EMMAUS LIFE SCIENCES, INC. (Form: 10-Q, Received: 11/14/2018 17:00:22)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2018

☐	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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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	☐	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

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. ☒

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

The registrant had 35,952,805 shares of common stock, par value $0.001 per share, outstanding as of November 9, 2018.

EMMAUS LIFE SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2018

INDEX

		Page
Part I Financial Information

Item 1.	Financial Statements	3

	(a)Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	3

	(b)Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2018 and 2017 (Unaudited)	4

	(c)Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months ended September 30, 2018 (Unaudited)	5

	(d)Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and 2017 (Unaudited)	6

	(e)Notes to Consolidated Financial Statements as of and for the Nine Months ended September 30, 2018 (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

Signatures		40

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

	As of
	September 30, 2018			December 31, 2017
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	16,662,211		$	15,836,063
Restricted cash		—			6,720,000
Accounts receivable		1,415,208			26,814
Inventories, net		3,347,229			625,299
Investment in marketable securities		61,585,792			99,836,397
Marketable securities, pledged to creditor		345,510			160,925
Prepaid expenses and other current assets		319,143			290,371
Total current assets		83,675,093			123,495,869
PROPERTY AND EQUIPMENT, NET		152,490			105,302
OTHER ASSETS
Long-term investment at cost		572,199			65,520
Intangibles, net		57,120			67,200
Notes receivable		13,523			—
Deposits		335,148			111,581
Total other assets		977,990			244,301
Total assets	$	84,805,573		$	123,845,472
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	7,542,026		$	5,695,310
Deferred rent		13,915			30,078
Other current liabilities		2,138,562			10,109
Warrant derivative liabilities		—			26,377,000
Notes payable, net		4,384,241			7,871,143
Notes payable to related parties, net		1,344,973			2,036,261
Convertible notes payable, net		14,137,645			7,025,002
Convertible notes payable to related parties, net		400,000			400,000
Total current liabilities		29,961,362			49,444,903
LONG-TERM LIABILITIES
Deferred rent		273,150			10,821
Other long-term liabilities		39,531,500			36,852,290
Warrant derivative liabilities		1,722,000			1,882,000
Notes payable, net		6,670,000			—
Conversion option liabilities		—			1,289,000
Convertible notes payable, net		5,258,462			20,075,780
Convertible notes payable to related parties, net		12,934,388			—
Total long-term liabilities		66,389,500			60,109,891
Total liabilities		96,350,862			109,554,794
STOCKHOLDERS’ EQUITY
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, 35,952,805 shares and 34,885,506 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		35,953			34,886
Additional paid-in capital		126,137,862			113,111,745
Accumulated other comprehensive income (loss)		(75,428	)		41,275,785
Accumulated deficit		(137,643,676	)		(140,131,738	)
Total stockholders’ equity (deficit)		(11,545,289	)		14,290,678
Total liabilities & stockholders’ equity	$	84,805,573		$	123,845,472

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months ended September 30,						Nine Months ended September 30,
	2018			2017			2018			2017
REVENUES, NET		4,882,246			140,314			8,234,657			366,432
COST OF GOODS SOLD		141,200			128,618			496,580			222,130
GROSS PROFIT		4,741,046			11,696			7,738,077			144,302
OPERATING EXPENSES
Research and development		466,123			379,344			1,273,287			2,331,702
Selling		1,224,388			214,309			3,663,217			405,608
General and administrative		5,181,619			3,223,338			12,130,244			9,536,680
Total operating expenses		6,872,130			3,816,991			17,066,748			12,273,990
LOSS FROM OPERATIONS		(2,131,084	)		(3,805,295	)		(9,328,671	)		(12,129,688	)
OTHER INCOME (EXPENSE)
Other income		737,956			—			737,956			—
Loss on debt extinguishment		—			—			(3,244,769	)		—
Change in fair value of warrant derivative liabilities		19,456,000			(10,542,000	)		20,351,000			(16,204,000	)
Change in fair value of embedded conversion option		—			—			466,000			—
Unrealized gain (loss) on investment in marketable securities		9,583,295			—			(24,066,019	)		—
Loss on investment in marketable securities		(7,560,760	)		—			(7,560,760	)		—
Interest and other income (loss)		8,543			(15,051	)		42,528			(36,992	)
Interest expense		(5,524,687	)		(2,904,336	)		(16,268,533	)		(7,164,130	)
Total other income (expense)		16,700,347			(13,461,387	)		(29,542,597	)		(23,405,122	)
INCOME (LOSS) BEFORE INCOME TAXES		14,569,263			(17,266,682	)		(38,871,268	)		(35,534,810	)
INCOME TAXES		—			—			2,400			2,400
NET INCOME (LOSS)		14,569,263			(17,266,682	)		(38,873,668	)		(35,537,210	)
COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss on investment in marketable securities		—			(14,203,879	)		—			(14,616,291	)
Unrealized gain (loss) in foreign translation		(5,916	)		(1,090	)		10,517			(12,095	)
Other comprehensive income (loss)		(5,916	)		(14,204,969	)		10,517			(14,628,386	)
COMPREHENSIVE INCOME (LOSS)	$	14,563,347		$	(31,471,651	)	$	(38,863,151	)	$	(50,165,596	)
NET INCOME (LOSS) PER COMMON SHARE	$	0.42		$	(0.50	)	$	(1.11	)	$	(1.02	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		34,966,481			34,842,353			34,894,572			34,762,315

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(UNAUDITED)

	Common stock – par value $0.001 per share, 100,000,000									Accumulated Other
	Shares authorized						Additional			Comprehensive			Accumulated
	Shares			Common Stock			Paid-In Capital			Income (Loss)			Deficit			Total
Balance, December 31, 2017		34,885,506		$	34,886		$	113,111,745		$	41,275,785		$	(140,131,738	)	$	14,290,678
Cumulative effect adjustment on adoption of ASU 2016-01		—			—			—			(41,361,730	)		41,361,730			—
Beneficial conversion feature relating to convertible notes		—			—			10,218,609			—			—			10,218,609
Exercise of warrants		30,000			30			104,970									105,000
Stock issued for cash		25,000			25			274,975			—			—			275,000
Repurchase of common stock and cancelled		(700,000	)		(700	)		(1,313,300	)		—			—			(1,314,000	)
Share-based compensation		—			—			3,742,575			—			—			3,742,575
Exercise of common stock options (cashless)		84,248			84			(84	)		—			—			—
Exercise of warrants (cashless)		1,628,051			1,628			(1,628	)		—			—			—
Foreign currency translation effect		—			—			—			10,517			—			10,517
Net loss		—			—			—			—			(38,873,668	)		(38,873,668	)
Balance, September 30, 2018		35,952,805		$	35,953		$	126,137,862		$	(75,428	)	$	(137,643,676	)	$	(11,545,289	)

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(38,873,668	)	$	(35,537,210	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		43,671			18,593
Cost of scrapped inventory written off		11,191			—
Amortization of discount of convertible notes		13,056,693			5,695,652
Foreign exchange adjustments on convertible notes and notes payable		(21,611	)		77,429
Realized loss on securities available-for-sale		7,560,760			—
Loss on debt extinguishment		3,244,769			—
Share-based compensation		3,742,575			3,751,371
Change in fair value of warrant derivative liabilities		(20,351,000	)		16,204,000
Change in fair value of embedded conversion option		(466,000	)		—
Unrealized loss on investment in marketable securities		24,066,019			—
Net changes in operating assets and liabilities
Investment capital reserve		—			(31,841,500	)
Accounts receivable		(1,390,440	)		4,141
Inventories		(2,735,009	)		(226,934	)
Prepaid expenses and other current assets		(39,230	)		(89,282	)
Deposits		(237,735	)		106,879
Accounts payable and accrued expenses		2,586,359			1,639,275
Deferred rent		246,167			(11,349	)
Other current liabilities		2,130,370			36,841,500
Other long-term liabilities		2,690,000			—
Net cash flows provided by (used in) operating activities		(4,736,119	)		(3,367,435	)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of marketable securities		6,439,240			0
Purchases of property and equipment		(80,892	)		(86,215	)
Purchase of marketable securities and investment at cost		(501,249	)		—
Net cash flows provided by (used in) investing activities		5,857,099			(86,215	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock and warrants		(7,500,000	)		—
Proceeds from notes payable issued, net of issuance cost and discount		6,670,000			4,503,751
Proceeds from convertible notes payable issued, net of issuance cost and discount		17,644,700			1,200,000
Payments of notes payable		(4,200,000	)		(344,339	)
Payments of convertible notes		(20,000,000	)		—
Proceeds from exercise of warrants		105,000			—
Proceeds from issuance of common stock		275,000			1,141,600
Net cash flows provided by (used in) financing activities		(7,005,300	)		6,501,012
Effect of exchange rate changes on cash		(9,532	)		50,606
Net increase (decrease) in cash, cash equivalents and restricted cash		(5,893,852	)		3,097,968
Cash, cash equivalents and restricted cash, beginning of period		22,556,063			1,317,340
Cash, cash equivalents and restricted cash, end of period	$	16,662,211		$	4,415,308
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	1,782,840		$	567,093
Income taxes paid	$	2,400		$	2,400
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION
Conversion of notes payable to common stock	$	—		$	200,000
Conversion of accrued interest payable to common stock	$	—		$	10,079

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

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(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, market acceptance of Endari™, and achieving a profitable level of revenues. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The 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, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 16, 2018 (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, 2018.

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, 2018 except for revenues, which are discussed below. Below are disclosures of certain interim balances, transactions, and significant assumptions used in computing fair value as of and for the three and nine months ended September 30, 2018 and comparative amounts from the prior fiscal periods:

Revenues – Effective January 1, 2018, the Company adopted Accounting Standard codification (“ASC”) Topic 606, Revenue from Contracts with Customers using the modified retrospective transition methods. The adoption of ASC 606 did not have a material impact on the measurement or on the recognition of revenue of contracts for which all revenue had not been recognized as of January 1, 2018, therefore no cumulative adjustment has been made to the opening balance of accumulated deficit at the beginning of 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented.

Since January 2018, the Company has generated revenues through the sale of Endari as a treatment for sickle cell disease (“SCD”). The Company also generates revenues to a much lesser extent from NutreStore L-glutamine powder, as well as AminoPure, a nutritional supplement.

Revenues from Endari product sales are recognized upon transfer to our distributors, which are customers of the Company, when they obtain control of our products. These distributors subsequently resell our products to specialty pharmacy providers, health care providers, hospitals, patients and clinics. In addition to distribution agreements with these distributors, the Company enters into arrangements with specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and charge-backs are referred to as “variable consideration.” Revenues from product sales are recorded net of these variable considerations.

Prior to recognizing revenues, the Company’s management forecasts and estimates variable consideration. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Up until June 30, 2018, the Company recognized Endari sales revenues based upon the script data reports on shipments to patients as the Company did not have sufficient historical information to reliably forecast and estimate variable consideration and product returns. During the three months ended September 30, 2018, the Company obtained additional information based on new

contracts signed with major distributors and pharmacies, knowledge of our reimbursement payor mix, as well as improved visibility as to the relatively fast turnover of End ari inventory at the distributor level. As such, the new information obtained in the three months ended September 30, 2018 provided the C ompany with the ability to better forecast and estimate the expected variable consideration related to sales to the dis tributors, which are customers of the Company, as well as establishing the expectation of a low level of product returns. The gross sales of Endari to these customers were $1.3 million, $3.8 million and $5.5 million for the three month periods end ed March 31, June 30 and September 30 of 2018, respectively. The net revenue s for Endari reported for these periods were $0.7 million, $2.3 million and $4.7 million for the three month periods end ed March 31, June 30 and September 30 of 2018, respectively. The effe ct of being better able to forecast and estimate the expected variable consideration permitted the Company, in the three months ended September 30, 2018, to recognize $0.7 million in revenue s that had been deferred in prior periods when the Company did not have sufficient historical information to reliably forecast and estimate variable consideration and product returns.

Provisions for returns and other adjustments are provided for in the period in which the related revenues are recorded. Actual amounts of consideration ultimately received may differ from the management estimates. If actual results in the future vary from the estimates, the management will adjust these estimates, which would affect net product revenues in the period such variances become known. The following are our significant categories of sales discounts and allowances:

Sales Discounts: The Company provides its customers prompt payment discounts that are explicitly stated in its contracts and are recorded as a reduction of revenues in the period the revenues are recognized.

Product Returns: The Company offers its distributors a right to return product purchased directly from the Company, which is principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired products. Product return allowances are estimated and recorded at the time of sale.

Government Rebates: The Company is subject to discount obligations under state Medicaid programs and the Medicare prescription drug coverage gap program. The Company’s management estimates Medicaid and Medicare prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as an accrued liability in our balance sheet. The liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.

Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge the Company for the difference between what they pay for the products and the Company’s contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of products by the distributors.

Inventories — All of the raw material purchased during the nine months ended September 30, 2018 were from two vendors and for the year ended December 31, 2017 were from one vendor. The below table presents inventory by category:

Inventories by category	September 30, 2018		December 31, 2017
Raw materials and components	$	184,126	$	—
Work-in-process		924,275		124,801
Finished goods		2,238,828		500,498
Total	$	3,347,229	$	625,299

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the three months ended September 30, 2018 and 2017 were $16,750 and $18,201, respectively. Advertising costs for the nine months ended September 30, 2018 and 2017 were $76,654 and $35,399, respectively.

Marketable securities — The Company’s marketable securities consist of the following securities; (a) 39,250 shares of capital stock of CellSeed, Inc. (“CellSeed”) those that remain of the 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 $13.0 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 $1.0 million USD) at ₩4,050 KRW per share; and (d) 6,643,559 shares of

capital sto ck 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, 2018 and December 31, 2017, the closing prices per CellSeed share on the Tokyo Stock Exchange were ¥1,001 ($8.80 USD) and ¥462 JPY ($4.10 USD), respectively, and the closing prices per Telcon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were ₩10,300 ($9.27 USD) and ₩14,900 KRW ($13.95 USD), respectively. As of December 31, 2017, the closing price per KPM share on KOSDAQ was ₩1,625 KRW ($1.52 USD) and the closing price per Hanil share on KOSDAQ was ₩2,830 KRW ($2.65 USD). During the three months ended September 30, 2018, the Company sold all of its KPM and Hanil shares.

As of September 30, 2018, and December 31, 2017, 39,250 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. In addition, as of September 30, 2018 and December 31, 2017 6,643,559 shares of Telcon were pledged to secure the API Supply Agreement (see Note 8) in which Emmaus received $31,800,000 related to a trade advance discount. These shares were classified as current assets, as investment in marketable securities .

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Prepaid insurance	$	72,510	$	132,387
Other prepaid expenses and current assets		246,633		157,984
Total prepaid expenses	$	319,143	$	290,371

Other long-term liabilities —Other long-term liabilities consisted of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Trade discount	$	29,531,500	$	31,841,500
Unearned revenue		10,000,000		5,000,000
Other long-term liabilities		—		10,790
Total other long-term liabilities	$	39,531,500	$	36,852,290

The Company has entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon advanced to the Company approximately ₩36.0 billion KRW (approximately $31.8 million USD) as a trade discount to supply 25% of the Company’s requirements for bulk containers of pharmaceutical grade L-glutamine (“PGLG”) for a term of five years, with 10 one-year renewal terms. The agreement will automatically renew unless terminated by either party in writing. The agreement does not include yearly purchase commitments or margin guarantees. The advance trade discount will be applied against purchases made by the Company from Telcon over the life of the 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, 2018 and the year ended December 31, 2017:

	Nine Months Ended			Year Ended
Warrant Derivative Liabilities—Stock Purchase Warrants	September 30, 2018			December 31, 2017
Balance, beginning of period	$	26,377,000		$	10,600,000
Repurchased		(6,186,000	)		—
Change in fair value included in the statement of comprehensive income (loss)		(20,191,000	)		15,777,000
Balance, end of period	$	—		$	26,377,000

The following table presents warrants issued to GPB Debt Holdings II, LLC as described in Note 7 measured at fair value as of September 30, 2018:

	Nine Months Ended September 30, 2018						Year Ended December 31, 2017
Liability Instrument—GPB	Warrants			Embedded Conversion Option			Warrants		Embedded Conversion Option
Balance, beginning of period	$	1,882,000		$	1,289,000		$	—	$	—
Fair value at issuance date		—			—			1,882,000		1,289,000
Change in fair value included in the statement of comprehensive income (loss)		(160,000	)		(466,000	)		—		—
Extinguished upon debt repayment		—			(823,000	)		—		—
Balance, end of period	$	1,722,000		$	—		$	1,882,000	$	1,289,000

The value of warrant derivative liabilities and the change in fair value of the 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.

The value as of the dates set forth in the table below, was based on upon following assumptions:

	September 30, 2018			December 31, 2017
Stock price	$	11.10		$	11.40
Risk‑free interest rate		2.92	%		2.20	%
Expected volatility (peer group)		70.00	%		70.00	%
Expected life (in years)		4.25			5.00
Expected dividend yield	—			—
Number outstanding		240,764			240,764
Balance, end of period:
Warrant derivative liabilities (long-term)	$	1,722,000		$	1,882,000

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:

Type of Loan	Term of Loan	Stated Annual Interest	Original Loan Principal Amount		Conversion Rate	Beneficial Conversion Discount Amount		Warrants Issued with Notes		Exercise Price		Warrant FMV Discount Amount		Effective Interest Rate Including Discounts
2017 convertible notes payable	Due on demand - 3 years	10% - 13.5%	$	36,113,296	$3.50 - $10.31	$	11,678,725		240,764	$	10.80	$	1,882,000	10% - 110%
2018 convertible notes payable	Due on demand - 2 years	6% - 10%		26,501,808	$3.50 - $10.00		10,218,609		—		—		—	19% - 110%
			$	62,615,104		$	21,897,334		240,764			$	1,882,000

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

Net loss per share — As of September 30, 2018 and 2017, respectively, potentially dilutive securities exercisable or convertible into 15,286,940 and 15,617,245 shares of Company common stock were outstanding. No potentially dilutive securities were included in the calculation of diluted net 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. This Update was effective beginning January 1, 2018 and the Company is now recognizing any changes in the fair value of certain equity investments in net income as prescribed by the new

standard rather than in other comprehensive income. The C ompany recognized a cumulative effect adjustment to increase the opening balance of retained earnings as of January 1, 2018 by $ 41.4 million , net of $12.3 million income tax benefit . Refer to Note 4 for additional disclosures required by this ASU.

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. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements and ASU No. 2018-10 Codification Improvements to Topic 842, Leases with certain targeted changes and improvements to previously issued lease accounting standard. The Company is currently in the process of evaluating the impact of adoption of the amendments in these Updates on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in these Updates are expected to be material for most entities who have a material lease with a term of greater than twelve months.

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 adopted the new revenue standard as of January 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 did not have a material impact on its consolidated financial statements; however, adoption did result in significant changes to the Company’s financial statements disclosures.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this guidance intended to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. In addition, the Board re-characterized the indefinite deferral of certain provisions of Topic 480 to a scope exception. The re-characterization has no accounting effect. Down round features will no longer cause freestanding equity-linked financial instruments and embedded conversion options to be considered “not indexed to an entity’s own stock.” ASU 2017-11 is effective for public business entities for fiscal year beginning after December 15, 2018. All others have an additional year. Early adoption is permitted for all entities, including in an interim period. Entities may use the retrospective or modified retrospective transition method. The Company is currently assessing the impact the adoption of ASU 2017-11 will have on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The ASU also requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently assessing the impact the adoption of ASU 2018-02 will have on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”). The amendments in this Update (1) clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement , through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer, (2) clarify that the adjustments made under

the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a s imilar security took place, (3) clarify that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities, (4) clarify that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives , or 825- 10, Financial Instruments— Ove rall , (5) clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented sepa rately from the total change in fair value of the financial liability, and then both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates, (6) c larify that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in ASU 2016-01 is meant only for instances in which the measurement alternative is applied. For public business entities, ASU 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting th e amendments in ASU 2016-01. 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 June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-05 and expands the scope of ASC 718 to include all share-based payment arranges related to the acquisition of goods and services from both nonemployees and employee. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASC 2018-07 is effective for all entities for fiscal year beginning after December 15, 2018, and interim periods within those fiscal year, with early adoption permitting but no earlier than the date on which an entity adopts ASC 606.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820. The amendments in this Update removes some disclosures, modifies others, and add some new disclosure requirements. The amendments in this ASU are effective for all entities for fiscal years, and interim period within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2018-13 will have on its consolidated financial statements and accompanying footnote disclosures .

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”), which provide guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. The ASU aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such CCA. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and interim period within those fiscal years with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2018-15 will have on its consolidated financial statements.

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

	September 30, 2018			December 31, 2017
Equipment	$	292,212		$	225,615
Leasehold improvements		70,249			61,054
Furniture and fixtures		79,001			74,090
Subtotal		441,462			360,759
Less: accumulated depreciation		(288,972	)		(255,457	)
Total	$	152,490		$	105,302

During the three months ended September 30, 2018 and 2017, depreciation expense was $12,843 and $9,236 , respectively. During the nine months ended September 30, 2018 and 2017, depreciation expense was $33,591 and $18,593, respectively.

NOTE 4 — INVESTMENTS

Equity Securities— Effective January 1, 2018, the Company adopted ASU 2016-01 which requires the Company to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in earnings. The Company use quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired. During the nine months ended September 30, 2018, the Company did not recognize any fair value adjustments for equity securities without readily determinable fair values. The Company recognized a cumulative effect adjustment of $41.4 million, net of $12.3 million income tax benefit, to increase the opening balance of retained earnings with an offset to accumulated other comprehensive income as of January 1, 2018, in connection with the adoption of ASU 2016-01.

For fiscal periods beginning prior to January 1, 2018, marketable equity securities not accounted for under the equity method were classified as available-for-sale. There were no marketable equity securities classified as trading. For equity securities classified as available-for-sale, realized gains and losses were included in net loss. Unrealized gains and losses on equity securities classified as available-for-sale were recognized in accumulated other comprehensive income (loss), net of deferred taxes. In addition, the Company had equity securities without readily determinable fair values that were recorded at cost. For these cost method investments, the Company recorded dividend income, if any, when applicable dividends were declared. Cost method investments were reported as other investments in our consolidated balance sheets, and dividend income from cost method investments was reported in other income (loss) net in our consolidated statements of comprehensive loss. The Company reviewed all of its cost method investments quarterly to determine if impairment indicators were present; however, the Company was not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators did exist, the Company generally used discounted cash flow analyses to determine the fair value. The Company estimated that the fair values of its cost method investments approximated their carrying values as of December 31, 2017. The Company’s cost method investments had a carrying value of $65,520 as of December 31, 2017.

As of September 30, 2018, the carrying values of our equity securities were included in the following line items in our consolidated balance sheets:

	At September 30, 2018
	Fair Value with Changes Recognized in Income		Measurement Alternative - No Readily Determinable Fair Value
Marketable securities	$	61,931,302	$	—
Other investments		—		572,199
Total equity securities	$	61,931,302	$	572,199

The calculation of net unrealized gains and losses for the period that relate to equity securities still held at September 30, 2018 is as follows:

	Nine Months Ended September 30, 2018
Net losses recognized during the period related to equity securities	$	(31,626,779	)
Less: Net gain (loss) recognized during the period related to equity securities sold during the period		(7,560,760	)
Unrealized gain (loss) recognized during the period related to equity securities still held at the end of the period	$	(24,066,019	)

As of December 31, 2017, equity securities consisted of the following:

			Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
Trading securities	$	—	$	—	$	—		$	—
Available-for-sale securities		46,209,017		60,812,231		(6,958,406	)		100,062,842
Total equity securities	$	46,209,017	$	60,812,231	$	(6,958,406	)	$	100,062,842

As of December 31, 2017, the Company had investments classified as available-for-sale in which our cost basis exceeded the fair value of our investment. Management assessed each of the investment in marketable securities that were in a gross unrealized loss position to determine if the decline in fair value was other than temporary. Management's assessment as to the nature of a decline in fair value is based on, amo ng other things, the length of time and the extent to which the market value has been less than our cost basis; the financial condition and near-term prospects of the issuer , and the Company’s intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these assessments, management determined that the decline in fair value of these investments and did not record any impairment charges.

As of December 31, 2017, the fair values of our equity securities were included in the following line items in our consolidated balance sheets:

	Available-for-Sale Securities
Marketable securities	$	99,997,322
Long-term investment at cost		65,520
Total equity securities	$	100,062,842

During the nine months ended September 30, 2018, the Company sold all of its KPM Tech and Hanil shares.

NOTE 5 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

	September 30, 2018		December 31, 2017
Accounts payable:
Regulatory fees	$	—	$	715,999
Clinical and regulatory expenses		296,316		116,736
Commercialization consulting fees		8,544		30,000
Manufacturing cost		394,093		217,155
Legal expenses		60,526		87,701
Consulting fees		224,850		147,038
Accounting fees		25,770		67,293
Selling expenses		380,604		35,383
Investor relations and public relations expenses		-		45,526
Board member compensation		278,740		11,200
Other vendors		976,095		125,605
Total accounts payable		2,645,538		1,599,636
Accrued interest payable, related parties		506,322		318,120
Accrued interest payable		1,976,563		1,449,154
Accrued expenses:
Wages and payroll taxes payable		95,021		1,711,541
Deferred salary		291,667		291,667
Paid vacation payable		251,288		186,978
Other accrued expenses		1,775,627		138,214
Total accrued expenses		2,413,603		2,328,400
Total accounts payable and accrued expenses	$	7,542,026	$	5,695,310

NOTE 6 — NOTES PAYABLE

Notes payable consisted of the following at September 30, 2018 and December 31, 2017:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price		Principal Outstanding September 30, 2018		Discount Amount September 30, 2018		Carrying Amount September 30, 2018		Shares Underlying Notes September 30, 2018		Principal Outstanding December 31, 2017		Discount Amount December 31, 2017		Carrying Amount December 31, 2017		Shares Underlying Notes December 31, 2017
Notes payable
2013	10%	Due on demand		—	$	879,400	$	—	$	879,400		—	$	887,600	$	—	$	887,600		—
2015	10%	Due on demand		—		10,000		—		10,000		—		—		—		—		—
2016	10% - 11%	Due on demand		—		843,335		—		843,335		—		833,335		—		833,335		—
2017	11%	Due on demand		—		2,540,506		—		2,540,506		—		6,150,208		—		6,150,208		—
2018	10% - 11%	Due on demand - 18 months		—		6,811,000		30,000		6,781,000		—		—		—		—		—
					$	11,084,241	$	30,000	$	11,054,241		—	$	7,871,143	$	—	$	7,871,143		—

		Current			$	4,384,241	$	—	$	4,384,241		—	$	7,871,143	$	—	$	7,871,143		—
		Non-current			$	6,700,000	$	30,000	$	6,670,000		—	$	—	$	—	$	—		—
Notes payable - related party
2015	11%	Due on demand		—		—		—		—		—		310,000		—		310,000		—
2016	10%	Due on demand		—		270,000		—		270,000		—		810,510		—		810,510		—
2017	10%	Due on demand		—		915,751		—		915,751		—		915,751		—		915,751		—
2018	11%	Due on demand		—		159,222		—		159,222		—		—		—		—		—
					$	1,344,973	$	—	$	1,344,973		—	$	2,036,261	$	—	$	2,036,261		—

		Current			$	1,344,973	$	—	$	1,344,973		—	$	2,036,261	$	—	$	2,036,261		—
		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			501,273		—		501,273		176,777		486,878		—		486,878		168,766
2016	10%	1 year - 2 years	$3.60 - $4.50			182,495		7,952		174,543		55,983		1,516,329		83,298		1,433,031		441,048
2017	10%	Due on demand - 2 years	$3.50 - $10.00			5,256,547		947,731		4,308,816		1,441,824		36,113,296		11,232,423		24,880,873		5,357,488
2018	6% - 10%	Due on demand - 2 years	$3.50 - $10.00			16,522,996		2,411,522		14,111,474		2,983,385		—		—		—		—
					$	22,763,311	$	3,367,205	$	19,396,106		4,756,254	$	38,416,503	$	11,315,721	$	27,100,782		6,065,587

		Current			$	16,256,710	$	2,119,066	$	14,137,644		2,119,066	$	12,860,912	$	5,835,910	$	7,025,002		3,449,984
		Non-current			$	6,506,601	$	1,248,139	$	5,258,462		2,637,188	$	25,555,591	$	5,479,811	$	20,075,780		2,615,603
Convertible notes payable - related party
2012	10%	Due on demand	$	3.30	$	200,000	$	—	$	200,000		71,127	$	200,000	$	—	$	200,000		68,122
2015	10%	2 years	$	4.50		200,000		—		200,000		56,109		200,000		—		200,000		53,905
2017	10%	2 years	$	10.00		5,000,000		407,292		4,592,708		507,465		—		—		—		—
2018	10%	2 years	$	10.00		9,400,000		1,058,320		8,341,680		971,577		—		—		—		—
					$	14,800,000	$	1,465,612	$	13,334,388		1,606,278	$	400,000	$	—	$	400,000		122,027

		Current			$	400,000	$	—	$	400,000		127,236	$	400,000	$	—	$	400,000		122,027
		Non-current			$	14,400,000	$	1,465,612	$	12,934,388		1,479,042	$	—	$	—	$	—		—
		Total			$	49,992,525	$	4,862,817	$	45,129,708		6,362,532	$	48,723,907	$	11,315,721	$	37,408,186		6,187,614

The weighted-average stated interest rates of notes payable as of September 30, 2018 and December 31, 2017 were 10% and 11%, respectively. The weighted average effective interest rates of notes payable for the nine-month period ended September 30, 2018 and the year ended December 31, 2017 were 38% and 24% 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 $10.00 per share. Certain notes with a $4.50 or a $10.00 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:


2018 (three months)	$	20,894,505
2019		6,491,419
2020		22,606,601
Total	$	49,992,525

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 period ended December 31, 2017.

	2018		2017
Stock price		—	$	11.40
Exercise price		—	$	10.80
Term		—	5 years
Risk‑free interest rate		—		2.20	%
Expected dividend yield		—		—
Expected volatility		—		70.0	%

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.

The Company did not issue any warrants in conjunction with notes in the nine months ended September 30, 2018.

NOTE 7 — STOCKHOLDERS’ DEFICIT

Private placement — On September 11, 2013, the Company issued an aggregate of 3,020,501 units at a price of $2.50 per unit (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 Private Placement transaction (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, 2018. 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 c lassified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value of $1.8 million, representing their intrinsic value, with this adjusted carrying value of $1.8 mi llion 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 ex ercising 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 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 11, 2018, all of the Private Placement warrants, replacement warrants and Broker Warrants had been exercised primarily on a cashless basis, or had expired.

A summary of outstanding warrants as of September 30, 2018 and December 31, 2017 is presented below:

	Nine Months Ended			Year Ended
	September 30, 2018			December 31, 2017
Warrants outstanding, beginning of period		5,265,432			5,024,668
Granted		202,000			240,764
Exercised		(2,384,817	)	—
Cancelled, forfeited and expired		(985,684	)	—
Warrants outstanding, end of period		2,096,931			5,265,432

A summary of outstanding warrants by year issued and exercise price as of September 30, 2018 is presented below:

			Outstanding						Exercisable
Year issued and Exercise Price			Number of Warrants Issued		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Total		Weighted Average Exercise Price
At December 31, 2014
	$	3.50		50,000		0.58	$	3.50		50,000	$	3.50
	2014 Total			50,000						50,000
At December 31, 2015
	$	4.90		110,417		1.43	$	4.90		110,417	$	4.90
	2015 Total			110,417						110,417
At December 31, 2016
	$	4.50		118,750		2.75	$	4.50		118,750	$	4.50
	$	4.70		75,000		2.59	$	4.70		75,000	$	4.70
	$	5.00		1,300,000		2.61	$	5.00		1,300,000	$	5.00
	2016 Total			1,493,750						1,493,750
At December 31, 2017
	$	10.80		240,764		4.75	$	10.80		240,764	$	10.80
	2017 Total			240,764						240,764
At September 30, 2018
	$	11.30		202,000		4.86	$	11.30		202,000	$	11.30
	Grand Total			2,096,931						2,096,931

Stock options — During the nine months ended September 30 , 2018 , the Company granted 3 57,000 options to its officers, directors and employees . Of these options, 30,000 will equally vest one-third on each of the first three anniversaries of the grant date, have an exercise price of $11.40 per share and are exercisable through 2028, 277,000 options will vest over three years starting August 8, 2018, have an exercise price of $11.30 per share and are exercisable through 2028, 50,000 options will vest over three years starting September 27, 2018, have an exercise price of $11.10 per share and are exercisable through 2028. During the year ended December 31, 2017 , 50,000 options were granted by the Company’s Board of Directors to a consultant. These options vested immediately, have an exercise price of $11.40 per share and are exercisable through 2027. As of September 30 , 201 8 , there were 6, 835,534 options outstanding under the Company’s 2011 Stock Incentive Plan.

Summaries of outstanding options as of September 30, 2018 and December 31, 2017 are presented below.

	September 30, 2018					December 31, 2017
	Number of Options			Weighted‑ Average Exercise Price		Number of Options			Weighted‑ Average Exercise Price
Options outstanding, beginning of period		6,775,200		$	4.12		6,955,200		$	4.10
Granted or deemed issued		357,000		$	11.28		50,000		$	11.40
Exercised		(170,000	)	$	4.59		(11,895	)	$	4.19
Cancelled, forfeited and expired		(126,666	)	$	5.43		(218,105	)	$	4.98
Options outstanding, end of period		6,835,534		$	4.46		6,775,200		$	4.12
Options exercisable, end of period		5,985,823		$	4.02		5,604,439		$	3.95
Options available for future grant		2,164,466					2,224,800

During the nine months ended September 30, 2018 and 2017, the Company recognized $3.7 million and $3.8 million, respectively, of share-based compensation expense arising from stock options. As of September 30, 2018, there was $3.8 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 2.0 years.

Registration rights — Pursuant to the Purchase Warrant relating to the GPB Debt Holdings II, LLC issued by the Company on December 29, 2017, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which the Company has agreed to file a registration statement with the Securities and Exchange Commission (the “Commission”) relating to the offer and sale by GPB of the Company Shares underlying the Warrants. The Company is required to file a registration statement within one hundred eighty (180) days of closing of a public listing of the Company’s Common Stock for trading on any national securities exchange (excluding any over-the-counter market), whether through a direct listing application or merger transaction. The Company is required to have the registration statement become effective on the earlier of (A) the date that is two-hundred and forty (240) days following the later to occur of (i) the date of closing of the public listing or (ii) or in the event the registration statement receives a “full review” by the Commission, the date that is 300 days following the date of closing of the public listing, or (B) the date which is within three (3) business days after the date on which the Commission informs the Company (i) that the Commission will not review the registration statement or (ii) that the Company may request the acceleration of the effectiveness of the registration statement. If the Company does not effect such registration within that period of time, it will be required to pay GPB for liquidated damages an amount of cash equal to 2% of the product of (i) the number of Registrable Securities and (ii) the Closing Sale Price or Closing Bid Price as of the trading day immediately prior to the Event Date, such payments to be made on the Event Date and every thirty (30) day anniversary thereafter with a maximum penalty of 12% until the applicable Event is cured; provided, however, that in the event the Commission does not permit all of the Registrable Securities to be included in the Registration Statement because of its application of Rule 415, liquidated damages shall only be payable by the Company based on the portion of the Holder’s initial investment in the Securities that corresponds to the number of such Holder’s Registrable Securities permitted to be registered by the Commission in such Registration Statement pursuant to Rule 415.

Pursuant to the Subscription Agreements relating to the Private Placement and certain warrants, as well as the replacement warrants issued by the Company on June 10, 2014, the Company agreed to use its commercially reasonable best efforts to have on file with the SEC, by September 11, 2014 and at the Company’s sole expense, a registration statement to permit the public resale of 4,115,966 shares of 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 regis tration 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 relian ce 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 exer cise, 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 w ould 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.

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.

Korean Private Placement — On September 12, 2016, the Company entered into Letter of Agreement with KPM and Hanil, 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 $17.0 million and $3.0 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 $13.0 million and $1.0 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. 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 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, or a total of $20.0 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 $13.0 million and $1.0 million in capital increases by KPM and Hanil, respectively, at $15.32 and $3.68, respectively, per capital share.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Operating leases — The Company leases its office space under operating leases with unrelated entities. The Company has opened its New York office in February 2018 to support a sales team focused on commercial sales for Endari.

The rent expense during the three months ended September 30, 2018 and 2017 amounted to $190,903 and $134,585, respectively. The rent expense during the nine months ended September 30, 2018 and 2017 amounted to $493,312 and $427,687, respectively.

Future minimum lease payments under the agreements are as follows as of September 30, 2018:

Year	Amount
2018 (three months)	$	177,959
2019		722,092
2020		637,306
2021		626,545
2022		646,047
Thereafter		777,344
Total	$	3,587,293

Management Control Acquisition Agreement — O n 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 Inc. (“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 (approximat ely $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 1 0.3% of Telcon’s outstanding common stock shares and received representation on its board of directors.

The MCAA was amended in certain respect and supplemented by an Agreement, dated as of September 29, 2017, among the parties. Pursuant to the September 2017 Agreement, among other things, Telcon purchased 4,444,445 Emmaus shares from KPM and Hanil at a price of $6.60 per share.

On July 2, 2018, we entered into an Additional Agreement with Evercore Investment Holdings Co., Ltd. (formerly Telcon Holdings Co., Ltd.), (“Evercore”), and Telcon RF Pharmaceutical Inc. (formerly Telcon Inc.), (“Telcon”). In the Additional Agreement, we agreed to use the proceeds from any sales of our KPM shares to repurchase Emmaus shares from Telcon at a price of $7.60 a share, subject to certain exceptions, and Telcon granted us the right to purchase from Telcon all or a portion of its Emmaus shares at a price of $7.60 a share until October 31, 2018 and at a price to be agreed upon after October 31, 2018. Telcon also granted us under the Additional Agreement a right of first refusal until June 30, 2019 to purchase any Emmaus shares that Telcon may wish to sell.

In connection with the MCAA, on June 15, 2017, Emmaus and Telcon entered into exclusive distribution agreements for the distribution of L-glutamine powder for diverticulosis treatment for the South Korea, Japan and China Territories, with the intention to add the Australia territory. In the Additional Agreement, the parties agreed to dispense with a distribution agreement for Australia, and that the parties have no liabilities or obligations with respect to the intended Australia distribution, including any related liabilities and obligations under the September 2017 Agreement.

The Additional Agreement provides for specified damages in the event of a breach of the Additional Agreement by any party.

API Supply Agreement — On June 12, 2017, the Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon paid the Company approximately ₩36.0 billion KRW (approximately $31.8 million USD) in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG 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 PGLG at $50 USD per kilogram for a total of $47.0 million over the 15 years. The Revised API Supply Agreement is silent on yearly purchase commitments and margin guarantees on purchases of $5.0 million and $2.5 million, respectively. The raw materials purchased from Telcon are measured at net realizable value while the excess is recorded against the deferred Trade Discount.

NOTE 9 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related persons outstanding as of the date hereof or at any time during the nine months ended September 30, 2018:

Class	Lender	Interest Rate	Date of Loan	Term of Loan	Principal Amount Outstanding at September 30, 2018		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes September 30, 2018
Current, Promissory note payable to related parties:
	Masaharu & Emiko Osato (3)	11%	12/29/2015	Due on Demand		—		300,000		300,000		76,036		—		—
	Masaharu & Emiko Osato (3)	11%	2/25/2016	Due on Demand		—		400,000		400,000		94,389		—		—
	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		—		—		—		—
	Lan T. Tran (2)	10%	2/10/2018	Due on Demand		159,222		159,222		—		—		—		—
				Subtotal	$	1,344,973	$	2,044,973	$	700,000	$	170,425

Current, Convertible notes payable to related parties:
	Yasushi Nagasaki (2)	10%	6/29/2012	Due on Demand	$	200,000	$	388,800	$	188,800	$	-	$	3.30		71,127
	Yutaka & Soomi Niihara (2)(3)	10%	11/16/2015	2 years		200,000		200,000	—		—		$	4.50		56,109
				Subtotal	$	400,000	$	588,800	$	188,800	$	-				127,236

Non-Current, Convertible notes payable to related parties:
	Wei Peu Zen (3)	10%	11/6/2017	2 years		5,000,000		5,000,000	—			250,000	$	10.00		507,465
	Profit Preview Int'l Group, Ltd. (4)	10%	2/1/2018	2 years		4,037,000		4,037,000	—			201,850	$	10.00		420,290
	Profit Preview Int'l Group, Ltd. (4)	10%	3/21/2018	2 years		5,363,000		5,363,000	—			268,150	$	10.00		551,287
				Subtotal	$	14,400,000	$	14,400,000	$	—	$	720,000				1,479,042

				Total	$	16,144,973	$	17,033,773	$	888,800	$	890,425				1,606,278

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

(2)

Officer.

(3)

Director.

(4)	Mr. Zen, a Director, is the sole owner of Profit Preview Int'l Group, Ltd.

The following table sets forth information relating to our loans from related persons outstanding as of the date hereof or at any time during the year ended December 31, 2017 :

Class	Lender	Interest Rate	Date of Loan	Term of Loan	Principal Amount Outstanding at December 31, 2017		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes December 31, 2017
Current, Promissory note payable to related parties:
	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		14,762		—		—
	Hope Hospice (1)	8%	6/21/2012	Due on Demand		—		100,000		100,000		7,249		—		—
	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		28,630		—		—
	IRA Service Trust Co. FBO Peter B. Ludlum (2)	10%	2/20/2015	Due on Demand		10,000		10,000		—		—		—		—
	Masaharu & Emiko Osato (3)	11%	12/29/2015	Due on Demand		300,000		300,000		—		—		—		—
	Yutaka Niihara (2)(3)	10%	5/21/2015	Due on Demand		—		826,105		94,339		61,829		—		—
	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		8,110		—		—
	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		—		—		—		—
	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		—		—		—		—
				Subtotal	$	2,036,261	$	3,562,366	$	794,339	$	129,470			—

Current, Convertible notes payable to related parties:
	Yasushi Nagasaki (2)	10%	6/29/2012	Due on Demand	$	200,000	$	388,800	$	188,800	$	57,886	$	3.30		68,122
	Charles & Kimxa Stark (2)	10%	10/1/2015	2 years	—			20,000		20,000		4,405	$	4.50	—
	Yutaka & Soomi Niihara (2)(3)	10%	11/16/2015	2 years		200,000		200,000	—		—		$	4.50		53,905
				Subtotal	$	400,000	$	608,800	$	208,800	$	62,291				122,027

				Total	$	2,436,261	$	4,171,166	$	1,003,139	$	191,761				122,027

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

(2)

Officer

(3)

Director

NOTE 10 — GEOGRAPHIC INFORMATION

For the nine months ended September 30, 2018 and 2017, the Company earned revenue from countries as outlined in the table below:

Country	Revenue for the Nine Months Ended September 30, 2018		% of Total Revenue for the Nine Months Ended September 30, 2018			Revenue for the Nine Months Ended September 30, 2017		% of Total Revenue for the Nine Months Ended September 30, 2017
United States	$	7,669,989		93.1	%	$	66,545		19.2	%
Japan		128,644		1.6	%		119,033		32.5	%
Taiwan		137,821		1.7	%		180,854		49.4	%
France		233,220		2.8	%		—		0.0	%
Other		64,983		0.8	%		—		—

For the three months ended September 30, 2018 and 2017, the Company earned revenue from countries as outlined in the table below:

Country	Revenue for the Three Months Ended September 30, 2018		% of Total Revenue for the Three Months Ended September 30, 2018			Revenue for the Three Months Ended September 30, 2017		% of Total Revenue for the Three Months Ended September 30, 2017
United States	$	4,697,135		96.2	%	$	25,042		17.8	%
Japan		40,705		0.9	%		48,185		34.4	%
Taiwan				0.0	%		67,087		47.8	%
France		89,167		1.8	%		—		0.0	%
Saudi Arabia		55,239		1.1	%		—		0.0	%

The Company did not have any significant currency translation or foreign transaction adjustments during the nine months ended September 30, 2018 or 2017.

NOTE 11 — SUBSEQUENT EVENTS

Subsequent to September 30, 2018, the Company issued the following:

Principal

Amounts

Annual

Interest

Rate

Term

Conversion

Price

Senior Secured Debentures

12,200,000

10.00%

18 Months

N/A

In October 2018, the Company sold and issued $12.2 million principal amount of debentures and warrants to purchase an aggregate of up to 1,220,000 shares of the Company common stock. In September 2018, the Company received $6.7 million as an advance against the purchase price of the debentures and warrants, recorded as a long-term liabilities in note payable, net, on the Company’s consolidated balance sheet. The net proceeds of the sale of the debentures and warrants were used to fund the loan to EJ Holding, Inc, referenced below.

The debentures bear interest at the rate of 10% per annum, payable monthly commencing November 1, 2018, and will mature on April 21, 2020. The Company will be obliged to redeem $1,000,000 principal amount of the debentures monthly, commencing in May 2019, and to redeem the debentures in full upon a “subsequent financing” of at least of $20 million, subject to certain exceptions, or in the “event of default” (as defined). The Company’s obligations under the debentures are secured by a security interest in substantially all of our assets, except for certain pledged marketable securities and are guaranteed by the U.S. subsidiaries, Emmaus Medical, Inc. and Newfield Nutrition Corporation.

The common stock purchase warrants are exercisable for five years beginning April 22, 2019 at an initial exercise price of $11.30 per share, which will be subject to reduction if we become a listed company or our common stock becomes quoted on a trading market based upon the public offering price or “VWAP” of the Company common stock. The exercise price also will be subject to adjustment in certain other customary circumstances.

T.R. Winston & Company, LLC acted as placement agent in connection with the sale of the debentures and warrants pursuant to an amended and restated fee agreement with us dated October 1, 2018. In accordance with the fee agreement, the Company paid T.R. Winston a cash fee equal to 5% of the gross proceeds received from the purchasers gran t ed T.R. Winston warrants to purchase up to 120,000 shares of the Company common stock on the same terms as the common stock purchase warrants sold to the purchasers and reimburse d T.R. Winston for certain legal fees and expenses .

On October 9, 2018, the Company entered into a loan agreement dated October 3, 2018 with EJ Holding, Inc., a Japanese corporation, under which the Company made a long-term, unsecured loan to EJ Holdings, Inc. in the amount of 1.5 billion Japanese Yen, or approximately US$13.2 million. EJ Holdings, Inc. is 40% owned by the Company. The loan bears interest at a nominal rate payable annually on September 30 of each year, and will be due and payable in full on September 30, 2028, unless previously paid. The loan may be prepaid at any time without premium or penalty.

EJ Holdings, Inc. has entered into an acquisition agreement with Kyowa Hakko Bio Co. Ltd., a subsidiary of Kyowa Hakko Kirin Co., Ltd., to purchase Kyowa Hakko Bio Co. Ltd.’s manufacturing facility in Ube, Japan. The proceeds of the Company’s loan to EJ Holdings, Inc. will be used to fund the acquisition, which is expected to occur in or about December 2019, subject to regulatory approval and other closing conditions.

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,” “Emmaus” 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, 2017 and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 16, 2018 (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, our ability to commercialize Endari (pharmaceutical grade L-glutamine oral powder), market acceptance of Endari, our reliance on third-party manufacturers for our drug products, our dependence on licenses for certain of our products, exposure to product liability and defect claims, obtaining, and, or, maintaining the U.S. Food and Drug Administration (“FDA”) and other regulatory authorization to market our other drug and biological products, 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. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.

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.

Endari™ (L-glutamine oral powder), a prescription oral drug, was approved by FDA in July 2017 for SCD. Endari is the first treatment approved in nearly 20 years for adults and the first treatment approved for children five years and older, when used as directed. Endari is indicated to reduce the acute complications of SCD in adult and pediatric patients 5 years of age and older. The most common adverse reactions (incidence >10 percent) in clinical studies were constipation, nausea, headache, abdominal pain, cough, pain in extremities, back pain and chest pain. Adverse reactions leading to treatment discontinuation included one case each of hypersplenism, abdominal pain, dyspepsia, burning sensation and hot flash. The safety and efficacy of Endari in pediatric patients with sickle cell disease younger than five years of age has not been established.

Endari is currently being marketed in the U.S. by Emmaus. A Marketing Authorization Application, or MAA, has been submitted to the European Medicines Agency, or EMA, and is currently under review. Endari has received Orphan Drug designation in the U.S., and Orphan Medicinal Product designation in the EU.

An investigational new drug application, or IND, to study diverticulosis was submitted to the FDA and we have received the Study May Proceed letter from the FDA. We anticipate the pilot study for diverticulosis will commence in early 2019.

We intend to utilize strategic partnerships to market Endari in certain of the foreign jurisdictions in which we are able to obtain marketing approval. We have submitted a Marketing Authorization Application for Xyndari (the name under which Endari will be marketed in Europe) which has been fully validated and is now under assessment by the European Medicines Agency for the treatment of SCD .

We have extensive experience in the field of SCD, including the development, outsourcing manufacturing and conducting 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 much 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, whi ch 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 “Emmau s Holdings, Inc.” to “Emmaus Life Sciences, Inc.”

Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: 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, 2018, our accumulated deficit was $137.6 million and we had cash and cash equivalents of $16.7 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. Because of the numerous risks and uncertainties associated with pharmaceutical development, we are unable to predict if or when we will become profitable through the sales of Endari.

Financial Overview

Revenues

Since January 2018, we have generated revenues through the sale of Endari as a treatment for SCD. We also generate revenues to a much lesser extent from NutreStore L-glutamine powder, as well as AminoPure, a nutritional supplement.

Revenues from Endari product sales are recognized upon transfer to our distributors, which are our customers, when they obtain control of our products. These distributors subsequently resell our products to specialty pharmacy providers, health care providers, hospitals, patients and clinics. In addition to distribution agreements with these distributors, we enter into arrangements with specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and charge-backs are referred to as “variable consideration.” Revenues from product sales are recorded net of these variable considerations.

Prior to recognizing revenues, we forecast and estimate variable consideration. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Up until June 30, 2018, we recognized Endari sales revenues based upon the script data reports on shipments to patients as we did not have sufficient historical information to reliably forecast and estimate variable consideration and product returns. During the three months ended September 30, 2018, we obtained additional information based on new contracts signed with major distributors and pharmacies, knowledge of our reimbursement payor mix, as well as improved visibility as to the relatively fast turnover of Endari inventory at the distributor level. As such, the new information obtained in the three months ended September 30, 2018 provided us with the ability to better forecast and estimate the expected variable consideration related to sales to our distributors, which are customers of us, as well as establishing the expectation of a low level of product returns. Our gross sales of Endari to these customers were $1.3 million, $3.8 million and $5.5 million for the three month periods ended March 31, June 30 and September 30 of 2018, respectively. Our net revenues for Endari reported for these periods were $0.7 million, $2.3 million and $4.7 million for the three month periods ended March 31, June 30 and September 30 of 2018, respectively. The effect of being better able to forecast and estimate the expected variable consideration permitted us, in the three months ended September 30, 2018, to recognize $0.7 million in revenues that had been deferred in prior periods when we did not have sufficient historical information to reliably forecast and estimate variable consideration and product returns.

Provisions for returns and other adjustments are provided for in the period in which the related revenues are recorded. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenues in the period such variances become known. The following are our significant categories of sales discounts and allowances:

Sales Discounts : We provide our customers prompt payment discounts that are expl icitly stated in our contracts and are recorded as a reduction of revenue s in the period the revenue s are recognized.

Product Returns: We offer our distributors a right to return product purchased directly from us, which is principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired products. Product return allowances are estimated and recorded at the time of sale.

Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare prescription drug coverage gap program. We estimate Medicaid and Medicare prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as an accrued liability in our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.

Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of products by our distributors.

Cost of Goods Sold

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

Research and Development Expenses

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

The most significant clinical trial expenditures in prior years have been related to the CRO costs and the payments to study sites in our Endari clinical trials. 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.

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 of 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

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

Selling Expenses

Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion and marketing of our products. Other selling cost include advertising, commissions, third party consulting costs, the cost of contracted sales personnel and travel. We expect general and administrative expenses to increase as we add additional sales and administrative personnel to support the commercialization of Endari.

Environmental Expenses

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

Inventories

Inventories consist of raw material, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or market value. All of the raw material purchased during the nine months ended September 30, 2018 and 2017 was from one vendor.

Results of Operations

Three months ended September 30, 2018 and 2017

Net Income (Losses) . Net income increased by $31.9 million, or 184%, to $14.6 million from a loss of $17.3 million for the three months ended September 30, 2018 and 2017, respectively. The increase in net income is primarily a result of a $30.2 million increase in other income, $4.8 million increase in net revenues, offset by a $3.1 million increase in operating expenses as discussed below. On an operating basis, without changes, in other income (expense), our loss from operations were $2.1 million as opposed to loss of $3.8 million for the three months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of approximately $137.6 million. Losses will continue as we transition from developmental stage to our next phase as a commercial organization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized.

Revenues, Net . Net revenues increased by $4.8 million, or 4,800%, to $4.9 million from $0.1 million for the three months ended September 30, 2018 and 2017, respectively. Substantially all of these revenues were from Endari sales, and revenues from AminoPure, a nutritional supplement product and our NutreStore L-glutamine powder were immaterial. We expect Endari revenues to continue to increase as we expand our commercialization efforts in the United States and abroad.

Cost of Goods Sold . Cost of goods sold increased by $12,600, or 10%, to $141,200 from $128,600 for the three months ended September 30, 2018 and 2017, respectively. 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, 2018 and 2017 was from one vendor. Cost of goods sold increased due to the increase in Endari sales during the third quarter of 2018.

Research and Development Expenses . Research and development expenses decreased by $0.1 million, or 25%, to $0.5 million from $0.4 million for the three months ended September 30, 2018 and 2017, respectively. This decrease was primarily due to a decrease in regulatory consulting expenses. We expect our research and development costs to increase in the remainder of 2018 to support our post‑approval commitment, work on marketing approvals outside the U.S. and potentially future clinical trial activity.

Selling Expenses . Selling expenses increased by $ 1.0 million, or 500%, to $1.2 million from $0.2 million for the three months ended September 30, 2018 and 2017, respectively. Selling expenses include the distribution fees, sales force fees, promotion, travel, marketing and branding expenses for Endari. Also included are the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore and AminoPure. The increase was primarily related to Endari as we launched the product during the

current reporting period . We anticipate that our selling expenses will increase during the remainder of 2018 based on an increased selling effort of Endari .

General and Administrative Expenses. General and administrative expenses increased by $2.0 million, or 63%, to $5.2 million from $3.2 million for the three months ended September 30, 2018 and 2017, respectively. 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, an increase of $0.3 million in professional fees, an increase of 0.4 million in public relations and publications. We expect general and administrative expenses to continue to increase as we add additional personnel to support the commercialization of Endari and our other business operations.

Other Income and Expense . Total other income increased by $30.2 million, or 224%, to $16.7 million for the three months ended September 30, 2018, compared to $13.5 million in other expense for the three months ended September 30, 2017. The increase was primarily due to an increase of $30.0 million in a change in the fair value of the warrant derivative liabilities as a result of cashless exercise of 2013 Private Placement warrants and Broker Warrants and $9.6 million in unrealized gain on investment in marketable securities, partially offset by $7.6 million in loss on investment in marketable securities and $2.6 million increase of interest expense.

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

•

We intend to reinforce our sales and marketing team to commercialize Endari in the U.S. and to enter into one or more strategic partnership to market Endari in the EU and other territories, subject to marketing approvals.;

•

We anticipate increases in payroll and employee expenses associated with an increase in personnel, higher consulting, legal, accounting and investor relations costs, and increases in insurance premiums; and

•

We expect increases in research and development activities as we undertake development of our product candidates continues.

Nine months ended September 30, 2018 and 2017

Net Losses . Net losses increased by $3.4 million, or 9%, to $38.9 million from $35.5 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in net losses is primarily a result of a $6.1 million increase in other expenses and a $4.8 million increase in operating expenses, offset by a $7.9 million increase in net revenues as discussed below. On an operating basis, without changes, in other income (expense), our loss from operations were $9.3 million as opposed to loss of $12.1 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of approximately $137.6 million. Losses will continue as we transition from developmental stage to our next phase as a commercial organization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized.

Revenues, Net . Net revenues increased by $7.8 million, or 2,147%, to $8.2 million from $0.4 million for the nine months ended September 30, 2018 and 2017, respectively. Substantially all of these revenues were from Endari sales, and revenues from AminoPure, a nutritional supplement product and our NutreStore L-glutamine powder were immaterial. We expect Endari revenues to continue to increase as we expand our commercialization efforts in the United States and abroad.

Cost of Goods Sold . Cost of goods sold increased by $0.3 million, or 124%, to $0.5 million from $0.2 million for the nine months ended September 30, 2018 and 2017, respectively. 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, 2018 and 2017 came from one vendor. The increases in cost of goods sold were associated with increased sales of Endari sales during this period.

Research and Development Expenses . Research and development expenses decreased by $1.0 million, or 45%, to $1.3 million from $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. This decrease was primarily due to a decrease in regulatory consulting expenses. We expect our research and development costs to increase during the remainder of 2018 to support our post‑approval commitment, work on marketing approvals outside the U.S. and potentially future clinical trial activity.

Selling Expenses . Selling expenses increased by $3.3 million, or 803%, to $3.7 million from $0.4 million for the nine months ended September 30, 2018 and 2017, respectively. Selling expenses include the distribution fees, sales force fees, promotion, travel, marketing and branding expenses for Endari. Also included are the costs for distribution, promotion, travel, tradeshows and exhibits

related to NutreStore and AminoPure . The increase was primarily related to Endari as we launched the product during the current reporting period . We anticipate that our selling expenses will increase during the remainder of 2018 as we expand our selling efforts .

General and Administrative Expenses. General and administrative expenses increased by $2.6 million, or 27%, to $12.1 million from $9.5 million for the nine months ended September 30, 2018 and 2017, respectively. 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 $1.2 million of profession fees, $0.4 million in share-based compensation expense and $0.4 million in public relations and publications. We expect general and administrative expenses to increase as we add additional sales and administrative personnel to support the commercialization of Endari.

Other Income and Expense . Total other expense increased by $6.1 million, or 26%, to $29.5 million for the nine months ended September 30, 2018, compared to $23.4 million in other expense for the nine months ended September 30, 2017. The increase was primarily due to an increase in unrealized loss on investment in marketable securities of $24.1 million, a $9.1 million increase in interest expense as a result of increased debt, a $7.6 million in loss on investment in marketable securities and a $3.2 million loss on debt extinguishment upon early repayment of debt to GPB offset by a positive change in the fair value of the warrant derivative liabilities of 36.6 million as a result of cashless exercise of 2013 Private Placement warrants ad Broker Warrants.

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

•

We intend to reinforce our sales and marketing team to commercialize Endari in the U.S. and to enter into one or more strategic partnerships to market Endari and the EU and other territories, subject to marketing approvals;

•

We expect increases in research and development activities as we undertake to development of our product candidates continues.

Liquidity and Capital Resources

Based on our losses to date, anticipated future revenues and operating expenses, debt repayment obligations and cash and cash equivalents balance of $16.7 million as of September 30, 2018, we do not have sufficient operating capital for our business without raising additional capital. We had an accumulated deficit at September 30, 2018 of $137.6 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of Endari, research costs for 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. We have previously relied on private equity offerings, debt financings and loans, including loans from related parties. As part of this effort, we have received various loans from officers, stockholders and other investors as discussed below. As of September 30, 2018, we had outstanding notes payable in an aggregate principal amount of $50 million, consisting of $12.4 million of non-convertible promissory notes and $37.6 million of convertible notes. Of the $50 million aggregate principal amount of notes outstanding as of September 30, 2018, approximately $22.4 million is either due on demand or will become due and payable within the next 12 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.

As described in Note 2 to our consolidated financial statements, we have had recurring operating losses, have a significant amount of notes payable and other obligations due within the next year and projected operating losses, including the expected costs relating to the commercialization of Endari that exceed both the existing cash balances and cash expected to be generated from operations for at least the remainder of 2018. In order to meet our expected obligations, management intends to raise additional funds through equity and debt financings and partnership agreements. In addition, we may seek to raise additional funds through collaborations with other companies or financing from other sources. 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.

Our current cash burn rate for the nine months ended September 30, 2018 was approximately $0.5 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: the number, duration and results of the clinical trials for our various product candidates going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments

encountered in implementing our business and commercialization strategies; the outcome of existing and any future litigation; and further arrangements, if any, with collaborators. Revenues from AminoPure and NutreStore products are currently not significant and we are unsure whether sales of these products will increase or sales of Endari will grow as expected . U ntil we can generate sufficient product revenue, our 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 licensing or other strategic arrangements . We have understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such financing on terms acceptable to us (or at all).

For the nine months ended September 30, 2018 and during the year ended December 31, 2017, we borrowed varying amounts pursuant to convertible notes and non-convertible promissory notes, the majority of which have been issued to our officers and stockholders. As of September 30, 2018 and December 31, 2017, the aggregate principal amounts outstanding under convertible notes and non-convertible promissory notes totaled $37.6 million and $12.4 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 10% 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.

The table below lists our outstanding notes payable as of September 30 , 2018 and December 31, 2017 and the material terms of our outstanding borrowings:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price		Principal Outstanding September 30, 2018		Discount Amount September 30, 2018		Carrying Amount September 30, 2018		Shares Underlying Notes September 30, 2018		Principal Outstanding December 31, 2017		Discount Amount December 31, 2017		Carrying Amount December 31, 2017		Shares Underlying Notes December 31, 2017
Notes payable
2013	10%	Due on demand		—	$	879,400	$	—	$	879,400		—	$	887,600	$	—	$	887,600		—
2015	10%	Due on demand		—		10,000		—		10,000		—		—		—		—		—
2016	10% - 11%	Due on demand		—		843,335		—		843,335		—		833,335		—		833,335		—
2017	11%	Due on demand		—		2,540,506		—		2,540,506		—		6,150,208		—		6,150,208		—
2018	10% - 11%	Due on demand - 18 months		—		6,811,000		30,000		6,781,000		—		—		—		—		—
					$	11,084,241	$	30,000	$	11,054,241		—	$	7,871,143	$	—	$	7,871,143		—

		Current			$	4,384,241	$	—	$	4,384,241		—	$	7,871,143	$	—	$	7,871,143		—
		Non-current			$	6,700,000	$	30,000	$	6,670,000		—	$	—	$	—	$	—		—
Notes payable - related party
2015	11%	Due on demand		—		—		—		—		—		310,000		—		310,000		—
2016	10%	Due on demand		—		270,000		—		270,000		—		810,510		—		810,510		—
2017	10%	Due on demand		—		915,751		—		915,751		—		915,751		—		915,751		—
2018	11%	Due on demand		—		159,223		—		159,223		—		—		—		—		—
					$	1,344,974	$	—	$	1,344,974		—	$	2,036,261	$	—	$	2,036,261		—

		Current			$	1,344,974	$	—	$	1,344,974		—	$	2,036,261	$	—	$	2,036,261		—
		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			501,273		—		501,273		176,777		486,878		—		486,878		168,766
2016	10%	1 year - 2 years	$3.60 - $4.50			182,495		7,952		174,543		55,983		1,516,329		83,298		1,433,031		441,048
2017	10%	Due on demand - 2 years	$3.50 - $10.00			5,256,547		947,731		4,308,816		1,441,824		36,113,296		11,232,423		24,880,873		5,357,488
2018	6% - 10%	Due on demand - 2 years	$3.50 - $10.00			16,522,996		2,411,522		14,111,474		2,983,385		—		—		—		—
					$	22,763,311	$	3,367,205	$	19,396,106		4,756,254	$	38,416,503	$	11,315,721	$	27,100,782		6,065,587

		Current			$	16,256,710	$	2,119,066	$	14,137,644		2,119,066	$	12,860,912	$	5,835,910	$	7,025,002		3,449,984
		Non-current			$	6,506,601	$	1,248,139	$	5,258,462		2,637,188	$	25,555,591	$	5,479,811	$	20,075,780		2,615,603
Convertible notes payable - related party
2012	10%	Due on demand	$	3.30	$	200,000	$	—	$	200,000		71,127	$	200,000	$	—	$	200,000		68,122
2015	10%	2 years	$	4.50		200,000		—		200,000		56,109		200,000		—		200,000		53,905
2017	10%	2 years	$	10.00		5,000,000		407,292		4,592,708		507,465		—		—		—		—
2018	10%	2 years	$	10.00		9,400,000		1,058,320		8,341,680		971,577		—		—		—		—
					$	14,800,000	$	1,465,612	$	13,334,388		1,606,278	$	400,000	$	—	$	400,000		122,027

		Current			$	400,000	$	—	$	400,000		127,236	$	400,000	$	—	$	400,000		122,027
		Non-current			$	14,400,000	$	1,465,612	$	12,934,388		1,479,042	$	—	$	—	$	—		—
		Total			$	49,992,526	$	4,862,817	$	45,129,709		6,362,532	$	48,723,907	$	11,315,721	$	37,408,186		6,187,614

Cash flows for the nine months ended September 30 , 2018 and September 30 , 2017

Net cash provided by operating activities

Net cash flows provided by operating activities decreased by $1.4 million, or 41%, to a negative net cash flow of $4.7 million from $3.4 million for the nine months ended September 30, 2018 and 2017, respectively. This decrease was primarily due to a $3.4 million increase in net loss, offset by a $3.2 million decrease of working capital, a $5.1 million increase in the non-cash adjustments to net loss. The decrease in non-cash adjustments to net loss was primarily attributable to the following: a $24.1 million increase in unrealized loss on investment in marketable securities; a $7.6 million realized loss on securities available-for-sales; a $7.4 million in amortization of discount of convertible notes and a $3.2 million increase for loss on debt extinguishment, partially offset by a $37.0 million increase for the change in the fair value of warrant derivative liabilities and embedded conversion option;

Net cash used in investing activities

Net cash flows used in investing activities increased by $5.8 million, or 6,894%, to $5.9 million from $0.1 million for the nine months ended September 30, 2018 and 2017, respectively. Net cash used in investing activities includes purchase of marketable securities and investment at cost, as well as purchase of property and equipment. This increase was primarily due to $6.4 million in sales of marketable securities.

Net cash from financing activities

Net cash flows from financing activities decreased by $13.5 million, or 208%, to negative cash flow of $7.0 million from positive cash flow of $6.5 million for the nine months ended September 30, 2018 and 2017, respectively, as a result of a $23.9 million increase in repayment of convertible and non-convertible promissory notes and a $7.5 million increase in repurchase of common stock and warrants, offset by a $18.6 million increase in proceeds from issuance of convertible and non-convertible promissory notes.

Off-Balance-Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with 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, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (“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 (the “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.

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. Based upon this evaluation and due to the material weaknesses in our internal control over financial reporting as of December 31, 2017 described below, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s DCP were 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, 2017 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, 2018 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, 2017. 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 concluded that our DCP were not effective as of December 31, 2017, because of the continuance of a material weakness (the “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, 2014 and 2013, with respect to the application of GAAP on certain complex transactions, as well as maintaining effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions and internal communication of significant transactions.

We committed to remediating the control deficiencies that constituted the Material Weakness by implementing changes to our internal control over financial reporting. In 2017, we implemented measures designed to remediate the underlying causes of the control deficiencies that gave rise to the Material Weakness, including, without limitation:

•

engaging a third-party accounting consulting firm to assist us in the review of our application of GAAP on complex debt financing transactions;

•

using a GAAP Disclosure and SEC Reporting Checklist;

•

increasing the amount of external continuing professional training and academic education on accounting subjects for accounting staff including management staff to receive professional certification as a CPA or CMA;

•

enhancing the level of the precision of review controls related to our financial close and reporting; and

•

hiring a Chief Financial Officer

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 Weakness, 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 fully implemented, will remediate the control deficiencies that gave rise to the M aterial W eakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remedial measures are required.

Part II. Other Information

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Please refer to the 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 20, 2018, the Company issued a convertible note to a third party in the principal amount of $3,000,000 that bears interest at 6% per annum. The note is due on demand up to one year from the date of issuance. If the Company completes a qualified public offering, the principal amount of the note will automatically convert into shares of the Company's common stock at a conversion price equal to 80% of the initial public offering price in the qualified public offering. If the mandatory conversion is not executed, after three months of the loan date, the holder of the note may convert some or all of the unpaid principal amount thereof, including unpaid accrued interest, into shares of the Company's common stock at a conversion price of $10.00 per share.

On August 23, 2018, the Company refinanced a convertible note to a third party in the original principal amount of $578,813 with a new convertible note in the principal amount of $607,753 that bears interest at 10% per annum and matures in six months with an option on the part of the holder to renew for up to 1 year. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of Company common stock at $3.50 per share at any time during the term of the note upon the election of the holder .

In or about September 2018, we issued 1,649,735 shares of our common stock upon the exercise of our 2013 Private Placement warrant.

All of the 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 refinancing, 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. The securities issued in reliance upon the exemption from regulation Section 365(a) of the Securities Act qualified for the exemption because they were issued exclusively in exchange for our outstanding securities where no commission or remuneration was paid or given in soliciting the exchange.

The following table sets forth information with respect to the Company’s purchase of shares of the Company common stock during the three-month period ended September 30, 2018:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2018		—		—		—		—
February 1 - 28, 2018		—		—		—		—
March 1 - 31, 2018	700,000(1)		$	5.00		—	N/A

(1)

The shares were purchased on March 29, 2018 from a single stockholder in a privately negotiated transaction. In connection with the repurchase, the Company also purchased from the stockholder warrants to purchase a total of 800,000 shares of the Company common stock. The total purchase price was $7.5 million.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Saf ety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibit Number		Description of Document

4.1		Form of 10% Senior Secured Debenture (incorporated by reference from Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed with Security Exchange Commission on September 17, 2018).

4.2		Form of Common Stock Purchase Warrant (incorporated by reference from Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed with Security Exchange Commission on September 17, 2018).

4.3		Convertible Promissory Note dated July 20, 2018 issued by the registrant to Vivozon Inc.

4.4		Convertible Promissory Note dated August 23, 2018 issued by the registrant to The Shitabata Family Trust

10.1		Securities Purchase Agreement entered into on October 1, 2018 among Emmaus Life Sciences, Inc. and the Purchasers thereunder (incorporated by reference from Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2018).

10.2		Second Amendment to Securities Purchase Agreement entered into on October 1, 2018 among Emmaus Life Sciences, Inc. and the Purchasers thereunder (incorporated by reference from Exhibit 10.6 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on October 5, 2018).

10.3		Form of Security Agreement among Emmaus Life Sciences, Inc., Emmaus Medical, Inc., Newfield Nutrition Corporation and the holders of 10% Senior Secured Debentures (incorporated by reference from Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with Security Exchange Commission on September 17, 2018) .

10.4		Form of Subsidiary Guarantee among Emmaus Medical, Inc., Newfield Nutrition Corporation and the holders of 10% Senior Secured Debentures (incorporated by reference from Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with Security Exchange Commission on September 17, 2018).

10.5		Fee Agreement made as August 24, 2018 between Emmaus Life Sciences, Inc. and T.R. Winston & Company, LLC (incorporated by reference from Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with Security Exchange Commission on September 17, 2018).

10.6		Amended and Restated Fee Agreement made as of October 1, 2018 between Emmaus Life Sciences, Inc. and T.R. Winston & Company, LLC (incorporated by reference from Exhibit 10.5 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on October 5, 2018).

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.

EMMAUS LIFE SCIENCES, INC.

SIGNATURES

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

	Emmaus Life Sciences, Inc.

Dated: November 14, 2018	By:	/s/ Yutaka Niihara
	Name:	Yutaka Niihara, M.D., M.P.H.
	Its:	Chief Executive Officer


	By:	/s/ Kurt H. Kruger
	Name:	Kurt H. Kruger
	Its:	Chief Financial Officer

Exhibit 4.3

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: $3,000,000 Loan Date: __July 20, 2018______

Currency: U.S. Dollars Term: One Year

Interest Rate: 6.0 % Loan Due Date: Due On Demand

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

Lender: _______Vivozon Inc._________________________________________

FOR VALUE RECEIVED, Emmaus Life Sciences, Inc., a Delaware corporation, located at 21250 Hawthorne Blvd., Suite 800, Torrance, CA 90503 (“Borrower”) hereby promises to pay to the order of 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) : The entire unpaid Principal Amount and any accrued interest shall become immediately due and payable upon Lender’s demand after three months of Loan Date or 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.

2. Prepayment : This Note may be prepaid in whole or in part at any time after three months from the Loan Date without premium or penalty upon ten days advance written notice by Lender to Borrower. In the event such notice provides for prepayment after three months of Loan Date, Lender shall be permitted to exercise its conversion rights. 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 (“Holder”) of this Note may designate in writing in the future.

4. Conversion:

(a) Mandatory Conversion : Upon the first closing of the sale of shares of common stock of the Borrower (“Common Stock”) in a Qualifying Public Offering (as hereinafter defined), (i) the entire outstanding Principal Amount of this Note shall automatically be converted into a number of

shares of Common Stock determined by dividing (x) the outstanding Principal Amount of this Note by (y) an amount equal to the product obtained by multiplying (A) the Qualifying Public Offering Price Per Share and (B) 0. 80 . Within thirty days of such closing, all accrued and unpaid interest on the Note will be paid to the Holder in cash. “Qualifying Public Offering” means a firm commitment public offering of shares of Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, which results in aggregate cash proceeds to the Borrower of not less than $20,000,000; provided that in connection therewith the Common Stock is listed for trading on a national securities exchange; and provided further that the quoted market price per share of the Common Stock is at least $5.00 at the time of such listing. “Qualifying Public Offering Price Per Share” means the initial public offering price per share of Common Stock in such Qualifying Public Offering.

The Borrower shall notify the holder of this Note at least seven (7) calendar days prior to the initial closing of a Qualifying Public Offering. At the time of the initial closing of such Qualifying Public Offering, the holder of this Note shall deliver this Note to the Borrower and, as soon as reasonably practicable thereafter, the Borrower shall issue and deliver to the holder of this Note a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of this Note, and provision shall be made for any fraction of a share as provided in Section 4(b) below. At the time of the initial closing of the Qualifying Public Offering, and provided that the Borrower has complied fully with all of its obligations under this Section 4(a), the holder of this Note shall not have any further rights under this Note (including the right to receive payment of principal or interest hereunder) other than those rights set forth in this Section 4.

(b) Fractional Shares : No fractional shares or scrip shall be issued upon conversion of this Note. The number of full shares of Common Stock issuable upon conversion of this Note shall be computed on the basis of the aggregate value of outstanding principal of and, as applicable in accordance with the terms of this Section 4, accrued interest on this Note so surrendered. The value of any fractional shares of Common Stock shall be paid in cash.

(c) Conversion at the Election of the Holder : If the mandatory conversion is not executed, after three months of the Loan Date, Lender may by giving written Notice of Conversion to the Borrower in the form attached hereto as Exhibit A, elect to convert some or all of the unpaid Principal Amount, including up to all the interest accrued and unpaid thereon, into a number of shares of Common Stock determined by dividing (x) the outstanding Principal Amount of this Note by (y) the Conversion Price Per Share. As used in this Section 4(c), “Conversion Price Per Share” means $10.00 per share of Common Stock,subject to appropriate adjustment (see Section 15). Within two weeks following receipt of such Notice of Conversion, Borrower shall deliver to Lender one or more original stock certificates representing the full number of shares of Common Stock issuable upon such conversion, and provision shall be made for any fraction of a share as provided in Section 4(b) above. Upon such conversion, and provided that the Borrower has complied fully with all of its obligations under this Section 4(c), the holder of this Note shall not have any further rights under this Note (including the right to receive payment of principal or interest hereunder) other than those rights set forth in this Section 4.

5. Default: In the event of default, the interest rate shall be increased to 12%, and 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.

6. 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.

7. Modification: No modification or waiver of any of the terms of this Note shall be allowed unless by written agreement signed by the Borrower and the Lender. 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.

8. Complete Note: This Note is the complete and exclusive statement of agreement of the Borrower and Lender with respect to matters in this Note. This Note replaces and supersedes all prior written or oral agreements or statements by and among the Borrower and Lender with respect to the matters covered by it. No representation, statement, condition or warranty not contained in this Note is binding on either the Borrower or Lender. Each Holder of this Note, by its acceptance hereof, agrees to be bound by, and shall be entitled to the benefits of, the terms set forth herein.

9. Transfer of the Note:

(a) Subject to Section 9(b) hereof, this Note may be transferred, in whole or in part, at any time or from time to time, by the Lender. The Borrower hereby agrees to remain bound by the terms of this Note subsequent to any such 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, together with such additional documentation as the Lender may reasonably request, 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. The person in whose name this Note or any new Note issued in replacement hereof shall be registered shall be deemed and treated as the owner and holder thereof, and the Borrower shall not be affected by any notice or knowledge to the contrary except as provided in this Section 9(a). This Note may not be transferred by the Borrower, by operation of law or otherwise, without the prior written consent of the Lender.

(b) Lender acknowledges and agrees that this Note has been acquired for investment and has not been registered under the securities laws of the United States of America or any state thereof. Accordingly, notwithstanding Section 9(a), neither this Note nor any interest thereon may be offered for sale, sold or transferred in the absence of registration under applicable federal and state securities laws or an opinion of counsel of the Holder reasonably satisfactory to the Borrower that such registration is not required.

10. 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.

11. 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.

12. 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. Information Rights: Borrower shall provide financial statements in forms of 10-Q to Lender on timely basis. Borrower shall respond to Lender’s reasonable written request for information. For financial and general information about the Borrower as well as the risk disclosures, please refer to our annual form 10-K, quarterly form 10-Q reports, and current 8-K reports.

https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001420031&owner=exclude&count=40

15 . Adjustments : If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes or pursuant to any of the other Transaction Documents), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.

Signed Under Penalty of Perjury, this ___ 5 ^th _ day of _ July ___, __ 2018 ___

Emmaus Life Sciences, Inc.

_ /s/ _ Willis C. Lee ________________________

By: Willlis C. Lee, COO

Acknowledged and accepted by Lender

_ /s/ Vivozon Inc. _________________________

By: Lender

ATTACHMENT 1

Lender’s Name: Vivozon, Inc.

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 4.4

EMMAUS LIFE SCIENCES, INC.

Convertible Promissory Note

(6 Months up to 1 Year)

Principal Amount: _$607,753.13__ Loan Date: __08/23/2018________

Currency: __US Dollar_____ Term: _6 Months up to 1 Year

Interest Rate: __10%__________ Loan Due Date: _ 02/23/2019__ ______

Interest Payment Period: __Interest is accrued and paid on Loan Due Date____________

Conversion Price per Share: __$3.50 _________________

Lender: _The Shitabata Family Trust______________________________________________

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. 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.

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 sto ck issued upon such conversion.

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.

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.

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 ____, _ 2018 _____

Emmaus Life Sciences, Inc.

_ /s/ Willis C. Lee _________________________

By: Willis C. Lee, COO

_ /s/ _ Yutaka Niihara __ _________________________
By: Yutaka Niihara, M.D., MPH, Chairman and CEO

_ /s/ The Shitabata Family Trust __________________

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.

The undersigned hereby irrevocably elects to convert $


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 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, 2018

/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, Kurt H. Kruger, 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, 2018

/s/ Kurt H. Kruger
Kurt H. Kruger
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 ending September 30, 2018, 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, 2018

/s/ Kurt H. Kruger
Kurt H. Kruger
Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14, 2018