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.
43
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.
44
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.
45
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.
46
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.
47
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.
48
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.
49
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.
50
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.
51
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.
52
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.
53
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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