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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K


ý

 

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

For the fiscal year ended December 31, 2016

OR

o

 

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

For the transition period from            to          

Commission File Number: 000-53072

Emmaus Life Sciences, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  2834
(Primary Standard Industrial
Classification Code Number)
  41-2254389
(I.R.S. Employer
Identification No.)

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

(310) 214-0065
(Registrant's telephone number, including area code)

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o
(Do not check if
smaller reporting company)
  Smaller reporting company ý

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

         The aggregate market value of shares of common stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, was $128,544,048 based upon the last price at which the common stock was sold or issued.

         There were 34,714,219 shares of the registrant's common stock outstanding as of March 20, 2017. The registrant's common stock is not traded or listed on any exchange.

   


Table of Contents


TABLE OF CONTENTS

EMMAUS LIFE SCIENCES, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

ITEM
   
  PAGE  

PART I

 

 

       

ITEM 1.

 

BUSINESS

    5  

ITEM 1A.

 

RISK FACTORS

    29  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

    66  

ITEM 2.

 

PROPERTIES

    66  

ITEM 3.

 

LEGAL PROCEEDINGS

    66  

ITEM 4.

 

MINE SAFETY DISCLOSURES

    66  

PART II

 

 

       

ITEM 5.

 

MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

    67  

ITEM 6.

 

SELECTED CONSOLIDATED FINANCIAL DATA

    68  

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

    68  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    84  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    84  

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    84  

ITEM 9A.

 

CONTROLS AND PROCEDURES

    84  

ITEM 9B.

 

OTHER INFORMATION

    87  

PART III

 

 

       

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

    88  

ITEM 11.

 

EXECUTIVE COMPENSATION

    93  

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

    103  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

    106  

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

    108  

PART IV

 

 

       

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    110  

SIGNATURES

    118  

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        The information contained in this Annual Report contains some statements that are not purely historical and that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Such forward-looking statements include, but are not limited to: statements regarding our plans for our business and products; clinical studies and regulatory reviews of our products under development; our strategies and business outlook; our financial condition, results of operations and business prospects; the positioning of our products in relation to demographic and pricing trends in the relevant markets; and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations). These forward-looking statements express our management's expectations, hopes, beliefs, and intentions regarding the future. In addition, without limiting the foregoing, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "might," "plans," "possible," "potential," "predicts," "projects," "seeks," "should," "will," "would" and similar expressions and variations, or comparable terminology, or the negatives of any of the foregoing, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

        The forward-looking statements contained in this Annual Report are based on current expectations and beliefs concerning future developments that are difficult to predict. We cannot guarantee future performance, or that future developments affecting our company will be those currently anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:

    the review of our new drug application, or NDA, by the U.S. Food and Drug Administration, or FDA, based on our single Phase 3 clinical trial;

    our ability to raise additional capital or to complete the pending strategic transaction with Generex Biotechnology Corporation, or Generex, or to enter into other strategic relationships, or do both, in order to fund our operations and product development plans, including meeting our financial obligations under our existing agreements and any future licensing and related arrangements;

    our ability to obtain and maintain FDA and other regulatory approvals to market our drug products under development, including our pharmaceutical grade L-glutamine treatment for sickle cell disease, or SCD;

    our ability to manage our business despite continuing operating losses and cash outflows;

    completion of clinical trials or any required confirmatory studies for our product candidates;

    our ability to build and maintain the management and human resources and infrastructure necessary to support our business strategy and product development and commercialization plans;

    our ability to find and obtain strategic partners on acceptable terms;

    following approval, if any, of each of our product candidates by the FDA, and other government regulators outside the United States, our ability to comply with any applicable pharmacovigilance (drug safety) regulatory requirements, including without limitation, implementation and operation of any risk evaluation and mitigation strategies and successful completion of any post-approval safety studies, and the absence of any safety issues that would require withdrawal

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      of such products from the market or any warning or other material limitation on their prescription for or use by patients or consumers;

    our reliance on third party manufacturers for our product candidates and products;

    the ability of our third party manufacturers to meet regulatory and supply requirements;

    the approval and market entry of competitors' products and developments in science and medicine beyond our control;

    market acceptance of our product candidates, including our pharmaceutical grade L-glutamine treatment for SCD, and our ability to commercialize the resulting products;

    our reliance on the expected growth in demand for our products

    our dependence on licenses for certain of our product candidates and products, including our pharmaceutical grade L-glutamine treatment for SCD, and our ability to obtain, maintain and, if necessary, enforce against third parties additional intellectual property rights, through patents or otherwise, to technology required or desirable for the conduct of our business;

    our exposure to product liability and defect claims;

    our exposure to intellectual property claims from third parties;

    the lack of a current public trading market for our securities;

    the cost of complying with current and future governmental regulations, our ability to comply with applicable governmental regulations, and the impact of any changes in governmental regulations upon our operations; and

    such other factors referenced in this Annual Report, including, without limitation, under the sections entitled "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        All forward-looking statements attributable to us are expressly qualified in their entirety by these risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. You should not place undue reliance on any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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PART I

ITEM 1.    BUSINESS

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

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 on sickle cell disease, or SCD, a genetic disorder and a significant unmet medical need. Our lead product candidate is an oral pharmaceutical grade L-glutamine, or PGLG, treatment that demonstrated positive clinical results in our completed Phase 3 clinical trial for sickle cell anemia and sickle ß0-thalassemia, two of the most common forms of SCD.

        In the Phase 3, double-blind, placebo-controlled, parallel-group, multi-center clinical trial which enrolled a total of 230 adult and pediatric patients as young as five years of age, at 31 sites in the United States, PGLG treatment was administered up to 30 grams per day and demonstrated a 25% decrease in the median frequency of sickle cell crises and 33% decrease in the median number of hospitalizations, as compared to placebo. Based on an analysis, utilizing pre-specified statistical methods, the difference between groups was statistically significant; p=0.0052 and p=0.0045, respectively. Other clinically relevant endpoints showed similar results such as a 63% lower incidence of acute chest syndrome (p=0.0028), 41% less cumulative days in hospital (p=0.022) and 56% delay in onset of the first sickle cell crisis (p=0.0152). The safety data collected demonstrated a safety profile similar to that of placebo.

        Based on the results of this single Phase 3 clinical trial and other supportive studies, we have submitted to the FDA a New Drug Application, or NDA, for our orally-administered PGLG treatment for SCD. The deadline by which the FDA must review the NDA under the Prescription Drug User Fee Act, or PDUFA, is July 7, 2017.

        The PGLG treatment represents the first potential treatment for pediatric patients with SCD, and the first potential new treatment in nearly 20 years for adult patients.

        If the FDA approves our NDA, we intend to market in the United States our pharmaceutical grade L-glutamine treatment for SCD patients who are at least five years old. L-glutamine for the treatment of SCD has received Fast Track designation from the FDA, as well as Orphan Drug designation from both the FDA and the European Commission, or EC.

        We plan to market our L-glutamine treatment in the United States, if approved, either by strategic partnership or by building our own targeted sales force or some combination thereof. We intend to utilize strategic partnerships to market our treatment in the rest of the world.

        SCD is an inherited blood disorder characterized by the production of an altered form of hemoglobin which polymerizes and becomes fıbrous, 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 rigid, 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

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lead to organ damage, stroke, pulmonary complications, skin ulceration, infection and a variety of other adverse outcomes.

        Our pharmaceutical grade 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. All participants other than those who received a placebo, including children, received up to 30 grams of pharmaceutical grade L-glutamine treatment daily, dissolved in liquid, split between morning and evening—the same dosage as our Phase 2 clinical trial completed in 2009.

        We interpret the results of our Phase 3 clinical trial to indicate that our oral pharmaceutical grade L-glutamine treatment for SCD, when taken on a daily basis by a patient with SCD, can potentially decrease the incidence of sickle cell crisis by restoring the flexibility and function of red blood cells in patients with SCD. Further, we interpret these results to indicate that our prescription grade L-glutamine product candidate can reduce the number of costly hospitalizations as well as unexpected emergency room and urgent care visits from patients with SCD. L-glutamine enhances nicotinamide adenine dinucleotide, or NAD, synthesis to reduce excessive oxidative stress in sickle red blood cells that induces much of the damage leading to characteristic symptoms of SCD.

        Although non-prescription L-glutamine supplements are available, we are not aware of any reports in peer reviewed literature demonstrating their clinical safety and effectiveness for the treatment of SCD in controlled clinical trials, and they have not been approved by the FDA as a prescription drug for SCD. We believe that our pharmaceutical grade, consistent formulation of L-glutamine may be able to meet the rigorous safety and effectiveness requirements of regulatory agencies for approval, as a prescription drug, and if so, may be preferred by treating physicians and payors as compared to non-prescription L-glutamine supplements.

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

        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, or SBS, in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Our indirect wholly owned subsidiary, Newfield Nutrition, sells L-glutamine as a nutritional supplement under the brand name AminoPure through retail stores in multiple states in the United States and via importers and distributors in Japan, Taiwan and South Korea. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore and AminoPure.

Sickle Cell Disease—Market Overview

        Sickle cell disease is a genetic blood disorder that affects 20-25 million people worldwide, and occurs with increasing frequency among those whose ancestors are from regions including sub-Saharan Africa, South America, the Caribbean, Central America, the Middle East, India and Mediterranean regions such as Turkey, Greece and Italy. The U.S. Centers for Disease Control and Prevention estimates that there are as many as 100,000 patients with SCD in the United States, and we estimate there are approximately 80,000 patients in the European Union. In regions such as Central Africa, 90% of patients with SCD die by age five and 99% of patients die by age 20. In all regions, SCD requires ongoing physician care and considerable medical intervention. The overall survival of patients in the

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United States with sickle cell anemia correlates with the severity of their disease state, especially the number of crises per year.

        SCD is characterized by the production of an altered form of hemoglobin which polymerizes and becomes fıbrous, causing the red blood cells of patients with SCD to become sickle-shaped, inflexible and adhesive rather than round, smooth and flexible. The complications associated with SCD occur when these inflexible and sticky cells block, or occlude, small blood vessels, which can then cause severe and chronic pain throughout the body due to insufficient oxygen being delivered to tissue, or ischemia, and inflammation. According to an article in Annals of Internal Medicine, "In the Clinic: Sickle Cell Disease" by M.H. Steinberg (September 2011), which we refer to as the Steinberg Article, this leads to long-term organ damage, diminished exercise tolerance, increased risk of stroke and infection and decreased lifespan.

        Sickle cell crisis, a broad term covering a range of disorders, is one of the most devastating complications of SCD. Types of sickle cell crisis include:

    Vaso-occlusive crisis, characterized by obstructed blood flow to organs such as the bones, liver, kidney, eye or central nervous system;

    Aplastic crisis, characterized by acute anemia typically due to viral infection;

    Hemolytic crisis, characterized by accelerated red blood cell death and hemoglobin loss;

    Splenic sequestration crisis, characterized by painful enlargement of the spleen due to trapped red blood cells; and

    Acute chest syndrome, a potentially life-threatening obstruction of blood supply to the lungs characterized by fever, chest pain, cough and lung infiltrates.

        According to the Steinberg Article, acute chest syndrome affects more than half of all patients with SCD and is a common reason for hospitalization. Other symptoms and complications of SCD include swelling of the hands and feet, infections, pneumonia, vision loss, leg ulcers, gallstones and stroke.

        A crisis is characterized by excruciating musculoskeletal pain, visceral pain and pain in other locations. These crises occur periodically throughout the life of a person with SCD. In adults, the acute pain typically persists for five or ten days or longer, followed by a dull, aching pain generally ending only after several weeks and sometimes persisting between crises. According to the Steinberg Article, frequency of sickle cell crises varies within patients with SCD from rare occurrences to occurrences several times a month. Approximately 30% of patients have rare crises, 50% have occasional crises, and 20% have weekly or monthly crises. Crisis frequency tends to increase late in the second decade of life and to decrease after the fourth decade. The overall survival of patients in the United States with sickle cell anemia correlates with the severity of their disease state, especially the number of crises per year.

        According to Hematology in Clinical Practice by Robert S. Hillman et. al. (5th ed. 2011), patients with more than three sickle cell crises per year will experience fatal complications during the fourth and fifth decades of life whereas patients who experience between 1 and 3 crises per year have a median survival of nearly 50 years.

        Treatment of sickle cell crisis is burdensome and expensive for patients and payors, as it encompasses costs for hospitalization, emergency room visits, urgent care visits, and prescription pain medication. According to an article in American Journal of Hematology, "The Burden of Emergency Department Use for Sickle Cell Disease: An Analysis of the National Emergency Department Sample Database" by S. Lanzkron (October 2010), there were approximately 70,000 hospitalizations and 230,000 emergency room visits with a combined emergency room and hospital inpatient charges for these SCD patients estimated to be $2.4 billion in 2006.We plan to market our PGLG treatment in the United States, if approved, by either strategic partnership or by building our own targeted sales force of

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approximately 20 to 30 sales representatives. We intend to utilize strategic partnerships to market our treatment in the rest of the world.

        We believe our oral PGLG treatment for SCD, when taken on a daily basis by a patient with SCD, will decrease the incidence of sickle cell crisis by restoring the flexibility and function of red blood cells in patients with SCD. Further, we believe our PGLG product candidate will reduce the number of costly hospitalizations as well as unexpected emergency room and urgent care visits from patients with SCD. The ability to attain such results is attributable to the PGLG treatment enhancing nicotinamide adenine dinucleotide, or NAD, synthesis to reduce excessive oxidative stress in sickle red blood cells that induces much of the damage leading to characteristic symptoms of SCD.

        Although non-prescription L-glutamine supplements are available as dietary supplements which are generally marketed without undergoing an in-depth FDA approval process, are not subject to prescription, are generally not reimbursed fully or at all, and are not subject to the rigorous quality control standards required for pharmaceutical grade agents by regulatory authorities. Unlike prescription drug products, manufacturers of dietary supplements may not make claims that their dietary supplement products will cure, mitigate, treat, or prevent disease. Accordingly, we believe non-pharmaceutical grade L-glutamine formulations and dietary supplements will not consistently be effective in the long-term treatment of SCD. We believe that, if approved by regulatory agencies, treating physicians and payors will favor our PGLG treatment over other forms of L-glutamine. Furthermore, we are not aware of any reports in peer-reviewed literature of any demonstrations of their clinical effectiveness in controlled clinical trials and they have not been approved by the FDA as a prescription drug for SCD. We believe our pharmaceutical grade, consistent formulation of L-glutamine will meet the rigorous safety and effectiveness requirements of regulatory agencies for approval as a prescription drug and will be preferred by treating physicians and payors as compared to non-prescription L-glutamine supplements.

    Limitations of the Current Standard of Care

        The only approved pharmaceutical targeting sickle cell crisis is hydroxyurea, which is available in both generic and branded formulations. Hydroxyurea, a drug originally developed as an anticancer chemotherapeutic agent, has been approved as a once-daily oral treatment for reducing the frequency of sickle cell crisis and the need for blood transfusions in adult patients with recurrent moderate-to-severe sickle cell crisis. While hydroxyurea has been shown to reduce the frequency of sickle cell crisis in some patient groups, it is not suitable for many patients due to significant toxicities and side effects and is not approved by the FDA for pediatric use. In particular, hydroxyurea can cause a severe decrease in the number of blood cells in a patient's bone marrow, which may increase the risk that the patient will develop a serious infection or bleeding, or that the patient will develop certain cancers. Another potential treatment option for SCD, bone marrow transplant, is limited in its use due to the lack of availability of matched donors and the risk of serious complications, including graft versus host disease, infection and potentially death, as well as by its high cost.

        Upon onset of sickle cell crisis, the current standard of care is focused on symptom management. Narcotics are typically used for the management of acute pain associated with sickle cell crisis. Pain management often starts with oral medications taken at home at the onset of pain. However, if the pain is not relieved, or if it progresses, patients may seek medical attention in a clinic setting or emergency department. Pain that is not controlled in these settings may require hospitalization for more potent pain medications, typically opioids administered intravenously. The patient must stay in the hospital to receive these intravenous pain medications until the sickle cell crisis resolves and the pain subsides. Other supportive measures during hospitalization include hydration, supplemental oxygen and treatment of any concurrent infections or other conditions.

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        According to Hematology in Clinical Practice, by Robert S. Hillman et. al. (5th ed. 2011), sickle cell crisis, once it has started, almost always results in tissue damage at the affected site in the body, increasing the importance of preventative measures. While pain medications can be effective in managing pain during sickle cell crisis, they do not affect or resolve the underlying vascular occlusion, tissue ischemia or potential tissue damage. Additionally, opioid narcotics that are generally prescribed to treat pain can also lead to tissue or organ damage and resulting complications and morbidities, prolonged hospital stays and associated continuation of pain and suffering. Given the duration and frequency of sickle cell crises, addiction to these opioid narcotics is also a significant concern.

    Our Solution of a Pharmaceutical Grade L-glutamine Treatment for SCD

        Our pharmaceutical grade L-glutamine treatment, if approved, may provide a safe and effective means for reducing the frequency of sickle cell crisis in patients with SCD and reducing the need for costly hospital stays or treatment with opioid narcotics. Published academic research identifies L-glutamine as a precursor to NAD and its reduced form known as NADH. NAD is the major molecule that regulates and prevents oxidative damage in red blood cells. Several published studies have identified that sickle red blood cells have a significantly increased rate of transport of glutamine, which appears to be driven by the cells' need to promote NAD synthesis, protecting against the oxidative damage and thereby leading to further improvement in their regulation of oxidative stress. In turn this made sickle red blood cells less adhesive to cells of the interior wall of blood vessels. This implied that there is decreased chance of blockage of blood vessels especially the small ones. In summary, improved regulation of oxidative stress appears to lead to less obstruction or blockage of small blood vessels, thereby alleviating a major cause of the problems that patients with SCD face.

        Several of the studies in which Dr. Niihara has participated have been published in peer-reviewed academic research journals. These publications include, "L-glutamine Therapy Reduces Endothelial Adhesion of Sickle Red Blood Cells to Human Umbilical Vein Endothelial Cells" by Yutaka Niihara et al., published in BMC Blood Disorders (2005), "Oral L-glutamine Therapy for Sickle Cell Anemia: I. Subjective Clinical Improvement and Favorable Change in Red Cell NAD Redox Potential" by Yutaka Niihara et al., published in the American Journal of Hematology (1998) and "Increased Red Cell Glutamine Availability in Sickle Cell Anemia: Demonstration of Increased Active Transport, Affinity, and Increased Glutamate Level in Intact Red Cells" by Yutaka Niihara et al., published in the Journal of Laboratory and Clinical Medicine (1997).

        In December 2013, we completed a Phase 3 prospective, randomized, double-blind, placebo controlled, parallel-group multicenter clinical trial to measure, over a 48-week time frame, as its primary outcome, the reduction in the number of occurrences of sickle cell crises experienced by patients in the trial. This Phase 3 clinical trial enrolled a total of 230 patients across 31 clinical trial sites in the United States. Study participants included adults and children as young as five years of age. All participants other than those who received placebo, including children, received up to 30 grams of pharmaceutical grade L-glutamine treatment daily, dissolved in liquid, split between morning and evening—the same dosage as our Phase 2 clinical trial completed in 2009. Patients were randomized to the study treatment using a 2:1 ratio of L-glutamine to placebo. The randomization was stratified by investigational site and hydroxyurea usage.

        The following charts summarize the results of this Phase 3 clinical trial.

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GRAPHIC

Primary Endpoint—Reduction in the Frequency of Sickle Cell Crises

        Analysis of the primary endpoint of the number of sickle cell crises through 48 weeks demonstrated a 25% reduction in the median frequency of sickle cell crises (median 3 vs. 4). We have reviewed the results further and on February 25, 2016 submitted a letter to the FDA advising them of the intent to submit an NDA in the summer of 2016. With this letter, additional statistical information on our primary endpoint was provided. Included in this information was an evaluation of the efficacy of our primary endpoint using the CMH test with modified ridit scores. The following chart shows the results using the CMH test statistic with different ranking methods sent to the FDA on February 25, 2016:


Sensitivity Analysis of Number of Sickle Cell Crises and Impact of Ranking Method

 
  CMH Statistical Method Used in Test(a)  
Analysis
  Modified Ridit   Ridit   Table   Rank  

Number of Sickle Cell Crises (p-value)

    0.005     0.005     0.031     0.063  

(a)
p-values are from the CMH test with rank methods specified and controlling for hydroxyurea use and region.

        In communications with the FDA in 2010, we indicated that the statistical method for calculation of the Phase 3 sample size estimate was done via the Wilcoxon rank-sum test and was intended to mimic as much as possible the CMH test to be used in the primary analysis. In the 2010 communication, we added that the stratified Wilcoxon rank-sum test may be carried out using the CMH test with modified ridit scores as part of our justification for using the Wilcoxon rank-sum test for the sample size estimate.

        In the Phase 3 statistical analysis plan a rank-type scoring procedure is mentioned; however, the ranking method was not specified. The results presented to the FDA, at two meetings held in 2014,

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utilized the ranking method of scores=rank. This method resulted in a p-value of 0.063 which was above the pre-specified p-value of 0.045 for this analysis.

        As shown above, when the originally mentioned analytic method (CMH with modified ridit scores) that adjusts for varying strata size is utilized for the analysis of the primary endpoint, the results are highly statistically significant (p=0.005).

Secondary Endpoint—Reduction in the Frequency of Hospitalization

        We also assessed the effect of our prescription grade L-glutamine treatment for SCD by evaluating the frequency of hospitalizations for sickle cell pain as a secondary efficacy endpoint. The number of such hospitalizations, a key secondary endpoint, was significantly less, demonstrating a benefit from our prescription grade L-glutamine treatment as compared to placebo through Week 48 (a lower median number of hospitalizations of 2 vs. 3; p=0.005).


Sensitivity Analysis of Number of Hospitalizations and Impact of Ranking Method

Analysis
  Modified Ridit   Rank  

Number of Hospitalizations (p-value)

    0.005     0.041  

(a)
p-values are from the CMH test with rank methods specified and controlling for hydroxyurea use and region.

Additional Analysis

        Additional analyses were conducted to look at two key indicators which support the relevance of the efficacy findings. All such results demonstrated a benefit from our prescription grade L-glutamine treatment as compared to placebo:

    the median number of days before the first sickle cell crisis was longer in the L-glutamine group (87 days) compared to the placebo group (54 days), a difference that was statistically significant (p=0.0152); and

    the median number of days in hospital was shorter in the L-glutamine group (6.5 days) compared to the placebo group (11 days) (p=0.022).

        In addition, the severity of a patient's sickle cell crises was observed in our trial. The analyses of such data from the trial showed a statistically significant lower level in the severity of crises (p=0.0167). Further, the data from the trial showed a statistically significant reduction in the severity of reported ACS.

        Another indication of the reduction in the frequency and severity of crises is the incidence of acute chest syndrome, or ACS, which was also part of the sickle cell crisis definition. In the study, the incidence of ACS, was found to be significantly lower with the L-glutamine treatment compared to the placebo group (26.9% of placebo patients compared to 11.9% of patients in the L-glutamine group) (p=0.0028).

        Our trial results include imputation of values for patients who dropped out of the trial before reaching 48 weeks. In order to evaluate results without the imputation of values we have performed further sensitivity analyses which also showed a statistically significant lower number of sickle cell crises.

        Regarding safety, adverse events, or AEs, were reported for 98% of patients in the L-glutamine group and 100% of the placebo group. Most AEs were mild or moderate (73.5% in the L-glutamine group, 83.4% in the placebo group). As expected in this disease population, the most common AE was sickle cell anemia with crisis, which was reported for 81.5% of patients in the L-glutamine group and

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91.0% of patients in the placebo group. Other notable differences between the treatment groups (difference of about 10 percentage points or more) all favored L-glutamine treatment and included acute chest syndrome (11.9% L-glutamine, 26.9% placebo). Patients in both groups had AEs that were considered possibly related to the study medication (21.2% L-glutamine, 15.4% placebo). The majority of the possibly related AEs were due to gastrointestinal disorders.

        Serious adverse events, or SAEs, were reported for 78.1% of patients in the L-glutamine group and 87.2% of patients in the placebo group. The most common SAE was sickle cell crisis, which was reported in fewer patients treated with L-glutamine (67.5% L-glutamine, 80.8% placebo).

        In summary our trial data indicates that our pharmaceutical grade L-glutamine treatment achieved:

    a 25% reduction in the median number of sickle cell crises;

    a 33% reduction in the median number of sickle cell-related hospitalizations;

    a 41% reduction in the median number of sickle cell-related cumulative hospital days;

    a 63% lower reported incidence of sickle cell-related acute chest syndrome;

    an increase in the median number of days before the first sickle cell crisis from 54 to 87 days; and

    reported adverse events are similar between those treated with L-glutamine and placebo.

Regulatory Status of L-glutamine for SCD

        Throughout the development process of the PGLG treatment for SCD, we have communicated with the FDA for guidance and advice. Required updates have also been made throughout the development process.

        Emmaus' sickle cell disease therapy has Orphan Drug designation in the U.S. and Europe and Fast Track designation from the FDA. Emmaus also plans to submit a marketing authorization application to the European Medicines Agency.

        On September 7, 2016, we submitted the NDA to the FDA and were invited to an Application Orientation Meeting. The meeting was held at the FDA on October 27, 2016, and we received a positive reception at the meeting. On November 7, 2016, the NDA was deemed filed for review and on November 18, 2016, the FDA issued our "Day 74" letter with a PDUFA date of July 7, 2016. It was noted in the letter that any anticipated post-approval commitments would be communicated by June 9, 2017. The PGLG treatment represents the first potential treatment for pediatric patients with SCD, and the first potential new treatment in nearly 20 years for adult patients.

        There can be no assurance that the FDA will find the information and data in the NDA, which consists largely of a single Phase 3 study and other supporting studies, sufficient to grant approval for the PGLG treatment.

        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, or Modernization Act, 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

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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.

Sales and Marketing Plans for our SCD Product Candidate

        Subject to FDA approval of our pharmaceutical grade L-glutamine treatment for SCD, we intend to build a focused sales and marketing force of approximately 20 to 30 sales representatives to commercialize this product in the United States if we are not able to find a strategic partner on acceptable terms. We intend to focus our sales and marketing efforts across several different groups, including patients, physicians, health care providers, hospitals, treatment centers, insurance carriers, non-profit associations, and potentially, collaborating pharmaceutical or biotechnology companies. Our in-house product specialists and sales representatives will focus on the following tasks as part of our marketing strategy:

    promote our pharmaceutical grade L-glutamine treatment for SCD to hematologist /oncologists and key opinion leaders in the area of sickle cell disease;

    starting with our 31 clinical trial sites, promote awareness of our pharmaceutical grade L-glutamine treatment for SCD at all U.S. community-based treatment centers;

    develop collateral materials and informational packets about our pharmaceutical grade L-glutamine treatment for SCD to educate patients and physicians and garner industry support;

    establish collaborative relationships with non-profit organizations and patient advocacy groups that focus on SCD; and

    identify license partners and other international opportunities to commercialize our pharmaceutical grade L-glutamine treatment for SCD, if approved by international regulatory authorities.

Currently Marketed Products

        We currently market two L-glutamine-based products, NutreStore and AminoPure, in the United States and certain other territories. We generate limited revenues from the sale of these products, which we consider to be non-core operations.

        NutreStore is our FDA-approved prescription L-glutamine powder for oral solution for the treatment of SBS in conjunction with an approved recombinant human growth hormone and other customary SBS management. Patients with SBS have had half or more of their small intestine surgically removed or have a poorly functioning small intestine due to inflammatory bowel disease. These patients cannot adequately absorb nutrition through their small intestine and thus require long-term intravenous nutrition, which is expensive, inconvenient, and poses significant infection risk. As cited in the NutreStore label, after four weeks of treatment with NutreStore, the patients enrolled in the Phase 3 trial showed:

    Reduced mean frequency of intravenous nutrition in days per week from 5.4 to 1.2;

    Reduced mean intravenous nutritional volume in liters per week from 10.5 to 2.9; and

    Reduced mean intravenous nutritional calories per week from 7,895 to 2,144.

        NutreStore is distributed through local treating medical centers and physicians. We also provide the product to the U.S. Department of Veterans Affairs, U.S. Department of Defense, U.S. Coast Guard and Public Health Service (Indian Health Service).

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        AminoPure is our dietary supplement L-glutamine, sold through our indirect wholly-owned subsidiary, Newfield Nutrition Corporation. AminoPure is currently sold in several U.S. states, and we export the product to Japan, Taiwan and South Korea. AminoPure is subject to regulation under the Dietary Supplement Health and Education Act of 1994.

CellSeed Collaboration

        In April 2011, we entered into a Research Agreement dated as of April 8, 2011 (the "Research Agreement") and an Individual Agreement dated as of April 8, 2011 (the "Individual Agreement") with the Japanese company CellSeed, Inc., or CellSeed, and, in August 2011, we entered into an addendum to the Research Agreement. Pursuant to the Individual Agreement, CellSeed granted us the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell Sheet, or CAOMECS, for the treatment of corneal impairments in the United States.

        On December 29, 2015, we and CellSeed terminated the Research Agreement and the Individual Agreement. As a result, we have no obligation to pay CellSeed any further amounts under these agreements, and we may not have an active license with respect to CellSeed's CAOMECS technology. There can be no assurance that we will be able to negotiate new license agreements with CellSeed, and if we are unable to do so, we may not be able to pursue the research and development of CAOMECS for the treatment of corneal diseases.

        In June 2016, we entered into a non-exclusive agreement with CellSeed and Dr. Kohji Nishida for the development of CAOMECS technology under which we are required to pay single digit royalties based upon net sales.

        A cell sheet is a composite of cells grown and harvested in an intact sheet, rather than as individual cells. These cell sheets can be used for tissue transplantation. CellSeed's technology involves culturing cells on a surface coated with a temperature-responsive polymer. The thinness of this polymer coating is measured at the nanometer scale. The cells cultured on this polymer can be harvested intact as a composite cell sheet. Using a patient's own oral mucosal cells, we are working toward being able to grow and harvest a cell sheet for directly transplanting onto the cornea of the patient's affected eye to repair the damaged cornea.

        Our lead CAOMECS program is for treatment of corneal diseases. CAOMECS products are in preclinical development and have not been approved for marketing in the United States or any jurisdiction. The development of therapeutic products based on this cell sheet technology is in its early stages. We are not aware that cell sheets of the type that CellSeed and we are developing for treating corneal and other diseases are currently being used or sold by any third parties. The potential market for the corneal cell sheet products that CellSeed and we are developing includes patients with damaged corneas, which we believe represents a small percentage of the approximately 40,000 corneal transplants in the United States performed each year. The principal steps to development of a corneal cell sheet product include engaging a manufacturer compliant with applicable current good manufacturing practice, or cGMP, regulations and sufficient manufacturing capacity, conducting preclinical studies and human clinical trials, obtaining FDA approval of the product, training physicians who will use the product and perform procedures with the product and marketing the product.

        Since 2011, an Emmaus-led team at LA BioMed has been conducting preclinical studies on corneal cell sheet technology. Subject to filing an investigational new drug application, or IND, that the FDA allows to become effective, we are preparing to begin our first clinical studies with human participants. We currently intend, if our clinical studies are successful, to file with the FDA a Biological License Application, or BLA, for this product. Based on the current status of our research and development efforts relating to this technology, we anticipate it will be six to seven years or longer before we would be able to submit and obtain FDA approval of a BLA that would allow us to begin to

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commercialize this product in the United States. If the product is approved for marketing, we plan to build a cGMP level facility as part of our U.S. commercialization plan for this technology.

Research and Development

        We spent $2.0 million and $1.6 million, respectively, in 2016 and 2015 on research and development. None of these costs are borne or sponsored by our customers.

Raw Materials and Manufacturing

        Our SCD treatment uses pharmaceutical grade L-glutamine. This differs from non-pharmaceutical grade L-glutamine available as a nutritional supplement. The manufacturing of large quantities of pharmaceutical grade L-glutamine is a complex and expensive undertaking, which we believe discourages entry of third parties into the market. As a result of these challenges, there are limited alternative suppliers from which we can obtain the pharmaceutical grade L-glutamine required to manufacture our current products and our SCD treatment product under development.

        We currently obtain, and plan to continue to obtain, our pharmaceutical grade L-glutamine from Ajinomoto North America, Inc., a subsidiary of Ajinomoto U.S.A. referred to as Ajinomoto, a Japanese food, amino acid and pharmaceutical company, and from Kyowa Hakko Bio Co., Ltd., a Japanese pharmaceutical company referred to as Kyowa. Ajinomoto and Kyowa together produce the majority of pharmaceutical grade L-glutamine approved for sale in the United States.

        Ajinomoto has provided pharmaceutical grade L-glutamine to us free of charge for our clinical work, including our completed Phase 2 and Phase 3 clinical trials. Pursuant to a letter of intent between Emmaus Medical and Ajinomoto, we agreed to purchase or cause relevant third party purchasers to purchase from Ajinomoto all of the L-glutamine that we will need for our commercial products. Pursuant to the letter of intent, we will be permitted to source pharmaceutical grade L-glutamine from third party suppliers for up to 10% of our requirement for L-glutamine on a back-up basis. If, however, a competitor of Ajinomoto offers us more favorable price of L-glutamine of like grade with similar terms and conditions, we may respond to such offer in writing and request Ajinomoto to reconsider then-current price. We also currently source pharmaceutical grade L-glutamine from Kyowa for our NutreStore product.

        Eventually we plan to seek to enter into exclusive long term supply contracts with these manufacturers for pharmaceutical grade L-glutamine for our SCD treatment that will require these companies to agree not to sell L-glutamine as a nutritional supplement or pharmaceutical for SCD applications. We do not currently have long term supply contracts with these manufacturers for L-glutamine or any other compound. As such, there is no assurance we will be able to obtain agreements for obtaining pharmaceutical grade L-glutamine from these proposed suppliers on terms acceptable to us, or on an exclusive basis, or that these suppliers will not experience an interruption in supply that could materially and adversely affect our business.

        Our commercial products must be packaged by a facility that meets FDA requirements for cGMP. Packaging Coordinators, Inc., or PCI, of Rockville, Illinois, has handled the packaging for our Phase 2 and Phase 3 clinical trials of our pharmaceutical grade L-glutamine treatment for SCD. If the pharmaceutical grade L-glutamine treatment for SCD is approved, we intend to use the same company for commercial packaging of the product, if approved. PCI packaged L-glutamine for the clinical trials that resulted in the FDA's marketing approval for L-glutamine for SBS using the same dosage and packaging protocol as we expect to use for the treatment of SCD. Previous compliance with cGMP requirements for the packaging of pharmaceutical products, however, does not guarantee the ability to maintain cGMP compliance for the packaging of pharmaceutical products in the future.

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Facilities

        We lease office space under operating leases from unrelated entities. The rent expense during the years ended December 31, 2016 and 2015 amounted to $589,769 and $492,919, respectively.

        We lease approximately 13,329 square feet of office space for our headquarters in Torrance, California, at a base rental of $38,906 per month. The lease relating to this space expires on March 31, 2019. We lease an additional office suite in Torrance, California at a base rent of $2,240 per month for 1,600 square feet. The lease relating to this space will expire on January 31, 2020.

        In addition, EM Japan leases 1,322 total square feet of office space in Tokyo, Japan. The leases relating to the space will expire on September 30, 2018.

        We believe our existing facilities are adequate for our operations at this time and we expect to be able to renew the office lease for our headquarters on commercially reasonable terms. In the event we determine that we require additional space to accommodate expansion of our operations, we believe suitable facilities will be available in the future on commercially reasonable terms as needed.

Employees

        As of December 31, 2016, we had 25 employees, 16 of whom are full time, and we retained one consultant. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Competition

        The biopharmaceutical industry is highly competitive and subject to rapid and significant technological change. While we believe that our development experience and scientific knowledge provide us with competitive advantages, we face potential competition from both large and small pharmaceutical and biotechnology companies, academic institutions, governmental agencies (such as the National Institutes of Health) and public and private research institutions. In comparison to us, many of the entities against whom we are competing, or against whom we may compete in the future, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

        Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in increasing concentration of resources among a smaller number of our competitors. These competitors compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our product development programs.

        Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. The key competitive factors affecting the success of each of our product candidates, if approved, are likely to be their safety, efficacy, convenience, price, the level of proprietary and generic competition, and the availability of coverage and reimbursement from government and other third-party payors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer or more effective, have fewer or less severe side effects, or are more convenient or less expensive than any products that we may develop. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in their establishing a strong market position before we are able to enter the market.

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Sickle Cell Disease

        Our pharmaceutical grade L-glutamine treatment for SCD is being developed as a therapy to reduce the frequency of sickle cell crisis in patients with SCD. The only approved drug targeting a reduction in the frequency of sickle cell crisis is hydroxyurea, which is available in both generic and branded formulations. While hydroxyurea has been shown to reduce the frequency of sickle cell crisis in some patient groups, it is not suitable for all patients because it can have significant toxicities and side effects. Additionally, hydroxyurea has not been approved by the FDA for pediatric use in SCD patients.

        There is a high level of interest in SCD and we understand several academic centers and pharmaceutical companies are researching new treatments and therapies for SCD. There are studies underway testing different compounds that target various aspects of SCD pathophysiology. We are aware of two studies targeting the reduction or duration of vaso occlusive crisis events in patients with SCD which are currently in Phase 3 clinical trials sponsored by Global Blood Therapeutics and Pfizer. In addition, other companies or groups are working to obtain FDA approval for the use of hydroxyurea for pediatric patients.

        We are also aware of efforts to develop cures for SCD through approaches such as bone marrow transplant and gene therapy. Although bone marrow transplant is currently available for SCD patients, its use is limited by the lack of availability of matched donors and by the risk of serious complications, including graft versus host disease and infection. Attempts to develop a cure through gene therapy remain at an early stage, but if these attempts were to succeed and receive regulatory approval, this could limit the market for a product such as our L-glutamine product candidate.

        L-glutamine is marketed and sold without a prescription as a nutritional supplement. Although our L-glutamine treatment for SCD requires pharmaceutical grade L-glutamine, which we believe offers a more consistent quality and purity profile than non-pharmaceutical grade L-glutamine sold as a nutritional supplement, our L-glutamine product candidate for the treatment for SCD may compete with non-pharmaceutical grade alternative sources of L-glutamine. If our L-glutamine treatment for SCD is approved, we expect that it will be priced at a significant premium over non-prescription L-glutamine products. Furthermore, we face similar competition in respect of our own L-glutamine product marketed as a nutritional supplement.

Oral Mucosa Epithelial Cell Sheet

        The development of regenerative medicine products using CAOMECS technology is in the early stages. Although there are many academic centers and biotechnology companies working on regenerative medicine in various fields, we are not aware of any treatments using cell sheet technology that have been approved by the FDA. We are, however, aware of academic centers and biotechnology companies that are researching stem cells in various forms, including in cell sheets, with potential applications for the treatment of limbal stem cell deficiency, or LSCD, a disease of the cornea.

        For example, two academic centers outside the United States researching the transplantation of cells as a treatment for LSCD are the Centre Hospitalier National d'Ophtalmologie des Quinze-Vingts located in Paris, France, who we believe is conducting Phase 2 clinical trials evaluating the survivability of transplanted epithelium, and the Instituto Universitario de Oftalmobiología Aplicada located in Valladolid, Spain, who we believe has completed Phase 3 clinical trials looking at the viability and safety of mesenchymal stem cell transplants but the study results are not published. We are also aware of Holostem Terapie Avanzate, an Italian biotechnological company, who we believe is working with autologous cultures of limbal stem cells for corneal regeneration and restoration of visual acuity in patients with severe corneal chemical and thermal burns associated with total unilateral or severe bilateral LSCD. Holostem Terapie Avanzate has received conditional marketing approval from the European Commission for its therapy based on autologous stem cells for patients with severe cornea damage.

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        Currently, the standard of care for LSCD patients is the treatment of symptoms. This treatment may include use of artificial tears, topical cyclosporine or topical steroids. In more advanced cases, the treatment plan will likely include surgery. The initial surgical interventions may include management of eyelid positioning, insertion of small plugs into the openings in the eye that allows tears to drain or partially sew the eyelids together to protect the cornea prior to considering transplantation of healthy limbal tissue using either cultured cells or whole tissue grafts. The source of the transplanted tissue can be from the patient's own cells from their healthy eye, matched living donors, or cadavers. Similar to other transplantations, there is the risk of serious complications, including graft versus host disease when not using the patient's own tissue.

        In regenerative medicine and cell-based therapy, cell transplantation success not only depends on the cells, but also on the carrier/scaffold used, as it is not possible to graft separate cells in a suspension. Biodegradable polymers were the key technology for the first generation of cell therapy. Tremendous efforts have been made since to develop biofilms, acellular matrix (blood products e.g.; fibrin gel, amniotic membranes, etc.) to carry and deliver the cells to the target site. However, the risks of infection due to blood products or biomaterials cannot be completely denied. It has been repeatedly reported that decomposition of biodegradable transplanted scaffolds used for cell transplantations caused inflammation, foreign body reaction and cell damage. The use of an innovative temperature-responsive culture surface vessel technology eliminates these issues and, for the first time, offers the possibility to culture and engineer any type of cells to safely transplant cell-sheets to target organs for regenerative purpose, drug delivery, or tissue replacement.

        This cell-sheet-based regenerative medicine technology is advanced, simple and has already shown dramatic results in pilot studies in Japan and Europe. An important feature of this novel and innovative cell sheet therapy is that harvested cell-sheets retain intact basal membranes and intact extracellular matrix (fibronectin, laminin, collagen type IV), eliminating the inherent risks of suture during transplantation. Another innovative feature this cell sheet therapy is that the construction of multiple layered cell sheets is made possible during the culture process and that cell sheet harvesting is achieved without harmful enzymes use (trypsin or dispase) that may damage the cell-based therapeutic potential.

        This technology has the unique potential to construct in vitro stratified tissue equivalents by alternately layering different harvested cell sheets to provide regenerated tissue architectures. This novel technique thus holds promise for the study of cell-cell communications and angiogenesis in reconstructed, three-dimensional environments, as well as for tissues engineering with complex, multicellular architectures.

Government Regulation

        In 2001, the FDA granted Orphan Drug designation to L-glutamine for the treatment of SCD. In 2005, the FDA granted Fast Track designation to our clinical study program of L-glutamine for treating SCD. The FDA also approved, in 2004, our NDA for our L-glutamine product for the treatment of SBS. In addition, in July 2012, the European Commission, or EC, granted Orphan Drug designation to L-glutamine for the treatment of SCD. We describe below the significance of these designations and of data exclusivity under the Hatch/Waxman Act.

        Orphan Drug Designation.    The FDA has authority under the U.S. Orphan Drug Act to grant Orphan Drug designation to a drug or biological product intended to treat a rare disease or condition. This law defines a rare disease or condition generally as one that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of the development and distribution of the orphan product in the United States will be recovered from sales of the product. Being granted Orphan Drug designation provides tax benefits to mitigate expenses of developing the orphan product. More importantly, Orphan

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Drug designation provides seven years of market exclusivity if the product receives the first FDA approval for the disease or condition for which it was granted such designation and the indication for which approval is granted matches the indication for which Orphan Drug designation was granted. During the seven year exclusivity period, Orphan Drug exclusivity precludes FDA approval of a marketing application for the same product for the same indication. Orphan Drug exclusivity is limited and will not preclude the FDA from approving the same product for the same indication if the same product is shown to be clinically superior to the product previously granted exclusivity. For example, if the same product for the same indication is shown to have significantly fewer side effects, the FDA may approve the second product despite the Orphan Drug exclusivity granted to the first product. In addition, a product that is the same as the orphan product may receive approval for a different indication (whether orphan or not) during the exclusivity period of the orphan product. Also, Orphan Drug market exclusivity will not bar a different product intended to treat the same orphan disease or condition from obtaining its own Orphan Drug designation and Orphan Drug exclusivity. Orphan Drug status in the European Union has similar, but not identical, benefits, which includes a 10-year Orphan Drug exclusivity period.

        Fast Track Designation/Priority Review.    The FDA has authority under the U.S. Food, Drug, and Cosmetic Act, or the FD&C Act, to designate for "Fast Track" review new drugs and biologics that are intended to treat a serious or life-threatening condition and demonstrate the potential to meet an unmet medical need for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. A product candidate that receives Fast Track designation is eligible for some or all of the following: more frequent meetings with the FDA to discuss the development plan for the product candidate and ensure collection of appropriate data needed to support marketing approval; more frequent written correspondence from the FDA about the development of the product candidate; the ability, if agreed to by the FDA, to submit a NDA on a rolling basis; and, if certain criteria are met, eligibility for an FDA priority review designation, or Priority Review. These criteria for Priority Review include whether, if approved, the resulting product would provide significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions "cause"d by a disease when compared to standard treatment, diagnosis, or prevention of those conditions. Under Priority Review of a NDA, assuming that there are no requests from the FDA for additional information, the FDA's goal is to take action on the NDA within six months (compared to 10 months under standard review) after it is accepted for review, with the review clock starting at the time of submission. Requests for Priority Review of a NDA for the applicable product candidate must be submitted to the FDA when the NDA is submitted.

        505(b)(2) Applications.    Under Section 505(b)(2) of the FD&C Act, a person may submit a NDA for which one or more of the clinical studies relied upon by the applicant for approval were not conducted by or for the applicant and for which the applicant does not have a right of reference or use from the person by or for whom the clinical studies were conducted. Instead, a 505(b)(2) applicant may rely on published literature containing the specific information (e.g., clinical trials, animal studies) necessary to obtain approval of the application. The 505(b)(2) applicant may also rely on the FDA's finding of safety and/or effectiveness of a drug previously approved by the FDA when the applicant does not own or otherwise have the right to access the data in that previously approved application. The 505(b)(2) pathway to market thus allows an applicant to submit to the FDA a NDA without having to conduct its own studies to obtain data that are already documented in published reports or previously submitted NDAs. In addition to relying on safety data from our previously approved drug product, NutreStore, we intend to take advantage of the 505(b)(2) pathway to the extent published literature will further support our new drug marketing application.

        Hatch/Waxman Data Exclusivity.    Under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch/Waxman Act, a three-year period of data exclusivity is granted for a drug product that contains an active moiety that has been previously approved, when the application

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contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor that were essential to approval of the application. When granted to a sponsor, data exclusivity under the Hatch/Waxman Act prevents any third parties, such as generic drug manufacturers, from relying on or using the sponsor's data from the sponsor's new clinical investigations in order to obtain marketing approval for the same active moiety and indication for which the sponsor's NDA was approved. The FDA defines "new clinical investigation" as a "clinical study in humans the results of which have not been relied upon by FDA to demonstrate substantial evidence of effectiveness of a previously approved drug product for any indication or of safety for a new patient population and do not duplicate the results of another investigation that was relied upon by the agency to demonstrate the effectiveness or safety in a new patient population of a previously approved drug product." Our pharmaceutical grade L-glutamine drug product contains the same active moiety contained in our previously approved NutreStore drug product and we believe our Phase 3 clinical study meets the definition of a new clinical investigation for purposes of satisfying the requirements for Hatch/Waxman data exclusivity to be granted. Therefore, if approved, we anticipate receiving three years of data exclusivity under the Hatch/Waxman Act for our pharmaceutical grade L-glutamine treatment for SCD. These three years of data exclusivity would run concurrently with any other market exclusivity we may receive, as well as concurrently with any remaining patent term protection. However, the three-year exclusivity provided under the Hatch/Waxman Act would bar the approval of the same product for the same indication, even if the same product demonstrated clinical superiority. Thus, when running concurrently with Orphan Drug exclusivity, clinical superiority would not be sufficient to allow the FDA to approve a third party product during the first three years of Orphan Drug exclusivity. Similar to Orphan Drug exclusivity, the three-year exclusivity provided under Hatch/Waxman would not bar the FDA from approving another L-glutamine product for another indication, nor would it bar the FDA from approving a different active moiety to treat the same indication.

        Regulation by United States and foreign governmental authorities is a significant factor in the development, manufacture and expected marketing of our product candidates and in our ongoing research and development activities. The nature and extent to which such regulation will apply to us will vary depending on the nature of the product candidates we seek to develop.

        In particular, human therapeutic products, such as drugs, biologics and cell-based therapies, are subject to rigorous preclinical and clinical testing and other preapproval requirements of the FDA and similar regulatory authorities in other countries. Various federal and state statutes and regulations govern and influence pre- and post-approval requirements related to research, testing, manufacturing, labeling, packaging, storage, distribution and record-keeping of such products to ensure the safety and effectiveness for their intended uses. The process of obtaining marketing approval and ensuring post-approval compliance with the FD&C Act for drugs and biologics (and applicable provisions of the Public Health Service Act for biologics), and the regulations promulgated thereunder, and other applicable federal and state statutes and regulations, requires substantial time and financial resources. Any failure by us or our collaborators to obtain, or any delay in obtaining, marketing approval could adversely affect the marketing of any of our product candidates, our ability to receive product revenues, and our liquidity and capital resources.

        The manufacture of these products is subject to cGMP regulations. The FDA inspects manufacturing facilities for compliance with cGMP regulations before deciding whether to approve a product candidate for marketing. If the facility in which L-glutamine is manufactured is not ready for inspection at the time the FDA seeks to inspect it, or cGMP deficiencies are found upon such inspection, the FDA's approval of our NDA for our L-glutamine treatment for SCD could be delayed unless and until the facility is inspected and no deficiencies in need of correction prior to approval are identified or, if so identified, such deficiencies are corrected.

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        The steps required by the FDA before a new product, such as a drug, biologic or cell-based therapy, may be marketed in the United States include:

    completion of preclinical studies (during this stage, the treatment is called a development candidate);

    the submission to the FDA of a proposal for the design of a clinical trial program for studying in humans the safety and effectiveness of the product candidate. This submission is referred to as an investigational new drug application, or IND. The FDA reviews the IND to ensure it adequately protects the safety and rights of trial participants and that the design of the studies are adequate to permit an evaluation of the product candidate's safety and effectiveness. The IND becomes effective within thirty days after the FDA receives the IND, unless the FDA notifies the sponsor that the investigations described in the IND are deficient and cannot begin;

    the conduct of adequate and well-controlled clinical trials, usually completed in three phases, to demonstrate the safety and effectiveness of the product candidate for its intended use;

    the submission to the FDA of a marketing application, a NDA, if the product candidate is a drug, that provides data and other information to demonstrate the product is safe and effective for its intended use, or a BLA, if the product candidate is a biologic that provides data and other information to demonstrate that the product candidate is safe, pure, and potent; and

    the review and approval of the NDA or BLA by the FDA before the product candidate may be distributed commercially as a product.

        In addition to obtaining FDA approval for each product candidate before we can market it as a product, the manufacturing establishment from which we obtain it must be registered and is subject to periodic FDA post-approval inspections to ensure continued compliance with cGMP requirements. If, as a result of these inspections, the FDA determines that any equipment, facilities, laboratories, procedures or processes do not comply with applicable FDA regulations and the conditions of the product approval, the FDA may seek civil, criminal, or administrative sanctions and/or remedies against us, including the suspension of the manufacturing operations, recalls, the withdrawal of approval and debarment. Manufacturers must expend substantial time, money and effort in the area of production, quality assurance and quality control to ensure compliance with these standards.

        Preclinical testing includes laboratory evaluation of the safety of a product candidate and characterization of its formulation. Preclinical testing is subject to Good Laboratory Practice, or GLP, regulations. Preclinical testing results are submitted to the FDA as a part of an IND which must become effective prior to commencement of clinical trials. Clinical trials are typically conducted in three sequential phases following submission of an IND. In Phase 1, the product candidate under investigation (and therefore often called an investigational product) is initially administered to a small group of humans, either patients or healthy volunteers, primarily to test for safety (e.g., to identify any adverse effects), dosage tolerance, absorption, distribution, metabolism, excretion and clinical pharmacology, and, if possible, to gain early evidence of effectiveness. In Phase 2, a slightly larger sample of patients who have the condition or disease for which the investigational product is being studied receive the investigational product to assess the effectiveness of the investigational product, to determine dose tolerance and the optimal dose range, and to gather additional information relating to safety and potential adverse effects. If the data show the investigational product may be effective and has an acceptable safety profile in the targeted patient population, Phase 3 studies, also referred to as pivotal studies or enabling studies, are initiated to further establish clinical safety and provide substantial evidence of the effectiveness of the investigational product in a broader sample of the general patient population, to determine the overall risk-benefit ratio of the investigational product, and provide an adequate basis for physician and patient labeling. During all clinical studies, Good Clinical Practice, or GCP, standards and applicable human subject protection requirements must be

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followed. The results of the research and product development, manufacturing, preclinical studies, clinical studies, and related information are submitted in a NDA or BLA to the FDA.

        The process of completing clinical testing and obtaining FDA approval for a new therapeutic product, such as a drug, biologic or cell-based product, is likely to take a number of years and require the expenditure of substantial resources. If a NDA or BLA is submitted, there can be no assurance that the FDA will file, review, and approve it. Even after initial FDA approval has been obtained, post-market studies could be required to provide additional data on safety or effectiveness. Additional pivotal studies would be required to support adding other indications to the labeling. Also, the FDA will require post-market reporting and could require specific surveillance or risk mitigation programs to monitor for known and unknown side effects of the product. Results of post-marketing programs could limit or expand the continued marketing of the product. Further, if there are any modifications to the product, including changes in indication, manufacturing process, labeling, or the location of the manufacturing facility, a NDA or BLA supplement would generally be required to be submitted to the FDA prior to or corresponding with that change, or for minor changes in the periodic safety update report that must be submitted annually to the FDA.

        The rate of completion of any clinical trial depends upon, among other factors, sufficient patient enrollment and retention. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the trial, the number of clinical sites, the availability of alternative therapies, the proximity of patients to clinical sites, and the eligibility and exclusion criteria for the trial. Delays in planned patient enrollment might result in increased costs and delays. Patient retention could be affected by patient non-compliance, adverse events, or any change in circumstances making the patient no longer eligible to remain in the trial.

        Failure to adhere to regulatory requirements for the protection of human subjects, to ensure the integrity of data, other IND requirements, and GCP standards in conducting clinical trials could cause the FDA to place a "clinical hold" on one or more studies of a product candidate, which would stop the studies and delay or preclude further data collection necessary for product approval. Noncompliance with GCP standards would also have a negative impact on the FDA's evaluation of a NDA or BLA. If at any time the FDA finds that a serious question regarding data integrity has been raised due to the appearance of a wrongful act, such as fraud, bribery or gross negligence, the FDA may invoke its Application Integrity Policy, or AIP, under which it could immediately suspend review of any pending NDA or BLA or refuse to accept the submission of a NDA or BLA as filed, require the sponsor to validate data, require additional clinical studies, disapprove a pending NDA or BLA or withdraw approval of marketed products, as well as require corrective and preventive action to ensure data integrity in future submissions. Significant noncompliance with IND regulations could result in the FDA not only refusing to accept a NDA or BLA as filed but could also result in enforcement actions, including civil and administrative actions, civil money penalties, criminal prosecution, criminal fines and debarment. Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of marketing the product in those countries.

        The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval might be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for some European countries, in general, each country at this time has its own procedures and requirements.

        In most cases, if the FDA has not approved a product candidate for sale in the United States, the unapproved product may be exported to any country in the world for clinical trial or sale if it meets U.S. export requirements and has marketing authorization in any listed country without submitting an export request to the FDA or receiving FDA approval to export the product, as long as the product meets the regulatory requirements of the country to which the product is being exported. Listed

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countries include each member nation in the European Union or the European Economic Area, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. If an unapproved product is not approved in one of the listed countries, the unapproved product may be exported directly to an unlisted country if the product meets the requirements of the regulatory authority of that country, and the FDA determines that the foreign country has statutory or regulatory requirements similar or equivalent to the United States.

        In addition to the regulatory framework for product approvals, we and our collaborative partners must comply with federal, state and local laws and regulations regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and other local, state, federal and foreign regulation. All facilities and manufacturing processes used by third parties to produce our product candidates for clinical use in the United States and our products for commercialization must be in compliance with cGMP requirements and are subject to periodic regulatory inspections. The failure of third party manufacturers to comply with applicable regulations could extend, delay or cause the termination of clinical trials conducted for our product candidates or the withdrawal of our products from the market. The impact of government regulation upon us cannot be predicted and could be material and adverse. We cannot accurately predict the extent of government regulation that might result from future legislation or administrative action.

        With respect to our L-glutamine product candidate for the treatment of SCD, we have completed preclinical studies, submitted an IND to the FDA which has become effective and conducted Phase 1, Phase 2 and Phase 3 clinical trials. We submitted a NDA to the FDA in September 2016 and a PDUFA date was set for July 7, 2017, at which time we expect to know whether the FDA has approved the PGLG treatment for SCD.

        After reviewing the NDA, the FDA will make a determination as to whether data and other information demonstrate the safety and provide substantial evidence of effectiveness of the product candidate for its intended use(s), which includes an analysis of whether its benefits outweigh its risks; whether its proposed labeling is adequate and complete; and whether the methods used in, and the facilities or controls used for, its manufacture, processing, packing and storage conform to and are operated or administered in conformity with cGMP regulations. Upon completion of the NDA review, the FDA will either approve or not approve the application, or issue a Complete Response Letter (a letter from the FDA indicating that it cannot approve the application in its present form and informing the applicant of changes that should be made before the application could be approved). If the FDA approves the NDA, we will be able to commercialize the product. If the FDA does not approve our NDA, we will not be able to commercialize our SCD product candidate, which may have a material adverse impact on our business and financial condition.

        If the FDA issues a Complete Response Letter, the FDA would be required to provide the basis for its decision and we would have an opportunity to meet with FDA officials to discuss any deficiencies noted in the letter. At that point, we could choose to request a hearing and appeal the agency's decision, or address deficiencies and, if necessary, submit additional data or information, or withdraw the application. Common problems which may delay or prevent the FDA from approving a NDA include, but are not limited to, unexpected safety issues, inadequate data analysis, or the failure, in the FDA's judgment, to provide substantial evidence of a product candidate's effectiveness. If we receive a Complete Response Letter, we may need to conduct additional studies, perhaps studies of more people or, different types of people, or conduct studies for a longer period of time. If we must conduct additional clinical studies in order to address any deficiencies identified in a Complete Response Letter, we may not have sufficient funding to conduct such additional trials or studies.

        Outside the United States, we sell AminoPure in Japan, Taiwan and South Korea. There are no regulatory requirements to sell AminoPure in Japan because it is classified as a nutritional supplement

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product. To sell AminoPure in Taiwan, we are required to obtain a Certificate of Free Sale from the FDA, which we provide to our distributor. The FDA issues a Certificate of Free Sale upon request for products that either meet the applicable requirements of the FD&C Act and may be legally marketed in the United States or may be legally exported under the FD&C Act although they may not be legally marketed in the United States. Once the Certificate of Free Sale is furnished to our distributor in Taiwan, it is the distributor's responsibility to comply with local regulations, including but not limited to, obtaining the proper import license. In South Korea, AminoPure is imported and sold as a dietary supplement, which does not require any regulatory approval but is subject to dietary supplement cGMP regulations. In Ghana, AminoPure is a registered product with the Food and Drug Board of the Ministry of Health.

Patents, Proprietary Rights and Know-How

        Our success will depend in part on our ability to obtain patents and otherwise preserve the intellectual property rights relating to the design, operation, sale and distribution of our products. We intend to seek patents on our products when we deem it commercially appropriate. The process of seeking patent protection can be lengthy and expensive, and there can be no assurance that patents will be issued for currently pending or future applications or that our existing patents or any new patents issued will be of sufficient scope or strength or provide meaningful protection or any commercial advantage to us. We may be subject to, or may initiate, litigation or patent office interference proceedings, which may require significant financial and management resources. The failure to obtain necessary licenses or other rights or the advent of litigation arising out of any such intellectual property claims could have a material adverse effect on our operations.

        We have relied to date on a combination of patent licenses, trademark and trade secret protection and other unpatented proprietary information to protect our intellectual property rights and to maintain and enhance our competitiveness in the pharmaceutical industry. While we do not currently own any issued patents, we have two patent licenses with third parties. We have also submitted patent applications which have yet to be published. If our pharmaceutical grade L-glutamine treatment for SCD is approved by the FDA, we will seek seven years of Orphan Drug market exclusivity based on the FDA's previous grant to us of Orphan Drug designation for this product candidate.

        We also rely on unpatented technologies to protect the proprietary nature of our products. We require that our officers and key employees enter into confidentiality agreements that require these officers and employees to assign to us the rights to any inventions developed by them during the course of their employment with us. All of the confidentiality agreements include non-solicitation provisions that remain effective during the course of employment and for periods following termination of employment.

Patents

        On December 13, 2016, Emmaus announced the allowance covering the use of its lead investigative product, pharmaceutical grade L-glutamine (PGLG), directed to the treatment of diverticulosis by the Japanese Patent Office and the issuance of corresponding patents in both Australia and China.

        On February 1, 2017, Emmaus announced the allowance by the US Patent & Trade Office of a patent covering the use of its lead investigative product, pharmaceutical grade L-glutamine (PGLG), for the treatment of diverticulosis. Related patent applications are currently pending in various jurisdictions around the world, including the Europe, South Korea, Brazil, Russia, India, Mexico and Indonesia.

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        Diverticulosis refers to a condition where pouches (i.e., diverticula) form along the colon wall. Over time, some people get an infection in the pouches, diverticulitis, which usually requires hospitalization. Epidemiological studies indicate that the prevalence of this disease is increasing worldwide. It is estimated that at least 50% of the population over the age of 60 in the United States, Europe and Australia have diverticulosis. In Japan, a recent study found diverticulosis in 20% of the investigated population (approximate mean age 68 years).

        On February 7, 2017, Emmaus announced the allowance of a patent by the Japanese Patent Office for the use of its lead investigative product, pharmaceutical grade L-glutamine (PGLG), for the treatment of diabetes. A related patent application is currently pending in the U.S. and certain other jurisdictions.

        The allowed Japanese application reports a significant reduction of HbA1C levels, one of the best indicators of whether diabetics and pre-diabetics have blood sugar levels under control, through therapeutic application of L-glutamine.

        The covered invention is directed to compositions for decreasing HbA1C levels in individuals who are shown to have average blood sugar levels in the diabetic range. Diabetes is a chronic disease that occurs when the pancreas is no longer able to make insulin, or when the body cannot make good use of the insulin it produces. People with diabetes have an increased risk of developing a number of serious health problems including cardiovascular disease, kidney failure and blindness. Japan has more than 7 million diagnosed cases of diabetes, which represents about 7.6% of Japanese between the ages of 20 and 79. According to the U.S. Centers for Disease Control and Prevention, there are an estimated 29 million Americans living with diabetes and an estimated 86 million Americans with prediabetes, a serious health condition that can increase a person's risk of developing type 2 diabetes.

Licenses and Promotional Rights Agreements

        On March 1, 2001, Emmaus Medical became the exclusive worldwide licensee under U.S. Patent No. 5,693,671, entitled "L-glutamine Therapy for SCD and Thalassemia" issued on December 2, 1997 to Niihara et al., which we refer to as the SCD Patent, to develop a treatment approach for SCD and thalassemia using L-glutamine pursuant to a license agreement. Our Chief Executive Officer is one of the licensors of the SCD Patent. Pursuant to the license agreement and an addendum to the license agreement between us and Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center, or LA BioMed, we acquired the exclusive right to test, gain governmental approval of, make, have made, use, distribute and sell products designed for use in carrying out methods covered under the SCD Patent, which we refer to as the Licensed Methods, and/or incorporating technical information provided by the licensor or by any of certain doctors affiliated with the licensor, which we refer to as the Licensed Products. The license agreement and addendum terminated upon the expiration of the SCD Patent in May 2016. Such termination extended to any royalty payments due under the agreement. However, we may consider a new agreement to recognize LA BioMed's contribution to SCD research.

        Although the SCD patent is expired, we will continue to seek market exclusivity protection for the SCD treatment by way of our orphan designation which, if the product is approved, will grant us seven years market exclusivity. In addition, under the Title I of the Drug Price Competition and Patent Term Resolution Act or the Hatch/Waxman Act, we may be eligible for three year period market exclusivity if approved by the FDA. The FDA may not agree that our product is entitled to data exclusivity under the Hatch/Waxman Act and, if granted, data exclusivity protection under the Hatch/Waxman Act will expire three years after our product is approved.

        In October 2007, under a sublicense granted by CATO Research Ltd., or CATO, Emmaus Medical became the exclusive sublicensee of US Patent No. 5,288,703, which we refer to as the SBS Patent, for the U.S. market, including the rights to distribute the L-glutamine treatment for SBS under the

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trademark NutreStore in the United States, which we refer to as the SBS License. CATO granted Emmaus Medical the SBS License under a sublicense that CATO held from Ares Trading S.A. We commercially launched NutreStore in June 2008. In February 2011, we entered into an assignment and transfer agreement with CATO. Under this agreement, CATO assigned and transferred to us ownership of the NutreStore NDA, Drug Master Files, or DMFs, No. 16633 and 16639, NutreStore-related trademarks, and the know-how represented by the NutreStore NDA and DMFs. The two DMFs contain the proprietary information relating to the manufacturing and packaging specifications of the NutreStore product. In consideration of this assignment and transfer, we agreed to pay to CATO royalties following the expiration of the SBS License on October 7, 2011, when the SBS Patent expired, in the following amounts: 10% of adjusted gross sales of NutreStore from 2012 through 2016; and 1% of gross sales of L-glutamine as a treatment for SCD and thalassemia for a period of five years from the date of first commercial sale of the treatment. We do not anticipate that the expiration of the SBS License will have a significant impact on us and we intend to sell NutreStore in accordance with the terms of the assignment and transfer agreement. We currently do not believe there should be significant competition in the marketplace for a generic version of NutreStore given the small population of SBS patients (<10,000 adults).

        In April 2011, we entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, entered into an addendum to the Research Agreement. Pursuant to the Individual Agreement, CellSeed granted us the exclusive right to manufacture, sell, market and distribute CAOMECS for the cornea in the United States.

        On December 29, 2015, we and CellSeed terminated the Research Agreement and the Individual Agreement. As a result, we have no obligation to pay CellSeed any further amounts under these agreements, and we may not have an active license with respect to CellSeed's CAOMECS technology. There can be no assurance that we will be able to negotiate new license agreements with CellSeed, and if we are unable to do so, we may not pursue the research and development of CAOMECS for the treatment of corneal diseases.

        In June 2016, we entered into a non-exclusive agreement with CellSeed and Dr. Kohji Nishida for the development of CAOMECS technology. Under this license agreement, we are required to pay royalties upon commercialization. The royalties to be paid are based on net sales per annum.

Trademarks

        We currently own three federal U.S. trademark registrations, including for "Emmaus Medical," "NutreStore" and "AminoPure," a Japanese trademark for "AminoPure," a South Korean trademark for "AminoPure," a Taiwanese trademark for "AminoPure," , a Kenyan trademark for "AminoPure,", a Malaysian trademark for "AminoPure," a Chinese trademark for "AminoPure" and a Philippines trademark for "AminoPure." We are also pursuing trademark registrations for "AminoPure" in Ghana. This Annual Report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

Corporate Information

        Orphan Drugs International, LLC was organized on December 20, 2000 and its name was changed to Emmaus Medical, LLC in March 2002. In October 2003, Emmaus Medical, LLC undertook a merger reorganization with Emmaus Medical, Inc., which was originally incorporated in September 2003.

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        AFH Acquisition IV, Inc. was incorporated in the state of Delaware on September 24, 2007 and was originally organized as a "blank check" or "shell" company. On May 3, 2011, pursuant to an Agreement and Plan of Merger dated April 21, 2011, Emmaus Medical merged with and into AFH Merger Sub, Inc., a wholly-owned subsidiary of AFH Acquisition IV, with Emmaus Medical continuing as the surviving entity, which we refer to as the Merger. Upon the closing of the Merger, we (i) became the 100% parent of Emmaus Medical, (ii) assumed the operations of Emmaus Medical and its subsidiaries, and (iii) changed our name from "AFH Acquisition IV, Inc." to "Emmaus Holdings, Inc." On September 14, 2011, we changed our name from "Emmaus Holdings, Inc." to "Emmaus Life Sciences, Inc."

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

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

        In November 2011, we formed Emmaus Medical Europe, Ltd., referred to as EM Europe, a wholly-owned subsidiary of Emmaus Medical whose primary focus is expanding our business in Europe. L-glutamine for the treatment of SCD has received Orphan Drug designation from the EC.

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

        Our principal executive offices and corporate offices are located at 21250 Hawthorne Boulevard, Suite 800, Torrance, California and our telephone number at that address is (310) 214-0065. We maintain an Internet website at the following address: www.emmausmedical.com. The information on our website is not incorporated by reference in this Annual Report or in any other filings we make with the Securities and Exchange Commission, or SEC.

Proposed Generex Transaction

        As previously reported, on January 16, 2017 the Company entered into a letter of intent ("LOI") with Generex Biotechnology Corporation ("Generex") which contemplates that Generex will acquire a controlling interest in the Company for a total consideration of $225,000,000, payable $10,000,000 in cash and $215,000,000 in shares of Generex's common stock, which are referred to as the "Generex shares." The Generex shares are to be valued for this purpose at $3.80 per share, subject to adjustment in certain events.

        Under the LOI, Generex paid the Company $500,000 as a deposit for an initial cash consideration and was to pay the Company another deposit of $1,500,000 by February 6, 2017. On February 6, 2017, the Company granted Generex an extension of the payment date to February 16, 2017 and, by a letter amendment dated February 16, 2017, the Company granted Generex another extension of the payment date to February 24, 2017 and otherwise amended the LOI.

        On March 3, 2017, Generex and the Company further amended the LOI to provide as follows:

    Generex agreed to pay the Company an additional deposit of $500,000 on or prior to March 6, 2017, which the Company has received.

    Within ten trading days after March 14, 2017, the date of effectiveness of a reverse stock split of Generex common stock, Generex must pay the Company another deposit of $3,000,000, which the Company has received.

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    The parties will use their best efforts to negotiate and sign a definitive purchase agreement no later than March 30, 2017.

    The remaining $6,000,000 of the cash consideration will be paid to the Company at the closing under a definitive purchase agreement, which is to occur no later than five trading days after the date Generex amends its certificate of incorporation to effect an increase in its authorized capital, but no later than May 1, 2017.

    The closing of the proposed acquisition by Generex is to occur no later than May 8, 2017.

    If a definitive purchase agreement is not executed or the closing does not occur by the required deadlines, and the LOI is terminated by either party, the Company will refund and return to Generex all deposits within 60 days after the termination.

        In consideration for the foregoing waivers, extensions and amendments, Generex has agreed to issue to the Company 24,414,063 of restricted shares of Generex common stock within three trading days after Generex effects the planned increase in its authorized capital.

        The parties' respective obligations under the LOI to consummate the proposed acquisition are subject to a number of conditions, including completion of due diligence to each party's satisfaction parties and the negotiation and execution of a definitive purchase agreement, and there is no assurance these conditions will be satisfied. Any definitive purchase agreement also would contain customary conditions to closing, which may or may not be satisfied or waived by the parties.

        Although the Company has no present intention to terminate the LOI or to abandon the proposed acquisition, the Company may choose to do so if the conditions to the proposed acquisition have not been satisfied by the required deadlines, unless such deadlines are extended. If one or more of the conditions are not satisfied, the Company may decide to abandon the proposed acquisition if the Company's board of directors determines that it is in the best interests of the Company to do so.

        For all of the foregoing reasons, there is no assurance that the proposed acquisition by Generex and the payment to the Company of the cash consideration and the Generex shares will be completed on time, or at all, and the discussions in the Annual Report assume that the proposed acquisition will not be completed. If the proposed acquisition by Generex is completed, the Company's capitalization, the risks related to the Company's common stock and other information in the Annual Report would change materially from the descriptions in this Annual Report.

Other Possible Transactions

        From time to time in the ordinary course of business, the Company engages in informal or formal discussions, and may enter into non-binding or binding letters of intent, with prospective investors and other companies regarding possible investments in the Company such as the mutual co-investments between the Company and KPM Tech Co., Ltd. and Hanil Vacuum Co., Ltd. completed in the fourth quarter of 2016. The Company currently is engaged in discussions, and have entered into a non-binding letter of intent, with another company regarding possible co-investments by the companies.

        Such discussions and letters of intent are subject to inherent risks and uncertainties, and may not lead to definitive agreements regarding a possible transaction. There can be no assurance, therefore, whether any such transaction will be undertaken or completed or, if undertaken and completed, on what terms.

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ITEM 1A.    RISK FACTORS

        The following risk factors should be considered in conjunction with the other information included in this Annual Report. This report may include forward-looking statements that involve risks and uncertainties. In addition to those risk factors discussed elsewhere in this report, we identify the following risk factors, which could affect our actual results and cause actual results to differ materially from those in the forward-looking statements.

Risks Related to Proposed Acquisition by Generex

        The parties' respective obligations under the LOI to consummate the proposed acquisition by Generex of a controlling interest in the Company are subject to a number of conditions, including completion of due diligence to each party's satisfaction parties and the negotiation and execution of a definitive purchase agreement, and there is no assurance these conditions will be satisfied. Any definitive purchase agreement also would contain customary conditions to closing, which may or may not be satisfied or waived by the parties.

        Although we have no present intention to terminate the LOI or to abandon the proposed acquisition, we may choose to do so if the conditions to the proposed acquisition have not been satisfied by the required deadlines, unless such deadlines are extended. If one or more of the conditions are not satisfied, we may decide to abandon the proposed acquisition if our board of directors determines that it is in our best interests to do so.

        For all of the foregoing reasons, there is no assurance that the proposed acquisition by Generex and the payment to us of the cash consideration and the Generex shares will be completed on time, or at all, and the discussions in the Annual Report assume that the proposed acquisition will not be completed. If the proposed acquisition by Generex is completed, our capitalization, the risks related to our common stock and other information in the Annual Report would change materially from the descriptions in this Annual Report.

RISKS RELATED TO OUR FINANCIAL CONDITION AND CAPITAL REQUIREMENTS

We have incurred losses since inception, have limited cash resources and anticipate that we will continue to incur substantial losses for the foreseeable future, and we may never become profitable.

        Our net losses were $21.2 million and $13.5 million for the years ended December 31, 2016 and 2015, respectively, and we had an accumulated deficit of $106.8 million as of December 31, 2016. These losses resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. We have had limited revenue and have sustained significant operating losses since inception, and we are likely to sustain operating losses in the foreseeable future. Since inception, we have funded our operations through the private sale of equity securities and convertible notes and from other loans. 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 or other sources 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.

        We expect to continue to incur significant and increasing negative cash flow and operating losses as we continue our research activities, conduct potential future clinical trials, seek regulatory approvals for our pharmaceutical grade L-glutamine treatment for SCD and prepare for commercialization of our SCD product. These losses, among other things, have had and will continue to have an adverse effect on our stockholders' equity, total assets and working capital. Because of the numerous risks and uncertainties associated with pharmaceutical development, we are unable to predict the extent of any future losses, whether or when we will be able to commercialize our pharmaceutical grade L-glutamine

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treatment for SCD, or when we will become profitable, if ever. Our strategy depends heavily on the success of our pharmaceutical grade L-glutamine treatment for SCD. If we are unable to commercialize our pharmaceutical grade L-glutamine treatment for SCD or any of our other product candidates, or if we experience significant delays in doing so, our business may fail. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We will require substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate planned activities or result in our inability to continue as a going concern.

        We will require additional capital to pursue potential future clinical trials and regulatory approvals, as well as further research and preclinical development of our product candidates. We have no committed sources of additional capital and our access to capital funding is uncertain. If we are not able to secure financing, we may no longer be a going concern and may be forced to curtail operations, delay or stop ongoing clinical trials, or cease operations altogether, file for bankruptcy, or undertake any combination of the foregoing. In such event, any purchase of our common stock may lose their entire investment in our company. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

    the duration and results of the clinical trials for our existing or future product candidates;

    unexpected delays or complications in seeking regulatory approvals;

    the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims;

    adverse developments encountered in implementing our business development and commercialization strategies;

    our undertaking of collaborations with strategic partners and the outcome of those collaborations; and

    any need to engage in litigation relating to protecting our intellectual property rights or other commercial or regulatory matters and the outcome of any such litigation.

        We may attempt to raise additional funds through public or private financings, 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. If adequate funding is not available to us, or on reasonable terms, we may need to delay, reduce or eliminate one or more of our product development programs or obtain funds on terms less favorable than we would otherwise accept.

        In addition, if we do not meet our payment obligations to third parties as they become due, we may be subject to litigation claims and our credit worthiness would be adversely affected. Even if we are successful in defending against these claims, litigation could result in substantial costs and would be a distraction to management, and may result in unfavorable results that could further adversely impact our financial condition.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights.

        We may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that additional capital is raised through the sale of equity securities or securities convertible into or exchangeable for equity securities, the issuance of those securities would dilute existing stockholders' ownership interests in our company. The terms of such securities may include liquidation or other preferences that could adversely affect the rights of our existing stockholders. Moreover, the incurrence of debt financing could result in a substantial portion of our future operating cash flow, if any, being dedicated to the

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payment of principal and interest on such indebtedness and could impose restrictions on our operations. This could render us more vulnerable to competitive pressures and economic downturns.

        Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include grants of security interests or covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.

Our recurring operating losses and significant short-term indebtedness have raised substantial doubt regarding our ability to continue as a going concern.

        We have incurred recurring operating losses. In addition, we have a significant amount of notes payable and other obligations due within the next year and are projecting that our operating losses and expected capital needs will exceed our existing cash balances and cash expected to be generated from operations for the foreseeable future, including the expected costs relating to seeking FDA approval for, and the commercialization of, our pharmaceutical grade L-glutamine treatment for SCD. These factors raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its opinion on our financial statements as of and for the year ended December 31, 2016 with respect to this uncertainty. The continuation of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products and achieving a profitable level of operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

We have adopted an equity incentive plan under which we may grant securities to compensate employees and other services providers, which could result in increased share-based compensation expenses and, therefore, reduced net income.

        Under current accounting rules, we are required to recognize share-based compensation as compensation expense in our statement of comprehensive loss, based on the fair value of equity awards on the date of the grant, and recognize the compensation expense over the period in which the recipient is required to provide service in exchange for the equity award. We made grants of equity awards in 2015 and 2016, and accordingly our results of operations for the years ended December 31, 2015 and 2016 contain share-based compensation charges. Additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under our existing equity incentive plan or any equity incentive plan that we may adopt in the future. If we grant equity compensation to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income. However, if we do not grant equity compensation, we may not be able to attract and retain key personnel or be forced to expend cash or other compensation instead. Furthermore, the issuance of equity awards would dilute existing stockholders' ownership interests in our company.

We have issued and may continue to issue debt instruments that are convertible and/or may include warrant features, which could result in the calculation of discounts on the debt issued and increased amortization of discount expenses and, therefore, reduced net income.

        Under current accounting rules, we are required to recognize discounts on debt issued with stock conversion features or with attached or accompanying warrants which can result in amortization of the discount as an expense in our consolidated statement of comprehensive loss, based on the fair value of beneficial conversion feature or warrant on the date of issue. If we grant stock conversion features or

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warrants with debt instruments to attract capital, the expenses associated with amortization of the calculated discount may adversely affect our net income. However, if we do not grant stock conversion features or warrants with debt instruments, we may not be able to attract debt capital.

The market price and trading volume of shares of our common stock of other companies could decline.

        We hold shares of common stock in other companies. The shares recorded on our balance sheet are marked to market on a quarterly basis and could fluctuate significantly and may decline for many reasons, including reasons unrelated to the companies' performance, such as reports by industry analysts, investor perceptions, share arbitrage, the exercise of options or warrants or the conversion of convertible notes or announcements by our competitors regarding their own performance, as well as general economic and industry conditions. In addition, these stock could be subject to lock-up periods and liens that restrict the liquidity of these shares. For example, the shares acquired in October 2016 from two Korean companies are subject to a one-year lock up period. Korean Securities Commission enforces lockup for safekeeping on large stock transactions to protect the existing shareholders and new investors. Typical safekeeping period range from 6 months to 1 year. As in the case of our equity investment in the two Korean entities, our investment is in lockup for 1 year for safekeeping by a Korean Depository and is categorized as a strategic designated investment from a third party.

RISKS RELATED TO DEVELOPMENT OF OUR PRODUCT CANDIDATES

We may not be able to receive regulatory approval for our pharmaceutical grade L-glutamine treatment for SCD, or, even if approved, we may not be able to successfully commercialize our pharmaceutical grade L-glutamine treatment for SCD or any other product candidates, which would adversely affect our financial and operating condition.

        Our current efforts are, and a substantial portion of our efforts for the foreseeable future will be, focused primarily on our lead product candidate, our pharmaceutical grade L-glutamine treatment for SCD, for which we have recently submitted an NDA which has been accepted for review by the FDA. All of our other product candidates are still in preclinical development. Regulatory approval is required to market our pharmaceutical grade L-glutamine treatment for SCD and any other product candidates we may develop. There are many reasons that we may fail in our efforts to commercialize our pharmaceutical grade L-glutamine treatment for SCD or that such efforts will be delayed, including:

    the chance that the FDA will conclude that our single Phase 3 clinical trial did not demonstrate substantial evidence that our pharmaceutical grade L-glutamine treatment for SCD is effective and safe when used under the prescribed or recommended conditions of use;

    the failure of our pharmaceutical grade L-glutamine treatment for SCD to receive necessary regulatory approvals from the FDA or any foreign regulatory authorities in a timely manner, or at all;

    the failure of our pharmaceutical grade L-glutamine treatment for SCD to receive necessary regulatory approvals from the FDA or any foreign regulatory authorities in a timely manner, or at all;

    the failure of our pharmaceutical grade L-glutamine treatment for SCD, once approved, to be produced in commercial quantities or at reasonable costs;

    physicians' reluctance to switch to our pharmaceutical grade L-glutamine treatment for SCD from existing SCD treatment methods, including traditional therapy agents;

    the failure of our L-glutamine product candidate, once approved, to achieve commercial acceptance for the treatment of SCD;

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    the introduction of products by our competitors that are or are perceived to be more effective or have or are perceived to have a better safety profile than our pharmaceutical grade L-glutamine treatment for SCD;

    the application of restrictions to our pharmaceutical grade L-glutamine treatment for SCD by regulatory or governmental authorities;

    the possibility that we may not be able to maintain Orphan Drug market exclusivity for our pharmaceutical grade L-glutamine treatment for SCD even if the FDA approves that NDA because the approved indication differs from the indication for which the FDA granted us Orphan Drug designation;

    the possibility, even if we obtain regulatory approval and Orphan Drug market exclusivity for our pharmaceutical grade L-glutamine treatment for SCD, that another company with the same drug for the same indication could demonstrate clinical superiority over our product, and make that drug eligible for Orphan Drug designation and, if approved, Orphan Drug market exclusivity despite our market exclusivity;

    the possibility that another product, different from L-glutamine, receives Orphan Drug designation and is approved for the treatment of SCD, which our Orphan Drug exclusivity, should we receive it, would not bar;

    the possibility, if we obtain Orphan Drug market exclusivity for our pharmaceutical grade L-glutamine treatment for SCD, that we are unable to ensure an adequate supply of it, thus allowing the FDA to approve another L-glutamine product for Orphan Drug exclusivity; and

    the possibility that our Fast Track designation for our pharmaceutical grade L-glutamine treatment for SCD may be rescinded or may not actually lead to a faster regulatory review and approval of the NDA that we submitted in 2016.

        Even if the FDA and other regulatory authorities approve our pharmaceutical grade L-glutamine treatment for SCD, or any of our other product candidates, the manufacture, packaging, labeling, distribution, marketing and sale of such products will be subject to strict and ongoing post-approval regulations. Compliance with such regulations will be expensive and consume substantial financial and management resources.

        The FDA has the authority to regulate the claims we make in marketing our prescription products to ensure that such claims are true, not misleading, supported by scientific evidence, and consistent with the approved labeling of those products. The FDA and the Federal Trade Commission, or FTC, also have the authority to regulate the claims we make in marketing our dietary supplement AminoPure. Failure to comply with FDA or FTC requirements in this regard could result in, among other things, warning letters, withdrawal of approvals, seizures, recalls, injunctions prohibiting a product's manufacture and distribution, restricting promotional activities, requiring corrective actions regarding sales and marketing activities, other operating restrictions, civil money penalties, disgorgement, and criminal prosecution. In addition, if we make any marketing claims that are related to a health care provider's unlawful submission for reimbursement from government programs, we could be subject to potential liability for violations of the False Claims Act, which may lead to disqualification from government programs or criminal prosecution, or both. Any of these government enforcement actions, if taken against us, could negatively impact our product sales and profitability.

        Additionally, regulatory approval of any of our prescription products may be conditioned on our agreement to conduct costly post-marketing follow-up studies to monitor the safety or effectiveness of such products or to implement specific risk mitigation strategies. In addition, as clinical experience with any of our products following such approval, if any, expands after approval because the product is used by a greater number and more diverse group of patients than during clinical trials, unknown side

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effects or other problems may be observed that were not observed or anticipated during pre-approval clinical trials. In any such case, one or more regulatory authorities could require additional risk information be added to the labeling of the product, restrict the indications for which the product may be sold, restrict the distribution channels, or revoke the product's regulatory approval, which could hinder our ability to generate revenues from that product. If we fail to develop and commercialize our product candidates as planned, our financial results and financial condition will be adversely affected, we will have to delay or terminate some or all of our research product development programs, and we may be forced to cease operations.

We may be required to incur the time, expense, and risk of undertaking a confirmatory study or an additional Phase 3 clinical trial prior to obtaining marketing approval of such product, which could have a material adverse effect on our business, financial condition and operating results.

        Historically, the FDA has generally required applicants to submit as part of a NDA in respect of a drug two adequate and well-controlled clinical trials to demonstrate substantial evidence of effectiveness of that drug. The Modernization Act, however, makes clear that the FDA may consider data from only one adequate and well-controlled clinical investigation and confirmatory evidence (obtained prior to or after such investigation) if the FDA determines that such evidence is sufficient to establish effectiveness. 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 study 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 study include, but are not limited to, having large multi-centered studies, consistent data across subgroups, multiple endpoints, and statistically very persuasive findings. Our single Phase 3 clinical trial was multi-centered with multiple endpoints. However, there can be no assurance that the FDA will accept this single study to be sufficient to demonstrate substantial evidence of effectiveness.

The development process to obtain FDA approval for new drugs, biologics and cell-based therapies is very costly and time consuming and if we cannot complete our clinical trials in a cost-effective manner, our operations may be adversely affected.

        Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we or a collaborator must complete preclinical development and then complete one or more extensive clinical trials to demonstrate the safety and effectiveness of the product candidate in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Costs of clinical trials may vary significantly over the life of a development project owing, but not limited to, the following:

    the number of patients that participate in the trials;

    the per patient trial costs;

    the number of sites and clinical investigators involved in the trials;

    the number and types of trials and studies that may need to be performed;

    the length of time required to recruit, screen, and enroll eligible patients;

    the duration of the clinical trials;

    the countries in which the trials are conducted;

    the number of doses that patients receive;

    adverse events experienced by trial participants;

    the drop-out or discontinuation rates of patients;

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    potential additional safety monitoring or other studies requested by regulatory agencies;

    the extent and duration of patient follow-up;

    difficulties that could arise in analyzing and reporting to regulators the results of clinical trials; and

    the efficacy and safety profile of the product candidate.

        If we are unable to control the timing and costs of our clinical trials and conduct our trials and apply for regulatory approvals in a timely and cost-effective manner, our operations may be adversely affected.

        Our product development costs will also increase if any regulatory agencies impose a clinical hold on any of our clinical studies or we experience delays in obtaining marketing approvals, particularly if we are required to conduct additional clinical studies beyond those that we submit in any NDA. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our approved product candidates or allow our competitors to bring products to market before we do, and thereby impair our ability to successfully commercialize our product candidates.

We may not be able to complete clinical trial programs for any of our product candidates successfully within any specific time period or at all, and if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.

        Clinical testing is expensive, difficult to design and implement, can take many years to complete, and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of development. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of them.

        Generally speaking, whether we complete our clinical trials in a timely manner, or at all, for any product candidate is dependent in part upon: (i) the date the applicable investigational new drug application, or IND, becomes effective enabling us to commence the applicable clinical studies (which, under U.S. law, occurs no more than 30 days after the FDA receives the IND, unless the FDA places the IND on clinical hold, in which case the FDA may request us to provide additional data from completed preclinical studies or undertake additional preclinical studies, the latter of which could materially delay the clinical and regulatory development of the applicable product candidate); (ii) the engagement of clinical trial sites and clinical investigators; (iii) reaching an agreement with clinical investigators on acceptable clinical trial agreement terms, clinical trial protocols or informed consent forms; (iv) obtaining approval from the institutional review boards used by the clinical trial sites we seek to engage; (v) the rate of patient enrollment and retention; and (vi) the rate to collect, clean, lock and analyze the clinical trial database.

        Patient enrollment in trials is a function of many factors, including the design of the protocol, the size of the patient population, the proximity of patients to and availability of clinical sites, the eligibility criteria for the trial, the perceived risks and benefits of the product candidate under trial and of the control product, if any, the clinical investigator's efforts to facilitate timely enrollment in clinical trials, the patient referral practices of local physicians, the existence of competitive clinical trials, and whether other investigational or new therapies are available for the indication. If we experience delays in identifying and contracting with appropriate clinical investigators and sites, in obtaining approval of the applicable institutional review boards, in enrolling and retaining patients and/or in completing our

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clinical trial programs, we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-effective or timely basis, if at all. If we or any third party have difficulty obtaining sufficient clinical drug materials or enrolling a sufficient number of patients in a timely or cost-effective manner to conduct clinical trials as planned, or if enrolled patients do not complete the trial as planned, we or a third party may need to delay or terminate ongoing clinical trials, which could negatively affect our business.

        Clinical trials required for demonstration of substantial evidence of effectiveness and safety often require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Our ability to enroll sufficient numbers of patients in our clinical trials, especially when the disease or condition being studied is rare, depends on many factors, including the size of the relevant patient population, the nature and design of the protocol, the proximity of patients to clinical sites, the eligibility and exclusion criteria applicable for the trial, existence of competing clinical trials and the availability of already approved therapeutics for the indications being studied (whether or not such therapeutics are less safe or less effective than our product candidate under trial). In addition, patients may withdraw from a clinical trial or be unwilling to follow our clinical trial protocols for a variety of reasons, such as adverse events or noncompliance with trial requirements. If we fail to enroll and maintain the number of patients for which the clinical trial was designed, the statistical significance and/or statistical power of that clinical trial may be reduced which would make it harder to demonstrate that the product candidate being tested in such clinical trial is safe and effective for its intended use.

We may be required to suspend, repeat or terminate our clinical trials if they do not meet regulatory requirements, the results are negative or inconclusive, human subject protections are inadequate, the trials are not well designed, or clinical investigators fail to comply with all requirements for the conduct of trials under the applicable IND, any of which may result in significant negative repercussions on our business and financial condition.

        Our pharmaceutical grade L-glutamine treatment for SCD, which is our only product candidate in clinical development, has not yet received marketing approval in any jurisdiction. We cannot market a pharmaceutical product in any jurisdiction until we have completed rigorous preclinical testing and clinical trials for that product, demonstrated the product's safety and substantial evidence of effectiveness for its intended use, obtained the approval of the applicable regulatory authority for our proposed labeling of the product, and met the other requirements of such jurisdiction's extensive regulatory approval process. Preclinical testing and the conduct of clinical trials are long and expensive. Data obtained from preclinical and clinical tests can be interpreted in different ways and could ultimately be deemed by regulatory authorities to be insufficient with respect to providing substantial evidence of effectiveness and safety required for regulatory approval, which could delay, limit or prevent regulatory approval. It may take us many years to complete the required testing of our product candidates to support an application for marketing approval and failure can occur at any stage during this process.

        We cannot provide assurance that our preclinical testing and clinical trials will be completed successfully within any time period specified by us, or without significant additional resources or expertise provided by third parties to conduct such testing. We cannot provide assurance that any such testing will demonstrate that our product candidates meet regulatory approval requirements for safety and effectiveness or that any such product will be approved for a specific indication. Results from early clinical trials may not be indicative of the results that will be obtained in later-stage clinical trials or in the population of patients for whom the applicable product is prescribed following any approval. In addition, negative or inconclusive results from the clinical trials we conduct or adverse events experienced by the patients in such clinical trials could cause us to have to suspend, repeat or terminate the clinical trials. Clinical trials are subject to continuing oversight by governmental

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regulatory authorities and institutional review boards and must meet the requirements of these authorities including but not limited to requirements for informed consent, human subject protection and good clinical practices; and we cannot guarantee that we will be able to comply, or that a regulatory authority will agree that we have complied, with such requirements. We rely on third parties, such as contract research organizations and/or contract laboratories, regulatory consultants and data management companies to assist us in overseeing and monitoring clinical trials as well as to process the clinical data and manage test requests, which may result in delays or failure to complete trials, if the third parties fail to perform or meet applicable regulatory requirements and standards. A failure by us or any such third parties to comply with the terms and conditions of the protocol for any clinical study or the regulatory requirements for any particular product candidate or to complete the clinical trials for a product candidate in the projected time frame could have a significant negative effect on our business and financial condition.

        There are significant requirements imposed on us and on clinical investigators who conduct clinical trials under an IND. Although we are responsible for selecting qualified clinical investigators, providing them with the information they need to conduct an investigation properly, ensuring proper monitoring of the investigation(s), and ensuring that the investigation(s) is conducted in accordance with the general investigational plan and protocols contained in the IND, we cannot ensure the clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. We cannot ensure that the clinical investigators in our trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on our ability to obtain marketing approval, our business, and our financial condition.

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary changes to clinical trial protocols, informed consents and clinical trial budgets, any of which changes could result in increased costs to us, delay our development timeline or reduce the likelihood of successful completion of the clinical trial.

        Changes in regulatory requirements or the FDA's interpretation of those requirements, which may be provided through guidance documents, or the occurrence of unanticipated events during our clinical trials could require us to amend clinical trial protocols, informed consent forms and trial budgets. If we experience delays in initiation, conduct or completion of any of our clinical trials, or if we terminate any of our clinical trials due to changes in regulatory requirements or guidance documents, unexpected and serious adverse events, or other unanticipated events, we may incur additional costs and have difficulty enrolling subjects or achieving clinical investigator or institutional review board acceptance of the changes and successfully completing the trial. Any such additional costs and difficulties could potentially materially harm the commercial prospects for our product candidates and delay our ability to generate product revenue.

There are various uncertainties related to the research, development and commercialization of the cell sheet engineering regenerative medicine products we are developing in collaboration with a strategic partner which could negatively affect our ability to commercialize such products.

        We have historically focused on the research and development of our pharmaceutical grade L-glutamine treatment for SCD and have limited experience in the research, development or commercialization of cell sheet regenerative medicine products or any other biological product. No clinical trials of cell sheet regenerative products have been conducted in the United States and no biological products based on cell sheet engineering have been approved by regulatory authorities in any jurisdiction. Such products must be manufactured in conformance with current Good Manufacturing Practices, or cGMP, requirements as well as Good Tissue Practice, or GTP, requirements and

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demonstrate that they are safe, pure and potent to be effective for their intended uses to obtain FDA approval. The GTP requirements, which are specifically applicable to all cellular-based products, are intended to prevent communicable disease transmission. It is uncertain what type and quantity of scientific data would be required to support initiation of clinical studies or to sufficiently demonstrate the safety, purity and potency of cell sheet regenerative medicine products for their intended uses. Such uncertainties could delay our ability to obtain FDA approval for and to commercialize such products. In addition, the research and commercialization of cell sheet regenerative medicine products could be hindered if third party manufacturers of such products are not compliant with cGMP, GTP, and any other applicable regulations. Any delay in the development of, obtaining FDA approval for, or the occurrence of any problems with third party manufacturers of cell sheet regenerative medicine products would negatively affect our ability to commercialize such products.

The use of any of our product candidates in clinical trials and in the market may expose us to liability claims.

        The nature of our business exposes us to potential liability risks inherent in the testing and manufacturing of our product candidates and marketing of any products. While in clinical stage testing, our product candidates could potentially harm people or allegedly harm people and we may be subject to costly and damaging product liability claims. Some of the patients who participate in clinical trials are already critically ill when they enter a trial. Informed consent and contractual limitations on payments for subject injury or waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Although we currently carry a $5 million clinical product liability insurance policy, it may not be sufficient to cover future claims. In addition, in some cases the contractors on which we rely for manufacturing our product candidates may indemnify us for third party claims brought against us arising from matters for which these contractors are responsible. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim outside the scope of indemnity or insurance coverage, if the indemnity is not performed or enforced in accordance with its terms, or if our liability exceeds the amount of applicable insurance or indemnity. In addition, there can be no assurance that insurance will continue to be available on terms acceptable to us, if at all, or that if obtained, the insurance coverage will be sufficient to cover any potential claims or liabilities. Similar risks would exist upon the commercialization or marketing of any products by us or our partners. We currently do not have any clinical or product liability claims or threats of claims filed against us.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

        Because we have limited financial and management resources, we focus on a limited number of research programs and product candidates. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable product candidates or profitable market opportunities. Our spending on current and future research and development programs and product candidates for the specific indications we have selected may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights.

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RISKS RELATED TO COMMERCIALIZATION OF OUR PRODUCT CANDIDATES

The failure of our products to gain market acceptance will hinder our ability to generate revenues from the sale of our products.

        Even if our product candidates are approved for commercialization, they may be too expensive to manufacture or market or they may not otherwise be successful in the marketplace. Market acceptance of any of our product candidates, if approved for commercial sale, will depend on a number of factors including, but not limited to:

    demonstration of significant clinical effectiveness and safety of our product;

    the prevalence and severity of any adverse side effects experienced by patients to whom our product is administered;

    limitations or warnings contained in the approved labeling or package insert for our product;

    the availability of alternative treatments for the indications approved for our product;

    the availability of acceptable pricing and adequate third-party reimbursement for our product;

    the effectiveness of marketing and distribution methods for our product; and

    comparison of the above factors to those associated with treatments with which our product competes.

        If our products do not gain market acceptance among physicians, patients, treatment centers, healthcare payors and others in the health care community, any of which may not accept or utilize our products, our ability to generate significant revenues from our products would be limited and our financial condition will be materially adversely affected. In addition, if we fail to successfully penetrate our core markets and successfully expand our business into new markets, the growth in sales of our products, along with our business's operating results, could be negatively impacted.

        Our ability to penetrate the SCD treatment market and other markets in which we compete, or to expand our business into additional countries in Africa, Europe, Asia and the Americas, is subject to numerous factors, many of which are beyond our control. Our products, if successfully developed, may compete with a number of therapeutic products currently manufactured and marketed by major pharmaceutical companies. Our products may also compete with new products currently under development by others or with products which may be less expensive than our products. There is no assurance that our efforts to increase market penetration in our core markets and existing geographic markets will be successful. Our failure to do so could have an adverse effect on our operating results.

We may need to meet some or all of our commercialization needs through strategic partnerships and alliances which may not yield anticipated benefits and may adversely affect our operating results, financial condition and existing business.

        We may seek to meet some or all of our commercialization needs through strategic partnerships and alliances. The success of this approach will depend on, among other things:

    the availability of suitable strategic partners and alliance candidates;

    competition from other companies for strategic partners or forming alliances with available strategic partner and alliance candidates;

    our ability to value any potential strategic partnerships or alliances accurately and negotiate favorable terms for any strategic partnerships or alliances;

    the ability to establish new informational, operational and financial systems to meet the needs of such strategic partnerships or alliances;

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    the ability to achieve anticipated synergies with such strategic partnerships or alliances; and

    the availability of management resources to oversee the integration and operation of such strategic partnerships or alliances.

        If we are not successful in finding, negotiating and operating with such strategic partnerships or alliances in the future, we may be required to reevaluate our strategic partnerships and alliance strategy. We also may incur substantial expenses and devote significant management time and resources in seeking to complete such strategic partnerships and alliances. Strategic partnerships and alliances may fail to meet our performance expectations. If we do not achieve the anticipated benefits of such strategic partnerships and alliances as rapidly as expected, or at all, investors or analysts may not perceive the same benefits of the acquisition or alliance as we do. If these risks materialize, our operating results, financial condition and existing business could be materially adversely affected.

We lack experience in commercializing products, and we may not be able to establish the sales and marketing infrastructure necessary to support the commercialization of our product candidates if and when they are approved.

        With the conclusion of our Phase 3 clinical trial with respect to our pharmaceutical grade L-glutamine treatment for SCD, we are transitioning from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition. We have not yet demonstrated an ability to obtain marketing approval for product candidates and have limited experience in commercializing products. As a result, we may not be as successful as companies that have previously obtained marketing approval for product candidates and have more experience commercially launching them as products.

        To achieve commercial success for any of our pharmaceutical grade L-glutamine treatment for SCD or other product candidates for which we may obtain marketing approval and which we determine to market and sell directly, we will need to establish a sales and marketing infrastructure to market them as products. This will require us to attract and retain key personnel with commercial experience to lead the commercialization of our pharmaceutical grade L-glutamine treatment for SCD if approved by the FDA and other product candidates that we may develop. We have not yet identified or retained these key personnel and have no assurance that we will be able to do so on commercially acceptable terms, or at all. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

        Factors that may inhibit our efforts to commercialize our products on our own include:

    our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

    the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any of our products;

    the lack of complementary or sample products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more products;

    our anticipated sales force being materially smaller than the actual number of sales representatives required to successfully commercialize our products;

    unforeseen costs and expenses associated with creating an independent sales and marketing organization; and

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    the inability of sales and marketing personnel to maintain compliance with federal and state regulations and our inability to adequately monitor and ensure such compliance.

        If we are unable to establish our own sales, marketing and distribution capabilities and instead enter into arrangements with third parties to perform these services, our revenue and our profitability, if any, are likely to be lower than if we were to sell, market and distribute any products that we develop ourselves. If our anticipated sales force is not sufficient to commercialize our products, we may be required to hire substantially more sales representatives to adequately support the commercialization of our products, which could increase our expenses and cost of sales. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively or in compliance with applicable government requirements for the marketing of a pharmaceutical product. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates for which we obtain marketing approval.

Failure to obtain acceptable prices or adequate reimbursement for our products may cause an adverse impact on our results of operations.

        Our ability to successfully commercialize our products will depend significantly on our ability to obtain acceptable prices and the availability of reimbursement to the patient from third-party payors, such as governmental and private insurance plans. Our products may not be considered medically necessary or cost-effective, may not compare favorably on price with other L-glutamine products, and reimbursement to the patient may not be available or sufficient to allow us or our partners to sell our products on a competitive basis. It may not be possible to negotiate favorable reimbursement rates for our products. We cannot be sure that coverage and reimbursement will be available for our products or will continue to be available for our products and, if reimbursement is available, what the level of reimbursement will be.

        Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Third-party payors frequently require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for pharmaceuticals and other medical products. In addition, the continuing efforts of third-party payors to contain or reduce the costs of healthcare through various means may limit our commercial opportunity and reduce any associated revenue and profits. For example, in some foreign markets, the pricing or profitability of healthcare products is subject to government control. In other foreign markets, including Africa where the largest population of patients with SCD exists, there is a limited number of third-party payors from which reimbursement can be sought. In the United States, there have been, and we expect there will continue to be, a number of federal and state proposals to implement similar government control, as evidenced by the passing of the Patient Protection and Affordable Care Act and its amendment, the Health Care and Education Reconciliation Act. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services in the United States or internationally and the amount of reimbursement available from governmental agencies or other third-party payors. In addition, increasing emphasis on managed care will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we or any current or potential collaborators could receive for any of our products and could adversely affect our profitability. If we fail to obtain acceptable prices or an adequate level of reimbursement for our products, the sales of our products would be adversely affected or there may be no commercially viable market for our products.

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If the market opportunities for our product candidates are smaller than we believe they are, our revenues may be adversely affected and our business may suffer. Because the target patient populations of our product candidates are small, we must be able to successfully identify patients and achieve a significant market share to maintain profitability and growth.

        We focus our research and product development on treatments for rare diseases and conditions. Our projections of both the number of people who have these diseases or conditions, as well as the subset of people with these diseases or conditions who have the potential to benefit from treatment with our product candidates, are based on estimates. These estimates may prove to be incorrect and new studies may change the estimated incidence or prevalence of these diseases or conditions. The number of patients in the United States, Europe and elsewhere may turn out to be lower than expected, may not be otherwise amenable to treatment with our product candidates (if approved), or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business.

The intellectual property that we have licensed relating to our pharmaceutical grade L-glutamine treatment for SCD is limited, which could adversely affect our ability to compete in the market and adversely affect the value of our product candidate.

        The patent and exclusivity protections that we expect to protect our pharmaceutical grade L-glutamine product for treatment of SCD from competition is a combination of (i) rights under a license of the SCD Patent, and (ii) Orphan Drug market exclusivity under FDA, European Union and similar foreign regulations. These protections are limited in ways that may affect our ability to effectively exclude third parties from competing against us if we obtain regulatory approval to market our pharmaceutical grade L-glutamine treatment for SCD. In particular:

    each of the protections run concurrently, resulting in protection from competition that will diminish over time as the protections expire;

    protection under the SCD Patent expired in May 2016, which may allow competitors with more resources than us to concurrently develop similar products;

    the FDA may not agree that our product is entitled to data exclusivity under the Hatch/Waxman Act and, if granted, data exclusivity protection under the Hatch/Waxman Act will expire three years after our product is approved;

    Orphan Drug market exclusivity in the United States will only be granted if our product receives the first FDA approval for an L-glutamine treatment for SCD and, if granted, Orphan Drug market exclusivity protection will expire seven years after our product is approved. To be eligible for Orphan Drug market exclusivity in the United States requires that the indication approved by the FDA for our product (if it is approved) matches the indication for which the FDA originally granted us Orphan Drug designation. Orphan Drug designation will not preclude the FDA from granting Orphan Drug designation to another sponsor developing the same drug for the same indication, approving such other drug before our drug would receive FDA approval, granting Orphan Drug designation and approving such other drug after we would receive approval if such drug is considered clinically superior to our product, approving a product that is the same as our product for a different indication, or approving a different product intended to treat SCD;

    Orphan Drug status in the European Union is subject to exclusions similar to those in the United States; and

    there are many countries, including some key markets for our product, in which we do not have intellectual property coverage and where neither orphan drug nor data exclusivity is available.

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        If we obtain marketing approval for our pharmaceutical grade L-glutamine treatment for SCD, these limitations and any reductions in our expected protection resulting from any failure to obtain market exclusivity under the Orphan Drug Act or the Hatch/Waxman Act, or the approval of competing products, including other products that could be approved by FDA under the Orphan Drug Act, may subject our product to greater competition than we expect and reduce our ability to generate revenue from our product candidate, possibly materially. These circumstances may also impair our ability to obtain license partners or other international commercialization opportunities on terms acceptable to us, if at all.

        On May 1, 2016, the SCD Patent expired and the license agreement has terminated. Since the SCD Patent is expired, competitors with more resources than us may develop similar products which may subject our product to greater competition than we expect and materially reduce our ability to generate revenue from our product candidate. These circumstances may also impair our ability to obtain license partners or other international commercialization opportunities on terms acceptable to us, if at all.

If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our product candidates and products, then our technologies and future product candidates and products may be rendered less competitive.

        We face significant competition from industry participants, both pharmaceutical and nutritional, that are pursuing similar technologies to those we are pursuing and are developing pharmaceutical products that are competitive with our product candidates and any resulting products. Nearly all of our industry competitors have greater capital resources, larger research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources and experience, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies and to respond effectively and timely to competition. We may not be able to do this successfully. Rapid technological development, as well as new scientific developments, may result in our lead compounds, development compounds, product candidates or products becoming obsolete or less effective or otherwise clinically inferior for some or all patients before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy of the type that we are developing may limit the market potential of our treatment if it is subsequently demonstrated that only certain subsets of the overall patient population should be treated with our treatment. If a competitor develops the same product candidate as ours for the same indication but is able to demonstrate that its product candidate is clinically superior to ours, or if the same product candidate is intended for a different indication, or if we are unable to ensure adequate supplies of our product candidate following any approval by the FDA, the FDA may approve our competitor's marketing application regardless of any marketing exclusivity we may obtain. Any of these circumstances could have a material adverse effect on our ability to successfully commercialize our product candidate if it is approved and thus on our business and financial condition.

We may face potential competition for our pharmaceutical grade L-glutamine treatment for SCD from manufacturers and resellers of L-glutamine that may or may not be manufactured with the same purity and quality as our pharmaceutical grade L-glutamine.

        The amino acid L-glutamine is manufactured in large quantities, primarily by a few large chemical companies, and processed and sold as nutritional supplements. These quantities may not evidence the

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same level of quality and purity as our pharmaceutical grade L-glutamine. The sale of either pharmaceutical grade or non-pharmaceutical grade supplies of L-glutamine at prices lower than the minimum that we must charge to become and remain profitable could have a material adverse effect on our results.

There are known adverse side effects to our NutreStore product.

        We market and sell NutreStore L-glutamine powder for oral solution, a prescription pharmaceutical product that has received FDA approval for the treatment of SBS when used in combination with a recombinant human growth hormone approved for SBS, and a specialized nutritional support. Patients with SBS receiving intravenous parenteral nutrition, or IPN, and NutreStore should be routinely monitored for kidney and liver function, particularly patients with kidney or liver impairment. Common reported side effects of NutreStore for patients with SBS include, but are not limited to, nausea or vomiting, feeling the need or urge to empty bowels, gas, abdominal pain, hemorrhoids, constipation, and aggravation of Crohn's disease, gastric ulcer or gastric fistula. The approved indication of the product in combination with recombinant human growth hormone and specialized diets, and any of these known side effects or any associated warning statements or labeling requirements may limit the commercial profile of this product and prevent us from achieving or maintaining market acceptance of such product.

RISKS RELATED TO OUR RELIANCE ON THIRD PARTIES

If the L-glutamine manufacturers upon which we rely fail to produce in the volumes and quality that we require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our L-glutamine-based products, if any, and may lose any marketing exclusivity and potential revenues.

        We do not currently have our own manufacturing capabilities. We therefore depend heavily upon third party manufacturers for supplies of both our product candidates under development and the products we sell. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Our third party manufacturers and key suppliers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes, unstable political environments at foreign facilities, financial difficulties or other problems beyond their control and may not be able to expand their capacity or to produce additional product requirements for us in the event that demand for our products increases. If these manufacturers or key suppliers were to encounter any of these difficulties, or otherwise fail to comply with their regulatory and contractual obligations, our ability to timely launch any potential product candidate, if approved, would be jeopardized. If we are unable to ensure adequate supply of an orphan drug for which we have obtained marketing exclusivity, the FDA may approve another drug for marketing, which could have a material adverse effect on our business and financial condition.

        We currently obtain our pharmaceutical grade L-glutamine from two Japanese companies, which together produce the vast majority of pharmaceutical grade L-glutamine approved for sale in the United States, and obtain all of our L-glutamine for our NutreStore product from one of these companies. We intend to continue to rely on these manufacturers to produce our pharmaceutical grade L-glutamine, but we have not entered into, and may not be able to establish, long-term supply agreements with these key suppliers on acceptable terms. Furthermore, pursuant to a letter of intent between us and Ajinomoto, we have agreed to purchase or cause relevant third party purchasers to purchase from Ajinomoto all of the L-glutamine that we will need for our commercial products, subject to an exception that we may purchase up to 10% of our source pharmaceutical grade L-glutamine from third-party suppliers on a backup basis. If these suppliers were to experience any manufacturing or production difficulties producing pharmaceutical grade L-glutamine, or we were unable to purchase

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sufficient quantities of pharmaceutical grade L-glutamine on acceptable terms, our ability to conduct additional clinical trials, to commercialize pharmaceutical grade L-glutamine for the treatment of SCD, to maintain marketing exclusivity if granted, and to continue to sell NutreStore would be harmed.

        In addition, all manufacturers, packers, distributors and suppliers of pharmaceutical products must comply with applicable cGMP regulations for the manufacture of pharmaceutical products, which are enforced by the FDA through its facilities inspection program. The FDA is likely to conduct inspections of our third party manufacturer and key supplier facilities as part of the FDA's pre-approval review of any of our NDAs and post-approval, ongoing compliance programs. If our third party manufacturers and key suppliers are not in compliance with cGMP requirements, it may result in a delay of approval for products undergoing regulatory review or the inability to meet market demands for any approved products, particularly if these sites are supplying single source ingredients required for the manufacture of any potential product. These cGMP requirements include quality control, quality assurance and the maintenance of records and documentation, among other items. Furthermore, each manufacturing facility used to manufacture drug or biological products is subject to FDA inspection and must meet cGMP requirements. As a result, if one of the manufacturers that we rely on shifts production from one facility to another, the new facility must undergo a preapproval inspection and, for biological products, must be licensed by regulatory authorities prior to being used for commercial supply. Our manufacturers may be unable or fail to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. A failure to comply with any applicable manufacturing requirements may result in warning or untitled letters, fines, product recalls, seizures, corrective actions involving public notifications, injunctions, total or partial suspension of production, civil money penalties, suspension or withdrawals of previously granted regulatory approvals, refusal to approve new applications or supplements to applications for marketing of new products, import or export bans or restrictions, disgorgement of profits, debarment and criminal prosecution and criminal penalties. Any of these penalties could delay or prevent the promotion, marketing or sale of our products. If the safety of any quantities supplied is compromised due to a third party manufacturer's failure to comply with or adhere to applicable laws or for other reasons, we may be liable for injuries suffered by patients who have taken such products and we may not be able to obtain regulatory approval for or successfully commercialize our products.

We expect to rely on third parties to conduct future clinical trials of our product candidates and those third parties may not perform satisfactorily, including failing to meet deadlines for the conduct of such trials.

        We engaged a third-party contract research organization, or CRO, to conduct our clinical trials for our pharmaceutical grade L-glutamine treatment for SCD and expect to engage a CRO to conduct any further required clinical trials with respect to such product candidates and any clinical trials with respect to any of our other product candidates that may progress to clinical development. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical trials. Agreements with such third parties might terminate for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements, that would delay our product development activities.

        Our reliance on these third parties for research and development activities will reduce our control over these activities, but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording and reporting the results of clinical trials to ensure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, www.ClinicalTrials.gov, within specified timeframes. Failure to do so can result in the FDA refusing to accept a NDA for the product candidate under study, fines, adverse publicity and civil and criminal sanctions.

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        Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements and our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize them as products.

        We also expect to rely on other third parties to store and distribute supplies of our product candidates for clinical trials of them. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of them as products, producing additional losses and depriving us of potential revenue.

If we do not obtain the support of new, and maintain the support of existing, key scientific collaborators, it may be difficult to research medical indications for L-glutamine other than SCD and to expand our product offerings, which may limit our revenue growth and profitability and could have a material adverse effect on our business, financial condition and operating results.

        We will need to establish relationships with additional leading scientists and research institutions in order to develop new products and expand our product offerings and to explore other medical indications for L-glutamine-based products. Although we have established research collaborations, we cannot assure you that our relationships with our research collaborators will continue or that we will be able to attract additional research partners. If we are not able to maintain existing or establish new scientific relationships to assist in our research and development, we may not be able to successfully develop our product candidates or expand our product offerings.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

We depend on licenses and sublicenses of certain patents for our existing L-glutamine products and our pharmaceutical grade L-glutamine treatment for SCD product candidate. If any of these licenses, sublicenses, or the licenses under which we have been sublicensed terminates, or if any of the patents that have been licensed or sublicensed to us are challenged and we are limited in our ability to utilize any of those patents, we may be unable to develop, out-license, market and sell our products, which would cause a material adverse effect on our business, prospects, financial condition, and operating results.

        Our ability to develop products depends on licenses and sublicenses we have obtained to patents that claim the use of L-glutamine to treat SCD and diverticulosis and the use of CAOMECS for the treatment of corneal impairments.

        We face the risk that any of these licenses and sublicenses could be terminated if we fail to satisfy our obligations under them. In addition, even if we satisfy our obligations as sublicensee under any sublicense, if the license under which we have been sublicensed terminates, our sublicense could also terminate. In the event any claims in the patents that we have been licensed or sublicensed are challenged, the court or patent authority to which such challenge is presented could determine that such patent claims are invalid or unenforceable or not sufficiently broad in scope to protect our proprietary rights. In addition, as the licensee or sublicensee of such patents, our ability to participate in the defense or enforcement of such patents could be limited.

        In particular, the SCD Patent expired in May 2016, and our license to the SCD Patent terminated with the expiration of the patent. While this means we would have no further obligations to pay royalties under the SCD License, this also means that our competitors would be able to utilize processes, technologies and methods that were previously protected by the SCD Patent to potentially develop competing products. Since our competitors generally have greater resources than we do, our competitors may be able to develop competing products more quickly than we can. While we have an Orphan Drug designation for the use of L-glutamine for the treatment of SCD, Orphan Drug

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exclusivity may be lost if another L-glutamine product for the same indication demonstrates clinical superiority. If our competitors are able to develop alternative L-glutamine products, it may have a material and adverse effect on our operations and our ability to commercialize our products, since it may either eliminate our exclusivity before we are able to take a product to market, or may significantly shorten the period for which we have such exclusivity, making it more difficult for us to recoup the expenses we incurred in researching and developing our products.

If we are unable to protect proprietary technology that we invent and develop, we may not be able to compete effectively and our business and financial prospects may be harmed.

        Where appropriate, we seek patent protection for inventions we conceive and reduce to practice. Patent protection, however, is not available for all of these inventions and for some of these patent protection may be limited. In addition, in developing some of our inventions, we may have to design around patents held by others. If we must spend significant time and money protecting our patents, designing around patents held by others or in-licensing patent or other proprietary rights held by others, potentially for large fees, our business and financial prospects may be harmed.

        The patent prosecution process is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We also may have to relinquish to strategic partners or other third parties to whom we license our technology the right to control the preparation, filing and prosecution of patent applications claiming our inventions and to maintain any resulting patents. Therefore, patent applications and patents claiming our inventions may not be prosecuted and enforced in a manner consistent with the best interests of our business.

        The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States, or vice versa. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive product candidates. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

        Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The U.S. Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or

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defense of our licensed patents, all of which could have a material adverse effect on our business and financial condition.

        Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative treatments in a non-infringing manner.

        In addition, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing products similar or identical to our product candidates or products, or limit the duration of the patent protection of our product candidates or products. Given the amount of time required for the development, testing and regulatory review of new therapeutics, patents protecting our product candidates might expire before or shortly after such candidates are commercialized as products. Patent protection for our pharmaceutical grade L-glutamine treatment for SCD expired in May 2016. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

        We will incur significant ongoing expenses in maintaining our patent portfolio. Should we lack the funds to maintain our patent portfolio or to enforce our rights against infringers, we could be adversely impacted.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

        Our commercial success depends upon our ability, and the ability of our collaborators, to develop, manufacture, market and sell our products without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates and products. In these proceedings or litigation, third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. The party making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief. Such relief could effectively block our ability to make, use, sell, distribute or market our products in such jurisdiction. Even if claims of infringement are without merit, any such action could divert the time and attention of management and impair our ability to access additional capital and/or cost us significant funds to defend.

        If we are found to infringe a third party's intellectual property rights, we could be required to obtain a license from such third party to continue developing our product candidates and manufacturing and marketing any of our products. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Alternatively, we could be ordered to cease commercializing any of our products that is found to infringe a third party's intellectual property rights. In addition to being forced to cease commercialization of such a product, we could be found liable for monetary damages, including treble damages and attorneys' fees if we are found to have willfully infringed a third party's patent. A finding of infringement could prevent us from developing our product candidates and commercializing our products or force us to cease some of our business operations. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

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We may be subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

        Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these employees or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee's former employer. Litigation may be necessary to defend against these claims.

        Moreover, we may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of or invalidate our patent rights, allow third parties to commercialize products similar or identical to our product candidates or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.

        Competitors may infringe our issued patents, trade secrets, know-how or other intellectual property. To counter infringement or unauthorized use or to determine the scope and validity of our intellectual property rights, we may be required to file infringement claims or pursue other proceedings, which can be expensive and time consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent's claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly, subject us to significant liabilities, require us to cease using the subject technology or require us to license the subject technology from the third party, any or all of which could have a material adverse effect on our business.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

        Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.

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If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

        In addition to licensing patent rights and seeking patents for our intellectual property, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. Our competitors may use our methods, or acquire similar expertise, in order to develop L-glutamine-based treatments and progress these through clinical development and commercialization, which could impair our ability to successfully develop our product candidates and commercialize them as products.

        We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

We may not be able to protect our intellectual property rights throughout the world.

        Filing, prosecuting and defending patents in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

        Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

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Companies and universities that have licensed product candidates to us for research, clinical development and marketing are sophisticated competitors that could develop similar products to compete with our products, which could reduce our future revenues.

        Licensing our product candidates from other companies, universities or individuals does not always prevent them from developing non-identical but competitive products for their own commercial purposes, nor from pursuing patent protection in areas that are competitive with us. While we seek patent protection for all of our owned and in-licensed product candidates, the entities and individuals who have assigned or licensed to us these product candidates employ or are, as applicable, experienced scientists who may continue to do research and development relevant to our product candidates, and any of them may seek patent protection in the same areas that led to the discovery of the product candidates that they have assigned or licensed to us. By virtue of the previous research that led to the discovery of the inventions that they licensed or assigned to us, these companies, universities, and individuals may be able to develop and market competitive products in less time than might be required to develop a product with which they have no prior experience and may reduce our future revenues from products resulting from successful development and approval of our product candidates.

RISKS RELATED TO REGULATORY APPROVAL OF OUR PRODUCT CANDIDATES AND OTHER LEGAL COMPLIANCE MATTERS

Our business is subject to extensive government regulation, which could cause delays in the development of our product candidates and commercialization of any resulting products, impose significant costs on us or provide advantages to our larger competitors.

        The FDA and similar regulatory authorities in foreign countries impose substantial requirements upon the development, manufacture and marketing of therapeutic products, such as drugs, biologics, and cell-based therapies. Failure to obtain marketing approval for any of our product candidates in any jurisdiction will prevent us from commercializing it as a product in that jurisdiction. The FDA and most other regulatory authorities impose requirements for laboratory and clinical testing, manufacturing, labeling, registration, marketing, storage, distribution, recordkeeping, reporting, and advertising and promotion, and other costly and time-consuming processes and procedures applicable to therapeutic products. In some cases, as a condition for approval to market any of our product candidates, the FDA or other regulatory authorities may impose commitments that we must satisfy following any such approval. These post-approval commitments could vary substantially from country to country depending upon the type, complexity and novelty of the applicable therapeutic product. Satisfaction of any such post-approval commitments (including the requirement to conduct additional clinical studies), if imposed by the FDA or other regulatory authorities, could take several years or more. In addition, post-approval requirements regarding safety surveillance, cGMP compliance, advertising and promotion, adverse event reporting, and recordkeeping must be satisfied at all times.

        The effect of government regulation may be to delay marketing approval of our product candidates for a considerable or indefinite period of time, to impose costly processes and procedures upon our activities and to furnish a competitive advantage to companies that compete with us. There can be no assurance that marketing approval for any of our product candidates would be granted by the FDA or other regulatory authority on a timely basis, if at all, or, once granted, that the marketing authorization would not be withdrawn or other regulatory actions taken which might limit our ability to market our proposed products. Any such delay in obtaining or failing to obtain such approvals or imposition of regulatory actions would adversely affect us, the manufacturing and marketing of the products resulting from marketing approval of any of our product candidates, and our ability to generate product revenue.

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Even though we have obtained Orphan Drug designation for our most advanced product candidate, our pharmaceutical grade L-glutamine treatment for SCD, we may not be able to maintain Orphan Drug marketing exclusivity for this product candidate or any of our other product candidates.

        Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate therapeutic products under development for relatively small patient populations as "orphan drugs". Under the Orphan Drug Act, the FDA may designate a therapeutic product as an Orphan Drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States. We have obtained Orphan Drug designation from the FDA and European Commission, or EC, for L-glutamine treatment for SCD, and we may seek Orphan Drug designation for our other product candidates. Generally, if a product candidate with an Orphan Drug designation subsequently receives the first marketing approval for the indication for which it has been granted such designation, the drug is entitled to a period of marketing exclusivity, which precludes the FDA or European Medicines Agency, or EMA, as applicable, from approving another marketing application for the same product candidate prior to the expiration of that time period. The applicable period is seven years in the United States and ten years in the European Union. The exclusivity period in the European Union can be reduced to six years if the product no longer meets the criteria for Orphan Drug designation or if its commercialization is sufficiently profitable so that market exclusivity is no longer justified. Orphan Drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to ensure sufficient quantity of the product to meet the needs of patients with the rare disease or condition. In the United States, Orphan Drug exclusivity may be lost if another L-glutamine product for the same indication demonstrates clinical superiority, such as a better safety or efficacy profile, in which case the FDA would be permitted to approve the third party product. Orphan Drug exclusivity does not bar the FDA from approving another L-glutamine product for any other indication. Nor does Orphan Drug designation bar the FDA from granting Orphan Drug designation and approving another product for the same orphan disease or condition.

Even if we receive three years of data exclusivity upon approval of our pharmaceutical grade L-glutamine treatment for SCD under the Hatch-Waxman Act, that exclusivity will run concurrently with Orphan Drug exclusivity and will not prevent the FDA from approving other products intended to treat SCD or other L-glutamine products intended to treat other diseases or conditions.

        Under the Hatch/Waxman Act, a three-year period of data exclusivity is granted for a drug product that contains an active pharmaceutical ingredient, or active moiety, that has been previously approved, when the NDA for that drug product contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor of the NDA that were essential to approval of the NDA. When granted to a sponsor, data exclusivity under the Hatch/Waxman Act prevents any third parties, such as generic drug manufacturers, from relying on or using the sponsor's data from the sponsor's new clinical investigations in order to obtain marketing approval for the same active moiety and indication for which the sponsor's NDA was approved.

        The FDA defines "new clinical investigation" as "a clinical study in humans the results of which have not been relied upon by FDA to demonstrate substantial evidence of effectiveness of a previously approved drug product for any indication or of safety for a new patient population and do not duplicate the results of another investigation that was relied upon by the agency to demonstrate the effectiveness or safety in a new patient population of a previously approved drug product." Our pharmaceutical grade L-glutamine treatment for SCD contains the same active moiety contained in our previously approved NutreStore drug product and we believe our Phase 3 clinical study meets the definition of a new clinical investigation for purposes of satisfying the requirements for Hatch/Waxman data exclusivity to be granted.

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        Although we anticipate receiving three years of data exclusivity if our pharmaceutical grade L-glutamine treatment for SCD is approved, we may not be able to take advantage of all or any of the benefits of such exclusivity if Orphan Drug exclusivity is granted, because both exclusivities would run concurrently. However, Hatch/Waxman three-year exclusivity would bar the approval of the same product for the same indication even if the same product demonstrated clinical superiority. Similar to Orphan Drug exclusivity, the three-year exclusivity provided under the Hatch/Waxman Act would not bar the FDA from approving another L-glutamine product for an indication other than SCD; nor would it bar the FDA from approving a different active moiety to treat SCD.

The FDA Fast Track designation for our pharmaceutical grade L-glutamine treatment for SCD may not actually lead to a faster development or regulatory review or approval process.

        If a product candidate is intended for the treatment of a serious or life-threatening disease or condition and it demonstrates the potential to address unmet medical needs for this disease or condition, its sponsor may apply for FDA Fast Track designation. If Fast Track designation is obtained, the FDA may initiate review of completed individual sections of a NDA before all sections of the application are complete and the application can be submitted for filing by the FDA. This "rolling review" is available if the applicant provides, and the FDA approves, a schedule for submission of the individual sections of the application.

        Although we have obtained a Fast Track designation from the FDA for our pharmaceutical grade L-glutamine treatment for SCD, we may not experience a faster development process, review or approval compared to conventional FDA procedures. Our Fast Track designation may be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Our Fast Track designation does not guarantee that we will qualify for or be able to take advantage of the expedited review procedures or that we will ultimately obtain regulatory approval of our pharmaceutical grade L-glutamine treatment for SCD.

        A product candidate that receives Fast Track designation is also eligible for, among other benefits, Priority Review, if certain criteria are met. These criteria for Priority Review include whether, if approved, the resulting product would provide significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions caused by a disease when compared to standard treatment, diagnosis, or prevention of those conditions. Under Priority Review of a NDA, assuming that there are no requests for additional information, the FDA's goal is to take action on the NDA within six months (compared to 10 months under standard review) after it is accepted as filed. Requests for Priority Review of a NDA must be submitted to the FDA when the NDA is submitted. On September 7, 2016 we submitted our NDA to the FDA and requested a priority review. We cannot predict whether the FDA will grant our request for Priority Review for any such NDA or, if the request is granted, that the Priority Review status will be maintained and the NDA approved in a timely manner.

Any product candidate for which we obtain marketing approval would be subject to post-marketing regulatory requirements and limitations and could be subject to recall or withdrawal from the market, and we may be subject to penalties if we fail to comply with such regulatory requirements or if we experience unanticipated problems in commercializing any of our product candidates, when and if any of them are approved by regulators.

        Any product candidate for which we obtain marketing approval, along with the collection and reporting of post-approval clinical data, manufacturing processes, labeling, advertising and promotional activities for the resulting product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, establishment registration and product listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding

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maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if the FDA or other regulators outside the United States grant marketing approval to any of our product candidates, the approval may be subject to limitations on the indicated uses for which it may be marketed as a product or to the conditions of approval, including the requirement to implement a risk evaluation and mitigation strategy, or REMS. If any of our product candidates receives marketing approval, the labeling (including the package insert) that must accompany its distribution as a product may limit its approved use, which could limit the total number of prescriptions written for such products.

        The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or effectiveness of any approved product. The FDA closely regulates the post-approval marketing and promotion of therapeutic products to ensure they are marketed for the approved indications and in accordance with the provisions of the approved labeling, and that any marketing claims or communications by a person or company responsible for the manufacture and distribution of the product regarding off-label use are truthful and not misleading. If we market any of our products for indications that have not been approved in a manner that is considered misleading or not truthful, we may be subject to enforcement action for misbranding the product. Violations of the FD&C Act relating to the promotion of prescription products may lead to investigations alleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws. In recent years, several pharmaceutical companies have been or settled lawsuits for fined significant amounts for such violations.

        In addition, later discovery of previously unknown adverse events or other problems with any of our product candidates that are approved for marketing as products, the contract manufacturers from which we obtain supplies of these products, the manufacturing processes they use to manufacture these products, or our or their failure to comply with regulatory requirements, may have negative consequences, including:

    restrictions on the manufacturers or manufacturing processes for such products;

    restrictions on the labeling or marketing of such products;

    restrictions on distribution or use of such products;

    requirements to conduct post-marketing studies or clinical trials;

    warning letters;

    recall or withdrawal of such products from the market;

    refusal to approve pending applications or supplements to approved marketing applications that we submit;

    clinical holds on clinical studies of such products;

    fines, restitution or disgorgement of revenue or profit generated by sales of such products;

    suspension or withdrawal of the marketing approvals of such products;

    refusal to permit the import or export of such products;

    seizure of such products;

    injunctions prohibiting the manufacture, marketing, sale, distribution, or related action in respect of such products;

    the imposition of civil or criminal penalties; or

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    debarment of our company and any of our officers or other employees responsible for such problems from future dealings with the FDA.

        Non-compliance with applicable regulatory requirements regarding safety monitoring, also called pharmacovigilance, and with requirements related to the development of therapeutics for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with applicable regulatory requirements regarding the protection of personal information can also lead to significant penalties and sanctions.

Many of our potential customers are located in markets with underdeveloped health care systems.

        Our lead product candidate is an oral pharmaceutical grade L-glutamine treatment for sickle cell anemia and sickle ß0-thalassemia, two of the most common forms of SCD. SCD is a genetic blood disorder that affects 20-25 million people worldwide, and occurs with increasing frequency among those whose ancestors are from regions including sub-Saharan Africa, South America, the Caribbean, Central America, the Middle East, India and Mediterranean regions such as Turkey, Greece and Italy. Thus, while SCD affects people throughout the world, the prevalence of SCD is higher in certain geographies, such as central and sub-Saharan Africa and the Caribbean, that currently have underdeveloped health care systems or significantly lower rates of health insurance coverage. Furthermore, a majority of people in many of these geographies are low-income and may be unable to afford our pharmaceutical grade L-glutamine treatment. These factors may ultimately limit our addressable market. Our ability to achieve profitability may be adversely impacted if we are unable to access markets with greater prevalence of SCD, or if there are insufficient SCD patients in geographies with more well-developed health care systems.

Our current and future relationships with customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.

        Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. Any present or future arrangements with third-party payors, healthcare providers and professionals and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may restrict certain marketing and contracting practices. We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including inducing, facilitating or encouraging submission of false claims to government programs and prohibitions on the offer or payment or acceptance of kickbacks or other remuneration for the purchase of our products. Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with customers and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, which may constrain the business or financial arrangements and relationships through which we sell, market and distribute any products. In addition, we may be subject to transparency laws aimed at controlling healthcare costs and patient privacy regulation by the U.S. federal and state governments and by governments in foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability to operate include (but are not limited to):

    the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid;

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    federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil qui tam actions (commonly referred to as "whistleblower actions"), against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

    provisions under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, that impose criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

    provisions under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, that impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

    the federal Open Payments program under the federal Physician Payments Sunshine Act, which requires manufacturers of drugs, biologics, cell-based therapies, medical devices and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to "payments or other transfers of value" made to physicians, which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians and their immediate family members;

    state and foreign laws and regulations analogous to those described above, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers;

    state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers;

    state and foreign laws that require pharmaceutical and biopharmaceutical manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and

    state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

        Because of the sweeping language of the federal Anti-Kickback Statute, many potentially beneficial business arrangements would be prohibited if the statute were strictly applied. To avoid this outcome, the Department of Health and Human Services has published regulations, known as "safe harbors," that identify exceptions to or exemptions from the statute's prohibitions. Arrangements that do not fit within the safe harbors are not automatically deemed to be illegal, but must be evaluated on a case by case basis for compliance with the statute and may be subject to scrutiny (and ultimately prosecution) by enforcement agencies. We seek to comply with the Anti-Kickback Statute and, if necessary, to fit within one of the defined safe harbors. We may be less willing than some of our competitors to take actions or enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this

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unwillingness may put us at a competitive disadvantage. However, due to the breadth of the statutory provisions and the absence of uniform guidance in the form of regulations or court decisions, there can be no assurance that our practices fit within the safe harbors or that they will not be challenged under anti-kickback or similar laws. Further, liability may be established without a person or entity having actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Violations of such restrictions may be punishable by civil or criminal sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from U.S. federal healthcare programs (including Medicaid and Medicare). Any such violations could have a material adverse effect on our business, financial condition, results or operations and cash flows.

        Under the False Claims Act, drug manufacturers have been held responsible for claims filed by physicians for reimbursement of the cost of medical services related to uses of a pharmaceutical product that are not on the approved labeling, known as "off-label use," if the manufacturer promoted the product for such off-label use. If the FDA or other government agencies determine that our promotional materials, trainings or other activities constitute off-label promotion of any of our products, it could request that we modify our training or promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine, and criminal penalties. Violations of the False Claims Act may result in treble damages based on the amount of overpayment and additional civil fines of $5,000 to $10,000 for each false claim. Drug manufacturers could also be held responsible for reimbursement claims submitted by any physician for pharmaceutical products that were knowingly not manufactured in compliance with cGMP regulations.

        In addition to the state laws previously described, we also are subject to other state fraud and abuse statutes and regulations. Many of the states in which we operate or plan to expand to have adopted a form of anti-kickback law, self-referral prohibition, and false claims and insurance fraud prohibition. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Generally, state laws reach to all healthcare services and not just those covered under a governmental healthcare program. A determination of liability under any of these laws could result in fines and penalties and restrictions on our ability to operate in these states. We cannot assure that our arrangements or business practices will not be subject to government scrutiny or be found to violate applicable fraud and abuse laws.

        Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. Further, we cannot guarantee that our arrangements or business practices will not be subject to government investigations and prosecutions which, even if we are ultimately found to be without fault, can be costly and disruptive to our business. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we, our employees, officers, or directors may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any of the physicians or other healthcare providers or entities with whom we expect to do business, including our collaborators, is found not to be in compliance with applicable laws, such person or entity may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also materially affect our business.

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Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of our product candidates and then commercialize them as products and affect the prices we may obtain.

        In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

        Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or, collectively, the PPACA (often commonly referred to as the "Affordable Care Act"), a law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.

        Among the provisions of the PPACA of importance to our potential product candidates are:

    an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

    an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

    expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance;

    a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand medicines to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer's medicines purchased outside a hospital setting to be covered under Medicare Part D;

    extension of a manufacturer's Medicaid rebate liability to covered medicines dispensed to individuals who are enrolled in Medicaid managed care organizations;

    expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty level beginning in 2014, thereby potentially increasing a manufacturer's Medicaid rebate liability;

    expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

    the new requirements under the federal Open Payments program and its implementing regulations;

    a new requirement to annually report samples of medicines that manufacturers and distributors provide to physicians; and

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    a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

        In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. On March 1, 2013, the President signed an executive order implementing the 2% Medicare payment reductions, and on April 1, 2013, these reductions went into effect. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for any of our products, and, accordingly, our financial operations. Further, there have been multiple attempts through legislative action and legal challenge to repeal or amend the PPACA, and we cannot predict the impact that such a repeal or amendment would have on our business and operations.

        We expect that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any of our products. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize any of our products.

        Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for prescription medicines. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

A variety of risks associated with marketing any of our products internationally could hurt our business.

        We may seek regulatory approval for our pharmaceutical grade L-glutamine treatment for SCD and our other product candidates outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:

    differing regulatory requirements in foreign countries;

    the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market with low or lower prices rather than buying them locally;

    unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

    economic weakness, including inflation or political instability in particular foreign economies and markets;

    compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

    foreign taxes, including withholding of payroll taxes;

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    foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations related to doing business in another country;

    difficulties staffing and managing foreign operations;

    workforce uncertainty in countries where labor unrest is more common than in the United States;

    potential liability under the U.S. Foreign Corrupt Practices Act or comparable foreign regulations;

    challenges enforcing our contractual and intellectual property rights, especially in foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

    production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

    business interruptions resulting from geo-political actions, including war and terrorism.

        These and other risks associated with our potential international operations may compromise our ability to achieve or maintain profitability.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenue, if any.

        In some countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. To obtain coverage and reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of any of our products to other available therapies. If reimbursement of any of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could harm our business.

        We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

        Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

        In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations

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may impair our research, development or production efforts. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING OUR GROWTH

We rely heavily on Yutaka Niihara, M.D., M.P.H., our Chairman and Chief Executive Officer, and the loss of his services would have a material adverse effect upon our business and prospects.

        Our success depends to a significant extent upon the continued services of Yutaka Niihara, M.D., M.P.H., founder of Emmaus Medical and our Chairman and Chief Executive Officer. Since inception, we have been dependent upon Dr. Niihara, who was one of the initial patentees for the method we are utilizing in our pharmaceutical grade L-glutamine treatment for SCD. While Dr. Niihara and the rest of our executive officers are parties to confidentiality agreements that prevent them from soliciting our existing customers or disclosing information deemed confidential to us, we do not have any agreement with Dr. Niihara or any key members of management that would prohibit them from joining our competitors or forming competing companies. In addition, we do not maintain key man life insurance policies on any of our executive officers. If Dr. Niihara or any key management personnel resign to join a competitor or form a competing company, the loss of such personnel, together with the loss of any customers or potential customers due to such executive's departure, could materially and adversely affect our business and results of operations.

We are dependent on a technically trained workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our business, financial condition and results of operations.

        Our ability to compete effectively depends largely on our ability to attract and retain certain key personnel, including our clinical, regulatory and scientific staff members. Industry demand for such skilled employees, however, exceeds the number of personnel available, and the competition for attracting and retaining these employees is intense. As a result, we may be unable to retain our existing personnel or attract additional qualified employees to keep up with future business needs. If this should happen, our business, operating results and financial condition could be adversely affected.

        In addition, we intend to hire in-house marketing personnel to promote and market and sell our SCD and SBS treatment products to patients, physicians and treatment centers, and obtain the approval of insurance companies and healthcare payors for reimbursement of the cost of these treatments. We cannot assure you that we will be able to recruit and retain qualified personnel to perform these marketing functions. Our inability to hire and then retain such personnel and scientists could have a materially adverse effect on our business, financial condition and results of operations.

The pharmaceutical and biotechnology industries are subject to rapid technological change, and if we fail to keep up with such change, our results of operations and financial condition could be adversely impacted.

        Biotechnology and related pharmaceutical technology have undergone and are subject to rapid and significant change. We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our failure to keep pace with such rapid change could result in our pharmaceutical grade L-glutamine treatment for SCD and other product candidates becoming obsolete and we may be unable to recoup any expenses incurred with developing such products, which may adversely affect our future revenues and financial condition.

We expect to expand our product development, regulatory and marketing capabilities, and, as a result, we may encounter difficulties managing our growth, which could disrupt our operations.

        We expect to continue to grow, which could strain our managerial, operational, financial and other resources. With the completion of our Phase 3 clinical trial of our pharmaceutical grade L-glutamine treatment for SCD and the potential expansion of clinical-stage programs and in-licensing and

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acquisition of additional clinical-stage product candidates, we will be required to retain experienced personnel in the regulatory, clinical and medical areas over the next several years. Also, as our preclinical pipeline diversifies through the acquisition or in-licensing of new product candidates, we will need to hire additional scientific and other personnel in order to supplement our existing scientific expertise over the next several years.

        Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations, and our management may be unable to take advantage of future market opportunities or manage successfully our relationships with third parties if we are unable to adequately manage our anticipated growth and the integration of new personnel. We may not be able on a timely and cost effective basis to identify, hire and retain any needed additional management, scientific or sales and marketing personnel to develop and implement our product development plans, conduct preclinical and clinical testing of our product candidates and, if they are approved by the FDA and other government regulators, commercialize them as products. In addition, we may not be able to successfully manage potential rapid growth with our current limited managerial, operational, and financial resources.

We may pursue future growth through strategic acquisitions and alliances which may not yield anticipated benefits and may adversely affect our operating results, financial condition and existing business.

        We may seek to grow in the future through strategic acquisitions and alliances in order to complement and expand our business. The success of our acquisition strategy will depend on, among other things:

    the availability of suitable acquisition and alliance candidates;

    competition from other companies for acquiring or forming alliances with available acquisition and alliance candidates;

    our ability to value any acquisition candidates or alliances accurately and negotiate favorable terms for any prospective acquisitions or alliances;

    the availability of funds to finance any such acquisitions or alliances;

    the ability to establish new informational, operational and financial systems to meet the needs of our business;

    the ability to achieve anticipated synergies, including with respect to complementary products; and

    the availability of management resources to oversee the integration and operation of the acquired businesses.

        If we are not successful in integrating acquired businesses and completing acquisitions in the future, we may be required to reevaluate our acquisition and alliance strategy. We also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions and alliances. Acquired businesses and alliances may fail to meet our performance expectations. If we do not achieve the anticipated benefits of an acquisition or alliance as rapidly as expected, or at all, investors or analysts may not perceive the same benefits of the acquisition or alliance as we do. If these risks materialize, our operating results, financial condition and existing business could be materially adversely affected.

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RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

There is no current trading market for our common stock, and we cannot predict when or if an established public trading market will develop.

        There is no market for shares of our common stock. An active trading market for our shares may never develop. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of common stock as consideration.

Our principal stockholders are able to exert significant influence over matters submitted to stockholders for approval, and may have interests that differ from our stockholders, generally.

        As of December 31, 2016, our officers and directors controlled 30.2% of our issued and outstanding common stock, and our Chairman and Chief Executive Officer controlled 28.0% of our issued and outstanding common stock. These stockholders can exert significant influence in determining the outcome of corporate actions requiring stockholder approval and that otherwise control our business, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions, and may have interests that differ from our stockholders, generally.

If a market develops for our common stock, the market price and trading volume of our common stock may be volatile.

        If a market develops for our common stock, the market price of our common stock could fluctuate significantly for many reasons, including reasons unrelated to our specific performance, such as reports by industry analysts, investor perceptions, share arbitrage, the exercise of options or warrants or the conversion of convertible notes or announcements by our competitors regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other companies, whether large or small, within our industry experience declines in their share price, our share price may decline as well. Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the price of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could negatively affect revenues or expenses in any particular quarter, including vulnerability of our business to a general economic downturn; changes in the laws that affect our products or operations; competition; compensation related expenses; application of accounting standards; and our ability to obtain and maintain all necessary government certifications and/or licenses to conduct our business. In addition, in situations where the market price of a company's shares may drop significantly, stockholders could institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources. In addition, the market price for securities of pharmaceutical and biotechnology companies historically has been volatile, and the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to decline substantially.

If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.

        In the event a public trading market develops for our common stock, the price and trading volume of our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research

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coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock and other securities would be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our common stock could decrease, which could cause the price and trading volume of our common stock to decline.

We have identified a material weakness in our internal control over financial reporting and we may be unable to develop, implement and maintain appropriate controls in future periods. If the material weakness is not remediated, or if after remediation we are unable to maintain appropriate controls, the accuracy and timing of our financial reporting may be adversely affected.

        We have identified a material weakness in our internal control over financial reporting and, as a result of such weakness, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2016. The material weakness related to our not having adequate depth and sufficiency of human resources with the technical accounting principles generally accepted in the United States, or GAAP, expertise available in our accounting and finance department to appropriately identify, research, analyze and conclude upon the proper accounting treatment for complex or unusual transactions involving options, equities, and other financial instruments as well as to maintain effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions and effective internal communication of significant transactions. This and related events, however, did not result in a delay in the filing of our Annual Report for the fiscal year ended December 31, 2016 whereas it did contribute in the delay of filing our Annual Report for the previous fiscal year ended December 31, 2015.

        Unless and until remediated, this material weakness could result in additional material misstatements to our interim or annual consolidated financial statements and disclosures that may not be prevented or detected on a timely basis. In addition, we may experience delay or be unable to meet our reporting obligations or to comply with SEC rules and regulations, which could result in investigation and sanctions by regulatory authorities. Management's assessment of internal controls over financial reporting may in the future identify additional weaknesses and conditions that need to be addressed in our internal control over financial reporting. Any failure to improve our disclosure controls and procedures and our internal control over financial reporting or to address identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Any of these results could adversely affect our business and the value of our common stock.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance efforts.

        As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related SEC regulations have significantly increased the costs and risks associated with accessing the public markets and public reporting. We are required to comply with many of these rules, and would be required to comply with additional of these rules if our securities are listed on a stock exchange. Our management and other personnel need to devote a substantial amount of time and financial resources to comply with these requirements, as well any new requirements implemented by the SEC. Moreover, these rules and regulations increase our legal and financial compliance costs and will make some activities more time-consuming and costly and could lead to a diversion of management time and attention from revenue generating activities to compliance

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activities. We are currently unable to estimate these costs with any degree of certainty. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors and board committees or as executive officers and more expensive for us to obtain director and officer liability insurance.

Our certificate of incorporation and bylaws and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in control or adversely affect the value of our common stock.

        Our certificate of incorporation and bylaws and Delaware law could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial to our stockholders. We are authorized to issue up to 20,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party and thereby preserve control by the present management.

        Provisions of our certificate of incorporation and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation and bylaws and Delaware law, as applicable, among other things:

    provide the board of directors with the ability to alter the bylaws without stockholder approval;

    place limitations on the removal of directors;

    provide that vacancies on the board of directors may be filled by a majority of directors in office, although less than a quorum; and

    provide that stockholders must provide advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

        These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to first negotiate with our board of directors. These provisions may delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline.

We are an "emerging growth company" and we may take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors.

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock if one develops and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years.

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        Because of the exemptions from various reporting requirements provided to us as an "emerging growth company" we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

        We will remain an "emerging growth company" until the earliest of:

    the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion,

    the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our shares that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter,

    the date on which we have issued more than $1.0 billion in nonconvertible debt during the preceding three-year period, and

    the last day of our fiscal year containing the fifth anniversary of the date on which shares of our common stock become publicly traded in the U.S.

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors' sole source of gain, if any, will depend on capital appreciation, if any.

        We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors' sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of our common stock at or above the price they paid for them.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        Not applicable.

ITEM 2.    PROPERTIES

        We lease office space under operating leases from unrelated entities. The rent expense during the years ended December 31, 2016 and 2015 amounted to $589,769 and $492,919, respectively.

        We lease approximately 13,329 square feet of office space for our headquarters in Torrance, California, at a base rental of $38,906 per month. The lease relating to this space expires on March 31, 2019. We lease an additional office suite in Torrance, California at a base rent of $2,240 per month for 1,600 square feet. The lease relating to this space will expire on January 31, 2020.

        In addition, EM Japan leases 1,322 total square feet of office space in Tokyo, Japan. The leases relating to the space will expire on September 30, 2018.

        We believe our existing facilities are adequate for our operations at this time and we expect to be able to renew the office lease for our headquarters on commercially reasonable terms. In the event we determine that we require additional space to accommodate expansion of our operations, we believe suitable facilities will be available in the future on commercially reasonable terms as needed.

ITEM 3.    LEGAL PROCEEDINGS

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        Our common stock is not currently listed or quoted for trading on any national securities exchange or national quotation system, and there is no established trading market for our common stock.

Holders

        As of March 20, 2017, we had approximately 456 stockholders of record.

Dividends

        We did not pay cash dividends on our common stock in the years ended December 31, 2016 and 2015, and do not expect to do so in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors in its discretion and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers relevant.

Recent Sales of Unregistered Securities

        During the quarter ended December 31, 2016, the Company issued convertible notes to third parties totaling $1,214,779 in aggregate principal amount, which notes bear interest at 10% per annum and mature on the respective one-year anniversary dates of the notes. If our common stock becomes quoted on the OTC market, the principal amount and all accrued and unpaid interest of the notes will automatically convert into shares of our common stock at a conversion price of $4.50 per share (subject to appropriate adjustment in the event of any stock splits, stock dividends, recapitalizations and similar transactions with respect to the capital stock of the Company). 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 $4.50 per share.

        On October 14, 2016, the Company combined and refinanced three outstanding promissory notes into a single convertible note in the principal amount of $3,579,447 that bears interest at 10% per annum. The note has a six-month term, which may be extended by the holder for up to two years. The principal amount plus any unpaid accrued interest due under the convertible note is convertible into shares of our common stock at a conversion price of $3.50 per share at any time upon the election of the holder.

        On December 21, 2016, the Company refinanced an outstanding convertible note in the original principal amount of $100,800 into a new convertible note in the principal amount of $120,960, which bears interest at 10% per annum. The note has a two-year term. The principal amount plus any unpaid accrued interest under the convertible note is convertible into shares of our common stock at $3.60 per share at any time upon the election of the holder.

        The foregoing securities were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act. These issuances qualified for exemption under Section 4(a)(2) of the Securities Act because they did not involve a "public offering" based upon the following factors: (i) a limited number of securities were issued to a limited number of offerees; (ii) there was no public solicitation; (iii) each offeree was an "accredited investor" as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offerees. No underwriters or placement agents were used in connection with the issuances.

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Additional Information

        Copies of our annual reports, quarterly reports, current reports, and any amendments to those reports, are available free of charge on the Internet at www.sec.gov and on our website at www.emmausmedical.com (which is not incorporated by reference herein). All statements made in any of our filings, including all forward-looking statements, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        Not required for a smaller reporting company.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

        The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" or in other parts of this Annual Report.

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 sickle cell disease, or SCD, a genetic disorder and a significant unmet medical need. 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 in the patient's red blood cells. This altered form of hemoglobin causes the patient's red blood cells to become rigid and sickle-shaped instead of soft, flexible and rounded. Patients with SCD suffer debilitating episodes of sickle cell crisis when their sickle-shaped, inflexible red blood cells adhere to each other and the walls of blood vessels. This blockage, or occlusion, of the patient's blood vessels restricts the delivery of oxygen to tissues, a condition referred to as tissue ischemia, and also causes inflammation. In addition to being excruciatingly painful, sickle cell crises can lead to organ damage, stroke, pulmonary complications, skin ulceration, infection and a variety of other adverse outcomes. The overall survival of patients in the United States with sickle cell anemia correlates with the severity of their disease state, especially the number of crises per year. Patients with more than three sickle cell crises per year will experience fatal complications during the fourth and fifth decades of life whereas patients who experience between one and three crises per year have a median survival of nearly 50 years (Hematology in Clinical Practice by Robert S. Hillman et. al. (5th ed. 2011)).

        The only approved treatment for SCD in the United States is hydroxyurea, a cytotoxic drug first synthesized in the 19th century and approved in 1967 by the U.S. Food and Drug Administration, or FDA, for treating certain types of leukemia. In 1998, the FDA approved the use of hydroxyurea for treating SCD in adults. There are no approved treatments in the United States for pediatric patients with SCD.

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        L-glutamine is a precursor to nicotinamide adenine dinucleotide, or NAD, and its reduced form called NADH. NAD is the major molecule that regulates and prevents oxidative damage in red blood cells. Our published studies have identified that sickle red blood cells have a significantly increased rate of transport of glutamine, which appears to be driven by the cells' need to promote NAD synthesis, protecting against the oxidative damage thereby leading to significant improvement in the regulation of oxidative stress. In turn, this made sickle red blood cells less adhesive to cells of the interior wall of blood vessels. This implied that there is decreased chance of blockage of blood vessels, especially small ones. This improved regulation of oxidative stress appears to lead to less obstruction or blockage of small blood vessels, thereby alleviating a major "cause" of the problems faced by patients with SCD.

        Several of the studies conducted to support the development program of the PGLG treatment in which our Chief Executive Officer has participated have been published in peer-reviewed academic research journals. These publications include "L-Glutamine Therapy Reduces Endothelial Adhesion of Sickle Red Blood Cells to Human Umbilical Vein Endothelial Cells" by Yutaka Niihara et al., published in BMC Blood Disorders (2005), "Oral L-Glutamine Therapy for Sickle Cell Anemia: I. Subjective Clinical Improvement and Favorable Change in Red Cell NAD Redox Potential" by Yutaka Niihara et al., published in the American Journal of Hematology (1998) and "Increased Red Cell Glutamine Availability in Sickle Cell Anemia: Demonstration of Increased Active Transport, Affinity, and Increased Glutamate Level in Intact Red Cells" by Yutaka Niihara et al., published in the Journal of Laboratory and Clinical Medicine (1997).

        In a Phase 3, double-blind, placebo-controlled, parallel-group, multi-center clinical trial which enrolled a total of 230 adult and pediatric patients as young as five years of age, at 31 sites in the United States, PGLG treatment was administered up to 30 grams per day and demonstrated a 25% decrease in the median frequency of sickle cell crises and 33% decrease in the median number of hospitalizations, as compared to placebo. Based on an analysis, utilizing pre-specified statistical methods, the difference between groups was statistically significant; p=0.0052 and p=0.0045, respectively. Other clinically relevant endpoints showed similar results such as a 63% lower incidence of acute chest syndrome (p=0.0028), 41% less cumulative days in hospital (p=0.022), 56% delay in onset of the first sickle cell crisis (p=0.0152) and a 59% delay in the onset of the second sickle cell crises (p=0.026). The safety data collected demonstrated a safety profile similar to that of placebo.

Results   Primary
Endpoint
  Secondary
Endpoint
  Additional Analysis
Difference
between
treated and
placebo arms
  Decrease in
the frequency
of sickle cell
crises
  Decrease in
the frequency
of
hospitalization
  Decrease in
the incidence
of acute chest
syndrome
  Less
cumulative
days in
hospital
  Delay in the
onset of first
sickle cell
crises
  Delay in the
onset of
second sickle
cell crises
Result   25%   33%   63%   41%   56%   59%
P-values   p=0.005   p=0.005   p=0.003   p=0.022   p=0.015   p=0.026

        Of the 230 patients in the trial, 153 were also being treated with hydroxyurea. Primary endpoint subgroup analysis indicated a reduction in crises for those taking (n = 153) and not taking (n = 76) hydroxyurea (p = 0.046 and p = 0.042 respectively).

        Based on the results of this study and other supportive studies conducted, we have submitted a New Drug Application, or NDA, to the FDA requesting U.S. marketing approval for our orally-administered PGLG treatment for SCD which has been accepted for review with a PDUFA date of July 7, 2017. PDUFA dates are deadlines by which the FDA must review new drug applications. PDUFA is an acronym for the Prescription Drug User Fee Act.

        The PGLG treatment represents the first potential treatment for pediatric patients with SCD, and the first potential new treatment in nearly 20 years for adult patients. Our SCD therapy has Orphan Drug and Fast Track designations in the U.S. from the FDA.

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        Orphan medicinal designation in the European Union has also been granted for the L-glutamine treatment for SCD. We plan to submit a marketing authorization application to the European Medicines Agency.

        Our extensive experience in the field of SCD includes the development, outsourced manufacturing and conduct of clinical trials of our prescription grade L-glutamine product candidate for the treatment for SCD. Our chairman and chief executive officer, Yutaka Niihara, M.D., M.P.H., is a leading hematologist in the field of SCD. Dr. Niihara is licensed to practice medicine in both the United States and Japan and has been actively engaged in SCD research and the care of patients with SCD for over 20 years, primarily at the University of California Los Angeles and the Los Angeles Biomedical Research Institute, or LA BioMed, a nonprofit biomedical research institute at Harbor UCLA Medical Center.

        To a lesser extent, we are 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, or SBS, in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Since formed in May 2016, our indirect wholly owned subsidiary, Newfield has engaged in the sale of 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. In October 2010, we formed EM Japan to market and sell AminoPure in Japan and Taiwan. EM Japan also manages our distributors in Japan and may also import other medical products in the future. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore and AminoPure.

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

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

        Our corporate structure is illustrated as follows:

GRAPHIC

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        Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC undertook a merger reorganization 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 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 December 31, 2016, our accumulated deficit is $106.8 million and we had cash and cash equivalents of $1.3 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.

        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.

        On September 12, 2016, we entered into a Letter of Agreement with KPM Tech Co., Ltd. ("KPM") and Hanil Vacuum Co., Ltd. ("Hanil"), both Korean-based public companies whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In the Letter of Agreement, the parties agreed that KPM and Hanil would purchase $17 million and $3 million, respectively, of shares of our common stock at a price of $4.50 per share by September 30, 2016. In exchange, we agreed to invest $13 million and $1 million in future capital increases by KPM and Hanil, respectively, at prices based upon the trading prices of KPM and Hanil shares on KOSDAQ. The purchases of Emmaus shares by KPM and Hanil were completed prior to September 30, 2016.

        Subsequent to September 30, 2016, we completed the cross-investments with KPM and Hanil in which we purchased for an aggregate of $14 million a minority interest of 8.2% in KPM and of 0.8% in Hanil. KPM is principally engaged in the manufacture and distribution of surface treatment chemicals. Hanil is principally engaged in the design, manufacture and sale of vacuum coating systems. Both KPM and Hanil plan to expand their biopharma business.

Proposed Generex Transaction

        As previously reported, on January 16, 2017 the Company entered into a letter of intent ("LOI") with Generex Biotechnology Corporation ("Generex") which contemplates that Generex will acquire a controlling interest in the Company for a total consideration of $225,000,000, payable $10,000,000 in cash and $215,000,000 in shares of Generex's common stock, which are referred to as the "Generex

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shares." The Generex shares are to be valued for this purpose at $3.80 per share, subject to adjustment in certain events.

        Under the LOI, Generex paid the Company $500,000 as a deposit for an initial cash consideration and was to pay the Company another deposit of $1,500,000 by February 6, 2017. On February 6, 2017, the Company granted Generex an extension of the payment date to February 16, 2017 and, by a letter amendment dated February 16, 2017, the Company granted Generex another extension of the payment date to February 24, 2017 and otherwise amended the LOI.

        On March 3, 2017, Generex and the Company further amended the LOI to provide as follows:

    Generex agreed to pay the Company an additional deposit of $500,000 on or prior to March 6, 2017, which the Company has received.

    Within ten trading days after March 14, 2017, the date of effectiveness of a reverse stock split of Generex common stock, Generex must pay the Company another deposit of $3,000,000, which the Company has received.

    The parties will use their best efforts to negotiate and sign a definitive purchase agreement no later than March 30, 2017.

    The remaining $6,000,000 of the cash consideration will be paid to the Company at the closing under a definitive purchase agreement, which is to occur no later than five trading days after the date Generex amends its certificate of incorporation to effect an increase in its authorized capital, but no later than May 1, 2017.

    The closing of the proposed acquisition by Generex is to occur no later than May 8, 2017.

    If a definitive purchase agreement is not executed or the closing does not occur by the required deadlines, and the LOI is terminated by either party, the Company will refund and return to Generex all deposits within 60 days after the termination.

        In consideration for the foregoing waivers, extensions and amendments, Generex has agreed to issue to the Company 24,414,063 of restricted shares of Generex common stock within three trading days after Generex effects the planned increase in its authorized capital.

        The parties' respective obligations under the LOI to consummate the proposed acquisition are subject to a number of conditions, including completion of due diligence to each party's satisfaction parties and the negotiation and execution of a definitive purchase agreement, and there is no assurance these conditions will be satisfied. Any definitive purchase agreement also would contain customary conditions to closing, which may or may not be satisfied or waived by the parties.

        Although the Company has no present intention to terminate the LOI or to abandon the proposed acquisition, the Company may choose to do so if the conditions to the proposed acquisition have not been satisfied by the required deadlines, unless such deadlines are extended. If one or more of the conditions are not satisfied, the Company may decide to abandon the proposed acquisition if the Company's board of directors determines that it is in the best interests of the Company to do so.

        For all of the foregoing reasons, there is no assurance that the proposed acquisition by Generex and the payment to the Company of the cash consideration and the Generex shares will be completed on time, or at all, and the discussions in the Annual Report assume that the proposed acquisition will not be completed. If the proposed acquisition by Generex is completed, the Company's capitalization, the risks related to the Company's common stock and other information in the Annual Report would change materially from the descriptions in this Annual Report.

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Other Possible Transactions

        From time to time in the ordinary course of business, the Company engages in informal or formal discussions, and may enter into non-binding or binding letters of intent, with prospective investors and other companies regarding possible investments in the Company such as the mutual co-investments between the Company and KPM Tech Co., Ltd. and Hanil Vacuum Co., Ltd. completed in the fourth quarter of 2016. The Company currently is engaged in discussions, and have entered into a non-binding letter of intent, with another company regarding possible co-investments by the companies.

        Such discussions and letters of intent are subject to inherent risks and uncertainties, and may not lead to definitive agreements regarding a possible transaction. There can be no assurance, therefore, whether any such transaction will be undertaken or completed or, if undertaken and completed, on what terms.

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 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. Our operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing and sponsoring clinical trials of our pharmaceutical grade L-glutamine treatment for SCD, manufacturing products and maintaining and improving our patent portfolio.

        Currently, we generate revenue through the sale of NutreStore L-glutamine powder for oral solution as a treatment for SBS as well as AminoPure, a nutritional supplement. Pursuant to the exclusive sublicense agreement for US Patent No. 5,288,703, or SBS Patent, we were required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore to CATO Holding Company through 2016. 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, or 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 in prior years have been related to the CRO costs and the payments to study sites. The contract with the CRO is based on time and material expended, whereas the study site agreements are based on per patient costs as well as other pass-through costs, including, but not limited to, start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in

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uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

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

        At this time, due to the inherently unpredictable nature of the process for developing drugs, biologics and cell-based therapies and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in obtaining 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 risks and uncertainties relating to product development are described in this Annual Report under the headings "Risk Factors—Risks Related to Development of our Product Candidates," "Risk Factors—Risks Related to our Reliance on Third Parties," and "Risk Factors—Risks Related to Regulatory Approval of our Product Candidates and Other Legal Compliance Matters."

General and Administrative Expenses

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

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 purchase during 2016 and 2015 were from one vendor.

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 consolidated financial statements which are provided at the end of this Annual Report, we believe that the following

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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 notes issued with warrants to determine the appropriate accounting treatment, including determining whether conversion features are required to be bifurcated and treated as a discount, 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, derivative liabilities, 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 warrants 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 also 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 accrued interest to related parties are separately identified in our 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 calculated using the simplified method allowed under SEC Staff Accounting Bulletin Nos. 107 and 110. 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.

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Fair Value of Common Stock

        We are required to periodically estimate the fair value of our common stock when issuing share-based awards and accounting for share-based compensation expense. The fair value of the common stock underlying our share based awards was determined on each grant date by our board of directors, with the assistance of management and an independent third-party valuation expert. We considered multiple approaches to valuing our common stock. The Probability Weighted Expected Return Method, or PWERM, and the option pricing method were selected as the methods to allocate the enterprise value to the common stock. PWERM requires the projection of several likely scenarios and the determination of the future value of equity within different scenarios. For the scenarios analyzed, a Market Approach was used to derive the value of equity for two liquidity event scenarios and for a staying private scenario. In applying the Market Approach we relied on data of actual transactions that have occurred in our industry, more specifically orphan drug companies and pharmaceutical companies in Phase 3. Using PWERM, shares were valued upon the probability-weighted present value of expected future net cash flows, considering various future outcomes available to the company, discount rate as determined using the capital asset pricing model, as well as the rights of each share class. We then applied a probability weight to the value per share under each scenario and summed the resulting weighted values per share to estimate the fair value per share of our common stock. The majority of the weighting was applied to the liquidity event scenarios which relied on market transactions with similar type companies. We also apply a discount for lack of marketability of our common stock, as it is not freely traded in public markets.

        The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of significant levels of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our accounting for share-based awards could be materially different.

        In estimating the fair value of our common stock, our board of directors exercised reasonable judgment and considered a range of objective and subjective factors, including:

    independent third-party valuation;

    recent arm's length transactions involving the sale of common stock, if any;

    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;

    issuance of new convertible notes, although not grandfathered refinanced notes;

    the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering, sale, licensing or other strategic transaction, given prevailing market and biotechnology sector conditions; and

    the illiquid nature of our common stock.

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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; and

      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 December 31, 2016 and 2015. 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 5 to our consolidated financial statements.

        We issued stock purchase warrants in conjunction with our September 2013 private placement and issued replacement warrants upon the exercise of certain of such warrants in June 2014 (see Note 6 to our consolidated financial statements). Warrants issued in September 2013 and June 2014 that were not exercised became exercisable on a cashless exercise basis in accordance with their terms on September 11, 2014 and June 10, 2015, respectively, and due to the exercisability of the cashless exercise feature, are classified as warrant derivative liabilities as of December 31, 2016 and 2015. Such warrants and replacement warrants are accounted for as liability classified warrants or warrant derivative liabilities whose fair market value is determined using Level 3 inputs. These inputs include expected term and expected volatility.

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.

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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 accrue a sales return allowance at the time of sale. 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.

Financial Overview

 
  Year Ended December 31,  
 
  2016   2015*  

REVENUES, Net

  $ 461,591   $ 590,114  

COST OF GOODS SOLD

    221,250     286,687  

GROSS PROFIT

    240,341     303,427  

OPERATING EXPENSES

             

Research and development

    1,987,966     1,579,112  

Selling

    438,242     428,643  

General and administrative

    9,342,635     10,219,683  

Impairment of intangible assets

        678,571  

    11,768,843     12,906,009  

LOSS FROM OPERATIONS

    (11,528,502 )   (12,602,582 )

OTHER INCOME (EXPENSE)

             

Realized loss on securities available-for-sale

        (48,709 )

Gain on debt extinguishment

    1,019      

Loss on debt settlement

    (266,736 )    

Gain on derecognition of accounts payable and settlement of litigation

        418,366  

Change in fair value of liability classified warrants

        661,000  

Change in fair value of warrant derivative liabilities

    (2,745,890 )   1,202,000  

Convertible note inducement expense

    (1,444,863 )    

Interest and other income

    1,538     102,676  

Interest expense

    (5,191,720 )   (3,227,160 )

    (9,646,652 )   (891,827 )

LOSS BEFORE INCOME TAXES

    (21,175,154 )   (13,494,409 )

INCOME TAXES

    3,693     3,564  

NET LOSS

    (21,178,847 )   (13,497,973 )

NET LOSS PER COMMON SHARE

  $ (0.70 ) $ (0.47 )

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

    30,194,085     28,958,580  

*
See Note 1 to our consolidated financial statements.

Years ended December 31, 2016 and 2015

        Net Losses.    Net losses were $21.2 million for the year ended December 31, 2016 compared to $13.5 million for the year ended December 31, 2015, representing a increase of $7.7 million, or 57%. The increase in net losses is primarily a result of a $8.8 million increase in other expenses, net, partially

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offset by a $1.1 million decrease in operating expenses as discussed below. As of December 31, 2016, we had an accumulated deficit of approximately $106.8 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.    Net revenues decreased $0.1 million, or 22%, to $0.5 million from $0.6 million for the years ended December 31, 2016 and 2015, respectively. This was primarily due to a $0.1 million decrease in our AminoPure L-glutamine nutritional supplement product revenues from international markets.

        Cost of Goods Sold.    Cost of goods sold decreased $0.1 million, or 21%, to $0.2 million from $0.3 million for the years ended December 31, 2016 and 2015, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. All purchases of raw materials during the years ended December 31, 2016 and 2015 were from one vendor.

        Research and Development Expenses.    Research and development expenses increased $0.4 million, or 26%, to $2.0 million from $1.6 million for the years ended December 31, 2016 and 2015, respectively. This increase was primarily due to a $0.4 million increase in regulatory consulting costs as more extensive work was required for the NDA submission. We expect such costs to continue in 2017 to support our NDA post-submission activities, work on marketing approvals outside the US and potentially future clinical trial activity.

        Selling Expenses.    Selling expenses remained approximately the same at just over $0.4 million for the years ended December 31, 2016 and 2015. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore and AminoPure as well as the marketing expense for our pharmaceutical grade L-glutamine treatment for SCD.

        General and Administrative Expenses.    General and administrative expenses decreased $0.9 million, or 9%, to $9.3 million from $10.2 million for the years ended December 31, 2016 and December 31, 2015, respectively. The decrease was primarily due to a $0.8 million decrease in settlement fee, $0.4 million decrease in share-based compensation expenses due to expiration of the service period for certain options in prior periods, partially offset by a $0.2 million increase in professional fees, $0.1 million increase in office rent expenses, and $0.1 million increase in payroll expenses.

        Impairment of Intangible Assets.    During the year ended December 31, 2015, we recorded an impairment loss on intangible assets of $0.7 million due to the termination of our license of CAOMECS technology from CellSeed and uncertainty around the recoverability of the related license fees.

        Other Income and Expense.    Total other expense has increased by $8.7 million, or 982%, to a $9.6 million expense from a $0.9 million expense for the years ended December 31, 2016 and 2015, respectively. The increase was primarily due to absences of gain on derecognition of accounts payable and settlement of litigation of $0.4 million and change in fair value of liability classified warrants of $0.7 million, a negative change in fair value of warrant derivative liabilities of $3.9 million, $1.4 million of convertible note inducement expense, an increase in interest costs of $2.0 million as a result of increased debt and an increase in loss on debt settlement of $0.3 million for the promissory note settlement into Company common stock.

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

    as a result of future debt repayments, 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.

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 $1.3 million as of December 31, 2016, we do not have sufficient operating capital for our business without raising additional capital. We received a deposit of $0.5 million from Generex upon the signing of the LOI on Janury 16, 2017. Subsequently, we received additional deposits of $3.5 million from Generex. These deposits are refundable if the LOI with Generex is canceled. We incurred losses of $21.2 million and $13.5 million for the years ended December 31, 2016 and 2015, respectively. We had an accumulated deficit at December 31, 2016 of $106.8 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 treatment for SCD, 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 officers, stockholders and other investors as discussed below. As of December 31, 2016, we had outstanding notes payable in an aggregate principal amount of $18.3 million, consisting of $6.0 million of non-convertible promissory notes and $12.3 million of convertible notes. Of the $18.3 million aggregate principal amount of notes outstanding as of December 31, 2016, approximately $17.0 million is either due on demand or will become due and payable within the next twelve months. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies, including the commercialization of our pharmaceutical grade L-glutamine treatment for SCD and the development in the United States of CAOMECS-based cell sheet technology.

        As described in Note 2 to our consolidated financial statements, we have had recurring operating losses, have a significant amount of notes payable and other obligations due within the next year and projected operating losses including the expected costs relating to the commercialization of 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. As previously reported, the Company has filed a draft registration statement with the SEC with respect to an initial public offering. Additional funding may not be available in amounts or on terms which are acceptable to us, if at all. Due to the uncertainty of our ability to meet our current operating and capital expenses, there is substantial doubt about our ability to continue as a going concern.

        In addition, our current cash burn rate is approximately $0.8 million per month.

        As discussed in this Annual Report under the heading "Risk Factors—Risks Related to Development of our Product Candidates" above, if the FDA does not approve our NDA based on a single Phase 3 clinical trial, in such case unless we conduct a second Phase 3 clinical trial or

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confirmatory study, 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 confirmatory study is unnecessary for filing or approval, or to design and conduct a second Phase 3 clinical trial or confirmatory study, or both. If we conduct a second Phase 3 clinical trial or confirmatory study prior to the approval of our NDA, it is possible that the results of that trial will be less favorable than the results of our completed Phase 3 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.

        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 and NutreStore. Revenues from both products are currently not significant and we are unsure whether sales of these products will increase. Until we can generate a sufficient amount of product revenue, future cash needs are expected to be financed through public or private equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. Until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable to us (or at all).

        For the years ended December 31, 2016 and 2015, we borrowed varying amounts pursuant to convertible notes and non-convertible promissory notes, the majority of which have been issued to our officers and stockholders. As of December 31, 2016 and 2015, the aggregate principal amounts outstanding under convertible notes and non-convertible promissory notes totaled $18.3 million and $19.1 million, respectively. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 0% to 11% and, except for the 2011 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 purposes.

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        The table below lists our outstanding notes payable as of December 31, 2016 and 2015, and the material terms of our outstanding borrowings:

Year Issued
  Interest
Rate
Range
  Term of Notes   Conversion
Price
  Principal
Outstanding
December 31,
2016
  Discount
Amount
December 31,
2016
  Carrying
Amount
December 31
2016
  Shares
Underlying
Notes
December 31,
2016
  Principal
Outstanding
December 31,
2015
  Discount
Amount
December 31,
2015
  Carrying
Amount
December 31,
2015
  Shares
Underlying
Notes
December 31,
2015
 

Notes payable

                                                             

2013

  10%   Due on demand     $ 854,900   $   $ 854,900       $ 830,000   $   $ 830,000      

2014

  11%   Due on demand ~ 2 years                       1,446,950         1,446,950      

2015

  11%   Due ondemand       2,406,194         2,406,194         2,379,799         2,379,799      

2016

  11%   Due ondemand       833,335         833,335                      

              $ 4,094,429       $ 4,094,429       $ 4,656,749   $   $ 4,656,749      

      Current       $ 4,094,429   $   $ 4,094,429       $ 4,656,749   $   $ 4,656,749      

      Long-term       $   $   $       $   $   $      

Notes payable—related party

                                                             

2012

  8%   Due on demand     $ 500,000   $   $ 500,000       $ 626,730   $   $ 626,730      

2013

  8%   Due on demand       50,000         50,000         50,000         50,000      

2014

  11%   Due on demand ~ 2 years                       240,308         240,308      

2015

  10% ~ 11%   Due on demand       514,340         514,340         1,849,266         1,849,266      

2016

  10% ~ 11%   Due on demand       860,510         860,510                      

              $ 1,924,850   $   $ 1,924,850       $ 2,766,304   $   $ 2,766,304      

      Current       $ 1,924,850   $   $ 1,924,850       $ 2,766,304   $   $ 2,766,304      

      Long-term       $   $   $       $   $   $      

Convertible notes payable

                                                             

2010

  6%   5 years   $3.05   $   $   $       $ 2,.000   $   $ 2,000     656  

2011

  10%   5 years   $3.05     300,000         300,000     98,285     500,000         500,000     163,809  

2013

  10%   2 years   $3.60                     525,257         525,257     185,553  

2014

  10%   Due on demand ~ 2 years   $3.05 ~$3.60     452,168         452,168     152,986     4,378,563     353,700     4,024,863     1,120,470  

2015

  10%   2 years   $3.50 ~$3.60     2,904,800     104,389     2,800,411     889,115     5,681,166     526,066     5,155,100     1,517,996  

2016

  10%   Due on demand ~ 1 year   $3.50 ~$4.50     8,126,129     1,475,744     6,650,385     2,193,687                  

              $ 11,783,097   $ 1,580,133   $ 10,202,964     3,334,073   $ 11,086,986   $ 879,766   $ 10,207,220     2,988,484  

      Current       $ 10,499,303   $ 1,294,296   $ 9,205,007     2,984,161   $ 6,358,698   $ 358,351   $ 6,000,347     1,762,849  

      Long-term       $ 1,283,794   $ 285,837   $ 997,957     349,912   $ 4,728,288   $ 521,415   $ 4,206,873     1,225,635  

Convertible notes payable—related party

                                                             

2012

  10%   Due on demand   $3.30   $ 254,000   $   $ 254,000     94,532   $ 298,000   $   $ 298,000     108,505  

2015

  10%   2 years   $4.50     220,000         220,000     54,463     320,000         320,000     72,354  

              $ 474,000   $   $ 474,000     148,995   $ 618,000   $   $ 618,000     180,859  

      Current       $ 474,000   $   $ 474,000     148,995   $ 298,000   $   $ 298,000     108,505  

      Long-term       $   $   $       $ 320,000   $   $ 320,000     72,354  

      Grand Total       $ 18,276,376   $ 1,580,133   $ 16,696,243     3,483,068   $ 19,128,039   $ 879,766   $ 18,248,273     3,169,343  

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        Subsequent to the year ended December 31, 2016, the Company issued the following:

Notes Issued after December 31, 2016
  Principal
Amounts
  Annual
Interest Rate
  Term of Notes   Conversion
Price
 

Convertible notes(1)

  $ 504,312     10 % Due on Demand to 2 Years   $ 3.60  

Convertible notes(1)

    1,130,536     10 % 6 Months to 2 Years   $ 3.50  

Convertible note

    200,000     10 % Due on Demand to 6 Months   $ 7.60  

Promissory note(1)(2)

    605,315     11 % Due on Demand      

Promissory notes—related party(1)

    12,000     10 % Due on Demand      

Total

  $ 2,452,163                  

(1)
Refinancings of prior notes already outstanding.

(2)
Principal amount of note is JPY68,320,000 which was converted into US dollars using an exchange rate of 0.008860 as of February 17, 2017.

        Subsequent to December 31, 2016, the Company issued 13,000 shares of our common stock for gross proceeds of $98,000.

Cash Flows

Net cash used in operating activities

        Net cash flows used in operating activities increased by $3.0 million, or 44%, to $10.0 million from $7.0 million for the years ended December 31, 2016 and 2015, respectively. The increase was primarily due to an increase of $7.7 million in net loss, partially offset by an $7.0 million increase in non-cash adjustments to net loss and a $2.4 million decrease in working capital. The increase in non-cash adjustments to net loss was primarily attributable to the following: $4.6 million for the change in the fair value of liability classified warrants and warrant derivative liabilities, $1.4 million for convertible note inducement expense, $1.5 million increase in interest expense accrued from discount of notes, $0.4 million for gain on derecognition of accounts payable and settlement of litigation and $0.3 million for loss on debt settlement for promissory note conversion into Company common stock, partially offset by a $0.7 million decrease in impairment on intangible assets, a $0.4 million decrease in share-based compensation and a $0.2 million decrease in depreciation and amortization expense.

Net cash used in investing activities

        Net cash flows used in investing activities increased by $14.1 million, or 33460%, to $14 million used in investing marketable securities from cash flows of $42,000 for the years ended December 31, 2016 and 2015, respectively. The increase was due to investment into marketable securities for KPM Tech and Hanil Vacuum pursuant to the Letter of Agreement dated September 12, 2016 from the sale of marketable securities of $47,000.

Net cash from financing activities

        Net cash flows from financing activities increased by $18.1 million, or 264%, to $24.9 million from $6.8 million for the years ended December 31, 2016 and 2015, respectively, primarily as a result of a $22.3 million increase in aggregate proceeds from issuance of common stocks and a $0.1 million increase in aggregate proceeds from issuance of notes payable and convertible notes payable, which was partially offset by a $4.3 million increase in repayments of promissory notes and convertible notes.

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not required for a smaller reporting company.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this Item 8 is incorporated by reference to the information that begins on Page F-1 of this Annual Report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        We are responsible for establishing and maintaining disclosure controls and procedures ("DCP") that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. In designing and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives.

        We conducted an evaluation pursuant to Rule 13a-15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2016. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective as of December 31, 2016, because of the continuance of a material weakness (the "Material Weakness") in our internal control over financial reporting, initially identified in our evaluations of the effectiveness of our internal control over financial reporting as of December 31, 2014 and 2013, with respect to the application of generally accepted accounting principles (GAAP) in the United States of America on certain complex transactions, as well as maintaining effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions and internal communication of significant transactions. Notwithstanding the Material Weakness, our management, based on the substantial work performed, concluded that our consolidated financial statements for the periods covered by and included in this Annual Report are fairly stated in all material respects in accordance with GAAP for each of the periods presented in this Annual Report.

        We committed to remediating the control deficiencies that constituted the Material Weaknesses by implementing changes to our internal control over financial reporting. In 2016, we implemented measures designed to remediate the underlying causes of the control deficiencies that gave rise to the Material Weaknesses, including, without limitation:

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

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    use of GAAP Disclosure and SEC Reporting Checklist;

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

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

    engaging supplemental internal and external resources.

        Our management concluded that, as of December 31, 2016, while the remedial actions implemented in an effort to remediate the underlying causes of the control deficiencies that gave rise to the Material Weakness has been completed for certain areas, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary to determine whether the Material Weakness has been remediated. Specifically, we are continuing to address the adequacy of the depth and sufficiency of human resources with the technical GAAP expertise available in our accounting and finance department to appropriately identify, research, analyze and conclude upon the proper accounting treatment for complex or unusual transactions involving options, equities, and other financial instruments as well as to maintain effective controls over the completeness and accuracy of financial reporting for complex or unusual transactions. Because certain corrective actions specific to this Material Weakness have not been fully implemented as of the date of this report, the Material Weakness was not considered remediated as of December 31, 2016.

Management's Plan for Remediation

        Our management and Board of Directors are committed to the remediation of the Material Weakness, as well as the continued improvement of our overall system of internal control over financial reporting. We are in the process of implementing measures to remediate the underlying causes of the control deficiency that gave rise to the Material Weakness, which primarily include engaging additional and supplemental internal and external resources with the technical expertise in US GAAP as well as to implement new policies and procedures to provide more effective controls to track, process, analyze, and consolidate the financial data and reports. Further, we are in the process of reviewing plans to establish a Disclosure Committee to ensure more effective internal communication of significant transactions.

        We believe these measures will remediate the control deficiencies that gave rise to a Material Weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional measures may be required.

        We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent improvements in our internal control over financial reporting when they are fully implemented. Certain remediation steps, however, have not been implemented or have not had sufficient time to be fully integrated in the operations of our internal control over financial reporting. As a result, the identified Material Weakness will not be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for our management to conclude that the control environment is operating effectively. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting and DCP.

        As we continue to evaluate and work to remediate the Material Weakness and enhance our internal control over financial reporting and DCP, we may determine that we need to modify or otherwise adjust the remediation measures described above. As a result, we cannot assure you that our

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remediation efforts will be successful or that our internal control over financial reporting or DCP will be effective as a result of those efforts.

Management's Annual Report on Internal Control over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and our dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2016.

        A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by a company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. In conducting our review of our internal control over financial reporting, we identified a continuing material weakness in our internal control over financial reporting initially identified in our evaluations of the effectiveness of our internal control over financial reporting as of December 31, 2014 and 2013. This material weakness relates to the adequacy of resources and controls resulting from us not having an adequate level of resources with the appropriate level of training and experience in regards to the application of generally accepted accounting principles for certain complex transactions. In addition, we did not maintain effective controls over the completeness and accuracy of financial reporting for complex or significant unusual transactions.

        To assist with the accounting for complex and/or significant unusual transactions, we have retained a consulting professional with greater knowledge and experience of U.S. GAAP and related regulatory requirements to supplement our internal resources and added to our accounting staff. We also have implemented procedures to evaluate and improve our existing internal control documentation and procedures to develop clear identification of key financial and reporting controls over complex or significant unusual transactions. We continue to strengthen our procedures and staffing levels in order to fully address this material weakness.

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Attestation Report

        This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We are not subject to the attestation requirement because we are a smaller reporting company.

Changes in Internal Control over Financial Reporting

        Except as described above, based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 of the Exchange Act, we believe that there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers, Directors and Key Employees

        The following individuals constitute our board of directors and executive management:

Name
  Age   Position

Yutaka Niihara, M.D., M.P.H. 

    57   Chairman and Chief Executive Officer

Willis C. Lee

    56   Vice-Chairman, Chief Operating Officer and Chief Financial Officer

Peter B. Ludlum

    61   Co-President and Chief Business Officer

Lan T. Tran, M.P.H. 

    41   Co-President and Chief Administrative Officer

Yasushi Nagasaki

    49   Senior Vice President, Finance

Charles Stark, Pharm.D. 

    61   Senior Vice President, Research and Development

Ian Zwicker

    69   Director

Masaharu Osato, M.D. 

    62   Director

Jon Kuwahara

    51   Director

        All of our officers devote at least 40 hours per week, the equivalent of a full-time employee, to our business and affairs.

Background of Officers and Directors

        The following is a brief summary of the background of each of our directors, executive officers and executive management:

        Yutaka Niihara, M.D., M.P.H. has served as our Chairman and Chief Executive Officer since January 2016. From April 2015 until December 2015, he served as Chief Scientific Officer of the company and from April 2011 to April 2015, he served as President and Chief Executive Officer. He served as President, Chief Executive Officer and Chairman of the Board of Emmaus Medical from 2003 to April 2011. Since May 2005, Dr. Niihara has also served as the President, Chief Executive Officer and Medical Director of Hope International Hospice, Inc., or Hope Hospice, a Medicare-certified hospice program. From June 1992 to October 2009, Dr. Niihara served as a physician specialist for Los Angeles County. Dr. Niihara is the principal inventor of the patented L-glutamine treatment for SCD. Dr. Niihara has been involved in patient care and research for sickle cell disease during most of his career and is a widely published author in the area of sickle cell disease. Dr. Niihara is board-certified by the American Board of Internal Medicine/Medical Oncology and by the American Board of Internal Medicine/Hematology. He is licensed to practice medicine in both the United States and Japan. Dr. Niihara is a Professor of Medicine at the David Geffen School of Medicine at UCLA. Dr. Niihara received his B.A. in Religion from Loma Linda University in 1982, obtained his M.D. degree from the Loma Linda University School of Medicine in 1986 and received his M.P.H. from Harvard School of Public Health in 2006. We believe Dr. Niihara is qualified to serve as a director due to his knowledge and experience.

        Willis C. Lee, M.S. has served as Chief Operating Officer of the company since May 2011, as a director since December 2015, as Vice-Chairman of the Board of Directors since January 2016 and as CFO since October 2016. Mr. Lee also previously served as a director of Emmaus Life Sciences, Inc. from May 2011 to May 2014 and again from to December 2015 to January 2016. Mr. Lee also served as the Co-Chief Operating Officer and Chief Financial Officer and as a director of Emmaus Medical from March 2010 to May 2011. Prior to that, he was the Controller at Emmaus Medical from February 2009 to February 2010. From 2004 to 2010, Mr. Lee led worldwide sales and business development of Yield Dynamics product group at MKS Instruments, Inc., a provider of instruments, subsystems, and

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process control solutions for the semiconductor, flat panel display, solar cell, data storage media, medical equipment, pharmaceutical manufacturing, and energy generation and environmental monitoring industries. Mr. Lee also served as President and Managing Director of Kenos Inc., a private service provider that provides funeral services to individuals, from January 2004 to December 2008. Mr. Lee held various managerial and senior positions at semiconductor companies such as MicroUnity Systems Engineering, Inc., a private semiconductor company that designs and develops new generation multimedia processors for computers and cable control boxes, from August 1995 to July 1996, HPL, Inc., a public semiconductor company that provides a software platform that enables data- driven decisions by gathering, managing and analyzing semiconductor manufacturing data, from June 2000 to October 2002, Syntricity, Inc., a private semiconductor software company that provides a software platform that enables data-driven decisions by gathering, managing and analyzing semiconductor manufacturing data, from November 2002 to April 2004 and also at Reden & Anders, a subsidiary of United Healthcare that provides actuarial services including capitation and risk assessment analyses for healthcare insurance carriers, from September 1996 to June 2000. Mr. Lee received his B.S. and M.S. in Physics from University of Hawaii (1984) and University of South Carolina (1986), respectively. We believe Mr. Lee is qualified to serve as a director due to his extensive knowledge and experience, as well as his intimate knowledge of the company through his service as executive officer of the company.

        Ian Zwicker is the founder of Zwicker Advisory Group and has been its Chief Executive Officer since 2014. From 1981 to 1990, Mr. Zwicker served as Managing Director and held a variety of management positions at the investment banking firms of SG Cowen and Hambrecht & Quist. From 1990 to 1999, Mr. Zwicker served as Managing Director and head of worldwide technology investment banking for Donaldson, Lufkin & Jenrette Securities Corporation, and from 2000 to 2001 as the President of WR Hambrecht + Co (WRH). He was a Director of Stirling Energy Systems, Inc. from 2006 to 2012. Mr. Zwicker was a Partner at WRH and was also Head of Capital Markets from 2013 to 2014. We believe Mr. Zwicker is qualified to serve as a director due to his executive experience and business expertise .

        Masaharu Osato, M.D. has been practicing gastroenterology and internal medicine ("GI") at his private practice, the Osato Medical Clinic, Inc. in Torrance, CA, since 2001. Between 1998 and 2001 he completed a GI Fellowship at the Harbor-UCLA Medical Center. Between 1993 and 1997 and 1988 and 1993, respectively, Dr. Osato served as General Internist and Director of Health Screening Center at the Tokyo Adventist Hospital in Tokyo, Japan, and at the Kobe Adventist Hospital in Kobe, Japan. He attended the Loma Linda University School of Medicine in California between 1979 and 1983 and completed an internal medicine residency at the Kettering Memorial Medical Center at Wright State University between 1983 and 1986. Between 1986 and 1988 he completed a pediatric residency at the Loma Linda University Medical Center. We believe Dr. Osato is qualified to serve as a director due to his extensive knowledge of and experience in the GI sector.

        Jon Kuwahara, C.P.A. has served as Vice President Finance of Espero Pharmaceuticals ("Espero"), an emerging growth specialty pharmaceutical company engaged in maximizing the commercial value of proven treatments that improve the quality of life for patients, since June of 2016. Mr. Kuwahara served as Corporate Controller of Avanir Pharmaceuticals ("Avanir"), a biopharmaceutical company focused on acquiring, developing, and commercializing therapeutic products for the treatment of central nervous system disorders, since 2014. Between 2010 and 2014, Mr. Kuwahara served as Associate Director of Finance and Assistant Corporate Controller of Questcor Pharmaceuticals, a specialty pharmaceutical company. Between 2003 and 2009, Mr. Kuwahara served as a consultant for Resources Global Professionals, a global project-based professional services firm. Prior to that Mr. Kuwahara served in various leadership positions in the technology, healthcare and service industries. Mr. Kuwahara holds a B.B.A. with an emphasis in accounting from the University of Hawaii and is a certified public accountant in California (active license) and Hawaii (inactive license). We believe

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Mr. Kuwahara is qualified to serve as a director due to his business and financial management experience.

        Peter B. Ludlum, C.M.A. has served as our Chief Business Officer since April 2016 and as Co-President since January 2016. From April 2012 to April 2016, Mr. Ludlum served as our Executive Vice President and Chief Financial Officer. Mr. Ludlum previously served as the Chief Financial Officer of Energy and Power Solutions, Inc., an energy intelligence company, from April 2008 to March 2012. Mr. Ludlum also served as the Financial Compliance Officer from April 2006 to March 2008 and the Chief Financial Officer from April 2005 to April 2006 of Applied Medical Resources Corporation, a medical device company. Mr. Ludlum also served as Group Controller for IsoTis S.A., a biomedical company, from October 2003 to April 2005. IsoTis S.A. acquired GenSci Regeneration Sciences Inc., an orthobiologics company, in October 2003 where Mr. Ludlum served as Vice President and Chief Financial Officer from December 1999 to October 2003. Prior to his position at GenSci, Mr. Ludlum had served as the Vice President Finance and Chief Financial Officer from November 1996 to December 1999 of Pacific Biometrics, Inc., a diagnostic products and reference laboratory company. Earlier in his career, Mr. Ludlum had worked for Derlan Industries, Ltd., a diversified manufacturing company, as Corporate Controller and Treasurer and in various positions at Mobil Oil Corporation, an international oil and gas company, and for subsidiaries of Bechtel Corporation, an engineering, procurement, construction, and project management services provider, and PacifiCorp, a diversified utility holding company. He received a B.S. in Business and Economics with a major in accounting from Lehigh University in 1977 and a Masters in Business Administration with a concentration in Finance from California State University, Fullerton in 1991.

        On September 23, 2011, Mr. Ludlum was serving as the Chief Financial Officer of Energy and Power Solutions, Inc., or EPS, when EPS filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy filing was made in part to effect a sale of EPS' primary assets pursuant to Section 363 of the U.S. Bankruptcy Code, and the EPS bankruptcy case has been dismissed.

        Lan T. Tran, M.P.H. has served as our Chief Administrative Officer since May 2011 and as Co-President since January 2016. From May 2011 to December 2016, Ms. Tran served as our Corporate Secretary. Ms. Tran also served as the Co-Chief Operating Officer and Corporate Secretary of Emmaus Medical from April 2010 to May 2011, and as the Chief Compliance Officer of Emmaus Medical from May 2008 to May 2011. Prior to joining Emmaus Medical, Ms. Tran was with LA BioMed, a non-profit medical research and education company, from September 1999 to April 2008 and held positions of increasing responsibility including Grants and Contracts Trainee from September 1999 to March 2000, Grants and Contracts Officer from April 2000 to August 2004, Associate Director, Pre-Clinical/Clinical Trials Unit from September 2004 to June 2005, Director, Pre- Clinical/Clinical Trials Unit from July 2005 to June 2007, and Assistant Vice President, Research Administration from June 2007 to April 2008. In her position as Director, Pre-Clinical/Clinical Trials Unit and Assistant Vice President, Research Administration, Ms. Tran was part of the executive management team of LA BioMed and was responsible for all administrative aspects of research in her assigned area at LA BioMed, which had a research budget of $61,000,000 in 2008. Ms. Tran holds a B.S. in Psychobiology from UCLA, which was awarded in 1999, and a Masters of Public Health from UCLA which was awarded in 2002.

        Yasushi Nagasaki, C.P.A. has served as our Senior Vice President, Finance since April, 2012. From May 2011 to April 2012, Mr. Nagasaki served as our Chief Financial Officer. From September 2005 until joining us, Mr. Nagasaki was the Chief Financial Officer of Hexadyne Corporation, an aerospace and defense supplier. Mr. Nagasaki also served on the Board of Directors at Hexadyne Corporation from September 2005 to April 2011. From May 2003 to August 2005, Mr. Nagasaki was the Controller at Upsilon Intertech Corporation, an international distributor of defense and aerospace parts and sub systems. Mr. Nagasaki is a Certified Public Accountant and received a B.A. in Commerce from Waseda

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University and a M.A. in International Policy Studies from the Monterey Institute of International Studies, a graduate school of Middlebury College.

        Charles Stark, Pharm.D. has served as our Senior Vice President of Research and Development of the company since November 2013. Dr. Stark previously served as Director of Clinical Development at Bavarian Nordic, Inc., an immunotherapeutic company, from March 2013 to November 2013. Dr. Stark had also served as Associate Director of Medical Affairs from July 2010 to March 2013 for the Dendreon Corporation, an immunotherapeutic company, and prior to his position at Dendreon, he was the Director, Medical Science Liaisons (cardiovascular, metabolic and oncology) from July 1999 to July 2010 at Pfizer, Inc., a pharmaceutical company. Dr. Stark served as the Director of Investigational Drug Services and Clinical Research at LA BioMed at Harbor-UCLA Medical Center from 1989 to 2003 and at the Health Research Association at Los Angeles County USC Medical Center from 1995 to 1999. Dr. Stark has also served as a faculty member at the University of Southern California School of Pharmacy since 1997. Dr. Stark received his Pharm.D. from the University of Southern California in 1982 and completed his residency at the Veteran's Affairs Medical Center in West Los Angeles in 1983.

Family Relationships

        There are no family relationships among any of the officers and directors.

Board of Directors and Committees and Director Independence

        Our board of directors currently consists of five members. Our board of directors has determined that each of Ian Zwicker, Masaharu Osato and Jon Kuwahara is an "independent" director as defined by The NASDAQ Marketplace Rules currently in effect and all applicable rules and regulations of the SEC. All members of the Audit and Compensation, Nominating and Corporate Governance Committees satisfy the "independence" standards of The NASDAQ Marketplace Rules applicable to members of such committees. The board of directors made this affirmative determination regarding these directors' independence based on discussions with the directors and on its review of the directors' responses to a standard questionnaire regarding employment and compensation history, affiliations, family and other relationships; and transactions with the Company. The board of directors considered relationship and any transactions between each director or any member of his immediate family and the Company and its subsidiaries and affiliates.

Audit Committee

        Our Audit Committee consists of Mr. Kuwahara, Mr. Zwicker and Dr. Osato, each of whom is an independent director as defined by The NASDAQ Marketplace Rules. Mr. Kuwahara serves as Chairman of the Audit Committee and qualifies as an "audit committee financial expert" as defined under Item 407(d) of Regulation S-K. The purpose of the Audit Committee is to represent and assist our board of directors in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal control and audit functions. The Audit Committee's responsibilities include:

    The appointment, replacement, compensation, and oversight of work of the independent registered public accounting firm, including resolution of disagreements between management and the independent registered public accounting firm regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services.

    Reviewing and discussing with management and the independent registered public accounting firm various topics and events that may have significant financial impact on our company or that are the subject of discussions between management and the independent registered public accounting firm.

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        The board of directors has adopted a written charter for the Audit Committee. A copy of the Audit Committee Charter is available on our website at www.emmausmedical.com.

Compensation, Nominating and Corporate Governance Committee

        The Compensation, Nominating and Corporate Governance Committee consists of Mr. Zwicker, Dr. Osato and Mr. Kuwahara, each of whom is an independent director as defined by The NASDAQ Marketplace Rules. Mr. Zwicker serves as Chairman of the Compensation, Nominating and Corporate Governance Committee. The Compensation, Nominating and Corporate Governance Committee is responsible for the design, review, recommendation and approval of compensation arrangements for our directors, executive officers and key employees, and for the administration of our equity incentive plans, including the approval of grants under such plans to our employees, consultants and directors, assists in the selection of director nominees, approves director nominations to be presented for stockholder approval at our annual general meeting, fills any vacancies on our board of directors, considers any nominations of director candidates validly made by stockholders, and reviews and considers developments in corporate governance practices. The Compensation, Nominating and Corporate Governance Committee also reviews and determines compensation of our executive officers, including our Chief Executive Officer. The board of directors has adopted a written charter for the Compensation, Nominating and Corporate Governance Committee. A copy of the Compensation, Nominating and Corporate Governance Committee Charter is available on our website at www.emmausmedical.com.

Section 16(a) Beneficial Ownership Reporting Compliance

        Our common stock is currently registered under Section 12 of the Securities Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2, our directors and officers and holders of 10% or more of our common stock are currently required to file statements of beneficial ownership with respect to their ownership of our equity securities under Sections 13 or 16 of the Exchange Act. Based on a review of written representations from our executive officers and directors and a review of Forms 3, 4 and 5 furnished to us, we believe that during the fiscal year ended December 31, 2016 the directors, officers and owners of more than 10% of our common stock filed, on a timely basis, all reports required by Section 16(a) of the Exchange Act except that Dr. Niihara failed to timely file two Forms 4 to report his exercise of warrants and conversion of a promissory note, due to an administrative error.

Code of Business Conduct and Ethics

        Our board of directors has approved a Code of Conduct and Ethics, which we refer to as the Code of Ethics, which applies to all of our directors, officers and employees. The Code of Ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the Code of Ethics is available on our website at www.emmausmedical.com. Requests for copies of the Code of Ethics should be sent in writing to Emmaus Medical, Inc., Attention: Secretary, 21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503.

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ITEM 11.    EXECUTIVE COMPENSATION

Summary Compensation Table

        The following table sets forth information concerning the compensation earned by our Chief Executive Officer, Chief Financial Officer and our next three most highly compensated executive officers for the two fiscal years ended December 31, 2016 and 2015:

Name and Position
  Year   Salary   Bonus   Option
Awards
  Total  

Yutaka Niihara, M.D., MPH

    2016   $ 250,000   $   $ 4,072,562   $ 4,322,562  

Chairman and Chief Executive Officer(1)

    2015     250,000             250,000  

Willis C. Lee

    2016     180,000     20,000     892,568     1,092,568  

Vice-Chairman, Chief Operating Officer

    2015     180,000             180,000  

and Chief Financial Officer

                               

Peter B. Ludlum

    2016     180,000         892,568     1,072,568  

Co-President and Chief Business Officer(2)

    2015     180,000             180,000  

Lan T. Tran, MPH

    2016     180,000     10,000     892,568     1,082,568  

Co-President, Chief Administrative Officer

    2015     166,124             166,124  

and Corporate Secretary(2)

                               

Yasushi Nagasaki

    2016     180,000     10,000     892,568     1,082,568  

Senior Vice President, Finance

    2015     180,000             180,000  

(1)
Dr. Niihara was elevated to the title of Chairman on May 1, 2015. From May 1, 2015 until December 16, 2015, Dr. Niihara served as our Chief Scientific Officer rather than our Chief Executive Officer.

(2)
From May 1, 2015 until December 16, 2015, Mr. Ludlum and Ms. Tran served as an executive committee that served the role of our principal executive officer.

        Total compensation for Dr. Niihara, Mr. Lee and Ms. Tran for the years ended December 31, 2016 and 2015 did not include an amount for the annual performance bonus pursuant to their respective employment agreements. We did not grant performance-based cash bonuses in 2016 and 2015 in part because of management's emphasis on preserving available capital to fund operating expenses. Additionally, specific performance criteria were not established for our executive officers for 2016 or 2015. Each of our executive officers waived any right under their respective employment agreement to an annual performance bonus for 2016 and 2015 and we did not incur any liability as a result of not granting such performance-based cash bonuses.

        In October 2016, the Compensation, Nominating and Corporate Governance Committee approved discretionary bonuses for each of Mr. Lee, Mr. Nagasaki and Ms. Tran as shown in the table above under the heading "Bonus."

        On May 10, 2016, the board of directors of the Company authorized and approved option grants to the named executive officers in the amounts set forth below, with a term of 10 years and an exercise

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price of $5.00 per share, the fair market value of a share of Common Stock as of the grant date, as determined by the board of directors.

Name
  Title   Number of
Options
 

Yutaka Niihara, M.D., MPH

  Chairman and Chief Executive Officer     300,000  

Willis C. Lee

  Vice-Chairman, Chief Operating Officer and Chief Financial Officer     300,000  

Peter B. Ludlum

  Co-President and Chief Business Officer     300,000  

Yasushi Nagasaki

  Senior Vice President, Finance     300,000  

Lan T. Tran, MPH

  Co-President, Chief Administrative Officer and Corporate Secretary     300,000  

        The options granted to each named executive officer will vest as follows: one-third (1/3) will vest on the first anniversary of the grant date, and the remaining two-thirds (2/3) will vest in twenty-four approximately equal monthly installments over a period of two years thereafter.

        On May 10, 2016, the board of directors of the Company authorized and approved the grant to Dr. Niihara of a warrant with a term of five years to purchase 1,300,000 shares of our common stock at an exercise price of $5.00 per share, the fair market value of a share of our common stock as of the grant date, as determined by the board of directors. Dr. Niihara may purchase one-half of the shares underlying his respective warrant from January 1, 2018 to May 9, 2021 and the other half of the shares underlying his warrant from January 1, 2019 to May 9, 2021.

Outstanding Equity Awards at 2016 Fiscal Year End

        The following table sets forth information regarding outstanding equity awards held by our named executive officers at the end of the 2016 fiscal year.

Name
  Number of Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of Securities
Underlying
Unexercised
Options (#)
Unexercisable(1)
  Option
Exercise
Price
  Option
Expiration
Date
 

Yutaka Niihara, M.D., MPH

    250,000       $ 3.60     4/1/2022  

    500,000       $ 3.60     2/28/2023  

        300,000 (1) $ 5.00     5/10/2026  

Willis C. Lee

    250,000       $ 3.60     4/1/2022  

    500,000       $ 3.60     2/28/2023  

        300,000 (1) $ 5.00     5/10/2026  

Peter B. Ludlum

    500,000       $ 3.60     2/28/2023  

        300,000 (1) $ 5.00     5/10/2026  

Lan T. Tran, MPH

    250,000       $ 3.60     4/1/2022  

    500,000       $ 3.60     2/28/2023  

        300,000 (1) $ 5.00     5/10/2026  

Yasushi Nagasaki

    250,000       $ 3.60     4/1/2022  

    500,000       $ 3.60     2/28/2023  

        300,000 (1) $ 5.00     5/10/2026  

(1)
One-third (1/3) of the options vested on May 10, 2017, the first anniversary of the grant date. The remaining two-thirds (2/3) vest in approximately equal monthly installments over a period of two years thereafter.

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Employment Agreements

        On April 5, 2011, we entered into employment agreements with Yutaka Niihara, M.D., MPH, our Chief Executive Officer, Willis C. Lee, our Chief Operating Officer, and Lan T. Tran, MPH, our Chief Administrative Officer. On April 8, 2011, we entered into an employment agreement with Yasushi Nagasaki, our former Chief Financial Officer and current Senior Vice President, Finance. On April 2, 2012, we entered into an employment agreement with Peter B. Ludlum, our Executive Vice President and Chief Financial Officer (the employment agreements, collectively, are referred to as the "Employment Agreements"). Each of the Employment Agreements has an initial two-year term, unless terminated earlier. Mr. Nagasaki's employment agreement expired in April 2013, and Mr. Ludlum's employment agreement expired in April 2014. The Employment Agreements for Dr. Niihara, Mr. Lee and Ms. Tran automatically renew for additional one-year periods unless the Company or the officer provides notice of non-renewal at least 60 days prior to the expiration of the then current term.

        Base Salary, Bonus and Other Compensation.    Dr. Niihara's, Mr. Lee's, and Ms. Tran's base salaries are $250,000, $180,000, and $180,000 per year, respectively, which will be reviewed at least annually. In addition to the base salary, each officer may be entitled to receive an annual performance bonus based on the officer's performance for the previous year. The Employment Agreements each provide that the respective officer's performance for the previous year will be measured against a set of targets and goals as mutually established by us and the officer. To date, our board of directors and the Compensation, Nominating and Corporate Governance Committee have evaluated an officer's performance on an overall basis related to the Company's progress on major milestones, without reliance on specific position by position pre-established targets and goals. The officers are also eligible to receive paid vacation, and participate in health and other benefit plans and will be reimbursed for reasonable and necessary business expenses.

        Equity Compensation.    The Employment Agreements state that at the end of each calendar year on December 31, or as soon as reasonably practicable after such date (each a "Grant Date"), the Company will grant non-qualified 10-year stock options with a Black-Scholes-Merton value of $100,000 to Dr. Niihara, $50,000 to Mr. Lee, and $40,000 to Ms. Tran, in each case with an exercise price per share equal to the "Fair Market Value" (as such term is defined in the Company's 2011 Stock Incentive Plan) on the applicable Grant Date. One-third of the options granted to each officer will vest on the first anniversary of the applicable Grant Date, one-third will vest on the second anniversary of the applicable Grant Date and the final one-third will vest on the third anniversary of the applicable Grant Date, although our current practice is to grant options that vest one-third on the first anniversary of the applicable Grant Date and then vest equally on a monthly basis until the third anniversary of the applicable Grant Date. Any unvested options will vest immediately upon a change in control (as defined below), termination of the officer's employment other than a voluntary termination by the officer or a termination of the officer for cause. In the event that the officer is terminated for any reason other than cause, death or disability or retirement, each option, to the extent that it is exercisable at the time of such termination, shall remain exercisable for the 90 day period following such termination, but in no event following the expiration of its term. In the event that the officer's employment terminates on account of death, disability or, with respect to any non-qualified stock option, retirement, each option granted that is outstanding and vested as of the date of such termination shall remain exercisable by such officer (or the officer's legal representatives, heirs or legatees) for the one-year period following such termination, but in no event following the expiration of its term.

        Severance Compensation.    If Dr. Niihara's, Mr. Lee's, or Ms. Tran's employment is terminated for any reason during the term of his or her respective employment agreement, other than for cause or without good reason, he or she will be entitled to receive his or her base salary prorated through the termination date, any expense reimbursement due and owing for reasonable and necessary business

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expenses, and unpaid vacation benefits (the "Voluntary Termination Benefits"). If Dr. Niihara's, Mr. Lee's, or Ms. Tran's employment is terminated due to death or disability of such officer during the term of his or her respective employment agreement, then such officer will also receive an amount equal to his or her target annual performance bonus, and for a termination due to disability only, six additional months of his or her base salary to be paid out over a six-month period and payment of COBRA benefits of up to six months following the termination. If Dr. Niihara's employment is terminated without cause or Dr. Niihara resigns with good reason (not within two years following a change in control), he will receive the Voluntary Termination Benefits and, provided he signs a Release, a severance package equal to one year of his base salary to be paid out over a 12-month period, a pro rata amount of the annual performance bonus for the calendar year in which the termination date occurs based on the achievement of any applicable performance terms or goals for the year, and payment of COBRA benefits of up to 12 months following the termination. If the employment of any of Mr. Lee, or Ms. Tran is terminated without cause or any of them resigns with good reason (not within two years following a change in control) during the term of his or her respective employment agreement, he or she will receive the Voluntary Termination Benefits and, provided he or she signs a Release, a severance package equal to six months of his or her base salary to be paid out over a six-month period, an amount equal to half of the targeted annual performance bonus, and payment of COBRA benefits of up to six months following the termination.

        Termination with cause includes a proven act of dishonesty, fraud, embezzlement or misappropriation of Company proprietary information; a conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude; willful misconduct which cannot be cured on reasonable notice to the officer; or the officer's habitual failure or refusal to perform his duties if such failure or refusal is not cured within 20 days after receiving written notice thereof from the board of directors. Good reason includes a reduction of more than 10% to the officer's base salary or other compensation (except as part of a general reduction for all executive employees); a material diminution of the officer's authority, responsibilities, reporting or job duties (except for any reduction for cause); the Company's material breach of the Employment Agreement; or, in the case of Dr. Niihara, Mr. Lee and Ms. Tran, a relocation of the business requiring the officer to move or drive to work more than 40 miles from its current location. The officer may terminate the Employment Agreement for good reason if he or she provides written notice to the Company within 90 days of the event constituting good reason and the Company fails to cure the good reason within 30 days after receiving such notice.

        Change of Control.    The Employment Agreements will not be terminated upon a change of control. A change of control means any merger or reorganization where the holders of the Company's capital stock prior the transaction own fewer than 50% of the shares of capital stock after the transaction, an acquisition of 50% of the voting power of the Company's outstanding securities by another entity, or a transfer of at least 50% of the fair market value of the Company's assets. Upon Dr. Niihara's termination without cause or good reason that occurs within two years after a change of control, he will receive the Voluntary Termination Benefits and, provided he signs a release of all claims relating to his employment, a severance package equal to two years of his base salary to be paid out over a 12-month period, an amount equal to double the targeted annual performance bonus, payment of COBRA benefits of up to 18 months following the termination; and a one-time cash payment of $3.0 million. Upon Mr. Lee's or Ms. Tran's termination without cause or good reason that occurs within two years after a change of control, he or she will receive the Voluntary Termination Benefits and, provided he or she signs a Release, a severance package equal to one year of his or her base salary to be paid out over a 12-month period, an amount equal to the full year targeted annual performance bonus, payment of COBRA benefits of up to 12 months following the termination. Mr. Lee and Ms. Tran will also receive a one-time cash payment of $200,000. In addition, each officer's unvested equity awards shall vest upon such termination and the officer will have 36 months in which to sell or exercise such awards (subject to expiration of the term of such options). The officer will also be free from all lock-up or other contractual restrictions upon the free sale of shares that are subject to waiver by the Company upon such termination.

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Director Compensation

        Since February 26, 2014, the compensation program for non-employee directors has consisted of:

    a cash retainer of $500 per month;

    cash compensation of $700 for each in-person board meeting attended, $400 for each telephonic board meeting attended, $400 for each committee meeting attended, and $200 for each meeting chaired by such non-employee director;

    an initial grant of 100,000 options upon election and 50,000 stock options annually thereafter;

    a one-time grant of 2,000 options to the chairman of each committee; and

    a one-time grant of 10,000 options to the Chairman of the Board, if a non-employee.

Options granted under this program are expected to vest over 3 years. Pursuant to the 2011 Stock Incentive Plan, non-employee directors receive at a minimum an annual grant of 10,000 options. Additionally, the Chairman of the Board receives a one-time retainer grant of 10,000 options and each committee chair receives a one-time retainer grant of 2,000 options. These provisions of the 2011 Stock Incentive Plan have effectively been superseded by the current non-employee director compensation program. Because the Company did not hold a 2015 annual meeting of stockholders, directors were not granted any options in 2015.

        The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2016 by the non-employee members of our board of directors. Compensation earned by our current employee directors, Yutaka Niihara, M.D., MPH and Willis C. Lee, who do not receive compensation for their services as a director, is reported above under the heading "Summary Compensation Table."

Name
  Fees Earned or
Paid in Cash
  Option
Awards
  Total  

Ian Zwicker

    13,700     574,659     588,359  

Jon Kuwahara

    13,300     574,659     587,959  

Masaharu Osato, M.D. 

    12,900     574,659     587,559  

Total

  $ 39,900   $ 1,723,977   $ 1,763,877  

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        As of December 31, 2016, our former non-employee directors had option awards outstanding pursuant to the 2011 Stock Incentive Plan to purchase the following number of shares of our common stock in the table directly below:

Name
  Number of
Securities
Underlying
Unexercised
Options ($)
Exercisable
(Vested)
  Number of
Securities
Underlying
Unexercised
Options ($)
Unexercisable
(Unvested)
  Option
Exercise
Price
  Option
Expiration
Date
 

Maurice J. DeWald(1)

    12,000       $ 3.60     12/19/2021  

    75,000       $ 3.60     4/2/2022  

    250,000       $ 3.60     2/28/2023  

    10,000       $ 0.00     2/28/2023  

    34,667 (a)   17,333   $ 3.60     2/26/2024  

Jon Kuwahara

        100,000 (b) $ 4.70     1/14/2026  

        100,000 (c) $ 5.00     5/10/2026  

Masaharu Osato

        100,000 (b) $ 4.70     1/14/2026  

        100,000 (c) $ 5.00     5/10/2026  

Ian Zwicker

        100,000 (b) $ 4.70     1/14/2026  

        100,000 (c) $ 5.00     5/10/2026  

(a)
Options vest annually in equal amounts (or as close to an equal amount as possible) over a period of three years with the first one-third (1/3) vesting on February 26, 2015.

(b)
Options vest annually in equal amounts (or as close to an equal amount as possible) over a period of three years with the first one-third (1/3) vesting on January 14, 2017.

(c)
Options vest annually in equal amounts (or as close to an equal amount as possible) over a period of three years with the first one-third (1/3) vesting on May 10, 2017.

(1)
Mr. DeWald resigned from the board of directors on May 8, 2014.

        On January 14, 2016, the board of directors authorized and approved the option grants to new non-employee directors upon joining the Company contemplated by our director compensation program, which options have a term of 10 years and an exercise price of $4.70 per share, the fair market value of a share of common stock as of the grant date as determined by the board of directors.

        On May 10, 2016, the board of directors authorized and approved the annual option grants to non-employee directors contemplated by our director compensation program, which options have a term of 10 years and an exercise price of $5.00 per share, the fair market value of a share of common stock as of the grant date as determined by the board of directors.

2011 Stock Incentive Plan

Background

        On May 3, 2011, the board of directors and stockholders adopted the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan, or the Plan. Stockholder approval of the Plan enables us to satisfy stock exchange listing requirements, if and when we become subject to such requirements, and to make awards that qualify as performance-based compensation that is exempt from the deduction limitation set forth under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. Subject to certain exceptions, Section 162(m) generally limits the corporate income tax deductions to $1,000,000 annually for compensation paid to each of the Chief Executive Officer and our other three highest paid executive officers required to be reported under the proxy disclosure rules.

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        The Plan permits grants of stock options, stock appreciation rights, or SARs, restricted stock, stock units, stock bonus and unrestricted stock awards, which we collectively refer to as Awards. Our board of directors believes that the Plan is an important factor in attracting, retaining and motivating our employees, consultants, agents, and directors and our affiliates, who are collectively referred to as Eligible Persons. Our board of directors believes that we need the flexibility both to have an ongoing reserve of common stock available for future equity-based awards, and to make future awards in a variety of forms.

        On February 28, 2013, our board of directors authorized and adopted an amendment to Section 1.5(a) of the Plan. The amendment increased the total number of shares of our common stock with respect to which awards may be granted pursuant to the Plan from 3,000,000 to 6,000,000 (subject to adjustment as set forth in the Plan), which we refer to as the Cap. Except for this increase in the Cap, the terms of the Plan, including the adjustment mechanisms set forth therein, were unchanged by the amendment. The amendment was subsequently ratified by our stockholders at our 2013 Annual Meeting on September 23, 2013. On July 17, 2014, our board of directors authorized and adopted an amendment to Section 1.5(a) of the Plan. The amendment increased the total number of shares of our common stock with respect to which awards may be granted pursuant to the Plan from 6,000,000 to 9,000,000 (subject to adjustment as set forth in the Plan) and was subsequently ratified by our stockholders at our 2014 Annual Meeting on October 23, 2014.

Purpose

        The purpose of the Plan is to attract, retain and motivate select employees, consultants and directors for us and our affiliates and to provide incentives and rewards for superior performance. As of December 31, 2016, there were approximately 28 Eligible Persons who were our directors or employees of one of our subsidiaries.

Shares Subject to the Plan

        The Plan provides that no more than 9,000,000 shares of common stock may be issued pursuant to Awards under the Plan. The number of shares available for Awards, as well as the terms of outstanding Awards, is subject to adjustment as provided in the Plan for stock splits, stock dividends, recapitalizations and other similar events.

        The maximum awards that can be granted under the Plan to a single participant in any calendar year shall be 500,000 shares of common stock in the form of options or SARs, and 500,000 shares of common stock in the form of restricted shares, restricted stock units, stock bonus and other stock-based awards.

Administration

        The Compensation, Nominating and Corporate Governance Committee of the board of directors or another committee appointed by our board of directors administer the Plan. The Compensation, Nominating and Corporate Governance Committee of our board of directors and any other committee exercising discretion under the Plan from time to time are referred to below as the Committee.

        Subject to the terms of the Plan, the Committee has express authority to determine the Eligible Persons who will receive Awards, the number of shares of common stock, units or dollars to be covered by each Award, and the terms and conditions of Awards. The Committee has broad discretion to prescribe, amend, and rescind rules relating to the Plan and its administration, to interpret and construe the terms of the Plan and the terms of all Award agreements, and to take all actions necessary or advisable to administer the Plan.

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        Stock awards granted under the Plan (other than performance-based awards, awards involving an aggregate number of shares equal to less than 5% of shares available for awards and annual director stock grants described below) will have a minimum vesting period of three years.

        The Plan provides that we will indemnify members of the Committee and their delegates against any claims, liabilities or costs arising from the good faith performance of their duties under the Plan. The Plan releases these individuals from liability for good faith actions associated with the Plan's administration.

Eligibility

        The Committee may grant options that are intended to qualify as incentive stock options, or ISOs, only to our and our subsidiaries' employees, and may grant all other Awards to Eligible Persons. The Plan and the discussion below use the term "Participant" to refer to an Eligible Person who has received an Award.

Types of Awards

        Options.    Options granted under the Plan provide Participants with the right to purchase shares of common stock at a predetermined exercise price. The Committee may grant options that are intended to qualify as ISOs or options that are not intended to so qualify, referred to as Non-ISOs. The Plan also provides that ISO treatment may not be available for options that become first exercisable in any calendar year to the extent the value of the underlying shares that are the subject of the option exceeds $100,000 (based upon the fair market value of the shares of common stock on the option grant date).

        Stock Appreciation Rights (SARs).    A stock appreciation right generally permits a Participant to receive, upon exercise, cash and/or shares of common stock equal in value to an amount determined by multiplying (a) the excess of the fair market value, on the date of exercise, of the shares of common stock with respect to which the SAR is being exercised, over the exercise price of the SAR for such shares by (b) the number of shares with respect to which the SARs are being exercised. The Committee may grant SARs in tandem with options or independently of them.

        Exercise Price for Options and SARs.    The exercise price of ISOs, Non-ISOs, and SARs may not be less than 100% of the fair market value on the grant date of the shares of common stock subject to the Award (110% of fair market value for ISOs granted to employees who, on the grant date, own stock representing more than 10% of the combined voting power of all classes of our stock).

        Exercise of Options and SARs.    To the extent exercisable in accordance with the agreement granting them, an option or SAR may be exercised in whole or in part, during the term established by the Committee, subject to earlier termination relating to a holder's termination of employment or service. The expiration date of options and SARs may not exceed 10 years from the date of grant (five years in the case of ISOs granted to employees who, on the grant date, own more than 10% of the combined voting power of all classes of our stock).

        Unless otherwise provided under the terms of the agreement evidencing a grant, options and SARs that have vested may be exercised during the one-year period after the optionee's termination of service due to death or permanent disability or after the optionee retires (with respect to SARs and Non-ISOs only) and during the 90-day period after the optionee's termination of employment other than for cause (but in no case later than the termination date of the option or SAR). Each option or SAR that remains unexercisable at the time of termination shall be terminated at the time of termination.

        Restricted Stock, Stock Units, Stock Bonus, and Other Stock-Based Awards.    Under the Incentive Plan, the Committee may grant restricted stock that is forfeitable until certain vesting requirements are

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met, may grant restricted stock units, or RSUs, which represent the right to receive shares of common stock after certain vesting requirements are met, and may grant unrestricted stock as to which the Participant's interest is immediately vested (subject to the exceptions to the minimum vesting requirements described above). The Plan provides the Committee with discretion to determine the terms and conditions under which a Participant's interests in such Awards becomes vested, which may include the achievement of financial or other objective performance goals or other objectives.

        Annual Non-Employee Director Grants.    The Plan provides for annual grants of 10,000 options to non-employee directors, which we refer to as the Annual Director Award. Each Annual Director Award will vest in four substantially equal quarterly installments. These grants have been superseded by, and are not in addition to, the compensation program for non-employee directors.

Clawback of Awards

        Unless otherwise provided in an agreement granting an Award, we may terminate any outstanding, unexercised, unexpired or unpaid Award, rescind any exercise, payment or delivery pursuant to the Award, or recapture any common stock (whether restricted or unrestricted) or proceeds from the Participant's sale of shares issued pursuant to the Award in the event of the discovery of the Participant's fraud or misconduct, or otherwise in connection with a financial restatement.

Income Tax Withholding

        As a condition for the issuance of shares pursuant to Awards, the Plan requires satisfaction of any applicable federal, state, local, or foreign withholding tax obligations that may arise in connection with the award or the issuance of shares.

Transferability

        Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of other than by will or the laws of descent and distribution, except to the extent the Committee permits.

Certain Corporate Transactions

        The Committee shall equitably adjust, as it deems necessary and appropriate, the number of shares covered by each outstanding Award, the number of shares that have been authorized for issuance under the Plan but have not yet been granted or that have been returned to the Plan upon cancellation, forfeiture or expiration of an Award, and the maximum number of shares that may be granted in any calendar year to individual participants, as well as the price per share covered by each outstanding Award, to reflect any increase or decrease in the number of issued shares resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the shares, or any other increase or decrease in the number of issued shares effected without receipt of consideration by us.

        The Committee has the authority, in the event of a merger, sale of assets, reorganization or similar change in control transaction, to cause us to accelerate the vesting of Awards. To the extent that an Award is not exercised prior to consummation of a transaction in which the Award is not being assumed or substituted, such Award shall terminate upon such consummation.

Term of the Plan; Amendments or Termination

        The term of the Plan is 10 years from the date of adoption by the board of directors. Our board of directors may from time to time, amend, alter, suspend, discontinue or terminate the Plan; provided that no amendment, suspension or termination of the Plan shall materially and adversely affect Awards already granted. Furthermore, the Plan specifically prohibits the repricing of stock options or SARs

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without stockholder approval. For this purpose, a "repricing" means any of the following (or any other action that has the same effect as any of the following): (i) changing the terms of a stock option or SAR to lower its exercise price; (ii) any other action that is treated as a "repricing" under generally accepted accounting principles; and (iii) repurchasing for cash or canceling a stock option or SAR at a time when its exercise price is greater than the fair market value of the underlying stock in exchange for another award, unless the cancellation and exchange occurs in connection with a change in capitalization or similar change. Such cancellation and exchange would be considered a "repricing" regardless of whether it is treated as a "repricing" under generally accepted accounting principles and regardless of whether it is voluntary on the part of the participant.

U.S. Federal Income Tax Consequences

        The U.S. federal income tax rules applicable to awards under the Plan under the Code are summarized below. This summary omits the tax laws of any municipality, state, or foreign country in which a participant resides.

        Stock option grants under the Plan may be intended to qualify as incentive stock options under Section 422 of the Code or may be non-qualified stock options governed by Section 83 of the Code. Generally, federal income tax is not due from a participant upon the grant of a stock option, and a deduction is not taken by us. Under current tax laws, if a participant exercises a non-qualified stock option, he or she will have taxable income equal to the difference between the market price of the common stock on the exercise date and the stock option grant price. We are entitled to a corresponding deduction on our income tax return. A participant will not have any taxable income upon exercising an incentive stock option after the applicable holding periods have been satisfied (except that the alternative minimum tax may apply), and we will not receive a deduction when an incentive stock option is exercised. The treatment for a participant of a disposition of shares acquired through the exercise of a stock option depends on how long the shares were held and whether the shares were acquired by exercising an incentive stock option or a non-qualified stock option. We may be entitled to a deduction in the case of a disposition of shares acquired under an incentive stock option before the applicable holding periods have been satisfied.

        Generally, taxes are not due when a restricted stock or RSU award is initially granted, but the restricted stock becomes taxable when it is no longer subject to a "substantial risk of forfeiture" (generally, when it becomes vested or nontransferable), in the case of restricted stock, or when shares are issued in connection with vesting, in the case of an RSU. Income tax is calculated on the value of the stock at ordinary rates at that time, and then at capital gain rates when the shares are sold. However, no later than 30 days after a participant receives an award of restricted stock, pursuant to Section 83(b) of the Code, the participant may elect to recognize taxable ordinary income in an amount equal to the fair market value of the stock at the time of receipt. Provided that the election is made in a timely manner, the participant will not recognize any additional income when the award is no longer transferable or subject to a "substantial risk of forfeiture."

        The grant of a stock appreciation right ("SAR') generally will have no federal income tax consequences for the participant. Upon the exercise of a SAR, the participant will recognize ordinary income equal to the excess of the fair market value, on the date of exercise, of the shares of common stock with respect to which the SAR is being exercised, over the exercise price of the SAR for such shares. Generally, we will be entitled to a deduction equal to the amount of ordinary income recognized by the participant at the time the participant recognizes such income for tax purposes.

        Section 409A of the Code provides additional tax rules governing non-qualified deferred compensation. Generally, Section 409A will not apply to awards granted under the Plan, but may apply in some cases to RSUs. For such awards subject to Section 409A, certain of our officers may experience a delay of up to six months in the settlement of the awards in shares of our stock.

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        Awards granted under the Plan may be structured to qualify as performance-based compensation under Section 162(m) of the Code. To qualify, the Plan must satisfy the conditions set forth in Section 162(m) of the Code, and stock options and other awards must be granted under the Plan by a committee consisting solely of two or more outside directors (as defined under Section 162 regulations) and must satisfy the Plan's limit on the total number of shares that may be awarded to any one participant during any calendar year. For awards other than stock options and SARs to qualify, the grant, issuance, vesting, or retention of the award must be contingent upon satisfying one or more of the performance criteria set forth in the Plan, as established and certified by a committee consisting solely of two or more outside directors. The rules and regulations promulgated under Section 162(m) are complicated and subject to change from time to time, sometimes with retroactive effect. In addition, a number of requirements must be met in order for particular compensation to so qualify. As such, there can be no assurance that any compensation awarded or paid under the Plan will be deductible under all circumstances. The Compensation, Nominating and Corporate Governance Committee retains the right to make awards which would not be deductible under Section 162(m).

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options, warrants and convertible notes held by that person that are currently exercisable or become exercisable within 60 days of March 20, 2017 are deemed outstanding even if they have not actually been exercised. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

        The following table sets forth certain information as of March 20, 2017 with respect to beneficial ownership of our common stock based on issued and outstanding shares of common stock owned by:

    Each person known to be the beneficial owner of 5% or more of our outstanding common stock;

    Each named executive officer;

    Each director; and

    All of our executive officers and directors as a group.

        Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder's name, subject to community property laws, where applicable. Unless otherwise indicated in the table or its footnotes, the

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address of each stockholder listed in the table is c/o Emmaus Life Sciences, Inc., 21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503.

Name of Beneficial Owner
  Title   Amount and
Nature of
Beneficial
Ownership of
Shares of
Common Stock
  Percent of
Class(1)
 

Directors and Executive Officers

                 

Yutaka Niihara, M.D., MPH

  Chairman and Chief Executive Officer     11,914,198 (2)   32.3 %

Willis C. Lee

  Vice-Chairman, Chief Operating Officer and Chief Financial Officer     1,099,057 (3)   3.1 %

Yasushi Nagasaki

  Senior Vice President, Finance     929,900 (4)   2.6 %

Lan T. Tran, MPH

  Co-President, Chief Administrative Officer and Corporate Secretary     875,294 (5)   2.5 %

Peter B. Ludlum

  Co-President and Chief Business Officer     603,000 (6)   1.7 %

Masaharu Osato, M.D. 

  Director     560,282 (7)   1.6 %

Ian Zwicker. 

  Director     66,666     *  

Jon Kuwahara

  Director     66,666     *  

Officers and Directors as a Group (total of 8 persons)

        16,115,063 (8)   39.9 %

5% or More Owners

                 

KPM Tech Co., Ltd. & Hanil Vacuum Co., Ltd.(11)

        4,444,445     12.8 %

Daniel R. and Yuka I. Kimbell

        2,434,028 (9)   7.0 %

Sarissa Capital Management LP

        1,997,657 (10)   5.6 %

*
Less than 1%.

(1)
Based on 34,714,219 shares of common stock issued and outstanding as of March 20, 2017.

(2)
Includes 9,593,260 shares that are held jointly by Yutaka Niihara and his wife Soomi Niihara. Also includes 44,229 shares of common stock for which Dr. Niihara is custodian. Dr. Niihara may be deemed the indirect beneficial owner of these securities since he has sole voting and investment control over the securities. Also includes 55,556 shares owned by Hope Hospice. Dr. Niihara is the Chief Executive Officer of Hope Hospice and has voting and investment power over such shares. Also includes 850,000 shares underlying stock options, 1,300,000 shares underlying warrants to purchase shares of common stock and 51,153 shares of common stock underlying outstanding convertible notes, in each case exercisable or convertible within 60 days after March 20, 2017.

(3)
Includes 850,000 shares underlying options to purchase shares of common stock exercisable within 60 days after March 20, 2017.

(4)
Includes 79,900 shares of common stock underlying outstanding convertible notes convertible within 60 days after March 20, 2017, and 850,000 shares underlying options to purchase shares of common stock exercisable within 60 days after March 20, 2017.

(5)
Includes 850,000 shares underlying options to purchase shares of common stock exercisable within 60 days after March 20, 2017.

(6)
Includes 600,000 shares underlying options to purchase shares of common stock exercisable within 60 days after March 20, 2017.

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(7)
Includes 491,506 shares that are held by Osato Medical Clinic and its pension plan of which Dr. Osato is the sole owner and trustee. As such, Dr. Osato may be deemed to beneficially own such shares.

(8)
Includes options to purchase 4,199,998 shares of common stock, warrants to purchase 1,300,000 shares of common stock and 131,053 shares of common stock underlying outstanding convertible notes, in each case exercisable or convertible within 60 days after March 20, 2017.

(9)
Includes 44,229 shares of common stock held by the holder as custodian. Daniel and Yuka Kimbell may be deemed the indirect beneficial owner of these securities since they have sole voting and investment control over the securities. The address for these stockholders is 16 N. Marengo Street, Suite 307, Pasadena, CA 91101.

(10)
Includes (i) 1,192,801 shares of common stock held by Sarissa Capital Domestic Fund LP ("Sarissa Domestic"), consisting of 715,121 shares of common stock and 477,680 shares underlying warrants to purchase shares of common stock and (ii) 804,856 shares of common stock held by Sarissa Capital Offshore Master Fund LP ("Sarissa Offshore"), consisting of 482,536 shares of common stock and 322,320 shares underlying warrants to purchase shares of common stock. Sarissa, as the investment advisor to Sarissa Domestic and Sarissa Offshore (collectively, the "Sarissa Funds"), may be deemed to beneficially own the 1,997,657 aggregate shares beneficially owned by the Sarissa Funds on the basis of its sole or shared power to vote or direct the vote of such shares and/or its sole or shared power to dispose or direct the disposition of such shares. By virtue of his position as the Chief Investment Officer of Sarissa and as the managing member of Sarissa's general partner, Dr. Alexander J. Denner may also be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the 1,997,657 shares beneficially owned by the Sarissa Funds. The address for this stockholder is 660 Steamboat Road, Greenwich, CT 06830.

(11)
Of the shares shown, 3,777,778 are owned of record by KPM Tech Co. Ltd. ("KPM") and 666,667 are owned of record by Hanil Vacuum Co., Ltd. ("Hanil"). KPM and Hanil may be deemed to be a member of a "group" with respect to the company or the shares shown for the purposes of Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended, and, as such, each may be deemed to own beneficially the shares shown. COS Investment, a company organized under the laws of the Republic of Korea, is the controlling shareholder of KPM and Hanil and, as such, also may be deemed to own beneficially the shares shown. The address of KPM is Dan-Won-Gu San-Dan-Ro, 163 Beon-Gil 122, An-San-Shi, Gyeong-Gi-Do, South Korea. The business address of Hanil is Nam-Dong-Gu Nam-Dong-Dong-Ro 183 Beon-Gil 30, Incheon, South Korea.

Securities Authorized for Issuance under Equity Compensation Plans

        The following table provides information as of December 31, 2016 regarding compensation plans, including any individual compensation arrangements, under which equity securities of the Company are authorized for issuance. Please see Part III. Item 11 "2011 Stock Incentive Plan" for a description of the terms of the 2011 Stock Incentive Plan as amended.

Plan Category
  Number of Securities
to be issued
upon exercise of
outstanding options,
warrants and rights
  Weighted-average
exercise price of
outstanding options,
warrants and rights
  Number of securities
remaining available
for future issuance
under equity
compensation plans
 

Equity compensation plans approved by securityholders

    6,955,200   $ 4.10     2,044,800  

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Emmaus Medical, Inc.

        Emmaus Life Sciences, Inc., Emmaus Medical, Newfield Nutrition, EM Japan, ELSK and EM Europe, which are either our directly or indirectly wholly-owned subsidiaries, each have interlocking executive and director positions with us and with each other. Dr. Niihara and Mr. Lee are directors of Newfield Nutrition. Dr. Niihara is a director of EM Japan. Dr. Niihara and Mr. Lee are directors of ELSK. Dr. Niihara and Ms. Tran are directors of EM Europe. The officers of Emmaus Life Sciences are also the officers of Emmaus Medical and Newfield Nutrition and hold the same officer positions in Emmaus Medical and Newfield Nutrition as they do in Emmaus Life Sciences.

Loans by Related Persons

        The following table sets forth information relating to our loans from related persons outstanding as of the date hereof or at any time during the year ended December 31, 2016.

Class
  Lender   Annual
Interest
Rate
  Date
of
Loan
  Term
of
Loan
  Principal
Amount
Outstanding
at
December 31,
2016
  Highest
Principal
Outstanding
  Amount
of
Principal
Repaid or
Converted
into Stock
  Amount
of
Interest
Paid
  Conversion
Rate
  Shares
Underlying
Notes at
December 31,
2016
 

Notes payable to related parties—current:

                                                     

 

Hope Hospice(1)

    8 %   1/17/2012   Due on demand   $ 200,000   $ 200,000   $   $ 20,000   $      

 

Hope Hospice(1)

    8 %   6/14/2012   Due on demand     200,000     200,000         20,000          

 

Hope Hospice(1)

    8 %   6/21/2012   Due on demand     100,000     100,000         10,000          

 

Hope Hospice(1)

    8 %   2/11/2013   Due on demand     50,000     50,000         5,000          

 

Hope Hospice(1)

    10 %   1/7/2015   Due on demand     100,000     100,000                  

 

Lan T. Tran(2)

    10 %   2/9/2015   Due on demand     10,000     10,000                  

 

IRA Service Trust Co. FBO Peter B. Ludlum(2)

    10 %   2/20/2015   Due on demand     10,000     10,000                  

 

Yutaka Niihara(2)(3)

    10 %   5/21/2015   Due on demand     94,340     826,105     731,765     47,822          

 

Masaharu & Emiko Osato(3)

    11 %   12/29/2015   Due on demand     300,000     300,000                  

 

Lan T. Tran(2)

    11 %   2/10/2016   Due on demand     130,510     130,510                  

 

Hideki & Eiko Uehara(4)

    11 %   2/15/2016   Due on demand         133,333     133,333     12,226   $ 3.50      

 

Masaharu & Emiko Osato(3)

    11 %   2/25/2016   Due on demand     400,000     400,000                  

 

Hope Hospice(1)

    10 %   4/4/2016   Due on demand     50,000     50,000                  

 

Willis C. Lee(2)(3)

    10 %   4/8/2016   Due on demand         79,700     79,700     1,288          

 

Lan T. Tran(2)

    10 %   4/29/2016   Due on demand     20,000     20,000                  

 

IRA Service Trust Co. FBO Peter B. Ludlum(2)

    10 %   5/5/2016   Due on demand     10,000     10,000                  

 

Hope Hospice(1)

    10 %   6/3/2016   Due on demand     250,000     250,000                  

 

Sub total

                  $ 1,924,850   $ 2,869,648   $ 944,798   $ 116,336   $      

Convertible notes payable to related parties—current:

                                                     

 

Yasushi Nagasaki(2)

    10 %   6/29/2012   Due on demand   $ 254,000   $ 388,800   $ 134,800   $ 27,824   $ 3.30     94,532  

 

Charles & Kimxa Stark(2)

    10 %   10/1/2015   2 years     20,000     20,000           $ 4.50     5,002  

 

Yutaka & Soomi Niihara(2)(3)

    10 %   11/16/2015   2 years     200,000     200,000           $ 4.50     49,461  

 

Sub total

                  $ 474,000   $ 608,800   $ 134,800   $ 27,824         148,995