News Column

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

August 14, 2014

The following discussion relates to the financial condition and results of operations of Emmaus Life Sciences, Inc. (the "Company"), 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 the audited consolidated financial statements for the years ended December 31, 2013 and 2012 and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on May 8, 2014 (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 biological products, successful completion of our clinical trials, our ability to achieve regulatory authorization to market our L-glutamine treatment for SCD, our ability to commercialize our L-glutamine treatment for SCD, our reliance on third party manufacturers for our drug products, market acceptance of our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, development of a public trading market for our securities, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and accordingly there can be no assurances made with respect to the actual results or developments. Company Overview We are a biopharmaceutical company engaged in the discovery, development and commercialization of innovative treatments and therapies primarily for rare and orphan diseases. We are initially focusing our product development efforts on SCD, a genetic disorder. Our lead product candidate is an oral pharmaceutical grade L-glutamine treatment that demonstrated positive clinical results in our completed Phase 3 clinical trial for sickle cell anemia and sickle ß0-thalassemia, two of the most common forms of SCD. SCD is an inherited blood disorder characterized by the production of an altered form of hemoglobin which polymerizes and becomes fIbrous, causing red blood cells to become rigid and change form so that they appear sickle shaped instead of soft and rounded. Patients with SCD suffer from debilitating episodes of sickle cell crisis, which occur when the sickle shaped, adhesive and inflexible red blood cells occlude blood vessels. Sickle cell crisis causes excruciating pain as a result of insufficient oxygen being delivered to tissue, referred to as tissue ischemia, and inflammation. These events may lead to organ damage, stroke, pulmonary complications, skin ulceration, infection and a variety of other adverse outcomes. We have completed a 230 patient randomized, double-blind, placebo-controlled, parallel-group, multi-center Phase 3 clinical trial which enrolled adult and pediatric patients as young as five years of age, involving 31 sites in the United States. Our L-glutamine treatment and the placebo were randomized by site and by patients using hydroxyurea, a chemotherapeutic agent first approved for SCD by the FDA in 1998. Preliminary data from this clinical trial adjusted for hydroxyurea use demonstrate that patients treated with our L-glutamine product candidate over a 48-week period experienced a statistically significant 25% reduction (from four to three; p-value = 0.008) in the median frequency of sickle cell crises and a statistically significant 33% reduction (from three to two; p-value = 0.018) in the median frequency of hospitalizations. Positive results were observed for both those on hydroxyurea and those not taking hydroxyurea. To account for the wide variation in number of subjects enrolled at each site and to be able to perform meaningful analyses, the sites were grouped into five geographic regions. Once stratified, or adjusted, for both hydroxyurea use and geographic region, the p-value for the reduction in the number of painful sickle cell crises was 0.063, which did not meet the p-value of 0.045 that had been pre-specified for this Phase 3 clinical trial. Using the same stratification factors, the p-value for the reduction in hospitalization was 0.041, which met the p-value of 0.045 that had been pre-specified for this Phase 3 clinical trial. On June 11, 2014, we met with the FDA to discuss the preliminary data from our Phase 3 clinical trial and our plans to submit a New Drug Application, or NDA, based on our single Phase 3 clinical trial. In minutes of the meeting that the FDA has provided to us, based on their review of partial data from our Phase 3 clinical trial, the FDA expressed concern that the data on the primary endpoint of painful sickle cell crisis (controlling for both geographic region and hydroxyurea use) did not reach the pre-specified p-value significance level of 0.045. The FDA commented that the primary efficacy results were inconsistent among geographic regions, as shown by the large difference in results observed based on the stratified analyses adjusted for both geographic region and hydroxyurea use versus being adjusted for hydroxyurea use only. The FDA commented that a reduction in the median number of painful sickle cell crises by one (from four to three) is not clinically meaningful and is not consistent across geographic regions. The FDA asked us to provide explanations for the differences in results observed based on the stratified analysis adjusted for geographic region and hydroxyurea. The FDA also commented on the number of patients who discontinued the study, which was greater in the L-glutamine group, and the FDA would need to understand what impact the imputation of such data, which is a method of accounting for missing information, would have on the interpretation of the results. Based on preliminary data, the FDA recommended a second Phase 3 study be conducted to support the indication for SCD and suggested enrolling patients with a higher baseline level of sickle cell crises to help demonstrate a larger difference in the mean results. The FDA's recommendation was without consideration of complete data and information, which we intend to provide to the FDA. 17

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Based on other questions we submitted to the FDA regarding the previous pre-clinical work and evidence gathered for the L-glutamine treatment related to pharmacology, toxicology, and clinical pharmacology, the FDA noted that the information provided appeared to be acceptable; however, final affirmations regarding such matters would be made during the NDA review. The FDA also made certain recommendations to the chemistry, manufacturing and controls of our L-glutamine treatment for SCD which we believe we will be able to successfully incorporate or address. We believe that the complete Phase 3 study data, including supplemental analysis, will address the FDA's questions and comments. These additional data and information we believe will provide clinically meaningful and statistically very persuasive findings that support consideration of our NDA without a second Phase 3 study. We intend to submit the complete study results and additional analysis for pre-NDA review to the FDA during the third quarter of 2014. There can be no assurance that the additional data and analysis will affect the position expressed by the FDA. Regarding the submission of NDAs that include only one Phase 3 clinical trial, the FDA has in some cases accepted evidence from one clinical trial to support a finding of substantial evidence of effectiveness. A change in the law under the U.S. Food and Drug Administration Modernization Act of 1997 made clear that the FDA may consider data from only one adequate and well-controlled clinical investigation and confirmatory evidence if the FDA determines that such evidence is sufficient to establish effectiveness of the medicine under study. In a guidance document titled "Providing Clinical Evidence of Effectiveness for Human Drug and Biological Products" (May 1998), the FDA stated that reliance on a single clinical trial is generally limited to situations in which a trial has demonstrated a clinically meaningful effect on mortality, irreversible morbidity, or prevention of a disease with a potential serious outcome, and where confirmation of the result in a second trial would be impractical or unethical. The factors the FDA considers for accepting a single clinical trial include, but are not limited to, having large multi-centered studies, consistent data across subgroups, multiple endpoints, and statistically very persuasive findings. We believe a second clinical trial of an orphan drug to treat SCD, a rare and severely debilitating, sometimes fatal, disease, would not be required if a single Phase 3 clinical trial satisfies these factors. Our single Phase 3 clinical trial was multi-centered with multiple endpoints. We believe that this design coupled with the complete results of the trial and our supplemental analysis of those results - which we intend to submit during the third quarter of 2014 to the FDA for pre-NDA review - will address the FDA's questions and comments about the preliminary results described above and will provide a clinically meaningful and statistically persuasive basis for the FDA's acceptance for filing of our NDA without the need for a second Phase 3 clinical trial. There can be no assurance that the FDA will agree that the complete Phase 3 study results and our supplemental analysis will address its concerns. 18 --------------------------------------------------------------------------------



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To a lesser extent, we are also engaged in the marketing and sale of NutreStore L-glutamine powder for oral solution, which has received FDA approval, as a treatment for 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. In May 2006, we formed Newfield, 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 in the future.

In November 2011, we formed EM Europe, a wholly-owned subsidiary of Emmaus Medical, whose primary focus is expanding our business in Europe. Our corporate structure is illustrated as follows:

[[Image Removed: GRAPHIC]] 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, which we refer to as the Merger Agreement, by and among us, AFH Merger Sub, Inc., our wholly-owned subsidiary, which we refer to as AFH Merger Sub, AFH Advisory and Emmaus Medical, Emmaus Medical merged with and into AFH Merger Sub on May 3, 2011 with Emmaus Medical continuing as the surviving entity, which we refer to as the Merger. Upon the closing of the Merger, we changed our name from "AFH Acquisition IV, Inc." to "Emmaus Holdings, Inc." Subsequently, on September 14, 2011, we changed our name from "Emmaus Holdings, Inc." to "Emmaus Life Sciences, Inc." Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including, but not limited to: the duration and results of the clinical trials for our various product candidates going forward; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; current and future unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation in which we are currently engaged or may become engaged in the future; and further arrangements, if any, with collaborators. Until we can generate a sufficient amount of product revenue, future cash requirements are expected to be financed through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. As of June 30, 2014, our accumulated deficit is $63.9 million and we had cash and cash equivalents of $3.6 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 $1.1 million to administratively close out the post-clinical aspects of our Phase 3 clinical trial of our pharmaceutical grade L-glutamine treatment for SCD and submit a NDA to the FDA. We also own a minority interest of less than 1% in CellSeed, Inc., a Japanese company listed on the Tokyo Stock Exchange, which is engaged in research and development of regenerative medicine products and the manufacture and sale of temperature-responsive cell culture equipment. In collaboration with CellSeed, we are engaged in research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products. 19

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Table of Contents Recent Highlights In May and June 2014, we issued convertible notes to third parties totaling $1,520,000 in aggregate principal amount, which bear interest at 10% per annum and mature on the respective two-year anniversary dates of the notes. If we complete a qualified public offering, the principal amount of the notes will automatically convert into shares of our common stock at a conversion price equal to 80% of the initial public offering price in the qualified public offering. At or after the first anniversary of the loan date, the holders of the notes may convert some or all of the unpaid principal amount thereof, including unpaid accrued interest, into shares of our common stock at a conversion price of $7.00 per share. On June 10, 2014, certain holders of warrants issued in our September 11, 2013 private placement exercised 1,095,465 warrants for the exercise price of $3.50 per share, as a result of which we received aggregate exercise proceeds of $3.8 million and issued 1,095,465 shares of common stock. Also on June 10, 2014, based on an offer made to such holders in connection with such exercises, we issued an aggregate of 1,095,465 replacement warrants having 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. Financial Overview Revenue



Since our inception in 2000, we have had limited revenue from the sale of NutreStore, an FDA approved prescription drug to treat SBS and AminoPure, a nutritional supplement. We have funded operations principally through the private placement of equity securities and debt financings. Emmaus' operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, sponsoring clinical trials of our pharmaceutical grade L-glutamine treatment for SCD, 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 exclusive sublicense agreement of US Patent No. 5,288,703, or 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 $6,501 in June 2014. Management expects that any revenues generated from the sale of NutreStore and AminoPure will fluctuate from quarter to quarter based on the timing of orders and the amount of product sold. Cost of Goods Sold



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

Research and Development Expenses

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to the contract research organization ("CRO") that conducts the clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees, and activities related to regulatory filings, manufacturing development costs and other related supplies. The costs of later stage clinical studies, such as Phase 2 and 3 trials, are generally higher than those of earlier stages of development, such as preclinical studies and Phase 1 trials. This is primarily due to the increased size, expanded scope, patient-related healthcare and regulatory compliance costs, and generally longer duration of later stage clinical studies. The most significant clinical trial expenditures 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. 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 of our product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements. We currently estimate that we will need an additional $1.1 million to administratively close out the post-clinical aspects of our Phase 3 clinical trial and submit a NDA to the FDA. Our current cash burn rate is approximately $1.0 million per month. 20

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At this time, due to the inherently unpredictable nature of the process for developing drugs, biologics and cell-based therapies and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in obtaining FDA approval of our pharmaceutical grade L-glutamine treatment for SCD and the continued development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other related risks and uncertainties are described in our 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 Drug Candidates and Other Legal Compliance Matters." We estimate that the cost to us to develop in the United States corneal cell sheet products based on CAOMECS technology will be approximately $3.0 million, in addition to the $8.5 million fee payable to CellSeed under the Research Agreement. This estimate includes the anticipated cost of obtaining FDA approval for the corneal cell sheets and assumes that we will need the FDA to approve a Biologic License Application ("BLA") for the corneal cell sheets, rather than a NDA. We estimate that we will need another $2.0 million to commercialize any approved products based on corneal cell sheet technology. In addition, we estimate that we will need $2.5 million for research related to other cell sheet applications and to build a cGMP laboratory to establish the infrastructure and production capabilities related to regenerative medicine products. At this time, we do not plan to incur any additional research and development costs for our NutreStore and AminoPure products.



General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, information technology, marketing, and legal functions. Other general and administrative expenses include share-based compensation, 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 on a first-in, first-out basis and at the lower of cost or market value. All of the raw material purchased during the six months ended June 30, 2014 were from one vendor and during 2013 were from two vendors. 21 -------------------------------------------------------------------------------- Table of Contents Results of operations Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 REVENUES, Net $ 107,404$ 91,208$ 192,094$ 180,768 COST OF GOODS SOLD 60,881 54,988 107,783 98,972 GROSS PROFIT 46,523 36,220 84,311 81,796 OPERATING EXPENSES Research and development 596,349 696,008 1,201,389 1,311,261 Selling 122,883 129,335 248,814 256,688 General and administrative 3,267,379 2,519,148



6,253,293 4,831,403

3,986,611 3,344,491



7,703,496 6,399,352

LOSS FROM OPERATIONS (3,940,088 ) (3,308,271 )



(7,619,185 ) (6,317,556 )

OTHER INCOME (EXPENSE) Gain on derecognition of accounts payable - - - 341,361 Change in fair value of liability classified warrants 643,256 - (1,979,744 ) - Warrant exercise inducement expense (3,523,000 ) - (3,523,000 ) - Interest and other income (loss) (4,761 ) 5,081 (23,166 ) 10,722 Interest expense (553,561 ) (496,483 ) (970,922 ) (1,101,010 ) (3,438,066 ) (491,402 ) (6,496,832 ) (748,927 ) LOSS BEFORE INCOME TAXES (7,378,154 ) (3,799,673 ) (14,116,017 ) (7,066,483 ) INCOME TAXES (BENEFIT) - (134,640 ) 2,500 (399,252 ) NET LOSS (7,378,154 ) (3,665,033 ) (14,118,517 ) (6,667,231 ) NET LOSS PER COMMON SHARE $ (0.25 ) $ (0.14 )$ (0.48 )$ (0.27 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,368,691 25,391,949 29,298,886 25,141,376



Three months ended June 30, 2014 and 2013

Net Losses. Net losses increased by $3.7 million, or 101%, to $7.4 million from $3.7 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase in losses is primarily a result of $3.5 million in warrant exercise inducement expense incurred in connection with the warrant exercises and issuance, partially offset by a $0.6 million change in fair value of liability classified warrants, and increased operating expenses as discussed below. As of June 30, 2014, we had an accumulated deficit of approximately $63.9 million. Losses will continue as we advance our pharmaceutical grade L-glutamine treatment for SCD 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, Net. Revenues, Net remained approximately the same at just over $0.1 million and just under $0.1 million for the three months ended June 30, 2014 and 2013, respectively. We estimate our sales returns based upon our prior sales and return history. Historically, sales returns have been very nominal. We continue to monitor our sales returns and will adjust our estimates based on our actual sales return experience. Cost of Goods Sold. Cost of goods sold remained approximately the same at $0.06 million for the three months ended June 30, 2014 and 2013. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the purchases during the three months ended June 30, 2014 were from one vendor and during 2013 were from two vendors. Research and Development Expenses. Research and development expenses decreased by $0.1 million, or 14%, to $0.6 million from $0.7 million for the three months ended June 30, 2014 and 2013, respectively. Cost in 2013 were primarily CRO costs and payments to sites. Cost in 2014 are primarily related to the cost of compiling and analyzing data from our Phase 3 clinical trial and other end of study costs. Such costs will continue for the remainder of 2014. 22 --------------------------------------------------------------------------------



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Selling Expenses. Selling expenses remained approximately the same at just over $0.1 million for the three months ended June 30, 2014 and 2013. Selling expenses includes the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore and AminoPure. General and Administrative Expenses. General and administrative expenses increased by $0.8 million, or 30%, to $3.3 million from $2.5 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase was primarily due to a $0.4 million increase in professional fees including accounting and consulting fees, a $0.1 million increase in payroll related costs and a $0.1 million increase in travel expenses. Other Income and Expense. Total other income and expense increased by $2.9 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, primarily due to an increase in warrant exercise inducement expense of $3.5 million incurred in connection with warrant exercises and issuance, offset in part by a change in fair value of liability classified warrants of $0.6 million.



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

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



to support research and development activities, which we expect to expand as development of our product candidates continues; and

to build a sales and marketing team before we receive regulatory approval of our pharmaceutical grade L-glutamine treatment for SCD in anticipation of commercial launch.

Six months ended June 30, 2014 and 2013

Net Losses. Net losses increased by $7.4 million, or 112%, to $14.1 million from $6.7 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The increase in losses is primarily a result of $3.5 million in warrant exercise inducement expense incurred in connection with warrant exercises and issuance, an increase in change in fair value of liability classified warrants of $2.0 million and increased operating expenses as discussed below. As of June 30, 2014, we had an accumulated deficit of approximately $63.9 million. Losses will continue as we advance our pharmaceutical grade L-glutamine treatment for SCD 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, Net. Revenues, Net remained approximately the same at just under $0.2 million for the six months ended June 30, 2014 and 2013. We estimate our sales returns based upon our prior sales and return history. Historically, sales returns have been very nominal. We continue to monitor our sales returns and will adjust our estimates based on our actual sales return experience. Cost of Goods Sold. Cost of goods sold remained approximately the same at just over $0.1 million and just under $0.1 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All of the purchases during the six months ended June 30, 2014 were from one vendor and during 2013 were from two vendors. Research and Development Expenses. Research and development expenses decreased $0.1 million, or 8%, from $1.3 million to $1.2 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Cost in 2013 were primarily CRO costs and payments to sites. Cost in 2014 are primarily related to the cost of compiling and analyzing data from our Phase 3 clinical trial and other end of study costs. Such costs will continue for the remainder of 2014. Selling Expenses. Selling expenses remained approximately the same at just under $0.3 million and just over $0.3 million for the six months ended June 30, 2014 and 2013, respectively. Selling expenses includes the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore and AminoPure. General and Administrative Expenses. General and administrative expenses increased $1.4 million, or 29%, to $6.2 million from $4.8 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The increase is due to a $0.7 million increase in share-based compensation, a $0.3 million increase in professional fees, absence of gain on derecognition of accounts payable of $0.3 million and a $0.1 million increase in payroll expense. 23

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Other Income and Expense. Total other income and expense decreased by $5.7 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, primarily due to an increase in warrant exercise inducement expense of $3.5 million incurred in connection with warrant exercises and issuance, an increase in change in fair value of liability classified warrants of $2.0 million and the absence of gain on derecognition of accounts payable that was $0.3 million for the six months ended June 30, 2013.



Liquidity and Capital Resources

Based on our losses to date, anticipated future revenue and operating expenses, debt repayment obligations and cash and cash equivalents balance of $3.6 million as of June 30, 2014, we do not have sufficient operating capital for our business without raising additional capital. We incurred losses of $14.1 million for the six months ended June 30, 2014 and $6.7 million for the six months ended June 30, 2013. We had an accumulated deficit at June 30, 2014 of $63.9 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of our pharmaceutical grade L-glutamine for treatment of sickle cell disease, research costs for corneal cell sheets using 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 stockholders and other investors. As of June 30, 2014, we had total outstanding notes payable of $13.1 million, consisting of $3.0 million of non-convertible promissory notes and $10.1 million of convertible notes. Of the $13.1million aggregate outstanding principal amount of notes outstanding as of June 30, 2014, approximately $9.3 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 pharmaceutical grade L-glutamine treatment for SCD and development in the United States of CAOMECS-based corneal cell sheet technology. As described in Note 2 to the condensed 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 our pharmaceutical grade L-glutamine treatment for SCD that exceed both the existing cash balances and cash expected to be generated from operations for at least the next year. In order to meet our expected obligations, management intends to raise additional funds through equity and debt financings and partnership agreements. In addition, we may seek to raise additional funds through collaborations with other companies or financing from other sources. 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. 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 to us of the accumulated information package, as defined in the Research Agreement. Pursuant to the Individual Agreement with CellSeed, we agreed to pay $1.5 million to CellSeed and a royalty to be agreed upon by the parties. We paid the $1.5 million due to CellSeed pursuant to the Individual Agreement in February 2012. 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 pharmaceutical grade L-glutamine treatment for SCD. If the payment obligation becomes due and payable prior to our generation of revenue from the commercialization of our pharmaceutical grade L-glutamine treatment for SCD, we will need to seek other funding sources, including the sale of additional equity or debt securities, and partnership arrangements 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, we currently estimate that we will need an additional $1.1 million to perform the post-clinical study tasks required for closing our Phase 3 clinical trial, completing the associated end-of-study data analysis and report, and submitting a NDA to the FDA. Our current cash burn rate is approximately $1.0 million per month. As discussed under the caption "Company Overview" above, if the FDA does not accept our NDA for filing or does not approve our NDA based on a single Phase 3 clinical trial, in each case unless we conduct a second Phase 3 clinical trial, the potential approval of our product candidate will be delayed. Under these circumstances, we will incur additional costs to seek to convince the FDA that a second clinical trial is unnecessary, or to design and conduct a second Phase 3 clinical trial, or both. If we conduct a second Phase 3 clinical trial, it is possible that the results of that trial will be less favorable than the results of our completed trial and further delay or complicate the approval process. The incurrence of additional costs may require us to raise additional capital, and any delay in obtaining approval of our product candidate will reduce the period during which we can market and sell our product with patent protection and may affect our ability to obtain other protections against competition. 24 --------------------------------------------------------------------------------



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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. We will rely, in part, on sales of AminoPure for revenues, which we expect will increase due to the expected growth in its export volume as we have added additional distributors and expanded retail markets outside of the United States. Revenues from NutreStore 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. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to us (or at all). For the six months ended June 30, 2014 and during the year ended December 31, 2013, 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 June 30, 2014 and December 31, 2013, the amounts outstanding under convertible notes and non-convertible promissory notes totaled $13.1 million and $11.5 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 0% to 11% and, except for the convertible note listed below in the principal amount of $0.5 million are unsecured. 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.



The table below lists our outstanding notes payable as of June 30, 2014 and the material terms of our outstanding borrowings:

Shares Shares Underlying Principal Discount Carrying Underlying Principal Discount Carrying Principal

Interest Outstanding Amount Amount Principal Outstanding Amount Amount as of Year rate Term of June 30, June 30, June 30, as of June December 31, December December December Issued range Notes Conv. Price 2014 2014 2014 30, 2014 2013 31, 2013 31, 2013 31, 2013 Convertible notes payable 2009 6.50% 5 years $3.05 $ - $ - $ - - $ 254,460 $ - $ 254,460 83,366 2010 0 ~ 6.0% 5 years $3.05 74,000 5,751 68,249 24,243 74,000 8,308 65,692 24,248 2011 10% 5 years $3.05 500,000 - 500,000 163,809 500,000 - 500,000 163,809 2012 10% 2 years $3.30~$3.60 251,100 - 251,100 71,000 251,100 - 251,100 71,000 6 months ~ 2 2013 10% years $3.30~$3.60 6,057,601 48,622 6,008,979 1,746,547 6,913,606 215,798 6,697,808 1,998,215 Due on demand 2014 10% ~2 years $3.05~$7.00 2,721,652 400,555 2,321,097 579,239 - - - - $ 9,604,353$ 454,928$ 9,149,425 2,584,838 $ 7,993,166$ 224,106$ 7,769,060 2,340,638 Current $ 6,698,203$ 388,211$ 6,309,992 1,927,078 $ 4,955,868$ 153,396$ 4,802,472 1,438,033 Non-current $ 2,906,150$ 66,717$ 2,839,433 657,760 $ 3,037,298$ 70,710$ 2,966,588 902,605 Convertible notes payable - related party 2012 10% Due on demand $3.30$ 373,000 $ - $ 373,000 113,030 $ 373,000 $ - $ 373,000 113,030 2013 10% 1 year $3.60 187,706 - 187,706 52,141 187,706 - 187,706 52,141 $ 560,706 $ - $ 560,706 165,171 $ 560,706 $ - $ 560,706 165,171 Current $ 560,706 $ - $ 560,706 165,171 $ 560,706 $ - $ 560,706 165,171 Notes payable 2012 11% 2 years NA $ - $ - $ - - $ 833,335$ 18,265$ 815,070 - Due on demand ~ 2013 2% ~ 10% 2 years NA 1,180,000 - 1,180,000 - 1,150,000 - 1,150,000 - 2014 11% 2 years NA 833,335 - 833,335 - - - - - $ 2,013,335 $ - $ 2,013,335 - $ 1,983,335$ 18,265$ 1,965,070 - Current $ 1,180,000 $ - $ 1,180,000 - $ 1,783,335$ 18,265$ 1,765,070 - Non-current $ 833,335 $ - $ 833,335 - $ 200,000 $ - $ 200,000 - Notes payable - related party 2012 8% ~ 10% Due on demand NA $ 656,730 $ - $ 656,730 - $ 880,062$ 4,421$ 875,641 - 2013 8% Due on demand NA 50,000 - 50,000 - 50,000 - 50,000 - Due on demand ~ 2014 11% 2 years NA 252,165 - 252,165 - - - - - $ 958,895 $ - $ 958,895 - $ 930,062$ 4,421$ 925,641 - Current $ 825,562 $ - $ 825,562 - $ 930,062$ 4,421$ 925,641 - Non-current $ 133,333 $ - $ 133,333 - $ - $ - $ - - Grand Total $ 13,137,289$ 454,928$ 12,682,361 2,750,009 $ 11,467,269$ 246,792$ 11,220,477 2,505,809



Cash flows for the six months ended June 30, 2014 and June 30, 2013

Net cash used in operating activities

Net cash flows used in operating activities increased by $1.3 million, or 36%, to $5.0 million from $3.7 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. This increase was primarily due to a $7.4 million increase in net loss and a decrease of cash provided by accounts payable of $0.6 million, both of which were partially offset by an increase of non-cash expense of $3.5 million of warrant exercise inducement expense, $0.7 million of share-based compensation, absence of a tax benefit recognized on unrealized gain on securities of $0.4 million and $2.0 million of change in the fair value of liability classified warrants. 25 --------------------------------------------------------------------------------



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Net cash used in investing activities

Net cash flows used in investing activities increased by $0.02 million to $0.02 million from $0.0 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The increase was due to purchases of property and equipment. No other investing activities occurred in the six months ended June 30, 2014 or 2013.



Net cash from financing activities

Net cash flows from financing activities increased by $1.1 million, or 30%, to $5.0 million from $3.9 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily as a result of the receipt of $3.9 million in proceeds from the issuance of common stock upon the exercise of warrants (compared to the receipt of $1.2 million of proceeds from issuance of common stock during the six months ended June 30, 2013) and the absence of $0.7 million in payments of promissory and convertible notes payable, offset, in part, by a $1.9 million decrease in proceeds from promissory and convertible notes payable issued and a $0.4 million repurchase of common stock.



Off-Balance-Sheet Arrangements

Since our inception, we have 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 ("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 which are provided in Item 1 of this Form 10-Q, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.



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 liability classified warrants, 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. 26 --------------------------------------------------------------------------------



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Notes payable to related parties and interest expense and accrued interest to related parties are separately identified in our condensed consolidated financial statements. We also disclose significant terms of all transactions with related parties. 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;

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



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

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

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

The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at June 30, 2014. 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 our prior written approval, 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. We estimate our sales returns based upon our prior sales and return history and accrues a Sales Return Allowance at the time of sale. Historically, sales returns have been immaterial. We pay 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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