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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to  

 

Commission File Number: 001-36242

 

 

 

ADAMIS PHARMACEUTICALS CORPORATION  

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   82-0429727

(State or other jurisdiction 

of incorporation or organization)

 

(I.R.S. Employer 

Identification Number)

11682 El Camino Real, Suite 300, San Diego, CA 92130 

 

(Address of principal executive offices, including zip code) 

(858) 997-2400 

 

(Registrant’s telephone number, including area code)

 

 

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ADMP

NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

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

 

Large accelerated filer   Accelerated Filer
         
Non-accelerated filer   Smaller reporting company
         
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

  

The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 5, 2020, was 93,657,628.

 

 

 

 

 

 

 

ADAMIS PHARMACEUTICALS, INC. 

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at September 30, 2020 (Unaudited) and December 31, 2019 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2020 and 2019 4
     
  Condensed Consolidated Statements Of Stockholders’ Equity (Unaudited) for the Three Months and Nine Months Ended September 30, 2020 and 2019 5
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2020 and 2019 6-7
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosure of Market Risk 33
     
Item 4. Controls and Procedures 33
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
     
Item 3. Defaults Upon Senior Securities 64
     
Item 4. Mine Safety Disclosures 64
     
Item 5. Other Information 64
     
Item 6. Exhibits 65
     
Signatures 66

 

 

  2  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                 
   

September 30,

2020

   

December 31,

2019

 
ASSETS     (Unaudited)          
CURRENT ASSETS                
Cash and Cash Equivalents   $ 12,377,183     $ 8,810,636  
Accounts Receivable, net     928,547       1,877,655  
Inventories     2,056,340       2,061,097  
Prepaid Expenses and Other Current Assets     1,776,864       1,127,322  
Total Current Assets     17,138,934       13,876,710  
LONG TERM ASSETS                
Intangible Assets, net     9,683,387       11,127,562  
Goodwill     4,497,422       7,640,622  
Fixed Assets, net     11,000,774       11,667,416  
Right-of-Use Assets      1,537,317       1,873,552  
Other Non-Current Assets     54,655       1,654,655  
Total Assets   $ 43,912,489     $ 47,840,517  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts Payable   $ 3,100,964     $ 4,267,654  
Deferred Revenue, current portion     140,079       115,671  
Accrued Other Expenses     2,806,650       2,428,619  
Accrued Bonuses     1,442,959      
Lease Liabilities, current portion     465,831       444,621  
Bank Loan - Building & Equipment      2,092,111       2,153,182  
Paycheck Protection Plan (PPP) Loan      1,767,185      
Warrant Liabilities, at fair value     1,161,000      
Total Current Liabilities     12,976,779       9,409,747  
                 
LONG TERM LIABILITIES                
Deferred Revenue, net of current portion      875,000       800,000  
Deferred Tax Liability, net     112,530       112,530  
Lease Liabilities, net of current portion      1,128,623       1,480,996  
PPP Loan, net of current portion     1,424,515      
Total Liabilities     16,517,447       11,803,273  
                 
COMMITMENTS AND CONTINGENCIES                
STOCKHOLDERS’ EQUITY                
Preferred Stock – Par Value $.0001; 10,000,000 Shares Authorized; Series A-2 Convertible, Zero and Zero Issued and Outstanding at September 30, 2020 (Unaudited) and December 31, 2019, Respectively.          
Common Stock - Par Value $.0001; 200,000,000 Shares Authorized; 94,180,585 and 62,352,465 Issued, 93,657,628 and 61,829,508 Outstanding at September 30, 2020 (Unaudited) and December 31, 2019, Respectively.     9,418       6,235  
Additional Paid-in Capital     238,726,680       218,350,785  
Accumulated Deficit     (211,335,806 )     (182,314,526 )
Treasury Stock, at cost - 522,957 and 522,957 Shares at September 30, 2020 (Unaudited) and December 31, 2019, Respectively.     (5,250 )     (5,250 )
Total Stockholders’ Equity     27,395,042       36,037,244  
    $ 43,912,489     $ 47,840,517  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

 

  3  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

                             
    Three Months Ended     Nine Months Ended  
    September 30,
2020
    September 30,
2019
    September 30,
2020
    September 30,
2019
 
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
REVENUE, net   $ 4,300,513     $ 5,902,975     $ 12,890,065     $ 16,573,647  
COST OF GOODS SOLD     3,646,342       3,988,962       12,017,221       11,279,994  
Gross Profit     654,171       1,914,013       872,844       5,293,653  
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES     5,793,958       5,300,107       17,501,421       20,321,912  
RESEARCH AND DEVELOPMENT     1,699,410       3,318,743       6,821,966       8,361,003  
IMPAIRMENT EXPENSE - Goodwill                 3,143,200        
IMPAIRMENT EXPENSE - Write-off of Contract Asset                 1,750,000        
LOSS ON IMPAIRMENT OF INVENTORIES           303,568             303,568  
Loss from Operations     (6,839,197 )     (7,008,405 )     (28,343,743 )     (23,692,830 )
OTHER INCOME (EXPENSE)                                
Interest Expense     (46,043 )     (21,935 )     (117,255 )     (68,897 )
Interest/Other Income     24,042       30,589        63,718       139,084  
Change in Fair Value of Warrant Liabilities     (624,000         (624,000 )      
Total Other Income (Expense), net     (646,001 )     8,654     (677,537 )     70,187  
Net Loss   $ (7,485,198 )   $ (6,999,751 )   $ (29,021,280 )   $ (23,622,643 )
         
Basic and Diluted Loss Per Share:                                
                                 
Basic and Diluted Loss Per Share   $ (0.10 )   $ (0.12 )   $ (0.40 )   $ (0.47 )
                                 
Basic and Diluted Weighted Average Shares Outstanding     76,044,862       56,283,832       72,137,685       50,411,038  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

  4  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

                                               
    Convertible Preferred Stock   Common Stock   Additional 
Paid-In
  Treasury Stock   Accumulated    
For the Three Months Ended September 30, 2020   Shares   Amount   Shares   Amount   Capital   Shares   Amount   Deficit   Total
Balance June 30, 2020     1,000,000     $ 100       74,443,722     $ 7,444     $ 226,969,294       522,957     $ (5,250 )   $ (203,850,608 )   $ 23,120,980  
Series B Convertible Preferred Stock Conversion to Common Stock     (1,000,000 )     (100 )     1,000,000       100                —                               
Common Stock Issued, Net of Issuance Costs of $839,387     —                  18,548,386       1,855       10,658,757       —                           10,660,612  
Issuance of Restricted Stock Units (RSUs)     —                  188,477       19       (19 )     —                               
Share Based Compensation     —                  —                  1,098,648       —                           1,098,648  
Net Loss     —                  —                           —                  (7,485,198 )     (7,485,198 )
Balance September 30, 2020     —       $          94,180,585     $ 9,418     $ 238,726,680       522,957     $ (5,250 )   $ (211,335,806 )   $ 27,395,042  

 

For the Three Months Ended September 30, 2019

                                                                       
Balance June 30, 2019     —       $          48,161,066     $ 4,816     $ 203,439,869       522,957     $ (5,250 )   $ (169,630,649 )   $ 33,808,786  
Common Stock Issued, Net of Issuance Costs of $1,012,130     —                  13,800,000       1,380       12,786,490       —                           12,787,870  
Issuance of Restricted Stock Units (RSUs)     —                  195,700       20       (20 )     —                               
Share Based Compensation     —                  —                  702,567       —                           702,567  
Net Loss     —                  —                           —                  (6,999,751 )     (6,999,751 )
Balance September 30, 2019     —       $          62,156,766     $ 6,216     $ 216,928,906       522,957     $ (5,250 )   $ (176,630,400 )   $ 40,299,472  

 

For the Nine Months Ended September 30, 2020

                                                                       
Balance December 31, 2019     —       $          62,352,465     $ 6,235     $ 218,350,785       522,957     $ (5,250 )   $ (182,314,526 )   $ 36,037,244  
Common Stock Issued, Net of Issuance Costs of $1,334,289     —                  30,148,386       3,016       16,890,695       —                           16,893,711  
Series B Convertible Preferred Stock Issued     1,000,000       100       —                  589,900       —                           590,000  
Preferred Stock Conversion to Common Stock     (1,000,000 )     (100 )     1,000,000       100                —                               
Issuance of Restricted Stock Units (RSUs)     —                  679,734       67       (67 )     —                               
Share Based Compensation     —                  —                  3,432,367       —                           3,432,367  
Net Loss     —                  —                           —                  (29,021,280 )     (29,021,280 )
Out of Period Adjustment (see note 1)     —                  —                  (537,000 )     —                           (537,000 )
Balance September 30, 2020     —       $          94,180,585     $ 9,418     $ 238,726,680       522,957     $ (5,250 )   $ (211,335,806 )   $ 27,395,042  

 

For the Nine Months Ended September 30, 2019

                                                                       
Balance December 31, 2018     —       $          47,814,315     $ 4,781     $ 199,696,656       522,957     $ (5,250 )   $ (153,004,370 )   $ 46,691,817  
Cumulative Effect from Adoption of ASU 2016-02, Leases (Topic 842)     —                  —                           —                  (3,387 )     (3,387 )
Common Stock Issued, Net of Issuance Costs of $1,012,130     —                  13,800,000       1,380       12,786,490       —                           12,787,870  
Issuance of Restricted Stock Units (RSUs)     —                  542,451       55       (55 )     —                               
Share Based Compensation     —                  —                  4,445,815       —                           4,445,815  
Net Loss     —                  —                           —                  (23,622,643 )     (23,622,643 )
Balance September 30, 2019     —       $          62,156,766     $ 6,216     $ 216,928,906       522,957     $ (5,250 )   $ (176,630,400 )   $ 40,299,472  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements  

  5  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

               
    Nine Months Ended
September 30,
 
    2020     2019  
    (Unaudited)     (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (29,021,280 )   $ (23,622,643 )
Adjustments to Reconcile Net Loss to Net                
Cash Used in Operating Activities:                
Stock Based Compensation     3,432,367       4,445,815  
Acquired IPR&D      840,000          
Provision for Bad Debts     99,493       13,087  
Provision for Excess and Obsolete Inventory     1,294,786       717,678  
Change in Fair Value of Warrant Liabilities     624,000        
Non-Cash Operating Lease Expense     5,062       14,481  
Depreciation and Amortization Expense     2,692,692       2,252,317  
Impairment of Inventory           303,568
Impairment of Goodwill     3,143,200        
Impairment of Contract Assets     1,750,000        
Gain on Sale of Fixed Assets         (9,000
Change in Assets and Liabilities:                
(Increase) Decrease in:                
 Accounts Receivable - Trade     849,615     (1,518,823 )
 Inventories     (1,290,029 )     (256,283 )
 Prepaid Expenses and Other Current Assets     (849,542     1,066,816
Increase (Decrease) in:                
Accounts Payable     (980,504 )     (420,027 )
Deferred Revenue     99,408     (63,661 )
Accrued Other Expenses and Bonuses     1,820,990       129,101
Net Cash Used in Operating Activities     (15,489,742 )     (16,947,574 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of Equipment     (714,697 )     (2,564,967 )
Purchase of IPR&D     (250,000 )    
Net Cash Used in Investing Activities     (964,697 )     (2,564,967 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from Issuance of Common Stock     18,228,000       13,800,000  
Costs of Issuance of Common Stock     (1,334,289 )     (1,012,130 )
Principal Payment of Finance Leases     (3,354     (54,257
Proceeds of PPP Loan     3,191,700        
Payment of Bank Loans     (61,071 )     (370,800 )
Net Cash Provided by Financing Activities     20,020,986       12,362,813  
Increase (Decrease) in Cash and Cash Equivalents     3,566,547       (7,149,728
Cash and Cash Equivalents:                
Beginning     8,810,636       19,271,642  
Ending   $ 12,377,183     $ 12,121,914  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

 

  6  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

               
    Nine Months Ended
September 30,
 
    2020     2019  
    (Unaudited)     (Unaudited)  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash Paid for Income Taxes   $ 11,300     $ 9,717  
Cash Paid for Interest   $ 103,133     $ 70,368  
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, FINANCING AND INVESTING ACTIVITIES                
Decrease in Accrued Capital Expenditures   $ (186,186   $ (408,299
Series B Preferred Stock Issuance for License Agreement   $ 590,000     $  

 

The accompanying notes are in an integral part of these Condensed Consolidated Financial Statements

 

  7  

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1: Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented. The results of operations of Adamis Pharmaceuticals Corporation (“the Company”) for any interim periods are not necessarily indicative of the results of operations for any other interim periods or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

On January 30, 2020, the World Health Organization (“WHO”) declared that the recent novel coronavirus ("COVID-19") outbreak was a global health emergency, which prompted national governments to begin putting actions in place to slow the spread of COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. The governmental actions and the widespread economic disruption arising from the pandemic have the potential to materially impact our business and influence our business decisions. The extent and duration of the pandemic is unknown, and the future effects on our business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company’s estimates and assumptions in the future.  

 

Segment Reporting

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 280, Segment Reporting (“ASC 280”), establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company’s business segments are based on the organization structure used by the chief operating decision maker for making operating and investment decisions and for assessing performance. Commencing April 1, 2020, our management, including the chief executive officer, who is our chief operating decision maker (“CODM”), began managing our operations as operating in two business segments: Drug Development and Commercialization which includes without limitation out-licensing the Company’s FDA approved products; and Compounded Pharmaceuticals which includes the Company’s registered outsourcing facility, based on changes to the way that management monitors performance, aligns strategies, and allocates resources results. We determined that each of these operating segments represented a reportable segment. These consolidated financial statements and related footnotes, including prior year financial information, are presented as if there were two reporting segments for all periods presented, to the extent described in Note 13. We are a specialty biopharmaceutical company focused on developing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease; and a registered drug compounding outsourcing facility, which compounds sterile prescription medications and certain nonsterile preparations and compounds for human and veterinary use by patients, physician clinics, hospitals, surgery centers, vet clinics and other clients throughout most of the United States.

 

Liquidity and Capital Resources

 

The Company's cash and cash equivalents were $12,377,183 and $8,810,636 at September 30, 2020 and December 31, 2019, respectively.  

 

The Company prepared the condensed consolidated financial statements assuming that the Company will continue 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 the Company’s future business as described below, which may preclude the Company from realizing the value of certain assets.    

The Company has significant operating cash flow deficiencies. Additionally, the Company will need significant funding in 2021 for future operations and the expenditures that it believes will be required to support commercialization of its products and conduct the clinical and regulatory activities relating to the Company’s product candidates, satisfy existing obligations and liabilities, and otherwise support the Company’s intended business activities and working capital needs. The preceding conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements for the nine months ended September 30, 2020, 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. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management’s plans include attempting to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property or other assets, products, product candidates or technologies, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research and development efforts, or similar transactions, and through revenues from existing agreements and sales of prescription compounded formulations. There is no assurance that the Company will be successful in obtaining the necessary funding to meet its business objectives. In addition, the COVID-19 outbreak has resulted in a severe economic downturn, has significantly affected the financial markets of many countries and has had an adverse impact on the Company.  In light of the current economic downturn that we believe affected the trading prices of our common stock, we determined that it was more likely than not that the fair value of our subsidiary, U.S. Compounding, Inc., or USC,  was less than its carrying value, which triggered the Company to perform an interim impairment assessment as of March 31, 2020 to test the carrying value of goodwill resulting in approximately $3,143,000 of goodwill impairment charges. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all.

 

Basic and Diluted Loss per Share

 

The Company computes basic loss per share by dividing the loss attributable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The diluted loss per share calculation is based on the treasury stock method and gives effect to dilutive options, warrants, convertible notes, convertible preferred stock and other potential dilutive common stock. Except as noted below, the effect of common stock equivalents was anti-dilutive and was excluded from the calculation of weighted average shares outstanding. Potential dilutive securities, which are not included in dilutive weighted average shares for the three and nine month periods ended September 30, 2020 and September 30, 2019 consist of outstanding warrants (24,634,670 and 15,934,670, respectively), outstanding options (6,590,387 and 8,096,822, respectively), and outstanding restricted stock units (2,345,630 and 3,286,096, respectively).

Prior Periods Reclassifications

 

Certain amounts in prior periods have been reclassified to conform with current period presentation related to the amortization of the cost to obtain a contract included in prepaid expenses and other current assets in the unaudited condensed consolidated statement of cash flows, and had no effect on cash used in operations or statement of cash flows for the period ended September 30, 2019. The reclassification has no effect on the consolidated balance sheet as of December 31, 2019, or the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019.

 

  8  

 

 

Out of Period Adjustments 

 

It was determined during the review of the second quarter 2020 financial statements that the warrants  issued by the Company as part of a financing transaction in August 2019 (the “2019 Warrants”) (i) are presumed to require the Company to issue registered shares when the 2019 Warrants are exercised and (ii) the agreement does not specify whether the 2019 Warrants prohibit net cash settlement or require an alternative form of share settlement if there are insufficient registered shares available to be issued upon the holder’s exercise.  This requires the Company to account for the 2019 warrants as liability instruments due to the assumed cash settlement based on ASC 815, Derivatives and Hedging. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not material to results of operations or financial position for any prior annual or interim period or future annual period. The approximate fair value of the 2019 Warrants at issuance was approximately $828,000 and was approximately $276,000 , $138,000 and $276,000 at December 31, 2019, March 31, 2020 and June 30,2020, respectively. We corrected this immaterial error in the three and six months ended June 30, 2020 (prior periods were not revised to reflect the immaterial errors) to reflect the fair value of the warrant liability at June 30, 2020 in the amount of $276,000. The gain on remeasurement of the warrant liability in the amount $552,000 as of December 31, 2019 was not recorded because the amount was deemed immaterial. As of September 30, 2020 and June 30,2020, the fair value of the 2019 Warrants was approximately $552,000 and $276,000, respectively.

 

It was also determined that the warrants issued in February 2020 (the “2020 Warrants”) contain certain clauses that may require cash settlement in certain circumstances and as of the date of issuance the Company did not have adequate authorized shares available to be issued upon the exercise of the 2020 Warrants, although adequate authorized shares are now available, see Note 12. The clauses that may require cash settlement requires the Company to account for the 2020 Warrants as liability instruments. The Company evaluated this error and determined that the related impact, including the cumulative impact of the 2019 Warrants above, was not material to the operating results or financial position of the Company for the three months ended March 31, 2020. The fair value of the 2020 warrants at issuance was approximately $261,000 and was approximately $174,000 and $261,000 at March 31, 2020 and June 30, 2020, respectively. To correct this immaterial error the Company recorded an out of period adjustment in the three months ended June 30, 2020 to additional paid-in capital in the amount of $261,000 and a gain of $87,000, which represents the gain due to the change in fair value of the warrants from the date of issuance to the period ended March 31, 2020. As of September 30, 2020 and June 30, 2020, the fair value of the 2020 Warrants was approximately $609,000 and $261,000, respectively. 

 

Deferred revenue in prior periods has been adjusted to reflect short-term and long-term portion of the liability. This adjustment had no effect on the total liability or income (loss) for any period presented.

 

 

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses. ASU No. 2016-13 is intended to provide users of financial statements with more decision-useful information about credit losses on financial instruments that are expected, but do not yet meet the “probable” threshold. This Update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses. ASU No. 2016-13 was effective for fiscal years beginning after December 15, 2019 and did not have a material impact on the Company’s consolidated financial statements. 

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB’s new revenue standard (Topic 606). Such guidance clarifies revenue recognition and financial statement presentation for transactions between collaboration participants. ASU 2018-18 is effective for the Company in the first quarter of 2020, with early adoption permitted. The standard requires retrospective application to the date we adopted Topic 606, January 1, 2018. The adoption had no significant impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements  

 

Accounting Standards Update (“ASU”) 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: simplifies accounting for convertible instruments by removing major separation models required under current Generally Accepted Accounting Principles (GAAP). Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company plans to adopt early and is assessing the impact that the adoption of ASU 2020-06 will have on the consolidated balance sheet and consolidated statement of operations. The early adoption is expected to affect warrants and warrants liabilities as noted below.

 

The Company has issued and outstanding Warrants that contain certain clauses that may require cash settlement in in certain circumstances. As of September 30, 2020, the Company has included Warrant Liabilities of $1,161,000. The Warrant Liabilities balance on December 31, 2020 will be adjusted to equity upon early adoption in January 2021.

 

  

  9  

 

 

 

Note 2: Revenues 

Revenue Recognition 

Revenue is recognized pursuant to ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606). Accordingly, revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:

 

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when (or as) each performance obligation is satisfied

 

Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease. The Company’s subsidiary U.S. Compounding, Inc. or USC, provides compounded sterile prescription medications and certain nonsterile preparations and compounds, for human and veterinary use by patients, physician clinics, hospitals, surgery centers, vet clinics 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.

 

Adamis and USC have contracts with customers when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. 

 

Termination of the Distribution and Commercialization Agreement for SYMJEPI with Sandoz Inc. 

 

On May 11, 2020, the Company entered into an agreement (the “Termination Agreement”) with Sandoz Inc. to terminate the Distribution and Commercialization Agreement dated as of July 1, 2018 (the “Sandoz Agreement”) and entered into between the Company and Sandoz, following an initial transition period which has ended as a result of the execution of a transition services agreement, and reacquire rights to the SYMJEPI products.   The Termination Agreement provided for the mutually agreed return to Adamis of the marketing, promotion, and distribution rights, and certain marketing and promotional materials, relating to the SYMJEPI products, and the termination of the Sandoz Agreement, supported by a transition services agreement that the Company entered into with Sandoz and USWM, LLC (“USWM” or “US WorldMeds”), concerning certain transition services, activities and arrangements relating to the SYMJEPI products.  As part of the Termination Agreement, Sandoz continued to support the products in the U.S. under the Sandoz Agreement through the end of the transition period to help reduce or minimize any potential impact to patients and customers.  The Termination Agreement also provided for a future resolution of any amounts that may be payable or owed with respect to the net sales and profit sharing provisions of the Sandoz Agreement, and for survival of certain provisions of the Sandoz Agreement. As a result of entering into the Termination Agreement with Sandoz, the Company’s financial results for the quarter ending June 30, 2020, included an impairment of the capitalized cost to obtain a contract of $1,750,000.

 

Entering Into an Exclusive Distribution and Commercialization Agreement for SYMJEPI and ZIMHI with US WorldMeds

 

On May 11, 2020, the Company also entered into an exclusive distribution and commercialization agreement (the “USWM Agreement”) with USWM for the United States commercial rights for the SYMJEPI products, as well as for the Company’s ZIMHI (naloxone HCI Injection, USP) 5mg/0.5mL product candidate intended for the emergency treatment of opioid overdose.  

 

Under the terms of the USWM Agreement, the Company appointed USWM as the exclusive (including as to the Company) distributor of SYMJEPI in the United States and related territories (“Territory”) effective upon the termination of the Sandoz Agreement, and of the ZIMHI product if approved by the U.S. Food and Drug Administration (“FDA”) for marketing, and granted USWM an exclusive license under the Company’s patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, subject to the provisions of the USWM Agreement, in partial consideration of an initial payment by USWM and potential regulatory and commercial based milestone payments totaling up to $26 million, if the milestones are achieved. There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to the Company.  The Company retains rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory.  In addition, the Company 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 the Company’s Symject™ syringe product platform.  

 

Compounded Pharmaceuticals Facility Revenue Recognition

 

With respect to sales of prescription compounded medications by the Company’s USC subsidiary, revenue arrangements consist of a single performance obligation which is satisfied at the point in time when goods are delivered to the customer. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer which is the price reflected in the individual customer’s order. Additionally, the transaction price for medication sales is adjusted for estimated product returns that the Company expects to occur under its return policy. The estimate is based upon historical return rates, which has been immaterial.  The Company does not have a history of offering a broad range of price concessions or payment term changes, however, when the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes.  Variable consideration is not a significant component of the transaction price for sales of medications by USC.

  10  

 

 

Drug Development and Commercialization Revenue Recognition

 

Sandoz

 

Please see Note 4 to our consolidated financial statements in the 2019 Annual Report on Form 10-K.  

 

USWM

 

Effective May 11, 2020 (the “Effective Date”), Adamis and USWM entered into the USWM Agreement.   The initial term for the USWM Agreement began on the Effective Date and continues for a period of 10 years from the launch by USWM of the first product in the United States pursuant to the agreement, unless terminated earlier in accordance with its terms. We have determined that the individual purchase orders, whose terms and conditions taken with the distribution and commercialization agreement, creates a contract according to ASC 606. The term will automatically renew for five year terms after the initial 10-year term, unless terminated by either party. 

The Company has determined that there are two performance obligations in the contract: (i) the manufacture and supply of SYMJEPI™ and ZIMHI™ products to USWM; and (ii) the exclusive distribution and commercialization in the United States. 

Revenues from the manufacture and supply of SYMJEPI™ and ZIMHI™ are recognized at a point in time upon delivery to USWM. The right of exclusive distribution and commercialization is considered a symbolic license and will be recognized over time over the life of the contract. The Company believes that due to ongoing efforts to comply with regulations that a performance obligation continues to exist over the life of the contract. Under the USWM Agreement, the Company is entitled to receive various amounts and milestone payments, including: (1) certain non-refundable up-front fees for executing the agreement and regulatory milestone payments, both of which will be recognized over the expected customer life, estimated to be equal to the initial 10-year term of the agreement; (2) net-profit sharing payments based on certain percentages of net profit generated from the sale of products over a given quarter; (3) commercial milestone payments. Items (2) and (3) are royalties generated from the exclusive right to distribute and commercialize SYMJEPI and ZIMHI in the United States; these are considered sales-based royalties of intellectual property and recognized as they are occur.

Revenues do not include any state or local taxes collected from customers on behalf of governmental authorities. The Company made the accounting policy election to continue to exclude these amounts from revenues. 

Disaggregation of Revenue 

Our sterile environment operations are governed by specific regulatory and quality requirements. Any deviation from these standards could result in a stoppage of operations, recall of products, and a significant reduction in revenues. The Company outsources the manufacturing of the SYMJEPI product to third party manufacturers who bear the responsibility of maintaining a suitable environment as governed by specific regulatory and quality requirements.  

 

The following table presents the Company’s revenues disaggregated by outsourced manufacturing, sterile and non-sterile regulatory environments for the three months and nine months ended September 30, 2020 and 2019. 

                             
    Three Months Ended September 30, (Unaudited)   Nine Months Ended September 30, (Unaudited)
    2020   2019   2020   2019
Drug Development & Commercialization:                                
Outsourced Manufacturing   $ 868,077     $ 1,347,157     $ 2,096,796     $ 2,931,730  
Compounded Pharmaceuticals:                                
Sterile     2,240,150       3,370,365       7,247,927       9,869,180  
Non-Sterile   1,192,286     1,185,453     3,545,342     3,772,737  
Total Compounded Pharmaceuticals Revenues      3,432,436       4,555,818        10,793,269       13,641,917  
Total   $

4,300,513

    $ 5,902,975     $ 12,890,065     $ 16,573,647  

 

The Company’s revenues relating to its FDA approved product SYMJEPI are dependent on an exclusive distribution agreement with USWM, which replaced the previous Sandoz Agreement in May 2020, and the Company’s pharmacy formulations rely, in large part, on sales generated from clinics and hospital customers. Adverse economic conditions pose a risk that the Company’s customers may reduce or cancel spending, which would impact the Company’s revenues. The COVID-19 outbreak has adversely affected revenues from sales of USC products, in part due to reductions or cancellations of elective surgeries and reduction in office visits to physicians’ offices, healthcare facilities or clinics by patients, and the resulting decreased demand by USC’s customers for certain of USC’s products, and will likely continue to adversely affect revenues from sales of USC products for a period of time which cannot be predicted.
   

  11  

 

 

The following table presents the Company’s revenue disaggregated by end market for the three months and nine months ended September 30, 2020 and 2019.

 

    Three Months Ended September 30, (Unaudited)   Nine Months Ended September 30, (Unaudited)
    2020   2019   2020   2019
Drug Development & Commercialization:                                
Distribution Channel - Sandoz   $ 868,077     $ 1,347,157     $ 2,096,796     $ 2,931,730  
Compounded Pharmaceuticals:                                
Clinics/Hospitals     3,308,801       4,384,693       10,251,475       12,857,766  
Direct to Patients   123,635     171,125     541,794     784,151  
Total Compounded Pharmaceuticals Revenues      3,432,436       4,555,818        10,793,269       13,641,917  
Total   $ 4,300,513     $ 5,902,975     $ 12,890,065     $ 16,573,647  

     

Deferred Revenue   

Deferred Revenue are contract liabilities that the Company records when cash payments are received or due in advance of the Company’s satisfaction of performance obligations. The Company’s performance obligation is met when control of the promised goods is transferred to the Company’s customers. For the three months ended September 30, 2020 and 2019, $467,925 and $39,296 of the revenues recognized were reported as deferred revenue as of June 30, 2020 and 2019, respectively, and for the nine months ended September 30, 2020 and 2019, $940,671 and $86,246 of the revenues recognized were reported as deferred revenue as of December 31, 2019 and 2018, respectively. Included in the deferred revenue balance at September 30, 2020 and December 31, 2019 was $0 and $900,000, respectively, relating to the non-refundable upfront payment received from Sandoz pursuant to the Sandoz Agreement; and another $975,000 included in the deferred revenue balance at September 30, 2020 was for the non-refundable upfront payment received from USWM pursuant to the USWM Agreement.  On May 11, 2020, the Company entered into a termination agreement with Sandoz which resulted in the acceleration of recognition of the upfront payment from Sandoz to revenue over the transition service agreement period. 

Cost to Obtain a Contract

The Company capitalizes costs related to contracts that would have not been incurred if the contract was not obtained and the Company expects to recover such costs. The deferred costs, reported in the prepaid expenses and other current assets and other non-current assets on the Company’s Condensed Consolidated Balance Sheets, will be amortized over the economic benefit period of the contract. 

 

The Company capitalized the $2.0 million fee paid to a financial advisor as an incremental cost of obtaining a contract to commercialize and distribute the Company’s first FDA approved product SYMJEPI with Sandoz. On May 11, 2020, the Company entered into a termination agreement with Sandoz. As a result of entering into the termination agreement, the Company determined that its financial results for the quarter ending June 30, 2020 include recognition of a full $1,750,000 impairment of the capitalized cost to obtain a contract that was reflected on its condensed consolidated balance sheet as of March 31, 2020.  The deferred costs were classified as current or non-current in the Company’s condensed consolidated balance sheets based on the timing of when the Company expects to recognize the expense. As of September 30, 2020 and December 31, 2019, the Company had $0 and $1.8 million, respectively, of Cost to Obtain a Contract deferred costs. Deferred costs related to obtaining a contract were amortized to Selling, General and Administrative expenses with $0 and $50,000 expensed for the three months ended September 30, 2020 and 2019, respectively; and $50,000 and $150,000 expensed for the nine months ended September 30, 2020 and 2019, respectively. 

 

 

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Note 3: Inventories

 

Inventories, net of reserves, at September 30, 2020 and December 31, 2019 consisted of the following: 

 

         
    September 30, 
2020
  December 31, 
2019
Finished Goods   $ 692,587     $ 1,167,913  
Raw Material     305,078       230,781  
Devices     1,058,675       662,403  
Inventories   $ 2,056,340     $ 2,061,097  

 

Reserve for obsolescence as of September 30, 2020 and December 31, 2019 was approximately $386,000 and $473,000, respectively. 

 

 

Note 4: Fixed Assets, net

 

Fixed Assets, net at September 30, 2020 and December 31, 2019 are summarized in the table below:

 

Description   Useful Life (Years)   September 30,  2020   December 31, 2019
Building     30     $ 3,040,000     $ 3,040,000  
Machinery and Equipment     3 - 7       5,416,169       2,437,525  
Furniture and Fixtures     7       160,012       156,259  
Automobile     5       9,500       9,500  
Leasehold Improvements     7 - 15       342,330       342,330  
Total Fixed Assets             8,968,011       5,985,614  
Less: Accumulated Depreciation             (3,142,099 )     (2,050,697 )
Land             460,000       460,000  
Construction In Progress - Equipment             4,714,862       7,272,499  
Fixed Assets, net           $ 11,000,774     $ 11,667,416  

  

Depreciation expense for the three months ended September 30, 2020 and 2019 was approximately $417,000 and $149,000, respectively; and for the nine months ended September 30, 2020 and 2019, depreciation expense was approximately $1,197,000 and $450,000, respectively.  

 

 

Note 5: Intangible Assets and Goodwill

 

Intangible assets at September 30, 2020 and December 31, 2019 are summarized in the tables below: 

 

September 30, 2020   Gross 
Carrying 
Value
  Accumulated 
Amortization
  Net Carrying 
Amount
Definite-lived Intangible assets, estimated lives in years:                        
Patents, Taper DPI Intellectual Property, 10 years   $ 9,708,700     $ (6,553,373 )   $ 3,155,327  
FDA 503B Registration & Compliance - USC, 10 years     3,963,000       (1,771,240 )     2,191,760  
Customer Relationships - USC, 10 years     5,572,000       (2,490,374 )     3,081,626  
Website Design - USC, 3 years     16,163       (16,163 )     —    
  Total Definite-lived Assets     19,259,863       (10,831,150 )     8,428,713  
Trade Name and Brand - USC, Indefinite     1,245,000       —         1,245,000  
SYMJEPI™ Domain Name     9,674       —         9,674  
Balance, September 30, 2020   $ 20,514,537     $ (10,831,150 )   $ 9,683,387  

 

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December 31, 2019   Gross 
Carrying 
Value
  Accumulated 
Amortization
  Net Carrying 
Amount
Definite-lived Intangible assets, estimated lives in years:                        
Patents, Taper DPI Intellectual Property, 10 years   $ 9,708,700     $ (5,825,220 )   $ 3,883,480  
FDA 503B Registration & Compliance - USC, 10 years     3,963,000       (1,474,015 )     2,488,985  
Non-compete Agreement, 3 years     1,639,000       (1,639,000 )      
Customer Relationships, 10 years     5,572,000       (2,072,475 )     3,499,525  
Website Design, 3 years     16,163       (15,265 )     898  
  Total Definite-lived Assets     20,898,863       (11,025,975 )     9,872,888  
Trade Name and Brand - USC, Indefinite     1,245,000       —         1,245,000  
Symjepi™ Domain Name     9,674       —         9,674  
Balance, December 31, 2019   $ 22,153,537     $ (11,025,975 )   $ 11,127,562  

 

Amortization expense for the three months ended September 30, 2020 and 2019 was approximately $481,000 and $482,000, respectively; and for the nine months ended September 30, 2020 and 2019, amortization expense was approximately $1,444,000 and $1,601,000, respectively. 

    

Estimated amortization expense of definite-lived intangible assets at September 30, 2020 for each of the five succeeding years and thereafter is as follows:    

 

Year ending December 31,    
Remainder of 2020   $ 481,092  
2021     1,924,370  
2022     1,924,370  
2023     1,924,370  
2024     953,500  
Thereafter     1,221,011  
Total   $ 8,428,713  

  

We have two operating segments and two reporting units. During the three months ended March 31, 2020, COVID-19 spread across the globe and adversely impacted economic growth, including as a result of government mandated shut-downs, stay-at-home policies and social distancing efforts intended to mitigate the spread of the virus. In light of the current economic downturn that we believe affected the trading prices of our common stock, we determined that it was more likely than not that the fair value of our reporting unit was less than its carrying value, which triggered the Company to perform an interim impairment assessment to test the carrying value of goodwill, all of which is related to the Compounded Pharmaceuticals reporting unit, as of March 31, 2020.

 

Our quantitative assessment utilized a market-based approach and assessed guideline publicly traded companies that are similar from an investment standpoint to the Company and operating in the drug manufacturing and compounding industry in the healthcare sector. We determined our fair value using the income approach which requires management to estimate the future cash flows related to our reporting unit and includes a Company specific risk premium to account for the increased risk to future cash flows in the current environment. As a result of the analysis, the carrying value of our reporting unit exceeded the fair value by approximately $3,143,000, which was recorded as goodwill impairment expense as of March 31, 2020.  These valuation approaches utilize a variety of company and market assumptions which may change in the future and could result in additional impairment.”

The carrying value of the Company’s goodwill as of September 30, 2020 and December 31, 2019 was approximately $4,497,000 and $7,641,000, respectively.

 

The change in the carrying amount of goodwill consisted of the following activity:

Balance, December 31, 2019

 

 

$

7,640,622

Less: Impairment

 

 

 

(3,143,200)

Balance, September 30, 2020

 

 

$

4,497,422

 

 

 

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Note 6: Leases 

 

The Company has two operating leases, one for an office space and another for office space and a manufacturing facility; and two finance leases for office equipment and plant equipment. As of September 30, 2020, the leases have remaining terms between less than one year and less than four years. The operating leases do not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreements do not require material variable lease payments, residual value guarantees or restrictive covenants. 

The tables below present the operating and financing lease assets and liabilities recognized on the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019:

 

Right-of Use Assets

 

September 30, 2020

 

December 31, 2019

   Operating Leases

 

$

1,534,334

 

 

$

  1,867,205

 

   Financing Leases

 

 

2,983

 

 

  6,347

 

 

 

$

1,537,317

 

 

$

  1,873,552

 

 

 

Lease Liabilities, Current

 

September 30, 2020

 

December 31, 2019

   Operating Leases

 

$

463,153

 

 

$

  440,127

 

   Financing Leases

 

 

2,678

 

 

 

  4,494

 

 

 

$

465,831

 

 

$

  444,621

 

Lease Liabilities, Non-Current