 million for the six months ended June 30, 2022 and had a working capital deficit of $ 39.5 million.

The Company incurred a net loss of $ 10.8 million for the nine months ended September 30, 2022 and had a working capital deficit of $ 35.1 million as of September 30, 2022.

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.

4 unchanged sentences

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 will not have a material effect on the Company’s condensed consolidated financial statements.

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

Factoring accounts receivables — 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

3 unchanged sentences

In connection with the purchase and sale agreement, Emmaus has guaranteed Emmaus Medical’s obligations under the purchase and sale agreement.

At June 30, 2022, accounts receivable included $ 402 , 0 00 of factoring accounts receivable and there were $ 14,000 liabilities related to factoring reflected in other current liabilities.

For three and six months ended June 30, 2022, the Company incurred approximately $ 101,000 , and $ 154,000 , respectively, of factoring fees.

Accounts receivable included $ 86,000 and $ 472,000 of factoring accounts receivable and there were $ 17,000 and $ 9,000 liabilities related to factoring reflected in other current liabilities at September 30, 2022 and September 30, 2021, respectively .

For three and nine months ended September 30, 2022, the Company incurred approximately $ 121,000 , and $ 275,000 , respectively, of factoring fees.

For three and nine months ended September 30, 2021, the Company incurred approximately $ 106,000 and $ 181,000 , respectively of factori ng 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 that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

As of June 30, 2022 and June 30, 2021, the Company had outstanding potentially dilutive securities exercisable for or convertible into 52,523,286 shares and 23,326,667 shares, respectively, of the Company’s 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 period ended June 30, 2021 and June 30, 2022.

As of September 30, 2022 and September 30, 2021, the Company had outstanding potentially dilutive securities exercisable for or convertible into 52,635,590 shares and 23,276,594 shares, respectively, of the Company’s 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 periods ended September 30, 2022 and September 30, 2021.

NOTE 3 — REVENUES

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

Three Months Ended June 30,

Six Months Ended June 30,

Three months ended September 30,

Nine months ended September 30,

Revenues, net

The following table summarizes the revenue allowance and accrual activities for the six months ended June 30, 2022 and June 30, 2021 (in thousands):

The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 2022 and September 30, 2021 (in thousands):

Trade Discounts, Allowances and Chargebacks

2 unchanged sentences

Provision related to sales in the current year

Adjustments related prior period sales

Credit and payments made

Balance as of June 30, 2022

Adjustments related to prior period sales

Credits and payments made

Balance as of September 30, 2022

Balance as of December 31, 2020

Provision related to sales in the current year

Adjustments related prior period sales

Credit and payments made

Balance as of June 30, 2021

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

Three Months Ended June 30,

Six Months Ended June 30,

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 .

Adjustments related to prior period sales

Credits and payments made

Balance as of September 30, 2021

The following table summarizes revenues attributable to each of our customers that accounted for 10% or more of our net revenues in any of the periods shown:

Three months ended September 30,

Nine months ended September 30,

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 a $ 10 million upfront fee and agreement to purchase from the Company specified minimum quantities of the PGLG.

In a related license agreement with Telcon, the Company agreed to use commercially reasonable best efforts to obtain product registration in these territories within three years of obtaining FDA marketing authorization for PGLG in this indication.

Telcon has the right to terminate the distributor agreement in certain circumstances specified in the distributor agreement 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 fee is included in other long-term liabilities as unearned revenue as of June 30, 202 2 and December 31, 20 2 1 .

The fee is included in other long-term liabilities as unearned revenue as of September 30, 2022 and December 31, 2021.

Refer to Note 6 and 11 and for additional transaction details.

1 unchanged sentence

Inventories consisted of the following (in thousands):

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

4 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

Total property and equipment, net

During the three months ended June 30, 2022 and 2021, depreciation expense was approximately $ 10,000 and $ 12,000 , respectively.

During the six months ended June 30, 2022 and 2021, depreciation expense was approximately $ 21,000 and $ 23,000 , respectively.

During the three months ended September 30, 2022 and 2021, depreciation expense was approximately $ 9,000 and $ 11,000 , respectively.

During the nine months ended September 30, 2022 and 2021, depreciation expense was approximately $ 30,000 and $ 34,000 , respectively.

NOTE 5 — INVESTMENTS

3 unchanged sentences

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 June 30, 2022 is set forth in the “Investment in convertible bond” table below.

The conversion price as of September 30, 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 API Supply Agreement and revised API Agreement with Telcon described in Note 6 and Note 11.

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.

Concurrent with the purchase of the convertible bond, the Company entered into an agreement dated September 28, 2020 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.

3 unchanged sentences

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 a net loss on investment convertible bond of $ 126,000 and other income of $ 41,000 as reflected in the statement of operations.

As a result, the Company realized a net loss on investment convertible bond of $ 126,000 , which previously was classified as unrealized loss on debt securities available-for-sale in the other comprehensive income, and other income of $ 41,000 .

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 June 30, 2022 and December 31, 2021 (in thousands):

The following table sets forth the fair value and changes in fair value of the investment in the Telcon convertible bond as of September 30, 2022 and December 31, 2021 (in thousands):

Investment in convertible bond

June 30, 2022

September 30, 2022

December 31, 2021

4 unchanged sentences

Balance, end of period

The fair value as of June 30, 2022 and December 31, 2021 was based upon following assumptions:

June 30, 2022

The fair value as of September 30, 2022 and December 31, 2021 was based upon following assumptions:

September 30, 2022

December 31, 2021

12 unchanged sentences

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.

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 .

1 unchanged sentence

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 six months ended June 30, 2022, the Company made an additional $ 3.3 million of loans to EJ Holdings.

As of June 30, 2022, and December 31, 2021, the loans receivable from EJ Holdings were approximately $ 22.1 million and $ 22.6 million, respectively, as reflected in equity method investment on the consolidated balance sheets .

The parties also contemplated that t he Ube facility w ould eventually supply the Company with the facility’s output of amino acids and that the operation of the facility w ould be principally for the Company’s benefit and, as such, that major decisions affecting EJ Holdings and the Ube facility w ould 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, 202 2 , the Company made an additional $ 4.2 million of loans to EJ Holdings.

As of September 3 0 , 202 2 , and December 31, 20 2 1 , the loan s receivable from EJ Holdings w ere approximately $ 21.7 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.

unless and until the Ube facility is activated and EJ Holdings can secure customers for its products.

There is no assurance the Company will be able to continue to provide loan financing to support EJ Holdings’ activities at the Ube facility.

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.

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.

There is no assurance the Company will be able to continue to provide loan financing to support EJ Holdings’ activities at the Ube facility or that EJ Holdings will be able to obtain other financing.

If EJ Holdings is unable to obtain financing, it may need to seek to sell all or part of the Ube facility.

In such event, the Company could lose all or part of its investment.

The Company has determined that EJ Holdings is a variable interest entity, or VIE, based upon its dependence upon 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 the directors of EJ Holdings and its Chief Executive Officer and outside auditors, and, as such, controls the management, business, and operations of EJ Holdings.

2 unchanged sentences

The investment is evaluated for impairment 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 and six months ended June 30, 2022 and 2021 (in thousands):

Three months ended June 30,

Six months ended June 30,

The following table sets forth certain financial information of EJ Holdings for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three months ended September 30,

Nine months ended September 30,

REVENUES, NET

NOTE 6 — SELECTED FINANCIAL STATEMENT - LIABILITIES

Accounts payable and accrued expenses consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022

Accounts payable and accrued expenses consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022

December 31, 2021

15 unchanged sentences

Total accounts payable and accrued expenses

Other current liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022

Other current liabilities consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022

December 31, 2021

2 unchanged sentences

Total other current liabilities

Other long-term liabilities consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022

Other long-term liabilities consisted of the following at September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022

December 31, 2021

5 unchanged sentences

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 $ 245,000 of PGLG from Telcon in the six months ended June 30, 2022 and purchased none of PGLG in the six months ended June 30, 2021 of which $ 248,000 and $ 378,000 were reflected in accounts payable as of June 30, 2022 and December 31, 2021, respectively.

The Company purchased $ 523,000 of PGLG from Telcon in the nine months ended September 30, 2022 and purchased $ 250,000 of PGLG in the nine months ended September 30, 2021 of which $ 537,000 and $ 382,000 were reflected in accounts payable as of September 30, 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 the Company’s obligations under the API Supply Agreement and he revised API Agreement.

See Note 5 for information regarding the settlement in the six months ended June 30, 2022 of the target shortfall for 2021 and 2020 .

See Note 5 for information regarding the settlement in the nine months ended September 30, 2022 of the target shortfall for 2021 and 2020 .

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at June 30, 2022 and December 31, 2021 (in thousands except for number of underlying shares) excluding the revolving line of credit agreement with related party discussed below:

Notes payable consisted of the following at September 30, 2022 and December 31, 2021 (in thousands except for number of underlying shares) excluding the revolving line of credit agreement with related party discussed below:

Interest Rate

Term of Notes

Outstanding June 30, 2022

Unamortized Discount June 30, 2022

Amount June 30, 2022

Underlying Shares June 30, 2022

Outstanding September 30, 2022

Unamortized Discount September 30, 2022

Amount September 30, 2022

Underlying Shares September 30, 2022

Notes payable

5 unchanged sentences

Due on demand

Due on demand - 5 years

Convertible notes payable

10 unchanged sentences

Convertible notes payable

The notes are convertible into Emmaus Life Sciences, Inc.

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 a Trading Market (as defined in the agreement).

Accordingly, the notes are classified as current liabilities .

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

The weighted-average stated annual interest rate of notes payable was 12 % and 6 % as of June 30, 2022 and December 31, 2021, respectively.

The weighted-average effective annual interest rate of notes payable as of June 30, 2022 and December 31, 2021 was 22 % and 15 %, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.

As of June 30, 2022, future contractual principal payments due on notes payable were as follows (in thousands):

2022 (six months)

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

The notes are convertible into shares of common stock of Emmaus Life Sciences, Inc.

Beginning February 28, 2022, the note holders became entitled to call for redemption of the convertible notes payable at any time.

Accordingly, the notes are classified as current liabilities.

Includes $41,000 of the fair value of embedded derivative.

The weighted-average stated annual interest rate of notes payable was 7 % and 6 % as of September 30, 2022 and December 31, 2021, respectively.

The weighted-average effective annual interest rate of notes payable as of September 30, 2022 and December 31, 2021 was 19 % and 15 %, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.

As of September 30, 2022, future contractual principal payments due on notes payable were as follows (in thousands):

2022 (three months)

Includes $ 14.3 million principal amount of convertible notes subject to redemption at any time at the election of the holders.

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.

4 unchanged sentences

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 June 30, 2022 and December 31, 2021, the outstanding principal balance under the agreement of $ 400,000 was reflected in revolving line of credit from related party on the condensed consolidated balance sheets.

With the tax-gross up, the effective interest rate on the outstanding balance as of June 30, 2022, was 10.4 %.

As of September 30, 2022 and December 31, 2021, the outstanding principal balance under the agreement of $ 400,000 was reflected in revolving line of credit from related party on the condensed consolidated balance sheets.

With the tax-gross up, the effective interest rate on the outstanding balance as of September 30, 2022, was 10.4 %.

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

6 unchanged sentences

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.

As of June 30, 2022, the conversion price was $ 0.37 per share.

As of September 30, 2022, the conversion price was $ 0.37 per share.

The convertible promissory notes bear interest at the stated rate of 2 % per year ( 10 % in the event of a default), 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.

3 unchanged sentences

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 June 30, 2022 and December 31, 2021 (in thousands) :

The following table sets forth the fair value of the conversion feature liability as of September 30, 2022 and December 31, 2021 (in thousands) :

Convertible promissory notes

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

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

The fair value as of June 30, 2022 and December 31, 2021was based upon following assumptions:

The fair value as of September 30, 2022 and December 31, 2021was based upon following assumptions:

Convertible promissory notes

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

Risk-free rate

In June 2022, we entered into a Business Loan and Security Agreement and Addenda with a third-party lender pursuant to which the lender loaned to us $ 1,800,000 , which we refer to as the “loan amount,” of which we received net proceeds of approximately $ 1,666,000 after deduction of the lender’s origination fee but without deduction for other transaction expenses.

The loan amount, together with interest of $ 738,000 , is payable in over the 40-week loan term in weekly installments of $ 31,725 for the first eight weeks and $ 71,381 for the remaining 32 weeks.

The loan amount and interest may be prepaid by us at any time within 90 days from the disbursement date for a repayment amount of $ 2,250,000 , less all prior payments on the loan, unless an event of default has occurred under the Business Loan and Security Agreement.

Repayment of the loan is secured by a security interest in all or substantially all our assets and all assets of our U.S.

subsidiaries and is personally guaranteed by Yutaka Niihara, M.D., M.P.H., our Chairman and Chief Executive Officer and principal stockholder, and his wife and Hope Hospice International, Inc., which is wholly owned by Dr.

In June 2022, the Company entered into a Business Loan and Security Agreement and Addenda with a third-party lender pursuant to which the lender loaned the Company $ 1,800,000 , which we refer to as the “loan amount,” of which we received net proceeds of approximately $ 1,666,000 after deduction of the lender’s origination fee but without deduction for other transaction expenses.

The loan amount, together with interest of $ 738,000 , was payable over the 40-week loan term in weekly installments of $ 31,725 for the first eight weeks and $ 71,381 for the remaining 32 weeks.

The loan amount and interest were prepayable by the Company at any time within 90 days from the disbursement date for a repayment amount of $ 2,250,000 , less all prior payments on the loan, unless an event of default has occurred under the Business Loan and Security Agreement.

Repayment of the loan was secured by a security interest in all or substantially all our assets and all assets of our U.S.

subsidiaries and was personally guaranteed by Yutaka Niihara, M.D., M.P.H., our Chairman and Chief Executive Officer and principal stockholder, and his wife and Hope Hospice International, Inc., which is wholly owned by Dr.

Niihara and his wife.

The personal guarantee is secured by a deed of trust on certain real property of Dr.

The personal guarantee was secured by a deed of trust on certain real property of Dr.

Niihara and his wife.

The Business Loan and Security Agreement contains representations and warranties of the parties and restrictive covenants against incurring additional indebtedness, subject to certain exceptions, granting liens or security interests in our or our subsidiaries assets, and similar matters.

In the event of a breach of our representations and warranties or the restrictive covenants or other covenants, the lender would be entitled to accelerate the repayment of the loan and, in certain events, require us to pay an additional fee equal to 10 % of the loan amount, or $ 180,000 .

In August 2022, the Company repaid in full $ 1.6 million principal of the outstanding balance of the loan and recognized debt extinguishment loss of $ 421,000 .

In July 2022, Dr.

Niihara and his wife loaned the Company $ 370,000 , representing the net proceeds of personal loans to them from unaffiliated parties in the principal amount of $ 402,000 .

The loan is due and payable in a lump sum on maturity on July 31, 2027 and bears interest at the rate of 12 % per annum, payable monthly in arrears.

In connection with the loan, the Company granted Dr.

Niihara a warrant as described in Note 8.

The issuance cost of $ 32,000 and the fair value of warrant of $ 84,000 were treated as debt discount and will be amortized over the five-year term of the warrant using effective interest method.

In August 2022, Dr.

Niihara and his wife loaned the Company $ 1,576,574 , representing the net proceeds of personal loans to them from unaffiliated third parties in the principal amount of $ 1,668,751 , as well as $ 250,000 from personal funds.

The loans are evidenced by promissory notes, which are due and payable in a lump sum on maturity on August 16, 2027 and bear interest at the rate of 10 % per annum, payable monthly in arrears.

The foregoing loans were in addition to a $ 50,000 loan to us from Hope International Hospice, Inc., an affiliate of Dr.

Niihara, on August 15, 2022, which is evidenced by a demand promissory note of the Company bearing interest at the rate of 10 % per annum.

The proceeds of the loans were used to prepay $ 1,924,819 indebtedness of the Company under the Business Loan and Security Agreement referred to above.

In September 2022, Seah Lim, M.D., Ph.D.

loaned the Company $ 1.2 million, the proceeds of which were used to augment the Company’s working capital.

The principal amount of the loan and interest thereon at the rate of 6 % per annum, together with 240,000 shares of the Company’s common stock, is due and payable in lump sum on maturity in September 2025 .

In October 2022, Dr.

Lim was appointed as a director of the Company.

In accordance with ACS 835, the Company accounted the right to receive shares as the bifurcated embedded derivative and the embedded derivative is measured at fair value at the inception and subsequently measured at fair value with changes in fair value recognized in income statements.

The fair values of the embedded derivatives at the inception were $ 68,000 at inception and $ 41,000 as of September 30, 2022.

In July 2022, Emmaus Medical, Inc., or Emmaus Medical, an indirect wholly owned subsidiary of the Company, entered into a Standard Merchant Cash Advance Agreement with a third party pursuant to which it sold $ 816,000 of accounts receivable (the “Receivables Purchased Amount”) in exchange for net proceeds of $ 516,000 .

Under the agreement, the third party is entitled to collect a specified percentage of all accounts receivable of Emmaus Medical, not to exceed $ 34,000 weekly, until the third party receives total proceeds equal to the Receivables Purchased Amount.

In September 2022, Emmaus Medical and the third party entered into a similar agreement pursuant to which Emmaus Medical sold $ 694,960 of accounts receivable (the “Receivables Purchased Amount”) for net proceeds of $ 500,000 .

Under the agreement, the third party is entitled to collect a specified percentage of all accounts receivable of Emmaus Medical, not to exceed $ 25,969 weekly, until the third party receives total proceeds equal to the Receivables Purchased Amount.

Emmaus Medical’s obligations under the two agreements are guaranteed by the Emmaus Life Sciences, Inc.

Company and its U.S.

subsidiaries, and the obligations of Emmaus Medical and the guarantors are secured by a security interest in all or substantially all the assets of Emmaus Life Sciences and its U.S.

subsidiaries.

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 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 and comprehensive income.

The following table presents the change in fair value of the GPB Warrant as of June 30, 2022 and December 31, 2021 (in thousands):

Warrant Liability—GPB

June 30, 2022

December 31, 2021

Balance, beginning of period

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.

The fair value as of June 30, 2022, and December 31, 2021 was based upon the following assumptions:

June 30, 2022

December 31, 2021

Adjusted exercise price

Common stock fair value

Risk‑free interest rate

Time until expiration (years)

Expected dividend yield

Number outstanding

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 %.

Extension 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 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 a five-year warrant to purchase up to 1,250,000 shares ( 500,000 shares if the related convertible promissory note was repaid by June 15, 2022) of the Company common stock at an exercise price of $ 2.05 a share.

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

Since the loan was no t repaid before June 15, 2022, the warrant was reclassified as equity.

Since the loan was no t repaid before June 15, 2022, the number of warrant shares became fixed per the warrant terms and the warrant was reclassified as equity.

The following table presents the fair value and the change in fair value of the warrants as of June 15, 2022 and December 31, 2020 (in thousands):

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Number outstanding

A summary of outstanding warrants as of June 30, 2022 and December 31, 2021 is presented below:

June 30, 2022

A summary of outstanding warrants as of September 30, 2022 and December 31, 2021 is presented below:

September 30, 2022

December 31, 2021

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Warrants outstanding, end of period

Warrnts exercisable end of period

As of June 30, 2022, the weighted-average remaining contractual life of outstanding warrants was 2.1 years.

Warrants exercisable end of period

Warrants — In September 2022, in connection with the loans from Dr.

Niihara and Mrs.

Niihara, the Company granted Dr.

Niihara a five-year warrant to purchase up to 500,000 shares of common stock of the Company at an exercise price of $ 2.50 per share.

Under ASC 480-10 and ASC 815, the warrant is classified as a liability.

The fair value of the warrant liability was determined using Black-Scholes Merton model and the fair value of the warrant was $ 33,000 as of September 30, 2022.

The change in fair value was recorded in the condensed consolidated statements of operations.

For three month ended September 30, 2022, the change in fair value of warrant liability was $ 51,000 .

As of September 30, 2022, the weighted-average remaining contractual life of outstanding warrants was 2.3 years.

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.

5 unchanged sentences

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 June 30, 2022 and December 31, 2021, no awards were outstanding under the 2021 Stock Incentive Plan.

A summary of outstanding stock options as of June 30, 2022 and December 31, 2021 is presented below.

June 30, 2022

The number of shares available for Awards and the terms of outstanding awards are subject to adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and other similar events.

As of September 30, 2022 and December 31, 2021, no awards were outstanding under the 2021 Stock Incentive Plan.

A summary of outstanding stock options as of September 30, 2022 and December 31, 2021 is presented below.

September 30, 2022

December 31, 2021

5 unchanged sentences

Options available for future grant

During the three months ended June 30, 2022 and June 30, 2021, the Company recognized $ 5,000 and $ 274,000 , respectively of share-based compensation expense.

During the six months ended June 30, 2022 and June 30, 2021 the Company recognized $ 10,000 and $ 450,000 , respectively, of share-based compensation expense.

As of June 30, 2022, there was approximately

$ 11,000 of unrecognized share-based compensation expense related to unvested stock option s which is expected to be recognized over the weighted-average remaining vesting period of 1.0 year .

During the three months ended September 30, 2022 and September 30, 2021, the Company recognized $ 3,000 and $ 93,000 , respectively of share-based compensation expense.

During the nine months ended September 30, 2022 and September 30, 2021 the Company recognized $ 13,000 and $ 548,000 , respectively, of share-based compensation expense.

As of September 30, 2022, there was approximately $ 8,000 of unrecognized share-based compensation expense related to unvested stock options which is expected to be recognized over the weighted-average remaining vesting period of 0.7 year.

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.

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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 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 June 30, 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.

2 unchanged sentences

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 six months ended June 30, 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 six months ended June 30, 2022.

Amended and Restated Warrants – The Company evaluated its outstanding amended and restated warrants to purchase up to 4,038,200 shares of common stock under ASC 815-40 and concluded that the warrants should be accounted for equity.

During the nine months ended September 30, 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 nine months ended September 30, 2022.

In June 2022, the exercise price of outstanding amended and restated warrants was reduced to $ 0.446 per share pursuant to the anti-dilution adjustment provisions of the warrants triggered by the Company’s issuance of restricted shares of common stock for professional relations and consulting services discussed below.

The warrants were valued using the Black-Scholes Merton model and the $ 446,000 change in fair value was recorded as additional paid-in capital and accumulated loss.

The warrants were valued using the Black-Scholes Merton model and the $ 446,000 change in fair value was recorded as additional paid-in capital and accumulated deficit.

Stock issued for services – In June 2022, the Company issued 246,637 shares of restricted share of common stock, with an estimated fair value of $ 110,000 for professional relations and consulting services to be rendered over the six-month period beginning July 1, 2022.

The value of the shares issued in connection with this agreement was recorded in prepaid expenses and other current assets in the condensed consolidated balance sheet as of June 30, 2022 and will be amortized over the six-month period.

The value of the shares issued in connection with this agreement was recorded in prepaid expenses and other current assets in the condensed consolidated balance sheet as of September 30, 2022 and is being amortized over the six-month period beginning July 1, 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 and six months ended June 30, 2022, the Company recorded an income tax provision of $ 182,000 and $ 79,000 , respectively.

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

For the three and nine months ended September 30, 2022, the Company recorded an income tax benefit of $ 35,000 and provision of $ 44,000 , respectively.

For three and nine month ended September 30, 2021, the Company recorded an income tax provision of $ 232,000 and $ 58,000 , 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 no unrecognized tax benefit as of June 30, 2022 or June 30, 2021.

The Company established a full valuation allowance against its federal and state deferred tax asset and there was no unrecognized tax benefit as of September 30, 2022 or September 30, 2021.

NOTE 10 — LEASES

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

In addition, the Company leases 1,163 square feet of office space in Dubai, United Arb Emirates, which lease will expire on June 19, 2023 .During six month ended June 30, 2020, the Company terminated leases of office space in New York, New York and Tokyo, Japan.

In addition, the Company leases 1,163 square feet of office space in Dubai, United Arb Emirates, which lease will expire on June 19, 2023 .

During nine month ended September 30, 2020, the Company terminated leases of office space in New York, New York and Tokyo, Japan.

Upon termination of New York lease, the Company recognized $ 31,000 of loss on leased assets.

The rent expense during the three months ended June 30, 202 2 and 202 1 was approximately $ 294,000 and $ 288,000 , respectively, and during the six months ended June 30, 2022 and June 30 , 2021 was approximately $ 597,000 and $ 589,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of June 30, 2022 (in thousands):

2022 (six months)

The rent expense during the three months ended September 30, 2022 and 2021 was approximately $ 272000 and $ 300,000 , respectively, and during the nine months ended September 30, 2022 and September 30, 2021 was approximately $ 868,000 and $ 889,000 , respectively.

Future minimum lease payments under the lease agreements were as follows as of September 30, 2022 (in thousands):

2022 (three months)

Total lease payments

Present value of lease liabilities

As of June 30, 2022, the Company had an operating lease right-of-use asset of $ 3.1 million and lease liability of $ 3.6 million reflected on the condensed consolidated balance sheet.

The weighted average remaining term of the Company’s leases as of June 30, 2022 was 4.2 years and the weighted-average discount rate was 12.9 %.

As of September 30, 2022, the Company had an operating lease right-of-use asset of $ 2.9 million and lease liability of $ 3.4 million reflected on the condensed consolidated balance sheet.

The weighted average remaining term of the Company’s leases as of September 30, 2022 was 4.0 years and the weighted-average discount rate was 12.9 %.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

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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 six months ended June 30, 2022 (in thousands):

Principal Amount Outstanding at June 30, 2022

Current, Promissory note payable to related parties:

The following table sets forth information relating to loans from related parties outstanding at any time during the nine months ended September 30, 2022 (in thousands):

Principal Amount Outstanding at September 30, 2022

Promissory note payable to related parties:

Willis Lee(2)

16 unchanged sentences

Due on Demand

Osato Medical Clinic (3)

Due on Demand

Alfred Lui (2)

Due on Demand

Hope International Hospice, Inc.(1)

2 unchanged sentences

Due on Demand

Wei Pei Zen (2)

Wei Pei Derek Zen(2)

Due on Demand

3 unchanged sentences

Due on Demand

Yutaka and Soomi Niihara(1)

Hope International Hospice, Inc.(1)

Due on Demand

Yutaka and Soomi Niihara(1)

Hope International Hospice, Inc.(1)

Due on Demand

Yutaka and Soomi Niihara(1)

Due on Demand

Revolving line of credit agreement

3 unchanged sentences

Principal Amount Outstanding at December 31, 2021

Current, Promissory note payable to related parties:

Promissory note payable to related parties:

Willis Lee(2)

10 unchanged sentences

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

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

Officer or director.

(3) The rate varies with changes in the prime rate and does not give effect to the “tax gross-up” described in Note 7.

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

Niihara and Note 13 for information regarding a recent related party loan.

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 June 30, 2022.

As of June 30, 2022, the Company held a Telcon convertible bond in the principal amount of approximately $ 20.6 million as discussed in Note 5.

Niihara and Note 13 for information regarding recent related party loans.

As of September 30, 2022, the Company held a Telcon convertible bond in the principal amount of approximately $ 18.4 million as discussed in Note 5.

NOTE 13 — SUBSEQUENT EVENTS

Subsequent to June 30, 2022, the Company received $ 1.0 million of proceeds from loans from related and unrelated parties to augment its working capital.

Subsequent to September 30, 2022, the Company redeemed $ 175,000 principal amount of its outstanding convertible promissory notes.

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