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EX-23.2 - EXHIBIT 23.2 - EMMAUS LIFE SCIENCES, INC.v308769_ex23-2.htm
EX-4.24 - EXHIBIT 4.24 - EMMAUS LIFE SCIENCES, INC.v308769_ex4-24.htm
EX-4.22 - EXHIBIT 4.22 - EMMAUS LIFE SCIENCES, INC.v308769_ex4-22.htm
EX-4.23 - EXHIBIT 4.23 - EMMAUS LIFE SCIENCES, INC.v308769_ex4-23.htm
EX-4.21 - EXHIBIT 4.21 - EMMAUS LIFE SCIENCES, INC.v308769_ex4-21.htm
EX-10.32 - EXHIBIT 10.32 - EMMAUS LIFE SCIENCES, INC.v308769_ex10-32.htm
EX-10.20 - EXHIBIT 10.20 - EMMAUS LIFE SCIENCES, INC.v308769_ex10-20.htm
EX-10.27 - EXHIBIT 10.27 - EMMAUS LIFE SCIENCES, INC.v308769_ex10-27.htm
EX-10.34 - EXHIBIT 10.34 - EMMAUS LIFE SCIENCES, INC.v308769_ex10-34.htm
EX-10.33 - EXHIBIT 10.33 - EMMAUS LIFE SCIENCES, INC.v308769_ex10-33.htm

As Filed with the Securities and Exchange Commission on April 10, 2012 Registration No. 333-175434
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 4

to

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

Emmaus Life Sciences, Inc.

(Name of Registrant As Specified in its Charter)

 

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

 

20725 S. Western Avenue, Suite 136

Torrance, CA 90501

310-214-0065

(Address and Telephone Number of Principal Executive Offices)

 

 

 

Corporation Service Company

2711 Centerville Road

Suite 400

Wilmington, DE 19808

800-222-2122

(Name, Address and Telephone Number of Agent for Service)

 

 

 

Copies to

Thomas J. Poletti, Esq.

Katherine J. Blair, Esq.

Melissa A. Brown, Esq.

K&L Gates LLP

10100 Santa Monica Blvd., 7th Floor

Los Angeles, CA 90067

Telephone: (310) 552-5000

Facsimile: (310) 552-5001

 

Yvan-Claude Pierre, Esq.

Daniel I. Goldberg, Esq.

Reed Smith LLP

599 Lexington Avenue

New York, NY 10022

Telephone: (212) 521-5400

Facsimile: (212) 521-5450

 

 

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. £

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. £

 

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. (Check one):

 

Large accelerated filer £ Accelerated filer £

Non-accelerated filer £

(Do not check if a smaller reporting company)

Smaller reporting company R

   

CALCULATION OF REGISTRATION FEE

 

   Proposed     
   Maximum   Amount of 
Title of Each Class of  Aggregate   Registration 
Securities To Be Registered  Offering Price   Fee 
Common Stock, $0.001 par value per share  $46,000,000(1)  $5,271.60 
Underwriters’ Warrants to Purchase Common Stock   N/A    N/A(2)
Common Stock Underlying Underwriters’ Warrants, $0.001 par value per share  $2,500,000(3)  $286.50 
Total Registration Fee       $5,558.10(4) 

 

(1)The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes shares that the Underwriters have the option to purchase from the Registrant to cover over-allotments, if any.

 

(2)In accordance with Rule 457(g) under the Securities Act, because the shares of the Registrant’s common stock underlying the Underwriters’ warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.

 

(3)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, based on an estimated maximum exercise price of $5.00 per share, or 125% of the maximum offering price.

 

(4) Previously paid.

  

 

  

The Registrant amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

 

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED April 10, 2012

 

 

 

Shares

Common Stock

 


  

Emmaus Life Sciences, Inc. is offering shares of its common stock. No public market currently exists for our shares. We anticipate that the initial public offering price of our shares of common stock will be between $   and $   per share.

 

We have applied to have our shares of common stock listed on the NASDAQ Global Market under the symbol “EMMA.” No assurance can be given that such application will be approved.

 

Investing in our common stock involves a high degree of risk.  See “Risk Factors” beginning on page 7 of this prospectus for a discussion of information that should be considered before investing in our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities described herein or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

    Per Share     Total  
Public offering price   $     $  
Underwriting discounts and commissions (1)   $     $  
Proceeds to Emmaus, before expenses   $     $  

(1) The underwriters will receive compensation in addition to the discounts and commissions. See “Underwriting” for a description of compensation payable to the underwriters.

 

We have granted the underwriters an option to purchase up to an additional      shares of our common stock from us at the public offering price, less underwriting discounts and commissions, within 45 days from the date of this prospectus, to cover over-allotments of the shares.

 

The Underwriters expect to deliver our shares to purchasers in the offering on or about               , 2012.

 

Aegis Capital Corp

 

 

 
 

 

[INSIDE FRONT COVER]

 

 
 

 

TABLE OF CONTENTS

 

Prospectus Summary 1
Summary Financial Data 6
Risk Factors 7
Cautionary Statement Regarding Forward-Looking Statements 23
Use of Proceeds 25
Dividend Policy 27
Capitalization 27
Market for Common Equity and Related Stockholder Matters 28
Dilution 28
Management’s Discussion and Analysis of  Financial Condition and Results of Operations 30
Business 43
Management 59
Related Party Transactions 72
Beneficial Ownership of Certain Beneficial Owners, and Management 79
Description of Capital Stock 82
Shares Eligible For Future Sale 87
Underwriting 8 9
Legal Matters 96
Experts 96
Additional Information 96
Index to Financial Statements F-1

 

Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

 

You should rely only on information contained in this prospectus. We have not, and the Underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date. This prospectus may only be used where it is legal to offer and sell these securities.

 

For investors outside the United States:

 

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

 
 

 

  

PROSPECTUS SUMMARY

 

This summary highlights information contained throughout this prospectus and is qualified in its entirety by reference to the more detailed information and financial statements included elsewhere herein. Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading “Risk Factors” beginning on page 7 . Unless otherwise indicated, the information in this prospectus does not give effect to the Reverse Stock Split that we intend to effect prior to consummation of this offering.

 

As used in this prospectus, unless otherwise indicated, the terms “we,” “our,” “us,” “Company” and “Emmaus” refer to Emmaus Life Sciences, Inc., a Delaware corporation, formerly known as AFH Acquisition IV, Inc., and its wholly-owned subsidiary, Emmaus Medical, Inc., a Delaware corporation (“Emmaus Medical”), and its wholly-owned subsidiaries, Newfield Nutrition Corporation, a Delaware corporation, and Emmaus Medical Japan, Inc., a Japanese corporation.

 

Company Overview

 

We are a specialty pharmaceutical company engaged in the discovery, development and commercialization of innovative and cost-effective treatments and therapies for rare diseases, areas that we believe have traditionally been underserved by large pharmaceutical companies. We believe that there are attractive niche markets and financial opportunities for companies such as ours that specialize in treatments of rare diseases. Over time, we plan to expand our business to include the development and marketing of additional products to treat more common diseases. The primary focus of our business is the late-stage development of the amino acid L-glutamine as a prescription drug for the treatment of sickle cell disease (“SCD”). We have also entered into a Joint Research and Development Agreement (the “Research Agreement”) and an Individual Agreement (the “Individual Agreement”) with CellSeed, Inc. (“CellSeed”) for the research and development of cell sheet engineering regenerative medicine products (the “Products”), and the future commercialization of such Products. Currently, Emmaus Medical and CellSeed are interested in the joint research and development of Cultured Autologous Oral Mucosal Epithelial Cell-Sheet (“CAOMECS”) for regenerative medicine for cornea cell regeneration, and potentially Cell-Sheets for Cardiac Muscle Regeneration, and Regenerated Cartilage Sheets. To a lesser extent, we are also engaged in the marketing and sale of NutreStore® [L-glutamine powder for oral solution] as a treatment for short bowel syndrome (“SBS”) in addition to the sale of L-glutamine as a nutritional supplement under the brand name AminoPure®. Since inception, we have generated minimal revenues from the sale of NutreStore® and AminoPure®.

 

Our goal is to become a profitable specialty pharmaceutical company focused on the development and commercialization of proprietary branded products and product candidates to treat rare diseases. We intend to achieve this goal by:

 

·Maximizing the value of our L-glutamine treatment for SCD. We are currently conducting a phase III clinical trial of our L-glutamine treatment for SCD. We believe our treatment could have distinct advantages over traditional treatments for SCD, including cost savings. We intend to undertake activities to prepare for the commercialization of this treatment. When and if this treatment is approved by the U.S. Food and Drug Administration (“FDA”), we intend to commercialize our L-glutamine SCD treatment.

 

· Expanding our collaborative research arrangement with CellSeed . In April 2011, we entered into the Research Agreement and the Individual Agreement CellSeed. Pursuant to the Research Agreement, the parties formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products. Pursuant to the Individual Agreement, CellSeed granted us the exclusive right to manufacture, sell, market and distribute CAOMECS to be used on the cornea of appropriate patients residing in the United States. We intend to work on commercializing the CAOMECS for the cornea and to expand our relationship with CellSeed to develop cell sheets for other types of cells in the future.

 

·Establishing strategic collaborations. We are seeking opportunities to enter into strategic collaborations with other leading pharmaceutical and biotechnology companies so that we may commercialize our product candidates, ultimately, to drive growth and profitability. Leveraging the capabilities of third parties will allow us to add efficiency to our operations and expand our commercial reach.

 

·Pursuing acquisitions to broaden our drug candidates and product offerings. We shall consider strategic acquisitions that may provide us with a broader range of drug candidates and product offerings. When evaluating potential acquisition targets, we shall consider factors such as market position, growth potential, earnings prospects and the strength and experience of management.

 

  

1
 

 

 

Risks

 

We are a development stage company and have generated minimal revenues to date. Since our inception, we have incurred substantial losses related to the development of our treatment for SCD. Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should carefully consider the following risks, which are discussed more fully in "Risk Factors" beginning on page 7.

·We have incurred losses since inception, have limited cash resources and anticipate that we will continue to incur substantial losses for the foreseeable future.
·Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.
·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.
·Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.
·Our business is subject to extensive government regulation, which could cause delays in the development and commercialization of our drug products, impose significant costs on us or provide advantages to our larger competitors.
·We cannot assure you that we will be able to complete our clinical trial programs successfully within any specific time period, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
·The drug development process to obtain FDA approval is very costly and time consuming and if we cannot complete our clinical trials in a cost-effective manner, our results of operations may be adversely affected.
·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 or adversely affect the necessary human subject protections, or if the trials are not well designed, which may result in significant negative repercussions on our business and financial condition.
·There are known adverse side effects to our NutreStore® product.
·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, which could result in increased costs to us, delay our development timeline or reduce the likelihood of successful completion of the clinical trial.
·Even if we are able to develop our L-glutamine treatment for SCD, we may not be able to receive regulatory approval, or if approved, we may not be able to generate significant revenues or successfully commercialize our L-glutamine treatment for SCD, which would adversely affect our financial results and financial condition.
· Our marketed products, NutreStore® and AminoPure®, are subject to regulatory oversight and various laws and regulations. Violation of any regulatory requirements could result in enforcement actions, which could have a material adverse effect on our business.
·We are subject to various regulations pertaining to healthcare fraud and abuse, violations of which could have a material adverse affect on our business.
·If the manufacturers upon whom we rely fail to produce in the volumes and quality that we require on a timely basis, or 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 products, if any, and may lose potential revenues.
·The failure of our products to gain market acceptance will hinder our ability to generate revenues from the sale of our products.
·We lack experience in commercializing products, which may have an adverse effect on our business.
· We are required to make a significant payment to CellSeed pursuant to the Research Agreement and if we cannot make such payment when due, CellSeed may terminate the agreement which will negatively impact our financial condition and our ability to implement our business strategies.
·There are various uncertainties related to the research, development and commercialization of cell sheet engineering regenerative medicine products pursuant to the Research Agreement and Individual Agreement which could negatively affect our ability to commercialize such products.
·Failure to obtain acceptable prices or adequate reimbursement for our products may cause an adverse impact on our results of operations.
·If we do not achieve our projected development goals in the time frames we expect and announce, the credibility of our management and our drug products may be adversely affected.

  

  

2
 

  

 

·If we do not obtain the support of new, and maintain the support of existing, key scientific collaborators, it may be difficult to research other 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.
·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 drug product candidates, then our technologies and future drug product candidates may be rendered less competitive.
· The use of any of our drug product candidates in clinical trials and in the market may expose us to product or other liability claims.
·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.
·We rely heavily on the founder of Emmaus Medical, Yutaka Niihara, M.D., MPH, our current President and Chief Executive Officer. The loss of his services would have a material adverse effect upon us and our business and prospects.
·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.
·We are dependent on licenses and sublicenses for certain patents for our products. If the licenses of any superior sublicenses terminates or if the patents of our licensors are challenged and we are limited in our ability to utilize the licensed 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.
·If we are unable to protect our proprietary technology, we may not be able to compete as effectively and our business and financial prospects may be harmed.
·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.
·Our success depends on our ability to manage our growth.
·Our business and results of operations may be negatively impacted by general economic and financial market conditions and such conditions may exacerbate the other risks that affect our business.
·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 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, reduce net income.
·Our charter documents may have anti-takeover effects that could prevent a change in control, which may cause our stock price to decline.

 

Corporate Information

 

Our company was incorporated in the state of Delaware on September 24, 2007 and was originally organized as a “blank check” shell company to investigate and acquire a target company or business which sought the perceived advantages of being a publicly held corporation. On May 3, 2011, we (i) closed a reverse merger transaction, described below, pursuant to which we 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.”

 

Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC conducted a reorganization and merged into Emmaus Medical, which was originally incorporated on September 12, 2003. Through this merger of Emmaus Medical, LLC and Emmaus Medical, Emmaus Medical acquired the exclusive patent rights for a treatment for SCD.

 

 

3
 

 

  

The corporate structure of the Company is illustrated as follows: 

 

 

Our principal executive offices and corporate offices are located at 20725 S. Western Avenue, Ste. 136, Torrance, CA 90501-1884. Our telephone number is 310-214-0065.

 

We are a reporting company pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied to have our shares of common stock listed on the NASDAQ Global Market under the symbol “EMMA.”

 

Reverse Stock Split

 

On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the “Reverse Stock Split”), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of the offering contemplated herein. Our board of directors has not determined whether to effect the Reverse Stock Split or which exchange ratio to implement. If our board of directors elects to effect the Reverse Stock Split, it will set the ratio for the Reverse Stock Split as it determines is advisable after consulting with the underwriters and advisors and considering relevant market conditions at the time of the closing. The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the Delaware Secretary of State. The par value and number of authorized shares of our common stock will remain unchanged.

  

 

4
 

 

 

The Offering

 

Common stock we are offering  

shares (1) 

     

Common stock included in Underwriters’ option to purchase shares from us to cover over-allotments, if any 

  shares
     

Common stock outstanding after the offering 

  shares (2)(3)
     
Offering price   $           to $            per share (estimate)
     
Use of proceeds  

We intend to use the proceeds of this offering for research and development, commercialization costs, payments to CellSeed pursuant to the Research Agreement, payments to AFH Holding and Advisory, LLC (“AFH Advisory”), loan repayments and operating costs and working capital. See “Use of Proceeds” on page 25 for more information on the use of proceeds. 

     
Risk factors  

Investing in these securities involves a high degree of risk. As an investor you should be able to withstand a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 7. 

     
Proposed symbol   We have applied to have our shares of common stock listed on the NASDAQ Global Market under the symbol “EMMA” on or promptly after the date of this prospectus.

 

 

  

(1) Excludes (i) up to                shares of common stock underlying warrants to be received by the Underwriters in this offering and (ii) the                shares of our common stock that we may issue upon the Underwriters’ over-allotment option exercise.

 

(2) Based on (i) 24,393,461 shares of common stock issued and outstanding as of the date of this prospectus and (ii)                 shares of common stock issued in the public offering.  Excludes (i) Underwriters’ warrants to purchase a number of shares equal to 5% of the shares of common stock sold in this offering excluding the shares sold in the over-allotment option; (ii) 298,494 shares of common stock underlying warrants that are exercisable at $3.05; (iii) 374,492 shares of common stock underlying warrants that are exercisable at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise; (iv) 2,222,058 shares of common stock underlying warrants that are exercisable at $1.00; (v) 11,795 shares of common stock underlying options that are exercisable at $3.05 per share; (vi) 61,000 shares of common stock underlying options that are exercisable at $3.60 per share; (vii) 275,745 shares of common stock underlying convertible notes convertible at $3.05 per share (as of March 20, 2012); (viii) 1,191,878 shares of common stock underlying convertible notes convertible at $3.60 per share (as of March 20, 2012); and (ix)                 shares of common stock underlying warrants that will be issued to AFH Advisory upon completion of this offering. Also excludes shares of our common stock that we may issue upon the Underwriters’ exercise of over-allotment option.

 

(3) Does not give effect to the Reverse Stock Split that we intend to effect prior to consummation of the offering.

  

 

 

5
 

 

 

SUMMARY FINANCIAL DATA

 

The following summary financial information contains (i) consolidated statement of operations data for the years ended December 31, 2011 and 2010 and since inception through December 31, 2011 and (ii) the consolidated balance sheet data as of December 31, 2011. The consolidated statement of operations data for the years ended December 31, 2011 and 2010 and balance sheet data as of December 31, 2011 were derived from the audited consolidated financial statements included elsewhere in this prospectus. Such financial data should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements starting on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Years Ended
December 31,
    From
December 20, 2000
(date of inception)
to December 31,
 
    2011     2010     2011  
                   
    (in thousands, except share and per share amounts)  
Sales   $ 339     $ 169     $ 714  
Sales return & allowance     (2 )     (30 )     (33 )
Revenues     337       139       681  
                         
Cost of goods sold                        
Cost of goods sold     132       99       358  
Scrapped inventory     -       236       236  
Total cost of goods sold     132       335       594  
Gross profit (loss)     205       (196 )     87  
                         
Operating expenses                        
Research and development     1,552       1,062       6,452  
Selling     697       656       2,499  
General and administrative     5,048       1,818       10,660  
Transaction costs     789       -       789  
      8,086       3,536       20,400  
                         
Loss from operations     (7,881 )     (3,732 )     (20,313 )
                         
Other income (expense)                        
Interest income     30       39       116  
Interest expense     (979 )     (60 )     (1,369 )
      (949 )     (21 )     (1,253 )
                         
Loss before income taxes     (8,830 )     (3,753 )     (21,566 )
Income taxes     3       4       18  
Net loss     (8,833 )     (3,757 )     (21,584 )
Loss per share   $ (0.38 )   $ (0.19 )        
Weighted average shares outstanding     23,068,206       19,661,306          

 

Consolidated Balance Sheets   As of December 31,     As Adjusted (1)  
    2011        
           
    (in thousands)  
Total Current Assets   $ 590          
Total Assets     2,482          
Total Current Liabilities     3,577          
Total Liabilities     5,457          
Total Stockholders' Equity (Deficit)     (2,975 )        

 

(1) As adjusted amounts give effect to the issuance and sale of         shares of common stock by us in this offering at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus) and the application of the net proceeds of the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth under “Use of Proceeds.” See “Use of Proceeds” and “Capitalization.”

 

The acquisition of Emmaus Medical by us on May 3, 2011 pursuant to the Merger was accounted for as a recapitalization by us. The recapitalization was, at the time of the Merger, the merger of a private operating company (Emmaus Medical) into a non-operating public shell corporation (currently the Company) with nominal net assets and as such is treated as a capital recapitalization, as opposed to a business combination. As a result, the assets of the operating company are recorded at historical cost. The transaction is the equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation. The pre-acquisition financial statements of Emmaus Medical are treated as the historical financial statements of the consolidated companies. The financial statements presented will reflect the change in capitalization for all periods presented, therefore the capital structure of the consolidated enterprise, being the capital structure of the legal parent, is different from that appearing in the financial statements of Emmaus Medical in earlier periods due to the aforementioned recapitalization.

 

 

6
 

 

RISK FACTORS

 

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common stock. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. Our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. If and when our shares of common stock are traded, the trading price could decline due to any of these risks, and an investor may lose all or part of his or her investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting our company. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.

 

Risks Related to Our Operations

 

We have incurred losses since inception, have limited cash resources and anticipate that we will continue to incur substantial losses for the foreseeable future.

 

We are in the development stage.  As of December 31, 2011, we had an accumulated deficit of $21.6 million since our inception in 2000. Our net losses were $8.8 million and $3.8 million for the years ended December 31, 2011 and 2010, respectively. 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 are likely to sustain operating losses in the foreseeable future. Since inception, we have funded our operations through the private placement of equity securities, convertible notes and loans from stockholders and expect that we will continue to fund our operations through public or private equity or debt financings or other sources, such as strategic partnerships. Such financings may not be available in amounts or on terms acceptable to us, if at all. Our failure to raise capital as and when needed would inhibit our ability to continue operations and implement our business strategies.

 

We expect to continue to incur significant and increasing negative cash flow and operating losses as we continue our research activities, conduct clinical trials, and seek regulatory approvals for our L-glutamine treatment for SCD. 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 drug development, we are unable to predict the extent of any future losses, whether or when we will be able to commercialize our L-glutamine treatment for SCD, or when we will become profitable, if at all. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

 

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

 

Our recurring operating losses 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 report on our financial statements as of and for the year ended December 31, 2011 with respect to this uncertainty. 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 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 planned clinical trials and regulatory approvals, as well as further research and development and marketing efforts for our products and potential products. 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 various products going forward;

 

·unexpected delays or developments in seeking regulatory approvals;

 

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

 

·other unexpected developments encountered in implementing our business development and commercialization strategies; and

 

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·the outcome of litigation, if any, and further arrangements, if any, with collaborators.

 

We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or financing from other sources. Additional funding may not be available on terms which are acceptable to us. If adequate funding is not available to us 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. 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 could result in dilution to our 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 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.

 

In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and 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 existing 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 we raise additional capital through the sale of equity or convertible debt securities, your ownership interest in us will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include 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 business is subject to extensive government regulation, which could cause delays in the development and commercialization of our drug products, impose significant costs on us or provide advantages to our larger competitors.

 

The FDA and similar agencies in foreign countries impose substantial requirements upon the development, manufacture and marketing of drugs. They require laboratory and clinical testing, manufacturing, labeling, registration, notification, clearance or approval, marketing, distribution, recordkeeping, reporting and promotion, and other costly and time-consuming processes and procedures to be in compliance with applicable regulatory requirements. Satisfaction of clearance or approval commitments or requirements typically takes several years or more and varies substantially from country to country as well as upon the type, complexity and novelty of the therapeutic product.

 

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

 

We cannot assure you that we will be able to complete our clinical trial programs successfully within any specific time period, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.

 

We do not know if our current clinical trials for our L-glutamine treatment for SCD will be completed on schedule or at all. Even if completed, we do not know if these trials will produce statistically significant or clinically meaningful results sufficient to support an application for marketing approval. Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to obtain regulatory clearance to commence clinical trials, engage clinical trial sites and medical investigators, reach agreement on acceptable clinical trial agreement terms, clinical trial protocols or informed consent forms with medical investigators, clinical trial sites or institutional review boards and, thereafter, the rate of patient enrollment, and the rate to collect, clean, lock and analyze the clinical trial database.

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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 study, the perceived risks and benefits of the drug under study and of the control drug, if any, the medical 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 existing or new drugs are available or approved for the indication. If we experience delays in identifying and contracting with appropriate medical investigators and sites, in patient enrollment and/or completion of our 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. Accordingly, we may not be able to complete the clinical trials within an acceptable time frame, 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 its 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 often require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit for our clinical trials. Our ability to enroll sufficient numbers of patients in our clinical trials 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 effective drugs for the indications being studied. In addition, patients may withdraw from a clinical trial or be unwilling to follow our clinical trial protocols for a variety of reasons. If we fail to enroll and maintain the number of patients for which the clinical trial was designed, the 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.

 

The drug development process to obtain FDA approval is very costly and time consuming and if we cannot complete our clinical trials in a cost-effective manner, our results of operations may be adversely affected.

 

Even with the granting of orphan drug status and fast track designation, the cost associated with the successful development of the L-glutamine treatment for SCD is uncertain. Costs of clinical trials may vary significantly over the life of a project owing but not limited to the following:

 

· the duration of the clinical trials;

 

·the number of sites included in the trials;

 

· the countries in which the trials are conducted;

 

·the length of time required to enroll eligible patients;

 

·the number of patients that participate in the trials;

 

·the number of doses that patients receive;

 

·the drop-out or discontinuation rates of patients;

 

·per patient trial costs;

 

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

 

·the duration of patient follow-up;

 

·the efficacy and safety profile of the product candidate;

 

·the costs and timing of obtaining regulatory approvals; and

 

·the costs involved in enforcing or defending patent claims or other intellectual property rights.

 

If we are unable to control the costs of our clinical trials and conduct our trials in a cost-effective manner, our results of operations may be adversely affected.

 

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 or adversely affect the necessary human subject protections, or if the trials are not well designed, all of which may result in significant negative repercussions on our business and financial condition.

 

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We must be evaluated in light of the uncertainties and complexities affecting a development stage company. Our L-glutamine treatment for SCD, which is currently our only product in development, has not yet received regulatory approval for its intended use or for commercial sale. We cannot market a pharmaceutical product in any jurisdiction until it has completed rigorous preclinical testing and clinical trials and passed such jurisdiction’s extensive regulatory approval process. Pre-clinical testing and clinical development are long, expensive and uncertain processes. Data obtained from pre-clinical and clinical tests can be interpreted in different ways and could be ultimately deemed insufficient by regulatory authorities, which could delay, limit or prevent regulatory approval. It may take us many years to complete the required testing of our products to support application for clearance or approval and failure can occur at any stage of this process. We cannot provide assurance that our preclinical and clinical testing will be completed successfully within any specified time period by us, or without significant additional resources or expertise provided by third parties we need to conduct such testing. We cannot provide assurance that any such testing will demonstrate potential products to be safe and efficacious 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. In addition, negative or inconclusive results from the clinical trials we conduct or adverse medical events could cause us to have to suspend, repeat or terminate the clinical trials. Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must meet the requirements of these authorities including but not limited to requirements for informed consent and good clinical practices and we cannot guarantee that we will be able to comply with such requirements. We will rely on third parties, such as contract research organizations and/or contract laboratories, regulatory consultants or data management companies, to assist us in overseeing and monitoring clinical trials as well as to process the clinical results and manage test requests, which may result in delays or failure to complete trials, if the third parties fail to perform or to meet the applicable regulatory requirements and standards. A failure by us or any such third parties to comply with the terms of a product development program and regulatory requirements for any particular product candidate or to complete the clinical trials for a product candidate in the envisaged time frame could have a significant negative effect on our business and financial condition.

 

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 this indication and a specialized nutritional support. Patients receiving intravenous parenteral nutrition (“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® include, but are not limited to, nausea or vomiting, feeling the need or urge to empty bowels, gas, abdominal pain, hemorrhoids, constipation, 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 and 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.

 

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 study budgets, which 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 and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend clinical trial protocols, informed consents and study budgets. If we experience delays in initiation, conduct or completion of, or if we terminate, any of our clinical trials, due to changes in regulatory requirements or guidance or other unanticipated events, we may incur additional costs, have difficulty enrolling subjects or achieving medical investigator or institutional review board acceptance of the changes and the successful completion of the trial and ultimately the commercial prospects for our L-glutamine treatment for SCD may be harmed and our ability to generate product revenue will be delayed, possibly materially.

 

Even if we are able to develop our L-glutamine treatment for SCD, we may not be able to receive regulatory approval, or if approved, we may not be able to generate significant revenues or successfully commercialize our L-glutamine treatment for SCD, which would adversely affect our financial results and financial condition.

 

Although our L-glutamine treatment for SCD is in Phase III clinical trials, it will still require regulatory approval before we can market it.  We cannot predict the outcome of our Phase III clinical trial of this product and cannot assure you that we will obtain the necessary regulatory approvals to permit commercialization. There are many reasons that we may fail in our efforts to develop and commercialize our L-glutamine treatment for SCD and other drug product candidates, including:

 

· the chance that our preclinical testing or clinical trials could show that our L-glutamine treatment for SCD or other drug product candidates are ineffective and/or cause harmful side effects;

 

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·the failure of our drug product candidates to receive necessary regulatory approvals from the FDA or foreign regulatory authorities in a timely manner, or at all;

 

·the failure of our drug product candidates, once approved, to be produced in commercial quantities or at reasonable costs;

 

·physicians’ reluctance to switch from existing treatment methods, including traditional therapy agents, to our products;

 

·the failure of our drug product candidates, once approved, to achieve commercial acceptance;

 

·the introduction of products by our competitors that are more effective or have a different safety profile than our products;

 

·the application of restrictions to our drug product candidates by regulatory or governmental authorities;

 

·the proprietary rights of other parties preventing us or our potential collaborative partners from marketing our drug product candidates;

 

·the possibility that we may not be able to maintain the orphan drug designation or obtain orphan drug exclusivity for our product; and

 

·the possibility that our fast track designation may not actually lead to a faster development or regulatory review or approval process.

 

Even if the FDA and other regulatory authorities approve our L-glutamine treatment for SCD or any of our products, the manufacture, packaging, labeling, distribution, marketing and sale of such products will be subject to strict and ongoing regulation. Compliance with such regulation 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 drug products to ensure that such claims are true, not misleading, supported by scientific evidence and consistent with the labeled use of the drug. The FDA also has the authority to regulate the claims we make in marketing AminoPure®. Failure to comply with FDA requirements in this regard could result in, among other things, warning letters, suspensions of approvals, seizures or recalls of products, injunctions against a product's manufacture, distribution, sales and marketing, operating restrictions, civil penalties and criminal prosecutions. Any of these FDA actions could negatively impact our product sales and profitability. Additionally, an approval for a product may be conditioned on our agreement to conduct costly post-marketing follow-up studies to monitor the safety or efficacy of the products. In addition, as clinical experience with a drug expands after approval because the drug is used by a greater number and more diverse group of patients than during clinical trials, unknown side effects or other problems may be observed after approval that were not observed or anticipated during pre-approval clinical trials. In such a case, a regulatory authority could restrict the indications for which the product may be sold or restrict the distribution channels or revoke the product’s regulatory approval, which could hinder our ability to generate revenues from our products. If we fail to develop and commercialize our drug 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 may be forced to cease operations.

 

We are subject to various regulations pertaining to healthcare fraud and abuse, violations of which could have a material adverse affect on our business.

 

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. Specifically, these anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer or pay any remuneration in exchange for purchasing, leasing or ordering any service or items including the purchase or prescribing of a particular drug for which payment may be made under a federal healthcare program. 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 or exemptions to 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.  We seek to comply with anti-kickback statutes and, if necessary, to fit within one of the defined “safe harbors;” and we are unaware of any violations of these laws.  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 will not be challenged under anti-kickback or similar laws.  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.

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If the manufacturers upon whom we rely fail to timely produce in the volumes and quality that we require, 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 products, if any, and may lose potential revenues.

 

We do not currently have or intend to develop our own manufacturing capabilities. We intend to enter into various arrangements with contract manufacturers and others to manufacture our products and, thus, will significantly depend upon the subsequent success of these outside parties in performing their manufacturing responsibilities. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products may encounter difficulties in production, including problems with quality control, quality assurance testing, shortages of qualified personnel, and compliance with strictly enforced federal, state and foreign regulations. 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 or financial difficulties. 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.

 

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 U.S., and obtain all of our L-glutamine for our NutreStore® product from one of these companies. If these suppliers were to experience any manufacturing or production difficulties producing pharmaceutical grade L-glutamine, our ability to complete our clinical trials, to commercialize L-glutamine for the treatment of SCD and to continue to sell NutreStore® would be harmed.

 

We intend to enter into long term supply agreements with one or more manufacturers for our products. There can be no assurance that we will be successful in entering into such long term supply contracts, or that such contracts will be at prices that are acceptable to us. Our manufacturing partners may not be able to expand capacity or to produce additional product requirements for us in the event that demand for our products increases. There can be no assurance that we or our manufacturers will be able to continue purchasing raw materials, or single source ingredients for our products from current suppliers or any other supplier on terms similar to current terms or at all. Any interruption in the availability of certain raw materials or ingredients, or significant increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.

 

In addition, all manufacturers and suppliers of pharmaceutical products must comply with applicable current good manufacturing practice, or cGMP, regulations for the manufacture of our 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 Agency’s review of any of our NDAs and its 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 approved, marketed 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, regulatory qualifications of manufacturing facilities are applied on the basis of the specific facility being used to produce supplies. As a result, if one of the manufacturers that we rely on shifts production from one facility to another, the new facility must go through a complete regulatory qualification and be approved 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 these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, suspension or withdrawals of previously granted regulatory approvals, warning or untitled letters, refusal to approve pending applications for marketing approval of new products or of supplements to approved applications, import or export bans or restrictions, and criminal prosecution and 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 or key supplier’s failure to comply with or adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.

 

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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 products are approved for commercialization, they may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors including, but not limited to:

 

· demonstration of significant clinical efficacy and safety;

 

·the prevalence and severity of any adverse side effects;

 

·limitations or warnings contained in the product’s approved labeling;

 

·the availability of alternative treatments for the indications;

 

·the advantages and disadvantages of our products relative to current or alternative treatments;

 

·the availability of acceptable pricing and adequate third-party reimbursement; and

 

·the effectiveness of marketing and distribution methods for the products.

 

If our products do not gain market acceptance among physicians, patients, treatment centers, healthcare payors and others in the medical community, which may not accept or utilize our products, our ability to generate significant revenues from our products would be limited and our financial conditions 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 its operating results, could be negatively impacted.

 

Our ability to successfully penetrate our core markets in which we compete or to expand our business successfully into additional countries in Africa, Europe, Asia or elsewhere is subject to numerous factors, many of which are beyond our control. Our products, if successfully developed, may compete with a number of drugs and therapies 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 lack experience in commercializing products, which may have an adverse effect on our business.

 

We will need to transition 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 drug candidates and have more experience commercially launching drugs.

 

We are required to make a significant payment to CellSeed pursuant to the Research Agreement, and if we cannot make such payment when due, CellSeed may terminate the agreements which will negatively impact our financial condition and our ability to implement our business strategies.

 

In April 2011, Emmaus Medical entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, an addendum to the agreements. Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products, and the future commercialization of such products. 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 and agreed to disclose its accumulated information package (the “Package”) for the joint development of CAOMECS to us. Under the Research Agreement, as supplemented by the addendum, we agreed to pay CellSeed $8.5 million within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the Package to Emmaus and Emmaus providing written confirmation of its acceptance of the complete Package. Under the Individual Agreement, we agreed to pay CellSeed $1.5 million, which we paid in February 2012. We have had limited revenue, have sustained significant operating losses, and are likely to sustain operating losses in the foreseeable future. As of December 31, 2011, we had cash and cash equivalents of approximately $0.3 million. We anticipate that we will continue to fund our operations through public or private equity or debt financings or other sources, such as strategic partnership agreements. Such financings may not be available in amounts or terms acceptable to us, if at all. Our failure to raise capital as and when needed could impact our ability to pay the amounts required under the Research Agreement and Individual Agreement to CellSeed. If we are unable to pay the amounts required, CellSeed could terminate the agreements which would negatively impact on our ability to pursue our business strategies.

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There are various uncertainties related to the research, development and commercialization of cell sheet engineering regenerative medicine products pursuant to the Research Agreement and Individual Agreement which could negatively affect our ability to commercialize such products.

 

We have historically focused on the research and development of our L-glutamine treatment for SCD and have no experience in the research, development or commercialization of cell sheet regenerative medicine products. Such products require FDA approval prior to commercialization, however, it is uncertain what type of approval the FDA would require for such products or what type of scientific data would be required to prove sufficiently demonstrate the safety and efficacy of any such products. 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 or other regulations. Any delay in developing obtaining FDA approval or the occurrence of problems with third party manufacturers of cell sheet regenerative medicine products would negatively affect our ability to commercialize such products.

 

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. These 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. 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.

 

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products and third-party payers 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 SCD patients exists, there is 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.

 

If we do not achieve our projected development goals in the time frames we expect and announce, the credibility of our management and our drug products may be adversely affected.

 

For business planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of preclinical studies, clinical trials and the submission of regulatory filings for our products.

 

From time to time, we may publicly announce the expected timing of some of these milestones. All of these milestones will be based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. If we do not meet these milestones as publicly announced, our stockholders may lose confidence in our ability to meet these milestones and, as a result, the price of our common stock may decline.

 

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If we do not obtain the support of new, and maintain the support of existing, key scientific collaborators, it may be difficult to research other 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 for SCD. We have donated NutreStore® to a multicenter study in Canada and the U.S. for the treatment of burn victims with L-glutamine and intend to sponsor a study for the use of NutreStore® to treat pediatric SBS patients. 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 drug product candidates or expand our products offerings.

 

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 drug product candidates, then our technologies and future drug product candidates may be rendered less competitive.

 

We face significant competition from industry participants that are pursuing similar technologies to those we are pursuing and developing pharmaceutical products that are competitive with our drug product candidates. Nearly all of our industry competitors have greater capital resources, larger overall 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. Rapid technological development, as well as new scientific developments, may result in our compounds, drug product candidates or processes becoming obsolete 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 like we are developing may limit the drug’s market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.

 

The use of any of our drug 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, manufacturing and marketing of our drug product candidates. While we are in clinical stage testing, our drug 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. 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. 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.

 

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 products 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.

 

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We rely heavily on the founder of Emmaus Medical, Yutaka Niihara, M.D., MPH, our current President and Chief Executive Officer. The loss of his services would have a material adverse effect upon us and our business and prospects.

 

Our success depends, to a significant extent, upon the continued services of Yutaka Niihara, M.D. MPH, who is the founder of Emmaus Medical and our current President and Chief Executive Officer. Since inception, we have been dependent upon Dr. Niihara, who was one of the initial patentees for the technology for treatment of 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. Because of this intense competition for skilled employees, 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 marketing personnel and scientists could have a materially adverse effect on our business and our projects.

 

We are dependent on licenses and sublicenses for certain patents for our products. If the licenses of any superior sublicenses terminates or if the patents of our licensors are challenged and we are limited in our ability to utilize the licensed 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 we have obtained to patents for treatment of SCD and SBS. We hold a license as a sublicense of certain patent rights needed to operate our business. If any of the licenses of any of the superior sublicensees terminate, our license may terminate also.

 

There can be no assurance that, in the event any claims in such sublicensed patents are challenged, that any court or patent authority would determine that such patent claims are valid and enforceable or sufficiently broad in scope to protect our proprietary rights. Our commercial success will depend, in part, on not infringing patents or proprietary rights of others, and there can be no assurance that the technologies and products used or developed by us will not infringe such rights. Infringement actions could result in litigation and we could incur significant costs and diversion of resources in defending such claims. 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 and services in such jurisdiction. If such infringement occurs and we are unable to obtain a license from the relevant third party, we will not be able to continue the development, manufacture, use or sale of any such infringing technology or product. There can be no assurance that necessary license to third party technology will be available at all, or on commercially reasonable terms. Our failure to obtain a license to technology that it may require to utilize its technologies or commercialize its products could have a material adverse effect on us. In some cases, litigation or other proceedings may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets, know-how or other intellectual property rights owned by us or to determine the scope and validity of the proprietary rights of third parties. Any potential litigation could result in substantial costs to, and diversion of, resources by us and could have a material and adverse impact on us. There can be no assurance that any of our issued or licensed patents would ultimately be held valid or that efforts to defend any of our patents, trade secrets, know-how or other intellectual property rights would be successful. An adverse outcome in any such litigation or proceeding could 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, all of which could have a material adverse effect on our business.

 

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

 

Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the drug product candidates we are developing. If we must spend significant time and money protecting our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed.

 

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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. 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.

 

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 does it prevent them from pursuing patent protection in areas that are competitive with us. While we seek patent protection for all of our owned and licensed product candidates, our licensors or assignors who created these product candidates are experienced scientists and business people who may continue to do research and development and seek patent protection in the same areas that led to the discovery of the product candidates that they licensed or assigned to us. By virtue of the previous research that led to the discovery of the drugs or product candidates that they licensed or assigned to us, these companies, universities, or 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 such product candidates.

 

Our success depends on our ability to manage our growth.

 

If we are able to raise significant additional financing, we expect to continue to grow, which could strain our managerial, operational, financial and other resources. With the addition of our clinical-stage programs and with our plan to in-license and acquire 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 molecules, we will need to hire additional scientists 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.

 

Our business and results of operations may be negatively impacted by general economic and financial market conditions and such conditions may exacerbate the other risks that affect our business.

 

The world’s financial markets are currently experiencing significant turmoil, resulting in reductions in available credit, constraints in access to capital, extreme volatility in security prices, rating downgrades of investments and reduced valuations of securities generally. These economic conditions have had, and we expect will continue to have, an adverse impact on the pharmaceutical industries. Our business depends on our ability to raise substantial additional capital and to maintain and enter into new collaborative research, development and commercialization agreements with leading pharmaceutical companies. Current market conditions could impair our ability to raise additional capital when needed for our clinical trials. Recent economic conditions may result in prospective collaborators electing to defer entering into collaborative agreements with us or reduce the amount of discretionary investment that prospective collaborators may have available to invest in our business.

 

We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and abroad, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that current economic conditions or worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our operating results.

 

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 in order to complement and expand our business. The success of our acquisition strategy will depend on, among other things:

 

·the availability of suitable candidates;

 

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·competition from other companies for the purchase of available candidates;

 

·our ability to value those candidates accurately and negotiate favorable terms for those acquisitions;

 

·the availability of funds to finance acquisitions;

 

·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 strategy. We also may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions. Acquired businesses may fail to meet our performance expectations. If we do not achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or analysts may not perceive the same benefits of the acquisition as we do. If these risks materialize, our stock price could be materially adversely affected.

 

Risks Related to Ownership of our Common Stock and this Offering

 

There is no current trading market for our common stock, and there is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.

 

Our common stock is not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied for the listing of our common stock on the NASDAQ Global Market in the future. There is no guarantee that NASDAQ Global Market, or any other securities exchange or quotation system, will permit our shares to be listed and traded. If we fail to obtain a listing on the NASDAQ Global Market, we may seek listing on the NYSE Amex or quotation on the OTC Bulletin Board. The Financial Industry Regulatory Authority (“FINRA”) has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Global Market and NYSE Amex. Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market and NYSE Amex. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.

 

If the NASDAQ Global Market or another securities exchange or national quotation system does not list our securities we could face significant consequences, including:

 

 · a limited availability for market quotations for our shares of common stock; 
 ·reduced liquidity with respect to our shares of common stock; 
·a determination that our shares of common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; and
·limited amount of news and analyst coverage.

 

The market price and trading volume of shares of our common stock may be volatile.

 

When and if a market develops for our securities, 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, or announcements by our competitors regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies 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, when the market price of a company’s shares drops 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.

 

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Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.

 

Following the one year anniversary of the filing of our current report on Form 8-K reporting the Merger, our pre-Merger stockholders and the former stockholders of Emmaus Medical and may be eligible to sell all or some of our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations and the terms of lock-up agreements entered into by such stockholders. Securityholders holding an aggregate of            shares of our common stock and         shares underlying securities convertible or exercisable for shares of our common stock (as of the date of this prospectus) have entered into a lock-up agreement pursuant to which he, she or it agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our common stock or other securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 6 months after the effective date of the registration statement of which this prospectus is a part without the prior written consent of Aegis Capital Corp.

 

Under Rule 144, an affiliate stockholder who has satisfied the required holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. As of the date of this prospectus, 1% of our issued and outstanding shares of common stock is approximately 243,935 shares. Non-affiliate stockholders are not subject to volume limitations. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

 

We granted “piggyback” registration rights to certain pre-Merger stockholders of the Company. All stockholders possessing piggyback registration rights have waived such rights in connection with this offering. All of the shares included in an effective registration statement may be freely sold and transferred, subject to a lock-up agreement.

 

Members of our management team have significant influence over us.

 

Our officers and directors own approximately 51.3% of the outstanding shares of common stock on an undiluted basis. These stockholders, therefore, have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. These stockholders may also have the power to prevent or cause a change in control. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of these stockholders may differ from the interests of our other stockholders.

 

If you purchase securities in this offering, you will suffer immediate dilution of your investment.

 

Assuming our sale of                 shares of common stock at an assumed public offering price of $         per share of common stock (the midpoint of the range set forth on the cover page of this prospectus), and after deducting the underwriting discount and commissions and estimated offering expenses, our pro forma, as-adjusted net tangible book value as of December 31, 2011 would be approximately $         million, or $       per share of common stock outstanding. The sale of          shares of common stock in this offering represents an immediate increase in net tangible book value of $       per share of common stock to our existing stockholders and an immediate dilution of $       per share of common stock to the new investors purchasing common stock in this offering.  Purchasers of common stock in this offering will have contributed approximately         % of the aggregate price paid by all owners of our common stock but will own only approximately        % of our common stock outstanding after this offering. There would be further dilution when our outstanding warrants to purchase 298,494 shares of common stock are exercised at $3.05 per share, our outstanding warrants to purchase 374,492 shares of common stock are exercised at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise, our outstanding warrants to purchase 2,222,058 shares of common stock are exercised at $1.00 per share, our outstanding options to purchase 11,795 shares of common stock are exercised at $3.05 per share, our outstanding options to purchase 61,000 shares of common stock are exercised at $3.60 per share, our outstanding convertible notes convertible into 275,745 shares of common stock (as of March 20, 2012) are converted at $3.05 per share and our outstanding convertible notes convertible into 1,191,878 shares of common stock (as of March 20, 2012) are converted at $3.60 per share.

 

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We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our securities. We are not required to allocate the net proceeds from this offering to any specific investment or transaction and, therefore, you cannot determine at this time the value or propriety of our application of the proceeds. Moreover, you will not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the price of our securities to decline. Pending the application of these funds, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

For a further description of our intended use of the proceeds of this offering, see the “Use of Proceeds” section of this prospectus.

 

If we fail to maintain effective internal control over financial reporting, the price of our shares of common stock may be adversely affected.

 

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require us to assess the effectiveness of our internal control over financial reporting annually and to report our conclusion in our annual report on form 10-K. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted.

 

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. In March 2011 our auditor issued a management letter to us which noted a material weakness in our internal control over financial reporting related to our lack of personnel with adequate knowledge of U.S. generally accepted accounting principles. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

We may not be able to achieve the benefits we expect to result from the Merger.

 

On April 21, 2011, we entered into a Merger Agreement with AFH Merger Sub, AFH Advisory and Emmaus Medical, pursuant to which we (i) exchanged each outstanding share of Emmaus Medical common stock for approximately 29.48548924976 shares of our common stock, (ii) exchanged each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock and (iii) exchanged each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, Emmaus Medical became our wholly-owned subsidiary and our operations became that of Emmaus Medical.

 

We may not realize the benefits that we hoped to receive as a result of the Merger, which include:

 

·the increased market liquidity expected to result from exchanging stock in a private company for securities of a public company that may eventually be traded;

 

·the ability to use registered securities to make acquisition of assets or businesses;

 

·increased visibility in the financial community;

 

·enhanced access to the capital markets;

 

·improved transparency of operations; and

 

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·perceived credibility and enhanced corporate image of being a publicly traded company.

 

There can be no assurance that any of the anticipated benefits of the Merger will be realized with respect to our new business operations.  In addition, the attention and effort devoted to achieving the benefits of the Merger and attending to the obligations of being a public company, such as reporting requirements and securities regulations, could significantly divert management’s attention from other important issues, which could materially and adversely affect our operating results or stock price in the future.

 

We will incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. For example, on January 30, 2009, the SEC adopted rules requiring companies to provide their financial statements in interactive data format using the eXtensible Business Reporting Language, or XBRL. We are required to comply with these rules. Our management and other personnel will 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 will 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 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.

 

If the NASDAQ Global Market or any other national securities exchange or national quotation system does not list our shares of common stock, our shares of common stock will be considered may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock, which is not currently listed or quoted for trading, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act, once, and if, it starts trading. Our common stock may be a “penny stock” if it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the NASDAQ Global Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million.

 

The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

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.

 

The trading market for 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 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 securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.

 

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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.

 

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, reduce net income.

 

Under current accounting rules, we would be required to recognize share-based compensation as compensation expense in our statement of operations, 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 2011, and accordingly our results of operations for the year ended December 31, 2011 contain share-based compensation charges. Additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under an 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 the stockholders’ ownership interests in our company.

 

Our certificate of incorporation and bylaws and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in control, which may cause our stock price to decline.

 

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; and

 

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

 

Upon consummation of this offering, we will be subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder.

 

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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 its board. 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.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The information contained in this prospectus, which includes the documents incorporated by reference into this prospectus, contains some statements that are not purely historical and that are forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations and the expected impact of the Merger on the parties’ individual and combined financial performance. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including the existence of 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, or the contrary counterparts of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement fails to be forward-looking.

 

The forward-looking statements contained in this prospectus are based upon current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. Such forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties’ 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:

 

·our ability to raise additional capital to fund our operations;

 

· our obtaining FDA and other regulatory approval for our future drug products;

 

· successful initiation, conduct or completion of our clinical trials;

 

·our ability to achieve regulatory approval for our L-glutamine treatment for SCD;

 

·our ability to commercialize our L-glutamine treatment for SCD;

 

·our reliance on third party manufacturers for our drug products;

 

· market acceptance and reimbursement of our products;

 

·our dependence on licenses for certain of our products;

 

·our reliance on the expected growth in demand for our products;

 

·exposure to product liability and defect claims;

 

· exposure to regulatory oversight and enforcement;

 

·exposure to intellectual property claims from third parties;

 

·development of a public trading market for our securities;

 

·the cost of complying with current and future governmental regulations and the impact of any changes in the regulations upon our operations; and

 

· such other factors referenced in this Prospectus, including, without limitation, under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.”

 

23
 

 

These risks and uncertainties, along with others, are also described above under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of the parties’ assumptions prove to be incorrect, actual results may vary in material respects from those projected in these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will ever be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person associated with the Company assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus for the purpose of conforming these statements to actual results or to publish changes in our expectations.

 

You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to this prospectus with the Securities and Exchange Commission, completely and with the understanding that our actual future results, levels of activity, performance and achievements may materially differ from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

 

Based on a per share offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), we estimate that the net proceeds from the sale of the         shares of common stock in this offering will be approximately $         million after deducting the estimated underwriting discounts and commission and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) the net proceeds to us from this offering by approximately $      , assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering as follows:

 

    Approximate
Allocation of
Net Proceeds
($)
 
Research and development (1)     10,976,000  
Commercialization costs     9,018,000  
Payments to CellSeed under Research Agreement     1,500,000  
Payments to AFH Advisory pursuant to Amended and Restated Letter of Intent     394,446  
Loan repayments (2)     3,320,624  
Operating costs and working capital (3)     10,590,930  
Total     35,800,000  

 

  (1) Includes approximately $5.2 million to complete our Phase III clinical trial for our L-glutamine therapy for SCD, approximately $3.0 million for research related to the corneal cell sheet technology and approximately $2.8 million for research related to the cardiac cell sheet technology.
(2) Includes $220,000 for payments to stockholders of Emmaus Medical who exercised their dissenter’s rights in connection with the Merger. Also includes $2,242,386 for the repayment of outstanding non-convertible promissory notes and $858,238 for the repayment of outstanding convertible notes that will be due within one year from the closing date of this offering. See discussions below regarding repayment of non-convertible and convertible promissory notes.
(3) The principal components of operating costs and working capital include: (a) salaries, wages and fringe benefits; (b) consultant costs; and (c) other general and administrative costs. The approximate net proceeds to be allocated to such components are $5.0 million, $2.7 million, and $2.9 million, respectively.

 

The non-convertible notes which we will repay with the proceeds of this offering include:

 

Repayment of Non-Convertible Promissory Notes

 

Lender   Loan Type   Annual
Interest
Rate
    Date of
loan
    Term of Loan   Principal
Loan
Amount
(1)
    Amount Outstanding
as of March 20, 2012
(1)
 
Hope International Hospice, Inc.   Non-convertible     8 %     1/12/2011     2 years   $ 200,000     $ 203,067  
Yutaka Niihara   Non-convertible     6.5 %     1/12/2009     Due on demand   $ 350,000     $ 352,338  
Yutaka Niihara   Non-convertible     8 %     6/21/2011     Due on demand   $ 30,000     $ 30,187  
Hope International Hospice, Inc.   Non-convertible     8 %     1/17/2012     Due on demand   $ 200,000     $ 202,844  
Lan T. Tran   Non-convertible     11 %     2/10/2012     2 years (2)   $ 205,000     $ 207,506  
Izumi Tanaka   Non-convertible     11 %     2/16/2012     2 years (3)   $ 133,333     $ 134,719  
Mariko Tejima   Non-convertible     11 %     2/16/2012     2 years (3)   $ 133,333     $ 134,719  
Hideki & Eiko Uehara   Non-convertible     11 %     2/15/2012     Due on demand   $ 133,333     $ 134,759  
Shigeru Matsuda   Non-convertible     11 %     2/15/2012     Due on demand   $ 833,335     $ 842,247  
TOTAL                      2,218,334     2,242,386   

 

(1) Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as applicable, on each loan as of the dates indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
(2) Lender may demand repayment of the note in full at any time prior to maturity.
(3) Lender may demand repayment of the note on or after the six-month anniversary of the loan date.

 

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Repayment of Convertible Promissory Notes

 

We believe that noteholders holding 80% of the aggregate amount outstanding on our convertible notes due within one year of the date of this offering (the “One-Year Convertible Notes”) will convert their notes into shares of our common stock pursuant to the terms of such notes. Therefore, our calculation of the use the proceeds of this offering assumes that we will repay 20% of the aggregate amount outstanding on our One-Year Convertible Notes. The following is a list of our outstanding One-Year Convertible Notes:

 

Lender   Loan Type   Annual
Interest
Rate
    Date of
loan
    Term of
Loan
    Principal
Loan
Amount
(1)
    Conversion
Price
    Amount
Outstanding
as of March
20, 2012 (1)
    Number of
Shares
Underlying
Note as of
March 20,
2012
 
Yasushi Nagasaki   Convertible     8 %     6/29/2011       1 year     $ 360,000     $ 3.60     $ 381,200       105,888  
Andrew Wood   Convertible     8 %     7/8/2011       1 year     $ 3,240     $ 3.60     $ 3,424       951  
Yung Min Suh   Convertible     8 %     7/11/2011       1 year     $ 925,200     $ 3.60     $ 977,206       271,445  
Yumiko Nakamura   Convertible     8 %     8/9/2011       1 year     $ 54,000     $ 3.60     $ 56,688       15,746  
Technoble Co., Ltd.   Convertible     8 %     8/30/2011       1 year (2)    $ 130,100     $ 3.60     $ 135,998       37,777  
Delfan Co., Ltd.   Convertible     8 %     8/30/2011       1 year (2)      $ 130,100     $ 3.60     $ 135,998       37,777  
Jun & Yumi Saito   Convertible     8 %     8/31/2011       1 year      $ 5,400     $ 3.60     $ 5,644       1,567  
Sumiko Fujisawa   Convertible     8 %     9/7/2011       1 year (2)      $ 30,000     $ 3.60     $ 31,307       8,696  
Hideki & Eiko Uehara   Convertible     8 %     9/7/2011       1 year (2)      $ 30,000     $ 3.60     $ 31,307       8,696  
Dennis Y. Teranishi   Convertible     8 %     9/9/2011       1 year (2)      $ 108,000     $ 3.60     $ 112,656       31,293  
Shitabata Family Trust   Convertible     8 %     9/29/2011       1 year (2)      $ 450,000     $ 3.60     $ 467,400       129,833  
Shitabata Family Trust   Convertible     8 %     10/3/2011       1 year (2)      $ 1,050,000     $ 3.60     $ 1,089,667       302,685  
MLPF&S Cust. FBO Willis C. Lee   Convertible     8 %     10/5/2011      

 

1 year

    $ 128,002     $ 3.60     $ 132,780       36,883  
Tracey & Mark Doi   Convertible     8 %     2/10/2012       1 year     $ 108,000     $ 3.60     $ 108,960       30,266  
The Saito Family Trust   Convertible     8 %     2/20/2012       1 year (2)      $ 100,000     $ 3.60     $ 100,667       37,325  
J.R. Downey   Convertible     8 %     3/2/2012       1 year (2)      $ 150,004     $ 3.60     $ 150,638       37,283  
Robert and Megumi Jo   Convertible     8 %     2/18/2012       1 year (2)      $ 100,000     $ 3.60     $ 100,667       27,962  
Yukio Hasegawa   Convertible     8 %     2/15/2012       1 year (2)      $ 133,333     $ 3.60     $ 134,759       27,962  
Hiroshi Iguchi   Convertible     8 %     2/20/2012       1 year (2)      $ 133,333     $ 3.60     $ 134,222       41,843  
TOTAL                         4,128,712            4,291,188        1,191,878  

 

(1) Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
(2) Lender may demand repayment of the note on or after the three-month anniversary of the loan date.

 

To the extent that 80% of the aggregate amount of the One-Year Convertible Notes do not convert to shares of our common stock, we will use proceeds from this offering to repay all such notes. In the event none of those noteholders convert their notes to shares of our common stock, we will use an aggregate of $6,753,574 from the proceeds of this offering for loan repayments, which includes $220,000 for payments to stockholders of Emmaus Medical who exercised their dissenter’s rights in connection with the Merger. The approximate amount of proceeds to be used would change to $10 million for research and development, $7.5 million for commercialization costs and $9.6 million for operating costs and working capital.

 

We also have convertible notes with aggregate principal amounts of $221,895, $74,000 and $500,000 that are due in 2014, 2015 and 2016, respectively.

 

General

 

The allocation of the net proceeds of this offering set forth above represents our intentions based upon our current plans and assumptions regarding industry and general economic conditions, our future revenues and expenditures. The amounts and timing of our actual expenditures will depend upon numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth.

 

In addition, we may use a portion of the net proceeds from this offering to acquire, invest in or license complementary products, technologies or businesses. We currently have no agreements or commitments with respect to any potential acquisitions, investments, licenses or similar transactions. We may allocate funds from other sources to fund some or all of these activities.

 

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Pending their use, we intend to invest the net proceeds of this offering in direct and guaranteed obligations of the United States, interest-bearing, investment-grade instruments or certificates of deposit.

 

DIVIDEND POLICY

 

We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. 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 significant. We did not pay cash dividends in the years ended December 31, 2011 and 2010.

  

CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2011 on:

 

· an actual basis, which consists of the shares of common stock outstanding on December 31, 2011; and

 

· an as-adjusted basis to reflect our receipt of estimated net proceeds of approximately $         million from the sale of               shares of common stock in this offering at an assumed public offering price of $       , and after deducting estimated underwriting discounts of 7.0%, a non-accountable allowance of 1.0% and commissions and estimated offering expenses of approximately $        .

 

This table does not give effect to the Reverse Stock Split that we intend to effect prior to the consummation of this offering.

 

You should read this table in conjunction with “Use of Proceeds,” “Summary Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    As of December 31, 2011  
    Actual     As Adjusted  
    (in thousands)  
Current Assets:                
Cash and cash equivalents     314          
                 
Current Liabilities:                
Due to related party     394       -  
Dissenting stockholders liability     200       -  
Notes payable     380       -  
Convertible notes payable     1,846       -  
                 
Long-term Liabilities:                
Notes payable     1,042       -  
Convertible notes payable     838       -  
                 
Stockholders’ Equity (Deficit):                
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding   $ -     $ -  
Common stock, $0.001 par value, 100,000,000 shares authorized, 24,393,461 shares issued and outstanding on an actual basis and issued and outstanding on an as-adjusted basis (1)     24          
Additional paid-in capital     18,333          
Accumulated other comprehensive income     252          
Deficit accumulated during the development stage     (21,584 )        
Total stockholders’ equity (deficit)   $ (2,975 )      

 

 

 

(1) The number of our shares of common stock shown above to be outstanding after this offering is based on (i) 24,393,461 shares of common stock issued and outstanding as of December 31, 2011 and (ii)             shares of common stock issued in the public offering. The number excludes (i)         shares of our common stock that we may issue upon the Underwriters’ over-allotment option exercise, (ii) 298,494 shares of common stock underlying outstanding warrants exercisable at $3.05 per share; (iii) 374,492 shares of common stock underlying warrants that are exercisable at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise; (iv) 2,222,058 shares of common stock underlying warrants that are exercisable at $1.00; (v) 11,795 shares of common stock underlying outstanding options exercisable at $3.05 per share; (vi) 61,000 shares of common stock underlying outstanding options exercisable at $3.60 per share; (vii) 275,745 shares of common stock underlying outstanding convertible notes convertible at $3.05 per share (as of March 20, 2012) ; (vii) 1,191,878 shares of common stock underlying outstanding convertible notes convertible at $3.60 per share (as of March 20, 2012); (viii)              shares of common stock underlying warrants that will be issued to the Underwriters upon completion of this offering; and (ix)        shares of common stock underlying warrants that will be issued to AFH Advisory upon completion of this offering.

 

27
 

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

There has never been a public trading market for our common stock and our shares of common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied to have our shares of common stock listed on the NASDAQ Global Market under the symbol “EMMA” on or promptly after the date of this prospectus. No assurance can be given that such listing will be approved. As of the date of this prospectus, we had 324 stockholders of record.

 

DILUTION

 

If you invest in our shares of common stock, you will incur immediate, substantial dilution based on the difference between the public offering price per share you will pay in this offering and the net tangible book value per share of common stock immediately after this offering.

 

Our net tangible book value as of December 31, 2011 was approximately $          million, or $        per share based on 24,393,461 shares of common stock outstanding.  Net tangible book value per share is determined by dividing our total tangible assets less total liabilities by the number of shares of common stock outstanding at December 31, 2011 before giving effect to this offering. Based on an assumed per share offering price of $      (the midpoint of the range set forth on the cover page of this prospectus), investors will incur further dilution from the sale by us of         shares of common stock offered in this offering, and after deducting the estimated underwriting discount and commissions of 7.0%, a non-accountable allowance of 1.0% and estimated offering expenses of $      , our as adjusted net tangible book value as of December 31, 2011 would have been $        million, or $     per share.  This represents an immediate increase in net tangible book value of $     per share, or     %, to our existing stockholders and an immediate dilution of $        per share, or       %, to the new investors purchasing shares of common stock in this offering. Dilution per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards, after giving effect to the sale of       shares in this offering at an assumed public offering price of $      per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This discussion does not give effect to the Reverse Stock Split that we intend to effect prior to consummation of this offering.

 

The following table illustrates this per share dilution:

 

Assumed public offering price per share            
Net tangible book value per share as of December 31, 2011   $          
Increase per share attributable to new public investors   $                 
                 
Net tangible book value per share after this offering            
                 
Dilution per share to new public investors                  

  

A $1.00 increase (decrease) in the assumed initial public offering price of $       per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) our net tangible book value after this offering by $       and the dilution per share to new investors by $      , in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table sets forth, on an as adjusted basis as of December 31, 2011, the difference between the number of shares of common stock purchased from us, the total cash consideration paid, and the average price per share paid by our existing stockholders and the average price to be paid by new investors in this public offering before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, using an assumed public offering price of $ per share of common stock (the midpoint of the range set forth on the cover page of this prospectus).   

 

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    Shares Purchased     Total Cash Consideration        
    Number     Percent     Amount
(in thousands)
    Percent     Average Price
Per Share
 
Shares issued to stockholders of Emmaus Medical in the Merger (including shares issued upon the exercise of warrants)     20,631,667       %   $       %   $  
Shares held by pre-Merger Company stockholders after Merger     3,750,000       %   $       %   $  
Shares issued upon exercise of warrants and options post-Merger     15,156       %   $          %   $  
New investors in this offering                                %   $                 %   $  
Total                      100.0 %   $            100.0 %        

 

The total consideration amount for shares of common stock held by our existing stockholders includes total cash paid for our outstanding shares of common stock, including imputed interest allocated for interest free loans that we have received from related parties, as of December 31, 2011 and excludes the value of securities that we have issued for services. Unless otherwise noted, the number of our shares outstanding after this offering as shown above excludes the      shares of our common stock that we may issue upon the Underwriters’ over-allotment option exercise. If the Underwriters’ over-allotment option of      shares of common stock is exercised in full, the number of shares held by existing stockholders will be reduced to     % of the total number of shares that will be outstanding after this offering, and the number of shares held by the new investors in this offering will be increased to      shares, or         % of the total number of shares of common stock outstanding after this offering.

 

The information also assumes no exercise of any outstanding options, warrants and convertible notes. As of December 31, 2011, there were options outstanding to purchase 11,795 shares of common stock at an exercise price of $3.05 per share, options outstanding to purchase 61,000 shares of common stock at an exercise price of $3.60 per share, warrants outstanding to purchase 298,494 shares of common stock at an exercise price of $3.05 per share, warrants outstanding to purchase 331,670 shares of common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise, warrants outstanding to purchase 311,038 shares of common stock at an exercise price of $1.00 per share, convertible notes outstanding convertible into 274,776 shares of common stock at a conversion price of $3.05 per share, and convertible notes outstanding convertible into 972,440 shares of common stock at a conversion price of $3.60 per share. To the extent that any of these options, warrants or convertible notes are exercised or converted, there will be further dilution to new investors. If all of these options, warrants and convertible notes had been exercised or converted as of December 31, 2011, net tangible book value per share after this offering would have been $      and total dilution per share to new investors would have been $          or         %, assuming no exercise of the over-allotment option.

  

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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 prospectus.

 

This prospectus contains forward-looking statements. The words “anticipated,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, our ability to raise additional capital to fund our operations, obtaining FDA and other regulatory approval for our future drug and biologic products, initiation, conduct and successful completion of our clinical trials, our ability to achieve regulatory approval for our L-glutamine treatment for SCD, our ability to commercialize our L-glutamine treatment for SCD; our reliance on third party manufacturers for our drug products, market acceptance of or reimbursement for our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, development of a public trading market for our securities, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements and accordingly there can be no assurances made with respect to the actual results or developments.

 

Company Overview

 

We develop and commercialize treatments and therapies for rare diseases and are primarily focused on the late-stage development—currently in Phase III clinical trials with the FDA — of the amino acid L-glutamine as a prescription drug for the treatment of SCD. To a lesser extent, we are also engaged in the marketing and sale of NutreStore® [L-glutamine powder for oral solution], which has received FDA approval, as a treatment for SBS in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication.  Our indirect wholly owned subsidiary, Newfield Nutrition Corporation, sells L-glutamine as a nutritional supplement under the brand name AminoPure® through retail stores in multiple states and via importers and distributors in Japan and Taiwan. Since inception, we have generated minimal revenues from the sale and promotion of NutreStore® and AminoPure®. We also own a minority interest in CellSeed, Inc., a Japanese company listed on the JASDAQ NEO market in Tokyo, which is engaged in research and development, manufacture and sale of temperature-responsive cell culture equipment. Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, “Emmaus Medical, LLC undertook a reorganization and merged with Emmaus Medical, which was originally incorporated in September 2003.

 

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

 

Upon consummation of the Merger on May 3, 2011, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical common stock, options, warrants and convertible notes received 20,628,305 shares of our common stock (excluding 47,178 shares held by stockholders who exercised dissenters’ rights in connection with the Merger), options and warrants to purchase an aggregate of 326,508 shares of our common stock, and convertible notes to purchase an aggregate of 271,305 shares of our common stock. Securityholders of Emmaus Medical held 85% of our issued and outstanding common stock on a fully diluted basis upon the closing of the Merger. Immediately after the closing of the Merger, we had 24,378,305 (excluding 47,178 shares held by stockholders who exercised dissenters’ rights) shares of common stock, no shares of preferred stock, options to purchase 23,590 shares of common stock, warrants to purchase 302,918 shares of common stock and convertible notes exercisable for 271,305 shares of common stock issued and outstanding.

 

30
 

 

Our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including: the duration and results of the clinical trials for our various products going forward; unexpected delays or developments when seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. 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, 2011, our accumulated deficit since inception is $21.6 million and cash and cash equivalents of $0.3 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. Currently, we estimate we will need approximately $5.2 million to complete our Phase III clinical trial and $400,000 to obtain regulatory approval of L-glutamine as a therapy for SCD. In addition, we have agreed to pay CellSeed an aggregate of $8.5 million pursuant to the Research Agreement that is still payable and we believe that we will need approximately $3 million for research and development to develop corneal cell sheet technology in the U.S and $2.8 million to initiate the cardiac cell sheet work.

 

Recent Highlights

 

In April 2009, the FDA authorized us to begin a large Phase III clinical trial directed to study L-glutamine as an experimental agent to reduce sickle cell crisis. Patient enrollment began in mid-2010 and as of March 20, 2012, we have signed contracts with 28 study sites across the United States and have enrolled over 130 patients. We aim to complete the Phase III clinical trial enrollment by mid 2012 and complete the trial in 2013.

 

In October 2010, we formed Emmaus Medical Japan, Inc. (“EM Japan”) and held approximately 97% of the outstanding shares of EM Japan since its formation until March 2011, when we acquired the remaining outstanding shares of EM Japan. EM Japan is now a wholly-owned subsidiary of Emmaus Medical that markets and sells AminoPure® in Japan and other neighboring regions. EM Japan also manages our distributors in Japan and may also import other medical products and drugs in the future. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of its formation. The aggregate formation costs were $52,500. EM Japan recorded approximately $160,000 in net sales in the year ended December 31, 2011and approximately $6,000 in 2010 from the date of its formation through December 31, 2010.

 

The Company agreed to contribute $15,000 per month to EM Japan from January 5, 2011 through June 2011, renewable automatically for six months on equivalent terms if the existing agreement is not updated within one month before expiration. The agreement was extended until June 2012. The monthly payments represent consulting services EM Japan performs on behalf of Emmaus Medical including (1) coordinating stockholder briefing meetings in Japan, (2) performing reception duties in Japan for employees and customers of Emmaus Medical, (3) conducting research activities and analysis in conjunction with the raw material market of AminoPure®, and (4) providing other services such as translation of documents and creating supporting investor relations documents for Emmaus Medical. We are currently in discussions with EM Japan regarding another possible extension of the agreement.

 

In December 2010, we were awarded a five-year contract by the U.S. Department of Veterans Affairs for our NutreStore® product.  In October 2007, we became the exclusive sublicensee of the SBS Patent for the U.S. market, including the rights to distribute the L-glutamine treatment for SBS under the trademark NutreStore®, in the U.S., and commercially launched NutreStore® in June 2008. Internationally, we are in the last stages of seeking approval to market NutreStore® in Hong Kong and have received a Certificate of Free Sale from the FDA to export NutreStore® to Hong Kong. Previously we promoted Zorbtive® in the United States pursuant to a promotional rights agreement with EMD Serono, Inc. Subsequently we terminated the agreement effective July 31, 2011 and no longer promote Zorbtive®. We do not anticipate that the termination of the promotional rights agreement with EMD Serono will have a significant impact on the Company as we had generated no revenues from the promotion of Zorbtive® pursuant to the promotional rights agreement and we continue to sell NutreStore® and AminoPure®.

 

In March 2011, prior to the Merger, Emmaus Medical completed a private placement of shares of its common stock in which it raised gross proceeds of $1.2 million. During the same month, we received our first order for AminoPure® from Taiwan.

 

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We sell L-glutamine as a nutritional supplement under the brand name AminoPure® through our wholly-owned subsidiary Newfield Nutrition Corporation. The product is currently sold online and through retail stores in multiple states and via importers and distributors in Japan, Taiwan, Ghana and South Korea. As part of the growth strategy, Newfield Nutrition is focused on adding additional distributors both domestically and internationally. On November 27, 2010, we added a new distributor in Taiwan. In November 2011, we added a new distributor in South Korea for the distribution of AminoPure® and received our first order from this South Korean distributor in January 2012.

 

On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the “Reverse Stock Split”), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of a contemplated public offering of our common stock. Our board of directors has not determined whether to effect the Reverse Stock Split or which exchange ratio to implement. If our board of directors elects to effect the Reverse Stock Split, it will set the ratio for the Reverse Stock Split as it determines is advisable after consulting with the underwriters and advisors and considering relevant market conditions at the time of the closing of the contemplated public offering. The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the Delaware Secretary of State. The par value and number of authorized shares of our common stock will remain unchanged.

 

In November 2011, we formed Emmaus Medical Europe, Ltd. (“EM Europe”), a wholly owned subsidiary of Emmaus Medical. EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe. EM Europe submitted an application for orphan medicinal product designation with the European Medicines Agency (“EMA”) in January 2012.

 

Financial Overview

 

Revenue

 

As noted above, we are in the development stage. Since our inception in 2000, we have had limited revenue from the sale of NutreStore®, an FDA approved prescription drug to treat SBS, and AminoPure®, a nutritional supplement. We have funded operations principally through the private placement of equity securities and debt financings. Emmaus Medical’s operations to date have been primarily limited to staffing, licensing and promoting products for SBS, outsourcing distribution and sales activities, developing clinical trials for sickle cell treatment, establishing manufacturing for products and maintaining and improving its patent portfolio. In November 2011, we added a new distributor in South Korea for the distribution of AminoPure® and received our first order from this South Korean distributor in January 2012.

 

Currently, we generate revenue through the sale of NutreStore® [L-glutamine powder for oral solution] as a treatment for SBS as well as AminoPure®, a nutritional supplement. Pursuant to the sublicense agreement for the SBS Patent, we are required to pay an annual royalty equal to 10% of adjusted gross sales of NutreStore® to Cato Holding Company (“Cato”), the sublicensor, In 2008 and 2009, we were required to make minimum royalty payments to Cato of $30,000 and $70,000, respectively, pursuant to the agreement. There was no required minimum royalty due in 2010 and any time thereafter; however, we are still required to pay Cato the annual royalty payment equal to 10% of our annual adjusted gross sales of NutreStore®. We made a royalty payment to Cato in the amount of $469 in October 2011 which represents the 10% royalty of the adjusted gross sales for 2010 of NutreStore®. Management expects that any revenues generated from the sale of NutreStore® and AminoPure® will fluctuate from quarter to quarter as a result of the timing of orders and the amount of product sold.

 

Research and Development Expenses

 

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to the contract research organization (CRO), payroll-related expenses, study site payments, consultants, activities related to regulatory filings, manufacturing development costs and other related supplies. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of late stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we seek to complete the development of our most advanced product candidate, the amino acid L-glutamine as a prescription drug for the treatment of SCD. Currently, we estimate that we will need approximately $5.2 million to complete our Phase III clinical trial.

 

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Expenses related to the Phase III clinical trial are based on estimates of the services received and efforts expended pursuant to contracts with study sites and the CRO that conducts and manages the clinical trial on our behalf. We expect to incur increased research and development expenses as we continue to enroll patients in the Phase III clinical trial for sickle cell disease. The most significant clinical trial expenditures are related to the CRO costs and the payments to study sites. The contract with the CRO is based on time and material expended whereas the study site agreements are based on per patient costs as well as other pass-through costs including but not limited to start-up costs and institutional review board (IRB) fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. Management estimates the expenses based on the time period over which the services will be performed and the level of effort to be expended by the CRO in each period. Although we do not expect the estimate to be materially different from amounts actually incurred, our estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary and consequently, result in us reporting amounts that are higher or lower in any given period.

 

While we currently are focused on advancing the sickle cell clinical trials, future research and development expenses will depend on any new products or technologies that may be introduced in the pipeline. In addition, we cannot forecast with any degree of certainty which product candidate(s) may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.

 

At this time, due to the inherently unpredictable nature of the drug development process and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in the continued development of the sickle cell treatment and other clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. The current estimated cost to complete the Phase III clinical trial is $5.2 million, which is based on the assumptions that the total number of trial sites does not increase beyond our current estimates and that we remain on the projected timeline. Should the total number of trial sites need to be increased or should the timeline require extension, there will be a commensurate increase in costs associated with the additional time and effort required by the CRO and company staff.

 

The drug development process to obtain FDA approval is very costly and time consuming. Even with the granting of orphan drug status and fast track designation, the successful development of the L-glutamine treatment for SCD is uncertain and subject to a number of variables, in addition to other risks, some of which are described above under the caption “Risk Factors.”

 

The L-glutamine treatment for SCD is investigational in nature and has not yet received FDA approval. In order to grant marketing approval, the FDA must conclude that the clinical data establishes the safety and efficacy of the L-glutamine treatment for SCD and that the manufacturing processes and controls are adequate. Despite our efforts, the L-glutamine treatment for SCD may not be proven safe and effective in clinical trials, or meet applicable regulatory standards. We are focused on completing the Phase III clinical trial and submitting the new drug application (NDA) to the FDA for consideration. As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollment and the risks inherent in the development process, we are unable to determine with any degree of certainty the duration and completion of costs or when, and to what extent, we will generate revenues from the commercialization and sale of the L-glutamine treatment for SCD.

 

In connection with our agreements with CellSeed related to the development of corneal cell sheet technology in the U.S., we believe that the future cost to develop this technology is approximately $11.5 million, which includes the $8.5 million we have agreed to make to CellSeed pursuant to Research Agreement but have not yet paid, and $3 million in research and development costs. Such estimate includes the cost of obtaining FDA approval for the cornea cell sheets. We have assumed that we will need biologic approval from the FDA for the cornea cell sheets, rather than pharmaceutical approval, and that we will only have to run a small trial here in the U.S. to test the safety and efficacy of the corneal cell sheets because we believe that we will be able to submit, and the FDA will accept, the data regarding corneal cell sheets submitted to the EMA. We estimate that we will need an additional $2 million to commercialize the corneal cell sheet technology. Based on the data available for cornea treatment using this technology, we anticipate it will be several years before we can commercialize this product in the U.S. In addition, we plan to participate in a multi-center international study involving cardiac cell sheets within the next two years. We estimate that we will need $2.8 million to initiate the cardiac cell sheet work. The total estimated costs and timeframe for commercialization and development of the cardiac cell sheets has not yet determined.

 

At this time, no research and development costs are associated with the SBS treatment.

 

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General and Administrative Expenses

 

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, information technology, marketing, and legal functions. Other general and administrative expenses include facility costs, patent filing costs, and professional fees for legal, consulting, auditing and tax services.

 

Inventories

 

Inventories consist of finished goods and work-in-process and are valued based on a first-in, first-out basis and at the lower of cost or market value. All of the purchases during the years ended December 31, 2011 and 2010 for the Company were from two vendors.

 

Results of Operations

 

    Year Ended December 31,     From
December 20, 2000
(date of inception)
to December 31,
 
    2011     2010     2011  
SALES   $ 339,156     $ 168,964     $ 713,655  
SALES RETURN & ALLOWANCE     (2,182 )     (30,230 )     (32,539 )
REVENUES   $ 336,974     $ 138,734     $ 681,116  
                         
COST OF GOODS SOLD                        
Cost of goods sold     132,104       99,373       358,138  
Scrapped inventory     -       235,537       235,537  
Total cost of goods sold     132,104       334,910       593,675  
GROSS PROFIT (LOSS)     204,870       (196,176 )     87,441  
                         
OPERATING EXPENSES                        
Research and development     1,552,205       1,062,031       6,451,857  
Selling     696,758       656,200       2,498,966  
General and administrative     5,047,886       1,817,728       10,660,626  
Transaction costs     788,893       -       788,893  
      8,085,742       3,535,959       20,400,342  
                         
LOSS FROM OPERATIONS     (7,880,872 )     (3,732,135 )     (20, 312,901)  
                         
OTHER INCOME (EXPENSE)                        
Interest income     30,493       39,005       115,727  
Interest expense     (979,170 )     (59,936 )     (1,369,163 )
      (948,677 )     (20,931 )     (1,253,436 )
                         
LOSS BEFORE INCOME TAXES     (8,829,549 )     (3,753,066 )     (21,566,337 )
                         
INCOME TAXES     3,209       4,304       18,057  
                         
NET LOSS     (8,832,758 )     (3,757,370 )     (21,584,394 )
NET LOSS PER COMMON SHARE   $ (0.38 )   $ (0.19 )        
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING     23,068,206       19,661,306          

   

Year Ended December 31, 2011 and 2010

 

Net Losses . Net losses increased by $5.0 million, or 135%, to $8.8 million from $3.8 million for the years ended December 31, 2011 and 2010, respectively. The increase in net losses is primarily a result of increased operating expenses as discussed below. As of December 31, 2011, we had an accumulated deficit of approximately $21.6 million. Losses, partially offset by revenue from commercialized products, will continue as we advance our sickle cell treatment toward regulatory approval and potential commercialization. As a result, we anticipate that we will continue to incur net losses and be unprofitable for the foreseeable future. There can be no assurance that we will ever operate at a profit, even if all of our products are commercialized.

 

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Revenues . Sales increased $170,192, or 101%, to $339,156 from $168,964 for the years ended December 31, 2011 and 2010, respectively. Sales increased primarily due to increases in the number of units sold of our AminoPure® product. There were $1,540 in returns of NutreStore® product in the year ended December 31, 2011 as compared to $30,230 in the year ended December 31, 2010. This was a significant decrease due to the expiration of the NutreStore® product in 2010. The Company recorded 5% NutreStore® Sales Return Allowance of $642 for year ended December 31, 2011.

 

Cost of goods sold. Cost of goods sold decreased to $132,104 from $334,910 for the years ended December 31, 2011 and 2010, respectively. Cost of goods sold includes the costs for raw material, packaging, testing, shipping, and the cost related to scrapped inventory. No scrapped inventory expense was realized for the year ended December 31, 2011, compared to $0.2 million for the year ended December 31, 2010. This expense relates to the actual value of NutreStore® inventory from the 2008 production that had to be destroyed in 2010 due to its expiration. All of the purchases during the years ended December 31, 2011 and 2010 were from two vendors. Purchases from these two vendors amounted to 90% and 10% of our total purchases for the year ended December 31, 2011, respectively, and 36% and 64%, respectively, for the year ended December 31, 2010.

 

Research and Development Expenses . Research and development expenses increased $0.5 million, or 46%, to $1.6 million from $1.1 million for the years ended December 31, 2011 and 2010, respectively. This increase was primarily due to increases in our CRO costs and study site costs due to the increase in the patient enrollment for the Phase III clinical trial of our L-glutamine treatment for SCD. For the year ended December 31, 2011, the CRO spent a tremendous amount of time with Phase III study related activities; a total of 25 clinical study sites were actively recruiting patients during 2011. Research and development costs increased as follows: $249,389 for CRO costs, $165,974 for study site expenses and $71,362 for study site set up costs.

 

Selling Expenses . We incurred selling expenses of $0.7 million for each of the years ended December 31, 2011 and 2010. Selling expenses included the costs for distribution, promotion, travel, tradeshows and exhibits related to NutreStore®, Zorbtive® and AminoPure®.

 

General and Administrative Expenses. General and administrative expenses increased $3.2 million, or 178%, to $5.0 million from $1.8 million for the years ended December 31, 2011 and 2010, respectively. The increase was largely due to an increase in costs related to payroll, legal fees and consulting fees. The Company increased its management and professional staff to support its efforts to prepare for the merger and initial public offering (IPO). As a result, the payroll increased $0.5 million, and its legal and consulting expenses increased by $0.9 million and $1.6 million, respectively.

 

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

 

· as a result of increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company;
· to support research and development activities, which the Company expects to expand as development of our product candidate(s) continue; and
· to build a sales and marketing team before we receive regulatory approval of a product candidate in anticipation of commercial launch.

 

Liquidity and Capital Resources

 

Based on our losses to date, anticipated future revenue and operating expenses and our cash and cash equivalents balance of $0.3 million as of December 31, 2011, the Company does not appear to have sufficient operating capital for its business without raising additional capital. We incurred losses of $8.8 million for the year ended December 31, 2011 and $3.8 million for the year ended December 31, 2010. We had an accumulated deficit since inception to December 31, 2011 of $21.6 million. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the development and commercialization of L-glutamine as a prescription drug for the treatment of sickle cell disease, the corneal cell sheets technology and the expansion of corporate infrastructure, including costs associated with being a public company. We have previously relied on private equity offerings, debt financings, and loans, including loans from related parties. As part of this effort, we have received many loans from stockholders as discussed below. Emmaus Medical raised approximately $1.2 million in a private offering of its common stock in March 2011. In addition, the Company has raised about $1.8 million by notes payable and $3.9 million by convertible notes payable in 2011. 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 development of cell sheet technology in the U.S.

 

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Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the years ended December 31, 2011 and 2010, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and, finally, achieving a profitable level of operations.

 

On April 8, 2011, pursuant to the Research Agreement, we agreed to pay CellSeed $8.5 million (the “Research Agreement Payment”) within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the Package to us. Pursuant to the Individual Agreement, the Company agreed to pay $1.5 million to CellSeed (the “Individual Agreement Payment”) within 30 days of CellSeed’s delivery of the Package to the Company and a royalty to be agreed upon by the parties. The Company made the Individual Agreement Payment to CellSeed in February 2012. Pursuant to an addendum to the Research Agreement, CellSeed and the Company confirmed that the Company is obligated to make the Research Agreement Payment only after the Company provides its written confirmation of acceptance of the complete Package from CellSeed. We intend to use $1.5 million of the proceeds from this offering to pay a portion of the Research Agreement Payment to CellSeed. We currently anticipate the delivery of the Package to Emmaus to be completed after we begin to generate revenues from the commercialization of our L-glutamine treatment for SCD and, therefore, we believe that we will be able to pay the remaining $7.0 million that will be payable to CellSeed pursuant to the Research Agreement from revenue. If the Package is delivered prior to our generation of revenue from the commercialization of our L-glutamine SCD treatment, we will seek other funding sources, including the sale of additional equity or debt securities, in order to make the payment. CellSeed may terminate these agreements with us if we are unable to make timely payments, which are required under the agreements.

 

In addition to the Research Agreement Payment we have agreed to pay CellSeed pursuant to the Research Agreement, we currently estimate that we will need an additional $5.2 million to complete our Phase III clinical trial and $0.4 million to obtain FDA approval for our L-glutamine treatment for SCD. Our current cash burn rate is approximately $0.5 million per month. Our future capital requirements will be substantial and may increase beyond our current expectations depending on many factors including, but not limited to: the number, duration and results of the clinical trials for our various products going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. We will rely, in part, on sales of AminoPure® for revenues, which we expect will increase. Revenues from NutreStore® are currently not significant and we are unsure whether sales of NutreStore® will increase. Until we can generate a sufficient amount of product revenue, future cash needs are expected to be financed through public or private equity offerings, debt financings, loans, including loans from related parties, or other sources, such as strategic partnership agreements and corporate collaboration and licensing arrangements. If we do not receive adequate funding to complete our clinical trials or to obtain FDA approval for our L-glutamine treatment for SCD, we may be required to delay our trial. If we are required to delay our trial, we cannot enroll additional subjects, which will delay the approval of our L-glutamine treatment for SCD.

 

Our cash flow from operations is not adequate and our future capital requirements are substantial and may increase beyond our current expectations depending on many factors including, but not limited to; the duration and results of the clinical trials for our various products going forward; unexpected delays or developments in seeking regulatory approvals; the time and cost in preparing, filing, prosecuting, maintaining and enforcing patent claims; other unexpected developments encountered in implementing our business development and commercialization strategies; the outcome of litigation, if any; and further arrangements, if any, with collaborators. Although we intend to fund our cash flow needs through public or private equity offerings, debt financings loans, and other sources such as strategic partnership agreements and corporate collaboration and licensing arrangements until we can generate a sufficient amount of product revenue, there can be no assurance of the availability of such capital on terms acceptable (or at all) to the Company.

 

For the year ended December 31, 2011 and during the year ended December 31, 2010, we borrowed varying amounts pursuant to promissory notes, the majority of which has been from our stockholders. As of December 31, 2011 and 2010, our amounts outstanding under outstanding promissory notes totaled $5.7 million and $0.9 million, respectively. Of the $5.7 million of promissory notes outstanding as of December 31, 2011, $3.0 million was due to stockholders and all of the amounts outstanding under the notes as of December 31, 2010 were due to stockholders. The promissory notes carry interest from 0% to 10% and except for two promissory notes in the principal amount of $0.5 million and $0.8 million, the debt is unsecured. Interest on 0% loans was imputed at the incremental borrowing rate of 6% per annum. The net proceeds of the loans were used for working capital.

 

36
 

 

The table below lists our outstanding convertible loans as of March 20, 2012 and the material terms of such loans:

 

Lender   Loan Type   Annual
Interest
Rate
    Date of loan     Term of
Loan
    Principal
Loan
Amount (1)
    Conversion
Price
    Amount
Outstanding
as of March
20, 2012 (1)
    Number of
Shares
Underlying
Note as of
March 20,
2012
 
Nami Murakami   Convertible     0 %     8/16/2010       5 years     $ 18,000     $ 3.05     $ 18,000       5,898  
Makoto Murakami   Convertible     0 %     8/16/2010       5 years     $ 18,000     $ 3.05     $ 18,000       5,898  
Kazuo Murakami   Convertible     0 %     8/16/2010       5 years     $ 18,000     $ 3.05     $ 18,000       5,898  
M’s Support Co. Ltd.   Convertible     0 %     8/17/2010       5 years     $ 18,000     $ 3.05     $ 18,000       5,898  
Yumiko Takemoto   Convertible     6 %     11/23/2010       5 years     $ 2,000     $ 3.05     $ 2,000       656  
Shigeru Matsuda   Convertible     6.5 %     1/12/2009       5 years     $ 221,895     $ 3.05     $ 267,451       87,688  
Mitsubishi UFJ Capital III, Limited Partnership   Convertible     10 %     3/14/2011       5 years     $ 500,000     $ 3.05     $ 502,778       163,809  
Yasushi Nagasaki   Convertible     8 %     6/29/2011       1 year     $ 360,000     $ 3.60     $ 381,200       105,888  
Andrew Wood   Convertible     8 %     7/8/2011       1 year     $ 3,240     $ 3.60     $ 3,424       951  
Yung Min Suh   Convertible     8 %     7/11/2011       1 year     $ 925,200     $ 3.60     $ 977,206       271,445  
Yumiko Nakamura   Convertible     8 %     8/9/2011       1 year     $ 54,000     $ 3.60     $ 56,688       15,746  
Technoble Co., Ltd.   Convertible     8 %     8/30/2011       1 year (2)     $ 130,100     $ 3.60     $ 135,998       37,777  
Delfan Co., Ltd.   Convertible     8 %     8/30/2011       1 year (2)     $ 130,100     $ 3.60     $ 135,998       37,777  
Jun & Yumi Saito   Convertible     8 %     8/31/2011       1 year     $ 5,400     $ 3.60     $ 5,644       1,567  
Sumiko Fujisawa   Convertible     8 %     9/7/2011       1 year (2)     $ 30,000     $ 3.60     $ 31,307       8,696  
Hideki & Eiko Uehara   Convertible     8 %     9/7/2011       1 year (2)     $ 30,000     $ 3.60     $ 31,307       8,696  
Dennis Y. Teranishi   Convertible     8 %     9/9/2011       1 year (2)     $ 108,000     $ 3.60     $ 112,656       31,293  
Shitabata Family Trust   Convertible     8 %     9/29/2011       1 year (2)     $ 450,000     $ 3.60     $ 467,400       129,833  
Shitabata Family Trust   Convertible     8 %     10/3/2011       1 year (2)     $ 1,050,000     $ 3.60     $ 1,089,667       302,685  
MLPF&S Cust. FBO Willis C. Lee   Convertible     8 %     10/5/2011      

1 year

    $ 128,002     $ 3.60     $ 132,780       36,883  
Tracey & Mark Doi   Convertible     8 %     2/10/2012       1 year     $ 108,000     $ 3.60     $ 108,960       30,266  
The Saito Family Trust   Convertible     8 %     2/20/2012       1 year (2)     $ 100,000     $ 3.60     $ 100,667       37,325  
J.R. Downey   Convertible     8 %     3/2/2012       1 year (2)     $ 150,004     $ 3.60     $ 150,638       37,283  
Robert and Megumi Jo   Convertible     8 %     2/18/2012       1 year (2)     $ 100,000     $ 3.60     $ 100,667       27,962  
Yukio Hasegawa   Convertible     8 %     2/15/2012       1 year (2)     $ 133,333     $ 3.60     $ 134,759       27,962  
Hiroshi Iguchi   Convertible     8 %     2/20/2012       1 year (2)     $ 133,333     $ 3.60     $ 134,222       41,843  
TOTAL                       $ 4,924,607           $ 5,135,417       1,467,623  

 

(1)Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as applicable, on each loan as of the dates indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
(2)Lender may demand repayment of the note on or after the three-month anniversary of the loan date.

 

The table below lists our outstanding non-convertible loans as of March 20, 2012 and the material terms of such loans:

 

Lender   Loan Type   Annual
Interest
Rate
    Date of
loan
    Term of Loan   Principal
Loan
Amount
(1)
    Amount
Outstanding as
of March 20,
2012 (1)
 
Hope International Hospice, Inc.   Non-convertible     8 %     1/12/2011     2 years   $ 200,000     $ 203,067  
Yutaka Niihara   Non-convertible     6.5 %     1/12/2009     Due on demand   $ 350,000     $ 352,338  
Yutaka Niihara   Non-convertible     8 %     6/21/2011     Due on demand   $ 30,000     $ 30,187  
Equities First Holdings, LLC   Non-convertible     4.5 %     7/21/2011     3 years   $ 841,728     $ 848,146  
Hope International Hospice, Inc.   Non-convertible     8 %     1/17/2012     Due on demand   $ 200,000     $ 202,844  
Lan T. Tran   Non-convertible     11 %     2/10/2012     2 years (2)   $ 205,000     $ 207,506  
Izumi Tanaka   Non-convertible     11 %     2/16/2012     2 years (3)   $ 133,333     $ 134,719  
Mariko Tejima   Non-convertible     11 %     2/16/2012     2 years (3)   $ 133,333     $ 134,719  
Hideki & Eiko Uehara   Non-convertible     11 %     2/15/2012     Due on demand   $ 133,333     $ 134,759  
Shigeru Matsuda   Non-convertible     11 %     2/15/2012     Due on demand   $ 833,335     $ 842,247  
TOTAL                   $ 3,060,062     $ 3,090,532  

 

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(1) Represents the full amount of the principal and amount outstanding (inclusive of accrued interest), as applicable, on each loan as of the dates indicated, without regard for the value of any recorded discounts for (i) the beneficial conversion feature of convertible notes or (ii) warrants issued in connection with certain convertible notes.
(2) Lender may demand repayment of the note in full at any time prior to maturity.
(3) Lender may demand repayment of the note on or after the six-month anniversary of the loan date.

 

The loan to the Company from Hope International Hospice, Inc. made in 2011 is evidenced by a promissory note. Pursuant to the note, interest is payable quarterly with the principal being due and payable on the maturity date. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.

 

The loan to the Company from Dr. Niihara made in 2009 is evidenced by a promissory note. Pursuant to the note, interest is payable monthly with principal and any accrued unpaid interest being due upon demand by the holder. If we fail to make a payment within 10 days after the due date, we must pay an additional late fee equal to 2% of the late interest payment. If we fail to make any payment when due under the note, breach any condition relating to any security for the note (despite the fact that the note is unsecured), seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. Dr. Niihara loaned the Company an additional $100,000 on June 21, 2011; the Company made a $70,000 partial repayment of this note on August 29, 2011. Pursuant to the promissory note evidencing the loan, interest is payable monthly with principal and any accrued unpaid interest being due upon demand by the holder. If we fail to make any payment when due under the note or seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.

 

The loans to the Company from Nami Murakami, Makoto Murakami, Kazuo Murakami and M’s Support Co. Ltd. are evidenced by promissory notes. Pursuant to the notes, interest is payable quarterly with the principal being due and payable on the maturity date. The holder, at his option, may convert the principal amount of the note into shares of our common stock at a conversion price of $3.05 per share. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder.

 

The loan to the Company from Mitsubishi UFJ Capital III, Limited Partnership is evidenced by a promissory note. Pursuant to the note, interest accrues at 10% per annum beginning on January 1, 2012. Interest only payments are due monthly with the principal being due and payable on the maturity date. The holder, at any time during the term of the note but no later than one month after the date our shares of common stock are traded on NASDAQ, may convert the principal amount and any accrued interest owing at the time of such conversion into shares of our common stock at $3.05 per share. Upon the conversion of the note, the holder will also receive a warrant to purchase shares of our common stock in an amount equal to 25% of the number of shares received upon the conversion of the note. The exercise price of the warrants will be $3.05 per share. The principal amount of the note is secured by 73,550 shares of common stock of CellSeed owned by Emmaus Medical. If we fail to make any payment when due under the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note is due and payable to the holder. In addition, the lender may require us to perform all obligations under the note in the event our shares are not traded on NASDAQ on or prior to December 31, 2011 or that any stockholder is engaged in any antisocial activities.

 

The loan to the Company from Shigeru Matsuda from January 2009 is evidenced by a promissory note. If requested by the lender, we must make quarterly interest only payments. The lender may also allow interest payments to accrue, pursuant to which the unpaid but accrued interest shall be added to the principal.  The entire unpaid principal and any accrued interest thereon shall become immediately due and payable on demand by the holder. The holder, at any time during the term of the note, may convert the principal amount and any accrued interest owing at the time of such conversion into shares of our common stock at $3.05 per share. If we fail to make a payment within 10 days after the due date, we must pay an additional late fee equal to 2% of the late interest payment. Dr. Niihara and Daniel Kimbell, the former Chief Operating Officer of Emmaus Medical, agreed to be the primary guarantor and secondary guarantor on the note such that in the event we are unable to pay the note, Dr. Niihara and Mr. Kimbell, in that order, shall make payments due to the lender. If we or the guarantors fail to make any payment due under the terms of the note, or breach any condition relating to any security, security agreement, note, mortgage or lien granted as collateral security for the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership not vacated within 30 days, the entire balance of the note and any interest accrued thereon shall be immediately due and payable to the holder.

 

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The loan to the Company from Yumiko Takemoto is evidenced by a promissory note. Pursuant to the note, interest is payable quarterly with the principal being due and payable on the maturity date. The holder, at his option, may convert the principal amount of the note into shares of our common stock at a conversion price of $3.05 per share. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.

 

The loan to the Company from Yasushi Nagasaki is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on the maturity date. The principal amount and any unpaid interest due under the promissory note are convertible into shares of our common stock at $3.60 per share. Mr. Nagasaki received a warrant to purchase 25,000 shares of common stock at an exercise price equal to 75% of the fair market value of the Company’s common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.

 

The loans to the Company from Jun & Yumi Saito, Andrew K. Wood and Yumiko Nakamura are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued Jun & Yumi Saito, Mr. Wood and Ms. Nakamura, three-year warrants to purchase 375, 225 and 3,750 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loan to the Company from Yung Min Suh is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest is due on the maturity date. The principal amount and any unpaid accrued interest due under the promissory note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mr. Suh a three-year warrant to purchase 64,250 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment when due under the note, seek relief under the U.S. Bankruptcy Code, fail to deliver shares of common stock upon conversion of the note within the deadline specified in the note, suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, consent to the appointment of a receiver or similar official that is not vacated within 30 days, make a general assignment for the benefit of our creditors or admit in writing that we are generally unable to pay our debts as they become due, the entire balance of the note shall be due and payable to the holder.

 

The loans to the Company from Technoble Co., Ltd., Delfan Co., Ltd., Hideki & Eiko Uehara, Sumiko Fujisawa, Dennis Teranishi and the Shitabata Family Trust are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued Technoble, Delfan, Hideki & Eiko Uehara, Ms. Fujisawa, Mr. Teranishi and the Shitabata Family Trust three-year warrants to purchase 9,035, 9,035, 2,083, 2,083, 7,500 and 208,333 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder. Dr. Niihara and Mr. Lee provided a guarantee on the promissory notes entered into with the Shitabata Family Trust.

 

The loan to the Company from Equities First Holdings, LLC (“Equities First”) is evidenced by to a loan agreement by and between Emmaus Medical and Equities First. Pursuant to the loan agreement, Equities First agreed to lend to Emmaus Medical funds equal to 70% of the current fair market value of 73,550 shares of CellSeed, Inc. owned by Emmaus Medical for the three consecutive trading days for the CellSeed stock. Prepayment of the principal amount of the loan or any interest due is not permitted. As collateral for the loan, Emmaus Medical pledged 73,550 of its shares of CellSeed (the “Collateral”) pursuant to a Pledge Agreement with Equities First in which Emmaus Medical assigned its right, title and ownership interest in the Collateral. Within five business days of Emmaus Medical’s payment of all of its obligations under the loan agreement, Equities First shall reassign all right, title and ownership interest in identical securities, as defined in Internal Revenue Code Section 1058, to Emmaus Medical and redeliver the Collateral. If we fail to make any payment when due under the note or we seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder.

 

39
 

 

The loan to the Company from MLPF&S Cust. FBO Willis C. Lee is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the maturity date of the note. The principal amount plus the unpaid accrued interest due under the promissory note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued three-year warrants to purchase 35,556 shares of our common stock at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loan to the Company from Hope International Hospice, Inc. is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on demand. In connection with the issuance of the note, we issued Hope International Hospice, Inc. three-year warrants to purchase 55,556 shares of our common stock, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loans to the Company from Ms. Izumi Tanaka and Ms. Mariko Tejima are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the six month anniversary of the loan date the holder demands earlier payment of the note. The Company must make quarterly interest payments under each note. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loan to the Company from Ms. Lan T. Tran is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on demand. In connection with the issuance of the note, we issued Ms. Tran three-year warrants to purchase 56,945 shares of our common stock, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loans to the Company from Mr. & Mrs. Uehara and Shigeru Matsuda from February 2012 are evidenced by promissory notes. The Company is required to make quarterly interest payments pursuant to the notes. The entire principal amount of each note and any outstanding accrued interest thereon is due upon demand of the holder. In connection with the issuance of the notes, we issued Mr. & Mrs. Uehara and Mr. Matsuda three-year warrants to purchase 37,037 and 231,482 shares of our common stock, respectively, at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall immediately be due and payable to the holder.

 

The loan to the Company from Tracey & Mark Doi is evidenced by a promissory note. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of the note. The principal amount plus the unpaid accrued interest due under the note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mrs. & Mr. Doi three-year warrants to purchase 30,000 shares of our common stock at a per share exercise price equal to $1.00. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

The loan to the Company from Yukio Hasegawa is evidenced by a promissory note. The entire principal amount of each note and any outstanding accrued interest thereon is due on the maturity date of each note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mr. Hasegawa three-year warrants to purchase 9,259 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

40
 

 

The loans to the Company from The Saito Family Trust, J.R. Downey, Robert & Megumi Jo and Hiroshi Iguchi are evidenced by promissory notes. The entire principal amount of each note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the notes, we issued The Saito Family Trust, J.R. Downey, Robert & Megumi Jo and Hiroshi Iguchi three-year warrants to purchase 6,944; 10,417; 6,944, and 9,259 shares of our common stock, respectively, at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder.

 

Cash Flows

 

Net cash used in operating activities

 

Net cash flows used in operating activities increased by $2.3 million, or 62%, to $6.0 million from $3.7 million for the years ended December 31, 2011 and 2010, respectively. This increase was primarily due to a $5.0 million increase in net loss offset by an increase in the accounts payable outstanding balance of $0.6 million, an increase in the due to related party of $0.4 million, an increase in deposits of $0.2 million and an increase in inventory of $0.1 million. In addition, we issued warrants to a consultant in exchange for services rendered, which resulted in a $1.1 million decrease in cash flows used in operating activities. These warrants have not been exercised and were recorded in operating activities as non-cash item. Another non-cash item is interest expenses accrued from discount of convertible note of $0.8 million. The increase in operating expenses was a direct result of costs associated in preparing for the merger and public offering.

 

Net cash used in investing activities

 

Net cash flows used in investing activities decreased to $1,171 from $5,720 for the year ended December 31, 2011 and 2010, respectively. The decrease was mainly due to a decrease in the purchase of property and equipment. No other investing activities occurred in the year ended December 31, 2011 and 2010.

 

Net cash from financing activities

 

Net cash flows from financing activities increased by $2.5 million, or 70%, to $6.1 million from $3.6 million for the years ended December 31, 2011 and 2010, respectively, primarily as a result a $3.4 million increase in the proceeds from the issuance of notes payable and convertible notes payable, partially offset by a $0.9 million decrease in proceeds from the issuance of shares of our common stock. Since July 2011, the Company has mainly relied on the sale and issuance of convertible notes for its financial and working capital needs.

 

A total of $0.1 million of convertible notes payable were converted into shares of our common stock during the years ended December 31, 2011, compared to $1.3 million for the year ended December 31, 2010.

 

Off-Balance-Sheet Arrangements

 

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

 

Critical Accounting Policies

 

Management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the present circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

 

While our significant accounting policies are more fully described in Note 2 to our financial statements which is provided at the end of this prospectus, we believe that the following accounting policies are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

 

41
 

 

Revenue recognition

 

We recognize revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”), as amended by Staff Accounting Bulletin No. 104, Revision of Topic 13 (“SAB 104”).

 

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured

 

With prior written approval of the Company, product is returnable only by our direct customers for a returned goods credit, provided the product meets any of the following criteria:

 

A.Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.
B.Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.
C.Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.
D.Product that is discontinued, withdrawn, or recalled.

 

Credits will only be issued for full cartons only without any missing packets of product.  No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company.  No credit is issued for product destroyed by anyone other than the Company.  Customers must return the product within 60 days of receiving our written approval for the return or the return will not be issued a credit.  The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%.  When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases.   Credit memos expire one hundred eighty (180) days from date issued. 

 

We estimate our sales return based upon our prior sales and return history. Historically, sales returns have been very nominal. The extraordinary sales returns in the year ended December 31, 2010 were all related to the same batch of NutreStore® product produced in 2008 that expired. The expiry date of that batch of NutreStore® product was two years after the date of manufacture. Currently-manufactured batches of NutreStore® product have an expiration date that is four years after the date of manufacture.  All products sold in 2009 were part of the batch that had a two year expiry period and expired in 2010.  All products produced in 2010 and sold from 2010 through 2011 have an expiry date of 2014 and we anticipate that the product will be consumed before expiration and not returned. We continue to monitor our returns and will adjust our estimates based on its actual sales return experience. As of December 31, 2011, we recorded a 5% Sales Return Allowance for the NutreStore® sales in the accompanying financial statements.

 

We are required to pay royalties, which are recognized as an expense upon sale of the products. We are required to pay a royalty to Cato equivalent to 10% of our adjusted gross sales of NutreStore® calculated on an annual basis. The 10% royalty is calculated at the end of the year and accrued on an annual basis.

 

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

 

42
 

 

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.

 

BUSINESS

Overview

 

We are engaged in the discovery, development, and commercialization of innovative and cost-effective treatments and therapies for rare diseases, areas that we believe have traditionally been underserved by large pharmaceutical companies. We believe that there are attractive niche markets and financial opportunities for companies such as ours that specialize in treatments for rare diseases. Over time, we plan to expand our business to include developing and marketing products to treat more common diseases. The primary focus of our business is the late-stage development of the amino acid L-glutamine as a prescription drug for the treatment of sickle cell disease (“SCD”). To a lesser extent, we are also engaged in the marketing and sale of NutreStore® [L-glutamine powder for oral solution], a treatment for short bowel syndrome (“SBS”) and the sale of L-glutamine as a nutritional supplement under the brand name AminoPure®. Since inception, we have generated minimal revenue from the sale and/or promotion of NutreStore® and AminoPure®.

 

Industry and Market Opportunity

 

We focus on developing treatments and therapies for rare diseases. Rare diseases, pursuant to the Rare Diseases Act of 2002, defines a “rare disease” as any disease or condition that affects fewer than 200,000 persons residing in the United States. In Japan, a rare disease is one that affects fewer than 50,000 persons residing in Japan. The European Commission on Public Health defines a rare disease as a life-threatening or chronically debilitating disease which is of such low prevalence, namely, that it affects fewer than 1 in 2,000 people, that special combined efforts are required to treat it.

 

Articles referenced in this prospectus can be accessed through PubMed (http://www.ncbi.nlm.nih.gov/pubmed/) or by contacting the publisher directly for a copy of the article.

 

Sickle Cell Disease

 

We are currently engaged in a Phase III clinical trial of L-glutamine as a treatment for SCD, for which we anticipate to obtaining approval from the U.S. Food and Drug Administration (“FDA”) in late 2013. It is estimated that SCD affects approximately 90,000 to 100,000 persons in the U.S., according to the section of the Centers for Disease Control’s website regarding SCD last updated September 2011, and millions of people worldwide. The disease is particularly common among those whose ancestors come from sub-Saharan Africa; Spanish-speaking regions in the Western Hemisphere such as South America, the Caribbean, and Central America; Saudi Arabia; India; and Mediterranean countries such as Turkey, Greece and Italy.

 

SCD is an inherited blood disorder that affects red blood cells. Red blood cells contain hemoglobin which allows red blood cells to carry oxygen from the air in the lungs to all parts of the body. Normal red blood cells contain hemoglobin A. In contrast, the bone marrow of people with SCD produces red blood cells with a different form of hemoglobin called hemoglobin S (S stands for sickle). When a person has SCD, rather than remaining round, smooth and flexible, the red blood cells become sickle (crescent) shaped, inflexible, and sticky as they release oxygen to other tissues in the body. These abnormally shaped cells become rigid and become lodged in the capillaries when oxygen is released from the cells’ hemoglobin, causing blockages and preventing the normal flow of oxygen to the surrounding tissue. SCD diseased red blood cells also tend to clump together, further impeding circulation.

 

According to the section of the National Heart, Lung and Blood Institute’s website regarding SCD (the “NHLBI SCD Website”), normal red blood cells live for about 120 days before they are replaced with new ones. In sharp contrast, sickle-shaped red blood cells are destroyed faster, in about 10 to 20 days, and cannot always be replaced quickly. As a result, people with SCD are often anemic. Sickle cell disease includes sickle cell anemia (which results from two hemoglobin S genes), sickle ß-thalassemia (one hemoglobin S and one ß-thalassemia gene), hemoglobin SC disease (one hemoglobin S and one hemoglobin C), and the somewhat rare disease hemoglobin C Harlem. According to the NHLBI SCD Website, these hereditary diseases often affect individuals of African American heritage, and increasingly, Hispanic populations.

 

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The complications of sickle cell disease occur when sickle-shaped red blood cells block veins which then can cause pain in the arms, legs, back and stomach, bones, skin and other parts of the body, as well as long-term organ damage, diminished exercise tolerance, increased stroke and infection rate, and decreased lifespan. According to Hematology in Clinical Practice, by Hillman et al. published by McGraw Hill in 2005 (the “Hillman Treatise”), “sickle cell crisis” is a broad term that describes several different conditions, particularly aplastic crisis, which is temporary bone marrow aplasia; hemolytic crisis, which is acute red cell destruction, leading to jaundice; and vaso-occlusive crisis, which is severe pain due to infarctions located in the bones, joints, lungs, liver, spleen, kidney, eye, or central nervous system. The acute pain of a sickle cell crisis generally persists for several days, and is usually followed by a dull, aching pain, which generally ends after several weeks, although it may persist between crises.

 

According to the article In the Clinic-Sickle Cell Disease by M.H. Steinberg published in Annals of Intern. Med. in September 2011 (the “Steinberg Article”), acute chest syndrome (ACD), which can often lead to death, is a particularly serious complication of SCD and is commonly accompanied by infections in the lungs, characterized by fever, chest pain, cough, and lung infiltrates, this sometimes-lethal complication affects more than half of all patients with sickle cell disease and is the second most common reason for hospitalization.

 

Pain is the hallmark of sickle cell disease (see the Steinberg Article). This pain is called a sickle cell crisis and often affects the bones, lungs, abdomen and joints. The pain can be acute or chronic, but acute pain is more common according to the NHLBI SCD Website. Typical painful episodes last 5 to 10 days in adults but some seem to persist for weeks. The frequency of acute pain episodes varies within and among individuals from rare to several times a month. Approximately one third of patients have a few pain episodes, 50% have occasional episodes, and 20% have weekly or monthly episodes. A few patients account for most patients with acute pain episodes. The frequency of pain episodes increases late in the second decade of life and decreases after the fourth decade. More than 3 episodes per year is associated with reduced life expectancy (see the Steinberg Article). According to the Hillman Treatise, sickle cell pain is treated with nonsteroidal anti-inflammatory drugs (NSAIDs), narcotics (e.g. morphine, codeine and oxycodone), other pain relief medicines, and blood transfusions. SCD patients also require frequent visits to emergency rooms and urgent care facilities. Aside from pain and ACD, there are other complications of SCD that includes proliferative retinopathy, gallstone, aseptic necrosis of the femoral and humeral heads, leg ulcers and renal insufficiency (see the Hillman Treatise), infection, priapism, digestive system disease (biliary tract and liver disease) (see the Steinberg Article), stroke and hand-foot disease (see the NHLBI SCD Website).

 

We have acquired the rights to develop a treatment approach for SCD covered under U.S. Patent No. 5,693,671, entitled “L-glutamine Therapy for Sickle Cell Disease and Thalassemia” issued on December 2, 1997 to Niihara et al. Emmaus Medical is the exclusive worldwide licensee of this patent. The license agreement is effective until the expiration of the patent in 2016. For further information on the key terms of the license agreement, see “Intellectual Property” below. L-glutamine is a conditionally essential amino acid that has long been used as a non-pharmaceutical nutritional supplement. A conditionally essential amino acid is an amino acid that the body can naturally synthesize, but under certain circumstances, the body may be unable to synthesize such amino acid and it must be supplied, instead, by diet or supplement. Emmaus’ treatment involves SCD patients orally consuming 30 gm/day of USP-grade L-glutamine for adults, and 0.6 gm/kg of body weight for infants and children, up to 30 gm/day.

 

In red blood cells, pyridine nucleotides, nicotinamide adenine dinucleotide (NAD) and its reduced form NADH, are the major molecules that regulate and prevent oxidative damage. According to various articles including 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 in 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 in 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 1997 in the Journal of Laboratory and Clinical Medicine, sickle red blood cells have a significantly increased rate of transport of one of the major precursors of NAD, glutamine. It was proposed that the SCD red blood cell is attempting to improve NAD redox potential by increasing transport of glutamine. Analysis of the chemistry of NAD synthesis in red blood cells has suggested that with glutamine supplementation to sickle red blood cells, the NAD synthesis will further increase, which would prevent the sickle red blood cells from being oxidative damaged, and make the sickle red blood cells less adhesive to small blood vessels, leading to less obstruction or blockage of small blood vessels, which is a major cause of the problems that sickle cell patients face.

 

Before FDA approval can be granted, we are required to complete the Phase III clinical trial and analyze all of the data collected during the trial. We believe that the Phase III clinical trial will be completed by the second half of 2013. Upon completion of the Phase III trial and analysis of the data, we intend to submit a New Drug Application (NDA) to the FDA. Should the trial be completed by the end of the second half of 2013 as anticipated, we believe that we will file the NDA with the FDA in late 2013. After the NDA is submitted, the FDA will have 60 days to decide whether to file the NDA for review. The FDA can refuse to file an application for review that is incomplete for reasons such as missing studies that may be required. In accordance with the Prescription Drug User Fee Act (PDUFA), the FDA’s Center for Drug Evaluation and Research (CDER) expects to review and either approve or issue a comment letter on at least 90 percent of NDAs for standard drugs no later than 10 months after the applications are received. The goal is a six month review for priority drugs. Our L-glutamine treatment for SCD has obtained orphan drug and fast track designation as outlined in greater detail below. Based on these designations granted by the FDA, we believe that such treatment will qualify as a priority drug.

 

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After reviewing the NDA, the FDA will make a determination as to whether the drug is safe and effective in its proposed use(s) and whether the benefits of the drug outweigh the risks, whether the drug’s proposed labeling (package insert) is appropriate, and the information the package insert should contain and whether the methods used in manufacturing the drug and the controls used to maintain the drug’s quality are adequate to preserve the drug’s identity, strength, quality, and purity. Upon completion of the NDA review, the FDA will either 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 applicants of changes that must be made before an application can be approved). If FDA approval is granted, we will be able to commercialize the drug.

 

Should the NDA be rejected, the FDA will provide an outline justifying its decision to reject the NDA in a response letter to us and we will have an opportunity to meet with FDA officials to discuss any deficiencies noted in the letter. At that point, we can choose to ask for a hearing, or correct any deficiencies and submit new information, or we can withdraw the application. Common problems which may delay or prevent the FDA from approving our NDA include unexpected safety issues or the failure to demonstrate a drug’s effectiveness. We may need to conduct additional studies, perhaps studies of more people, different types of people, or for a longer period of time.

 

Manufacturing issues also may be a reason that approval is delayed or denied. Drugs must be manufactured in accordance with standards referred to as “good manufacturing practices”, and the FDA inspects manufacturing facilities before a drug can be approved. If a facility is not ready for inspection, approval can be delayed. We would need to correct any manufacturing deficiencies before the FDA will approve the NDA.

 

If FDA approval is not granted, we will not be able to commercialize the drug, which will have a material adverse impact on us. If we must conduct new studies pursuant to the FDA’s review of our NDA, we may not have sufficient funding in order to conduct such additional studies. While we do not expect that the FDA will reject our NDA, if that occurs, we may decide to proceed with having the L-glutamine treatment approved as a medical food rather than a pharmaceutical product. We will also continue to develop other products in our pipeline, including the cell sheet cornea technology we are developing with CellSeed, Inc. described below.

 

Short Bowel Syndrome

 

We currently sell one prescription pharmaceutical product, NutreStore® [L-glutamine powder for oral solution], in the United States. NutreStore® has received FDA approval as a treatment for SBS.

 

SBS is a condition affecting people who have had half or more of their small intestine surgically removed or who have a congenital defect or a disease affecting the small intestine, such as Crohn’s disease and inflammatory bowel disease. The small bowel plays a significant role in nutrient absorption and those with SBS experience malnourishment due to an inadequate absorption of nutrients and fluids. As described in the article Economic Implications of Growth Hormone Use in Patients with Short Bowel Syndrome by K. Migliaccio-Walle published in Current Medical Research and Opinion in 2006, SBS is a life threatening condition that results in nutritional mal-absorption causing diarrhea, dehydration, weight loss, increased susceptibility to infections, osteoporosis and shortened life expectancy.

 

According to an article titled Long-term Survival and Parenteral Nutrition Dependence in Adult Patients With the Short Bowel Syndrome which was published in 1999 in Gastroenterology and an article titled Management of Complications in Patients Receiving Home Parenteral Nutrition which was published in 2003 in Gastroenterology, the standard treatment for SBS for many years has been changes in diet, intravenous (IV) feeding (also called “parenteral nutrition”), vitamin and mineral supplements, and medication to relieve symptoms. Long term IV feeding is expensive, inconvenient for the patient and can be harmful to the body.

 

In 2004, a new and patented treatment regime was approved by the FDA which was covered by US Patent No. 5,288,703 (the “SBS Patent”). This treatment is comprised of a man-made human growth hormone (hGH), namely Zorbtive® [somatropin (rDNA origin) for injection] in combination with NutreStore® [L-glutamine powder for oral solution] and a specialized diet.

 

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The treatment is comprised of NutreStore® used in combination with a recombinant human growth hormone approved for SBS and a specialized diet. The recombinant human growth hormone is administered by injection for four weeks, and NutreStore® is taken orally for 16 weeks. Treatment with NutreStore® alone or with a specialized diet, recombinant human growth hormone alone or with a specialized diet, and recombinant human growth hormone and NutreStore® used in combination with a specialized diet all help the small intestine take in more water, electrolytes and nutrients and reduce the volume and frequency of IV feedings and the associated problems. Study results presented in an article entitled Growth Hormone, Glutamine, and an Optimal Diet Reduces Parenteral Nutrition in Patients With Short Bowel Syndrome, A Prospective, Randomized, Placebo-Controlled, Double-Blind Clinical Trial published in Annals of Surgery in 2005 (the “Ann Surg Article”) and described in the NutreStore Full Package Information available on our website, show that the treatment has the potential to reduce the mean weekly frequency of intravenous parenteral nutrition from 5.4 days to 1.2 days per week after 4 weeks of treatment and to reduce the required weekly volume and caloric content for subjects in the study arm receiving recombinant human growth hormone and NutreStore® used in combination with a specialized diet.

 

In October 2007, we became the exclusive sublicensee of the SBS Patent for the U.S. market, including the rights to distribute the L-glutamine treatment for SBS under the trademark NutreStore® in the U.S. We commercially launched NutreStore® in June 2008 and the patent expired on October 7, 2011. Internationally, we are in the last stages of seeking approval to market NutreStore® in Hong Kong and have received a Certificate of Free Sale from the FDA to export NutreStore® to Hong Kong.

 

In December 2010, we were awarded a five-year contract by the U.S. Department of Veterans Affairs for our NutreStore® product. The contract is effective from December 15, 2010 to December 14, 2015. The estimated value of the award is $125,000. Pursuant to the agreement, we agreed to sell NutreStore® to the Department of Veterans Affairs from time to time during the term of the agreement at a rate of $205.31 per carton. The discount pricing that we have offered to the Department of Veterans Affairs under this contract is also extended to the Department of Defense, Public Health Service (Indian Health Service), and U.S. Coast Guard customers.

 

CellSeed Collaboration and Investment

 

In January 2009, Emmaus made a strategic investment in CellSeed, Inc. (“CellSeed”), a Japanese company engaged in the research and development, manufacture and sale of temperature-responsive cell culture equipment, which is a cell sheet tissue-engineering platform tool, and application products, as well as cell sheet tissue engineered medical products and application products. Emmaus owns a 3% stake in CellSeed, a public company traded on the JASDAQ NEO market in Tokyo, Japan.

 

On April 8, 2011, Emmaus Medical entered into the Research Agreement and the Individual with CellSeed. Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products (the “Products”), and the future commercialization of such Products, particularly Emmaus Medical and CellSeed are interested in the joint research and development of Cultured Autologous Oral Mucosal Epithelial Cell-Sheet (“CAOMECS”) for regenerative medicine for cornea cell regeneration, and potentially Cell-Sheets for Cardiac Muscle Regeneration, and Regenerated Cartilage Sheets. The parties will enter into separate agreements for each project or task conducted pursuant to the Research Agreement defining the details of such project. CellSeed will transfer to Emmaus’ U.S. laboratories the engineering and know-how technology necessary for Emmaus to create cell sheets under each individual agreement. Pursuant to the Individual Agreement, CellSeed granted the Company an exclusive right to manufacture, sell, market and distribute CAOMECS for the cornea in the United States. CellSeed shall disclose its accumulated information package (the “Package”) for the joint development of CAOMECS to Emmaus Medical.  The Individual Agreement will remain in effect until CellSeed’s patents used for the CAOMECS expire in the United States in February 2023 and February 2024, unless terminated earlier by the parties.

 

Cell sheet technology is a method that allows us to grow and harvest tissue in a sheet form rather than individual cells. Clinical trials to repair damaged cornea and heart muscle using cell sheets have been initiated in Japan and Europe. In Europe, a multi-center clinical trial to repair damaged cornea with the patients’ own oral mucosal cells are being prepared in consultation with the EMA using the cell sheet technology. A relatively large single center clinical trial entitled “Multicenter Study of Cultured Autologous Oral Mucosal Epithelial Cell-sheet (CAOMECS) Transplantation to Patients with Total Limbal Stem Cell Deficiency,” was conducted from 2007 to 2011 at the Les Hospices Civils De Lyon in France involving 25 patients with limbal stem cell deficiencies who have suffered loss of vision. The results of the study, which have not yet been published, produced an abundance of positive data indicating improvement in symptoms for patients with “limbal stem cell deficiency” (“LSCD”). Based on this data, management hopes that this treatment can potentially provide a cure for a group of patients diagnosed with LSCD, which was considered incurable. An interim report of the results of the study was presented at the World Cornea Congress in April 2010. CellSeed issued a press release in April 2010 regarding such interim report which can be viewed on CellSeed’s website. The final report for the trial is currently being reviewed by the EMA. Upon the EMA’s completion of its review, the results of the completed review will be announced on the EMA’s website and a summary of the study is anticipated to be announced on CellSeed’s website at that time. It is anticipated that the results of the study will be published in a scientific journal after the EMA completes its review; however, it is not known in which journal the results will be published. Upon the EMA’s approval of the product, we intend to apply for FDA approval of the corneal cell sheets, for which we have the exclusive rights to manufacture, sell, market and distribute in the United States pursuant to the Individual Agreement.

 

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Currently, cell sheets for cornea cells and cardiac cells are not being sold.  The potential market for the cornea cell sheet products include patients with damaged corneas, which we believe includes a small percentage of the approximate 40,000 corneal transplants in the U.S. each year, which number is from the National Eye Institute section of the National Institutes of Health website.  The market for cardiac cell sheets also includes the approximate 3,000 persons who are awaiting heart transplants in the United States, according to the section of the National Heart, Lung and Blood Institute’s website regarding heart transplants.

 

While many large pharmaceutical and biotechnology companies throughout the world, especially in Europe, have contracts with CellSeed to promote this technology, Emmaus is the first company to obtain the marketing and development contracts with CellSeed for this technology in the U.S. The principal steps to develop the corneal and cardiac cell sheets include engaging a manufacturer compliant with applicable cGMP, obtaining FDA approval of the products, training physicians who will use the products and perform procedures with the products and promoting the availability of the products. We believe the cost to develop this the corneal cell sheet technology in U.S. is approximately $13 million, which includes the $10 million in payments we have agreed to make to CellSeed pursuant to the Research Agreement and Individual Agreement and $3 million in research and development costs. Such estimate includes the cost of obtaining FDA approval for the corneal cell sheets. The FDA has different divisions that review products and the designation of the approval would depend on the classification of the product. Biological products include a wide range of things such as vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins. Biologics can be composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues. The review and approval process for biologics is handled by the FDA’s Center for Biologics Evaluation and Research (CBER). Pharmaceutical drugs are typically chemically synthesized and have a known structure, whereas most biologics are complex mixtures that are not easily identified or characterized. The review and approval process for pharmaceuticals (“pharmaceutical approval”) is handled by the FDA’s Center for Drug Evaluation and Research (CDER). Although the review process for biologics and pharmaceuticals is handled by different divisions, the regulatory pathway is virtually the same. We have assumed that we will need biologic approval from the CBER division of the FDA for the corneal cell sheets, rather than pharmaceutical approval from the CDER division, although because the review and approval process for biologics and pharmaceuticals is virtually the same, the type of approval required for the cell sheets should not affect our proposed activities with respect to the cell sheets. We have also assumed that we will only have to run a small trial here in the U.S. to test the safety and efficacy of the corneal cell sheets because we believe that we will be able to submit, and the FDA will accept, the data regarding corneal cell sheets submitted to the EMA. We estimate that we will need another $2 million to commercialize the corneal cell sheet technology. Based on the data available for cornea treatment using this technology, we anticipate it will be two to three years before we can commercialize this product in U.S. We plan to participate in a multi-center international study involving cardiac cell sheets within the next two years and anticipate that we will be able to commercialize these products in about five years. We estimate that we will need $2.8 million to initiate the cardiac cell sheet work. The total estimated costs and timeframe for commercialization and development of the cardiac cell sheets has not yet determined.

 

AminoPure® Business

 

We sell L-glutamine as a nutritional supplement (also called dietary supplement) under the brand name AminoPure® through our indirect wholly owned subsidiary, Newfield Nutrition Corporation. AminoPure® is made up of USP-grade L-glutamine that the body requires when a person is under physical exertion, stress, or is sick. Data from scientific research has shown that L-glutamine helps with gastrointestinal health and to support the body’s natural immune response. In the U.S., AminoPure® may be marketed and sold as a nutrient or dietary ingredient that is intended to affect the structure or function of the body, but may not be marketed or sold for the diagnosis, treatment, cure or prevention of any disease.

 

AminoPure® is currently sold through retail stores in several states and via importers and distributors in Japan. We have started to export AminoPure® to Taiwan, Ghana and South Korea. We plan to expand sales of AminoPure® to the Philippines and Vietnam in the near future. We added a new distributor, PMAI, a subsidiary of JFC International, Inc., a leading distributor of Japanese foods in Asian-American communities in the United States, in November 2010 to take advantage of its retail outlet network in the United States.

 

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Nutritional supplements are regulated by FDA and we must comply with numerous federal and state laws and regulations related to the AminoPure® product’s testing, manufacturing, labeling, packaging, storage, distribution, recordkeeping, reporting and marketing claims. The federal laws and regulations are administered by FDA and are often incorporated by the U.S. States’ individual laws and regulations.

 

Sales of AminoPure® have steadily increased in recent years. Sales increased 148.9% in the year ended December 31, 2011 as compared to the year ended December 31, 2010 and 121.2% in the year ended December 31, 2010 as compared to the year ended December 31, 2009. However, despite the increase in sales of AminoPure®, we have generated minimal revenues from the sale of AminoPure® and NutreStore® since our inception, and the sale of such products are not part of our principal operations.

 

Competitive Strengths

 

We believe the following strengths contribute to our competitive advantages:

 

Management Team

 

Our senior management team has extensive business experience and knowledge of the healthcare and biotechnology industries. Our President and Chief Executive Officer, Yutaka Niihara, M.D., MPH, has extensive knowledge of our operations and our patents, being one of the initial patentees for the technology for the treatment with SCD. Dr. Niihara has extensive research experience in the field of SCD and other blood diseases; he is a widely published scientist in the area of SCD and actively treats SCD patients. The members of our senior management team also have significant experience with respect to the key aspects of our operations and product candidates. We plan to strengthen the management team as we get closer to our commercial launch of the SCD treatment.

 

Strategic Supplier Relationships with Major Suppliers of USP-Grade L-Glutamine.

 

Ajinomoto U.S.A., through its parent company, the Ajinomoto Company in Japan, has provided free of charge L-glutamine for our clinical work, including our completed Phase II clinical trials. Ajinomoto is also providing L-glutamine for our Phase III clinical trials without charge. We have supplier relationships with Ajinomoto and the only other major supplier of USP-grade L-glutamine, Kyowa Hakko U.S.A, the U.S. subsidiary of Kyowa Hakko Kogyo Co., Ltd. We currently source L-glutamine from Kyowa Hakko U.S.A. for our NutreStore® product (see description under the heading “Product Sourcing and Packaging” on page 54).

 

Orphan Drug Act and the Prescription Drug User Fee Act (PDUFA) of 1992 – Federal Subsidies.

 

We obtained an Orphan Drug Designation, which provides numerous advantages, for the L-glutamine therapy for SCD under Application number 01-1459 on August 1, 2001. As a designated orphan drug, pursuant to the Orphan Drug Act (“ODA”), we receive a 50% tax credit for clinical research. Furthermore, our new drug application fee (presently over $1 million) is waived, and upon obtaining FDA approval, we will receive seven years of exclusive marketing rights for the SCD indication, independent of the patent protection. In addition, under the Prescription Drug User Fee Act of 1992 and its amendments, we will not be required to pay the annual establishment fee and product fee, which are $520,100 and $98,970, respectively, for the fiscal year ended December 31, 2012; and were $497,200 and $86,520, respectively, for the fiscal year ended December 31, 2011 and $457,200 and $79,720, respectively, for the fiscal year ended December 31, 2010.

 

Our Strategy

 

We are a specialty pharmaceutical company focused on the development and commercialization of proprietary branded products and product candidates to treat rare diseases. We intend to achieve this goal by:

 

Maximizing the value of our L-glutamine treatment for SCD

 

We are currently conducting a phase III clinical trial of our L-glutamine treatment for SCD. We believe our treatment will have significant advantages over traditional treatments for SCD. Some of the advantages we anticipate proving are: reducing the incidence of sickle cell crisis; reducing hospital emergency room visits and hospital admissions and achieving a significant cost savings in the SCD patients overall treatment. We intend to undertake activities to prepare for the commercialization of this treatment. When and if this treatment is approved by the FDA, we intend to commercialize our L-glutamine SCD treatment and may enter into strategic relationships with third parties.

 

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Establishing strategic collaborations

 

We intend to seek opportunities to enter into strategic collaborations with leading pharmaceutical and biotechnology companies to commercialize our product candidates to drive our growth and profitability. We believe that leveraging the capabilities of third parties will allow us to add efficiency to our operations and expand our commercial reach.

 

Expanding our collaborative research arrangement with CellSeed

 

In April 2011, we entered into the Research Agreement and an Individual Agreement with CellSeed. Pursuant to the Research Agreement, the parties formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products and the future commercialization of such products. 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. We intend to work on commercializing the CAOMECS for the cornea and to expand our relationship with CellSeed to develop cell sheets for other types of cells in the future such as, cardiac cells.

 

Pursuing acquisitions to broaden our drug candidates and product offerings

 

We will consider strategic acquisitions that will provide us with a broader range of drug candidates and product offerings. When evaluating potential acquisition targets, we will consider factors such as: market position; growth potential; earnings prospects; strength and experience of management.

 

Governmental Regulation of Pharmaceutical and Biotechnology Industries

 

Regulation by governmental authorities in the U.S. and foreign countries is a significant factor in the development, manufacture, and expected marketing of our drug 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 any drug product candidates developed.

 

In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in other countries. Various federal and state statutes and regulations govern and influence research, testing, manufacturing, safety, efficacy, labeling, packaging, storage, distribution and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with the appropriate 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, regulatory approval could adversely affect the marketing of any of our drug product candidates, our ability to receive product revenues, and our liquidity and capital resources.

 

Before obtaining regulatory approvals for the commercial sale of L-glutamine as a treatment for any of our products under development, we must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in each target indication. The results from preclinical studies and early clinical trials might not be predictive of results that will be obtained in large-scale testing. Our clinical trials might not successfully demonstrate the safety and efficacy of any product candidates or result in marketable products.

 

In order to clinically test, manufacture, and market products for therapeutic use, we and our third-party collaborators will have to satisfy mandatory procedures and safety and effectiveness standards established by various regulatory bodies. In the U.S., the Public Health Service Act and the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the research, testing, manufacture, labeling, packaging, storage, distribution, record keeping, approval, advertising, and promotion of our current and proposed product candidates. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources.

 

The steps required by the FDA before new drug products may be marketed in the U.S. include:

 

·completion of preclinical studies;

 

·the submission to the FDA of a request for authorization to conduct clinical trials on an investigational new drug application, or IND, which must become effective before clinical trials may commence;

 

·adequate and well-controlled Phase 1, Phase 2 and Phase 3 clinical trials to establish and confirm the safety and efficacy of a drug candidate;

 

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· submission to the FDA of a new drug application, or NDA or Biologics License Application (“BLA”), for the drug or biological product candidate for marketing approval; and

 

· review and approval of the NDA/BLA by the FDA before the product may be shipped or sold commercially.

 

In addition to obtaining FDA approval for each product, each product manufacturing establishment must be registered with the FDA and undergo an inspection prior to the approval of an NDA. Each manufacturing facility and its quality control and manufacturing procedures must also conform and adhere at all times to the FDA’s current good manufacturing practice, or cGMP, regulations. In addition to preapproval inspections, the FDA and other government agencies regularly inspect manufacturing facilities for compliance with these requirements. If, as a result of these inspections, the FDA determines that any equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal, or administrative sanctions and/or remedies against us, including the suspension of the manufacturing operations and market withdrawal of marketed product. Manufacturers must expend substantial time, money and effort in the area of production, quality assurance and quality control to ensure full technical compliance with these standards.

 

Preclinical testing includes laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. 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. Phase 1 represents the initial administration of the drug to a small group of humans, either patients or healthy volunteers, typically to test for safety (adverse effects), dosage tolerance, absorption, distribution, metabolism, excretion and clinical pharmacology, and, if possible, to gain early evidence of effectiveness. Phase 2 involves studies in a small sample of the actual intended patient population to assess the efficacy of the drug for a specific indication, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase 3 studies are initiated to further establish clinical safety and efficacy of the therapy in a broader sample of the general patient population, in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for any physician labeling. During all clinical studies, we must adhere to Good Clinical Practice, or GCP, standards and applicable human subject protections standards. The results of the research and product development, manufacturing, preclinical studies, clinical studies and related information are submitted in an NDA or BLA to the FDA.

 

The process of completing clinical testing and obtaining FDA approval for a new drug is likely to take a number of years and require the expenditure of substantial resources. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA. Even after initial FDA approval has been obtained, further studies, including post-market studies, might be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested and approved. Also, the FDA will require post-market reporting and might require surveillance programs to monitor the side effects of the drug. Results of post-marketing programs might limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling or a change in manufacturing facility, an NDA supplement might be required to be submitted to the FDA prior to or corresponding with that change.

 

The rate of completion of any clinical trials will be dependent upon, among other factors, the rate of patient enrollment. 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 and drugs, the proximity of patients to clinical sites and the eligibility and exclusion criteria for the study. Delays in planned patient enrollment might result in increased costs and delays, which could have a material adverse effect on us.

 

Failure to comply with applicable FDA requirements may result in a number of consequences that could materially and adversely affect us. Failure to adhere to approved trial standards and GCPs in conducting clinical trials could cause the FDA to place a clinical hold on one or more studies which would delay research and data collection necessary for product approval. Noncompliance with GCPs could also have a negative impact on the FDA’s evaluation of an NDA or BLA. Failure to adhere to cGMPs and other applicable requirements could result in FDA enforcement action and in civil and criminal sanctions, including but not limited to fines, seizure of product, refusal of the FDA to approve product approval applications, withdrawal of approved applications, and prosecution.

 

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 of 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. There can be no assurance that any foreign approvals would be obtained. In most cases, if the FDA has not approved a drug product candidate for sale in the U.S., the drug product candidate may be exported for sale outside of the U.S. only if it has been approved in any one of the following: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. Specific FDA regulations govern this process.

 

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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 drug candidates for clinical use in the United States must conform to cGMPs. These facilities and practices are subject to periodic regulatory inspections to ensure compliance with cGMP requirements. Their failure to comply with applicable regulations could extend, delay, or cause the termination of clinical trials conducted for our drug candidates. 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.

 

Outside of the United States, we sell AminoPure® in Japan, Taiwan, South Korea and Ghana. There are no regulatory requirements to sell AminoPure® in Japan because it is classified as a nutritional supplement product. In Taiwan, we must obtain a Certificate of Free Sale from the FDA and provide it to our distributor. The Certificate of Free Sale is for food, including dietary supplements, and cosmetic products that may 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. The certificate expires on August 16, 2012. We will submit an application for its renewal 3-6 months before the certificate expires to ensure it does not lapse. In South Korea, AminoPure® will be imported and sold as a food supplement which does not require any regulatory approval. 

 

We intend to begin selling NutreStore® in Hong Kong as soon as we receive the required approvals. We have received a Free Sale Certificate from the FDA in order to sell NutreStore® in Hong Kong. Selling NutreStore® in Hong Kong requires registering NutreStore® with and obtaining the approval of the Hong Kong Department of Health. Typically, the approval process takes approximately six months. We estimate that it will cost a maximum of $10,000 to obtain this approval. The application for registration was originally filed in February 2010 and subsequently re-filed in July 2011. We are continuing to work with the Hong Kong Department of Health to obtain the requisite registration and approval. A We have not yet obtained the requisite registration or approval but hope to receive approvals in mid 2012.

 

Clinical Trials

 

We have conducted a number of clinical trials with the goal of obtaining FDA approval to market and sell L-glutamine as a treatment for SCD. The FDA approval process begins with laboratory testing and then moves on to the clinical trial stage. In July 1994, Dr. Niihara started a pilot clinical trial using L-glutamine as an oral supplement to SCD patients. The study showed based on the preclinical data and demonstrated that oral consumption of L-glutamine by SCD patients increases the concentration of the reduced form of NAD, NADH, and its redox status. Clinically, all the patients who participated in the study reported an increase in their energy level and decrease in the severity of chronic pain with treatment.

 

In a Phase II, 12-week open label study conducted in 1995, Dr. Niihara found a significant decrease in the incidence and severity of sickle cell crisis in selected patients who experience unusually frequent episodes of sickle cell crisis. A Phase II blind clinical trial to assess the reduction of sickle cell crisis and chronic pain, which started in 1997 and was funded by the National Institutes of Health, the results of which were released in January 2003, demonstrated statistically significant reduction of chronic pain, while a strong trend toward significance was observed in the reduction in sickle cell crises. Another Phase II open label clinical trial directed to exercise tolerance, which started in 2000 and was funded by the FDA, the results of which were released in April 2009, demonstrated that patients on L-glutamine have improved physical stamina with no significant side effects.

 

In April 2009, Emmaus completed an 80 patient Phase II clinical trial funded by the FDA directed to reduce the incidence of sickle cell crisis as its primary indication. The trial took place at the following institutions: the Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center (“LABioMed”); Emory University, Atlanta, Georgia; Kaiser Permanente, Bellflower, California; the University of Medicine and Dentistry of New Jersey (Robert Wood Johnson Medical School), New Brunswick, NJ; and the Jacobi Medical Center-North Bronx Healthcare Network, Bronx, New York. This study showed clinical significance for reducing the incidence of sickle cell crisis (more than a 50% reduction in incidence of sickle cell crisis) but due to a higher than expected drop out rate, the statistical significance was not high enough to support Emmaus’ direct submission of a new drug application to the FDA. However, the safety of L-glutamine was well demonstrated in this trial. This Phase II clinical trial was managed by the contract research organization, ClinDatrix, Inc.

 

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In April 2009, the FDA authorized Emmaus to begin a large Phase III clinical trial directed to study L-glutamine as an experimental agent to reduce sickle cell crisis. Patient enrollment began in mid-2010 and as of March 20, 2012, we have signed contracts with 28 sickle cell study sites across the United States and have enrolled over 130 patients. We aim to complete the Phase III clinical trial enrollment by second quarter 2012. This Phase III trial will include an interim analysis after 24 weeks of the 48-week study period and we expect that it will involve 200+ patients at approximately 30 clinical trial sites around the country. This Phase III clinical trial is managed by ClinDatrix, Inc.

 

We anticipate, based on the fast track designation, that we will receive a Priority Review. A Priority Review is a streamlined review of the NDA and may take up to six months from when an NDA is submitted. If a Priority Review is not granted, the more involved review process would extend the review time to 10-12 months from the filing of the NDA. The primary difference between the Priority Review and the more involved review process is essentially the turnaround time by the FDA. We anticipate completing our clinical trial by the second half of 2013 and submitting the NDA for our product in late 2013. If we receive Priority Review of our NDA and no application deficiencies are identified by FDA, we expect that we would receive approval of the NDA in the first quarter of 2014.

 

Status of FDA Approvals and Orphan Drug Designation

 

The FDA has already approved L-glutamine as a treatment for short bowel syndrome. Accordingly, instead of the more involved approval process of Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act (“FD&C Act”) that is required for the first medical indication of a drug, Emmaus will proceed under Section 505(b)(2) of the FD&C Act, which provides a more streamlined and easier approval process for subsequent indications of a drug. Consequently, we believe that our Phase III clinical trial directed to reduce sickle cell crises will likely be considered a pivotal study for purposes of applying for FDA marketing approval under Section 505(b)(2). An NDA filed pursuant to Section 505(b)(1) is a “full” NDA that contains all original data produced by a company, while an NDA filed pursuant to Section 505(b)(2) contains slightly less data because a company is able to reference public data or drug approval that is known to the FDA.

 

The FDA Modernization Act of 1997 codified the FDA’s policy of granting “fast track” review of certain therapies targeting “orphan” indications and other therapies intended to treat severe or life threatening diseases and having potential to address unmet medical needs. Orphan indications are defined by the FDA as having a prevalence of less than 200,000 patients in the U.S. The Orphan Drug Act (“ODA”) provides for the granting of special status to a product to treat a rare disease or condition. The Orphan Drug Designation program provides orphan status to drugs and biologics which are defined as those intended for the safe and effective treatment, diagnosis or prevention of rare diseases/disorders that affect fewer than 200,000 people in the U.S., or drugs for the treatment of diseases/disorders that affect more than 200,000 persons but for which the drug developer is not expected to recover the costs of developing and marketing the drug from the commercialization and sale of such drug.

 

In order to obtain Orphan Drug designation, we had to submit two copies of a completed, dated, and signed request for designation containing the following: 

 

i.A statement requesting orphan drug designation for a rare disease which was identified with specificity;

  

ii.Our contact information, the generic name of the drug and the name and address of the source of the drug if it is not manufactured by the sponsor;

  

iii.A description of the rare disease or condition for which the drug is being investigated, the proposed indication or indications for use of the drug, and the reasons why such therapy is needed;

  

iv.A description of the drug and a discussion of the scientific rationale for the use of the drug for the rare disease, including all data from nonclinical laboratory studies, clinical investigations, and other relevant data that are available to the sponsor, whether positive, negative, or inconclusive. Copies of pertinent unpublished and published papers are also required;

  

v.A summary of the regulatory status and marketing history of the drug in the United States and in foreign countries; and

 

vi.Documentation, with appended authoritative references, to demonstrate that the disease or condition for which the drug is intended affects fewer than 200,000 people in the United States.

 

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We applied for Orphan Drug designation June 11, 2001 and were granted orphan drug status on August 1, 2001. There is no expiration date on the status of the Orphan Drug designation. This designation waived the new drug application fee (presently over $1 million) and annual establishment and product fees, which were $497,200 and $86,520 respectively for the fiscal year ended December 31, 2011, provided a 50% tax credit for clinical work and if the product is approved, will provide us exclusive marketing rights for the SCD indication for seven years. The seven years of exclusivity is measured from the date of the approval of the application or the issuance of the license. Because we were granted Orphan Drug status, the 50% tax credit is absolute and is provided pursuant to the Orphan Drug Act, which provides for tax credits for testing expenses for drugs for rare disease or conditions, and the Internal Revenue Code, which specifically provides a tax credit equal to 50% of the qualified clinical testing expenses for the taxable year.

 

The waiver of the annual establishment fee is provided for under the FD&C Act, as amended by the Food and Drug Administration Amendments Act of 2007 (the “FDAAA”), which provides that a drug designated as an Orphan Drug shall be exempt from product and establishment fees if the drug meets all of the following conditions: the drug meets the public health requirements contained in the FD&C Act as such requirements are applied to requests for waivers for product and establishment fees; and the drug is owned or licensed and is marketed by a company that had less than $50,000,000 in gross worldwide revenue during the previous year. While our right to a waiver of the product fee and annual establishment fee are not absolute as such waivers are subject to the above conditions, we have qualified for waivers of such fees because the experimental treatment for SCD meets all of the above conditions: (1) L-glutamine treatment for SCD received orphan designation under section 526 of FDC Act on August 1, 2001 and (2) the L-glutamine treatment for SCD is licensed by Emmaus Medical, Inc. whose gross worldwide revenue during the previous 12 months was less than $50,000,000. We believe that we will continue to meet such conditions in the future and receive waivers of the establishment and product fees.

 

Further, a marketing application for a prescription drug product that has been designated as a drug for a rare disease or condition is not subject to a prescription drug user fee unless the application includes an indication for other than a rare disease or condition.

 

We have obtained Fast Track designation for the L-glutamine therapy for SCD. Fast Track designation will provide us with many advantages over the normal FDA approval process, including the right to submit modules of the new drug application (NDA) in portions (“rolling submission”), rather than all at once, and the opportunity to have more FDA interaction.

 

Fast track is a process designed to facilitate the development, and expedite the review of, drugs to treat serious diseases and fill an unmet medical need.  The purpose is to get important new drugs to the patient sooner. We assume that since we were granted fast track designation, we will be eligible for some or all the following:

 

·More frequent meetings with the FDA to discuss the drug’s development plan and ensure collection of appropriate data needed to support drug approval;

 

·More frequent written correspondence from the FDA about such things as the design of the proposed clinical trials;

 

·Eligibility for Accelerated Approval, i.e., approval on an effect on a surrogate, or substitute endpoint reasonably likely to predict clinical benefit; and

 

·Rolling Review, which means that we can submit completed sections of the New Drug Application (NDA) for review by FDA, rather than waiting until every section of the application is completed before the entire application can be reviewed.  NDA review usually does not begin until the entire application has been submitted to the FDA.

 

We assume, based on the fast track designation, that we will receive a Priority Review. A Priority Review is a streamlined review of the NDA and may take up to six months from when an NDA is submitted. If a Priority Review is not granted, the more involved review process would extend the review time to 10-12 months from the filing of the NDA. The primary difference between the Priority Review and the more involved review process is essentially the turnaround time by the FDA. We anticipate completing our clinical trial by the second half of 2013 and submitting the NDA for our product in the third quarter of 2013. If we receive Priority Review of our NDA and no application deficiencies are identified by FDA, we expect that we would receive approval of the NDA in the first quarter of 2014.

 

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We intend to communicate with the FDA on a regular basis to assure that questions and issues are resolved quickly, which may help lead to earlier drug approval and access by patients.

 

The expected cost to obtain FDA approval is difficult to estimate based on the dynamic process. Based on our assumption of receiving a Priority Review, we estimate that our regulatory and administrative costs to obtain FDA approval are approximately $400,000. Actual costs can vary greatly from this figure based on how the FDA review process proceeds. The bulk of these costs would be associated with the consultants retained by us to assist with the FDA application and response process. Should the FDA find deficiencies with our study data, additional studies may be required or if the FDA finds issues with the manufacturing of the product, such issues would need to be resolved prior to the approval of the NDA, the occurrence of either of which would increase the costs dramatically.

 

Product Sourcing and Packaging

 

We plan to obtain our USP-grade L-glutamine from Ajinomoto, a Japanese food, amino acid and pharmaceutical company, and from Kyowa Hakko, a Japanese pharmaceutical company. The Ajinomoto Company and Kyowa Hakko together produce the vast majority of USP-grade L-glutamine approved for sale in the U.S. The manufacturing of large quantities of USP-grade L-glutamine is a complex and expensive undertaking, and is therefore not an easy market for third parties to enter.

 

Ajinomoto Aminoscience LLC, through its parent company, the Ajinomoto Company, has previously provided L-glutamine to us free of charge for our clinical work, including our completed Phase II clinical trials. Ajinomoto is also providing L-glutamine for our Phase III clinical trials without charge. 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 L-glutamine from third party suppliers of up to 10% of our requirement for L-glutamine on a back-up basis. However, if a third party competitor of Ajinomoto offers us a more favorable pricing on L-glutamine of a similar grade with similar terms and conditions, we may ask Ajinomoto to adjust its pricing. Although the letter of intent contemplates that we will enter into a supply agreement with Ajinomoto, we have not yet entered into the supply agreement.

 

We currently source L-glutamine from Kyowa Hakko U.S.A. for our NutreStore® product. We do not have an agreement with Kyowa Hakko for the supply of L-glutamine. We purchase L-glutamine from Kyowa Hakko on an as-needed basis pursuant to individual purchase orders.

 

Eventually we plan to enter into exclusive long term supply contracts with these manufacturers for L-glutamine for SCD treatment that will require these companies to agree not to sell L-glutamine as a nutritional supplement or pharmaceutical for sickle cell disease applications. However, there is no assurance that we will be able to obtain such terms or economically attractive terms for obtaining pharmaceutical grade L-glutamine from these proposed suppliers, or that the suppliers will not experience an interruption in supply that could materially and adversely affect our business.

 

Our products will be packaged by an FDA approved facility. Anderson Packaging, Inc., of Rockville, Illinois, has handled the packaging for our Phase II and III clinical trials of L-glutamine for SCD and we plan to use the same company for commercial packaging of the product. Anderson Packaging, Inc. packaged L-glutamine for the clinical trials that resulted in the FDA’s marketing approval for L-glutamine for short bowel syndrome using the same dose and packaging protocol as the Company expects to use for treatment of SCD. Prior FDA approval of packaging types and protocols does not guarantee future approval of packaging types and protocols.

 

Sales and Marketing

 

We have one full time pharmaceutical sales representative. Our sales representative is in constant contact with management and other employees at our headquarters to share current product information and sales strategies to assist with any immediate patient and physician needs.

 

As we expand our sales of L-glutamine for SBS and commercialize our L-glutamine treatment for SCD, we intend to increase the size of our sales staff. We intend to employ experienced sales representatives in the U.S. to promote our prescription pharmaceuticals. Sales representatives will receive appropriate training, education and development to ensure they have current knowledge of our products, disease states, policies and procedures as well as the current Compliance Program Guidance for Pharmaceutical Manufacturers published by the U.S. Department of Health and Human Services, Office of Inspector General, the provisions of the Code on Interactions with Healthcare Professionals created by the Pharmaceutical Research and Manufacturers of America (“PhRMA Code”) and the FDA’s regulatory limitations on promotional activities. We also intend to seek partnerships if deemed necessary.

 

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After obtaining FDA approval for the SCD indication, 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 collaborating pharmaceutical companies. Our in-house product specialists and sales representatives will focus on the following tasks as part of our marketing strategy:

 

·promote our L-glutamine therapy to SCD specialist physicians;

 

·promote awareness of our L-glutamine therapy at all U.S. community-based treatment centers;

 

·develop L-glutamine therapy collateral materials and informational packets to educate patients and physicians and garner industry support;

 

·establish collaborative relationships with non-profit organizations that focus on SCD; and

 

·identify international opportunities for our L-glutamine therapy.

 

Our target customers for NutreStore® are SBS patients, as well as their local treating medical centers and physicians. Patient and physician awareness of the NutreStore® brand will be key to our success. We intend to exhibit at trade shows and other events and maintain websites with current information on NutreStore® to strengthen this brand. We will also work with patient support organizations, such as the Oley Foundation, to promote our SBS treatment

 

Research and Development

 

For the years ended December 31, 2011 and 2010, we expended $1.6 million and $1.1 million, respectively, in research and development costs related to our L-glutamine treatment for SCD.

 

The estimated cost to complete the Phase III clinical trial we are currently conducting for our L-glutamine treatment for SCD is $5.2 million. This estimate is based on our current plan to use up to 35 clinical trial sites across the U.S. and assumes that the trial is conducted in accordance with our projected timeline to complete the trial by the end of 2012. Should the trial take longer than expected to complete or we use more trial sites than currently anticipated, our costs related to the Phase III trial will increase.

 

We believe that the research and development cost for corneal cell sheet technology in the U.S. is approximately $3 million in research and development costs. Such estimate includes the cost of obtaining FDA approval for the corneal cell sheets. We have assumed that we will need biologic approval of the FDA for the corneal cell sheets, rather than pharmaceutical approval, and that we will only have to run a small trial here in the U.S. to test the safety and efficacy of the corneal cell sheets because we believe that we will be able to submit, and the FDA will accept, the data regarding corneal cell sheets submitted to the EMA.

 

The estimated cost to initiate the cardiac cell sheet work is $2.8 million. This estimate is based on our current plan to work with regulatory consultants and medical advisors. We expect that these costs will increase in the future when the clinical study program has been developed.

 

Intellectual Property

 

We rely 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 have any patents, we have two patent licenses with third parties.

 

We also rely on unpatented technologies to protect the proprietary nature of our products. We require that our management team and key employees enter into confidentiality agreements that require the employees to assign 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.

 

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Licenses and Promotional Rights Agreements

 

On March 1, 2001, Emmaus Medical became the exclusive worldwide licensee of U.S. Patent No. 5,693,671, entitled “L-glutamine Therapy for Sickle Cell Disease and Thalassemia” (the “SCD Patent”) to develop a treatment for SCD and thalassemia using L-glutamine pursuant to a license agreement. The license agreement is effective until the expiration of the SCD Patent, which will be in 2016 unless a patent term extension is granted by the United States Patent & Trademark Office due to a regulatory delay, such as an FDA-related delay, related to product commercialization. The maximum possible term extension one can receive is five years. We intend to apply for an extension of the term of the SCD Patent. Pursuant to the license agreement, we acquired the exclusive right to test, gain governmental approval of, make, have made, use, distribute and sell products (“Licensed Products”) designed for use in carrying out methods covered under the SCD Patent and/or incorporating technical information provided by the licensor or by any of certain doctors affiliated with the licensor. Pursuant to an addendum to the license agreement, we agreed to pay royalties to the licensor during the term of the agreement equal to 4.5% of net sales of Licensed Products in the U.S. until lifetime royalty payments made to the licensor total $100,000, at which time the royalty rate will decrease to 2.5% of net sales of the Licensed Products. No royalties will be paid to the licensor for Licensed Products sold or distributed, or Licensed Methods practiced, on a non-profit basis. Royalty payments are due within 45 days of the end of each fiscal quarter, with the last payment due 45 days after the termination of the agreement. Any payments not made when due accrue interest on and after the due date at a rate equal to the prime interest rate quoted by the Bank of America on the date the payment is due, with interest being compounded on the last day of each calendar quarter.

 

We are also responsible for paying all fees and costs relating to the maintenance of the SCD Patent. Before any Licensed Products are commercially sold or Licensed Methods are practiced on humans, we are required to obtain comprehensive general liability insurance policies, including product liability insurance coverage in the minimum amount of $0.5 million. If we fail to obtain the required insurance policies, the licensor may terminate the agreement or obtain such insurance at our sole cost and expense. We currently have product liability insurance for NutreStore® and also have clinical trial insurance for the SCD study.

 

The license agreement will terminate upon the expiration of the patent in 2016 unless an extension is granted, or earlier upon a court’s determination that the patent is invalid or unenforceable. If we fail to pay royalties when due and payable, the licensor may terminate the agreement upon 90 days’ written notice, unless we pay all outstanding royalties and interest due, during such 90-day period. The licensor may also terminate the agreement upon our material breach of the agreement upon providing us with 90 days’ written notice. The agreement shall automatically terminate at the end of such 90-day period unless we cure the breach or default during such period.

 

In October 2007, Emmaus Medical became the exclusive sublicensee of US Patent No. 5,288,703 (the “SBS Patent”) for the U.S. market, including the rights to distribute the L-glutamine treatment for the treatment of SBS under the trademark NutreStore® in the U.S., and commercially launched NutreStore® in June 2008. Pursuant to the sublicense, as amended by an assignment and transfer agreement, we are required to pay a royalty of 10% of adjusted gross sales of NutreStore® to Cato Holding Company (“Cato”) through 2016. We are also required to pay to Cato Holding Company a royalty of 1% of gross sales of L-glutamine as a treatment for SCD and thalassemia for a period of five years from the date of the first commercial sale of such product as outlined in the Sublicense Agreement with Cato. The sublicense is subject to a sublicense that Cato Holding Company holds from Ares Trading, S.A. (the “Ares License”), and if the Ares License is terminated for any reason, then our sublicense with Cato will also terminate. This sublicense was amended in February 2011 and ownership of the NutreStore® NDA and Drug Master Files (DMF) containing the proprietary information relating to the manufacturing and packaging specifications of NutreStore® product were transferred to us. The sublicense agreement terminates upon the earliest to occur of (i) the expiration or invalidation of the SBS Patent in the U.S., (ii) the voluntary termination by Emmaus Medical at the end of a calendar year upon 180 days’ written notice, (iii) termination by either party upon the other party’s breach of a material provision of the agreement upon 60 days’ notice and opportunity by the breaching party to cure such breach, (iv) by licensor upon 90 days’ written notice to Emmaus Medical for Emmaus Medical’s failure to comply with any applicable law or governmental rule or regulation concerning manufacture, marketing or sale of licensed product and failure to cure such breach within such 90 days period , or (v) the termination, for any reason, of the Ares License. The SBS Patent expired on October 7, 2011 and the sublicense agreement terminated on the date of expiration. Pursuant to the assignment and transfer agreement, Emmaus Medical agreed to pay royalties to Cato though 2016 on sales of NutreStore®. We agreed to pay royalties after the expiration of the sublicense agreement from 2012 to 2016 in consideration of the transfer of the NDA for NutreStore® from Cato to us, the transfer of the NutreStore® related trademarks from Cato to us, the transfer of the NutreStore Drug Master File Nos. 16633 and 16639 from Cato to us, and the services provided by Cato related to the filing of a new Drug Master File (“DMF”) and for the know-how represented by the NutreStore® NDA and DMFs.

 

We do not anticipate that the expiration of sublicense agreement with Cato will have a significant impact on the Company. We intend to sell NutreStore® upon the expiration of the agreement. Upon the expiration of the 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).

 

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On April 8, 2011, Emmaus Medical entered into the Research Agreement and the Individual with CellSeed. Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products (the “Products”), and the future commercialization of such Products, particularly Emmaus Medical and CellSeed are interested in the joint research and development of CAOMECS for regenerative medicine for cornea cell regeneration, and potentially Cell-Sheets for Cardiac Muscle Regeneration, and Regenerated Cartilage Sheets. The parties will enter into separate agreements for each project or task conducted pursuant to the Research Agreement defining the details of such project. CellSeed will transfer to Emmaus’ U.S. laboratories the engineering and know-how technology necessary for Emmaus to create cell sheets under each individual agreement. All intellectual property rights created in the course of the Research Agreement and any individual agreement, including rights made jointly by the employees of the Company and CellSeed or made solely by the employee(s) of the other party based on confidential information or intellectual property rights exchanged between the parties, will be owned jointly by the Company and CellSeed. Intellectual property rights related to the Products that are developed solely by one party’s employees independently from confidential information and intellectual property rights of the other party, shall be owned by the party whose employees made such invention, provided however, that such party will grant a worldwide, perpetual, irrevocable, non-exclusive, royalty free, fully paid up, sub-licensable, transferable license of such rights to the other party. Pursuant to the Individual Agreement, CellSeed granted the Company an exclusive right to manufacture, sell, market and distribute CAOMECS for the cornea in the United States. CellSeed shall disclose its accumulated information package (the “Package”) for the joint development of CAOMECS to Emmaus Medical.  Pursuant to the Research Agreement, the Company agreed to pay CellSeed $8,500,000 (the “Research Agreement Payment”) within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the Package to Emmaus.  Pursuant to the Individual Agreement, the Company agreed to pay $1,500,000 to CellSeed (the “Individual Agreement Payment”) within 30 days of CellSeed’s delivery of the Package to the Company and a royalty to be agreed upon by the parties.  Pursuant to the Addendum to the Research Agreement, CellSeed and the Company further acknowledged that all obligations of CellSeed corresponding to the Research Agreement Payment and the Individual Agreement Payment shall be fully discharged by CellSeed’s delivery of the Package, which delivery shall be documented by written confirmation of acceptance by the Company. The Company made the Individual Agreement Payment to CellSeed in February 2012. The Company is obligated to make the Research Agreement Payment only after the Company provides its written confirmation of acceptance of the complete Package to CellSeed. The parties will determine the rate at which profits from the net sales of CAOMECS in the United States will be split between the parties.  The Individual Agreement will remain in effect until CellSeed’s patents used for the CAOMECS expire in the United States in February 2023 and February 2024, unless terminated earlier by the parties.

 

Trademarks

 

We currently own two U.S. trademarks, including "Nutrestore" and "Aminopure", a Japanese trademark for "Aminopure" and a Philippines trademark for "Aminopure". We are pursuing the following trademark registrations: "Aminopure" in South Korea, Taiwan, Ghana and Kenya; and, "Emmaus", "Emmaus Medical", "Nosic" and "Nosik" in the U.S. A registered U.S. trademark, "Emmaus Medical", was recently allowed to go abandoned. It was subsequently refiled to broaden its scope of use in the U.S. 

 

Our success will depend in part on our ability to obtain patents and preserve other intellectual property rights covering the design and operation 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.

 

Competition

 

The development and commercialization of pharmaceutical products is very competitive and characterized by extensive research efforts and rapid technological progress. Competition in our industry occurs on a number of fronts, including developing and bringing new products to market before our competitors, developing new products to provide the same benefits as existing products at lower cost and developing new products to provide benefits superior to those of existing products. We face competition from other pharmaceutical companies, particularly those that provide alternative drugs to treat SCD and SBS, as well as other entities that develop alternative therapies and dietary supplements that could limit the market for our L-glutamine product.

 

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We currently face two competing treatments for SCD treatment, one of which being Bristol-Myers Squibb’s Hydroxyurea and the other being bone marrow transplants. Additionally, gene therapy techniques hold promise as a potential treatment for a variety of genetic diseases, including SCD; however, there are currently many questions about the efficacy of gene therapy and when such therapies could become available to treat diseases such as SCD.

 

Presently, the most prevalent therapy for patients with SBS is parenteral nutrition. However, as outlined above, Emmaus’ product NutreStore® when used in conjunction with a recombinant human growth hormone approved for this indication and a specialized diet can be used to reduce the volume and frequency of parenteral nutrition therapy for most patients.

 

Because L-glutamine is currently sold as a nutritional supplement, there is risk that both of the Company’s pharmaceutical products for treatment of SCD and SBS may experience competition with providers of L-glutamine in nutritional supplement form. In fact, when dealing with a method patent directed to new uses for old compounds, there is always a risk that the medication can be obtained from unauthorized sources, and sold at cut-rate prices, known as the “generic leakage” problem. More generally, generic leakage results when a barrier to competition, e.g. a patent expires or is invalidated, suddenly opening up the formerly price protected (and relatively expensive) product to competition from relatively inexpensive products. As a result, consumers will tend to purchase more of the cheaper product and less of the expensive product. However, the Company believes generic leakage will not be a major factor for a number of reasons, including but not limited to insurance/reimbursement factors, pricing strategies, regulatory barriers to market entry, state laws governing the prescribing and dispensing of pharmaceuticals and the substitution of therapeutic equivalents, distribution mechanisms, FDA-administered market exclusivity protections, intellectual property protections, and other factors inherent in the FDA regulatory differences between pharmaceuticals and nutritional supplements including but not limited to advertising laws and manufacturing practices. The FDA-administered market exclusivity protection that we will have is tied to the orphan drug status designation granted by the FDA. This provides for an additional seven years of market exclusivity for the SCD indication.

 

Our competitors may have products that have been approved or are in advanced development and may succeed in developing drugs that are more effective, safer and more affordable or more easily administered than ours or that achieve commercialization sooner than our products.

 

Employees

 

As of March 20, 2012, we had 13 employees, 11 of whom are full time, and four consultants. We have not experienced any work stoppages and we consider our relations with our employees to be good.

 

Properties

 

We lease approximately 4,540 square feet of office space at our headquarters at 20725 S. Western Avenue, Ste. 136, Torrance, CA 90501-1884, at a base rent of $4,994 per month and will expire on May 31, 2012. We plan on extending the lease for an additional two years. In addition, we lease two warehouse suites at 3870 Del Amo Boulevard, Torrance California under two separate leases: Suite 506 (approximately 1,400 square feet) at a base rent of $1,610 per month; and Suite 507 (approximately 1,300 square feet) at a base rent of $1,750 per month. The lease for Suite 506 will expire on August 11, 2013; the lease for Suite 507 will expire on February 28, 2013. Approximately 490 square feet of Suite 506 and 480 square feet of Suite 507 are currently subleased to an unaffiliated entity on a month to month basis. We do not expect to experience any difficulties in renewing our leases, or finding additional or replacement office and warehouse space, at their current or more favorable rates.

 

The 4,540 square feet office space at 20725 S. Western Ave. is adequate and suitable for our corporate headquarters and we currently use all of such office space. Additionally, the two warehouse facilities at 3870 Del Amo Blvd., a total of 2,700 square feet, are adequate and suitable for the storage and distribution of the sickle cell study medication, study placebo and AminoPure®. Suite 506 is used to store and distribute our SCD study medication and study placebo and we are able to store all study medication and study placebo required at this location. Suite 507 is used to store AminoPure® and can store up to a six month supply of AminoPure®, which is adequate for operations.

 

We also lease two office suites of approximately 512 square feet and 532 square feet, respectively, in Tokyo, Japan at a base rent of $1,678 per month each. These leases will expire on October 14, 2012 and September 15, 2013, respectively. We anticipate that the lease expiring on October 14, 2012 will be extended for another two year term on the same terms.

 

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The 1,044 total square feet of office space in Tokyo, Japan is adequate and suitable for our operations in Japan and we currently use all of such office space.

 

Legal Proceedings

 

We are not involved in any material legal proceedings outside of the ordinary course of our business.

 

MANAGEMENT

 

Executive Officers, Directors and Key Employees

 

The following individuals constitute our board of directors and executive management as of the date of this prospectus.

 

Name   Age   Position
Yutaka Niihara, M.D., MPH   52   President, Chief Executive Officer and Director
Willis C. Lee   51   Chief Operating Officer and Director
Peter Ludlum   56   Executive Vice President and Chief Financial Officer
Lan T. Tran   36   Chief Administrative Officer and Corporate Secretary
Yasushi Nagasaki   44   Senior Vice President, Finance
Henry A. McKinnell, Jr., Ph.D.   69   Chairman of the Board
Amir Heshmatpour   45   Director
Alfred E. Osborne, Jr., Ph.D.   67   Director
Tracey C. Doi   51   Director
Maurice J. DeWald   72   Director

 

All officers of the Company devote at least forty (40) hours per week, the equivalent of a full-time employee, to their positions with Company.

 

Background of Officers and Directors

 

The following is a brief summary of the background of each director and executive officer of the Company:

 

Yutaka Niihara, M.D., MPH, has served as the President and Chief Executive Officer of the Company since the closing of the Merger. Dr. Niihara has served as the President, Chief Executive Officer and Chairman of the Board of Emmaus Medical since 2003. Since May 2005, Dr. Niihara has served as the President, Chief Executive Officer and Medical Director of Hope International Hospice. 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 therapy for treatment of 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 the American Board of Internal Medicine/Hematology. He is licensed to practice medicine in both the U.S. 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 and obtained his MD degree from the Loma Linda University School of Medicine in 1986. Dr. Niihara is qualified to serve on our board of directors due to his knowledge and experience.

 

Willis C. Lee, MS has served as the Chief Operating Officer and a director of the Company since the closing of the Merger. He has served as the co-Chief Operating Officer and Chief Financial Officer and as a director of Emmaus Medical since April 2010. Prior to that, he was the Controller at Emmaus 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 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. from January 2004 to December 2008. Mr. Lee held various managerial and senior positions at semiconductor companies such as MicroUnity Systems Engineering, Inc. from August 1995 to July 1996, HPL, Inc. from June 2000 to October 2002, Syntricity, Inc. from November 2002 to April 2004 and also at a healthcare actuarial consulting firm, Reden & Anders from September 1996 to June 2000, which was acquired by United Health Care. Mr. Lee received his B.S. and M.S. in Physics from University of Hawaii (1984) and University of South Carolina (1986) respectively. Mr. Lee’s knowledge of our business and operations and his business, leadership and management experience qualify him to serve as a member of the Company’s board of directors.

 

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Peter Ludlum was appointed Executive Vice President and Chief Financial Officer of the Company effective April 2, 2012. Mr. Ludlum previously served as the Chief Financial Officer of Energy and Power Solutions, Inc. 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. Mr. Ludlum also served as Group Controller for IsoTis S.A. from October 2003 to April 2005. IsoTis S.A. acquired GenSci Regeneration Sciences Inc. 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. Earlier in his career Mr. Ludlum had worked for Derlan Industries, Ltd. as Corporate Controller and Treasurer and in various positions at Mobil Oil Corporation, and for subsidiaries of Bechtel Corporation and PacifiCorp. Mr. Ludlum is a Certified Management Accountant (CMA). 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.

 

Lan T. Tran, MPH has served as the Chief Administrative Officer and Corporate Secretary of the Company since the closing of the Merger. She has served as the Co-Chief Operating Officer and Corporate Secretary of Emmaus Medical since April 2010 and as the Chief Compliance Officer of Emmaus Medical since May 2008. Prior to joining Emmaus Medical, Ms. Tran was with LABioMed 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 LABioMed and responsible for all administrative aspects of research in her assigned area at LABioMed, 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 was appointed as the Senior Vice President, Finance of the Company effective April 2, 2012. From May 2011 to April 1, 2012, Mr. Nagasaki served as the Company’s Chief Financial Officer. From September 2005 until joining our Company, Mr. Nagasaki was the Chief Financial Officer of Hexadyne Corporation, an aerospace and defense supplier. From May 2003 to August 2005, Mr. Nagasaki was the Controller at Upsilon Intertech Corporation. Mr. Nagasaki received a B.A. in Commerce in 1992 from Waseda University and an M.A. in International Policy Studies in 1994 from the Monterey Institute of International Studies.

 

Henry A. McKinnell, Jr., Ph.D. has served as Chairman of the Board of the Company since the closing of the Merger and as a director of Emmaus Medical since April 2010. Dr. McKinnell served as the Chairman of the Board of Pfizer Inc. (NYSE: PFE), a pharmaceutical company, from May 2001 until his retirement in December 2006. He also served as Chief Executive Officer of Pfizer from January 2001 to July 2006. He served as President of Pfizer from May 1999 to May 2001, and as President of Pfizer Pharmaceuticals Group from January 1997 to April 2001. Dr. McKinnell served as Chief Operating Officer of Pfizer from May 1999 to December 2000 and as Executive Vice President from 1992 to 1999. Since October 1997, Dr. McKinnell has served as a member of the board of directors of Moody’s Corporation (NYSE: MCO), where he serves as the lead independent director and a member of the audit committee, the governance and compensation committee and MIS committee. From 2008 to May 2011, Dr. McKinnell served as a director of Angiotech Pharmaceuticals, Inc. (OTCBB: ANPIQ), and as a member of the audit committee and the governance, nominating and compensation committee. Dr. McKinnell has served as a director of Optimer Pharmaceuticals, Inc. (NasdaqGM: OPTR) since January 2001 and serves as a member of the nominating and corporate governance committee and the science and technology committee. Dr. McKinnell also serves as Chairman of the Board of the Accordia Global Health Foundation. He is Chairman Emeritus of the Connecticut Science Center, and is a member of the Academic Alliance for AIDS Care and Prevention in Africa. He served as director of ExxonMobil Corporation from 2002 to 2007 and John Wiley & Sons until 2005.  Dr. McKinnell holds a Bachelor’s Degree in business from the University of British Columbia, and M.B.A. and Ph.D. degrees from the Stanford University Graduate School of Business. We believe that Dr. McKinnell is qualified to serve on our board of directors due to his extensive experience and leadership in the pharmaceutical industry, in addition to his substantial involvement with business and civic organizations and years of experience as an officer and director of publicly traded companies.

 

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Amir Heshmatpour has served as a director since the closing of the Merger and served as the President, Secretary and Chief Financial Officer and a director of the Company from September 2007 to April 2011. Mr. Heshmatpour has been the Managing Director of AFH Holding & Advisory LLC since July 2003. From 1996 through January 2002, Mr. Heshmatpour served as Chairman and Chief Executive Officer of Metrophone Telecommunications, Inc. Mr. Heshmatpour has a background in venture capital, mergers and acquisitions, investing and corporate finance. Mr. Heshmatpour was the recipient of the Businessman of the Year award in 2003 at the National Republican Congressional Committee. Mr. Heshmatpour currently serves as sole officer and director of AFH Acquisition III, Inc., AFH Acquisition V, Inc., and AFH Acquisition VII, Inc., AFH Acquisition VIII, Inc, AFH Acquisition IX, Inc., AFH Acquisition, X, Inc., AFH Acquisition XI, Inc. and AFH Acquisition XII, Inc., all of which are publicly reporting, non-trading, blank check shell companies. Since October 10, 2007 Mr. Heshmatpour has served as President, Secretary and a member of the board of directors of AFH Holding I, Inc. and AFH Holding II, Inc. Since inception, Mr. Heshmatpour has served as President, Secretary and sole director of AFH Holding III, Inc., AFH Holding V, Inc., AFH Holding VI, Inc. and AFH Holding VII, Inc. Mr. Heshmatpour received a Bachelor of Arts from Pennsylvania State University in 1988. Mr. Heshmatpour is qualified to serve on our board of directors due to his operating and leadership experience, knowledge of the financial markets experience as a director of other public companies.

 

Alfred E. Osborne, Jr., Ph.D. has served as a director since June 2011. Dr. Osborne is currently the Senior Associate Dean at the UCLA Anderson School of Management, a position he assumed in July 2003. He has been employed as a professor at UCLA since 1972 and has served the school in various capacities over the years. Currently, he also serves as the faculty director of the Harold Price Center for Entrepreneurial Studies at UCLA, a position he has held since July 2003, and has been Professor of Global Economics and Management since July 2008 and a director at the UCLA Head Start – Johnson and Johnson Management Fellows Program since 1991. Dr. Osborne is a member of the board of directors of Kaiser Aluminum, Inc., a fabricated aluminum products manufacturing company, Wedbush, Inc., a financial services and investment firm, and Heckmann Corporation, a company engaged in water solutions for energy development and bottled water products. Dr. Osborne also serves as a director of First Pacific Advisors’ Capital, Crescent, International Value and New Income Funds. Dr. Osborne has served on many public and private company boards during the past 30 years, including service on audit, compensation and governance committees, which qualifies him to serve on our board of directors. Dr. Osborne is qualified to serve on our board of directors due to his knowledge of business in various industries and his experience serving on boards and the committees of other public companies.

 

Tracey C. Doi has served as a director since August 2011. Ms. Doi serves as the group vice president and chief financial officer of Toyota Motor Sales, U.S.A., Inc., the marketing, sales, distribution and customer service arm of Toyota, Lexus and Scion in the United States. Ms. Doi is responsible for corporate finance, tax, customs, treasury, accounting, procurement and corporate services. Ms. Doi serves on Toyota Motor Sales’ audit committee, risk committee and benefit committee, as well as an officer or director of several subsidiaries. Ms. Doi joined Toyota in 2000 as vice president, corporate controller and was promoted to CFO in 2003. Prior to that, she held financial executive positions with AT&T Wireless, L.A. Cellular Telephone Company, and L.A. Gear, Inc. Ms. Doi received a bachelor’s degree in business economics from UCLA in 1983 and is a certified public accountant (inactive). Ms. Doi serves on the Federal Reserve Bank of San Francisco’s Economic Advisory Council, the board of directors for the Food Allergy & Anaphylaxis Network (FAAN), the board of governors for the Japanese American National Museum, and the board of directors for the Japan America Society. The Company believes that Ms. Doi is qualified to serve as a director of the Company due to her business and financial management experience, including her position as a chief financial officer, and her knowledge of audit committee functions.

 

Maurice J. DeWald has served as a director since August 2011. Mr. DeWald has served as the Chairman and Chief Executive Officer of Verity Financial Group, Inc., a financial advisory firm he founded, since 1992. From 1962 to 1991, Mr. DeWald served in various positions with KPMG LLP, including managing partner of the Orange County office from 1976 to 1984, managing partner of the Chicago office from 1985 to 1986 and managing partner of the Los Angeles office from 1986 to 1991. Mr. DeWald has served as a director of Targeted Medical Pharma, Inc. since February 2011, as a director of Healthcare Trust of America, Inc. since September 2006 and as a director of Integrated Healthcare Holdings, Inc. (OTCBB: IHCH.OB) since August 2005, including as Chairman of the Board since October 2008. Mr. DeWald served as a director of Mizuho Corporate Bank of California from 1992 to 2011. From 1991 to July 2003 he served on the board of directors of Tenet Healthcare Corporation (NYSE: THC) and from 1995 to 2003 he served on the board of directors of ARV Assisted Living, Inc. Mr. DeWald received a B.B.A. in finance and accounting from the University of Notre Dame in 1962 and is a certified public accountant (inactive). Mr. DeWald also sits on the School of Business Advisory Council of the University of Notre Dame and has previously served as the Chairman and a director of the United Way of Greater Los Angeles. The Company believes that Mr. DeWald is qualified to sit on the Company’s board of directors due to his extensive management, finance, public accounting and public company directorship experience, as well as his experience in the healthcare industry.  

 

Family Relationships

 

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

 

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Involvement in Certain Legal Proceedings

 

On September 23, 2011, Peter Ludlum, our current Chief Financial Officer, was serving as the Chief Financial Officer of Energy and Power Solutions, Inc. (“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. Such sale closed in December 2011 and EPS is currently winding down all other operations. 

 

Other than as described above, there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of the Company during the past ten years.

 

The Company is not aware of any legal proceedings in which any director, nominee, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, nominee, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

 

Board of Directors and Committees and Director Independence

 

Under NASDAQ Marketplace Rules, a listed company’s board of directors must consist of a majority of independent directors. Certain exceptions are available for this requirement but we do not qualify for any such exception. Currently, our board of directors has determined that each of Henry A. McKinnell, Jr., Alfred E. Osborne, Jr., Tracey C. Doi and Maurice J. DeWald 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, Compensation and Nominating Committees satisfy the “independence” standards applicable to members of each such committee. 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 relationships and transactions between each director or any member of his immediate family and the Company and its subsidiaries and affiliates.

 

Audit Committee

 

We established our Audit Committee on May 3, 2011. The Audit Committee consists of Dr. McKinnell, Dr. Osborne, Ms. Doi and Mr. DeWald each of whom is an independent director as defined by the NASDAQ Marketplace Rules. Mr. DeWald serves as Chairman of the Audit Committee. Each of Ms. Doi and Mr. DeWald 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 auditor, including resolution of disagreements between management and the independent auditor 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 auditor 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 auditors.

 

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

 

Compensation Committee

 

We established our Compensation Committee on May 3, 2011. The Compensation Committee consists of Dr. McKinnell, Dr. Osborne, Ms. Doi and Mr. DeWald, each of whom is an independent director as defined by the NASDAQ Marketplace Rules.   Dr. McKinnell is the Chairman of the Compensation Committee. The Compensation 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. The Compensation 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 Committee. A copy of the Compensation Committee Charter will be available on our website at www.Emmausmedical.com.

 

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Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee consists of Dr. McKinnell, Dr. Osborne, Ms. Doi and Mr. DeWald, each of whom is an independent director as defined by the NASDAQ Marketplace Rules. Dr. Osborne is the Chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee 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 board of directors has adopted a written charter for the Nominating and Corporate Governance Committee. A copy of the Nominating and Corporate Governance Committee Charter will be available on our website at www.Emmausmedical.com.

 

Code of Business Conduct and Ethics

 

On May 3, 2011, our board of directors approved a Code of Conduct and Ethics (the “Code of Ethics”) that applies to all of the directors, officers and employees of the Company. 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 will be 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, 20725 S. Western Avenue, Ste. 136, Torrance, CA 90501-1884.

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth information concerning the compensation earned for services rendered to our predecessor and Emmaus Medical for the two fiscal years ended December 31, 2011 of the principal executive officer, in addition to our four most highly compensated officers whose annual compensation exceeded $100,000, and one additional individual for whom disclosure would have been required but for the fact that the individual was not serving as one of our executive officers at the end of our last fiscal year.

 

Name and Position   Year     Salary
($)
    Bonus
($)
    Total
($)
 
Yutaka Niihara, M.D., MPH     2011       218,750       -       218,750  
President, Chief Executive Officer and Director     2010       125,000       -       125,000  
                                 
Willis C. Lee     2011       170,000       -       170,000  
Chief Operating Officer and Director     2010       119,693       -       119,693  
                                 
Lan T. Tran     2011       161,000       50,000       211,000  
Chief Administrative Officer and Corporate Secretary     2010       104,000       -       104,000  
                                 
Yasushi Nagasaki (1)     2011       120,000       -       120,000  
Former Chief Financial Officer     2010       -       -       -  
                                 
Amir F. Heshmatpour (2)     2011       -       -       -  
Former President, Secretary and Chief Financial Officer     2010       -       -       -  

 

 

(1) Mr. Nagasaki resigned as the Company’s Chief Financial Officer effective April 2, 2012.

(2) Upon the close of the Merger on May 3, 2011, Mr. Heshmatpour resigned as the President, Secretary and Chief Financial Officer of the Company.

 

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Total compensation for Dr. Niihara, Mr. Lee and Ms. Tran for the year ended December 31, 2011 listed in the table above does not include the amount of the annual performance bonus to be paid pursuant to their respective employment agreements based on performance in 2011. The board of directors has not yet determined the amount of the annual performance bonus to be paid to such officers pursuant to the employment agreements, the terms of which are described below.  Pursuant to the employment agreements, the amounts of the target annual performance bonuses for 2011 for Dr. Niihara, Mr. Lee and Ms. Tran are $50,000, $25,000 and $20,000, respectively. In addition, based on each officer's performance from the immediate prior year as may be determined by the board of directors, Dr. Niihara, Mr. Lee and Ms. Tran are to receive non-qualified ten-year options to purchase shares of our common stock with a Black Scholes value of $100,000, $50,000 and $40,000, respectively. Upon the board of directors' determination of the amounts of the annual performance bonuses payable and whether the annual option grants will be made to such officers, the Company will disclose the amounts of such compensation in a Form 8-K filing with the SEC.

 

The above table also does not reflect option grants made to the following officers by the board of directors on April 2, 2012:

 

Officer   No. Shares
Underlying
Option Grant
  Exercise Price     Term of
Option
    Expiration
Date
 
Yutaka Niihara, M.D., MPH   250,000   $ 3.60       10 years     4/1/2022  
Willis C. Lee   250,000   $ 3.60       10 years     4/1/2022  
Lan T. Tran   250,000   $ 3.60       10 years     4/1/2022  
Yasushi Nagasaki   250,000   $ 3.60       10 years     4/1/2022  

 

The above options vest annually in equal installments (or as close to equal installments as possible) over a period of three (3) years from the grant date, with the first one-third (1/3) to vest on the one-year anniversary of the grant date.

 

Outstanding Equity Awards at 2011 Fiscal Year End

 

There were no outstanding equity awards held by named executive officers in 2011.

 

Employment Agreements

 

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, our Chief Administrative Officer on April 5, 2011; with Yasushi Nagasaki, our former Chief Financial Officer and current Senior Vice President, Finance, on April 8, 2011 and with Peter Ludlum, our Executive Vice President and Chief Financial Officer on April 2, 2012 (collectively, the “Employment Agreements”). Each of the Employment Agreements has an initial 2-year term, unless terminated earlier. 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 sixty (60) days prior to the expiration of the then current term. The Company may terminate Mr. Ludlum and his employment agreement at any time and for any reason during the 180 days (and including the 180th day) following the effective date of the employment agreement (the “Initial Employment Period”) by providing written notice to Mr. Ludlum.

 

Base Salary, Bonus and Other Compensation . Dr. Niihara’s, Mr. Lee’s, Ms. Tran’s, Mr. Nagasaki’s and Mr. Ludlum’s base salary is $250,000, $180,000, $180,000, $180,000 and $180,000 per year, respectively, which will be reviewed at least annually. In addition to base salary, the officers are entitled to receive an annual performance bonus based on the officer’s performance for the previous year, measured against certain targets and goals mutually established by the Company and the officer. The target bonus for 2011 for Dr. Niihara, Mr. Lee and Ms. Tran are $50,000, $25,000 and $20,000, respectively. Targets may include the same criteria described in the Company’s 2011 Stock Incentive Plan. There is no expected performance bonus for 2011 for Mr. Nagasaki or for 2012 for Mr. Ludlum. 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 . Effective December 31, 2011 and at the end of each calendar year on December 31st or as soon as reasonably practicable after each such December 31st (each a “Grant Date”), the Company will grant non-qualified ten-year stock options with a Black Scholes value of $100,000 to Dr. Niihara, $50,000 to Mr. Lee, and $40,000 to Ms. Tran 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. Mr. Nagasaki will receive a grant of non-qualified ten-year options with a Black Scholes value of $40,000 on December 31, 2012; however, there is no predetermined grant of options to Mr. Nagasaki for 2011. 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. 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.

 

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Effective December 31, 2012 and on each successive Grant Date, the Compensation Committee may grant ten-year options to purchase shares of common stock to Mr. Ludlum based on his performance for the previous year. There is no predetermined option grant for Mr. Ludlum for 2012. Any unvested options will vest upon a change of control (as defined below) or any termination of Mr. Ludlum’s employment other than a termination by Mr. Ludlum or a termination of Mr. Ludlum by the Company for cause or during the Initial Employment Period. If Mr. Ludlum is terminated for any reason other than (i) cause, (ii) death or (iii) disability or retirement, each option granted to Mr. Ludlum, 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 of the termination of Mr. Ludlum’s employment for cause, each outstanding option granted to Mr. Ludlum shall terminate at the commencement of business on the date of such termination. In the event that Mr. Ludlum’s employment with the Company terminates on account of death, disability or, with respect to any non-qualified stock option, retirement of Mr. Ludlum, each option granted that is outstanding and vested as of the date of such termination shall remain exercisable by Mr. Ludlum (or Mr. Ludlum’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, Ms. Tran’s, Mr. Nagasaki’s or Mr. Ludlum’s employment is terminated for any reason, other than without cause or good reason, each 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 expenses, and unpaid vacation benefits (the “Voluntary Termination Benefits”). If Dr. Niihara’s, Mr. Lee’s, Ms. Tran’s or Mr. Nagasaki’s termination is due to death or disability of such officer, 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, 6 additional months of his or her base salary to be paid out over a 6-month period and payment of COBRA benefits of up to 6 months following the termination. If Mr. Ludlum’s termination is due to death or disability, he will receive the Voluntary Termination Benefits and an amount equal to 6 months of his target annual performance bonus, and for a termination due to disability only (provided Mr. Ludlum signs a binding release of all claims relating to his employment (a “Release”)), 6 additional months of his or her base salary to be paid out over a 6-month period and payment of COBRA benefits of up to 6 months following the termination. If Dr. Niihara is terminated without cause or resigns with good reason (not within 2 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 any of Mr. Lee, Ms. Tran or Mr. Nagasaki is terminated without cause or resigns with good reason (not within 2 years following a change in control), he or she will receive the Voluntary Termination Benefits and, provided he or she signs a Release, a severance package equal to 6 months of his or her base salary to be paid out over a 6-month period, an amount equal to half of the targeted annual performance bonus, and payment of COBRA benefits of up to 6 months following the termination. If Mr. Ludlum is terminated without cause after the Initial Employment Period or resigns with good reason (not within 1 year following a change in control), he will receive the Voluntary Termination Benefits and, provided he signs a Release, a severance package equal to 6 months of his base salary to be paid out over a 6-month period, a pro-rata amount of the targeted annual performance bonus based on his achievement of applicable terms or performance goals at the time of termination, and payment of COBRA benefits of up to 6 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% (or 25% in the case of Mr. Nagasaki and Mr. Ludlum) 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) (and except in Mr. Nagasaki’s case if his position is reduced to Treasurer, Comptroller or Controller during the first 14 months of employment); 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 ninety (90) days of the event constituting good reason and the Company fails to cure the good reason within thirty (30) days after receiving such notice.

 

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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 2 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 2 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 2 years after a change of control or upon Mr. Nagasaki’s or Mr. Ludlum’s termination without cause or good reason that occurs within 1 year after a change of control (provided Mr. Ludlum’s termination is after the Initial Termination Period), he or she will receive the Voluntary Termination Benefits and, provided he or she signs a Release, a severance package equal to 1 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, except for Mr. Nagasaki and Mr. Ludlum who will have 4 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.

 

Director Compensation

 

The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2011 by members of board of directors, except Yutaka Niihara, M.D., MPH and Willis C. Lee, whose compensation for services as a director is included in the Summary Compensation Table above.

 

Name   Fees Earned 
or Paid in 
Cash 
($)
    Stock 
Awards 
($)
    Option 
Awards
($)
    Non-Equity 
Incentive Plan 
Compensation 
($)
    Change in 
Pension Value
and 
Nonqualified 
Deferred 
Compensation 
Earnings
    All Other 
Compensation
($)
    Total
($)
 
Henry A. McKinnell, Jr., Ph.D.     8,100 (1)       -       129,102       -       -       -       137,202  
Amir Heshmatpour     -       -       -       -       -       -       -  
Douglas W. Wilmore, M.D. (3)     4,900 (2)       -       -       -       -       -       4,900  
Alfred E. Osborne, Jr., Ph.D.     3,100       -       41,736       -       -       -       44,836  
Tracey C. Doi     3,000       -       34,780       -       -       -       37,780  
Maurice J. DeWald     2,400       -       41,736       -       -       -       44,136  

 

 

(1)Includes fees of $3,000 earned for service on the board of directors of Emmaus Medical.
(2)Includes fees of $2,000 earned for service on the board of directors of Emmaus Medical.
(3)Dr. Wilmore resigned from the board of directors on September 1, 2011.

 

Non-officer directors will receive an annual grant of 10,000 options pursuant to the 2011 Stock Incentive Plan. Such grants will vest annually. The Chairman of the Board will receive a one-time retainer grant of 10,000 options and each committee chair will receive a one-time retainer grant of 2,000 options. Additionally, non-officer directors will receive compensation of $700 for each in-person board meeting that they attend, $400 for each telephonic board meeting that they attend and $400 for each committee meeting. We expect the board of directors to hold four in-person meetings and two telephonic meetings each calendar year.

 

On February 29, 2012, we issued warrants to purchase 1,000,000 and 500,000 to Henry McKinnell and Alfred Osborne, respectively, with an exercise price of $1.00 per share. Each warrantholder may purchase one-half of the shares underlying his respective warrant in 2013 only and the other half of the shares underlying his warrant in 2014 only. The warrants were issued to each of the directors as compensation for their contributions to various projects on the Company’s behalf.

 

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On April 2, 2012, we issued options to purchase 75,000 shares of common stock to each of Tracey Doi and Maurice DeWald with an exercise price of $3.60 per share. The options vest annually in equal installments (or as close to equal installments as possible) over a period of three (3) years from the grant date, with the first one-third (1/3) to vest on the one-year anniversary of the grant date.

 

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 (the “Incentive Plan”). Stockholder approval of the Incentive Plan enables the Company to satisfy stock exchange listing 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 (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 the other three highest paid executive officers of the Company required to be reported under the proxy disclosure rules. The Company intends to cause the shares of common stock that will become available for issuance to be registered on a Form S-8 registration statement to be filed with the SEC at the Company’s expense.

 

The amount and nature of the proposed awards under the Incentive Plan have not yet been determined, although the Incentive Plan permits grants of stock options, stock appreciation rights, or SARs, restricted stock or units, unrestricted stock, deferred stock and performance awards. The Company’s board of directors believes that the Incentive Plan will be an important factor in attracting, retaining and motivating employees, consultants, agents, and directors of the Company and its affiliates, collectively referred to herein as Eligible Persons. Our board of directors believes that the Company needs 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.

 

Pursuant to the Incentive Plan, 3,000,000 shares of common stock will be reserved for future awards to eligible persons.

 

Capitalized terms used in this summary and not otherwise defined herein will have the meanings ascribed to such terms in the Incentive Plan.

 

Purpose

 

The purpose of the Incentive Plan is to attract, retain and motivate select Eligible Persons, and to provide incentives and rewards for superior performance.

 

Shares Subject to the Incentive Plan

 

The Incentive Plan provides that no more than 3,000,000 shares of common stock may be issued pursuant to Awards under the Incentive Plan. These shares shall be authorized but unissued shares, or shares that the Company otherwise holds in treasury or in trust. The number of shares available for Awards, as well as the terms of outstanding Awards, is subject to adjustment as provided in the Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events. Shares of common stock that are subject to any Award that expires, or is forfeited, cancelled or otherwise terminated without the issuance of some or all of the shares that are subject to the Award will again be available for subsequent Awards unless such shares are used as payment in connection with any Award or used to satisfy tax obligations with respect to an Award.

 

The maximum awards that can be granted under the Incentive 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 share units, stock bonus and other stock-based awards.

 

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Administration

 

Following the consummation of the Merger, either the Company’s Compensation Committee of the board of directors or another committee appointed by the Company’s board of directors will administer the Incentive Plan. The Compensation Committee of the Company’s board of directors and any other committee exercising discretion under the Incentive Plan from time to time are referred to herein as the “Committee.” It is expected that the Compensation Committee of the Company’s board of directors will act as the Committee for purposes of the Incentive Plan. To the extent permitted by law, the Committee may authorize one or more persons who are reporting persons for purposes of Rule 16b-3 under the Exchange Act (or other officers) to make Awards to eligible persons who are not reporting persons for purposes of Rule 16b-3 under the Exchange Act (or other officers whom the Company has specifically authorized to make Awards). With respect to decisions involving an Award intended to satisfy the requirements of Section 162(m) of the Code, the Committee is to consist of two or more directors who are “outside directors” for purposes of that Code section. The Committee may delegate administrative functions to individuals who are reporting persons for purposes of Rule 16b-3 of the Exchange Act, officers or employees of the Company or its affiliates.

 

Subject to the terms of the Incentive 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 Incentive Plan and its administration, to interpret and construe the terms of the Incentive Plan and the terms of all Award agreements, and to take all actions necessary or advisable to administer the Incentive Plan.

 

Stock awards granted under the Incentive Plan (other than annual director stock grants described below) will have a minimum forfeiture period of at least three years (but such forfeiture periods may lapse in installments). However, performance-based stock awards may have a minimum vesting or forfeiture period of one year. As an exception to these minimum vesting and forfeiture provisions, the Committee has discretion to accelerate the exercisability or vesting of outstanding awards or waive any restrictions applicable to such awards in connection with a participant’s death, disability, retirement, involuntary termination, a change in control or for recruitment. In addition, the Committee will have discretion to award up to 10% of the shares reserved under the Incentive Plan without regard to these minimum vesting or forfeiture periods, primarily for special one-time recognition awards and retention purposes.

 

The Incentive Plan provides that the Company 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 Incentive Plan. The Incentive Plan releases these individuals from liability for good faith actions associated with the Incentive Plan’s administration.

 

Eligibility

 

The Committee may grant options that are intended to qualify as incentive stock options, or ISOs, only to employees of the Company or its affiliates, and may grant all other Awards to Eligible Persons. The Incentive 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 Incentive 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 herein as Non-ISOs. The Incentive 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).

 

Share Appreciation Rights (SARs). A share appreciation right generally permits a Participant who receives it 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. SARs that are independent of options may limit the value payable on its exercise to a percentage, not exceeding 100%, of the excess value.

 

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 stock of the Company).

 

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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, and from time to time during its term, subject to earlier termination relating to a holder’s termination of employment or service. With respect to options, the Committee has the discretion to accept payment of the exercise price in any of several forms (or combination of them), including: cash or check in U.S. dollars, certain shares of common stock, and cashless or “net” exercise under a program the Committee approves. The term over which Participants may exercise options and SARs may not exceed ten 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 stock of the Company).

 

Unless otherwise provided under the terms of the agreement evidencing a grant, options and SARs that have vested may be exercised during the six-month period after the optionee retires, during the one-year period after the optionee’s termination of service due to death or permanent disability, 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. The agreement evidencing the grant of an option or SAR may, in the discretion of the Committee, set forth additional or different terms and conditions applicable to such grant upon a termination or change in status of the employment or service of the participant. All SARs may be settled in cash or shares of the Company’s stock in the discretion of the Committee.

 

Restricted Shares, Stock Units, Stock Bonus, and Other Stock-Based Awards. Under the Incentive Plan, the Committee may grant restricted shares that are forfeitable until certain vesting requirements are met, may grant restricted stock units which represent the right to receive shares of common stock after certain vesting requirements are met, and may grant unrestricted shares as to which the Participant’s interest is immediately vested (subject to the exceptions to the minimum vesting requirements described above). The Incentive 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.

 

The performance goals described in the preceding paragraphs may be established by the Committee, in its discretion, based on one or more of the following measures (the “Business Criteria”): (1) return on total stockholder equity; (2) earnings or book value per share of Company Stock; (3) net income (before or after taxes); (4) earnings before all or any interest, taxes, depreciation and/or amortization (“EBIT,” “EBITA” or “EBITDA”); (5) inventory goals; (6) return on assets, capital or investment; (7) market share; (8) cost reduction goals; (9) earnings from continuing operations; (10) levels of expense, costs or liabilities; (11) unit level performance; (12) operating profit; (13) sales or revenues; (14) stock price appreciation; (15) total stockholder return; (16) implementation or completion of critical projects or processes; or (17) any combination of the foregoing. Where applicable, Business Criteria may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the Company, an affiliate, or a division or strategic business unit of the Company, or may be applied to the performance of the Company relative to a market index, a group of other companies or a combination thereof, all as determined by the Committee. Each of the Business Criteria shall be determined, where applicable and except as otherwise provided by the Committee, in accordance with generally accepted accounting principles and shall be subject to certification by the Committee; provided that the Committee shall have the authority to make equitable adjustments to the Business Criteria in recognition of unusual or non-recurring events affecting the Company or any affiliate or the financial statements of the Company or any affiliate, in response to changes in applicable laws or regulations, or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principles.

 

Whenever shares of common stock are delivered pursuant to these Awards, the Participant will be entitled to receive additional shares of common stock equal to the sum of (i) any stock dividends that the Company’s stockholders received between the grant date of the Award and issuance or release of the shares of common stock and (ii) a number of additional shares of common stock equal to the shares of common stock that the Participant could have purchased at Fair Market Value on the payment date of any cash dividends for shares of common stock if the Participant had received such cash dividends between its grant date and its settlement date. However, any dividend equivalents awarded in connection with a grant of any performance-based award will not be payable unless and until the performance conditions applicable to the award have been met, or the award otherwise becomes vested in accordance with the award agreement and the Incentive Plan.

 

Annual Non-Employee Director Grants. The Incentive Plan provides for annual grants of 10,000 options to non-employee directors (the “Annual Director Award”). Each Annual Director Award will vest in four substantially equal quarterly installments.

 

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Clawback of Awards

 

Unless otherwise provided in an agreement granting an Award, the Company 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 Incentive 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 lifetime transfers in the form of Non-ISOs, Share-settled SARs, Restricted Shares, or Performance Shares to charitable institutions, certain family members or related trusts, or as otherwise approved by the Committee.


Certain Corporate Transactions

 

The Committee shall equitably adjust the number of shares covered by each outstanding Award, the number of shares that have been authorized for issuance under the Incentive Plan but as to which no Awards have yet been granted or that have been returned to the Incentive 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 the Company.

 

In addition, in the event of a Change in Control (as defined in the Incentive Plan) but subject to the terms of any Award agreements or any employment or other similar agreement between the Company or any of its affiliates and a Participant then in effect, each outstanding Award shall be assumed or a substantially equivalent award shall be substituted by the surviving or successor corporation or a parent or subsidiary of such surviving or successor corporation upon the consummation of the transaction; provided, however, that to the extent outstanding Awards are neither being assumed nor replaced with substantially equivalent Awards by the successor corporation, the Committee may in its sole and absolute discretion and authority, without obtaining the approval or consent of the Company’s stockholders or any Participant with respect to his or her outstanding Awards, take one or more of the following actions: (a) accelerate the vesting of Awards for any period so that Awards shall vest (and, to the extent applicable, become exercisable) as to the shares of common stock that otherwise would have been unvested and provide that repurchase rights of the Company with respect to shares of common stock issued pursuant to an Award shall lapse as to the shares of common stock subject to such repurchase right; (b) arrange or otherwise provide for payment of cash or other consideration to Participants in exchange for the satisfaction and cancellation of outstanding Awards; or (c) terminate all or some Awards upon the consummation of the transaction, provided that the Committee shall provide for vesting such Awards in full as of a date immediately prior to consummation of the Change of Control. 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 Incentive Plan; Amendments or Termination

 

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

 

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Expected Tax Consequences

 

The following is a brief summary of certain U.S. tax consequences of certain transactions under the Incentive Plan. This summary is not intended to be complete and does not describe state or local tax consequences.

 

U.S. Federal Income Tax Consequences

 

Under the Code, the Company will generally be entitled to a deduction for federal income tax purposes at the same time and in the same amount as the ordinary income that Participants recognize pursuant to Awards (subject to the Participant’s overall compensation being reasonable, and to the discussion below with respect to Code section 162(m)). For Participants, the expected U.S. federal income tax consequences of Awards are as follows:

 

Non-ISOs. A Participant will not recognize income at the time a Non-ISO is granted. At the time a Non-ISO is exercised, the Participant will recognize ordinary income in an amount equal to the excess of (a) the fair market value of the shares of common stock issued to the Participant on the exercise date, over (b) the exercise price paid for the shares. At the time of sale of shares acquired pursuant to the exercise of a Non-ISO, the appreciation (or depreciation) in value of the shares after the date of exercise will be treated either as short-term or long-term capital gain (or loss) depending on how long the shares have been held.

 

ISOs. A Participant will not recognize income upon the grant of an ISO. There are generally no tax consequences to the Participant upon exercise of an ISO (except the amount by which the fair market value of the shares at the time of exercise exceeds the option exercise price is a tax preference item possibly giving rise to an alternative minimum tax). If the shares of common stock are not disposed of within two years from the date the ISO was granted or within one year after the ISO was exercised, any gain realized upon the subsequent disposition of the shares will be characterized as long-term capital gain and any loss will be characterized as long-term capital loss. If both of these holding period requirements are not met, then a “disqualifying disposition” occurs and (a) the Participant recognizes ordinary income gain in the amount by which the fair market value of the shares at the time of exercise exceeded the exercise price for the ISO and (b) any remaining amount realized on disposition (except for certain “wash” sales, gifts or sales to related persons) will be characterized as capital gain or loss.

 

Share Appreciation Rights. A Participant to whom a SAR is granted will not recognize income at the time of grant of the SAR. Upon exercise of a SAR, the Participant must recognize taxable compensation income in an amount equal to the value of any cash or shares of common stock that the Participant receives.

 

Restricted Shares. A participant will not be taxed at the date of an award of restricted shares, but will be taxed at ordinary income rates on the fair market value of any restricted shares as of the date that the restrictions lapse, unless the participant, within 30 days after transfer of such restricted shares to the participant, elects under Section 83(b) of the Internal Revenue Code to include in income the fair market value of the restricted shares as of the date of such transfer. If the participant makes the election under Section 83(b), the Company will be entitled to a corresponding deduction. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or on the date of the transfer of the restricted shares, if the employee elects to be taxed on the fair market value upon such transfer). To the extent dividends are payable during the restricted period under the applicable award agreement, any such dividends will be taxable to the participant at ordinary income tax rates and will be deductible by the Company unless the participant has elected to be taxed on the fair market value of the restricted shares upon transfer, in which case they will thereafter be taxable to the employee as dividends and will not be deductible by the Company.

 

Restricted Units. A participant will normally not recognize taxable income upon an award of restricted units, and the Company will not be entitled to a deduction until the lapse of the applicable restrictions. Upon the lapse of the restrictions and the issuance of the earned shares, the participant will recognize ordinary taxable income in an amount equal to the fair market value of the common stock received and the Company will be entitled to a deduction in the same amount.

 

Other Stock-Based Awards. Normally, a participant will not recognize taxable income upon the grant of other stock-based awards. Subsequently, when the conditions and requirements for the grants have been satisfied and the payment determined, any cash received and the fair market value of any common stock received will constitute ordinary income to the participant. The Company also will then be entitled to a deduction in the same amount.

 

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Stock Bonus Awards. A Participant will recognize income at the time of grant of unrestricted stock bonus awards in an amount equal to the excess of the market value of the unrestricted shares over any amount the Participant pays for them (in which case subsequent gain or loss would be capital in nature).

 

Special Tax Provisions. Under certain circumstances, the accelerated vesting, cash-out or accelerated lapse of restrictions on Awards in connection with a change in control of the Company might be deemed an “excess parachute payment” for purposes of the golden parachute tax provisions of Code section 280G, and the Participant may be subject to a 20% excise tax and the Company may be denied a tax deduction. Furthermore, the Company may not be able to deduct the aggregate compensation in excess of $1,000,000 attributable to Awards that are not “performance-based” within the meaning of Code section 162(m) in certain circumstances.

 

Income Taxes and Deferred Compensation. The Incentive Plan provides that participants are solely responsible and liable for the satisfaction of all taxes and penalties that may arise in connection with Awards (including any taxes arising under Section 409A of the Code), and that the Company will not have any obligation to indemnify or otherwise hold any Participant harmless from any or all of such taxes. Nevertheless, the Incentive Plan authorizes the Committee to grant or to unilaterally modify any Award in a manner that (i) conforms with the requirements of Section 409A of the Code, (ii) that voids any Participant election to the extent it would violate Section 409A of the Code, and (iii) for any distribution election that would violate Section 409A of the Code, to make distributions pursuant to the Award at the earliest to occur of a distribution event that is allowable under Section 409A of the Code or any distribution event that is both allowable under Section 409A of the Code and is elected by the Participant, with the Committee’s consent, in accordance with Section 409A.

 

General Tax Law Considerations

 

The preceding paragraphs are intended to be merely a summary of certain important tax law consequences concerning a grant of options under the Incentive Plan and the disposition of shares issued thereunder in existence as of the date of this filing. Special rules may apply to the Company’s officers, directors or greater than ten percent stockholders. Participants in the Incentive Plan should review the current tax treatment with their individual tax advisors at the time of grant, exercise or any other transaction relating to an Award or the underlying shares.

 

New Plan Benefits

 

The Committee will grant Awards under the Incentive Plan at its discretion. Consequently, it is not possible to determine at this time the amount or dollar value of Awards to be provided under the Incentive Plan, other than to note that the Committee has not granted Awards that are contingent upon the approval of the Incentive Plan.

 

RELATED PARTY TRANSACTIONS

 

Emmaus Medical, Inc.

 

Emmaus Life Sciences, Inc., Emmaus Medical Inc., Newfield Nutrition Corporation, Emmaus Medical Japan, Inc (“EM Japan”) and Emmaus Medical Europe Ltd. (“EM Europe”) which are either directly or indirectly wholly-owned subsidiaries of the Company, each have interlocking executive and director positions with us and with each other. Dr. Niihara and Mr. Lee are directors of Newfield Nutrition Corporation. Dr. Niihara is a director of EM Japan. 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 as they do in Emmaus Life Sciences.

 

AFH Acquisition IV, Inc.

 

Mr. Heshmatpour, our former President and a director and our original stockholder, is deemed our promoter as this term is defined under the federal securities laws.

 

On April 19, 2011, the Company sold an aggregate of 577,750 shares of our common stock at a per share purchase price of $2.00 per share for gross proceeds of approximately $1.2 million (the “Private Placement”), which proceeds were distributed to AFH Advisory, the Company’s majority stockholder prior to the Merger. The proceeds were paid directly to AFH Advisory as a consulting fee for services to be provided to the Company, AFH Acquisition IV, prior to the Merger.

 

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Merger and AFH Advisory

 

Pursuant to the Merger Agreement, AFH Merger Sub merged with and into Emmaus Medical with Emmaus Medical continuing as the surviving entity. As a result of the Merger, Emmaus Medical became a wholly-owned subsidiary of the Company. In connection with the Merger, the Company changed its corporate name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” Subsequently, on September 14, 2011, we changed our name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.”

 

Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock and (iii) each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, Emmaus Medical securityholders received 20,673,714 of our shares of common stock, options and warrants to purchase an aggregate of 326,507 shares of common stock, and convertible notes to purchase an aggregate of 271,305 shares of our common stock, or 85% of our issued and outstanding common stock on a fully diluted basis. Immediately after the closing of the Merger, we had 24,423,714 shares of common stock, no shares of preferred stock, options to purchase 23,590 shares of common stock, warrants to purchase 302,918 shares of common stock and convertible notes convertible into 271,305 shares of our common stock issued and outstanding.

 

Prior to the closing of the Merger, AFH Advisory cancelled an aggregate of 1,827,750 shares of the Company’s common stock. AFH Advisory did not receive any consideration for the cancellation of the shares. The cancellation of the shares was accounted for as a contribution to capital. The number of shares cancelled was determined based on negotiations with AFH Advisory, the majority stockholder of the Company, and Emmaus Medical.  Emmaus Medical and AFH Advisory negotiated an estimated value of Emmaus Medical and its subsidiaries, an estimated value of the shell company, and the mutually desired capitalization of the company resulting from the Merger. With respect to the determination of the amount of shares cancelled, the value of the shell company was derived primarily from its utility as a public company platform, including its good corporate standing and its timely public reporting status; the shell’s lack of previous operations, legal difficulties and potential contingent liabilities; and the shell’s stockholder base. We did not consider registering our own securities directly as a viable option for accessing the public markets. The services provided by AFH Advisory were not a consideration in determining this aspect of the transaction. Under these circumstances and based on these factors, Emmaus Medical and AFH Advisory agreed upon the number of shares to be cancelled.  

 

The Merger resulted in a change in control of our company from AFH Advisory, which is owned by Mr. Amir F. Heshmatpour, to the former securityholders of Emmaus Medical. In connection with the change in control, we appointed new persons to our board of directors and elected new officers of the Company. Mr. Heshmatpour, an officer and director of the Company prior to the consummation of the Merger, resigned from all of his officer positions with the Company at the time the transaction was consummated, but continues as a member of our board of directors. The appointments of the new officers and directors, as set forth below, were made on the closing of the Merger, except for Alfred E. Osborne, Jr., who was appointed to the board of directors on June 21, 2011, and Tracey C. Doi and Maurice J. DeWald, who were appointed to the board of directors on August 4, 2011.

 

Name   Position
Yutaka Niihara, M.D.   President and Chief Executive Officer and Director
Willis C. Lee   Chief Operating Officer and Director
Lan T. Tran   Chief Administrative Officer and Corporate Secretary
Yasushi Nagasaki   Chief Financial Officer (1)
Henry A. McKinnell, Jr., Ph.D.,   Chairman of the Board
Amir Heshmatpour   Director
Alfred E. Osborne, Jr., Ph.D.   Director
Tracey C. Doi   Director
Maurice J. DeWald   Director

(1) Mr. Nagasaki resigned as the Company’s Chief Financial Officer effective April 2, 2012.

 

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The Company has agreed to (i) pay AFH Advisory, the former majority stockholder of the Company, $500,000 (the “Shell Cost”) to allow Emmaus Medical stockholders to acquire shares of common stock of the Company and become the majority owners in the aggregate of the Company and to achieve the desired post-merger capitalization of the Company and (ii) reimburse AFH Advisory for its advancement of expenses on behalf of the Company, including, without limitation, reasonable expenses of AFH Advisory incurred in connection with the Merger, a public offering and certain consulting services provided by AFH Advisory to the Company, including coordinating the Merger, assisting with a public offering and managing the interrelationship of legal and accounting activities (the “Transaction Costs”). As of December 31, 2011, AFH Advisory had advanced an aggregate of $288,893 in expenses on our behalf. As of December 31, 2011, AFH Advisory had advanced an aggregate of $288,893 in expenses on our behalf. During the year ended December 31, 2011, we paid AFH Advisory $288,893 in cash for the advanced expenses and $105,554 of the Shell Cost to AFH Advisory and currently owe AFH Advisory $394,446 for the balance of the Shell Cost. The Company does not anticipate that any further Transaction Costs will be advanced by AFH Advisory.

 

AFH Advisory may be paid any outstanding Shell Cost and Transaction Costs from the proceeds of this public offering or upon the consummation of any other financing. Alternatively, AFH Advisory may, in its discretion, convert such amount (or any portion thereof) into common stock at a conversion price equal to 75% of the per share price in this offering (the “Conversion Price”). Additionally, we have agreed to issue warrants to purchase shares of common stock to AFH Advisory upon the closing of this offering. Such warrants will have a term of 5 years from the date of issuance and will have an exercise price equal to the Conversion Price. The number of shares underlying the warrants will be calculated by dividing the aggregate of the Shell Cost and the total Transaction Costs by the Conversion Price.

 

Shares held by AFH Advisory and certain others will be decreased, at the rate of 1% of the post-offering outstanding common shares, for each $1 million or fraction thereof that the gross proceeds to the Company from this offering are less than $10 million. In the event of such reduction, AFH Advisory will reduce the number of those shares by an appropriate percentage. If this offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $5 million, the Company’s arrangement with AFH Advisory provides that the Company may terminate this offering at its sole and absolute discretion, and if the Company terminates the offering, all shares held by AFH Advisory and certain others will be canceled. We currently anticipate that the gross proceeds from this offering will exceed $10 million and, therefore, that no reduction or cancellation of shares owned by AFH Advisory or other stockholders will occur.

 

If our arrangement with AFH Advisory is terminated based on mutual agreement of the parties or based on a breach by the Company, AFH Advisory will receive its unreimbursed Transaction Costs incurred as of the date of termination. If the arrangement with AFH Advisory is terminated (i) by either party (without being cured within 30 days) based on identification of information in the course of its due diligence investigation that it deems unsatisfactory, or if the parties are unable to agree to a valuation within 45 days following completion of satisfactory due diligence by an investment bank, or (ii) by the Company if this offering cannot be consummated to provide for minimum gross  proceeds to the Company of at least $10 million or based on a breach by AFH Advisory that is not cured within 30 days, then AFH Advisory will receive reimbursement for 50% of Transaction Costs actually incurred to the date of such termination. If this offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $5 million, and the Company exercises its right to terminate this offering, then the Company will reimburse AFH Advisory an amount equal to 50% of the Shell Cost and 50% of the unreimbursed Transaction Costs incurred as of the date of termination, and AFH Advisory, in its discretion, has the option to be paid any outstanding amounts at the time of termination in cash or to convert such amounts (or any portion thereof) into common stock at a conversion price equal to 75% of the per share price of the shares of common stock sold in the Company’s most recently completed private offering of common stock. In the event of termination by the Company because this offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $10 million, and if the Company enters into any transaction or a sale of all or substantially all of its assets within 12 months of such termination, AFH Advisory will be entitled to (i) 5% of its holdings (including holdings of certain others) of any securities received by the Company or the Company’s stockholders upon consummation of any business combination or other similar transaction; or (ii) cash or any other consideration it would have received as if it had a 5% ownership interest in the Company immediately prior to the closing of any such transaction.

 

In the event that the Company’s pre-Merger stockholders, Mr. Heshmatpour and his relatives, assignees and affiliates (collectively, the “AFH Group”) collectively beneficially own less than ten percent (10%) of the issued and outstanding shares of our common stock upon the closing of this offering, we have agreed to issue such number of shares of our common stock to the AFH Group as is necessary to cause such group to collectively beneficially own 10% of our issued and outstanding shares of common stock immediately after the closing of this offering. In the event that the AFH Group collectively beneficially owns more than 10% of our issued and outstanding shares of common stock upon the closing of this offering, AFH Advisory and the Company will cause to be cancelled such number of shares of our common stock as is necessary to reduce the collective beneficial ownership of the AFH Group to 10% of our issued and outstanding common stock.

 

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The Company granted AFH Advisory exclusive rights to act as its advisor in connection with all financings and mergers and acquisitions until November 10, 2012 and the right to appoint two (2) board members to the Company’s board of directors upon the closing of the Merger. In addition, in the event of any merger, stock purchase, asset purchase or similar transaction occurring within one (1) year of the closing of this offering, AFH Advisory may receive a warrant to purchase shares in an amount necessary such that AFH Advisory’s total holdings shall increase to 10% of the outstanding fully diluted equity of the Company but only to the extent the Company issues securities in connection with such merger, stock purchase, asset purchase or similar transaction.

 

The transactions contemplated by the Merger Agreement, as amended, were intended to be a “tax-free” contribution and/or reorganization pursuant to the provisions of Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as amended.

 

Loans by Related Parties

 

On January 12, 2009, Shigeru Matsuda, a stockholder of the Company, loaned Emmaus Medical an aggregate of 20,000,000 Japanese Yen (US $221,895), which loan is evidenced by a promissory note. The loan bears interest at 6.5% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.05 per share. The note matures on January 11, 2014. No interest payments were made in 2011. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $221,895 and $48,761, respectively. Dr. Niihara and Daniel Kimbell, the former Chief Operating Officer of Emmaus Medical, are the primary guarantor and secondary guarantor on the note, respectively, such that in the event we are unable to pay the note, Dr. Niihara and Mr. Kimbell, in that order, shall make payments due to the lender.

 

Dr. Niihara, our Chief Executive Officer, made loans to Emmaus on January 12, 2009 and April 23, 2009 in the aggregate principal amounts of $350,000 and $80,000, respectively. We repaid the April 23, 2009 loan, which bore interest at 6.5% per annum and was due on demand by Dr. Niihara, in June 2011. The January 12, 2009 loan, which is due on demand by Dr. Niihara, accrues interest at 6.5% per annum with interest only payments due monthly. Dr. Niihara made a loan of $100,000 to the Company on June 21, 2011, which bears interest at 8% per annum. The loan is not convertible and is due on demand. As of March 20, 2012, the principal amount and accrued but unpaid interest outstanding on the January 12, 2009 note were $350,000 and $2,338, respectively. The Company repaid $70,000 of the principal amount of the June 21, 2011 note on August 29, 2011 and as of March 20, 2012, the principal amount and accrued but unpaid interest outstanding on such note were $30,000 and $187, respectively. During the years ended December 31, 2011 and 2010, we made interest payments of $22,750 and $22,750, respectively, on the January 12, 2009 note. During the years ended December 31, 2011 and 2010, we made interest payments of $2,311 and $5,200, respectively, on the April 23, 2009 note. During the year ended December 31, 2011, we made an interest payment of $2,293 on the June 21, 2011 note.

 

Hope International Hospice, Inc., of which Dr. Niihara is the Chief Executive Officer, made a $200,000 loan to Emmaus on January 12, 2011. The loan, which has a term of two years, bears interest at a rate of 8% per annum. Interest only payments are due quarterly. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $200,000 and $3,067, respectively. During the year ended December 31, 2011, the Company made interest payments of $12,000.

 

On January 12, 2011, Willis C. Lee made a two-year loan to Emmaus in the amount of $100,000. The loan bears interest at a rate of 8% per annum. Interest only payments are due quarterly. The loan was repaid in full in June 2011 together with outstanding interest of $3,156.

 

On June 29, 2011, Yasushi Nagasaki, an officer of the Company, made a one-year loan to the Company in the amount of $360,000. The loan bears interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. In connection with the issuance of the note, we issued Mr. Nagasaki a three-year warrant to purchase 25,000 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. No interest payments were made during the year ended December 31, 2011. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $360,000 and $21,200, respectively.

 

On July 7, 2011 and July 11, 2011, Yoko Hagiike, a stockholder of the Company, made loans to the Company in the aggregate principal amount of $300,000, which loans are evidenced by a promissory note. Each loan bore interest at 10% per annum and were due upon demand by the lender. The Company repaid each of the loans on September 7, 2011, together with $10,000 in interest and neither loan is currently outstanding.

 

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On September 7, 2011, Sumiko Fujisawa, a stockholder of the Company, made loan to the Company in the principal amount of $30,000, which loan is evidenced by a promissory note. The loan has a term of one year, however, the lender may demand repayment of the note at any time after the three month anniversary of the loan date. The loan bears interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. In connection with the issuance of the notes, we issued Ms. Fujisawa three-year warrants to purchase 2,083 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. No interest payments were made on the note during the year ended December 31, 2011. During As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $30,000 and $1,307, respectively.

 

On September 7, 2011, Hideki & Eiko Uehara, a stockholder of the Company, made a loan to the Company in the principal amount of $30,000, which loan is evidenced by a promissory note. The loan has a term of one year, however, the lender may demand repayment of the note at any time after the three month anniversary of the loan date. The loan bears interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. In connection with the issuance of the notes, we issued Hideki & Eiko Uehara three-year warrants to purchase 2,083 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. No interest payments were made on the note during the year ended December 31, 2011. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $30,000 and $1,307, respectively.

 

On September 29, 2011 and October 3, 2011, the Shitabata Family Trust, a stockholder of the Company, made loans to the Company in the principal amounts of $450,000 and $1,050,000, respectively, which loans are evidenced by promissory notes. The loans have a term of one year; however, the lender may demand repayment of the notes at any time after the three month anniversary of the respective loan dates. The loans bear interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. Dr. Niihara and Mr. Lee have provided a guarantee on each of the promissory notes. In connection with the issuance of the notes, we issued the Shitabata Family Trust three-year warrants to purchase an aggregate of 208,334 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. No interest payments were made on the note during the year ended December 31, 2011. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the September 2011 note were $450,000 and $17,400, respectively. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the October 2011 note were $1,050,000 and $39,667, respectively.

 

On October 5, 2011, Willis Lee, an officer of the Company, made a loan to the Company in the principal amount of $128,002, which loan is evidenced by a promissory note payable to MLPF&S Cust. FBO Willis C. Lee. The loan has a term of one year. The loan bears interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. In connection with the issuance of the note, we issued MLPF&S Cust. FBO Willis C. Lee three-year warrants to purchase 35,556 shares of our common stock at a per share exercise price equal to $1.00. No interest payments were made on the note during the year ended December 31, 2011. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note was $128,002 and $4,779, respectively.

 

On January 17, 2012, Hope International Hospice, Inc., of which Dr. Niihara is the Chief Executive Officer, made a loan to the Company in the principal amount of $200,000, which loan is evidenced by a promissory note. The lender may demand repayment of the note at any time. The loan bears interest at 8% per annum. In connection with the issuance of the notes, we issued to Hope International Hospice, Inc. three-year warrants to purchase 55,556 shares of our common stock at a per share exercise price equal to $1.00. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note was $200,000 and $2,844, respectively.

 

On February 10, 2012, Lan Tran, an officer of the Company, made a loan to the Company in the principal amount of $205,000, which loan is evidenced by a promissory note. The loan has a term of two years, however, the lender may demand repayment of the note at any time. The loan bears interest at 11% per annum. In connection with the issuance of the notes, we issued to Lan Tran three-year warrants to purchase 56,945 shares of our common stock at a per share exercise price equal to $1.00. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note was $205,000 and $2,506, respectively.

 

On February 10, 2012, Tracey Doi, a Director of the Company, made a loan to the Company in the principal amount of $108,000, which loan is evidenced by a promissory note payable to Tracey and Mark Doi. The loan has a term of one year. The loan bears interest at 8% per annum. The principal and any unpaid accrued interest is convertible into shares of our common stock at a conversion rate of $3.60 per share. In connection with the issuance of the note, we issued Tracey and Mark Doi three-year warrants to purchase 30,000 shares of our common stock at a per share exercise price equal to $1.00. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note was $108,000 and $960, respectively.

 

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On February 15, 2012, Hideki & Eiko Uehara, a stockholder of the Company, made a loan to the Company in the principal amount of $133,333, which loan is evidenced by a promissory note. The loan is due upon demand by the lender. The loan bears interest at 11% per annum. In connection with the issuance of the notes, we issued Hideki & Eiko Uehara three-year warrants to purchase an aggregate of 37,037 shares of our common stock at a per share exercise price equal to $1.00. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $133,333 and $1,426, respectively.

 

On February 15, 2012, Shigeru Matsuda, a stockholder of the Company, loaned the Company an aggregate of $833,335, which loan is evidenced by a promissory note. The loan is due upon demand by the lender. The loan bears interest at 11% per annum. In connection with the issuance of the note, the Company issued Mr. Matsuda three-year warrants to purchase an aggregate of 231,482 shares of our common stock at a per share exercise price of $1.00. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $833,335 and $8,912, respectively.

 

On February 15, 2012, Yukio Hasegawa, a stockholder of the Company, made a loan to the Company in the principal amount of $133,333 which is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The loan bears interest at 8% per annum. The principal amount plus the unpaid accrued interest due under the note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Mr. Hasegawa a three-year warrant to purchase 9,259 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of each of the notes shall be due and payable to the holder. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $133,333 and $1,426, respectively.

 

On February 16, 2012, Izumi Tanaka, a stockholder of the Company, loaned the Company an aggregate of $133,333, which loan is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the two-year anniversary date of the note, unless after the six month anniversary of the loan date the holder demands earlier payment of the note. The note bears interest at 11% per annum and the Company must make quarterly interest payments. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $133,333 and $1,386, respectively.

 

On February 18, 2012, Robert and Megumi Jo, a stockholder of the Company, made a loan to the Company in the principal amount of $100,000 which is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The loan bears interest at 8% per annum. The principal amount plus the unpaid accrued interest due under each of the promissory notes is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued Robert and Megumi Jo a three-year warrant to purchase 6,944 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $100,000 and $667, respectively.

 

On February 20, 2012, The Saito Family Trust, a stockholder of the Company, made a loan to the Company in the principal amount of $100,000, which is evidenced by a promissory note. The entire principal amount of the note and any outstanding accrued interest thereon is due on the one-year anniversary date of the note, unless after the three month anniversary of the loan date the holder demands earlier payment of the note. The loan bears interest at 8% per annum. The principal amount plus the unpaid accrued interest due under the note is convertible into shares of our common stock at $3.60 per share. In connection with the issuance of the note, we issued The Saito Family Trust three-year warrants to purchase 6,944 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. If we fail to make any payment due under the terms of the note, seek relief under the U.S. Bankruptcy Code or suffer an involuntary petition in bankruptcy or receivership that is not vacated within 30 days, the entire balance of the note shall be due and payable to the holder. As of March 20, 2012, the principal amount and accrued and unpaid interest outstanding on the note were $100,000 and $667, respectively.

 

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The above loans were made to provide us with needed working capital.

 

Guarantee by Officers

 

As discussed above, on January 12, 2009, Emmaus Medical entered into a convertible promissory note with Shigeru Matsuda for 20 million Japanese Yen, equivalent to $221,895. Dr. Niihara and Mr. Kimbell, the former Chief Operating Officer of Emmaus Medical, are the primary guarantor and secondary guarantor on the note, respectively, such that in the event we are unable to pay the note, Dr. Niihara and Mr. Kimbell, in that order, shall make payments due to the lender.

 

On each of September 29, 2011 and October 3, 2011, Emmaus Medical entered into a promissory note with the Shitabata Family Trust for $450,000 and $1,050,000, respectively. Dr. Niihara and Mr. Lee have provided a guarantee on the promissory notes entered into with the Shitabata Family Trust.

 

Policy for Approval of Related Party Transactions

 

We do not currently have a formal related party approval policy for review and approval of transactions required to be disclosed pursuant to Item 404(a) of Regulation S-K. We expect to adopt such a policy that will identify the types of transactions covered by such policy and the standards to be applied pursuant to such policy. We expect that the Nominating and Corporate Governance Committee will be responsible for applying such policy.

 

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BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, AND MANAGEMENT

 

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 the date of this prospectus 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 with respect to beneficial ownership of our common stock based on issued and outstanding shares of common stock before and after the offering, by:

 

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

 

·Each executive officer;

 

·Each director; and

 

·All of the executive officers and directors as a group.

 

The number of shares of our common stock outstanding as of the date of this prospectus, excludes up to shares of our common stock to be offered by us in this offering concurrently herewith, 72,795 shares of common stock underlying outstanding options, 2,895,044 shares of common stock underlying outstanding warrants and 1,467,623 shares of common stock underlying outstanding convertible notes (as of March 20, 2012). 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 address of each stockholder listed in the table is c/o Emmaus Life Sciences, Inc., 20725 S. Western Avenue, Ste. 136, Torrance, CA 90501-1884.

 

   

Beneficial Ownership 
Before the Offering

   

Beneficial Ownership 
After the Offering

Name and Address 
of Beneficial Owner

 

Title

 

Shares of
Common
Stock 

   

Percent of
Class(1)

   

Shares of
Common
Stock

 

Percent of
Class(2)

                         
Directors and Executive Officers                        
                         
Yutaka Niihara, M.D., MPH   President, Chief Executive Officer and Director   9,629,496 (3)   39.6 %        
                         
Peter Ludlum   Executive Vice President and Chief Financial Officer   -     -          
                         
Yasushi Nagasaki   Senior Vice President, Finance   130,889 (4)   *          
                         
Willis C. Lee   Chief Operating Officer and Director   249,353 (5)   1.0 %        
                         
Lan T. Tran   Chief Administrative Officer and Corporate Secretary   80,239 (6)   *          
                         
Henry A. McKinnell, Jr., Ph.D.   Chairman of the Board   11,795 (7)   *          
                         

Alfred E. Osborne, Jr., Ph.D.

c/o UCLA Anderson School of Management

110 Westwood Plaza, F405

Los Angeles, CA 90095

  Director   -     -          

 

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        Beneficial Ownership 
Before the Offering
 
    Beneficial Ownership 
After the Offering
 

Name and Address 
of Beneficial Owner

 

Title

 

Shares of
Common
Stock 

   

Percent of
Class(1)

   

Shares of
Common
Stock

 

Percent of
Class(2)

                         
Tracey C. Doi   Director   60,267 (8)   *          
                         
Maurice J. DeWald   Director   -     -          
                         

Amir Heshmatpour

9595 Wilshire Blvd, Suite 700

Beverly Hills, CA 90212

  Director   2,504,249 (9)   10.3 %        
                         
Officers and Directors as a Group (total of 10 persons)       12,666,288 (10)   51.3 %        
                         
5% or More Owners                        
                         

AFH Holding & Advisory, LLC (11)

9595 Wilshire Blvd, Suite 700

Beverly Hills, CA 90212

      2,170,000     8.9 %        
                         

Daniel R. and Yuka I. Kimbell

350 W. Colorado Blvd., Ste. 350

Pasadena, CA 91105

      2,434,028 (12)   9.9 %        

 

* Less than 1.0%.

 


 

(1)Based on 24,393,461 shares of common stock issued and outstanding as of the date of this prospectus.

 

(2) Based on shares of common stock, which consists of (i) 24,393,461 shares of common stock issued and outstanding as of the date of this prospectus, and (ii) shares of common stock issued in the public offering. This amount excludes (i) the shares of our common stock that we may issue upon the Underwriters’ over-allotment option exercise, (ii) 72,795 shares of common stock underlying outstanding options; (iii) 2,895,044 shares of common stock underlying outstanding warrants; (iv) 1,467,623 shares of common stock underlying outstanding convertible notes (as of March 20, 2012); (v) shares of common stock underlying warrants that will be issued to the Underwriters upon the completion of this offering; and (vi) shares of common stock underlying warrants that will be issued to AFH Advisory upon completion of this offering.

 

(3) Includes 9,629,496 shares that are held jointly by Yutaka and Soomi Niihara, his wife. 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 underlying warrants to purchase shares of common stock owned by Hope International Hospice, Inc. (“Hope Hospice”). Dr. Niihara is the chief executive officer of Hope Hospice and has voting and investment power over such shares.

 

(4) Includes 105,889 shares of common stock underlying outstanding convertible notes (as of March 20, 2011) and 25,000 shares underlying warrants to purchase shares of common stock.

 

(5) Includes 36,884 shares of common stock underlying outstanding convertible notes (as of March 20, 2011) and 35,556 shares underlying warrants to purchase shares of common stock owned by MLPF&S Cust. FBO Willis C. Lee.

 

(6) Includes 56,945 shares underlying warrants to purchase shares of common stock.

 

(7) Represents options to purchase 11,795 shares of common stock.

 

(8) Includes 30,267 shares of common stock underlying outstanding convertible notes (as of March 20, 2012) and 30,000 shares underlying warrants to purchase shares of common stock owned by Tracey and Mark Doi.

 

(9) Represents 2,170,000 shares of common stock owned by AFH Advisory, 131,999 shares of common stock owned by Griffin Ventures LTD (“Griffin”) and 202,250 shares of common stock owned by the Amir Heshmatpour & Kathy Heshmatpour Family Foundation (the “Foundation”). Mr. Heshmatpour is the sole member of AFH Advisory and the control person of Griffin and has sole voting and investment control over the shares of common stock owned of record by AFH Advisory and Griffin. Mr. Heshmatpour is a trustee of the Foundation and has shared voting and investment control over the shares of common stock owned by the Foundation. Accordingly, he may be deemed a beneficial owner of the 2,170,000 shares of common stock owned by AFH Advisory, the 131,999 shares of common stock owned by Griffin and the 202,250 shares owned by the Foundation.
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(10) Includes options to purchase 11,795 shares of common stock, warrants to purchase 203,057 shares of common stock and 173,040 (as of March 20, 2012) shares of common stock underlying outstanding convertible notes.

 

(11) Mr. Heshmatpour is the managing partner of AFH Advisory and may be deemed to have voting and dispositive controls with respect to these shares. Mr. Heshmatpour disclaims beneficial ownership of any shares in which he does not have a pecuniary interest.

 

(12) 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.

 

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DESCRIPTION OF CAPITAL STOCK

 

Common Stock

 

We are authorized to issue 100,000,000 shares of common stock, $0.001 par value per share. Prior to the Merger, the stockholders of the Company held an aggregate of 5,577,750 shares, 1,827,750 of which were cancelled in conjunction with the closing of the Merger. There are currently 24,393,461 shares of common stock issued and outstanding. Each outstanding share of common stock is entitled to one vote, either in person or by proxy, on all matters that may be voted upon by their holders at meetings of the stockholders.

 

Holders of our common stock:

 

·have equal ratable rights to dividends from funds legally available therefore, if declared by our board of directors;

 

·are entitled to share ratably in all of the Company’s assets available for distribution to holders of common stock upon our liquidation, dissolution or winding up;

 

·do not have preemptive, subscription or conversion rights or redemption or sinking fund provisions; and

 

·are entitled to one non-cumulative vote per share on all matters on which stockholders may vote at all meetings of our stockholders.

 

The holders of shares of our common stock do not have cumulative voting rights, which means that the holders of more than fifty percent (50%) of outstanding shares voting for the election of directors can elect all of our directors if they so choose and, in such event, the holders of the remaining shares will not be able to elect any of our directors.

 

Our officers and directors collectively own 51.3% of the outstanding shares of our common stock. Accordingly, these stockholders are in a position to control all of our affairs.

 

On February 28, 2012, our board of directors and stockholders holding a majority of the voting power of our outstanding shares of common stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all outstanding shares of our common stock at an exchange ratio of up to one-for-three (1:3) (the “Reverse Stock Split”), with our board of directors maintaining the discretion of whether or not to implement the Reverse Stock Split and which exchange ratio to implement prior to the closing of the offering contemplated herein. Our board of directors has not determined whether to effect the Reverse Stock Split or which exchange ratio to implement. If our board of directors elects to effect the Reverse Stock Split, it will set the ratio for the Reverse Stock Split as it determines is advisable after consulting with the underwriters and advisors and considering relevant market conditions at the time of the closing. The board of directors will effect the Reverse Stock Split, if at all, by filing the amendment with the Delaware Secretary of State. The par value and number of authorized shares of our common stock will remain unchanged

 

Preferred Stock

 

We may issue up to 20,000,000 shares of our preferred stock, par value $0.001 per share, from time to time in one or more series. No shares of Preferred Stock have been issued.

 

Our board of directors, without further approval of our stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series. Issuances of shares of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our common stock and prior series of preferred stock then outstanding.

 

Warrants

 

Upon consummation of the Merger, each outstanding Emmaus Medical warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for a warrant exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical warrants received warrants to purchase an aggregate of 302,918 of our shares at an exercise price of $3.05 per share. In the second quarter of 2011, we issued 3,362 shares of common stock upon the exercise of warrants by two warrantholders who received warrants as a result of the Merger. The remaining outstanding warrants issued in connection with the Merger are currently exercisable and expire on the earlier of (1) the date of the closing of this offering (the “Public Offering Termination”) or (2) five years from their respective dates of issuance. If this offering is not consummated, the warrants expire on various dates from June 15, 2014 through November 21, 2015.

 

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From June 2011 through March 2012, we issued various three-year warrants to purchase an aggregate of 374,492 shares of our common stock at a per share exercise price equal to 75% of the per share fair market value of our common stock on the date prior to exercise. Of the 374,492 warrants, 25,000 expire in June 2014, 64,475 expire in July 2014, 22,195 expire in August 2014, 74,166 expire in September 2014, 145,833 expire in October 2014, 32,406 expire in February 2015 and 10,417 expire in March 2015.

 

On August 31, 2011, we issued a warrant to purchase 275,482 shares of our common stock at an exercise price of $1.00 per share to a consultant, which warrant was amended on January 9, 2012. The warrant, as amended, is generally exercisable for three years from the issuance date, however, will terminate if FINRA deems the Underwriters’ compensation for this offering to be unreasonable. The warrantholder may not exercise the warrant to the extent that such exercise would cause the holder and its affiliates to be a beneficial owner of more than 9.99% of the Company’s outstanding shares of common stock.

 

From October 2011 to February 2012, we issued various three-year warrants to purchase an aggregate of 446,576 shares of our common stock at an exercise price of $1.00. Of the 446,576 warrants, 35,556 expire in October 2014, 55,556 expire in January 2015 and 355,464 expire in February 2015.

 

On February 29, 2012, we issued warrants to purchase 1,000,000 and 500,000 to Henry McKinnell and Alfred Osborne, respectively, with an exercise price of $1.00 per share. Each warrantholder may purchase one-half of the shares underlying his respective warrant in 2013 only and the other half of the shares underlying his warrant in 2014 only.

 

We currently have warrants to purchase an aggregate of 2,895,044 shares of common stock issued and outstanding, 298,494 of which will terminate upon the closing of this offering unless exercised prior to termination

 

We have agreed to issue warrants to purchase shares of our common stock to AFH Advisory upon the closing of this offering. Such warrants will have a term of five years from the date of issuance and will have an exercise price equal to 75% of the per share public offering price (the “Exercise Price”). The number of shares underlying the warrants will be calculated by dividing $788,893 by the Exercise Price.

 

In addition, we plan to issue a warrant to the Underwriters as partial compensation for underwriting services in connection with this offering. The Underwriters will be able to purchase up to shares of common stock at an exercise price equal to $   , which 125% per share public offering price of this offering. The warrants will have a term of five years. The warrants will be subject to standard anti-dilution adjustments for stock splits and similar transactions, and will become exercisable one year after the closing date of this offering and expire five years from the closing date of this offering.

 

None of the warrants issued to the Underwriters will be exercisable unless at the time of exercise the common stock issuable upon the exercise of the warrants is covered by an effective registration statement filed with the SEC under the Securities Act and such securities are qualified for sale or exempt from qualification under applicable securities laws of the states or other jurisdictions in which the registered holders of the warrants reside.

 

Under the terms of the warrants issued to the Underwriters, we have agreed that prior to the date on which the warrants becomes exercisable, we will file with the SEC a post-effective amendment to the registration statement of which this prospectus is a part, or a new registration statement, for the registration under the Securities Act of, and that we shall take such action as is necessary to qualify for sale, in those states in which the warrants were initially offered by the Company, the shares of common stock issuable upon exercise of the warrants and any shares of common stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of any of the shares of common stock issued upon exercise of the warrants. In either case, we agreed to use our commercially reasonable efforts to cause the same to become effective on or prior to the date on which the warrants first become exercisable and to maintain the effectiveness of such registration statement until the expiration of the warrants pursuant to their terms.

 

In no event will the holders of the warrants issued to the Underwriters be entitled to receive a net-cash settlement or other consideration in lieu of physical settlement in shares of common stock if the shares issuable upon exercise of the warrants are not covered by an effective registration statement filed with the SEC under the Securities Act. Accordingly, the warrants may expire unexercised and worthless if a current registration statement covering the shares of common stock issuable upon exercise of the warrants is not effective.

 

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Options

 

Upon consummation of the Merger, each outstanding Emmaus Medical option, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option exercisable for 29.48548924976 shares of Company common stock. As a result of the Merger, holders of Emmaus Medical options received options to purchase an aggregate of 23,590 of our shares at an exercise price of $3.05 per share. Of these options, 11,795 are currently issued and outstanding. On November 11, 2011, we issued 11,794 shares of common stock upon the exercise of options issued in connection with the Merger.

 

On December 19, 2011, we issued options to purchase an aggregate of 61,000 shares of our common stock to our directors at an exercise price of $3.60 per share. Such options vest on December 19, 2012 and expire on the tenth anniversary of the grant date.

 

On April 2, 2012, we issued options to purchase an aggregate of 1,490,000 shares of our common stock to various of our directors, officers, employees and consultants at an exercise price of $3.60 per share. Such options expire on the tenth anniversary of the grant date and vest in equal installments (or as close to equal installments as possible) over a three year period, with the first one-third of such options to vest on the one-year anniversary of the grant date.

 

Convertible Notes

 

Upon consummation of the Merger, each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical convertible notes received convertible notes exercisable for 271,305 shares of common stock. The convertible notes issued in connection with the Merger are convertible at any time at the option of the holder into shares of our common stock at $3.05 per share until their maturity date. In June 2011, we issued a convertible note in the principal amount of $360,000, which principal amount and any accrued interest is convertible at the option of the holder until the maturity date in June 2012, into common stock of the Company at a conversion price of $3.60 per share. In July 2011, we issued convertible notes in the aggregate principal amount of $928,440, which principal amount and any accrued interest is convertible at the option of the holder until the maturity date in July 2012, into common stock of the Company at a conversion price of $3.60 per share. In August 2011, we issued convertible notes in the aggregate principal amount of $319,600, which principal amount and any accrued interest on the notes is convertible at the option of the holders until the maturity dates in August 2012, into common stock of the Company at a conversion price of $3.60 per share. In September 2011, we issued convertible notes in the aggregate principal amount of $618,000, which principal amount and any accrued interest is convertible at the option of the holders until the maturity dates in September 2012, into common stock of the Company at a conversion price of $3.60 per share. In October 2011, we issued convertible notes in the aggregate principal amount of $1,178,002, which principal amount and any accrued interest is convertible at the option of the holders until the maturity dates in October 2012, into common stock of the Company at a conversion price of $3.60 per share. As of March 20, 2012, we have outstanding notes convertible into 1,467,623 shares of our common stock. Of the convertible notes outstanding, notes convertible into 105,888 shares mature in June 2012, notes convertible into 272,396 shares mature in July 2012, notes convertible into 92,867 shares mature in August 2012, notes convertible into 178,518 shares mature in September 2012, notes convertible into 339,568 shares mature in October 2012, notes convertible into 160,798 shares mature in February 2013, notes convertible into 41,843 shares mature in March 2013, notes convertible into 87,688 shares mature in January 2014, notes convertible into 23,592 shares mature in August 2015, notes convertible into 656 shares mature in November 2015, and notes convertible into 163,809 shares mature in March 2016.

 

Market Price of Our Common Stock

 

The shares of our common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied for the listing of our common stock on the NASDAQ Global Market under the symbol “EMMA.” In order to comply with the corporate governance standards of NASDAQ Global Market, we have added independent directors to our board of directors and formed an audit committee, compensation committee and nominating committee comprised of independent directors. The Company believes that it will meet all initial listing standards of the NASDAQ Global Market upon completion of this offering.

 

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If and when our common stock is listed or quoted for trading, the price of our common stock will likely fluctuate in the future. The stock market in general has experienced extreme stock price fluctuations in the past few years. In some cases, these fluctuations have been unrelated to the operating performance of the affected companies. Many companies have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside our control, could cause the price of our common stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our common stock:

 

·our financial position and results of operations;

 

·our ability to obtain additional financing and, if available, the terms and conditions of the financing;

 

·the ability of our products to gain market acceptance;

 

·announcements of innovations or new products by us or our competitors;

 

·federal and state regulatory actions and the impact of such requirements on our business;

 

·the development of litigation against us;

 

·changes in estimates of our performance by any securities analysts;

 

·the issuance of new equity securities pursuant to a future offering or acquisition;

 

·competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·period-to-period fluctuations in our operating results;

 

·investor perceptions of us; and

 

·general economic and other national conditions.

 

Delaware Anti-Takeover Law and Charter Bylaws Provisions

 

We are subject to Section 203 of the Delaware General Corporation Law. This provision generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless:

 

·prior to such date, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

·upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

·on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual meeting or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

 

Section 203 defines a business combination to include:

 

·any merger or consolidation involving the corporation and the interested stockholder;

 

·any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

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·subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

·any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

 

·the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 

In general, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation, or an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of a corporation at any time within three years prior to the time of determination of interested stockholder status; and any entity or person affiliated with or controlling or controlled by such entity or person.

 

Our certificate of incorporation and bylaws contain provisions that 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. In particular, the certificate of incorporation and bylaws, as applicable, among other things:

 

·provide our board of directors with the ability to alter its bylaws without stockholder approval; and

 

·provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum.

 

Such provisions may have the effect of discouraging a third-party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.

 

However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.

 

Transfer Agent

 

The transfer agent and registrar for our common stock is Corporate Stock Transfer, Inc.

 

Listing

 

The shares of our common stock are not currently listed or quoted for trading on any national securities exchange or national quotation system. We have applied for the listing of our common stock on the NASDAQ Global Market under the symbol “EMMA.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices. Upon completion of this offering, we will have outstanding an aggregate of shares of common stock, assuming no exercise of the Underwriters’ over-allotment option. The shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our “affiliates,” as that term is defined in Rule 144 of the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.

 

All other outstanding shares not sold in this offering will be deemed “restricted securities” as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, which rules are summarized below. Our current stockholders will not be eligible to utilize Rule 144 until May 4, 2012, at the earliest, which is 12 months from the date we filed our Form 10 information, as required under Rule 144. Subject to the lock-up agreements described below and the provisions of Rule 144, additional shares will be available for sale in the public market as follows (excluding outstanding options to purchase 72,795 shares of our common stock, outstanding warrants to purchase 2,895,044 shares of common stock and convertible notes convertible into 1,467,623 shares of our common stock outstanding (as of March 20, 2012), up to           shares of common stock that may underlie warrants issued to AFH Advisory and up to           shares of common stock that may underlie the Underwriters’ warrants).

 

Approximate Number of
Shares Eligible for
Future Sale

 

Date

    After the date of this prospectus, these shares sold in this offering, excluding the additional shares that the Underwriters have a 45-day option to purchase from us, will be freely tradeable.
     
24,381,667  

Subject to the lock up agreement described below, on May 4, 2012, which is twelve months after the filing of a current report on Form 8-K reporting the closing of the Merger, these shares, which consist of 20,628,305 shares issued in connection with the Merger, 3,750,000 shares outstanding prior to the Merger, and 3,362 shares issued upon the exercise of warrants in May and June 2011 and may be sold under and subject to Rule 144.

 

Stockholders holding an aggregate of       of these shares have agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our common stock or other securities convertible into or exercisable or exchangeable for shares of our common stock for a period of six (6) months after the effective date of the registration statement of which this prospectus is a part without the prior written consent of Aegis Capital Corp.

     
11,794   On May 11, 2012, these shares, which consist of shares issued upon the exercise of options, may be sold under and subject to Rule 144.  This stockholder has agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our common stock or other securities convertible into or exercisable or exchangeable for shares of our common stock for a period of six (6) months after the effective date of the registration statement of which this prospectus is a part without the prior written consent of Aegis Capital Corp.

 

Rule 144

 

In general, under Rule 144 a person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner, except if the prior owner was one of our affiliates, would be entitled to sell all of their shares, provided the availability of current public information about our company.

 

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Sales under Rule 144 may also be subject to manner of sale provisions and notice requirements and to the availability of current public information about our company. Any substantial sale of common stock pursuant to any resale registration statement or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.

 

Because we were a shell company with no operations prior to the close of the Merger, sales of our shares must be compliant with Rule 144(i).  Pursuant to Rule 144(i), none of our shares of common stock may be sold under Rule 144 until May 4, 2012, which is 12 months after the filing of our current report on form 8-K filed on May 4, 2011 reporting the closing of the Merger. Additionally, stockholders may not sell our shares pursuant to Rule 144 unless at the time of the sale, we have filed all reports, other than reports on Form 8-K, required under the Exchange Act with the SEC for the preceding 12 months.

 

Lock-Up Agreements and Registration

 

We, our directors and executive officers and certain of our stockholders have entered into lock up agreements with Aegis Capital Corp., acting as the representative of the underwriters of the offering, prior to the commencement of this offering pursuant to which each of these persons or entities, for a period of six months from the effective date of this offering without the prior written consent of the representative, agree not to (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, owned or acquired on or prior to the closing date of this offering (including any shares of common stock acquired after the closing date of this offering upon the conversion, exercise or exchange of such securities), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock, or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any of the common stock. Notwithstanding these limitations, these common shares may be transferred by gift, will or intestate succession, or by judicial decree under certain limited circumstances.

 

The lock-up period described in the preceding paragraphs will be automatically extended if: (1) during the last 17 days of the restricted period, we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the earnings release.

 

We have been advised by Aegis Capital Corp. that it has no present intention and there are no agreements or understandings, explicit or tacit, relating to the early release of any locked-up shares. Aegis Capital Corp. may, however, consent to an early release from the lock-up period if, in its opinion, the market for the common stock would not be adversely impacted by sales provided, however, that we must announce any such release through a major news service and such release will only be effective two business days after the publication date of such press release. The release of any lock-up would be considered on a case-by-case basis. When determining whether or not to release shares from the lock-up agreements, Aegis Capital Corp. will consider, among other factors, the securityholder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time.

 

We granted “piggyback” registration rights to certain pre-Merger stockholders of the Company. All stockholders possessing such piggyback registration rights have waived such rights in connection with this offering. All of the shares included in an effective registration statement may be freely sold and transferred, subject to a lock-up agreement.

 

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UNDERWRITING

 

Aegis Capital Corp. is acting as the representative of the underwriters of the offering. We have entered into an underwriting agreement dated       , 2012 with the representative. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below and each underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name of Underwriter   Number of Shares
Aegis Capital Corp.      
Total       

 

The underwriters are committed to purchase all the shares of common stock offered by us other than those covered by the option to purchase additional shares described below, if it purchases any shares. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

The underwriters propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers that are members of the Financial Industry Regulatory Authority, or FINRA, at that price less a concession not in excess of $     per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $     per share from the public offering price. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters.

 

We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the underwriters may be required to make in respect thereof.

 

Discounts and Commissions. The following table shows the per share and total underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering.

 

    Per Share   Total Without
Over-Allotment
Option
  Total With
Over-Allotment
Option
Public offering price   $           
               
Underwriting discount (7%)   $           
               
Non-accountable expense allowance (1%)   $          
               
Proceeds, before expenses, to us   $          

 

We have paid a non-refundable expense deposit of $50,000 to the representative which will be applied against the non-accountable expenses that will be paid by us to the underwriters in connection with this offering

 

We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discount, will be approximately $   .

 

Overallotment Option

 

We have granted a 45-day option to the underwriters to purchase up to an additional shares of common stock sold on the date hereof, at the same price as the initial shares offered. If the underwriters fully exercise this option, the total public offering price (before expenses) and net proceeds to us will be approximately $   million and $   million, respectively, based on a public offering price of $   per share.

 

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Discretionary Accounts. The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.

 

Lock-Up Agreements

 

We, our directors and executive officers and certain of our stockholders have entered into lock up agreements with the representative prior to the commencement of this offering pursuant to which each of these persons or entities, for a period of six months from the effective date of this offering without the prior written consent of the representative, agree not to (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock owned or acquired on or prior to the closing date of this offering (including any shares of common stock acquired after the closing date of this offering upon the conversion, exercise or exchange of such securities), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock, or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any of the common stock. Notwithstanding these limitations, these common shares may be transferred by gift, will or intestate succession, or by judicial decree under certain limited circumstances.

 

The lock-up period described in the preceding paragraphs will be automatically extended if: (1) during the last 17 days of the restricted period, we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the earnings release.

 

Any of the securities subject to the lock-up agreement may be released in whole or part from the terms thereof only upon the approval of Aegis Capital Corp.; provided, however, that we must announce any such release through a major news service and such release will only be effective two business days after the publication date of such press release.

 

Representative's Warrants

 

We have agreed to issue to the representative warrants to purchase up to a total of 5% shares of common stock sold in this offering. The warrants are exercisable at per share price equal to 125% of the public offering price per share in this offering commencing on a date which is one year from the date of the closing of the offering under this prospectus and expiring on a date which is no more than five years from the effectiveness date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(i). The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The representative (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these options, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the date of this prospectus. In addition, the warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(iv). The piggyback registration right provided will not be greater than seven years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

 

Electronic Offer, Sale and Distribution of Shares

 

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute the prospectus electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.

 

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Stabilization

 

In connection with this offering, the underwriters may engage in stabilizing transactions, which involve making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts or may be “naked” shorts. The underwriters may close out any covered short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

 

The underwriters have advised us that, pursuant to Regulation M promulgated under the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if a representative of an underwriter purchases common stock in the open market in stabilizing transactions or to cover short sales, the underwriter can require the representative that sold those shares as part of this offering to repay the underwriting discount received by such representative.

 

These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NASDAQ Global Market, in the over-the-counter market or otherwise.

 

In determining the public offering price, we and the underwriters expect to consider a number of factors including:

 

·the information set forth in this prospectus and otherwise available to the underwriters;
·our prospects and the history and prospects for the industry in which we compete;
·an assessment of our management;
·our prospects for future earnings;
·the general condition of the securities markets at the time of this offering;
·the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
·other factors deemed relevant by the underwriters and us.

 

Neither we, nor the underwriters can assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market at or above the public offering price.

 

Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

Other Terms

 

In connection with this offering, the underwriters and certain of the securities dealers may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering.

 

Certain of the underwriters and their affiliates have provided, and may in the future provide, various investment banking, commercial banking and other financial services for us and our affiliates for which they have received, and may in the future receive, customary fees, however, except as disclosed in this prospectus, we have no present arrangements with any of the underwriters for any further services.

 

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From time to time, the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

 

We have also agreed to pay the underwriter expenses relating to the offering, including (a) all fees, expenses and disbursements relating to background checks of our officers and directors in an amount not to exceed $5,000 per individual and $15,000 in the aggregate; (b) up to $15,000 for the underwriters’ expenses (including fees of counsel) incurred in clearing this offering with FINRA, (c) up to $15,000 for the underwriters’ expenses (including fees of counsel) incurred relating to registration or qualification of the shares under the “blue sky” securities laws, (d) up to $20,000 of accountable “road show” expenses and (e) up to $20,000 for the underwriters use of Ipreo’s book-building, prospectus tracking and compliance software for this offering. We will pay an advance of $50,000 to the underwriter, which will be applied against the non-accountable expense allowance (including an advance for the fees and expenses of the underwriter’s counsel.) The total of any advanced payments will be refundable to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).

 

Offer restrictions outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

Australia

 

This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.

 

China

 

The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People's Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to "qualified domestic institutional investors."

 

European Economic Area—Belgium, Germany, Luxembourg and Netherlands

 

The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC ("Prospectus Directive"), as implemented in Member States of the European Economic Area (each, a "Relevant Member State"), from the requirement to produce a prospectus for offers of securities.

 

An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:

 

 (a) to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

 (b) to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);

 

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 (c) to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or

 

 (d) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

France

 

This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers ("AMF"). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.

 

This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.

 

Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d'investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.

 

Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.

 

Ireland

 

The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the "Prospectus Regulations"). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.

 

Israel

 

The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), or ISA, nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.

 

Italy

 

The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Societ—$$—Aga e la Borsa, "CONSOB" pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 ("Decree No. 58"), other than:

 

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·to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 ("Regulation no. 1197l") as amended ("Qualified Investors"); and

 

·in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended.

 

Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:

 

·made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and

 

·in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.

 

Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.

 

Japan

 

The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the "FIEL") pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.

 

Portugal

 

This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are "qualified investors" (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

 

Sweden

 

This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are "qualified investors" (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

 

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Switzerland

 

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange ("SIX") or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).

 

This document is personal to the recipient only and not for general circulation in Switzerland.

 

United Arab Emirates

 

Neither this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor has the Company received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the securities within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or redemption of such shares, may be rendered within the United Arab Emirates by the Company.

 

No offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre.

 

United Kingdom

 

Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended ("FSMA")) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to "qualified investors" (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.

 

Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.

  

In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 ("FPO"), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together "relevant persons"). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

 

95
 

 

LEGAL MATTERS

 

The validity of the common stock offered by this prospectus will be passed upon for us by K&L Gates LLP, Los Angeles, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Reed Smith LLP, New York, New York.

 

EXPERTS

 

The consolidated financial statements of Emmaus Life Sciences, Inc. as of December 31, 2011 and 2010 and for the years ended December 31, 2011 and 2010 and for the period of inception (December 20, 2000) through December 31, 2011 appearing in this prospectus and registration statement have been audited by EFP Rotenberg, LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

  

ADDITIONAL INFORMATION

 

We filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.

 

We file periodic reports under the Securities Exchange Act of 1934, including annual, quarterly and special reports, and other information with the Securities and Exchange Commission. These periodic reports and other information are available for inspection and copying at the regional offices, public reference facilities and website of the Securities and Exchange Commission referred to above.

 

We are in the process of establishing a corporate website and expect to have it complete in the near future. We intend to make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

  

96
 

 

INDEX TO FINANCIAL STATEMENTS

 

EMMAUS LIFE SCIENCES, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  PAGE
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010 F-3
   
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 AND FROM DECEMBER 20, 2000 (INCEPTION) TO DECEMBER 31, 2011 F-4
   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) From December 20, 2000 (inception) to December 31, 2011 F-5
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 and from December 20, 2000 (inception) to December 31, 2011 F-9
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 F-10

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Emmaus Life Sciences, Inc.

 

We have audited the accompanying consolidated balance sheets of Emmaus Life Sciences, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2011 and for the period since inception (December 20, 2000) through December 31, 2011. Emmaus Life Sciences, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emmaus Life Sciences, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 and for the period since inception (December 20, 2000) through December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

/s/ EFP Rotenberg, LLP

 

EFP Rotenberg, LLP

Rochester, New York

March 29, 2012

 

F-2
 

 

Emmaus Life Sciences, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Balance Sheets

 

    As of  
    December 31, 2011     December 31, 2010  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 313,684     $ 258,676  
Accounts receivable     17,996       21,746  
Inventories     195,114       130,573  
Marketable securities     -       1,674,386  
Prepaid expenses and other current assets     62,774       11,479  
Total current assets     589,568       2,096,860  
                 
PROPERTY AND EQUIPMENT, net     60,018       94,179  
                 
OTHER ASSETS                
Marketable securities, long-term     1,387,153       -  
Intangibles, net     -       134,880  
Notes receivable     18,000       18,000  
Deposits     427,572       348,408  
Total other assets     1,832,725       501,288  
Total Assets   $ 2,482,311     $ 2,692,327  
                 
LIABILITIES AND StockHOLDERS’ EQUITY (DEFICIT)                
CURRENT LIABILITIES                
Accounts payable and accrued expenses   $ 756,714     $ 190,107  
Due to related party     394,446       -  
Dissenting stockholders payable     200,000       -  
Notes payable     380,000       460,000  
Convertible notes payable, net     1,846,010       246,889  
Total current liabilities     3,577,170       896,996  
                 
LONG-TERM LIABILITIES                
Notes payable     1,041,728       -  
Convertible notes payable     838,492       184,030  
Total long-term liabilities     1,880,220       184,030  
Total Liabilities     5,457,390       1,081,026  
                 
STOCKHOLDERS’ EQUITY (DEFICIT)                
Preferred stock – par value $0.001 per share, 20,000,000 shares authorized, none issued and outstanding     -       -  
Common stock – par value $0.001 per share, 100,000,000 shares authorized, 24,393,461, (excluding 47,178 shares held by stockholders who exercised dissenters’ rights) and 20,365,053 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively.     24,394       20,365  
Additional paid-in capital     18,332,508       13,799,999  
Accumulated other comprehensive income     252,413       542,573  
Deficit accumulated during the development stage     (21,584,394 )     (12,751,636 )
Total Stockholders’ Equity (Deficit)     (2,975,079 )     1,611,301  
Total Liabilities & Stockholders’ Equity (Deficit)   $ 2,482,311     $ 2,692,327  

 

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

  

F-3
 

 

Emmaus Life Sciences, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Operations

 

    Year Ended December 31,     From
December 20, 2000 (date
of inception)
to December 31,
 
    2011     2010     2011  
                   
SALES   $ 339,156     $ 168,964       713,655  
SALES RETURN & ALLOWANCE     (2,182 )     (30,230 )     (32,539 )
REVENUES     336,974       138,734       681,116  
                         
COST OF GOODS SOLD                        
Cost of goods sold     132,104       99,373       358,138  
Scrapped inventory     -       235,537       235,537  
Total cost of goods sold     132,104       334,910       593,675  
GROSS PROFIT (LOSS)     204,870       (196,176 )     87,441  
                         
OPERATING EXPENSES                        
Research and development     1,552,205       1,062,031       6,451,857  
Selling     696,758       656,200       2,498,966  
General and administrative     5,047,886       1,817,728       10,660,626  
Transaction costs     788,893       -       788,893  
      8,085,742       3,535,959       20,400,342  
                         
LOSS FROM OPERATIONS     (7,880,872 )     (3,732,135 )     (20,312,901 )
                         
OTHER INCOME (EXPENSE)                        
Interest income     30,493       39,005       115,727  
Interest expense     (979,170 )     (59,936 )     (1,369,163 )
      (948,677 )     (20,931 )     (1,253,436 )
                         
LOSS BEFORE INCOME TAXES     (8,829,549 )     (3,753,066 )     (21,566,337 )
                         
INCOME TAXES     3,209       4,304       18,057  
                         
NET LOSS     (8,832,758 )     (3,757,370 )     (21,584,394 )
                         
OTHER INCOME (LOSS)                        
Unrealized holding gain (loss) on securities available-for-sale, net of tax     (287,233 )     542,573       255,340  
Unrealized foreign translation     (2,927 )     -       (2,927 )
COMPREHENSIVE LOSS   $ (9,122,918 )   $ (3,214,797 )   $ (21,331,981 )
NET LOSS PER COMMON SHARE   $ (0.38 )   $ (0.19 )        
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING     23,068,206       19,661,306          

 

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

 

F-4
 

 

Emmaus Life Sciences, inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to December 31, 2011

 

   Common stock – par value $0.001       Accumulated   Deficit     
   per share, 100,000,000 shares
authorized
   Additional
Paid-in
   Other
Comprehensive
   Accumulated
during
     
   Shares   Common stock   Capital   income   Development Stage   Total 
                         
Balance, December 31, 2000 (1) (2)   12,531,125   $12,531   $(2,931)   -   $-   $9,600 
                               
Net loss   -    -    -    -    (21,942)   (21,942)
                               
Balance, December 31, 2001   12,531,125    12,531    (2,931)   -    (21,942)   (12,342)
                               
Net loss   -    -    -    -    (12,464)   (12,464)
                               
Balance, December 31, 2002   12,531,125    12,531    (2,931)   -    (34,406)   (24,806)
                               
Constructive distribution of retained loss to Additional Paid-in Capital   -    -    (34,406)   -    34,406    - 
                               
Common stock issued   737,125    737    249,263    -    -    250,000 
                             - 
Net loss   -    -    -    -    (97,481)   (97,481)
                               
Balance, December 31, 2003   13,268,250    13,268    211,926    -    (97,481)   127,713 

  

(1) Reflects recapitalization of members’ equity into (425,000 pre-merger) 12,531,125 shares of common stock of Emmaus Medical, Inc.

 

(2) The stockholders’ equity has been recapitalized to give effect to the share exchanged by existing stockholders pursuant to the merger agreement dated April 21, 2011, more fully discussed in the Recapitalization and change in legal status of entity footnotes to these financial statements.

 

F-5
 

 

Emmaus Life Sciences, Inc.

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to December 31, 2011 (Continued)

 

               Deficit     
   Common stock – par value
$0.001 per share, 100,000,000
   Additional   Accumulated
Other
   Accumulated
during
     
   shares authorized   Paid-in   Comprehensive   Development     
   Shares   Common stock   Capital   income   Stage   Total 
                         
Balance, December 31, 2003   13,268,250   $13,268   $211,926   $-   $(97,481)  $127,713 
                               
Common stock issued   1,615,542    1,616    646,459    -    -    648,075 
                               
Net loss   -    -    -    -    (624,936)   (624,936)
                               
Balance, December 31, 2004   14,883,792    14,884    858,385    -    (722,417)   150,852 
                               
Common stock issued   398,549    399    327,886    -    -    328,285 
                               
Net loss   -    -    -    -    (668,091)   (668,091)
                               
Balance, December 31, 2005   15,282,341    15,283    1,186,271    -    (1,390,508)   (188,954)
                               
Common stock issued   523,388    523    824,517    -    -    825,040 
                               
Net loss   -    -    -    -    (759,962)   (759,962)
                               
Balance, December 31, 2006   15,805,729    15,806    2,010,788    -    (2,150,470)   (123,876)
                               
Common stock issued   1,344,162    1,344    2,732,516    -    -    2,733,860 
                               
Net loss   -    -    -    -    (1,282,212)   (1,282,212)
                               
Balance, December 31, 2007   17,149,891    17,150    4,743,304    -    (3,432,682)   1,327,772 

 

F-6
 

 

Emmaus Life Sciences, Inc

(A Development Stage Company)

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

for the period from December 20, 2000 (Inception) to December 31, 2011 (Continued)

 

    Common stock – par value $0.001
per share, 100,000,000 shares
    Additional     Accumulated
Other
    Deficit
Accumulated
       
    authorized     Paid-in     Comprehensive     during        
    Shares     Common stock     Capital     income     Development  Stage     Total  
                                     
Balance, December 31, 2007     17,149,891     $ 17,150     $ 4,743,304     $ -     $ (3,432,682 )   $ 1,327,772  
                                                 
Common stock issued     1,226,959       1,227       3,389,464       -       -       3,390,691  
                                                 
Net loss     -       -       -       -       (2,993,777 )     (2,993,777 )
                                                 
Balance, December 31, 2008     18,376,850       18,377       8,132,768       -       (6,426,459 )     1,724,686  
                                                 
Warrants issued     -       -       160,000       -       -       160,000  
                                                 
Common stock issued, net of issuance cost of $160,000     854,446       854       2,078,071       -       -       2,078,925  
Net loss     -       -       -       -       (2,567,807 )     (2,567,807 )
Balance, December 31, 2009     19,231,296       19,231       10,370,839       -       (8,994,266 )     1,395,804  
                                                 
Warrants issued     -       -       480,000       -       -       480,000  
Common stock issued, net of issuance cost of $480,000     705,900       706       1,643,588       -       -       1,644,294  
Conversion of notes payable to common stock     427,857       428       1,305,572       -       -       1,306,000  
Unrealized gain on securities available for sale     -       -       -       542,573       -       542,573  
                                                 
Net loss     -       -       -       -       (3,757,370 )     (3,757,370 )
                                                 
Balance, December 31, 2010     20,365,053       20,365       13,799,999       542,573       (12,751,636 )     1,611,301  

 

F-7
 

 

EMMAUS LIFE SCIENCES, INC. and subsidiaries 

(A Development Stage Company) 

Consolidated Statement of Changes in Stockholders’ Equity (Deficit) 

for the period from December 20, 2000 (Inception) to December 31, 2011

  

    Common stock – par value $0.001
per share, 100,000,000 shares  
    Additional     Accumulated
Other
    Deficit
Accumulated
       
    authorized     Paid-in     Comprehensive     during        
    Shares     Common stock     Capital     income     Development Stage     Total  
                                     
Balance, December 31, 2010     20,365,053     $ 20,365     $ 13,799,999     $ 542,573     $ (12,751,636 )   $ 1,611,301  
                                                 
Common stock issued, net of issuance cost     272,147       272       1,153,402       -       -       1,153,674  
Conversion of notes payable to common stock     36,514       37       109,993       -       -       110,030  
Shares issued to existing shell stockholders in the reorganization     3,750,000       3,750       (3,750 )                     -  
Shares issued for stock option exercised     11,794       12       35,960                       35,972  
Proceeds from exercise of warrants     4,718       5       14,395                       14,400  
Stock options vested     -       -       35,196       -       -       35,196  
Cashless exercise of warrants     413       -       -       -       -       -  
Common stock repurchased and cancelled from dissenting stockholders     (47,178 )     (47 )     (199,953 )     -       -       (200,000 )
Warrants issued as a payment of consulting fee                     1,053,150                       1,053,150  
Warrants issued in conjunction with convertible note (367,226)                     864,773                       864,773  
Impact of beneficial conversion feature                     1,469,343                       1,469,343  
Unrealized gain on securities     -       -       -       (287,233 )     -       (287,233 )
Foreign currency translation effect     -       -       -       (2,927 )     -       (2,927 )
Net loss     -       -       -       -       (8,832,758 )     (8,832,758 )
                                                 
Balance, December 31, 2011     24,393,461     $ 24,394     $ 18,332,508     $ 252,413     $ (21,584,394 )   $ (2,975,079 )

 

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

 

F-8
 

 

Emmaus Life Sciences, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Cash Flows

  

    Year ended December 31,     From December 20,
2000 (date of inception)
to December 31,
 
    2011     2010     2011  
CASH FLOWS FROM OPERATING ACTIVITIES                        
Net loss   $ (8,832,758 )   $ (3,757,370 )   $ (21,584,394 )
Adjustments to reconcile net loss to net cash flows from operating activities                        
Depreciation and amortization     170,271       280,032       877,019  
Cost of scrapped inventory written off     -       235,537       235,537  
Fair value of warrants issued for services     1,053,150       -       1,053,150  
Interest expense accrued from discount of convertible note     776,084       -       776,084  
Share-based compensation     35,196       -       35,196  
Net changes in operating assets and liabilities, net of  acquisition                        
Accounts receivable     3,750       (9,833 )     (24,102 )
Inventory     (64,541 )     (134,203 )     (426,641 )
Prepaid expenses and other current assets     (51,295 )     1,503       (80,774 )
Deposits     (79,164 )     (296,907 )     (376,936 )
Accounts payable and accrued expenses     566,607       (34,265 )     696,576  
Due to related party     394,446       -       394,446  
Net cash flows used in operating activities     (6,028,254 )     (3,715,506 )     (18,424,839 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES                        
Payment towards license     -       -       (750,000 )
Purchases of marketable securities     -       -       (1,131,813 )
Purchases of property and equipment     (1,171 )     (5,720 )     (186,978 )
Net cash flows used in investing activities     (1,171 )     (5,720 )     (2,068,791 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES                        
Borrowings from line of credit     -       -       299,500  
Repayment of line of credit     -       -       (299,500 )
Proceeds from notes payable issued     1,841,728       -       2,584,191  
Payments of notes payable     (880,000 )     (35,576 )     (915,576 )
Proceeds from convertible notes payable issued     3,921,645       1,490,030       5,411,675  
Proceeds from issuance of common stock     1,204,046       2,124,294       13,718,410  
Net cash flows from financing activities     6,087,419       3,578,748       20,798,700  
Effect of exchange rate changes on cash     (2,986 )             (2,986 )
                         
Net change in cash and cash equivalents     55,008       (142,478 )     302,084  
                         
Cash and cash equivalents, beginning of period     258,676       389,554       -  
Cash acquired     -       11,600       11,600  
Cash and cash equivalents, end of period   $ 313,684     $ 258,676     $ 313,684  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES                        
Interest paid   $ 63,284     $ 59,936     $ 453,277  
Income taxes paid   $ 3,209     $ 4,304     $ 18,057  
Non-cash financing activities:                        
Conversion of notes payable to common stock   $ 110,030     $ 1,306,000     $ 1,416,030  

 

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

 

F-9
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Organization – Emmaus Life Sciences, Inc. (the “Company” or “Emmaus”), which is engaged in the discovery, development, and commercialization of treatments and therapies for rare diseases, was incorporated in the state of Delaware on September 24, 2007. Pursuant to an Agreement and Plan of Merger, dated April 21, 2011 (the “Merger Agreement”), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“AFH Merger Sub”), AFH Holding and Advisory, LLC, and Emmaus Medical, Inc. (“Emmaus Medical”), Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”). Upon the closing of the Merger, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” and became the parent company of Emmaus Medical. The Company changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

 

Emmaus Medical is a Delaware corporation originally incorporated on September 12, 2003. Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC conducted a reorganization and merged with Emmaus Medical. As a result of the merger, Emmaus Medical acquired the exclusive patent rights for a treatment for sickle cell disease.

 

In October 2010, the Company established Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”) by paying 97.33% of the initial capital. EM Japan is engaged in the business of trading in nutritional supplements and other medical products and drugs. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of formation. The aggregate formation cost was $52,500. Emmaus Medical acquired the additional 3% of the outstanding shares of EM Japan during the three months ended March 31, 2011 and is the 100% owner of the outstanding share capital.

 

Emmaus, its wholly-owned subsidiary, Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation and EM Japan, are collectively referred to herein as the “Company.”

 

Nature of BusinessThe Company has undertaken the business of developing and commercializing cost-effective treatments and therapies for rare diseases. The Company’s primary business purpose is to continue its late-stage development of the amino acid L-glutamine as a prescription drug for the treatment of sickle cell disease (“SCD”). The Company’s current focus is to complete the Phase 3 clinical trial on SCD that involves over 20 research sites and 200 patients. The Company is also engaged in the marketing and sale of NutreStore® [L-glutamine powder for oral solution], which has received FDA approval, as a treatment for SBS in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. Over time, the Company plans to expand its mission to include developing and marketing products for more common diseases.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

Going concern – The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has losses for the year ended December 31, 2011 totaling $8,832,758 as well as accumulated deficit since inception amounting to $21,584,394. Further the Company appears to have inadequate cash and cash equivalents of $313,684 as of December 31, 2011 considering that revenues from operations since inception totaled only $713,655. As a result, the Company is dependent upon funds from private investors and the support of certain stockholders.

 

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.

 

Recapitalization and change in legal status of entity – In October 2003, Emmaus Medical acquired substantially all of the assets of Emmaus Medical, LLC. The stockholders of Emmaus Medical were substantially the same as the members of Emmaus Medical, LLC. As such, the transaction was accounted for as a transfer of assets between entities under common control pursuant to accounting standards codification 805, Business Combinations.

 

F-10
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set of assets is separated from the transferor, which include the ability to sustain a revenue stream by providing its outputs to customers. Emmaus Medical obtained the inputs and processes necessary for normal operations. The transaction has been accounted for as a recapitalization of Emmaus Medical, LLC. Accordingly, the assets were carried over to Emmaus Medical, Inc. at the historical carrying values and the historical operations of those assets owned by Emmaus Medical are presented in the accompanying financial statements as the historical operations of Emmaus Medical, Inc. for all periods presented.

 

The effect of the recapitalization was to retroactively present the stockholders’ equity of Emmaus Medical, Inc. (the surviving entity) to the earliest period presented in the financial statements. This recapitalization had no effect on results of operations for any period presented. Also, concurrent with the recapitalization, Emmaus Medical changed its legal status from a Limited Liability Company to a “C” Corporation. In connection with this change, deficits accumulated in the Limited Liability Company were transferred to additional paid in capital.

 

Pursuant to the Merger Agreement, Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”).

 

Upon the closing of the Merger on May 3, 2011, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” The Company subsequently changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

 

Upon consummation of the Merger, (i) each outstanding share of Emmaus Medical common stock was exchanged for 29.48548924976 shares of Company common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of Company common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was converted for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of Company common stock.

 

As a result of the Merger, security holders of Emmaus Medical received 20,628,305 shares of Company common stock, options and warrants to purchase an aggregate of 326,507 shares of Company common stock, and convertible notes to purchase an aggregate of 271,305 shares of Company common stock.

 

Four stockholders exercised their dissenters’ rights in connection with the Merger and returned an aggregate of 47,178 shares for an aggregate of $200,000. The shares were cancelled as of May 3, 2011, the closing date of the Merger.

 

For accounting purposes, the Merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of Emmaus Medical and its subsidiaries, with Emmaus Life Sciences, Inc. (the legal acquirer of Emmaus Medical and its subsidiaries) considered the accounting acquiree and Emmaus Medical whose management took control of Emmaus Life Sciences, Inc. (the legal acquiree of Emmaus Medical) considered the accounting acquirer.

 

Principles of consolidation – The financial statements include the accounts of the Company (and its wholly-owned subsidiary, Emmaus Medical, Inc., and its wholly-owned subsidiaries, Newfield Nutrition Corporation, Emmaus Medical Japan, Inc (“EM Japan”) and Emmaus Medical Europe Ltd. All significant intercompany transactions have been eliminated.

 

Development stage company – The Company is a development stage company as defined in accounting principles generally accepted in the United States of America. The Company is considered a development stage company because it devotes substantially all of its time to research and development for potential pharmaceutical products and to establish its business and operations. The minimal sales for the period from inception to December 31, 2011 are from NutreStore and the products of its wholly owned subsidiary Newfield Nutrition Corporation which is not considered to be a part of its principal operations.

 

Use of estimates – Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the useful lives of equipment and other assets, along with the variables used to calculate the valuation of stock options and warrants using the Black-Scholes-Merton option valuation model. Actual results could differ from those estimates.

 

F-11
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

Cash and cash equivalents – Cash and cash equivalents include all short-term securities with original maturities of less than ninety days. The Company maintains its cash and cash equivalents at insured financial institutions, the balances of which may, at times, exceed federally insured limits. Management believes that the risk of loss due to the concentrations is minimal.

 

Inventories – Inventories as of December 31, 2011 consisted of 99% finished goods and 1% work-in-process and are valued based on first-in, first-out and at the lesser of cost or market value. Work-in-process inventories consist of raw material L-Glutamine for the Company’s AminoPure and NutreStore products that has not yet been packaged and labeled for sale.

 

All of the purchases during the years ended December 31, 2011 and 2010 were from two vendors. Purchases from the two vendors amounted to 90% and 10% and 36% and 64% of total purchases during the years ended December 31, 2011 and 2010, respectively.

 

Deposits – Carrying value of amounts transferred to third parties for security purposes that are expected to be returned or applied towards payment after one year or beyond the operating cycle, if longer. Deposit amounts consist primarily of the 20% patient site enrollment deposit paid to the Company’s contract research organization for the FDA Phase III clinical trial activities.

 

Revenue recognition – The Company recognizes revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”), as amended by Staff Accounting Bulletin No. 104, Revision of Topic 13 (“SAB 104”).

 

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.  

 

With prior written approval of the Company, product is returnable only by the Company’s direct customers for a returned goods credit, if the product meets any of the following criteria:

 

A.Product expiring within six (6) months of the expiration date printed on the package/container that is in the manufacturer’s original package/container and bears the original label.
B.Expired product that is in the manufacturer’s original package/container and bears the manufacturer’s original label, provided, however, that expired product must be returned within 12 months of the expiration date printed on the package/container.
C.Product shipped directly by the Company that is damaged in transit, subject to Free on Board (“FOB”) Destination, or material shipped in error by the Company.
D.Product that is discontinued, withdrawn, or recalled.

 

Credits will only be issued for full cartons only without any missing packets of product.  No credit is issued, nor does the Company accept charges or deductions for administrative, handling, or freight charges associated with the return of product to the Company.  No credit is issued for product destroyed by anyone other than the Company.  Customers must return the product within 60 days of receiving the Company’s written approval for the return or the return will not be issued a credit.  The amount of the credit provided for returned product is based on the current wholesale acquisition cost of the returned product less 5%.  When product is returned, a credit memo is applied to the customer’s current account balance or applied to future purchases.   Credit memos expire one hundred eighty (180) days from date issued. 

 

The Company estimates its sales return based upon its prior sales and return history. Historically, sales returns have been very nominal. The extraordinary sales returns in the year ended December 31, 2010 were all related to the same batch of NutreStore product produced in 2008 that expired. The expiry date of the NutreStore product was two years after the date of manufacture but was changed by the Company and is currently four years after the date of manufacture.  All products sold in 2009 were part of the batch that had a two year expiry period and expired in 2010.  All products produced in 2010 and sold from 2010 through 2011 have an expiry date of 2014 and the Company anticipates that the product will be consumed before expiration and not returned. The Company continues to monitor its returns and will adjust its estimates based on its actual sales return experience. As of December 31, 2011, the Company recorded a 5% Sales Return Allowance for the NutreStore sales in the accompanying financial statements.

 

The Company is currently required to pay royalties to CATO Holding Company on an annual basis, which is recognized as an expense upon sale of the products.

 

F-12
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

Allowance for doubtful accounts – The Company provides an allowance for uncollectible accounts based upon prior experience and management’s assessment of the collectability of existing specific accounts.

 

Advertising cost – Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2011 and 2010 were $104,168 and $52,371, respectively. Advertising costs from inception to December 31, 2011 were approximately $244,168.

 

Property and equipment – Leaseholds, furniture, and fixtures are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of 5 to 7 years. Maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized. Gains and losses on disposition are included in current operations.

 

Intangibles – The Company’s intangible assets include license issue fees and patent costs relating to a license agreement (Note 4). These intangible assets are amortized over a period of 3 years, the estimated legal life of the patents and economic life of the License Agreement. The intangible assets are assessed by management, annually, for potential impairment. No impairment exists as of December 31.

 

Impairment of Long-Lived Assets – In accordance with FASB ASC 360-10-5, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist. The Company considers the following factors or conditions, among others, that could indicate the need for an impairment review:

 

significantly lower performance relative to expected historical or projected future operating results;
market projections;
its ability to obtain patents, including continuation patents, on technology;
significant changes in its strategic business objectives and utilization of the assets;
significant negative industry or economic trends, including legal factors;
potential for strategic partnerships for the development of its patented technology;
changing or implementation of rules regarding manufacture

 

If the Company determines that the carrying values of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company’s management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, the Company measures the impairment based on the difference between the asset’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the long-lived asset impairment is determined by management.

 

Based on its analysis, the Company believes that no indicators of impairment of the carrying value of its long-lived assets existed at December 31, 2011 and 2010.

 

There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue or allow the Company to realize the value of its long-lived assets and prevent future impairment.

 

Research and development – Research and development consist of expenditures for the research and development of new products and technologies, which primarily involve contract research, payroll-related expenses, and other related supplies. Research and development costs are expensed as incurred.

 

Share-based compensation – The Company recognizes 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 is calculated using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton model requires subjective assumptions regarding future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of awards granted is derived from historical data on awards exercised and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the effective 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.

 

F-13
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

Income taxes – The Company accounts for income taxes under the asset and liability method, wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

The Company's short-term and long-term deferred tax liability is based on the calculation of the deferred taxes on the Company's unrealized gain on available-for-sale securities using a 40% effective tax rate based on a 31% federal income tax rate (net of state tax deduction) combined with an 8.84% California state income tax rate. The Company recognizes a deferred tax asset (through changes in the valuation allowance) for the exact amount of the deferred tax liability. The classification of these deferred taxes is concurrent with the classification of investments for which the unrealized gain is derived. For balance sheet presentation, current deferred tax assets and liabilities have been offset and presented as a single amount and non-current deferred tax assets and liabilities within each tax jurisdiction have been offset and presented as a single amount.

 

When tax returns are filed, it is highly probable that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2011, the Company had no unrecognized tax benefits, and the Company had no positions which, in the opinion of management, would be reversed if challenged by a taxing authority. The Company’s evaluation of tax positions was performed for those tax years which remain open to audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of December 31, 2011, all federal tax returns since 2008 and state tax returns since 2007 are still subject to adjustment upon audit. No tax returns are currently being examined by taxing authorities.

 

Comprehensive income (loss) – Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). The items of other comprehensive income (loss) for the Company are unrealized gains and losses on securities classified as available-for-sale and unrealized foreign translation effects from its subsidiaries. When the Company realizes a gain or loss on available-for-sale securities for which an unrealized gain or loss was previously recognized, a corresponding reclassification adjustment is made to remove the unrealized gain or loss from other comprehensive income and reflect the realized gain or loss in current operations.

 

Marketable securities – Investment securities as of December 31, 2011 and 2010 are classified as available-for-sale. Securities available-for-sale are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gain or loss, net of taxes in accumulated other comprehensive income. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. CellSeed securities are the only marketable security the Company currently carries on its books. The Company’s marketable securities consist of 147,100 shares of CellSeed stocks acquired in January 2009 for 100,028,000 Japanese Yen (equivalent to $1,109,819), at 680 Yen per share. CellSeed’s IPO (symbol 7776) was completed on March 16, 2010. As of December 31, 2011 and 2010, the closing price per share was 730 Yen and 921 Yen, respectively. Historical JASDEQ closing price can be found from http://www.bloomberg.com/apps/quote?ticker=7776:JP. The Company’s security position in CellSeed is many times the average daily trading volume of the stock on the JASDAQ exchange. Any attempt to sell the Company’s position in a short period of time may have an adverse impact on the price of the stock. During the year ended December 31, 2011, the Company granted a security interest in 100% of its CellSeed securities to lenders as discussed in Note 6.

 

As of December 31, 2011, 100% of the investment in CellSeed is classified as a long term asset in the accompanying balance sheet as the investment is assigned as collateral on certain borrowings.

 

F-14
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

Fair value measurements – The Company defines 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. The Company measures 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 the Company has the ability to access.

 

Level 2: Inputs to the valuation methodology include:

·Quoted prices for similar assets or liabilities in active markets;
·Quoted prices for identical or similar assets or liabilities in inactive markets;
·Inputs other than quoted prices that are observable for the asset or liability;
·Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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

 

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

 

The assets 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 are determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at December 31, 2011. The fair value of the Company’s debt instruments are not materially different from their carrying values as presented. The fair value of the Company’s convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6.

 

Net loss per share – In accordance with FASB ASC Topic 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Dilutive loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of December 31, 2011 and 2010, there were 2,443,983 and 463,661 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted earnings per share since their effect would be anti-dilutive for that reporting period.

 

Recent Accounting Pronouncements

 

FASB Accounting Standards Update 2011-05, "Presentation of Comprehensive Income," was issued in June 2011 to be effective for fiscal years beginning after December 15, 2011.  Comprehensive income includes certain items that are recognized as "other comprehensive income" ("OCI") and are excluded from net income.  Examples include unrealized gains/losses on certain investments and gains/losses on derivative instruments designated as hedges.  Under the provisions of the update, the components of OCI must be presented in one of two formats: either (i) together with net income in a continuous statement of comprehensive income or (ii) in a second statement of comprehensive income to immediately follow the income statement.  An existing option to present the components of OCI as part of the statement of changes in stockholders' equity is being eliminated.  The Company is evaluating the preferable format for presentation of its other comprehensive income upon the effective date of the standard.

 

FASB Accounting Standards Update 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS," was issued in May 2011 to be effective for fiscal years beginning after December 15, 2011.  The update changes the wording for certain measurement and disclosure requirements relating to fair value determinations under U.S. GAAP in order to make them more consistent with International Financial Reporting Standards (IFRS).  While many of the modifications are not expected to change the application of U.S. GAAP, there are additional disclosure requirements relating to the use of Level 3 inputs in determining fair value.  The Company does not expect the standard to have a material effect on its consolidated financial statements.

 

F-15
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

    December 31, 2011     December 31, 2010  
Equipment   $ 111,655     $ 110,484  
Leasehold improvements     23,054       23,054  
Furniture and fixtures     52,269       52,269  
      186,978       185,807  
Less:  accumulated depreciation     (126,960 )     (91,628 )
    $ 60,018     $ 94,179  

 

During the years ended December 31, 2011 and 2010, the depreciation expense was $35,332 and $26,080, respectively. Depreciation expense from inception to December 31, 2011 was $126,960.

 

NOTE 4 – INTANGIBLE ASSETS

 

The Company is licensed to market and sell NutreStore® [L-glutamine powder for oral solution] as a treatment for short bowel syndrome (“SBS”). The Company previously promoted Zorbtive® [somatropin (rDNA origin) for injection] prior to July 31, 2011. Subsequent to July 31, 2011, the Company has not promoted Zorbtive.

 

Intangible assets consisted of the following at:

 

    December 31, 2011     December 31, 2010  
License fees and patent filing costs   $ 750,000     $ 750,000  
Less:  accumulated amortization     (750,000 )     (615,120 )
    $ -     $ 134,880  

 

During the years ended December 31, 2011 and 2010, the amortization expense was $134,880 and $253,952, respectively. Amortization expense from inception to December 31, 2011 was $750,000.

 

NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following at:

 

    December 31, 2011     December 31, 2010  
Accounts payable                
CRO expenses   $ 237,202     $ 129,580  
Public relations expenses     40,862       10,362  
Miscellaneous vendors     221,265       50,165  
Subtotal     499,329       190,107  
Accrued expenses (interest accrued for convertible notes)     96,719       -  
Accrued expenses (deferred salary)     160,666       -  
Total accounts payable and accrued expenses   $ 756,714     $ 190,107  

 

There are no amounts due to related parties included in accounts payable. However, accrued expenses include accrued interest for the Convertible Notes issued to related parties. Amounts due to related parties have been separately presented on the balance sheet.

   

F-16
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

  

NOTE 6 – NOTES PAYABLE

 

Notes payable consisted of the following at:

  

    Original
Principal
Loan Amount
December 31,
2011
    Discount
Amount 
December 31,
2011
    Carrying
Amount 
December 31,
2011
    December 31,
2010
 
Note payable to a stockholder, due on demand, interest payable monthly at 6.5% per annum.                                
*Yutaka Niihara – Note 1     350,000       -       350,000       350,000  
*Yutaka Niihara – Note 2     -       -       -       80,000  
Daniel Kimbell – Note 1     -       -       -       20,000  
Daniel Kimbell – Note 2     -       -       -       10,000  
                                 
Note payable to a stockholder, due on demand, interest payable monthly at 8% per annum.                                
*Yutaka Niihara – Note 3     30,000       -       30,000       -  
                                 
Note Payable to related parties, due 2013, interest payable quarterly at 8% per annum                                
**Hope International Hospice, Inc.     200,000       -       200,000       -  
                                 
Note Payable to a financial institution, due in 2014, interest payable quarterly at 4.5% per annum.     841,728       -       841,728       -  
                                 
Convertible note payable to related party, due 2012, interest payable annually at 8% per annum                                
*Yasushi Nagasaki     360,000       87,733       272,267       -  
                                 
Convertible note payable, due 2012,  interest payable annually at 8% per annum     1,293,400       397,476       895,924       -  
                                 
***Convertible note payable, due 2012,  interest payable annually at 8% per annum     1,750,642       1,072,823       677,819       -  
                                 
Convertible notes payable to stockholders, due 2015, 0% interest payable.     72,000       -       72,000       132,030  
                                 
Convertible note payable to stockholder, originally due in 2011 but extended by the Lender until 2014, interest payable monthly at 6.5% per annum****     264,492       -       264,492       246,889  
                                 
Convertible note payable to a bank, due in 2016, interest payable monthly at 10% per annum, beginning January 2012.     500,000       -       500,000       -  
                                 
Convertible notes payable to stockholders, due in 2015, interest payable monthly at 6% per annum.     2,000       -       2,000       52,000  
      5,664,262       1,558,032       4,106,230       890,919  
                                 
Amount due in one year     (3,784,042 )    

  

      (2,226,010 )     (706,889 )
                                 
Long term portion of notes payable   $ 1,880,220             $ 1,880,220     $ 184,030  

    

*Officers of the company

**Dr. Niihara is also the CEO of Hope International Hospice, Inc.

*** Related Party

****Original loan amount was $221,895 and accrued interest of $42,597 was added to the principal amount.

 

During the year ended December 31, 2011, the Company granted a security interest in 100% of its CellSeed securities to lenders as discussed in Note 6.

 

During the year ended December 31, 2011, notes payable in the amount of $838,492 and $3,404,042 were convertible, at option of the lender, into shares of the Company’s common stock at $3.05 and $3.60 per share, respectively. During the year ended December 31, 2011, notes payable in the amount of $110,030 were converted to common stock at a conversion price of $3.05 per share.

 

F-17
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

During the year ended December 31, 2011, the Company issued a convertible note in the amount of $500,000 which bears interest at 10% per annum beginning on January 1, 2012. The note is convertible, at the lender’s option until one month after the Company’s shares of common stock are traded on NASDAQ, into common stock of the Company at a conversion price of $3.05 per share. The note matures on March 14, 2016. Immediately upon conversion of this note, the lender will receive, without any consideration, warrants to acquire such number of shares of common stock of the Company equal to 25% of the number of shares received upon the conversion of the note. The warrants will have an exercise price of $3.05 per share. These warrants will be exercisable by giving written notice to the Company. As security for the obligations under the note, the Company granted to the lender a security interest in 50% of the Company’s investment in marketable securities as specified in an agreement with the lender.

 

In addition, the Company issued convertible notes in the aggregate principal amount of $3,404,042 during the year ended December 31, 2011. All notes will mature in 2012 and bear interest at 8% per annum. The principal amount and any unpaid interest due under the notes are convertible into shares of the Company’s common stock at $3.60 per share at the lender’s option.  The lenders also received warrants to purchase 331,670 shares of common stock with an exercise price equal to 75% of the fair market value of the Company’s common stock on the date prior to exercise. The Company recorded a discount on the convertible debt based on the value of warrants granted in the note agreement and a beneficial conversion feature. $864,773 was allocated to the warrants and $1,469,343 was allocated to the beneficial conversion feature.

 

The Company estimated the total fair value of the convertible note and warrant in allocating the debt proceeds. The proceeds were allocated to the warrant and convertible note based on the pro-rata fair value. The proceeds allocated to the beneficial conversion were determined by taking the estimated fair value of shares issuable under the convertible note less the fair value of the convertible note determined above. The fair value of the warrant was determined through the Black Scholes Option pricing model with the following inputs:

 

Stock Price   $4.24
Exercise Price   $3.60
Term   3 years
Risk-Free Rate   0.31 ~ 0.79%
Dividend Yield   0%
Volatility   103.28 ~ 140.19%

 

NOTE 7 – STOCKHOLDERS’ EQUITY (Deficit)

  

Common stock – During the year ended December 31, 2011, the Company issued a total of 24,393,461 shares of its common stock, which includes 20,628,305 shares issued to the former stockholders of Emmaus Medical pursuant to the Merger Agreement (excluding the 47,178 shares held by stockholders who exercised dissenter’s right in connection with the Merger), and 15,156 shares issued upon the exercise of warrants and options. As discussed in Note 2, in connection with the closing of the Merger, stockholders of the Company prior to the Merger cancelled an aggregate of 1,827,750 shares of common stock owned by them such that they held an aggregate of 3,750,000 shares of common stock upon the closing of the Merger. Pursuant to the Merger Agreement on May 3, 2011, four stockholders of Emmaus Medical exercised their dissenter’s rights and returned 47,178 shares for $200,000, which was outstanding as of December 31, 2011. The shares were cancelled as of May 3, 2011, the closing date of the Merger.

 

Stock warrants – During the year ended December 31, 2011, the Company issued warrants to purchase an aggregate of 302,918 shares of common stock at an exercise price of $3.05 per shares to the former warrant holders of Emmaus Medical upon the closing of the Merger. From the closing of the Merger through December 31, 2011, the Company issued warrants in connection with the issuance of convertible notes to purchase an aggregate of 331,670 shares of common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise. During this period, the Company also issued warrants to purchase a total of 311,038 shares of common stock at an exercise price of $1.00 per share. 275,482 warrants were issued to a consultant in lieu of a financial consulting fee and 35,556 warrants were issued in connection with the issuance of convertible note. During the year ended December 31, 2011 after the Merger, the Company issued 3,362 shares of common stock upon the exercise of warrants issued pursuant to the Merger.

 

F-18
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

A summary of outstanding warrants as of December 31, 2011 is presented below.

 

    Year ended
December 31, 2011
 
Warrants outstanding, beginning of period     298,789  
Granted     648,605  
Exercised     (5,131 )
Cancelled, forfeited and expired     (1,061 )
Warrants outstanding, end of period     941,202  

 

      Outstanding     Exercisable  
Exercise
Prices
    Number of
Warrants
    Weighted
Average
Remaining
Contractual Life
(Years)
    Weighted
Average
Exercise
Price
    Total     Weighted
Average
Exercise Price
 
During 2011                                          
$ 1.00       311,038       3     $ 1.00       311,038     $ 1.00  
                                             
  75% of FMV       331,670       3       75% of FMV       331,670       75% of FMV  
$ 3.05       5,897       5     $ 3.05       5,897     $ 3.05  
                                             
During 2010                                          
$ 3.05       197,146       4.56     $ 3.05       197,146     $ 3.05  
                                             
During 2009                                          
$ 3.05       95,450       3.99     $ 3.05       95,450     $ 3.05  

 

Stock options – Management has valued the options at their date of grant utilizing the Black-Scholes-Merton Option pricing model.   Accordingly, the fair value of the underlying shares was determined based on recent transactions by the Company to sell shares to third parties and other factors determined by management to be relevant to the valuation of such shares.   The expected volatility was calculated using the historical volatility of a similar public entity in the industry.  

 

In making this determination and finding another similar company, the Company considered the industry, stage of life cycle, size and financial leverage of such other entities.  Based on the development stage of the Company, similar companies with enough historical data are not available.   The Company was able to find one entity that met the industry criterion and as a result has based its expected volatility off of this Company’s historical stock prices for a period similar to the expected term of the option. 

 

The risk–free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options.  The expected life of options used was based on the contractual life of the option granted.  

 

The Company had 11,795 options outstanding held by directors of the Company exercisable at $3.05 per share as of December 31, 2011, all of which were vested as of December 31, 2011 and are exercisable through 2015. During the year ended December 31, 2011, the Company issued stock options to purchase an aggregate of 61,000 shares of common stock at an exercise price of $3.60 per shares to the Board of Directors, all of which will be vested on December 19, 2012. The Company recognized $35,196 of compensation expense for the year ended December 31, 2011.

 

Registration Rights – In connection with the consummation of the Merger, the Company entered into the Registration Rights Agreement for the benefit of certain pre-Merger Company stockholders. Pursuant to the Registration Rights Agreement, the such stockholders have certain “piggyback” registration rights on registration statements filed after the Merger is consummated other than registration statements (i) filed in connection with any employee stock option or other benefit plan, (ii) for an exchange offer or offering of securities solely to the Company’s existing stockholders, (iii) for an offering of debt that is convertible into equity securities of the Company; (iv) for a dividend reinvestment plan or (v) for an offering of equity securities of the Company underwritten by Aegis Capital Corp. The Company will bear the expenses incurred in connection with the filing of any such registration statements.

 

F-19
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

NOTE 8 - INCOME TAXES

 

The provision (benefit) for income taxes consists of the following for the year ended December 31:

 

          2011     2010  
Current     U.S.     $ 1,997     $ 4,304  
      International       1,212       -  
                         
Deferred     U.S.       -       -  
      International       -       -  
            $ 3,209     $ 4,304  

 

The Company maintains a deferred tax asset in the amount of the deferred tax liability for the unrealized holding gain on its available-for-sale securities. A valuation allowance for the remaining amount of the net deferred tax assets has been recorded as it is more likely than not that these benefits will not be realized through future operations.

 

Deferred tax assets consist of the following as of December 31, 2011 and 2010:

 

    2011     2010  
Net operating loss carryforward   $ 5,800,000     $ 4,412,000  
General business tax credit     2,035,893       728,000  
Charitable contribution     128,601       -  
Accrued expenses     42,256       -  
Other     6,804       -  
      8,013,554       5,140,000  
Valuation allowance     (7,911,418 )     (4,922,971 )
    $ 102,136     $ 217,029  

 

Deferred tax liabilities consist of the following as of December 31, 2011 and 2010:

 

    2011     2010  
Unrealized appreciation on available-for-sale securities   $ 102,136     $ 217,029  

 

During 2011 and 2010, the valuation allowance increased by $2,988,447 and $1,344,971, respectively.

 

As of December 31, 2011 and 2010, the Company had net operating loss carryforwards (“NOL”) for federal and state reporting purposes of approximately $14,500,000 and $11,000,000, and $13,900,000 and $8,400,000 respectively, which expire in various years through 2031. The Federal and state tax codes provide for restrictive limitations on the annual utilization of NOLs to offset taxable income when the stock ownership of a company significantly changes, as defined. As of December 31, 2011 and 2010, the Company has general business tax credits of $2,035,893 and $728,000, respectively, for federal tax purposes. The tax credits are available to offset future tax liabilities, if any, through 2020.

 

The income tax provision differs from that computed using the statutory federal tax rate of 34%, due to the following:

 

    2011     2010  
Tax benefit at statutory federal rate   $ (2,947,420 )   $ (1,277,506 )
State taxes, net of federal tax benefit     (235,764 )     (219,220 )
Increase (decrease) in valuation allowance     2,908,447       1,344,971  
Other     28,985       -  
Nondeductible expense – Professional fees     960,061       156,059  
Nondeductible interest     332,918       -  
General business tax credit     (1,044,018 )     -  
    $ 3,209     $ 4,304  

 

F-20
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

  

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Distribution contract – Cardinal Health Specialty Pharmacy Services is contracted to distribute NutreStore to other wholesale distributors and some independent pharmacies since April 2008. For its service, Emmaus Medical pays a monthly commercialization management fee of $5,000 with discount.

 

Operating leases – The Company leased its office space under an operating lease from an unrelated entity. The rent expense during the years ended December 31, 2011 and 2010 amounted to $142,960 and $97,701, respectively.

 

The Company leases its approximately 4,540 square foot headquarters offices in Torrance, CA, at a base rental of $4,994 per month plus $320 per month as its share of common area expenses. The lease will expire on May 31, 2012. In addition, the Company leases two office suites in Torrance, California at a base rent of $1,610 per month plus share of common area expenses of $90 per month, and at a base rent of $1,750 per month plus share of common area expenses of $90 per month. These leases will expire on August 19, 2013 and February 28, 2013, respectively. Approximately 490 square feet from one office and 1,079 square feet from the other office are currently subleased to an unaffiliated entity on a month to month basis. The Company does not expect to experience any difficulties in renewing its leases, or finding additional or replacement office and warehouse space, at its current or more favorable rates.

 

The Company also leases two office suites of approximately 512 square feet and 532 square feet, respectively, in Tokyo, Japan at a base rent of $1,678 per month each. These leases will expire on October 14, 2012 and September 15, 2013, respectively. The Company anticipates that the lease expiring on October 14, 2012 will be extended for another two years with the same terms.

 

Future minimum lease payments under the agreements are as follows:

 

  2012     $ 105,127  
  2013       31,543  
        $ 136,670  

 

Licensing agreement - On April 8, 2011, pursuant to a Research Agreement, the Company agreed to pay CellSeed $8.5 million within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the Package (as defined in the Research Agreement) to the Company. Pursuant to the Individual Agreement, the Company agreed to pay $1.5 million to CellSeed within 30 days of CellSeed’s delivery of the Package to the Company and a royalty to be agreed upon by the parties. CellSeed may terminate these agreements with us if the Company is unable to make timely payments required under the agreements.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

As of December 31, 2011 an aggregate of $2,986,537 in the principal amount of promissory notes from certain stockholders and officers was outstanding. The debt is unsecured and carries interest rates from 0% to 8%. An aggregate of $338,492 and $2,110,642 in principal and unpaid accrued interest on the notes are convertible to into shares of common stock at $3.05 and $3.60 per share, respectively. Interest on 0% loans was imputed at the incremental borrowing rate of 6% per annum.

 

The Company has agreed to (i) pay AFH Holding and Advisory, LLC (“AFH Advisory”) $500,000 (the “Shell Cost”) to allow Emmaus Medical stockholders to acquire shares of common stock of the Company and become the majority owners in the aggregate of the Company and to achieve the desired post-merger capitalization of the Company and to (ii) reimburse AFH Advisory for its advancement of expenses on behalf of the Company related to the Merger and a public offering (the “Reimbursable Costs,” and collectively with the Shell Cost, the “Transaction Costs”). These Transaction Costs have been recorded as an expense in the accompanying statement of operations in the period in which they were incurred. As of December 31, 2011, AFH Advisory had advanced an aggregate of $288,893 in Reimbursable Costs on the Company’s behalf. During the year ended December 31, 2011, the Company paid $288,893 in cash to AFH Advisory for the Reimbursable Costs and $105,554 of the Shell Cost, therefore, as of December 31, 2011, owed AFH Advisory an aggregate of $394,446 for the Shell Cost. The Company does not anticipate that any further Transaction Costs will be advanced by AFH Advisory.

 

F-21
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

AFH Advisory may be paid any outstanding Transaction Costs from the proceeds of a public offering or upon the consummation of any other financing. Alternatively, AFH Advisory may, in its discretion, convert such amount (or any portion thereof) into common stock at a conversion price equal to 75% of the per share public offering price (the “Conversion Price”). Additionally, the Company has agreed to issue warrants to purchase shares of common stock to AFH Advisory upon the closing of a public offering. Such warrants will have a term of 5 years from the date of issuance and will have an exercise price equal to the Conversion Price. The number of shares underlying the warrants will be calculated by dividing the aggregate of the Shell Cost and the total advanced Reimbursable Costs by the Conversion Price.

 

Shares held by AFH Advisory and certain others will be decreased, at the rate of 1% of post public offering outstanding common shares, for each $1 million or fraction thereof that the gross proceeds to the Company from an offering are less than $10 million. In the event of such reduction, AFH Advisory will reduce the number of those shares by an appropriate percentage. If a public offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $5 million, the Company’s arrangement with AFH advisory provides that the Company may terminate the offering at its sole and absolute discretion, and if the Company terminates the public offering, then all shares held by AFH Advisory and certain others will be canceled.

 

If the arrangement with AFH Advisory is terminated based on mutual agreement of the parties or based on a breach by the Company, AFH Advisory will receive its Reimbursable Costs incurred as of the date of termination. If the arrangement with AFH Advisory is terminated (i) by either party (without being cured within 30 days) based on identification of information in the course of its due diligence investigation that it deems unsatisfactory, or if the parties are unable to agree to a valuation within 45 days following completion of satisfactory due diligence by an investment bank, or (ii) by the Company if an offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $10 million or based on a breach by AFH Advisory that is not cured within 30 days, then AFH Advisory will receive reimbursement for 50% of Reimbursable Costs actually incurred to the date of such termination. If a public offering can not be consummated with gross proceeds of at least $5 million, and the Company exercises its right to terminate the offering, the Company will reimburse AFH Advisory an amount equal to 50% of the of the Transaction Costs incurred as of the date of termination, and AFH Advisory, in its discretion, has the option to be paid any outstanding amounts at the time of termination in cash or to convert such amounts (or any portion thereof) into common stock at a conversion price equal to 75% of the per share price of the shares of common stock sold in the Company’s most recently completed private offering of common stock. In the event of termination by the Company because a public offering cannot be consummated to provide for minimum gross proceeds to the Company of at least $10 million, and if the Company enters into any transaction or a sale of all or substantially all of its assets within 12 months of such termination, AFH Advisory will be entitled to (i) 5% of its holdings (including holdings of certain others) of any securities received by the Company or the Company’s stockholders upon consummation of any business combination or other similar transaction; or (ii) cash or any other consideration it would have received as if it had a 5% ownership interest in the Company immediately prior to the closing of any such transaction.

 

The Company granted AFH Advisory exclusive rights to act as its advisor in connection with all financings and mergers and acquisitions until November 10, 2012 and the right to appoint two board members to the Company’s board of directors upon the closing of the Merger. In addition, in the event of any merger, stock purchase, asset purchase or similar transaction occurring within one year of the closing of the Company’s next public offering, AFH Advisory may receive a warrant to purchase shares in an amount to increase AFH Advisory’s total Life Sciences to 10% of the outstanding fully diluted equity of the Company but only to the extent the Company issues securities in connection with such merger, stock purchase, asset purchase or similar transaction.

 

NOTE 11 – NET LOSS PER SHARE

 

The “Net loss per share” is disclosed in Note 2 above. Following are the numerators and denominators for the net loss per share:

 

    2011     2010  
Numerator for the net loss per share:                
Net loss   $ (8,832,758 )   $ (3,757,370 )
                 
Denominator for the net loss per share:                
Weighted average shares     23,068,206       19,661,306  
                 
    $ (0.38 )   $ (0.19 )

  

F-22
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

Note 12 - Common Stock Transactions

 

The Company engaged in the following stock transactions for the period from inception (December 20, 2000) through December 31, 2011.

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                 
Balance, December 31, 2000 (1) (2)             12,531,125       0.00       12,531       (2,931 )   $ -     $ -     9,600  
                                                               
Net loss             -               -       -       -       (21,942 )   (21,942 )
                                                               
Balance, December 31, 2001             12,531,125               12,531       (2,931 )     -       (21,942 )   (12,342 )
                                                               
Net loss             -               -       -       -       (12,464 )   (12,464 )
                                                               
Balance, December 31, 2002             12,531,125               12,531       (2,931 )     -       (34,406 )   (24,806)  
                                                               
Constructive distribution of retained loss to Additional Paid-in Capital             -               -       (34,406 )     -       34,406     -  
                                                               
                                                               
Common stock issued             737,125               737       249,263                     250,000  
                                                               
      9/25/03       29,485       0.34       29       9,971                     10,000  
      9/25/03       14,743       0.34       15       4,985                     5,000  
      9/25/03       14,743       0.34       15       4,985                     5,000  
      9/25/03       14,743       0.34       15       4,985                     5,000  
      9/25/03       103,198       0.34       103       34,897                     35,000  
      9/25/03       58,970       0.34       59       19,941                     20,000  
      9/25/03       73,713       0.34       74       24,926                     25,000  
      9/28/03       14,743       0.34       15       4,985                     5,000  
      9/28/03       14,743       0.34       15       4,985                     5,000  
      9/28/03       14,743       0.34       15       4,985                     5,000  
      9/29/03       29,485       0.34       29       9,971                     10,000  
      9/30/03       176,910       0.34       177       59,823                     60,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
      10/10/03       29,485       0.34       29       9,971                     10,000  
                                                               
Net loss             -               -       -       -       (97,481 )   (97,481 )

 

F-23
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                 
Balance, December 31, 2003             13,268,250               13,268       211,926       -       (97,481 )   127,713  
                                                               
Common stock issued             1,615,542               1,616       636,384                     638,000  
                                                               
      4/21/04       147,425       0.34       147       49,853                     50,000  
      4/21/04       147,425       0.34       147       49,853                     50,000  
      4/21/04       147,425       0.34       147       49,853                     50,000  
      4/21/04       147,425       0.34       147       49,853                     50,000  
      4/21/04       73,713       0.34       74       24,926                     25,000  
      4/21/04       73,713       0.34       74       24,926                     25,000  
      4/21/04       36,856       0.34       37       12,463                     12,500  
      6/22/04       147,425       0.34       147       49,853                     50,000  
      6/22/04       88,455       0.34       88       29,912                     30,000  
      6/22/04       41,279       0.34       41       13,959                     14,000  
      4/24/04       73,713       0.34       74       24,997                     25,000  
      6/22/04       73,713       0.34       74       24,997                     25,000  
      7/6/04       16,217       0.34       16       5,484                     5,500  
      7/6/04       16,217       0.34       16       5,484                     5,500  
      9/21/04       88,455       0.06       88       4,912                     5,000  
      4/21/04       29,485       0.34       29       9,971                     10,000  
      6/22/04       36,856       0.34       37       12,463                     12,500  
      6/22/04       147,425       0.34       147       49,853                     50,000  
      12/28/05       44,228       2.03       44       89,998                     90,000  
      4/4/05       14,743       0.34       15       4,999                     5,000  
      1/31/05       14,743       2.03       15       29,999                     30,000  
      2/17/05       5,897       2.03       6       11,994                     12,000  
      2/24/05       2,949       2.03       3       5,997                     6,000  
                                                               
Rounding             (240 )                                              
                                                               
(Subscriptions Receivable) Collections                                     10,075                     10,075  
                                                             
Net loss             -               -       -       -       (624,936 )   (624,936
                                                             
Balance, December 31, 2004             14,883,792               14,884       858,385       -       (722,417 )   150,852  
                                                               
Common stock issued             398,549               399       811,227                     811,626  
                                                               
      1/31/05       49,151       2.03       49       99,951                     100,000  
      7/25/05       2,949       2.03       3       5,997                     6,000  
      7/25/05       2,949       2.03       3       5,997                     6,000  
      7/25/05       2,949       2.03       3       5,997                     6,000  
      7/25/05       2,949       2.03       3       5,997                     6,000  
      10/21/05       29,485       2.03       29       59,971                     60,000  
      12/21/05       11,794       2.03       12       23,988                     24,000  
      7/2/07       4,953       2.04       5       10,075                     10,080  

 

F-24
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

   Date   Shares   $/
Share
   Common
stock
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income
   Deficit
Accumulated
during
Development
Stage
   Total  
                                  
    5/9/08    288,747    2.03    289    587,258             587,546  
                                          
Rounding        (326)             3                 
    9/21/05    2,949    2.03    3    5,997             6,000  
(Subscriptions Receivable) Collections                       (489,341)            (489,341
Net loss        -         -    -    -    (668,091)  (668,091 )
                                          
Balance, December 31, 2005        15,282,341         15,283    1,186,271    -    (1,390,508)  (188,954)  
                                          
Common stock issued        523,388         523    824,517             1,062,460  
                                          
    7/25/05    4,423    2.03    4    8,996             9,000  
    12/16/05    14,743    2.03    15    29,985             30,000  
    1/10/06    29,485    2.03    29    59,971             60,000  
    1/6/06    14,743    2.03    15    29,985             30,000  
    1/6/06    29,485    2.03    29    59,971             60,000  
    1/5/06    29,485    2.03    29    59,971             60,000  
    1/6/06    29,485    2.03    29    59,971             60,000  
    1/6/06    4,924    2.03    5    9,995             10,000  
    1/13/06    2,949    2.03    3    5,997             6,000  
    2/28/06    2,949    2.03    3    5,997             6,000  
    4/28/06    14,743    2.03    15    29,985             30,000  
    4/28/06    14,743    2.03    15    29,985             30,000  
    4/28/06    8,846    2.03    9    17,991             18,000  
    4/28/06    2,949    2.03    3    5,997             6,000  
    5/1/06    2,949    2.03    3    5,997             6,000  
    5/9/06    14,743    2.03    15    29,985             30,000  
    5/1/06    14,743    2.03    15    29,985             30,000  
    6/15/06    2,949    2.03    3    5,997             6,000  
    9/29/06    2,949    2.03    3    5,997             6,000  
    10/17/06    14,743    2.03    15    29,985             30,000  
    10/13/06    14,743    2.03    15    29,985             30,000  
    10/19/06    14,743    2.03    15    29,985             30,000  
    11/10/06    7,371    2.03    7    14,993             15,000  
    11/10/06    4,423    2.03    4    8,996             9,000  
    11/10/06    29,485    2.03    29    59,971             60,000  
    11/22/06    14,743    2.03    15    29,985             30,000  
    11/6/06    5,897    2.03    6    11,994             12,000  
    11/6/06    14,743    2.03    15    29,985             30,000  
    11/22/06    14,743    2.03    15    29,985             30,000  
    11/22/06    7,371    2.03    7    14,993             15,000  
    12/1/06    29,485    2.03    29    59,971             60,000  
    11/27/06    2,949    2.03    3    5,997             6,000  
    12/6/06    9,848    2.03    10    20,030             20,040  
    12/6/06    4,423    2.03    4    8,996             9,000  
    12/6/06    7,371    2.03    7    14,993             15,000  

 

F-25
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

   Date   Shares   $/
Share
   Common
stock
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income
   Deficit
Accumulated
during
Development
Stage
   Total  
                                         
    12/18/06    14,743    2.03    15    29,985             30,000  
    1/24/07    14,743    2.03    15    29,985             30,000  
    4/10/07    14,743    2.03    15    29,985             30,000  
    5/31/07    2,949    2.03    3    5,997             6,000  
    5/29/08    14,743    2.03    15    29,985             30,000  
    5/29/08    14,743    2.03    15    29,985             30,000  
    3/31/08    4,423    1.45    4    6,416             6,420  
    3/10/08    2,949    2.03    3    5,997             6,000  
                                          
Rounding                       (5)            (5
(Subscriptions Receivable) Collections                       (237,415)            (237,415
                                          
Net loss        -         -    -    -    (759,962)  (759,962
                                          
Balance, December 31, 2006        15,805,729         15,806    2,010,788    -    (2,150,470)  (123,876
                                          
Common stock issued        1,344,162         1,344    2,679,376             2,680,720  
                                          
    2/5/07    4,423    2.03    4    8,996             9,000  
    3/8/07    4,423    2.03    4    8,996             9,000  
    4/26/07    14,743    2.03    15    29,985             30,000  
    5/3/07    14,743    2.03    15    29,985             30,000  
    5/8/07    5,897    2.03    6    11,994             12,000  
    5/8/07    14,743    2.03    15    29,985             30,000  
    5/8/07    14,743    2.03    15    29,985             30,000  
    5/11/07    8,846    2.03    9    17,991             18,000  
    5/11/07    4,423    2.03    4    8,996             9,000  
    5/11/07    4,423    2.03    4    8,996             9,000  
    5/14/07    9,730    2.03    10    19,790             19,800  
    5/11/07    4,423    2.03    4    8,996             9,000  
    5/18/07    14,743    2.03    15    29,985             30,000  
    5/18/07    14,743    2.03    15    29,985             30,000  
    5/24/07    14,743    2.03    15    29,985             30,000  
    5/31/07    29,485    2.03    29    59,971             60,000  
    6/2/07    49,181    2.03    49    100,031             100,080  
    6/1/07    29,485    2.03    29    59,971             60,000  
    6/1/07    29,485    2.03    29    59,971             60,000  
    6/6/07    29,485    2.03    29    59,971             60,000  
    6/4/07    4,924    2.03    5    10,015             10,020  
    6/28/07    44,228    2.03    44    89,956             90,000  
    6/15/07    5,897    2.03    6    11,994             12,000  
    6/14/07    7,371    2.04    7    14,993             15,000  
    6/15/07    4,423    2.03    4    8,996             9,000  
    6/15/07    5,897    2.03    6    11,994             12,000  
    6/15/07    14,743    2.03    15    29,985             30,000  
    6/20/07    14,743    2.03    15    29,985             30,000  

 

F-26
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                               
    6/20/07       14,743       2.03       15       29,985             30,000  
      6/28/07       9,877       2.04       10       20,090                     20,100  
      6/20/07       14,743       2.03       15       29,985                     30,000  
      6/20/07       14,743       2.03       15       29,985                     30,000  
      6/29/07       14,743       2.03       15       29,985                     30,000  
      7/2/07       14,743       2.03       15       29,985                     30,000  
      7/2/07       5,897       2.03       6       11,994                     12,000  
      7/2/07       44,228       2.03       44       89,956                     90,000  
      7/2/07       1,474       2.04       1       2,999                     3,000  
      7/2/07       7,371       2.04       7       14,993                     15,000  
      7/11/07       29,485       2.03       29       59,971                     60,000  
      7/6/07       29,485       2.03       29       59,971                     60,000  
      7/11/07       29,485       2.03       29       59,971                     60,000  
      7/17/07       23,588       2.03       24       47,976                     48,000  
      7/16/07       147,425       2.03       147       299,853                     300,000  
      7/11/07       20,640       2.03       21       41,979                     42,000  
      7/18/07       26,537       2.03       27       53,973                     54,000  
      7/21/07       14,743       2.03       15       29,985                     30,000  
      7/23/07       11,794       2.03       12       23,988                     24,000  
      7/24/07       7,371       2.04       7       14,993                     15,000  
      7/26/07       29,485       2.03       29       59,971                     60,000  
      7/23/07       11,794       2.03       12       23,988                     24,000  
      7/27/07       29,485       2.03       29       59,971                     60,000  
      7/27/07       14,743       2.03       15       29,985                     30,000  
      7/30/07       14,743       2.03       15       29,985                     30,000  
      7/30/07       14,743       2.03       15       29,985                     30,000  
      7/31/07       26,537       2.03       27       53,973                     54,000  
      8/7/07       2,949       2.03       3       5,997                     6,000  
      8/25/07       29,485       2.03       29       59,971                     60,000  
      8/25/07       14,743       2.03       15       29,985                     30,000  
      8/30/07       14,743       2.03       15       29,985                     30,000  
      10/3/07       14,743       2.03       15       29,985                     30,000  
      10/17/07       10,320       2.08       10       21,490                     21,500  
      11/5/07       32,434       2.03       32       65,968                     66,000  
      10/22/07       4,924       2.03       5       10,015                     10,020  
      11/28/07       14,743       2.03       15       29,985                     30,000  
      11/15/07       5,307       2.04       5       10,795                     10,800  
      11/15/07       5,307       2.04       5       10,795                     10,800  
      12/15/07       14,743       2.03       15       29,985                     30,000  
      12/5/07       29,485       0.17       29       4,971                     5,000  
      12/4/07       2,949       2.03       3       5,997                     6,000  
      12/4/07       2,949       2.03       3       5,997                     6,000  
      12/12/07       14,743       2.03       15       29,985                     30,000  
      12/18/07       14,743       2.03       15       29,985                     30,000  
      12/21/07       23,883       2.03       24       48,576                     48,600  
      12/26/07       2,949       2.03       3       5,997                     6,000  
      12/26/07       14,743       2.03       15       29,985                     30,000  

  

F-27
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                 
      12/28/07       14,743       2.03       15       29,985                     30,000  
      12/29/07       14,743       2.03       15       29,985                     30,000  
                                                               
(Subscriptions Receivable) Collections                                     53,149                     53,149  
Rounding             10                       (9 )                   (9
Net loss             -               -       -       -       (1,282,212 )   (1,282,212
                                                               
Balance, December 31, 2007             17,149,891               17,150       4,743,304       -       (3,432,682 )   1,327,772  
                                                               
Common stock issued             1,226,959               1,227       2,495,493                     2,496,720  
                                                               
      1/4/08       14,743       2.03       15       29,985                     30,000  
      1/4/08       14,743       2.03       15       29,985                     30,000  
      1/4/08       14,743       2.03       15       29,985                     30,000  
      1/4/08       14,743       2.03       15       29,985                     30,000  
      1/9/08       17,691       2.03       18       35,982                     36,000  
      1/9/08       29,485       2.03       29       59,971                     60,000  
      1/9/08       14,743       2.03       15       29,985                     30,000  
      1/10/08       14,743       2.03       15       29,985                     30,000  
      1/11/08       14,743       2.03       15       29,985                     30,000  
      1/11/08       14,743       2.03       15       29,985                     30,000  
      1/15/08       14,743       2.03       15       29,985                     30,000  
      1/15/08       147,425       2.03       147       299,853                     300,000  
      1/11/08       14,743       2.03       15       29,985                     30,000  
      1/18/08       14,743       2.03       15       29,985                     30,000  
      1/15/08       14,743       2.03       15       29,985                     30,000  
      1/22/08       14,743       2.03       15       29,985                     30,000  
      1/24/08       23,588       2.03       24       47,976                     48,000  
      1/24/08       14,743       2.03       15       29,985                     30,000  
      1/24/08       14,743       2.03       15       29,985                     30,000  
      1/24/08       14,743       2.03       15       29,985                     30,000  
      1/28/08       14,743       2.03       15       29,985                     30,000  
      1/29/08       23,588       2.03       24       47,976                     48,000  
      1/28/08       14,743       2.03       15       29,985                     30,000  
      1/30/08       14,743       2.03       15       29,985                     30,000  
      2/7/08       17,691       2.03       18       35,982                     36,000  
      2/1/08       14,743       2.03       15       29,985                     30,000  
      2/1/08       19,165       2.03       19       38,981                     39,000  
      2/7/08       73,713       2.03       74       149,926                     150,000  
      2/1/08       98,274       2.03       98       199,882                     199,980  
      2/25/08       14,743       2.03       15       29,985                     30,000  
      2/25/08       23,588       2.03       24       47,976                     48,000  
      2/27/08       98,303       2.03       98       199,942                     200,040  
      3/1/08       19,165       2.03       19       38,981                     39,000  
      3/1/08       29,485       2.03       29       59,971                     60,000  
      2/29/08       5,897       2.03       6       11,994                     12,000  

 

F-28
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                 
      2/29/08       2,949       2.03       3       5,997                     6,000  
      3/3/08       14,743       2.03       15       29,985                     30,000  
      2/29/08       2,949       2.03       3       5,997                     6,000  
      3/4/08       2,949       2.03       3       5,997                     6,000  
      3/4/08       10,320       2.03       10       20,990                     21,000  
      3/5/08       14,743       2.03       15       29,985                     30,000  
      3/13/08       14,743       2.03       15       29,985                     30,000  
      3/10/08       14,743       2.03       15       29,985                     30,000  
      3/31/08       590       2.03       1       1,199                     1,200  
      3/25/08       14,743       2.03       15       29,985                     30,000  
      3/31/08       14,743       2.03       15       29,985                     30,000  
      4/2/08       14,743       2.03       15       29,985                     30,000  
      4/2/08       5,160       2.03       5       10,495                     10,500  
      4/7/08       117,940       2.03       118       239,882                     240,000  
      4/11/08       29,485       2.03       29       59,971                     60,000  
      4/9/08       14,743       2.03       15       29,985                     30,000  
                                                               
(Subscriptions Receivable) Collections                                     893,988                     893,988  
Rounding             12                       (17 )                   (17 )
Net loss             -               -       -       -       (2,993,777 )   (2,993,777 )
                                                               
Balance, December 31, 2008             18,376,850               18,377       8,132,768       -       (6,426,459 )   1,724,686  
                                                               
Common stock issued             854,446               854       2,238,072                     2,349,940  
                                                               
      3/28/08       58,970       2.03       59       119,941                     120,000  
      3/31/08       5,897       2.03       6       11,994                     12,000  
      4/7/08       7,371       2.03       7       14,993                     15,000  
      1/12/09       19,165       2.03       19       38,981                     39,000  
      1/12/09       14,743       2.03       15       29,985                     30,000  
      1/12/09       24,590       2.03       25       49,975                     50,000  
      1/12/09       122,864       2.03       123       249,877                     250,000  
      3/30/09       8,846       3.05       9       26,991                     27,000  
      3/16/09       5,897       3.05       6       17,994                     18,000  
      3/16/09       11,794       3.05       12       35,988                     36,000  
      3/18/09       7,371       3.05       7       22,493                     22,500  
      5/11/09       7,371       3.05       7       22,493                     22,500  
      5/15/09       7,371       3.05       7       22,493                     22,500  
      5/19/09       8,846       3.05       9       26,991                     27,000  
      5/19/09       7,371       3.05       7       22,493                     22,500  
      5/19/09       7,371       3.05       7       22,493                     22,500  
      5/19/09       7,371       3.05       7       22,493                     22,500  
      5/20/09       7,371       3.05       7       22,493                     22,500  

 

F-29
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total
                                                         
      5/22/09       7,371       3.05       7       22,493                     22,500
      6/30/09       8,846       3.05       9       26,991                     27,000
      6/30/09       7,371       3.05       7       22,493                     22,500
      6/25/09       7,371       3.05       7       22,493                     22,500
      6/24/09       7,371       3.05       7       22,493                     22,500
      6/18/09       20,640       3.05       21       62,979                     63,000
      5/21/09       7,371       3.05       7       22,493                     22,500
      5/20/09       7,371       3.05       7       22,493                     22,500
      6/16/09       9,848       3.05       10       30,050                     30,060
      6/29/09       44,228       3.05       44       134,956                     135,000
      7/10/09       7,371       3.05       7       22,493                     22,500
      6/25/09       7,371       3.05       7       22,493                     22,500
      7/2/09       14,743       3.05       15       44,985                     45,000
      7/2/09       7,371       3.05       7       22,493                     22,500
      7/27/09       7,371       3.05       7       22,493                     22,500
      7/23/09       7,371       3.05       7       22,493                     22,500
      7/29/09       10,320       3.05       10       31,490                     31,500
      7/31/09       30,959       3.05       31       94,469                     94,500
      8/5/09       22,114       3.05       22       67,478                     67,500
      8/27/09       14,743       3.05       15       44,985                     45,000
      8/7/09       7,371       3.05       7       22,493                     22,500
      8/21/09       20,640       3.05       21       62,979                     63,000
      9/4/09       28,011       3.05       28       85,472                     85,500
      9/4/09       5,897       3.05       6       17,994                     18,000
      9/8/09       7,371       3.05       7       22,493                     22,500
      9/18/09       11,794       3.05       12       35,988                     36,000
      7/15/09       7,371       3.05       7       22,493                     22,500
      7/17/09       7,371       3.05       7       22,493                     22,500
      7/27/09       7,371       3.05       7       22,493                     22,500
      9/25/09       7,371       3.05       7       22,493                     22,500
      1/10/10       14,743       3.05       15       44,985                     45,000
      12/18/09       88,455       3.05       88       269,912                     270,000
      12/11/09       9,789       3.05       10       29,870                     29,880
      11/25/09       32,787       3.05       33       99,967                     100,000
                                       
(Subscriptions Receivable) Collections                                     (111,015 )                   (111,015)
Rounding                    (1                  
                                       
Net loss             -               -       -       -       (2,567,807 )   (2,567,807)
                                                            
Balance, December 31, 2009             19,231,296               19,231       10,370,839       -       (8,994,266 )   1,395,804
                                                            
Common stock issued     Total       705,311               706       2,149,637                     3,456,342

 

F-30
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                               
      11/16/09       11,794       3.05       12       35,988                 36,000  
      1/10/10       14,743       3.05       15       44,985                     45,000  
      2/10/10       35,382       3.05       35       107,965                     108,000  
      2/9/10       10,320       3.05       10       31,490                     31,500  
      2/9/10       826       -       1       (1 )                      
      3/23/10       29,485       3.05       29       89,971                     90,000  
      3/23/10       51,599       3.05       52       157,448                     157,500  
      3/23/10       81,909       3.05       82       249,938                     250,020  
      5/12/10       10,320       3.05       10       31,490                     31,500  
      5/12/10       10,320       3.05       10       31,490                     31,500  
      5/12/10       10,320       3.05       10       31,490                     31,500  
      4/12/10       58,970       3.05       59       179,941                     180,000  
      5/19/10       10,320       3.05       10       31,490                     31,500  
      5/25/10       10,320       3.05       10       31,490                     31,500  
      7/15/10       106,146       3.05       106       323,894                     324,000  
      7/15/10       32,758       3.05       33       99,967                     100,000  
      7/12/10       8,551       3.05       9       26,091                     26,100  
      7/14/10       10,320       3.05       10       31,490                     31,500  
      7/12/10       7,371       3.05       7       22,493                     22,500  
      10/18/10       38,331       3.05       38       116,962                     117,000  
      10/20/10       10,320       3.05       10       31,490                     31,500  
      10/20/10       10,320       3.05       10       31,490                     31,500  
      10/27/10       10,320       3.05       10       31,490                     31,500  
      11/10/10       32,787       3.05       33       100,047                     100,080  
      11/16/10       11,794       3.05       12       35,988                     36,000  
      11/17/10       10,320       3.05       10       31,490                     31,500  
      11/23/10       10,320       3.05       10       31,490                     31,500  
      11/23/10       16,394       3.05       16       50,024                     50,040  
      11/24/10       7,371       3.05       7       22,495                     22,502  
      11/23/10       14,743       3.05       15       44,985                     45,000  
      11/26/10       4,128       3.05       4       12,596                     12,600  
      11/9/10       16,394       3.05       16       49,984                     50,000  
                                                               
Conversion of notes payable to Common stock     Total       427,945               428       1,305,572                        
                                                               
      11/9/10       49,151       3.05       49       149,951                     150,000  
      11/9/10       49,151       3.05       49       149,951                     150,000  
      11/11/10       73,713       3.05       74       224,926                     225,000  
      11/12/10       32,787       3.05       33       99,967                     100,000  
      11/22/10       131,061       3.05       131       399,869                     400,000  
      11/22/10       49,151       3.05       49       149,951                     150,000  
      11/23/10       14,743       3.05       15       44,985                     45,000  
      11/30/10       16,394       3.05       16       49,984                     50,000  
      12/3/10       11,794       3.05       12       35,988                     36,000  
                                                               
(Subscriptions Receivable) Collections                                     (26,048 )                   (26,048 )

 

F-31
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                 
Rounding             501               1       (1 )                      
                                                               
Unrealized gain on securities available for sale             -               -       -       542,573       -     542,573  
                                                               
Net loss             -               -       -       -       (3,757,370 )   (3,757,370)  
                                                               
Balance, December 31, 2010             20,365,053               20,365       13,799,999       542,573       (12,751,636 )   1,611,301  
                                                               
Common stock issued     Total       272,147               272       1,153,402                     1,153,674  
                                                               
      3/18/11       70,764       4.24       71       299,929                     300,000  
      3/18/11       11,794       4.24       12       49,988                     50,000  
      3/18/11       5,897       4.24       6       24,994                     25,000  
      3/21/11       5,897       4.24       6       24,994                     25,000  
      3/18/11       11,794       4.24       12       49,988                     50,000  
      3/18/11       11,794       4.24       12       49,988                     50,000  
      3/18/11       11,794       4.24       12       49,988                     50,000  
      3/18/11       5,897       4.24       6       24,994                     25,000  
      3/18/11       5,897       4.24       6       24,994                     25,000  
      3/18/11       14,743       4.24       15       62,485                     62,500  
      3/21/11       5,897       4.24       6       24,994                     25,000  
      3/21/11       8,551       4.24       9       36,241                     36,250  
      3/22/11       5,897       4.24       6       24,994                     25,000  
      3/22/11       8,846       4.24       9       37,491                     37,500  
      3/22/11       5,897       4.24       6       24,994                     25,000  
      3/22/11       17,691       4.24       18       74,982                     75,000  
      3/22/11       7,076       4.24       7       29,993                     30,000  
      3/23/11       14,743       4.24       15       62,470                     62,485  
      3/24/11       23,588       4.24       24       99,947                     99,971  
      3/24/11       11,794       4.24       12       49,973                     49,985  
      3/25/11       5,897       4.24       6       24,977                     24,983  
                                                               
Conversion of notes payable to Common stock     Total       36,060               36       109,994                        
                                                               
      1/21/11       16,394       3.05       16       49,984                     50,000  
      1/21/11       19,666       3.05       20       60,010                     60,030  
                                                               
Shares issued to existing shell stockholders in the reorganization     5/3/11       3,750,000               3,750       (3,750 )                   -  
                                                               
Common stock repurchased and cancelled from dissenting stockholders             (47,178 )             (47 )     (199,953 )                   (200,000 )

  

F-32
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

    Date     Shares     $/
Share
    Common
stock
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Deficit
Accumulated
during
Development
Stage
    Total  
                                                               
Rounding             454               1       (1 )                      
                                                               
Proceeds from exercise of warrants     Total       4,718               5       14,395                        
                                                               
      4/11/11       1,769       3.05       2       5,398                     5,400  
      5/25/11       413       -       -       -                        
      6/3/11       2,949       3.05       3       8,997                     9,000  
                                                               
Warrants issued for services                                     1,053,150                     1,053,150  
                                         
Stock options vested     12/19/11                               35,196                     35,196  
                                         
Shares issued for stock option exercised     11/22/11       11,794       3.05       12       35,960                     35,972  
Warrants issued in conjunction with convertible note                                     4,864,773                     864,773  
                                                               
                                                               
Impact of beneficial conversion feature                                     1,469,343                     1,469,343  
                                                               
Unrealized gain on securities available for sale             -               -       -       (287,233 )     -     (287,233 )
                                                               
Unrealized foreign currency translation effect                                             (2,927 )           (2,927 )
                                                               
Net loss             -               -       -       -       (8,832,758 )   (8,832,758 )
                                                               
Balance, December 31, 2011             24,393,461               24,394       18,332,508       252,413       (21,584,394 )   (2,975,079 )

 

NOTE 13 – Geographic Information

 

For the years ended December 31, 2011 and 2010, the Company earned revenue from countries outside of the U.S. as outlined in the table below. The Company did not have any significant currency translation or foreign transaction adjustments during the years ended December 31, 2011 and 2010.

 

Country   Sales  year  ended
December 31, 2011
    % of Total Revenue
year ended December
31, 2011
    Sales year ended
December 31, 2010
    % of Total Revenue
year  ended
December 31, 2010
 
Ghana   $ 15,400       5 %   $ 0       0 %
Japan   $ 161,602       48 %   $ 65,395       47 %
Taiwan   $ 50,000       15 %   $ 0       0 %

 

F-33
Emmaus Life Sciences, Inc.
(A Development Stage Company)
Notes to the Financial Statements

 

NOTE 14 – SUBSEQUENT EVENTS

 

In January 2012, the Company issued a promissory note in the amount of $200,000. The note bears interest at 8% per annum and all unpaid principal and interest are due upon demand at the lender’s option. In connection with the issuance of the note, the Company issued three-year warrants to purchase 55,556 shares of the Company’s common stock at a per share exercise price of $1.00.

 

In February 2012, the Company issued a promissory note in the amount of $205,000, which bears interest at 11% per annum and matures on the two year anniversary date of the note. The lender may, at any time after the six month anniversary date of the note, declare the entire unpaid principal and unpaid accrued interest immediately due and payable. In connection with the issuance of the note, the Company issued three-year warrants to purchase 56,945 shares of the Company’s common stock at a per share exercise price of $1.00.

 

In February 2012, the Company issued a one-year convertible note in the amount of $108,000, which bears interest at 8% per annum and matures on the anniversary date of the note. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase 30,000 shares of the Company’s common stock at a per share exercise price of $1.00.

 

In February 2012, the Company issued two promissory notes totaling $966,668 in aggregate principal amount. The notes each bear interest at 11% per annum and are due on demand by the lender. In connection with the issuance of the notes, the Company issued three-year warrants to purchase an aggregate of 268,519 shares of the Company’s common stock at a per share exercise price of $1.00.

 

In February 2012, the Company issued two promissory notes totaling $266,667 in aggregate principal amount. The notes each bear interest at 11% per annum. All unpaid principal and accrued interest is due upon the second anniversary date of each of the notes, however each lender may demand the entire unpaid principal and unpaid accrued interest immediately due and payable at any time after the six month anniversary date of each note.

 

In February 2012, the Company issued four convertible notes totaling $466,666 in aggregate principal amount, which bear interest at 8% per annum and mature on the one-year anniversary dates of the notes. Each lender may, after the three month anniversary date of its note, declare all unpaid principal and accrued unpaid interest immediately due and payable. The principal amount plus the unpaid accrued interest due under each of the convertible notes is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the notes, the Company issued three-year warrants to purchase a total of 32,406 shares of the Company’s common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise.

 

In February 2012, the Company made a payment of $1.5 million to CellSeed pursuant to the Individual Agreement.

 

In February 2012, we issued warrants to purchase 1,000,000 and 500,000 to Henry McKinnell and Alfred Osborne, respectively, with an exercise price of $1.00 per share.  Each warrantholder may purchase one-half of the shares underlying his respective warrant in 2013 only and the other half of the shares underlying his warrant in 2014 only.  The warrants were issued to each of the warrantholders as compensation for their contributions to various projects on the Company’s behalf.

 

In March 2012, the Company issued a convertible note in the principal amount of $150,005, which bears interest at 8% per annum and matures on the one-year anniversary date of the note. The lender may, after the three month anniversary date of the note, declare all unpaid principal and accrued unpaid interest immediately due and payable. The principal amount plus the unpaid accrued interest due under the convertible note is convertible into shares of the Company’s common stock at $3.60 per share. In connection with the issuance of the note, the Company issued three-year warrants to purchase a total of 10,417 shares of the Company’s common stock at a per share exercise price equal to 75% of the per share fair market value of the Company’s common stock on the date prior to exercise.

 

In April 2012, the Company issued options to purchase an aggregate of 1,490,000 shares of its common stock to various of its directors, officers, employees and consultants at an exercise price of $3.60 per share. Such options expire on the tenth anniversary of the grant date and vest in equal installments over a three year period, with the first one-third of such options to vest on the one-year anniversary of the grant date.

 

F-34
 

 

[INSIDE BACK COVER]

 

 
 

 

 

 

Shares

Common Stock

 

   

 

 PROSPECTUS

 

 

Aegis Capital Corp 

 

, 2012 

 

 

 
 

 

PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, if any, payable by the Registrant relating to the sale of common stock being registered. All amounts are estimates other than the Commission's registration fee, FINRA filing fee and NASDAQ Global Market listing fee.

 

Securities and Exchange Commission registration fee  $5,558.10 
FINRA filing fee  $5,350.00 
NASDAQ Global Market listing fee   * 
Printing and transfer agent fees   * 
Accounting fees and expenses   * 
Legal fees and expenses   * 
Miscellaneous   * 
. Total  $

*

 

* To be completed by amendment

 

Item 14. Indemnification of directors and officers

 

Under Section 145 of the General Corporation Law of the State of Delaware, we can indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”).  Our Certificate of Incorporation provides for the indemnification, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, of officers, directors, employees and agents of the Company.  We may, prior to the final disposition of any proceeding, pay expenses incurred by an officer or director upon receipt of an undertaking by or on behalf of that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under the bylaws or otherwise.  We shall indemnify any officer, director, employee or agent upon a determination that such individual has met the applicable standards of conduct specified in Section 145.  In the case of an officer or director, the determination shall be made by (a) a majority vote of directors who are not parties to such proceeding, even though less than a quorum; (b) a committee of such directors designated by majority vote of such directors, even though less than a quorum; (c) if there are no such directors, independent legal counsel in a written opinion or (d) the stockholders.

 

Our certificate of incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders.  This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of no monetary relief will remain available under Delaware law.  In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law.  The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

 

We have been advised that in the opinion of the Securities and Exchange Commission, insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.  In the event a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by its director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

II-1
 

 

We maintain officers’ and directors’ liability insurance. We have also entered into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and that provide additional procedural protection. Such indemnification agreements require us, among other things, to:

 

·indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors;

 

·advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; or

 

·obtain directors’ and officers’ insurance.

 

At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

 

Item 15. Recent sales of securities

 

On May 3, 2011, pursuant to the terms of the Merger Agreement (i) each outstanding share of Emmaus Medical common stock was exchanged for approximately 29.48548924976 shares of our common stock, (ii) each outstanding Emmaus Medical option and warrant, which was exercisable for one share of Emmaus Medical common stock, was exchanged for an option or warrant, as applicable, exercisable for 29.48548924976 shares of our common stock; and (iii) each outstanding convertible note of Emmaus Medical, which was convertible for one share of Emmaus Medical common stock, was exchanged for a convertible note exercisable for 29.48548924976 shares of our common stock. As a result of the Merger, holders of Emmaus Medical common stock, options, warrants and convertible notes received 20,628,305 of our shares of common stock (excluding 47,178 shares held by stockholders who exercised dissenters’ rights in connection with the Merger), options and warrants to purchase an aggregate of 326,507 shares of our common stock and convertible notes exercisable for 271,305 shares of our common stock, or 85% of our issued and outstanding common stock on a fully diluted basis.

 

All of the securities issued pursuant to the Merger Agreement were offered and issued in reliance upon the exemption from registration pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 promulgated thereunder. Each of the securityholders of Emmaus Medical qualified as an “accredited investor,” as defined by Rule 501 under the Securities Act.

 

On April 19, 2011, we sold an aggregate of 577,750 shares of our common stock in a private placement transaction at a purchase price per share equal to $2.00 for aggregate cash proceeds of $1,155,500, which proceeds were distributed to AFH Advisory, the Company's former majority stockholder prior to the Merger. The shares were sold to in reliance upon the exemption from registration pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. These securities qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of securities by the Company did not involve a “public offering”.  The issuance was not 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.

 

From June 2011 through March 2012, the Company issued convertible notes and three-year warrants to the following persons and entities on the dates and with the respective terms indicated below:

  

II-2
 

 

Securityholder   Date of
Issuance
    Principal
Amount of
Note
    Interest
Rate of
Note
    Term of Note     No. Shares
Underlying
Warrants
    Per Share Exercise
Price of Warrants
 
Yasushi Nagasaki     6/29/2011     $ 360,000       8 %     1 year       25,000       (2 )
Andrew Wood     7/8/2011     $ 3,240       8 %     1 year       225       (2)
Yung Ming Suh     7/11/2011     $ 925,000       8 %     1 year       64,250       (2)
Yumiko Nakamura     8/9/2011     $ 54,000       8 %     1 year       3,750       (2)
Technoble Co., Ltd.     8/30/2011     $ 130,100       8 %     1 year (1)       9,035       (2)
Delfan Co., Ltd.     8/30/2011     $ 130,100       8 %     1 year (1)       9,035       (2 )
Jun & Yumi Saito     8/31/2011     $ 5,400       8 %     1 year       375       (2 )
Sumiko Fujisawa     9/7/2011     $ 30,000       8 %     1 year (1)       2,083       (2 )
Hideki & Eiko Uehara     9/7/2011     $ 30,000       8 %     1 year (1)       2,083       (2 )
Dennis Y. Teranishi     9/9/2011     $ 108,000       8 %     1 year (1)       7,500       (2 )
Shitabata Family Trust     9/29/2011     $ 450,000       8 %     1 year (1)       62,500       (2 )
Shitabata Family Trust     10/3/2011     $ 1,050,000       8 %     1 year (1)       145,833       (2 )
MLPF&S Cust. FBO Willis C. Lee     10/5/2011     $ 128,002       8 %     1 year       35,556     $ 1.00  
Tracey & Mark Doi     2/10/2012     $ 108,000       8 %     1 year       30,000     $ 1.00  
Yukio Hasegawa     2/15/2012     $ 133,333       8 %     1 year (1)       9,259       (2)
The Saito Family Trust     2/20/2012     $ 100,000       8 %     1 year (1)       6,944       (2 )
Robert & Magumi Jo     2/18/2012     $ 100,000       8 %     1 year (1)       6,944       (2 )
Hiroshi Iguchi     2/20/2012     $ 133,333       8 %     1 year (1)       9,259       (2 )
J.R. Downey     3/2/2012     $ 150,005       8 %     1 year (1)       10,417       (2 )

(1) Noteholder may demand repayment of the note after the three month anniversary of the date of issuance.

(2) Per share exercise price is equal to 75% of the per share fair market value of Company’s common stock on the date prior to exercise

 

The principal amount plus the unpaid accrued interest due under each of the convertible notes listed above is convertible into shares of our common stock at $3.60 per share.

 

All of the convertible notes and warrants issued to the above-listed securityholders, except Mr. Suh, were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. These securities qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of securities by the Company did not involve a “public offering.”  The issuance was not 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.

 

All of the securities issued to Mr. Suh were offered and issued in reliance upon an exemption from registration pursuant to Regulation S of the Securities Act.  We complied with the conditions of Rule 903 as promulgated under the Securities Act including, but not limited to, the following: (i) the recipient of the securities is a non-U.S. resident and has not offered or sold their securities in accordance with the provisions of Regulation S; (ii) an appropriate legend was affixed to the securities issued in accordance with Regulation S; (iii) each recipient of the securities has represented that it was not acquiring the securities for the account or benefit of a U.S. person; and (iv) the recipient of the shares agreed to resell the securities only in accordance with the provisions of Regulation S, pursuant to a registration statement under the Securities Act, or pursuant to an available exemption from registration.  We will refuse to register any transfer of the securities not made in accordance with Regulation S, after registration, or under an exemption.

 

On May 25, 2011, we issued 413 shares of common stock upon the cashless exercise of an outstanding warrant. On June 3, 2011, we issued 2,949 shares of common stock upon the exercise of an outstanding warrant. The warrant was exercised for cash at an exercise price of $3.05 per share for an aggregate price of $8,994.45. On November 11, 2011 we issued 11,794 shares of common stock upon the exercise of outstanding options. The options were exercised for cash at an exercise price of $3.05 per share for an aggregate price of $35,971.70. The shares issued upon the exercises of the warrants and options were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. These securities qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of securities by the Company did not involve a “public offering.”  The issuance was not 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.

 

II-3
 

 

In January 2012 and February 2012, we issued three-year warrants to the securityholders listed below in connection with the issuance of promissory notes to such securityholders on the dates and with the respective terms indicated below:

 

Securityholder   Date of
Issuance
    No. Shares
Underlying
Warrants
    Per Share Exercise
Price of Warrants
 
Hope International Hospice, Inc.     1/17/2012       55,556     $ 1.00  
Hideki & Eiko Uehara     2/15/2012       37,037     $ 1.00  
Shigeru Matsuda     2/15/2012       231,482     $ 1.00  
Lan T. Tran     2/10/2012       56,945     $ 1.00  

 

The warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. These warrants qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of the warrants by the Company did not involve a “public offering.”  The issuance was not 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) the offeree was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offeree.

 

On February 29, 2012, we issued warrants to purchase 1,000,000 and 500,000 to Henry McKinnell and Alfred Osborne, respectively, with an exercise price of $1.00 per share. Each warrantholder may purchase one-half of the shares underlying his respective warrant in 2013 only and the other half of the shares underlying his warrant in 2014 only. The warrants were issued to each of the warrantholders as compensation for their contributions to various projects on the Company’s behalf. These warrants qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of the warrants by the Company did not involve a “public offering.”  The issuance was not 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) the offeree was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offeree.

 

On April 2, 2012, we issued options to purchase an aggregate of 1,490,000 shares of our common stock to various of our directors, officers, employees and consultants at an exercise price of $3.60 per share. Such options expire on the tenth anniversary of the grant date and vest in equal installments over a three year period, with the first one-third of such options to vest on the one-year anniversary of the grant date. These options qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of the options by the Company did not involve a “public offering.”  The issuance was not 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) the offeree was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offeree.

 

Issuances of Securities by Emmaus Medical Prior to the Merger

 

During the year ended December 31, 2008 prior to the Merger, Emmaus Medical sold an aggregate of 1,226,959 shares of its common stock to various accredited investors for total proceeds of $2.5 million. During the year ended December 31, 2009 prior to the Merger, Emmaus Medical (a) sold an aggregate of 854,446 shares of its common stock to various accredited investors for total proceeds of $2.2 million; (b) issued warrants to purchase an aggregate of 113,919 shares of its common stock at an exercise price of $3.05 per share to the purchasers of the common stock in connection with the sale of common stock that expire upon the earlier of five years from the date of issuance or upon the closing of this offering of common stock; and (c) issued a convertible note to Shigeru Matsuda in the principal amount of 20,000,000 Japanese Yen (US$221,895) which was convertible into common stock of Emmaus Medical at $3.05 per share. During the year ended December 31, 2010 prior to the Merger, Emmaus Medical (a) sold an aggregate of 705,900 shares of its common stock to various accredited investors for total gross proceeds of $2.1 million; (b) issued warrants to purchase an aggregate of 184,870 shares of its common stock at an exercise price of $3.05 per share to the purchasers of the common stock in connection with the sale of common stock that expire upon the earlier of five years from the date of issuance or upon the closing of this offering of common stock; (c) issued 427,857 shares of its common stock upon the conversion of $1,306,000 in convertible notes at a conversion price of $3.05 per share; (d) issued convertible notes to various accredited investors in the aggregate principal amount of $1,490,030 convertible into common stock of Emmaus Medical at $3.05 per share; and (e) issued options to purchase an aggregate of 23,590 shares of its common stock at an exercise price of $3.05 to two of its directors. Emmaus Medical issued 36,514 shares of common stock upon the conversion of $110,030 of convertible notes in January 2011 prior to the Merger at a conversion price of $3.05 per share. In March 2011 prior to the Merger, Emmaus Medical (a) sold 272,147 shares of common stock to various accredited investors at $4.24 per share for total gross proceeds of $1.2 million and (b) issued a convertible note in the principal amount of $500,000 to Mitsubishi UFJ Capital II, Limited Partnership, an accredited investor, convertible into common stock of Emmaus Medical at $3.05 per share. During the three months ended March 31, 2011, Emmaus Medical issued warrants to purchase an aggregate of 5,897 shares of its common stock at an exercise price of $3.05 per share to the purchasers of the common stock in connection with the sale of common stock that expire upon the earlier of five years from the date of issuance or upon the closing of this offering of common stock. In April 2011 prior to the Merger, Emmaus Medical issued 1,769 shares of common stock upon the exercise of a warrant.

 

II-4
 

 

All of the securities issued by Emmaus Medical were sold or issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. These securities qualified for exemption under Rule 506 promulgated under Section 4(2) of the Securities Act because the issuance of shares by the Company did not involve a “public offering.”  The issuance was not 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. All of the share and per share figures disclosed in this section as issued by Emmaus Medical prior to the Merger have been adjusted to reflect the recapitalization due to the Merger.

 

Item 16. Exhibits

 

Exhibit No.   Exhibit Description
 1.1*    Form of Underwriting Agreement.
2.1    Merger Agreement dated as of April 21, 2011 by and among the registrant, AFH Merger Sub, Inc., AFH Holding and Advisory, LLC, and Emmaus Medical, Inc. (incorporated by reference from Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 25, 2011).
3.1    Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the registrant’s Form 10-SB filed with the Securities and Exchange Commission on February 1, 2008). 
3.2   Bylaws (incorporated by reference from Exhibit 3.2 to the registrant’s Form 10-SB filed with the Securities and Exchange Commission on February 1, 2008).
3.3   Certificate of Ownership and Merger filed with the Office of Secretary of State of Delaware on May 3, 2011 (incorporated by reference from Exhibit 3.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
3.4   Certificate of Ownership and Merger effecting the name change to Emmaus Life Sciences, Inc. filed with the Delaware Secretary of State on September 14, 2011 (incorporated by reference from Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 15, 2011).
4.1   Form of Warrant (incorporated by reference from Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.2   Convertible Promissory Note (Cash Interest) dated March 14, 2011 (incorporated by reference from Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.3   Form of Convertible Note (No Interest) entered into with the persons indicated in Schedule A attached to the Form of Convertible Note (incorporated by reference from Exhibit 4.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.4   Convertible Promissory Note (2-5 Years) dated January 12, 2009 (incorporated by reference from Exhibit 4.4 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.5   Convertible Promissory Note (Cash Interest) dated November 23, 2010 (incorporated by reference from Exhibit 4.5 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).

 

II-5
 

 

4.6*   Specimen Certificate of Common Stock.
4.7*   Form of Underwriters’ Warrant.
4.8+   Convertible Promissory Note dated June 29, 2011 issued by the registrant to Yasushi Nagasaki.
4.9   Loan Agreement dated June 9, 2011 by and between Emmaus Medical, Inc. and Equities First Holdings, LLC (incorporated by reference to Exhibit 4.2 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011).
4.10   Pledge Agreement dated June 9, 2011 by and between Emmaus Medical, Inc. and Equities First Holdings, LLC (incorporated by reference to Exhibit 4.3 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011).
4.11+   Form of Convertible Promissory Note (1 Year Cash Interest) issued by the registrant to the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.12+   Convertible Promissory Note dated July 11, 2011 issued by the registrant to Suh Yung Min.
4.13+   Form of Convertible Promissory Note (On Demand Up to 1 Year) issued by the registrant to the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.14   Form of Warrant issued to the individuals listed in Schedule A thereto (incorporated by reference to Exhibit 4.4 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.15+   Warrant dated August 31, 2011 issued by the registrant to Gregoire De Rothschild.
4.15(a)   Amendment No. 1 dated January 9, 2011 to Warrant dated August 31, 2011 issued by the registrant to Gregoire De Rothschild.
4.16   Convertible Promissory Notes issued by the registrant to The Shitabata Family Trust on September 29, 2011 and October 3, 2011 (incorporated by reference to Exhibit 4.6 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.17   Convertible Promissory Note dated October 5, 2011 issued by the registrant to MLPF&S Cust. FBO Willis C. Lee (incorporated by reference from Exhibit 4.7 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.18   Warrant dated October 5, 2011 issued to MLPF&S Cust. FBO Willis C. Lee (incorporated by reference to Exhibit 4.8 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.19 +   Warrant dated January 17, 2012 issued by the registrant to Hope International Hospice, Inc.
4.20   Form of Warrant dated February 29, 2012 issued to Henry McKinnell and Alfred Osborne in the amounts indicated on Schedule A attached to the Form of Warrant.
4.21   Convertible Promissory Note dated as of February 10, 2012 issued by the registrant to Tracey and Mark Doi.
4.22   Form of Convertible Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A attached to the Form of Convertible Promissory Note.
4.23   Form of Warrant issued to the individuals listed in Schedule A to the Form of Warrant.
4.24   Form of Warrant issued to the individuals listed in Schedule A to the Form of Warrant.
4.25*   Form of Warrant to be issued to AFH Holding and Advisory, LLC upon the closing of this offering.
5.1*   Opinion of K&L Gates LLP.
10.1   Share Cancellation Agreement dated as of April 21, 2011 by and between the registrant and AFH Holding and Advisory, LLC (incorporated by reference from Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.2   Registration Rights Agreement dated as of May 3, 2011 by and among the registrant and the individuals listed on Schedule A thereto (incorporated by reference from Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.2(a)   Amendment and Waiver No. 1 to Registration Rights Agreement dated as of March 6, 2012 by and among the registrant and the individuals listed on Schedule A thereto.
10.3   Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).

 

II-6
 

 

10.3(a)   Form of Incentive Stock Option Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(a) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(b)   Form of Incentive Stock Option Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(b) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(c)   Form of Non-Qualified Stock Option Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(c) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(d)   Form of Non-Qualified Stock Option Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(d) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(e)   Form of Restricted Stock Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(e) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(f)   Form of Restricted Stock Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(f) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.4   License Agreement dated as of March 7, 2001 by and between Harbor-UCLA Research and Education Institute and Orphan Drug International, L.L.C (i.e. Emmaus Medical, Inc.) and corresponding Addendum to the License Agreement entered into December 19, 2003 between Harbor-UCLA Research and Education Institute and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.4 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.5   Federal Supply Schedule Contract Award dated December 8, 2010 by and between the United States Department of Veterans Affairs and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.5 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.6   Office Lease, dated March 12, 2008, by and between Emmaus Medical, Inc. and 20655 S. Western Avenue, LLC (incorporated by reference from Exhibit 10.6 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.7   Sublicense Agreement dated as of October 18, 2007 by and between Cato Holding Company and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.8   Assignment and Transfer Agreement dated as of February 1, 2011 by and among Cato Holding Company, Nutritional Restart Pharmaceutical Limited Partnership and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.9   Promotional Rights Agreement effective as of March 12, 2008 by and between Ares Trading S.A. and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.10   Joint Research and Development Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and CellSeed, Inc. (incorporated by reference from Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.10(a)+   Addendum to the Joint Research and Development Agreement effective August 8, 2011.
10.11   Individual Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and CellSeed, Inc. (incorporated by reference from Exhibit 10.11 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.12   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.12 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.13   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Willis C. Lee (incorporated by reference from Exhibit 10.13 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).

 

II-7
 

 

10.14   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Lan T. Tran (incorporated by reference from Exhibit 10.14 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.15   Employment Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and Yasushi Nagasaki (incorporated by reference from Exhibit 10.15 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.16   Promissory Note dated as of January 12, 2009 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.16 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.17   Promissory Note dated as of April 23, 2009 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.17 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.18   Promissory Note dated as of January 12, 2011 by and between Emmaus Medical, Inc. and Willis C. Lee (incorporated by reference from Exhibit 10.18 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.19   Promissory Note dated as of January 12, 2011 by and between Emmaus Medical, Inc. and Hope International Hospice, Inc. (incorporated by reference from Exhibit 10.19 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.20   Form of Indemnification Agreement and List of Officers and Directors (incorporated by reference from Exhibit 10.20 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.21   Promissory Note dated as of April 29, 2009 by and between Emmaus Medical, Inc. and Daniel Kimbell (incorporated by reference from Exhibit 10.21 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.22   Promissory Note dated as of May 11, 2009 by and between Emmaus Medical, Inc. and Daniel Kimbell (incorporated by reference from Exhibit 10.22 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.23   Trademark Assignment dated as of February 14, 2011 by and between Cato Research Ltd. and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.23 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.24   Letter of Intent by and between Ajinomoto Company and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.24 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.25   Services Agreement dated as of March 16, 2004 by and between Emmaus Medical, Inc. and ClinDatrix, Inc. (incorporated by reference from Exhibit 10.25 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on August 18, 2011).
10.26+   Amended and Restated Letter of Intent by and between the registrant and AFH Holding & Advisory LLC dated September 30, 2011.
10.27   Form of Lock-Up Agreement.
10.28+   Promissory Note dated June 21, 2011 issued by the registrant to Yutaka Niihara, M.D., MPH.
10.29+   Form of Promissory Note issued to Yoko Hagiike issued on the dates and in the amounts indicated in Schedule A attached to the Form of Promissory Note.
10.30+   Promissory Note dated January 17, 2012 issued by the registrant to Hope International Hospice, Inc.
10.31   Employment Agreement dated as of April 2, 2012 by and between the registrant and Peter Ludlum (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2012).
10.32   Promissory Note dated February 10, 2012 issued by the registrant to Lan T. Tran.
10.33   Form of Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A.
10.34   Form of Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A.
21.1+   List of Subsidiaries.
23.1*   Consent of K&L Gates LLP (contained in Exhibit 5.1).

 

II-8
 

 

23.2   Consent of EFP Rotenberg, LLP.
24.1   Power of Attorney (included on signature page).

* To be filed by amendment.

+ Previously filed.

 

Item 17. Undertakings

 

(h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred and paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

 

(i) The undersigned Registrant hereby undertakes that it will:

 

(1) for determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.

 

(2) for determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

 

II-9
 

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Torrance, California, on the 9th day of April, 2012.

 

  Emmaus Life Sciences, Inc.
     
  By:   /s/  Yutaka Niihara
  Name:  Yutaka Niihara, MD, MPH
  Title: 

President and Chief Executive Officer

(principal executive officer and duly authorized officer)

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yutaka Niihara, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign (1) any and all amendments to this Form S-1 (including post-effective amendments) and (2) any registration statement or post-effective amendment thereto to be filed with the Securities and Exchange Commission pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

 

SIGNATURE   TITLE   DATE
         
    President and Chief Executive Officer (Principal    
/s/  Yutaka Niihara   Executive Officer) and Director   April 9, 2012
Yutaka Niihara, M.D., MPH        
         
    Executive Vice President and Chief Financial Officer    
    (Principal Financial and Accounting    
/s/  Peter Ludlum   Officer)   April 9, 2012
Peter Ludlum        
         
 /s/ Henry A. McKinnell, Jr.   Chairman of the Board   April 8, 2012
Dr. Henry A. McKinnell, Jr.        
         
/s/ Willis C. Lee   Director   April 9, 2012
Willis C. Lee        
         
/s/ Amir F. Heshmatpour   Director   April 8, 2012
Amir F. Heshmatpour        
         
/s/ Alfred E. Osborne, Jr.   Director   April 9, 2012
Dr. Alfred E. Osborne, Jr.        
         
/s/ Tracey C. Doi   Director   April 8, 2012
Tracey C. Doi        
         
/s/ Maurice J. DeWald   Director   April 9, 2012
Maurice J. DeWald        

 

II-10
 

 

EXHIBIT INDEX

 

Exhibit No.   Exhibit Description
 1.1*    Form of Underwriting Agreement.
2.1    Merger Agreement dated as of April 21, 2011 by and among the registrant, AFH Merger Sub, Inc., AFH Holding and Advisory, LLC, and Emmaus Medical, Inc. (incorporated by reference from Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 25, 2011).
3.1    Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to the registrant’s Form 10-SB filed with the Securities and Exchange Commission on February 1, 2008). 
3.2   Bylaws (incorporated by reference from Exhibit 3.2 to the registrant’s Form 10-SB filed with the Securities and Exchange Commission on February 1, 2008).
3.3   Certificate of Ownership and Merger filed with the Office of Secretary of State of Delaware on May 3, 2011 (incorporated by reference from Exhibit 3.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
3.4   Certificate of Ownership and Merger effecting the name change to Emmaus Life Sciences, Inc. filed with the Delaware Secretary of State on September 14, 2011 (incorporated by reference from Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 15, 2011).
4.1   Form of Warrant (incorporated by reference from Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.2   Convertible Promissory Note (Cash Interest) dated March 14, 2011 (incorporated by reference from Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.3   Form of Convertible Note (No Interest) entered into with the persons indicated in Schedule A attached to the Form of Convertible Note (incorporated by reference from Exhibit 4.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.4   Convertible Promissory Note (2-5 Years) dated January 12, 2009 (incorporated by reference from Exhibit 4.4 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
4.5   Convertible Promissory Note (Cash Interest) dated November 23, 2010 (incorporated by reference from Exhibit 4.5 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
4.6*   Specimen Certificate of Common Stock.
4.7*   Form of Underwriters’ Warrant.
4.8+   Convertible Promissory Note dated June 29, 2011 issued by the registrant to Yasushi Nagasaki.
4.9   Loan Agreement dated June 9, 2011 by and between Emmaus Medical, Inc. and Equities First Holdings, LLC (incorporated by reference to Exhibit 4.2 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011).
4.10   Pledge Agreement dated June 9, 2011 by and between Emmaus Medical, Inc. and Equities First Holdings, LLC (incorporated by reference to Exhibit 4.3 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011).
4.11+   Form of Convertible Promissory Note (1 Year Cash Interest) issued by the registrant to the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.12+   Convertible Promissory Note dated July 11, 2011 issued by the registrant to Suh Yung Min.
4.13+   Form of Convertible Promissory Note (On Demand Up to 1 Year) issued by the registrant to the persons indicated in Schedule A attached to the Form of Convertible Promissory Note.
4.14   Form of Warrant issued to the individuals listed in Schedule A thereto (incorporated by reference to Exhibit 4.4 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.15+   Warrant dated August 31, 2011 issued by the registrant to Gregoire De Rothschild.
4.15(a)   Amendment No. 1 dated January 9, 2011 to Warrant dated August 31, 2011 issued by the registrant to Gregoire De Rothschild.

 

 
 

 

4.16   Convertible Promissory Notes issued by the registrant to The Shitabata Family Trust on September 29, 2011 and October 3, 2011 (incorporated by reference to Exhibit 4.6 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.17   Convertible Promissory Note dated October 5, 2011 issued by the registrant to MLPF&S Cust. FBO Willis C. Lee (incorporated by reference from Exhibit 4.7 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.18   Warrant dated October 5, 2011 issued to MLPF&S Cust. FBO Willis C. Lee (incorporated by reference to Exhibit 4.8 to the registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2011).
4.19 +   Warrant dated January 17, 2012 issued by the registrant to Hope International Hospice, Inc.
4.20   Form of Warrant dated February 29, 2012 issued to Henry McKinnell and Alfred Osborne in the amounts indicated on Schedule A attached to the Form of Warrant.
4.21   Convertible Promissory Note dated as of February 10, 2012 issued by the registrant to Tracey and Mark Doi.
4.22   Form of Convertible Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A attached to the Form of Convertible Promissory Note.
4.23   Form of Warrant issued to the individuals listed in Schedule A to the Form of Warrant.
4.24   Form of Warrant issued to the individuals listed in Schedule A to the Form of Warrant.
4.25*   Form of Warrant to be issued to AFH Holding and Advisory, LLC upon the closing of this offering.
5.1*   Opinion of K&L Gates LLP.
10.1   Share Cancellation Agreement dated as of April 21, 2011 by and between the registrant and AFH Holding and Advisory, LLC (incorporated by reference from Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.2   Registration Rights Agreement dated as of May 3, 2011 by and among the registrant and the individuals listed on Schedule A thereto (incorporated by reference from Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.2(a)   Amendment and Waiver No. 1 to Registration Rights Agreement dated as of March 6, 2012 by and among the registrant and the individuals listed on Schedule A thereto.
10.3   Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(a)   Form of Incentive Stock Option Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(a) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(b)   Form of Incentive Stock Option Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(b) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(c)   Form of Non-Qualified Stock Option Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(c) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(d)   Form of Non-Qualified Stock Option Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(d) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(e)   Form of Restricted Stock Agreement (Time-based and Performance-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(e) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.3(f)   Form of Restricted Stock Agreement (Time-based Vesting) under the Emmaus Life Sciences, Inc. 2011 Stock Incentive Plan (incorporated by reference from Exhibit 10.3(f) to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).

 

 
 

 

10.4   License Agreement dated as of March 7, 2001 by and between Harbor-UCLA Research and Education Institute and Orphan Drug International, L.L.C (i.e. Emmaus Medical, Inc.) and corresponding Addendum to the License Agreement entered into December 19, 2003 between Harbor-UCLA Research and Education Institute and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.4 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.5   Federal Supply Schedule Contract Award dated December 8, 2010 by and between the United States Department of Veterans Affairs and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.5 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.6   Office Lease, dated March 12, 2008, by and between Emmaus Medical, Inc. and 20655 S. Western Avenue, LLC (incorporated by reference from Exhibit 10.6 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.7   Sublicense Agreement dated as of October 18, 2007 by and between Cato Holding Company and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.8   Assignment and Transfer Agreement dated as of February 1, 2011 by and among Cato Holding Company, Nutritional Restart Pharmaceutical Limited Partnership and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.9   Promotional Rights Agreement effective as of March 12, 2008 by and between Ares Trading S.A. and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.10   Joint Research and Development Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and CellSeed, Inc. (incorporated by reference from Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.10(a)+   Addendum to the Joint Research and Development Agreement effective August 8, 2011.
10.11   Individual Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and CellSeed, Inc. (incorporated by reference from Exhibit 10.11 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.12   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.12 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.13   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Willis C. Lee (incorporated by reference from Exhibit 10.13 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.14   Employment Agreement dated as of April 5, 2011 by and between Emmaus Medical, Inc. and Lan T. Tran (incorporated by reference from Exhibit 10.14 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.15   Employment Agreement dated as of April 8, 2011 by and between Emmaus Medical, Inc. and Yasushi Nagasaki (incorporated by reference from Exhibit 10.15 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.16   Promissory Note dated as of January 12, 2009 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.16 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.17   Promissory Note dated as of April 23, 2009 by and between Emmaus Medical, Inc. and Yutaka Niihara, M.D., MPH (incorporated by reference from Exhibit 10.17 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.18   Promissory Note dated as of January 12, 2011 by and between Emmaus Medical, Inc. and Willis C. Lee (incorporated by reference from Exhibit 10.18 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.19   Promissory Note dated as of January 12, 2011 by and between Emmaus Medical, Inc. and Hope International Hospice, Inc. (incorporated by reference from Exhibit 10.19 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).
10.20   Form of Indemnification Agreement and List of Officers and Directors (incorporated by reference from Exhibit 10.20 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2011).

 

 
 

 

10.21   Promissory Note dated as of April 29, 2009 by and between Emmaus Medical, Inc. and Daniel Kimbell (incorporated by reference from Exhibit 10.21 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.22   Promissory Note dated as of May 11, 2009 by and between Emmaus Medical, Inc. and Daniel Kimbell (incorporated by reference from Exhibit 10.22 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.23   Trademark Assignment dated as of February 14, 2011 by and between Cato Research Ltd. and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.23 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.24   Letter of Intent by and between Ajinomoto Company and Emmaus Medical, Inc. (incorporated by reference from Exhibit 10.24 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 5, 2011).
10.25   Services Agreement dated as of March 16, 2004 by and between Emmaus Medical, Inc. and ClinDatrix, Inc. (incorporated by reference from Exhibit 10.25 to the registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on August 18, 2011).
10.26+   Amended and Restated Letter of Intent by and between the registrant and AFH Holding & Advisory LLC dated September 30, 2011.
10.27   Form of Lock-Up Agreement.
10.28+   Promissory Note dated June 21, 2011 issued by the registrant to Yutaka Niihara, M.D., MPH.
10.29+   Form of Promissory Note issued to Yoko Hagiike issued on the dates and in the amounts indicated in Schedule A attached to the Form of Promissory Note.
10.30+   Promissory Note dated January 17, 2012 issued by the registrant to Hope International Hospice, Inc.
10.31   Employment Agreement dated as of April 2, 2012 by and between the registrant and Peter Ludlum (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2012).
10.32   Promissory Note dated February 10, 2012 issued by the registrant to Lan T. Tran.
10.33   Form of Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A.
10.34   Form of Promissory Note issued by the registrant on the dates and to the persons and in the amounts indicated on Schedule A.
21.1+   List of Subsidiaries.
23.1*   Consent of K&L Gates LLP (contained in Exhibit 5.1).
23.2   Consent of EFP Rotenberg, LLP.
24.1   Power of Attorney (included on signature page).

* To be filed by amendment.

+ Previously filed.