UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

☒	~~Quarterly Report Pursuant to Section~~
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) ~~of the Securities Exchange Act of~~OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~quarterly period ended December 31, 2018~~Quarterly Period Ended September 30, 2019

☐	~~Transition Report Pursuant to Section~~
☐	TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) ~~of the Securities Exchange Act of~~OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~__________________~~ to ~~______________________.~~

Commission File No.: 001-35527

~~Commission file number 001-35527~~EMMAUS LIFE SCIENCES, INC.

~~MYnd Analytics, Inc.~~

(Exact name of ~~registrant~~Registrant as specified in its charter)

Delaware		87-0419387
(State or other jurisdiction of	~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)

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

~~26522 La Alameda, Suite 290~~

~~Mission Viejo, California 92691~~

~~(Address of principal executive offices) (Zip Code)~~

~~(949) 420-4400~~ (310) 214-0065

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, $0.001 par value	~~The Nasdaq Stock Market LLC~~ EMMA	OTCQB

~~Warrants to Purchase~~ Common Stock Purchase Warrants	~~The Nasdaq Stock Market LLC~~
EMMAW
~~Securities registered under Section 12(g) of the Exchange Act:~~	OTC Pink

~~None~~

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 ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes ☒ No ☐

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

Large accelerated filer ☐	☐	Accelerated filer	☐
Non-accelerated filer ~~☐ (Do not check if smaller reporting company)~~	☒	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 ~~Act.)~~Exchange Act). Yes ☐ No ☒

The registrant had 48,471,446 shares of common stock, par value $0.001 per share, outstanding as of November 11, 2019.

~~As of February 14, 2019, the registrant had 8,423,694 shares of Common Stock, issued and outstanding.~~

~~MYnd Analytics, Inc. and its subsidiaries~~EMMAUS LIFE SCIENCES, INC.

For the Quarterly Period Ended September 30, 2019

INDEX

				Page
Part I. Financial Information
~~PART I~~		~~FINANCIAL INFORMATION~~		3
Item 1.		Financial Statements		4
~~Item 1.~~		~~Condensed Consolidated Financial Statements (unaudited)~~		3

	~~Unaudited Condensed~~ (a)Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 ~~and September 30, 2018~~		3 4

		~~Unaudited Condensed~~ (b)Consolidated Statements of ~~Operations~~Comprehensive Income (Loss) for the three and nine months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~(Unaudited)		4 5

		~~Unaudited Condensed~~ (c)Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~(Unaudited)		5 6

		~~Unaudited Condensed~~ (d)Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~(Unaudited)		6 8

		(e)Notes to ~~Unaudited Condensed~~ Consolidated Financial Statements as of and for the nine months ended September 30, 2019 (Unaudited)		7 9

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		30 26

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		46 33

Item 4.		Controls and Procedures		46 34

~~PART~~ Part II Other Information			~~OTHER INFORMATION~~		47

Item 1.		Legal Proceedings		47 36

Item 1A.		Risk Factors		47 36

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		47 36

Item 3.		Defaults Upon Senior Securities	36

Item 4.		Mine Safety Disclosures	36

Item 5.		Other Information		47 36

Item 6.		Exhibits	37
		49
Signatures			39

~~PART I~~

~~FINANCIAL INFORMATION~~EXPLANATORY NOTE

~~Item 1. Financial Statements~~

~~MYND ANALYTICS, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

As of
December 31,
2018
(Unaudited) As of
September 30,
2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,499,800 $ 3,254,700
Accounts receivable, net 120,000 63,300
Prepaid insurance 24,100 57,900
Prepaid other assets 146,600 134,700
Total current assets 1,790,500 3,510,600
Property and equipment, net 98,800 110,800
Intangible assets, net 102,400 116,500
Goodwill 1,386,800 1,386,800
Other assets 27,500 27,100
TOTAL ASSETS $ 3,406,000 $ 5,151,800

LIABILITIES AND STOCKHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Accounts payable (including $31,400 and $30,400 to related parties as of December 31, 2018 and September 30, 2018, respectively) $ 728,800 $ 346,900
Accrued liabilities 304,000 268,900
Accrued compensation 206,300 175,400
Accrued compensation – related parties 185,100 209,300
Accrued interest and other 3,900 3,900
Deferred revenue 156,900 159,700
Current portion of capital lease 1,400 1,300
Total current liabilities 1,586,400 1,165,400
LONG-TERM LIABILITIES
Long-term borrowing, net 597,100 587,700
Accrued interest on long - term borrowing 115,800 110,100
Long-term portion of capital lease 1,700 2,100
Total long-term liabilities 714,600 699,900
TOTAL LIABILITIES 2,301,000 1,865,300
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 15,000,000 authorized; 1,500,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 authorized; 550,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 issued and outstanding as of December 31, 2018 and as of September 30, 2018; aggregate liquidation preference of $1,968,750 as of December 31, 2018 and as of September 30, 2018; 1,100 1,100
Common stock, $0.001 par value; 250,000,000 shares authorized as of December 31, 2018 and September 30, 2018 respectively, 7,555,004 and 7,407,254 shares issued and outstanding as of December 31, 2018 and September 30, 2018, respectively; 7,600 7,400
Additional paid-in capital 89,780,400 89,257,700
Accumulated deficit (87,622,800 ) (85,245,300 )
2,166,300 4,020,900
Non controlling interest (1,061,300 ) (734,400 )

Total stockholders’ equity 1,105,000 3,286,500
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,406,000 $ 5,151,800

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~MYND ANALYTICS, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

Three Months Ended
December 31,
2018 2017
REVENUES
Neurometric services $ 79,200 $ 53,300
Telepsychiatry services 307,900 68,700
Total revenues 387,100 122,000

COST OF REVENUES
Neurometric services 6,400 49,100
Telepsychiatry services 218,700 35,900
225,100 84,900

GROSS MARGIN 162,000 37,100

OPERATING EXPENSES
Research 80,800 81,500
Product development 237,000 269,200
Sales and marketing 151,900 667,200
General and administrative 2,373,800 1,774,800
Total operating expenses 2,843,500 2,792,700

OPERATING LOSS (2,681,500 ) (2,755,600 )

OTHER INCOME (EXPENSE):
Interest expense, net (22,900 ) (13,700 )
Total other income (expense) (22,900 ) (13,700 )
LOSS BEFORE PROVISION FOR INCOME TAXES (2,704,400 ) (2,769,300 )
Income taxes — —
NET LOSS $ (2,704,400 ) $ (2,769,300 )

Net loss attributable to noncontrolling interest (326,900 ) —

Net Loss attributable to MYnd Analytics, Inc. $ (2,377,500 ) $ (2,769,300 )

BASIC AND DILUTED LOSS PER SHARE: $ (0.32 ) $ (0.64 )

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 7,542,663 4,332,927

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~MYND ANALYTICS, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~for the three months ended December 31, 2018 and 2017~~

Common Stock Preferred Stock
Shares Amount Shares Amount
Additional
Paid-in
Capital

Accumulated
Deficit
Sub-total MYnd Stockholders’ Equity Noncontrolling Interest Total
Balance at September 30, 2017 4,299,311 $ 4,300 — $ — $ 80,189,700 $ (75,646,600 ) 4,547,400 — $ 4,547,400
Stock-based compensation 37,500 100 — — 336,500 — 336,600 — 336,600
Common Stock issued to vendors for services 23,750 — — — 14,800 — 14,800 — 14,800
Net loss — — — — — (2,769,300 ) (2,769,300 ) — (2,769,300 )
Balance at December 31, 2017 4,360,561 $ 4,400 — $ — $ 80,541,000 $ (78,415,900 ) 2,129,500 — $ 2,129,500

Common Stock Preferred Stock
Shares Amount Shares Amount
Additional
Paid-in
Capital

Accumulated
Deficit
Sub-total MYnd Stockholders’ Equity Noncontrolling Interest Total
Balance at September 30, 2018 7,407,254 $ 7,400 1,050,000 $ 1,100 $ 89,257,700 $ (85,245,300 ) 4,020,900 (734,400 ) $ 3,286,500
Stock-based compensation 144,000 200 — — 517,100 — 517,300 — 517,300
Common Stock issued to vendors for services 3,750 — — — 5,600 — 5,600 — 5,600
Net loss — — — — — (2,377,500 ) (2,377,500 ) (326,900 ) (2,704,400 )
Balance at December 31, 2018 7,555,004 $ 7,600 1,050,000 $ 1,100 $ 89,780,400 $ (87,622,800 ) 2,166,300 (1,061,300 ) $ 1,105,000

~~See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.~~

~~MYND ANALYTICS, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Three Months Ended
December 31,
2018 2017
OPERATING ACTIVITIES:
Net loss $ (2,704,400 ) $ (2,769,300 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 30,200 23,300
Change in provision for doubtful accounts 3,200 600
Stock-based compensation 517,300 336,600
Common stock issued to vendors for services 5,600 14,800
Accretion of debt discount and non–cash interest expense 23,400 4,700
Changes in operating assets and liabilities:
Accounts receivable (59,900 ) (18,100 )
Prepaid expenses and other assets 21,500 6,100
Accounts payable and accrued liabilities 417,100 (38,600 )
Deferred revenue (2,800 ) —
Deferred compensation 6,600 —
Net cash used in operating activities (1,742,200 ) (2,439,900 )
INVESTING ACTIVITES:
Purchase of furniture and equipment (4,100 ) (28,100 )
Payment for acquisition of business, net of cash acquired — (306,600 )
Net cash used in investing activities (4,100 ) (334,700 )
FINANCING ACTIVITIES:
Principal payments on note payable (8,300 ) (15,800 )
Principal payments on capital lease (300 ) (300 )
Net cash used in financing activities (8,600 ) (16,100 )
NET INCREASE (DECREASE) IN CASH (1,754,900 ) (2,790,700 )
CASH AND CASH EQUIVALENTS - BEGINNING OF THE PERIOD 3,254,700 5,449,000
CASH AND CASH EQUIVALENTS - END OF THE PERIOD $ 1,499,800 $ 2,658,300
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,200 $ 3,000
Income taxes $ — $ —
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES:
Long-term borrowings assumed in business combination $ — $ 651,700

~~See accompanying notes to unaudited condensed consolidated financial statements~~

~~MYND ANALYTICS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Organization, Nature of Operations and Going Concern Uncertainty~~

~~MYnd Analytics,~~This Quarterly Report is filed by Emmaus Life Sciences, Inc. (“~~MYnd,” “CNS,~~Emmaus,” “we,” “us,” “our,” or the “Company”), formerly known as ~~CNS Response~~MYnd Analytics, Inc.~~, is~~ As of and for the period ending June 30, 2019, the Company was a predictive analytics company that ~~has~~had developed a decision support tool to help physicians reduce trial and error treatment in mental health and provide more personalized care to patients. As reported in its Current Report on Form 8-K filed with the SEC on July 22, 2019 and as discussed in more detail in this Quarterly Report, on July 17, 2019, the Company completed its merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“EMI”), pursuant to which EMI became a wholly-owned subsidiary of the Company (the “Merger”). On July 17, 2019, immediately after completion of the Merger, the Company changed its name to “Emmaus Life Sciences, Inc.”

The Merger was treated as a reverse recapitalization with EMI being deemed the acquiring company for accounting purposes under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.

In connection with and prior to the Merger, the Company ~~employs~~contributed and transferred to Telemynd, Inc. (“Telemynd”), a ~~clinically validated scalable technology platform~~newly formed, wholly owned subsidiary of the Company, all or substantially all of the Company’s business, assets and liabilities. On July 15, 2019, the board of directors of the Company declared a dividend with respect to ~~support personalized care~~the shares of the Company common stock outstanding at the close of business on that day of one share of the Telemynd common stock held by the Company for ~~mental health patients.~~each outstanding share of the Company common stock after giving effect to a 1-for-6 reverse stock split of the Company’s common stock effected by the Company on July 17, 2019. The dividend, which together with the contribution and transfer of the Company’s historical business, assets and liabilities described above, is referred to as the “Spin-Off.” Prior to the Spin-Off, Telemynd engaged in no business or operations.

As a result of the Spin-Off and the Merger, since July 17, 2019 the Company ~~utilizes~~has operated through EMI and its ~~patented machine learning, artificial intelligence, data analytics platform~~direct and indirect subsidiaries and the ongoing business of the Company is the EMI business. EMI is a commercial-stage biopharmaceutical company focused on the development, marketing and sale of innovative treatments and therapies, including those in the rare and orphan disease categories. For more information, please visit www.emmausmedical.com. The information contained on, or accessible through, our website is not incorporated by reference into this Quarterly Report and should not be considered a part of this Quarterly Report.

On August 14, 2019, the Company filed an amendment on Form 8-K/A to its Current Report on Form 8-K relating to the completion of the Merger and the Spin-Off which includes financial statements of EMI as of and for the ~~delivery~~three months and six months ended June 30, 2019 and certain pro forma financial information. This Quarterly Report should be read in conjunction with the information in the Form 8-K/A.

Item 1. Financial Statements

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	As of
	September 30, 2019			December 31, 2018
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ($12,220 and $13,175 attributable to the VIE)	$	13,546		$	17,080
Accounts receivable, net		1,900			1,351
Inventories, net		7,491			4,705
Investment in marketable securities		27,643			49,343
Marketable securities, pledged to creditor		—			238
Prepaid expenses and other current assets ($610 and $273 attributable to the VIE)		1,194			743
Total current assets		51,774			73,460
PROPERTY AND EQUIPMENT, NET		163			152
OTHER ASSETS
Long-term investment at cost		—			538
Intangibles, net		44			54
Right of use assets		4,118			—
Deposits and other assets		383			352
Total other assets		4,545			944
Total assets	$	56,482		$	74,556
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses ($148 and $0 attributable to the VIE)	$	10,706		$	9,122
Deferred rent		—			19
Operating lease liabilities		844			—
Other current liabilities		5,412			5,181
Embedded conversion option liabilities		264			—
Notes payable, net		3,886			6,394
Notes payable to related party, net		193			468
Convertible debentures		11,000			—
Convertible notes payable, net		2,928			11,253
Convertible notes payable to related parties, net		—			5,089
Total current liabilities		35,233			37,526
LONG-TERM LIABILITIES
Deferred rent		—			268
Operating lease liabilities		3,714			—
Other long-term liabilities		34,556			36,222
Warrant derivative liabilities		—			1,399
Embedded conversion option liabilities		29			—
Notes payable, net		—			1,021
Convertible debentures		1,200			—
Convertible notes payable, net		—			5,485
Convertible notes payable to related parties, net		—			8,529
Total long-term liabilities		39,499			52,924
Total liabilities		74,732			90,450
STOCKHOLDERS’ DEFICIT
Preferred stock — par value $0.001 per share, 15,000,000 shares authorized, none issued and outstanding		—			—
Common stock — par value $0.001 per share, 250,000,000 shares authorized, 47,671,446 shares and 37,341,393 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		47			37
Additional paid-in capital		199,395			140,903
Accumulated other comprehensive income (loss)		(51	)		(69	)
Accumulated deficit		(216,916	)		(156,668	)
Total stockholders’ equity (deficit)		(17,525	)		(15,797	)
Noncontrolling interest		(725	)		(97	)
Total liabilities & stockholders’ equity (deficit)	$	56,482		$	74,556

The accompanying notes are an integral part of ~~telebehavioral health services~~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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUES, NET	$	6,084		$	4,882		$	17,260			8,235
COST OF GOODS SOLD		178			141			573			497
GROSS PROFIT		5,906			4,741			16,687			7,738
OPERATING EXPENSES
Research and development		725			466			1,778			1,273
Selling		1,789			1,224			5,177			3,663
General and administrative		6,991			5,182			14,523			12,130
Total operating expenses		9,505			6,872			21,478			17,066
LOSS FROM OPERATIONS		(3,599	)		(2,131	)		(4,791	)		(9,328	)
OTHER INCOME (EXPENSE)
Other income		—			738			—			738
Loss on debt extinguishment		(6,427	)		—			(6,427	)		(3,245	)
Impairment loss on long-term investment		—			—			(524	)		—
Change in fair value of warrant derivative liabilities		424			19,456			623			20,351
Change in fair value of embedded conversion option		342			—			342			466
Net loss on investment in marketable securities		(5,248	)		2,023			(21,718	)		(31,627	)
Transaction cost		(309	)		—			(309	)		—
Notes conversion expense		(3,906	)		—			(3,906	)		—
Interest and other income (loss)		(17	)		8			146			43
Interest expense		(7,318	)		(5,525	)		(22,757	)		(16,269	)
Total other income (expense)		(22,459	)		16,700			(54,530	)		(29,543	)
INCOME (LOSS) BEFORE INCOME TAXES		(26,058	)		14,569			(59,321	)		(38,871	)
INCOME TAXES		25			—			242			2
NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST		(26,083	)		14,569			(59,563	)		(38,873	)
Net (income) loss attributable to noncontrolling interest		(54	)		—			620			—
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY		(26,137	)		14,569			(58,943	)		(38,873	)

COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		11			(5	)		10			11
Other comprehensive income (loss)		11			(5	)		10			11
COMPREHENSIVE INCOME (LOSS)		(26,072	)		14,564			(59,553	)		(38,862	)
Amounts attributable to noncontrolling interest:
Net (income) loss attributable to noncontrolling interest		(54	)		—			620			—
Foreign currency translation adjustments		(6	)		—			8			—
Comprehensive (income) loss attributable to noncontrolling interest		(60	)		—			628			—
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	(26,132	)	$	14,564		$	(58,925	)	$	(38,862	)
NET INCOME (LOSS) PER COMMON SHARE - BASIC	$	(0.60	)	$	0.40		$	(1.49	)	$	(1.06	)
NET INCOME (LOSS) PER COMMON SHARE - DILUTIVE	$	(0.60	)	$	(0.13	)	$	(1.49	)	$	(1.58	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING		46,020,507			36,719,892			40,474,847			36,644,377

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

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

	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Emmaus Stockholders' Equity / (Deficit)			Non-controlling Interest			Total Equity / (Deficit)
Balance at January 1, 2019		37,341,393	$	37	$	140,903		$	(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 notes payable		—		—		2,039			—			—			2,039			—			2,039
Exercise of warrants		525		—		5			—			—			5			—			5
Common stock issued for cash (net of issuance cost)		322,920		—		2,530			—			—			2,530						2,530
Conversion of notes payable to common stock		85,410		—		329			—			—			329			—			329
Share-based compensation		—		—		536			—			—			536			—			536
Exercise of stock options		175		—		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		37,750,423	$	37	$	146,343		$	(62	)	$	(170,864	)	$	(24,546	)	$	(82	)	$	(24,628	)
Beneficial conversion feature relating to convertible notes payable		—		—		5,391			—			—			5,391			—			5,391
Exercise of warrants		53,032		—		181			—			—			181			—			181
Common stock issued for cash (net of issuance cost)		76,755		—		730			—			—			730			—			730
Share-based compensation		—		—		438			—			—			438			—			438
Foreign currency translation effect		—		—		—			6			—			6			(15	)		(9	)
Net income (loss)		—		—		—			—			(18,639	)		(18,639	)		(688	)		(19,327	)
Balance, June 30, 2019		37,880,210	$	37	$	153,083		$	(56	)	$	(189,503	)	$	(36,439	)	$	(785	)	$	(37,224	)
Common stock issued for cash (net of issuance cost)		477,338		1		2,949			—			—			2,950			—			2,950
Conversion of convertible notes payable and notes payable to common stock		6,983,350		7		35,502			—			—			35,509			—			35,509
Notes conversion expense		—		—		3,906			—			—			3,906			—			3,906
Reclassification of warrant liability to equity		—		—		776			—			—			776			—			776
Common stock issued in merger		2,330,548		2		(1,644	)		—			—			(1,642	)		—			(1,642	)
Share-based compensation		—		—		129			—			—			129			—			129
Fair value of replacement equity awards		—		—		2,438			—			—			2,438			—			2,438
Fair value of placement agent warrant including down-round protection adjustments		—		—		2,256			—			(1,276	)		980			—			980
Foreign currency translation effect		—		—		—			5			—			5			6			11
Net income (loss)		—		—		—			—			(26,137	)		(26,137	)		54			(26,083	)
Balance, September 30, 2019		47,671,446	$	47	$	199,395		$	(51	)	$	(216,916	)	$	(17,525	)	$	(725	)	$	(18,250	)

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

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

	Common Stock
	Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Treasury Stock, at Cost			Accumulated Deficit			Total Emmaus Stockholders' Equity / (Deficit)			Non-controlling Interest		Total Equity / (Deficit)
Balance at January 1, 2018		36,634,856		$	37		$	113,110		$	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 notes payable		—			—			3,638			—			—			—			3,638			—		3,638
Common stock issued for cash		26,254			—			275			—			—			—			275			—		275
Repurchase of 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		36,661,110		$	37		$	117,733		$	(72	)	$	(1,314	)	$	(104,867	)	$	11,517		$	—	$	11,517
Beneficial conversion feature relating to convertible notes payable		—			—			5,583			—			—			—			5,583			—		5,583
Common stock issued for cash		—			—			—			—			—			—			—			—		—
Repurchase of stock		(735,102	)		(1	)		1			—			—			—			—			—		—
Share-based compensation		—			—			955			—			—			—			955			—		955
Exercise of warrants (cashless)		8,733			—			—			—			—			—			—			—		—
Foreign currency translation effect		—			—			—			2			—			—			2			—		2
Net income (loss)		—			—			—			—			—			(47,345	)		(47,345	)		—		(47,345	)
Balance at June 30, 2018		35,934,741		$	36		$	124,272		$	(70	)	$	(1,314	)	$	(152,212	)	$	(29,288	)	$	—	$	(29,288	)
Beneficial conversion feature relating to convertible notes payable		—			—			997			—			—			—			997			—		997
Exercise of warrants		31,504			—			105			—			—			—			105					105
Stock issued for cash		—			—			—			—			—			—			—			—		—
Cancellation of stock		—			—			(1,314	)		—			1,314			—			—			—		—
Share-based compensation		—			—			2,078			—			—			—			2,078			—		2,078
Exercise of stock option (cashless)		88,473			1			(1	)		—			—			—			—			—		—
Exercise of warrants (cashless)		1,700,957			1			(1	)		—			—			—			—			—		—
Foreign currency translation effect		—			—			—			(5	)		—			—			(5	)		—		(5	)
Net income (loss)		—			—			—			—			—			14,569			14,569			—		14,569
Balance at September 30, 2018		37,755,675		$	38		$	126,136		$	(75	)	$	—		$	(137,643	)	$	(11,544	)	$	—	$	(11,544	)

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

EMMAUS LIFE SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended September 30,

	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(59,563	)	$	(38,873	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		54			44
Impairment loss on long-term investment		524			—
Cost of inventory written off		—			11
Amortization of discount of notes payable and convertible notes payable		19,479			13,057
Foreign exchange adjustments on convertible notes and notes payable		49			(22	)
Net loss on investment in marketable securities		21,718			31,627
Loss on debt settlement		6,427			3,245
Share-based compensation		1,103			3,743
Fair value of replacement equity awards		2,438			—
Notes conversion expense		3,906			—
Change in fair value of warrant derivative liabilities		(623	)		(20,351	)
Change in fair value of embedded conversion option		(342	)		(466	)
Net changes in operating assets and liabilities
Accounts receivable		(548	)		(1,390	)
Inventories		(2,787	)		(2,735	)
Prepaid expenses and other current assets		(426	)		(39	)
Other non-current assets		(4,150	)		(238	)
Accounts payable and accrued expenses		4,857			2,585
Deferred revenue		500			—
Deferred rent		(287	)		246
Other current liabilities		230			2,130
Other long-term liabilities		2,363			2,690
Net cash flows used in operating activities		(5,078	)		(4,736	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in connection with the Merger		(1,641	)		—
Purchases of property and equipment		(55	)		(81	)
Sales of marketable securities		221			6,439
Purchase of marketable securities and investment at cost		—			(501	)
Net cash flows provided by (used in) investing activities		(1,475	)		5,857
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock and warrants		—			(7,500	)
Proceeds from notes payable issued, net of issuance cost and discount		—			6,670
Proceeds from convertible notes payable issued, net of issuance cost and discount		—			17,645
Payments of notes payable		—			(4,200	)
Payments of convertible notes		(3,368	)		(20,000	)
Proceeds from exercise of warrants		186			105
Proceeds from issuance of common stock		6,210			275
Net cash flows provided by (used in) financing activities		3,028			(7,005	)
Effect of exchange rate changes on cash		(9	)		(10	)
Net decrease in cash and cash equivalents		(3,534	)		(5,894	)
Cash and cash equivalents, beginning of period		17,080			22,556
Cash and cash equivalents, end of period	$	13,546		$	16,662
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Interest paid	$	1,239		$	1,783
Income taxes paid	$	242		$	2
Warrant liabilities reclassified to equity	$	776		$	—
Conversion of convertible notes payable and notes payable to common stock	$	33,457		$	—
Conversion of accrued interest payable to common stock	$	2,381		$	—
Exercise of warrants and options on cashless basis		—			1,798

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

EMMAUS LIFE SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements of Emmaus Life Sciences, Inc., (formerly, “MYnd Analytics, Inc.”) and its ~~PEER~~direct and indirect consolidated 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. All significant intercompany transactions have been eliminated. The Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows. 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 Annual Report on Form 10-K for the year ended December 31, 2018, filed by EMI Holding, Inc. 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.

Going Concern Assessment

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

Based on our loss to date, anticipated future revenues and operating expenses, debt repayment obligations and cash and cash equivalent of $13.5 million, of which $12.2 million was attributable to a variable interest entity (“VIE”) as of September 30, 2019, we do not have sufficient operating capital for our business without raising additional capital and therefore there is substantial doubt about the Company’s ability to continue as a going concern.

Organization and Nature of Operations

As of and for the period ending June 30, 2019, Emmaus Life Sciences, Inc. (“Emmaus,” “we,” “us,” “our,” or the “Company”), formerly known as MYnd Analytics, Inc., was a predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian Telepsychiatry Services LLC (“Arcadian”), which manages the delivery of telepsychiatry and telebehavioral health services throughcompany that had developed a ~~nationwide network of licensed and credentialed psychiatrists, psychologists and master’s-level therapists. The Company is commercializing its PEER predictive analytics~~decision support tool to help physicians reduce trial and error treatment in mental ~~health. MYnd’s patented, clinically validated technology platform~~health and provide more personalized care to patients. On July 17, 2019, the Company completed its merger transaction with EMI Holding, Inc., formerly known as Emmaus Life Sciences, Inc. (“~~PEER Online”~~EMI”) ~~utilizes complex algorithms~~, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of January 4, 2019, among the Company, Athena Merger Subsidiary, Inc. (“Merger Sub”), and Emmaus, as amended by Amendment No. 1 thereto, dated as of May 10, 2019 (as so amended, the “Merger Agreement”), pursuant to ~~analyze electroencephalograms (“EEGs”~~which Merger Sub merged with and into EMI, with EMI surviving as a wholly-owned subsidiary of the Company (the “Merger”). On July 17, 2019, immediately after completion of the Merger, the Company changed its name to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict individual responses to a range of medications prescribed for the treatment of behavioral disorders including depression, anxiety, bipolar disorder, PTSD and other non-psychotic disorders.

~~Going Concern Uncertainty~~“Emmaus Life Sciences, Inc.”.

The ~~accompanying unaudited condensed consolidated financial statements have been prepared~~Merger was treated as a reverse recapitalization with EMI being deemed the acquiring company for accounting purposes under the acquisition method of accounting in ~~conformity~~accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.

In connection with and prior to the Merger, the Company contributed and transferred to Telemynd, Inc. (“~~GAAP”~~Telemynd”), ~~which contemplate continuation~~a newly formed, wholly owned subsidiary of the Company, as a going concern. The Company’s operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business. These risks include the ability to obtain adequate financing on a timely basis, if at all ~~the failure to develop~~ or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.

The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During the three months ended December 31, 2018, the Company incurred a net loss of $2.7 million and used $1.7 million of net cash in operating activities. As of December 31, 2018, the Company’s accumulated deficit was $87.6 million. In connection with these unaudited condensed consolidated financial statements, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they become due for the next twelve months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.

To date, the Company has financed its cash requirements primarily from equity financings. As of December 31, 2018, the Company's principal sources of liquidity were cash balance of $1.5 million and amount available under Aspire Equity Line of Credit of $8.1 million. The Company will need to raise funds immediately to continue its operations and increase demand for its services. Until it can generate sufficient revenues to meet its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growthsubstantially all of the Company’s business, assets and other factors described elsewhere in this Quarterly Report on Form 10-Q. The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptableliabilities pursuant to the ~~Company to permit it to continue operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if~~Amended and Restated Separation and Distribution Agreement, dated as of March 27, 2019, among the Company, ~~is unable to continue as~~Telemynd and MYnd Analytics, Inc., a ~~going concern.~~

~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

~~Basis of Presentation~~

~~The accompanying unaudited condensed consolidated financial statements~~wholly owned subsidiary of the Company ~~have been prepared in accordance with GAAP and applicable rules and regulations~~(the “Separation Agreement”). On July 15, 2019, the board of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, changes in stockholders’ equity, results of operations and cash flowsdirectors of the Company declared a dividend with respect to the shares of the Company common stock outstanding at the ~~dates and~~close of business on that day of one share of the Telemynd common stock held by the Company for each outstanding share of the ~~periods indicated.~~Company common stock after giving effect to the reverse split described below. The interim results for the quarter ended December 31, 2018 are not necessarily indicative of results for the full 2019 fiscal year or any other future interim periods. As such, the information included in this quarterly report on Form 10-Q should be read in conjunctiondividend, which together with the ~~consolidated financial statements~~contribution and ~~accompanying notes included~~transfer of MYnd’s business, assets and liabilities described above, is referred to as the “Spin-Off.” Prior to the Spin-Off, Telemynd engaged in no business or operations.

On July 17, 2019, in connection with, and prior to the ~~Company’s Form 10-K for~~completion of, the ~~year ended September 30, 2018.~~Merger, the Company effected a 1-for-6 reverse split (the “Reverse Split”) of its outstanding shares of common stock, par value $0.001 per share.

~~Basis~~As a result of ~~Consolidation~~the Spin-Off and the Merger, since July 17, 2019 the Company has operated through EMI and its direct and indirect subsidiaries and the ongoing business of the Company is the EMI business, which is that of a commercial-stage biopharmaceutical company focused on the development, marketing and sale of innovative treatments and therapies, including those in the rare and orphan disease categories. As the acquiring company for accounting purposes, financial condition and results of operations of the Company reflected in the accompanying unaudited consolidated interim financial statements for periods prior to the Merger are those of EMI. .

Principles of consolidation—The ~~unaudited condensed~~ consolidated financial statements include the ~~results~~accounts of the Company, ~~its wholly~~ EMI and EMI’s wholly‑owned subsidiary, ~~Arcadian. two professional associations, Arcadian Telepsychiatry PA~~Emmaus Medical, Inc. and Emmaus Medical, Inc.’s wholly‑owned subsidiaries, Newfield Nutrition Corp., Emmaus Medical Japan, Inc. (“~~Texas PA”~~EMJ”), Emmaus Life Sciences, Co. Ltd (“ELSK”) ~~incorporated in Texas, Arcadian Telepsychiatry Florida P.A.~~and Emmaus Medical Europe, Ltd (“~~Florida PA”~~EM Europe”) incorporated in Florida, and two professional corporations, Arcadian Telepsychiatry P.C. (“Pennsylvania PC”) incorporated in Pennsylvania and Arcadian Telepsychiatry of California, P.C. incorporated in California (“California PC” and together the Pennsylvania PC, Florida PA and Texas PA, the “Arcadian Entities.”)

Arcadian is party to Management Services Agreements by and among it and the Arcadian Entities, pursuant to which Arcadian provides management and administrative services to each of the Arcadian Entities. Each entity is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine.. All significant intercompany ~~balances and~~ transactions have been ~~eliminated upon consolidation.~~

~~Segments~~eliminated.

~~We view our operations~~The Company also consolidates EJ Holdings, Inc., a Japanese corporation, as a variable interest entity (VIE) on the basis that the Company is an indirect 40% shareholder and ~~manage our business as one operating segment.~~

~~Variable Interest Entities (VIE)~~

On November 13, 2017, Arcadian entered into a management and administrative services agreement with Texas PA and with Pennsylvania PC, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, Texas PA and Pennsylvania PC are each determined to be a Variable Interest Entity (“VIE”) as MYnd is the primary beneficiary ~~with the ability to direct the activities (excluding clinical decisions) that most significantly affect Texas PA’s and Pennsylvania PC’s economic performance through its majority representation~~ of the Texas PA and Pennsylvania PC; therefore, Texas PA and Pennsylvania PC are consolidated by MYnd. On January 19, 2018, Arcadian entered into a management and administrative services agreement with California PC, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, California PCVIE. The Company is ~~determined~~deemed to be ~~a VIE and MYnd is~~ the primary beneficiary ~~with the ability to direct the activities (excluding clinical decisions) that most significantly affect California PC’s economic performance through its majority representation~~ of California PC; therefore, California PC is consolidated by MYnd. On March 27, 2018, Arcadian entered into a management and administrative services agreement with Florida PA, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, Florida PA is determined to be a VIE and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect Florida PA’s economic performance through its majority representation of Florida PA; therefore, Florida PA is consolidated by MYnd.

The Company holds a variable interest in the entities which contract with physicians and other health professionals in order to provide telepsychiatry services to Arcadian. The entities are considered variable interest entities since they do not have sufficient equity to finance their activities without additional financial support. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both ~~power and benefits—that is, it has (1)~~(a) the power to direct the activities of athe VIE that most significantly ~~impact~~affect the VIE’s economic performance ~~(power)~~ and ~~(2)~~(b) the obligation to absorb losses of the VIE that could potentially ~~could~~ be significant to the VIE or the right to receive benefits from the VIE that could potentially ~~could~~ be significant to the ~~VIE (benefits). The Company has the power and rights to control all activities of the entities and funds and absorbs all losses of the~~ VIE.

~~Use of Estimates~~

The preparation of the ~~unaudited condensed~~ consolidated financial statements requires the use of management estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reported period. 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 nine months ended September 30, 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 and nine months ended September 30, 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 method. 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 Company generates revenues through the sale of Endari® as a treatment for sickle cell disease (“SCD”) and 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 chargebacks 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 revenues and earnings in the period such variances become known. The following are our significant categories of variable consideration:

Sales Discounts and Allowances: 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 Part D prescription drug coverage gap program. The Company’s management estimates Medicaid and Medicare Part D 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 and pharmacy benefit management 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 paym ents 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 the raw material purchased during the three and nine months ended September 30, 2019 and the year ended December 31, 2018 were from one vendor. The below table presents inventory by category (in thousands):


	September 30, 2019		December 31, 2018
Raw materials and components	$	1,089	$	171
Work-in-process		2,392		2,471
Finished goods		4,010		2,063
Total	$	7,491	$	4,705

Marketable securities— The Company’s marketable securities as of December 31, 2018 consisted of the following; (a) 39,250 shares of capital stock of CellSeed, Inc., a Japanese Corporation (“CellSeed”) acquired in January 2009 at ¥680 JPY per share ($7.69 USD), which shares were sold in June 2019 for cash proceeds of approximately $221,000; and (b) 6,643,559 shares of capital stock of Telcon RF Pharmaceutical, Inc., a Korean corporation (formerly, Telcon Inc. and herein “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 September 30, 2019 and December 31, 2018, the closing prices per Telcon share on the Korean Securities Dealers Automated Quotations (“KOSDAQ”) were ₩4,995 ($4.16 USD) and ₩8,280 KRW ($7.43 USD), respectively. As of December 31, 2018, the closing price per CellSeed share on the Tokyo Stock Exchange was ¥668 JPY ($6.07 USD).

As of September 30, 2019 and December 31, 2018, all shares of Telcon common stock were pledged to secure our obligations under the revised API agreement with Telcon.

As of December 31, 2018, the 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 was due on demand and were classified as marketable securities, pledged to creditor in our balance sheet. During the nine months ended September 30, 2019, the Company repaid the convertible notes.

Prepaid expenses and other current assets — Prepaid expenses and other current assets consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):


	September 30, 2019		December 31, 2018
Prepaid insurance	$	427	$	82
Other prepaid expenses and current assets		767		661
	$	1,194	$	743

Other long-term liabilities—Other long-term liabilities consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Trade discount	$	24,052	$	26,222
Unearned revenue		10,500		10,000
Other long-term liabilities		4		—
Total other long-term liabilities	$	34,556	$	36,222

On June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which Telcon advanced to the Company approximately ₩36.0 billion KRW (approximately $31.8 million USD) in consideration for the right to supply 25% of the Company’s requirements for bulk containers of pharmaceutical grade L-glutamine (“PGLG”). The advance was accounted for a trade discount. See 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 September 30, 2019 and December 31, 2018 (in thousands):

	Nine Months Ended					Year Ended
	September 30, 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
Change in fair value included in the statement of comprehensive income (loss)		(623	)		—		(483	)		(466	)
Extinguished upon debt repayment		—			—		—			(823	)
Reclassification to equity		(776	)
Balance, end of period	$	—		$	—	$	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 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. In connection with the Merger, the variable exercise price was fixed, and the warrants were reclassified to equity.

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

	July 17, 2019			December 31, 2018
Stock price	$	7.02		$	9.10
Risk‑free interest rate		1.81	%		2.48	%
Expected volatility (peer group)		70.00	%		70.00	%
Expected life (in years)		3.96			4.00
Expected dividend yield		—		—
Number outstanding		252,802			240,764
Balance, end of period:
Warrant derivative liabilities (long-term) (in thousands)	$	776		$	1,399

The embedded conversion option in our 10% senior secured convertible debentures is separately accounted at fair value as a derivative liability under the guidance in ASC 815 as of September 30, 2019 and any changes in the fair value of the embedded conversion option are recognized in earnings.

The following table sets forth the fair value of the embedded conversion option measured as of September 30, 2019:

	Nine Months Ended
Embedded Conversion Option Liabilities—10% Secured Senior Debentures	September 30, 2019
Balance, beginning of period	$	—
Fair value at issuance date	$	635
Change in fair value included in the statement of comprehensive income (loss)		(342	)
Balance, end of period	$	293

The value and the change in fair value of embedded conversion option liabilities were determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.

The values as of September 30, 2019 and as of the Merger date were based upon following assumptions:

	September 30, 2019			July 17, 2019
Conversion price	$	9.52		$	10.00
Risk‑free interest rate		1.74	%		1.92	%
Expected volatility (peer group)		60.00	%		55.00	%
Expected life (in years)		1.06			1.26
Expected dividend yield	—			—
Balance, end of period:
Embedded conversion option liabilities (in thousands)	$	293		$	635

Net loss per share — As of September 30, 2019 and 2018, the Company had outstanding potentially dilutive securities exercisable for or convertible into 13,458,185 and 16,053,511 shares of Company common stock, respectively. No potentially dilutive securities were included in the calculation of diluted net loss per share since their effect would be anti-dilutive for the period ended September 30, 2019.

Recent accounting pronouncements— In June 2016, the FASB issued ASU 2016-13—Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of this new standard on our financial statements and related disclosures.

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 2018-13 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, ASU 2018-17 (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 September 30, 2019				Nine Months Ended September 30,
	2019		2018		2019		2018
Endari®	$	5,994	$	4,803	$	16,960	$	7,863
Other		90	$	79		300		372
Revenues, net		6,084		4,882		17,260		8,235

The following table summarizes the revenue allowance and accrual activities for the nine months ended September 30, 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	$	2,364
Provision related to sales in the current year		1,039			2,368			190		3,597
Adjustments related prior period sales		(218	)		(1,082	)		—		(1,300	)
Credit and payments made		(866	)		(1,816	)		—		(2,682	)
Balance as of September 30, 2019	$	258		$	1,350		$	371	$	1,979

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 September 30, 2019						Nine Months Ended September 30,
	2019			2018			2019			2018
AmerisourceBergen Specialty Group		62	%		90	%		60	%		88	%
McKesson Plasma and Biologics LLC		22	%		4	%		21	%		3	%

NOTE 4 — PROPERTY AND EQUIPMENT

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

	September 30, 2019			December 31, 2018
Equipment	$	333		$	306
Leasehold improvements		82			70
Furniture and fixtures		95			79
Total property and equipment		510			455
Less: accumulated depreciation		(347	)		(303	)
Property and equipment, net	$	163		$	152

During the three months ended September 30, 2019 and 2018, depreciation expense was approximately $16,000 and $13,000, respectively. During the nine months ended September 30, 2019 and 2018, depreciation expense was approximately $44,000 and $21,000, 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 nine months ended September 30, 2019, the Company recognized approximately $524,000 in impairment loss for equity securities without readily determinable fair values attributable to an investment in KPS Co., Ltd. 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 September 30, 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):

	September 30, 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	$	27,643	$	—	$	49,581	$	—
Long-term investment at cost		—		—		—		538
Total equity securities	$	27,643	$	—	$	49,581	$	538

Net unrealized loss on marketable securities available-for-sale still held at September 30, 2019 and at September 30, 2018 was approximately $21.7 million and approximately $24.1 million, respectively.

NOTE 6 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

At September 30, 2019 and December 31, 2018, accounts payable and accrued expenses consisted of the following (in thousands):

	September 30, 2019		December 31, 2018
Accounts payable:
Clinical and regulatory expenses	$	352	$	83
Professional fees		1,531		2,157
Selling expenses		552		382
Manufacturing costs		4,171		—
Other vendors		794		980
Total accounts payable		7,400		3,602
Accrued interest payable, related parties		36		842
Accrued interest payable		824		2,138
Accrued expenses:
Payroll expenses		819		713
Government rebates and other incentives		1,350		1,744
Other accrued expenses		277		83
Total accrued expenses		2,446		2,540
Total accounts payable and accrued expenses	$	10,706	$	9,122

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at September 30, 2019 and December 31, 2018 (in thousands):

Year Issued	Interest Rate Range	Term of Notes	Conversion Price		Principal Outstanding September 30, 2019		Discount Amount September 30, 2019		Carrying Amount September 30, 2019		Shares Underlying September 30, 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		—	$	926	$	—	$	926		—		$	909	$	—	$	909		—
2015	10%	Due on demand		—		—		—		—		—			10		—		10		—
2016	10% - 11%	Due on demand		—		—		—		—		—			843		—		843		—
2017	5% - 11%	Due on demand		—		—		—		—		—			2,575		—		2,575		—
2018	10% - 11%	Due on demand- 18 months		—		—		—		—		—			12,311		9,233		3,078		—
2019	11%	Due on demand - 6 months		—		2,960		—		2,960		—			—		—		—		—
					$	3,886	$	—	$	3,886		—		$	16,648	$	9,233	$	7,415		—
		Current			$	3,886	$	—	$	3,886		—		$	12,448	$	6,054	$	6,394		—
		Non-current			$	—	$	—	$	—		—		$	4,200	$	3,179	$	1,021		—
Notes payable - related parties
2016	10%	Due on demand		—	$	20	$	—	$	20		—		$	270	$	—	$	270		—
2017	10%	Due on demand		—		—		—		—		—			39		—		39		—
2018	11%	Due on demand		—		159		—		159		—			159		—		159		—
2019	10%	Due on demand		—		14		—		14		—			—		—		—		—
					$	193	$	—	$	193		—		$	468	$	—	$	468		—
		Current			$	193	$	—	$	193		—		$	468	$	—	$	468		—
Convertible debentures
2019	10%	18 months	$	9.52	$	12,200	$	—	$	12,200		1,292	(a)
					$	12,200	$	—	$	12,200		1,292		$	—	$	—	$	—		—
		Current			$	11,000	$	—	$	11,000		1,166		$	—	$	—	$	—		—
		Non-current			$	1,200			$	1,200		126		$	—	$	—	$	—		—
Convertible notes payable
2011	10%	5 years	$3.05		$	—	$	—	$	—		—		$	300	$	—	$	300		98
2014	10%	Due on demand - 2 years	$3.05 - $3.60			—		—		—		—			519		—		519		184
2016	10%	1 year	$	4.50		—		—		—		—			61		—		61		17
2017	10%	Due on demand - 1 year	$3.50 - $4.50			—		—		—		—			2,820		349		2,471		899
2018	6% - 10%	Due on demand - 2 years	$3.50 - $10.00			3,000		72		2,928		356	(b)		19,556		6,169		13,387		3,664
					$	3,000	$	72	$	2,928		356		$	23,256	$	6,518	$	16,738		4,862
		Current			$	3,000	$	72	$	2,928		356		$	16,604	$	5,351	$	11,253		3,981
		Non-current			$	—	$	—	$	—		—		$	6,652	$	1,167	$	5,485		881
Convertible notes payable - related parties
2012	10%	Due on demand	$	3.30	$	—	$	—	$	—		—		$	200	$	—	$	200		74
2015	10%	2 years	$	4.50		—		—		—		—			200		—		200		58
2017	10%	2 years	$	10.00		—		—		—		—			5,000		311		4,689		533
2018	10%	2 years	$	10.00		—		—		—		—			9,400		871		8,529		972
					$	—	$	—	$	—		—		$	14,800	$	1,182	$	13,618		1,637
		Current			$	—	$	—	$	—		—		$	5,400	$	311	$	5,089		665
		Non-current			$	—	$	—	$	—		—		$	9,400	$	871	$	8,529		972
		Total			$	19,279	$	72	$	19,207	$	1,648		$	55,172	$	16,933	$	38,239	$	6,499

(a) The notes are convertible to Emmaus Life Sciences, Inc. shares.
(b) The notes are convertible to EMI Holding, Inc. shares.

The weighted-average stated interest rate of notes payable was 10% as of September 30, 2019 and December 31, 2018. The weighted-average effective interest rates of notes payable as of September 30, 2019 and December 31, 2018 were 12% and 35%, respectively, after giving effect to discounts relating to beneficial conversion features of these notes. The notes payable and convertible notes payable contain no restrictive financial covenants or acceleration clauses associated with a material adverse change event. The convertible debentures contain negative covenants.

Immediately prior to the completion of the Merger, all but one of the convertible notes payable were converted into shares of EMI common stock at their respective conversion prices. At the completion of the Merger, the converted shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable of EMI is convertible into shares of common stock of EMI at conversion price of $10.00 per share as of September 30, 2019.

Our 10% senior secured convertible debentures were amended and restated immediately prior to the Merger to include, among other changes, an option to convert their debentures into shares of common stock of the Company at a conversion price of $9.52 per share during the term of the debentures. The conversion feature of the debentures is treated as a conversion feature derivative liability.

Contractual principal payments due on notes payable and debentures are as follows (in thousands):

Year Ending
2019 (three months)	$	6,079
2020		13,200
Total	$	19,279

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance.

The Company issued warrants with our 10% senior secured convertible debentures. The fair value of the warrants issued in conjunction with debentures were determined using the Binominal Monte-Carlo Cliquet Option Pricing Model with the following inputs for the nine months ended September 30, 2019 and year ended December 31, 2018 (See Note 8).

	Nine months ended September 30, 2019			Year ended December 31, 2018
Stock price	$	6.86		$	11.10
Exercise price	$	5.87		$	11.30
Term until expiration	4.26 years			5 years
Risk‑free interest rate		1.79	%		3.05	%
Expected dividend yield		—			—
Expected volatility		65.0	%		70.0	%

With respect to the notes that included both a beneficial conversion feature and a warrant, the proceeds were allocated to the beneficial conversion feature and the warrant based on their respective pro rata fair values.

NOTE 8 — STOCKHOLDERS’ DEFICIT

Private placement — On September 11, 2013, the Company issued an aggregate of 3,020,501 units at a price of $2.50 per unit (the “Private Placement”). Each unit consisted of one share of common stock and one common stock warrant for the purchase of an additional share of common stock. The aggregate purchase price for the units was approximately $7.6 million. In addition, 300,000 warrants for the purchase of a share of common stock were issued to a broker under the same terms as the Private Placement transaction (the “Broker Warrants”).

The warrants issued in the Private Placement and the Broker Warrants entitle the holders thereof to purchase, at any time on or prior to September 11, 2018, shares of common stock of the Company at an exercise price of $3.50 per share. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as liabilities, were originally recorded at fair value, and are adjusted to fair market value each reporting period. Because the shares of common stock underlying the Private Placement warrants and Broker Warrants were not effectively registered for resale by September 11, 2014, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The shares have not been registered for resale as of September 30, 2018. The availability to warrant holders of the cashless exercise feature as of September 11, 2014 caused the then-outstanding 2,225,036 Private

Placement warrants and Broker Warrants with fair value of approximately $7.1 million to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period. On June 10, 2014, certain warrant holders exercised 1,095,465 warrants issued in the Private Placement for the exercise price of $3.50 per share, resulting in the Company receiving aggregate exercise proceeds of $3.8 million and issuing 1,095,465 shares of common stock. Prior to exercise, these Private Placement warrants were accounted for at fair value as liability classified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value of $1.8 million, representing their intrinsic value, with this adjusted carrying value of $1.8 million being transferred to additional paid-in capital. Also on June 10, 2014, based on an offer made to holders of Private Placement warrants in connection with such exercises, the Company issued an aggregate of 1,095,465 replacement warrants to holders exercising Private Placement warrants, which replacement warrants have terms that are generally the same as the exercised warrants, including an expiration date of September 11, 2018 and an exercise price of $3.50 per share.

The replacement warrants are treated for accounting purposes as liability classified warrants, and their issuance gave rise to a $3.5 million warrant exercise inducement expense based on their fair value as of issuance as determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. Because the shares of common stock underlying the replacement warrants were not effectively registered for resale by June 10, 2015, the warrant holders have an option to exercise the warrants using a cashless exercise feature. The availability to warrant holders of the cashless exercise feature as of June 10, 2015 caused the then-outstanding 1,095,465 replacement warrants with fair value of approximately $2.5 million to be reclassified from liability classified warrants to warrant derivative liabilities and to continue to be remeasured at fair value each reporting period.

As of September 11, 2018, all of the Private Placement warrants, replacement warrants and Broker Warrants had been exercised primarily on a cashless basis or had expired.

Purchase Agreement with GPB—On December 29, 2017, the Company entered into the Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which the Company issued to GPB a $13 million principal amount senior secured convertible promissory note (the “GPB Note”) for an aggregate purchase price of approximately $12.5 million, which reflected a 4.0% original issue discount.

In connection with the issuance of the GPB Note, the Company also issued to GPB a warrant (the “GPB Warrant”) to purchase up to 240,674 of Company common stock at an exercise price of $10.80 per company share, with customary adjustments for stock splits, stock dividends and other recapitalization events and anti-dilution provisions set forth in the GPB Warrant. If the Company effects a public listing of common stock for trading on any securities market or exchange, whether through a direct listing application or merger transaction, at a price per share less than the exercise price, the exercise price will be adjusted on a one-time basis to a 10% premium to the dilutive issuance price and the number of shares issuable under the GPB Warrant will be increased on a full ratchet basis. The GPB Warrant became exercisable six months after issuance and has a term of five years after the initial exercise date.

In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which the Company has agreed to file a registration statement with SEC relating to the offer and sale by GPB of the common stock underlying the GPB Warrant within one hundred eighty (180) days of closing of a public listing of the Company’s Common Stock for trading on any national securities exchange (excluding any over-the-counter market), whether through a direct listing application or merger transaction. The Company is required to have the registration statement become effective on the earlier of (A) the date that is two-hundred and forty (240) days following the later to occur of (i) the date of closing of the public listing or (ii) or in the event the registration statement receives a “full review” by the Commission, the date that is 300 days following the date of closing of the public listing, or (B) the date which is within three (3) business days after the date on which the Commission informs the Company (i) that the Commission will not review the registration statement or (ii) that the Company may request the acceleration of the effectiveness of the registration statement. If the Company does not timely effect such registration, it will be required to pay GPB certain late payments specified in the Registration Rights Agreement.

In February 2018, the Company prepaid the GPB Note in full. Upon such prepayment, the Purchase Agreement and the Company’s obligations under the transaction documents entered into pursuant to the Purchase Agreement terminated except for the GPB Warrant and the Registration Rights Agreement.

Purchase Agreement with 10% senior secured debentures—In October 2018, the EMI sold and issued $12.2 million principal amount of 10% senior secured debentures and warrants to purchase an aggregate of up to 1,220,000 share of EMI common stock pursuant to a securities purchase agreement dated as of September 18, 2018 among EMI and limited number of accredited investors. The net proceeds of the sale of the debentures and warrants were used to fund EMI’s loan to EJ Holdings, Inc., a variable interest entity (“VIE”), reflected in the Company’s consolidated financial statements.

The debentures were amended and restated in their entirety in conjunction with the merger of the Company on July 17, 2019 as described in Note 12. As originally issued, the debentures bore interest at the rate of 10% per annum, payable monthly commencing November 1, 2018, and were to mature on April 21, 2020. The Company was to be obligated to redeem $1 million principal amount of debentures monthly, commencing in May 2019 and to redeem the debentures in full upon a “subsequent financing” of at least $20 million, subject to certain exceptions, or in the “event of default” (as defined). The Company’s obligations under the debentures were secured by a security interest in substantially all of our assets, except for certain pledged marketable securities, and are guaranteed by the U.S. subsidiaries, Emmaus Medical, Inc. and Newfield Nutrition Corporation.

The common stock purchase warrants also were amended and restated in their entirety in conjunction with the Merger. As originally issued, the common stock purchase warrants were exercisable for five years beginning April 22, 2019 at an initial exercise price of $11.30 per share, which was to be subject to reduction if EMI became a listed company or its common stock became listed or quoted on a trading market based upon the public offering price or “VWAP” of the common stock. The exercise price also was subject to adjustment in certain other customary circumstances.

T.R. Winston & Company, LLC acted as placement agent in connection with the sale of the debentures and warrants pursuant to an amended and restated fee agreement with us dated October 1, 2018. In accordance with the fee agreement, EMI paid T.R. Winston a cash fee equal to 5% of the gross proceeds received from the purchasers, granted T.R. Winston warrants to purchase up to 120,000 shares of EMI common stock on the same terms as the common stock purchase warrants sold to the purchasers and reimbursed T.R. Winston for certain legal fees and expenses.

Effective as of March 5, 2019, EMI entered into a securities amendment agreement with the debenture and warrant holders which amended in certain respects the original securities purchase agreement provided that the debentures and warrants were to be amended in certain respects and restated in their entirety immediately prior to and subject to the completion of the then-pending Merger.

Pursuant to the terms of the securities amendment agreement, (i) the debenture holders waived their right to the monthly redemption of $1,000,000 principal amount of the debentures that was due May 1, 2019 and their right to accelerate the repayment of the debentures in connection with the proposed Merger and (ii) the provision of the debentures requiring their mandatory redemption in connection with any “subsequent financing” was eliminated. The debenture holders subsequently waived their rights to the monthly redemptions due June 1 and July 1, 2019 respectively.

The amended and restated debentures provide that the mandatory monthly redemption of $1,000,000 principal amount thereof will commence in November 2019 and that they will mature on October 21, 2020, six months later than the original maturity date of the debentures. Unlike the debentures, the amended and restated debentures are convertible at the option of each holder into shares of Company common stock at a conversion price of $10.00 a share, subject to adjustment for stock splits, merger reorganizations and other customary events. The amended and restated warrants will be exercisable for up to an aggregate of up to 1,460,000 shares of our common stock, or 244,000 more shares than are currently purchasable under the original warrants, at an initial exercise price of $10.00 per share, or $1.30 less than the original exercise price of the warrants. The exercise price of the warrants was subject to reduction in connection with a “going public event,” such as the Merger based upon the “VWAP” (i.e., volume-weighted average trading price) of the Company common stock at the time of the Merger. The exercise price also will be subject to adjustment for stock splits and other customary events. Upon completion of the Merger, the exercise price of the warrants and the number of underlying warrant shares were adjusted based upon “exchange ratio” in the Merger. Subsequent to the Merger, exercise price of the warrants was adjusted in accordance with their terms to $5.87 per share based upon the VWAP of the Company common stock on the day following completion of the Merger.

A summary of outstanding warrants as of September 30, 2019 and December 31, 2018 is presented below:


	September 30, 2019			December 31, 2018
Warrants outstanding, beginning of period		3,436,431			5,265,432
Assumed as part of Merger		1,044,939
Granted		500,951			1,542,000
Exercised		(51,000	)		(2,385,317	)
Cancelled, forfeited or expired		—			(985,684	)
Warrants outstanding, end of period		4,931,321			3,436,431

A summary of outstanding warrants by year issued and exercise price as of September 30, 2019 is presented below:

			Outstanding						Exercisable
Year issued and Exercise Price			Number of Warrants Issued		Weighted-Average Remaining Contractual Life (Years)		Weighted-Average Exercise Price		Total		Weighted-Average Exercise Price
At December 31, 2015
	$	4.67		115,953		0.43	$	4.67		115,953	$	4.67
	2015 Total			115,953						115,953
At December 31, 2016
	$	4.29		124,703		1.78	$	4.29		124,703	$	4.29
	$	4.48		78,760		1.59	$	4.48		78,760	$	4.48
	$	4.76		1,365,189		1.61	$	4.76		1,365,189	$	4.76
	2016 Total			1,568,652						1,568,652
At December 31, 2017
	$	10.28		252,802		3.75	$	10.28		252,802	$	10.28
	2017 Total			252,802						252,802
At December 31, 2018
	$	10.76		210,553		3.86	$	10.76		210,553	$	10.76
	$	5.87		1,407,188		4.06	$	5.87		1,407,188	$	5.87
	2018 Total			1,617,741						1,617,741
At September 30, 2019
	$	6.12		32,391		4.66	$	6.12		32,391	$	6.12
	$	12.00		76,575		3.98	$	12.00		76,575	$	12.00
	$	14.04		174,999		3.50	$	14.04		174,999	$	14.04
	$	31.50		737,975		2.82	$	31.50		737,975	$	31.50
	$	36.24		22,333		2.82	$	36.24		22,333	$	36.24
	$	60.00		666		1.25	$	60.00		666	$	60.00
	$	5.87		256,234		4.08	$	5.87		256,234	$	5.87
	$	7.68		75,000		4.80	$	7.68		75,000	$	7.68
	2019 Total			1,376,173						1,376,173
	Total			4,931,321						4,931,321

Summary of Plans – Upon completion of the Merger, the EMI Amended and Restated 2011 Stock Incentive Plan was assumed by the Company. The 2011 Stock Incentive Plan permits grants of incentive stock options to employees, including executive officers, and other share-based awards such as stock appreciation rights, restricted stock, stock units, stock bonus and unrestricted stock awards to employees, directors, and consultants. The Company also maintains a 2012 Omnibus Incentive Compensation Plan under which the Company may grant incentive stock options to selected employees including officers, non-employee consultants and non-employee directors. All outstanding stock options under the 2012 Omnibus Incentive Compensation Plan were fully vested prior to the merger.

Stock options—During the nine months ended September 30, 2019, the Company granted options to purchase 50,000 shares of common stock. The options have an exercise price of $10.30 per share. During the year ended December 31, 2018, the Company grantedstock options to purchase up to 357,000 shares of Company common stock. All of the options are exercisable for ten years of from the date of grant and will vest and become exercisable with respect to the underlying shares as follows: as to one‑third (1/3) of the share on the first anniversary of the grant date, and as to the remaining two‑thirds (2/3) of the shares in twenty‑four (24) approximately equal monthly installments over a period of two years thereafter.

Upon completion of the Merger, the option exercise prices and number of underlying option shares were adjusted based upon “exchange ratio” in the Merger.

A summary of outstanding stock options as of September 30, 2019 and December 31, 2018 are presented below.

	September 30, 2019					December 31, 2018
	Number of Options			Weighted‑ Average Exercise Price		Number of Options			Weighted‑ Average Exercise Price
Options outstanding, beginning of period		6,642,200		$	4.40		6,775,200		$	4.12
Granted or deemed granted		636,683		$	7.09		357,000		$	11.28
Exercised		(200	)	$	5.00		(170,000	)	$	4.59
Cancelled, forfeited and expired		(33,333	)	$	11.30		(320,000	)	$	6.06
Options outstanding, end of period		7,245,350		$	4.68		6,642,200		$	4.40
Options exercisable, end of period		6,987,464		$	4.46		5,958,783		$	3.87
Options available for future grant		2,167,150					2,357,800

During the nine months ended September 30, 2019 and 2018, the Company recognized approximately $3.5 million and $1.7 million, respectively, of share-based compensation expense arising from stock options, including $1.9 million of one-time adjustments resulting from the Merger As of September 30, 2019, there was approximately $1.7 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s 2011 Stock Incentive Plan. That expense is expected to be recognized over the weighted-average remaining period of 1.9 years.

NOTE 9 — LEASES

Operating leases — The Company leases its office space under operating leases with unrelated entities.

We lease 13,734 square feet of office space for our headquarters in Torrance, California, at a base rental of $48,087 per month. In December 2018, we have entered into an amended lease to expand our headquarter by an additional 7,559 square feet commencing September 9, 2019. The base monthly rent for this additional space of $27,590 will be payable commencing January 1, 2020. The amended lease will expire on May 31, 2026. We also lease an additional 1,600 square feet office space in Torrance, California, at a base rent of $2,240 per month and 2,986 square feet office space in New York, New York, at a base rent of $5,500, which leases will expire on January 31, 2020 and December 30, 2019, respectively.

In addition, we lease 1,322 square feet of office space in Tokyo, Japan, which the lease will expire on September 30, 2020.

The rent expense during the three months ended September 30, 2019 and 2018 amounted to approximately $286,000 and $191,000, respectively. The rent expense during the nine months ended September 30, 2019 and 2018 amounted to approximately $705,000 and $493,000, respectively.

Future minimum lease payments under the agreements were as follows as of September 30, 2019 (in thousands):

	Amount
2019 (three months)	$	184
2020		900
2021		978
2022		1,006
2023 and thereafter		3,668
Total lease payments		6,736
Less: Interest		2,178
Present value of lease liabilities	$	4,558

The weighted average remaining lease term is 6.5 years and the weighted average discount rate is 13.1%.

The Company adopted ASU 2016-02 on January 1, 2019 as noted in Note 2. Prior to the adoption, future minimum lease payment under the non-cancellable leases at December 31, 2018 were as follows (in thousands):

	Amount
2019	$	730
2020		974
2021		973
2022		1,003
2023 and thereafter		3,665
Total	$	7,345

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Management Control Acquisition Agreement — On June 12, 2017, the Company entered into a Management Control Acquisition Agreement (the “MCAA”) with Telcon Holdings, Inc., a Korean corporation, and Telcon RF Pharmaceutical Inc. (formerly Telcon Inc. and herein “Telcon”), a Korean-based public company whose shares are listed on KOSDAQ, a trading board of Korea Exchange in South Korea. In accordance with the MCAA, the Company invested the ₩36.0 billion KRW (approximately $31.8 million USD) of the proceeds from the advance payment by Telcon Inc. under the API Supply Agreement discussed below to purchase 6,643,559 shares of Telcon Inc.’s common shares at a purchase price of ₩5,419 KRW (approximately $4.79 USD) per share.

The MCAA was amended in certain respect and supplemented by an Agreement, dated as of September 29, 2017 (the “September 2017 Agreement”), among the parties. Pursuant to the September 2017 Agreement, among other things, Telcon purchased 4,444,445 shares of Company common stock from two non-affiliated stockholders of the Company at a price of $6.60 per share.

On July 2, 2018, the Company entered into an additional agreement (the “Additional Agreement”) with Evercore Investment Holdings Co., Ltd. (formerly Telcon Holdings Co., Ltd.) (“Evercore”) and Telcon. In the Additional Agreement, the Company agreed to use the proceeds from any sales of the Company’s KPM Tech Co., Ltd. shares to repurchase shares of Company common stock from Telcon at a price of $7.60 a share, subject to certain exceptions, and Telcon granted the Company the right to repurchase all or a portion of Telcon’s shares of Company common stock at a price of $7.60 a share until October 31, 2018 and at a price to be agreed upon after October 31, 2018.

Raw Material Supply Agreement — As described in Note 2, on June 12, 2017, the Company entered into an API Supply Agreement with Telcon pursuant to which it advanced to the Company approximately ₩36.0 billion KRW (approximately $31.8 million USD) in consideration of the right to supply 25% of the Company’s requirements for bulk containers of PGLG for a term of fifteen (15) years. The amount advanced to the Company was recorded as a deferred Trade Discount. On July 12, 2017, the parties entered into a Raw Material Supply Agreement which superseded the API Supply Agreement. The Raw Material Supply Agreement is effective for a term of five years with ten one-year renewal periods. The Raw Material Supply Agreement will automatically renew unless terminated by either party in writing. The Raw Material Supply Agreement provides that the Company will purchase from Telcon 940,000 kilograms of PGLG at $50 USD per kilogram, or a total of $47.0 million. The Company purchases from Telcon approximately $0.4 million of PGLG monthly under the Raw Material Supply Agreement. The PGLG purchased from Telcon is included in inventory at net realizable value (i.e., approximately $19 per kilogram as of September 30, 2019) with the excess purchase price being recorded as a charge against the deferred Trade Discount.

NOTE 11 — RELATED PARTY TRANSACTIONS

The following table sets forth information relating to our loans from related persons outstanding on or at any time during the nine months ended September 30, 2019 (in thousands):

Class	Lender	Interest Rate	Date of Loan	Term of Loan	Principal Amount Outstanding at September 30, 2019		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes September 30, 2019
Current, Promissory note payable to related parties:
	Lan T. Tran (2)	10%	4/29/2016	Due on Demand		20		20		—		—		—		—
	Hope Hospice (1)	10%	6/3/2016	Due on Demand		—		250		250		78		—		—
	Lan T. Tran (2)	10%	2/9/2017	Due on Demand		—		12		—		—		—		—
	Yutaka Niihara (2)(3)	10%	9/14/2017	Due on Demand		—		904		27		2		—		—
	Lan T. Tran (2)	11%	2/10/2018	Due on Demand		159		159		—		—		—		—
	Lan T. Tran (2)	10%	2/9/2019	Due on Demand		14		14		—		—		—		—
				Subtotal	$	193	$	1,359	$	277	$	80				—

Current, Convertible notes payable to related parties:
	Yasushi Nagasaki (2)	10%	6/29/2012	Due on Demand	$	—	$	200	$	200	$	56	$	3.30		—
	Yutaka & Soomi Niihara (2)(3)	10%	11/16/2015	2 years		—		200		200		73	$	4.50		—
	Wei Peu Zen (3)	10%	11/6/2017	2 years		—		5,000		5,000		597	$	10.00		—
	Profit Preview International Group, Ltd. (4)	10%	2/1/2018	2 years		—		4,037		4,037		385	$	10.00		—
	Profit Preview International Group, Ltd. (4)	10%	3/21/2018	2 years		—		5,363		5,363		442	$	10.00		—
				Subtotal	$	—	$	14,800	$	14,800	$	1,553				—
				Total	$	193	$	16,159	$	15,077	$	1,633				—

(1)	Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also the Chief Executive Officer of Hope Hospice.

(2)

Officer.

(3)

Director.

(4)	Mr. Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.

The following table sets forth information relating to our loans from related persons outstanding at any time during the year ended December 31, 2018:

Class	Lender	Interest Rate	Date of Loan	Term of Loan	Principal Amount Outstanding at December 31, 2018		Highest Principal Outstanding		Amount of Principal Repaid or Converted into Stock		Amount of Interest Paid		Conversion Rate		Shares Underlying Notes December 31, 2018
Current, Promissory note payable to related parties:
	Masaharu & Emiko Osato (3)	11%	12/29/2015	Due on Demand	$	—	$	300	$	300	$	76		—		—
	Lan T. Tran (2)	11%	2/10/2016	Due on Demand		—		131		131		29		—		—
	Masaharu & Emiko Osato (3)	11%	2/25/2016	Due on Demand		—		400		400		94		—		—
	Lan T. Tran (2)	10%	4/29/2016	Due on Demand		20		20		—		—		—		—
	Hope Hospice (1)	10%	6/3/2016	Due on Demand		250		250		—		—		—		—
	Lan T. Tran (2)	10%	2/9/2017	Due on Demand		12		12		—		—		—		—
	Yutaka Niihara (2)(3)	10%	9/14/2017	Due on Demand		27		904		877		95		—		—
	Lan T. Tran (2)	11%	2/10/2018	Due on Demand		159		159		—		—		—		—
				Subtotal	$	468	$	2,176	$	1,708	$	294				—

Current, Convertible notes payable to related parties:
	Yasushi Nagasaki (2)	10%	6/29/2012	Due on Demand		200		200		—		—	$	3.30		74
	Yutaka & Soomi Niihara (2)(3)	10%	11/16/2015	2 years		200		200		—		—	$	4.50		58
	Wei Peu Zen (3)	10%	11/6/2017	2 years		5,000		5,000		—		250	$	10.00		533
				Subtotal	$	5,400	$	5,400	$	—	$	250				665

Non Current, Convertible notes payable to related parties:
	Profit Preview International Group, Ltd. (4)	10%	2/1/2018	2 years		4,037		4,037		—		202	$	10.00		420
	Profit Preview International Group, Ltd. (4)	10%	3/21/2018	2 years		5,363		5,363		—		268	$	10.00		552
				Subtotal	$	9,400	$	9,400	$	—	$	470				972
				Total	$	15,268	$	16,976	$	1,708	$	1,014				1,637

(1)	Dr. Niihara, a Director and the Chairman, and Chief Executive Officer of the Company, is also the Chief Executive Officer of Hope Hospice.

(2)

Officer

(3)

Director

(4)	Mr. Zen, a Director of the Company, is the sole owner of Profit Preview International Group, Ltd.

NOTE 12 — SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 13, 2019, the date the financial statements were issued. No events require adjustment of, or disclosure in, the financial statements except for the common stock issued as follow:

Amount

Number of

Shares Issued

Common stock

2,400,000

800,000

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

With respect to the following discussion, the terms, “we,” “us,” “our,” “Emmaus” or the “Company” refer to Emmaus Life Sciences, Inc., (formerly “MYnd Analytics, Inc.”) and its direct and indirect wholly-owned subsidiaries, including EMI Holding, Inc. (“EMI”).

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and the related notes included in the EMI’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”).

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipate,” “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, market acceptance of Endari®, our reliance on third-party manufacturers for our drug products, our exposure to product liability and defect claims, obtaining, and, or, maintaining the U.S. Food and Drug Administration (“FDA”) and other regulatory authorization to market Endari®, maintaining an active public trading market for our securities, and various other matters, many of which are beyond our control.

Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements. We undertake no duty to amend or update these statements beyond what is required by SEC reporting requirements.

Company Overview

We are a commercial-stage biopharmaceutical company engaged in the discovery, development, marketing and sale of innovative treatments and therapies, primarily for rare and orphan diseases. On July 7, 2017, the U.S. Food and Drug Administration, or FDA, approved Emmaus’ lead product, Endari® (L-glutamine oral powder), to reduce the severe complications of sickle cell disease, or SCD, in adult and pediatric patients five years of age and older, and in January 2018, we began marketing and selling Endari® in the U.S. Endari® has received Orphan Drug designation from the FDA and Orphan Medical designation from the European Commission, or EC, which designations afford marketing exclusivity for Endari® for a seven-year period in the U.S. and ten-year period in the E.U., respectively, following marketing approval.

Until we began marketing and selling Endari® in the U.S. in early 2018, we had minimal revenues and relied upon funding from sales of equity securities and debt financings and loans, including loans from related parties. As of September 30, 2019, our accumulated deficit was $216.9 million and we had cash and cash equivalents of $13.5 million, of which $12.2 million was attributable to EJ Holdings Inc., a Japanese company which we consolidate as a variable interest entity (“VIE”). Until we can generate sufficient Endari® sales revenues, our future cash requirements are expected to be financed through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Because of the numerous risks and uncertainties associated with pharmaceutical development, we are unable to predict if or when we will become profitable.

We were incorporated in Delaware on March 20, 1987 under the name Age Research, Inc. Prior to January 16, 2007, our company (then called Strativation, Inc.) existed as a “shell company” which nominal assets and whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On January 16, 2007, we entered into an Agreement and Plan of Merger with CNS Response, Inc., and CNS Merger Corporation, our wholly owned subsidiary, pursuant to which CNS Merger Corporation merged with and into CNS Response, Inc., which survived the merger. On March 7, 2007, we changed our corporate name to CNS Response, Inc. On November 2, 2015, we changed our corporate name to MYnd Analytics, Inc. As described above, on July 17, 2019, we changed our corporate name to Emmaus Life Sciences, Inc.

Our principal executive offices are located at 21250 Hawthorne Boulevard, Suite 800, Torrance, California 90503, and our telephone number there is (310) 214-0065.

Financial Overview

Revenues

Since January 2018, we have generated revenues through the sale of Endari® as a treatment for SCD. We also generate revenues to a much lesser extent from 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 providers. Distributors resell the products to other specialty pharmacy providers, health care providers, hospitals, patients and clinics. In addition to distribution agreements with distributors, we enter into contractual arrangements with specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities that provide for government-mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as “variable consideration.” Revenues from product sales are recorded net of variable consideration.

Prior to recognizing revenues, we forecast and estimate 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 variable 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 variable consideration:

Sales Discounts and Allowances: We provide our 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: We offer our distributors a right to return product purchased directly from us based principally upon (i) overstocks, (ii) inactive products 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: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D 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 in accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to 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 us for the difference between what they pay for the products and our 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 our distributors.

Cost of Goods Sold

Cost of goods sold includes the raw materials, packaging, shipping and distribution costs of Endari® and of AminoPure, nutritional supplement.

Research and Development Expenses

Research and development costs consist of expenditures for new products and technologies, which primarily involve fees paid to contract research organizations (“CRO”) that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees, and activities related to regulatory filings, manufacturing development costs and other related supplies. The costs of later-stage clinical studies, such as Phase 2 and 3 trials, are generally higher than those of earlier stages of development, such as preclinical studies and Phase 1 trials. This is primarily due to the increased size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.

The contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including, but not limited to, start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

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

Due to the inherently unpredictable nature of the process for developing drugs, biologics and cell-based therapies and the interpretation of the regulatory requirements, we are unable to estimate with any degree of certainty the amount of costs which will be incurred in obtaining regulatory approvals of Endari® outside of the U.S. and the continued development of our other preclinical and clinical programs. Clinical development timelines, the probability of success and development costs can differ materially from expectations and can vary widely. These and other risks and uncertainties relating to product development are described in the Annual Report under the headings “Risk Factors—Risks Related to Development of our Product Candidates,” “Risk Factors—Risks Related to our Reliance on Third Parties,” and “Risk Factors—Risks Related to Regulatory Approval of our Product Candidates and Other Legal Compliance Matters.”

General and Administrative Expenses

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

Selling Expenses

Selling expenses consist principally of salaries and related costs for personnel involved in the launch, promotion and marketing of our products. Other selling cost include advertising, commissions, third party consulting costs, the cost of contracted sales personnel and travel. We expect selling expenses, as well as general and administrative expenses to increase as we add additional sales and administrative personnel to support the commercialization of Endari®.

Inventories

Inventories consist of raw material, finished goods and work-in-process and are valued on a first-in, first-out basis and at the lower of cost or net realizable value. Substantially all of the raw material purchased during the nine months ended September 30, 2019 and 2018 was from one vendor.

Results of Operations

Three months ended September 30, 2019 and 2018

Revenues, Net. Net revenues increased by $1.2 million, or 25%, to $6.1 million for the three months ended September 30, 2019 from $4.9 million for the three months ended September 30, 2018. Substantially all of these revenues were from sales of Endari®, and revenues from sales of AminoPure were immaterial. The increase in net revenues is primarily attributable to the higher market acceptance of Endari® and expansion of our customer base. We expect Endari® revenues to continue to increase as we expand our commercialization efforts in the United States and abroad.

Cost of Goods Sold. Cost of goods sold were $0.2 million and $0.1 million for the three months ended September 30, 2019 and the three months ended September 30, 2018, respectively. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. Substantially all of the raw material purchased during the three months ended September 30, 2019 and 2018 was from one vendor.

Research and Development Expenses. Research and development expenses increased by $0.3 million, or 56%, to $0.7 million for the three months ended September 30, 2019 from $0.5 million for the three months ended September 30, 2018. This increase was primarily due to an increase in expenses related to our sponsored diverticulosis study. We expect our research and development costs to increase in the remainder of 2019 as the study progresses.

Selling Expenses. Selling expenses increased by $0.6 million, or 46%, to $1.8 million for the three months ended September 30, 2019 from $1.2 million for the three months ended September 30, 2018. Selling expenses consist primarily of distribution fees, sales force fees, promotion, travel, marketing and branding expenses for Endari® and to a much lesser extent costs of distribution and promotion related to AminoPure. The increase in selling expenses was primarily due to an increase of $0.1 million in contract sales force fees for Endari® and an increase of $0.5 million in salaries and other marketing activities including public relations, sales meeting and sponsorships. We anticipate that our selling expenses will increase during the remainder of 2019 as we expand Endari® marketing and sales activities.

General and Administrative Expenses. General and administrative expenses increased by $1.8 million, or 35%, to $7.0 million for the three months ended September 30, 2019 from $5.2 million for the three months ended September 30, 2018. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. The increase of general and administrative expenses is primarily due to an increase of $0.9 million in professional services, an increase of $0.4 million in share-based compensation, $0.3 million in salaries and an increase of $0.2 million in insurance expense. The increase in share-based compensation includes $1.9 million of additional one-time expenses resulting from the Merger. We will continue to review and adjust our general and administrative expenses and expect them to remain the same during the remainder of 2019.

Other Income (Expense). Total other expense increased by $39.2 million, or 234%, to $22.5 million of other expense for the three months ended September 30, 2019, compared to $16.7 million of other income for the three months ended September 30, 2018. The increase in other expense was primarily due to a decrease of approximately $19 million in a change in fair value of warrant derivative liabilities, an increase of $7.3 million in a change in the net loss on investment in marketable securities, an increase of $6.4 million of loss on debt extinguishment, additional $3.9 million of note conversion expense and an increase of $1.8 million in interest expense. The increase in interest expense includes $6.3 million of accelerated amortization of beneficial conversion features on convertible notes as substantially all convertible notes were converted to equity in connection with the Merger.

Net Income (Loss). Net loss attributable to us for the three months ended September 30, 2019 increased by $40.7 million, or, to $26.1 million for the three months ended June 30, 2019 from $14.6 million for the three months ended September 30, 2018 The net loss attributable to us is primarily a result of $ 39.2 million increase in other expenses and $2.6 million increase in operating expenses partially offset by $1.2 million increase in net revenues as discussed above.

Nine months ended September 30, 2019 and 2018

Revenues, Net. Net revenues increased by $9.0 million, or 110%, to $17.3 million for the nine months ended September 30, 2019 from $8.2 million for the nine months ended September 30, 2018. Substantially all of these revenues were from Endari® sales, and revenues from AminoPure, a nutritional supplement product, were immaterial. The increase in net revenue is primarily attributable to an increase in sales personnel and higher market acceptance of Endari®. We expect Endari® revenues to continue to increase as we expand our commercialization efforts in the United States and abroad.

Cost of Goods Sold. Cost of goods sold were $0.6 million for the nine months ended September 30, 2019 and $0.5 million for the nine months ended September 30, 2018. Cost of goods sold includes costs for raw material, packaging, testing, shipping and costs related to scrapped inventory. Substantially all of the raw material purchased during the nine months ended September 30, 2019 and 2018 came from one vendor.

Research and Development Expenses. Research and development expenses increased by $0.5 million, or 40%, to $1.8 million for the nine months ended September 30, 2019 from $1.3 million for the nine months ended September 30, 2018. This increase was primarily due to an increase in expenses related to our sponsored diverticulosis study. We expect our research and development costs to increase in the remainder of 2019 as the study progresses.

Selling Expenses. Selling expenses increased by $1.5 million, or 41%, to $5.2 million for the nine months ended September 30, 2019 from $3.7 million for the nine months ended September 2018. Selling expenses include the distribution fees, sales

force fees, promotion, travel, marketing and branding expenses for Endari® and to a much lesser extent costs of distribution and promotion related to AminoPure. The increase was primarily related to increased contract sales force fees for Endari®. We anticipate that our selling expenses will increase during the remainder of 2019 as we expand our selling efforts.

General and Administrative Expenses. General and administrative expenses increased by $2.4 million, or 20%, to $14.5 million for the nine months ended September 30, 2019 from $12.1 million for the nine months ended September 30, 2018. General and administrative expenses include share-based compensation expenses, professional fees, office rent and payroll expenses. The increase of general and administrative expenses is primarily $1.1 million of employee salaries and $0.7 million of professional services. The general and administrative expenses also include $1.9 million in shared-based compensation adjustment resulting from the Merger.

Other Income and Expense. Total other expense increased by $25.0 million, or 85%, to $54.5 million for the nine months ended September 30, 2019 from $29.5 million in other expense for the nine months ended September 30, 2018. The increase was primarily due to a decrease of $19.7 million in a change in fair value of warrant derivative liabilities, $3.2 million in a loss on debt extinguishment, $3.9 million in note conversion expense and $6.5 million in interest expenses partially offset by a decrease of $ 9.9 million net loss on investment in marketable securities. In connection with the Merger, the Company recognized $6.5 million of a loss on debt extinguishment resulting from the modification of senior secured debenture, $3.9 million of note conversion expense and $6.3 million of accelerated amortization of beneficial conversion feature on convertible notes which is included as an interest expense.

Operating Expenses Overall. We anticipate that our overall operating expenses will increase for, among others, the following reasons:

We intend to reinforce our sales and marketing team to commercialize Endari® in the U.S. and to enter into one or more strategic partnerships to market Endari® in other territories, subject to marketing approvals;

We anticipate increases in payroll and employee expenses associated with an increase in personnel, higher consulting, legal, accounting and investor relations cost, and higher insurance premiums; and

We expect increases in research and development activities as we undertake to development of our product candidates continues.

Net Losses. Net losses attributable to us increased by $20.1 million, or 52%, to $58.9 million for the nine months ended September 30, 2019 from $38.9 million for the nine months ended September 30, 2018. The increase in net losses attributable to us is primarily a result of an increase of $25.0 million of other expenses and $4.4 million of operating expenses partially offset by an increase of $9.0 million in net revenues as discussed above. On an operating basis, our loss from operations decreased by $4.5 million or 49%, to $4.8 million for the nine months ended September 30, 2019 from $9.3 million for the nine months ended September 30, 2018. The decrease of loss is primarily due to a $9.0 million increase of net revenue partially offset by a $4.4 million increase of operating expenses as discussed above.

Liquidity and Capital Resources

Based on our losses to date, anticipated future revenues and operating expenses, debt repayment obligations and cash and cash equivalents of $13.5 million, of which $12.2 million was attributable to a VIE, as of September 30, 2019, we do not have sufficient operating capital for our business without raising additional capital. We had an accumulated deficit of $216.9 million at September 30, 2019. We anticipate that we will continue to incur net losses for the foreseeable future as we incur expenses for the commercialization of Endari®, research costs for our pilot study of our L-glutamine product in the treatment of diverticulosis and diabetes, research cost relating to corneal cell sheets using Cultured Autologous Oral Mucosal Epithelial Cell Sheet technology and the expansion of corporate infrastructure, including costs associated with being a public reporting company. We have previously relied on private equity offerings, debt financings and loans, including loans from related parties. As part of this effort, we have received various loans from officers, stockholders and other investors as discussed below. As of September 30, 2019, we had outstanding notes payable in an aggregate principal amount of $19.3 million, consisting of $4.1 million of non-convertible promissory notes, $3.0 million of convertible notes and $12.2 million of 10% senior secured convertible debentures. The convertible notes and non-convertible promissory notes bear interest at rates ranging from 10% to 11% per year and, are unsecured. The net proceeds of the loans were used for working capital purposes. Immediately prior to the Merger, approximately $35.5 million principal amount of, and accrued interest on, outstanding convertible notes payable and notes payable of the EMI were converted into shares of EMI common stock thereby increasing stockholders’ equity by the corresponding amount.

For the nine months ended September 30, 2019 and the year ended December 31, 2018, we borrowed varying amounts pursuant to convertible notes, non-convertible promissory notes and convertible debentures. As of September 30, 2019, and

December 31, 2018, the aggregate principal amounts outstanding under convertible notes, non-convertible promissory notes and convertible debentures totaled $19.3 million and $55.2 million, respectively.

Of the notes and convertible debentures outstanding as of September 30, 2019, approximately $18.1 million principal amounts of the notes and debentures are either due on demand or will become due and payable within the next 12 months. Our ability to repay the notes and debentures as they come due will require us to raise additional capital or to refinance the notes and debentures, and there is no assurance whether or on what terms we may be able to do so.

Our average monthly cash burn rate over the nine months ended September 30, 2019 was approximately $0.6 million.

Until we can generate a sufficient product revenue, our 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 licensing or other strategic arrangements. We have no understanding or arrangements with respect to future financings, and there can be no assurance of the availability of such capital on terms acceptable to us (or at all). Due to the uncertainty of our ability to meet our current operating and capital expenses, there is substantial doubt about our ability to continue as a going concern. There is also no assurance that revenues from sales of Endari® will increase as expected.

The table below lists our outstanding notes payable, convertible debentures and convertible notes payable as of September 30, 2019 and December 31, 2018 and the material terms of our outstanding borrowings:

Year Issued	Interest Rate Range	Term of Notes	Conversion Price		Principal Outstanding September 30, 2019		Discount Amount September 30, 2019		Carrying Amount September 30, 2019		Shares Underlying September 30, 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		—	$	926	$	—	$	926		—		$	909	$	—	$	909		—
2015	10%	Due on demand		—		—		—		—		—			10		—		10		—
2016	10% - 11%	Due on demand		—		—		—		—		—			843		—		843		—
2017	5% - 11%	Due on demand		—		—		—		—		—			2,575		—		2,575		—
2018	10% - 11%	Due on demand- 18 months		—		—		—		—		—			12,311		9,233		3,078		—
2019	11%	Due on demand - 6 months		—		2,960		—		2,960		—			—		—		—		—
					$	3,886	$	—	$	3,886		—		$	16,648	$	9,233	$	7,415		—
		Current			$	3,886	$	—	$	3,886		—		$	12,448	$	6,054	$	6,394		—
		Non-current			$	—	$	—	$	—		—		$	4,200	$	3,179	$	1,021		—
Notes payable - related parties
2016	10%	Due on demand		—	$	20	$	—	$	20		—		$	270	$	—	$	270		—
2017	10%	Due on demand		—		—		—		—		—			39		—		39		—
2018	11%	Due on demand		—		159		—		159		—			159		—		159		—
2019	10%	Due on demand		—		14		—		14		—			—		—		—		—
					$	193	$	—	$	193		—		$	468	$	—	$	468		—
		Current			$	193	$	—	$	193		—		$	468	$	—	$	468		—
Convertible debentures
2019	10%	18 months	$	9.52	$	12,200	$	—	$	12,200		1,292	(a)
					$	12,200	$	—	$	12,200		1,292		$	—	$	—	$	—		—
		Current			$	11,000	$	—	$	11,000		1,166		$	—	$	—	$	—		—
		Non-current			$	1,200			$	1,200		126		$	—	$	—	$	—		—
Convertible notes payable
2011	10%	5 years	$3.05		$	—	$	—	$	—		—		$	300	$	—	$	300		98
2014	10%	Due on demand - 2 years	$3.05 - $3.60			—		—		—		—			519		—		519		184
2016	10%	1 year	$	4.50		—		—		—		—			61		—		61		17
2017	10%	Due on demand - 1 year	$3.50 - $4.50			—		—		—		—			2,820		349		2,471		899
2018	6% - 10%	Due on demand - 2 years	$3.50 - $10.00			3,000		72		2,928		356	(b)		19,556		6,169		13,387		3,664
					$	3,000	$	72	$	2,928		356		$	23,256	$	6,518	$	16,738		4,862
		Current			$	3,000	$	72	$	2,928		356		$	16,604	$	5,351	$	11,253		3,981
		Non-current			$	—	$	—	$	—		—		$	6,652	$	1,167	$	5,485		881
Convertible notes payable - related parties
2012	10%	Due on demand	$	3.30	$	—	$	—	$	—		—		$	200	$	—	$	200		74
2015	10%	2 years	$	4.50		—		—		—		—			200		—		200		58
2017	10%	2 years	$	10.00		—		—		—		—			5,000		311		4,689		533
2018	10%	2 years	$	10.00		—		—		—		—			9,400		871		8,529		972
					$	—	$	—	$	—		—		$	14,800	$	1,182	$	13,618		1,637
		Current			$	—	$	—	$	—		—		$	5,400	$	311	$	5,089		665
		Non-current			$	—	$	—	$	—		—		$	9,400	$	871	$	8,529		972
		Total			$	19,279	$	72	$	19,207	$	1,648		$	55,172	$	16,933	$	38,239	$	6,499

(a) The notes are convertible to Emmaus Life Sciences, Inc. shares.
(b) The notes are convertible to EMI Holding, Inc. shares.

Cash flows for the nine months ended September 30, 2019and September 30, 2018

Net cash from operating activities

Net cash flows used in operating activities increased by $0.3 million, or 7%, to a negative net cash flow of $5.1 million for the nine months ended September 30, 2019 from negative net cash flow of $4.7 million for nine months ended September 30, 2018. This increase was primarily due to a $20.7 million increase in net loss and a $3.5 million increase in working capital expenditures partially offset by increase of $23.8 million in the non-cash adjustments to net loss. The increase of working capital is due to timing of cash receipt and payments.

Net cash from investing activities

Net cash flows provided by (used in) investing activities decreased by $7.4 million, or 125%, to $1.5 million negative net cash flow for nine months ended September 30, 2019 compared to $5.9 million positive cash flows for the nine months ended September 30, 2018. Net cash used in investing activities includes sales and purchase of marketable securities and investment at cost, as well as purchase of property and equipment. The decrease of cash flows is mainly due to $1.6 million of cash paid in connection with the merger and a decrease in cash receipt from sales of marketable securities to $0.2 million for the nine months ended September 30, 2019 from $6.4 million for the nine months ended September 30, 2018.

Net cash from financing activities

Net cash flows provided by (used in) financing activities increased by $10.0 million, or 143%, to $3.0 million positive cash flows for the nine months ended September 30, 2019 from $7.0 million negative cash flows for the nine months ended September 30, 2018, as a result of a decrease of $21.9 million in repayment of notes payable and convertible notes and increase of $5.9 million in net proceeds from issuance of common stock and that there were no repurchases of common stock or warrants during the nine months ended September 30, 2019, compared to $7.5 million used during the nine months ended September 30, 2018. The increase of cash inflow was partially offset by the $24.3 million of proceeds from convertible notes and note payable issued for the nine months ended September 30, 2018 while there were no corresponding proceeds during the nine months ended September 30, 2019.

Off-Balance-Sheet Arrangements

We have no off-balance sheet arrangements.

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 U.S. generally accepted accounting principles (“GAAP”), on the basis that the Company will continue as a going concern. Due to the uncertainty of the Company’s ability to meet its current operating 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, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The consolidated interim financial statements do not include any adjustments that might result from the outcome of these uncertainties. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities ~~revenue~~ and ~~expense, and related disclosure of assets and liabilities.~~expenses. On an ongoing basis, ~~the Company evaluates its~~we evaluate these estimates and judgments, including those ~~related to revenue recognition, allowance for doubtful accounts, useful lives of furniture and equipment, intangible assets, valuation allowance~~described below. We base our estimates on ~~deferred taxes, valuation of equity instruments, and accrued liabilities. The Company bases its estimates on~~our historical experience and on various other assumptions that ~~are believed~~we believe to be reasonable under the ~~circumstances, the results of which~~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.

~~Cash and Cash Equivalents~~

~~The Company considers all liquid instruments purchased with a maturity of three months or less~~Refer to be cash equivalents. The Company deposits its cash with major financial institutions and may at times exceed the federally insured limit of $250,000. At December 31, 2018 cash exceeds the federally insured limit by $1.3 million. The Company believes that the risk of loss is minimal. To date, the Company has not experienced any losses related to cash deposits with financial institutions.

~~Debt Instruments~~

~~Debt instruments are initially recorded at fair value, with coupon interest and amortization of debt issuance discounts recognized~~“Critical Accounting Policies” in ~~the statement of operations as interest expense at each period end while such instruments are outstanding.~~

~~Fair Value of Financial Instruments~~

Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, ASC 825-10 Recognition and Measurement of Financial Assets and Financial Liabilities defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.

~~The Company also analyzes all financial instruments with features of both liabilities and equity under ASC 480-10, ASC 815-10 and ASC 815-40.~~

The FASB has established a framework for measuring fair value using generally accepted accounting principles. That framework 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 I inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets;~~

●

~~Level II 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 III inputs to the valuation methodology are unobservable and significant to the fair value measurement.~~

The asset 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 must maximize the use of observable inputs and minimize the use of unobservable inputs.

~~Accounts Receivable, net~~

The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer. Allowances are provided for specific receivables deemed to be at risk for collection which as of December 31, 2018 and September 30, 2018 were $5,000 and $1,800, respectively.

~~Property and Equipment~~

Property and equipment, which are recorded at cost, consist of office furniture and equipment which are depreciated, over their estimated useful lives on a straight-line basis. The useful lives of these assets are estimated to be between three and five years. Depreciation expense on furniture and equipment for the three months ended December 31, 2018 and 2017 was $16,200 and $12,400, respectively. Accumulated depreciation at December 31, 2018 and September 30, 2018 was $165,400 and $149,000, respectively.

~~Intangible Assets~~

Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the unaudited condensed consolidated balance sheets. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life.

On November 13, 2017, the Company acquired customer relationship and tradename intangibles in connection with the Arcadian acquisition which were recorded at fair value and are being amortized over an estimated useful life of four years on a straight-line basis.

Amortization for the three months ended December 31, 2018 and 2017 was $14,000 and $10,900, respectively. Accumulated amortization was $108,300 and $94,200 at December 31, 2018 and September 30, 2018 respectively.

~~The expected amortization of the intangible assets, as of December 31, 2018, for each of the next five years is as follows:~~

For the year ended September 30, Intangible assets
2019 (for the remaining nine months) $ 40,100
2020 29,400
2021 29,400
2022 3,500
Total $ 102,400

~~Goodwill~~

Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant under performance relative to expected historical or projected future results of operations. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional impairment testing is not required. The Company tests for goodwill impairment annually on September 30.

The Company performed a qualitative goodwill assessment at September 30, 2018 and concluded there was no impairment based on consideration of a number of factors, including the improvement in the Company’s key operating metrics over the prior year, improvement in the strength of the general economy and the Company’s continued execution against its overall strategic objectives.

Based on the foregoing, the Company determined that it was not more likely than not that the fair value of its reporting unit is less than its carrying amount and therefore that no further impairment testing was required.

~~During the three months ended December 31, 2018, the Company did not record any Goodwill impairment.~~

~~Accrued Compensation~~

~~Accrued compensation consists of accrued vacation pay, accrued compensation granted by the Board but not paid, and accrued pay due to staff members.~~

~~Accrued compensation – related parties consists of accrued vacation pay, accrued bonuses granted by the Board but not paid for officers and directors.~~

~~Deferred Revenue~~

Deferred revenue represents cash collected in advance of services being rendered but not earned as of December 31, 2018 and September 30, 2018. This represents a philanthropic grant for the payment of PEER Reports ordered in a clinical trial for a member of the U.S. Military, a veteran or their family members, the cost of which is not covered by other sources. On August 1, 2017, the Company entered into a Research Study Funding Agreement with Horizon Healthcare Services, Inc. dba Horizon Blue Cross Blue Shield of New Jersey and its subsidiaries (collectively "Horizon") and Cota, Inc. ("Cota"). On February 6, 2018, Horizon prepaid for part of the study, $125,000 and the Company paid Cota $15,000 out of this payment for its services under the Study.

~~These deferred revenue grant funds total $156,900 and $159,700 as of December 31, 2018 and September 30, 2018, respectively.~~

~~Revenue Recognition~~

Neurometric services - gross service revenue is recorded in the accounting records at the time the services are provided on an accrual basis at the provider’s established rates, regardless of whether the provider expects to collect that amount. The Company reserves a provision for contractual adjustment and discounts that are deducted from gross service revenue. The Company reports revenues net of any sales, use and value added taxes.

Telepsychiatry services - The Company satisfies its performance obligation to stand ready to provide telepsychiatry services which occurs when the Company’s clients have access to the telepsychiatry service. The Company generally bills for the telepsychiatry services on a monthly basis with payment terms generally being 30 days. There are not significant differences between the timing of revenue recognition and billing. Consequently, the Company has determined that client contracts do not include a financing component. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the service and this may include a variable transaction price as the number of members may vary from the initial billing. Based on historical experience, the Company estimates this amount which is recorded as a component of revenue.

~~Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ (“Topic 606”), became effective for the Company on October 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606. As sales are and have been primarily from providing healthcare services, and the Company has no significant post-delivery obligations, this new standard did not result in a material recognition of revenue on the Company’s accompanying consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with its historical accounting practices under Topic 605, ~~Revenue Recognition~~.

Revenue from providing neurometric and telepsychiatry services are recognized under Topic 606 in a manner that reasonably reflects the delivery of its services to customers in return for expected consideration and includes the following elements:

○

~~executed contracts with the Company’s customers that it believes are legally enforceable;~~

○

~~identification of performance obligations in the respective contract;~~

○

~~determination of the transaction price for each performance obligation in the respective contract;~~

○

~~allocation the transaction price to each performance obligation; and~~

○

~~recognition of revenue only when the Company satisfies each performance obligation.~~

~~Research and Development Expenses~~

~~The Company charges research and development expenses to operations as incurred.~~

~~Advertising Expenses~~

~~The Company charges all advertising expenses to operations as incurred. For the three months ended December 31, 2018 and 2017 advertising expenses were $0 and $151,100, respectively.~~

~~Stock-Based Compensation~~

The Company accounts for employee stock options in accordance with ASC 718, Compensation-Stock Compensation. For stock options issued to employees and directors we use the Black-Scholes option valuation model for estimating fair value at the date of grant. For stock options issued for services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50, Equity, as amended. Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options or warrants are fully vested.

~~Warrants~~

From time to time, the Company has issued warrants to purchase shares of common stock. These warrants have been issued in connection with the Company’s financing transactions. The Company’s warrants are subject to standard anti-dilution provisions applicable to shares of our common stock. The Company estimates the fair value of warrants using the Black-Scholes option valuation model with the following assumptions: market prices of the stock, time to maturity, volatility, zero expected dividend rate and risk free rate all at the date of the warrant issuance.

~~Income Taxes~~

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to 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 the 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 that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.

On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended, or the Code. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent, limitation of the tax deduction for interest expense to 30 percent of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80 percent of current-year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.

As a result of the implementation of certain provisions of FASB ASC 740, Income Taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, the Company has analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified U.S. Federal and California as our major tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2014 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2013 through 2016 California Franchise Tax Returns. We have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

Deferred taxes have been recorded on a net basis in the accompanying balance sheet. The Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. As of September 30, 2018, the Company had gross Federal net operating loss carryforwards of approximately $60.2 million and State gross net operating loss carryforwards of approximately $33.8 million. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2023 respectively. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future.

The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.

~~Noncontrolling Interest~~

The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and VIEs for which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in the Company’s consolidated entities. The amount of net loss attributable to noncontrolling interests for the three months ended December 31, 2018 and 2017 was $326,900 and $0, respectively.

~~Earnings (Loss) per Share~~

Basic and diluted earnings (loss) per share is presented in conformity with the two-class method. Under the two-class method, basic net loss per share is computed by dividing income (loss) available to common stockholders by the weighted average common shares outstanding during the period. Net loss per share is calculated as the net loss less the current period preferred stock dividends. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into Common Stock.

~~Recent Accounting Pronouncements~~

~~Apart from the below-mentioned recent accounting pronouncements, there are no new accounting pronouncements that are currently applicable to the Company.~~

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). The amendments in this Update expand the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating the impact of adoption of this standard to its financial statements.

ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Payments” was issued by the Financial Accounting Standards Board (FASB) in August 2016. The purpose of this amendment is to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2016-15 during our first quarter of fiscal year 2019, which had no impact on our consolidated financial statements, and will apply the new guidance in future periods.

ASU 2016-02, “Leases (Topic 842)” was issued by the FASB in February 2016. The guidance requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and should be applied using a modified retrospective approach. The guidance is effective for the Company on October 1, 2019. The Company will elect the prospective transition method with the effects of adoption recognized as a cumulative effect adjustment to the opening balance of retained earnings in the Company’s fiscal 2020 financial statements, with no restatement of comparative periods. The Company will also elect the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements and related disclosures. The Company expects to record right of use assets and lease liabilities, which may be material, on its consolidated balance sheet upon adoption of this standard and is still assessing the impact to its results of operations and cash flows.

~~Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ (“Topic 606”), became effective for the Company on October 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606. As sales are and have been primarily from providing healthcare services, and the Company has no significant post-delivery obligations, this new standard this new standard did not result in a change to revenue recognition on the Company’s accompanying condensed consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with its historical accounting practices under Topic 605, ~~Revenue Recognition~~.

~~3. REVENUE RECOGNITION~~

At the adoption of Topic 606, the cumulative effect of initially applying the new revenue standard is required to be presented as an adjustment to the opening balance of retained earnings. The Company determined there was no impact to opening retained earnings based on applying the new revenue standard.

The Company operates as one reportable segment, the healthcare delivery segment. The Company disaggregates revenue from contracts by service type and by payor. This level of detail provides useful information pertaining to how the Company generates revenue by significant revenue stream and by type of direct contracts. The condensed consolidated statements of operations present disaggregated revenue by service type. The following table presents disaggregated revenue for the three months ended December 31, 2018 and 2017:

December 31, December 31,
2018 2017
Neurometric services
$ 79,200 $ 53,300
Telepsychiatry services
307,900 68,700
Revenue $ 387,100 $ 122,000

As of December 31, 2018, accounts receivable, net of allowance for doubtful accounts, was $120,000. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specific account information and other currently available evidence.

The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) the federal government under the Medicare program administered by CMS; (iii) state governments under the Medicaid and other programs; (iv) other third party payors (e.g., hospitals); and (v) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

The Company derives a significant portion of its revenue from Medicare, Medicaid and other payors that receive discounts from established billing rates. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursements are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by such programs, rights of appeal and the application of numerous technical provisions.

~~Under the new revenue standard, the Company has elected to apply the following practical expedients and optional exemptions:~~

●

~~Recognize incremental costs of obtaining a contract with amortization periods of one year or less as expense when incurred. These costs are recorded within general and administrative expenses.~~

●

Recognize revenue in the amount of consideration to which the Company has a right to invoice the customer if that amount corresponds directly with the value to the customer of the Company’s services completed to date.

●

Exemptions from disclosing the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which revenue is recognized in the amount of consideration to which the Company has a right to invoice for services performed, and (iii) contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.

●

~~Use a portfolio approach for the fee-for-service (FFS) revenue stream to group contracts with similar characteristics and analyze historical cash collections trends.~~

●

~~No adjustment is made for the effects of a significant financing component as the period between the time of service and time of payment is typically one year or less.~~

~~Contract Assets~~

Typically, revenues and receivables are recognized once the Company has satisfied its performance obligation. Accordingly, the Company’s contract assets are comprised of accounts receivable. Generally, the Company does not have material amounts of other contract assets.

~~Contract Liabilities (Deferred Revenue~~)

Contract liabilities are recorded when cash payments are received in advance of the Company’s performance. The Company’s contract liability balance was $156,900 and $159,700 as of December 31, 2018 and September 30, 2018 and is presented within the “Deferred Revenue” line item of the condensed consolidated balance sheets. $2,800 of the amounts recorded as of September 30, 2018 was recognized as revenue for the three months ended December 31, 2018. The Company has elected the optional exemption to not disclose the remaining performance obligations of its contracts since substantially all of its contracts have a duration of one year or less.

~~4. ACCOUNTS RECEIVABLE~~

~~Accounts receivable, net, is as follows:~~

December 31, September 30,
2018 2018
Accounts receivable $ 125,000 $ 65,100
Allowance for doubtful accounts (5,000 ) (1,800 )
Accounts receivable, net $ 120,000 $ 63,300

~~5. LONG - TERM BORROWINGS AND OTHER NOTES PAYABLE~~

~~Debt assumed from Arcadian~~

As a result of the acquisition of Arcadian, the Company guaranteed Arcadian’s then outstanding debt obligations totaling $700,000 owed to Ben Franklin Technology Partners of Southeastern Pennsylvania (“BFTP”). The maturity date for the debt is September 30, 2021 and interest accrues at an 8% annual rate. Unpaid interest was $115,800 as of December 31, 2018. The Company recorded the debt at its fair value and recorded a discount of $102,900 as of December 31, 2018 attributable to the difference between the market interest rate and the stated interest rate on the debt. Interest expense related to the accretion of debt discount for the three months ended December 31, 2018 and 2017 was $9,400 and $4,700, respectively.

~~A balloon payment of $700,000 plus interest will be made on the scheduled maturity date of September 30, 2021.~~

~~The changes in carrying amounts of the debt acquired through acquisition for the three months ended December 31, 2018 were as follows:~~

Beginning balance (September 30, 2018) $ 587,700
Accretion of debt discount 9,400
Ending balance (December 31, 2018) $ 597,100

~~6. ACQUISITION~~

On November 13, 2017, the Company acquired Arcadian. The Company accounted for the acquisition of Arcadian using the acquisition method of accounting for business combinations under ASC 805, Business Combinations. The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.

Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materiality impact our results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates.

The purchase price, including the value of the indebtedness and payables of Arcadian, is $1,339,600 based upon a deemed acquisition of all of the assets and liabilities of Arcadian, including the equity interests in Arcadian. The aggregate purchase price consists of (i) initial investment in Arcadian of $195,900 (ii) $317,000 of forgiveness of a note receivable with the primary member of Arcadian (iii) assumption by Arcadian of subordinated debt (“Arcadian Note”) with a fair value of $555,000, plus accrued interest of $96,700 (iv) $175,000 payment for the redemption and cancellation of two warrants to purchase equity interests in Arcadian Services. The Arcadian Note bears interest at an annual rate of 8% and matures on September 30, 2021.

~~Unaudited Pro Forma Financial Information~~

The following unaudited pro forma statement of operations data presents the combined results of operations for the three months ended December 31, 2017 as if the acquisition of Arcadian had taken place on October 1, 2017. The unaudited pro forma financial information includes the effects of certain adjustments, including the amortization of acquired intangibles and the associated tax effect and the elimination of the Company’s and the acquiree’s non-recurring acquisition related expenses.

The unaudited pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisitions been consummated at October 1, 2017 nor of the results which may occur in the future. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable.

Pro Forma For Three Months
Ended
December 31,
2017
Revenues $ 267,200
Net income (loss) (2,949,100 )
Basic and diluted loss per share: $ (0.68 )

Outstanding at weighted average shares outstanding 4,332,927

~~7. STOCKHOLDERS’ EQUITY~~

~~The Aspire Capital Equity Credit Lines~~

On December 6, 2016, the Company, entered into the first common stock purchase agreement (the “First Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the First Purchase Agreement. Concurrently with entering into the First Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company maintained an effective registration statement registering the sale of the shares of Common Stock that were issued to Aspire under the First Purchase Agreement. Under the First Purchase Agreement, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company had the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

~~the lowest sale price of Common Stock on the purchase date; or~~

~~the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.~~

In addition, on any date on which the Company submitted a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company also had the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.

The purchase price was subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the First Purchase Price. The Company could deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

The First Purchase Agreement provided that the Company and Aspire Capital would not effect any sales under the First Purchase Agreement on any purchase date where the closing sale price of the Company’s common stock was less than $0.50. There were no trading volume requirements or restrictions under the First Purchase Agreement, and the Company could control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital had no right to require any sales by the Company, but was obligated to make purchases from the Company as directed by the Company in accordance with the First Purchase Agreement. There were no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the First Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “ First Commitment Shares”). The First Purchase Agreement was terminated and replaced by the Second Purchase Agreement defined below on May 15, 2018. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the First Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $100,000 per business day.

As of December 31, 2018, the Company has issued purchase notices to Aspire Capital under the First Purchase Agreement to purchase an aggregate of 1,180,000 shares of common stock, at a per share price of $2.00, resulting in gross cash proceeds of approximately $2.4 million. The issuance of shares of common stock that were issued from time to time to Aspire Capital under the First Purchase Agreement were exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.

~~The Second Purchase Agreement with Aspire Capital~~

On May 15, 2018, the Company terminated the First Purchase Agreement, and entered into a second common stock purchase agreement (the “Second Purchase Agreement”) with Aspire Capital under substantially the same terms, conditions and limitations as the First Purchase Agreement which are: Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the Second Purchase Agreement. Concurrently with entering into the Second Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company maintains an effective registration statement registering the sale of the shares of Common Stock that have and may be issued to Aspire under the Second Purchase Agreement. Under the Second Purchase Agreement, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

~~a) the lowest sale price of Common Stock on the purchase date; or~~

b) the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.

In addition, on any date on which the Company submits a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.

The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Second Purchase Agreement, so long as the most recent purchase has been completed.

The Second Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Second Purchase Agreement on any purchase date where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Second Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Second Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Second Purchase Agreement. In consideration for entering into the Second Purchase Agreement, concurrently with the execution of the Second Purchase Agreement, the Company issued to Aspire Capital 2,500,000 shares of Common Stock (the “ Second Commitment Shares”). The Second Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Second Purchase Agreement. Any proceeds from the Company receives under the Second Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $300,000 per business day.

As of December 31, 2018, the Company has issued purchase notices to Aspire Capital under the Second Purchase Agreement to purchase an aggregate of 884,671 shares of common stock, resulting in gross cash proceeds of approximately $1.9 million. The issuance of shares of common stock that were issued from time to time to Aspire Capital under the Second Purchase Agreement were exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.

~~The First Purchase Agreement was terminated and replaced by the Second Purchase Agreement defined below on May 15, 2018.~~

~~Shareholder Approval for Removal of Exchange Cap~~

The Second Purchase Agreement previously restricted the amount of shares that may be sold to Aspire Capital thereunder to 1,134,671 shares of Common Stock (the “Exchange Cap”). On November 26, 2018, the Company received shareholder approval to remove the Exchange Cap in compliance with the applicable listing rules of the Nasdaq Stock Market. Pursuant to Nasdaq Listing Rule 5635(d), shareholder approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock outstanding before the issuance for less than the greater of book or market value of the stock. Following receipt of shareholder approval, the Company may issue an additional $8.1 million, up to an aggregate of $10 million, of common stock to Aspire Capital under the Second Purchase Agreement.

~~Common and Preferred Stock~~

As of December 31, 2018, the Company is authorized to issue 265,000,000 shares of stock of which 250,000,000 are common stock, and 15,000,000 shares were preferred shares, with a par value of $0.001 per shares are blank-check preferred stock which the Board is expressly authorized to issue without stockholder approval, for one or more series of preferred stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.

~~Private Placement with Directors and Management~~

On September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a director of the Company, and entities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a private placement of an aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of common stock and one common stock purchase warrant to purchase one share of Common Stock for $2.00 per share.

~~Stock-Option Plans~~

~~2006 Stock Incentive Plan~~

On August 3, 2006, CNS Response, Inc. adopted the CNS 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provided for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the Board. A total of 3,339 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of December 31, 2018, zero options were exercised and there were 1,445 option shares outstanding under the amended 2006 Plan. The outstanding options have exercise prices to purchase shares of common stock ranging from $2,400 to $3,300 per share.

~~2012 Omnibus Incentive Compensation Plan~~

On March 22, 2012, our Board approved the MYnd Analytics, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 1,667 shares of stock for issuance and on December 10, 2012, the Board approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 1,667 shares to 27,500 shares. On March 26, 2013, the Board further approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 27,500 shares to 75,000 shares. The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.

~~On April 5, 2016, the Board approved a further amendment of the 2012 Plan to increase the Common Stock authorized for issuance from 75,000 shares to 200,000 shares.~~

On September 22, 2016 the Board amended the 2012 Plan to: (i) increase the total number of shares of Common Stock available for grant under the 2012 Plan from 200,000 shares to an aggregate of 500,000 shares, (ii) add an “evergreen” provision which, on January 1st of each year through 2022, automatically increases the number of shares subject to the 2012 Plan by the lesser of: (a) a number equal to 10% of the shares of Common Stock authorized under the 2012 Plan as of the preceding December 31st, or (b) an amount, or no amount, as determined by the Board, but in no event may the number of shares of Common Stock authorized under the 2012 Plan exceed 885,781 and (iii) increase the annual individual award limits under the 2012 Plan to 100,000 shares of Common Stock, subject to adjustment in accordance with the 2012 Plan. Per the above mentioned “evergreen” provision, an additional 50,000 shares were automatically allocated for distribution under the 2012 Plan as of January 1, 2017.

At the 2017 Annual Meeting of Stockholders of the Company, held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s 2012 Plan to increase: (i) the total number of shares of common stock, par value $0.001 per share (“Common Stock”), available for grant under the 2012 Plan (subject to the overall limits described in clause (ii) below) from 550,000 shares to an aggregate of 975,000 shares; (ii) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 885,781 shares to 1,570,248 shares and (iii) the annual individual award limits under the 2012 Plan to 150,000 shares of Common Stock (subject to adjustment in accordance with the 2012 Plan);

At the 2018 Annual Meeting of Stockholders of the Company, held on April 4, 2018 (the “2018 Annual Meeting”), the holders of the Company’s common stock voted to amend the 2012 Plan to increase (i) the total number of shares of Common Stock available for grant under the 2012 Plan (subject to the overall limit described in clause (ii) below) from 1,072,500 shares to an aggregate of 1,500,000 shares and (ii) the aggregate limitation on the authorization shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 1,570,248 shares to 2,200,000 shares.

At the Special Meeting of Stockholders of the Company, held on November 26, 2018, the holders of the Company’s common and preferred stock voted to (i) amend the 2012 Plan to eliminate the annual individual award limits under the 2012 Plan and (ii) amend 2012 Plan to increase: (a) the total number of shares of common stock, par value $0.001 per share (“Common Stock”), available for grant under the 2012 Plan (subject to the overall limits described in clause (b) below) from 1,500,000 shares to an aggregate of 2,250,000 shares and (b) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision (the “Evergreen Provision”), from 2,200,000 shares to 2,950,000 shares.

~~Amendment to Chief Executive Officer’s Agreement~~

~~On April 19, 2018, the Company and George C. Carpenter, IV, the former CEO of the Company, entered into an amendment to his Employment Agreement, dated as of September~~Part II, Item 7, 2007 (the “CEO Amendment"), pursuant to which Mr. Carpenter's annual salary was reduced from $270,000 to $206,250. This change is retroactive to April 13, 2018. Further, pursuant to the CEO Amendment, Mr. Carpenter was granted 34,380 restricted shares of common stock under the 2012 Plan. The shares granted under the CEO Amendment will vest quarterly. If the employee’s relationship with the Company is terminated, the above grant will be prorated. On or before December 31, 2018, the parties will review this modification to determine if the above salary reduction adjustment will be renewed. As of December 31, 2018, the parties have not amended the modification.

~~Appointment of Chief Innovation Officer; Amendment to Former CEO Employment Agreement~~

As of December 12, 2018, George C. Carpenter, IV no longer served in the position of Chief Executive Officer and became, in addition to President, the Chief Innovation Officer of the Company. In connection therewith, on December 12, 2018, the Company and Mr. Carpenter entered into an amendment to his Employment Agreement, dated as of September 7, 2007 (the “Carpenter Amendment”), pursuant to which Mr. Carpenter was given the title of President and Chief Innovation Officer of the Company. Pursuant to the Carpenter Amendment, Mr. Carpenter received an option to purchase 50,000 shares of common stock of the Company, with such option vesting over a twelve-month period.

~~Appointment of Patrick Herguth as CEO; Herguth Employment Agreement~~

~~Effective December 12, 2018, the Company appointed Patrick Herguth to the position of Chief Executive Officer.~~

In connection with Mr. Herguth’s appointment to the position of Chief Executive Officer, the Company entered into an employment agreement with Mr. Herguth, dated as of December 12, 2018 (the “Herguth Employment Agreement”). Pursuant to the Herguth Employment Agreement, Mr. Herguth will serve as the Company’s Chief Executive Officer and will receive a base annual compensation of $325,000, subject to periodic increases. For fiscal year 2019, Mr. Herguth is eligible to receive a performance bonus in a target amount of $340,000, with payment of such bonuses subject to achievement of certain performance goals set forth in the Herguth Employment Agreement. The employment agreement also provides that Mr. Herguth will receive an option to purchase up to 200,000 shares of the Company’s common stock, subject to the time-based vesting schedule and up to 200,000 shares of the Company’s common stock subject to a performance-based vesting schedule, both as specified in the Herguth Employment Agreement, with options to purchase 50,000 of such shares vesting on the date of the Herguth Employment Agreement. The time-based options will be subject to vesting upon a change of control of the Company.

~~Election of Patrick Herguth to the Board of Directors~~

Effective December 12, 2018, the Board increased the number of directors on the Board by one and elected Mr. Herguth to the Board to serve as a director of the Company to fill the vacancy created by such increase. Mr. Herguth has not been appointed to any committee of the Board.

~~Stock-based Compensation and Expenses~~

As of December 31, 2018, options to purchase 1,421,000 shares of Common Stock were outstanding under the 2012 Plan with exercise prices ranging from $1.20 to $600.00 per share, with a weighted average exercise price of $3.06 per share. Additionally, 550,564 restricted shares of Common Stock have been granted under the 2012 Plan, leaving 978,436 shares of Common Stock available to be awarded under the 2012 Plan.

Stock-based compensation expenses are generally recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying unaudited condensed consolidated statements of operations for the three months ended December 31, 2018 and 2017 is as follows:

Three months ended December 31,
2018 2017

Stock-based compensation expense non-Restricted Shares Stock-based compensation expense Restricted Shares Stock-based compensation expense non-Restricted Shares Stock-based compensation expense Restricted Shares
Research $ — $ — $ — $ —
Product development 15,100 9,000 100 —
Sales and marketing 10,300 — 100 —
General and administrative 266,000 216,900 117,200 219,200
Total $ 291,400 $ 225,900 $ 117,400 $ 219,200

~~Total unrecognized stock compensation expense as of December 31, 2018 amounted to $443,523.~~

The following table sets forth the Company’s unrecognized stock-based compensation expense, net of estimated forfeitures, by type of award and the weighted-average period over which that expense is expected to be recognized:

Three Months Ended December 31,
2018 2017

Type of Award: Unrecognized Expense, net of estimated forfeitures Weighted average Recognition Period (in years) Unrecognized Expense, net of estimated forfeitures Weighted average Recognition Period (in years)
Stock Options $ 411,647 1.67 $ 963,200 8.82
Restricted Stock 31,876 0.50 209,800 0.74
Total $ 443,523 1.57 $ 1,173,000 7.86

* All unrestricted stock options are based on milestones so there is no weighted average recognition period.

~~A summary of stock option activity is as follows:~~

Number of Shares Weighted Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Intrinsic
Value
Outstanding at September 30, 2018 803,937 $ 10.13 8.75 $ 7,500
Granted 839,758 1.33 —
Exercised — — —
Forfeited or expired (21,250 ) 1.52
Outstanding at December 31, 2018 1,622,445 $ 5.68 9.12 $ —

~~There are 763,859 options vested and 858,586 unvested as of December 31, 2018; there are 531,604 options vested and 272,333 options unvested as of September 30, 2018;~~

~~Following is a summary of the restricted stock activity for the three months ended December 31, 2018:~~

Number of Shares Weighted Average Grant Date Fair Value
Outstanding at September 30, 2018 406,564 $ 4.09
Granted 144,000 1.38
Forfeited — —
Outstanding at December 31, 2018 550,564 $ 3.38

~~There are 524,374 shares of restricted stock vested and 26,190 unvested as of December 31, 2018; there are 351,522 shares of restricted stock vested and 55,042 unvested as of September 30, 2018;~~

~~The range of Black-Scholes option-pricing model assumption inputs for all the valuation dates are in the table below:~~

Three Months Ended
December 31, 2018

Low High
Annual dividend yield — % — %
Expected life (years) 3.0 5.0
Risk-free interest rate 2.51 % 2.90 %
Expected volatility 183.86 % 200.47 %

~~Expected Dividend Yield~~~~. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.~~

~~Expected Life~~. The Company elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term.

~~Expected Volatility.~~ ~~The expected volatility rate used to value stock option grants is based on the historical volatilities of the Company’s common stock.~~

~~Risk-free Interest Rate~~~~. The risk-free interest rate assumption was based on U.S. Treasury bill instruments that had terms consistent with the expected term of the Company’s stock option grants.~~

~~The warrant activity for the three months ended December 31, 2018, are described as follows:~~

Number of Shares Weighted Average Exercise Price
Outstanding at September 30, 2018 6,075,874 $ 4.53
Expired/ Forfeited (105 ) 55.00
Outstanding at December 31, 2018 6,075,769 $ 4.53

~~Following is a summary of the status of warrants outstanding at December 31, 2018:~~

Exercise
Price Number
of Shares Expiration
Date Weighted Average
Exercise Price
$ 2.00 459,458 (1) 09 /2023 $ 2.00
2.34 1,050,000 (2) 03 /2023 2.34
5.25 2,539,061 (3) 07 /2022 5.25
5.25 1,675,000 (4) 07 /2022 5.25
5.25 213,800 (5) 07 /2022 5.25
6.04 134,000 (6) 07 /2022 6.04
10.00 4,000 06 /2021 10.00
$ 55.00 450 09/2018 – 03/2019 55.00
Total 6,075,769 $ 4.53

~~(1)~~

On September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and former Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a director of the Company, and entities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a private placement of an aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of Common Stock and one Common Stock Purchase Warrant to purchase one share of Common Stock for $2.00 per share. The closing price per share of the Common Stock on the Nasdaq Stock Market on September 20, 2018 was $1.72 per share.

~~(2)~~

On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit each consisting of one share of newly-designated Series A Preferred Stock, and one warrant in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million. The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share.

~~(3)~~

On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants are exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years from the date of issuance.

~~(4)~~

~~On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering.~~

~~(5)~~

On August 23, 2017, the Company issued warrants to purchase 213,800 shares of common stock to underwriters as part of the exercise of the overallotment option attributed to the July 2017 underwritten public offering.

~~(6)~~

As part of the underwritten public offering on July 19, 2017, the Company issued warrants to purchase 134,000 shares of common stock to the underwriters as part of the services performed by them in connection with the underwritten public offering.

~~8. RELATED PARTY TRANSACTIONS~~

~~DCA Agreement~~

On September 25, 2013, the Board approved a consulting agreement effective May 1, 2013, for marketing services provided by Decision Calculus Associates (“DCA”), an entity operated by Mr. Carpenter’s spouse, Jill Carpenter. Effective August 2015, DCA was engaged at a fee of $10,000 per month. From August 2015 through February 2017, DCA has been paid $170,000. The DCA contract was renewed at $3,000 a month effective March 1, 2017. On May 1, 2018, the Company amended the agreement with DCA to reduce the monthly fee to $2,000 a month. The amendment provides for a term of one year with a 30 day termination clause. The Company incurred fees of $6,000 and $9,000 for the three months ended December 31, 2018 and 2017, respectively.

~~Hooper Holmes Agreement~~

In 2016, we entered into an agreement with Hooper Holmes Inc, for which Dr. Smith, our Chairman of the Board, became an advisory member of its board as of March 16, 2017, and in which Mr. Pappajohn, our director, has participated in equity raises to become the beneficial owner of a greater than 10% interest. Hooper Holmes performs EEGs nationwide to patients who wish to obtain a PEER report. The Company paid $2,600 and $36,400 for these services during the three months ended December 31, 2018 and 2017, respectively.

~~Private Placement with Directors and Management~~

~~9. LOSS PER SHARE~~

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders less the current period preferred stock dividend by the weighted average common shares outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into Common Stock

~~A summary of the net income (loss) and shares used to compute net income (loss) per share for the three months ended December 31, 2018 and 2017 is as follows:~~

Three Months Ended
December 31,
2018 2017
Net loss for computation of basic and diluted net loss per share:
Net Loss attributable to MYnd Analytics, Inc. $ (2,377,500 ) $ (2,769,300 )
Preferred stock dividends (24,600 ) —
$ (2,402,100 ) $ (2,769,300 )

Basic and diluted net loss per share:
Basic and diluted net loss per share $ (0.32 ) $ (0.64 )
Basic and diluted weighted average shares outstanding 7,542,663 4,332,927

Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share:
Warrants 6,075,769 4,567,672
Restricted common stock 550,564 254,333
Options 1,622,445 559,617
Total 8,248,778 5,381,622

~~10. COMMITMENTS AND CONTINGENT LIABILITIES~~

~~Litigation~~

The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.

~~Lease Commitments~~

The Company has entered into operating lease agreements for its office locations in California, Virginia and Pennsylvania which expire at various times through September 30, 2020. Minimum future lease payments under these leases are as follows:

Payments due by period
Contractual Obligations Total 2019 2020
Operating Lease Obligations $ 216,600 $ 169,100 $ 47,500
Total $ 216,600 $ 169,100 $ 47,500

~~11. SUBSEQUENT EVENTS~~

~~Merger Agreement~~

On January 4, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, the Company’s wholly owned subsidiary, Athena Merger Subsidiary, Inc., a Delaware corporation (“Merger Sub”), and Emmaus Life Sciences, Inc., a Delaware corporation (“Emmaus”). Under the terms of the Merger Agreement, pending stockholder approval of the transaction, Merger Sub will merge with and into Emmaus with Emmaus surviving the merger and becoming a wholly-owned subsidiary of MYnd (the “Merger”). Subject to the terms of the Merger Agreement, at the effective time of the Merger, Emmaus stockholders will receive a number of newly issued shares of MYnd common stock determined using the exchange ratio described below in exchange for their shares of Emmaus stock. Following the Merger, stockholders of Emmaus will become the majority owners of MYnd.

The exchange ratio will be determined prior to closing and will cause the MYnd securityholders (including holders of options and warrants) prior to the effective time to collectively own 5.9% of the combined company on a fully diluted basis and Emmaus securityholders (including holders of options, warrants and convertible notes) prior to the effective time to collectively own 94.1% of the combined company on a fully diluted basis. The exchange ratio will reflect any dilution that may result from securities sold by MYnd or Emmaus prior to the closing of the Merger and any changes to the number of outstanding convertible securities of each company. The Merger Agreement provides that if Emmaus converts certain debt obligations into equity within six months of the completion of the Merger, Emmaus will issue additional shares (equal to 5.9% of the shares issued in connection with the debt conversion to third parties) to an existing subsidiary of MYnd which is expected to be spun-off to stockholders of MYnd prior to the effective time of the merger, as described below.

The combined company, led by Emmaus’ management team, is expected to be named “Emmaus Life Sciences, Inc.” Prior to the closing of the Merger, MYnd will seek shareholder approval to conduct a reverse split of its outstanding shares if necessary to satisfy listing requirements of the Nasdaq Capital Market (the “NasdaqCM”). The combined company is expected to trade on the NasdaqCM under a new ticker symbol. At the closing, the combined company’s board of directors is expected to consist of one member from MYnd and up to six members from Emmaus. The Merger has been unanimously approved by the Board of Directors of each company. The transaction is expected to close in the first half of 2019, subject to approvals by the stockholders of MYnd and Emmaus, and other closing conditions, including but not limited to the approval of the continued listing of the combined company’s common stock on the NasdaqCM, conversion of MYnd’s preferred stock into common stock, satisfaction of certain cash and debt conversion conditions and consummation of the MYnd spin-off described below.

The parties to the Merger Agreement have made representations and warranties to each other as of specific dates for the purpose of allocating risk and not for the purpose of establishing facts. Accordingly, the representations and warranties should not be relied on as characterizations of the actual state of facts.

The Merger Agreement contains certain termination rights for each of MYnd and Emmaus, and further provides that, upon certain terminations of the Merger Agreement, MYnd may be required to pay Emmaus a termination fee of $750,000 and Emmaus may be required to pay MYnd a termination fee of $750,000; provided that if the termination results from the failure to obtain the approval of the continued listing of the combined company’s common stock on the NasdaqCM, this fee payable by Emmaus will be $1,600,000. In connection with the termination of the Merger Agreement upon certain circumstances, either party also may be required to pay the other party’s third party expenses up to $600,000. The termination of the Merger Agreement will not relieve any party thereto from any liability or damages resulting from or arising out of any fraud or willful or intentional breach of any representation, warranty, covenant, obligation or other provision contained in the Merger Agreement.

~~Spin-Off~~

Prior to the closing of the Merger, the Company currently intends, subject to obtaining any required regulatory approvals and the completion of certain tax analyses, to transfer all of its businesses, assets and liabilities not assumed by Emmaus to our existing wholly-owned subsidiary, MYnd Analytics, Inc., a California corporation (“MYnd California”), pursuant to the terms of a Separation Agreement (the “Separation Agreement”) entered into on January 4, 2019 by the Company and MYnd California. The Company intends to distribute all shares of MYnd California held by it to the Company’s stockholders of record as of a future record date to be determined for said distribution. The Separation Agreement includes the terms of the proposed spin-off and the distribution to the Company’s stockholders and includes representations and warranties, covenants and conditions, which will impact the terms of the proposed spin-off and distribution. The proposed spin-off will be subject to conditions and regulatory approvals not entirely under the control of MYnd and the terms of the proposed spin-off, if and when completed, are subject to change.

~~Aspire Line~~

Subsequent to December 31, 2018, the Company issued purchase notices to Aspire Capital to purchase 815,429 shares of common stock, at a weighted average per share price of $1.40, resulting in gross cash proceeds of approximately $1.1 million.

~~Item 2. Management’s~~“Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations” of the Annual Report for our critical accounting policies. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2019 except for adopting the new lease accounting standard.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

The following discussion and analysis of our financial condition and results of operation should be read in conjunction with our unaudited condensed consolidated financial statements as of, and for, the three months ended December 31, 2018 and 2017, and our Annual Report on Form 10-K for the year ended September 30, 2018, filed with the U.S. Securities and Exchange Commission on December 11, 2018.

~~Forward-Looking Statements~~

This discussion summarizes the significant factors affecting the unaudited condensed consolidated operating results, financial condition and liquidity and cash flows of MYnd Analytics, Inc. (“we,” “us,” “our,” or the “Company”) for the three month periods ended December 31, 2018 and 2017. Except for historical information, the matters discussed in this management’s discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new products or services; our statements concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; trends affecting our financial condition, results of operations or future prospects; our financing plans or growth strategies; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:

●

~~our need for immediate additional funding to support our operations and capital expenditures;~~

●

our ability to successfully maintain listing of our shares of common stock on the Nasdaq Capital Market, particularly given our failure as reported in this filing to satisfy the continued listing requirement for stockholder equity;

●

~~our history of operating losses;~~

●

~~our inability to gain widespread acceptance of our PEER Reports;~~

●

our inability to prevail in convincing the United States Food and Drug Administration (the “FDA”), that our rEEG or PEER Online service does not constitute a medical device and should, therefore, not be subject to regulations;

●

~~the possible imposition of fines or penalties by the FDA for alleged violations of its rules and regulations;~~

●

~~our subsidiary in telebehavioral health may be harmed by evolving governmental regulation;~~

●

~~our subsidiary’s business model requires us to work with affiliated professional entities not owned by the Company;~~

●

~~our subsidiary may require an expanded and maintained network of certified professionals;~~

●

~~our business may be subject to additional regulations in the future that could increase our compliance costs;~~

●

~~our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the expectations of analysts or investors;~~

●

~~our inability to achieve greater and broader market acceptance of our products and services in existing and new market segments;~~

●

~~any negative or unfavorable media coverage;~~

●

~~our inability to generate and commercialize additional products and services;~~

●

~~our inability to comply with the substantial and evolving regulation by state and federal authorities, which could hinder, delay or prevent us from commercializing our products and services;~~

●

~~our inability to successfully compete against existing and future competitors;~~

●

~~delays or failure in clinical trials;~~

●

~~any losses we may incur as a result of litigation;~~

●

~~our inability to manage and maintain the growth of our business;~~

●

~~our inability to protect our intellectual property rights;~~

●

~~employee relations;~~

●

~~possible security breaches;~~

●

~~possible medical liability claims;~~

●

~~our ability to sell common stock to Aspire Capital under our current common stock purchase agreement;~~

●

~~possible personal injury claims in the future; and~~

●

~~our limited trading volume.~~

Additional risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found and in our Annual Report on Form 10-K for the year ended September 30, 2018 under the headings “Risk Factors” and “Business,” as updated in this Quarterly Report on Form 10-Q.

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

~~Overview~~

MYnd Analytics, Inc. (“MYnd,” “CNS,” “we,” “us,” “our,” or the “Company”), formerly known as CNS Response Inc., is a predictive analytics company that has developed a decision support tool to help physicians reduce trial and error treatment in mental health and provide more personalized care to patients. The Company employs a clinically validated scalable technology platform to support personalized care for mental health patients. The Company utilizes its patented machine learning, artificial intelligence, data analytics platform for the delivery of telebehavioral health services and its PEER predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian, which manages the delivery of telepsychiatry and telebehavioral health services through a nationwide network of licensed and credentialed psychiatrists, psychologists and master’s-level therapists. The Company is commercializing its PEER predictive analytics tool to help physicians reduce trial and error treatment in mental health. MYnd’s patented, clinically validated technology platform (“PEER Online”) utilizes complex algorithms to analyze electroencephalograms (“EEGs”) to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict individual responses to a range of medications prescribed for the treatment of behavioral disorders including depression, anxiety, bipolar disorder, PTSD and other non-psychotic disorders.

~~Recent Developments~~

~~Merger Agreement~~

On January 4, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among us, our wholly owned subsidiary, Athena Merger Subsidiary, Inc., a Delaware corporation (“Merger Sub”), and Emmaus Life Sciences, Inc., a Delaware corporation (“Emmaus”). Under the terms of the Merger Agreement, pending stockholder approval of the transaction, Merger Sub will merge with and into Emmaus with Emmaus surviving the merger and becoming a wholly-owned subsidiary of us (the “Merger”). Subject to the terms of the Merger Agreement, at the effective time of the Merger, Emmaus stockholders will receive a number of newly issued shares of our common stock determined using the exchange ratio described below in exchange for their shares of Emmaus stock. Following the Merger, stockholders of Emmaus will become the our majority owners.

The exchange ratio will be determined prior to closing and will cause our securityholders (including holders of options and warrants) prior to the effective time to collectively own 5.9% of the combined company on a fully diluted basis and Emmaus securityholders (including holders of options, warrants and convertible notes) prior to the effective time to collectively own 94.1% of the combined company on a fully diluted basis. The exchange ratio will reflect any dilution that may result from securities sold by us or Emmaus prior to the closing of the Merger and any changes to the number of outstanding convertible securities of each company. The Merger Agreement provides that if Emmaus converts certain debt obligations into equity within six months of the completion of the Merger, Emmaus will issue additional shares (equal to 5.9% of the shares issued in connection with the debt conversion to third parties) to an existing subsidiary of us which is expected to be spun-off to our stockholders of prior to the effective time of the merger, as described below.

The combined company, led by Emmaus’ management team, is expected to be named “Emmaus Life Sciences, Inc.” Prior to the closing of the Merger, MYnd will seek shareholder approval to conduct a reverse split of its outstanding shares if necessary to satisfy listing requirements of the Nasdaq Capital Market (the “NasdaqCM”). The combined company is expected to trade on the NasdaqCM under a new ticker symbol. At the closing, the combined company’s board of directors is expected to consist of one member from us and up to six members from Emmaus. The Merger has been unanimously approved by the Board of Directors of each company. The transaction is expected to close in the first half of 2019, subject to approvals by the stockholders of us and Emmaus, and other closing conditions, including but not limited to the approval of the continued listing of the combined company’s common stock on the NasdaqCM, conversion of MYnd’s preferred stock into common stock, satisfaction of certain cash and debt conversion conditions and consummation of the MYnd spin-off described below.

~~Spin-Off~~

Prior to the closing of the Merger, we intend, subject to obtaining any required regulatory approvals and the completion of certain tax analyses, to transfer all of our businesses, assets and liabilities not assumed by Emmaus to our existing wholly-owned subsidiary, MYnd Analytics, Inc., a California corporation (“MYnd California”), pursuant to the terms of a Separation Agreement (the “Separation Agreement”) entered into on January 4, 2019 by us and MYnd California. We intend to distribute all shares of MYnd California held by us to our stockholders of record as of a future record date to be determined for said distribution.

~~Going Concern Uncertainty~~

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.

The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During the three months ended December 31, 2018, the Company incurred a net loss of $2.7 million and used $1.7 million of net cash in operating activities. As of December 31, 2018, the Company’s accumulated deficit was $87.6 million. In connection with these consolidated financial statements, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they become due for the next twelve months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.

If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.

To date, the Company has financed its cash requirements primarily from equity financings. The Company will need to raise funds immediately to continue its operations and increase demand for its services. Until it can generate sufficient revenues to meet its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in this Quarterly Report on Form 10-Q. The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

~~Nasdaq Listing Requirements~~

As of December 31, 2018, our stockholders’ equity is approximately $1.1 million. The minimum stockholders' equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on The Nasdaq Capital Market is $2.5 million. While we have not yet received a notice from Nasdaq that we are not compliant with the minimum stockholders' equity requirement under Nasdaq Listing Rule 5550(b)(1), we expect that we will. We intend to take the measures that may be necessary to regain compliance. No assurances can be given that we will be successful or that Nasdaq will not delist our securities.

~~Financial Operations Overview~~

~~Revenues~~

Our neurometric services revenues are derived from the sales of PEER Reports and services of Electroencephalographs (EEG) and Quantitative Electroencephalographs (qEEG). Physicians and Customers are generally billed upon delivery of a PEER Report. The customer’s insurance is billed for EEG and qEEG services. The Company also derives revenue from its subsidiary Arcadian who manages the delivery of telepsychiatry and telebehavioral health services which are delivered directly to patients.

~~Cost of Revenues~~

~~Cost of revenues are for services and represent the cost of direct labor, the costs associated with external processing, analysis and consulting services necessary to generate the revenues.~~

~~Research and Product Development~~

Research and product development expenses are associated with our neurometric and telepsychiatry services and primarily represent costs incurred to design and conduct clinical studies, to recruit patients into the studies, to add data to our database, to improve analytical techniques and advance application of the methodology. We charge all research and development expenses to operations as they are incurred.

~~Sales and Marketing~~

For our neurometric and telepsychiatry services, our selling and marketing expenses consist primarily of personnel, media, support and travel costs to inform user organizations and consumers of our products and services. Additional marketing expenses are the costs of advertising, educating physicians, laboratory personnel, other healthcare professionals regarding our products and services.

~~General and Administrative~~

~~Our general and administrative expenses consist primarily of personnel, occupancy, legal, audit, consulting and administrative support costs.~~

~~Critical Accounting Policies and Significant Judgments and Estimates~~

This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our condensed Consolidated Financial Statements included elsewhere in this report. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

~~Revenue Recognition~~

~~○ executed contracts with the Company’s customers that it believes are legally enforceable;~~

~~○ identification of performance obligations in the respective contract;~~

~~○ determination of the transaction price for each performance obligation in the respective contract;~~

~~○ allocation the transaction price to each performance obligation; and~~

~~○ recognition of revenue only when the Company satisfies each performance obligation.~~

~~Stock-based Compensation Expense~~

Stock-based compensation expense, which is a non-cash charge, results from stock option grants and restricted share awards. Compensation for option is measured at the grant date based on the calculated fair value of the award. We recognize stock-based compensation expense on a straight-line basis over the vesting period of the underlying option. The amount of stock-based compensation expense expected to be amortized in future periods may decrease if unvested options are subsequently cancelled or may increase if future option grants are made.

~~Long-Lived Assets and Intangible Assets~~

Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible assets with finite lives are amortized on a straight-line basis over their useful lives of ten years.

Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. The Company will begin amortizing the software over its estimated economic life once it has been placed into service.

~~Derivative accounting for convertible debt and warrants~~

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2018, the Company had no financial instruments that contain embedded derivative features.

~~Results of Operations for Three Months Ended December 31, 2018 and 2017~~

MYnd Analytics is focused on research and the commercialization of its PEER Reports through its Neurometric Services, as well as providing telehealth service through scheduling and videoconferencing which is accessed through a secure portal.

~~The following table presents consolidated statement of operations data for each of the periods:~~

~~Revenues~~

Three months ended
December 31, Change
2018 2017
Neurometric services $ 79,200 $ 53,300 $ 25,900
Telepsychiatry services 307,900 68,700 239,200
TotalRevenues $ 387,100 $ 122,000 $ 265,100

~~The increase was primarily due to increased sales of PEER, reports, as well as sales generated from Arcadian during the three months ended December 31, 2018.~~

~~Cost of Revenues~~

Three months ended
December 31,
Change
2018 2017
Neurometric services $ 6,400 $ 49,100 $ (42,700 )
Telepsychiatry services 218,700 35,900 182,800
Cost of Revenues $ 225,100 $ 84,900 $ 140,200

~~Cost of revenues increased during the three months ended December 31, 2018, primarily due to increased telepsychiatry service and labor cost to service our increased revenue.~~

~~Research expenses~~

Three months ended
December 31,
Change
2018 2017
Services Research $ 80,800 $ 81,500 $ (700 )

~~Research expenses consist of consulting fees, travel expenses, conference fees, and other miscellaneous costs listed as following:~~

Three months ended
December 31,
Change
2018 2017
(1 ) Consulting fees 78,500 79,000 (500 )
(2 ) Other miscellaneous costs 2,300 2,500 (200 )
Total Research Expenses $ 80,800 $ 81,500 $ (700 )

~~(1)~~

~~Consulting costs for the three months ended December 31, 2018 and 2017 were relatively unchanged.~~

~~(2)~~

~~Other miscellaneous costs for the three months ended December 31, 2018 and 2017 were relatively unchanged.~~

~~Product Development~~

Three months ended
December 31,
Change
2018 2017
Product Development Expenses $ 237,000 $ 269,200 $ (32,200 )

Product development expenses consist of payroll costs, (including stock-based compensation), consulting fees, system development costs, conference fee, travel expenses, and miscellaneous costs which were as follows:

Three months ended
December 31, Change
2018 2017
(1 ) Salaries and benefit costs $ 142,500 $ 124,400 $ 18,100
(2 ) Consulting fees 51,600 72,500 (20,900 )
(3 ) System development costs 35,100 36,000 (900 )
(4 ) Conference & travel 1,400 10,900 (9,500 )
(5 ) Other miscellaneous costs 6,400 25,400 (19,000 )
Total Product Development $ 237,000 $ 269,200 $ (32,200 )

~~(1)~~

~~Salaries and benefits increased by $18,100 for the three months ended December 31, 2018, primarily due to increased stock-based compensation recognized during the three months of 2018;~~

~~(2)~~

Consulting fees decreased by $20,900 for the three months ended December 31, 2018, primarily due to services in relation to the upgrade of the Company’s cloud based sales platform and for a data science project to improve the Company’s algorithms for the production of an enhanced PEER report during the three months ended December 31, 2017.

~~(3)~~

~~System development and maintenance costs for the three months ended December 31, 2018 and 2017 were relatively unchanged.~~

~~(4)~~

~~Conference and travel costs decreased by $9,500 during the three months December 31, 2018; and~~

~~(5)~~

~~Other miscellaneous costs decreased by $19,000 for the three months ended December 31, 2018, primarily due to decreased computer services and dues subscriptions during the three months of 2018;~~

~~Sales and marketing~~

Three months ended
December 31,
Change
2018 2017
Sales and Marketing Expenses $ 151,900 $ 667,200 $ (515,300 )

~~Sales and marketing expenses consist of payroll and benefit costs, (including stock-based compensation), advertising and marketing expenses, consulting fees, and miscellaneous expenses.~~

Three months ended
December 31,

2018 2017 Change
(1 ) Salaries and benefit costs $ 91,400 $ 247,100 $ (155,700 )
(2 ) Consulting fees 26,900 174,900 (148,000 )
(3 ) Advertising and marketing costs — 151,100 (151,100 )
(4 ) Conferences and travel costs 3,500 25,600 (22,100 )
(5 ) Other miscellaneous costs 30,100 68,500 (38,400 )
Total Sales and marketing expenses $ 151,900 $ 667,200 $ (515,300 )

~~(1)~~

Salaries and benefits for the three months ended December 31, 2018 decreased by $155,700 from the 2017 period; primarily due to decreased salaries and commission of marketing and sales staff, offset by increased stock-based compensation;

~~(2)~~

~~Consulting fees for the three months ended December 31, 2018 decreased by $148,000, primarily due to the decrease in the number of marketing consultants;~~

~~(3)~~

~~Advertising and marketing expenses for the three months ended December 31, 2018 decreased by $151,100 primarily due to decreased social media advertising;~~

~~(4)~~

~~Conference and travel expenditures for the three months ended December 31, 2018 decreased by $22,100, primarily due to decreased travel expense for the sales staff; and~~

~~(5)~~

~~Miscellaneous expenditures for the three months ended December 31, 2018 decreased by $38,400, primarily due to decreased rent and office expenses.~~

~~General and administrative~~

Three months ended
December 31,

2018 2017 Change
General and administrative expenses $ 2,373,800 $ 1,774,800 $ 599,000

General and administrative expenses consist of payroll and benefit costs, (including stock based compensation), legal fees, patent costs, other professional and consulting fees, general administrative and occupancy costs, dues and subscriptions, conference fees, and travel expenses.

Three months ended
December 31,

2018 2017 Change
(1 ) Salaries and benefit costs $ 976,700 $ 702,800 $ 273,900
(2 ) Transaction fees — 438,600 (438,600 )
(2 ) Consulting fees 393,200 198,100 195,100
(3 ) Legal fees 441,400 34,600 406,800
(4 ) Other professional fees 98,700 121,100 (22,400 )
(5 ) Patent costs 1,400 9,500 (8,100 )
(6 ) Marketing and investor relations costs 86,000 72,500 13,500
(7 ) Conference and travel costs 27,400 56,700 (29,300 )
(8 ) Dues & subscriptions fees 56,400 45,300 11,100
(9 ) Computer & web services 48,300 — 48,300
(10 ) General admin and occupancy costs 244,300 95,600 148,700
Total General and administrative costs $ 2,373,800 $ 1,774,800 $ 599,000

~~(1)~~

Salaries and benefit expenses increased by $273,900 for the three months ended December 31, 2018 period. This increase was primarily due to increased stock–based compensation of $146,000; increased telepsychiatry management and staff cost due to acquisition of Arcadian on November 13, 2017;

~~(2)~~

~~Consulting fees increased by $195,100 for the three months ended December 31, 2018 period, primarily related to increased operational and consulting fees, as well as increased recruitment fees;~~

~~(3)~~

~~Legal fees increased by $406,800 for the three months ended December 31, 2018 period, primarily due to additional legal fees related to~~t~~he negotiation and execution of the merger agreement and other financing activities;~~

~~(4)~~

~~Other professional fees decreased by $22,400 for the three months ended December 31, 2018 period, primarily due to decreased audit fees because of the acquisition of Arcadian in fiscal 2018;~~

~~(5)~~

~~Patent costs decreased by $8,100 primarily due to less volume of patent and trademark applications and maintenance costs;~~

~~(6)~~

~~Marketing and investor relations costs increased by $13,500 for the three months ended December 31, 2018 as we engaged public relations firms to enhance the Company’s presence in the media;~~

~~(7)~~

~~Conference and travel costs decreased by $29,300 for the three months ended December 31, 2018, primarily due to less conferences attended and less travel made during the period;~~

~~(8)~~

~~Dues and subscription costs increased by $11,100 for the three months ended December 31, 2018, primarily due to additional licenses for our Salesforce platform;~~

~~(9)~~

~~Computer and web services increased by $48,300 for the three months ended December 31, 2018, primarily due to CTO services related to our telepsychiatry business and cloud hosting fees; and~~

~~(10)~~

General administrative and occupancy costs increased by $148,700 for the three months ended December 31, 2018 period. The increase was primarily due to an increase in Delaware franchise tax in the amount of $44,000, and increased depreciation of fixed assets and amortization of intangible asset purchased.

~~Other income (expense)~~

Three months ended
December 31, Change
2018 2017
Interest expense $ (22,900 ) $ (13,700 ) $ (9,200 )

Interest expense for the three months ended December 31, 2018 was $22,900 compared to $13,700 for the three months of December 31, 2017, the increase was due to interest expense on acquisition of the long term borrowing on the telepsychiatry business.

~~Net Loss~~

Three months ended
December 31, Change
2018 2017
Loss, net $ (2,704,400 ) $ (2,769,300 ) $ 64,900

Our net loss was $2.7 million for the three months ended December 31, 2018, compared to a net loss of approximately $2.8 million for the same period ended December 31, 2017, which was primarily due to increased revenue from the acquisition of our telepsychiatry business on November 13, 2018, offset by costs of Arcadian and by decreased costs in other areas.

~~Liquidity and Capital Resources~~

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern.

Since our inception, we have never been profitable and we have generated significant losses. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.

As of December 31, 2018, we had an accumulated deficit of approximately $87.6 million compared to our accumulated deficit as of September 30, 2018, of approximately $85.2 million. Our management expects that with our proposed clinical trials, sales and marketing and general and administrative costs, our expenditures will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. The Company continues to explore additional sources of capital but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations.

As of December 31, 2018, we had $1.5 million in cash and cash equivalents and a working capital surplus of approximately $0.2 million. This is compared to our cash position of $3.3 million as of September 30, 2018 and working capital of $2.3 million.

The Company has been funded through multiple rounds of private placements, primarily from members of our Board or our affiliates, one public offering of common stock and recently, through our facility with Aspire Capital.

~~Working Capital, Going Concern, Operating Capital and Capital Expenditure Requirements~~

~~As of December 31, 2018, we had approximately $1.5 million in cash and cash equivalents, compared to $3.3 million of cash and cash equivalents as of September 30, 2018.~~

Our recurring net losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Management's assessment of substantial doubt of going concern is based on current estimates and assumptions regarding our programs and business needs. Actual working capital requirements could differ materially from the above working capital projection. We may explore strategic opportunities including partnerships, licensing and acquisitions of other entities, assets or products. If we are unable to continue to identify sources of capital, we may be required to limit our activities, to terminate programs or terminate operations temporarily or permanently. Even if we close the Merger, we will be required to fund our continuing operations.

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I Item 1A and elsewhere in our Annual Report on Form 10-K and in other reports we file with the SEC.

~~The amount of capital we will need to conduct our operations and the time at which we will require such capital may vary significantly depending upon a number of factors, such as:~~

●

the amount and timing of costs we incur in connection with our clinical trials and product development activities, including enhancements to our PEER Online database and costs we incur to further validate the efficacy of our technology;

●

~~whether we can receive sufficient business revenues from Arcadian to adequately cover our costs;~~

●

~~the amount and timing of costs we incur in connection with the expansion of our commercial operations, including our sales and marketing efforts;~~

●

~~whether we incur additional consulting and legal fees in our efforts in conducting Non-Significant Risk trials within FDA requirements, which will enable us to obtain a 510(k) clearance from the FDA;~~

●

~~if we expand our business by acquiring or investing in complimentary businesses; and~~

●

~~our continuing access to funding from Aspire Capital.~~

~~Sources of Liquidity~~

~~Since our inception, substantially all of our operations have been financed from equity and debt financings.~~

~~The Aspire Capital Equity Lines of Credit~~

On December 6, 2016, the Company, entered into a common stock purchase agreement (the “First Purchase Agreement”) with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the First Purchase Agreement. For details of the First Purchase Agreement financing see “~~Private Placement Transactions - The Aspire Capital Equity Credit Lines~~~~” below.~~

~~From April 3, 2018 to May 7, 2018 the Company sold 1,180,000 shares of common stock to Aspire Capital under the First Purchase Agreement and received total proceeds of $2.4 million.~~

On May 15, 2018, the Company, entered into the Second Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Second Purchase Agreement. For details of the Purchase Agreement financing see “~~Private Placement Transactions―The Aspire Capital Equity Credit Linea~~~~” below.~~

From May 15, 2018 to December 31, 2018, the Company sold 884,671 shares of common stock to Aspire Capital under the Second Purchase Agreement and received total proceeds of approximately $1.9 million.

~~Public Offering~~

In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.

~~Private Placement of Series A Preferred Stock with Warrant~~

On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit, each consisting of one share of newly-designated Series A Preferred Stock, par value $0.001 per share and one Warrant to purchase one share of Common Stock, par value $0.001 per share for $2.34 per share in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million. The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share.

On April 30, 2018, the Company entered into the First Amended Subscription Agreement for Shares of Series A Preferred Stock and Common Stock Purchase Warrants (the “Amended Agreement”) with John Pappajohn and Mary Pappajohn (each an “Investor”, and collectively the “Investors”), which provides for the issuance, as of the date of the Original Agreement, of an aggregate of 500,000 Shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Convertible Preferred Stock”), in lieu of the same number of Shares of Series A Convertible Preferred Stock that the Company had originally agreed to issue to the Investors. The Series A-1 Convertible Preferred Stock will have substantially the same rights and preferences as the Shares of Series A Preferred Stock, except that the Shares of Series A-1 Convertible Preferred Stock are non-voting and cannot be converted into Common Stock by an Investor if, as a result of such conversion, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock. Additionally, the Warrants were amended to provide that they would not be exercisable by an Investor if, following any such exercise, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock.

Shares of the Company’s Series A and Series A-1 Preferred Stock will be entitled to receive cash dividends at the rate of five percent (5.00%) of the Original Series A and Series A-1 Issue Price per annum, payable out of funds legally available therefor. Dividends will only payable when and if declared or upon certain events.

The Warrants will be exercisable for a period of five years for an exercise price of $2.34. The exercise price is subject to adjustment for stock splits, stock dividends, combinations or similar events. The Warrants may not be exercised on a cashless basis.

~~Cash Flows~~

Net cash used in operating activities was $1.7 million for the three months ended December 31, 2018, compared to $2.4 million for the same period in 2017. The $0.7 million net decrease in cash used for operations was primarily due to an increase in accounts payable of $0.5 million.

During the three months ended December 31, 2018, the Company used $4,100 in investing activities related to the purchase of furniture and equipment. During the three months ended December 31, 2017, the Company used $334,700 in investing activities, including $28,100 for the purchase of office equipment and $306,600 related to the acquisition of Arcadian.

Net Cash used in financing activities for the three months ended December 31, 2018 was $8,600, consisting of $8,300 in repayments on notes payable which was offset by $300 in payments on a capital lease.Net Cash used in financing activities for the three months ended December 31, 2017 was $16,100, which was related to payments on notes payable and capital leases.

~~Off-Balance Sheet Arrangements~~

~~We have no off-balance sheet arrangements or financing activities with special purpose entities.~~

~~Private Placement Transactions~~

~~The Aspire Capital Equity Credit Lines~~

On December 6, 2016, the Company entered into the First Purchase Agreement with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the First Purchase Agreement. In consideration for entering into the First Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock. See~~Note 7. Stockholders’ Equity”,Consolidated Financial Statements for additional detail.~~

Under the First Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock was equal or greater than $0.50 per share, the Company had the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

~~a) the lowest sale price of Common Stock on the purchase date; or~~

The Company had the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice was generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.

The purchase price was to be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company could deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

The Purchase Agreement provides that the Company and Aspire Capital would not effect any sales under the First Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock was less than $0.50. There are no trading volume requirements or restrictions under the First Purchase Agreement, and the Company could control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital had no right to require any sales by the Company, but was obligated to make purchases from the Company as directed by the Company in accordance with the First Purchase Agreement. There were no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the First Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “ First Commitment Shares”). The First Purchase Agreement was terminated and replace by the Second Purchase Agreement, defined below on May 15, 2018. Aspire Capital had agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the First Purchase Agreement. Any proceeds from the Company receives under the First Purchase Agreement were expected to be used for working capital and general corporate purposes.

On May 15, 2018 the Company terminated the First Purchase Agreement and entered into the Second Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 250,000 shares of the Company’s common stock ( the “Second Commitment Shares”). See~~Note 6. Stockholders’ Equity~~ ~~of the Condensed Consolidated Financial Statements for additional detail.~~

Under the Second Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:

~~a) the lowest sale price of Common Stock on the purchase date; or~~

The Company has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.

The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

The Second Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Second Purchase Agreement. In consideration for entering into the Second Purchase Agreement, concurrently with the execution of the Second Purchase Agreement, the Company issued to Aspire Capital 250,000 shares of Common Stock (the “Commitment Shares”). The Second Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Second Purchase Agreement. Any proceeds from the Company receives under the Second Purchase Agreement are expected to be used for working capital and general corporate purposes.

As of December 31, 2018, the Company has issued purchase notices to Aspire Capital under the First Purchase Agreement to purchase 1,180,000 shares of common stock, at a per share price of $2.00, resulting in gross cash proceeds of approximately $2.4 million.

~~Private Placement of Series A Preferred Stock with Warrant~~

On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit, each consisting of one share of newly-designated Series A Preferred Stock, par value $0.001 per share and one Warrant to purchase one share of Common Stock, par value $0.001 per share for $2.34 per share in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million (“the Financing”). The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share.

In connection with the Financing, the Company also entered into the Registration Rights Agreement with the investors, requiring the Company to register the resale of the shares of Common Stock underlying the preferred stock and the Warrants. Under the Registration Rights Agreement, the Majority Holders may by a written Demand Notice to the Company commencing six (6) months from the closing date, request the Company to effect the registration of all or part of the registrable securities owned by such Majority Holders and their respective affiliates on a Registration Statement on Form S-3. The Company has agreed to use its reasonable best efforts to cause such registration and/or qualification to be complete as soon as practicable, but in no event later than sixty (60) days, after receipt of the Demand Notice.

The shares of Series A and Series A-1 Preferred Stock were offered and sold in reliance upon the exemption from the registration requirements of the Securities Act, set forth under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act, relating to sales by an issuer not involving any public offering and in reliance on similar exemptions under applicable state laws. Each purchaser represented that it is an accredited investor and that it acquired the Series A and Series A-1 Preferred Stock and Warrants for investment purposes only and not with a view to any resale, distribution or other disposition of such securities in violation of the United States federal securities laws.

On September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a director of the Company, and entities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a private placement (the “September Private Placement”) of an aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of common stock and one common stock purchase warrant to purchase one share of Common Stock for $2.00 per share.

~~The Company expects to use the proceeds of the Financing and the September Private Placement for general corporate purposes.~~

~~These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act, and Regulation D thereunder.~~

~~Item 3.~~

~~Quantitative and Qualitative Disclosures about Market Risk.~~

~~Not applicable.~~

~~Item 4.~~

~~Controls and Procedures.~~

Evaluation of Disclosure Controls and ~~Procedures.~~Procedures

Our management conducted an evaluation, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial and accounting officer, of the effectiveness of our disclosureDisclosure controls and procedures ~~(as defined~~(“DCP”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in ~~Rules 13a-15(e) and 15d-15(e)~~the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. DCP include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as ~~amended (the "Exchange Act")) as~~appropriate to allow timely decisions regarding required disclosures.

As of the end of the period covered by this ~~Quarterly Report on~~ Form ~~10–Q.~~10-Q, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our DCP. Based upon ~~that~~this evaluation and due to the material weaknesses in our ~~President,~~internal control over financial reporting as of December 31, 2018 described below, our Chief Executive Officer and Chief Financial Officer concluded that asthe Company’s DCP were not effective. Our management is working at remediating the material weaknesses in our internal controls over financial reporting. However, we have not yet completed a ~~result~~full annual accounting cycle since December 31, 2019 to fully validate the remediation of the material ~~weakness~~weaknesses in our internal controls and the effectiveness of the Company’s DCP.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting ~~described below, our disclosure controls~~(as defined in Rules 13a-15(f) and ~~procedures were not effective as of December 31, 2018.~~

~~Changes in Internal Controls over Financial Reporting~~

Effective October 1, 2018, we adopted the new revenue standard. While the new revenue standard is expected to have an immaterial impact on our ongoing revenue and net income, it will require management to make significant judgments and estimates. As a result, we implemented changes to our internal controls related to revenue recognition for the quarter ended December 31, 2018. These changes include updated accounting policies affected by the new revenue standard, redesigned internal controls over financial reporting related to the new revenue standard, expanded data gathering to comply with the additional disclosure requirements, training of individuals responsible for implementation of, and continuing compliance with, the new revenue standard, as well as ongoing contract review requirements.

Other than the material weakness in our internal control over financial reporting and adoption of the new revenue standard described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of15d-15(f) under the Exchange ~~Act~~Act) that occurred during the ~~three months~~fiscal quarter ended ~~December 31, 2018 that has~~September 30, 2019 which have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

Material Weakness and Plan of Remediation

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

We conducted an evaluation pursuant to Rule 13a‑15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2018. This evaluation was conducted under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective as of December 31, 2018, because of the continuance of a material weakness (the “Material Weakness”) due to inadequate financial closing process, segregation of duties including access control of information technology especially financial information, inadequate documentation of policies and procedures over risk assessments, internal control and significant account process, and insufficient entity risk assessment process.

We are committed to remediating the control deficiencies that constituted the Material Weakness by implementing changes to our internal control over financial reporting. In 2018, we implemented measures designed to remediate the underlying causes of the control deficiencies that gave rise to the Material Weakness, including, without limitation:

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

using a GAAP Disclosure and SEC Reporting Checklist;

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

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

engaging other supplemental internal and external resources.

~~PART II~~

~~OTHER INFORMATION~~Our management and Board of Directors are committed to the remediation of the Material Weakness, as well as the continued improvement of our overall system of DCP. We are in the process of implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the Material Weakness, which primarily include engaging additional and supplemental internal and external resources with the technical expertise in GAAP, as well as to implement new policies and procedures to provide more effective controls to track, process, analyze, and consolidate the financial data and reports.

~~Item 1.~~

~~Legal Proceedings~~

We believe these measures, once fully implemented, will remediate the control deficiencies that gave rise to the Material Weakness. As we continue to evaluate and work to remediate these control deficiencies, we may determine that additional remedial measures are required.

Part II. Other Information

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

~~Item 1A.~~

~~Risk Factors~~

~~As a smaller reporting company, we are not required to provide the information required by this item. However, we direct you~~Please refer to the risk factors ~~included~~disclosed in the ~~Risk Factors~~“Risk Factors” section of the Annual Report.

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

On July 9, 2019, EMI sold and issued an aggregate of 454,545 shares of EMI Holding, Inc.’s (“EMI”) common stock to certain stockholders, at a price of $6.60 per share, for an aggregate price of approximately $3,000,000.

On July 17, 2019, EMI issued an aggregate of 6,794,048 shares of common stock upon conversion of EMI convertible notes and notes payable.

The shares noted above were issued in ~~our Annual Report on Form 10-K for~~reliance upon the ~~year ended September 30, 2018 filed with~~exemption from registration provided by Section 4(a)(2) of the Securities ~~and Exchange Commission on December 11, 2018 and in our registration statement on Form S-4 filed with~~Act of 1933, as amended (the “Securities Act”), or Regulation D under the Securities Act. These issuance of the shares qualified for exemption under Section 4(a)(2) of the Securities Act or Regulation D because it did not involve a “public offering” based upon the following factors: (i) the shares were issued to a limited number of investors; (ii) there was no public solicitation; (iii) each investor was an “accredited investor” as such term is defined by Rule 501 under the Securities Act; and ~~Exchange Commission on February 13, 2019.~~(iv) the investment intent of the investors. No broker-dealers was used in connection with such issuance.

~~Item 2.~~

~~Unregistered Sales of Equity~~

Item 3. Defaults Upon Senior Securities ~~and Use of Proceeds~~

None.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

~~None.~~

~~Item 4.~~

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

1.~~Merger Agreement.~~On January 4, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among us, our wholly owned subsidiary, Athena Merger Subsidiary, Inc., a Delaware corporation (“Merger Sub”), and Emmaus Life Sciences, Inc., a Delaware corporation (“Emmaus”). Under the terms of the Merger Agreement, pending stockholder approval of the transaction, Merger Sub will merge with and into Emmaus with Emmaus surviving the merger and becoming a wholly-owned subsidiary of us (the “Merger”). Subject to the terms of the Merger Agreement, at the effective time of the Merger, Emmaus stockholders will receive a number of newly issued shares of our common stock determined using the exchange ratio described below in exchange for their shares of Emmaus stock. Following the Merger, stockholders of Emmaus will become our majority owners.None.

The exchange ratio will be determined prior to closing and will cause our securityholders (including holders of options and warrants) prior to the effective time to collectively own 5.9% of the combined company on a fully diluted basis and Emmaus securityholders (including holders of options, warrants and convertible notes) prior to the effective time to collectively own 94.1% of the combined company on a fully diluted basis. The exchange ratio will reflect any dilution that may result from securities sold by us or Emmaus prior to the closing of the Merger and any changes to the number of outstanding convertible securities of each company. The Merger Agreement provides that if Emmaus converts certain debt obligations into equity within six months of the completion of the Merger, Emmaus will issue additional shares (equal to 5.9% of the shares issued in connection with the debt conversion to third parties) to an existing subsidiary of our which is expected to be spun-off to stockholders of us prior to the effective time of the merger, as described below.

The combined company, led by Emmaus’ management team, is expected to be named “Emmaus Life Sciences, Inc.” Prior to the closing of the Merger, we will seek shareholder approval to conduct a reverse split of our outstanding shares if necessary to satisfy listing requirements of the Nasdaq Capital Market (the “NasdaqCM”). The combined company is expected to trade on the NasdaqCM under a new ticker symbol. At the closing, the combined company’s board of directors is expected to consist of one member from us and up to six members from Emmaus. The Merger has been unanimously approved by the Board of Directors of each company. The transaction is expected to close in the first half of 2019, subject to approvals by the stockholders of us and Emmaus, and other closing conditions, including but not limited to the approval of the continued listing of the combined company’s common stock on the NasdaqCM, conversion of our preferred stock into common stock, satisfaction of certain cash and debt conversion conditions and consummation of the spin-off described below.

2.~~Spin-Off~~. Prior to the closing of the Merger, we intend, subject to obtaining any required regulatory approvals and the completion of certain tax analyses, to transfer all of our business, assets and liabilities not assumed by Emmaus to our existing wholly-owned subsidiary, MYnd Analytics, Inc., a California corporation (“MYnd California”), pursuant to the terms of a Separation Agreement (the “Separation Agreement”) entered into on January 4, 2019 by us and MYnd California. We intend to distribute all shares of MYnd California held by it to our stockholders of record as of a future record date to be determined for said distribution. The Separation Agreement includes the terms of the proposed spin-off and the distribution to the our stockholders and includes representations and warranties, covenants and conditions, which will impact the terms of the proposed spin-off and distribution. The proposed spin-off will be subject to conditions and regulatory approvals not entirely under our control and the terms of the proposed spin-off, if and when completed, are subject to change.Item 6. Exhibits

(a)3.~~Appointment of Chief Executive Officer and Director.~~Effective December 12, 2018, we appointed Patrick Herguth to the position of Chief Executive Officer, replacing the current Chief Executive Officer of the Company, George C. Carpenter, IV. In addition, effective December 12, 2018, the Board increased the number of directors on the Board by one and elected Mr. Herguth to the Board to serve as a director of the Company to fill the vacancy created by such increase. Mr. Herguth has not been appointed to any committee of the Board.

4.~~Appointment of Chief Innovation Officer; Amendment to former Chief Executive Officer’s Agreement.~~As of December 12, 2018, George C. Carpenter, IV resigned his position of Chief Executive Officer and became, in addition to President, the Chief Innovation Officer of the Company. In connection therewith, on December 12, 2018, we entered into an amendment to his Employment Agreement, dated as of September 7, 2007 (the “Carpenter Amendment”), pursuant to which Mr. Carpenter was given the title of President and Chief Innovation Officer of the Company. Pursuant to the Carpenter Amendment, Mr. Carpenter received an option to purchase 50,000 shares of common stock of the Company, with such option vesting over a twelve-month period.Exhibits

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed/ Furnished
2.1	Agreement and Plan of Merger and Reorganization dated as of January 4, 2019, by and among MYnd Analytics, Inc., Athena Merger Subsidiary, Inc. and Emmaus Life Sciences, Inc.	8-K	000-142031	2.1	January 7, 2019
2.2	Amendment No.1 to Agreement and Plan of Merger and Reorganization dated as of May 10, 2019.	Form 424B3	333-229660	Annex B	June 14. 2019
4.1	Form of Amended and Restated 10% Senior Secured Debenture.	8-K	000-142031	4.1	March 11, 2019
4.2	Form of Amended and Restated Common Stock Purchase Warrant.	8-K	000-142031	4.2	March 11, 2019
10.1	Form of Emmaus Voting Agreement dated as of January 4, 2019, including form of irrevocable proxy.	8-K	000-142031	10.1	January 7, 2019
10.2	Form of MYnd Voting Agreement dated as of January 4, 2019, including form of irrevocable proxy.	8-K	000-142031	10.2	January 7, 2019
10.3	Form of Emmaus Lock-Up Agreement dated as of January 4, 2019.	8-K	000-142031	10.3	January 7, 2019
10.4	Form of MYnd Lock-Up Agreement dated as of January 4, 2019.	8-K	000-142031	10.4	January 7, 2019
10.5	Securities Amendment Agreement dated as of March 5, 2019 among Emmaus Life Sciences, Inc. and the Holders thereunder.	8-K	000-142031	10.1	March 11, 2019
10.6	Amended and Restated Separation and Distribution Agreement dated as of March 27, 2019 by and among Mynd Analytics, Inc., a Delaware corporation and its wholly-owned subsidiary, Telmynd, Inc., Delaware corporation and MYnd analytics, In., a California corporation.	Form 424B3	333-229660	Annex B	June 14. 2019
10.7	Loan Agreement dated as October 3, 2018 between EMI Holding, In. (formerly, Emmaus Life Sciences, Inc.) and EJ Holdings, Inc.					*
31.1+	Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					*
31.2+	Certification of Chief Financial Officer pursuant of Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					*

~~Item 6.~~

~~Exhibits~~

~~The following exhibits are filed as part of this report or incorporated by reference herein:~~

~~Exhibit~~ ~~Number~~	~~Exhibit Title~~
~~2.1~~	Agreement and Plan of Merger and Reorganization dated as of January 4, 2019 by and among MYnd Analytics, Inc., Athena Merger Subsidiary, Inc. and Emmaus Life Sciences, Inc., incorporated by reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File No. 001-35527).
~~10.1~~	Separation Agreement dated as of January 4, 2019 by and among MYnd Analytics, Inc., a Delaware corporation and its wholly-owned subsidiary, MYnd Analytics, Inc., a California corporation, incorporated by reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File No. 001-35527).
~~10.2~~	Form of Emmaus Voting Agreement dated as of January 4, 2019, incorporated by reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File No. 001-35527).
~~10.3~~	Form of MYnd Voting Agreement dated as of January 4, 2019, incorporated by reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File No. 001-35527).
~~10.4~~	~~Form of Emmaus Lock-Up Agreement dated as of January 4, 2019, incorporated~~Incorporated by ~~reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File No. 001-35527).~~Reference
~~10.5~~ Exhibit Number	Exhibit Description	Form ~~of MYnd Lock-Up Agreement dated as of January 4, 2019, incorporated by reference to the registrants Current Report on Form 8-K dated January 4, 2019 and filed on January 7, 2019. (File~~	File No. ~~001-35527).~~	Exhibit	Filing Date	Filed/ Furnished
~~10.6~~ 32.1+	Employment Agreement dated as of December 12, 2018 by and between MYnd Analytics, Inc. and Patrick Herguth, incorporated by reference to the registrant’s Current Report on Form 8-K dated December 12, 2018 and filed on December 12, 2018. (File No. 001-35527).
~~10.7~~	Amendment to Carpenter Employment Agreement dated as of December 12, 2018 by and between MYnd Analytics, Inc. and George C. Carpenter, IV, incorporated by reference to the registrant’s Current Report on Form 8-K dated December 12, 2018 and filed on December 12, 2018. (File No. 001-35527).
~~31.1~~	Certification of ~~Principal~~Chief Executive ~~Officer pursuant to Securities Exchange Act Rules 13a-14(a)~~Office and ~~15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2~~	~~Certification of Principal~~Chief Financial Officer ~~pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.1~~	~~Certification of Principal Executive Officer and Principal Financial Officer pursuant~~Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ~~section~~Section 906 of the Sarbanes-Oxley Act of 2002.					*
101.INS	XBRL Instance Document
~~101.INS~~ 101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

~~SIGNATURES~~EMMAUS LIFE SCIENCES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, ~~as amended,~~ the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	~~MYnd Analytics, Inc.~~

~~Date: February 14, 2019~~		~~/s/ Patrick Herguth~~
	~~By:~~	~~Patrick Herguth~~ Emmaus Life Sciences, Inc.
	~~Its:~~
Dated: November 13, 2019	By:		/s/ Yutaka Niihara
	Name:		Yutaka Niihara, M.D., M.P.H.
	Its:		Chief Executive Officer ~~(Principal Executive Officer)~~

		~~/s/ Donald D’Ambrosio~~
	By:	~~Donald D’Ambrosio~~	/s/ Joseph C. Sherwood III
	~~Its:~~ Name:		Joseph C. Sherwood III
	Its:		Chief Financial Officer ~~(Principal Financial Officer)~~

50 39

	As of December 31, 2018 (Unaudited)			As of September 30, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,499,800		$	3,254,700
Accounts receivable, net		120,000			63,300
Prepaid insurance		24,100			57,900
Prepaid other assets		146,600			134,700
Total current assets		1,790,500			3,510,600
Property and equipment, net		98,800			110,800
Intangible assets, net		102,400			116,500
Goodwill		1,386,800			1,386,800
Other assets		27,500			27,100
TOTAL ASSETS	$	3,406,000		$	5,151,800

LIABILITIES AND STOCKHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Accounts payable (including $31,400 and $30,400 to related parties as of December 31, 2018 and September 30, 2018, respectively)	$	728,800		$	346,900
Accrued liabilities		304,000			268,900
Accrued compensation		206,300			175,400
Accrued compensation – related parties		185,100			209,300
Accrued interest and other		3,900			3,900
Deferred revenue		156,900			159,700
Current portion of capital lease		1,400			1,300
Total current liabilities		1,586,400			1,165,400
LONG-TERM LIABILITIES
Long-term borrowing, net		597,100			587,700
Accrued interest on long - term borrowing		115,800			110,100
Long-term portion of capital lease		1,700			2,100
Total long-term liabilities		714,600			699,900
TOTAL LIABILITIES		2,301,000			1,865,300
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 15,000,000 authorized; 1,500,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 authorized; 550,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 issued and outstanding as of December 31, 2018 and as of September 30, 2018; aggregate liquidation preference of $1,968,750 as of December 31, 2018 and as of September 30, 2018;		1,100			1,100
Common stock, $0.001 par value; 250,000,000 shares authorized as of December 31, 2018 and September 30, 2018 respectively, 7,555,004 and 7,407,254 shares issued and outstanding as of December 31, 2018 and September 30, 2018, respectively;		7,600			7,400
Additional paid-in capital		89,780,400			89,257,700
Accumulated deficit		(87,622,800	)		(85,245,300	)
		2,166,300			4,020,900
Non controlling interest		(1,061,300	)		(734,400	)

Total stockholders’ equity		1,105,000			3,286,500
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,406,000		$	5,151,800

	Three Months Ended December 31,
	2018			2017
REVENUES
Neurometric services	$	79,200		$	53,300
Telepsychiatry services		307,900			68,700
Total revenues		387,100			122,000

COST OF REVENUES
Neurometric services		6,400			49,100
Telepsychiatry services		218,700			35,900
		225,100			84,900

GROSS MARGIN		162,000			37,100

OPERATING EXPENSES
Research		80,800			81,500
Product development		237,000			269,200
Sales and marketing		151,900			667,200
General and administrative		2,373,800			1,774,800
Total operating expenses		2,843,500			2,792,700

OPERATING LOSS		(2,681,500	)		(2,755,600	)

OTHER INCOME (EXPENSE):
Interest expense, net		(22,900	)		(13,700	)
Total other income (expense)		(22,900	)		(13,700	)
LOSS BEFORE PROVISION FOR INCOME TAXES		(2,704,400	)		(2,769,300	)
Income taxes		—			—
NET LOSS	$	(2,704,400	)	$	(2,769,300	)

Net loss attributable to noncontrolling interest		(326,900	)		—

Net Loss attributable to MYnd Analytics, Inc.	$	(2,377,500	)	$	(2,769,300	)

BASIC AND DILUTED LOSS PER SHARE:	$	(0.32	)	$	(0.64	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted		7,542,663			4,332,927

	Common Stock				Preferred Stock
	Shares		Amount		Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Sub-total MYnd Stockholders’ Equity			Noncontrolling Interest		Total
Balance at September 30, 2017		4,299,311	$	4,300		—	$	—	$	80,189,700	$	(75,646,600	)		4,547,400			—	$	4,547,400
Stock-based compensation		37,500		100		—		—		336,500		—			336,600			—		336,600
Common Stock issued to vendors for services		23,750		—		—		—		14,800		—			14,800			—		14,800
Net loss		—		—		—		—		—		(2,769,300	)		(2,769,300	)		—		(2,769,300	)
Balance at December 31, 2017		4,360,561	$	4,400		—	$	—	$	80,541,000	$	(78,415,900	)		2,129,500			—	$	2,129,500

For the year ended September 30,	Intangible assets
2019 (for the remaining nine months)	$	40,100
2020		29,400
2021		29,400
2022		3,500
Total	$	102,400

	December 31,		December 31,
	2018		2017
Neurometric services	$	79,200	$	53,300
Telepsychiatry services		307,900		68,700
Revenue	$	387,100	$	122,000

	December 31,			September 30,
	2018			2018
Accounts receivable	$	125,000		$	65,100
Allowance for doubtful accounts		(5,000	)		(1,800	)
Accounts receivable, net	$	120,000		$	63,300

Beginning balance (September 30, 2018)	$	587,700
Accretion of debt discount		9,400
Ending balance (December 31, 2018)	$	597,100

Pro Forma	For Three Months Ended December 31,
	2017
Revenues	$	267,200
Net income (loss)		(2,949,100	)
Basic and diluted loss per share:	$	(0.68	)

Outstanding at weighted average shares outstanding		4,332,927

	Three months ended December 31,
	2018				2017

		Stock-based compensation expense non-Restricted Shares		Stock-based compensation expense Restricted Shares		Stock-based compensation expense non-Restricted Shares		Stock-based compensation expense Restricted Shares
Research	$	—	$	—	$	—	$	—
Product development		15,100		9,000		100		—
Sales and marketing		10,300		—		100		—
General and administrative		266,000		216,900		117,200		219,200
Total	$	291,400	$	225,900	$	117,400	$	219,200

	Number of Shares			Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Intrinsic Value
Outstanding at September 30, 2018		803,937		$	10.13		8.75	$	7,500
Granted		839,758			1.33				—
Exercised		—			—				—
Forfeited or expired		(21,250	)		1.52
Outstanding at December 31, 2018		1,622,445		$	5.68		9.12	$	—

	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at September 30, 2018		406,564	$	4.09
Granted		144,000		1.38
Forfeited		—		—
Outstanding at December 31, 2018		550,564	$	3.38

	Three Months Ended December 31, 2018
	Low			High
Annual dividend yield		—	%		—	%
Expected life (years)		3.0			5.0
Risk-free interest rate		2.51	%		2.90	%
Expected volatility		183.86	%		200.47	%

Exercise Price		Number of Shares			Expiration Date		Weighted Average Exercise Price
$	2.00		459,458	(1)		09 /2023	$	2.00
	2.34		1,050,000	(2)		03 /2023		2.34
	5.25		2,539,061	(3)		07 /2022		5.25
	5.25		1,675,000	(4)		07 /2022		5.25
	5.25		213,800	(5)		07 /2022		5.25
	6.04		134,000	(6)		07 /2022		6.04
	10.00		4,000			06 /2021		10.00
$	55.00		450			09/2018 – 03/2019		55.00
	Total		6,075,769				$	4.53


	Three Months Ended
	December 31,
	2018			2017
Net loss for computation of basic and diluted net loss per share:
Net Loss attributable to MYnd Analytics, Inc.	$	(2,377,500	)	$	(2,769,300	)
Preferred stock dividends		(24,600	)		—
	$	(2,402,100	)	$	(2,769,300	)

Basic and diluted net loss per share:
Basic and diluted net loss per share	$	(0.32	)	$	(0.64	)
Basic and diluted weighted average shares outstanding		7,542,663			4,332,927

Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share:
Warrants		6,075,769			4,567,672
Restricted common stock		550,564			254,333
Options		1,622,445			559,617
Total		8,248,778			5,381,622

	Payments due by period
Contractual Obligations	Total		2019		2020
Operating Lease Obligations	$	216,600	$	169,100	$	47,500
Total	$	216,600	$	169,100	$	47,500

	Three months ended
	December 31,				Change
	2018		2017
Neurometric services	$	79,200	$	53,300	$	25,900
Telepsychiatry services		307,900		68,700		239,200
TotalRevenues	$	387,100	$	122,000	$	265,100