Information Relating to Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report") includes forward-looking
statements. Such statements are not historical facts, but are based on our
current expectations, estimates and beliefs about our business and industry.
Such forward-looking statements may include, without limitation, statements
about our strategies, objectives and our future achievements; our expectations
for growth; estimates of future revenue; our sources and uses of cash; our
liquidity needs; our current or planned clinical trials or research and
development activities; anticipated completion dates for clinical trials;
product development timelines; anticipated dates for commercial introduction of
products; our future products; regulatory matters; our expectations concerning
the timing of regulatory actions relating to our products and product
candidates; anticipated dates for meetings with regulatory authorities and
submissions to obtain required regulatory marketing approvals; expense, profit,
cash flow, or balance sheet items or any other guidance regarding future
periods; the impact of broad-based business or economic disruptions, including
relating to the COVID-19 pandemic, on our ongoing business and prospects; our
expectations concerning the outcome of proceedings discussed in this Report
under Item 1 of Part II of this Report under the caption "Legal Proceedings";
and other statements concerning our future operations and activities. Such
forward-looking statements include those that express plans, anticipation,
intent, contingencies, goals, targets or future development and/or otherwise are
not statements of historical fact. These forward-looking statements are based
on our current expectations and projections about future events, and they are
subject to risks and uncertainties, known and unknown, that could cause actual
results and developments to differ materially from those expressed or implied in
such statements. In some cases, you can identify forward-looking statements by
terminology, such as "believe," "will," "expect," "may," "anticipate,"
"estimate," "intend," "plan," "should," and "would," or the negative of such
terms or other similar expressions. Any forward-looking statements are qualified
in their entirety by reference to the factors discussed throughout this
Report. These forward-looking statements are not guarantees of future
performance and concern matters that could subsequently differ materially from
those described in the forward-looking statements. Actual events or results may
differ materially from those discussed in this Report. In addition, many
forward-looking statements concerning our anticipated future business activities
assume that we have or are able to obtain sufficient funding to support such
activities and continue our operations and planned activities. As discussed
elsewhere in this Report, we may require additional funding to continue
operations, and there are no assurances that such funding will be available.
Failure to timely obtain required funding would adversely affect and could delay
or prevent our ability to realize the results contemplated by such
forward-looking statements. New factors emerge from time to time, and it is not
possible for us to predict which factors will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Because factors
referred to elsewhere in this Report and in our Annual Report on Form 10-K for
the year ended December 31, 2020 (sometimes referred to as the "2020 Form 10-K")
that we previously filed with the Securities and Exchange Commission, including
without limitation the "Risk Factors" section in this Report and in the 2020
Form 10-K, could cause actual results or outcomes to differ materially from
those expressed in any forward-looking statements made by us, you should not
place undue reliance on any forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it is made, and
except as may be required by applicable law, we undertake no obligation to
release publicly the results of any revisions to these forward-looking
statements or to reflect events or circumstances arising after the date of this
Report. Important risks and factors that could cause actual results to differ
materially from those in these forward-looking statements are disclosed in this
Report including, without limitation, under the headings "Part II, Item 1A. Risk
Factors," and "Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in our 2020 Form 10-K, including,
without limitation, under the headings "Part I, Item 1A. Risk Factors," "Part I,
Item 1. Business," and "Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as in our subsequent
filings with the Securities and Exchange Commission, press releases and other
communications.
Unless the context otherwise requires, the terms "we," "our," "the company" and
"the Company" refer to Adamis Pharmaceuticals Corporation, a Delaware
corporation, and its subsidiaries.
Investors and others should note that we may announce material information to
our investors using our website (www.adamispharmaceuticals.com), SEC filings,
press releases, public conference calls and webcasts, as well as social media
and blogs. We use these channels as a means of disclosing material non-public
information and making disclosures pursuant to Regulation FD, and to communicate
with our members and the public about our company. It is possible that the
information we post on our website or social media and blogs could be deemed to
be material information. Therefore, we encourage investors, the media, and
others interested in our company to review the information we post on our
website social media channels and blogs listed on our investor relations
website.
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 have 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. 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,
provides 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. USC's product offerings broadly include, among others, corticosteroids,
hormone replacement therapies, hospital outsourcing products, and injectables.
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.
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SYMJEPI (epinephrine) Injection
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.
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.
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 December 2019,
we provided responses to the FDA to the comments included in the CRL and
subsequently held a Type A meeting with the FDA to discuss the company's
response to the CRL and the process and timeline for resubmission of the NDA to
the FDA. On May 15, 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. We submitted responses to the deficiencies identified in the
CRL and held a Type A meeting with the FDA to discuss the CRL and the company's
responses, and on May 13, 2021, we resubmitted the NDA for ZIMHI to the FDA. On
October 18, 2021, we issued a press release announcing that the FDA had approved
ZIMHI for the treatment of opioid overdose. The company's commercial partner
USWM has indicated that it is preparing for a commercial launch of ZIMHI
anticipated to be in the first quarter of 2022.
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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.
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 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 have
experienced enrollment challenges primarily as a result of the decrease in
COVID-19 infections and increased immunizations in the United States. To
mitigate this challenge, we are in the process of undertaking the steps required
to open new sites across the U.S., and enrollment rates may also be affected by
any increase in COVID-19 during this coming winter. New site activation requires
multiple steps and can take many weeks to complete. In addition, we intend to
consider sites outside of the United States in geographic locations where
vaccination rates are lower, and COVID19 rates are higher. Absent unexpected
developments, the company intends to announce the interim analysis of interim
results for the clinical trial after 50 eligible subjects have completed day
21of the trial protocol and the appropriate analysis has been performed and
reviewed by the Data Safety Monitoring Board (DSMB).
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 decreased cytokines from stimulated
cells from COVID-19 patients. On August 24, 2021, we announced that an article
reporting on the study and study results was published in the peer reviewed
journal Clinical Immunology. In March 2021, we announced that in studies
conducted at Galveston National Laboratory, 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. We intend to continue to explore the availability of government and/or
non-government funding to help support study the efficacy of Tempol as a
therapeutic treatment for COVID-19. We also continue to explore options
regarding the funding and design of a clinical study to examine the effects of
Tempol for other clinical indications including, but not limited to, the
treatment of methamphetamine use disorder, and are engaged in additional
activities intended to support an IND to begin such a study
29
US Compounding, Inc. Agreement
On July 30, 2021, the Company and its wholly-owned USC subsidiary entered into
an Asset Purchase Agreement (the "USC Agreement") effective as of July 30, 2021
(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
(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, 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 (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 (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 (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 September 30, 2021.
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, 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. 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. In August 2021, the company and USC entered into
an asset purchase agreement with a third party buyer providing for the sale and
transfer by USC of certain customer information and other assets related to
USC's veterinary compounded pharmaceuticals business, in consideration for the
payment to the company by the buyer of a percentage of amounts actually
collected by the buyer on sales of certain veterinary products to veterinary
customers covered by the agreement over the five year period after the date of
the agreement.
30
The 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, severance or other termination
benefits or payments in connection with workforce reduction and termination of
employment, and payments anticipated to be made pursuant to retention agreements
or incentive agreements with certain employees is approximately $1.6 million.
The substantial majority of the cash payments related to personnel-related
restructuring charges were paid and will be paid during the third and fourth
quarters of 2021. The charges that the company incurred in connection with the
workforce reduction and winding down of operations of USC are actual expenses.
In addition, as part of the restructuring, the company and USC intend to sell or
dispose of tangible assets relating to USC's business, including equipment,
building and property. The company expects to incur commissions and other costs
associated with the sale or other disposition of certain of such assets.
As a result of the transactions contemplated by the USC Agreement and the
restructuring activities described above, the company has determined that its
financial results for the quarter ending September 30, 2021, will include an
impairment of certain assets relating to USC, including inventories, intangible
assets, goodwill, fixed assets, and right of use assets. The company currently
estimates approximately $8.2 million for the impairment charges of inventory,
fixed assets, intangibles, goodwill and right of use assets. The impairment
charges that the company 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's Plan
The financial statements included elsewhere herein for the nine months ended
September 30, 2021, and our financial statements for the year ended December 31,
2020 and 2019, 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 September 30, 2021, we had cash and cash equivalents and restricted cash
of approximately $28.8 million, an accumulated deficit of approximately $269.3
million, and liabilities of approximately $10.6 million. We have incurred
substantial recurring losses from 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. 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. In January and
February 2021, the company issued common stock upon exercise of investor
warrants, as a result, the company received a total of approximately $5,852,000
and the warrant holders received 8,356,000 shares of common stock. On February
2, 2021, the company completed the closing of an underwritten public offering of
46,621,621 shares of common stock at a public offering price of $1.11 per share,
which included 6,081,081 shares pursuant to the full exercise of the
over-allotment option granted to the underwriters, resulting in net proceeds of
approximately $48.4 million. In March 2021, we received approximately $1.8
million of debt funding that we obtained under the Second Draw Loan pursuant to
the terms of the PPP, the CARES Act, and the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act enacted in December 2020. However, we may
need additional funding in the future to continue operations, satisfy our
obligations including any expenses that may arise in the future relating to
matters in Part II, Item 1 - Legal Proceedings, fund the future expenditures
that we believe will be required to support commercialization of our products
and conduct the clinical and regulatory work to develop our product candidates.
The above conditions raise substantial doubt about our ability to continue as a
going concern. The condensed consolidated financial statements included
elsewhere herein for the nine months ended September 30, 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. In preparing these condensed consolidated
financial statements, consideration was given to our future business as
described elsewhere herein, which may preclude us from realizing the value of
certain assets. Our unaudited condensed consolidated financial statements do not
include any adjustments that may result from the outcome of this uncertainty.
This basis of accounting contemplates the recovery of our assets and the
satisfaction of liabilities in the normal course of business. Without additional
funds in the future from debt or equity financing, sales of assets, sales or
out-licenses of intellectual property, products, product candidates or
technologies, or from a business combination or a similar transaction, after
expenditure of our existing cash resources and revenues from existing agreements
and sales of prescription compounded formulations, we would exhaust our
resources and be unable to continue operations.
Our management intends to attempt to secure additional required funding through
equity or debt financing, sales or out-licensing of product candidates or
intellectual property assets, consideration that we may receive from the
Purchaser pursuant to our asset purchase agreement relating to certain assets of
USC and sale of other assets used in the USC business, share of profits received
relating to sales in the U.S. of our SYMJEPI 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.
31
Results of Operations
Three Months Ended September 30, 2021 and 2020
Revenues. Revenues of our Drug Development and Commercialization business
conducted by Adamis were approximately $760,000 and $868,000 for the three
months ended September 30, 2021 and 2020, respectively. Revenue relating to the
sales of SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg decreased
approximately $108,000.
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 of our Drug Development and Commercialization business conducted by Adamis
was approximately $1,236,000 and $1,414,000 for the three months ended September
30, 2021 and 2020, respectively. The gross loss percentage for the three-months
ended September 30, 2021 was approximately 63% compared to approximately 63% for
the three-months ended September 30, 2020. Cost of goods sold for the third
quarter of the 2021 period compared to the comparable period of 2020 decreased
primarily due to the decrease of approximately $402,000 for maintenance fees and
other related expenses associated with the production of SYMJEPI, offset by an
increase of approximately $224,000 in SYMJEPI direct materials costs.
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 of our Drug Development and
Commercialization business conducted by Adamis for the three months ended
September 30, 2021 and 2020 were approximately $4,794,000 and $3,309,000,
respectively. The increase was primarily attributable to an increase in
professional fees of approximately $1,677,000 mainly due to legal matters,
approximately $700,000 for a fee payable to the financial advisor related to the
sale of non-financial assets to Fagron, and approximately $119,000 increase for
other SG&A expenses, partially offset by a decrease in compensation related
expenses of approximately $769,000 largely attributed to stock-based
compensation expense forfeiture credits related to employee terminations and
decreased stock compensation expenses as a result of the completion of vesting
of a significant amount of option grants in February 2021, and an approximately
$242,000 decrease in depreciation and amortization as a result of the write-off
of the DPI intangible asset in the fourth quarter of 2020 that eliminated
amortization expense in future periods.
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 of our Drug Development and Commercialization business
conducted by Adamis were approximately $4,620,000 and $1,648,000 for the three
months ended September 30, 2021 and 2020, respectively. Approximately $3,643,000
of the increase in R&D expenses for the three months ended September 30, 2021,
compared to the comparable 2020 period was related to increased development
spending on Tempol and ZIMHI, offset by a decrease of development spending of
approximately $214,000 for SYMJEPI and other projects. In addition, wages,
benefits, and other compensation expenses for research and development employees
decreased approximately $457,000 during the three-months ended September 30,
2021, compared to the comparable 2020 period, largely attributed to decreased
stock compensation expenses as a result of the completion of vesting of a
significant amount of option grants through February 2021.
Loss on derecognition of inventory. Approximately $330,000 was recorded for a
loss on derecognition of inventory returned to our supplier. The supplier agreed
to repurchase the inventory at an amount lower than our cost.
Other Income (Expense). Other Income (Expenses) consists primarily of interest
income, interest expense, and changes to the fair value of warrant liabilities.
Other income (expense) for the three months ended September 30, 2021 and 2020
was approximately $5,052,000 and ($4,500,000), respectively. The increase in
other income (expense) during the three-month period in 2021, compared to the
same period in 2020, was primarily due to a gain of approximately $4,542,000
associated with the change in fair value of warrants, an approximately
$5,010,000 gain on forgiveness of the PPP1 and PPP2 loans.
Loss from Discontinued Operations. The Company recorded a net loss from
discontinued operations of approximately $7,193,000 related to its US
Compounding Inc. subsidiary in the three months ending September 30, 2021. The
main components of that loss were asset impairments totaling approximately
$8,167,000 primarily related to adjustments associated with the winding down of
the business of USC. Also contributing to that loss was gross loss of
approximately $1,177,000, approximately $2,499,000 of other operating expenses,
partially offset by approximately $4,637,000 of gain from the sale of
non-financial asset to Fagron, approximately $8,000 for interest income, and
other income of approximately $5,000. The process of winding down the remaining
business of USC could require us to incur significant expenses or pay
significant amounts in connection with or relating to the termination of
employment of USC's employees, the disposition of remaining USC assets, or the
resolution of outstanding obligations, liabilities, or current or future claims
or proceedings relating to the USC business. In addition, we could be required
to pay significant fines, penalties or other amounts as a result of proceedings
by federal or state regulatory authorities relating to the business and
operations of USC.
32
Nine Months Ended September 30, 2021 and 2020
Revenues. Revenues of our Drug Development and Commercialization business
conducted by Adamis were approximately $3,368,000 and $2,097,000 for the nine
months ended September 30, 2021 and 2020, respectively. Revenue relating to the
sales of SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg increased
approximately $1,271,000 primarily due to the sales and marketing initiatives of
our distribution partner, USWM, when compared with the comparable 2020 period.
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 of our Drug Development and Commercialization business conducted by Adamis
was approximately $4,877,000 and $4,987,000 for the nine-months ended September
30, 2021 and 2020, respectively. The gross loss percentage for the nine-months
ended September 30, 2021 was approximately 45% compared to approximately 138%
for the nine-months ended September 30, 2020. Cost of goods sold for the quarter
ended September 30, 2021 compared to the comparable period of 2020 decreased
approximately $110,000, primarily due to an approximately $1,189,000 decrease in
maintenance fees and other related expense, partially offset by increased direct
material costs of $1,079,000.
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 of our Drug Development and
Commercialization business conducted by Adamis for the nine months ended
September 30, 2021 and 2020 were approximately $13,247,000 and $9,621,000,
respectively. The increase was primarily attributable to professional fees of
approximately $4,611,000 mainly due to legal expenses, approximately $700,000
for a fee payable to the financial advisor related to the sale of non-financial
assets to Fagron, and approximately $82,000 increase in other administrative
costs, partially offset by a decrease of approximately $1,039,000 of
compensation related expenses largely attributable to decreased stock
compensation expenses as a result of the completion of vesting of a significant
amount of option grants through February 2021 and also stock-based compensation
expense forfeiture credits related to employee terminations, and an
approximately $728,000 decrease in depreciation and amortization as a result of
the write-off of the DPI intangible asset in the fourth quarter of 2020 that
eliminated amortization expense in future periods.
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 of our Drug Development and Commercialization business
conducted by Adamis were approximately $9,067,000 and $6,611,000 for the nine
months ended September 30, 2021 and 2020, respectively. Approximately $3,302,000
of the increase in R&D expenses for the nine months ended September 30, 2021,
compared to the comparable 2020 period was related to increased development
spending on Tempol and ZIMHI, offset by decreased development spending of
approximately $98,000 in development spending for other projects and SYMJEPI. In
addition, wages, benefits, and other compensation expenses for research and
development employees decreased approximately $748,000 during the nine-months
ended September 30, 2021, compared to the comparable 2020 period, largely
attributed to decreased stock compensation expenses as a result of the
completion of vesting of a significant amount of option grants through February
2021.
Loss on derecognition of inventory. Approximately $330,000 was recorded for a
loss on derecognition of inventory returned to our supplier. The supplier agreed
to repurchase the inventory at an amount lower than our cost.
Impairment Expense, Contract Costs. Impairment expenses of contract costs for
the nine months ended September 30, 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 nine-months ending September 30,
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 nine months ended September
30, 2021 and 2020 was approximately ($2,635,000) and $(3,103,000),
respectively. The decrease in other income (expense) during the nine month
period in 2021, compared to the same period in 2020, was primarily due to the
increase of other expense of approximately $4,509,000 associated with the change
in fair value of warrants, a decrease in interest income of approximately
$30,000, offset by an approximately $5,010,000 gain on forgiveness of the PPP1
and PPP2 loans, and an increase of interest expense of approximately $3,000.
Loss from Discontinued Operations. The Company recorded a net loss from
discontinued operations of approximately $10,266,000 related to US Compounding
in the nine months ending September 30, 2021. The main component of that loss
were asset impairments totaling approximately $8,176,000 primarily related to
adjustments associated with the winding down of the business of USC. Also
contributing to that loss was approximately $7,145,000 of SG&A and R&D operating
expenses, approximately $71,000 of interest expense, partially offset by
approximately $4,637,000 of gain from the sale of non-financial asset to Fagron,
approximately $463,000 gross profit on sales and approximately $26,000 of other
income. The process of winding down the remaining business of USC could require
us to incur significant expenses or pay significant amounts in connection with
or relating to the termination of employment of USC's employees, the disposition
of remaining USC assets, or the resolution of outstanding obligations,
liabilities, or current or future claims or proceedings relating to the USC
business. In addition, we could be required to pay significant fines, penalties
or other amounts as a result of proceedings by federal or state regulatory
authorities relating to the business and operations of USC.
33
Liquidity and Capital Resources
We have incurred net losses from our continuing and discontinued operations of
approximately $37.1 million and $31.5 million for the nine months ended
September 30, 2021 and 2020, respectively. Since inception, and through
September 30, 2021, we have an accumulated deficit of approximately $269.3
million. Since inception and through September 30, 2021, we have financed
operations principally through debt financing and through public and private
issuances of common stock, preferred stock and warrants. In January and February
2021, the company issued common stock upon exercise of investor warrants, the
company received a total of approximately $5,852,000 and the warrant holders
received 8,356,000 shares of common stock. On February 2, 2021, the company
completed the closing of an underwritten public offering of 46,621,621 shares of
common stock at a public offering price of $1.11 per share, which included
6,081,081 shares pursuant to the full exercise of the over-allotment option
granted to the underwriters, resulting in net proceeds of approximately $48.4
million.
However, we may need additional funding in the future to satisfy our
obligations and fund the future expenditures that we believe will be required to
support commercialization of our products and conduct the clinical and
regulatory work, studies and trials to develop our product candidates, including
without limitation relating to our Tempol product candidates. We may seek to
finance future cash needs primarily through proceeds from equity or debt
financings, loans, share of profits anticipated to be received relating to sales
in the U.S. of our SYMJEPI and ZIMHI products, sales of assets, out-licensing
transactions, and/or collaborative agreements with corporate partners.
As of September 30, 2021, our continuing operations had cash and cash
equivalents of approximately $28.7 million. Total assets were approximately
$45.1 million and $30.9 million as of September 30, 2021 and December 31, 2020
respectively. Current assets exceeded current liabilities by approximately
$32.7 million as of September 30, 2021.
Net cash used in operating activities for the nine months ended September 30,
2021 and 2020, was approximately $31.1 million and $15.5 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. The company estimates that it provided cash to help support USC's
business operations of approximately $1,130,000 per quarter in 2020, and
approximately $1,240,000 per quarter for the nine months ended September 30,
2021 excluding, for that period, expenses associated with the winding down of
USC's business.
Net cash used in investing activities was approximately $882,000 and $965,000
for nine months ended September 30, 2021 and 2020, respectively. The net cash
used in investing activities decreased primarily due to the decrease in IPR&D
purchases and cash received on sale of assets; partially offset by the purchase
of additional equipment during the nine months ended September 30, 2021 compared
to the nine months ended September 30, 2020.
Net cash provided in financing activities was approximately $54.0 million and
$20.0 million for the nine months ended September 30, 2021 and 2020,
respectively. Net cash flows provided by financing activities increased for the
period ended September 30, 2021 primarily due to the issuance of common stock,
exercise of warrants and Second Draw Loan under PPP. In the nine months ended
of 2020, net cash used in financing activities consisted primarily of issuance
of common stock and the initial draw of PPP Loan.
As noted above under the heading "Going Concern and Management Plan," through
September 30, 2021, Adamis has incurred substantial losses. The availability of
any required additional funding cannot be assured. If we do not obtain required
additional equity or debt funding, our cash resources could be depleted and we
could be required to materially reduce or suspend operations. 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,
and during this period Adamis could require additional funds. No assurance can
be given as to the timing or ultimate success of obtaining any required future
funding. The company will be required to devote additional cash resources, which
could be significant, in order to continue development and commercialization of
our product candidates and to support our other operations and activities. As a
result of the COVID-19 pandemic and actions taken to slow its spread, 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 II, Item 1, "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 has 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.
34
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these unaudited condensed 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.
Except for the net assets affected by the discontinued operations, as discussed
above under the heading "Loss from Discontinued Operations" and in Note 2 to the
accompanying financial statements included in this Quarterly Report on Form
10-Q, the company's critical accounting policies and estimates previously
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020
have not materially changed.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 1 to the accompanying
financial statements included in this Quarterly Report on Form 10-Q.
Off Balance Sheet Arrangements
At September 30, 2021, Adamis did not have any off balance sheet arrangements.
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DMK PHARMACEUTICALS CORPORATION 