UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended SeptemberJune 30, 20162017

OR

For the transition period from                      to                     

Commission File Number: 001-36242

ADAMIS PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

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

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 NovemberAugust 14, 2016,2017, was 21,584,833.31,351,334.

ADAMIS PHARMACEUTICALS, INC.

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Articles 8 and 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 Adamis Pharmaceuticals Corporation’s operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

On April 11, 2016, Adamis Pharmaceuticals Corporation (the "Company" or "Adamis") completed its acquisition of U.S. Compounding, Inc., an Arkansas corporation ("USC"), pursuant to the terms of the Agreement and Plan of Merger dated March 28, 2016 (the "Merger Agreement") and entered into by and among the Company, USC and Ursula MergerSub Corp., an Arkansas corporation and a wholly owned subsidiary of the Company ("MergerSub"). Pursuant to the terms of the Merger Agreement, MergerSub merged with and into USC (the "Merger"), with USC surviving as a wholly owned subsidiary of the Company.

Segment Information

The Company is engaged primarily in the discovery, development and sales of pharmaceutical, biotechnology and other drug products. Accordingly, the Company has determined that it operates in one operating segment.

Overview of U.S. Compounding, Inc.

USC, which is registered as a drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act and the U.S. Drug Quality and Security Act, provides prescription compounded medications, including compounded sterile preparations and non-sterile compounds to patients, physician clinics, hospitals, surgery centers and other clients in many states throughout the United States. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, injectables, urological preparations, ophthalmic preparations, topical compounds for pain and men’s and women’s health products. USC’s compounded formulations in many circumstances are offered as therapeutic alternatives to drugs approved by the U.S. Food and Drug Administration, or the FDA. USC also provides certain veterinary pharmaceutical products for animals.

Revenue Recognition

The Company recognizes revenues when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Revenues from our USC subsidiary consist of sales of compounded drugs for humans and animals, including sterile injectable and non-sterile integrative therapies. Sales discounts and rebates are sometimes offered to customers if specified criteria are met. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale.  

Cost of Sales

Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, the write-off of obsolete inventory and other related expenses.2016.

Accounts Receivable

Accounts receivable are reported at the amount management expects to collect on outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and credit to allowance for doubtful accounts. Uncollectible amounts are based on USC's history of past write-offs and collections and current credit conditions. Provision for bad debt totaled $40,711 as of September 30, 2016.

Inventories

Inventories are valued at the lower of cost or market.net realizable value (NRV). The costscost of inventories areis determined using the first-in, first-out (“FIFO”) method. Inventories consist of compounding formulation raw materials, currently marketed products, and device supplies. A reserve for obsolescence is recorded monthly based on a percentagereview of raw materials and finished goods inventory andfor obsolescence. Reserve for obsolescence was $109,206$57,059 as of SeptemberJune 30, 2016.2017.

Acquisitions and Intangibles

The Company has engaged in business combination activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill represents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Goodwill and Other Long-Lived Assets

Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test.

The Company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets' book value to future net undiscounted cash flows that the assets are expected to generate.

Claims Liabilities

USC isOur U.S. Compounding, Inc. (“USC”) subsidiary was self-insured up to certain limits for health insurance. Provisions are made for both the estimated liabilities for known claims as incurred and estimates for those incurred but not reported. As of September 30, 2016, the Company was self-insured for upinsurance through February 28, 2017. Beginning March 1, 2017, USC elected to the first $40,000 of claims per covered person with an aggregate deductible of $766,497.participate in a fully insured health insurance plan. The Claims Payable at September 30, 2016 was $225,540 consisting of the estimated IBNR (Incurred But Not Reported) provided by the plan administrator of $161,790 and claims reported but not yet paid of $63,750. 

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of such assets and liabilities. The Company maintains a valuation allowance against its deferred tax assets duerelated to the uncertainty regarding the future realization of such assets, which is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Until such time as the Company can demonstrate that it will no longer incur losses, or if the Company is unable to generate sufficient future taxable income, it could be required to maintain the valuation allowance against its deferred tax assets.self-insured plan at June 30, 2017 was $0.

Liquidity and Capital Resources

Our cash was $8,810,522,$11,742,900 and $5,095,760 at June 30, 2017 and December 31, 2016, respectively, including theapproximately $1.0 million in restricted cash held by the bankBear State Bank, N.A. as loan collateral and $4,080,648 at September 30, 2016 and December 31, 2015, respectively.for a $2.0 million working capital line.  

We prepared the condensed consolidated financial statements assuming that we 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, theThe Company will need significantadditional funding for future operations and the expenditures that will be required to conduct the clinical, development and regulatory workactivities relating to develop the Company’s product candidates, commercially launch any products that may be approved by applicable regulatory authorities, market and sell products, satisfy existing obligations and liabilities, and otherwise support the Company'sCompany’s intended business activities.activities and working capital needs. The preceding conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include attempting to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property assets, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research, and development or commercialization efforts, or similar transactions, in order to satisfy existing obligations, liabilities and future working capital needs, to build working capital reserves, to fund the Company’s research and development projects and to support the operations of USC.transactions. There is no assurance that the Company will be successful in obtaining the necessary funding to meet its business objectives.

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 diluteddilutive weighted average shares outstanding for the ninesix months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 20152016 consist of outstanding equity classified warrants (9,194,044(8,904,714 and 1,730,868,3,914,299, respectively), outstanding options (4,403,519(6,399,649 and 2,146,133,4,516,019, respectively), and outstanding restricted stock units (350,000(1,300,000 and 5,590,355,590, respectively), and convertible preferred stock (1,724,137 and 1,009,021, respectively).

The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of liability classified equity securities and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. Accordingly, the Company considered the impact of the warrants from the June 2013 private placement (see Note 7) on the calculation of the diluted earnings per share.

In July 2016, the Company issued 1,724,137 shares of Series A-2 Convertible Preferred Stock and warrants to purchase up to 1,724,137 shares of common stock or Series A-2 Preferred. The shares of Series A-2 Preferred and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $2.90 per unit. Using the guidance provided by Accounting Standards Codification (ASC) 820, Fair Value Measurements, the Convertible Series A-2 Preferred and the Warrants were valued at $3.18 per share and $0.69 per unit, respectively, using the Binomial Option Pricing Model. After calculating the values of the Convertible Series A-2 and the warrants, the Beneficial Conversion Feature ("BCF") at issuance was approximately $1,374,000. Accordingly, the Company considered the impact of the BCF from the July 2016 private placement (see Note 6) on the calculation of the earnings per share.

Recent Accounting Pronouncements

In August 2016,May 2014, the FASB issued ASU No. 2016-15, Statement2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of Cash Flows (Topic 230): Classificationfinancial statements to understand the nature, amount, timing, and uncertainty of Certain Cash Receiptsrevenue and Cash Payments.  ASU No. 2016-15 is intended to provide guidance regarding eight specific cash flow issues.  The amendments have been issued as an improvement to GAAP because they provide guidance for each offlows arising from contracts with customers. An entity should apply the eight issues, thereby reducing the current and potential future diversity in practice.  The amendments in this update areASU using one of the following two methods: (1) retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, (2) on a modified retrospective basis with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures. For a public entity, the ASU as amended is effective for public business entities for fiscal yearsannual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Given the Company’s current level of revenue, we do not expect a significant impact from the adoption of this new accounting guidance on our financial statements and footnote disclosures.

In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim fiscal periods within those fiscal years.annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period.permitted. We do not expect adoption of ASU No. 2016-15this new guidance to have a significantmaterial impact on our consolidated financial statements.

Note 2: Acquisition of U.S. Compounding

OnOn April 12,11, 2016, we acquired the Company filed a report on Form 8-K announcingnet assets and assumed the completion of its acquisitionprincipal debt obligations of USC in a merger transaction (the “Merger”) pursuant to the terms of the Agreement and Plan of Merger, dated March 28, 2016 (the "Merger Agreement"), withwhich we acquired USC and Merger-Sub. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into USC with USC survivingcontinued as a wholly owned subsidiary of the Company. Pursuant to the Merger and the Merger Agreement, all of the outstanding shares of common stock of USC were converted into the right to receive a total of approximately 1,618,539 shares of Adamis common stock; and as described further below, in connection with the Merger and the transactions contemplated by the Merger Agreement, the Company assumed approximately $5,722,000 principal amount of debt obligations and related loan agreements of USC and certain related entities.

The mergeracquisition is accounted for as an acquisition of USC underusing the purchase method of accounting in accordance with FASB Accounting Standard Codification Subtopic 805—Business Combinations.accounting.  USC is registered as a drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act, as amended, and the U.S. Drug Quality and Security Act, and provides prescription compounded medications, including compounded sterile preparation and certain nonsterile drugs, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States.  USC also provides certain veterinary pharmaceutical drugs for animals.  The assets and liabilitiestotal consideration for the transaction was $15,967,942. 

The principal reasons for the acquisition of USC will be reflected at fair value onwere (i) to expand the balance sheet of the Company. The fair value of the assets and liabilities reflected in the financial statements and notes appearing in this Report on Form 10-Q was based on the estimated value of USC as of April 11, 2016 (the date on whichCompany’s product portfolio, (ii) provide revenues to the Company, acquired USC). A final determination ofand (iii) significantly increase the purchase accounting adjustments, including the allocation of fair value to the USC assetsCompany’s manufacturing, sales, and liabilities, has not been made. Actual adjustments and allocations will be based on the final purchase price and analyses of fair values of identifiable tangible and intangible assets, and estimates of the useful lives of tangible and intangible assets, which will be completed after the Company completes its valuation and assessment process,marketing capabilities, which the Company believes will be finalized not later than one year fromassist in the acquisition date. Accordingly,future in commercializing the purchase accounting adjustments madeCompany’s pipeline of product candidates if they are approved for marketing by applicable regulatory authorities, and diversify the Company’s future revenue mix.

USC is included in connection with the development of the financial statements are preliminary. Differences between the preliminary and final purchase price allocations could have a material impact on the accompanying unaudited financial statements for the period ended September 30, 2016, and the Company's futureour results of operations for the six months ended June 30, 2017, and financial position.its results of operations after the acquisition date of April 11, 2016, but not before that date, are included in our results of operations for the six months ended June 30, 2016.  The Company's unaudited financial statements asacquisition did have a significant effect on our consolidated results of Septemberoperations in the six months ended June 30, 2016 do not include any adjustments to income tax benefit/provision related2017 compared to the Merger.

Total purchase price is summarized as follows: 

The purchase price has been preliminarily allocated based oncomparable period of the fair valueprevious year, due to the size of assets acquired and liabilities assumed:the acquisition in relation to our overall consolidated results of operations. 

Note 3: Inventories

As of SeptemberJune 30, 2016,2017, the inventories of the Company, which consistconsisted primarily of inventories of the Company's wholly-ownedwholly owned subsidiary USC and raw materials of approximately $59,000, Active Pharmaceutical Ingredient ("API"), for our recently FDA approved product, Symjepi. Inventories consisted of the following:

Reserve for obsolescence as of June 30, 2017, was $57,059.

Note 4: Fixed Assets

Fixed Assets at SeptemberJune 30, 20162017 is summarized in the table below:

For the three months and ninesix months ended SeptemberJune 30, 2016,2017, depreciation expense was $167,719$158,748 and $319,772,$323,201, respectively.

Note 5: Intangible Assets and Goodwill

The Company’s intangibleIntangible assets at SeptemberJune 30, 2016, consisted of2017, summarized in the following:table below: 

 AmortizationFor the three months and six months ended June 30, 2017, amortization expense for intangible assets for the periods ended September 30, 2016, was as follows:

$619,022 and $1,237,147, respectively.

Estimated future amortization expense for the Company's intangible assets at SeptemberJune 30, 2016,2017, is as follows:

Goodwill recorded at the acquisition of USC was approximately $2,225,000. Goodwill is calculatedIn addition, the Company recorded a deferred tax liability of approximately $5,416,000 through acquisition goodwill. The carrying value of our goodwill as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for income tax purposes. As indicated in Note 2 above, with respect to the Company’s acquisition of USC in April 2016, a final allocation of fair value to the USC assets and liabilities, including intangible assets and goodwill, has not been made. As a result, the amount of intangible assets, amortization expense and goodwill are subject to change, and differences between the preliminary and final purchase price allocations could have a material impact on the determination of such amounts.June 30, 2017, was approximately $7,641,000.

Note 6: Sale of Preferred Stock

August 2014 Series A Preferred Stock and Warrants

In August 2014, the Company completed a private placement transaction with a small number of sophisticated investors pursuant to which the Company issued 1,418,439 shares of Series A Convertible Preferred Stock (“Series A Preferred”) and warrants to purchase up to 1,418,439 shares of common stock.stock or Series A Preferred. The shares of Series A Preferred and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $3.525 per unit. The Series A Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of the warrants is $3.40 per share, and the warrants are exercisable for five years. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of Series A Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A Preferred or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, then a holder of Series A Preferred or warrants is entitled to participate in such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A Preferred or exercise of the warrants (without regard to any limitations on conversion). In accordance with the transaction agreements, the Company filed a registration statement with the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series A Preferred and the warrants.

The

The warrants include call provisions giving the Company the option, subject to various conditions, to call the exercise of any or all of the 2014 warrants, by giving a call notice to the warrant holders. We may give a call notice only within (i) if a holder and its affiliates beneficially own 2% or less of our outstanding common stock, then 10 trading days after any 20-consecutive trading day period during which the daily volume weighted average price of the common stock (the “VWAP”) is not less than 250% of the exercise price for the 2014 warrants in effect for 10 out of such 20-consecutive trading day period, and (ii) if holder and its affiliates beneficially own more than 2% of the outstanding common stock, five trading days after any 30-consecutive trading day period during which the VWAP of the common stock is not less than 250% of the exercise price then in effect for 25 out of such 30-consecutive trading day period. The exercise price of the 2014 warrants is $3.40 per share, and accordingly 250% of such exercise price is $8.50 per share. During a “call period” of 30 trading days following the date on which the call notice is deemed given and effective (with the call period being extended for one trading day for each trading day during the call period during which the VWAP is less than 225% of the exercise price then in effect during the call period), a holder may exercise the 2014 warrant and purchase the called warrant shares. Subject to the foregoing and to the other provisions of the 2014 warrants, if the holder fails to timely exercise the called 2014 warrant, the Company may cancel the unexercised called warrant (or portion thereof that was called). As of June 30, 2017, August 2014 warrants to purchase 1,418,439 shares remain outstanding.

As of September 30,December 31, 2016, the investors have converted 1,418,439 shares of Series A Preferred into an equal number of shares of common stock, with no shares ofzero Series A Preferred shares remaining outstanding.

January 2016 Series A-1 Preferred Stock and Warrants

On January 26, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant to which the Company issued 1,183,432 shares of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) and warrants to purchase up to 1,183,432 shares of common stock or Series A-1 Preferred. The shares of Series A-1 Preferred and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $4.225 per unit. The Series A-1 Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of the warrants is $4.10 per share, and the warrants are exercisable at any time over the five year term of the warrants. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of Series A-1 Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-1 Preferred or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, then a holder of Series A-1 Preferred or warrants is entitled to participate in such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-1 Preferred or exercise of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately $5,000,000 excluding transactions costs, fees and expenses. In accordance with the transaction agreements, the Company filed a registration statement with the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series A-1 Preferred and the warrants. The January 2016 warrants include call provisions that are generally similar to the 2014 warrants. The exercise price of the January 2016 warrants is $4.10 per share, and accordingly 250% of such exercise price is $10.25 per share. As of June 30, 2017, January 2016 warrants to purchase 1,183,432 shares remain outstanding.

As of September 30,December 31, 2016, the investors have converted 1,183,432 shares of Series A-1 Preferred into an equal number of shares of common stock, with no shares of Series A-1 Preferred Sharesshares remaining outstanding.

July 2016 Series A-2 Preferred Stock and Warrants

On July 11, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant to which the Company issued 1,724,137 shares of Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”) and warrants to purchase up to 1,724,137 shares of common stock or Series A-2 Preferred. The shares of Series A-2 Preferred and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $2.90 per unit. The Series A-2 Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of the warrants is $2.90 per share, and the warrants are exercisable at any time over the five year term of the warrants. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of Series A-2 Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-2 Preferred or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, then a holder of Series A-2 Preferred or warrants is entitled to participate in such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-2 Preferred or exercise of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately $5,000,000 excluding transactions costs, fees and expenses. In accordance with the transaction agreements, the Company filed a registration statement with the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series A-2 Preferred and the warrants. The July 2016 warrants include call provisions that are generally similar to the 2014 warrants. The exercise price of the July 2016 warrants is $2.90 per share, and accordingly 250% of such exercise price is $7.25 per share. As of June 30, 2017, July 2016 warrants to purchase 1,724,137 shares remain outstanding.

On the date of the issuance, the fair value of the common stock issuable upon conversion of the Series A-2 preferred stock was greater than the proceeds received for the Series A-2 convertible preferred stock.Preferred. As such, the Company accounted for the beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options. The Company identified a deemed dividend charge of approximately $1,374,000 for the recognition of a discount on the Series A-2 convertible preferred stock,Preferred, resulting from an allocation of the proceeds received between the warrants and the beneficial conversion feature embedded within the Series A-2 preferred stock,Preferred, which equals the amount by which the estimated fair value of the common stock issuable upon conversion of the issued Series A-2 convertible preferred stock exceeded the proceeds from such issuance. The deemed dividend on preferred stock was a non-cash transaction and reflected below the net loss in the Consolidated Statement of Operations for the year ending December 31, 2016, to arrive at the net loss applicable to common stock.

For the period ended December 31, 2016 and June 30, 2017, the investors have converted 1,099,124 shares and 625,013 shares, respectively, of Series A-2 Preferred into an equal number of shares of common stock, with no shares of Series A-2 Preferred Shares remaining outstanding.

Note 7: Debt

Ben Franklin Note

Biosyn, Inc., a wholly owned subsidiary of the Company, issued a note payable to Ben Franklin Technology Center of Southeastern Pennsylvania (“Ben Franklin Note”) in October 1992, in connection with funding the development of Savvy, a compound then under development to prevent the transmission of HIV/AIDS.

The Ben Franklin Note was recorded at its estimated fair value of $205,000 and was assumed by the Company as an obligation in connection with its acquisition of Biosyn in 2004. The repayment terms of the non-interest bearing obligation include the remittance of an annual fixed percentage of 3.0% applied to future revenues of Biosyn, if any, until the principal balance of $777,902 (face amount) is satisfied. Under the terms of the obligation, revenues are defined to exclude the value of unrestricted research and development funding received by Biosyn from nonprofit sources. Absent a material breach of contract or other event of default, there is no obligation to repay the amounts in the absence of future Biosyn revenues. The Company accreted the discount of $572,902 against earnings using the interest rate method (approximately 46%) over the discount period of five years, which was estimated in connection with the Ben Franklin Note’s valuation at the time of the acquisition.

Accounting principles generally accepted in the United States emphasize market-based measurement through the use of valuation techniques that maximize the use of observable or market-based inputs. The Ben Franklin Note’s peculiar repayment terms outlined above affects its comparability with main stream market issues and also affects its transferability. The value of the Ben Franklin Note would also be impacted by the ability to estimate Biosyn’s expected future revenues which in turn hinge largely upon future efforts to commercialize the product candidate, the results of which efforts are not known by the Company. Given the above factors and therefore the lack of market comparability, the Ben Franklin Note would be valued based on Level 3 inputs (see Note 8). As such, management has determined that the Ben Franklin Note will have no future cash flows, as we do not believe the product will create a revenue stream in the future. As a result, the Note had no fair market value at the time of the merger in April 2009 between the Company (which was then named Cellegy Pharmaceuticals, Inc.) and the corporation then-named Adamis Pharmaceuticals Corporation.

Secured Convertible Promissory Notes 

OnJune 26, 2013, the Company completed the closing of a private placement financing transaction (the “Transaction”) with a small number of accredited institutional investors. Pursuant to a Subscription Agreement (the “Purchase Agreement”) and other transaction documents, we issued Secured Convertible Promissory Notes (“Secured Notes”) and common stock purchase warrants (“Warrants”) to purchase up to 764,960 shares of common stock (“Warrant Shares”), and received gross cash proceeds of $5,300,000, of which $286,349 was used to pay for transaction costs, fees and expenses. The Secured Notes had an aggregate principal amount of $6,502,158. The Secured Notes are no longer outstanding. The exercise price of the Warrants was subject to anti-dilution provisions providing that, with the exception of certain excluded categories of issuances and transactions, if we issue any shares of common stock or securities convertible into or exercisable for common stock, or if common stock equivalents are repriced, at an effective price per share less than the exercise price, without the consent of a majority in interest of the investors, the exercise price would be adjusted downward to equal the per share price of the securities issued or deemed issued in such transaction. 

The Warrants were exercisable for a period of five years from the date of issuance. The exercise price of the Warrants was initially $12.155 per share (and was subsequently reduced to $3.40 per share), which was 110% of the closing price of the common stock on the day before the closing. The Warrants provided for proportional adjustment of the number and kind of securities purchasable upon exercise of the Warrants and the per share exercise price upon the occurrence of certain specified events, and included price anti-dilution provisions which provided for an adjustment to the per share exercise price of the Warrants and, in certain instances, the number of shares issuable upon exercise of the Warrants, if the Company issued common stock or common stock equivalents at effective per share prices lower than the exercise price of the Warrants. The Warrants included call provisions and, as described in great detail in the paragraph below, subject to a call notice given by the Company in May 2016, after expiration of the applicable call period all unexercised Warrants were cancelled in June 2016. 

On May 31, 2016, the Company gave a Call Notice to all outstanding warrant holders to exercise the warrants. A Call Notice may be given only within 10 trading days after any 20-consecutive trading day period during which the volume weighted average price (“VWAP”) of the Company’s common stock is not less than 250% of the exercise price for the Warrants in effect for 10 out of such 20-consecutive trading day period. A holder must exercise the Warrant and purchase the called Warrant Shares within 14 trading days after the Call Date, or the Warrant will be cancelled with respect to the unexercised portion of the Warrant that was subject to the Call Notice. After the expiration of the applicable period, in June 2016 the holders of unexercised warrants were informed that the unexercised warrants subject to the Call Notice were canceled.

The Warrants with the embedded call option at issuance were valued using the Binomial Option Pricing Model (“BOPM”). The estimated fair value of a single Warrant, including the call option, was $2.329 per share and the estimated value of the Warrant anti-dilution reset feature was $1.2002 per share. As a result, the Company recorded liabilities for the warrant and warrant down-round protection derivative totaling $2,398,280. The warrant and warrant derivative liabilities at September 30, 2016 were zero with the cancellation of the June 2013 warrants, see Note 8.

Working Capital Line of Credit

On March 28, 2016, the Company entered into a loan and security agreement (sometimes referred to as the "Adamis New“Adamis Working Capital Line"Line”) with Bear State Bank, N.A. (the “Lender” or the “Bank”), pursuant to which the Company may borrow up to an aggregate of $2,000,000 to provide working capital to USC, subject to the terms and conditions of the loan agreement. Interest on amounts borrowed under the Adamis New Working Capital Line accrues at a rate equal to the prime interest rate, as defined in the agreement. Interest payments are required to be made quarterly. TheAs amended effective March 31, 2017, the entire outstanding principal balance, and all accrued and unpaid interest and all other sums payable pursuant to the loan documents, are due and payable on March 1, 2017,2018, or sooner upon the occurrence of certain events as provided in the loan agreement and related documents. The Company'sCompany’s obligations under the loan agreement are secured by certain collateral, including without limitation its interest in amounts that it has loaned to USC, and a warrant that the Company issued to the Bank to purchase up to 1,000,000 shares of the Company'sCompany’s common stock at an exercise price equal to par value per share, exercisable only if the Company is in default under the loan agreement or related loan documents.

On November 14,10, 2016, the Adamis New Working Capital Line with the Bank was amended to include a Certificate of Deposit of the Company for $1.0 million as additional collateral to the working capital line of credit, and to make certain other amendments to the loan documents relating to the Adamis New Working Capital Line, including to the provisions governing the warrant issued to the Bank to provide that if before full repayment of the Company’s obligations under the Adamis New Working Capital Line the value of the sum of (i) the amount of funds in the certificate of deposit plus (ii) the product of (A) the number of unexercised shares under the warrant multiplied by (B) the value of the Company’s common stock, falls below the product of (Y) 1.5 multiplied by (Z) the outstanding principal balance of the note evidencing the Adamis New Working Capital Line, then following delivery of a notice from the Bank to the Company, the Company agrees to either amend the warrant or provide an additional warrant to the Bank to provide the Bank with rights to acquire additional shares of common stock, or reduce the principal balance of the note, to bring the Company in compliance with the foregoing provisions.Line. The $1.0 million in Certificate of Deposit with the Bank, included as collateral, was recorded as Restricted Cash.

As of SeptemberJune 30, 2017 and December 31, 2016, the loan balance on the Adamis New Working Capital Line of credit was $2,000,000 and interest$2,000,000. Interest expense related to the loan was approximately $29,000.$20,653 and $39,403 for the three and six months ended June 30, 2017, respectively.

Loans Assumed from Acquisition of USC: 

Building Loan  

In connection with the closing of the USC Merger and the transactions contemplated byagreements relating to the Merger Agreement,transaction, 4 HIMS, LLC, an entity of which Eddie Glover, the chief executive officer of USC, and certain other former stockholders of USC are members, agreed to sell to the Company, the building and property owned by 4 HIMS on which USC'sUSC’s offices are located, in consideration of the Company being added as an additional “borrower””borrower” and assuming the obligations under the loan agreement, promissory note and related loan documents that 4 HIMS and certain other parties previously entered into with the Lender (the "4“4 HIMS Loan Documents"Documents”).

On November 14,10, 2016, a Loan Amendment and Assumption Agreement was entered with into the Bank. Pursuant to the agreement, the Company agreed to pay the Bank monthly payments of principal and interest of $15,411, with a final monthly payment and any other amounts due under the 4 HIMS Loan DocumentsDocument due and payable in August 2019.    

As of SeptemberJune 30, 2017 and December 31, 2016, the outstanding principal balance owed on the applicable note was approximately $2,454,000.$2,394,000 and $2,441,000, respectively. The loan currently bears an interest of 3.75% per year and interest expense for the Company paid all accrued interest ofthree and six months ended June 30, 2017 was approximately $60,000 on September 30,2016.$23,000 and $46,000, respectively.

USC Working Capital Loan

In connection with the Merger,our acquisition of USC, Adamis agreed to be added as a Borrower and to assume the obligations as a Borrower under the USC Working Capital Loan Agreement and related promissory note and other related loan documents (the "USC“USC Working Capital Loan Documents"Documents”). Under the USC Working Capital Loan Agreement, Lender agreed to loan funds to USC, as the “Borrower,” up to an aggregate principal amount of $2,500,000, and evidenced by the USC Working Capital Note. Borrowings are limited to 80% of qualified trade accounts receivables and 50% of qualified inventories peras determined under the borrowing base agreementUSC Working Capital Loan Documents, and are collateralized with trade accounts receivables and inventory.inventory

On November 14,10, 2016, the Company and Lender agreed to amend the USC Working Capital Loan Documents to provide that the personal property securing the LoanBorrower’s obligations under the loan documents will also secure the Borrower'sBorrower’s obligations under the other ExistingUSC Loan Documents with the Lender. In addition, a new financial covenant replaced the previous financial covenants, providing that USC will, at all times during the term of the loan, maintain a “Cash Flow Coverage Ratio” of not less than 1.2:1. “Cash Flow Coverage Ratio” is defined as: (i) net income plus non-cash expense items including, but not limited to, depreciation expense, amortization expense and option expense for the month in which the measurement date occurs times 12; divided by (ii) the cash required for payments of interest for the prospective twelve (12) month period and current maturities of principal on all outstanding debt to any person or entity, including without limitation to debt by the Company to the Lender. The Cash Flow Coverage Ratio will be measured on the last day of each December, March, June and September, commencing on December 31, 2016.  Under the amendment, in lieu of compliance with the foregoing covenant, Borrower has the option, at the time of each quarterly measuring period, of making a principal reduction in the amount of Two Hundred Fifty Thousand Dollars ($250,000). 

In addition, pursuant to the amendment, Borrower and Lender agreed that certain other financial covenants set forth in the loan agreement included in the 4 HIMS Loan Documents, the loan agreement included in the Tribute Loan Documents, and the loan agreement included in the USC Equipment Loan Agreement, as well as the original USC Working Capital Loan Agreement described above, are waived for the remainder of the term of the respective loans, and certain individual guarantors, including without limitation Eddie W. Glover, the chief executive officer of USC, were released from their individual guarantor obligations under certain of the loan documents.loans. The amended loan will mature on September 30, 2017.              

As of SeptemberJune 30, 2017 and December 31, 2016, the outstanding unpaid principal balance was approximately $2,116,000.$0 and $1,864,000, respectively. The note currently accruesaccrued interest at 3.25%3.75% per year, and interest expense for the Company paid all accrued interest ofthree and six months ended June 30, 2017 was approximately $60,000 on September 30, 2016.$7,000 and $29,000, respectively.  

Equipment Loans, Consolidated

Equipment Loan, Tribute. In connection with the Merger, Tribute Labs, LLC, a Nevada limited liability company and former related party of USC (“Tribute” or “Borrower”) assigned to Adamis all of its rights under the loan agreement, promissory note and related loan documents that Tribute and certain other parties previously entered into with the Lender (the "Tribute“Tribute Loan Documents"Documents”). Adamis agreed to become an additional co-borrower and to assume Borrower’s obligations under the Tribute Loan Documents, in consideration of the transfer to USC of laboratory equipment owned by Tribute and used to perform testing services for USC’s products,formulations, and Lender consented to such assignment. As of September 30, 2016, theThe outstanding unpaid principal balance under the applicable note that was consolidated, as described below, to one equipment loan was approximately $518,000. ThePrior to the consolidation, the loan currently bearshad an interest rate of 4.75% per year, and the Company paid all accrued interest of approximately $26,000 on September 30, 2016.year.

USC Equipment Loan. In connection with the Merger, Adamis agreed to become a Borrower and to assume the obligations as a Borrower under the USC Equipment Loan Agreement and the related USC Equipment Loan Documents. Under the USC Equipment Loan Agreement, Lender agreed to loan funds to USC, as the “Borrower,”Borrower,” up to an aggregate principal amount of $700,000, with amounts loaned evidenced by the Commercial Line of Credit Agreement and Note (the “USC Equipment Note”). The loan is collateralized by USC'sUSC’s property and equipment. As of September 30, 2016, theThe outstanding unpaid principal balance under the USC Equipment Note that was consolidated to one equipment loan was approximately $635,000. The note currently accrueshad an interest atrate of 3.25% per year and, the Company paid interest of approximately $18,000 on September 30, 2016.year.

Consolidated Equipment Loans. On November 14,10, 2016, the Company and the Lender agreed to the amendment and consolidation of the above USC and Tribute equipment loans. The principal amount of the consolidated loans is $1,152,890 with an interest rate of 3.75% per annum. The loan is payable in three years at an equal monthly amortization of $33,940 commencing on November 1, 2016, and continuing on the first day of each succeeding month through October 1, 2019. As of June 30, 2017 and December 31, 2016, the outstanding unpaid principal balance was approximately $908,000 and $1,092,000, respectively. Interest expense for the three and six months ended June 30, 2017 was approximately $9,000 and $19,000, respectively. 

Loan Amendment, Forbearance and Assumption Agreement

In connection with our acquisition of USC in April 2016, Lender, Adamis, USC, 4 HIMS and Tribute (USC, 4 HIMS and Tribute sometimes referred to as the “Initial Loan Parties” and together with Adamis, collectively the “Loan Parties”), and certain individual guarantors, entered into a Loan Amendment, Forbearance and Assumption Agreement (the “Loan Amendment Agreement”).

Pursuant to the Loan Amendment Agreement, Adamis was added as a “Borrower” and co-borrower under the existing loan agreements and related loan documents between USC (and certain other entities) and Lender (the “Existing“USC Loan Documents”), and assumed all of the rights, duties, liabilities and obligations as a Borrower and a party under the ExistingUSC Loan Documents, jointly and severally with the current borrower or borrowers under each of the ExistingUSC Loan Documents.

InAs part of the Loan Amendment Agreement, the Initial Loan Parties acknowledged that the Existing Loans were in default with respect to certain nonmonetary covenants contained in the Existing Loan Documents. The Bank agreed that all obligations of the Bank to forbear from pursuing its available remedies to collect the obligations evidenced and secured by the Existing Loan Documents shall conditionally exist until October 31, 2016 (the "Forbearance Period"). During the Forbearance Period, and subject to the terms of the Loan Amendment Agreement and the compliance by the Loan Parties with their obligations under the Loan Amendment Agreement, the Bank agreed that it would not pursue available remedies existing as a result of the Loan Parties’ failure to comply with the nonmonetary covenants of the Loan Parties as set forth in the Existing Loan Documents. Upon the expiration of the Forbearance Period, all monetary and nonmonetary obligations of the Loan Parties as set forth in the Existing Loan Documents will be fully reinstated or waived. As described above, in connection with the November 2016 amendments to the loan documents with the Bank, the nonmonetary covenants contained in the Existing Loan Documents were amended and modified.

 The Loan Parties agreed during the Forbearance Period to (i) continue to make all regularly scheduled payments of principal and interest due as set forth in the Existing Loan Documents, and (ii) except to the extent modified in the Loan Amendment Agreement, comply with all covenants of the Loan Parties set forth in the Existing Loan Documents. In the Loan Amendment Agreement, each Initial Loan Party reaffirmed its obligations under the Existing Loans and made certain other representations, warranties and agreements regarding the Existing Loans, and the Bank acknowledged that the applicable Borrower was current in its interest payments or other obligations under the applicable Loan Documents that are due and payable before the date of the Loan Amendment Agreement. The parties also agreed that the real and personal property securing each of the ExistingUSC Loans will also secure each of the other ExistingUSC Loans, as well as the Adamis New Working Capital Line of $2.0 million.

Except as expressly set forth in the Loan Amendment Agreement, as amended, the terms and provisions set forth in the ExistingUSC Loan Documents were not modified and remain in full force and effect. Subject

The notes evidencing the foregoing loans from the Lender are subject to the satisfaction of all conditions precedent set forthcustomary subjective acceleration clauses, effective upon a material impairment in collateral, a material adverse change in the Loan Amendment Agreement,Company’s business or financial condition, or a material impairment in the Bank consentedCompany’s ability to repay the transfernote.  

At June 30, 2017, the outstanding principal maturities of the real and personal property by 4 HIMS and Tribute to Adamis and the foregoing acceptance and assumptions by Adamis. The Loan Amendment Agreement provide for a number of conditions precedent to Bank’s obligations under the agreement, including without limitation: (i) satisfactory title insurance and other insurance regarding the 4 HIMS Property; (ii) satisfactory lien searches and UCC-1 financing statements; (iii) any other document and agreements required by the Bank; (iv) accuracy of the representations and warranties set forth in the Loan Amendment Agreement; and (v) certain other customary conditions.  

Future principal payments under the amended bank loans identified below arelong-term debts were as follows:

Note 8: Derivative Liabilities and Fair Value Measurements

Accounting Standards Codification (“ASC”) 815 - DerivativesDerivatives and Hedging, provides guidance to determine what types of instruments, or embedded features in an instrument, are considered derivatives. This guidance can affect the accounting for convertible instruments that contain provisions to protect holders from a decline in the stock price, referred to as anti-dilution or down-round protection. Down-round provisions reduce the exercise price of a convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments, or issues new convertible instruments that have a lower exercise price. The Company has determined that the warrant liability and related down-round provision related to the Secured Notes should be treated as derivatives. The Company is required to report derivatives at fair value and record the fluctuations in fair value in current operations.provisions.

The Company recognizes the derivative liabilities at their respective fair values at inception and on each reporting date. The Company values its financial assets and liabilities on a recurring basis and certain nonfinancial assets and nonfinancial liabilities on a nonrecurring basis based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy that prioritizes observable and unobservable inputs is used to measure fair value into three broad levels, which are described below:

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The Company recognizes derivative liabilities at their respective fair values at inception and on each reporting date. The Company utilized the BOPM to develop its assumptions for determining the fair value of the Warrants and related anti-dilution features.

The numberAs of liability classified Warrants outstanding as of SeptemberJune 30, 2016, and December 31, 2015 were zero and 575,164, respectively. As shown in the table below, after the cancellationcarrying value of the Warrants with call options the carrying value at September 30, 2016 was $0zero and the carryingCompany recognized a change in fair value of $1,397,471 in the down-round protection derivativecondensed consolidated statement of operations for the same date was $0. 

The table below provides a reconciliation of beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3): 

The derivative liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair values includes various assumptions about future activities and stock price and historical volatility inputs.

The following table describes the valuation techniques used to calculate fair values for assets in Level 3. There were no changes in the valuation techniques during the ninesix months ended SeptemberJune 30, 2016 from December 31, 2015. 

Significant unobservable inputs for the derivative liabilities include (1) the estimated probability of the occurrence of a down-round financing during the term over which the related warrants are exercisable, (2) the estimated magnitude of the down-round and (3) the probability of the reset provision being waived. These estimates which are unobservable in the market were utilized to value the anti-dilution features of the warrants as2016. As of December 31, 2015.2016, all of the outstanding Warrants with call options were either exercised or canceled.

As of June 30, 2017, the fair values of the liability classified warrants and warrant derivatives were zero.

Note 9: Common Stock

In April 2017, the Company completed the closing of an underwritten public offering of 4,928,572 shares of common stock at a public offering price of $3.50 per share. Net proceeds were approximately $16.0 million, after deducting approximately $1,214,000 in underwriting discounts and commissions and estimated offering expenses payable by the Company.  Raymond James & Associates, Inc. acted as the sole book-running manager of the offering and Maxim Group LLC acted as co-manager for the offering.  The securities were issued by the Company pursuant to a “shelf” registration statement on Form S-3 that the Company previously filed with the Securities and Exchange Commission (and a related registration statement), and a prospectus supplement and an accompanying prospectus relating to the offering filed in April 2017.

In June 2017, the Company issued common stock upon exercise of an investor warrant. The warrant holder exercised for cash at an exercise price of $2.98 per share. The Company received a total proceeds of approximately $321,000 and the warrant holder received 107,755 shares of common stock.

Note 9: License Agreement

On May 9, 2016, the Company entered into a Development, License and Commercialization Agreement (the “Agreement”) with Allergan plc’s wholly owned subsidiary, Watson Laboratories, Inc. (“Licensee”), regarding the Company’s Epinephrine Pre-filled Syringe (“PFS”) product candidate for the emergency treatment of anaphylaxis. Under the terms of the Agreement, the Company granted Licensee exclusive commercial rights to market and sell the PFS product in the United States and related territories. Licensee agreed to pay the Company an upfront payment and agreed to make additional potential regulatory, performance and sales based milestone payments. If the FDA does not approve the Company's New Drug Application ("NDA") relating to the PFS product within the time period specified in the Agreement, Licensee has the right, but not the obligation, to terminate the Agreement, and if Licensee elects to terminate the Agreement then the upfront payment previously paid to the Company will be refunded.

             On July 21, 2016, the Company received a notice from Licensee exercising its right to terminate the Agreement; in the absence of termination of the Agreement before expiration of the time period specified in the Agreement, any milestone or other payments would not be refundable. No upfront fee or payment was made, and as a result the Company is not obligated to refund any amounts to Licensee as a result of the termination.

Note 10: Common Stock

On August 3, 2016, the Company completed a registered direct offering of 3,573,255 shares of common stock and warrants to purchase 3,573,255 shares of common stock under its existing shelf registration statements. The shares and warrants were sold in units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase one share of common stock at an exercise price of $2.98 per share, at a purchase price of $3.095 per unit. The warrants will expire five years from the date on which they become exercisable. Gross proceeds from the offering, after deducting placement agent fees, were approximately $10.2 million, excluding any future proceeds from the potential exercise of the warrants and before deducting other estimated offering expenses payable by the Company.

On August 25, 2016, the Company issued 5,590 shares of common stock upon the vesting of restricted stock units ("RSU") with a total value of approximately $63,670.

Note 11:10: Stock Option Plans, Shares Reserved and Warrants

 The Company has a 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan provides forDuring 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 2009 Plan provides for the grant of performance cash awards. The initial aggregate number of shares of common stock that may be issued initially pursuant to stock awards under the 2009 Plan was 411,765 shares. The number of shares of common stock reserved for issuance automatically increase on January 1 of each calendar year, from January 1, 2010 through and including January 1, 2019, by the lesser of (a) 5.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year or (b) 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. On May 25, 2016, upon the approval of the Company's stockholders at the annual meeting of stockholders, the number of shares reserved for issuance increased by 4,500,000, aggregating to 8,566,800 at Septemberquarter ended June 30, 2016, including shares that have previously been issued under the 2009 Plan and shares that are covered by outstanding options, restricted stock units, or other awards under the 2009 Plan.

On July 11, 2016, warrants previously issued to consultants to purchase 17,647 shares of common stock at an exercise price of $3.74 per share expired.

 From July 18, 2016 to September 12, 2016,2017, the Company granted options to purchase 40,00090,000 shares of common stock to the new hires of the Company under the 2009 Equity Incentive Plan with exercise prices ranging from $2.62$3.50 to $3.08$4.60 per share. These options will vest with respect to the one-sixth of the option shares on the date that is six months after the vesting commencement date and one thirty-sixth of the option shares thereafter on each subsequent monthly anniversary of the vesting commencement date, so that the option is exercisable in full over a period of three years andyears. These options were valued using a Black Scholes model;the Black-Scholes option pricing model, the expected volatility was approximately 60%57%, the term was six years, the dividend rate was 0.0%0.0 % and the risk-free interest rate was approximately 1.4%. The2.1%, which resulted in a calculated fair value of the options was $64,950.

 During the three months ended September 30, 2016, previously granted and unvested options to purchase 152,500 shares of common stock were canceled following the holders’ termination of employment.  

$203,000.

The following table summarizes the stock option activity for the ninesix months ended SeptemberJune 30, 2016:2017 below:

ThisThis Quarterly Report on Form 10-Q includes “forward-looking” statements. These forward-looking statements are not historical facts, but are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. These forward-looking statements may include, without limitation, statements about our strategies, objectives and our future achievement. To the extent statements in this Quarterly Report involve, without limitation,achievements; our expectations for growth,growth; estimates of future revenue,revenue; our sources and uses of cash,cash; our liquidity needs,needs; our current or planned clinical trials or research and development activities,activities; anticipated completion dates for clinical trials; product development timelines, timelines; anticipated dates for commercial introduction of products; our future products,products; regulatory matters,matters; our expectations concerning the timing of regulatory approvals; expense, profits, cash flow balance sheet itemsitems; or any other guidance onconcerning future periods, theseperiods. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development and/or otherwise are not statements of historical fact.  These forward-looking statements are forward-lookingbased on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. These statements are often, but not always, made through the use of word or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and “would.” These forward-looking statements are not guarantees of future performance and concern matters that could subsequently differ materially from those described in the forward-looking statements. Actual events or results may differ materially from those discussed in this Quarterly Report on Form 10-Q. Except as may be required by applicable law, we undertake no obligation to update any forward-looking statements or to reflect events or circumstances arising after the date of this Report. Important risks and factors that could cause actual results to differ materially from those discussed inanticipated by these forward-looking statements are identifieddisclosed in this Quarterly Report on Form 10-Q including under the section entitled “Riskheadings “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the our most recent Annual Report on Form 10- K, filed withincluding without limitation under the Securitiesheadings “Item 1A. Risk Factors,” “Item 1. Business” and Exchange Commission,“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the other risks and uncertainties described elsewhere in this report as well as in other risks identified from time to time in our subsequent filings with the Securities and Exchange Commission, press releases and other communications. In addition, the statements contained throughout this Quarterly Report concerning future events or developments or our future activities, including concerning, among other matters, current or planned clinical trials, anticipated research and development activities, anticipated dates for commencement of clinical trials, anticipated completion dates of clinical trials, anticipated meetings with the FDA or other regulatory authorities concerning our product candidates, anticipated dates for submissions to obtain required regulatory marketing approvals,matters, anticipated dates for commercial introduction of products, and other statements concerning our future operations and activities, are forward-looking statements that in each instance assume that we are able to obtain sufficient funding in the near term and thereafter to support such activities and continue our operations and planned activities in a timely manner.manner and assume that there are no significant delays in the successful commercialization of our products that have been approved for marketing. There can be no assurance that this will be the case. Also, such statements assume that there are no significant unexpected developments or events that delay or prevent such activities from occurring. Failure to timely obtain sufficient funding, or unexpected developments or events, could delay the occurrence of such events or prevent the events described inanticipated by any such statements from occurring.Further, any forward-looking statement speaks only as of the date on which it is made, and except as may be required by applicable law, we undertake no obligation to update any forward-looking statements or to reflect events or circumstances arising after the date of this Report.

Unless the context otherwise requires, the terms “we,” “our,” and “the Company” refer to Adamis Pharmaceuticals Corporation, a Delaware corporation, and its subsidiaries. 

General

Company Overview

We

We are an emerging pharmaceuticala specialty biopharmaceutical company focused on combining specialty pharmaceuticalsdeveloping and biotechnology to provide innovative medicines for patientscommercializing products in the therapeutic areas of respiratory disease and physicians. We are currently primarily focused on our specialty pharmaceutical products.allergy.  We are currently developing several products in the allergy and respiratory markets, including our Epinephrine Injection pre-filled syringe, or PFS, product for use in the emergency treatment of acute allergic reactions, including anaphylaxis,anaphylaxis; albuterol (APC-2000) and fluticasone (APC-4000) Dry Powder Inhaler, or DPI, products for the treatment of bronchospasm and asthma, respectively; and a dry powdersteroid hydrofluoroalkane, or HFA metered dose inhaler technology.product (APC-1000) for the treatment of asthma.  Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all specialty pharmaceuticals product lines, we intend to submit Section 505(b)(2) New Drug Applications, or NDAs, or Section 505(j) Abbreviated New Drug Applications, or ANDAs, to the U.S. Food and Drug Administration, or FDA, whenever possible, in order to potentially reduce the time to market and to save on costs, compared to those associated with Section 505(b)(1) NDAs for new drug products. We also have a number of biotechnology product candidates and technologies, including therapeutic vaccine and cancer product candidates and technologies intended to treat patients with unmet medical needs in the global cancer market. To achieve our goals and support our overall strategy, we will need to raise a substantial amount of funding and make significant investments in equipment, new product development and working capital.

Our U.S. Compounding, Inc., or USC, subsidiary, which is registered as a drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act, as amended and the U.S. Drug Quality and Security Act, providesor DQSA, compounds sterile prescription compounded medications, including compounded sterile preparations,drugs, and certain nonsterile compoundsdrugs, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, injectables, urological preparations, ophthalmic preparations, topical compounds for pain and men’s and women’s health products. USC’s compounded formulations in many circumstances are offered as therapeutic alternatives to drugs approved by the U.S. Food and Drug Administration, or the FDA. USC prepares and provides a broad range of customized stock keeping units to meet the individual requirements of customers located throughout most of the United States. USC also provides certain veterinary pharmaceutical products for animals.

Segment Information

The Company is engaged primarily in the discovery, development and sales of pharmaceutical, biotechnology and other drug products. Accordingly, the Company has determined that it operates in one operating segment.

Recent Developments

Epinephrine Injection USP 1:1000 0.3mg Pre-filled Single Dose Syringe

On May 28, 2014, we submitted a Section 505(b)(2) NDA application toJune 15, 2017, the U.S. Food & Drug Administration, or FDA, for approval for sale of ourapproved the Company’s Epinephrine Injection USP, 1:1000 0.3mg(0.3 mg Pre-filled Single Dose Syringe,single dose syringe), or the Epinephrine PFS product. The Epinephrine PFS, product delivers a premeasured dose of epinephrine for the emergency treatment of acute allergic reactions (Type I) including anaphylaxis. We received a complete response letter (“CRL”) fromThe FDA approved also the FDA on March 27, 2015. A CRL is issued bytrade name of “Symjepi™” for the product. The approval was pursuant to the FDA’s Center for Drug Evaluation and Research when it has completed its review of a filethe Company’s New Drug Application, or NDA, which was amended and questions remain that precluderesubmitted in December 2016, pursuant to the approval of the NDA in its current form. We resubmitted the NDA on December 4, 2015.

On June 6, 2016, we issued a press release announcing that we received a second Complete Response Letter from the FDA regarding our NDA forFood, Drug & Cosmetic Act, as amended, relating to the Epinephrine PFS product. The CRL indicated thatSymjepi provides two single dose syringes of epinephrine (adrenaline), which is used for emergency, immediate administration in acute anaphylactic reactions to insect stings or bites, allergic reaction to certain foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis. We are in the FDA determined that it could not approve the NDAprocess of exploring commercialization options and are in its present form. The agency indicated that in order to support approval of the product, the Company must expand its human factors study (patient usability) and reliability study (product stress testing),discussions with new studies, with protocols to be reviewed by the FDA before commencement of the studies. The CRL indicated that the new human factors study would need to provide additional, adequate and satisfactory data and information concerning, among other things, use of the product in different use environments and by different kinds of users and user groups. The CRL included comments on certain other aspectspotential partners regarding commercialization of the product, and in the materialsinterim, we expect to build inventory levels in preparation for an anticipated launch before the end of this year, although the actual timing of a commercial launch will depend on a number of factors. If we enter into an agreement with a commercialization partner, the timing of a commercial launch of a product will depend in part on the plans of any such partner, and data submitted as parta result there are no assurances regarding the date of commercial launch of the NDA. The CRL indicated that the agency had reserved comment, if any, on the proposed labeling for the product until the application was otherwise adequate. The FDA indicated that the NDA will remain open until the issues identified in the CRL are resolved.

The Company is continuing to review the CRL and actions that may be responsive to the items raised in the CRL. The Company has been in communication with the FDA regarding the CRL and plans to prepare and submit a response to the FDA that will be intended to address the items raised in the CRL. Under the FDA’s procedures concerning target response times, the Company believes that the FDA should respond to the Company’s additional submission within six months after the Company’s responsive submission, though that target deadline may be extended if FDA requests additional data, information, materials or clarification or for other reasons, such as difficulties scheduling an advisory committee meeting, FDA workload issues, or other reasons. The Company remains committed to attempting to obtain FDA approval of the NDA for the Epinephrine PFS product and commercializing the product, and remains hopeful that the issues and questions raised by the FDA in the CRL will be satisfactorily addressed and the product ultimately approved for marketing. However, the Company cannot provide any assurances concerning if or when the NDA will be approved and whether the Epinephrine PFS product will ultimately be commercialized. In addition, the Company will be required to devote additional cash resources, which could be significant, in order to respond to the issues raised by the FDA in the CRL and any follow-up requests and to design and manufacture the Epinephrine PFS product in a manner that is satisfactory to the FDA.product.

APC-1000

The Company isWe are continuing development of the APC-1000 product candidate, a steroid hydrofluoroalkane, or HFA, metered dose inhaler product for asthma. Following discussions with the FDA and additional consideration of the development pathway for the product, the Company haswe have decided to conduct additional development work for APC-1000. Our product development timelines are subject to a number of risks and uncertainties, which can delay the actual development time.  Our development plans concerning our allergy and respiratory products, including APC-1000, are affected by developments in the marketplace, including the introduction of potentially competing new products by our competitors. For example, certain products that previously have been available by prescription only have been approved by the FDA and introduced for sale over-the-counter without a prescription at a lower price than competing prescription products, and other new allergy or respiratory products have been or could in the future also be approved as “branded generic” products or as over-the-counter products. Such products could be sold at lower prices than prescription products, could adversely affect the willingness of health insurers or other third party payors to reimburse patients for the cost of prescription products, and could adversely affect our ability to successfully develop and market product candidates in our pipeline. As a result, the Company intends, dependingour product development plans could be affected by such considerations. The anticipated dates for development and introduction of products in our allergy and respiratory product pipeline will depend on the outcomea number of several factors, including resultsthe availability of the additionaladequate funding to support product development work and obtaining additional fundingefforts. We believe that willshould we decide to pursue such applications, we would be required to commence asubmit data for an application for approval to market APC-1000 pursuant to Section 505(b)(2), although there are no assurances that this will be the case. We believe that the next pivotal trial to submit an IND for APC-1000 during the first half of 2017,would be a Phase 3 pivotal trial, although there canare no assurances that this will be no assurancesthe case or concerning the timing of any such filing or theregulatory filings that we may make relating to commencement of a clinical trial relatingtrials regarding the APC-1000 product. Total time to develop the APC-1000 after submission of such an IND.

Termination of License Agreements Relating to Vaccine and Cancer Technologies

        As has been disclosed in the Company’s previous filings, the Company has previously entered into a number of license agreements pursuant to which the Company has acquired license rights regarding patent rights relating to a number of potential therapeutic vaccine and cancer product, candidate technologies.  In April 2010, the Company acquired rights as licensee under three exclusive license agreements (the “WARF Agreements”) with the Wisconsin Alumni Research Foundation (“WARF”) regarding certain prostate cancer technologies and product candidates, named APC-100, APC-200 and APC-300.  In April 2011, the Company entered into an exclusive license agreement (the “UC/DF Agreement”) with The Regentsincluding manufacture of the University of California (“UCSD”)product, clinical trials and the Dana-Farber Cancer Institute, Inc. (“DFCI”), pursuant to which the Company licensed certain patent rights relating to a telomerase-based cancer vaccine technology. 

            The Company has also disclosed in its previous filings that itFDA review, is currently primarily focused on its specialty pharmaceutical products and compounding pharmacy operations and does not intend to devote material financial resources for research and development of its licensed cancer and biotechnology product candidates and technologies.

            On November 10, 2016, the Company delivered a notice of termination to UCSD and DFCI of the UC/DF Agreement.  Under the terms of the agreement, the notice of termination is effective 90 days after delivery.  Also on November 10, 2016, the Company delivered a notice of termination to WARF of the WARF Agreements, which such terminationexpected to be effective 90 days after deliveryapproximately 24-30 months from inception of the notice.  These agreements permit either party to terminate the agreements upon prior notice to thefull product development efforts, assuming adequate funding and that there are no unforeseen regulatory issues or other party, without termination fees or penalties.  As a result of termination of these agreements, the Company will not be responsible after the effective date of termination for minimum annual payments under the agreements or for payment of patent-related fees and costs relating to the licensed patents and technologies.  As part of the winding up and termination process, the Company is responsible for certain expenses and costs incurred through the effective date of termination, and certain provisions of the agreements survive the termination or expiration of the agreements.delays. 

Going Concern and Management Plan

OurOur independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our consolidated financial statements for the yearyears ended December 31, 20152016 and the nine-month transition period ended December 31, 20142015 indicating that we have sustained substantial losses from continuing operations and have used, rather than provided, cash in itsour continuing operations, and incurred recurring losses from operations and have limited working capital to pursue our business alternatives, and that these factors raise substantial doubt about our ability to continue as a going concern.alternatives. As of SeptemberJune 30, 2016,2017, we had cash of approximately $8,811,000,$11.7 million, including theapproximately $1.0 million in restricted cash, an accumulated deficit of approximately $87.8$99.2 million, and liabilities of approximately $12.0$10.1 million. Even withAs noted below under the proceeds from our July 2016 private placement financing transactionheading “Liquidity and our registered directCapital Resources” and in Note 9 to the financial statements appearing elsewhere herein, in April 2017, we completed an underwritten public offering of shares of common stock resulting in estimated net proceeds, after underwriting discounts and warrants,estimated offering expenses, of approximately $16.0 million. In addition, in July 2017, we received approximately $10.6 million of proceeds from the exercise of certain warrants. However, we will need significantadditional funding to continuefor future operations satisfy our obligations and fund the future expenditures that will be required to conduct the clinical, development and regulatory workactivities relating to develop our product candidates, commercially launch any products that may be approved by applicable regulatory authorities, market and tosell products, satisfy existing obligations and liabilities, and otherwise support our other activities.intended business activities and working capital needs. Such additional funding may not be available, may not be available on reasonable terms, and could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained.

TheThe above conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements included elsewhere herein for the three months and ninesix months ended SeptemberJune 30, 2016,2017, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. In preparing these condensed consolidated financial statements, consideration was given to our future business as described elsewhere herein, which may preclude us from realizing the value of certain assets. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or from a business combination or a similar transaction, after expenditure of our existing cash resources we would exhaust our resources and would be unable to continue operations.

Our management intends to attempt to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property assets, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research and development efforts, or similar transactions.transactions, and through revenues from sales of compounded sterile formulations. However, there can be no assurance that we will be able to obtain any required additional funding. If we are unsuccessful in securing funding from any of these sources, we will defer, reduce or eliminate certain planned expenditures, and delay development or commercialization of some or all of our products.products and reduce the scope of our operations. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

Results of Operations

NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

Revenues. 

RevenuesRevenues were approximately $4,004,000$6,843,000 and $0$1,928,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The revenues for the nine-monthsix-month period ended SeptemberJune 30, 2016, consist of and reflect our acquisition of USC effective April 11, 2016, but do not include revenues of USC for the first quarter of 2016 or the second quarter of 2016 before the closing date of the acquisition. Revenues for the nine-monthsix-month period ending June 30, 2016 were adversely affected by the suspension of production of USC’s sterile compounded formulations, product recall and remediation efforts in the third and fourth quarters of 2015 and the first quarter of 2016. USC resumed production and sales of compounded sterile formulations in March and April 2016. The suspension of production and sales of compounded sterile formulations adversely affected USC’s relationships with certain of its customers and with certain of USC’s independent contractors and sales representatives, and is expected to continue to adversely affectaffected sales of compounded sterile formulations.compounded formulations in 2016.  

Cost of SalesGoods Sold.

Cost of sales weregoods sold was approximately $3,167,000$3,546,000 and $0$1,346,000 for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively.  The cost of goods sold for the six-month period ended June 30, 2016 consists of and 2015, respectively. We did not incur any cost of sales for the nine-month period of 2015, as we did not have any revenues for the nine-month period ended September 30, 2015, andreflects our acquisition of USC was completed ineffective April 2016. The11, 2016, but does not include the cost of sales for the nine months ended September 30, 2016, was affected by an obsolescence expensegoods sold of approximately $182,000 as a result of a surplus in production of sterile products in mid-March to April 2016, when USC resumed the production of sterile products, in anticipation of a larger number of customer orders following the resumption of sterile production than actually occurred before the products became obsolete. Moreover, some chemicals in inventory intended for sterile products had expired beforeclosing date of the chemicals could be used.acquisition. Our cost of salesgoods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses.

Research and Development Expenses.

Our research and development costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. Research and development costs were approximately $8,325,000$2,696,000 and $3,807,000$6,831,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The increasedecrease in research and development expenses was primarily due to the additional expense in product development, consisting mostly of expenditures related to product testing and product validationa reduction of approximately $4,422,000 relating to$4,528,000 in development costs of our product candidates, including our Dry Powder Inhaler (DPI) products, Epinephrine PFS, APC-2000, APC-5000,APC-100, and APC 100TeloBVax product candidates and an initial trial relating to a veterinary product candidate, and. This amount was offset by an increase in regulatory fees.  These amounts were somewhat offset by a reductionof approximately $516,000 in development costs for our APC 3000, APC 1000 and TeloB-VAXattributed to the APC-1000 product candidates of approximately $548,000.candidate.  Compensation expense, which includes salaries, stock options, employee benefits and bonus accrual, increaseddecreased by approximately $605,000$123,000 for the nine months ended September 30, 2016first half of 2017 compared to the comparable period of the prior year primarily asbecause of a result of salary increases and additional options granted.   reduction in option expense.  

Selling, General and Administrative Expenses.

Selling, general and administrative expenses consist primarily of depreciation and amortization, legal fees, accounting and audit fees, professional/consulting fees and employee compensation. Selling, general and administrative expenses for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 were approximately $12,535,000$11,228,000 and $7,180,000,$7,199,000, respectively. The increase was primarily due to expenses of approximately $5,403,000$4,204,000 relating to our USC subsidiary which we acquired in April 2016, including acquisition related expenses.2016.  Expenses related to the commercialization activities of ourthe Epinephrine PFS product candidate decreased by approximately $686,000$219,000 for the first ninesix months of the year2017 compared to the comparable period of 2015.2016.  Compensation expense for General and Administrative employees increased by approximately $537,000$231,000 for the nine monthssix month period ended SeptemberJune 30, 20162017, compared to the comparable period of the prior year,2016, primarily due to salary increases, additional stock options granted and monthly accrual of bonus. Other increasesdecreases in expenditures for the ninefirst six months ended September 30, 2016of 2017 compared to the nine months ended September 30, 2015comparable period of 2016 included increasesdecreases of approximately $100,000$324,000 for business development, insurance, board of directors’ feesUSC acquisition related expenses, legal and patent expenses, selling travel and office expenses, and a reduction in taxes.  This amount was partially offset by an increase of approximately $137,000 in legal,finance and accounting recruitment, SEC reporting fees, travelrelated expenses and otherfacility expenses. 

Other Income (Expense).

Other incomeIncome (Expense) for the ninesix month period ended SeptemberJune 30, 20162017 and 20152016, was approximately $1,256,000($118,000) and approximately $1,053,000,$1,325,000, respectively. Other Income (Expense) consists primarily of a change in fair value of warrants, change in fair value of derivative liabilities, and interest expense. The netexpense, change in fair value of warrants and derivatives resultedchange in an incomefair value of approximately $1,397,000 for the nine months ended September 30, 2016, compared to income of approximately $1,053,000 for the nine months ended September 30, 2015.derivative liabilities. The fluctuationincrease in the valuation of the warrants and warrant derivativesother expenses was primarily due to the changesexercise and cancellation of warrants and derivatives in stock price, term and volatility. Debt2016 which account for the approximately $1,397,000 of income for the six months ended June 30, 2016, partially offset by the debt related expense (Interest Expense) of approximately $127,000 for the ninesix month periodsperiod ended SeptemberJune 30, 20162017 and 2015 were approximately $143,000 and $0, respectively.$72,000 for the comparable period in 2016. The increase in debt related expenses for the ninesix month period ended SeptemberJune 30, 2016, in comparison2017, compared to the samecomparable period for fiscal 2015in 2016 was due to interest payments related to the working capital loan in the principal amount of $2.0 million and other bank liabilities assumed in relation toconnection with the acquisition of USC in April 2016.

Three Months Ended SeptemberJune 30, 20162017 and 20152016

Revenues. 

Revenues were approximately $2,076,000$3,805,000 and $0$1,928,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The revenues for the three-month period ended SeptemberJune 30, 2016, consist of and reflect our acquisition of USC effective April 11, 2016, and onlybut do not include revenues of USC forbefore the three-month period ended September 30, 2016.closing date of the acquisition. Revenues for the three-month period ending June 30, 2016 were adversely affected by the suspension of production of USC’s sterile compounded formulations, product recall and remediation efforts in the third and fourth quarters of 2015 and the first quarter of 2016. USC resumed production and sales of compounded sterile formulations in March and April 2016. TheThe suspension of production and sales of compounded sterile formulations adversely affected USC’s relationships with certain of its customers and with certain of USC’s independent contractors and sales representatives, and is expected to continue to adversely affectaffected sales of compounded sterile formulations.compounded formulations in 2016.  

Cost of SalesGoods Sold.

CostCost of sales weregoods sold was approximately $1,821,000$1,881,000 and $0$1,346,000 for the three months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively. We did not incur any cost of sales for the three-month period of 2015, as we did not have any revenues for the three-month period ended September 30, 2015, and our acquisition of USC was completed in April 2016. The cost of sales for the three months ended September 30, 2016, was affected by an obsolescence expense of approximately $153,000 as a result of a surplus in production of sterile products in mid-March to April 2016, when USC resumed the production of sterile products, in anticipation of a larger number of customer orders following the resumption of sterile production than actually occurred before the products became obsolete. Moreover, some chemicals in inventory intended for sterile products had expired before the chemicals could be used. Our cost of salesgoods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses.  The cost of goods sold for the three-month period ended June 30, 2016, consists of and reflects our acquisition of USC effective April 11, 2016, but does not include cost of sales of USC before the closing date of the acquisition.

Research and Development Expenses.

Our researchResearch and development costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. Research and development costsexpenses were approximately $1,494,000$1,186,000 and $1,183,000$3,430,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The increasedecrease in research and development expenses was primarily due to the additional expense in product development, consisting mostly of expenditures related to product testing and product validationa reduction of approximately $230,000.$2,369,000 in development costs of our product candidates, including our Dry Powder Inhaler (DPI) products, Epinephrine PFS, APC-2000, APC-100, and TeloBVax product candidates. This amount was offset by an increase of approximately $318,000 in development costs attributed to the APC-1000 product candidate.  Compensation expense which includes salaries, stock options, employee benefits and bonus accrual, increased bydecreased approximately $63,000 for$193,000 during the 2017 three month period ended September 30, 2016 compared to the comparable periodsecond quarter of the prior year because of salary increases, additional stock2016, due to a reduction in options granted and monthly accrual of bonus. expense.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses consist primarily of depreciation and amortization, legal fees, accounting and audit fees, professional/consulting fees and employee compensation. Selling, general and administrative expenses for the three months ended SeptemberJune 30, 20162017 and 20152016, were approximately $5,335,000$5,655,000 and $2,125,000,$4,583,000, respectively. The increase was primarily due to an increase of approximately $1,124,000 of expenses related with ourrelating to USC subsidiary thatwhich we acquired during the second quarter of 2016, of approximately $3,057,000.in April 2016. Expenses related to the anticipated commercialization activities of the Epinephrine PFS product candidate decreased by approximately $84,000$11,000 for the second quarter of 2017 compared to the comparable period of the prior year.2016.  Compensation expense for Selling, General and Administrative employees increased by approximately $93,000$67,000 for the three monthsmonth period ended SeptemberJune 30, 20162017, compared to the comparable period of the prior year,2016, primarily due to salary increases, additional stock options granted and monthly accrual of bonus. Other increasesdecreases in expenditures for the three months ended September 30, 2016second quarter of 2017 compared to the comparable quarter in 2015of 2016 included decreases of approximately $165,000 for business development, insurance, USC acquisition related expenses, legal and otherpatent expenses, of approximately $106,000selling travel and office expenses, and a reduction in taxes.  This amount is partially offset by a increase of approximately $113,000$57,000 in relation to legal,finance and accounting recruitment, SEC reporting fees, board of directors’ fees,related expenses and patent expenses, which were somewhat offset by a reduction of approximately $75,000 in consulting and otherfacility expenses.

Other Income (Expense).

Other income (expense)Income (Expense) for the three month period ended SeptemberJune 30, 20162017 and 20152016, was approximately ($69,000)54,000) and approximately $159,000,$1,717,000, respectively. Other Income (Expense) consists primarily of ainterest expense, change in fair value of warrants and change in fair value of derivative liabilities. The net changeincrease in fair valueother expenses was primarily due to the exercise and cancellation of warrants and derivatives resulted in an2016 which accounted for the approximately $1,789,000 income of  $0 for the three months ended September 30, 2016, compared to an incomemonth period and a reduction in debt related expense (Interest Expense) of approximately $159,000$13,000 for the three monthsmonth period ended SeptemberJune 30, 2015.2017 compared to the same period in 2016. The interest expense for the three months ended September 30, 2016 and 2015 was approximately $70,000 and $0.  The increasedecrease in debt related expenses for the three month period ended SeptemberJune 30, 2016, in comparison2017, compared to the samecomparable period for fiscal 2015in 2016 was due to the full payment of our USC working capital loan of $2.0 million and other bank liabilities assumed in relation to the acquisition of USC in April 2016. 

loan.

Liquidity and Capital Resources

WeWe have incurred net losses of approximately $18.8$10.7 million and $9.9$12.1 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Since inception, and through SeptemberJune 30, 2016,2017, we have an accumulated deficit of approximately $87.8$99.2 million. Since inception and through SeptemberJune 30, 20162017, we have financed our operations principally through debt financing, through private issuances of common stock and preferred stock, and through underwritten public offerings of common stock. Since inception,We have primarily devoted our resources for general corporate purposes, which have included funding for research and development, selling, general and administrative expenses, working capital, reducing indebtedness, pursuing and completing acquisitions or investments in other businesses, products or technologies, and for capital expenditures. In April 2017, we have raisedcompleted an underwritten public offering of 4,928,572 shares of common stock at a public offering price of $3.50 per share, resulting in net proceeds, after underwriting discounts and estimated offering expenses, of approximately $16.0 million. In July 2017, a total of approximately $95 million3,680,014 investor warrants were exercise for cash that resulted in debt and equity financing transactions, consistinggross proceeds of approximately $17.8$10.6 million.  As part of our acquisition of USC in April of 2016, we assumed debt of approximately $5.7 million, in debt financingof which approximately $3.3 million remains outstanding, and approximately $77.2entered into a secured $2 million in equity financing transactions.line of credit agreement. We expect to finance future cash needs primarily through proceeds from equity or debt financings, loans, sales of assets, out-licensing transactions, and/or collaborative agreements with corporate partners. We have used the net proceeds from debt and equity financings for general corporate purposes, which have included funding for research and development, selling, general and administrative expenses, working capital, reducing indebtedness, pursuing and completing licenses, acquisitions or investments in other businesses, products or technologies, and for capital expenditures.

Total assets were approximately $36.7$43.9 million and $12.0$37.8 million as of SeptemberJune 30, 20162017 and December 31, 2015. All liabilities are classified as current.2016, respectively.  Current assets exceededexceed current liabilities by approximately $1.9$7.7 million at SeptemberJune 30, 2016.  Current assets exceeded current liabilities by approximately $1.4 million as of December 31, 2015.2017.

Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, was approximately $17.9$7.0 million and $8.1$11.1 million, respectively. Net cash used in operating activities increasedreduced due to additionalthe increase in revenue, cancellation of liability classified warrants and warrant derivatives in 2016, and slowdown in research and development costs, and increases in selling, general & administrative expenses.spending.

Net cash provided by (used in) investing activities was approximately $(632,000) and $365,000 and $0 for ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The net cash provided byused in investing activities increased due to the cash received from the acquisition of USC.new equipment. 

Net cash provided by financing activities was approximately $21.2$14.3 million and $10.6$7.1 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Net cash flows provided by financing activities increased primarilyas of June 30, 2017 due to the issuance of common stock preferred stock and proceeds of a bank loan in 2016 that generatedwarrant conversion generating net proceeds of approximately $22$16.4 million offset by the payment of loans of approximately $2.1 million whereas, in 2016, capital raised from issuance of preferred stock and warrant conversion totaled $5.1 million and an offsetproceeds of approximately $1.0 million of restricted cash for the certificate of deposit held as collateral by the bank.bank loan amounted to $2 million. 

As noted above under the heading “Going Concern and Management Plan,” through SeptemberJune 30, 2016,2017, Adamis had incurred substantial losses. The availability of any required additional funding cannot be assured. If we do not obtain additional equity or debt funding that may be required in the near future, our cash resources will be depleted and we willcould be required to materially reduce or suspend operations. Even if we are successful in obtaining additional funding to permit us to continue operations at the levels that we desire, substantial time willmay pass before we obtain regulatory marketing approval for any products andof our product candidates other than our Epinephrine PFS product or begin to realize revenues from product sales of any of our products, and during this period Adamiswe will require additional funds.funds to continue operations and development of our product candidates. No assurance can be given as to the timing or ultimate success of obtaining any future funding. funding that may be required.  

As notedwe have previously disclosed in our SEC filings, in connection with our acquisition of USC and the transactions contemplated by the Merger Agreement relating to the USC acquisition, we assumed approximately $5,722,000 principal amount of debt obligations under two loan agreements and related loan documents relating to the building, real property and equipment that certain third parties agreed to transfer to the Company or USC in connection with the Merger, as well as the two loan agreements to which USC is a party, a working capital loan and an equipment loan, and related loan documents evidencing loans previously made to USC, and we agreed to become an additional co-borrower under the heading Recent Developments,USC Loan Documents.  The lender in all of the Company will beUSC Loan Documents was First Federal Bank and/or its successor Bear State Bank, referred to as Lender or the Bank.  In November 2016, we entered into amendments of our loan agreements with the Bank. Under the loan agreements and with the full pay off of the USC Working Capital Line, we are required to devote additional cash resources,make current periodic interest and principal payments under the Amended Loan Documents, in an amount of approximately $49,000 per month; the amount of required interest payments is subject to change depending on future changes in interest rates.  The balances of the Building Loan and Equipment Loan are due and payable on August 8, 2019 and October 1, 2019, respectively. We also entered into a loan and security agreement with the Lender, referred to as the Adamis Working Capital Line, pursuant to which could be significant, in orderwe may borrow up to respondan aggregate of $2,000,000 to provide working capital to USC, subject to the issuesterms and questions raised byconditions of the FDAloan agreement.  Interest on amounts borrowed under the Adamis Working Capital Line accrues at a rate equal to the prime interest rate, as defined in the CRL regardingagreement.  Interest payments are required to be made quarterly.  As amended effective March 31, 2017, the entire outstanding principal balance, and all accrued and unpaid interest and all other sums payable pursuant to our Epinephrine PFS productloan agreement with the Bank, are due and payable on March 1, 2018, or sooner upon the occurrence of certain events as provided in the loan agreement and related documents. Our obligations under the Adamis Working Capital Line are secured by certain collateral, including without limitation our interest in amounts that we have loaned to continue developmentUSC; a warrant that we issued to the Lender to purchase up to 1,000,000 shares of our other product candidates including APC-1000common stock at an exercise price equal to par value per share, only exercisable by Lender if we are in default under the loan documents and APC-5000,if the Lender delivers a notice to us and to supportwe do not cure the default within the applicable cure period; and our other operations and activities. Certificate of Deposit (“CD”) with the Lender of approximately $1,000,000.

Critical Accounting Policies and Estimates

TheThe discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

TheThe Company’s critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20152016 have not significantly changed exceptchanged. Refer to Note 1 to the accompanying financial statements of this Quarterly Report on Form 10-Q for the following policies that have beenadditional policy adopted during the ninethree months ended SeptemberJune 30, 2016.2017.

Revenue Recognition

The Company recognizes revenues when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Revenues from our USC subsidiary consist of sales of compounded drugs for humans and animals, including sterile injectable and non-sterile integrative therapies. Sales discounts and rebates are sometimes offered to customers if specified criteria are met. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale.  

Cost of Sales

Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, the write-off of obsolete inventory and other related expenses.

Accounts Receivable

Accounts receivable are reported at the amount management expects to collect on outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and credit to allowance for doubtful accounts. Uncollectible amounts are based on USC's history of past write-offs and collections and current credit conditions. 

Inventories

Inventories are valued at the lower of cost or market.net realizable value (NRV). The cost of inventories areis determined using the first-in, first-out (“FIFO”) method. Inventories consist of compounding formulation raw materials, currently marketed products, and device supplies. A reserve for obsolescence is recorded monthly based on a percentagereview of raw materials and finished goods inventory.inventory for obsolescence. Reserve for obsolescence was $57,059 as of June 30, 2017.

Acquisitions and Intangibles

The Company has engaged in business combination activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill represents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Goodwill and Other Long-Lived Assets

 Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test.

The Company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets' book value to future net undiscounted cash flows that the assets are expected to generate.

Claims Liabilities

Our USC issubsidiary was self-insured up to certain limits for health insurance. Provisions are made for both the estimated liabilities for known claims as incurred and estimates for those incurred but not reported. As of September 30, 2016, the Company was self-insured for upinsurance through February 28, 2017. Beginning March 1, 2017, USC elected to participate in a fully insured health insurance plan. The Claims Payable related to the first $40,000 of claims per covered person with an aggregate deductible of $766,497.  self-insured plan at June 30, 2017 was $0.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of such assets and liabilities. The Company maintains a valuation allowance against its deferred tax assets dueRecent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 1 to the uncertainty regarding the future realizationaccompanying financial statements of such assets, which is basedthis Quarterly Report on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Until such time as the Company can demonstrate that it will no longer incur losses, or if the Company is unable to generate sufficient future taxable income, it could be required to maintain the valuation allowance against its deferred tax assets.Form 10-Q.   

Recent Accounting Pronouncements

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  ASU No. 2016-15 is intended to provide guidance to eight specific cash flow issues.  The amendments have been issued as an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice described above.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim fiscal periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.   We do not expect adoption of ASU No. 2016-15 to have a significant impact on our financial statements. 

Off Balance Sheet Arrangements

At SeptemberJune 30, 2016,2017, Adamis did not have any off balance sheet arrangements. 

ITEM  3. Quantitative and Qualitative Disclosure of Market Risk

Not required. 

ITEM  4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

WeWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance and not absolute assurance of achieving their objectives.  In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

AsAs required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls

Except as described in this paragraph, thereThere has been no change during the three monthsquarter ended SeptemberJune 30, 20162017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In connection with our acquisition of U.S. Compounding, Inc. (“USC”) in April 2016, we began implementing the Company’s standards and procedures at USC, including controls over accounting systems, financial reporting, and the preparation of financial statements in accordance with U.S. GAAP. We are continuing to integrate the acquired operations of USC into our overall internal control over financial reporting process.

PART II OTHER INFORMATION

ITEM  1. Legal Proceedings

Information regarding certain legal proceedings to which the Company is or may become a party can be found in the description of legal proceedings contained in the Company’s most recent Annual Report on Form 10-K for the nine-month periodyear ended December 31, 2015,2016, and is incorporated herein by reference. There have not been any material developments with respect to any such proceedings during the quarter to which this Report on Form 10-Q relates.

Item 1A. Risk Factors

AsAs a smaller reporting company, Adamis is not required under the rules of the Securities and Exchange Commission, or SEC, to provide information under this Item. Risks and uncertainties relating to the amount of cash and cash equivalents at SeptemberJune 30, 2016,2017, and uncertainties concerning the need for additional funding, are discussed above under the headings, “Going Concern and Management Plan” and “Liquidity and Capital Resources” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q, and are incorporated herein by this reference. Other material risks and uncertainties associated with Adamis’ business have been previously disclosed in our most recent transition reportAnnual Report on Form 10-K filed with the Securities and Exchange Commission,SEC, included under the heading “Risk Factors,” and in our Report on Form 8-K filed with the Commission on July 28, 2016, including under the heading “Risk Factors,” and those disclosures are incorporated herein by reference.

The risk factor below presents additional information concerning risks relating to our Epinephrine Pre-filled Single Dose Syringe, or the Epinephrine PFS, product, and updates and supersedes any inconsistent statements in our previous disclosures regarding risk factors contained in our previously filed Annual Report on Form 10-K for the year ended December 31, 2016, or in our other filings with the SEC before the date of this Report on Form 10-Q.

The failure to successfully commercialize our approved Epinephrine pre-filled syringe product could have a material effect on our business, financial condition, results of operations and the market price of our common stock. 

On June 15, 2017, the U.S. Food & Drug Administration approved the Company’s Epinephrine Injection USP, 1:1000 (0.3 mg Pre-filled single dose syringe), or PFS, product, and the trade name of “Symjepi™,” for the emergency treatment of allergic reactions (Type I) including anaphylaxis. We are in the process of exploring commercialization options and are in discussions with potential partners regarding commercialization of the product. Other than revenues from sale of compounded prescription drugs from our U.S. Compounding, Inc. subsidiary, our ability to generate revenue in the near term will likely depend on the successful commercialization of our Epinephrine PFS product. The actual timing of a commercial launch will depend on a number of factors. If we enter into an agreement with a commercialization partner, the timing of a commercial launch of a product will depend in part on the plans of any such partner, and as a result there are no assurances regarding the date of commercial launch of the product. Any failure or significant delay in the successful commercialization of the product could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock. 

ITEM  2. Unregistered Sales of Equity Securities and Use of Proceeds

DuringInformation required by this Item regarding sales of equity securities during the quarter ended SeptemberJune 30, 2016, except as described below we did not issue securities2017, without registration under the Securities Act of 1933, as amended, (the "Securities Act"). 

On July 11, 2016, the Company completed a private placement transaction with a small number of sophisticated investors pursuant to which the Company issued 1,724,137 shares of Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”) and warrants to purchase up to 1,724,137 shares of common stock or Series A-2 Preferred. The shares of Series A-2 Preferred and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $2.90 per unit. The Series A-2 Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of the warrants is $2.90 per share, and the warrants are exercisable at any time over the five year term of the warrants. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of Series A-2 Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-2 Preferred or exercise of the warrants (without regard to any limitations on conversion).

Gross proceeds to the Company were approximately $5,000,000 excluding transactions costs, fees and expenses. The securities were issued in a private placement transaction to a limited number of shareholders in reliance on Section 4(2) of the Securities Act.  Each person or entity to whom securities were issued represented that the securities were being acquired for investment purposes, for the person’s or entity’s own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, and that the investor was an accredited investor as defined in Regulation D promulgated pursuant to the Securities Act.  In accordance with the transaction agreements, the Company filed a registration statement with the SEC, which has been declared effective, to registerpreviously included in Current Reports on Form 8-K filed by the resale from time to time of shares of common stock underlying the Series A-2 Preferred and the warrants. Company.