EMI Holding 10-Q 2015 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File No.:  000-53072

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

Delaware	41-2254389
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

21250 Hawthorne Boulevard, Suite 800, Torrance, California	90503
(Address of principal executive offices)	(Zip code)

(310) 214-0065

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o   No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o	Accelerated filer  o
Non-accelerated filer  o	Smaller reporting company  x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

The registrant had 28,563,478 shares of common stock, par value $0.001 per share, outstanding as of May 10, 2016.

EMMAUS LIFE SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

INDEX

				Page
Part I	Financial Information
	Item 1.	Financial Statements
		(a)	Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014	1
		(b)	Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	2
		(c)	Consolidated Statements of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2015 (Unaudited)	3
		(d)	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	4
		(e)	Notes to Consolidated Financial Statements as of and for the Nine Months Ended September 30, 2015 (Unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
	Item 4.	Controls and Procedures		26
Part II	Other Information
	Item 1.	Legal Proceedings		28
	Item 1A.	Risk Factors		28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
	Item 3.	Defaults Upon Senior Securities		29
	Item 4.	Mine Safety Disclosures		29
	Item 5.	Other Information		29
	Item 6.	Exhibits		30
Signatures

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

	As of
	September 30, 2015			December 31, 2014
	(unaudited)			(Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	482,767		$	556,318
Accounts receivable	23,311			42,734
Inventories, net	294,582			250,413
Marketable securities	47,889			79,236
Marketable securities, pledged to creditor	190,755			—
Prepaid expenses and other current assets	173,591			129,554
Total current assets	1,212,895			1,058,255
PROPERTY AND EQUIPMENT, Net	61,255			72,391
OTHER ASSETS
Marketable securities, pledged to creditor	—			334,410
Intangibles, net	732,143			892,857
Deposits	277,612			306,379
Total other assets	1,009,755			1,533,646
Total Assets	$	2,283,905		$	2,664,292
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	3,157,072		$	2,601,420
Due to related party	—			394,446
Notes payable, net	4,677,350			1,643,615
Notes payable to related parties, net	2,466,304			825,562
Convertible notes payable, net	3,815,541			3,456,959
Convertible notes payable to related parties, net	498,000			373,000
Total current liabilities	14,614,267			9,295,002
LONG-TERM LIABILITIES
Deferred rent	61,844			3,729
Liability classified warrants	—			3,206,000
Warrant derivative liabilities	7,570,000			6,520,000
Notes payable, net	—			833,335
Notes payable to related parties, net	—			133,333
Convertible notes payable, net	4,967,373			3,651,555
Convertible notes payable to related parties, net	100,000			200,000
Total long-term liabilities	12,699,217			14,547,952
Total Liabilities	27,313,484			23,842,954
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued and outstanding	—			—
Common stock — par value $0.001 per share, 100,000,000 shares authorized, 28,128,403 and 30,511,573 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	28,128			30,512
Additional paid-in capital	55,760,198			51,068,677
Accumulated other comprehensive loss	(390,465		)	(194,015		)
Accumulated deficit	(80,427,440		)	(72,083,836		)
Total Stockholders’ Deficit	(25,029,579		)	(21,178,662		)
Total Liabilities & Stockholders’ Deficit	$	2,283,905		$	2,664,292

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

1

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
				(Note 1)						(Note 1)
REVENUES, Net	$	77,173		$	155,644		$	318,268		$	347,737
COST OF GOODS SOLD	36,854			90,421			150,513			198,203
GROSS PROFIT	40,319			65,223			167,755			149,534
OPERATING EXPENSES
Research and development	465,455			507,377			1,012,580			1,708,766
Selling	80,758			115,060			326,280			363,874
General and administrative	2,170,963			2,667,826			7,383,842			9,762,734
	2,717,176			3,290,263			8,722,702			11,835,374
LOSS FROM OPERATIONS	(2,676,857		)	(3,225,040		)	(8,554,947		)	(11,685,840		)
OTHER INCOME (EXPENSE)
Gain on derecognition of amounts due to related party and settlement of litigation	—			—			418,366			—
Change in fair value of liability classified warrants	—			92,000			661,000			(2,259,744		)
Change in fair value of warrant derivative liabilities	173,000			—			1,495,000			—
Warrant exercise inducement expense	—			—			—			(3,523,000		)
Interest and other income (loss)	(10,933		)	97,370			71,248			74,204
Interest expense	(929,572		)	(591,494		)	(2,432,071		)	(1,562,417		)
	(767,505		)	(402,124		)	213,543			(7,270,957		)
LOSS BEFORE INCOME TAXES	(3,444,362		)	(3,627,164		)	(8,341,404		)	(18,956,797		)
INCOME TAXES	—			—			2,200			2,500
NET LOSS	(3,444,362		)	(3,627,164		)	(8,343,604		)	(18,959,297		)
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gain (loss) on securities available-for-sale	(56,576		)	(80,593		)	(198,921		)	(374,806		)
Unrealized foreign currency translation	4,446			(5,006		)	2,471			(5,681		)
	(52,130		)	(85,599		)	(196,450		)	(380,487		)
COMPREHENSIVE LOSS	$	(3,496,492	)	$	(3,712,763	)	$	(8,540,055	)	$	(19,339,784	)
NET LOSS PER COMMON SHARE	$	(0.12	)	$	(0.12	)	$	(0.29	)	$	(0.64	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	28,124,375			30,303,396			29,231,370			29,637,402

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

2

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE PERIOD FROM DECEMBER 31, 2014 TO SEPTEMBER 30, 2015

(UNAUDITED)

	Common stock — par value $0.001 per share, 100,000,000 shares authorized					Additional			Accumulated Other						Total
	Shares		Common Stock			Paid-in Capital			Comprehensive Loss			Accumulated Deficit			Stockholders’ Deficit
Balance, December 31, 2014	30,511,573		$	30,512		$	51,068,677		$	(194,015	)	$	(72,083,836	)	$	(21,178,662	)
Warrant issued in conjunction with convertible notes	—		—			220,071			—			—			220,071
Proceeds from exercise of warrants	113,181		113			102,772			—			—			102,885
Conversion of notes payable to common stock	5,898		5			17,995			—			—			18,000
Beneficial conversion feature relating to convertible and promissory notes payable	—		—			1,380,153			—			—			1,380,153
Share-based compensation	—		—			2,968,028			—			—			2,968,028
Exercise of common stock options (cashless)	2,000		2			(2		)	—			—			—
Stock cancelled	(2,504,249	)	(2,504		)	2,504			—			—			—
Unrealized loss on marketable securities, net of tax	—		—			—			(198,921		)	—			(198,921		)
Foreign currency translation effect	—		—			—			2,471			—			2,471
Net loss	—		—			—			—			(8,343,604		)	(8,343,604		)
Balance, September 30, 2015	28,128,403		$	28,128		$	55,760,198		$	(390,465	)	$	(80,427,440	)	$	(25,029,579	)

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

3

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months ended September 30,
	2015			2014
				(Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(8,343,604	)	$	(18,959,297	)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization	175,897			172,713
Interest expense accrued from discount of convertible notes	1,278,364			680,994
Foreign exchange adjustments on convertible notes and notes payable	24,111			(54,919		)
Gain on settlement of litigation	(418,366		)	—
Share-based compensation	2,968,028			5,171,766
Warrant exercise inducement expense	—			3,523,000
Change in fair value of liability classified warrants	(661,000		)	2,259,744
Change in fair value of warrant derivative liabilities	(1,495,000		)	—
Net changes in operating assets and liabilities
Accounts receivable	19,605			(19,241		)
Inventories	(43,366		)	14,657
Prepaid expenses and other current assets	(40,977		)	(66,992		)
Deposits	29,136			(338		)
Accounts payable and accrued expenses	976,221			11,360
Due to related party	—			—
Other current liability	—			—
Deferred rent	58,095			—
Net cash flows used in operating activities	(5,472,856		)	(7,266,553		)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment	(3,953		)	(25,775		)
Net cash flows used in investing activities	(3,953		)	(25,775		)
CASH FLOWS FROM FINANCING ACTIVITIES
Due to dissenters	—			(125,000		)
Repurchase of common stock	—			(377,500		)
Proceeds from notes payable issued	3,935,566			—
Proceeds from convertible notes payable issued	1,893,343			1,720,000
Payments of notes payable	(250,000		)	—
Payments of convertible notes	(279,800		)	(138,744		)
Proceeds from exercise of warrants	102,885			4,217,078
Net cash flows from financing activities	5,401,994			5,295,834
Effect of exchange rate changes on cash	1,264			(1,574		)
Net decrease in cash and cash equivalents	(73,551		)	(1,998,068		)
Cash and cash equivalents, beginning of period	556,318			3,638,600
Cash and cash equivalents, end of period	$	482,767		$	1,640,532
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	253,223		$	322,445
Income taxes paid	$	2,200		$	2,500
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION
Conversion of notes payable to common stock	$	18,000		$	1,404,552
Conversion of accrued interest payable to common stock	$	—		$	93,827
Derecognition of amounts due to related party from settlement of litigation	$	394,446		$	—
Acquisition of marketable securities from settlement of litigation	$	23,920		$	—

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

4

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of Emmaus Life Sciences, Inc. and subsidiaries (the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss) 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, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The accompanying consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on March 31, 2015 (“Annual Report”). Interim results for the periods presented herein are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.

The preparation of the consolidated financial statements requires the use of management estimates. Actual results could differ materially from those estimates.

Correction of immaterial errors — During the first quarter of 2016, management became aware of prior period accounting errors related to stock option accounting that were made in the previously filed SEC Form 10-Q for the quarter ended September 30, 2014. Specifically, the prior period accounting errors involved shared-based payments instruments related to not appropriately accounting for stock option modifications and not re-measuring the fair value of stock options issued to non-employees from the issuance date until the services required under the arrangement had been completed. The adjustments to the consolidated statements of comprehensive loss for three months ended September 30, 2014 for the stock option accounting errors and the warrant derivative liabilities were ($91,272) and ($8,000), respectively, for an aggregate incremental charge of ($99,272). The adjustments to the consolidated statements of comprehensive loss for nine months ended September 30, 2014 for the stock option accounting errors and the warrant derivative liabilities were $750,343 and $364,000, respectively, for an aggregate amount of $1,114,343.

Further, during the preparation and filing of its financial statements for the three months ended March 31, 2015, the Company identified and disclosed an immaterial error relating to certain warrant derivative liability instruments for its financial statements as of and for the years ended December 31, 2013 and 2014 as well as the interim periods of September 30, 2013 and 2014. This prior period error involved not recording a warrant for the purchase of 300,000 shares of the common stock of the Company issued to a certain broker as compensation for services rendered in a private placement transaction during 2013. These purchase warrants were deemed to be a derivative liability instrument and had an initial fair value of $681,000 on the date of transaction of which $62,000 needed to be allocated to additional paid in capital and $619,000 charged as transaction costs. Accordingly, the Company did not account for the changes in the fair value of these warrants in periods subsequent to their issuance. This immaterial error was then corrected by adjusting the prior-period information in the financial statements as of and for the three months ended March 31, 2015.

Pursuant to the guidance of Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company evaluated these errors individually as well as in the aggregate and concluded that the errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior periods, the prior period financial statements were revised, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to the significance of the out-of-period correction.

A reconciliation of the effects of the adjustments to the previously reported consolidated balance sheet at September 30, 2014 follows:

	As Previously Reported		Adjustment		As Revised
	As of September 30, 2014
Liability classified warrants	9,594,000		953,000		10,547,000
Total liabilities	23,616,020		953,000		24,569,020
Additional paid in capital	47,772,911		688,003		48,460,914
Accumulated deficit	(67,643,816	)	(1,641,003	)	(69,284,819	)
Total stockholder’s deficit	(19,958,319	)	(953,000	)	(20,911,319	)

A reconciliation of the effect of the adjustments to the previously reported consolidated statement of comprehensive loss for the three and nine months ended September 30, 2014 follows:

5

	As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised
	For Three Months Ended September 30, 2014						For Nine Months Ended September 30, 2014
General and administrative	2,759,098		(91,272	)	2,667,826		9,012,391		750,343		9,762,734
Loss from operations	(3,316,312	)	91,272		(3,225,040	)	(10,935,497	)	(750,343	)	(11,685,840	)
Change in fair value of liability classified warrants	84,000		8,000		92,000		(1,895,744	)	(364,000	)	(2,259,744	)
Loss before income taxes	(3,726,437	)	99,272		(3,627,165	)	(17,842,454	)	(1,114,343	)	(18,956,797	)

A reconciliation of the effect of the adjustments to the previously reported consolidated statements of cash flows for the three and nine months ended September 30, 2014 follows:

	As Previously Reported		Adjustment		As Revised		As Previously Reported		Adjustment		As Revised
	For Three Months Ended September 30, 2014						For Nine Months Ended September 30, 2014
Net loss	(3,726,437	)	99,272		(3,627,165	)	(17,844,954	)	(1,114,343	)	(18,959,297	)
Share-based compensation	1,443,794		(91,272	)	1,352,522		4,421,423		750,343		5,171,766
Change in fair value of liability classified warrants	(84,000	)	(8,000	)	(92,000	)	1,895,744		364,000		2,259,744

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Refer to the Company’s Annual Report for a summary of significant accounting policies. There have been no material changes to our significant accounting policies during the nine months ended September 30, 2015. Below are disclosures of certain interim balances, transactions, and significant assumptions used in computing fair value as of and for the nine months ended September 30, 2015 and comparative amounts from the prior fiscal periods:

Inventories — All of the raw material purchased during the nine months ended September 30, 2015 and for the year ended December 31, 2014 was from one vendor. The below table presents inventory by category:

Inventory by category	September 30, 2015		December 31, 2014
Raw materials and components	$	—	$	43,700
Work-in-process	160,994		27,665
Finished goods	133,588		179,048
	$	294,582	$	250,413

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the three months ended September 30, 2015 and 2014 were $11,720 and $52,990, respectively.  Advertising costs for the nine months ended September 30, 2015 and 2014 were $47,955 and $185,465, respectively.

Marketable securities — The Company’s marketable securities consist of two securities; (a) 48,550 shares of CellSeed, Inc. (“CellSeed”) stock which are part of 147,100 shares acquired in January 2009 for 100,028,000 Japanese Yen (equivalent to $1,109,819), at 680 Yen per share, and (b) 150,000 shares of Targeted Medical Pharma, Inc. (“Targeted Medical”) which were acquired at $0.16 per share as part of a settlement of the litigation the Company was engaged in with AFH Holding and Advisory, LLC (“AFH Advisory”) (see Note 9). CellSeed’s IPO (Tokyo Stock Exchange symbol 7776) was completed on March 16, 2010. As of September 30, 2015 and December 31, 2014, the closing price per share for CellSeed was 579 Yen ($4.86) and 1,027 Yen ($8.52), respectively, and the closing price per share for Targeted Medical on the OTCQB was $0.02 as of September 30, 2015.

As of September 30, 2015, 9,300 shares of CellSeed stock and 150,000 shares of Targeted Medical are classified as current assets, as they are available for sale by the Company. The remaining 39,250 shares of CellSeed stock are pledged to secure a $500,000 convertible note issued to Mitsubishi UFJ Capital III Limited Partnership that is due in March 2016 and are classified as current assets, as marketable securities, pledged to creditor.

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
Prepaid insurance	$	99,569	$	86,061
Other prepaid expenses and current assets	74,022		43,493
	$	173,591	$	129,554

Fair value measurements — The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2015 and the year ended December 31, 2014:

	Period ended
Liability Classified Warrants—Stock Purchase Warrants	September 30, 2015			December 31, 2014
Balance, beginning of period	$	3,206,000		$	6,517,000
Fair value at issuance date	—			3,523,000
Settlement of liability associated with warrants exercised	—			(1,752,744		)
Reclassification to warrant derivative liabilities	(2,545,000		)	(7,068,000		)
Reduction of the warrants exercised to intrinsic value included in the statement of comprehensive loss	—			(1,770,256		)
Change in fair value included in the statement of comprehensive loss	(661,000		)	3,757,000
Balance, end of period	$	—		$	3,206,000

	Period ended
Warrant Derivative Liabilities—Stock Purchase Warrants	September 30, 2015			December 31, 2014
Balance, beginning of period	$	6,520,000		$	—
Reclassification from liability classified warrants	2,545,000			7,068,000
Change in fair value included in the statement of comprehensive loss	(1,495,000		)	(548,000		)
Balance, end of period	$	7,570,000		$	6,520,000

6

The value of the liability classified warrants , the value of warrant derivative liability and the change in fair value of the liability classified warrants and warrant derivative liability were determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. The model is similar to traditional Black-Scholes-type option pricing models except that the exercise price resets at certain dates in the future. The values as of September 30, 2015, December 31, 2014, December 31, 2013 and the initial value as of September 11, 2013 were calculated based on the following assumptions:

	September 30, 2015			December 31, 2014			December 31, 2013			Initial Value
Stock price	$	4.50		$	4.90		$	3.60		$	3.60
Risk-free interest rate	0.91		%	1.38		%	1.75		%	1.72		%
Expected volatility (peer group)	65.10		%	71.50		%	63.20		%	72.40		%
Expected life (in years)	2.95			3.70			4.70			5.00
Expected dividend yield	—			—			—			—
Number outstanding	3,320,501			3,320,501			3,320,501			3,320,501
Balance, end of period:
Liability classified warrants	$	—		$	3,206,000		$	6,517,000		$	7,541,000
Warrant derivative liabilities	$	7,570,000		$	6,520,000		$	—		$	—

Debt and related party debt — The following table presents the effective interest rates on the original loan principal amount for loans originated in the respective periods that either had a beneficial conversion feature or an attached warrant:

Type of Loan	Term of Loan	Stated Annual Interest Rate		Original Loan Principal Amount		Conversion Rate	Beneficial Conversion Discount Amount		Warrants Issued with Notes	Exercise Price		Warrant FMV Discount Amount		Effective Interest Rate Including Discounts
2014 convertible notes payable	6 mo. ~ 2 years	10	%	$	3,096,266	$3.05 ~ $3.60	$	1,392,387	50,000	$	3.50	$	126,732	28 % ~ 100%
2015 convertible notes payable	Due on demand ~ 2 years	10	%	3,869,951		$3.50 ~ $4.50	1,380,153		110,417	$	4.90	220,071		19 % ~ 109%
Total				$	6,966,217		$	2,772,540	160,417			$	346,803

Related party notes are disclosed as separate line items in the Company’s balance sheet presentation.

Net loss per share — As of September 30, 2015 and 2014, potentially dilutive securities exercisable or convertible into 11,311,625 and 13,993,997 shares of the Company’s common stock were outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted loss per share since their effect would be anti-dilutive for all periods presented.

Recent accounting pronouncements — In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity must apply the amendments on a retrospective basis wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, the debt issuance cost asset and the debt liability). The adoption of the amendments in this Update is not expected to have material impact on the Company’s consolidated financial position or results of operations.

In July 2015, FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory to simplify the measurement of inventory, redefining measurement from lower of cost or market to lower of cost and net realizable value. The amendments in this Update require an entity using the first-in, first-out (FIFO) or average cost method of measuring inventory to measure inventory at the lower of cost and net realizable value, defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update should be applied prospectively, and are effective for the Company for fiscal years beginning after December 15, 2016, including interim periods within those years. The adoption of the amendments in this Update is not expected to have material impact on the Company’s consolidated financial position or results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments applicable to the Company in this Update (1) supersede the guidance to classify equity securities, except equity method securities, with readily determinable fair values into trading or available-for-sale categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income, (2) allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment, (3) require assessment for impairment of equity investments without readily determinable fair values qualitatively at each reporting period, (4) eliminate the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the Update. The impact of the adoption of the amendments in this Update will depend on the amount of equity securities and financial instruments subject to the amendments in this Update held by the Company at the time of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in this Update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of the amendments in this Update on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have a material lease greater than twelve months.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this Update simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This Update is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted. The Company is currently in the process of evaluating this Update.

7

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

	September 30, 2015			December 31, 2014
Equipment	$	164,198		$	160,201
Leasehold improvements	30,670			30,579
Furniture and fixtures	74,714			74,683
Sub total	269,582			265,463
Less: accumulated depreciation	(208,327		)	(193,072		)
Total	$	61,255		$	72,391

During the three months ended September 30, 2015 and 2014, depreciation expense was $4,210 and $3,930, respectively.

During the nine months ended September 30, 2015 and 2014, depreciation expense was $15,182 and $11,999, respectively.

NOTE 4 — INTANGIBLE ASSETS

Intangible assets, related to license fees and patent filing costs associated with NutreStore® L-glutamine powder for oral solution as a treatment for short bowel syndrome (“SBS”) and the Company’s exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell-Sheet (“CAOMECS”) under that certain Joint Research and Development Agreement dated as of April 8, 2011 (the “Research Agreement”) as well as that certain Individual Agreement dated as of April 8, 2011 (the “Individual Agreement”)with CellSeed (see Note 8) consisted of the following at:

	September 30, 2015			December 31, 2014
License fees and patent filing costs	$	2,000,000		$	2,000,000
Less: accumulated amortization	(1,267,857		)	(1,107,143		)
Total	$	732,143		$	892,857

During the three months ended September 30, 2015 and 2014, amortization expense was $53,571 for each period. During the nine months ended September 30, 2015 and 2014, amortization expense was $160,714 for each period. As of September 30, 2015 estimated aggregate amortization expense for the next five years is as follows:

Periods ending December 31,	Amount
2015	$	53,572
2016	214,286
2017	214,286
2018	214,286
2019	35,713
Total	$	732,143

NOTE 5 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at:

	September 30, 2015		December 31, 2014
Accounts payable
Clinical and regulatory expenses	$	254,453	$	266,537
Legal expenses	167,254		176,691
Other vendors	765,485		774,444
Subtotal	1,187,192		1,217,672
Accrued interest payable, related parties	181,654		110,200
Accrued interest payable	1,179,823		761,682
Accrued expenses	301,736		220,200
Deferred salary	306,667		291,666
Total accounts payable and accrued expenses	$	3,157,072	$	2,601,420

8

NOTE 6 — NOTES PAYABLE

Notes payable consisted of the following at September 30, 2015 and December 31, 2014:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price	Principal Outstanding September 30, 2015		Discount Amount September 30, 2015		Carrying Amount September 30, 2015		Shares Underlying Notes September 30, 2015	Principal Outstanding December 31, 2014		Discount Amount December 31, 2014		Carrying Amount December 31, 2014		Shares Underlying Notes December 31, 2014
Notes payable
2013	10%	Due on demand	—	$	840,000	$	—	$	840,000	—	$	1,030,000	$	—	$	1,030,000	—
2014	11%	Due on demand ~ 2 years	—	1,446,950		—		1,446,950		—	1,446,950		—		1,446,950		—
2015	11%	Due on demand ~ 2 years	—	2,390,400		—		2,390,400		—	—		—		—		—
				$	4,677,350	$	—	$	4,677,350	—	$	2,476,950	$	—	$	2,476,950	—
		Current		$	4,677,350	$	—	$	4,677,350	—	$	1,643,615	$	—	$	1,643,615	—
		Long-term		$	—	$	—	$	—	—	$	833,335	$	—	$	833,335	—
Notes payable - related party
2012	8% ~ 10%	Due on demand	—	$	626,730	$	—	$	626,730	—	$	656,730	$	—	$	656,730	—
2013	8%	Due on demand	—	50,000		—		50,000		—	50,000		—		50,000		—
2014	11%	Due on demand ~ 2 years	—	240,308		—		240,308		—	252,165		—		252,165		—
2015	10% ~ 11%	Due on demand ~ 2 years	—	1,549,266		—		1,549,266		—	—		—		—		—
				$	2,466,304	$	—	$	2,466,304	—	$	958,895	$	—	$	958,895	—
		Current		$	2,466,304	$	—	$	2,466,304	—	$	825,562	$	—	$	825,562	—
		Long-term		$	—	$	—	$	—	—	$	133,333	$	—	$	133,333	—
Convertible notes payable
2010	6%	5 years	$3.05	$	2,000	$	—	$	2,000	656	$	74,000	$	3,195	$	70,805	24,248
2011	10%	5 years	$3.05	500,000		—		500,000		163,809	500,000		—		500,000		163,809
2013	10%	2 years	$3.60	525,257		—		525,257		181,875	2,463,299		18,750		2,444,549		834,667
2014	10%	Due on demand ~ 2 years	$3.05~$7.00	4,176,123		477,941		3,698,182		1,064,382	4,939,773		846,613		4,093,160		1,241,241
2015	10%	Due on demand ~ 2 years	$3.50~$7.00	4,769,951		712,476		4,057,475		1,280,362	—		—		—		—
				$	9,973,331	$	1,190,417	$	8,782,914	2,691,084	$	7,977,072	$	868,558	$	7,108,514	2,263,965
		Current		$	3,919,313	$	103,772	$	3,815,541	1,014,855	$	3,478,904	$	21,945	$	3,456,959	1,156,050
		Long-term		$	6,054,018	$	1,086,645	$	4,967,373	1,676,229	$	4,498,168	$	846,613	$	3,651,555	1,107,915
Convertible notes payable - related party
2012	10%	Due on demand	$3.30	$	298,000	$	—	$	298,000	106,229	$	373,000	$	—	$	373,000	121,461
2014	10%	2 years	$7.00	200,000		—		200,000		32,324	200,000		—		200,000		30,187
2015	10%	2 years	$4.50	100,000		—		100,000		22,234	—		—		—		—
				$	598,000	$	—	$	598,000	160,787	$	573,000	$	—	$	573,000	151,648
		Current		$	498,000	$	—	$	498,000	138,553	$	373,000	$	—	$	373,000	121,461
		Long-term		$	100,000	$	—	$	100,000	22,234	$	200,000	$	—	$	200,000	30,187
		Grand Total		$	17,714,985	$	1,190,417	$	16,524,568	2,851,871	$	11,985,917	$	868,558	$	11,117,359	2,415,613

9

The average stated interest rate of notes payable for the nine-month period ended September 30, 2015 and the annual period ended December 31, 2014 was 10%. The average effective interest rate of notes payable for the nine-month period ended September 30, 2015 and the annual period ended December 31, 2014 was 24% and 23%, respectively, after giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into the Company’s common stock at the stated conversion price during the term of their convertible notes. Conversion prices on these convertible notes payable range from $3.05 to $3.60 per share. Certain notes with a $4.50 or a $7.00 stated conversion price in the second year of their two year term are subject to automatic conversion into shares of our common stock at a conversion price equal to 80% of the initial public offering price at the time of a qualified public offering. All due on demand notes are treated as current liabilities.

Contractual principal payments due on notes payable are as follows:

Year Ending	at September 30, 2015
2015	$	7,999,560
2016	5,798,352
2017	3,917,073
Total	$	17,714,985

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the debt proceeds. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of the Company’s common stock as of the date of issuance (see Note 2). The fair value of the warrants issued in conjunction with notes was determined using the Black Scholes Merton option pricing model with the following inputs for the periods ended:

	September 30, 2015			December 31, 2014
Stock price	$	4.50		$	4.90
Exercise price	$	4.90		$	3.50
Term	5 years			5 years
Risk-free interest rate	1.57		%	1.66		%
Expected dividend yield	—			—
Expected volatility	67.30		%	70.10		%

In situations where the debt included both a beneficial conversion feature and a warrant, the proceeds were allocated to the warrants and beneficial conversion feature based on their respective pro-rata fair values.

NOTE 7 — STOCKHOLDERS’ DEFICIT

Private placement — On September 11, 2013, the Company issued an aggregate of 3,020,501 units at a price of $2.50 per unit. Each unit consisted of one share of common stock and one common stock warrant for the purchase of an additional share of common stock. The aggregate purchase price for the units was $7,551,253. In addition, the Broker Warrants, constituting 300,000 warrants for the purchase of a share of common stock, were issued to a broker under the same terms as the Private Placement transaction.

The warrants issued in the Private Placement and the Broker Warrants entitle the holders thereof to purchase, at any time on or prior to September 11, 2018, shares of common stock of the Company at an exercise price of $3.50 per share. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as liabilities, were originally recorded at fair value, and are adjusted to fair market value each reporting period. Because the shares of common stock underlying the Private Placement warrants and Broker Warrants were not effectively registered for resale by September 11, 2014, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2015. The availability to warrant holders of the cashless exercise feature as of September 11, 2014 caused the then-outstanding 2,225,036 Private Placement warrants and Broker Warrants with fair value of $7,068,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period.

10

On June 10, 2014, certain warrant holders exercised 1,095,465 warrants issued in the Private Placement for the exercise price of $3.50 per share, resulting in the Company receiving aggregate exercise proceeds of $3.8 million and issuing 1,095,465 shares of common stock. Prior to exercise, these Private Placement warrants were accounted for at fair value as liability classified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value immediately prior to exercise of $1.8 million, representing their intrinsic value, with this adjusted carrying value of $1.8 million being transferred to additional paid-in capital. Also on June 10, 2014, based on an offer made to holders of Private Placement warrants in connection with such exercises, the Company issued an aggregate of 1,095,465 replacement warrants to holders exercising Private Placement warrants, which replacement warrants have terms that are generally the same as the exercised warrants, including an expiration date of September 11, 2018 and an exercise price of $3.50 per share. The replacement warrants are treated for accounting purposes as liability classified warrants, and their issuance gave rise to a $3.5 million warrant exercise inducement expense based on their fair value as of issuance as determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. Because the shares of common stock underlying the replacement warrants were not effectively registered for resale by June 10, 2015, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2015. The availability to warrant holders of the cashless exercise feature as of June 10, 2015 caused the then-outstanding 1,095,465 replacement warrants with fair value of $2,545,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period.

As of September 30, 2015, the fair value of these Private Placement warrants, replacement warrants, and Broker Warrants was $7,570,000 (see Note 2). For further details regarding registration rights associated with the Private Placement warrants, replacement warrants and Broker Warrants, see the Registration Rights section below in this footnote.

Stock warrants —During the nine months ended September 30, 2015, in connection with the issuance of a convertible notes, the Company issued five-year warrants to purchase an aggregate of 110,417 shares of common stock of the Company at an exercise price of $4.90 per share.

Warrant exercises and issuance— During the nine months ended September 30, 2015, the Company issued 113,181 shares of common stock upon the exercise of warrants at exercise prices ranging from $1.00 to $3.05 per share, including 40,763 warrants exercised on a cashless basis.

A summary of outstanding warrants as of September 30, 2015 and December 31, 2014 is presented below.

	Nine months ended September 30, 2015		Year ended December 31, 2014
Warrants outstanding, beginning of period	5,101,450		6,279,296
Granted	110,417		1,145,465
Exercised	(113,181	)	(1,254,621	)
Cancelled, forfeited or expired	(1,458,933	)	(1,068,690	)
Warrants outstanding, end of period	3,639,753		5,101,450

A summary of outstanding warrants by year issued and exercise price as of September 30, 2015 is presented below.

	Outstanding
		Weighted Average			Exercisable
Exercise Price	Number of Warrants Issued	Remaining Contractual Life (Years)	Weighted Average Exercise Price		Total	Weighted Average Exercise Price
Balance 2012
$3.05	108,835	0.12	$	3.05	108,835	$	3.05
2012 total	108,835				108,835
During 2013
$3.30	50,000	2.59	$	3.30	50,000	$	3.30
$3.50	2,225,036	2.95	$	3.50	2,225,036	$	3.50
2013 total	2,275,036				2,275,036
During 2014
$3.50	1,145,465	2.98	$	3.50	1,145,465	$	3.50
2014 total	1,145,465				1,145,465
During 2015
$4.90	110,417	4.43	$	4.90	110,417	$	4.90
Total	3,639,753				3,639,753

11

Stock options — During the nine months ended September 30, 2015, no options were granted by the Company’s Board of Directors. During the year ended December 31, 2014, the Company’s Board of Directors granted 840,000 options to its directors, employees, and consultants. During the nine months ended September 30, 2014, 340,000 options that were approved by the Company’s Board of Directors in April 2012 were deemed issued. The aggregate fair value of these tranches of options, including options granted or deemed issued in 2014 was approximately $3.0 million. As of September 30, 2015, there were 4,820,001 options outstanding under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan.

A summary of outstanding options as of September 30, 2015 is presented below.

					Current Plan
	Prior Plan				September 30, 2015				December 31, 2014
	Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
Options outstanding, beginning of period	11,795		$	3.05	5,669,000		$	3.68	4,504,000		$	3.58
Granted or deemed issued	—		—		—		—		1,180,000		$	4.06
Exercised	—		—		(2,000	)	$	3.60	—		—
Cancelled, forfeited and expired	(11,795	)	$	3.05	(846,999	)	$	3.97	(15,000	)	$	3.60
Options outstanding, end of period	—				4,820,001		$	3.63	5,669,000		$	3.68
Options exercisable, end of period	—				4,172,890		$	3.61	2,855,251		$	3.55
Options available for future grant, end of period	—				4,179,999				3,331,000

The weighted average grant-date fair value of options granted or deemed issued during the nine months ended September 30, 2014 was $2.58. The weighted average grant-date fair value of common shares underlying stock options granted or deemed issued during the nine months ended September 30, 2014 was $4.06. No options were issued during the nine months ended September 30, 2015.

During the three months ended September 30, 2015 and 2014, the Company recognized $0.8 million and $1.4 million, respectively, of share-based compensation cost arising from stock options. During the nine months ended September 30, 2015 and 2014, the Company recognized $3.0 million and $5.2 million, respectively, of share-based compensation cost arising from stock options. As of September 30, 2015, there was $1.6 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2011 Stock Incentive Plan. That cost is expected to be recognized over the weighted average remaining period of 0.8 years.

Registration rights — Pursuant to the Subscription Agreements relating to the Private Placement and certain warrants, as well as pursuant to the replacement of certain warrants by the Company on June 10, 2014, the Company agreed to use its commercially reasonable best efforts to have on file with the SEC, by September 11, 2014 and at the Company’s sole expense, a registration statement to permit the public resale of 4,115,966 shares of the Company’s common stock and 3,320,501 shares of common stock underlying warrants (collectively, the “Registerable Securities”). In the event such registration statement includes securities to be offered and sold by the Company in a fully underwritten primary public offering pursuant to an effective registration under the Securities Act, and the Company is advised in good faith by any managing underwriter of securities being offered pursuant to such registration statement that the number of Registrable Securities proposed to be sold in such offering is greater than the number of such securities which can be included in such offering without materially adversely affecting such offering, the Company will include in such registration the following securities in the following order of priority: (i) any securities the Company proposes to sell, and (ii) the Registrable Securities, with any reductions in the number of Registrable Securities actually included in such registration to be allocated on a pro rata basis among the holders thereof. The registration rights described above apply until all Registerable Securities have been sold pursuant to Rule 144 under the Securities Act or may be sold without registration in reliance on Rule 144 under the Securities Act without limitation as to volume and without the requirement of any notice filing.

If the shares of common stock underlying warrants to purchase 2,225,036 shares are not registered for resale at the time of exercise or if the shares of common stock underlying warrants to purchase 1,095,465 shares are not registered for resale at the time of exercise, and in each such case the registration rights described above then apply with respect to the holder of such warrants, such holder may exercise such warrants on a cashless basis. In such a cashless exercise of all the shares covered by the warrant, the warrant holder would receive a number of shares equal to the quotient of (i) the difference between the fair market value of the common stock, as defined, and the $3.50 exercise price, as adjusted, multiplied by the number of shares exercisable under the warrant, divided by (ii) the fair market value of the common stock, as defined. As of September 30, 2015, based on a fair market value of a share of the Company’s common stock of $4.50 and 3,320,501 warrants issued and outstanding and eligible for cashless exercise, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, is 737,889 shares. If the fair market value of a share of the Company’s common stock were to increase by $1.00 from $4.50 to $5.50, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, would increase to 1,207,455 shares as of September 30, 2015.

12

The Company has not yet filed a registration statement with respect to the resale of the Registrable Securities because doing so is not feasible prior to the completion by the Company of its initial public offering. As previously reported, the Company has filed a draft registration statement with the SEC with respect to its proposed initial public offering. The Company believes that it has used commercially reasonable efforts to pursue an initial public offering and, accordingly, considers itself to be in compliance with its registration rights obligations notwithstanding that it has not filed a registration statement with respect to the resale of the Registrable Securities and the deadline for doing so has passed without extension.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Distribution contract — Cardinal Health Specialty Pharmacy Services has been contracted to distribute NutreStore to other wholesale distributors and some independent pharmacies since April 2008. For these services, the Company pays a monthly commercialization management fee of $5,000.

Operating leases — The Company leases its office space under operating leases with unrelated entities. The rent expense during the three months ended September 30, 2015 and 2014 amounted to $124,980 and $58,981, respectively.

The rent expense during the nine months ended September 30, 2015 and 2014 amounted to $368,294 and $163,605, respectively.

Future minimum lease payments under the agreements are as follows as of September 30, 2015:

Year	Amount
2015 (three months)	$	75,842
2016	494,969
2017	470,073
2018	482,294
2019	123,875
	$	1,647,053

Licensing agreement — In April 2011, the Company entered into a Research Agreement and an Individual Agreement with CellSeed and, in August 2011, entered into an addendum to the Research Agreement. Pursuant to the Individual Agreement, CellSeed granted the Company the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell-Sheet (“CAOMECS”) for the cornea in the United States and agreed to disclose to the Company its accumulated information package for the joint development of CAOMECS. Under the Individual Agreement, the Company agreed to pay CellSeed $1.5 million, which it paid in February 2012. The technology acquired under the Individual Agreement is being used to support an ongoing research and development project and management believes the technology has alternative future uses in other future development initiatives.

Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products. Under the Research Agreement, as supplemented by the addendum, the Company agreed to pay CellSeed $8.5 million within 30 days after the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the accumulated information package, as defined in the Research Agreement, to the Company and the Company providing written confirmation of its acceptance of the complete Package, which has not yet been completed as of September 30, 2015.

CellSeed may terminate these agreements with the Company if the Company is unable to make timely payments required under the agreements. At the time the Company entered into the agreements with CellSeed, it left for further negotiation provisions covering how the Company and CellSeed will share any financial results of commercializing any cell sheet engineering regenerative medicine products that it is seeking to develop in collaboration with CellSeed. If the Company is not able to successfully negotiate these terms, its current development and commercialization plans with respect to any of these products would be materially adversely affected.

13

NOTE 9 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to the Company’s loans from related persons outstanding as of September 30, 2015.

Class	Lender	Annual Interest Rate		Date of Loan	Term of Loan	Principal Amount Outstanding at September 30, 2015		Highest Principal Outstanding		Amount of Principal Repaid		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes at September 30, 2015
Notes payable to related parties - current:
	Hope Hospice (1)	8	%	1/17/2012	Due on demand	$	200,000	$	200,000	$	—	$	8,000	$	—	—
	Hope Hospice (1)	8	%	6/14/2012	Due on demand	200,000		200,000		—		8,000		—		—
	Hope Hospice (1)	8	%	6/21/2012	Due on demand	100,000		100,000		—		4,000		—		—
	Yutaka Niihara (2)(4)	10	%	12/5/2012	Due on demand	126,730		1,213,700		1,086,970		56,722		—		—
	Hope Hospice (1)	8	%	2/11/2013	Due on demand	50,000		50,000		—		2,000		—		—
	Lan T. Tran (2)	11	%	2/10/2014	2 years(3)	106,976		106,976		—		—		—		—
	Hideki & Eiko Uehara (5)	11	%	2/15/2014	2 years	133,333		133,333		—		—		—		—
	Hope Hospice (1)	10	%	1/7/2015	2 years(3)	100,000		100,000		—		—		—		—
	James Lee (5)	10	%	1/26/2015	2 years(3)	50,000		50,000		—		—		—		—
	Hope Hospice (1)	10	%	1/29/2015	2 years(3)	30,000		30,000		—		—		—		—
	Yutaka Niihara (2)(4)	10	%	1/29/2015	Due on demand	—		20,000		20,000		773
	Lan T. Tran (2)	10	%	2/9/2015	2 years(3)	10,000		10,000		—		—		—		—
	Charles Stark (2)	10	%	2/10/2015	2 years(3)	10,000		10,000		—		—		—		—
	IRA Service Trust Co. FBO Peter B. Ludlum (2)	10	%	2/20/2015	2 years(3)	10,000		10,000		—		—		—		—
	Cuc T. Tran (5)	11	%	3/5/2015	1 year	13,160		13,160		—		—		—		—
	Yutaka Niihara (2)(4)	10	%	4/7/2015	2 years (3)	500,000		500,000		—		—		—		—
	Yutaka Niihara (2)(4)	10	%	5/21/2015	Due on demand	826,105		826,105		—		—		—		—
					Sub total	$	2,466,304	$	3,573,274	$	1,106,970	$	79,495	$	—	—
Convertible notes payable to related parties - current:
	Yasushi Nagasaki (2)	10	%	6/29/2012	Due on demand	$	298,000	$	388,800	$	90,800	$	—	$	3.30	106,229
	Phillip M. Satow (4)	10	%	6/6/2014	2 years	100,000		100,000		—		—		$	7.00	16,172
	Richard S. Pechter (5)	10	%	6/11/2014	2 years	100,000		100,000		—		—		$	7.00	16,152
					Sub total	$	498,000	$	588,800	$	90,800	$	—	$	—	138,553
Non-Current, convertible notes payable to related parties:
	Yutaka Niihara (2)(4)	10	%	9/29/2015	2 years	$	100,000	$	100,000	$	—	$	—	$	4.50	22,234
					Sub total	100,000		100,000		$	—	$	—	$	—	22,234
					Total	$	3,064,304	$	4,262,074	$	1,197,770	$	79,495	$	—	160,787

(1) Dr. Niihara, a director and officer of the Company, is also the CEO of Hope Hospice.

(2) Officer

(3) Due on Demand

(4) Director

(5) Family of Officer/Director

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The following table sets forth information relating to the Company’s loans from related persons outstanding as of December 31, 2014.

Class	Lender	Annual Interest Rate		Date of Loan	Term of Loan	Principal Amount Outstanding at December 31, 2014		Highest Principal Outstanding		Amount of Principal Repaid		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes at December 31, 2014
Notes payable to related parties - current:
	Hope Hospice(1)	8	%	1/17/2012	Due on demand	$	200,000	$	200,000	$	—	$	16,000	$	—	—
	Hope Hospice(1)	8	%	6/14/2012	Due on demand	200,000		200,000		—		20,000		—		—
	Hope Hospice(1)	8	%	6/21/2012	Due on demand	100,000		100,000		—		10,000		—		—
	Yutaka Niihara(2)(4)	10	%	12/5/2012	Due on demand	156,730		1,213,700		1,056,970		60,851		—		—
	Hope Hospice(1)	8	%	2/11/2013	Due on demand	50,000		50,000		—		4,000		—		—
	Lan T. Tran(2)	11	%	2/10/2014	2 years(3)	106,976		106,976		—		—		—		—
	Cuc T. Tran(5)	11	%	3/5/2014	1 year	11,856		11,856		—		—		—		—
					Sub total	$	825,562	$	1,882,532	$	1,056,970	$	110,851	$	—	—
Convertible note payable to related parties - current:
	Yasushi Nagasaki(2)	10	%	6/29/2012	Due on demand	$	373,000	$	388,800	$	15,800	$	67,680	$	3.30	121,461
					Sub total	$	373,000	$	388,800	$	15,800	$	67,680	$	—	121,461
Note payable to related parties — long-term:
	Hideki & Eiko Uehara(5)	11	%	2/15/2014	2 years	$	133,333	$	133,333	$	—	$	14,697	$	—	—
					Sub total	$	133,333	$	133,333	$	—	$	14,697	$	—	—
Convertible notes payable to related parties — long-term:
	Phillip M. Satow(4)	10	%	6/6/2014	2 years	$	100,000	$	100,000	$	—	$	—	$	7.00	15,103
	Richard S. Pechter(5)	10	%	6/11/2014	2 years	100,000		100,000		—		—		$	7.00	15,084
					Sub total	$	200,000	$	200,000	$	—	$	—	$	—	30,187
					Total	$	1,531,895	$	2,604,665	$	1,072,770	$	193,228	$	—	151,648

(1) Dr. Niihara, a director and officer of the Company, is also the CEO of Hope Hospice.

(2) Officer

(3) Due on Demand

(4) Director

(5) Family of Officer/Director

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Litigation with AFH Advisory

From July 2012 until May 2015, the Company was engaged in litigation with AFH Advisory, which was the sole stockholder of AFH Acquisition IV, Inc. immediately prior to its merger with Emmaus Medical in May 2011. In September 2012, AFH Advisory and related parties filed a complaint against the Company in the Superior Court of Delaware. In October 2012, the Company filed counterclaims against the plaintiffs and third-party claims against Amir Heshmatpour. Mr. Heshmatpour was an officer of AFH Acquisition IV, Inc. prior to its merger with Emmaus Medical and a former director of the Company and is the Managing Partner of AFH Advisory. On June 27, 2013, the Superior Court of the State of Delaware issued an order implementing a partial summary judgment in favor of the Company in its litigation against AFH Advisory, Griffin Ventures, Ltd. (‘‘Griffin’’), The Amir & Kathy Heshmatpour Family Foundation (the ‘‘Foundation’’) and Amir Heshmatpour. The order, among other things, (i) stated that a letter of intent previously entered into between the Company and AFH Advisory (the ‘‘Letter of Intent’’) was properly terminated by the Company as of July 19, 2012, and (ii) ordered the transfer agent for the Company to effect the cancellation of 2,504,249 shares of the Company’s common stock held by AFH Advisory, Griffin and the Foundation. The cancellation of such shares was effected by the Company’s transfer agent on June 28, 2013. The cancellation of such shares was subject to appeal until 30 days after the completion of trial court proceedings.

On May 4, 2015, a settlement was entered with the Superior Court of the State of Delaware dismissing the case with prejudice, thus removing any right to appeal. Thus, as of May 4, 2015, the Company no longer presents these shares of common stock as outstanding in its consolidated financial statements. The settlement called for the exchange of documents and financial records, and for AFH Advisory to assign and transfer to the Company 150,000 shares of stock of Targeted Medical. In addition, the parties to the litigation dismissed all remaining claims with prejudice. The Parties agree that there are no further obligations due under any of the Letters of Intent. The Letters of Intent are considered rescinded, nulled, and voided. This enabled the elimination of a $394,446 payable to AFH Advisory which was recorded as a gain on derecognition of amounts due to related party.

Section 225 Litigation

On April 28, 2015, Dr. Yutaka Niihara, the Company’s President, Chief Executive Officer and Chairman of the Board, filed a complaint (the “Complaint”) in the Court of Chancery of the State of Delaware (the “Court”) under Section 225 of the Delaware General Corporation Law against Tracey C. Doi, Henry A. McKinnell, Jr., Akiko M. Miyashita, Phillip M. Satow and Mayuran Sriskandarajah, each of whom was a member of the Board as of April 24, 2015 (together with Dr. Niihara, the “Incumbent Directors”), Sarissa Capital Management L.P. (“Sarissa”) and T.R. Winston & Company, LLC (“TRW”), as defendants, and the Company as nominal defendant. The Complaint requested that the Court issue an order declaring, among other things, that:

·Dr. Niihara validly delivered stockholder consents to the Company to effect certain amendments to the Company’s By-laws and to elect certain additional individuals to the Company’s Board of Directors, and that such stockholder consents are effective;

·the Company’s By-laws were validly amended as provided in the stockholder consents;

·Blair A. Contratto, S. Steve Lee, Willis C. Lee, Masaharu Osato, M.D., Lan T. Tran, David J. Wohlberg and Ian Zwicker were validly elected as directors of the Company;

·any actions taken by the Incumbent Directors since April 24, 2015 are invalid and void; and

·the actions purportedly taken by written consent were not prohibited by the terms of the Agreement, dated as of September 11, 2013, among the Company, Dr. Niihara, Sarissa and TRW (the “Designation Agreement”).

Along with the Complaint, Dr. Niihara filed a motion for an order maintaining the status quo and a motion for expedited proceedings.

On April 29, 2015, following their resignations from our Board, Ms. Doi and Ms. Miyashita were dismissed from the action. On May 22, 2015, Mr. Satow and Dr. McKinnell were dismissed from the action. On July 31, 2015, Mr. Sriskandarajah was dismissed from the action.

On June 10, 2015, the Delaware court issued a Status Quo Order providing that, until conclusion of the case, the Board would be comprised of Dr. Niihara, Mr. Sriskandarajah, Mr. Satow and Dr. McKinnell; provided, however, that nothing in the Status Quo Order would prevent voluntary resignations from the Board, and no director could be seated or replaced pursuant to the Designation Agreement except upon ten calendar days written notice to the parties in this Action by the party seeking to exercise its right to designate such director. The Status Quo Order also specified certain corporate actions that would require approval of all directors voting on an action.

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On June 15, 2015, Mr. Satow tendered his resignation from the Board of the Company, effective upon the election and qualification of Dr. Scott Gottlieb as the designee of TRW pursuant to the Designation Agreement. This resignation, as well as Dr. Gottlieb’s election to the Board of the Company, became effective on August 3, 2015.

NOTE 10 — GEOGRAPHIC INFORMATION

For the nine months ended September 30, 2015 and 2014, the Company earned revenue from countries outside of the United States as outlined in the table below:

Country	Revenues for the nine months ended September 30, 2015		% of total revenue for the nine months ended September 30, 2015		Revenues for the nine months ended September 30, 2014		% of total revenue for the nine months ended September 30, 2014
Japan	$	148,319	47	%	$	132,145	38	%
South Korea	—		0	%	45,312		13	%
Taiwan	110,104		35	%	129,310		37	%

For the three months ended September 30, 2015 and 2014, the Company earned revenue from countries outside of the United States as outlined in the table below:

Country	Revenues for the three months ended September 30, 2015		% of total revenue for the three months ended September 30, 2015		Revenues for the three months ended September 30, 2014		% of total revenue for the three months ended September 30, 2014
Japan	$	48,707	63	%	$	53,757	35	%
South Korea	—		0	%	—		0	%
Taiwan	—		0	%	101,580		65	%

The Company did not have any significant currency translation or foreign transaction adjustments during the three and nine months ended September 30, 2015 and 2014.

NOTE 11 — SUBSEQUENT EVENTS

Subsequent to September 30, 2015, the Company issued the following:

Notes Issued after September 30, 2015	Principal Amounts		Annual Interest Rate	Term of Notes	Conversion Price
Convertible notes (1)	$	749,009	10%	Due on Demand up to 2 years	$	3.60
Convertible notes (2)	1,401,325		10%	2 years	$	4.50
Convertible notes — related party (2)	220,000		10%	2 yeas	$	4.50
Promissory note	250,000		11%	6 months	—
Promissory note (1)	833,335		11%	Due on Demand	—
Promissory notes — related party (1)	263,843		11%	Due on Demand	—
Promissory notes — related party	859,700		10%~11%	Due on Demand up to 2 years	—
Total	$	4,577,212

(1)Refinancings of prior notes already outstanding.

(2)Includes mandatory conversion at the time of an initial public offering at a conversion price equal to 80% of the initial public offering price.

Subsequent to the quarter ended September 30, 2015, the Company issued the following:

Common Shares Issued for Cash after September 30, 2015	Principal Amounts		Number of Shares Issued
Common shares	$	1,700,000	377,778
Common shares—related party	99,999		22,222
Total	$	1,799,999	400,000

Secured Loans after September 30, 2015	Principal Amounts		Annual Interest Rate	Term of Loans
Secured loans	$	1,295,000	10%	Earlier of closing of new debt financing or May 1, 2017
Total	$	1,295,000

Regarding the lawsuit described above under “NOTE 9 — RELATED PARTY TRANSACTIONS, Section 225 Litigation,” on November 19, 2015, counsel to Dr. Niihara, Sarissa and the Company filed a joint stipulation to dismiss the action. In connection therewith, on November 19, 2015, the Company, Dr. Niihara and Sarissa entered into Amendment No. 1 (the “Amendment”) to the Designation Agreement. The Amendment terminates the Designation Agreement with respect to the Company, Dr. Niihara and Sarissa, and provides that those parties shall have no further rights or obligations to each other under the Designation Agreement. Furthermore, each of the Company, Sarissa and Dr. Niihara waived all rights each has ever had, has or may have under the Designation Agreement against each other, and released each other from any and all obligations each has ever had, has or may have to the other under the Designation Agreement. As a result of the Amendment, Sarissa no longer has the right to designate any members of the Company’s Board, nor does it have the right to approve any actions as were set forth in the Designation Agreement. On November 20, 2015, the Court entered the dismissal, at which time the Status Quo Order ceased to be in effect.

In connection with the Amendment, on November 19, 2015, Mr. Sriskandarajah tendered his resignation from the Board, effective immediately. The Company has agreed to indemnify Mr. Sriskandarajah for $43,476 in attorneys’ fees and expenses he incurred in defense of this action.

On December 29, 2015, the Company and CellSeed, Inc. (“CellSeed”) terminated the Research Agreement and the Individual Agreement.  The Company no longer has an obligation to pay the $8.5 million or any other amount under this terminated agreement.

On May 1, 2016, the SCD Patent expired and subsequently, the license agreement has terminated. Since the SCD Patent is expired, competitors with more resources than us may develop similar products which may subject our product to greater competition than we expect and reduce our ability to generate revenue from our product candidate, possibly materially. These circumstances may also impair our ability to obtain license partners or other international commercialization opportunities on terms acceptable to us, if at all.

Although the SCD patent is expired, we will continue to seek market exclusivity protection for the SCD treatment by way of our orphan designation which, if the product is approved, will grant us seven years market exclusivity. In addition, under the Title I of the Drug Price Competition and Patent Term Resolution Act or the Hatch/Waxman Act, we may be eligible for three-year period market exclusivity if approved by the FDA. The FDA may not agree that our product is entitled to data exclusivity under the Hatch/Waxman Act and, if granted, data exclusivity protection under the Hatch/Waxman Act will expire three years after our product is approved.

With the termination of the license agreement, we will no longer be bound by the terms of the agreement which include but are not limited to paying royalties. The royalties were equal to 4.5% of net sales of Licensed Products in the United States until lifetime royalty payments made to the licensor total $100,000, at which time the royalty rate will decrease to 2.5% of net sales of the Licensed Products.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

With respect to the following discussion, the terms, “we,” “us,” “our” or the “Company” refer to Emmaus Life Sciences, Inc., and its wholly-owned subsidiary Emmaus Medical, Inc., a Delaware corporation which we refer to as Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, a Delaware corporation which we refer to as Newfield Nutrition; Emmaus Medical Japan, Inc., a Japanese corporation which we refer to as EM Japan, and Emmaus Medical Europe Ltd., a U.K. corporation which we refer to as EM Europe.

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2014 and 2013 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 31, 2015 (the “Annual Report”).

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, our ability to raise additional capital to fund our operations, obtaining U.S. Food and Drug Administration (“FDA”) and other regulatory authorization to market our drug and biological products, successful completion of our clinical trials, our ability to achieve regulatory authorization to market our pharmaceutical grade L-glutamine treatment for sickle cell disease (“SCD”), our ability to commercialize our pharmaceutical grade L-glutamine treatment for SCD; our reliance on third party manufacturers for our drug products, market acceptance of our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, development of a public trading market for our securities, and various other matters, many of which are beyond our control.

Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and accordingly there can be no assurances made with respect to the actual results or developments.

Company Overview

We are a biopharmaceutical company engaged in the discovery, development and commercialization of innovative treatments and therapies primarily for rare and orphan diseases. We are initially focusing our product development efforts on SCD, a genetic disorder and a significant unmet medical need. Our lead product candidate is an oral pharmaceutical grade L-glutamine treatment that demonstrated positive clinical results in our completed Phase 3 clinical trial for sickle cell anemia and sickle ß0-thalassemia, two of the most common forms of SCD.

We are in the process of preparing a new drug application (“NDA”) for submission to the FDA, with respect to this product candidate. If the FDA accepts our submission and approves this NDA, we will be authorized to market in the United States our pharmaceutical grade L-glutamine treatment for SCD patients who are at least five years old.

We plan to market our L-glutamine treatment in the United States, if approved, by either strategic partnership or by building our own targeted sales force of approximately 30 sales representatives. We intend to utilize strategic partnerships to market our treatment in the rest of the world. L-glutamine for the treatment of SCD has received Fast Track designation from the FDA as well as Orphan Drug designation from both the FDA and the European Commission (“EC”).

We have extensive experience in the field of SCD, including the development, outsourced manufacturing and conduct of clinical trials of our prescription grade L-glutamine product candidate for the treatment of SCD. Yutaka Niihara, M.D., MPH, is a leading hematologist in the field of SCD. Dr. Niihara is licensed to practice medicine in both the United States and Japan and has been actively engaged in SCD research and the care of patients with SCD for over 20 years, primarily at the University of California Los Angeles and the Los Angeles Biomedical Research Institute (“LA BioMed”) a nonprofit biomedical research institute at Harbor UCLA Medical Center.

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To a lesser extent, we are also engaged in the marketing and sale of NutreStore L-glutamine powder for oral solution, which has received FDA approval, as a treatment for short bowel syndrome (“SBS”) in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Our indirect wholly owned subsidiary, Newfield Nutrition, sells L-glutamine as a nutritional supplement under the brand name AminoPure through retail stores in multiple states and via importers and distributors in Japan, Taiwan and South Korea. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore and AminoPure.

In May 2006, we formed Newfield Nutrition, a wholly-owned subsidiary of Emmaus Medical, that distributes L-glutamine as a nutritional supplement under the brand name AminoPure.

In October 2010, we formed EM Japan, a wholly-owned subsidiary of Emmaus Medical, that markets and sells AminoPure in Japan and other countries in Asia. EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future.

In November 2011, we formed EM Europe, a wholly-owned subsidiary of Emmaus Medical, whose primary focus is expanding our business in Europe.

Our corporate structure is illustrated as follows:

Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC undertook a reorganization and merged with Emmaus Medical, which was originally incorporated in September 2003.

Pursuant to an Agreement and Plan of Merger dated April 21, 2011, which we refer to as the Merger Agreement, by and among us, AFH Merger Sub, Inc., our wholly-owned subsidiary, which we refer to as AFH Merger Sub, AFH Advisory and Emmaus Medical, Emmaus Medical merged with and into AFH Merger Sub on May 3, 2011 with Emmaus Medical continuing as the surviving entity, which we refer to as the Merger. Upon the closing of the Merger, we changed our name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” Subsequently, on September 14, 2011, we changed our name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.”

Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: the duration and results of the clinical trials for our various products candidates going forward; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; current and future unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation in which we are currently engaged or may become engaged in the future; and further arrangements, if any, with collaborators. Until we can generate a sufficient amount of product revenue, future cash requirements are expected to be financed through registered or unregistered equity offerings, debt financings or corporate collaboration and licensing arrangements. As of September 30, 2015, our accumulated deficit was $80.3 million and we had cash and cash equivalents of $0.5 million. Since inception we have had minimal revenues and have been required to rely on funding from sales of equity securities and borrowings from officers and stockholders. Currently, we estimate we will need approximately $2.0 million to submit a NDA to the FDA for our pharmaceutical grade L-glutamine treatment for SCD. We expect the NDA will be submitted in mid-2016.

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We also own a minority interest of less than 1% in CellSeed, Inc., a Japanese company listed on the Tokyo Stock Exchange, which is engaged in research and development of regenerative medicine products and the manufacture and sale of temperature-responsive cell culture equipment. In collaboration with CellSeed, we are engaged in research and development of cell sheet engineering regenerative medicine products.

Financial Overview

Revenue

Since our inception in 2000, we have had limited revenue from the sale of NutreStore, an FDA approved prescription drug to treat SBS and AminoPure, a nutritional supplement. We have funded operations principally through the private placement of equity securities and debt financings. Our operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing and sponsoring clinical trials of our pharmaceutical grade L-glutamine treatment for SCD, manufacturing products and maintaining and improving our patent portfolio.

Currently, we generate revenue through the sale of NutreStore L-glutamine powder for oral solution as a treatment for SBS as well as AminoPure, a nutritional supplement. Pursuant to the exclusive sublicense agreement for US Patent No. 5,288,703, we are required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore to CATO Holding Company (“CATO”). Management expects that any revenues generated from the sale of NutreStore and AminoPure will fluctuate from quarter to quarter based on the timing of orders and the amount of product sold.

Cost of Goods Sold

Cost of goods sold includes the raw materials, packaging, shipping and distribution costs of NutreStore and AminoPure.

Research and Development Expenses

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to the contract research organization (“CRO”), that conducts the clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees, and activities related to regulatory filings, manufacturing development costs and other related supplies. The costs of later stage clinical studies, such as Phase 2 and 3 trials, are generally higher than those of earlier stages of development, such as preclinical studies and Phase 1 trials. This is primarily due to the increased size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later stage clinical studies.

The most significant clinical trial expenditures in prior years have been related to the CRO costs and the payments to study sites. The contract with the CRO is based on time and material expended, whereas the study site agreements are based on per patient costs as well as other pass-through costs, including, but not limited to, start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements. We currently estimate that we will need an additional $2.0 million to submit a NDA to the FDA for our pharmaceutical grade L-glutamine treatment for SCD. We expect the NDA will be submitted in the summer of 2016.

At this time, due to the inherently unpredictable nature of the process for developing drugs, biologics and cell-based therapies and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in obtaining FDA approval of our pharmaceutical grade L-glutamine treatment for SCD and the continued development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Development of our Product Candidates,” “Risk Factors—Risks Related to our Reliance on Third Parties,” and “Risk Factors—Risks Related to Regulatory Approval of our Product Candidates and Other Legal Compliance Matters.”

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We estimate that the cost to us to develop in the United States corneal cell sheet products based on Cultured Autologous Oral Mucosal Epithelial Cell-Sheets (“CAOMECS”) technology will be approximately $3.0 million. This estimate includes the anticipated cost of obtaining FDA approval for the corneal cell sheets and assumes that we will need the FDA to approve a Biologic License Application (“BLA”) for the corneal cell sheets, rather than a NDA. We estimate that we will need another $2.4 million to commercialize any approved products based on corneal cell sheet technology.

In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and to build a current Good Manufacturing Practices (“cGMP”) laboratory to establish the infrastructure and production capabilities related to regenerative medicine products. At this time, we do not plan to incur any research and development costs for our NutreStore and AminoPure products.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs, including share-based compensation, for personnel in executive, finance, business development, information technology, marketing and legal functions. Other general and administrative expenses include facility costs, patent filing costs and professional fees and expenses for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years.

Environmental Expenses

The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.

Inventories

Inventories consist of finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or market value. All of the raw material purchased during the nine months ended September 30, 2015 and 2014 were from one vendor.

Results of Operations

Three months ended September 30, 2015 and 2014

Net Losses. Net losses decreased by $0.2 million, or 5%, to $3.4 million from $3.6 million for the three months ended September 30, 2015 and 2014, respectively. The decrease in losses is primarily a result of increased other income and decreased operating expenses as discussed below. As of September 30, 2015, we had an accumulated deficit of approximately $80.4 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward potential regulatory approval and commercialization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized.

Revenues, Net. Net revenues decreased by $79,000, or 50%, to $77,000 from $156,000 for the three months ended September 30, 2015 and 2014. Combined revenues from our AminoPure® L-glutamine nutritional supplement product and our NutreStore® L-glutamine powder for oral solution for treatment of SBS decreased during these periods.

Cost of Goods Sold. Cost of goods sold decreased by $53,000, or 59%, to $37,000 from $90,000 for the three months ended September 30, 2015 and 2014. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the three months ended September 30, 2015 and 2014 was from one vendor. Cost of sales decreased due to decreased sales associated with our AminoPure® L-glutamine nutritional supplement product and our NutreStore® L-glutamine powder for oral solution for treatment of SBS during these periods.

Research and Development Expenses. Research and development expenses decreased by $42,000, or 8%, to $465,000 from $507,000 for the three months ended September 30, 2015 and 2014. This decrease was primarily due to a decrease in external costs related to compiling and analyzing data from our Phase 3 clinical trial and other end of study reports. Despite the decline in research and development costs quarter-over-quarter, we expect such costs to increase in the remainder of 2015 and early 2016 to support our submission of a NDA and to potentially increase depending upon future clinical trial activity.

Selling Expenses. Selling expenses decreased by $34,000, or 30%, to $81,000 from $115,000 for the three months ended September 30, 2015 and 2014 due primarily to a decrease in advertising. Selling expenses includes the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore® and AminoPure® as well as the marketing expense for our pharmaceutical grade L-glutamine treatment for SCD.

21

General and Administrative Expenses. General and administrative expenses decreased $0.5 million, or 19%, to $2.2 million from $2.7 million for the three months ended September 30, 2015 and 2014. General and administrative expenses include share-based compensation expenses, professional fees, office rent, and payroll expenses. This decrease was primarily due to a decrease of $0.5 million for share-based compensation due to expiration of the service period for certain options in prior periods partially offset by an increase of $0.1 million for insurance and office rent expenses.

Other Income and Expense. Total other expense decreased by $0.4 million, or 91%, to $0.8 million expense for the three months ended September 30, 2015, compared to $0.4 million expense for the three months ended September 30, 2014, primarily due to an increase in interest costs of $0.3 million as a result of increased debt and an increase of $0.1 million in foreign exchange loss.

We anticipate that our operating expenses will increase for, among others, the following reasons:

·as a result of future debt repayments, increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company;

·to support research and development activities, which we expect to expand as development of our product candidate(s) continues and we approach submission of an NDA for pharmaceutical grade L-glutamine treatment for SCD; and

·to build a sales and marketing team before we receive regulatory approval of a product candidate in anticipation of commercial launch.

Nine months ended September 30, 2015 and 2014

Net Losses. Net losses decreased by $10.6 million, or 56%, to $8.3 million from $18.9 million for the nine months ended September 30, 2015 and 2014, respectively. The decrease in losses is primarily a result of increased other income and decreased operating expenses as discussed below. As of September 30, 2015, we had an accumulated deficit of approximately $80.4 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward potential regulatory approval and commercialization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized.

Revenues, Net. Net revenues decreased by $30,000, or 8%, to $318,000 from $348,000 for the nine months ended September 30, 2015 and 2014 due to decline of sales volume of our AminoPure® L-glutamine nutritional supplement product during these periods.

Cost of Goods Sold. Cost of goods sold decreased by $48,000, or 24%, to $0.15 million from $0.2 million for the nine months ended September 30, 2015 and 2014. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the nine months ended September 30, 2015 and 2014 was from one vendor. Cost of sales associated with our AminoPure® L-glutamine nutritional supplement product and our NutreStore® L-glutamine powder for oral solution for treatment of SBS slightly decreased during these periods due to a decline in international sales.

Research and Development Expenses. Research and development expenses decreased by $0.7 million, or 41%, to $1.0 million from $1.7 million for the nine months ended September 30, 2015 and 2014. This decrease was primarily due to a decrease in external costs related to compiling and analyzing data from our Phase 3 clinical trial and other end of study reports. Despite the decline in research and development costs, we expect such costs to increase in the remainder of 2015 and early 2016 to support our submission of a NDA and to potentially increase depending upon future clinical trial activity.

Selling Expenses. Selling expenses decreased by $38,000, or 10%, to $326,000 from $364,000 for the nine months ended September 30, 2015 and 2014. Selling expenses includes the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore® and AminoPure® as well as the marketing expense for our pharmaceutical grade L-glutamine treatment for SCD.  The slight decrease is primarily due to an $110,000 decrease in advertising costs, partially offset by a $70,000 increase in marketing expense for our pharmaceutical grade L-glutamine treatment for SCD.

General and Administrative Expenses. General and administrative expenses decreased $2.4 million, or 24%, to $7.4 million from $9.8 million for the nine months ended September 30, 2015 and 2014. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. This decrease was primarily due to a decrease of $2.2 million for share-based compensation due to expiration of the service period for certain options in prior periods and a decrease of $0.4 million for professional fees, partially offset by an increase of $0.2 million for insurance and office rent expenses.

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Other Income and Expense. Total other income increased by $7.5 million to $0.2 million income for the nine months ended September 30, 2015, compared to $(7.3 million) expense for the nine months ended September 30, 2014, primarily due to the fact that the fair value of our liability classified warrants and warrant derivative liabilities declined by $2.9 million and $1.5 million, respectively, the absence of warrant exercise inducement expenses of $3.5 million and an increase of $0.4 million for gain on derecognition of amounts due to AFH Advisory, a related party, upon settlement of litigation in the nine months ended September 30, 2015. These gains created a period to period change of $8.3 million. This was partially offset by an increase in interest costs of $0.9 million as a result of increased debt.

We anticipate that our operating expenses will increase for, among others, the following reasons:

·as a result of future debt repayments, increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company;

·to support research and development activities, which we expect to expand as development of our product candidate(s) continues and we approach submission of an NDA for pharmaceutical grade L-glutamine treatment for SCD; and

·to build a sales and marketing team before we receive regulatory approval of a product candidate in anticipation of commercial launch.

Liquidity and Capital Resources

Based on our losses to date, anticipated future revenue and operating expenses, debt repayment obligations and cash and cash equivalents balance of $0.5 million as of September 30, 2015, we do not have sufficient operating capital for our business without raising additional capital. We incurred losses of $8.3 million for the nine months ended September 30, 2015 and $18.9 million for the nine months ended September 30, 2014. We had an accumulated deficit at September 30, 2015 of $80.4 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of our pharmaceutical grade L-glutamine treatment of SCD, research costs for the corneal cell sheets using CAOMECS technology and the expansion of corporate infrastructure, including costs associated with being a public reporting company and potentially additional expenses that may be associated with an initial public offering. We have previously relied on unregistered equity offerings, debt financings and loans, including loans from related parties. As part of this effort, we have received various loans from officers, stockholders and other investors as discussed below. As of September 30, 2015, we had outstanding notes payable in an aggregate principal amount of $17.7 million, consisting of $7.1 million of non-convertible promissory notes and $10.6 million of convertible notes. Of the $17.7 million aggregate principal amount of notes outstanding as of September 30, 2015, approximately $11.6 million is either due on demand or will become due and payable within the next twelve months. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies, including the commercialization of our pharmaceutical grade L-glutamine treatment for SCD and the development in the United States of CAOMECS-based cell sheet technology.

We have had recurring operating losses, have a significant amount of notes payable and other obligations due within the next year and projected operating losses including the expected costs relating to the commercialization of our pharmaceutical grade L-glutamine treatment for SCD that exceed both the existing cash balances and cash expected to be generated from operations for at least the next year. In order to meet our expected obligations, management intends to raise additional funds through equity and debt financings and partnership agreements. In addition, we may seek to raise additional funds through collaborations with other companies or financing from other sources. As previously reported, we have filed a draft registration statement with the SEC with respect to an initial public offering. Additional funding may not be available in amounts or on terms which are acceptable to us, if at all. Due to the uncertainty of our ability to meet our current operating and capital expenses, there is substantial doubt about our ability to continue as a going concern. Furthermore, our ability to raise capital may be negatively impacted by our current shareholder litigation, or by any adverse aspects of a settlement or judgment related to such litigation.

On April 8, 2011, pursuant to a Research Agreement with CellSeed, we agreed to pay CellSeed $8.5 million within 30 days after the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery to us of the accumulated information package, as defined in the Research Agreement, which is not completed yet. Pursuant to the Individual Agreement with CellSeed, we agreed to pay $1.5 million to CellSeed and a royalty to be agreed upon by the parties. We paid the $1.5 million due to CellSeed pursuant to the Individual Agreement in February 2012.

On December 29, 2015, the Company and CellSeed, Inc. (“CellSeed”) terminated that certain Joint Research and Development Agreement dated as of April 8, 2011 (the “Research Agreement”) as well as that certain Individual Agreement dated as of April 8, 2011 (the “Individual Agreement”).

The Company is currently negotiating the terms of a new license agreement with CellSeed which has not been finalized as of this time. The Company no longer has an obligation to pay the $8.5 million or any other amount under this terminated agreement.

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In addition, we currently estimate that we will need an additional $2.0 million to submit a NDA to the FDA for our pharmaceutical grade L-glutamine treatment for SCD. Our cash burn rate for the first nine months ending September 30, 2015 was approximately $0.6 million per month.

As discussed in our Annual Report under the heading “Risk Factors—Risks Related to Development of our Product Candidates,” if the FDA does not accept for filing our NDA for our pharmaceutical grade L-glutamine treatment or does not approve our NDA based on a single Phase 3 clinical trial, in each case unless we conduct a second Phase 3 clinical trial or confirmatory study, the potential approval of our product candidate will be delayed. Under these circumstances, we will incur additional costs to seek to convince the FDA that a confirmatory study is unnecessary for filing or approval, or to design and conduct a second Phase 3 clinical trial or confirmatory study, or both. If we conduct a second Phase 3 clinical trial or confirmatory study prior to the approval of our NDA, it is possible that the results of that trial will be less favorable than the results of our completed Phase 3 trial and further delay or complicate the approval process. The incurrence of additional costs may require us to raise additional capital, and any delay in obtaining approval of our product candidate will reduce the period during which we can market and sell our product with patent protection and may affect our ability to obtain other protections against competition.

Our cash flow from operations is not adequate and our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: the number, duration and results of the clinical trials for our various product candidates going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business and commercialization strategies; the outcome of and expenses incurred during existing and any future litigation; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure for revenues, which we expect will increase due to the expected growth in its export volume as we have added additional distributors and expanded retail markets outside of the United States. Revenues from NutreStore currently are not significant and we are unsure whether sales of NutreStore will increase. Until we can generate a sufficient amount of product revenue, future cash needs are expected to be financed through registered or unregistered equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to us (or at all).

For the nine months ended September 30, 2015 and during the year ended December 31, 2014, we borrowed $5.8 million and $2.1 million, respectively, pursuant to convertible notes and non-convertible promissory notes, of which $1.7 million and $0.5 million, respectively, have been issued to related parties. As of September 30, 2015 and December 31, 2014, the aggregate principal amounts outstanding under convertible notes and non-convertible promissory notes totaled $17.7 million and $12.0 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 0% to 11% and are unsecured, except for a 2011 convertible note in the principal amount of $0.5 million. Interest on 0% loans was imputed at the incremental borrowing rate of 6.25% per annum. The net proceeds of the loans were used for working capital.

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The table below lists our outstanding notes payable as of September 30, 2015 and December 31, 2014 and the material terms of our outstanding borrowings:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price	Principal Outstanding September 30, 2015		Discount Amount September 30, 2015		Carrying Amount September 30, 2015		Shares Underlying Notes September 30, 2015	Principal Outstanding December 31, 2014		Discount Amount December 31, 2014		Carrying Amount December 31, 2014		Shares Underlying Notes December 31, 2014
Notes payable
2013	10%	Due on demand	—	$	840,000	$	—	$	840,000	—	$	1,030,000	$	—	$	1,030,000	—
2014	11%	Due on demand ~ 2 years	—	1,446,950		—		1,446,950		—	1,446,950		—		1,446,950		—
2015	11%	Due on demand ~ 2 years	—	2,390,400		—		2,390,400		—	—		—		—		—
				$	4,677,350	$	—	$	4,677,350	—	$	2,476,950	$	—	$	2,476,950	—
		Current		$	4,677,350	$	—	$	4,677,350	—	$	1,643,615	$	—	$	1,643,615	—
		Long-term		$	—	$	—	$	—	—	$	833,335	$	—	$	833,335	—
Notes payable - related party
2012	8% ~ 10%	Due on demand	—	$	626,730	$	—	$	626,730	—	$	656,730	$	—	$	656,730	—
2013	8%	Due on demand	—	50,000		—		50,000		—	50,000		—		50,000		—
2014	11%	Due on demand ~ 2 years	—	240,308		—		240,308		—	252,165		—		252,165		—
2015	10% ~ 11%	Due on demand ~ 2 years	—	1,549,266		—		1,549,266		—	—		—		—		—
				$	2,466,304	$	—	$	2,466,304	—	$	958,895	$	—	$	958,895	—
		Current		$	2,466,304	$	—	$	2,466,304	—	$	825,562	$	—	$	825,562	—
		Long-term		$	—	$	—	$	—	—	$	133,333	$	—	$	133,333	—
Convertible notes payable
2010	6%	5 years	$3.05	$	2,000	$	—	$	2,000	656	$	74,000	$	3,195	$	70,805	24,248
2011	10%	5 years	$3.05	500,000		—		500,000		163,809	500,000		—		500,000		163,809
2013	10%	2 years	$3.60	525,257		—		525,257		181,875	2,463,299		18,750		2,444,549		834,667
2014	10%	Due on demand ~ 2 years	$3.05~$7.00	4,176,123		477,941		3,698,182		1,064,382	4,939,773		846,613		4,093,160		1,241,241
2015	10%	Due on demand ~ 2 years	$3.50~$7.00	4,769,951		712,476		4,057,475		1,280,362	—		—		—		—
				$	9,973,331	$	1,190,417	$	8,782,914	2,691,084	$	7,977,072	$	868,558	$	7,108,514	2,263,965
		Current		$	3,919,313	$	103,772	$	3,815,541	1,014,855	$	3,478,904	$	21,945	$	3,456,959	1,156,050
		Long-term		$	6,054,018	$	1,086,645	$	4,967,373	1,676,229	$	4,498,168	$	846,613	$	3,651,555	1,107,915
Convertible notes payable - related party
2012	10%	Due on demand	$3.30	$	298,000	$	—	$	298,000	106,229	$	373,000	$	—	$	373,000	121,461
2014	10%	2 years	$7.00	200,000		—		200,000		32,324	200,000		—		200,000		30,187
2015	10%	2 years	$4.50	100,000		—		100,000		22,234	—		—		—		—
				$	598,000	$	—	$	598,000	160,787	$	573,000	$	—	$	573,000	151,648
		Current		$	498,000	$	—	$	498,000	138,553	$	373,000	$	—	$	373,000	121,461
		Long-term		$	100,000	$	—	$	100,000	22,234	$	200,000	$	—	$	200,000	30,187
		Grand Total		$	17,714,985	$	1,190,417	$	16,524,568	2,851,871	$	11,985,917	$	868,558	$	11,117,359	2,415,613

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Subsequent to September 30, 2015, we entered into financing arrangements as set forth below. The total amount of these loans and proceeds from sale of common shares amounted to $7.7 million.

Notes Issued after September 30, 2015	Principal Amounts		Annual Interest Rate	Term of Notes	Conversion Price
Convertible notes (1)	$	749,009	10%	Due on Demand up to 2 years	$	3.60
Convertible notes (2)	1,401,325		10%	2 years	$	4.50
Convertible notes — related party (2)	220,000		10%	2 yeas	$	4.50
Promissory note	250,000		11%	6 months	—
Promissory note (1)	833,335		11%	Due on Demand	—
Promissory notes — related party (1)	263,843		11%	Due on Demand	—
Promissory notes — related party	859,700		10%~11%	Due on Demand up to 2 years	—
Total	$	4,577,212

(1)Refinancings of prior notes already outstanding.

(2)Includes mandatory conversion at the time of an initial public offering at a conversion price equal to 80% of the initial public offering price.

Subsequent to the quarter ended September 30, 2015, we issued the following:

Common Shares Issued for Cash after September 30, 2015	Principal Amounts		Number of Shares Issued
Common shares	$	1,700,000	377,778
Common shares—related party	99,999		22,222
Total	$	1,799,999	400,000

In April and May of 2016, we entered into secured loan agreements, pursuant to which we borrowed in the aggregate amount of $1,295,000 at a fixed interest rate of 10% per annum. These loans will mature on the earlier of the closing of a new debt financing (subject to certain exceptions, including refinancings of our outstanding convertible notes) or May 1, 2017. These loans are secured by all of our personal property and are personally guaranteed by Dr. Niihara and secured by certain of his real property. Furthermore, the loan agreements contain certain negative covenants that may hinder our ability to raise additional capital or might otherwise affect our liquidity, including restrictions on our ability to (1) acquire material assets outside of the ordinary course of business, (2) sell, lease, license transfer or dispose of our personal property outside of the ordinary course of business, (3) pay or declare dividends, (4) make investments in or loans to other persons, (5) redeem or repurchase our stock, (6) make deposits or investments unless they are subject to a deposit control account, (7) incur additional indebtedness other than permitted debt, (8) make payments on subordinated obligations, (9) undergo a merger, change in control or sale of a substantial portion of our assets, or (10) use loan proceeds to make payments to our affiliates. If we are unable to repay these loans when they become due, or if we otherwise suffer an event of default under the loan agreements, the lender may have the right to foreclose on their collaterals, which could have a material and adverse effect on our business, financial condition, liquidity and operations.

In connection with these loans, we also issued the lender a warrant for the purchase of 62,500 shares of our common stock at an exercise price of $4.50 per share. In addition, if these loans remain outstanding for at least 30 days during the 90 day periods ending June 30, 2016, September 30, 2016 and December 31, 2016, we will be obligated to issue the lender additional warrants for the purchase of 37,500, 18,750 and 18,750 shares of our common stock, respectively, for an exercise price of the lowest of the fair market value of our common stock as of the start or end of such 90-day period or the lowest public sale price of our common stock during the quarter ended on the applicable measurement date. These warrants may be exercised through a cashless feature.

Secured Loans after September 30, 2015	Principal Amounts		Annual Interest Rate	Term of Loans
Secured loans	$	1,295,000	10%	Earlier of closing of new debt financing or May 1, 2017
Total	$	1,295,000

Cash flows for the nine months ended September 30, 2015 and September 30, 2014

Net cash used in operating activities

Net cash flows used in operating activities decreased by $1.8 million, or 25%, to $5.5 million from $7.3 million for the nine months ended September 30, 2015 and 2014, respectively. This decrease was primarily due to a $10.6 million decrease in net loss, offset by an increase of working capital of $1.1 million plus a $9.9 million increase in the non-cash adjustments to net income. The increase in non-cash adjustments to net income was primarily attributable to the following: $4.4 million for the change in the fair value of liability classified warrants and warrant derivative liabilities, $3.5 million for the lack of any warrant exercise inducement expense in the current period, $2.2 million decrease of share-based compensation and a gain of $0.4 million for a gain on settlement of litigation, partially offset by the impact of a decrease of $0.6 million in interest expense accrued from discount of convertible notes.

Net cash used in investing activities

Net cash flows used in investing activities decreased by $22,000, or 85%, to $4,000 from $26,000 for the nine months ended September 30, 2015 and 2014, respectively. The decrease was due to fewer purchases of property and equipment. No other investing activities occurred in the nine months ended September 30, 2015 and 2014.

Net cash from financing activities

Net cash flows from financing activities increased by $0.1 million, or 2%, to $5.4 million from $5.3 million for the nine months ended September 30, 2015 and 2014, respectively, as a result of a $3.9 million increase in proceeds from issuance of promissory notes payable, a $0.2 million increase in proceeds from issuance of convertible notes payable, and absence of $0.4 million paid for the repurchase of common stock, offset by a $4.1 million decrease in proceeds from exercise of warrants and a $0.4 million increase in repayment of convertible and non-convertible notes.

Off-Balance-Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP, on the basis that the Company will continue as a going concern. 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, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The condensed consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2015.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

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As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Executive Committee (which, as of such time, carried out the roles and responsibilities of the Chief Executive Officer) and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation and due to the material weakness in our internal control over financial reporting as of December 31, 2014 described below, our Executive Committee and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective. Our management is working at remediating the material weakness in our internal controls over financial reporting. However, we have not yet completed a full annual accounting cycle since December 31, 2014 to fully validate the remediation of the material weakness in our internal controls and the effectiveness of the Company’s disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2015 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Material Weakness and Plan of Remediation

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. In conducting our review of our internal control over financial reporting, we identified a continuing material weakness in our internal control over financial reporting initially identified in our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013. This material weakness relates to the adequacy of resources and controls resulting from us not having an adequate level of resources with the appropriate level of training and experience in regards to the application of generally accepted accounting principles for certain complex transactions. In addition, we did not maintain effective controls over the completeness and accuracy of financial reporting for complex or significant unusual transactions.

Further, as of mid-August 2015 through December 2015 we did not have a sufficient number of independent directors to constitute an audit committee.

The material weakness described above resulted in a material misstatement of our liabilities, shareholders’ deficit, net loss, non-cash expenses and related financial disclosures for the three month period ended September 30, 2013 that was not prevented or detected on a timely basis and, consequently, a restatement of the unaudited consolidated financial statements contained in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. Additionally, other prior period adjustments related to recording share based compensation are attributable to us not having an adequate level of resources in regard to these transactions. As a result of these matters, we were unable to timely file our Annual Report on Form 10-K for the year ended December 31, 2013.

To assist with the accounting for complex and/or significant unusual transactions, we have retained consulting professionals with greater knowledge of and experience with financial reporting under GAAP and related regulatory requirements to supplement our internal resources and added to our accounting staff. We also have implemented procedures to evaluate and improve our existing internal control documentation and procedures to develop clear identification of key financial and reporting controls over complex or significant unusual transactions, including (i) utilizing our consulting professionals to evaluate financing transactions prior to consummation of material financing transactions to better determine GAAP accounting as soon as possible, (ii) enhancing segregation of duties and (iii) implementing more robust quarterly review processes, particularly at our foreign locations. We continue to strengthen our procedures and staffing levels in order to fully address this material weakness.

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Part II. Other Information

Item 1. Legal Proceedings

Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015, for a summary of material developments regarding legal proceedings reported in that Annual Report.

Litigation with AFH Advisory

From July 2012 until May 2015, the Company was engaged in litigation with AFH Holding and Advisory, LLC (“AFH Advisory”), which was the sole stockholder of AFH Acquisition IV, Inc. immediately prior to its combination with Emmaus Medical pursuant to the Merger in May 2011. On June 27, 2013, the Superior Court of the State of Delaware issued an order implementing a partial summary judgment in favor of the Company which led to the cancellation of 2,504,249 shares of the Company held by AFH Advisory and related parties. On May 4, 2015 a settlement was entered with the Superior Court of the State of Delaware dismissing all remaining claims in the case with prejudice, thus removing any right to appeal. The settlement called for the exchange of documents and financial records, and for AFH Advisory to assign and transfer to the Company 150,000 shares of stock of Targeted Medical. In addition, the parties to the litigation dismissed all remaining claims with prejudice. The Parties agree that there are no further obligations due under any of the Letters of Intent. The Letters of Intent are considered rescinded, nulled, and voided.

Section 225 Litigation

As disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, on April 28, 2015, Dr. Yutaka Niihara, the Company’s President, Chief Executive Officer and Chairman of the Board, filed a complaint (the “Complaint”) in the Court of Chancery of the State of Delaware (the “Court”) under Section 225 of the Delaware General Corporation Law against Tracey C. Doi, Henry A. McKinnell, Jr., Akiko M. Miyashita, Phillip M. Satow and Mayuran Sriskandarajah, each of whom was a member of the Board as of April 24, 2015 (together with Dr. Niihara, the “Incumbent Directors”), Sarissa Capital Management L.P. (“Sarissa”) and T.R. Winston & Company, LLC (“TRW”), as defendants, and the Company as nominal defendant. The Complaint requested that the Court issue an order declaring, among other things, that:

·Dr. Niihara validly delivered stockholder consents to the Company to effect certain amendments to the Company’s By-laws and to elect certain additional individuals to the Company’s Board of Directors, and that such stockholder consents are effective;

·the Company’s By-laws were validly amended as provided in the stockholder consents;

·Blair A. Contratto, S. Steve Lee, Willis C. Lee, Masaharu Osato, M.D., Lan T. Tran, David J. Wohlberg and Ian Zwicker were validly elected as directors of the Company;

·any actions taken by the Incumbent Directors since April 24, 2015 are invalid and void; and

·the actions purportedly taken by written consent were not prohibited by the terms of the Agreement, dated as of September 11, 2013, among the Company, Dr. Niihara, Sarissa and TRW (the “Designation Agreement”).

Along with the Complaint, Dr. Niihara filed a motion for an order maintaining the status quo and a motion for expedited proceedings.

On April 29, 2015, following their resignations from our Board, Ms. Doi and Ms. Miyashita were dismissed from the action. On May 22, 2015, Mr. Satow and Dr. McKinnell were dismissed from the action. On July 31, 2015, Mr. Sriskandarajah was dismissed from the action.

On June 10, 2015, the Delaware court issued a Status Quo Order providing that, until conclusion of the case, the Board would be comprised of Dr. Niihara, Mr. Sriskandarajah, Mr. Satow and Dr. McKinnell; provided, however, that nothing in the Status Quo Order would prevent voluntary resignations from the Board, and no director could be seated or replaced pursuant to the Designation Agreement except upon ten calendar days written notice to the parties in this Action by the party seeking to exercise its right to designate such director. The Status Quo Order also specified certain corporate actions that would require approval of all directors voting on an action.

On June 15, 2015, Mr. Satow tendered his resignation from the Board of the Company, effective upon the election and qualification of Dr. Scott Gottlieb as the designee of TRW pursuant to the Designation Agreement. This resignation, as well as Dr. Gottlieb’s election to the Board of the Company, became effective on August 3, 2015.

On November 19, 2015, counsel to Dr. Niihara, Sarissa and the Company filed a joint stipulation to dismiss the action. In connection therewith, on November 19, 2015, the Company, Dr. Niihara and Sarissa entered into Amendment No. 1 (the “Amendment”) to the Designation Agreement. The Amendment terminates the Designation Agreement with respect to the Company, Dr. Niihara and Sarissa, and provides that those parties shall have no further rights or obligations to each other under the Designation Agreement. Furthermore, each of the Company, Sarissa and Dr. Niihara waived all rights each has ever had, has or may have under the Designation Agreement against each other, and released each other from any and all obligations each has ever had, has or may have to the other under the Designation Agreement. As a result of the Amendment, Sarissa no longer has the right to designate any members of the Company’s Board, nor does it have the right to approve any actions as were set forth in the Designation Agreement. On November 20, 2015, the Court entered the dismissal, at which time the Status Quo Order ceased to be in effect.

In connection with the Amendment, on November 19, 2015, Mr. Sriskandarajah tendered his resignation from the Board, effective immediately. The Company has agreed to indemnify Mr. Sriskandarajah for $43,476 in attorneys’ fees and expenses he incurred in defense of this action.

Item 1A. Risk Factors

Not required for smaller reporting companies.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 16, 2015, the Company issued a convertible note to a third party in the principal amount of $100,000, which bears interest at 10% per annum and mature on the two-year anniversary date of the note. If the Company completes a qualified public offering, the principal amount of the note will automatically convert into shares of the Company’s common stock at a conversion price equal to 80% of the initial public offering price in the qualified public offering. At or after the first anniversary of the loan date, the holder of the note may convert some or all of the unpaid principal amount thereof, including unpaid accrued interest, into shares of the Company’s common stock at a conversion price of $4.50 per share.

On July 18, 2015, the Company refinanced a convertible note payable to shareholders in the principal amount of $552,103, with a new convertible note in the principal amount of $662,524 which bears interest at 10% per annum and matures on the two-year anniversary date of the note. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.50 per share.

On September 29, 2015, the Company issued a convertible note to Dr. Yutaka Niihara, an officer and a director of the Company, in the principal amount of $100,000, which bears interest at 10% per annum and matures on the two-year anniversary date of the note. If the Company completes a qualified public offering, the principal amount of the note will automatically convert into shares of the Company’s common stock at a conversion price equal to 80% of the initial public offering price in the qualified public offering. At or after the first anniversary of the loan date, the holder of the note may convert some or all of the unpaid principal amount thereof, including unpaid accrued interest, into shares of the Company’s common stock at a conversion price of $4.50 per share.

On July 2, 2015, a holder of warrants exercised its right to purchase 6,546 shares of common stock using a cashless exercise feature.   As a result of this cashless exercise, we issued 2,472 shares of our common stock to the holder of this warrant and withheld issuing 4,074 shares of our common stock in satisfaction of the exercise price under the warrant.

On July 10, 2015, a holder of warrants exercised its right to purchase 26,537 shares of common stock using a cashless exercise feature.   As a result of this cashless exercise, we issued 10,020 shares of our common stock to the holder of this warrant and withheld issuing 16,517 shares of our common stock in satisfaction of the exercise price under the warrant.

On July 22, 2015, a holder of options exercised its right to purchase 10,000 shares of common stock using a cashless exercise feature.  As a result of this cashless exercise, we issued 2,000 shares of our common stock to the holder of these options and withheld issuing 8,000 shares of our common stock in satisfaction of the exercise price under the option.

On August 10, 2015, a convertible note in the principal amount of $18,000 was converted into common stock at a conversion price of $3.05 per share.

All such securities were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder or, in the case of refinancings and cashless exercises of warrants and options, upon the exemption from registration provided by Section 3(a)(9) of the Securities Act.  No underwriters or placement agents were used in connection with such sales of unregistered securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

(a)Exhibits

Exhibit Number	Description of Document
4.1	Form of Convertible Promissory Note issued by the registrant to IBC Solutions Ltd. and Dr. Yutaka Niihara.
4.2	Convertible Promissory Note dated July 18, 2015 issued by the registrant to The Takemoto Family.
31.1	Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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EMMAUS LIFE SCIENCES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Emmaus Life Sciences, Inc.
Dated: May 20, 2016	By:	/s/ Yutaka Niihara
	Name:	Yutaka Niihara, M.D., MPH
	Its:	Chief Executive Officer (principal executive officer and duly authorized officer)
	By:	/s/ Steve Lee
	Name:	Steve Lee
	Its:	Interim Chief Financial Officer
		(principal financial and accounting officer)

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