News Column

EMMAUS LIFE SCIENCES, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 8, 2014

The following discussion relates to the financial condition and results of operations of Emmaus Life Sciences, Inc. (the "Company") and its wholly-owned subsidiary Emmaus Medical, Inc., a Delaware corporation ("Emmaus Medical"), and Emmaus Medical's wholly-owned subsidiaries Newfield Nutrition Corporation, a Delaware corporation ("Newfield"), Emmaus Medical Japan, Inc., a Japanese corporation ("EM Japan"), and Emmaus Medical Europe, Ltd. ("EM Europe"). Forward-Looking Statements This management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes that are included in this Quarterly Report and the Quarterly Reports on Form 10-Q for the period ended March 31, 2013 and for the period ended June 30, 2013 filed with the Securities and Exchange Commission ("SEC") on May 15, 2013 and August 14, 2013, respectively, and the audited consolidated financial statements for the years ended December 31, 2012 and 2011 and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 29, 2013 (the "Annual Report"). This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "anticipated," "believe," "expect, "plan," "intend," "seek," "estimate," "project," "could," "may," and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management's current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, our ability to raise additional capital to fund our operations, obtaining FDA and other regulatory authorization to market our drug and biologic products, successful completion of our clinical trials, our ability to achieve regulatory authorization to market our L-glutamine treatment for sickle cell disease ("SCD"), 21 --------------------------------------------------------------------------------



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our ability to commercialize our L-glutamine treatment for SCD; our reliance on third party manufacturers for our drug products, market acceptance of our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, our ability to fund development of regenerative medicine products and license payments, our ability to commercialize the regenerative medicine products, development of a public trading market for our securities, and various other matters, many of which are beyond our control. Our actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, or if any of the risks or uncertainties described elsewhere in this report or in Part I, Item 1A."Risk Factors" of the Annual Report. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and accordingly there can be no assurances made with respect to the actual results or developments. Company Overview We are a development stage company engaged in the development of treatments and therapies for rare diseases and are primarily focused on the late-stage development of our lead product candidate currently in Phase 3 clinical trials studying the use of the amino acid L-glutamine as a prescription drug for the treatment of SCD. To a lesser extent, we are also engaged in the marketing and sale of NutreStore® [L-glutamine powder for oral solution], which has received FDA approval, as a treatment for Short Bowel Syndrome ("SBS") in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Our indirect wholly-owned subsidiary, Newfield Nutrition Corporation, sells L-glutamine as a nutritional supplement under the brand name AminoPure® through retail stores in multiple states and via importers and distributors in Japan, Taiwan and South Korea. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore® and AminoPure®.



We also own a minority interest in CellSeed, Inc., a Japanese company listed on the Tokyo Stock Exchange, which is engaged in research and development of regenerative medicine products and the manufacture and sale of temperature-responsive cell culture equipment.

We also have certain rights to regenerative medicine products owned by CellSeed and are involved in research focused on providing innovative solutions for tissue-engineering through the development of novel cell harvest methods and 3-dimensional living tissue replacement products for "cell sheet therapy" and regenerative medicine and the commercialization of such products. In April 2011, we entered into a Joint Research and Development Agreement (the "Research Agreement") with CellSeed regarding the future research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products. Additionally, pursuant to the Individual Agreement between us and CellSeed executed in April 2011, CellSeed granted us the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell Sheet ("CAOMECS") to be used on the cornea of appropriate patients residing in the United States. We intend to work on commercializing the CAOMECS for the cornea and to expand our relationship with CellSeed to develop cell sheets for other types of cells in the future. Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC undertook a reorganization and merged with Emmaus Medical, Inc., which was originally incorporated in September 2003. Pursuant to an Agreement and Plan of Merger dated April 21, 2011 (the "Merger Agreement"), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company ("AFH Merger Sub"), AFH Advisory and Emmaus Medical, Emmaus Medical merged with and into AFH Merger Sub on May 3, 2011 with Emmaus Medical continuing as the surviving entity (the "Merger"). Upon the closing of the Merger, the Company changed its name from "AFH Acquisition IV, Inc." to "Emmaus Holdings, Inc." Subsequently, on September 14, 2011, we changed our name from "Emmaus Holdings, Inc." to "Emmaus Life Sciences, Inc." Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical common stock, options, warrants and convertible notes received 20,628,305 shares of our common stock (excluding 47,178 shares held by stockholders who exercised dissenters' rights in connection with the Merger), options and warrants to purchase an aggregate of 326,508 shares of our common stock, and convertible notes to purchase an aggregate of 271,305 shares of our common stock. Securityholders of Emmaus Medical held 85% of our issued and outstanding common stock on a fully diluted basis upon the closing of the Merger. Immediately after the closing of the Merger, we had issued and outstanding 24,378,305 (excluding 47,178 shares held by stockholders who exercised dissenters' rights) shares of common stock, no shares of preferred stock, options to purchase 23,590 shares of common stock, warrants to purchase 302,918 shares of common stock and convertible notes exercisable for 271,305 shares of common stock. 22 --------------------------------------------------------------------------------



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Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: the duration and results of the clinical trials for our various products going forward; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; current and future unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation; and further arrangements, if any, with collaborators. Until we can generate a sufficient amount of product revenue, future cash requirements are expected to be financed through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. As of September 30, 2013, our accumulated deficit since inception is $46.7 million and we had cash and cash equivalents of $5.8 million. Since inception we have had minimal revenues and have been required to rely on funding from sales of equity securities and borrowings from officers and stockholders. Currently, we estimate we will need approximately $2.4 million to complete our Phase 3 clinical trial and $400,000 to obtain regulatory approval of L-glutamine as a therapy for SCD. In addition, we agreed to pay CellSeed an aggregate of $8.5 million pursuant to the Research Agreement, which is still payable, and we believe that we will need approximately $3.0 million for research and development to develop corneal cell sheet technology in the United States. We estimate that we will need an additional $2.5 million for research related to other cell sheet applications and current good manufacturing practice ("cGMP") laboratory costs for regenerative medicine. Recent Highlights In April 2009, the FDA authorized us to begin a large Phase 3 clinical trial directed to study L-glutamine as an experimental agent to reduce sickle cell crisis. An interim analysis of a subset of data from the Phase 3 clinical trial was completed by an independent third party. The results of the interim analysis were then reported to the FDA by way of the independent third party in August 2012. At a meeting held with the FDA in November 2012, we received support to continue the trial without any modification to the protocol. We completed enrollment for the Phase 3 clinical trial in December 2012 with 230 patients at 31 clinical trial sites and aim to complete the trial in December 2013. In October 2010, we formed EM Japan, a wholly-owned subsidiary of Emmaus Medical that markets and sells AminoPure® in Japan and other neighboring regions. EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future. EM Japan recorded approximately $125,600 in net sales in the nine months ended September 30, 2013. We sell L-glutamine as a nutritional supplement under the brand name AminoPure® through our wholly-owned subsidiary Newfield Nutrition Corporation. The product is currently sold online and through retail stores in multiple states and via importers and distributors in Japan, Taiwan and South Korea. As part of the growth strategy, Newfield Nutrition is focused on adding additional distributors both domestically and internationally.



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

On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the "Reverse Stock Split"), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of a public offering of our common stock, if any. The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the DelawareSecretary of State. The par value and number of authorized shares of our common stock will remain unchanged. On July 17, 2012, Emmaus Medical, Inc., a subsidiary of Emmaus Life Sciences, Inc., announced that the European Commission (EC) has granted Orphan Medicinal Product designation for the Company's investigational drug Levoglutamide (L-glutamine) for the treatment of sickle cell disease. The Company already has Orphan Drug status designation from the FDA. Orphan drug status provides us with certain marketing exclusivity advantages if we succeed in obtaining approval of an NDA from the FDA and the equivalent of an NDA in Europe (called a Market Approval Authorization).



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

On September 11, 2013, we completed a private placement transaction pursuant to which we issued to certain accredited investors units consisting of an aggregate of 3,020,501 shares of common stock of the Company and common stock purchase warrants for the purchase of an additional 3,020,501 shares of common stock of the Company, at a price of $2.50 per unit. The aggregate purchase price for the units was $7.6 million. Net proceeds to the Company, after expenses relating to the transaction, were $6.4 million. Additional information regarding the transaction, including the terms of the securities issued in the transaction, may be found in the Company's Current Report on Form 8-K filed with the SEC on September 17, 2013. 23

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Table of Contents Financial Overview Revenue As noted above, we are in the development stage. Since our inception in 2000, we have had limited revenue from the sale of NutreStore®, an FDA approved prescription drug to treat short bowel syndrome, or SBS, and AminoPure®, a nutritional supplement. We have funded operations principally through the private placement of equity securities and debt financings. Emmaus Medical's operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing clinical trials for sickle cell treatment, manufacturing products and maintaining and improving its patent portfolio. Currently, we generate revenue through the sale of NutreStore® [L-glutamine powder for oral solution] as a treatment for SBS as well as AminoPure®, a nutritional supplement. Pursuant to the sublicense agreement for the SBS Patent, we are required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore® to CATO Holding Company ("Cato"). We made royalty payments to Cato in the amount of $855 in May 2012 and $6,870 in October 2013, which represent the 10% royalty of the adjusted gross sales for 2010, 2011 and 2012, respectively. Management expects that any revenues generated from the sale of NutreStore® and AminoPure® will fluctuate from quarter to quarter based on the timing of orders and the amount of product sold.



Research and Development Expenses

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to the contract research organization, or CRO, payroll-related expenses, study site payments, consultant fees, activities related to regulatory filings, manufacturing development costs and other related supplies. Product candidates, as they move from preclinical studies to clinical studies, generally have higher development costs particularly in the later stage clinical studies, such as Phase 2 and 3 trials, as compared to those in earlier stages of development, such as preclinical studies and Phase 1 trials. This is primarily due to the increased size, expanded scope and generally longer duration of later stage clinical studies. We plan to increase our research and development expenses for the foreseeable future as we seek to complete the development of our most advanced product candidate, our L-glutamine treatment for SCD. Expenses related to the Phase 3 clinical trial of our L-glutamine treatment for SCD are based on estimates of the services received and efforts expended pursuant to contracts with study sites and the CRO that conducts and manages the clinical trial on our behalf. We expect to incur increased research and development expenses as we begin to prepare study close-out activities for this Phase 3 clinical trial. The most significant clinical trial expenditures are related to the CRO costs and the payments to study sites. The contract with the CRO is based on time and material expended, whereas the study site agreements are based on per patient costs as well as other pass-through costs, including, but not limited to, start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. Management estimates the expenses based on the time period over which the services will be performed and the level of effort to be expended by the CRO in each period. Although we do not expect the estimate to be materially different from amounts actually incurred, our estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary and consequently, result in us reporting amounts that are higher or lower in any given period. While we currently are focused on advancing the Phase 3 clinical trial, future research and development expenses will depend on any new products or technologies that may be introduced in the pipeline. In addition, we cannot forecast with any degree of certainty which product candidate(s) may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements. At this time, due to the inherently unpredictable nature of the drug development process and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in the continued development of the sickle cell treatment and other clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. Our current estimated cost to complete the Phase 3 clinical trial is $2.4 million, which is based on the assumptions that the total number of trial sites does not increase beyond our current estimates and that we remain on the projected timeline. Should the total number of trial sites need to be increased or should the timeline require extension, there will be a commensurate increase in costs associated with the additional time and effort required by the CRO and Company staff. 24

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The drug development process to obtain FDA approval is very costly and time consuming. Even with the granting of Orphan Drug status and Fast Track Designation, the successful development of our L-glutamine treatment for SCD is uncertain and subject to a number of variables, in addition to other risks as described under the caption ''Risk Factors'' in the Company's Annual Report. Our L-glutamine treatment for SCD is investigational in nature and has not yet received FDA approval. In order to grant marketing approval, the FDA must conclude that the clinical data establish the safety and effectiveness of our L-glutamine treatment for SCD and that the manufacturing processes and controls are adequate. Despite our efforts, our L-glutamine treatment for SCD may not be proven safe and effective in clinical trials for the treatment of SCD, or meet applicable regulatory standards. We are focused on completing the Phase 3 clinical trial and submitting the New Drug Application, or NDA, to the FDA for consideration. As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollment and the risks inherent in the development process, we are unable to determine with any degree of certainty the duration and completion of costs or when, and to what extent, we will generate revenues from the commercialization and sale of our L-glutamine treatment for SCD. In connection with our agreements with CellSeed related to the development of corneal cell sheet technology in the United States, we believe the cost to develop the corneal cell sheet technology in the United States will be approximately $3.0 million, in addition to the $8.5 million we have agreed to pay CellSeed pursuant to the Research Agreement. Such estimate includes the anticipated cost of obtaining FDA approval for the corneal cell sheets and assumes that we will need biologic approval of the FDA for the corneal cell sheets, rather than pharmaceutical approval. We estimate that we will need another $2.0 million to commercialize the corneal cell sheet technology. Based on data currently available for cornea treatment using this technology, we anticipate it will be two to three years before we would be able to submit a BLA and obtain a marketing decision from the FDA to allow us to begin to commercialize this product in the United States. In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and to build a cGMP laboratory to establish the infrastructure and production capabilities related to regenerative medicine products. At this time, no research and development costs are associated with NutreStore and AminoPure.



General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, information technology, marketing, and legal functions. Other general and administrative expenses include facility costs, patent filing costs, and professional fees for legal, consulting, auditing and tax services. Inflation has not had a material impact on our general and administrative expenses over the past two years. Environmental Expenses The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs. Inventories Inventories consist of finished goods and work-in-process and are valued based on a first-in, first-out basis and at the lower of cost or market value. All of the purchases during the nine months ended September 30, 2013 were from two vendors and during 2012 were from one vendor. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations From December 20, 2000 (date of inception) Three Months Ended Nine Months Ended to September 30, September 30, September 30, 2013 2012(1) 2013 2012(1) 2013 Restated Restated Restated REVENUES, Net $ 66,129$ 113,126$ 246,897$ 365,409$ 1,471,071 COST OF GOODS SOLD 48,445 36,585 147,418 86,358 924,766 GROSS PROFIT 17,684 76,541 99,479 279,051 546,305 OPERATING EXPENSES Research and development 490,138 780,193 1,801,399 2,209,176 11,219,839 Selling 120,647 90,341 377,335 288,794 3,278,902 General and administrative 2,506,808 1,692,004 7,338,211 5,706,108 26,021,163 Transaction costs 1,014,019 - 1,014,019 - 1,802,912 4,131,612 2,562,538



10,530,964 8,204,078 42,322,816

LOSS FROM OPERATIONS (4,113,928 ) (2,485,997 )



(10,431,485 ) (7,925,027 ) (41,776,511 )

OTHER INCOME (EXPENSE) Gain on debt extinguishment - - - 300,312 300,312 Realized loss on securities available-for-sale - - - (24,490 ) (24,490 ) Gain on derecognition of accounts payable - - 341,361 - 341,361 Change in fair value of derivative liabilities 291,000 - 291,000 - 291,000 Interest and other income 5,089 15,092 15,811 29,705 169,187 Interest expense (567,491 ) (884,496 )



(1,668,501 ) (2,776,893 ) (6,459,884 )

(271,402 ) (869,404 )



(1,020,329 ) (2,471,366 ) (5,382,514 )

LOSS BEFORE INCOME TAXES $ (4,385,330 )$ (3,355,401 )$ (11,451,814 )$ (10,396,393 )$ (47,159,025 ) INCOME TAXES (BENEFIT)

(51,129 ) 113 (450,381 ) 5,913 (425,078 ) NET LOSS $ (4,334,201 )$ (3,355,514 )$ (11,001,433 )$ (10,402,306 )$ (46,733,947 ) NET LOSS PER COMMON SHARE $ (0.16 )$ (0.14 )$ (0.43 )$ (0.43 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 27,066,743 24,409,360 25,694,988 24,399,390



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(1) See Note 2 to condensed consolidated financial statements.

Three months ended September 30, 2013 and 2012

Net Losses. Net losses increased by $1.0 million, or 29%, to $4.3 million from $3.4 million for the three months ended September 30, 2013 and 2012, respectively. The increase in losses is primarily a result of increased operating expenses as discussed below. As of September 30, 2013, we had an accumulated deficit of approximately $46.7 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. Revenues. Sales decreased approximately $0.05 million, or 42%, to just under $0.1 million from just over $0.1 million for the three months ended September 30, 2013 and 2012, respectively. Sales decreased primarily due to decreases in the number of units sold of our AminoPure® product. The Company continues to monitor its returns and will adjust its estimates based on its actual sales return experience. The Company recorded a 5% of sales return allowance for both NutreStore® and AminoPure® for the quarter ended September 30, 2013. 26

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Table of Contents Cost of Goods Sold. Cost of goods sold increased to $0.05 million from $0.04 million for the three months ended September 30, 2013 and 2012, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. The majority of the increased cost is due to a reserve for inventory valuation of $0.02 million. No scrapped inventory expense was realized for the three months ended September 30, 2013 or for the three months ended September 30, 2012. All of the purchases during the three months ended September 30, 2013 were from two vendors and during 2012 were from one vendor. Research and Development Expenses. Research and development expenses decreased $0.3 million, or 37%, to $0.5 million from $0.8 million for the three months ended September 30, 2013 and 2012, respectively. This decrease was primarily due to decreases in our CRO costs and other related costs of our Phase 3 clinical trial as the total number of active study patients decreased due to study patients completing participation in the study. We anticipate an increase in our Phase 3 clinical trial costs in future periods. Factors contributing to the anticipated increased trial costs include, but are not limited to, the costs of compiling and analyzing data from the clinical trial, preparing an end-of-study report, and, if warranted by the results of the trial, preparing and submitting to the FDA an NDA. Selling Expenses. Selling expenses were just over $0.1 million and just under $0.1 million for the three months ended September 30, 2013 and September 30, 2012, respectively. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore® and AminoPure®. General and Administrative Expenses. General and administrative expenses increased $0.8 million, or 48%, to $2.5 million from $1.7 million for the three months ended September 30, 2013 and September 30, 2012, respectively. The increase is primarily due to a $0.8 million increase in share-based compensation expense and $0.1 million increase in consulting fees. Transaction Expenses. Transaction costs increased $1.0 million from $0 due to costs associated with the Company's 2013 private placement of units that were allocated to the derivative warrant liability. Other Income and Expense. Total other income and expense has improved by $0.6 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, primarily due to lower interest expense of $0.3 million. The lower interest expense is due to a $0.5 million decrease in the amortization of debt discount of convertible notes and promissory notes, partially offset by an increase of $0.2 million in interest expense on debt obligations as a result of higher outstanding debt balances. The change in fair value of derivative liabilities has improved by $0.3 million for the three months ended September 30, 2013 compared to none in the three months ended September 30, 2012.



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

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



† to support research and development activities, which the Company expects to expand as development of our product candidate(s) continue; and

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

Nine months ended September 30, 2013 and 2012

Net Losses. Net losses increased by $0.6 million, or 6%, to $11.0 million from $10.4 million for the nine months ended September 30, 2013 from 2012. As of September 30, 2013, we had an accumulated deficit of approximately $46.7 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized. Revenues. Revenue decreased $0.12 million, or 32%, to $0.25 million from $0.37 million for the nine months ended September 30, 2013 and 2012, respectively. Sales decreased primarily due to decreases in the number of units sold of our AminoPure® product. Cost of Goods Sold. Cost of goods sold increased to $0.15 million from $0.09 million for the nine months ended September 30, 2013 and 2012, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. The majority of the increased cost is due to a reserve for the valuation of inventory at $0.06 million as well as an increase in raw material cost. No scrapped inventory expense was realized for the nine months ended September 30, 2013 and for the nine months ended September 30, 2012. Research and Development Expenses. Research and development expenses decreased $0.4 million, or 18%, to $1.8 million from $2.2 million for the nine months ended September 30, 2013 and 2012, respectively. This decrease was primarily due to a decrease in our CRO costs and start-up costs, partially offset by an increase in site reimbursement costs. 27 --------------------------------------------------------------------------------



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



General and Administrative Expenses. General and administrative expenses increased $1.6 million, or 29%, to $7.3 million from $5.7 million for the nine months ended September 30, 2013 and September 30, 2012, respectively. The increase was largely due to increase in share-based compensation of $1.5 million.

Transaction Expenses. Transaction costs increased $1.0 million from $0 due to costs associated with the Company's 2013 private placement of units that were allocated to the derivative warrant liability. Other Income and Expense. Total other income and expense improved by $1.5 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, primarily due to lower interest expense of $1.1 million, the decrease in fair value of derivative liabilities of $0.3 million and a gain on derecognition of accounts payable of $0.3 million partially offset by lower realized gain on securities available-for-sale of $0.3 million. The lower interest expense is due to a $1.4 million decrease in the amortization of debt discount of convertible notes and promissory notes, partially offset by an increase of $0.3 million in interest expense on debt obligations as a result of higher outstanding debt balances.



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

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



† to support research and development activities, which the Company expects to expand as development of our product candidate(s) continue; and

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

Liquidity and Capital Resources

Based on our losses to date, anticipated future revenue and operating expenses and our cash and cash equivalents balance of $5.8 million as of September 30, 2013, we do not have sufficient operating capital for our business without raising additional capital. We incurred losses of $11.0 million for the nine months ended September 30, 2013 and $10.4 million for the nine months ended September 30, 2012. We had an accumulated deficit since inception to September 30, 2013 of $46.7 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the development and commercialization of L-glutamine as a prescription drug for the treatment of sickle cell disease, the development of the corneal cell sheets technology and the expansion of corporate infrastructure, including costs associated with being a public company. We have previously relied on private equity offerings, debt financings, and loans, including loans from related parties. As part of this effort, we have received various loans from stockholders as discussed below. As of September 30, 2013, we had total outstanding notes payable of $11.5 million, consisting of $3.3 million of non-convertible promissory notes and $8.2 million of convertible notes. Of the $11.5 million aggregate outstanding principal amount of notes outstanding as of September 30, 2013, approximately $7.7 million will become due and payable within one year. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies, including the commercialization of our L-glutamine product for SCD and the development of cell sheet technology in the United States. Of the $7.7 million, $4.7 million aggregate principal amount of convertible notes is convertible into shares of the Company's common stock. Regarding the remaining $3.0 million of the $7.7 million aggregate principal amount of notes that will become due and payable within one year, the Company expects to either repay the outstanding principal and accrued interest or seek to convert the outstanding principal and accrued interest into shares of the Company's common stock prior to the notes becoming due and payable. As described in Note 2 to the condensed consolidated financial statements, the Company has had recurring operating losses, has 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 its L-glutamine treatment for SCD that exceed both the existing cash balances and cash expected to be generated from operations for at least the next year. In order to meets its expected obligations, management intends to raise additional fund through equity and debt offerings and partnership agreements. However, 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 as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, successful partnership arrangements and, finally, achieving a profitable level of operations. Additional funding may not be available in amounts or on terms which are acceptable to us, if at all. 28 --------------------------------------------------------------------------------



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On April 8, 2011, pursuant to a Research Agreement with CellSeed, we agreed to pay CellSeed $8.5 million within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed's delivery of the accumulated information package, as defined in the Research Agreement, to us. Pursuant to the Individual Agreement with CellSeed, the Company agreed to pay $1.5 million to CellSeed and a royalty to be agreed upon by the parties. We paid the $1.5 million due to CellSeed pursuant to the Individual Agreement in February 2012. We currently anticipate that the additional $8.5 million payment obligation under the Research Agreement will become due and payable after we begin to generate revenues from the commercialization of our L-glutamine treatment for SCD. If the payment obligation becomes due and payable prior to our generation of revenue from the commercialization of our L-glutamine SCD treatment, we will need to seek other funding sources, including the sale of additional equity or debt securities, in order to make the payment. CellSeed may terminate these agreements if we are unable to make timely payments, as required under the agreements. In addition to the $8.5 million we have agreed to pay CellSeed pursuant to the Research Agreement, we currently estimate that we will need an additional $2.4 million to complete our Phase 3 clinical trial and $0.4 million to obtain FDA approval for our L-glutamine treatment for SCD. Our current cash burn rate is approximately $0.6 million per month for the third quarter of 2013. Our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: the number, duration and results of the clinical trials for our various products going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation; and further arrangements, if any, with collaborators. Revenues from NutreStore® are currently not significant and we are unsure whether sales of NutreStore® will increase. Until we can generate a sufficient amount of product revenue, future cash needs are expected to be financed through public or private equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. If we do not receive adequate funding to complete our clinical trials or to obtain FDA approval for our L-glutamine treatment for SCD, we may be required to delay our trial. If we are required to delay our trial, we will delay the approval of our L-glutamine treatment for SCD. If no funds are available to continue the trial, we risk losing the data gathered to date and may need to start over with additional subjects. Our cash flow from operations is not adequate and our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including, but not limited to; the duration and results of the clinical trials for our various products going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. We intend to fund our cash flow needs through public or private equity offerings, debt financings, loans, and other sources such as strategic partnership agreements and corporate collaboration and licensing arrangements. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to the Company (or at all). For the nine months ended September 30, 2013 and during the year ended December 31, 2012, we borrowed varying amounts pursuant to convertible notes and non-convertible promissory notes, the majority of which have been issued to our stockholders. As of September 30, 2013 and December 31, 2012, the amounts outstanding under convertible notes and non-convertible promissory notes totaled $11.5 million and $11.3 million, respectively. The convertible notes and non-convertible promissory notes carry interest from 0% to 11% and, except for the convertible note listed below in the principal amount of $0.5 million, are unsecured (see Footnote 8 to the table below regarding the secured note). Interest on 0% loans was imputed at the incremental borrowing rate of 6.25% per annum. The net proceeds of the loans were used for working capital. On September 11, 2013, we completed a private placement transaction pursuant to which we issued to certain accredited investors units consisting of an aggregate of 3,020,501 shares of our common stock and common stock purchase warrants for the purchase of an additional 3,020,501 shares of our common stock, at a price of $2.50 per unit. The aggregate purchase price for the units was $7.6 million. Net proceeds to us, after expenses relating to the transaction, were $6.4 million. Each warrant is exercisable for the five year period ending September 11, 2018, at an initial exercise price of $3.50 per share of common stock. We have had limited revenue and have sustained significant operating losses since inception, and are likely to sustain operating losses in the foreseeable future. Since inception, we have funded our operations through the private placement of equity securities, convertible notes and loans from certain related parties (including, without limitation, certain of our officers) and from non-related parties. We expect that we will continue to fund our operations primarily through the issuance of public or private equity or debt securities, or other sources, such as strategic partnerships. Such financings may not be available in amounts or on terms acceptable to us, if at all. Our failure to raise capital as and when needed would inhibit our ability to continue operations and implement our business strategy. Through private issuances of debt and equity instruments the Company has raised net funds of $6.1 million, $8.1 million and $11.1 million, respectively, in 2011, 2012 and the nine months ended September 30, 2013. 29

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The table below lists our outstanding notes payable as of September 30, 2013 and the material terms of our outstanding borrowings:

Shares Underlying Shares Principal Discount Carrying Principal Principal Discount Carrying Underlying Interest Outstanding Amount Amount as of Outstanding Amount Amount Principal as Year rate Conv. September



September September September December December December of December Issued range Term of Notes Price 30, 2013 30, 2013 30, 2013 30, 2013 31, 2012 31, 2012 31, 2012

31, 2012 Convertible notes payable 2009 6.5% 5 years $3.05$ 269,207 $ - $ 269,207 88,197 $ 294,355 $ - $ 294,355 96,436 2010 0 ~ 6.0% 5 years $3.05 74,000 9,585 64,415 24,248 74,000 13,420 60,580 24,248 2011 10% 5 years $3.05 500,000 - 500,000 163,809 500,000 - 500,000 163,809 Due on demand 2012 10% ~ 2 years $3.30 ~$3.60 2,004,973 - 2,004,973 558,187 4,307,107 69,179 4,237,928 1,241,925 Due on demand 2013 10% ~ 2 years $3.30 ~$3.60 4,777,459 339,535 4,437,924 1,404,835 - - - - $ 7,625,639 $



349,120 $ 7,276,519 2,239,276 $ 5,175,462$ 82,599$ 5,092,863 1,526,418

Current $ 4,386,741 $



256,782 $ 4,129,959 1,280,676 $ 4,056,007$ 69,179$ 3,986,828 1,170,922

Non-current $ 3,238,898 $



92,338 $ 3,146,560 958,600 $ 1,119,455$ 13,420$ 1,106,035 355,496

Convertible notes payable - related party 2012 10% Due on demand $3.30$ 511,242 $ - 511,242 151,430 $ 388,800$ 17,084$ 371,716 117,819 2013 10% 1 year $3.60 35,640 - 35,640 9,900 278,642 9,491 269,151 77,403 $ 546,882 $ - 546,882 161,330 $ 667,442$ 26,575$ 640,867 195,222 Current $ 546,882 $ - $ 546,882 161,330 $ 667,442$ 26,575$ 640,867 195,222



Notes payable

Due on demand 2012 2% ~ 11% ~ 2 years NA $ 833,335$ 67,690$ 765,645 - $ 1,782,060$ 214,350$ 1,567,710 - Due on demand 2013 2% ~ 10% ~ 2 years NA 1,217,400 - 1,217,400 - - - - - $ 2,050,735$ 67,690$ 1,983,045 - $ 1,782,060$ 214,350$ 1,567,710 - Current $ 1,850,735$ 67,690$ 1,783,045 - $ 1,082,060$ 214,350$ 867,710 - Non-current $ 200,000 $ - $ 200,000 - $ 700,000 $ - $ 700,000 -



Notes payable - related party

2009 6.5% Due on demand NA $ - $ - $ - - $ 272,800 $ - $ 272,800 - 2011 8% 2 years NA - - - - 200,000 - 200,000 - Due on demand 2012 1% ~ 11% ~ 2 years NA 1,225,440 17,085 1,208,355 - 3,207,133 608,602 2,598,531 - 2013 8% Due on demand NA 50,000 - 50,000 - - - - - $ 1,275,440$ 17,085$ 1,258,355 - $ 3,679,933$ 608,602$ 3,071,331 - Current $ 1,275,440$ 17,085$ 1,258,355 - $ 3,679,933$ 608,602$ 3,071,331 - Grand Total $ 11,498,696 $



433,895 $ 11,064,801 2,400,606 $ 11,304,897$ 932,126$ 10,372,771 1,721,640

Cash Flows



Cash flows for the nine months ended September 30, 2013 and September 30, 2012

Net cash used in operating activities

Net cash flows used in operating activities increased by $1.2 million, or 27%, to $5.6 million from $4.4 million for the nine months ended September 30, 2013 and 2012, respectively. This increase was primarily due to an increase of $1.4 million in the cash used for accounts payable. An increase in non-cash share-based compensation of $1.5 million was offset by changes in other non-cash based items of $1.7 million.



Net cash used in investing activities

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

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Net cash from financing activities

Net cash flows from financing activities increased by $5.1 million, or 85%, to $11.1 million from $6.0 million for the nine months ended September 30, 2013 and 2012, respectively, primarily as a result of a $6.4 million increase in net proceeds from the sale of common stock and warrants in a September 2013 private placement, a $1.8 million increase in proceeds from the issuance of common stock and a $1.6 million increase in proceeds from issuance of convertible and non-convertible notes payable, offset, in part, by a $4.7 million increase in payments on convertible and non-convertible notes payable.



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

Off-Balance-Sheet Arrangements

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

Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. While our significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements included in this Form 10-Q/A, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.



Notes Payable, Convertible Notes Payable and Warrants

From time to time, we obtain financing in the form of notes payable and/or notes with detachable warrants, some of which are convertible into shares of our common stock and some of which are issued to related parties. We analyze all of the terms of our convertible notes and related detachable warrants to determine the appropriate accounting treatment, including determining whether conversion features are required to be bifurcated and treated as derivative liabilities, allocation of fair value of the issuance to the debt instrument, detachable stock purchase warrant, and any beneficial conversion features, and the applicable classification of the convertible notes payable and warrants as debt, equity or temporary equity (mezzanine). We allocate the proceeds from the issuance of a debt instrument with detachable stock purchase warrants to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. We account for the portion of the proceeds allocated to warrants in additional paid-in capital and the remaining proceeds are allocated to the debt instrument. The allocation to debt instrument results in a discount to notes payable which is amortized using the effective interest method to interest expense over the expected term of the note. We include the intrinsic value of the embedded conversion feature of convertible notes payable in the discount to notes payable, which is amortized and charged to interest expense over the expected term of the note. We also estimate the total fair value of any beneficial conversion feature and accompanying warrants in allocating debt proceeds. The proceeds allocated to the beneficial conversion feature are 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 our common stock as of the date of issuance. In situations where the debt includes both a beneficial conversion feature and a warrant, the proceeds are allocated to the warrants and beneficial conversion feature based on the pro-rata fair value. We use the Black Scholes-Merton option pricing model to determine the fair value of our warrants. Notes payable to related parties and interest expense and accured interest to related parties are separately identified in our condensed consolidated financial statements. We also disclose significant terms of all transactions with related parties. 31

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



Fair Value of Common Stock

The fair value of the common stock underlying our share-based awards was determined on each grant date by our board of directors, with input from management, primarily based on recent sales of equity and equity related financial instruments to non-affiliated purchasers in arm's length negotiated transactions, as well as other factors our board of directors considered relevant to the valuation of our common stock. Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a range of objective and subjective factors to estimate the fair value of our common stock. More specifically, the fair value of the underlying shares was determined based on recent arms-length sales of our equity to third parties and other factors determined by management to be relevant to the valuation of such shares, including: † progress of our research and development efforts;



† our operating results and financial condition, including our levels of available capital resources;

† our stages of development and material risks related to our business;



† the achievement of enterprise milestones, including entering into collaboration or license agreements and our progress in clinical trials;

† the valuation of publicly-traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; † equity market conditions affecting comparable public companies; † the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering given prevailing market and biotechnology sector conditions; and † that the grants involved illiquid securities. Fair Value Measurements We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.



Level 2: Inputs to the valuation methodology include:

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



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

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



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

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

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

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The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at December 31, 2013. The fair value of our debt instruments is not materially different from their carrying values as presented. The fair value of our convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6 to our condensed consolidated financial statements. Marketable Securities Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gains or losses, net of taxes in accumulated other comprehensive income. We monitor these investments for impairment and make appropriate reductions in carrying values when necessary. Revenue Recognition Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. With prior written approval of the Company, in certain situations, product is returnable only by our direct customers for a returned goods credit, for product that is expired, damaged in transit, or which is discontinued, withdrawn or recalled. The Company estimates its sales returns based upon its prior sales and return history and accrues a Sales Return Allowance at the time of sale. Historically, sales returns have been immaterial. The Company pays royalties on an annual basis based on existing license arrangements. These royalties are recognized as cost of goods sold upon sale of the products.


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