DMK PHARMACEUTICALS CORPORATION Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
OnApril 14, 2021 , the Audit Committee of the Board of Directors (the "Audit Committee") ofAdamis Pharmaceuticals Corporation (the "Company"), concluded that, because of the misapplication of valuation principles used to determine the fair value of the Company's warrant liabilities and related changes in fair value of these warrant liabilities relating to warrants issued by the Company inAugust 2019 (the "2019 Warrants") andFebruary 2020 (the "2020 Warrants" and, together with the 2019 Warrants, the "Warrants"), the Company's previous quarterly and year-to-date unaudited condensed consolidated financial statements for the periods endedMarch 31, 2020 ,June 30, 2020 , andSeptember 30, 2020 (the "Affected Periods"), should no longer be relied upon. Similarly, any previously furnished or filed reports, related earnings releases, investor presentations or similar communications of the Company describing the Company's financial results for the Affected Periods should no longer be relied upon. While the issues identified and disclosed in this Report on Form 8-K do affect the Company's reported net losses for the Affected Periods, they are non-cash and do not impact the Company's revenues, operating expenses, operating loss, cash and cash equivalents, assets, liquidity or cash position for the Affected Periods. For example, in addition to the other adjustments described in the tables below, (i) for the three-month period endingMarch 31, 2020 , the previously reported net loss of$10,273,369 will be decreased by$3,027,000 to$7,246,369 , (ii) for the six-month period endingJune 30, 2020 , the previously reported net loss of$21,536,082 will be decreased by$1,365,000 to$20,171,082 , and (iii) for the nine-month period endingSeptember 30, 2020 , the previously reported net loss of$29,021,280 will be increased by$2,511,000 to$31,532,280 . The adjustments will be reflected and summarized in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K").
Background
In connection with the Company's preparation of its financial statements for the year endedDecember 31, 2020 , the Company re-assessed certain matters relating to its determination of the amount of warrant liabilities, and the associated gain or loss recognized as a result of the change in the fair value of the warrant liabilities, related to the outstanding Warrants for the Affected Periods. The Company concluded that certain of the valuation principles, estimates, and methods used to determine the valuation of the Warrants for the Affected Periods were not in accordance with ASC 820 - "Fair Value Measurement and Disclosures," primarily because of the applicability of the Black-Scholes option-pricing model to determine the fair value of the Warrants and because the Company's calculation incorporated the estimated exercise behavior of its warrant holders by applying an early exercise multiple, rather than using the full contractual exercise term of the Warrants as an input for determining the fair value of the Warrants. As a result of the above, the Company will restate its unaudited condensed consolidated financial statements for the Affected Periods. The adjustments to the financial statement items for the Affected Periods will be set forth through expanded disclosure in the consolidated financial statements included in the 2020 Form 10-K, including describing the restatement and its impact on previously reported amounts. The Company's previously filed quarterly reports on Form 10-Q for the Affected Periods have not been amended. Accordingly, investors should no longer rely upon the Company's previously released financial statements for the Affected Periods, and any earnings releases or other communications relating to these periods. Financial Impact
The change in warrant liabilities related to the Warrants for the Affected
Periods will result in the following changes to the financial results reported
in the Affected Periods, as reflected in the tables below. There will be no
impact on the Company's cash and cash equivalents, total assets, revenues,
operating expenses or operating loss for the Affected Period, as the change in
fair value of warrant liabilities was presented within other income (expense)
and not as a component of operating loss in the Company's condensed consolidated
statement of operations for the Affected Periods. Accordingly, the restatement
of the Company's unaudited consolidated financial statements for the Affected
Periods will have no impact on the Company's liquidity or cash position as of
the end of the Affected Periods.
All of the following adjustments relate to the Company's determination of the
fair value of the Warrants. The change in warrant liabilities and the associated
gain or loss recognized as a result of the change in the fair value of warrant
liabilities for the Warrants will result in the following changes to the
financial statement line items indicated below as of and for the periods
indicated, which were included in the previously reported Quarterly Reports on
Form 10-Q for the Affected Periods:
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 2020 June 30, 2020 March 31, 2020
Warrant
Liabilities,
at Fair Value As Previously Reported $ 1,161,000 $ 537,000 $ -
Adjustments $ 6,924,000 $ 3,048,000 $ 1,923,000
As Restated $ 8,085,000 $ 3,585,000 $ 1,923,000
Current
Liabilities As Previously Reported $ 12,976,779 $ 12,367,234 $ 10,586,976
Adjustments $ (1,161,000 ) $ (537,000 ) $ -
As Restated $ 11,815,779 $ 11,830,234 $ 10,586,976
Total
Liabilities As Previously Reported $ 16,517,447 $ 16,582,680 $ 12,063,556
Adjustments $ 6,924,000 $ 3,048,000 $ 1,923,000
As Restated $ 23,441,447 $ 19,630,680 $ 13,986,556
Additional
Paid-in
Capital As Previously Reported $ 238,726,680 $ 226,969,294 $ 225,801,654
Adjustments $ (6,207,000 ) $ (6,207,000 ) $ (6,744,000 )
As Restated $ 232,519,680 $ 220,762,294 $ 219,057,654
Accumulated
Deficit As Previously Reported $ (211,335,806 ) $ (203,850,608 ) $ (192,587,895 )
Adjustments $ (717,000 ) $ 3,159,000 $ 4,821,000
As Restated $ (212,052,806 ) $ (200,691,608 ) $ (187,766,895 )
Total
Stockholders'
Equity As Previously Reported $ 27,395,042 $ 23,120,980 $ 33,215,935
Adjustments $ (6,924,000 ) $ (3,048,000 ) $ (1,923,000 )
As Restated $ 20,471,042 $ 20,072,980 $ 31,292,935
Condensed Consolidated Statement of Operations - YTD
Unaudited
Nine Months Ended Six Months Ended
September 30, June 30,
2020 2020
Change in Fair
Value of Warrant
Liabilities As Previously Reported $ (624,000 ) $ -
Adjustments $ (2,511,000 ) $ 1,365,000
As Restated $ (3,135,000 ) $ 1,365,000
Total Other
Income
(Expense), net As Previously Reported $ (677,537 ) $ (31,536 )
Adjustments $ (2,511,000 ) $ 1,365,000
As Restated $ (3,188,537 ) $ 1,333,464
Net Loss As Previously Reported $ (29,021,280 ) $ (21,536,082 )
Adjustments $ (2,511,000 ) $ 1,365,000
As Restated $ (31,532,280 ) $ (20,171,082 )
Basic and
Diluted Loss Per
Share As Previously Reported $ (0.40 ) $
(0.31 )
Adjustments $ (0.03 ) $ 0.02
As Restated $ (0.43 ) $ (0.29 )
Condensed Consolidated Statement of Operations - Three
months ended
Unaudited
September 30, June 30, March 31,
2020 2020 2020
Change in
Fair Value
of WarrantLiabilities As Previously Reported$ (624,000 ) $ - $ - Adjustments$ (3,876,000 ) $
(1,662,000 )
As Restated $ (4,500,000 ) $ (1,662,000 ) $ 3,027,000
Total Other
Income
(Expense),
net As Previously Reported $ (646,001 ) $
(16,304 )
Adjustments $ (3,876,000 ) $
(1,662,000 )
As Restated $ (4,522,001 ) $
(1,678,304 )
Net Loss As Previously Reported
Adjustments $ (3,876,000 ) $
(1,662,000 )
As Restated $ (11,361,198 ) $ (12,924,713 ) $ (7,246,369 )
Basic and
Diluted
Loss Per
Share As Previously Reported $ (0.10 ) $ (0.15 ) $ (0.15 )
Adjustments $ (0.05 ) $ (0.02 ) $ 0.05
As Restated $ (0.15 ) $ (0.17 ) $ (0.10 )
Condensed Consolidated Statement of Shareholders' Equity- YTD (Unaudited)
September 30, 2020 June 30, 2020 March 31, 2020
Additional
Paid-in
Capital As Previously Reported $ 238,726,680 $ 226,969,294 $ 225,801,654
Adjustments $ (6,207,000 ) $
(6,207,000 )
As Restated $ 232,519,680 $
220,762,294
Accumulated
Deficit As Previously Reported
Adjustments $ (717,000 ) $
3,159,000
As Restated $ (212,052,806 ) $
(200,691,608 )
Total
Shareholders'
Equity As Previously Reported$ 27,395,042 $
23,120,980
Adjustments $ (6,924,000 ) $
(3,048,000 )
As Restated $ 20,471,042 $
20,072,980
Condensed Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended Six Months Ended Three Months Ended
September 30, 2020 June
30, 2020
Adjustments $ (2,511,000 ) $
1,365,000
As Restated $ (31,532,280 ) $ (20,171,082 ) $ (7,246,369 )
Change in
Fair Value of
Warrant
Liabilities As Previously Reported $ 624,000 $ - $ -
Adjustments $ 2,511,000 $
(1,365,000 )
As Restated $ 3,135,000 $ (1,365,000 ) $ (3,027,000 ) The Audit Committee and management have discussed the matters disclosed in this
Current Report on Form 8-K with the Company's independent registered public
accounting firm,
As a result of new accounting guidance and pronouncements and the Company's early adoption of such pronouncements, commencing with the quarter beginningJanuary 1, 2021 and for subsequent financial periods, the Company anticipates that the 2019 Warrants will no longer be treated as derivative liabilities and will instead be treated as equity instruments, that the fair value of the 2019 Warrants will be recorded as an adjustment to equity, and that no warrant liabilities or change in fair value of warrant liabilities relating to the 2019 Warrants will be reflected in the Company's future financial results. While 2020 Warrants to purchase up to 8,700,000 shares of the Company's common stock were initially issued, as a result of Warrant exercises in January and February of 2021, only 2020 Warrants to purchase approximately 350,000 shares of the Company's common stock remain outstanding as of the date of this Report. At the date of warrant exercise, the value of the exercised warrants will be re-measured and the Company will recognize a corresponding gain or loss as a result of the change in the fair value of the warrants. As a result of such exercises of the 2020 Warrants, after the first quarter of 2021 the subsequent calculation of the Company's warrant liabilities and the gain or loss recognized as result of the change in the fair value of the warrant liabilities related to the 2020 Warrants will be determined with respect to a smaller number of outstanding warrants in future financial periods. The impact of these changes will be reflected in the Company's financial statements for the first quarter of 2021 endingMarch 31, 2021 , and for subsequent periods as applicable.
Controls and Procedures
The Company expects to report a material weakness in the Company's internal control over financial reporting, and as a result to conclude that the Company's internal control over financial reporting and the Company's disclosure controls and procedures, as ofMarch 31, 2020 ,June 30, 2020 ,September 30, 2020 andDecember 31, 2020 , were not effective. Management expects to adopt various measures intended to remediate and improve the Company's internal control over financial reporting, in particular to increase the quality of review of accounting principles used to evaluate the Company's determination of the fair value of its warrants and other derivative instruments.
Caution Regarding Forward-Looking Statements
Certain statements included in this Current Report on Form 8-K, which are not historical facts, are forward-looking statements, including statements about the estimated effect of the restatement on certain of the Company's previously issued interim financial statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and speak only as of the date of this Current Report. These forward-looking statements represent the Company's current expectations or beliefs and involve certain risks and uncertainties, including those described in its public filings with theSEC , any or all of which could cause actual results to differ from those reflected in the forward-looking statements. The forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially from the Company's estimates depending on a variety of important factors.
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