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 March 31, 2021

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 22, 2021, was 148,886,141.

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020	5
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2021 and 2020	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2021 and 2020	7
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020	8  - 9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosure of Market Risk	40
Item 4.	Controls and Procedures	41
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
Signatures		67

2

Summary of Material Risks Associated With Our Business

The business of Adamis Pharmaceuticals Corporation (“we,” “us,” “our,” “Adamis,” or the “company”) is subject to numerous risks and uncertainties that you should be aware of before making an investment decision, including those highlighted in the section entitled “Risk Factors.” These risks include, but are not limited to, the following:

● There is substantial doubt about our ability to continue as a going concern. We have incurred significant losses since our inception, anticipate that we will continue to incur losses in 2021, and may continue to incur losses in the future. We may never achieve or sustain profitability.

● Statements in this Report concerning our future plans and operations are dependent on our having adequate funding and the absence of unexpected delays or adverse developments. We may require additional financing in the future and may not be able to secure required funding, which could force us to delay, reduce or eliminate our commercialization efforts or product development programs and could cause us to cease operations.

● We may never commercialize additional product candidates that are subject to regulatory approval or earn a profit. 

● Several of our potential products and technologies are in early stages of development, or have been discontinued or are suspended.

● Our development plans concerning our products and product candidates are affected by many factors, the outcome of which are difficult to predict.

● We could experience delays in the commencement or completion of clinical testing of our product candidates, which could result in increased costs and delays and adversely affect our business and financial condition. We may be required to suspend, repeat or terminate our clinical trials if trials are not well designed, do not meet regulatory requirements or the results are negative or inconclusive.

● We are subject to the risk of lawsuits or other legal proceedings.

● We are subject to substantial government regulation, which could materially adversely affect our business. We may encounter difficulties or delays in applying for or obtaining regulatory approval for our products. If we do not receive required regulatory approvals for our products, we may not be able to develop and commercialize our products or technologies.

● Even if they are approved and commercialized, our potential products may not be able to compete effectively with other products targeting similar markets.  

● Our failure to adequately protect or to enforce our intellectual property rights or secure rights to third party patents or other intellectual property rights could materially harm our proprietary position in the marketplace or prevent the commercialization of our products. We may become involved in patent litigation or other intellectual property proceedings, which could result in liability for damages and have a material adverse effect on our business and financial position.

● If we determine that our intangible assets or other assets have become impaired, our total assets and financial results could be adversely affected.

● We borrowed funds pursuant to the Paycheck Protection Program. Even though our loans have been forgiven pursuant to the program, we remain subject to possible review and audit in connection with such loans.

● Our business is impacted by state and federal statutes and regulations.

● Our US Compounding Inc. subsidiary, or USC, which is registered as a human drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act, as amended, or FDCA, is subject to many federal, state and local laws, regulations, and administrative practices, including, among others: federal registration as an outsourcing facility, state and local licensure, and registration requirements concerning the operation of outsourcing facilities and the compounding, labeling, marketing, sale and distribution of products from our registered outsourcing facility. Effective as of July 30, 2021, we entered into an asset purchase agreement pursuant to which we sold and transferred certain assets of USC related to its human compounding pharmaceutical business, and we have approved a restructuring pursuant to which the remaining operations and business of USC will be wound down and wound up and assets relating to USC’s business will be sold or otherwise disposed of. Nevertheless, USC and we could become involved in proceedings with the U.S. Food & Drug Administration, or FDA , or other federal or state regulatory authorities alleging non-compliance with applicable federal or state regulatory legal requirements, which could adversely affect our business, financial condition and results of operations.

3

● We have received a grand jury subpoena issued in connection with a criminal investigation. As we have previously disclosed, on May 11, 2021, each of the company and our USC subsidiary received a grand jury subpoena from the U.S. Attorney’s Office (“USAO”) 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 of directors (the “Board”) has engaged outside counsel to conduct an independent internal investigation to review these and other matters. The company has also received a request from the Securities and Exchange Commission (“SEC”) that the company voluntarily provide documents and information relating to certain matters including the subject matter of the subpoena from the USAO. The Company has produced and will continue to produce and provide documents in response to the subpoena and requests. The company intends to cooperate with the USAO and SEC. At this time, the company is unable to determine what, if any, additional actions the USAO, SEC or other federal or state authorities may take, 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. We could receive additional requests from the USAO, SEC or other authorities, which may require further investigation. 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, 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.

● Changes in healthcare laws could adversely affect the ability or willingness of customers to purchase our products and, as a result, adversely impact our business and financial results.

● We identified a material weakness in our internal control over financial reporting, concluded that our internal control over financial reporting was not effective and that our disclosure controls and procedures were not effective at the reasonable assurance level, and restated our unaudited condensed consolidated financial statements for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020, which may lead to additional risks and uncertainties, including loss of investor confidence, legal investigations or proceedings, and negative impacts on our business, financial condition and stock price. In addition, we identified a material weakness in our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of March 31, 2021, June 30, 2021 and September 30, 2021. If we fail to effectively remediate material weaknesses in our internal control over financial reporting, it could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.

● Our business depends on complex information systems, and any failure to successfully maintain these systems or implement new systems to handle our changing needs could materially harm our operations.  Cybersecurity or other system failures could disrupt our business, result in liabilities, and adversely affect our business, financial condition and results of operations.

● Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders and may have the effect of entrenching, and making it difficult to remove, management.

● Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common shares and our ability to access the capital markets.

4

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2021
	(Unaudited)			December 31, 2020
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	57,923,201		$	6,855,355
Accounts Receivable, net		1,192,869			1,092,857
Inventories		2,556,840			3,115,926
Prepaid Expenses and Other Current Assets		975,570			1,459,983
Total Current Assets		62,648,480			12,524,121
LONG TERM ASSETS
Intangible Assets, net		6,051,309			6,289,684
Goodwill		868,412			868,412
Fixed Assets, net		9,612,682			9,586,593
Right-of-Use Assets		1,423,295			1,543,997
Other Non-Current Assets		54,655			54,655
Total Assets	$	80,658,833		$	30,867,462
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable	$	4,035,796		$	3,491,717
Deferred Revenue, current portion		120,692			100,070
Accrued Other Expenses		2,319,735			2,524,412
Accrued Bonuses		1,471,965			1,047,719
Contingent Loss Liability		7,900,000			7,900,000
Lease Liabilities, Current Portion		501,515			494,342
Bank loans - Building, current portion		2,042,507			2,067,213
Paycheck Protection Plan (PPP) Loan , current portion		2,923,797			2,300,253
Total Current Liabilities		21,316,007			19,925,726
LONG TERM LIABILITIES
Deferred Revenue, net of current portion		825,000			850,000
Deferred Tax Liability, net		112,530			112,530
Lease Liabilities, net of current portion		975,772			1,105,219
PPP Loan, net of current portion		2,033,398			891,447
Warrant Liabilities, at fair value		201,250			4,485,000
Total Liabilities		25,463,957			27,369,922
COMMITMENTS AND CONTINGENCIES, see Note 9
STOCKHOLDERS’ EQUITY
Preferred Stock – Par Value $ .0001 ; 10,000,000 Shares Authorized; Series A-1 and Series A-2 Convertible, no shares Issued and Outstanding at March 31, 2021 (Unaudited) and December 31, 2020, respectively.		—			—
Common Stock - Par Value $ .0001 ; 200,000,000 Shares Authorized; 149,409,098 and 94,365,015 Issued; 148,886,141 and 93,842,058 Outstanding at March 31, 2021 (Unaudited) and December 31, 2020, respectively		14,941			9,437
Additional Paid-in Capital		302,822,034			233,404,968
Accumulated Deficit		(247,636,849	)		(229,911,615	)
Treasury Stock - 522,957 Shares, at cost		(5,250	)		(5,250	)
Total Stockholders’ Equity		55,194,876			3,497,540
Total Liabilities and Stockholders’ Equity	$	80,658,833		$	30,867,462

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

5

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,
	2021			2020
	(Unaudited)
REVENUE, net	$	4,108,532		$	4,663,210
COST OF GOODS SOLD		3,641,948			3,687,044
Gross Profit		466,584			976,166
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		5,919,474			6,054,371
RESEARCH AND DEVELOPMENT		2,261,322			2,036,732
IMPAIRMENT EXPENSE - Goodwill		—			3,143,200
Loss from Operations		(7,714,212	)		(10,258,137	)
OTHER INCOME (EXPENSE)
Interest Expense		(39,325	)		(38,287	)
Other Income		16,203			23,055
Change in Fair Value of Warrants		(7,641,900	)		3,027,000
Total Other Income (Expense), net		(7,665,022	)		3,011,768
Net (Loss)	$	(15,379,234	)	$	(7,246,369	)
Basic and Diluted (Loss) Per Share	$	(0.12	)	$	(0.11	)
Basic and Diluted Weighted Average Shares Outstanding		129,463,867			66,499,766

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

6

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

Three Months Ended March 31, 2021 (Unaudited)	Series A-2 Convertible Preferred Stock				Common Stock				Additional Paid-In			Treasury Stock					Accumulated
	Shares		Amount		Shares		Amount		Capital			Shares		Amount			Deficit			Total
Balance December 31, 2020, as reported		—	$	—		94,365,015	$	9,437	$	233,404,968			522,957	$	(5,250	)	$	(229,911,615	)	$	3,497,540
Adjustment, Conversion of 2019 Warrants Liability upon Adoption of ASU 2020-06		—		—		—		—		4,830,000			—		—			(2,346,000	)		2,484,000
Balance December 31, 2020, as adjusted		—		—		94,365,015		9,437		238,234,968			522,957		(5,250	)		(232,257,615	)		5,981,540
Common Stock Issued, Net of Issuance Costs of $ 3,330,752		—		—		46,621,621		4,661		48,414,585			—		—			—			48,419,246
Exercise of Warrants		—		—		8,356,000		836		15,292,714			—		—			—			15,293,550
Issuance of Restricted Stock Units (RSUs)		—		—		66,462		7		(7	)		—		—			—			—
Share Based Compensation		—		—		—		—		879,774			—		—			—			879,774
Net (Loss)						—		—		—			—		—			(15,379,234	)		(15,379,234	)
Balance March 31, 2021		—	$	—		149,409,098	$	14,941	$	302,822,034			522,957	$	(5,250	)	$	(247,636,849	)	$	55,194,876

Three Months Ended March 31, 2020 (Unaudited)	Series A-2 Convertible Preferred Stock				Common Stock				Additional Paid-In			Treasury Stock					Accumulated
	Shares		Amount		Shares		Amount		Capital			Shares		Amount			Deficit			Total
Balance December 31, 2019		—	$	—		62,352,465	$	6,235	$	213,520,785			522,957	$	(5,250	)	$	(180,520,526	)	$	33,001,244
Common Stock Issued, Net of Issuance Costs of $ 494,902		—		—		11,600,000		1,161		6,231,938			—		—			—			6,233,099
Issuance of Restricted Stock Units (RSUs)		—		—		302,780		30		(30	)		—		—			—			—
Issuance of 2020 Warrants		—		—		—		—		(1,914,000	)		—		—			—			(1,914,000	)
Share Based Compensation		—		—		—		—		1,218,961			—		—			—			1,218,961
Net (Loss)						—		—		—			—		—			(7,246,369	)		(7,246,369	)
Balance March 31, 2020		—	$	—		74,255,245	$	7,426	$	219,057,654			522,957	$	(5,250	)	$	(187,766,895	)	$	31,292,935

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

7

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2021			2020
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)	$	(15,379,234	)	$	(7,246,369	)
Adjustments to Reconcile Net (Loss) to Net
Cash (Used in) Operating Activities:
Stock Based Compensation		879,774			1,218,961
Change in Fair Value of Warrant Liability		7,641,900			(3,027,000	)
Provision for Bad Debts		26,534			31,459
Provision for Excess and Obsolete Inventory		491,923			583,695
Non-Cash Operating Lease Expense		(1,541	)		1,686
Depreciation and Amortization Expense		647,161			917,200
Impairment of Goodwill		—			3,143,200
Change in Operating Assets and Liabilities:
Accounts Receivable - Trade		(126,546	)		548,048
Inventories, net		67,163			(1,043,643	)
Prepaid Expenses and Other Current Assets		484,413			118,437
Accounts Payable		628,850			(736,212	)
Deferred Revenue		(4,378	)		(1,828	)
Accrued Other Expenses and Bonuses		107,228			1,252,429
Net Cash (Used in) Operating Activities		(4,536,753	)		(4,239,937	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment		(406,185	)		(274,309	)
Net Cash (Used in) Investing Activities		(406,185	)		(274,309	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock		51,749,998			6,728,001
Costs of Issuance of Common Stock		(3,330,752	)		(494,902	)
Proceeds from Exercise of Warrants		5,851,900			—
Proceeds of PPP Loan		1,765,495			—
Principal Payment of Finance Leases		(1,151	)		(1,105	)
Payment of Bank Loans		(24,706	)		(22,363	)
Net Cash Provided by Financing Activities		56,010,784			6,209,631
Increase in Cash and Cash Equivalents		51,067,846			1,695,385
Cash and Cash Equivalents:
Beginning Cash and Cash Equivalents		6,855,355			8,810,636
Ending Cash and Cash Equivalents	$	57,923,201		$	10,506,021

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

8

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

	Three Months Ended March 31,
	2021		2020
	(Unaudited)		(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Interest	$	30,894	$	39,214
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Increase (Decrease) in Accrued Capital Expenditures	$	27,570	$	(122,443	)

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

9

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, 2020 (the “2020 Form 10-K”).

On January 30, 2020, the World Health Organization (“WHO”) declared that the 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 disruptions arising from the pandemic have adversely affected certain aspects of our business. The extent and duration of the pandemic is unknown, and the future effects on our business are uncertain and difficult to predict, including in light of recent new variants of the virus. 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 12. 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 $ 57,923,201 and $ 6,855,355 at March 31, 2021 and December 31, 2020, 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 may need additional funding in the future to help 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 three months ended March 31, 2021, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. 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 pandemic has had an adverse impact on the Company. 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.

10

Basic and Diluted 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 and other potential dilutive common stock. 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 diluted weighted average shares outstanding for the three months ended March 31, 2021 and March 31, 2020, consist of outstanding equity classified warrants 15,095,238 shares and 24,634,670 shares, respectively, outstanding options 6,431,796 shares and 7,475,358 shares, respectively, and outstanding restricted stock units 2,034,260 shares and 2,722,584 shares, respectively.   

Recently Adopted Accounting Pronouncement

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 has adopted early ASU 2020-06 applying the modified retrospective approach. 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 certain circumstances. As of December 31, 2020, the Company had Warrant Liabilities of $ 4,485,000, of which $ 2,484,000 pertained to the warrants issued in August 2019 (the “2019 Warrants”) that have been adjusted to equity upon the early adoption of ASU 2020-06 in January 2021. ASU 2020-06 allows the Company to move to equity accounting of the 2019 Warrants because the requirement to have an active registration statement no longer requires liability accounting for warrants issued pursuant to a registration statement. 

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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 US 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. 

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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 standard payment terms are 2%/10 and Net 30. 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. 

Drug Development and Commercialization Revenue Recognition

Sandoz 

See Note 5 to our consolidated financial statements in the 2020 Form 10-K for information relating to our exclusive distribution and commercialization agreement dated as of July 1, 2018 with Sandoz Inc. (the “Sandoz Agreement”), which was terminated pursuant to a termination agreement entered into on May 11, 2020.

USWM 

The Company has determined that there are two performance obligations in its exclusive distribution and commercialization agreement (the “USWM Agreement”) with USWM, LLC (“USWM” or “US WorldMeds”): (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 terms of 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; and (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 occur.

Practical Expedients 

As part of the adoption of the ASC Topic 606, the Company elected to use the following practical expedients: (i) incremental costs of obtaining a contract in the form of sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within Selling, General and Administrative expenses; (ii) taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products, are excluded from revenues; and (iii) shipping and handling activities are accounted for as fulfillment costs and recorded in cost of sales. 

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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 ended March 31, 2021 and 2020.  

	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020
Drug Development & Commercialization:
Outsourced Manufacturing	$	1,332,679	$	507,284
Compounded Pharmaceuticals:
Sterile		1,625,011		3,051,115
Non-Sterile		1,150,842		1,104,811
Total Compounded Pharmaceuticals Revenues		2,775,853		4,155,926
Total	$	4,108,532	$	4,663,210

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.  

The following table presents the Company’s revenue disaggregated by end market for the three months ended March 31, 2021 and 2020.

	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020
Drug Development & Commercialization:
Distribution Channel	$	1,332,679	$	507,284
Compounded Pharmaceuticals:
Clinics/Hospitals		2,726,740		3,927,428
Direct to Patients		49,113		228,498
Total Compounded Pharmaceuticals Revenues		2,775,853		4,155,926
Total	$	4,108,532	$	4,663,210

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 March 31, 2021 and 2020, $ 25,070 and $ 40,671, respectively, of the revenues recognized were reported as deferred revenue as of December 31, 2020 and 2019, respectively. Included in the deferred revenue at March 31, 2021 and December 31, 2020 was $ 925,000 and $ 950,000, respectively, relating to 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 revenue over the transition service agreement period.   

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Cost to Obtain a Contract 

The Company capitalizes incremental costs of obtaining a contract with a customer if the Company expects to recover those costs and that it would not have been incurred if the contract had not been obtained. The deferred costs, reported in the prepaid expenses and other current assets and other non-current assets on the Company’s Consolidated Balance Sheets, will be amortized over the economic benefit period of the contract. 

In 2018, 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. As of March 31, 2021 and December 31, 2020, the Company had $ 0 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 March 31, 2021 and 2020, respectively.   

Note 3: Inventories

Inventories at March 31, 2021 and December 31, 2020 consisted of the following: 

	March 31, 2021		December 31, 2020
Finished Goods	$	1,605,495	$	2,059,095
Work-in-Process		—		334,164
Devices & Raw Materials		951,345		722,667
	$	2,556,840	$	3,115,926

 Reserve for obsolescence as of March 31, 2021 and December 31, 2020 was approximately $ 395,000 and $ 446,000, respectively.  

Note 4: Fixed Assets

Fixed assets at March 31, 2021 and December 31, 2020 are summarized in the table below:

Description	Useful Life (Years)		March 31,  2021			December 31, 2020
Building		30	$	3,040,000		$	3,040,000
Machinery and Equipment		3 - 7		6,009,516			5,633,265
Furniture and Fixtures		7		160,012			160,012
Automobile		5		9,500			9,500
Leasehold Improvements		7 - 15		342,330			342,330
Total Fixed Assets				9,561,358			9,185,107
Less: Accumulated Depreciation				(3,979,534	)		(3,571,870	)
Land				460,000			460,000
Construction In Progress - Equipment				3,570,858			3,513,356
Fixed Assets, net			$	9,612,682		$	9,586,593

For the three months ended March 31, 2021 and 2020, depreciation expense was approximately $ 408,000 and $ 384,000, respectively. During the first quarter of 2021, fixed assets increased primarily due to the upgrades made to the assembly lines.

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Note 5: Goodwill and Intangible Assets 

Intangible assets at March 31, 2021 and December 31, 2020 are summarized in the tables below:

March 31, 2021	Gross  Carrying  Value		Accumulated  Amortization			Net Carrying  Amount
Definite-lived Intangible assets, estimated lives in years:
FDA 503B Registration & Compliance - USC, 10 years	$	3,963,000	$	(1,969,391	)	$	1,993,609
Customer Relationships - USC, 10 years		5,572,000		(2,768,974	)		2,803,026
Total Definite-lived Assets		9,535,000		(4,738,365	)		4,796,635
Trade Name and Brand - USC, Indefinite		1,245,000		—			1,245,000
SYMJEPI Domain Name		9,674		—			9,674
Balance, March 31, 2021	$	10,789,674	$	(4,738,365	)	$	6,051,309

December 31, 2020	Gross Carrying Value		Accumulated Amortization				Impairment		Net Carrying Amount
Definite-lived Intangible assets, estimated lives in years:
Patents, Taper DPI Intellectual Property, 10 years	$	9,708,700	$	(6,796,090	)	$	(2,912,610	)	$	—
FDA 503B Registration & Compliance - USC, 10 years		3,963,000		(1,870,316	)		—			2,092,684
Customer Relationships - USC, 10 years		5,572,000		(2,629,674	)		—			2,942,326
Website Design- USC, 3 years		16,163		(16,163	)		—			—
Total Definite-lived Assets		19,259,863		(11,312,243	)		(2,912,610	)		5,035,010
Trade Name and Brand - USC, Indefinite		1,245,000		—			—			1,245,000
SYMJEPI Domain Name		9,674		—			—			9,674
Balance, December 31, 2020	$	20,514,537	$	(11,312,243	)	$	(2,912,610	)	$	6,289,684

Amortization expense for the three months ended March 31, 2021 and 2020 was approximately $ 238,000 and $ 482,000, respectively. 

Estimated amortization expense of definite-lived intangible assets at March 31, 2021 for each of the five succeeding years and thereafter is as follows: 

Year ending December 31,
Remainder of 2021	$	715,125
2022		953,500
2023		953,500
2024		953,500
2025		953,500
Thereafter		267,510
Total	$	4,796,635

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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. This 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. We also performed our annual impairment testing related to our Compounded Pharmaceuticals reporting unit as of December 31, 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows.

For both the interim and annual impairment assessments, the Company utilized a combination of the market-based approach and income approach to determine the fair value of our Compounded Pharmaceuticals business segment. Our quantitative assessments utilized a market-based approach and assessed guideline publicly traded companies operating in the drug manufacturing and compounding industry in the healthcare sector that are similar from an investment standpoint to the Company. The income approach required management to estimate the future cash flows related to our reporting unit and included an adjustment to the discount rate for a company specific risk premium to account for the increased risk to future cash flows in the current environment. As a result of these analyses, the carrying value of our reporting unit exceeded the fair value by approximately $ 3,143,000 and $ 3,629,000 as of March 31, 2020 and December 31, 2020, respectively. The difference between the carrying values and fair values which were recorded as goodwill impairment expense in their respective periods. No impairment charge was recorded for the year ended December 31, 2019. 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 March 31, 2021 and December 31, 2020 was approximately $ 868,000 . 

Change in the carrying amount of goodwill consist of the following activity:

	Amount
Balance, December 31, 2019	$	7,640,622
Less: March 31, 2020 Impairment		(3,143,200	)
Less: December 31, 2020 Impairment		(3,629,010	)
Balance, December 31, 2020	$	868,412
Balance, March 31, 2021	$	868,412

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Note 6: Leases 

The Company has three operating leases, one for an office space, another for an office space and manufacturing facility, and one for office equipment; and one finance lease for plant equipment. As of March 31, 2021, the leases have remaining terms between less than one year and less than five year. 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 March 31, 2021 and December 31, 2020:

Right-of Use Assets	March 31, 2021		December 31, 2020
Operating Leases	$	1,422,548	$	1,542,130
Financing Leases		747		1,867
	$	1,423,295	$	1,543,997

Lease Liabilities, Current	March 31, 2021		December 31, 2020
Operating Leases	$	501,129	$	492,804
Financing Leases		386		1,538
	$	501,515	$	494,342
Lease Liabilities, Non-Current
Operating Leases	$	975,772	$	1,105,219
Total Lease Liabilities		1,477,287		1,599,561

The amortizable lives of operating and financing leased assets are limited by the expected lease term.

The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for leases that commenced prior to that date.

The Company’s weighted average remaining lease term and weighted average discount rate for operating and financing leases as of March 31, 2021 and December 31, 2020 are:

March 31, 2021	Operating			Financing
Weighted Average Remaining Lease Term		3.60 Years			0.08 Years
Weighted Average Discount Rate		4.31	%		3.95	%

December 31, 2020	Operating			Financing
Weighted Average Remaining Lease Term		3.85 Years			0.42 Years
Weighted Average Discount Rate		4.29	%		3.95	%

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2021:

Year Ending December 31,	Operating		Financing
Remainder of 2021	$	412,210	$	388
2022		562,615		—
2023		543,577		—
2024		28,320		—
2025		23,600		—
Undiscounted Future Minimum Lease Payments		1,570,322		388
Less: Difference between undiscounted lease payments and discounted lease liabilities		93,421		2
Total Lease Liabilities	$	1,476,901	$	386
Short-Term Lease Liabilities	$	501,129	$	386
Long-Term Lease Liabilities	$	975,772	$	—

18

Operating lease expense was approximately $ 136,000 and $ 128,000 for the three months ended March 31, 2021 and 2020, respectively. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations.

Amortization expenses related to our financing leases for the three months ended March 31, 2021 and 2020 was approximately $ 1,000 and $ 1,000. Interest expense related to financing leases for the three months ended was approximately $ 10 and $ 100, respectively. Financing lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations. 

Cash paid for amounts included in the measurement of operating lease liabilities were approximately $ 137,000 and $ 127,000 for the three months ended March 31, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of financing lease liabilities were approximately $ 1,000 and $ 1,000 for the three months ended March 31, 2021 and 2020, respectively.

Note 7: Debt

Building Loan

In connection with the closing of the acquisition of USC by the Company in April 2016 and the agreements relating to the transaction, an entity of which certain then-current or former officers, or stockholders, of USC were members, agreed to sell to the Company, the building and property owned by the entity on which USC’s offices are located, in consideration of the Company being added as an additional “borrower” and assuming the obligations under the loan agreement, promissory note and related loan documents that the entity and certain other parties previously entered into with First Federal Bank or its successor Bear State Bank (together with Arvest Bank, as successor in interest to Bear State Bank, referred to as “Lender” or the “Bank”).  

On November 10, 2016, a Loan Amendment and Assumption Agreement was entered with into the Bank. Pursuant to the agreement, as subsequently amended, the Company agreed to pay the Bank monthly payments of principal and interest which currently are approximately $ 19,000 per month, with a final payment due and payable in August 2021.  

As of March 31, 2021 and December 31, 2020, the outstanding principal balance owed on the applicable note was approximately $ 2,043,000 and $ 2,067,000, respectively. The loan currently bears an interest of 6.00 % per year and interest expense for the quarter ended March 31, 2021 and 2020 was approximately $ 31,000 and $ 38,000, respectively. 

First Draw Paycheck Protection Program Loan 

On April 13, 2020, the Company received $ 3,191,700 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company (the “Note”), in the principal amount of $ 3,191,700, to Arvest Bank (the “Bank”), the lender.  The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequent guidance from the SBA and the Department of the Treasury indicated that in assessing the economic need for the loan, a borrower must take into account its current activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds pursuant to the PPP Loan, and the forgiveness of the PPP Loan attendant to these funds, is dependent on the Company having initially qualified for the loan and, in the case of forgiveness, qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. 

Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, unless sooner provided in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note (or later if a timely loan forgiveness application has been submitted), until the maturity date.

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during a specified period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week or 24-week period will qualify for forgiveness. After the Company received funds pursuant to the PPP Loan, the Secretary of the Treasury and SBA issued guidance that the government will review all PPP loans of more than $ 2 million for which the borrower applies for forgiveness, and that all PPP loans in excess of $ 2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. Accordingly, the Company may be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return or repay the full amount of the PPP Loan and could be subject to fines or penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations. In December 2020, the Company submitted an application for the forgiveness of our PPP Loan. Should the Company qualify for ultimate forgiveness of the loan, the amount would be recognized as other income upon formal notice of forgiveness.  If, despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP loan were satisfied, it is later determined that the Company was ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety and/or be subject to additional penalties.

19

The Note may be prepaid in part or in full, at any time, without penalty. The Company may prepay 20% or less of the unpaid principal balance of the Note at any time without notice, and may prepay more than 20% of the unpaid principal balance of the Note subject to certain conditions. If any payment on the Note is more than 15 days late, the Bank may charge the Company a late fee of up to 5% of the unpaid portion of the regularly scheduled payment. The Note provides for certain customary events of default, including (i) failing to make a payment when due under the Note, (ii) failure to do anything required by the Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect the Company’s ability to pay the Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of the Company’s business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect the Company’s ability to pay the Note, (ix) if the Company reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect the Company’s ability to pay the Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the Note, collect all amounts owing from the Company, and file suit and obtain judgment against the Company. 

Second Draw PPP Loan

On March 15, 2021, the Company entered into a Note (the “PPP2 Note”) in favor of the Bank, in the principal amount of $ 1,765,495 relating to funding under a Second Draw loan (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. Under the terms of the PPP2 Note and Second Draw Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP2 Note is five years, unless sooner provided in connection with an event of default under the PPP2 Note. The Company may prepay the Second Draw Loan at any time prior to maturity with no prepayment penalties. Under the PPP, the proceeds of the Second Draw Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments. The Company may apply for forgiveness of some or all of the Second Draw Loan pursuant to the PPP. In order to obtain full or partial forgiveness of the Second Draw Loan, the borrower must timely request forgiveness, must provide satisfactory documentation in accordance with applicable SBA guidelines, and must satisfy the criteria for forgiveness under the PPP and applicable SBA requirements. If the Company timely applies for forgiveness, payments will be deferred in accordance with the CARES Act, as modified by the Paycheck Protection Program Flexibility Act of 2020, and we will not be obligated to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount to the Bank or notifies the Bank that no loan forgiveness in allowed; and the Bank will then notify us of remittance by SBA of the loan forgiveness amount (or notify us that the SBA determined that no loan forgiveness is allowed) and the date that our first payment is due. Interest will accrue during the deferral period. Should the Company qualify for ultimate forgiveness of the loan, the amount would be recognized as other income upon formal notice of forgiveness.  If, despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP loan were satisfied, it is later determined that the Company was ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety and/or be subject to additional penalties. If we do not submit a loan forgiveness application to the Bank within 10 months after the end of our applicable covered period, as defined under the PPP and applicable regulations and guidance issued by the SBA or the U.S. Department of Treasury, then we must begin paying principal and interest after that period. The PPP2 Note contains customary events of default relating to, among other things, payment defaults, breaches of representations, warranties or covenants, defaults on other loans with the Bank, bankruptcy or insolvency events, certain change of control events, material adverse changes or events, and certain other events. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.  

As of March 31, 2021 and December 31, 2020, the outstanding unpaid principal balance of the PPP Loans were $ 4,957,195 and $ 3,191,700, respectively.  

At March 31, 2021, the principal maturities of the amended long-term debts were as follows: 

Years Ending December 31		Building Loan		First Draw PPP Loan*		Second Draw PPP Loan**		Total
Remainder of 2021	$	2,042,507	$	2,300,253	$	—	$	4,342,760
2022		—		891,447		398,245		1,289,692
2023		—		—		415,914		415,914
2024		—		—		420,126		420,126
2025		—		—		424,430		424,430
Thereafter		—		—		106,780		106,780
Total	$	2,042,507	$	3,191,700	$	1,765,495	$	6,999,702
Short-Term Loans	$	2,042,507	$	2,834,676	$	89,121	$	4,966,304
Long-Term Loans	$	—	$	357,024	$	1,676,374	$	2,033,398

*	Based on the amortization schedule provided to the Company by the lender prior to the submission of the PPP Loan forgiveness application. On August 12, 2021, the Company received notification through the Bank that the PPP Loan, including principal and interest thereon, has been fully forgiven by the SBA and that the remaining PPP Loan balance is zero effective August 5, 2021.
**	Based on the amortization schedule provided to the Company by the lender prior to the submission of the PPP Loan forgiveness application. In October 2021, the Company received notification through the Bank that the PPP2 Loan, including principal and interest thereon, has been fully forgiven by the SBA and that the remaining PPP2 Loan balance is zero effective September 28, 2021.

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Note 8: Fair Value Measurement 

The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the debt approximates fair value.  

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows: 

Level 1:	Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2:	Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3:	Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy: 

		Fair Value Measurements at March 31, 2021
	Total		Level 1		Level 2		Level 3
Liabilities
2020 Warrant Liability	$	201,250	$	—	$	—	$	201,250

The fair value measurement of the warrants issued by the Company in February 2020 (the “2020 Warrants”) are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions include the average volatility of the Company’s stock of approximately 70%, the Company’s stock price at valuation date of $ 0.94, expected dividend yield of 0.0% and average risk-free interest rate of approximately 0.808%. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. 

	Fair Value Measurements at December 31, 2020
	Total		Level 1		Level 2		Level 3
Liabilities
2019 Warrant Liability	$	2,484,000	$	—	$	—	$	2,484,000
2020 Warrant Liability		2,001,000		—		—		2,001,000
Total Warrant Liability	$	4,485,000	$	—	$	—	$	4,485,000

The fair value measurement of the warrants issued by the Company in August 2019 (the “2019 Warrants”) and the 2020 Warrants are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions include the expected volatility of the Company’s stock of approximately 80% and 70% for 2019 and 2020 Warrants, respectively; the Company’s stock price at valuation date of $ 0.49; expected dividend yield of 0.0% and; average risk-free interest rate of approximately 0.26% and 0.36% for 2019 and 2020 Warrants, respectively. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs.  

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments, which are treated as liabilities, as follows:

	2019 Warrants						2020 Warrants
	Number of Warrants			Liability			Number of Warrants			Liability
Balance at December 31, 2020		13,800,000		$	2,484,000			8,700,000		$	2,001,000
Adoption of ASC 2020-06, see Note 1		(13,800,000	)		(2,484,000	)		—			—
Change in Fair Value of Warrants at date of exercise		—			—			—			7,521,150
Exercise of Warrants		—			—			(8,350,000	)		(9,441,650	)
Change in Fair Value, March 31, 2021		—			—			—			120,750
Balance at March 31, 2021		—		$	—			350,000		$	201,250

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The Company has certain assets, such as goodwill, that are measured at fair value on a non-recurring basis and are adjusted to fair value only when the carrying values are more than the fair values. Based on market data of companies operating in the compounding and generic drug manufacturing industry, for the March 31, 2020 and December 31, 2020 goodwill impairment analysis, the Company used a discount rate of 26.5% and 17.3%, respectively, for the income approach calculation which includes a Company specific risk premium to account for the increased risk to future cash flows in the current environment. The categorization of the framework used to price the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. 

As discussed in Note 5, Intangible Assets And Goodwill, the Company performed 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. 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. On December 31, 2020, the Company performed its annual impairment assessment and as a result of the analysis, the carrying value of our reporting unit exceeded the fair value by approximately $ 3,629,000, which was recorded as goodwill impairment expense on December 31, 2020.  Refer to Note 5 for more information.

Note 9: Commitments and Contingencies

Legal Proceedings

The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims, claims relating to our compounded pharmacy business, and other matters. We may also become party to litigation in federal and state courts relating to opioid drugs. Any litigation could divert management time and attention, could involve significant amounts of legal fees and other fees and expenses, or could result in an adverse outcome having a material adverse effect on our financial condition, cash flows or results of operations. Actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty. Except as described below, we are not currently involved in any legal proceedings that we believe are, individually or in the aggregate, material to our business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on us because of associated cost and diversion of management time.

Nephron

On September 21, 2018, Nephron Pharmaceuticals Corporation, Nephron S.C., Inc., and Nephron Sterile Compounding Center LLC (collectively, “Nephron”) filed a lawsuit in the United States District Court for the Middle District of Florida, Orlando Division, alleging claims against our wholly owned subsidiary USC —and a USC employee who previously was an employee of Nephron. The original complaint asserted thirteen causes of action against the employee and USC alleging generally misappropriation of Nephron’s trade secrets. The plaintiffs subsequently amended their complaint to include Adamis as a defendant. After several motions to dismiss, only four claims remained from the third amended complaint: (1) misappropriation under the Federal Defend Trade Secrets Act (“DFSA”), (2) breach of contract (against the employee only), (3) misappropriation under the Florida Uniform Trade Secrets Act (“FUTSA”), and (4) tortious interference with an advantageous business relationship. The gravamen of these claims was that the employee improperly misappropriated trade secret information from the employee’s former employer, Nephron, prior to starting employment at USC and that USC improperly recruited the employee for employment at USC. The third amended complaint alleged that Adamis and USC aided in this misappropriation by “using and/or disclosing and/or retaining the same in an effort to unfairly compete against Nephron.” The third amended complaint sought actual, compensatory, consequential, special, and punitive damages, attorneys’ fees and costs, prejudgment interest, preliminary and permanent injunctive relief, and other relief. On September 3, 2019, Adamis and USC answered denying the claims and asserting various defenses and affirmative defenses.  

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Fact discovery closed on March 2, 2020. Expert discovery, including regarding the alleged damages that Nephron sought against Adamis and USC, occurred during the second and third quarters of 2020.  On May 6, 2020, Adamis and USC moved for summary judgment to dismiss the three claims that remained pending against them.  In October 2020, the magistrate judge presiding over the motion delivered a Report and Recommendation recommending that the court enter an order granting the motion in part and denying the motion in part.  The magistrate recommended that the court deny the motion for summary judgment by Adamis and USC with respect to the plaintiffs’ claims under the DFSA and FUTSA, concluding that there were triable issues of material fact that precluded the entry of summary judgment, and that the court grant the motion for summary judgment in favor of Adamis and USC with respect to the claim for tortious interference. Adamis and USC filed objections to the Report and Recommendation with the court; however, the court adopted the recommendation of the magistrate and granted in part and denied in part the motion of Adamis and USC for summary judgment.  Pursuant to court procedures, a mediation between the parties was held in October 2020, and the case was not resolved.  In March 2021, the court granted a motion by Nephron to hold Adamis and USC in civil contempt for violation of a previous consent preliminary injunction related to the hiring by USC of an employee, and ordered that Adamis and USC compensate Nephron for certain fees and expenses in the litigation relating to the matter as well as pay a fine, in an amount to be determined. A hearing on the amount of such sanctions was held on April 6, 2021, but decisions regarding sanctions were deferred until after trial. After the hearing, the court ruled on various pre-trial motions relating to the conduct of the trial. The case was set for trial on April 19, 2021. 

As previously disclosed in the 2020 Form 10-K, while we continue to believe that the claims and damages sought by the plaintiff were without merit, in light of several factors including the recent hearing and outcome of decisions concerning pre-trial motions, the legal expenses of ongoing litigation and trial, the uncertainties of litigation and jury trials, and the possibility of punitive damages and other adverse awards or sanctions, on April 9, 2021, Adamis, USC and Nephron agreed to terms of settlement of the Florida litigation as well as a related case filed by Nephron against USC, Adamis and a second USC employee in the United States District Court for the District of New Jersey alleging misappropriation of trade secrets from Nephron. Under the terms of the settlement agreement entered into by Adamis, the Nephron entities and certain other individuals (the “individual parties”), and related documents entered into by the parties thereto, the Company paid Nephron an amount equal to $ 7,900,000 following execution of the settlement agreement; the Company and USC, as well as the individual parties, agreed to a permanent injunction reflecting certain terms of the settlement and pursuant to which they agreed, among other things, not to retain, access, communication, use or disclose any proprietary or confidential information of Nephron and to destroy all such information in their possession or control, subject to very limited exceptions; and Nephron agreed to dismissal of or withdrawal from the lawsuits and related legal proceedings.  Pursuant to the agreement, each of the parties agreed to release each other from all existing claims that any of them may have against any of the other parties that arise from or relate to the claims and liabilities asserted in the various lawsuits and agreed not to sue any of the parties on the basis of any released claim. 

The Company records accruals for loss contingencies associated with legal matters when the Company determines it is probable that a loss has been or will be incurred and the amount of the loss can be reasonably estimated. Where a material loss contingency is reasonably possible and the reasonably possible loss or range of possible loss can be reasonably estimated, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires significant judgments about future events, including determining both the probability and estimated amount of a possible loss or range of loss. The amount of any ultimate loss may differ from any accruals or estimates that the Company may make.

As a result of the above matters, the Company has determined that liabilities associated with legal contingencies relating to the Nephron legal proceedings above are probable and can be reasonably estimated, and has accrued $ 7,900,000 as of March 31, 2021, which is included in contingent loss liabilities in the consolidated balance sheet in the financial statements included in this Report.

Other

The Company has a production threshold commitment to a manufacturer of our SYMJEPI Products where the Company would be required to pay for maintenance fees if it does not meet certain periodic purchase order minimums. Any such maintenance fees would be prorated as a percentage of the required minimum production threshold. Maintenance fees for the three months ended March 31, 2021 and 2020 were approximately $ 0 and $ 420,000, respectively.

Note 10: Common Stock

In January and February 2021, the Company issued common stock upon exercise of investor warrants. The warrant holders exercised for cash at exercise prices ranging from $ 0.70 to $ 1.15 per share. The Company received total proceeds 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. Net proceeds were approximately $ 48.4 million, after deducting approximately $ 3.3 million in underwriting discounts and commissions and estimated offering expenses payable by the Company.  

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Note 11: Stock-based Compensation, Warrants and Shares Reserved 

 At the Company’s 2020 annual meeting of stockholders, the stockholders approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation (collectively “stock awards”). In addition, the 2020 Plan provides for the grant of cash awards. The initial aggregate number of shares of common stock that may be issued initially pursuant to stock awards under the 2020 Plan is 2,000,000 shares. The number of shares of common stock reserved for issuance automatically increases on January 1 of each calendar year during the term of the 2020 Plan, commencing January 1, 2021, by 5.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares of common stock determined by the Company’s board of directors before the start of a calendar year for which an increase applies. One of the provisions of the 2020 Plan is that no award may be granted, issued or made under the 2020 Plan until such time as the fair market value of the common stock, which is generally the closing sales price of the common stock on the principal stock market on which the common stock is traded, has been equal to or greater than $ 3.00 per share (subject to proportionate adjustment for stock splits, reverse stock splits, and similar events) for at least ten consecutive trading days, after which time awards may be made under the 2020 Plan without regard to any subsequent increase or decrease in the fair market value of the common stock. No awards were made pursuant to the 2020 Plan during the three months ended March 31, 2021.

On January 1, 2021, pursuant to the 2020 Equity Incentive Plan the number of shares reserved for the issuance of stock awards increased by 4,692,103 shares. 

Stock Options 

The following table summarizes the outstanding stock option activity for the three months ended March 31, 2021:

	2009 Equity Incentive Plan			Weighted Average Exercise Price		Weighted Average Remaining Contract Life
Total Outstanding Vested and Expected to Vest as of December 31, 2020		6,508,296		$	4.29		5.60 years
Options Canceled/Expired		(76,500	)		2.88		—
Total Outstanding Vested and Expected to Vest as of March 31, 2021		6,431,796		$	4.31		5.19 years
Vested at March 31, 2021		6,422,556		$	4.31		5.19 years

Expense related to stock options for the three months ended March 31, 2021 and 2020 was approximately $ 142,000 and $ 430,000, respectively. As of March 31, 2021, the unamortized compensation expense related to stock options was approximately $ 5,000. The weighted-average period in years over which the remaining unamortized expense will be recognized is 0.06 years.

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 6,431,796 and 6,508,296 stock options outstanding at March 31, 2021 and December 31, 2020 was $ 0, respectively. The aggregate intrinsic value of 6,422,556 and 6,397,703 stock options exercisable at March 31, 2021 and December 31, 2020 was $ 0, respectively. 

Restricted Stock Units

The following table summarizes the RSUs outstanding at March 31, 2021: 

	Number of Shares/Unit			Weighted Average Grant Date Fair Value
Non-vested RSUs as of December 31, 2020		2,136,893		$	3.64
RSUs vested during the period		(66,462	)		3.04
RSUs forfeited during the period		(36,171	)		3.09
Non-vested RSUs as of March 31, 2021		2,034,260		$	3.66

Expense related to RSUs for the three months ended March 31, 2021 and 2020 was approximately $ 737,000 and $ 789,000, respectively. As of March 31, 2021, unrecognized compensation expense related to these RSUs was approximately $ 3,773,000 and will be recorded as compensation expense in 1.8 years.

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The following table summarizes warrants outstanding at March 31, 2021 and December 31, 2020:  

March 31, 2021	Warrant Shares			Exercise Price Per Share		Date Issued	Expiration Date
Old Adamis Warrants		58,824		$	8.50	November 15, 2007	November 15, 2021
Preferred Stock Series A-2 Warrants		192,414		$	2.90	July 11, 2016	July 11, 2021
2016 Warrants		700,000		$	2.98	August 3, 2016	August 3, 2021
2019 Warrants		13,794,000	**	$	1.15	August 5, 2019