EMI Holding 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
OR
o	TRANSITION 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 Number)

20725 S. Western Avenue, Suite 136

Torrance, CA 90501

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

310-214-0065

 (COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Former Name

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 S    No £

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 x     No o

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

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 26,724,057 shares of common stock, par value $0.001 per share, outstanding as of November 13, 2013.

EMMAUS LIFE SCIENCES, INC.

 FORM 10-Q

 For the Quarterly Period Ended September 30, 2013

 INDEX

				Page
Part I	Financial Information
	Item 1.	Financial Statements
		(a)	Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	1
		(b)	Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2013 and 2012 and from December 20, 2000 (Inception) to September 30, 2013 (Unaudited)	2
		(c)	Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Period from December 20, 2000 (Inception) to September 30, 2013 (Unaudited)	3
		(d)	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 and from December 20, 2000 (Inception) to September 30, 2013 (Unaudited)	9
		(e)	Notes to Consolidated Financial Statements as of and for the Nine Months Ended September 30, 2013 (Unaudited)	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
	Item 4.	Controls and Procedures		36
Part II	Other Information
	Item 1.	Legal Proceedings		37
	Item 1A.	Risk Factors		37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
	Item 3.	Defaults Upon Senior Securities		38
	Item 4.	Mine Safety Disclosures		38
	Item 5.	Other Information		38
	Item 6.	Exhibits		39
Signatures

i

Item 1. Financial Statements

 EMMAUS LIFE SCIENCES, INC.

 (A Development Stage Company)

Consolidated Balance Sheets

	As of
	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	5,773,184		$	402,823
Marketable securities		808,794			—
Accounts receivable		24,886			80,279
Inventories, net		167,764			203,389
Prepaid expenses and other current assets		74,510			62,833
Total current assets		6,849,138			749,324
PROPERTY AND EQUIPMENT, net		26,961			38,769
OTHER ASSETS
Marketable securities, long-term		925,515			561,521
Intangibles, net		1,160,714			1,321,429
Notes receivable		18,000			18,000
Deposits		53,528			195,197
Total other assets		2,157,757			2,096,147
Total Assets	$	9,033,856		$	2,884,240
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	2,673,691		$	2,560,278
Due to related party		—			394,446
Dissenting stockholders payable		125,000			200,000
Notes payable, net		3,041,400			3,939,041
Convertible notes payable, net		4,676,841			4,627,695
Total current liabilities		10,516,932			11,721,460
LONG-TERM LIABILITIES
Derivative liabilities		2,441,382			—
Notes payable		200,000			700,000
Convertible notes payable, net		3,146,560			1,106,035
Total long-term liabilities		5,787,942			1,806,035
Total Liabilities		16, 304,874			13,527,495
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, 26,724,057 and 24,878,436 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		26,724			24,878
Additional paid-in capital		38,415,254			25,361,863
Accumulated other comprehensive income		1,125,975			(12,432	)
Deficit accumulated during the development stage		(46,838,971	)		(36,017,564	)
Total Stockholders’ Deficit		(7,271,018	)		(10,643,255	)
Total Liabilities & Stockholders’ Deficit	$	9,033,856		$	2,884,240

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

1

EMMAUS LIFE SCIENCES, INC.

 (A Development Stage Company)

Consolidated Statements of Comprehensive Loss

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						From December 20, 2000 (date of inception) to September 30,
	2013			2012			2013			2012			2013
SALES	$	68,873		$	114,416		$	257,455		$	377,455		$	1,542,716
SALES RETURN & ALLOWANCE		(2,744	)		(1,290	)		(10,558	)		(12,046	)		(71,645	)
REVENUES		66,129			113,126			246,897			365,409			1,471,071
COST OF GOODS SOLD
Cost of goods sold		48,445			36,585			147,418			86,358			689,229
Scrapped inventory		—			—			—			—			235,537
Total cost of goods sold		48,445			36,585			147,418			86,358			924,766
GROSS PROFIT		17,684			76,541			99,479			279,051			546,305
OPERATING EXPENSES
Research and development		490,138			780,193			1,801,399			2,209,176			11,219,839
Selling		120,647			90,341			377,335			288,794			3,278,902
General and administrative		2,600,043			1,788,065			7,620,436			5,895,097			26,588,438
Transaction costs		—			—			—			—			788,893
		3,210,828			2,658,599			9,799,170			8,393,067			41,876,072
LOSS FROM OPERATIONS		(3,193,144	)		(2,582,058	)		(9,699,691	)		(8,114,016	)		(41,329,767	)
OTHER INCOME (EXPENSE)
Realized gain on securities available-for-sale		—			—			—			275,822			275,822
Gain on derecognition of liabilities		—			—			735,808			—			735,808
Change in fair value of derivative liabilities		47,578			—			47,578			—			47,578
Interest and other income		5,089			15,092			15,811			29,705			169,187
Interest expense		(567,491	)		(884,496	)		(1,918,363	)		(2,776,893	)		(6,709,746	)
		(514,824	)		(869,404	)		(1,119,166	)		(2,471,366	)		(5,481,351	)
LOSS BEFORE INCOME TAXES	$	(3,707,968	)	$	(3,451,462	)	$	(10,818,857	)	$	(10,585,382	)	$	(46, 811,118	)
INCOME TAXES		—			113			2,550			5,913			27,853
NET LOSS	$	(3,707,968	)	$	(3,451,575	)	$	(10,821,407	)	$	(10,591,295	)	$	(46,838,971	)
OTHER INCOME (EXPENSE)
Unrealized holding gain (loss) on securities available-for-sale, net of tax		132,390			(59,582	)		1,172,788			(128,045	)		1,168,403
Unrealized foreign translation		(7,949	)		(21,269	)		(34,381	)		(55,800	)		(42,427	)
COMPREHENSIVE LOSS	$	(3,583,527	)	$	(3,532,426	)	$	(9,683,000	)	$	(10,775,140	)	$	(45,712,995	)
NET LOSS PER COMMON SHARE	$	(0.15	)	$	(0.14	)	$	(0.44	)	$	(0.43	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		24,535,274			24,409,360			24,814,373			24,399,390

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

2

Emmaus Life Sciences, inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013

(Unaudited)

	Common stock – par value
	$0.001 per share, 100,000,000											Deficit
	shares authorized											Accumulated
	Shares		Common Stock		Gross $/Share		Additional Paid-in Capital			Accumulated Other Comprehensive Income		during Development Stage			Total
Balance, December 31, 2000 (1) (2)		12,531,125	$	12,531			$	(2,931	)	$	—	$	—		$	9,600
Net loss		—		—				—			—		(21,942	)		(21,942	)
Balance, December 31, 2001		12,531,125		12,531				(2,931	)		—		(21,942	)		(12,342	)
Net loss		—		—				—			—		(12,464	)		(12,464	)
Balance, December 31, 2002		12,531,125		12,531				(2,931	)		—		(34,406	)		(24,806	)
Constructive distribution of retained loss to Additional Paid-in Capital		—		—				(34,406	)		—		34,406			—
Common stock issued		737,125		737		0.34		249,263			—		—			250,000
Net loss		—		—				—			—		(97,481	)		(97,481	)
Balance, December 31, 2003		13,268,250		13,268				211,926			—		(97,481	)		127,713

(1)   Reflects recapitalization of members’ equity into (425,000 pre-merger) 12,531,125 shares of common stock of Emmaus Medical, Inc.

(2)  The stockholders’ equity has been recapitalized to give effect to the share exchanged by existing stockholders pursuant to the merger agreement dated April 21, 2011, more fully discussed in the Recapitalization and change in legal status of entity footnotes to these financial statements.

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

3

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013 (Continued)

(Unaudited)

	Common stock – par value										Deficit
	$0.001 per share, 100,000,000										Accumulated
	shares authorized						Additional		Accumulated		during
	Shares		Common Stock		Gross $/Share		Paid-in Capital		Other Comprehensive Income		Development Stage			Total
Balance, December 31, 2003		13,268,250	$	13,268			$	211,926	$	—	$	(97,481	)	$	127,713
Common stock issued		1,459,270		1,459		0.35		503,616		—		—			505,075
Common stock issued		88,455		89		0.06		4,911		—		—			5,000
Common stock issued		67,817		68		2.03		137,932		—		—			138,000
Net loss		—		—				—		—		(624,936	)		(624,936	)
Balance, December 31, 2004		14,883,792		14,884				858,385		—		(722,417	)		150,852
Common stock issued		398,549		399		2.03		327,886		—		—			328,285
Net loss		—		—				—		—		(668,091	)		(668,091	)
Balance, December 31, 2005		15,282,341		15,283				1,186,271		—		(1,390,508	)		(188,954	)
Common stock issued		523,388		523		2.03		824,517		—		—			825,040
Net loss		—		—				—		—		(759,962	)		(759,962	)
Balance, December 31, 2006		15,805,729		15,806				2,010,788		—		(2,150,470	)		(123,876	)
Common stock issued		1,344,162		1,344		2.03		2,732,516		—		—			2,733,860
Net loss		—		—				—		—		(1,282,212	)		(1,282,212	)
Balance, December 31, 2007		17,149,891		17,150				4,743,304		—		(3,432,682	)		1,327,772

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

4

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013 (Continued)

(Unaudited)

	Common stock – par value										Deficit
	$0.001 per share, 100,000,000										Accumulated
	shares authorized						Additional		Accumulated		during
	Shares		Common Stock		Gross $/Share		Paid-in Capital		Other Comprehensive Income		Development Stage				Total
Balance, December 31, 2007		17,149,891	$	17,150			$	4,743,304	$	—	$	(3,432,682	)	$	1,327,772
Common stock issued		1,226,959		1,227		2.03		3,389,464		—		—			3,390,691
Net loss		—		—				—		—		(2,993,777	)		(2,993,777	)
Balance, December 31, 2008		18,376,850		18,377				8,132,768		—		(6,426,459	)		1,724,686
Warrants issued		—		—				160,000		—		—			160,000
Common stock issued, net of issuance cost of $160,000		854,446		854		2.62		2,078,071		—		—			2,078,925
Net loss		—		—				—		—		(2,567,807	)		(2,567,807	)
Balance, December 31, 2009		19,231,296		19,231				10,370,839		—		(8,994,266	)		1,395,804
Warrants issued		—		—				480,000		—		—			480,000
Common stock issued, net of issuance cost of $480,000		705,900		706		3.05		1,643,588		—		—			1,644,294
Conversion of notes payable to common stock		427,857		428		3.05		1,305,572		—		—			1,306,000
Unrealized gain on securities available for sale		—		—				—		542,573		—			542,573
Net loss		—		—				—		—		(3,757,370	)		(3,757,370	)
Balance, December 31, 2010		20,365,053		20,365				13,799,999		542,573		(12,751,636	)		1,611,301

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

5

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013 (Continued)

(Unaudited)

	Common stock – par value														Deficit
	$0.001 per share, 100,000,000														Accumulated
	shares authorized								Additional			Accumulated			during
	Shares			Common Stock			Gross $/Share		Paid-in Capital			Other Comprehensive Income			Development Stage				Total
Balance, December 31, 2010		20,365,053		$	20,365				$	13,799,999		$	542,573		$	(12,751,636	)	$	1,611,301
Common stock issued, net of issuance cost		272,147			272			4.24		1,153,402			—			—			1,153,674
Conversion of notes payable to common stock		36,514			37			3.05		109,993			—			—			110,030
Shares issued to existing shell stockholders in the reorganization		3,750,000			3,750					(3,750	)		—			—			—
Shares issued for stock option exercised		11,794			12			3.05		35,960			—			—			35,972
Proceeds from exercise of warrants		4,718			5			3.05		14,395			—			—			14,400
Stock options vested		—			—					35,196			—			—			35,196
Cashless exercise of warrants		413			—					—			—			—			—
Common stock repurchased and cancelled from dissenting stockholders		(47,178	)		(47	)		4.24		(199,953	)		—			—			(200,000	)
Warrants issued as a payment of consulting fee		—			—					1,053,150			—			—			1,053,150
Warrants issued in conjunction with convertible note		—			—					864,773			—			—			864,773
Impact of beneficial conversion feature		—			—					1,469,343			—			—			1,469,343
Unrealized loss on securities		—			—					—			(287,233	)		—			(287,233	)
Foreign currency translation effect		—			—					—			(2,927	)		—			(2,927	)
Net loss		—			—					—			—			(8,832,758	)		(8,832,758	)
Balance, December 31, 2011		24,393,461			24,394					18,332,508			252,413			(21,584,394	)		(2,975,079	)

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

6

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013 (Continued)

(Unaudited)

	Common stock – par value											Deficit
	$0.001 per share, 100,000,000											Accumulated
	shares authorized						Additional		Accumulated			during
	Shares		Common Stock		Gross $/Share		Paid-in Capital		Other Comprehensive Income			Development Stage			Total
Balance, December 31, 2011		24,393,461	$	24,394			$	18,332,508	$	252,413		$	(21,584,394	)	$	(2,975,079	)
Warrants issued in conjunction with convertible note		—		—				175,961		—			—			175,961
Warrants issued in conjunction with promissory note		—		—				1,485,835		—			—			1,485,835
Impact of beneficial conversion feature		—		—				256,761		—			—			256,761
Discount on noninterest bearing convertible note		—		—				25,562		—			—			25,562
Stock based compensation		—		—				3,466,410		—			—			3,466,410
Stock issued as a payment of professional fee		12,787		12		3.60		46,021		—			—			46,033
Stock issued for cash		472,188		472		3.33		1,572,805		—						1,573,277
Realized gain on securities		—		—				—		24,490			—			24,490
Unrealized gain on securities		—		—				—		(284,215	)		—			(284,215	)
Foreign currency translation effect		—		—				—		(5,120	)		—			(5,120	)
Net loss		—		—				—		—			(14,433,170	)		(14,433,170	)
Balance, December 31, 2012		24,878,436		24,878				25,361,863		(12,432	)		(36,017,564	)		(10,643,255	)

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

7

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to September 30, 2013

(Unaudited)

	Common stock – par value													Deficit
	$0.001 per share, 100,000,000													Accumulated
	shares authorized								Additional		Accumulated			during
	Shares			Common Stock			Gross $/Share		Paid-in Capital		Other Comprehensive Income			Development Stage			Total
Balance, December 31, 2012		24,878,436		$	24,878				$	25,361,863	$	(12,432	)	$	(36,017,564	)	$	(10,643,255	)
Impact of beneficial conversion feature		—			—					396,801		—			—			396,801
Warrant issued in conjunction with convertible note		—			—					116,831		—			—			116,831
Stock based compensation		—			—					3,960,192		—						3,960,192
Stock issued as a payment of professional fee		32,840			33			3.60		118,191		—			—			118,224
Stock issued for cash		500,284			500			3.60		1,800,522		—						1,801,022
Stock issued for cash		27,000			27			3.30		89,073		—			—			89,100
Stock and warrants issued for cash, net of issuance costs and derivative liability		3,020,501			3,021			2.50		3,943,074		—			—			3,946,095
Conversion of notes payable to common stock		294,878			295			3.60		1,061,266		—			—			1,061,561
Conversion of notes payable to common stock		474,367			474			3.30		1,564,937		—			—			1,565,411
Stock cancelled		(2,504,249	)		(2,504	)				2,504		—			—			—
Unrealized gain on securities		—			—					—		1,172,788						1,172,788
Foreign currency translation effect		—			—					—		(34,381	)		—			(34,381	)
Net loss		—			—					—		—			(10,821,407	)		(10,821,407	)
Balance, September 30, 2013		26,724,057		$	26,724				$	38,415,254	$	1,125,975		$	(46,838,971	)	$	(7,271,018	)

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

8

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Cash Flows

(Unaudited)

	Nine Months ended September 30,						From December 20, 2000 (date of inception) to September 30,
	2013			2012			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(10,821,407	)	$	(10,591,295	)	$	(46,838,971	)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization		177,886			146,089			1,262,503
Cost of scrapped inventory written off		—			—			235,537
Fair value of warrants issued for services		—			—			1,053,150
Interest expense accrued from discount of convertible note		1,011,861			2,156,547			4,357,970
Gain on termination of secured debt		—			(275,822	)		(275,822	)
Gain on derecognition of liabilities		(735,808	)		—			(735,808	)
Share-based compensation		3,960,192			2,392,327			7,461,798
Change in fair value of derivative liabilities		(47,578	)		—			(47,578	)
Net changes in operating assets and liabilities, net of acquisition
Accounts receivable		54,672			(33,622	)		(32,323	)
Inventory		27,349			(59,553	)		(411,194	)
Prepaid expenses and other current assets		(15,016	)		18,048			(96,801	)
Deposits		140,776			164,341			(4,384	)
Accounts payable and accrued expenses		610,466			1,661,531			3,166,643
Due to related party		—			—			394,446
Due to dissenters		(75,000	)		—			(75,000	)
Net cash flows used in operating activities		(5,711,607	)		(4,421,409	)		(30,585,834	)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment towards license		—			(1,500,000	)		(2,250,000	)
Purchases of marketable securities		—			—			(1,131,813	)
Purchases of property and equipment		(5,495	)		(7,385	)		(199,858	)
Net cash flows used in investing activities		(5,495	)		(1,507,385	)		(3,581,671	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from line of credit		—			—			299,500
Repayment of line of credit		—			—			(299,500	)
Proceeds from notes payable issued		4,705,467			4,545,660			12,563,318
Proceeds from convertible notes payable issued		3,147,298			1,712,365			10,509,443
Payments of notes payable		(4,298,385	)		—			(5,605,628	)
Payments of convertible notes payable		(754,480	)		(350,100	)		(1,104,580	)
Proceeds from sale of common stock and warrants, net of issuance costs		6,435,055			—			6,435,055
Proceeds from issuance of common stock		1,890,122			79,034			17,181,809
Net cash flows from financing activities		11,125,077			5,986,959			39,979,417
Effect of exchange rate changes on cash		(37,614	)		(38,317	)		(50,328	)
Net increase/decrease in cash and cash equivalents		5,370,361			19,848			5,761,584
Cash and cash equivalents, beginning of period		402,823			313,684			—
Cash acquired		—			—			11,600
Cash and cash equivalents, end of period	$	5,773,184		$	333,532		$	5,773,184
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	187,823		$	159,677		$	889,980
Income taxes paid	$	2,550		$	5,913		$	27,853
Non-cash financing activities:
Stock issued as a payment of professional fee	$	118,224		$	—		$	164,257
Conversion of notes payable to common stock	$	2,606,100		$	—		$	4,022,130
Interest converted to stock	$	20,872		$	—		$	20,872
Disposal of pledged marketable securities	$	—		$	(565,907	)	$	(565,907	)
Cancellation of secured debt	$	—		$	841,728		$	841,728

The accompanying notes are an integral part of these financial statements

9

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS

Organization – Emmaus Life Sciences, Inc. (the “Company” or “Emmaus”), which is engaged in the discovery, development, and commercialization of treatments and therapies for rare diseases, was incorporated in the state of Delaware on September 24, 2007.  Pursuant to an Agreement and Plan of Merger, dated April 21, 2011 (the “Merger Agreement”), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“AFH Merger Sub”), AFH Holding and Advisory, LLC, and Emmaus Medical, Inc. (“Emmaus Medical”), Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”).  Upon the closing of the Merger, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” and became the parent company of Emmaus Medical.  The Company changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

Emmaus Medical is a Delaware corporation originally incorporated on September 12, 2003.  Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC conducted a reorganization and merged with Emmaus Medical.  As a result of the merger, Emmaus Medical acquired the exclusive patent rights for a treatment for sickle cell disease.

In October 2010, the Company established Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”) by paying 97% of the initial capital. EM Japan is engaged in the business of trading in nutritional supplements and other medical products and drugs. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of formation. The aggregate formation cost was $52,500. Emmaus Medical acquired the additional 3% of the outstanding shares of EM Japan during the three months ended March 31, 2011 and is now the 100% owner of the outstanding share capital.

In November 2011, the Company formed Emmaus Medical Europe, Ltd. (“EM Europe”), a wholly owned subsidiary of Emmaus Medical.  EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe.

Emmaus, its wholly-owned subsidiary, Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe, are collectively referred to herein as the “Company.”

Nature of Business – The Company has undertaken the business of developing and commercializing cost-effective treatments and therapies for rare diseases.  The Company’s primary business purpose is to continue its late-stage development of the amino acid L-glutamine as a prescription drug for the treatment of sickle cell disease (“SCD”).  The Company’s current focus is to complete the Phase III clinical trial of its product candidate for SCD treatment, which involves over 31 trial research sites and 230 patients.

To a lesser extent, the Company is 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.   The Company’s indirect wholly owned subsidiary, Newfield Nutrition Corporation, 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, Ghana and South Korea. The Company also owns a minority interest 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.

The Company also has certain rights to regenerative medicine products owned by CellSeed and is involved in research focused on providing innovative solutions for tissue-engineering through the development of novel cell harvest methods and 3-dimensional living tissue replacement products for “cell sheet therapy” and regenerative medicine and the commercialization of such products.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

10

Going concern – The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has losses for the nine months ended September 30, 2013 totaling $10,821,407 as well as an accumulated deficit since inception amounting to $46,838,971. Further, the Company appears to have inadequate cash and cash equivalents of $5,773,184 as of September 30, 2013 considering that revenues from operations since inception totaled only $1,471,071. As a result, the Company is dependent upon funds from private investors and the support of certain stockholders.

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.

Recapitalization and change in legal status of entity – In October 2003, Emmaus Medical acquired substantially all of the assets of Emmaus Medical, LLC.  The stockholders of Emmaus Medical were substantially the same as the members of Emmaus Medical, LLC.  As such, the transaction was accounted for as a transfer of assets between entities under common control pursuant to accounting standards codification 805, Business Combinations.

For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set of assets is separated from the transferor, which include the ability to sustain a revenue stream by providing its outputs to customers. Emmaus Medical obtained the inputs and processes necessary for normal operations. The transaction has been accounted for as a recapitalization of Emmaus Medical, LLC. Accordingly, the assets were carried over to Emmaus Medical, Inc. at the historical carrying values and the historical operations of those assets owned by Emmaus Medical are presented in the accompanying financial statements as the historical operations of Emmaus Medical, Inc. for all periods presented.

The effect of the recapitalization was to retroactively present the stockholders’ equity of Emmaus Medical, Inc. (the surviving entity) to the earliest period presented in the financial statements.  This recapitalization had no effect on results of operations for any period presented.  Also, concurrent with the recapitalization, Emmaus Medical changed its legal status from a Limited Liability Company to a “C” Corporation.  In connection with this change, deficits accumulated in the Limited Liability Company were transferred to additional paid in capital.

Pursuant to the Merger Agreement, Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”).

Upon the closing of the Merger on May 3, 2011, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.”  The Company subsequently changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of Company common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of Company common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was converted for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of Company common stock.

As a result of the Merger, security holders of Emmaus Medical received 20,628,305 shares of Company common stock, options and warrants to purchase an aggregate of 326,507 shares of Company common stock, and convertible notes to purchase an aggregate of 271,305 shares of Company common stock.

Four stockholders exercised their dissenters’ rights in connection with the Merger and returned an aggregate of 47,178 shares for an aggregate of $200,000.  The shares were cancelled as of May 3, 2011, the closing date of the Merger and recorded as a current liability as of that date.

For accounting purposes, the Merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of Emmaus Medical and its subsidiaries, with Emmaus Life Sciences, Inc. (the legal acquirer of Emmaus Medical and its subsidiaries) considered the accounting acquiree and Emmaus Medical whose management took control of Emmaus Life Sciences, Inc. (the legal acquiree of Emmaus Medical) considered the accounting acquirer.

Principles of consolidation – The financial statements include the accounts of the Company (and its wholly-owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe).  All significant intercompany transactions have been eliminated.

11

Development stage company – The Company is a development stage company as defined in accounting principles generally accepted in the United States of America. The Company is considered a development stage company because it devotes substantially all of its time to research and development for potential pharmaceutical products and to establish its business and operations. The minimal sales for the period from December 20, 2000 (date of inception) to September 30, 2013 are from NutreStore and the products of Newfield Nutrition Corporation which are not considered part of the Company’s principal operations.

Estimates – Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Among other things, management has estimated the useful lives of equipment and other assets, along with the variables used to calculate the valuation of stock options and warrants using the Black-Scholes-Merton option valuation model.  Actual results could differ from those estimates.

Cash and cash equivalents – Cash and cash equivalents include all short-term securities with original maturities of less than ninety days. The Company maintains its cash and cash equivalents at insured financial institutions, the balances of which may, at times, exceed federally insured limits.  Management believes that the risk of loss due to the concentrations is minimal.

Inventories – Inventories as of September 30, 2013 consisted of 64% finished goods and 36% work-in-process and are valued based on first-in, first-out and at the lesser of cost or market value. Work-in-process inventories consist of raw material L-glutamine for the Company’s AminoPure and NutreStore products that has not yet been packaged and labeled for sale.

All of the purchases during the nine months ended September 30, 2013 were from two vendors and during 2012 were from one vendor.

Deposits – Carrying value of amounts transferred to third parties for security purposes that are expected to be returned or applied towards payment after one year or beyond the operating cycle, if longer.  Deposit amounts consist primarily of the 20% patient site enrollment deposit paid to the Company’s contract research organization for the FDA Phase III clinical trial activities.

Revenue recognition – The Company recognizes revenue in accordance with ASC 605, Revenue Recognition.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.  

With prior written approval of the Company, product is returnable only by our direct customers for a returned goods credit, if the product meets any of the following criteria:

  A. Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.

  B. Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.

  C. Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.

  D. Product that is discontinued, withdrawn, or recalled.

Credits will only be issued for full cartons without any missing packets of product.  No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company.  No credit is issued for product destroyed by anyone other than the Company.  Customers must return the product within 60 days of receiving the Company’s written approval for the return or the return will not be issued a credit.  The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%.  When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases.   Credit memos expire one hundred eighty (180) days from date issued. 

The Company estimates its sales returns based upon its prior sales and return history. Historically, sales returns have been very nominal.   The Company continues to monitor its returns and will adjust its estimates based on its actual sales return experience.  The Company records a 5% Sales Return Allowance for its sales in the accompanying financial statements.

The Company is currently required to pay royalties on an annual basis, which is recognized as an expense upon sale of the products, primarily NutreStore.

12

Allowance for doubtful accounts – The Company provides an allowance for uncollectible accounts based upon prior experience and management’s assessment of the collectability of existing specific accounts.

Advertising cost – Advertising costs are expensed as incurred. Advertising costs for the nine months ended September 30, 2013 and 2012 were $161,301 and $134,221, respectively. Advertising costs from December 20, 2000 (date of inception) to September 30, 2013 were approximately $577,829.

Property and equipment – Leaseholds, furniture, and fixtures are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of 5 to 7 years. Maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.

Intangibles – The Company’s intangible assets include license issue fees and patent costs relating to a license agreement (Note 4). These intangible assets are amortized over a period of 3 to 7 years, the estimated legal life of the patents and economic life of the license agreements.  The intangible assets are assessed by management, annually, for potential impairment.  No impairment existed as of September 30, 2013 and December 31, 2012.

Impairment of long-lived assets – In accordance with FASB ASC 360-10-5, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist. The Company considers the following factors or conditions, among others, that could indicate the need for an impairment review:

● significantly lower performance relative to expected historical or projected future operating results;

● market projections;

● its ability to obtain patents, including continuation patents, on technology;

● significant changes in its strategic business objectives and utilization of the assets;

● significant negative industry or economic trends, including legal factors;

● potential for strategic partnerships for the development of its patented technology; and

● changing or implementation of rules regarding manufacture.

If the Company determines that the carrying values of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company’s management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, the Company measures the impairment based on the difference between the asset’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the long-lived asset impairment is determined by management.

Based on existing indicators of impairment and on the related analysis, the Company believes that no impairment of the carrying value of its long-lived assets existed at September 30, 2013 and December 31, 2012.

There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue or allow the Company to realize the value of its long-lived assets and prevent future impairment.

Research and development – Research and development consist of expenditures for the research and development of new products and technologies, which primarily involve contract research, payroll-related expenses, and other related supplies.  Research and development costs are expensed as incurred.

Share-based compensation – The Company recognizes compensation cost for share-based compensation awards during the service term of the recipients of the share-based awards.The fair value of share-based compensation is calculated using the Black-Scholes-Merton pricing model.  The Black-Scholes-Merton model requires subjective assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated values.  The expected term of awards granted is derived from historical data on awards exercised and post-vesting employment termination behavior.  The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate on the grant date that corresponds to the expected term of the award.  The expected volatility is based on the historical volatility of the common stock of comparable publicly traded companies.  These factors could change, affecting the determination of stock-based awards expense in future periods.

Income taxes – The Company accounts for income taxes under the asset and liability method, wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs.  A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

13

The Company’s short-term and long-term deferred tax liability is based on the calculation of the deferred taxes on the Company’s unrealized gain on available-for-sale securities using a 40% effective tax rate based on a 31% federal income tax rate (net of state tax deduction) combined with an 8.84% California state income tax rate. The Company recognizes a deferred tax asset (through changes in the valuation allowance) for the exact amount of the deferred tax liability.  The classification of these deferred taxes is concurrent with the classification of investments for which the unrealized gain is derived. For balance sheet presentation, current deferred tax assets and liabilities have been offset and presented as a single amount and non-current deferred tax assets and liabilities within each tax jurisdiction have been offset and presented as a single amount.

When tax returns are filed, it is highly probable that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  As of September 30, 2013, the Company had no unrecognized tax benefits, and the Company had no positions which, in the opinion of management, would be reversed if challenged by a taxing authority. The Company’s evaluation of tax positions was performed for those tax years which remain open to audit.  The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results.  In the event the Company is assessed interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

As of September 30, 2013, all federal tax returns since 2010 and state tax returns since 2009 are still subject to adjustment upon audit.  No tax returns are currently being examined by taxing authorities.

Comprehensive income (loss) – Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss).  The items of other comprehensive income (loss) for the Company are unrealized gains and losses on securities classified as available-for-sale and foreign translation adjustments from its subsidiaries.  When the Company realizes a gain or loss on available-for-sale securities for which an unrealized gain or loss was previously recognized, a corresponding reclassification adjustment is made to remove the unrealized gain or loss from other comprehensive income and reflect the realized gain or loss in current operations.

Marketable securities – Investment securities as of September 30, 2013 and December 31, 2012 are classified as available-for-sale. Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gain or loss, net of taxes in accumulated other comprehensive income. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. CellSeed, Inc. securities are the only marketable security the Company currently carries on its books. The Company’s marketable securities consist of 73,550 shares of 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.  CellSeed’s IPO (Tokyo Stock Exchange symbol 7776) was completed on March 16, 2010.  As of September 30, 2013 and December 31, 2012, the closing price per share was 2,318 Yen and 661 Yen, respectively.  Historical CellSeed closing prices can be found at http://www.bloomberg.com/apps/quote?ticker=7776:JP.  The Company’s security position in CellSeed is many times the average daily trading volume of the stock on the Tokyo Stock Exchange. Any attempt to sell the Company’s position in a short period of time may have an adverse impact on the price of the stock.

In July 2013, based on an increase in market value of CellSeed shares, Mitsubishi UFJ Capital III Limited Partnership (Mitsubishi) released to the Company 34,300 shares of CellSeed stock.  This was part of the 73,550 shares of CellSeed stock held by Mitsubishi as collateral on a $500,000 convertible note issued to Mitsubishi.  The note is now secured by the remaining 39,250 shares of CellSeed stock held by Mitsubishi as collateral.

As of September 30, 2013, 34,300 shares of CellSeed stock are classified as a current asset and 39,250 shares of CellSeed stock are pledged against the note, which is due in 2016, are classified as a long-term asset.  Subsequent to September 30, 2013 but prior to the date of this report, the Company sold 25,000 of the shares classified as a current asset in open market transactions. As of December 31, 2012, 100% of the investment in CellSeed was classified as a long-term asset in the accompanying balance sheet as the entire investment was assigned as collateral to secure the $500,000 convertible note issued to Mitsubishi.

14

Fair value measurements – The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company measures fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described as follows:

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2: Inputs to the valuation methodology include:

● Quoted prices for similar assets or liabilities in active markets;

● Quoted prices for identical or similar assets or liabilities in inactive markets;

● Inputs other than quoted prices that are observable for the asset or liability;

● Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at September 30, 2013.   The fair value of the Company’s debt instruments is not materially different from their carrying values as presented.  The fair value of the Company’s convertible debt instruments was determined based on Level 2 inputs.  The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6.The Company issued stock purchase warrants  in conjunction with its September 2013 private placement (see Note 7) that are accounted for as derivative instruments whose fair market value is determined using Level 3 inputs. These inputs include expected term and expected volatility.

The following table identifies the carrying amounts of such assets and liabilities:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Liabilities:
Derivative instruments - stock purchase warrants	$	—	$	—	$	2,441,382	$	2,441,382
	$	—	$	—	$	2,441,382	$	2,441,382

The Company did not have any Level 3 financial assets or liabilities measured at fair value at December 31, 2012.

The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2013:

	Derivative  Instruments - Stock  Purchase Warrants
Balance at December 31, 2012	$	—
Fair value at issuance date		2,488,960
Change in fair value included in the statement of operations		(47,578)
Balance at September 30, 2013	$	2,441,382

15

The initial value of the derivative liability as of September 11, 2013 and the change in fair value of the derivative liability as of September 30, 2013 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 11, 2013 and September 30, 2013 were calculated based on the following assumptions:

	September 30, 2013			Initial Value
Risk free interest rate		1.39	%		1.72	%
Expected volatility (peer group)		69.7	%		72.4	%
Expected life (in years)		4.95			5.00
Expected dividend yield		—			—
Number outstanding		3,020,501			3,020,501
Fair value at issue date	$	2,488,960		$	2,488,960
Change in derivative liability	$	(47,578	)		—
Fair value at end of period	$	2,441,382			—

Net loss per share – In accordance with FASB ASC Topic 260, Earnings per Share, the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding.  Dilutive loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2013 and 2012, there were 14,151,989 and 6,671,996 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive for that reporting period.

Recent accounting pronouncements

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities which provides further clarification relating to the scope of ASU 2011-11, Balance Sheet (Topic 210): Disclosure about Offsetting Assets and Liabilities. Effective for fiscal years beginning on or after January 1, 2013, ASU 2011-11 requires an entity to include additional disclosures about financial instruments and transactions eligible for offset in the statement of financial position, as well as financial instruments subject to a master netting agreement or similar arrangement. ASU 2013-01 added further scope clarification that ASU 2011-11 applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. This ASU is effective for fiscal years beginning on or after January 1, 2013, including interim periods within those fiscal years. The adoption of this ASU did not have a material impact on our consolidated financial position or results of operations.

In February 2013, the FASB issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective for reporting periods beginning after December 15, 2012. Other than a change in presentation, the adoption of these amendments to the accounting guidance did not have a material impact on the Company’s consolidated financial position or results of operations.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

	September 30, 2013			December 31, 2012
Equipment	$	125,617		$	120,603
Leasehold improvements		23,054			23,054
Furniture and fixtures		52,269			52,269
		200,940			195,926
Less:  accumulated depreciation		(173,979	)		(157,157	)
	$	26,961		$	38,769

16

During the nine months ended September 30, 2013 and 2012, the depreciation expense was $17,172 and $20,694, respectively.  Depreciation expense from December 20, 2000 (date of inception) to September 30, 2013 was $174,329, net of a $350 difference relative to the amount of accumulated depreciation reported on the balance sheet.  The difference is due to foreign exchange rates applied for income statement purposes.

NOTE 4 – INTANGIBLE ASSETS

The Company is licensed to market and sell NutreStore® [L-glutamine powder for oral solution] as a treatment for short bowel syndrome (“SBS”).  The Company previously promoted Zorbtive® [somatropin (rDNA origin) for injection] prior to July 31, 2011.  Subsequent to July 31, 2011, the Company has not promoted Zorbtive.

In April 2011, Emmaus Medical entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, an addendum to the agreements.  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, and the future commercialization of such products.  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 its accumulated information package for the joint development of CAOMECS to the Company. Under the Research Agreement, as supplemented by the addendum, the Company agreed to pay CellSeed $8.5 million within 30 days of 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 Emmaus and Emmaus providing written confirmation of its acceptance of the complete Package, which has not yet been completed. Under the Individual Agreement, the Company agreed to pay CellSeed $1.5 million, which it paid in February 2012.

Intangible assets consisted of the following at:

	September 30, 2013			December 31, 2012
License fees and patent filing costs	$	2,250,000		$	2,250,000
Less:  accumulated amortization		(1,089,286	)		(928,571	)
	$	1,160,714		$	1,321,429

During the nine months ended September 30, 2013 and 2012, the amortization expense was $160,714 and $125,000, respectively.  Amortization expense from December 20, 2000 (date of inception) to September 30, 2013 was $1,089,286.  Expected amortization expense for the year ended December 31, 2013 is estimated to be approximately $214,286.

As of September 30, 2013 estimated aggregate amortization expense for the next five years is as follows:

Periods ending December 31	Amount
2013	$	53,571
2014		214,286
2015		214,286
2016		214,286
2017		214,286
Thereafter		249,999
	$	1,160,714

NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at:

Accounts payable	September 30, 2013		December 31, 2012
Clinical trial management expenses	$	330,460	$	527,868
Legal expenses		418,683		609,823
Miscellaneous vendors		575,124		619,886
Subtotal		1,324,267		1,757,577
Accrued expenses		864,424		401,034
Accrued expenses (Deferred Salary)		485,000		401,667
Total accounts payable and accrued expenses	$	2,673,691	$	2,560,278

Accrued expenses include accrued interest in the amount of $555,245 on convertible and non-convertible notes issued to related parties.

17

NOTE 6 – NOTES PAYABLE

Notes payable consisted of the following at September 30, 2013:

Lender	Annual  Interest Rate		Date of  loan	Term of Loan		Loan  Principal Outstanding		Conversion Price	Shares Underlying  Principal as of September 30, 2013
Shigeru Matsuda (1)	6.50	%	1/12/2009	5 years	$	269,207	$	3.05	88,197
Kazuo Murakami (1)	0.00	%	8/16/2010	5 years	$	18,000	$	3.05	5,898
Makoto Murakami (1)	0.00	%	8/16/2010	5 years	$	18,000	$	3.05	5,898
Nami Murakami (1)	0.00	%	8/16/2010	5 years	$	18,000	$	3.05	5,898
M’s Support Co. Ltd. (1)	0.00	%	8/17/2010	5 years	$	18,000	$	3.05	5,898
Yumiko Takemoto (1)	6.00	%	11/23/2010	5 years	$	2,000	$	3.05	656
Mitsubishi UFJ Capital III, Limited Partnership (8)	10.00	%	3/14/2011	5 years	$	500,000	$	3.05	163,809
Hiroshi Iguchi	8.00	%	2/20/2012	1 year (2)	$	133,333	$	3.60	37,037
Yasushi Nagasaki (5)	10.00	%	6/29/2012	Due on Demand	$	373,000	$	3.30	113,030
Yumiko Nakamura	10.00	%	8/9/2012	2 years	$	49,500	$	3.30	15,000
Paul Shitabata (1)	10.00	%	10/3/2012	1 year (2)	$	1,620,540	$	3.60	450,150
Willis Lee (5)	10.00	%	10/5/2012	1 year	$	138,242	$	3.60	38,400
Alison Brown	10.00	%	12/21/2012	2 years	$	100,800	$	3.60	28,000
Yoshiko Takemoto (1)	10.00	%	12/27/2012	2 years	$	100,800	$	3.60	28,000
Sun Moo & Hyon Sil Lee	10.00	%	2/21/2013	2 years	$	100,800	$	3.60	28,000
Yukio Hasegawa (1)	10.00	%	2/15/2013	Due on Demand	$	144,000	$	3.60	40,000
J. R. Downey	10.00	%	3/2/2013	1 year	$	162,005	$	3.60	45,001
Shigenori  Yoshida	10.00	%	3/12/2013	2 years	$	100,800	$	3.60	28,000
Yoshiko & Yuki Takemoto (1)	10.00	%	3/14/2013	2 years	$	420,511	$	3.30	127,427
Wan Luen Pak Eric & Ho Shun Mei Grace	10.00	%	3/15/2013	2 years	$	125,000	$	3.60	34,722
Wong Shuk Ching Judy	10.00	%	3/19/2013	2 years	$	200,000	$	3.60	55,555
Yu Mei Lun Susan	10.00	%	4/2/2013	2 years	$	385,827	$	3.60	107,174
Yoshiko and Yuki Takemoto (1)	10.00	%	4/3/2013	2 years	$	227,200	$	3.30	68,848
Yeung Yat Ming Barry and Ng Sur Ngan	10.00	%	4/25/2013	2 years	$	50,000	$	3.60	13,888
Paul Terasaki (1) (7)	10.00	%	5/1/2013	1 year	$	550,000	$	3.30	166,666
Wong Shuk Ching Judy	10.00	%	5/29/2013	2 years	$	200,257	$	3.60	55,626
Alison Brown - Carvalho	10.00	%	6/20/2013	2 years	$	100,800	$	3.60	28,000
Andrew Wood (4)	10.00	%	7/8/2013	1 year	$	3,564	$	3.30	1,080
Hiromi Saito	10.00	%	7/10/2013	1 year	$	27,500	$	3.30	8,333
Yung Min Suh	10.00	%	7/11/2013	1 year	$	1,298,788	$	3.30	393,572
The Takemoto Family (1)	10.00	%	7/18/2013	2 years	$	552,103	$	3.30	167,303
Hideki & Eiko Uehara (1)	10.00	%	9/7/2013	1 year	$	35,640	$	3.60	9,900
Dennis Y. Teranishi	10.00	%	9/9/2013	1 year	$	128,304	$	3.60	35,640
Convertible Notes					$	8,172,521			2,400,606
Hope Int’l Hospice (6)	8.00	%	1/17/2012	Due on Demand	$	200,000	NA
Shigeru Matsuda (1)	11.00	%	2/15/2012	2 years (2)	$	833,335	NA
Hideki & Eiko Uehara (1)	11.00	%	2/15/2012	2 years (2)	$	133,333	NA
Hope Int’l Hospice (6)	8.00	%	6/14/2012	Due on Demand	$	200,000	NA
Hope Int’l Hospice (6)	8.00	%	6/21/2012	Due on Demand	$	100,000	NA
Cuc T. Tran	11.00	%	6/27/2012	1 year	$	10,000	NA
Yutaka Niihara (5)	10.00	%	12/5/2012	Due on Demand	$	502,107	NA
Lan T. Tran (5)	11.00	%	2/10/2012	2 years (2)	$	80,000	NA
Hope Int’l Hospice (6)	8.00	%	2/11/2013	Due on Demand	$	50,000	NA
Shigeru Matsuda (1)	10.00	%	5/29/2013	Due on Demand	$	1,017,400	NA
For Days Co., Ltd.	2.00	%	6/28/2013	2 years	$	200,000	NA
Non-Convertible Notes					$	3,326,175
Total, undiscounted (9)					$	11,498,696

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(1) Related party – Shareholder

(2) Due on Demand

(3) Director

(4) Employee

(5) Officer

(6) Dr. Niihara is also the CEO and owner of Hope International Hospice, Inc.

(7) Convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower

(8) Secured by the Company’s minority interest in CellSeed common stock (see Note 2 – Summary Of Significant Accounting Policies – Marketable securities)

(9) Total amount due on notes without discounts for fair market value of warrants issued and conversion features

Contractual principal payments due on loans and notes payable are as follows:

From September 30, 2013	Payments by Year
2013	$	4,488,622
2014		3,772,776
2015		2,737,298
2016		500,000
Total	$	11,498,696

The Company estimated the total fair value of the convertible notes and warrants in allocating the debt proceeds.  The proceeds were allocated to the warrants and convertible notes based on the pro-rata fair value.  The proceeds allocated to the beneficial conversion were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the convertible notes determined above.  The fair value of the warrants was determined through the Black Scholes Option pricing model with the following inputs:

Stock Price	$	3.60
Exercise Price	$	1.00 ~ 3.60
Term	2 ~ 10 years
Risk-Free Rate	0.30 ~ 2.22		%
Dividend Yield		0	%
Volatility	99.89 ~ 141.70		%

Original Principal Loan Amount at September 30, 2013		Discount Amount at September 30, 2013			Carrying Amount at September 30, 2013
$	11,498,696	$	(433,895	)	$	11,064,801

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NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT)

Common stock – As of the year ended December 31, 2012, the Company had issued a total of 24,878,436 shares of its common stock. During the nine months ended September 30, 2013, the Company issued 4,349,870 shares of its common stock and canceled 2,504,249 shares of its common stock. As of the quarter ended September 30, 2013, there were a total of 26,724,057 shares of the Company’s common stock issued and outstanding.

As a portion of the common shares issued in 2013, on September 11, 2013, the Company issued an aggregate of 3,020,501 units consisting of 3,020,501 shares of common stock and common stock purchase warrants for the purchase of an additional 3,020,501 shares of common stock at a price of $2.50 per unit. The aggregate purchase price for the units was $7,551,253.

These 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. These warrants may be exercised on a cashless basis after twelve months from the date of issuance if the shares of common stock underlying the warrant are not registered at the time of exercise. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as a derivative instrument and will be recorded at fair market value each reporting period.

Stock warrants – During the nine months ended September 30, 2013, the Company  issued warrants in connection with the issuance of a convertible note to purchase an aggregate of 50,000 shares of common stock at a per share exercise price equal to $3.30 per share.  During this period, the Company also issued warrants to purchase a total of 3,320,501 shares of common stock, at any time on or prior to September 11, 2018, at an exercise price of $3.50 per share in conjunction with a private placement of units, as further described above.

A summary of outstanding warrants as of September 30, 2013 is presented below.

	Nine months ended September 30, 2013
Warrants outstanding, beginning of period		3,408,795
Granted		3,370,501
Exercised		—
Cancelled, forfeited and expired		—
Warrants outstanding, end of period		6,779,296

		Outstanding						Exercisable
Exercise Price		Number of Warrants		Weighted Average Remaining Contractual Life  (Years)		Weighted Average Exercise Price		Total		Weighted Average Exercise Price
During 2013
$	3.50		3,320,501		4.95	$	3.50		3,320,501	$	3.50
$	3.30		50,000		4.59	$	3.30		50,000	$	3.30
During 2012
$	1.00		1,411,020		1.28	$	1.00		911,020	$	1.00
75% of FMV			56,573		1.49	75% of FMV			56,573	75% of FMV
$	2.50		1,000,000		1.91	$	2.50		1,000,000	$	2.50
During 2011
$	1.00		311,038		0.93	$	1.00		311,038	$	1.00
75% of FMV			331,670		0.93	75% of FMV			331,670	75% of FMV
$	3.05		5,898		1.48	$	3.05		5,898	$	3.05
During 2010
$	3.05		197,146		1.89	$	3.05		197,146	$	3.05
During 2009
$	3.05		95,450		1.02	$	3.05		95,450	$	3.05

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Stock options – Management has valued the options at their date of grant utilizing the Black-Scholes-Merton Option pricing model.   Accordingly, the fair value of the underlying shares was determined based on recent transactions by the Company to sell shares to third parties and other factors determined by management to be relevant to the valuation of such shares.   The expected volatility was calculated using the historical volatility of a similar public entity in the industry.  

In making this determination and finding another similar company, the Company considered the industry, stage of life cycle, size and financial leverage of such other entities.  Based on the development stage of the Company, similar companies with enough historical data are not available.   The Company was able to find one entity that met the industry criterion and as a result has based its expected volatility off of this company’s historical stock prices for a period similar to the expected term of the option. 

The risk–free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options.  The expected life of options used was based on the contractual life of the option granted.  

The Company has 11,795 options outstanding that were issued prior to the commencement of the Company’s 2011 Stock Incentive Plan. All such options are vested and are exercisable at $3.05 per share through 2015.

During the nine months ended September 30, 2013, the Company issued 3,305,000 options to its directors, officers and consultant.  The fair value of these options issued is approximately $10.5 million.  Except 30,000 options, which will be vested in a year, 3,275,000 options will be vested equally over 3 years starting February 28, 2014 and are exercisable at $3.60 per share through 2023.  During the nine months ended September 30, 2013, 10,000 options were canceled or forfeited.  The total outstanding options as of September 30, 2013 are 4,834,000 under the 2011 Stock Incentive Plan and 4,845,795 including options issued prior to the 2011 Stock Incentive Plan.

A summary of outstanding options as of September 30, 2013 is presented below.

Nine Months ended September 30, 2013	Prior Plan		2011 Stock Incentive Option
Options outstanding, beginning of period		11,795		1,539,000
Granted		—		3,305,000
Exercised		—		—
Cancelled, forfeited and expired		—		(10,000	)
Options outstanding, end of period		11,795		4,834,000

Registration Rights – Pursuant to the September 11, 2013 sale of units consisting of an aggregate of 3,020,501 shares of common stock of the Company and warrants to purchase an additional 3,020,501 shares of common stock in a private placement transaction (“the “Private Placement”), the Company agreed to use its commercially reasonable best efforts to have on file with the Securities and Exchange Commission, within twelve months of September 11, 2013 and at the Company’s sole expense, a registration statement (“Registration Statement”) to permit the public resale of all of the shares of common stock and shares of common stock underlying the warrants  issued to investors in the Private Placement (collectively, the “Registrable Securities”). In the event such Registration Statement includes securities of the Company to be offered and sold by the Company in a fully underwritten primary public offering pursuant to an effective registration under the Securities Act (a “Public Offering”), and the Company is advised in good faith by any managing underwriter of securities being offered pursuant to such Public Offering that the number of Registrable Securities proposed to be sold in such Public Offering is greater than the number of such securities which can be included in such Public Offering without materially adversely affecting such Public Offering, the Company will include in such registration (i) first, any securities the Company proposes to sell, and (ii) second, 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 shall apply until such date as all such shares of common stock and shares of common stock underlying the warrants have been sold by the investors in the Private Placement 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.

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 its service, Emmaus Medical pays a monthly commercialization management fee of $5,000 with discount.

Operating leases – The Company leases its office space under operating leases from unrelated entities.  The rent expense during the nine months ended September 30, 2013 and 2012 amounted to $101,891 and $105,366, respectively.

21

The Company leases its approximately 4,540 square foot headquarters offices in Torrance, California, at a base rental of $4,994 per month plus $320 per month as its share of common area expenses. The lease expires on November 30, 2013.  In addition, the Company leases two office suites in Torrance, California at a base rent of $1,708 per month plus share of common area expenses of $90 per month, and at a base rent of $1,690 per month plus share of common area expenses of $90 per month. These leases will expire on August 19, 2014 and February 28, 2015, respectively. Approximately 490 square feet from one office and 1,079 square feet from the other office are currently subleased to an unaffiliated entity on a month to month basis. The Company does not expect to experience any difficulties in renewing its leases, or finding additional or replacement office and warehouse space, at its current or more favorable rates.

The Company also leases two office suites of approximately 512 square feet and 532 square feet, respectively, in Tokyo, Japan at a base rent of JPY130,000 ($1,352 @0.0104) per month each. These leases will expire on October 14, 2014 and September 15, 2015, respectively.   Additionally, the Company leases approximately 135 square feet of warehouse space in Tokyo, Japan at a base rent of JPY52,500 ($546 @0.0104) per month.

Future minimum lease payments under the agreements are as follows:

2013	$	29,932
2014		69,564
2015		17,329
	$	116,825

Licensing agreement - On April 8, 2011, pursuant to a Research Agreement, the Company agreed to pay CellSeed $8.5 million within 30 days of 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. Pursuant to the Individual Agreement, the Company agreed to pay $1.5 million to CellSeed within 30 days of CellSeed’s delivery of the accumulated information package for the joint development of CAOMECS to the Company and a royalty to be agreed upon by the parties.  The Company made a payment of $1.5 million to CellSeed in February 2012, pursuant to the Individual Agreement.  CellSeed may terminate these agreements with the Company if the Company is unable to make timely payments required under the agreements.

NOTE 9 – RELATED PARTY TRANSACTIONS

In May 2013, the Company issued 470,000 shares of common stock to Dr. Yutaka Niihara, the Company’s President and Chief Executive Officer, in exchange for the retirement of $1,542,900 in outstanding principal amount of promissory notes held by Dr. Niihara and $8,100 accrued interest thereon.

As of September 30, 2013, an aggregate of $7,624,982 principal amount of promissory notes from certain stockholders and officers was outstanding.   The debt is unsecured and carries interest rates from 0% to 11%.

Since July 2012, we have been engaged in litigation with AFH Advisory, which was the sole stockholder of AFH Acquisition IV immediately prior to its combination with Emmaus Medical pursuant to the Merger 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. 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. Mr. Heshmatpour is a former officer of AFH Acquisition IV, Inc. (prior to the Merger) and former director of the Company and is the Managing Partner of AFH Advisory. The order, among other things, (i) stated that the letter of intent previously entered into between the Company and AFH Advisory (the “Letter of Intent”) was properly terminated as of July 19, 2012 by the Company, 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, which represented approximately 10 percent of the Company’s common stock, was effected by the Company’s transfer agent on June 28, 2013.  If the court’s ruling is appealed, it could result in our incurring liabilities and expenses that may have a material adverse effect on our financial condition and cash flows.

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NOTE 10 – GEOGRAPHIC INFORMATION

For the nine months ended September 30, 2013 and 2012, the Company earned revenue from countries outside of the United States as outlined in the table below.  The Company did not have any significant currency translation or foreign transaction adjustments during the nine months ended September 30, 2013 and 2012.

Country	Sales nine  months ended September 30, 2013		% of Total Revenue nine months ended September 30, 2013			Sales nine monthsended September 30, 2012		% of Total Revenue nine months ended September 30, 2012
Japan	$	125,590		51	%	$	204,166		56	%
South Korea	$	—		—		$	46,000		13	%
Taiwan	$	7,980		3	%	$	—		—

NOTE 11 – SUBSEQUENT EVENTS

Lender	Annual Interest Rate			Date of loan		Term of Loan	Loan Principal Outstanding		Conversion Price		Shares Underlying Principal as of September 30, 2013
The Shitabata Family Trust		10.00	%		10/10/2013	6 Mo to 1 Year	$	2,136,146	$	3.60		593,373
MLPF&S Cust FBO Willis Lee		10.00	%		11/12/2013	1 Year	$	152,066	$	3.60		42,240

In October 2013, the Company refinanced a convertible note payable to The Shitabata Family Trust, a stockholder, with an original principal amount of $1,620,540. The note payable to The Shitabata Family Trust was exchanged for a new convertible note in the principal amount of $2,136,146 which bears interest at 10% per annum and matures on the six-month anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share.

In November 2013, the Company approved the refinancing of a convertible note payable to MLPF&S Cust FBO Willis Lee, a director of the Company and the Company’s Chief Operating Officer, with an original principal amount of $138,242. The note payable to MLPF&S Cust FBO Willis Lee was exchanged for a new convertible note in the principal amount of $152,066 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share.

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

The following discussion relates to the financial condition and results of operations of Emmaus Life Sciences, Inc. (the “Company”) and its wholly-owned subsidiary Emmaus Medical, Inc., a Delaware corporation (“Emmaus Medical”), and Emmaus Medical’s wholly-owned subsidiaries Newfield Nutrition Corporation, a Delaware corporation (“Newfield”), Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”), and Emmaus Medical Europe, Ltd. (“EM Europe”).

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the Quarterly Reports on Form 10-Q for the period ended March 31, 2013 and for the period ended June 30, 2013 filed with the Securities and Exchange Commission (“SEC”) on May 15, 2013 and August 14, 2013, respectively, and the audited consolidated financial statements for the years ended December 31, 2012 and 2011 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 29, 2013 (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 “anticipated,” “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 FDA and other regulatory authorization to market our drug and biologic products, successful completion of our clinical trials, our ability to achieve regulatory authorization to market our L-glutamine treatment for sickle cell disease (“SCD”), our ability to commercialize our 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, our ability to fund development of regenerative medicine products and license payments, our ability to commercialize the regenerative medicine products, development of a public trading market for our securities, and various other matters, many of which are beyond our control.

Our actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, or if any of the risks or uncertainties described elsewhere in this report or in Part I, Item 1A.”Risk Factors” of the Annual Report. Consequently, all of the forward-looking statements made in this filing 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 development stage company engaged in the development of treatments and therapies for rare diseases and are primarily focused on the late-stage development of our lead product candidate currently in Phase III clinical trials studying the use of the amino acid L-glutamine as a prescription drug for the treatment of SCD.  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 Corporation, 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®.

We also own a minority interest 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.

We also have certain rights to regenerative medicine products owned by CellSeed and are involved in research focused on providing innovative solutions for tissue-engineering through the development of novel cell harvest methods and 3-dimensional living tissue replacement products for “cell sheet therapy” and regenerative medicine and the commercialization of such products. In April 2011, we entered into a Joint Research and Development Agreement (the “Research Agreement”) with CellSeed regarding the future research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products. Additionally, pursuant to the Individual Agreement between us and CellSeed executed in April 2011, CellSeed granted us the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell Sheet (“CAOMECS”) to be used on the cornea of appropriate patients residing in the United States. We intend to work on commercializing the CAOMECS for the cornea and to expand our relationship with CellSeed to develop cell sheets for other types of cells in the future.

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

Pursuant to an Agreement and Plan of Merger dated April 21, 2011 (the “Merger Agreement”), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“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 (the “Merger”).  Upon the closing of the Merger, the Company changed its 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.”

Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical common stock, options, warrants and convertible notes received 20,628,305 shares of our common stock (excluding 47,178 shares held by stockholders who exercised dissenters’ rights in connection with the Merger), options and warrants to purchase an aggregate of 326,508 shares of our common stock, and convertible notes to purchase an aggregate of 271,305 shares of our common stock.  Securityholders of Emmaus Medical held 85% of our issued and outstanding common stock on a fully diluted basis upon the closing of the Merger. Immediately after the closing of the Merger, we had issued and outstanding 24,378,305 (excluding 47,178 shares held by stockholders who exercised dissenters’ rights) shares of common stock, no shares of preferred stock, options to purchase 23,590 shares of common stock, warrants to purchase 302,918 shares of common stock and convertible notes exercisable for 271,305 shares of common stock.

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 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; 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 public or private equity offerings, debt financings or corporate collaboration and licensing arrangements.  As of September 30, 2013, our accumulated deficit since inception is $46.8 million and we had cash and cash equivalents of $5.8 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 $2.4 million to complete our Phase III clinical trial and $400,000 to obtain regulatory approval of L-glutamine as a therapy for SCD.

In addition, we agreed to pay CellSeed an aggregate of $8.5 million pursuant to the Research Agreement, which is still payable, and we believe that we will need approximately $3.0 million for research and development to develop corneal cell sheet technology in the United States.  We estimate that we will need an additional $2.5 million for research related to other cell sheet applications and current good manufacturing practice (“cGMP”) laboratory costs for regenerative medicine.

Recent Highlights

In April 2009, the FDA authorized us to begin a large Phase III clinical trial directed to study L-glutamine as an experimental agent to reduce sickle cell crisis.  An interim analysis of a subset of data from the Phase III clinical trial was completed by an independent third party.  The results of the interim analysis were then reported to the FDA by way of the independent third party in August 2012.  At a meeting held with the FDA in November 2012, we received support to continue the trial without any modification to the protocol. We completed enrollment for the Phase III clinical trial in December 2012 with 230 patients at 31 clinical trial sites and aim to complete the trial in December 2013.

In October 2010, we formed EM Japan, a wholly-owned subsidiary of Emmaus Medical that markets and sells AminoPure® in Japan and other neighboring regions.  EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future.  The results of EM Japan have been included in our consolidated financial statements of the Company since the date of our formation.  EM Japan recorded approximately $125,600 in net sales in the nine months ended September 30, 2013.

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We sell L-glutamine as a nutritional supplement under the brand name AminoPure® through our wholly-owned subsidiary Newfield Nutrition Corporation. The product is currently sold online and through retail stores in multiple states and via importers and distributors in Japan, Taiwan, Ghana and South Korea.  As part of the growth strategy, Newfield Nutrition is focused on adding additional distributors both domestically and internationally.

 In November 2011, we formed EM Europe, a wholly owned subsidiary of Emmaus Medical.  EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe.  EM Europe submitted an application for orphan medicinal product designation with the EMA in January 2012.

On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the “Reverse Stock Split”), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of a public offering of our common stock, if any.  The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the Delaware Secretary of State.  The par value and number of authorized shares of our common stock will remain unchanged.

On July 17, 2012, Emmaus Medical, Inc., a subsidiary of Emmaus Life Sciences, Inc., announced that the European Commission (EC) has granted Orphan Medicinal Product designation for the Company’s investigational drug Levoglutamide (L-glutamine) for the treatment of sickle cell disease.  The Company already has Orphan Drug status designation from the FDA.  Orphan drug status provides us with certain marketing exclusivity advantages if we succeed in obtaining approval of an NDA from the FDA and the equivalent of an NDA in Europe (called a Market Approval Authorization).

On December 3, 2012, Emmaus Medical, Inc. announced that it reached full enrollment for its Phase III clinical trial studying L-glutamine for the treatment of sickle cell disease.

On September 11, 2013, we completed a private placement transaction pursuant to which we issued to certain accredited investors units consisting of an aggregate of 3,020,501 shares of common stock of the Company and common stock purchase warrants for the purchase of an additional 3,020,501 shares of common stock of the Company, at a price of $2.50 per unit. The aggregate purchase price for the units was $7.6 million.  Net proceeds to the Company, after expenses relating to the transaction, were $6.4 million. Additional information regarding the transaction , including the terms of the securities issued in the transaction,  may be found in the Company’s Current Report on Form 8-K filed with the SEC on September 17, 2013.

Financial Overview

Revenue

As noted above, we are in the development stage. Since our inception in 2000, we have had limited revenue from the sale of NutreStore®, an FDA approved prescription drug to treat short bowel syndrome, or SBS, and AminoPure®, a nutritional supplement.  We have funded operations principally through the private placement of equity securities and debt financings.  Emmaus Medical’s operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing clinical trials for sickle cell treatment, manufacturing products and maintaining and improving its 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 sublicense agreement for the SBS Patent, we are required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore® to CATO Holding Company (“Cato”).  We made royalty payments to Cato in the amount of $469 in October 2011, $855 in May 2012 and $6,870 in October 2013, which represent the 10% royalty of the adjusted gross sales for 2010, 2011 and 2012, respectively. 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.

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), payroll-related expenses, study site payments, consultant fees, activities related to regulatory filings, manufacturing development costs and other related supplies. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of late stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to complete the development of our most advanced product candidate, the amino acid L-glutamine as a prescription drug for the treatment of SCD.

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Expenses related to the Phase III clinical trial of our L-glutamine product candidate for SCD treatment are based on estimates of the services received and efforts expended pursuant to contracts with study sites and the CRO that conducts and manages the clinical trial on our behalf. We expect to incur increased research and development expenses as we begin to prepare study close-out activities for this Phase III clinical trial. The most significant clinical trial expenditures are 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.  Management estimates the expenses based on the time period over which the services will be performed and the level of effort to be expended by the CRO in each period.  Although we do not expect the estimate to be materially different from amounts actually incurred, our estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary and consequently, result in us reporting amounts that are higher or lower in any given period.

While we currently are focused on advancing the Phase III clinical trial, future research and development expenses will depend on any new products or technologies that may be introduced in the pipeline. In addition, we cannot forecast with any degree of certainty which product candidate(s) 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.

At this time, due to the inherently unpredictable nature of the drug development process 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 the continued development of the sickle cell treatment and other clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely.  Our current estimated cost to complete the Phase III clinical trial is $2.4 million, which is based on the assumptions that the total number of trial sites does not increase beyond our current estimates and that we remain on the projected timeline.  Should the total number of trial sites need to be increased or should the timeline require extension, there will be a commensurate increase in costs associated with the additional time and effort required by the CRO and Company staff.

The drug development process to obtain FDA approval is very costly and time consuming.  Even with the granting of orphan drug status and Fast Track Designation, the successful development of the L-glutamine treatment for SCD is uncertain and subject to a number of variables, in addition to other risks as described under the caption “Risk Factors” in the Company’s Annual Report.

The L-glutamine treatment for SCD is investigational in nature and has not yet received FDA approval.  In order to grant marketing approval, the FDA must conclude that the clinical data establishes the safety and efficacy of the L-glutamine treatment for SCD and that the manufacturing processes and controls are adequate.  Despite our efforts, the L-glutamine treatment for SCD may not be proven safe and effective in clinical trials, or meet applicable regulatory standards.  We are focused on completing the Phase III clinical trial and submitting the new drug application (NDA) to the FDA for consideration. As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollment and the risks inherent in the development process, we are unable to determine with any degree of certainty the duration and completion of costs or when, and to what extent, we will generate revenues from the commercialization and sale of the L-glutamine treatment for SCD.

In connection with our agreements with CellSeed related to the development of corneal cell sheet technology in the United States, we believe the cost to develop the corneal cell sheet technology in the United States will be  approximately $3.0 million.  Such estimate includes the anticipated cost of obtaining FDA approval for the corneal cell sheets and assumes that we will need biologic approval of the FDA for the corneal cell sheets, rather than pharmaceutical approval. We estimate that we will need another $2.0 million to commercialize the corneal cell sheet technology.  Based on data currently available for cornea treatment using this technology, we anticipate it will be two to three years before we would be able to submit a BLA and obtain a marketing decision from the FDA to allow us to begin to commercialize this product in the United States.

In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and cGMP laboratory costs to establish the infrastructure and production capabilities related to regenerative medicine products.At this time, no research and development costs are associated with the SBS treatment.

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General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs 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 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.

 

Fair value measurements

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2: Inputs to the valuation methodology include:

· Quoted prices for similar assets or liabilities in active markets;

· Quoted prices for identical or similar assets or liabilities in inactive markets;

· Inputs other than quoted prices that are observable for the asset or liability;

· Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at September 30, 2013. The fair value of the Company’s debt instruments is not materially different from their carrying values as presented. The fair value of the Company’s convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6.

The Company issued stock purchase warrants in conjunction with its September 2013 private placement (see Note 7) that are accounted for as derivative instruments whose fair market value is determined using Level 3 inputs. These inputs include expected term and expected volatility.

The following table identifies the carrying amounts of such assets and liabilities:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Liabilities:
Derivative instruments - stock purchase warrants	$	—	$	—	$	2,441,382	$	2,441,382
	$	—	$	—	$	2,441,382	$	2,441,382

The Company did not have any Level 3 financial assets or liabilities measured at fair value at December 31, 2012.

The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2013:

		Derivative Instruments - Stock Purchase Warrants
Balance at December 31, 2012	$	—
Fair value at issuance date		2,488,960
Change in fair value included in the statement of operations		(47,578	)
Balance at September 30, 2013	$	2,441,382

The initial value of the derivative liability as of September 11, 2013 and the change in fair value of the derivative liability as of September 30, 2013 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 11, 2013 and September 30, 2013 were calculated based on the following assumptions:

	September 30, 2013			Initial Value
Risk free interest rate		1.39	%		1.72	%
Expected volatility (peer group)		69.7	%		72.4	%
Expected life (in years)		4.95			5.00
Expected dividend yield		—			—
Number outstanding		3,020,501			3,020,501
Fair value at issue date	$	2,488,960		$	2,488,960
Change in derivative liability	$	(47,578	)		—
Fair value at end of period	$	2,441,382			—

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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 based on a first-in, first-out basis and at the lower of cost or market value.  All of the purchases during the nine months ended September 30, 2013 were from two vendors and during 2012 were from one vendor.

Results of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,							From December 20, 2000 (date of inception) to September 30,
	2013			2012				2013			2012				2013
	(unaudited)			(unaudited)				(unaudited)			(unaudited)				(unaudited)
SALES	$	68,873		$	114,461			$	257,455		$	377,455			$	1,542,716
SALES RETURN & ALLOWANCE		(2,744	)		(1,290	)			(10,558	)		(12,046	)			(71,645	)
REVENUES		66,129			113,126				246,897			365,409				1,471,071
COST OF GOODS SOLD
Cost of goods sold		48,445			36,585				147,418			86,358				689,229
Scrapped inventory		—			—				—			—				235,537
Total cost of goods sold		48,445			36,585				147,418			86,358				924,766
GROSS PROFIT		17,684			76,541				99,479			279,051				546,305
OPERATING EXPENSES
Research and development		490,138			780,193				1,801,399			2,209,176				11,219,839
Selling		120,647			90,341				377,335			288,794				3,278,902
General and administrative		2,600,043			1,788,065				7,620,436			5,895,097				26,588,438
Transaction costs		—			—				—			—				788,893
		3,210,828			2,658,599				9,799,170			8,393,067				41,876,072
LOSS FROM OPERATIONS		(3,193,144	)		(2,582,058	)			(9,699,691	)		(8,114,016	)			(41,329,767	)
OTHER INCOME (EXPENSE)
Realized gain on securities available-for-sale		—			—				—			275,822				275,822
Gain on derecognition of liabilities		—			—				735,808			—				735,808
Change in fair value of derivative liabilities		47,578			—				47,578			—				47,578
Interest and other income		5,089			15,092				15,811			29,705				169,187
Interest expense		(567,491	)		(884,496	)			(1,918,363	)		(2,776,893	)			(6,709,746	)
		(514,824	)		(869,404	)			(1,119,166	)		(2,471,366	)			(5,481,351	)
LOSS BEFORE INCOME TAXES		(3,707,968	)		(3,451,462	)			(10,818,857	)		(10,585,382	)			(46,811,118	)
INCOME TAXES		—			113				2,550			5,913				27,853
NET LOSS	$	(3,707,968	)	$	(3,451,575	)		$	(10,821,407	)	$	(10,591,295	)		$	(46,838,971	)
NET LOSS PER COMMON SHARE	$	(0.15	)	$	(0.14	)		$	(0.44	)	$	(0.43	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		24,535,274			24,409,360				24,814,373			24,399,390

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Three months ended September 30, 2013 and 2012

Net Losses.  Net losses increased by $0.3 million, or 7%, to $3.7 million from $3.4 million for the three months ended September 30, 2013 and 2012, respectively.  The increase in losses is primarily a result of increased operating expenses as discussed below. As of September 30, 2013, we had an accumulated deficit of approximately $46.8 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization.  As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future.

Revenues.  Sales decreased approximately $0.05 million, or 40%, to just under $0.1 million from just over $0.1 million for the three months ended September 30, 2013 and 2012, respectively. Sales decreased primarily due to decreases in the number of units sold of our AminoPure® product.  The Company continues to monitor its returns and will adjust its estimates based on its actual sales return experience.  The Company recorded a 5% of sales return allowance for both NutreStore® and AminoPure® for the quarter ended September 30, 2013.

Cost of Goods Sold.  Cost of goods sold increased to $0.05 million from $0.04 million for the three months ended September 30, 2013 and 2012, respectively.  Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory.    The majority of the increased cost is due to a reserve for inventory valuation of $0.02 million. No scrapped inventory expense was realized for the three months ended September 30, 2013 or for the three months ended September 30, 2012.  All of the purchases during the three months ended September 30, 2013 were from two vendors and during 2012 were from one vendor.

Research and Development Expenses.  Research and development expenses decreased $0.3 million, or 37%, to $0.5 million from $0.8 million for the three months ended September 30, 2013 and 2012, respectively.  This decrease was primarily due to decreases in our CRO costs and other related costs as our Phase III clinical trial enters into later stage.

Selling Expenses.  Selling expenses were just over $0.1 million and just under $0.1 million for the three months ended September 30, 2013 and September 30, 2012, respectively. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore® and AminoPure®.

General and Administrative Expenses.General and administrative expenses increased $0.8 million, or 45%, to $2.6 million from $1.8 million for the three months ended September 30, 2013 and September 30, 2012, respectively. The increase is primarily due to a $0.9 million increase in share-based compensation expense.

Other Income and Expense.  Total other income and expense has improved by $0.3 million primarily due to lower interest expense of $0.3 million.

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

● as a result of 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 the Company expects to expand as development of our product candidate(s) continue; 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, 2013 and 2012

Net Losses. Net losses increased by $0.2 million, or 2%, to $10.8 million from $10.6 million for the nine months ended September 30, 2013 from 2012. As of September 30, 2013, we had an accumulated deficit of approximately $46.8 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential 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.  Revenue decreased $0.12 million, or 32%, to $0.25 million from $0.37 million for the nine months ended September 30, 2013 and 2012, respectively. Sales decreased primarily due to decreases in the number of units sold of our AminoPure® product.

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Cost of Goods Sold.  Cost of goods sold increased to $0.15 million from $0.09 million for the nine months ended September 30, 2013 and 2012, respectively.  Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory.  The majority of the increased cost is due to a reserve for the valuation of inventory at $0.06 million as well as an increase in raw material cost. No scrapped inventory expense was realized for the nine months ended September 30, 2013 and for the nine months ended September 30, 2012.

Research and Development Expenses.  Research and development expenses decreased $0.4 million, or 19%, to $1.8 million from $2.2 million for the nine months ended September 30, 2013 and 2012, respectively.  This decrease was primarily due to a decrease in our CRO costs and start-up costs, partially offset by an increase in site reimbursement costs.

Selling Expenses. Selling expenses increased by $0.1 million, or 31%, to $0.4 million from $0.3 million for the nine months ended September 30, 2013 and September 30, 2012.  Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore® and AminoPure®.  Selling expenses increased because we added more sales personnel for AminoPure® promotion.

General and Administrative Expenses. General and administrative expenses increased $1.7 million, or 29%, to $7.6 million from $5.9 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.  The increase was largely due to increase in share-based compensation of $1.6 million.

Other Income and Expense. Total other income and expense improved by $1.4 million primarily due to lower interest expense of $0.9 million and a gain on derecognition of accounts payable of $0.7 million partially offset by lower realized gain on available for sale securities of $0.3 million.

We anticipate that general and administrative expenses will continue to increase for, among others, the following reasons:

● as a result of 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 the Company expects to expand as development of our product candidate(s) continue; 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 and our cash and cash equivalents balance of $5.8 million as of September 30, 2013, we do not have sufficient operating capital for our business without raising additional capital. We incurred losses of $10.8 million for the nine months ended September 30, 2013 and $10.6 million for the nine months ended September 30, 2012.  We had an accumulated deficit since inception to September 30, 2013 of $46.8 million.  We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the development and commercialization of L-glutamine as a prescription drug for the treatment of sickle cell disease, the corneal cell sheets technology and the expansion of corporate infrastructure, including costs associated with being a public company. We have previously relied on private equity offerings, debt financings, and loans, including loans from related parties. As part of this effort, we have received various loans from stockholders as discussed below.  As of September 30, 2013, we had total outstanding notes payable of $11.5 million, consisting of $3.3 million of non-convertible promissory notes and $8.2 million of convertible notes.  Of the $11.5 million aggregate outstanding principal amount of notes outstanding as of September 30, 2013, approximately $7.7 million will become due and payable within one year.  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 development of cell sheet technology in the United States.

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the years ended December 31, 2012 and 2011, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and, finally, achieving a profitable level of operations.

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On April 8, 2011, pursuant to a Research Agreement with CellSeed, we agreed to pay CellSeed $8.5 million within 30 days of 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 us.  Pursuant to the Individual Agreement with CellSeed, the Company 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.  We currently anticipate that the additional $8.5 million payment obligation under the Research Agreement will become due and payable after we begin to generate revenues from the commercialization of our L-glutamine treatment for SCD.  If the payment obligation becomes due and payable prior to our generation of revenue from the commercialization of our L-glutamine SCD treatment, we will need to seek other funding sources, including the sale of additional equity or debt securities, in order to make the payment.  CellSeed may terminate these agreements if we are unable to make timely payments, as required under the agreements.

In addition to the $8.5 million we have agreed to pay CellSeed pursuant to the Research Agreement, we currently estimate that we will need an additional $2.4 million to complete our Phase III clinical trial and $0.4 million to obtain FDA approval for our L-glutamine treatment for SCD. Our current cash burn rate is approximately $0.6 million per month for the third quarter of 2013.

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 products 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 development and commercialization strategies; the outcome of litigation; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure® for revenues, which we expect will increase.  Revenues from NutreStore® are currently 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 public or private equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements.  If we do not receive adequate funding to complete our clinical trials or to obtain FDA approval for our L-glutamine treatment for SCD, we may be required to delay our trial.  If we are required to delay our trial, we will delay the approval of our L-glutamine treatment for SCD.  If no funds are available to continue the trial, we risk losing the data gathered to date and may need to start over with additional subjects.

Our cash flow from operations is not adequate and 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 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 development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators.  We intend to fund our cash flow needs through public or private equity offerings, debt financings, loans, and 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 the Company (or at all).

For the nine months ended September 30, 2013 and during the year ended December 31, 2012, we borrowed varying amounts pursuant to convertible notes and non-convertible promissory notes, the majority of which have been issued to our stockholders.  As of September 30, 2013 and December 31, 2012, the amounts outstanding under convertible notes and non-convertible promissory notes totaled $11.5 million and $11.3 million, respectively.  The convertible notes and non-convertible promissory notes carry interest from 0% to 11% and, except for the convertible note listed below in the principal amount of $0.5 million, are unsecured (see Footnote 8 to the table below regarding the secured note).  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, 2013 and the material terms of our outstanding borrowings:

Lender	Annual Interest Rate			Date of loan	Term of Loan	Loan Principal Outstanding		Conversion Price		Shares Underlying Principal as of September 30, 2013
Shigeru Matsuda (1)		6.50	%	1/12/2009	5 years	$	269,207	$	3.05		88,197
Kazuo Murakami (1)		0.00	%	8/16/2010	5 years	$	18,000	$	3.05		5,898
Makoto Murakami (1)		0.00	%	8/16/2010	5 years	$	18,000	$	3.05		5,898
Nami Murakami (1)		0.00	%	8/16/2010	5 years	$	18,000	$	3.05		5,898
M’s Support Co. Ltd. (1)		0.00	%	8/17/2010	5 years	$	18,000	$	3.05		5,898
Yumiko Takemoto (1)		6.00	%	11/23/2010	5 years	$	2,000	$	3.05		656
Mitsubishi UFJ Capital III, Limited Partnership (8)		10.00	%	3/14/2011	5 years	$	500,000	$	3.05		163,809
Hiroshi Iguchi		8.00	%	2/20/2012	1 year (2)	$	133,333	$	3.60		37,037
Yasushi Nagasaki (5)		10.00	%	6/29/2012	Due on Demand	$	373,000	$	3.30		113,030
Yumiko Nakamura		10.00	%	8/9/2012	2 years	$	49,500	$	3.30		15,000
Paul Shitabata (1)		10.00	%	10/3/2012	1 year (2)	$	1,620,540	$	3.60		450,150
Willis Lee (5)		10.00	%	10/5/2012	1 year	$	138,242	$	3.60		38,400
Alison Brown		10.00	%	12/21/2012	2 years	$	100,800	$	3.60		28,000
Yoshiko Takemoto (1)		10.00	%	12/27/2012	2 years	$	100,800	$	3.60		28,000
Sun Moo & Hyon Sil Lee		10.00	%	2/21/2013	2 years	$	100,800	$	3.60		28,000
Yukio Hasegawa (1)		10.00	%	2/15/2013	Due on Demand	$	144,000	$	3.60		40,000
J. R. Downey		10.00	%	3/2/2013	1 year	$	162,005	$	3.60		45,001
Shigenori  Yoshida		10.00	%	3/12/2013	2 years	$	100,800	$	3.60		28,000
Yoshiko & Yuki Takemoto (1)		10.00	%	3/14/2013	2 years	$	420,511	$	3.30		127,427
Wan Luen Pak Eric & Ho Shun Mei Grace		10.00	%	3/15/2013	2 years	$	125,000	$	3.60		34,722
Wong Shuk Ching Judy		10.00	%	3/19/2013	2 years	$	200,000	$	3.60		55,555
Yu Mei Lun Susan		10.00	%	4/2/2013	2 years	$	385,827	$	3.60		107,174
Yoshiko and Yuki Takemoto (1)		10.00	%	4/3/2013	2 years	$	227,200	$	3.30		68,848
Yeung Yat Ming Barry and Ng Sur Ngan		10.00	%	4/25/2013	2 years	$	50,000	$	3.60		13,888
Paul Terasaki (1) (7)		10.00	%	5/1/2013	1 year	$	550,000	$	3.30		166,666
Wong Shuk Ching Judy		10.00	%	5/29/2013	2 years	$	200,257	$	3.60		55,626
Alison Brown - Carvalho		10.00	%	6/20/2013	2 years	$	100,800	$	3.60		28,000
Andrew Wood (4)		10.00	%	7/8/2013	1 year	$	3,564	$	3.30		1,080
Hiromi Saito		10.00	%	7/10/2013	1 year	$	27,500	$	3.30		8,333
Yung Min Suh		10.00	%	7/11/2013	1 year	$	1,298,788	$	3.30		393,572
The Takemoto Family (1)		10.00	%	7/18/2013	2 years	$	552,103	$	3.30		167,303
Hideki & Eiko Uehara (1)		10.00	%	9/7/2013	1 year	$	35,640	$	3.60		9,900
Dennis Y. Teranishi		10.00	%	9/9/2013	1 year	$	128,304	$	3.60		35,640
Convertible Notes						$	8,172,521				2,400,606
Hope Int’l Hospice (6)		8.00	%	1/17/2012	Due on Demand	$	200,000	NA
Shigeru Matsuda (1)		11.00	%	2/15/2012	2 years (2)	$	833,335	NA
Hideki & Eiko Uehara (1)		11.00	%	2/15/2012	2 years (2)	$	133,333	NA
Hope Int’l Hospice (6)		8.00	%	6/14/2012	Due on Demand	$	200,000	NA
Hope Int’l Hospice (6)		8.00	%	6/21/2012	Due on Demand	$	100,000	NA
Cuc T. Tran		11.00	%	6/27/2012	1 year	$	10,000	NA
Yutaka Niihara (5)		10.00	%	12/5/2012	Due on Demand	$	502,107	NA
Lan T. Tran (5)		11.00	%	2/10/2012	2 years (2)	$	80,000	NA
Hope Int’l Hospice (6)		8.00	%	2/11/2013	Due on Demand	$	50,000	NA
Shigeru Matsuda (1)		10.00	%	5/29/2013	Due on Demand	$	1,017,400	NA
For Days Co., Ltd.		2.00	%	6/28/2013	2 years	$	200,000	NA
Non-Convertible Notes						$	3,326,175
Total, undiscounted (9)						$	11,498,696

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(1) Related party – Shareholder

(2) Due on Demand

(3) Director

(4) Employee

(5) Officer

(6) Dr. Niihara is also the CEO and owner of Hope International Hospice, Inc.

(7) Convertible into shares of the Company’s common stock at $3.30 per share or, if then publicly traded, at the average closing sale price per share for the three (3) trading days immediately preceding the exercise thereof, whichever is lower

(8) Secured by the Company’s minority interest in CellSeed common stock (see Note 2 – Summary Of Significant Accounting Policies – Marketable securities)

(9) Total amount due on notes without discounts for fair market value of warrants issued and conversion features

Cash Flows

Net cash used in operating activities

Net cash flows used in operating activities increased by $1.3 million, or 29%, to $5.7 million from $4.4 million for the nine months ended September 30, 2013 and 2012, respectively. This increase was primarily due to an increase of $1.1 million in the cash used for accounts payable. An increase in non-cash stock based compensation of $1.6 million was offset by changes in other non-cash based items of $1.6 million.

Net cash used in investing activities

Net cash flows used in investing activities decreased by $1.5 million to $0.0 from $(1.5) million for the nine months ended September 30, 2013 and 2012, respectively.  The decrease was mainly due to payments for license fees in 2012.  No other investing activities occurred in the nine months ended September 30, 2013 and 2012.

Net cash from financing activities

Net cash flows from financing activities increased by $5.1 million, or 86%, to $11.1 million from $6.0 million for the nine months ended September 30, 2013 and 2012, respectively, primarily as a result of a $6.4 million increase in net proceeds from the sale of common stock and warrants in a September 2013 private placement, a $1.8 million increase in proceeds from the issuance of common stock and a $1.6 million increase in proceeds from issuance of convertible and non-convertible notes payable, offset, in part, by a $4.7 million increase in payments on convertible and non-convertible notes payable.

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A total of $2.6 million of promissory and convertible notes payable were converted into shares of our common stock during the nine months ended September 30, 2013, compared to $0.0 million for the nine months ended September 30, 2012.

Off-Balance-Sheet Arrangements

Since our inception, Emmaus has not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

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 accounting principles generally accepted in the United States, or GAAP. 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.

While our significant accounting policies are more fully described in Note 2 to our financial statements provided in this Form 10-Q, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Revenue recognition

We recognize revenue in accordance with ASC 605, Revenue Recognition.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.

With prior written approval of the Company, product is returnable only by our direct customers for a returned goods credit, provided the product meets any of the following criteria:

A. Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.

B. Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.

C. Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.

D. Product that is discontinued, withdrawn, or recalled.

                Credits will only be issued for full cartons without any missing packets of product.  No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company.  No credit is issued for product destroyed by anyone other than the Company.  Customers must return the product within 60 days of receiving our written approval for the return or the return will not be issued a credit.  The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%.  When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases.   Credit memos expire one hundred eighty (180) days from date issued. 

We estimate our sales return based upon our prior sales and return history. Historically, sales returns have been  nominal.  We continue to monitor our returns and will adjust our estimates based on its actual sales return experience. As of September 30, 2013, we recorded a 5% sales return allowance for the NutreStore® sales in the accompanying financial statements.

We are required to pay royalties, which are recognized as an expense upon sale of the products.  We are required to pay a royalty to Cato equivalent to 10% of our adjusted gross sales of NutreStore® calculated on an annual basis.  The 10% royalty is calculated at the end of the year and accrued on an annual basis.

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Share-based compensation

We recognize compensation cost for share-based compensation awards during the service term of the recipients of the share-based awards. The fair value of share-based awards is calculated using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton model requires subjective assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of awards granted is derived from historical data on awards exercised and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the vesting period of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the common stock of comparable publicly traded companies. These factors could change, affecting the determination of stock-based awards expense in future periods.

Marketable securities

Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gains or losses, net of taxes in accumulated other comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values when necessary.

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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our 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, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 of the Exchange Act, we believe that there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Please refer to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, filed with the SEC on August 14, 2013, for a summary of material developments regarding legal proceedings reported in the Annual Report.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Annual Report.

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

In July 2013, the Company issued an aggregate of 86,000 shares of common stock to certain shareholders, at a price of $3.60 per share for an aggregate price of $309,600.

On July 8, 2013, the Company refinanced a convertible note payable to Andrew K. Wood, an employee, with an original principal amount of $3,240 with a new convertible note totaling $3,564 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share.

On July 10, 2013, the Company refinanced a convertible note payable to Hiromi Saito, a third party, with an original principal amount of $25,000 with a new convertible note totaling $27,500 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share.

On July 11, 2013, the Company refinanced a convertible note payable to Suh Yung Min, a third party, with an original principal amount of $1,180,716 with a new convertible note totaling $1,298,788 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.30 per share.

On July 18, 2013, the Company issued a convertible note payable to the Takemoto Family, including shareholders, in the principal amount of $552,103, 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 $3.30.

In August 2013, the Company issued an aggregate of 114,039 shares of common stock to certain shareholders, at a price of $3.60 per share for an aggregate price of $409,232.

In August 2013, the Company issued 4,507 shares of common stock to IQ PR Inc. as payment for $16,225 of professional fees.

On September 7, 2013, the Company refinanced a convertible note payable to Hideki & Eiko Uehara, shareholders, with an original principal amount of $32,400 with a new convertible note totaling $35,640 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share.

On September 8, 2013, the Company refinanced a convertible note payable to Dennis Y. Teranish, a shareholder, with an original principal amount of $116,640 with a new convertible note totaling $128,304 which bears interest at 10% per annum and matures on the one-year anniversary date of the note.  The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share.

On September 11, 2013, the Company issued and sold to certain accredited investors an aggregate of 3,020,501 units consisting of 3,020,501 shares of common stock and warrants for the purchase of 3,020,501 shares of common stock of the Company in a private placement transaction at a price of $2.50 per unit. The aggregate purchase price of the units was 7,551,252.

37

For its services as placement agent in connection with the transaction, the Company paid T.R. Winston & Company, LLC (“TRW”) a fee of $755,125, a non-accountable expense allowance of $75,513, and $50,000 as reimbursement of legal expenses. The Company also issued to TRW a common stock purchase warrant containing terms identical to the terms of the warrants issued to the accredited investors, for the purchase of up to 300,000 shares of common stock of the Company at an exercise price of $3.50 per share. Additional information regarding the transaction , including the terms of the securities issued in the transaction,  may be found in the Company’s Current Report on Form 8-K filed with the SEC on September 17, 2013.

All such securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.  The issuance of these securities was in each case exempt from the registration requirements of the Securities Act as a transaction by an issuer not involving a public offering.  No underwriters 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 the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.2	Form of Convertible Promissory Note issued by the registrant to the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.3	Convertible Promissory Note, dated July 11, 2013, issued by the registrant to Yung Ming Suh.
4.4	Convertible Promissory Note, dated July 18, 2013, issued by the registrant to the Takemoto Family.
4.5	Convertible Promissory Note, dated October 5, 2013, issued by the registrant to MLPF&S Cust FBO Willis Lee.
4.6	Convertible Promissory Note, dated October 10, 2013, issued by the registrant to The Shitabata Family Trust.
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.

39

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: November 14, 2013		/s/ Yutaka Niihara
	By:	Yutaka Niihara, M.D., MPH
	Its:	President and Chief Executive Officer (principal executive officer and duly authorized officer)
		/s/ Peter Ludlum
	By:	Peter Ludlum
	Its:	Chief Financial Officer (principal financial and accounting officer)

40