The following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements and accompanying notes of the company appearing elsewhere in this Report. This discussion of our financial condition and results of operations contains certain statements that are not strictly historical and are "forward-looking" statements and involve a high degree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in our operations, development efforts and business environment, including those set forth in this Item 7, and in the sections entitled "1A. Risk Factors" and "1. Business" in this Report and uncertainties described elsewhere in this Report. All forward-looking statements included in this Report are based on information available to the company as of the date hereof.



General



Company Overview

Adamis Pharmaceuticals Corporation ("we," "us," "our," "Adamis" or the "company") is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease. Our products and product candidates in the allergy, respiratory, and opioid overdose markets include: SYMJEPI™ (epinephrine) Injection 0.3mg, which was approved by the U.S. Food and Drug Administration, or FDA, in 2017 for use in the emergency treatment of acute allergic reactions, including anaphylaxis, for patients weighing 66 pounds or more; SYMJEPI (epinephrine) Injection 0.15mg, which was approved by the FDA in September 2018, for use in the treatment of anaphylaxis for patients weighing 33-65 pounds; ZIMHI™ (naloxone HCL Injection, USP) 5 mg/0.5 mL, which was approved by the FDA in October 2021 for the treatment of opioid overdose; and Tempol, an investigational drug. In June 2020, we entered into a license agreement with a third party to license rights under patents, patent applications and related know-how of the licensor relating to Tempol. The exclusive license includes the worldwide use under the licensed patent rights and related rights for the fields of COVID-19 infection, asthma, respiratory syncytial virus infection, and influenza infection, as well as the use of Tempol as a therapeutic for reducing radiation-induced dermatitis in patients undergoing treatment for cancer. We commenced Phase 2/3 clinical trial start-up activities to examine the safety and efficacy of Tempol in COVID-19 patients early in the infection and on September 2, 2021, we announced the initiation of patient dosing in the trial, and in February 2022 we announced that due to the acceleration of patient enrollment in the trial, the Data Safety Monitoring Board, or DSMB, held an ad hoc meeting to evaluate initial interim clinical and safety data for the trial and determined that the trial may continue as there were no safety or clinical concerns identified, and that the data from the first 50 subjects will be reviewed again, anticipated to be in March 2022, when the DSMB will examine additional clinical and safety data as part of the first planned DSMB interim analysis. Assuming continuation of the trial and continued enrollment of patients, following submission of additional data and information to the DSMB, the DSMB will conduct a second planned review, which may provide additional insight into the safety and clinical results at that time. Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all specialty pharmaceuticals product lines, we intend to submit NDAs under Section 505(b)(2), of the U.S. Food, Drug & Cosmetic Act, as amended, or FDCA, or Section 505(j) Abbreviated New Drug Applications, or ANDAs, to the FDA, whenever possible, in order to potentially reduce the time to market and to save on costs, compared to those associated with Section 505(b)(1) NDAs for new drug products.

Our US Compounding Inc. subsidiary, or USC, which we acquired in April 2016 and which is registered as a human drug compounding outsourcing facility under Section 503B of the FDCA and the U.S. Drug Quality and Security Act, or DQSA, provided prescription compounded medications, including compounded sterile preparations and nonsterile compounds, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States. In July 2021, we sold certain assets relating to USC's human compounding pharmaceutical business and approved a restructuring process to wind down the remaining USC business and sell, liquidate or otherwise dispose of the remaining USC assets. Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products.

To achieve our goals and support our overall strategy, we may need to raise additional funding in the future and make significant investments in, among other things, product development and working capital.

SYMJEPI (epinephrine) Injection Product

On June 15, 2017, the FDA approved our SYMJEPI (epinephrine) Injection 0.3mg product for the emergency treatment of allergic reactions (Type I) including anaphylaxis. SYMJEPI (epinephrine) Injection 0.3mg is intended to deliver a dose of epinephrine, which is used for emergency, immediate administration in acute anaphylactic reactions to insect stings or bites, allergic reaction to certain foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis for patients weighing 66 pounds or more. On September 27, 2018, the FDA approved our lower dose SYMJEPI (epinephrine) Injection 0.15mg product, for the emergency treatment of allergic reactions (Type I) including anaphylaxis in patients weighing 33 to 66 pounds.

In July 2018, we entered into a Distribution and Commercialization Agreement, or the Sandoz Agreement, with Sandoz Inc., or Sandoz, to commercialize both of our SYMJEPI products. In January 2019, we announced that Sandoz had launched SYMJEPI (epinephrine) 0.3 mg Injection in the U.S. market, initially available in the institutional setting. On July 9, 2019, we announced the full launch (institutional and retail) by Sandoz of both dose forms of the SYMJEPI injection products.





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On May 11, 2020, we announced that we entered into an agreement, or the Termination Agreement, with Sandoz to terminate the Sandoz Agreement and simultaneously announced that we entered into an exclusive distribution and commercialization agreement, or the USWM Agreement, with USWM, LLC, or USWM or US WorldMeds, for the United States commercial rights for the SYMJEPI products, as well as for our ZIMHI product. Under the terms of the USWM Agreement, we appointed USWM as the exclusive distributor of SYMJEPI in the United States and related territories, or the Territory, effective upon the termination of the Sandoz Agreement, and of the ZIMHI product if approved by the FDA for marketing, and granted USWM an exclusive license under our patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, in partial consideration of an initial payment of $1,000,000 by USWM and potential additional regulatory and commercial based milestone payments. There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to us. We retain rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory. In addition, we may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize our Symject™ syringe product platform.

The USWM Agreement provides that, after deducting the supply price and subject to certain other deductions and adjustments, including an allocation for USWM sales and distribution expenses from net sales of the products, USWM will pay to us 50% of the net profit from net sales, as each such term is defined in the USWM Agreement, of the product in the Territory to third parties, determined on a quarterly basis. We will be the supplier of the products to USWM, and USWM will order and pay us a supply price for quantities of products ordered. The agreement does not include minimum payments to us by USWM, minimum requirements for sales of product by USWM or, with certain exceptions, minimum purchase commitments by USWM.

On March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level. The four lots are being recalled due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM will handle the entire recall process for the company, with company oversight. SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. As of the date of this Report, neither USWM nor we have received, or are aware of, any adverse events related to this recall. The recall is being conducted with the knowledge of the FDA.





ZIMHI (naloxone) Injection


Naloxone is an opioid antagonist used to treat narcotic overdoses. Naloxone, which is generally considered the drug of choice for immediate administration for opioid overdose, blocks or reverses the effects of the opioid, including extreme drowsiness, slowed breathing, or loss of consciousness. Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and fentanyl.

On December 31, 2018, we filed an NDA with the FDA relating to our higher dose naloxone injection product, ZIMHI, for the treatment of opioid overdose. On November 22, 2019, we received a Complete Response Letter, or CRL, from the FDA regarding our NDA for ZIMHI. A CRL is issued by the FDA's Center for Drug Evaluation and Research when it has completed its review of a file and questions remain that preclude the approval of the NDA in its current form. The CRL stated that the FDA determined that it could not approve the NDA in its present form and provided recommendations needed for resubmission. In May 2020 we resubmitted to the FDA the NDA for ZIMHI. On November 13, 2020, we received a second CRL from the FDA regarding the resubmitted NDA. In May 2021 we resubmitted the NDA for ZIMHI to the FDA. On October 18, 2021, we announced that the FDA had approved ZIMHI for the treatment of opioid overdose. On March 31, 2022, our commercial partner USWM and we issued a press release announcing the commercial launch of ZIMHI.





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Tempol (APC400)

On June 12, 2020, we entered into a license agreement with Matrix Biomed, Inc., or the Licensor, to license rights under patents, patent applications and related know-how of Licensor relating to Tempol, an investigational drug. The exclusive license includes the worldwide use under the licensed patent rights and related rights of Tempol for the fields of COVID-19 infection, asthma, respiratory syncytial virus infection, and influenza infection. In addition, the exclusive license includes the use of Tempol as a therapeutic for reducing radiation-induced dermatitis in patients undergoing treatment for cancer. In consideration for the Licensor providing the rights under its patent rights and related know-how relating to Tempol within the licensed fields, we paid Licensor $250,000 and also issued to the Licensor 1,000,000 shares of our Series B Convertible Preferred Stock, which has previously converted into an equal number of shares of our common stock.

Tempol is a redox cycling nitroxide that promotes the metabolism of many reactive oxygen species and improves nitric oxide bioavailability. It has been studied extensively in animal models of oxidative stress and inflammation.

Overall, Tempol acts as both a super-oxide dismutase mimetic and also has demonstrated anti-inflammatory, anticoagulant activity and antiviral activity.

Inflammation and oxidative stress occur in various disease states including COVID-19. Both inflammatory cytokines and reactive oxygen species (ROS) from cells of the immune system called macrophages and neutrophils damage the lung in Acute Respiratory Distress Syndrome (ARDS). Many published articles describing animal models of ARDS show Tempol caused a decrease in lung inflammation and preserved lung pathology associated with acute and chronic lung injury. In animal models, Tempol has been shown to decrease proinflammatory cytokines (cytokine storm), and through its antioxidant activity has been shown to decrease the harmful effects of ROS. In addition, Tempol has been shown to decrease platelet aggregation, a problem observed in many COVID-19 patients. More recently, Tempol has been shown to have antiviral activity against the virus that causes COVID-19 in-vitro and may have synergy with the antiviral Remdesivir.

Preclinical studies of Tempol have shown it to have antiviral, anti-inflammatory, and antioxidant activity. The company believes this unique mechanism of action, combined with a relatively benign safety profile shown in prior preclinical studies, could provide physicians with a tool to intervene to slow or stop progression of COVID-19 or inflammation at multiple phases of the disease. If proven, this could provide Tempol with an advantage over oral antiviral drugs the FDA has recently cleared for the treatment of COVID-19.

On January 28, 2021, we announced that in collaboration with the Human Immune Monitoring Center at Stanford University we conducted a study to investigate the effects of Tempol on immune cells from COVID-19 patients, and that preliminary data from that study showed that Tempol decreases cytokines from stimulated cells from COVID-19 patients. In March 2021, we announced that in studies conducted at Galveston National Laboratory, or GNL, University of Texas Medical Branch, hamsters challenged with the virus that causes COVID-19 (SARS-CoV-2) showed decreased inflammation in the lungs when treated with Tempol compared to controls, and on March 22, 2022, we announced that in studies conducted at the GNL, hamsters challenged with high levels of the Omicron variant of the SAR-CoV-2 virus, resulted in significant decrease of inflammation in the lungs of animals treated with Tempol compared to controls.

In July 2020, we submitted to the FDA a pre-IND package which provided a protocol for a Phase 2/3 study examining Tempol in COVID-19 patients, and the FDA provided comments regarding the prospective use of Tempol in a randomized placebo controlled trial. In January 2021, we submitted an IND to the FDA for the investigational use of Tempol for the treatment of COVID-19. On February 22, 2021, we announced that the FDA notified the company that the agency had completed the safety review of the IND and concluded that the company may proceed with the proposed clinical investigation and trial described in the IND.

The goal of the study titled, "A Phase 2/3, Adaptive, Randomized, Double-Blind, Placebo-Controlled Study to Examine the Effects of Tempol (MBM-02) on Preventing COVID-19 Related Hospitalization in Subjects with COVID-19 Infection," is to examine the safety and activity of Tempol in COVID-19 patients early in the infection. In addition to safety, the study will examine markers of inflammation and the rate of hospitalization for patients taking Tempol versus placebo early in COVID-19 infection. On June 11, 2021, we announced that clinical trial start-up activities were underway, that the company was carrying out those activities with a large clinical research organization, that commenced activities included site identification and initiation, data base production, vendor management, and the establishment of an independent data safety monitoring board, or DSMB, of infectious disease experts, who will review the safety and efficacy of the trial, and that clinical trial drug product and placebo have also been obtained. On September 2, 2021, we announced the initiation of patient dosing in the trial. Our trial requires individuals with moderate COVID-19 symptoms to be unvaccinated and have co-morbidities such as heart disease, as those patients typically have worse outcomes, requiring hospitalization. We initially experienced enrollment challenges primarily as a result of the decrease in COVID-19 infections and increased immunizations in the United States. We took certain responsive steps including opening new sites across the U.S. and modifying the protocol to include vaccinated subjects.



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In February 2022 we announced the enrollment and dosing of more than 100 subjects in the Phase 2/3 trial. On March 14, 2022, we announced that the Data Safety Monitoring Board, or DSMB, is overseeing the Phase 2/3 clinical trial met to evaluate the clinical and safety data from the first planned interim analysis and, following its evaluation, recommended that the study continue without modification. Assuming continuation of the trial and continued enrollment of patients, following submission of additional data and information to the DSMB, the DSMB will conduct a second planned review, currently anticipated to be in May 2022, which may provide additional insight into the safety and clinical results at that time. In January 2022, we submitted a Fast Track Application to the FDA for Tempol for the treatment and prevention of COVID-19. Fast Track is a process designed to facilitate the development, and expedite the review, of drugs to treat serious conditions and fulfill an unmet medical need. The purpose is to get important new drugs to the patient earlier. Fast Track addresses a broad range of serious conditions and the request can be initiated by the drug company at any time during the development process. The FDA will review the request and decide based on whether the drug fills an unmet medical need in a serious condition. Once a drug receives Fast Track designation, early and frequent communication between the FDA and the drug company is encouraged throughout the entire drug development and review process. In March 2022, we received a communication from the FDA denying our request for Fast Track designation for our Tempol product at this time, indicating that the program did not satisfy the requirements for Fast Track designation.

US Compounding, Inc.

On July 30, 2021, the company and its wholly-owned USC subsidiary entered into an Asset Purchase Agreement, or the USC Agreement, effective as of July 30, 2021, or the Effective Date, with Fagron Compounding Services, LLC d/b/a Fagron Sterile Services (the "Purchaser"), providing for the sale and transfer by USC and the purchase by the Purchaser, effective as of the Effective Date, of certain assets of USC related to its human compounding pharmaceutical business, or the Business, including certain customer information and information on products sold to such customers by USC, together, the "Book of Business," including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products, collectively referred to as the "Assets." After the Effective Date, Purchaser may use the Book of Business to secure customers for its products and services and may otherwise use the Book of Business. Pursuant to the USC Agreement, the Purchaser will not assume any liabilities of USC, and the transaction did not include the sale or transfer of any USC equipment, buildings or real property, or any products, information, agreements, relationships or other assets relating to the veterinary business of USC.

The USC Agreement provides that the consideration payable by the Purchaser to the company for the Assets sold and transferred will consist of the following amounts: (i) a payment of $107,500 on the Effective Date; and (ii) monthly payments in an amount equal to (a) two (2.0) times the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain identified customers included in the Book of Business during the 12-month period following the Effective Date, or the "Payment Term." and (b) a lower multiple of the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain other customers included in the Book of Business. In addition, to the extent that such product or service is supplied by USC pursuant to the supply arrangement provided for by the USC Agreement, or the "Supply Agreement," the Purchaser agreed to reimburse USC for the cost of such product or service, as set forth in the Supply Agreement. The USC Agreement provides that during the Payment Term, the Purchaser will maintain the Book of Business and use commercially reasonable efforts to maximize the consideration payable to the company and collect amounts outstanding related to sales of products or services made to customers included in the Book of Business. However, the USC Agreement does not provide for any minimum purchase price consideration to the company or USC. Accordingly, there is no assurance as to the amount of purchase price consideration that the company or USC may ultimately receive as a result of the transactions contemplated by the USC Agreement. Certain of the customers included in the Book of Business may decide to not purchase products or to reduce their purchases of products from Purchaser after the Effective Date, and Purchaser may, in good faith, decide not to change its product mix from those products offered by Purchaser as of the Effective Date and may decide not to carry all of the products offered and sold by USC as part of the Business prior to the Effective Date.

The USC Agreement includes certain restrictive covenants of the company and USC, including noncompetition provisions, pursuant to which, for a period of five years from the Effective Date, or the "Restricted Period," and subject to certain exceptions, the company and USC have agreed, among other matters, not to solicit any Business from any customers included in the Book of Business or engage in certain other activities. Each of the USC Agreement and the Supply Agreement includes standard indemnification provisions, and a number of other covenants and agreements of the parties concerning the transactions contemplated by the USC Agreement and the Supply Agreement, including concerning cooperation and assistance, confidentiality, non-disparagement and the transfer of information and documents, compliance with laws, and personnel matters. The USC Agreement includes indemnification provisions pursuant to which the company and USC agreed to indemnify the Purchaser and certain related parties against losses incurred by such indemnified parties arising or resulting from certain matters including breach of the USC Agreement by USC and third party claims relating to product sales to customers by USC before the Effective Date. In connection with the transaction, the company accrued a $700,000 liability for a transaction fee payable to a financial advisor as of December 31, 2021.



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Plan for the Remaining Operations, Business and Assets of USC

In light of a number of factors including the sale of assets to the Purchaser pursuant to the USC Agreement, in August 2021 the Board approved a restructuring process of winding down the remaining operations and business of USC and selling, transferring or disposing of the remaining assets of USC. Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products. The restructuring and winding down includes, without limitation, the termination of USC's veterinary business and USC sales to veterinary customers; the termination of employment of all or substantially all employees engaged in the USC business (except as determined to be necessary or appropriate in connection with the company's and USC's performance of their obligations under the USC Agreement and the transactions contemplated thereby, or in connection with resolving matters relating to the winding down of USC's business), and providing such notices and making such payments to such employees as the officers of the company determine are necessary or appropriate, including as maybe required by law or as maybe provided for pursuant to any retention agreement, severance agreement, incentive agreement, or other written agreement with such employees; the sale or other disposition from time to time of the remaining equipment, real property, buildings and tangible and intangible assets relating to USC's business that are unrelated to the USC Agreement; the termination, assignment or other resolution of agreements with third parties relating to the USC business; making regulatory filings and taking appropriate actions with federal and state regulatory authorities in connection with the winding down and winding up of USC's business; and taking such other actions as the officers of the company or USC (as appropriate) determine are necessary or appropriate in connection with the restructuring and the winding down and winding up of the remaining business, operations and assets of USC. The company has sold and disposed of certain customer information and other assets related to USC's veterinary compounded pharmaceuticals business, and will continue the process of selling or otherwise disposing of the remaining assets relating to USC's business.

In connection with the winding down of the USC business, we incurred significant expenses and made a number of payments. The substantial majority of cash payments related to personnel-related restructuring charges, including without limitation costs associated with providing termination payments to USC employees, employee salaries and incentive payments during a transition period after the effective date of the sale of the Assets pursuant to the USC Agreement, severance or other termination benefits or payments in connection with workforce reduction and termination of employment, and payments pursuant to retention agreements or incentive agreements with certain employees, were made during the third and fourth quarters of 2021 and were approximately $1.6 million. In addition, as part of the winding down of USC's business, we have incurred other costs. We also expect to incur commissions and other costs associated with the sale or other disposition of certain USC tangible assets such as building, property and certain equipment.

As a result of the transactions contemplated by the USC Agreement and the restructuring activities described above, the company's financial results for the 2021 year include approximately $8.6 million for the impairment charges of inventory, fixed assets, intangibles, goodwill and right of use assets. The impairment charges that the company incurred and expects to incur in connection with the matters described above are subject to a number of assumptions, and the actual amount of impairment charges may differ materially from those estimated by the company. In addition, the company may determine in the future that additional impairments of assets are appropriate in connection with the matters described above.

Going Concern and Management Plan

The financial statements included elsewhere herein for the year ended December 31, 2021, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. However, as of December 31, 2021, we had cash and cash equivalents of approximately $23.2 million, an accumulated deficit of approximately $278.1 million, and liabilities of approximately $12.4 million. We have incurred substantial recurring losses from continuing operations, have used, rather than provided, cash in our continuing operations, and are dependent on additional financing to fund operations. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Our management intends to attempt to secure additional required funding through equity or debt financing if available, sales or out-licensing of product candidates or intellectual property assets, revenues relating to supply and sale of SYMJEPI and ZIMHI products and share of net profits received relating to sales in the U.S. of our SYMJEPI and ZIMHI products, seeking partnerships or commercialization agreements with other pharmaceutical companies or third parties to co-develop and fund research and development or commercialization efforts of our products, from a business combination, or similar transactions.

However, there can be no assurance that we will be able to obtain any sources of funding. Such additional funding may not be available, may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

Funding that we may receive during fiscal 2022 is expected to be used to satisfy existing and future obligations and liabilities and working capital needs, to support commercialization of our products and conduct the clinical and regulatory work to develop our product candidates, to begin building working capital reserves and to help fund a number of projects, which may include, without limitation, some or all of the following:



     ?    commercialization of our ZIMHI (naloxone) product;
     ?    continue development of our allergy and respiratory product candidates;
     ?    pursue the development of other product candidates that we may develop
          or acquire;
     ?    fund clinical trials of Tempol and other product candidates;
     ?    expand research and development activities;
     ?    access manufacturing, commercialization and sales capabilities;
     ?    implement additional internal systems and infrastructure;
     ?    maintain, defend and expand the scope of our intellectual property
          portfolio;
     ?    acquire products, technologies, intellectual property or companies and
          support continued development and funding thereof; and
     ?    hire additional management, sales, research, development and clinical
          personnel.




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Results of Operations



Our consolidated results of operations are presented for the year ending December 31, 2021 and for the year ending December 31, 2020. The financial results (revenues and expenses) relating to the USC business are reflected in Note 4, Discontinued Operations and Assets Held for Sale, of the notes to the consolidated financial statements appearing elsewhere in this Report. The discussion below, and the revenues and expenses discussed below, are based on and relate to the continuing operations of the company, which we sometimes refer to as our drug development and commercialization business, unless otherwise noted.

Years Ended December 31, 2021 and 2020

Revenues. Revenues were approximately $2,209,000 and $2,777,000 for the year ended December 31, 2021 and 2020, respectively. Revenue relating to the sales of SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg increased approximately $1,432,000 primarily due to increased unit sales of SYMJEPI as a result of the sales and marketing initiatives of our distribution partner, USWM, when compared with the comparable 2020 period, but were offset by and reflect approximately $2.0 million in product recall reserves recorded for the year ended December 31, 2021, relating to the voluntary recall, initiated in March 2022, of certain lots of SYMJEPI from the marketplace. The company may be able to be reimbursed by certain third parties for some of the costs of the recall under the terms of its manufacturing agreements, but there are no assurances regarding the amount or timing of any such recovery. The recall may have an adverse effect on the amount or timing of our revenues, and on our financial results and liquidity, for fiscal quarters in 2022 or thereafter, although as of the date of this Report the amount of any such impact cannot be predicted with certainty.

Cost of Goods Sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. Cost of goods sold was approximately $6,872,000 and $6,327,000 for the year ended December 31, 2021 and 2020, respectively. The gross loss percentage for the year ended December 31, 2021 was approximately 211% compared to approximately 128% for the year ended December 31, 2020. Cost of goods sold for the year ended December 31, 2021 compared to the comparable period of 2020 increased by approximately $545,000 primarily due to an increase of approximately $1,210,000 in direct material costs, including a loss of approximately $245,000 related to the derecognition of certain inventory , partially offset by an approximately $665,000 decrease in maintenance fees and other related expense.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of depreciation and amortization, professional fees which include legal, accounting and audit fees, consulting, and employee compensation. SG&A expenses for the year ended December 31, 2021 and 2020 were approximately $16,144,000 and $20,090,000, respectively. The decrease was primarily attributable to expenses relating to a legal settlement of approximately $7,900,000 recorded in 2020 compared to $0 recorded for the year ending in December 31, 2021. There was also a decrease of approximately $971,000 in depreciation and amortization expense for the 2021 year compared to 2020 as a result of the write-off of the company's Taper dry powder inhaler intellectual property intangible asset in the fourth quarter of 2020, which eliminated amortization expense relating to that asset in future periods, and a decrease of approximately $1,382,000 of compensation related expenses largely attributable to decreased stock compensation expenses as a result of the completion of vesting of certain option grants through February 2021 and also stock-based compensation expense forfeiture credits related to employee terminations. These decreases were partially offset by an increase in 2021 compared to 2020 in professional fees of approximately $5,499,000 primarily attributable to increases in legal expenses, an increase of approximately $700,000 for a fee payable to a financial advisor related to the sale of certain USC assets, and an increase of approximately $108,000 in other administrative costs.

Research and Development Expenses. Our research and development, or R&D, costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. R&D expenses were approximately $11,262,000 and $8,040,000 for the year ended December 31, 2021 and 2020, respectively. Approximately $4,333,000 of the increase in R&D expenses for the year ended December 31, 2021, compared to the comparable 2020 period was primarily related to increased development spending on Tempol and ZIMHI, offset by decreased development spending of approximately $65,000 in development spending for other projects. In addition, wages, benefits, and other compensation expenses for research and development employees decreased approximately $1,046,000 during the year ended December 31, 2021, compared to the comparable 2020 period, largely attributed to decreased stock compensation expenses as a result of the completion of vesting certain option grants through February 2021 and unvested RSU fair value modifications.



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Impairment Expense Intangibles. Impairment expense of intangibles for the years ended December 31, 2021 and 2020 was approximately $0 and $2,913,000, respectively. The impairment expense in 2020 was primarily due to the impairment of the Taper dry powder inhaler intellectual property asset, as a result of the company's determination not to pursue further development efforts regarding the product candidate related to this intangible.

Impairment Expense, Contract Costs. Impairment expenses of contract costs for the year ended December 31, 2021 and 2020 were approximately $0 and $1,750,000, respectively. As a result of entering into the Termination Agreement with Sandoz, our financial results for the year ended December 31, 2020, included an impairment of the Adamis capitalized cost to obtain a contract of $1,750,000.

Other Income (Expense). Other Income (Expenses) consists primarily of interest income, interest expense, changes to the fair value of warrant liabilities, and other transactions. Other income (expense) for the year ended December 31, 2021 and 2020 was approximately ($2,530,000) and $498,000 respectively. The decrease in other income (expense) during the year ended 2021, compared to the same period in 2020, was primarily due to the increase of other expense of approximately $8,005,000 associated with the change in fair value of warrants, a decrease in interest income of approximately $31,000, and an increase of interest expense of approximately $2,000, offset by an approximately $5,010,000 gain on forgiveness of first and second draws of the Paycheck Protection Program Loan.

Loss from Discontinued Operations. The company recorded a net loss from discontinued operations, after taxes, of approximately $11,228,000 and $13,545,000 related to the US Compounding business for the year ended December 31, 2021 and 2020, respectively. The decrease in loss from discontinued operations of approximately $2.3 million for 2021 compared to 2020 was primarily due to (i) the decrease in gross margin of approximately $4.6 million resulting from a decrease in net revenues of approximately $7.5 million primarily due to decreased unit sales of USC products in 2021 compared to 2020, (ii) a decrease in operating expenses of approximately $2.8 million, partially offset by an approximately $0.7 million increase in impairment expenses, (iii) an increase in other income of approximately $4.7 million primarily due to the gain on sale of assets to Fagron pursuant to the USC Agreement, and (iv) an increase in income tax benefit of approximately $0.1 million. The changes in net revenues, gross margin, operating expenses and other income (expense) were primarily related to the sale of certain assets of USC and the decision to wind down and cease USC's operations. For additional information on discontinued operations, see Note 4, Discontinued Operations and Assets Held for Sale, to our consolidated financial statements included elsewhere in this Report.



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Liquidity and Capital Resources

We have incurred net losses of approximately $45.8 million and $49.4 million for the years ended December 31, 2021 and 2020, respectively. Since our inception, June 6, 2006, and through December 31, 2021, we have an accumulated deficit of approximately $278.1 million. Since inception and through December 31, 2021, we have financed our operations principally through debt financing and through public and private issuances of common stock and preferred stock. Since inception, we have raised a total of approximately $269.7 million in debt and equity financing transactions, consisting of approximately $28.5 million in debt financing and approximately $241.2 million in equity financing transactions.

In February 2020, we completed a registered direct offering of 11,600,000 shares of common stock, and a concurrent private placement of warrants to purchase 8,700,000 shares of common stock, to a small number of accredited institutional investors, resulting in estimated net proceeds of approximately $6.2 million. In September 2020, we completed an underwritten public offering of 18,548,386 shares of common stock, resulting in estimated net proceeds of approximately $10.7 million. In February 2021, we completed an underwritten public offering of 46,621,621 shares of common stock, resulting in estimated net proceeds of approximately $48.4 million. In January and February 2021, we received gross proceeds of approximately $5.8 million from the exercise for cash of previously issued investor warrants.

Net cash used in operating activities for the years ended December 31, 2021 and 2020, was approximately $37.8 million and $20.9 million, respectively. Net cash used in operating activities increased primarily due to the increase in operating losses and the payment of contingent loss liability in 2021 as compared to 2020. Following the winding up of the business of USC and sale or other disposal of its assets, the company believes, based on USC's historical financial results, that there could be a cash benefit to the company as a result of not having to provide continued cash funding to help support USC's business operations.

Net cash provided by (used in) investing activities was approximately $0.3 million and ($0.9) million for the years ended December 31, 2021 and 2020, respectively. The net cash used in investing activities decreased primarily due to the decrease in process research and development ("IPR&D") purchases and cash received on sale of assets, partially offset by the purchase of additional equipment during the year ended December 31, 2021 compared to the year ended December 31, 2020.

Net cash provided by financing activities was approximately $53.9 million and $19.9 million for the years ended December 31, 2021 and 2020, respectively. Net cash flows provided by financing activities increased for the year ended December 31, 2021 primarily due to the issuance of common stock, exercise of warrants and Second Draw PPP Loan under the PPP. For the year ended of 2020, net cash used in financing activities consisted primarily of issuance of common stock and the initial draw of PPP Loan.

At December 31, 2021, we did not have any off balance sheet arrangements.





Loan Agreements

USC Building Loan. In connection with our acquisition of USC in 2016, we assumed approximately $5,722,000 principal amount of debt obligations under two loan agreements and related loan documents relating to the building, real property and equipment that certain third parties agreed to transfer to the company or USC in connection with the merger transaction, as well as the two loan agreements to which USC is a party, a working capital loan and an equipment loan, and related loan documents evidencing loans previously made to USC, and we agreed to become an additional co-borrower under the loan agreement and related documents, such documents as amended referred to as the "Loan Documents." The lender in all of the Loan Documents was First Federal Bank and/or its successor Bear State Bank (together with Arvest Bank, as successor in interest to Bear State Bank, referred to as "Lender" or the "Bank"). All amounts owed under the working capital loan and the equipment loan have previously been paid and there are no outstanding balances under those Loan Documents, and the working capital loan has not been renewed or extended. Periodic interest and principal payments under the building loan agreement were approximately $19,000 per month, with a final payment of all outstanding amounts due and payable in August 2021. Our aggregate indebtedness under the building loan agreement was approximately $2,018,000, which we paid in full in July 2021. There is no outstanding balance under the building loan or any of the other Loan Documents.

PPP Loans. As discussed in Note 12 to the financial statements included elsewhere herein, we applied for and obtained loan funding under the PPP pursuant to the PPP Loan and PPP Note in the principal amount of approximately $3.2 million, the balance of which has been forgiven, and under the Second Draw PPP Loan and PPP2 Note in the principal amount of $1,765,495, the balance of which has also been forgiven. However, even though the PPP Loan and the Second Draw PPP Loan have been forgiven, our PPP loans and applications for forgiveness of loan amounts remain subject to future review and audit by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form, including without limitation the required economic necessity certification by the Company that was part of the PPP loan application process. Accordingly, the Company is subject to audit or review by federal or state regulatory authorities as a result of applying for and obtaining the PPP Loan and Second Draw PPP Loan or obtaining forgiveness of those loans. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return or repay the full amount of the applicable loan and could be subject to fines or penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations. If it is determined that the Company was ineligible to receive the PPP Loan and/or the Second Draw PPP Loan, the Company may be required to repay the PPP Loan and Second Draw PPP Loan in its entirety and/or be subject to additional penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations.



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For additional information concerning our debt and equity financing transactions, and our loan agreements, see Notes 10, 12, 17, 18 and 19 accompanying our consolidated financial statements included elsewhere herein.

As noted above under the heading "Going Concern and Management Plan," through December 31, 2021, we have incurred substantial losses. We will be required to devote significant cash resources in order to continue development and commercialization of our product candidates and to support our other operations and activities. The availability of any required additional funding cannot be assured. In addition, an adverse outcome in legal or regulatory proceedings in which we are or in the future could be involved could adversely affect our liquidity and financial position. See Note 14 of the notes to our consolidated financial statements included elsewhere herein. If in the future we are not able to obtain additional required equity or debt funding, our cash resources could be depleted and we could be required to materially reduce or suspend operations. No assurance can be given as to the timing or ultimate success of obtaining future funding, if required. Even if we are successful in obtaining required additional funding to permit us to continue operations at the levels that we desire, substantial time may pass before we obtain regulatory marketing approval for any additional specialty pharmaceutical products and begin to realize revenues from sales of such additional products. No assurance can be given as to the timing or ultimate success of obtaining any required future funding. As a result of the COVID-19 pandemic and actions taken to slow its spread, national or global developments, or other factors, there can be no assurance that deterioration in credit and financial markets will not occur, which would make it more difficult, or more costly or dilutive, to obtain any necessary debt or equity financing.

As disclosed elsewhere in this Report, including in Part I, Item 3, "Legal Proceedings," on May 11, 2021, each of the company and its USC subsidiary received a grand jury subpoena from the U.S. Attorney's Office for the Southern District of New York issued in connection with a criminal investigation, requesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the company's USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC. The Audit Committee of the Board engaged outside counsel to conduct an independent internal investigation to review these and other matters. In addition to the subpoenas from the USAO, the company has also received requests from the SEC for the voluntary production of documents and information relating to the subject matter of the USAO's subpoenas and certain other matters. The company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests. The company intends to cooperate with the USAO and the SEC. At this time, the company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, or other agencies, or determine what, if any, proceedings the USAO, SEC, or other federal or state authorities may initiate, what, if any, remedies or remedial measures the USAO, SEC or other federal or state authorities may seek, or what, if any, impact the foregoing matters may have on the company's business, previously reported financial results, financial results included in this Report, or future financial results. The foregoing matters may divert management's attention, cause the company to suffer reputational harm, require the company to devote significant financial resources, subject the company and its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, result in fines, penalties, equitable remedies, and affect the company's business, previously reported financial results, financial results included in this Report, or future financial results. The occurrence of any of these events could have a material adverse effect on the company's business, financial condition and results of operations.

Material Cash Requirements

Based on our current and anticipated level of operations, we believe that our cash, cash equivalents and short-term investments, together with anticipated revenues from operations and amounts that we expect to receive as a result of our sales of assets relating to our former USC business, will be sufficient to meet our anticipated obligations for at least 12 months from December 31, 2021, although there can be no assurance that this will be the case. Thereafter, we believe that additional capital will be required to help fund the development and commercialization of our products and product candidates, conduct research, development and trials relating to our product candidates, fund our ongoing operations and satisfy our obligations and liabilities. Additional financing that may be required may not be available on a timely basis, on favorable terms, or at all, and such funding, if raised, may not be sufficient to meet our obligations or enable us to continue to implement our long-term business strategy.

As December 31, 2021, we had an operating lease for office space for our offices in San Diego, California, with a remaining term expiring in November 2023. Monthly rent through the remaining term of the lease is approximately $32,000 per month. We also have a lease agreement for space located in Conway, Arkansas, relating to the compounding pharmaceutical products business formerly conducted by our USC subsidiary, with a current term expiring December 31, 2023.

As a result of the sale of assets pursuant to the USC Agreement and the winding down of USC's remaining business, the company will not need the leased property. Monthly rent for the remaining term of this lease is approximately $10,600 per month. The company is exploring alternatives with respect to termination of the lease or sub-lease of the property. See Note 10 of the notes to the consolidated financial statements included elsewhere herein for additional information about our lease obligations.



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We have entered into arrangements with clinical sites and clinical research organizations, or CROs, for the conduct of our clinical trials. We make payments to these clinical sites and CROs based in part on the number of eligible patients enrolled, the length of their participation in the clinical trials and activities undertaken by the clinical sites and CROs. At this time, due to the variability associated with clinical site agreements, CRO agreements and manufacturing agreements, we are unable to estimate with certainty the future costs we will incur, including in connection with our ongoing Phase 2/3 clinical trial relating to Tempol, but such expenses could be material. In addition, we have entered into agreements and arrangements with third parties for the manufacture and supply of clinical and commercial materials and drug products, including for our SYMJEPI and ZIMHI products and our current clinical trial for our Tempol product candidate. In some of our agreements with manufacturers, we have a production threshold commitment where we would be required to pay for maintenance fees if we do not meet certain periodic purchase order minimums. Maintenance fees for the year ended December 31, 2021 were $0. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. We intend to use our current financial resources to fund our obligations under these commitments.

As disclosed elsewhere in this Report, on March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level, due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM will handle the entire recall process for the company, with company oversight. SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. The costs of the recall and the allocation of costs of the recall, including the costs to us resulting from the recall, are unknown as of the date of this Report; however, the recall could cause the company to suffer reputational harm, depending on the resolution of matters relating to the recall could result in the company incurring financial costs and expenses which could be material, could adversely affect the supply of SYMJEPI products until manufacturing is resumed, and depending on the resolution of matters relating to the recall could have a material adverse effect on our business, financial condition, and results of operations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which 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 from these estimates under different assumptions or conditions.

We believe the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial results. For further discussion of our accounting policies, see Note 3 in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Acquisitions and Intangibles. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill represents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Discontinued Operations. In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component/s of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes, is reported as components of net loss separate from the net loss of continuing operations. The company's financial statements as of and for the period ended December 31, 2021 reflect a gain on sale of assets to Fagron pursuant to the USC Agreement of approximately $4.6 million and a receivable from Fagron in the amount of approximately $5.1 million, reflecting in part the estimated fair value of the variable consideration payable to us by Fagron pursuant to the USC Agreement. As described in Note 4 - Discontinued Operations, in the notes to the consolidated financial statements appearing elsewhere in this Report, determining the amount of such variable consideration involves estimates using the expected value method to estimate Fagron's sales to former USC customers over the 12-month period after the date of the USC Agreement, as well as historical data and the company's judgments concerning the expected amount of such variable consideration. As such, the total amount of variable consideration that we may receive in the future as a result of the USC Agreement is subject to change as more information becomes available, and we could receive more, or less, variable consideration proceeds than is reflected in such estimate, which could affect our business, financial condition, and liquidity.

The company disposed of a component of its business in August 2021 and met the definition of a discontinued operation as of December 31, 2021. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020. For additional information, see Note 4 - Discontinued Operations, in the notes to the consolidated financial statements appearing elsewhere in this Report.





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Goodwill. Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually as of December 31 each year, or more frequently if events occur indicating the potential for impairment. During its goodwill impairment review, the company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance and outlook of the company. If, after assessing the totality of these qualitative factors, the company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. These determinations require management to make significant estimates and assumptions.

The company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets' book value to future net undiscounted cash flows that the assets are expected to generate.

As of March 31, 2020, in light of recent events associated with the global spread of COVID-19 and other factors, we performed a goodwill impairment interim review and recorded a charge of approximately $3,143,000 for impairment of goodwill during the first quarter of 2020. As of December 31, 2020, with the continued decline in revenue during 2020 primarily attributable to the COVID-19 pandemic and other factors affecting our USC compounded pharmaceutical reporting unit, we performed a goodwill impairment review and recorded an additional charge of approximately $3,629,000 for impairment of goodwill in 2020. For the 2021 year, as a result of the transactions contemplated by the USC Agreement and the winding down of activities relating to USC described elsewhere in this Report, our financial results for the year ended December 31, 2021, included an impairment of approximately $868,000 to goodwill. The goodwill impairments were reported under discontinued operations. See Note 4 of the Notes to the consolidated financial statements included elsewhere herein for additional information.

Other Long-Lived Assets. The company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets' book value to future net undiscounted cash flows that the assets are expected to generate.

As of the year ending December 31, 2021, USC's intangible assets were fully impaired as a result of the decision to wind down and cease USC's operations. Prior to that impairment, approximately $1,856,000 of USC's customer relationships intangible asset was allocated to the asset sale to Fagron pursuant to the USC Agreement. That amount is recorded within the gain from sale of assets of discontinued operations. The remaining intangibles had a carrying balance of approximately $3,835,000, which were fully impaired during the year ended December 31, 2021. USC's intangible assets had a carrying value of approximately $0 and $6,280,000 at December 31, 2021 and December 31, 2020, respectively.





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As of December 31, 2020, in light of the time and costs involved in further product development efforts and competitive conditions in the relevant markets related to the Taper DPI intellectual property, and our determination not to devote any further substantial financial resources to development of this product candidate or pursue further development efforts regarding this product candidate, we recorded a full impairment charge of approximately $2,913,000 for the year ended December 31, 2020.

The Construction In Progress - Equipment ("CIP") assets were primarily for the expansion of USC's operations, to be placed into service contingent upon the completion of equipment validation and when the economy has recovered from the COVID - 19 pandemic. In light of the delay in putting the CIP assets into service and the lingering effect of the COVID -19 pandemic as of December 31, 2020, the Company had recorded an impairment charge of approximately $1,116,000 for the year ended December 31, 2020. The carrying value of the CIP assets was determined by estimating the fair value of the assets. During the year ended December 31, 2021, we recorded approximately $2,150,000 in losses relating to the fair value of CIP included in the net loss from discontinued operations.

Stock-Based Compensation. We account for stock-based compensation transactions in which we receive employee services in exchange for options to purchase common stock. Stock-based compensation cost for restricted stock units or RSUs is measured based on the closing fair market value of our common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option's fair-value as calculated by the Black-Scholes option-pricing model. We recognize stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period.

Warrant Liabilities. Warrants are accounted for in accordance with the applicable authoritative accounting guidance as either liabilities or as equity instruments depending on the specific terms of the agreements. Liability-classified instruments are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of warrant liabilities in the consolidated statements of operations and comprehensive loss. The fair value measurement of the warrants issued by the company are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The company's estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions include the expected volatility of the company's stock, the company's stock price at valuation date, expected dividend yield and average risk-free interest rate. The Level 3 estimates are based, in part, on subjective assumptions. The company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs.

Product Recall. The company establishes reserves for product recalls on a product-specific basis when circumstances giving rise to the recall become known. The company, when establishing reserves for a product recall, considers cost estimates for any fees and incentives to customers for their effort to return the product, freight and destruction charges for returned products, warehouse and inspection fees, repackaging materials, point-of-sale materials and other costs including costs incurred by contract manufacturers. Additionally, the company estimates product returns from consumers and customers across distribution channels, utilizing third-party data and other assumptions. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall reserves are either insufficient to cover or exceed the estimated product recall expenses.

Significant changes in the assumptions used to develop estimates for product recall reserves could affect key financial information, including accounts receivable, inventory, accrued liabilities, net sales, gross profit, operating expenses and net income. In addition, estimating product recall reserves requires a high degree of judgment in areas such as estimating consumer returns, shelf and in-stock inventory at retailers across distribution channels, fees and incentives to be earned by customers for their effort to return the products, future freight rates and consumers' claims. During the year ended December 31, 2021, the company recorded $2.0 million in reserves for product recall. The recall of certain lots of SYMJEPI from the marketplace was initiated in March 2022.

Recent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 3 to the accompanying consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.

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