EMMAUS LIFE SCIENCES, INC. (Form: 10-Q, Received: 11/14/2017 15:04:39)

Table of Contents

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, 2017

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 No.)

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

(310) 214-0065

(Registrant’s telephone number, including area code)

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

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, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 34,873,611 shares of common stock, par value $0.001 per share, outstanding as of November 10, 2017.

Table of Contents

INDEX

			Page
Part I Financial Information

Item 1.	Financial Statements

	(a)	Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	1

	(b)	Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2017 and 2016 (Unaudited)	2

	(c)	Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months ended September 30, 2017 (Unaudited)	3

	(d)	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016 (Unaudited)	4

	(e)	Notes to Consolidated Financial Statements as of and for the Nine Months ended September 30, 2017 (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26

Item 4.	Controls and Procedures		26

Part II Other Information

Item 1.	Legal Proceedings		28

Item 1A.	Risk Factors		28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 3.	Defaults Upon Senior Securities		30

Item 4.	Mine Safety Disclosures		30

Item 5.	Other Information		30

Item 6.	Exhibits		31

Signatures			32

Table of Contents

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

	As of
	September 30, 2017			December 31, 2016
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,415,308		$	1,317,340
Accounts receivable	10,351			14,221
Inventories, net	395,810			166,209
Investment in marketable securities	28,153,107			10,917,301
Marketable securities, pledged to creditor	169,168			179,765
Prepaid expenses and other current assets	236,994			129,204
Total current assets	33,380,738			12,724,040

PROPERTY AND EQUIPMENT, Net	114,581			53,730

OTHER ASSETS
Deposits	109,120			214,808
Total other assets	109,120			214,808
Total Assets	$	33,604,439		$	12,992,578

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	4,079,230		$	3,201,154
Deferred rent		26,507			15,840
Other current liabilities	36,874,999			—
Warrant derivative liabilities	26,804,000			—
Notes payable, net	7,889,833			4,094,429
Notes payable to related parties, net	2,466,261			1,924,850
Convertible notes payable, net	10,573,853			9,205,007
Convertible notes payable to related parties, net	474,000			474,000
Total current liabilities	89,188,683			18,915,280

LONG-TERM LIABILITIES
Deferred rent	19,240			41,241
Warrant derivative liabilities	—			10,600,000
Convertible notes payable, net	281,761			997,957
Total long-term liabilities	301,001			11,639,198
Total Liabilities	89,489,684			30,554,478

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued and outstanding	—			—
Common stock — par value $0.001 per share, 100,000,000 shares authorized, 34,873,611 shares and 34,701,219 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	34,874			34,701
Additional paid-in capital	104,456,879			92,614,801
Accumulated other comprehensive loss	(18,079,132		)	(3,450,746		)
Accumulated deficit	(142,297,866		)	(106,760,656		)
Total stockholders’ deficit	(55,885,245		)	(17,561,900		)
Total Liabilities and Stockholders’ Deficit	$	33,604,439		$	12,992,578

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

Table of Contents

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

REVENUES, net	$	140,314		$	61,828		$	366,432		$	313,908

COST OF GOODS SOLD	128,618			20,997			222,130			132,069
GROSS PROFIT	11,696			40,831			144,302			181,839

OPERATING EXPENSES
Research and development	379,344			368,580			2,331,702			1,455,576
Selling	214,309			103,680			405,608			282,314
General and administrative	3,223,338			2,655,879			9,536,680			7,204,307
	3,816,991			3,128,139			12,273,990			8,942,197

LOSS FROM OPERATIONS	(3,805,295		)	(3,087,308		)	(12,129,688		)	(8,760,358		)

OTHER INCOME (EXPENSE)
Gain on debt extinguishment	—			1,019			—			1,019
Loss on debt settlement	—			(266,736		)	—			(266,736		)
Change in fair value of warrant derivative liabilities	(10,542,000		)	132,000			(16,204,000		)	75,110
Convertible note inducement expense	—			(1,444,863		)	—			(1,444,863		)
Interest and other income (loss)	(15,051		)	3,318			(36,992		)	(56,153		)
Interest expense	(2,904,336		)	(1,595,625		)	(7,164,130		)	(3,406,180		)
	(13,461,387		)	(3,170,887		)	(23,405,122		)	(5,097,803		)

LOSS BEFORE INCOME TAXES	(17,266,682		)	(6,258,195		)	(35,534,810		)	(13,858,161		)
INCOME TAXES	—			—			2,400			2,400
NET LOSS	(17,266,682		)	(6,258,195		)	(35,537,210		)	(13,860,561		)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS )
Unrealized holding gain (loss) on marketable securities	(14,203,879		)	7,065			(14,616,291		)	6,280
Unrealized foreign currency translation income (loss)	(1,090		)	18,899			(12,095		)	46,512
	(14,204,969		)	25,964			(14,628,386		)	52,792
COMPREHENSIVE LOSS	$	(31,471,651	)	$	(6,232,231	)	$	(50,165,596	)	$	(13,807,769	)
NET LOSS PER COMMON SHARE	$	(0.50	)	$	(0.22	)	$	(1.02	)	$	(0.48	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	34,842,353			29,031,346			34,762,315			28,688,376

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

Table of Contents

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(UNAUDITED)

	Common stock — par value $0.001
	per share, 100,000,000					Accumulated
	shares authorized			Additional		Other
		Common		Paid-in		Comprehensive			Accumulated			Total Stockholders’
	Shares	Stock		Capital		Loss			Deficit			Deficit

Balance, December 31, 2016	34,701,219	$	34,701	$	92,614,801	$	(3,450,746	)	$	(106,760,656	)	$	(17,561,900	)
Stock issued for cash	144,750	145		1,141,455		—			—			1,141,600
Beneficial conversion feature relating to convertible and promissory notes payable	—	—		6,739,201		—			—			6,739,201
Share-based compensation	—	—		3,751,371		—			—			3,751,371
Conversion of notes payable to common stock	27,642	28		210,051		—			—			210,079
Unrealized loss on marketable securities, net of tax	—	—		—		(14,616,291		)	—			(14,616,291		)
Foreign currency translation effect	—	—		—		(12,095		)	—			(12,095		)
Net loss	—	—		—		—			(35,537,210		)	(35,537,210		)

Balance, September 30, 2017	34,873,611	$	34,874	$	104,456,879	$	(18,079,132	)	$	(142,297,866	)	$	(55,885,245	)

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

Table of Contents

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended September 30,
	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(35,537,210	)	$	(13,860,561	)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization	18,593			11,210
Amortization of discount of convertible notes	5,695,652			1,807,592
Foreign exchange adjustments on convertible notes and notes payable	77,429			377,288
Gain on debt extinguishment	—			(1,019		)
Loss on debt settlement	—			266,736
Share-based compensation	3,751,371			2,259,834
Convertible note inducement expense	—			1,444,863
Change in fair value of warrant derivative liabilities	16,204,000			(75,110		)
Net changes in operating assets and liabilities
Investment capital reserve	(31,841,500		)	(14,000,000		)
Accounts receivable	4,141			88,396
Inventories	(226,934		)	(22,892		)
Prepaid expenses and other current assets	(89,282		)	76,180
Deposits	106,879			18,419
Accounts payable and accrued expenses	1,639,275			1,753,171
Other current liabilities	36,841,500			11,704
Deferred rent	(11,349		)	(1,320		)
Net cash flows used in operating activities	(3,367,435		)	(19,845,509		)

CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment	(86,215		)	(1,897		)
Net cash flows used in investing activities	(86,215		)	(1,897		)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable issued	4,503,751			2,754,700
Proceeds from convertible notes payable issued	1,200,000			2,461,710
Payments of notes payable	(344,339		)	(453,077		)
Payments of convertible notes	—			(976,488		)
Proceeds from issuance of common stock	1,141,600			22,138,494
Net cash flows provided by financing activities	6,501,012			25,925,339
Effect of exchange rate changes on cash	50,606			78,017

Net increase in cash and cash equivalents	3,097,968			6,155,950
Cash and cash equivalents, beginning of period	1,317,340			472,341
Cash and cash equivalents, end of period	$	4,415,308		$	6,628,291

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	567,093		$	599,038
Income taxes paid	$	2,400		$	2,400

SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Conversion of notes payable to common stock	$	200,000		$	4,600,930
Conversion of accrued interest payable to common stock	$	10,079		$	289,175

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

Table of Contents

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of Emmaus Life Sciences, Inc. and subsidiaries (collectively, the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions have been eliminated. The Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows.

Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2017 (the “Annual Report”). Interim results for the periods presented herein are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Refer to the Annual Report for a summary of significant accounting policies. There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2017. Below are disclosures of certain interim balances, transactions, and significant assumptions used in computing fair value as of and for the nine months ended September 30, 2017 and comparative amounts from the prior fiscal periods:

Inventories — All of the raw material purchased during the nine months ended September 30, 2017 and for the year ended December 31, 2016 was from one vendor. The below table presents inventory by category:

Inventory by category	September 30, 2017		December 31, 2016
Work-in-process	$	185,304	$	34,462
Finished goods	210,506		131,747
	$	395,810	$	166,209

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the three months ended September 30, 2017 and 2016 were $18,201 and $9,101, respectively. Advertising costs for the nine months ended September 30, 2017 and 2016 were $35,399 and $24,540, respectively.

Marketable securities — The Company’s marketable securities consist of four securities; (a) 39,250 shares of capital stock of CellSeed, Inc. (“CellSeed”) which are part of 147,100 shares acquired in January 2009 for ¥100,028,000 Japanese Yen (JPY) (equivalent to $1.1 million USD), at ¥680 JPY per share; (b) 849,744 shares of capital stock of KPM Tech Co., Ltd. (“KPM”) which were acquired in October 2016 for ₩14,318,186,400 South Korean Won (KRW) (equivalent to $13 million USD) at ₩16,850 KRW per share; (c) 271,950 shares of capital stock of Hanil Vacuum Co., Ltd. (“Hanil”) which were acquired in October 2016 for ₩1,101,397,500 KRW (equivalent to $1 million USD) at ₩4,050 KRW per share; and (d) 6,643,559 shares of capital stock of Telcon, Inc. (“Telcon”) which were acquired in July 2017 for ₩36,001,446,221 KRW (equivalent to $31.8 million USD) at ₩5,419 KRW per share. As of September 30, 2017 and December 31, 2016, the closing price per share for CellSeed on the Tokyo Stock Exchange was ¥486 JPY ($4.31 USD) and ¥536 JPY ($4.58 USD), respectively, the closing price per share for KPM on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) was ₩1,335 KRW ($1.16 USD) after 1-for-5 reverse stock split effective June 28, 2017 and ₩14,600 KRW ($12.08 USD), respectively, the closing price per share for Hanil on KOSDAQ was ₩2,090 KRW ($1.82 USD) and ₩2,895 KRW ($2.40 USD), respectively. As of September 30, 2017, the closing price per share for Telcon on KOSDAQ was ₩3,920 KRW ($3.42 USD).

Table of Contents

As of September 30, 2017, the shares of CellSeed common stock were pledged to secure a $300,000 convertible note of the Company issued to Mitsubishi UFJ Capital III Limited Partnership that is due on demand and were classified as current assets, as marketable securities, pledged to creditor.

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at September 30, 2017 and December 31, 2016:

	September 30, 2017		December 31, 2016
Prepaid insurance	$	92,806	$	100,060
Other prepaid expenses and current assets	144,188		29,144
	$	236,994	$	129,204

Other current liabilities — Included in the balance of other current liabilities as of September 30, 2017 is the $31.8 million received from Telcon related to an API supply agreement, disclosed in more detail at Note 7, and the upfront payment of $5 million received from Telcon for the distribution agreement.

Fair value measurements — The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2017 and the year ended December 31, 2016:

	Period ended
Warrant Derivative Liabilities—Stock Purchase Warrants	September 30, 2017		December 31, 2016
Balance, beginning of period	$	10,600,000	$	7,863,000
Change in fair value included in consolidated statements of comprehensive loss	16,204,000		2,737,000
Balance, end of period	$	26,804,000	$	10,600,000

The value of the liability classified warrants, the value of warrant derivative liabilities and the change in fair value of the liability classified warrants and warrant derivative liabilities 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. T he values as of September 30, 2017 and December 31, 2016 and the initial value as of September 11, 2013 were calculated based on the following assumptions:

	September 30, 2017			December 31, 2016			Initial Value
Stock price	$	11.50		$	6.00		$	3.60
Risk-free interest rate	1.30		%	1.09		%	1.72		%
Expected volatility (peer group)	55.70		%	68.30		%	72.40		%
Expected life (in years)	0.95			1.70			5.00
Number outstanding	3,320,501			3,320,501			3,320,501
Balance, end of period:
Liability classified warrants	$	—		$	—		$	7,541,000
Warrant derivative liabilities	$	26,804,000		$	10,600,000		$	—

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

		Stated		Original			Beneficial		Warrants			Warrant		Effective
		Annual		Loan			Conversion		Issued			FMV		Interest Rate
	Term of	Interest		Principal		Conversion	Discount		with	Exercise		Discount		Including
Type of Loan	Loan	Rate		Amount		Rate	Amount		Notes	Price		Amount		Discounts
2016 convertible notes payable	Due on demand - 2 years	10	%	$	10,866,291	$3.50 - $4.50	$	3,196,544	75,000	$	4.70	$	161,658	14% - 102%
2017 convertible notes payable	Due on demand - 2 years	10	%	8,622,305		$3.50 - $7.60	6,739,199		—	—		—		10% - 110%
Total				$	19,488,596		$	9,935,743	75,000			$	161,658

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

Table of Contents

Net loss per share — As of September 30, 2017 and 2016, respectively, potentially dilutive securities exercisable or convertible into 15,617,245 and 14,859,090 shares of Company common stock were outstanding. No potentially dilutive securities were included in the calculation of diluted loss per share since their effect would be anti-dilutive for all periods presented.

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amendments in this Update simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This Update is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify identification of performance obligations and licensing implementation. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606: For public companies, this Update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact that the implementation of ASU 2016-10 will have on the Company’s financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2016-15 will have on its financial statements.

Table of Contents

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company is currently in the process of evaluating the impact the adoption of this new Update will have on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation — Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2017-09 will have on its consolidated financial statements.

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

	September 30, 2017			December 31, 2016
Equipment	$	225,609		$	175,410
Leasehold improvements	61,054			30,804
Furniture and fixtures	74,090			74,760
Subtotal	360,753			280,974
Less: accumulated depreciation	(246,172		)	(227,244		)
Total	$	114,581		$	53,730

During the three months ended September 30, 2017 and 2016, depreciation expense was $9,236 and $3,808, respectively. During the nine months ended September 30, 2017 and 2016, depreciation expense was $18,593 and $11,210, respectively.

NOTE 4 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at:

	September 30, 2017		December 31, 2016
Accounts payable
Clinical and regulatory expenses	$	131,878	$	145,239
Legal expenses	91,054		43,700
Consulting fees	233,171		99,800
Accounting fees	350,893		65,267
Selling expenses	145,686		60,724
Investor relations and public relations expenses	43,400		19,931
Other vendors	276,010		41,640
Total accounts payable	1,272,092		476,301
Accrued interest payable, related parties	289,609		274,851
Accrued interest payable	1,533,530		1,441,450
Accrued expenses	692,333		716,886
Deferred salary	291,666		291,666
Total accounts payable and accrued expenses	$	4,079,230	$	3,201,154

Table of Contents

NOTE 5 — NOTES PAYABLE

Notes payable consisted of the following at September 30, 2017 and December 31, 2016:

										Shares							Shares
				Principal		Discount		Carrying		Underlying	Principal		Discount		Carrying		Underlying
				Outstanding		Amount		Amount		Notes September	Outstanding		Amount		Amount		Notes
Year	Interest Rate		Conversion	September 30,		September 30,		September 30,		30,	December 31,		December 31,		December 31,		December 31,
Issued	Range	Term of Notes	Price	2017		2017		2017		2017	2016		2016		2016		2016
Notes payable
2013	10%	Due on demand	—	$	887,000	$	—	$	887,000	—	$	854,900	$	—	$	854,900	—
2015	10%	Due on demand	—	10,000		—		10,000		—	2,406,194		—		2,406,194		—
2016	10% - 11%	Due on demand	—	843,335		—		843,335		—	833,335		—		833,335		—
2017	5% - 11%	Due on demand	—	6,149,498		—		6,149,498		—	—		—		—		—
				$	7,889,833	$	—	$	7,889,833	—	$	4,094,429	$	—	$	4,094,429	—

		Current		$	7,889,833	$	—	$	7,889,833	—	$	4,094,429	$	—	$	4,094,429	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Notes payable - related party
2012	8%	Due on demand	—	$	300,000	$	—	$	300,000	—	$	500,000	$	—	$	500,000	—
2013	8%	Due on demand	—	—		—		—		—	50,000		—		50,000		—
2015	10% - 11%	Due on demand	—	400,000		—		400,000		—	514,340		—		514,340		—
2016	10% - 11%	Due on demand	—	850,510		—		850,510		—	860,510		—		860,510		—
2017	10%	Due on demand	—	915,751		—		915,751		—	—		—		—		—
				$	2,466,261	$	—	$	2,466,261	—	$	1,924,850	$	—	$	1,924,850	—

		Current		$	2,466,261	$	—	$	2,466,261	—	$	1,924,850	$	—	$	1,924,850	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Convertible notes payable
2011	10%	5 years	$3.05	$	300,000	$	—	$	300,000	98,285	$	300,000	$	—	$	300,000	98,285
2014	10%	Due on demand - 2 years	$3.05 - $3.60	480,747		—		480,747		165,647	452,168		—		452,168		152,986
2015	10%	2 years	$4.50	881,070		649		880,421		234,200	2,904,800		104,389		2,800,411		889,115
2016	10%	1 - 2 years	$3.60 - $4.50	3,720,174		145,837		3,574,337		967,687	8,126,129		1,475,744		6,650,385		2,193,687
2017	10%	Due on demand - 2 years	$3.50 - $7.60	8,097,305		2,477,196		5,620,109		2,241,804	—		—		—		—
				$	13,479,296	$	2,623,682	$	10,855,614	3,707,623	$	11,783,097	$	1,580,133	$	10,202,964	3,334,073

		Current		$	12,802,744	$	2,228,891	$	10,573,853	3,509,426	$	10,499,303	$	1,294,296	$	9,205,007	2,984,161
		Non-current		$	676,552	$	394,791	$	281,761	198,197	$	1,283,794	$	285,837	$	997,957	349,912
Convertible notes payable - related party
2012	10%	Due on demand	$3.30	$	254,000	$	—	$	254,000	82,747	$	254,000	$	—	$	254,000	94,532
2015	10%	2 years	$4.50	220,000		—		220,000		58,118	220,000		—		220,000		54,463
				$	474,000	$	—	$	474,000	140,865	$	474,000	$	—	$	474,000	148,995

		Current		$	474,000	$	—	$	474,000	140,865	$	474,000	$	—	$	474,000	148,995
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
		Grand Total		$	24,309,390	$	2,623,682	$	21,685,708	3,848,488	$	18,276,376	$	1,580,133	$	16,696,243	3,483,068

Table of Contents

The weighted-average stated interest rate of notes payable as of September 30, 2017 and December 31, 2016 was 9%. The weighted-average effective interest rate of notes payable for the nine-month period ended September 30, 2017 and the year ended December 31, 2016 was 31% and 27%, respectively, after giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into Company common stock at the stated conversion price during the term of their convertible notes. Conversion prices on these convertible notes payable range from $3.05 to $7.60 per share. Certain notes with a $4.50 or a $7.60 stated conversion price in the second year of their two-year term are subject to automatic conversion into shares of Company common stock at a conversion price equal to 80% of the initial public offering price at the time of a qualified public offering. All notes due on demand are treated as current liabilities.

Contractual principal payments due on notes payable are as follows:

Year Ending	September 30, 2017
2017	$	21,796,787
2018	$	1,957,012
2019	$	555,591
Total	$	24,309,390

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the note proceeds. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of Company common stock as of the date of issuance (see Note 2). The fair value of the warrants issued in conjunction with notes was determined using the Black Scholes Merton Option Pricing Model with the following inputs for the periods ended December 31, 2016. The Company did not issue any warrants in conjunction with notes in the nine months ended September 30, 2017.

	December 31, 2016
Stock price	$	5.00
Exercise price	$	4.50 - 4.70
Term	5 years
Risk-free interest rate	1.01 - 1.28%
Expected dividend yield	—
Expected volatility	65.4 - 69.6%

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

NOTE 6 — STOCKHOLDERS’ DEFICIT

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

The warrants issued in the Private Placement and the Broker Warrants entitle the holders thereof to purchase, at any time on or prior to September 11, 2018, shares of common stock of the Company at an exercise price of $3.50 per share. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as liabilities, were originally recorded at fair value, and are adjusted to fair market value each reporting period. Because the shares of common stock underlying the Private Placement warrants and Broker Warrants were not effectively registered for resale by September 11, 2014, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2017. The availability to warrant holders of the cashless exercise feature as of September 11, 2014 caused the then-outstanding 2,225,036 Private Placement warrants and Broker Warrants with fair value of $7,068,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period. On June 10, 2014, certain warrant holders exercised 1,095,465 warrants issued in the Private Placement for the exercise price of $3.50 per share, resulting in the Company receiving aggregate exercise proceeds of $3.8 million and issuing 1,095,465 shares of common stock. Prior to exercise, these Private Placement warrants were accounted for at fair value as liability classified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value immediately prior to exercise of $1.8 million,

Table of Contents

representing their intrinsic value, with this adjusted carrying value of $1.8 million being transferred to additional paid-in capital. Also on June 10, 2014, based on an offer made to holders of Private Placement warrants in connection with such exercises, the Company issued an aggregate of 1,095,465 replacement warrants to holders exercising Private Placement warrants, which replacement warrants have terms that are generally the same as the exercised warrants, including an expiration date of September 11, 2018 and an exercise price of $3.50 per share.

The replacement warrants are treated for accounting purposes as liability classified warrants, and their issuance gave rise to a $3.5 million warrant exercise inducement expense based on their fair value as of issuance as determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. Because the shares of common stock underlying the replacement warrants were not effectively registered for resale by June 10, 2015, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2017. The availability to warrant holders of the cashless exercise feature as of June 10, 2015 caused the then-outstanding 1,095,465 replacement warrants with fair value of $2,545,000 to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period.

As of September 30, 2017, the aggregate fair value of the Private Placement warrants, replacement warrants and the Broker Warrants was $26,804,000 (see Note 2). For further details regarding registration rights associated with the Private Placement warrants, replacement warrants and Broker Warrants, see the Registration Rights section below in this footnote.

A summary of outstanding warrants as of September 30, 2017 and December 31, 2016 is presented below:

	September 30, 2017	December 31, 2016
Warrants outstanding, beginning of period	5,024,668	3,530,918
Granted	—	1,493,750
Exercised	—	—
Cancelled, forfeited or expired	—	—
Warrants outstanding, end of period	5,024,668	5,024,668

A summary of outstanding warrants by year issued and exercise price as of September 30, 2017 is presented below:

			Outstanding				Exercisable
Exercise Price			Number of Warrants Issued	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Total	Weighted Average Exercise Price
At December 31, 2013
	$	3.30	50,000	0.58	$	3.30	50,000	$	3.30
	$	3.50	2,225,036	0.95	$	3.50	2,225,036	$	3.50
	2013 total		2,275,036				2,275,036

At December 31, 2014
	$	3.50	1,145,465	0.98	$	3.50	1,145,465	$	3.50
	2014 total		1,145,465				1,145,465

At December 31, 2015
	$	4.90	110,417	2.43	$	4.90	110,417	$	4.90
	2015 total		110,417				110,417
At December 31, 2016
	$	4.50	118,750	3.75	$	4.50	118,750	$	4.50
	$	4.70	75,000	3.59	$	4.70	75,000	$	4.70
	$	5.00	1,300,000	3.61	$	5.00	1,300,000	$	5.00
2016 Total			1,493,750				1,493,750
September 30, 2017 Total			5,024,668				5,024,668

Table of Contents

Stock options — During the nine months ended September 30, 2017, no options were granted by the Company. During the year ended December 31, 2016, the Company granted 2,596,200 options to its officers, directors and employees. Of these options, 300,000 granted to directors of the Company will vest in equal one-third installments on each of the first three anniversaries of the grant date, have an exercise price of $4.70 per share and are exercisable through 2026. The remaining 2,296,200 options will vest one-third on the first anniversary of the grant date and two-thirds in 24 approximately equal monthly installments thereafter. These options have an exercise price of $5.00 per share and are exercisable through 2026. As of September 30, 2017, there were 6,744,089 options outstanding under the Company’s 2011 Stock Incentive Plan.

Summaries of outstanding options as of September 30, 2017 and December 31, 2016 are presented below.

	September 30, 2017				December 31, 2016
	Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
Options outstanding, beginning of period	6,955,200		$	4.10	4,753,335		$	3.60
Granted or deemed issued	—		$	—	2,596,200		$	4.97
Exercised	—		$	—	(15,866	)	$	3.60
Cancelled, forfeited and expired	(211,111	)	$	5.00	(378,469	)	$	3.91
Options outstanding, end of period	6,744,089		$	4.07	6,955,200		$	4.10
Options exercisable, end of period	5,432,373		$	3.85	4,372,667		$	3.59
Options available for future grant, end of period	2,255,911				2,044,800

During the nine months ended September 30, 2017 and 2016, the Company recognized $3.8 million and $2.3 million, respectively, of share-based compensation expense arising from stock options. As of September 30, 2017, there was $4.5 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s 2011 Stock Incentive Plan. That expense is expected to be recognized over the weighted-average remaining period of 1.5 years.

Registration rights — Pursuant to the Subscription Agreements relating to the Private Placement and certain warrants, as well as the replacement warrants issued on June 10, 2014, the Company agreed to use its commercially reasonable best efforts to have on file with the SEC, by September 11, 2014 and at the Company’s sole expense, a registration statement to permit the public resale of 4,115,966 shares of Company common stock and 3,320,501 shares of common stock underlying warrants (collectively, the “Registrable Securities”). In the event such registration statement includes securities to be offered and sold by the Company in a fully underwritten primary public offering pursuant to an effective registration under the Securities Act of 1933, as amended (the “Securities Act”), and the Company is advised in good faith by any managing underwriter of securities being offered pursuant to such registration statement that the number of Registrable Securities proposed to be sold in such offering is greater than the number of such securities which can be included in such offering without materially adversely affecting such offering, the Company will include in such registration the following securities in the following order of priority: (i) any securities the Company proposes to sell, and (ii) the Registrable Securities, with any reductions in the number of Registrable Securities actually included in such registration to be allocated on a pro rata basis among the holders thereof. The registration rights described above apply until all Registrable Securities have been sold pursuant to Rule 144 under the Securities Act or may be sold without registration in reliance on Rule 144 under the Securities Act without limitation as to volume and without the requirement of any notice filing. If the shares of common stock underlying these warrants to purchase 3,320,501 shares are not registered for resale at the time of exercise, and the registration rights described above then apply with respect to the holder of such warrants, such holder may exercise such warrants on a cashless basis. In such a cashless exercise of all the shares covered by the warrant, the warrant holder would receive a number of shares equal to the quotient of (i) the difference between the fair market value of the common stock, as defined, and the $3.50 exercise price, as adjusted, multiplied by the number of shares exercisable under the warrant, divided by (ii) the fair market value of the common stock, as defined. As of September 30, 2017, based on a fair market value of a share of Company common stock of $11.50 and 3,320,501 warrants issued and outstanding and eligible for cashless exercise, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, is 2,309,914 shares. If the fair market value of a share of Company common stock were to increase by $1.00 from $11.50 to $12.50, the maximum number of shares the Company would be required to issue, if the warrant holders elected to exercise the cashless exercise feature with respect to all then eligible warrants, would increase to 2,390,761 shares as of September 30, 2017.

The Company has not yet filed a registration statement with respect to the resale of the Registrable Securities. The Company believes that it has used commercially reasonable efforts to file a registration statement with respect to the resale of Registrable Securities.

Table of Contents

Korean Private Placement — On September 12, 2016, the Company entered into Letter of Agreement with KPM and Hanil Vacuum, both Korean-based public companies whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In the Letter of Agreement, the parties agreed that KPM and Hanil would purchase by September 30, 2016 $17 million and $3 million, respectively, of shares of the Company’s common stock at a price of $4.50 per share. In exchange, the Company agreed to invest $13 million and $1 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. The Letter of Agreement contemplates that KPM and Hanil may purchase additional shares of the Company common stock in a second transaction to be mutually agreed upon by the parties. In connection with the Letter of Agreement, KPM and Hanil entered into the Company’s standard form subscription agreement with respect to their purchase of shares which contains customary representations and warranties of the parties.

On September 29, 2016, KPM and Hanil purchased and acquired from the Company 3,777,778 shares and 666,667 shares, respectively, of common stock at a price of $4.50 a share for $17 million and $3 million, respectively, for a gross total of $20 million. The Company recognized $720,000 as a reduction to its additional paid-in-capital for fees and commissions payable by the Company in connection with the transaction.

Pursuant to the terms of the Letter of Agreement dated September 12, 2016, the Company invested $13 million and $1 million in capital increases by KPM and Hanil, respectively, at $15.32 and $3.68, respectively, per capital share.

Pursuant to the terms of a subscription agreement dated as of September 11, 2013 among the Company and certain purchasers of shares of the Company’s common stock and warrants to purchase shares of common stock, the purchasers are entitled to participation rights with respect to the sale of shares pursuant to the Letter of Agreement. To the extent the purchasers exercise their participation rights, the Company may be obliged to sell to them a specified number of shares of common stock at the price per share and other terms set forth in the Letter of Agreement. There can be no assurance that any purchaser will exercise its participation rights or that any shares of the Company’s common stock will be issued to any purchaser.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Distribution contract — Cardinal Health Specialty Pharmacy Services has been contracted to distribute NutreStore to other wholesale distributors and some independent pharmacies since April 2008. For these services, the Company pays a monthly commercialization management fee of $4,500.

On August 29, 2017, the Company signed a distributor agreement, effective as of August 23, 2017, with Megapharm Ltd., an Israeli Corporation (“Megapharm”), under which the Company granted Megapharm the exclusive rights to distribute its FDA approved product Endari™ (L-glutamine oral powder) in Israel and the Palestinian Authority, or the territories.

The term of the distributor agreement is for seven years from the product registration approval in the territories, unless earlier terminated as provided therein, and will renew automatically for successive one-year terms unless terminated by either party by written notice to the other party no less than 60 days prior to the date the term would renew.

In the distributor agreement, Megapharm agrees to use its reasonable best efforts to actively and diligently promote the sale of Endari in the territories and to maintain a competent and experienced sales force to serve each of the territories. Megapharm also agrees in the distributor agreement to purchase from the Company specified annual minimum quantities of Endari during each of the first five years of the term. The distributor agreement contains customary representations and warranties of the parties and customary mutual indemnification provisions.

Operating leases — The Company leases its office space under operating leases with unrelated entities. The rent expense during the three months ended September 30, 2017 and 2016 amounted to $134,585 and $151,958, respectively. The rent expense during the nine months ended September 30, 2017 and 2016 amounted to $427,687 and $443,921, respectively.

Future minimum lease payments under the agreements are as follows as of September 30, 2017:

Year	Amount
2017 (three months)	$	137,206
2018	537,731
2019	150,755
2020	2,240
	$	827,932

Table of Contents

Management Control Acquisition Agreement — As previously reported in its Form 8-K filed on June 19, 2017 and Form 10-Q filed on August 17, 2017, that on June 12, 2017, the Company entered into a Management Control Acquisition Agreement (the “MCAA”) with Telcon Holdings, Inc. (“Telcon Holdings”), a Korean corporation, and Telcon (“Telcon”), a Korean-based public company whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In accordance with the MCAA, the Company invested ₩36.0 billion KRW (approximately $31.8 million USD) to purchase 6,643,559 shares of Telcon’s common stock shares at a purchase price of ₩5,419 KRW (approximately $4.79 USD) per share. Upon consummation of the MCAA, the Company became Telcon’s largest shareholder owning approximately 10.3% of Telcon’s outstanding common stock shares and received representation on its board of directors.

Subsequent to entering into the MCAA, the Company held discussions with Telcon Holdings and Telcon to re-negotiate and clarify certain of the terms in the MCAA. On September 29, 2017, the Company executed a revised agreement with Telcon Holdings and Telcon which called for the Company’s representatives on Telcon’s board of directors to resign effective as of September 29, 2017 and granted the voting rights of the Company’s shares of Telcon’s common stock to Telcon Holdings to change the composition of the board of directors of Telcon. In addition, the revised agreement contains a provision for Telcon Holdings or any persons designated by Telcon Holdings to lend to the Company a bridge loan for $3.5 million. The Company shall repay the loan in full along with any interest accrued at 5% per annum immediately upon receipt of the $10 million due by December 31, 2017 under the distribution agreements for diverticulosis treatment for the geographical regions of Korea, Japan, China, and Australia. The loan is collateralized by a $5 million security interest in the amount due to the Company for the aforementioned distribution agreements as well as by shares of Telcon and KPM held by the Company pledged as additional security interest for the loan.

API Supply Agreement — The Company had previously reported in its Form 8-K filed on June 19, 2017, that on June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately ₩36 billion KRW (approximately $31.8 million USD) in consideration of the right to supply 25% of the Company’s requirements for bulk containers of pharmaceutical grade L-glutamine for a fifteen-year term. Due to unforeseen circumstances, the Company and Telcon held new discussions to re-negotiate certain terms of the API Agreement. The Company and Telcon made significant changes to critical terms of the API Agreement, which resulted in the Company and Telcon signing a Raw Material Supply Agreement (“Revised API Agreement”) on July 12, 2017. The Revised API Agreement is effective for a term of five years with 10 one-year renewal periods for a maximum of 15 years and the agreement will automatically renew unless terminated by either party in writing. The Revised API Agreement does not include yearly purchase commitments or margin guarantees, but revises the API Agreement such that a unit price is established for 940,000 kilograms of pharmaceutical grade L-glutamine at $50 USD per kilogram for a total of $47 million over the 15 years. The Revised API Supply Agreement is silent on yearly purchase commitments and margin guarantees on purchases of $5 million and $2.5 million, respectively.

Table of Contents

NOTE 8 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to the Company’s loans from related parties outstanding as of September 30, 2017:

Class	Lender	Annual Interest Rate		Date of Loan	Term of Loan	Principal Amount Outstanding at September 30, 2017		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes at September 30, 2017
Notes payable to related parties—current:
	Hope Hospice(1)	8	%	1/17/2012	Due on demand	$	—	$	200,000	$	200,000	$	7,331	$	—	—
	Hope Hospice(1)	8	%	6/14/2012	Due on demand	200,000		200,000		—		8,000		—		—
	Hope Hospice(1)	8	%	6/21/2012	Due on demand	100,000		100,000		—		4,000		—		—
	Hope Hospice(1)	8	%	2/11/2013	Due on demand	—		50,000		50,000		1,559		—		—
	Hope Hospice(1)	10	%	1/7/2015	Due on demand	100,000		100,000		—		—		—		—
	Yutaka Niihara(2)(3)	10	%	5/21/2015	Due on demand	—		826,105		94,339		61,829		—		—
	Masaharu & Emiko Osato(3)	11	%	12/29/2015	Due on demand	300,000		300,000		—		—		—		—
	Lan T. Tran(2)	11	%	2/10/2016	Due on demand	130,510		130,510		—		—		—		—
	Masaharu & Emiko Osato(3)	11	%	2/25/2016	Due on demand	400,000		400,000		—		—		—		—
	Hope Hospice(1)	10	%	4/4/2016	Due on demand	50,000		50,000		—		—		—		—
	Lan T. Tran(2)	10	%	4/29/2016	Due on demand	20,000		20,000		—		—		—		—
	Hope Hospice(1)	10	%	6/3/2016	Due on demand	250,000		250,000		—		—		—		—
	Lan T. Tran(2)	10	%	2/9/2017	Due on demand	12,000		12,000		—		—		—		—
	Yutaka Niihara(2)(3)	10	%	9/14/2017	Due on demand	903,751		903,751		—		—		—		—
					Sub total	$	2,466,261	$	3,542,366	$	344,339	$	82,719	$	—	—
Convertible notes payable to related parties—current:
	Yasushi Nagasaki(2)	10	%	6/29/2012	Due on demand	$	254,000	$	388,800	$	134,800	$	57,886	$	3.30	82,747
	Charles & Kimxa Stark(2)	10	%	10/1/2015	2 years	20,000		20,000		—		—		4.50		5,333
	Yutaka & Soomi Niihara(2)(3)	10	%	11/16/2015	2 years	200,000		200,000		—		—		4.50		52,785
					Sub total	$	474,000	$	608,800	$	134,800	$	57,886	—		140,865

					Total	$	2,940,261	$	4,151,166	$	479,139	$	140,605	—		140,865

(1) Dr. Niihara, the Chairman and Chief Executive Officer of the Company, is also the Chief Executive Officer of Hope Hospice.

(2) Officer and/or Management.

(3) Director.

Table of Contents

The following table sets forth information relating to the Company’s loans from related parties outstanding as of December 31, 2016.

Class	Lender	Annual Interest Rate		Date of Loan	Term of Loan	Principal Amount Outstanding at December 31, 2016		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes at December 31, 2016
Notes payable to related parties—current:
	Hope Hospice(1)	8	%	1/17/2012	Due on demand	$	200,000	$	200,000	$	—	$	20,000	$	—	—
	Hope Hospice(1)	8	%	6/14/2012	Due on demand	200,000		200,000		—		20,000		—		—
	Hope Hospice(1)	8	%	6/21/2012	Due on demand	100,000		100,000		—		10,000		—		—
	Hope Hospice(1)	8	%	2/11/2013	Due on demand	50,000		50,000		—		5,000		—		—
	Hope Hospice(1)	10	%	1/7/2015	Due on demand	100,000		100,000		—		—		—		—
	Lan T. Tran(2)	10	%	2/9/2015	Due on demand	10,000		10,000		—		—		—		—
	IRA Service Trust Co. FBO Peter B. Ludlum(2)	10	%	2/20/2015	Due on demand	10,000		10,000		—		—		—		—
	Yutaka Niihara(2)(3)	10	%	5/21/2015	Due on demand	94,340		826,105		731,765		47,822		—		—
	Masaharu & Emiko Osato(3)	11	%	12/29/2015	Due on demand	300,000		300,000		—		—		—		—
	Lan T. Tran(2)	11	%	2/10/2016	Due on demand	130,510		130,510		—		—		—		—
	Hideki & Eiko Uehara(4)	11	%	2/15/2016	Due on demand	—		133,333		133,333		12,226		—		—
	Masaharu & Emiko Osato(3)	11	%	2/25/2016	Due on demand	400,000		400,000		—		—		—		—
	Hope Hospice(1)	10	%	4/4/2016	Due on demand	50,000		50,000		—		—		—		—
	Willis C. Lee(2)(3)	10	%	4/8/2016	Due on demand	—		79,700		79,700		1,288		—		—
	Lan T. Tran(2)	10	%	4/29/2016	Due on demand	20,000		20,000		—		—		—		—
	IRA Service Trust Co. FBO Peter B. Ludlum(2)	10	%	5/5/2016	Due on demand	10,000		10,000		—		—		—		—
	Hope Hospice(1)	10	%	6/3/2016	Due on demand	250,000		250,000		—		—		—		—
					Sub total	$	1,924,850	$	2,869,648	$	944,798	$	116,336	$	—	—
Convertible notes payable to related parties—current:
	Yasushi Nagasaki(2)	10	%	6/29/2012	Due on demand	$	254,000	$	388,800	$	134,800	$	27,824	$	3.30	94,532
	Charles & Kimxa Stark(2)	10	%	10/1/2015	2 years	20,000		20,000		—		—		4.50		5,002
	Yutaka & Soomi Niihara(2)(3)	10	%	11/16/2015	2 years	200,000		200,000		—		—		4.50		49,461
					Sub total	$	474,000	$	608,800	$	134,800	$	27,824	—		148,995

					Total	$	2,398,850	$	3,478,448	$	1,079,598	$	144,160	—		148,995

(1) Dr. Niihara, the Company’s Chairman and Chief Executive Officer, is also the CEO of Hope Hospice.

(2) Officer and/or Management.

(3) Director.

(4) Family of Officer/Director.

Table of Contents

NOTE 9 — GEOGRAPHIC INFORMATION

For the nine months ended September 30, 2017 and 2016, the Company earned revenue from countries outside of the United States as set forth in the table below:

Country	Revenues for the Nine Months Ended September 30, 2017		% of Total Revenue for the Nine Months Ended September 30, 2017		Revenues for the Nine Months Ended September 30, 2016		% of Total Revenue for the Nine Months Ended September 30, 2016
Japan	$	119,033	32	%	$	120,280	38	%
Taiwan	180,854		49	%	138,313		44	%

For the three months ended September 30, 2017 and 2016, the Company earned revenue from countries outside of the United States as set forth in the table below:

Country	Revenues for the Three Months Ended September 30, 2017		% of Total Revenue for the Three Months Ended September 30, 2017		Revenues for the Three Months Ended September 30, 2016		% of Total Revenue for the Three Months Ended September 30, 2016
Japan	$	48,185	34	%	$	39,185	63	%
Taiwan	67,087		48	%	4,046		7	%

The Company did not have any significant currency translation or foreign transaction adjustments during the nine months ended September 30, 2017 or 2016.

NOTE 10 — SUBSEQUENT EVENTS

S ubsequent to September 30, 2017, the Company issued the following:

Notes issued after September 30, 2017	Amount		Annual Interest Rate		Term of Note	Conversion Price
Convertible notes	$	5,200,000	10	%	1 - 2 Years	$	10.00
Total	$	5,200,000

Table of Contents

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

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

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017 (the “Annual Report”).

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

Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements.

Company Overview

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

In the Phase 3, double-blind, placebo-controlled, parallel-group, multi-center clinical trial which enrolled a total of 230 adult and pediatric patients as young as five years of age, at 31 sites in the United States, Endari was administered up to 30 grams per day and demonstrated a 25% decrease in the median frequency of sickle cell crises and 33% decrease in the median number of hospitalizations, as compared to placebo. Based on an analysis, utilizing pre-specified statistical methods, the difference between groups was statistically significant; p=0.0052 and p=0.0045, respectively. Other clinically relevant endpoints showed similar results such as a 66% lower incidence of acute chest syndrome (p=0.0028), 41% less cumulative days in hospital (p=0.022) and 56% delay in onset of the first sickle cell crisis (p=0.0152). The safety data collected demonstrated a safety profile similar to that of placebo.

Based on the results of the Phase 3 clinical trial and other supportive studies, Endari was approved for marketing by the FDA on July 7, 2017. Endari represents the first treatment for pediatric patients with SCD, and the first new treatment in nearly 20 years for adult patients.

Endari has received Orphan Drug designation from both the FDA and the European Commission (“EC”). We intend to market Endari in the U.S. by building our own targeted sales force and to utilize strategic partnerships to market Endari in any foreign jurisdictions in which we are able to obtain marketing approval.

Table of Contents

We have extensive experience in the field of SCD, including the development, outsourced manufacturing and conduct of clinical trials of Endari. Our Chairman of the Board and Chief Executive Officer, Yutaka Niihara, M.D., M.P.H., is a leading hematologist in the field of SCD. Dr. Niihara is licensed to practice medicine in both the United States and Japan and has been actively engaged in SCD research and the care of patients with SCD for over 20 years, primarily at the University of California Los Angeles and the Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center (“LA BioMed”), a nonprofit biomedical research institute.

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

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

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

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

In December 2016, we formed Emmaus Life Sciences Korea (“ELSK”), a wholly owned subsidiary of Emmaus Medical, whose primary focus is expanding our business in Korea.

Our corporate structure is illustrated below:

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

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

Table of Contents

Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: our success in commercializing Endari in the U.S. or elsewhere; the duration and results of the clinical trials for our other product candidates; 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 any future 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, 2017, our accumulated deficit was $142.3 million and we had cash and cash equivalents of $4.4 million. Since inception we have had minimal revenues and have been required to rely on funding from sales of equity securities and debt financings and loans, including loans from related parties.

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

On September 12, 2016, we entered into a Letter of Agreement with KPM and Hanil. In the Letter of Agreement, the parties agreed that KPM and Hanil would purchase $17 million and $3 million, respectively, of shares of our common stock at a price of $4.50 per share by September 30, 2016. In exchange, we agreed to invest $13 million and $1 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. The purchases of Emmaus shares by KPM and Hanil were completed in 2016.

Subsequent to the receipt of investments from KPM and Hanil, we completed the cross-investments with KPM and Hanil in which we purchased for an aggregate of $14 million a minority interest of 8.2% in KPM and of 0.8% in Hanil. KPM is principally engaged in the manufacture and distribution of surface treatment chemicals. Hanil is principally engaged in the design, manufacture and sale of vacuum coating systems. Both KPM and Hanil plan to expand their biopharma business.

On June 12, 2017, we entered into the MCAA with Telcon Holdings and Telcon. In accordance with the MCAA, the Company invested ₩36.0 billion KRW (approximately $31.8 million USD) to purchase 6,643,559 shares of Telcon’s common stock at a purchase price of ₩5,419 KRW (approximately $4.79 USD) per share. Upon consummation of the MCAA, the Company became Telcon’s largest shareholder owning approximately 10.3% of Telcon’s outstanding common shares.

Financial Overview

Revenue

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

Currently, we generate revenue through the sale of NutreStore, L-glutamine powder for oral solution, as a treatment for SBS as well as AminoPure, a nutritional supplement. 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 products sold.

Cost of Goods Sold

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

Research and Development Expenses

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

Table of Contents

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

Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.

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

General and Administrative Expenses

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

Environmental Expenses

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

Inventories

I nventories consist of finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or market value. All of the raw material purchased during three months and nine months ended September 30, 2017 and 2016 was from one vendor.

Results of Operations

Three months ended September 30, 2017 and 2016

Net Losses . Net losses increased by $11.0 million, or 176%, to $17.3 million from $6.3 million for the three months ended September 30, 2017 and 2016, respectively. The increase in losses is primarily a result of increased other expenses and operating expenses, in each case as discussed below. 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.

Revenues, Net . Net revenues increased by $78,000, or 127%, to $140,000 from $62,000 for the three months ended September 30, 2017 and 2016. Combined revenues from our AminoPure, L-glutamine nutritional supplement product, and our NutreStore, L-glutamine powder for oral solution for treatment of SBS, increased due to higher demands during these periods.

Cost of Goods Sold . Cost of goods sold increased by $108,000, or 513%, to $129,000 from $21,000 for the three months ended September 30, 2017 and 2016. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the three months ended September 30, 2017 and 2016 was from one vendor. Cost of goods sold increased due to increased sales of AminoPure in Taiwan and a $62,000 increase in inventory reserve for AminoPure.

Table of Contents

Research and Development Expenses . Research and development expenses stayed approximately the same at around $0.4 million for the three months ended September 30, 2017 and 2016. We expect continued research and development costs in the rest of 2017 to support work on marketing approvals outside the U.S.

Selling Expenses . Selling expenses increased by $110,000, or 107%, to $214,000 from $104,000 for the three months ended September 30, 2017 and 2016. Selling expenses include the costs for marketing of Endari, distribution and freight for NutreStore, as well as advertisement, travel and salaries and wages for AminoPure. The increase was primarily due to an increase in the marketing expense for Endari.

General and Administrative Expenses. General and administrative expenses increased by $0.6 million, or 21%, to $3.2 million from $2.6 million for the three months ended September 30, 2017 and 2016. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. This increase was primarily due to an increase of $0.9 million in professional fees, and a $0.1 million increase in travel expenses, offset by a $0.3 million decrease in share-based compensation expense and a $0.1 million decrease in fundraising fees.

Other Income and Expense . Total other expense increased by $10.3 million, or 325%, to $13.5 million expense for the three months ended September 30, 2017, compared to $3.2 million in other expense for the three months ended September 30, 2016. The increase was primarily due to a negative change in the fair value of the warrant derivative liabilities of $10.7 million and an increase in interest expense of $1.3 million, offset by a decrease in convertible note inducement expense of $1.4 million and an absence of litigation settlement expense of $0.3 million.

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

· to build a sales and marketing team to commercialize Endari in the U.S.;

· 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; and

· to support research and development activities, which we expect to expand as we undertake to obtain marketing approval for Endari outside the U.S. and as development of our product candidates continues.

Nine months ended September 30, 2017 and 2016

Net Losses . Net losses increased by $21.7 million, or 156%, to $35.5 million from $13.8 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in losses is primarily a result of increased other expenses and operating expenses, in each case as discussed below. 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.

Revenues, Net . Net revenues increased by $52,000, or 17%, to $366,000 from $314,000 for the nine months ended September 30, 2017 and 2016. Combined revenues from our AminoPure, L-glutamine nutritional supplement product, and our NutreStore, L-glutamine powder for oral solution for treatment of SBS, increased during these periods.

Cost of Goods Sold . Cost of goods sold increased by $90,000, or 68%, to $222,000 from $132,000 for the nine months ended September 30, 2017 and 2016. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the raw material purchased during the nine months ended September 30, 2017 and 2016 was from one vendor. Cost of goods sold increased due to increased sales as well as a $62,000 increase in inventory reserve associated with AminoPure.

Research and Development Expenses . Research and development expenses increased by $0.9 million, or 60%, to $2.3 million from $1.4 million for the nine months ended September 30, 2017 and 2016. This increase was primarily due to an increase in the regulatory consulting expenses incurred in preparation for the meeting with the FDA Advisory Committee on May 24, 2017. We expect continued research and development costs in 2017 to support work on marketing approvals outside the U.S.

Selling Expenses . Selling expenses increased slightly by $123,000, or 44%, to $406,000 from $283,000 for the nine months ended September 30, 2017 and 2016. Selling expenses include the costs for marketing of Endari, distribution and freight for NutreStore, as well as advertisement, travel and salaries and wages for AminoPure. The increase was primarily due to an increase in marketing expense for Endari.

Table of Contents

General and Administrative Expenses. General and administrative expenses increased by $2.3 million, or 32%, to $9.5 million from $7.2 million for the nine months ended September 30, 2017 and 2016. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. This increase was primarily due to an increase of $1.5 million in share-based compensation expense and an increase of $0.7 million in professional fees.

Other Income and Expense . Total other expense increased by $18.3 million, or 359%, to $23.4 million expense for the nine months ended September 30, 2017, compared to $5.1 million in other expense for the nine months ended September 30, 2016. The increase was primarily due to a negative change in the fair value of the warrant derivative liabilities of $16.2 million and an increase in interest expense of $3.8 million, offset by a decrease in convertible note inducement expense of $1.4 million and an absence of litigation settlement expense of $0.3 million.

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

· to build a sales and marketing team to commercialize Endari in the U.S.;

Liquidity and Capital Resources

B ased on our losses to date, anticipated future revenue and operating expenses, debt repayment obligations and cash and cash equivalents balance of $4.4 million as of September 30, 2017, we do not have sufficient operating capital for our business without raising additional capital. We incurred a net loss of $35.5 million for the nine months ended September 30, 2017 and had an accumulated deficit at September 30, 2017 of $142.3 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of Endari in the U.S., NDA submission activities for Endari outside the U.S., research costs for the corneal cell sheets using Cultured Autologous Oral Mucosal Epithelial Cell Sheet (“CAOMECS”) technology and the expansion of corporate infrastructure, including costs associated with being a public reporting company and additional expenses that may be associated with pursuing a possible initial public offering. We have previously relied on unregistered equity offerings, debt financings and loans, including loans from related parties. As part of this effort, we have received various loans from officers, stockholders and other investors as discussed below. As of September 30, 2017, we had outstanding notes payable in an aggregate principal amount of $24.3 million, consisting of $10.3 million of non-convertible promissory notes and $14.0 million of convertible notes. Of the $24.3 million aggregate principal amount of notes outstanding as of September 30, 2017, approximately $23.6 million is either due on demand or will become due and payable within the next twelve months. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies, including the commercialization of Endari and the development in the United States of CAOMECS-based cell sheet technology.

We have had recurring operating losses, have a significant amount of notes payable and other obligations due within the next years and projected operating losses including the expected costs relating to the commercialization of Endari that exceed both the existing cash balances and cash expected to be generated from operations for at least the next year. In order to meet our expected obligations, management intends to raise additional funds through equity or debt financings. In addition, we may seek to raise additional funds through collaborations with other companies and financing from other sources and a possible initial public offering. Additional funding may not be available in amounts or on terms which are acceptable to us, if at all. Due to the uncertainty of our ability to meet our current operating and capital expenses, there is substantial doubt about our ability to continue as a going concern.

O ur cash burn rate for the first nine months ended September 30, 2017 was approximately $0.4 million per month.

Our cash flow from operations is not adequate and our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: our success in commercializing Endari in the U.S.; the number, duration and results of the clinical trials for our other product candidates; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business and commercialization strategies; the outcome of any future litigation; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure and NutreStore. Revenues from both products are currently not significant and we are unsure whether sales of these products 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. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to us or at all.

Table of Contents

For the nine months ended September 30, 2017 and during the year ended December 31, 2016, we borrowed $5.7 million and $7.4 million, respectively, pursuant to convertible notes and non-convertible promissory notes, of which $0.9 million and $2.2 million, respectively, have been issued to related parties. As of September 30, 2017 and December 31, 2016, the aggregate principal amounts outstanding under convertible notes and non-convertible promissory notes totaled $24.3 million and $18.3 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 5% to 11% and, except for the 2011 convertible note listed below in the principal amount of $0.3 million, are unsecured. The net proceeds of the loans were used for working capital purposes.

Table of Contents

The table below lists our outstanding notes payable as of September 30, 2017 and December 31, 2016 and the material terms of our outstanding borrowings:

										Shares							Shares
				Principal		Discount		Carrying		Underlying	Principal		Discount		Carrying		Underlying
				Outstanding		Amount		Amount		Notes September	Outstanding		Amount		Amount		Notes
Year	Interest Rate		Conversion	September 30,		September 30,		September 30,		30,	December 31,		December 31,		December 31,		December 31,
Issued	Range	Term of Notes	Price	2017		2017		2017		2017	2016		2016		2016		2016
Notes payable
2013	10%	Due on demand	—	$	887,000	$	—	$	887,000	—	$	854,900	$	—	$	854,900	—
2015	10%	Due on demand	—	10,000		—		10,000		—	2,406,194		—		2,406,194		—
2016	10% - 11%	Due on demand	—	843,335		—		843,335		—	833,335		—		833,335		—
2017	5% - 11%	Due on demand	—	6,149,498		—		6,149,498		—	—		—		—		—
				$	7,889,833	$	—	$	7,889,833	—	$	4,094,429	$	—	$	4,094,429	—

		Current		$	7,889,833	$	—	$	7,889,833	—	$	4,094,429	$	—	$	4,094,429	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Notes payable - related party
2012	8%	Due on demand	—	$	300,000	$	—	$	300,000	—	$	500,000	$	—	$	500,000	—
2013	8%	Due on demand	—	—		—		—		—	50,000		—		50,000		—
2015	10% - 11%	Due on demand	—	400,000		—		400,000		—	514,340		—		514,340		—
2016	10% - 11%	Due on demand	—	850,510		—		850,510		—	860,510		—		860,510		—
2017	10%	Due on demand	—	915,751		—		915,751		—	—		—		—		—
				$	2,466,261	$	—	$	2,466,261	—	$	1,924,850	$	—	$	1,924,850	—

		Current		$	2,466,261	$	—	$	2,466,261	—	$	1,924,850	$	—	$	1,924,850	—
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
Convertible notes payable
2011	10%	5 years	$3.05	$	300,000	$	—	$	300,000	98,285	$	300,000	$	—	$	300,000	98,285
2014	10%	Due on demand - 2 years	$3.05 - $3.60	480,747		—		480,747		165,647	452,168		—		452,168		152,986
2015	10%	2 years	$4.50	881,070		649		880,421		234,200	2,904,800		104,389		2,800,411		889,115
2016	10%	1 - 2 years	$3.60 - $4.50	3,720,174		145,837		3,574,337		967,687	8,126,129		1,475,744		6,650,385		2,193,687
2017	10%	Due on demand - 2 years	$3.50 - $7.60	8,097,305		2,477,196		5,620,109		2,241,804	—		—		—		—
				$	13,479,296	$	2,623,682	$	10,855,614	3,707,623	$	11,783,097	$	1,580,133	$	10,202,964	3,334,073

		Current		$	12,802,744	$	2,228,891	$	10,573,853	3,509,426	$	10,499,303	$	1,294,296	$	9,205,007	2,984,161
		Non-current		$	676,552	$	394,791	$	281,761	198,197	$	1,283,794	$	285,837	$	997,957	349,912
Convertible notes payable - related party
2012	10%	Due on demand	$3.30	$	254,000	$	—	$	254,000	82,747	$	254,000	$	—	$	254,000	94,532
2015	10%	2 years	$4.50	220,000		—		220,000		58,118	220,000		—		220,000		54,463
				$	474,000	$	—	$	474,000	140,865	$	474,000	$	—	$	474,000	148,995

		Current		$	474,000	$	—	$	474,000	140,865	$	474,000	$	—	$	474,000	148,995
		Non-current		$	—	$	—	$	—	—	$	—	$	—	$	—	—
		Grand Total		$	24,309,390	$	2,623,682	$	21,685,708	3,848,488	$	18,276,376	$	1,580,133	$	16,696,243	3,483,068

Table of Contents

Cash flows for the nine months ended September 30, 2017 and September 30, 2016

Net cash used in operating activities

Net cash flows used in operating activities decreased by $16.4 million, or 83%, to $3.4 million from $19.8 million for the nine months ended September 30, 2017 and 2016, respectively. This decrease was primarily due to a $18.5 million increase of working capital and a $19.6 million increase in the non-cash adjustments to net loss, partially offset by a $21.7 million increase in net loss. The increase in non-cash adjustments to net loss was primarily attributable to: $16.2 million for the change in the fair value of warrant derivative liabilities, a $3.9 million increase in amortization of discount of convertible notes and a $1.5 million increase in share-based compensation, offset by a $1.4 million decrease in convertible note inducement expense. The increase of working capital primarily consisted of $36.8 million increase in other current liabilities for the funds received related to an API supply agreement and the upfront payment for a distribution agreement, offset by $17.8 million decrease in investment capital reserve which we reserved to finance our reciprocal investments in Telcon, KPM and Hanil common shares (see Note 7).

Net cash used in investing activities

Net cash flows used in investing activities increased to $0.1 million from $0 for the nine months ended September 30, 2017 and 2016, respectively. Net cash used in investing activities included purchases of property and equipment.

Net cash from financing activities

Net cash flows from financing activities decreased by $19.4 million, or 75%, to $6.5 million from $25.9 million for the nine months ended September 30, 2017 and 2016, respectively, as a result of a $21.0 million decrease in proceeds of issuance of common stock and a $1.3 million decrease in proceeds from issuance of convertible promissory notes, partially offset by a $1.8 million increase in proceeds from non-convertible notes payable issued and a $1.1 million decrease in repayment of convertible and non-convertible promissory notes.

Off-Balance-Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

M anagement’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), on the basis that the Company will continue as a going concern. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

Refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2017.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

N ot required for a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

D isclosure controls and procedures (“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP 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 disclosures.

Table of Contents

As of the end of the period covered by this Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our DCP (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation and due to the material weaknesses in our internal control over financial reporting as of December 31, 2016 described below, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s DCP are not effective. Our management is working at remediating the material weaknesses in our internal controls over financial reporting. However, we have not yet completed a full annual accounting cycle since December 31, 2016 to fully validate the remediation of the material weaknesses in our internal controls and the effectiveness of the Company’s DCP.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2017 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Material Weakness and Plan of Remediation

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

We conducted an evaluation pursuant to Rule 13a-15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2016. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have identified the following control deficiencies that constituted material weaknesses in the Company’s internal control over financial reporting as of September 30, 2017, the first of which they have also determined to exist as of December 31, 2015 and 2016:

· We did not design and maintain effective controls over our DCP. Specifically, because of the continuance of a material weakness in our internal control over financial reporting, initially identified in our evaluations of the effectiveness of our internal control over financial reporting as of December 31, 2013 and 2014, we did not design and maintain effective controls related to the application of GAAP on certain complex transactions, nor did we maintain effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions and internal communication of significant transactions.

· We did not design and maintain effective controls over the identification and evaluation of accounting matters that may result from the Company entering into material agreements. Specifically, the internal communication process among members of management was determined to be insufficient to ensure that all agreements and significant terms and conditions are being properly communicated in a timely manner.

Our management and Board of Directors are committed to the remediation of the material weakness, as well as the continued improvement of our overall system of DCP. We are in the process of implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, which primarily include engaging additional and supplemental internal and external resources with the technical expertise in GAAP, as well as to implement new policies and procedures to provide more effective controls to track, process, analyze, and consolidate the financial data and reports.

We believe these measures, once implemented, will remediate the control deficiencies that gave rise to the material weaknesses. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remedial measures are required.

Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Risks Related to Commercialization of Endari

We are at an early stage in the commercialization of Endari, and have limited sales experience. We cannot predict if or when we will generate sufficient revenues to become profitable.

On July 7, 2017, Endari for treatment of SCD was approved for sale by the U.S. Food and Drug Administration ( “FDA”). We have limited experience in commercializing products. As a result, there is not enough historical basis upon which to assess how we will respond to regulatory, competitive or other challenges to our ability to sell Endari on a profitable basis, and it is difficult to predict the amount of revenues or profits, if any, that we will generate from the sale of Endari.

Our ability to generate sufficient revenues from Endari and to transition to profitability and generate positive cash flow will depend on numerous factors described in the following risk factors, and we may continue to incur losses and negative cash flow and may never transition to profitability or positive cash flow. In particular, we expect our operating expenses to continue to increase in the near-term as we seek to commercialize Endari, and we may not be able to generate sufficient revenues to offset this anticipated increase in expenses. If we are unable to transition to profitability and generate positive cash flow over time, our business, results of operations and financial condition would be materially and adversely affected, which could result in our inability to continue operations.

We are dependent on the commercial success of our approved product, Endari, and, although we expect to generate revenue from sales of Endari, we may never become profitable.

In the near term, our ability to become profitable will depend upon the commercial success of our approved product, Endari, which we anticipate launching in the fourth quarter of 2017. In addition to the risks discussed elsewhere in this section, our ability to generate future revenues from the sale of Endari will depend on a number of factors, including, but not limited to:

· achievement of broad market acceptance and coverage by third-party payors for Endari;

· the effectiveness of our efforts in marketing and selling Endari;

· our and our contract manufacturers’ ability to successfully manufacture commercial quantities of Endari at acceptable cost levels and in compliance with regulatory requirements;

· our ability to maintain a cost-efficient commercial organization and, to the extent we seek to do so, successfully partner with additional third parties;

· our ability to successfully expand and maintain intellectual property protection for Endari;

· our ability to effectively work with physicians to ensure that patients are treated to an effective dose of Endari;

· the efficacy and safety of Endari; and

· our ability to comply with ongoing regulatory requirements.

Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict the extent to which we will generate revenues from Endari or the timing for when or the extent to which we will become profitable, if ever. Even if we do achieve significant revenues from Endari and become profitable, we may not be able to sustain our revenues or maintain or increase profitability on an ongoing basis.

Table of Contents

If Endari does not achieve broad market acceptance or coverage by third-party payors, the revenues that we generate from that product will be limited.

The commercial success of Endari will depend upon the acceptance of the product by physicians, patients, healthcare payors and the medical community. Coverage and reimbursement for the product by third-party payors is also necessary for commercial success. The degree of market acceptance of Endari will depend on a number of factors, including:

· acceptance by physicians and patients of the product as a safe and effective treatment;

· the relative convenience and ease of administration;

· the prevalence and severity of adverse side effects;

· limitations or warnings contained in Endari’s FDA-approved labeling;

· availability and perceived advantages of alternative treatments;

· any negative publicity related to Endari or our competitors’ products;

· the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies;

· pricing and cost effectiveness;

· our ability to obtain sufficient third-party payor coverage and reimbursement;

· the willingness of patients to pay out of pocket in the absence of third-party payor coverage; and

· our ability to maintain compliance with regulatory requirements.

Our efforts to educate the medical community and third-party payors on the benefits of Endari and gain broad market acceptance may require significant resources and may never be successful. If Endari does not achieve an adequate level of acceptance by physicians, third-party payors and patients, we may not generate sufficient revenue from that product to become or remain profitable.

In addition, SCD treatments can be costly to third-party payors and patients. Accordingly, hospitals and physicians may resist prescribing Endari and third-party payors, and patients may not purchase Endari due to cost.

We have no internal manufacturing capabilities; we will be dependent on third parties in our supply chain for the commercial supply of Endari; and if we fail to maintain our supply and manufacturing relationships with these third parties or develop new relationships with other third parties, we may be unable to commercialize Endari.

We will rely on third parties for the commercial supply of Endari. Our ability to commercially supply Endari will depend, in part, on our ability to successfully outsource most, if not all, of the aspects of its manufacturing at competitive costs, in accordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. If we fail to develop and maintain supply relationships with these third parties, we may be unable to continue to commercialize Endari.

We will purchase pharmaceutical grade L-glutamine utilized in connection with Endari from third parties. Our ability to obtain pharmaceutical grade L-glutamine in sufficient quantities and quality, and on a timely basis, is critical to our commercialization of Endari. There is no assurance that these suppliers will produce pharmaceutical grade L-glutamine in the quantities and quality and at the times it is needed, if at all. Moreover, the replacement of any of these suppliers could lead to significant delays and increases in our costs.

The manufacture of pharmaceutical products generally requires significant expertise and capital investment, often including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems can include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Additionally, our manufacturers may experience difficulties due to resource constraints, labor disputes, unstable political environments or natural disasters. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations for any reason, our ability to commercially supply Endari could be jeopardized. Any delay or interruption in our ability to commercially supply Endari will result in the loss of potential revenues and could adversely affect the market’s acceptance of that product.

Table of Contents

Manufacturers and suppliers are subject to regulatory requirements including current Good Manufacturing Practices (“cGMPs”), which cover, among other things, manufacturing, testing, quality control and recordkeeping relating to Endari, and are subject to ongoing inspections by FDA and other regulatory agencies. We do not control the manufacturing processes of third-party manufacturers, and we will be currently completely dependent on them. If any of our third-party manufacturers cannot successfully manufacture product that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of Endari or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to commercially supply Endari.

We may not be successful in executing sales and marketing strategies for Endari.

We plan to launch Endari in the fourth quarter of 2017. In order to do so, we must build a commercial organization including sales, marketing, trade and distribution functions. We do not currently have any commercial organization, and therefore we cannot provide any assurance that we will be able to build an organization that is successful at marketing and selling Endari. Our competitors currently have sales and marketing organizations and significantly greater experience than we do in selling, marketing and distributing pharmaceuticals, and we may not be able to compete successfully with them.

If our third-party manufacturers or suppliers fail to deliver the required commercial quantities of Endari and its sub-components and starting materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers or suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, the commercialization of Endari would be impeded, delayed, limited or prevented, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

Please refer to the additional risk factors disclosed in the “Risk Factors” section of the Annual Report.

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

On July 18, 2017, the Company refinanced a convertible note payable to a third party in the original principal amount of $662,524 with a new convertible note in the principal amount of $795,028 which bears interest at 10% per annum. The note is due on demand up to two years from the date of issuance. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.50 per share at any time during the term of the note upon the election of the holder.

On August 23, 2017, the Company refinanced a convertible note payable to a third party in the original principal amount of $525,000 with a new convertible note in the principal amount of $551,250 which bears interest at 10% per annum. The note has a six-month term with an option on the part of the holder to renew for up to twelve months. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.50 per share at any time during the term of the note upon the election of the holder.

All such securities noted above were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), or Regulation D under the Securities Act or, in the case of refinancings and conversions, upon the exemption from registration provided by Section 3(a)(9) of the Securities Act. These securities qualified for exemption under Section 4(a)(2) of the Securities Act or Regulation D because the issuances did not involve a “public offering.” The issuances were not a public offering based upon the following factors: (i) a limited number of securities were issued to a limited number of investors; (ii) there was no public solicitation; (iii) each investor was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the investors. No broker-dealers 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.

Table of Contents

Item 6. Exhibits

(a) Exhibits

Exhibit Number		Description of Document

4.1		Convertible Promissory Note dated July 18, 2017 issued by the registrant to The Takemoto Family.

4.2		Convertible Promissory Note dated August 23, 2017 issued by the registrant to The Shitabata Family Trust.

10.1		Promissory Note dated September 14, 2017 issued by the registrant to Dr. Yutaka Niihara.

10.2		Promissory Note dated September 29, 2017 issued by the registrant to KPM Investment.

10.3		Revised Management Control Acquisition Agreement dated September 29, 2017 by and among the registrant, Telcon Holdings, Inc. and Telcon, Inc.

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.

Table of Contents

EMMAUS LIFE SCIENCES, INC.

SIGNATURES

P ursuant 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, 2017	By:	/s/ Yutaka Niihara
	Name:	Yutaka Niihara, M.D., M.P.H.
	Its:	Chief Executive Officer
		(principal executive officer and duly authorized officer)


	By:	/s/ Willis C. Lee
	Name:	Willis C. Lee
	Its:	Chief Financial Officer
		(principal financial and accounting officer)

Exhibit 4.1

THIS CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES INTO WHICH IT MAY BE CONVERTED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). NO SALE OR DISPOSITION MAY BE AFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN APPLICABLE EXEMPTION THEREFROM.

EMMAUS LIFE SCIENCES , INC.

Convertible Promissory Note

Principal Amount:	$795,028.48	Loan Date:	07/18/2017

Currency:	US Dollar	Term:	On Demand up to 2 Years

Interest Rate:	10%	Loan Due Date:	07/18/2019

Interest Payment Period: Interest will be paid upon Loan Due Date

Conversion Price per Share: $3.50

Lender: The Takemoto Family

FOR VALUE RECEIVED, Emmaus Life Sciences, Inc., a Delaware corporation, located at 21250 Hawthorne Blvd., Suite 800, Torrance, CA 90503 (“Borrower”) agrees to pay to Lender the sum of the Principal Amount in the stated Currency, together with any accrued interest at the stated Interest Rate, under the following terms and conditions of this Convertible Promissory Note (“Note”).

1. Terms of Repayment (Balloon Payment) and Conversion : The entire unpaid Principal Amount and any accrued interest shall become immediately due and payable upon the stated Loan Due Date. Simple interest at the stated Interest Rate will accrue on the outstanding Principal Amount commencing on the Loan Date of this Note and the Borrower shall make payments of interest only as per the stated Interest Payment Period.

At any time during the term of this Note, Lender shall by giving written Notice of Conversion to the Borrower in the form attached hereto as Exhibit A, have the right to convert some or all of the unpaid Principal Amount, including up to all the interest accrued and unpaid thereon, into shares of Common Stock of Borrower (the “Shares”) at the stated Conversion Price Per Share (subject to appropriate adjustment in the event of any stock splits, stock dividends, recapitalizations and similar transactions with respect to the capital stock of Borrower). Within two weeks following each conversion of this Note, Borrower shall deliver to Lender one or more original stock certificates representing the shares of common stock issued upon such conversion.

2. Prepayment : This Note may be prepaid in whole or in part at any time without premium or penalty upon ten days advance written notice by Borrower to Lender, provided that Lender shall be permitted to exercise its conversion rights pursuant to Section 1 hereof at any time or from time to time prior to the expiration of such ten-day period. All prepayments shall first be applied to interest, and then to principal payments.

3. Place of Payment: All payments due under this Note shall be sent to the Lender’s address, as noted in Attachment 1 hereto, or at such other place as the Lender or subsequently assigned holder of this Note may designate in writing in the future.

4 . Default: In the event of default, the Borrower agrees to pay all costs and expenses incurred by the Lender, including all reasonable attorney fees as permitted by law for the collection of this Note upon default.

5. Acceleration of Debt: If the Borrower (i) fails to make any payment due under the terms of this Note or seeks relief under the U.S. Bankruptcy Code, (ii) fails to deliver shares to the Lender by the deadline set forth in Section 4 hereof, (iii) suffers an involuntary petition in bankruptcy or receivership that is not vacated within thirty (30) days, (iv) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official or such appointment is not discharged or stayed within 30 days, (v) makes a general assignment for the benefit of its creditors or (vi) admits in writing that it is generally unable to pay its debts as they become due, the entire balance of this Note and any interest accrued thereon shall be immediately due and payable to the holder of this Note.

6. Modification: No modification or waiver of any of the terms of this Note shall be allowed unless by written agreement signed by the parties. No waiver of any breach or default hereunder shall be deemed a waiver of any subsequent breach or default of the same or similar nature.

7. Complete Note: This Note is the complete and exclusive statement of agreement of the parties with respect to matters in this Note. This Note replaces and supersedes all prior written or oral agreements or statements by and among the parties with respect to the matters covered by it. No representation, statement, condition or warranty not contained in this Note is binding on the parties.

8. Transfer of the Note: This Note may be transferred, in whole or in part, at any time or from time to time, by the Lender. The Borrower hereby waives any notice of the transfer of this Note by the Lender or by any subsequent holder of this Note, agrees to remain bound by the terms of this Note subsequent to any transfer, and agrees that the terms of this Note may be fully enforced by any subsequent holder of this Note. If this Note is to be transferred, the Lender shall surrender this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Lender a new Note registered as the Lender may request, representing the outstanding Principal Amount being transferred by the Lender and, if less then the entire outstanding Principal Amount is being transferred, a new Note to the Lender representing the outstanding Principal Amount not being transferred. This Note may not be transferred by the Borrower, by operation of law or otherwise, without the prior written consent of the Lender.

9. Lost, Stolen or Mutilated Note: Upon receipt by the Borrower of evidence reasonably satisfactory to the Borrower of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Lender to the Borrower in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Borrower shall execute and deliver to the Lender a new Note representing the outstanding Principal Amount and accrued and unpaid interest thereon.

10 . Remedies: The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Lender’s right to pursue actual and consequential damages for any failure by the Borrower to comply with the terms of this Note.

11 . Severability of Provisions : If any portion of this Note is deemed unenforceable, all other provisions of this Note shall remain in full force and effect.

12 . Insufficient Authorized Shares : The Borrower shall take all reasonable best action necessary to increase the Borrower’s authorized shares of common stock to an amount sufficient to allow Borrower to reserve the Required Reserve Amount for the Note.

13 . Choice of Law: All terms and conditions of this Note shall be interpreted under the laws of California, U.S.A., without regard to conflict of law principles.

Signed Under Penalty of Perjury, this 18th day of July, 2017

Emmaus Life Sciences, Inc.


/s/ WILLIS C. LEE
By: Willis C. Lee, COO & CFO



By: Investor (s)

ATTACHMENT 1

Lender’s Name: The Takemoto Family

Lender’s Address:

EXHIBIT A

NOTICE OF CONVERSION

(To be executed by the Lender in order to convert the Note)

TO: Emmaus Life Sciences, Inc.

The undersigned hereby irrevocably elects to convert $ of the principal amount of the Note issued to the Lender by Emmaus Life Sciences, Inc. (the “Company”) into shares of Common Stock of the Company according to the conditions stated therein, as of the Conversion Date written below.

Conversion Date:
Applicable Conversion Price:
Signature:
Name:
Address:
Amount to be converted:		$
Amount of Note unconverted:		$
Number of shares of Common Stock to be issued:
Please issue the shares of Common Stock in the following name and to the following address:
Address:
Address:
Phone Number:

Exhibit 4.2

EMMAUS LIFE SCIENCES , INC.

Convertible Promissory Note

(6 Months Up To 12 Months)

Principal Amount:	$551,250	Loan Date:	08/23/2017

Currency:	US Dollar	Term:	6 Months up to 12 Months

Interest Rate:	10%	Loan Due Date:	02/23/2018

Interest Payment Period: Interest is accrued and paid on Loan Due Date

Conversion Price per Share: $3.50

Lender: The Shitabata Family Trust

1. Terms of Repayment (Balloon Payment) and Conversion : The entire unpaid Principal Amount and any accrued interest shall become immediately due and payable upon the stated Loan Due Date. Lender has an option to renew this Note with the same term, up to a total of two years. Simple interest at the stated Interest Rate will accrue on the outstanding Principal Amount commencing on the Loan Date of this Note.

2. Prepayment : This Note may be prepaid in whole or in part without premium or penalty upon ten days advance written notice by Borrower to Lender, provided that Lender shall be permitted to exercise its conversion rights pursuant to Section 1 hereof at any time or from time to time prior to the expiration of such ten-day period. All prepayments shall first be applied to interest, and then to principal payments.

11 . Severability of Provisions : If any portion of this Note is deemed unenforceable, all other provisions of this Note shall remain in full force and effect.

13 . Choice of Law: All terms and conditions of this Note shall be interpreted under the laws of California, U.S.A., without regard to conflict of law principles.

14 . Additional Guarantor: Lender understands and acknowledges that Emmaus Life Sciences, Inc. is the borrower of this Note. However, for added security to lender, this note is guaranteed by Yutaka Niihara, M.D., CEO.

Signed Under Penalty of Perjury, this 23rd day of August, 2017

Emmaus Life Sciences, Inc.


/s/ WILLIS C. LEE
By: Willis C. Lee, COO & CFO


/s/ YUTAKA NIIHARA
By: Yutaka Niihara, M.D., MPH, Chairman and CEO



By: Lender

ATTACHMENT 1

Lender’s Name: The Shitabata Family Trust

Lender’s Address:

EXHIBIT A

NOTICE OF CONVERSION

(To be executed by the Lender in order to convert the Note)

TO: Emmaus Life Sciences, Inc.

Conversion Date:
Applicable Conversion Price:
Signature:
Name:
Address:
Amount to be converted:		$
Amount of Note unconverted:		$
Number of shares of Common Stock to be issued:
Please issue the shares of Common Stock in the following name and to the following address:
Address:
Address:
Phone Number:

Exhibit 10.1

EMMAUS LIFE SCIENCES, INC.

Promissory Note

Principal Amount:	$903.750.56	Loan Date:	September 14, 2017

Currency:	US dollar	Term:	Due on demand

Interest Rate:	10%	Loan Due Date:	Due on demand

Interest Payment Period: Interest is accrued and paid upon Loan Due Date

Lender: Yutaka Niihara

1. Terms of Repayment (Balloon Payment): The entire unpaid Principal Amount and any accrued interest shall become immediately due and payable upon the stated Loan Due Date. Simple interest at the stated Interest Rate will accrue on the outstanding Principal Amount commencing on the Loan Date of this Note and the Borrower shall make payments of interest only as per the stated Interest Payment Period.

2. Prepayment: This Note may be prepaid in whole or in part at any time after six months of the Loan Date without premium or penalty. All prepayments shall first be applied to interest, and then to principal payments.

4. Default: In the event of default, the Borrower agrees to pay all costs and expenses incurred by the Lender, including all reasonable attorney fees as permitted by law for the collection of this Note upon default.

5. Acceleration of Debt: If the Borrower (i) fails to make any payment due under the terms of this Note or seeks relief under the U.S. Bankruptcy Code, (ii) fails to deliver shares to the Lender by the deadline set forth in Section 4 hereof, (iii) suffers an involuntary petition in bankruptcy or receivership that is not vacated within thirty (30) days, (iv) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official or such appointment is not discharged or stayed within 30 days, (v) makes a general assignment for the benefit of its creditors or (vi) admits in writing that it is generally unable to pay its debts as they become due, the entire balance of this Note and any interest accrued thereon shall be immediately due and payable to the holder of this Note.

6. Modification: No modification or waiver of any of the terms of this Note shall be allowed unless by written agreement signed by the parties. No waiver of any breach or default hereunder shall be deemed a waiver of any subsequent breach or default of the same or similar nature.

7. Complete Note: This Note is the complete and exclusive statement of agreement of the parties with respect to matters in this Note. This Note replaces and supersedes all prior written or oral agreements or statements by and among the parties with respect to the matters covered by it. No representation, statement, condition or warranty not contained in this Note is binding on the parties.

8. Transfer of the Note: This Note may be transferred, in whole or in part, at any time or from time to time, by the Lender. The Borrower hereby waives any notice of the transfer of this Note by the Lender or by any subsequent holder of this Note, agrees to remain bound by the terms of this Note subsequent to any transfer, and agrees that the terms of this Note may be fully enforced by any subsequent holder of this Note. If this Note is to be transferred, the Lender shall surrender this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Lender a new Note registered as the Lender may request, representing the outstanding Principal Amount being transferred by the Lender and, if less then the entire outstanding Principal Amount is being transferred, a new Note to the Lender representing the outstanding Principal Amount not being transferred. This Note may not be transferred by the Borrower, by operation of law or otherwise, without the prior written consent of the Lender.

9. Lost, Stolen or Mutilated Note: Upon receipt by the Borrower of evidence reasonably satisfactory to the Borrower of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Lender to the Borrower in customary form and, in the case of mutilation , upon surrender and cancellation of this Note, the Borrower shall execute and deliver to the Lender a new Note representing the outstanding Principal Amount and accrued and unpaid interest thereon.

10. Remedies: The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Lender’s right to pursue actual and consequential damages for any failure by the Borrower to comply with the terms of this Note.

11. Severability of Provisions: If any portion of this Note is deemed unenforceable, all other provisions of this Note shall remain in full force and effect.

12. Choice of Law: All terms and conditions of this Note shall be interpreted under the laws of California, U.S.A., without regard to conflict of law principles.

Signed Under Penalty of Perjury, this 14 th day of September, 2017

Emmaus Life Sciences, Inc.



By: Willis C. Lee, COO and CFO


/s/ Yutaka Niihara
By: Lender

ATTACHMENT 1

Lender’s Name: Yutaka Niihara

Lender’s Address:

Exhibit 10.2

Loan Agreement

Creditor KPM investment (hereinafter “A”) and Debtor Emmaus Life Sciences Inc. USA (hereinafter “B”). The Loan Agreement (hereinafter “formal contract) is concluded as follows.

[Preamble]

1. This contract is for the purpose of “A” borrowing money from “B”, borrowing it and repaying it, and the “joint sureties” assuring obligation of “B”.

2. The parties hereby agree as follows.

Article 1 [Loan money of A]

A lends USD 3,500,000 to B on the date of this contract, and B borrows it.

Article 2 [Maturity date]

The maturity date under this Agreement is January 3, 2018. However, if A and B agree and A approves, the maturity date may be extended.

Article 3 [Interest]

1. A’s interest on the loan shall be 5% per annum and shall be repaid on maturity date.

2. B cannot claim deduction or reduction of all or part of the interest amount for any reason.

Article 4 [Collateral offer]

1. B will provide A as collateral for 6,643,559 shares in Telcon’s registered common stock and 4,248,720 shares in KPM tech’s registered common stock. However, the same collateral confirms that the collateral is provided to Telcon as a security before A is provided as collateral and that the collateral is a back burner.

2. The joint surety Emmaus will provide A with USD 5,000,000 of the bonds to be received from Telcon, Inc., which Emmaus holds, as collateral for B’s debt.

Article 5 [Trigger clause]

1. In the following cases, it is the cause of trigger clause.

① When B is unable to repay the principal at the redemption date of Article 2 without A’s consent

② B or the joint sureties has applied for a provisional seizure, seizure, auction, commencement of composition and commencement of company reorganization procedure to a third party other than A

③ When B or the joint sureties enter into settlement

④ When A reasonably judges that it is impossible to pay the loan

⑤ When A reasonably judges that either the contents of this Agreement or any of the verbal promises between A, B and the joint sureties cannot be executed or are impossible

2. In the occurrence of trigger clause, A may, in a reasonable manner, cover the principal of the loan by selling or entry of a change of a holder all collateral provided by B. Also, in this case, B must actively help A to execute the collateral smoothly.

Article 6 [Change of content]

Changes to the contents of this Agreement may be changed by written agreement of the parties.

Article 7 [Conflict resolution]

If a dispute arises in connection with this Agreement, A and B shall settle by mutual trust. However, if the settlement is not concluded, in case of filing a lawsuit, at a court of competent court of A’s head office, if B raises a lawsuit, it can file a suit at a court of competent court of B’s head office.

In order to confirm and certify the above contract, two contracts shall be prepared and signed by A and B, and one contract shall be kept for each one.

[Sign or seal is on the next page]

October , 2017

Creditor (A)

Company name: KPM investment

Address: 122, Sandan-ro 163beon-gil, Danwon-gu, Ansan-si, Gyeonggi-do, Republic of Korea

Representative Director: Chung Kyun Lee (Sealed)

Debtor (B)

Emmaus Life Sciences Inc. USA

Address: 21259 Hawthorne Blvd. Suite 800 Torrance, CA 90503

CEO: Dr. Yutaka Niihara (Sealed)

Exhibit 10.3

Agreement

This Agreement is made and entered as of September 29, 2017, by and between 1) Telcon Holdings Inc. (Hereinafter referred to as “Telcon Holdings”), 2) Telcon Inc. (Hereinafter referred to as “Telcon”) and 3) Emmaus Life Sciences (Hereinafter referred to as “Emmaus”) located in USA.

Telcon Holdings, Telcon and Emmaus (Hereinafter referred to as “The Parties”) hereby agree as follows

Article 1 [Objective]

This Agreement shall be concluded for the smooth execution of the matters stipulated in “Management Control Acquisition Agreement” and in order to agree on matters related to the management of TELCON in the future, executed by the parties on May 27, 2017.

Article 2 [Sale of Emmaus Shares held by Hanil Vacuum and KPM Tech to Telcon]

(1) The parties agree to sell total 4,444,445 shares (hereinafter referred to as “Target Shares”) of 666,667 shares of Emmaus held by Hanil Vacuum Co., Ltd. (Hanil Vacuum”) and 3,777,778 shares of Emmaus held by KPM Tech to Telkon at a price of USD. 6.6 per share. The contract shall be concluded on the date to be submitted the relevant external evaluation report and on October 31, 2017, whichever comes first.

(2) The parties shall cooperate in the external evaluation of the external evaluation agency to evaluate the adequacy on the sale price of target shares actively. If the external evaluation agency is reasonably necessary for external evaluation and the data can be prepared, Emmaus shall endeavor to ensure that target shares shall be sold as soon as possible by providing the data in a timely manner.

(3) Telcon shall pay the purchase price of target shares to Hanil Vacuum and KPM Tech as follows. The price of purchase and sale (the Issuing Price of Convertible Bond) for each shall be calculated as the Korean Won-Dollar exchange rate of the transaction day (Basic rate calculated of sale for the first time announced on Foreign Exchange Brokerage on the same day).

i ) New convertible bonds issued by Telcon, which make the amount of currency calculated in the above exchange rate as total amount of par value (Provided, it can be appropriately adjusted in consideration of the par value of one bond) shall be paid to Hanil Vacuum.

ii) New convertible bonds issued by Telconr which make the amount of currency calculated in the above exchange rate as total amount of par value (Provided, it can be appropriately adjusted in consideration of the par value of one bond) shall be paid to KPM Tech.

(4) Telcon shall not sell, offer or otherwise dispose target shares purchased from Hanil Vacuum and KPM Tech according to this Article for 1 year from the acquisition date (Hereinafter referred to as “Mandatory Holding Period”) without the prior written consent of Emmaus.

(5) Emmaus has a Preferred Purchase Rights if Telcon wants to dispose target shares after mandatory holding period has elapsed. Telcon shall notify Emmaus in written form if Emmaus intends to exercise the Preferred Purchase Rights after mandatory holding period has elapsed, and Emmaus shall notify Telcon in written form within 15 business days from the date of receipt of the notice of whether Preferred Purchase Rights shall be exercised by Telcon (hereinafter, “Prior Notice Period of Preferred Purchase Rights”). Telcon may sell target shares freely if it does not receive notification for the exercise of Preferred Purchase Rights within the Prior Notice Period of Preferred Purchase Rights.

(6) If Emmaus is listed on the NASDAQ within 1 year after the conclusion of this agreement, Telcon may dispose of target shares even before mandatory holding period stipulated in paragraph 4 of this article. In such case, Preferred Purchase Rights of Emmaus stipulated in paragraph 4 of this article shall be maintained.

Article 3 [Payment of Asian Copyright for Diverticular Disease Treatment]

(1) Emmaus and Telcon entered a Copyright Agreement related to a copyright in Korea, Japan and China for a total amount of $ 10,000,000 among the Asian copyright for Diverticular Disease Treatment, USD. 5,000,000 were paid on June 19, 2017 as a down payment, and a balance of USD.5,000,000 not paid to Emmaus shall be paid by December 31, 2017.

(2) The parties agree that they shall execute a valuation on the Copyright Agreement to be entered between Emmaus and Telcon related to a copyright in Australia for Diverticular Disease Treatment, conclude the Copyright Agreement related to a copyright in Australia as soon as possible after December 27, 2017. And Telcon agrees to pay Emmaus USD. 5,000,000 by December 31, 2017. However, if the amount of the external evaluation is less than USD.5,000,000 the parties shall conclude the agreement with mutual consultation by calculating the value within the external evaluation amount limit.

(3) Telcon Holdings or Any person designated by Telcon Holdings (hereinafter referred to as “Lender”) shall lend Emmaus USD. 3,500,000 (hereinafter referred to as “Loan”) after the resignation of Yutaka Niihara, Internal Director and Willis Lee, Internal Director in accordance with resolution of extraordinary general meeting of shareholders held by Article 4 (2) in this Agreement related to paragraphs 1 and 2 of this Article on September 29, 2017, and after the submission of the written resignation of BAXON KIM, Representative Director and YOUNGDON SON, External Director. However, in case of a request from Emmaus Korea, the lender shall cooperate with the Emmaus to return the loan to Emmaus Korea while the lender processes the foreign exchange report. If the loan is remitted to Emmaus within the term of the loan, Emmaus shall repay the loan immediately upon receipt from Telcon of the full amount of the Asian copyright for: Diverticular Disease Treatment in accordance with Paragraphs 1 and 2 of this Article.

(4) Emmaus shall provide the Lender the balance of USD. bond as the security for the loan stipulated in paragraph 3 of this Article for the Asian copyright for Diverticular Disease Treatment that will be paid from Telcon in accordance with Paragraph 1 of this Article. In addition, 6,643,559 shares of Talon held by Emmaus and 3,777,778 shares of KPM Tech held by Emmaus are pledged as subordinated bonds, and a Letter of Commitment shall be submitted to the Lender.

(5) Emmaus shall submit an Application for Diverticular Disease Clinical (IND) within the first quarter of 2018 and shall do its best to get the final approval soon.

(6) Telcon Holdings, hereby shall exempt the performance of the Agreement on the Fund Raising Obligation for the management support to Telcon stipulated in Article 6 (9) of “Management Control Acquisition Agreement” entered on May 26, 2017 in order for Telcon to pay USD. 10,000,000 in total amount related to the Asian Copyright for Diverticular Disease Treatment in accordance with paragraphs 1 and 2 of this Article. In addition, , Telcon Holdings does its best to ensure that Telcon finances and manages its operations by supporting the operating funds necessary for the management of Telcon.

Article 4 [Modification of Telcon Board of Directors and holding of extraordinary General Meeting of Shareholders]

(1) The parties agree to hold an extraordinary General Meeting of Shareholders in order to change the composition of the Board of Directors of Telcon and to appoint a new executive member under the assumption that they will faithfully fulfill the consent in this Agreement, and entrust Telcon Holdings with voting rights regarding the shares of Telcon held by Emmaus in order to be elected as a new executive member at this extraordinary General Meeting of Shareholders.

(2) The parties will hold the Telcon Board of Directors on September 29, 2017, assuming compliance with the provisions of Articles 2 and 3 of this Agreement (Including the completion of Emmaus Korea loan equivalent amount of the loan of Article 3 (3)). In addition, the Representative Director of Telcorn will be changed from previous Representative Director, BAXON KIM to a new Director appointed by Telcon Holdings, and will convene and hold an extraordinary General Meeting of Shareholders for the election of new Board of Directors.

(3) Under the assumption that they will faithfully fulfill the consent in this Agreement, Emmaus shall ensure that Internal Director, Yutaka Niihara and Internal Director, Willis Lee resign from the Telcon Board of Directors by September 29, 2017 and submit the required documents for resignation as soon as possible. Representative Director, BAXON KIM and Outside Director, YOUNGDON SOHN shall resign immediately after the Board of Directors, and decided not to object to the change from previous Representative Director, BAXON KIM to a new Director appointed by Telcon Holdings.

(4) Telcon shall pay the annual allowance equivalent to one year allowance to the Representative Director, BAXON KIM as retirement allowance or retirement bonus within 30 days from the date of submission of the resignation, and Telcon Holdings shall provide necessary funding so that Telcon can fulfill its obligations.

(5) Telcon Holdings shall appoint SANGGON HAN, Auditor of Telcon, as a non-registered president of Telcon with a condition to guarantee the term for one year from the resignation date.

Article 5 [[Effectiveness]

This Agreement shall become effective from the date on which the parties seal or sign.

Article 6 [Penalty]

If either Telcon Holdings or Emmaus does not comply with or fails to comply with any of the provisions in this Agreement (Including cases where either Telcon Holdings or Emmaus fails to fulfill the obligations of the Telcon in violation of this Agreement), the offending party shall pay a penalty of five billion Korean Won to the other party.

Article 7 [Others]

(1) This Agreement shall be construed and enforced in accordance with the laws of the Republic of Korea.

(2) Any dispute arising from or relating to this Agreement or the Parties’ relationship shall be adjudicated at Seoul Central District Court as the first court of competent jurisdiction.

IN WITNESS THEREOF, this Agreement shall be prepared in three copies and one each to each party, the Parties to this Agreement shall seal and sign below through their authorized representatives, and Certificate of Registered Seal shall be attached herein.

September 29, 2017

Telcon Holdings, Inc.

Address : 5 th Floor, 25, Teheran-ro 108-gil, Gangnam-gu, Seoul (Daechidong, Daechi bldg.)

Representative Director : JI HOON KIM (Sealed)

Telcon Inc.

Address: 684, Dongtangiheung-ro, Giheung-gu, Yongin-si, Gyeonggi-do

Representative Director: BAXON KIM (Sealed)

Emmaus Life Sciences Inc. USA

Address: 21250 Hawthorne Blvd. Suite 800 Torrance, CA 90503

CEO: Mr. Yutaka Niihara (Signed)

Translated by Song, Young Sun

Exhibit 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

I, Yutaka Niihara, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Emmaus Life Sciences, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2017

/s/ Yutaka Niihara
Yutaka Niihara, M.D., M.P.H.
Chief Executive Officer
(Principal Executive Officer)

Exhibit 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

I, Willis C. Lee, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Emmaus Life Sciences, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2017

/s/ Willis C. Lee
Willis C. Lee
Chief Financial Officer
(Principal Financial Officer)

Exhibit 32.1

Certification of 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

In connection with the quarterly report of Emmaus Life Sciences, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Yutaka Niihara
Yutaka Niihara, M.D., M.P.H.
Chief Executive Officer
(Principal Executive Officer)
November 14 , 2017


/s/ Willis C. Lee
Willis C. Lee
Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14 , 2017