UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2019

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

For the transition period from to

Commission File No.: 000-53072

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

Delaware		41-2254389
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(310) 214-0065

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Not applicable.

The registrant had 36,051,394 shares of common stock, par value $0.001 per share, outstanding as of May 10, 2019.

EMMAUS LIFE SCIENCES, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2019

INDEX

		Page
Part I Financial Information

Item 1.	Financial Statements	3

	(a)Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018	3

	(b)Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018 (Unaudited)	4

	(c)Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018 (Unaudited)	5

	(d)Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited)	6

	(e)Notes to Consolidated Financial Statements as of and for the three months ended March 31, 2019 (Unaudited)	7

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

Part II Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

Signatures		38

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share and per share amounts)

	As of
	March 31, 2019			December 31, 2018
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ($13,071 and $13,175 attributable to the VIE)	$	15,310		$	17,080
Accounts receivable, net		1,760			1,351
Inventories, net		5,795			4,705
Investment in marketable securities		42,873			49,343
Marketable securities, pledged to creditor		251			238
Prepaid expenses and other current assets ($271 and $273 attributable to the VIE)		818			743
Total current assets		66,807			73,460
PROPERTY AND EQUIPMENT, NET		153			152
OTHER ASSETS
Long-term investment at cost		527			538
Intangibles, net		50			54
Right of use assets		2,838			—
Deposits and other assets		360			352
Total other assets		3,775			944
Total assets	$	70,735		$	74,556
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	11,068		$	9,122
Deferred rent		—			19
Operating lease liabilities		682			—
Other current liabilities		5,217			5,181
Notes payable, net		7,000			6,394
Notes payable to related parties, net		470			468
Convertible notes payable, net		15,157			11,253
Convertible notes payable to related parties, net		13,896			5,089
Total current liabilities		53,490			37,526
LONG-TERM LIABILITIES
Deferred rent		—			268
Operating lease liabilities		2,478			—
Other long-term liabilities		35,637			36,222
Warrant derivative liabilities		1,447			1,399
Notes payable, net		1,922			1,021
Convertible notes payable, net		389			5,485
Convertible notes payable to related parties, net		—			8,529
Total long-term liabilities		41,873			52,924
Total liabilities		95,363			90,450
STOCKHOLDERS’ 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, 35,947,804 shares and 35,558,305 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		36			36
Additional paid-in capital		146,344			140,904
Accumulated other comprehensive income (loss)		(62	)		(69	)
Accumulated deficit		(170,864	)		(156,668	)
Total stockholders’ deficit		(24,546	)		(15,797	)
Noncontrolling interests		(82	)		(97	)
Total liabilities & stockholders’ deficit	$	70,735		$	74,556

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts) (Unaudited)

	Three months ended March 31,
	2019			2018
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
REVENUES, NET	$	5,307		$	781
COST OF GOODS SOLD		200			134
GROSS PROFIT		5,107			647
OPERATING EXPENSES
Research and development		513			411
Selling		1,485			870
General and administrative		3,681			3,807
Total operating expenses		5,679			5,088
LOSS FROM OPERATIONS		(572	)		(4,441	)
OTHER INCOME (EXPENSE)
Loss on debt extinguishment		—			(3,245	)
Change in fair value of warrant derivative liabilities		(48	)		840
Change in fair value of embedded conversion option		—			466
Net gains (losses) on equity investment in marketable securities		(6,457	)		5,535
Interest and other income (loss)		(111	)		46
Interest expense		(6,965	)		(5,298	)
Total other income (expenses)		(13,581	)		(1,656	)
LOSS BEFORE INCOME TAXES		(14,153	)		(6,097	)
INCOME TAXES		—			—
NET LOSS INCLUDING NONCONTROLLING INTERESTS		(14,153	)		(6,097	)
Net (income) loss attributable to noncontrolling interests		(14	)		—
NET LOSS ATTRIBUTABLE TO THE COMPANY		(14,167	)		(6,097	)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		8			14
Other comprehensive income (loss)		8			14
COMPREHENSIVE INCOME (LOSS)		(14,145	)		(6,083	)
Amounts attributable to noncontrolling interests:
Net (income) loss attributable to noncontrolling interest		(14	)		—
Foreign currency translation adjustments		(1	)		—
Comprehensive (income) loss attributable to noncontrolling interest		(15	)		—
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	(14,160	)	$	(6,083	)
NET LOSS PER COMMON SHARE	$	(0.40	)	$	(0.17	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		35,684,038			34,891,450

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018

(In thousands, except share and per share amounts) (Unaudited)

	Common stock – par value $0.001 per share, 100,000,000
	shares authorized
	Shares		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock, at cost			Accumulated Deficit			Total Emmaus Stockholders' Equity / (Deficit)			Non-controlling Interests			Total Equity / (Deficit)
Balance at January 1, 2018		34,885,506	$	35	$	113,112	$	41,276		$	—		$	(140,132	)	$	14,291		$	—		$	14,291
Cumulative effect adjustment on adoption of ASU 2016-01		—		—		—		(41,362	)		—			41,362			—			—			—
Beneficial conversion feature relating to convertible and promissory notes payable		—		—		3,638		—			—			—			3,638			—			3,638
Stock issued for cash		25,000		—		275		—			—			—			275						275
Repurchase of common stock		—		—		—		—			(1,314	)		—			(1,314	)					(1,314	)
Share-based compensation		—		—		710		—			—			—			710			—			710
Foreign currency translation effect		—		—		—		14			—			—			14			—			14
Net income (loss)		—		—		—		—			—			(6,097	)		(6,097	)		—			(6,097	)
Balance at March 31, 2018		34,910,506	$	35	$	117,735	$	(72	)	$	(1,314	)	$	(104,867	)	$	11,517		$	—		$	11,517

Balance at January 1, 2019		35,558,305	$	36	$	140,904	$	(69	)	$	—		$	(156,668	)	$	(15,797	)	$	(97	)	$	(15,894	)
Cumulative effect adjustment on adoption of ASC 842		—		—		—		—			—			(29	)		(29	)		—			(29	)
Beneficial conversion feature relating to convertible and promissory notes payable		—		—		2,039		—			—			—			2,039			—			2,039
Exercise of warrants		500		—		5		—			—			—			5			—			5
Stock issued for cash		307,500		—		2,530		—			—			—			2,530						2,530
Conversion of notes payable to common stock		81,332		—		329		—			—			—			329			—			329
Share-based compensation		—		—		536		—			—			—			536			—			536
Exercise of common stock options		167		—		1		—			—			—			1			—			1
Foreign currency translation effect		—		—		—		7			—			—			7			1			8
Net income (loss)		—		—		—		—			—			(14,167	)		(14,167	)		14			(14,153	)
Balance, March 31, 2019		35,947,804	$	36	$	146,344	$	(62	)	$	—		$	(170,864	)	$	(24,546	)	$	(82	)	$	(24,628	)

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Three months ended March 31,

	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,153	)	$	(6,097	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		17			13
Cost of scrapped inventory written off		—			8
Amortization of discount of convertible notes		5,641			4,192
Foreign exchange adjustments on convertible notes and notes payable		(19	)		135
Net losses (gains) on equity investment in marketable securities		6,457			(5,535	)
Loss on debt settlement		—			3,245
Share-based compensation		536			710
Change in fair value of warrant derivative liabilities		48			(840	)
Change in fair value of embedded conversion option		—			(466	)
Net changes in operating assets and liabilities
Accounts receivable		(409	)		(658	)
Inventories		(1,091	)		(388	)
Prepaid expenses and other current assets		(83	)		94
Other non-current assets		(2,813	)		(84	)
Accounts payable and accrued expenses		2,339			(539	)
Deferred revenue		500			596
Deferred rent		(287	)		(41	)
Other current liabilities		36			40
Other long-term liabilities		1,997			5,000
Net cash flows used in operating activities		(1,284	)		(615	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(16	)		(15	)
Purchase of marketable securities and investment at cost		—			(469	)
Net cash flows used in investing activities		(16	)		(484	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock and warrants		—			(7,500	)
Proceeds from convertible notes payable issued, net of issuance cost and discount		—			14,395
Payments of notes payable		—			(3,500	)
Payments of convertible notes		(3,048	)		(20,000	)
Proceeds from exercise of warrants		5			—
Proceeds from issuance of common stock		2,530			275
Proceeds from conversion of notes payable to common stock		21			—
Net cash flows used in financing activities		(492	)		(16,330	)
Effect of exchange rate changes on cash		22			(14	)
Net decrease in cash, cash equivalents and restricted cash		(1,770	)		(17,443	)
Cash and cash equivalents, beginning of period		17,080			22,556
Cash and cash equivalents, end of period	$	15,310		$	5,113
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	385		$	371
Conversion of notes payable to common stock	$	308		$	—

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

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of Emmaus Life Sciences, Inc. and subsidiaries (collectively, the “Company” or “Emmaus”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the basis that the Company will continue as a going concern. The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany transactions have been eliminated. The Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows. Due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, market acceptance of Endari™, and achieving a profitable level of revenues. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 21, 2019 (the “Annual Report”). Interim results for the periods presented herein are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

The preparation of the consolidated financial statements requires the use of management estimates. Actual results could differ materially from those estimates.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Refer to the Annual Report for a summary of significant accounting policies. There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2019 except for leases, which are discussed below. Below are disclosures of certain interim balances, transactions, and significant assumptions used in computing fair value as of and for the three months ended March 31, 2019 and comparative amounts from the prior fiscal periods:

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

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

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

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

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

Sales Discounts: The Company provides its customers contractual prompt payment discounts and from time to time offers additional one-time discounts that are recorded as a reduction of revenues in the period the revenues are recognized.

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

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

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

Leases — As described below under "Recent accounting pronouncements,” we adopted ASU 2016-02 – Leases (Topic 842) (“ASU 2016-02”) as of January 1, 2019. Pursuant to ASU 2016-02, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASU 2016-02, we recorded an operating lease right-of-use asset and an operating lease liability on our balance sheet. Right-of-use lease assets represent our right to use the underlying asset during the lease term and the lease obligation represents our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations were recognized based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, we have used an estimated incremental borrowing rate based on the information available at our adoption date in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and other operating costs are expensed as incurred. For all lease agreements we combine lease and non-lease components. No right-of-use asset and related lease liability are recorded for leases with an initial term of 12 months or less.

Prior to our adoption of ASU 2016-02, when our lease agreements contained tenant improvement allowances and rent escalation clauses, we recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. The lease expense related to operating leases was recognized on a straight-line basis in the statements of operations over the term of each lease. In cases where the lessor granted us leasehold improvement allowances, we capitalized the improvements as incurred and recognized it over the shorter of the lease term or the expected useful life of the improvements.

Inventories — Substantially all of the raw material purchased during the three months ended March 31, 2019 and for the year ended December 31, 2018 were from one vendor. The below table presents inventory by category (in thousands):


Inventories by category	March 31, 2019		December 31, 2018
Raw materials and components	$	647	$	171
Work-in-process		1,584		2,471
Finished goods		3,564		2,063
Total	$	5,795	$	4,705

Marketable securities— The Company’s marketable securities consist of the following securities; (a) 39,250 shares of capital stock of CellSeed, Inc. (“CellSeed”) acquired in January 2009 at ¥680 JPY per share ($7.69 USD); (b) 6,643,559 shares of capital stock of Telcon, Inc. (“Telcon”) which were acquired in July 2017 for ₩36,001,446,221 KRW (equivalent to $31.8 million USD) at ₩5,419 KRW per share.

As of March 31, 2019 and December 31, 2018, the closing prices per CellSeed share on the Tokyo Stock Exchange were ¥710 ($6.40 USD) and ¥668 JPY ($6.07 USD), respectively, and the closing prices per Telcon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were ₩7,350 ($6.45 USD) and ₩8,280 KRW ($7.43 USD), respectively.

As of March 31, 2019, and December 31, 2018, 39,250 shares of CellSeed common stock were pledged to secure a $300,000 convertible note of the Company issued to Mitsubishi UFJ Capital III Limited Partnership that is due on demand and were classified as marketable securities, pledged to creditor in our balance sheet.

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at March 31, 2019 and December 31, 2018 (in thousands):


	March 31, 2019		December 31, 2018
Prepaid insurance	$	80	$	82
Other prepaid expenses and current assets		738		661
	$	818	$	743

Other long-term liabilities—Other long-term liabilities consisted of the following at March 31, 2019 and December 31, 2018 (in thousands):

	March 31, 2019		December 31, 2018
Trade discount	$	25,137	$	26,222
Unearned revenue		10,500		10,000
Other long-term liabilities		—		—
Total other long-term liabilities	$	35,637	$	36,222

The Company entered into an API Supply Agreement (the “API Agreement”) with Telcon pursuant to which Telcon advanced to the Company approximately ₩36.0 billion KRW (approximately $31.8 million USD), accounted for as a trade discount, in consideration for the right to supply 25% of the Company’s requirements for bulk containers of pharmaceutical grade L-glutamine (“PGLG”). Refer Note 10 for additional details.

Fair value measurements — The following table presents the change in fair value of warrant derivative liabilities on a recurring basis using Level 3 inputs during the year ended December 31, 2018 (in thousands):

	Year Ended
Warrant Derivative Liabilities—Stock Purchase Warrants	December 31, 2018
Balance, beginning of period	$	26,377
Repurchased		(6,186	)
Change in fair value included in the statement of comprehensive income (loss)		(20,191	)
Balance, end of period	$	—

The following table presents the change in fair value of warrants issued to GPB Debt Holdings II, LLC as described in Note 8 as of March 31, 2019 and December 31, 2018 (in thousands):

	For the Three Months Ended				Year Ended
	March 31, 2019				December 31, 2018
Warrant Derivative Liabilities—GPB	Warrants		Embedded Conversion Option		Warrants			Embedded Conversion Option
Balance, beginning of period	$	1,399	$	—	$	1,882		$	1,289
Fair value at issuance date		—		—		—			—
Change in fair value included in the statement of comprehensive income (loss)		48		—		(483	)		(466	)
Extinguished upon debt repayment		—		—		—			(823	)
Balance, end of period	$	1,447	$	—	$	1,399		$	—

The value of warrant derivative liabilities and the change in fair value of the warrant derivative liabilities were determined using a Binomial Monte-Carlo Cliquet (aka “Ratchet”) Option Pricing Model. The model is similar to traditional Black-Scholes-type option pricing models, except that the exercise price resets at certain dates in the future.

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

	March 31, 2019			December 31, 2018
Stock price	$	10.30		$	9.10
Risk‑free interest rate		2.22	%		2.48	%
Expected volatility (peer group)		70.00	%		70.00	%
Expected life (in years)		3.75			4.00
Expected dividend yield	—			—
Number outstanding		240,764			240,764
Balance, end of period:
Warrant derivative liabilities (long-term) (in thousands)	$	1,447		$	1,399

Debt and related party debt — The following table presents the effective interest rates on loans originated and refinanced in the respective periods that either had a beneficial conversion feature or an attached warrant:

Type of Loan	Term of Loan	Stated Annual Interest	Original Loan Principal Amount		Conversion Rate	Beneficial Conversion Discount Amount		Warrants Issued with Notes		Exercise Price		Warrant FMV Discount Amount		Effective Interest Rate Including Discounts
2017 convertible notes payable	Due on demand - 2 years	10%	$	5,795	$3.50-$10.00	$	1,545	$	—	N/A		N/A		25% - 110%
2018 convertible notes payable	Due on demand - 2 years	10%		24,135	$3.50-$10.00		10,266		—		—		—	10%-110%
2019 convertible notes payable	Due on demand - 1 year	10%		2,039	$3.50-$4.50		2,039		—		—		—	110%
2018 notes payable	18 months	10%		12,200	N/A		—		1,220,000	$	11.30		9,687	89%
			$	44,169		$	13,850	$	1,220,000			$	9,687

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

Net loss per share — As of March 31, 2019 and 2018, respectively, the Company had outstanding potentially dilutive securities exercisable for or convertible into 16,317,940 and 17,122,176 shares of Company common stock. No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for all periods presented.

Recent accounting pronouncements—In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU amendments applicable to the Company (1) supersede the guidance to classify equity securities, except equity method securities, with readily determinable fair values into trading or available-for-sale categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income, (2) allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment, (3) require assessment for impairment of equity investments without readily determinable fair values qualitatively at each reporting period, (4) eliminate the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This ASU was effective beginning January 1, 2018. Since then, the Company has recognized any changes in the fair value of certain equity investments in net income as prescribed by the new standard rather than in other comprehensive income. The Company recognized a cumulative effect adjustment to increase the opening balance of retained earnings as of January 1, 2018 by $41.4 million, net of $12.3 million income tax benefit. Refer to Note 5 for additional disclosures required by this ASU.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in this Update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those years, with early adoption permitted. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements and ASU No. 2018-10 Codification Improvements to Topic 842, Leases with

certain targeted changes and improvements to previously issued lease accounting standard. The Company recognized operating lease liabilities of approximately $3.2 million and a right-of-use asset of approximately $2.9 million, derecognized deferred rent of approximately $286,000 and recognized the cumulative effect adjustment to increase the opening balance of accumulated deficit as of January 1, 2019 by approximately $29,000. We did not restate any financial information prior to January 1, 2019. Refer to Note 9 for additional disclosures required by this ASU.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify identification of performance obligations and licensing implementation. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606: For public companies, this Update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the new revenue standard as of January 1, 2018 using the modified retrospective transition method. The adoption of ASU 2016-10 did not have a material impact on the Company’s consolidated financial statements; however, adoption did result in significant changes to the Company’s financial statement notes.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). The amendments in this guidance intended to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. In addition, the Board re-characterized the indefinite deferral of certain provisions of Topic 480 to a scope exception. The re-characterization has no accounting effect. Down round features will no longer cause freestanding equity-linked financial instruments and embedded conversion options to be considered “not indexed to an entity’s own stock.” ASU 2017-11 is effective for public business entities for fiscal year beginning after December 15, 2018. All others have an additional year. Early adoption is permitted for all entities, including in an interim period. Entities may use the retrospective or modified retrospective transition method. The Company early adopted this ASU without a material impact on previously recorded balances on its consolidated financial statements.

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

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”). The amendments in ASU 2018-03 (1) clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer, (2) clarify that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place, (3) clarify that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities, (4) clarify that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives, or 825- 10, Financial Instruments— Overall, (5) clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability, and then both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates, (6) clarify that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in ASU 2016-01 is meant only for instances in which the measurement alternative is applied. For public business entities, ASU 2018-03 is effective for fiscal years beginning after December

15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU 2016-01. The impact of the adoption of the amendments in ASU 2018-03 depends on the amount of equity securities and financial instruments subject to the amendments in this Update held by the Company at the time of adoption. The adoption of ASU 2018-03 did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which supersedes ASC 505-05 and expands the scope of ASC 718 to include all share-based payment arranges related to the acquisition of goods and services from both nonemployees and employee. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASC 2018-07 is effective for all entities for fiscal year beginning after December 15, 2018, and interim periods within those fiscal year, with early adoption permitting but no earlier than the date on which an entity adopts ASC 606. The adoption of ASU 20218-07 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820. The amendments in ASU 22018-13 remove some disclosures, modify others, and add some new disclosure requirements. The amendments in this ASU are effective for all entities for fiscal years, and interim period within those fiscal years, beginning after December 15, 2019 with early adoption permitted. The Company is currently assessing the impact the adoption of ASU 2018-13 will have on its consolidated financial statements and accompanying footnote disclosures.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) Targeted Improvements to Related Party guidance for Variable Interest Entities (“ASU 2018-17”), which amends two aspects of the related-party guidance in ASC 810. Specifically, ASU2018-17 (1) adds an elective private-company scope exception to the variable interest entity guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17, Interest Held Through Related Parties That Are Under Common Control. The amendments in ASU 2018-17 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2018-17 to have a material impact on its consolidated financial statements.

NOTE 3 — REVENUES

Revenues disaggregated by category were as follows (in thousands):

	Three months ended
	March 31, 2019			March 31, 2018
Endari	$	5,787		$	720
Other		105			102
Gross sales		5,892			822
Less: discounts and allowances
Endari		(585	)		(30	)
Other		—			(11	)
Total	$	5,307		$	781

The following table summarizes the revenue allowance and accrual activities for the three months ended March 31, 2019 (in thousands):

	Trade Discounts, Allowances and Chargebacks			Government Rebates and Other Incentives			Returns		Total
Balance as of December 31, 2018	$	303		$	1,880		$	181	$	2,363
Provision related to sales in the current year		293			729			54		1,076
Adjustments related prior period sales		—			(600	)		—		(600	)
Credit and payments made		(316	)		(568	)		—		(884	)
Balance as of March 31, 2019	$	279		$	1,441		$	235	$	1,955

The following table summarizes revenues attributable to each of our customers who accounted for 10% or more of our total revenues (as a percentage of total revenues):

	Three months ended
	March 31, 2019			March 31, 2018
AmerisourceBergen Specialty Group		60	%		88	%
McKesson Plasma and Biologics LLC		17	%		—

NOTE 4 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

	March 31, 2019			December 31, 2018
Equipment	$	306		$	306
Leasehold improvements		71			70
Furniture and fixtures		79			79
Total property and equipment		456			455
Less: accumulated depreciation		(317	)		(303	)
Total depreciable assets		139			152
Construction-in-progress		14			—
Property and equipment, net	$	153		$	152

During the three months ended March 31, 2019 and 2018, depreciation expense was approximately $14,000 and $13,000, respectively.

NOTE 5 — INVESTMENTS

Equity Securities—Effective January 1, 2018, the Company adopted ASU 2016-01 which requires the Company to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize in earnings any changes in such fair value. The Company uses quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, the Company has elected the measurement alternative under which the Company measures these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. Additionally, on a quarterly basis, management is required to make a qualitative assessment of whether the investment is impaired; however, the Company is not required to determine the fair value of these investments unless impairment indicators existed. When impairment indicators exist, the Company generally uses discounted cash flow analyses to determine the fair value. For the three months ended March 31, 2019 and the year ended December 31, 2018, the Company did not recognize any fair value adjustments for equity securities without readily determinable fair values. The Company recognized a cumulative effect adjustment of $41.4 million, net of $12.3 million income tax benefit, to increase the opening balance of retained earnings with an offset to accumulated other comprehensive income as of January 1, 2018, in connection with the adoption of ASU 2016-01.

At March 31, 2019 and December 31, 2018, the carrying values of equity securities were included in the following line items in our consolidated balance sheets (in thousands):

	March 31, 2019				December 31, 2018
	Fair Value with Changes Recognized in Income		Measurement Alternative - No Readily Determinable Fair Value		Fair Value with Changes Recognized in Income		Measurement Alternative - No Readily Determinable Fair Value
Marketable securities	$	43,124	$	—	$	49,581	$	—
Long-term investment at cost		—		527		—		538
Total equity securities	$	43,124	$	527	$	49,581	$	538

Net realized losses on available-for-sales on marketable securities still held at March 31, 2019 was approximately $ 6.5 million and net realized gain on available-for sales on marketable securities still held at March 31, 2018 was approximately $ 5.5 million.

NOTE 6 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

At March 31, 2019 and December 31, 2018, accounts payable and accrued expenses consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Accounts payable:
Clinical and regulatory expenses	$	356	$	83
Professional fee		1,961		2,157
Selling expenses		421		382
Manufacturing costs		1,756		—
Other vendors		692		980
Total accounts payable		5,186		3,602
Accrued interest payable, related parties		1,217		842
Accrued interest payable		2,306		2,138
Accrued expenses:
Payroll expenses		796		713
Accrued rebates		1,441		1,744
Other accrued expenses		122		83
Total accrued expenses		2,359		2,540
Total accounts payable and accrued expenses	$	11,068	$	9,122

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at March 31, 2019 and December 31, 2018 (in thousands):

Year Issued	Interest Rate Range	Term of Notes	Conversion Price		Principal Outstanding March 31, 2019		Discount Amount March 31, 2019		Carrying Amount March 31, 2019		Shares Underlying Notes March 31, 2019		Principal Outstanding December 31, 2018		Discount Amount December 31, 2018		Carrying Amount December 31, 2018		Shares Underlying Notes December 31, 2018
Notes payable
2013	10%	Due on demand		—	$	902	$	—	$	902		—	$	909	$	—	$	909		—
2015	10%	Due on demand		—		10		—		10		—		10		—		10		—
2016	10% - 11%	Due on demand		—		843		—		843		—		843		—		843		—
2017	5% - 11%	Due on demand		—		1,951		—		1,951		—		2,575		—		2,575		—
2018	10% - 11%	Due on demand- 18 months		—		12,311		7,847		4,464		—		12,311		9,233		3,078		—
2019	11%	Due on demand		—		752		—		752		—		—		—		—		—
					$	16,769	$	7,847	$	8,922		—	$	16,648	$	9,233	$	7,415		—
		Current			$	14,569	$	7,569	$	7,000		—	$	12,449	$	6,054	$	6,394		—
		Non-current			$	2,200	$	278	$	1,922		—	$	4,200	$	3,179	$	1,021		—
Notes payable - related party
2016	10%	Due on demand		—		270		—		270		—		270		—		270		—
2017	10%	Due on demand		—		27		—		27		—		39		—		39		—
2018	11%	Due on demand		—		159		—		159		—		159		—		159		—
2019	10%	Due on demand		—		14		—		14		—		—		—		—		—
					$	470	$	—	$	470		—	$	468	$	—	$	468		—
		Current			$	470	$	—	$	470		—	$	468	$	—	$	468		—
		Non-current			$	—	$	—	$	—		—	$	—	$	—	$	—		—
Convertible notes payable
2011	10%	5 years	$3.05		$	300	$	—	$

EMMAUS LIFE SCIENCES, INC. 10-Q