UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20222023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 001-36242
ADAMISDMK PHARMACEUTICALS CORPCORPORATIONORATION
(Exact name of registrant as specified in its charter)
Delaware | 82-0429727 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
1168211622 El Camino Real, Suite 300100, San Diego, CA 92130
(Address of principal executive offices, including zip code)
(858) 997-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock |
| NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 8, 2022,13, 2023, was .
ADAMIS
DMK PHARMACEUTICALS INC.CORPORATION AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ADAMISDMK PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and Cash Equivalents | $ | 2,419,960 | $ | 23,220,770 | $ | 6,663,921 | $ | 1,081,364 | ||||||||
Restricted Cash | 30,056 | 30,023 | — | 30,068 | ||||||||||||
Accounts Receivable, net | 1,306,505 | 815,565 | — | 1,054,058 | ||||||||||||
Receivable from Fagron | 247,510 | 5,084,452 | ||||||||||||||
Inventories | 1,092,445 | 418,607 | 662,962 | 1,238,778 | ||||||||||||
Prepaid Expenses and Other Current Assets | 803,415 | 1,313,546 | 539,772 | 1,914,966 | ||||||||||||
Current Assets of Discontinued Operations (Note 2) | 4,188,239 | 4,320,659 | ||||||||||||||
Current Assets of Discontinued Operations | 5,406 | 3,952,916 | ||||||||||||||
Total Current Assets | 10,088,130 | 35,203,622 | 7,872,061 | 9,272,150 | ||||||||||||
LONG TERM ASSETS | ||||||||||||||||
Fixed Assets, net | 1,594,856 | 2,334,768 | 1,075,676 | 1,288,894 | ||||||||||||
Right-of-Use Assets | 402,126 | 650,460 | — | 317,622 | ||||||||||||
Other Non-Current Assets | 52,174 | 109,137 | 9,674 | 52,174 | ||||||||||||
Total Assets | $ | 12,137,286 | $ | 38,297,987 | $ | 8,957,411 | $ | 10,930,840 | ||||||||
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts Payable | $ | 5,297,717 | $ | 3,754,010 | $ | 9,973,413 | $ | 7,937,493 | ||||||||
Deferred Revenue, current portion (including $145,000 and $0 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively) | 172,779 | 27,779 | ||||||||||||||
Accrued Other Expenses | 1,341,759 | 2,800,241 | 2,323,738 | 1,510,053 | ||||||||||||
Product Recall Liability | 408,130 | 2,000,000 | — | 305,806 | ||||||||||||
Accrued Bonuses | — | 535,624 | ||||||||||||||
Lease Liabilities, current portion | 368,809 | 349,871 | 63,209 | 342,562 | ||||||||||||
Deferred Revenue, current portion | 27,779 | 100,000 | ||||||||||||||
Current Liabilities of Discontinued Operations (Note 2) | 1,429,925 | 1,683,246 | ||||||||||||||
Current Liabilities of Discontinued Operations | 929,328 | 1,272,173 | ||||||||||||||
Total Current Liabilities | 8,874,119 | 11,222,992 | 13,462,467 | 11,395,866 | ||||||||||||
LONG TERM LIABILITIES | ||||||||||||||||
Deferred Revenue, net of current portion | 185,191 | 750,000 | 157,413 | 178,247 | ||||||||||||
Lease Liabilities, net of current portion | 63,209 | 342,562 | ||||||||||||||
Warrant Liabilities, at fair value | 12,037 | 99,655 | 302,170 | 7,492 | ||||||||||||
Total Liabilities | 9,134,556 | 12,415,209 | 13,922,050 | 11,581,605 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 12) | ||||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||||||||||
MEZZANINE EQUITY | ||||||||||||||||
Convertible Preferred Stock - Par Value | ; Shares Authorized: Series C Preferred Stock Shares Authorized, liquidation preference per share; Issued and Outstanding at September 30, 2023 and December 31, 2022, respectively.330,000 | 157,303 | ||||||||||||||
Convertible Preferred Stock - Par Value $ | ; Shares Authorized: Series C Preferred Stock Shares Authorized, liquidation preference $ per share; and Issued and Outstanding at September 30, 2022 (Unaudited) and December 31, 2021, respectively. (Note 10)157,303 | — | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||
Common Stock - Par Value $ ; Shares Authorized; and Issued, and Outstanding at September 30, 2022 (Unaudited) and December 31, 2021, respectively. | 15,051 | 15,012 | ||||||||||||||
STOCKHOLDERS’ DEFICIT | ||||||||||||||||
Convertible Preferred Stock - Par Value | ; Shares Authorized; Series E Preferred Stock Shares Authorized, Issued and Outstanding at September 30, 2023 and Shares Authorized, Issued and Outstanding at December 31, 2022— | — | ||||||||||||||
Common Stock - Par Value ; Shares Authorized; and Issued, and Outstanding at September 30, 2023 and December 31, 2022, respectively. | 1,010 | 215 | ||||||||||||||
Additional Paid-in Capital | 304,072,176 | 303,958,829 | 318,178,762 | 303,761,053 | ||||||||||||
Accumulated Deficit | (301,236,550 | ) | (278,085,813 | ) | (323,469,161 | ) | (304,564,086 | ) | ||||||||
Treasury Stock, at cost - Shares at September 30, 2022 (Unaudited) and December 31, 2021. | (5,250 | ) | (5,250 | ) | ||||||||||||
Total Stockholders’ Equity | 2,845,427 | 25,882,778 | ||||||||||||||
Total Liabilities, Mezzanine Equity and Stockholders’ Equity | $ | 12,137,286 | $ | 38,297,987 | ||||||||||||
Treasury Stock - Shares, at cost | (5,250 | ) | (5,250 | ) | ||||||||||||
Total Stockholders’ Deficit | (5,294,639 | ) | (808,068) | |||||||||||||
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 8,957,411 | $ | 10,930,840 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
3
ADAMISDMK PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||
REVENUE, net | $ | 1,505,683 | $ | 759,962 | $ | 2,605,396 | $ | 3,368,115 | ||||||||||||||||
COST OF GOODS SOLD | 1,647,585 | 1,565,922 | 3,705,697 | 5,207,402 | ||||||||||||||||||||
Gross Loss | (141,902 | ) | (805,960 | ) | (1,100,301 | ) | (1,839,287 | ) | ||||||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 2,508,176 | 4,794,485 | 10,096,807 | 13,247,027 | ||||||||||||||||||||
RESEARCH AND DEVELOPMENT | 1,977,939 | 4,620,143 | 9,520,118 | 9,066,608 | ||||||||||||||||||||
Loss from Operations | (4,628,017 | ) | (10,220,588 | ) | (20,717,226 | ) | (24,152,922 | ) | ||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
Interest Expense | — | (1,865 | ) | — | (6,649 | ) | ||||||||||||||||||
Interest/Other Income (Expense) | 298,118 | 1,932 | (379,392 | ) | 5,283 | |||||||||||||||||||
Gain on Forgiveness of PPP Loans | — | 5,009,590 | — | 5,009,590 | ||||||||||||||||||||
PPP2 Loan Contingent Loss | — | — | (1,787,417 | ) | — | |||||||||||||||||||
Change in Fair Value of Warrant Liabilities | 58,690 | 42,525 | 87,618 | (7,642,949 | ) | |||||||||||||||||||
Total Other Income (Expense), net | 356,808 | 5,052,182 | (2,079,191 | ) | (2,634,725 | ) | ||||||||||||||||||
Net Loss from Continuing Operations before Income Taxes | (4,271,209 | ) | (5,168,406 | ) | (22,796,417 | ) | (26,787,647 | ) | ||||||||||||||||
Income Taxes | — | — | — | — | ||||||||||||||||||||
Net Loss from Continuing Operations | (4,271,209 | ) | (5,168,406 | ) | (22,796,417 | ) | (26,787,647 | ) | ||||||||||||||||
DISCONTINUED OPERATIONS | ||||||||||||||||||||||||
Net Loss from Discontinued Operations before Income Taxes | (127,692 | ) | (7,192,642 | ) | (354,320 | ) | (10,266,365 | ) | ||||||||||||||||
Income Taxes - Discontinued Operations | — | — | — | — | ||||||||||||||||||||
Net Loss from Discontinued Operations | (127,692 | ) | (7,192,642 | ) | (354,320 | ) | (10,266,365 | ) | ||||||||||||||||
Net Loss Applicable to Common Stock | $ | (4,398,901 | ) | $ | (12,361,048 | ) | $ | (23,150,737 | ) | $ | (37,054,012 | ) | ||||||||||||
Basic and Diluted Loss Per Share: | ||||||||||||||||||||||||
Continuing Operations | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||||||
Discontinued Operations | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||||||
Basic and Diluted Net Loss Per Share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||||||
Basic and Diluted Weighted Average Shares Outstanding |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||
Revenue, net | $ | 9,062 | $ | 1,505,683 | $ | 1,469,007 | $ | 2,605,396 | ||||||||||||||||
Costs of goods sold | 338,488 | 1,647,585 | 2,487,948 | 3,705,697 | ||||||||||||||||||||
Gross Loss | (329,426 | ) | (141,902 | ) | (1,018,941 | ) | (1,100,301 | ) | ||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||
Selling, General and Administrative | 2,517,161 | 2,508,176 | 11,332,333 | 10,096,807 | ||||||||||||||||||||
Research and Development | 418,518 | 1,977,939 | 2,106,004 | 9,520,118 | ||||||||||||||||||||
Acquired In-Process Research and Development (IPR&D) | — | — | 6,539,675 | — | ||||||||||||||||||||
Loss from Operations | (3,265,105 | ) | (4,628,017 | ) | (20,996,953 | ) | (20,717,226 | ) | ||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
Interest Income | 13,835 | 19,699 | 14,549 | 40,021 | ||||||||||||||||||||
Interest Expense | (29,465 | ) | — | (135,808 | ) | — | ||||||||||||||||||
Other Income (Expense) | 773,764 | 278,419 | 1,183,781 | (419,413 | ) | |||||||||||||||||||
Loss on PPP2 loan | — | — | — | (1,787,417 | ) | |||||||||||||||||||
Excess of March 2023 Warrant Fair Value over Offering Proceeds | — | — | (2,476,109 | ) | — | |||||||||||||||||||
Change in Fair Value of Warrants | 770,723 | 58,690 | 4,656,292 | 87,618 | ||||||||||||||||||||
Total Other Income (Expense), net | 1,528,857 | 356,808 | 3,242,705 | (2,079,191 | ) | |||||||||||||||||||
Net Loss from Continuing Operations | (1,736,248 | ) | (4,271,209 | ) | (17,754,248 | ) | (22,796,417 | ) | ||||||||||||||||
DISCONTINUED OPERATIONS | ||||||||||||||||||||||||
Net Income(Loss) from Discontinued Operations | 348,202 | (127,692 | ) | (1,150,827 | ) | (354,320 | ) | |||||||||||||||||
Net Loss Applicable to Common Stock | $ | (1,388,046 | ) | $ | (4,398,901 | ) | $ | (18,905,075 | ) | $ | (23,150,737 | ) | ||||||||||||
Basic and Diluted Loss Per Share: | ||||||||||||||||||||||||
Continuing Operations | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||||||
Discontinued Operations | $ | $ | ) | $ | ) | $ | ) | |||||||||||||||||
Basic and Diluted Loss Per share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||||||
Basic and Diluted Weighted Average Shares Outstanding |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
4
ADAMISDMK PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (UNAUDITED)DEFICIT
Convertible Preferred Stock
(Mezzanine Equity) | Common Stock | Additional Paid-In | Treasury Stock | Accumulated | Total | ||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2022 | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Stockholders' Equity | ||||||||||||||||||||||||||||
Balance June 30, 2022 | — | $ | — | 150,506,222 | $ | 15,051 | $ | 303,869,991 | 522,957 | $ | (5,250 | ) | $ | (296,837,649 | ) | $ | 7,042,143 | ||||||||||||||||||||
Issuance of Series C Preferred Stock, net of issuance costs of $ 8,300 | 3,000 | 157,303 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of 6,700 Warrants, pursuant to the Series C Preferred Stock issuance, net of issuance costs of $ | — | — | — | — | 127,697 | — | — | — | 127,697 | ||||||||||||||||||||||||||||
Stock Based Compensation | — | — | — | — | 74,488 | — | — | — | 74,488 | ||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (4,398,901 | ) | (4,398,901 | ) | ||||||||||||||||||||||||||
Balance September 30, 2022 | 3,000 | $ | 157,303 | 150,506,222 | $ | 15,051 | $ | 304,072,176 | 522,957 | $ | (5,250 | ) | $ | (301,236,550 | ) | $ | 2,845,427 | ||||||||||||||||||||
For the Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
Balance June 30, 2021 | — | $ | — | 149,409,098 | $ | 14,941 | $ | 303,620,101 | 522,957 | $ | (5,250 | ) | $ | (256,950,579 | ) | $ | 46,679,213 | ||||||||||||||||||||
Stock Based Compensation | — | — | — | — | 152,561 | — | — | — | 152,561 | ||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (12,361,048 | ) | (12,361,048 | ) | ||||||||||||||||||||||||||
Balance September 30, 2021 | — | $ | — | 149,409,098 | $ | 14,941 | $ | 303,772,662 | 522,957 | $ | (5,250 | ) | $ | (269,311,627 | ) | $ | 34,470,726 | ||||||||||||||||||||
For the Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||
Balance December 31, 2021 | — | $ | — | 150,117,219 | $ | 15,012 | $ | 303,958,829 | 522,957 | $ | (5,250 | ) | $ | (278,085,813 | ) | $ | 25,882,778 | ||||||||||||||||||||
Issuance of Series C Preferred Stock, net of issuance costs of $ 8,300 | 3,000 | 157,303 | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of 6,700 | Warrants, pursuant to the Series C Preferred Stock issuance, net of issuance costs of $— | — | — | — | 127,697 | — | — | — | 127,697 | ||||||||||||||||||||||||||||
Issuance of Common Stock upon Vesting of Restricted Stock Units (RSUs) | — | — | 389,003 | 39 | (39 | ) | — | — | — | — | |||||||||||||||||||||||||||
Stock Based Compensation | — | — | — | — | (14,311 | ) | — | — | — | (14,311) | |||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (23,150,737 | ) | (23,150,737 | ) | ||||||||||||||||||||||||||
Balance September 30, 2022 | 3,000 | $ | 157,303 | 150,506,222 | $ | 15,051 | $ | 304,072,176 | 522,957 | $ | (5,250 | ) | $ | (301,236,550 | ) | $ | 2,845,427 | ||||||||||||||||||||
For the Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
Balance December 31, 2020 | — | $ | — | 94,365,015 | $ | 9,437 | $ | 238,234,968 | 522,957 | $ | (5,250 | ) | $ | (232,257,615 | ) | $ | 5,981,540 | ||||||||||||||||||||
Common Stock Issued, net of issuance costs of $ 3,330,752 | — | — | 46,621,621 | 4,661 | 48,414,585 | — | — | — | 48,419,246 | ||||||||||||||||||||||||||||
Exercise of Warrants | — | — | 8,356,000 | 836 | 15,292,714 | — | — | — | 15,293,550 | ||||||||||||||||||||||||||||
Issuance of Common Stock upon Vesting of Restricted Stock Units (RSUs) | — | — | 66,462 | 7 | (7 | ) | — | — | — | — | |||||||||||||||||||||||||||
Share Based Compensation | — | — | — | — | 1,830,402 | — | — | — | 1,830,402 | ||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (37,054,012 | ) | (37,054,012 | ) | ||||||||||||||||||||||||||
Balance September 30, 2021 | — | $ | — | 149,409,098 | $ | 14,941 | $ | 303,772,662 | 522,957 | $ | (5,250 | ) | $ | (269,311,627 | ) | $ | 34,470,726 |
For the Three Months Ended September 30, 2023 | (Mezzanine Equity)
Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-In | Treasury Stock | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Deficit Total | ||||||||||||||||||||||||||||||||||||||
Balance June 30, 2023 | 3,000 | $ | 330,00 | 1,941.2 | $ | — | 2,797,865 | $ | 280 | $ | 310,260,759 | 7,470 | $ | (5,250 | ) | $ | (322,081,115 | ) | $ | (11,825,326 | ) | |||||||||||||||||||||||||||
Issuance of Common Stock and Warrants in August 2023 Financing, net of issuance costs of $912,751 | — | — | — | — | 4,800,000 | 480 | 7,092,156 | — | — | — | 7,092,636 | |||||||||||||||||||||||||||||||||||||
Conversion of Series E Preferred Stock into Common Stock | — | — | (729.2 | ) | — | 729,200 | 73 | (73 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon exercise of Prefunded Warrants | — | — | — | — | 1,129,985 | 113 | (73 | ) | — | — | — | 40 | ||||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon exercise of Common Stock Warrants | — | — | — | — | 645,000 | 64 | 870,686 | — | — | — | 870,750 | |||||||||||||||||||||||||||||||||||||
Share Based Compensation | — | — | — | — | (44,693 | ) | (44,693 | ) | ||||||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | — | — | (1,388,046 | ) | (1,388,046 | ) | |||||||||||||||||||||||||||||||||||
Balance September 30, 2023 | 3,000 | $ | 330,000 | .0 | $ | — | 10,102,050 | $ | 1,010 | $ | 318,178,762 | 7,470 | $ | (5,250 | ) | $ | (323,469,161 | ) | $ | (5,294,639 | ) | |||||||||||||||||||||||||||
For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2022 | 3,000 | $ | 157,303 | — | $ | — | 2,150,051 | $ | 215 | $ | 303,761,053 | 7,470 | $ | (5,250 | ) | $ | (304,564,086 | ) | $ | (808,068 | ) | |||||||||||||||||||||||||||
March 2023 Offering | — | — | — | — | 235,714 | 24 | (24 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Accretion of Series C Preferred Stock | — | 172,697 | — | — | — | — | (172,697 | ) | — | — | — | (172,697 | ) | |||||||||||||||||||||||||||||||||||
Issuance of Series E Preferred Stock pursuant to DMK Merger | — | — | 1,941.2 | — | — | — | 4,853,000 | — | — | — | 4,853,000 | |||||||||||||||||||||||||||||||||||||
Common Stock Issuance pursuant to DMK Merger | — | — | — | — | 302,815 | 30 | 757,008 | — | — | — | 757,038 | |||||||||||||||||||||||||||||||||||||
Assumption of DMK options pursuant to DMK Merger | — | — | — | — | — | — | 415,809 | — | — | — | 415,809 | |||||||||||||||||||||||||||||||||||||
Issuance of Common Stock and Warrants in the August 2023 Financing, net of issuance costs of $912,751 | — | — | — | — | 4,800,000 | 480 | 7,092,156 | — | — | — | 7,092,636 | |||||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon Exercise of Pre-funded Warrants | — | — | — | — | 1,237,127 | 124 | 525,045 | — | — | — | 525,169 | |||||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon Exercise of Common Stock Warrants | — | — | — | — | 645,000 | 64 | 870,686 | — | — | — | 870,750 | |||||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon Vesting of Restricted Stock Units (RSUs) | — | — | — | — | 2,143 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Conversion of Series E Preferred Stock into Common Stock | — | — | (729.2 | ) | — | 729,200 | 73 | (73 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||
Stock Based Compensation | — | — | — | — | 76,799 | — | — | — | 76,799 | |||||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (18,905,075 | ) | (18,905,075 | ) | |||||||||||||||||||||||||||||||||||||
Balance September 30, 2023 | 3,000 | $ | 330,000 | 1,212 | $ | — | 10,102,050 | $ | 1,010 | $ | 318,178,762 | 7,470 | $ | (5,250 | ) | $ | (323,469,161 | ) | $ | (5,294,639 | ) | |||||||||||||||||||||||||||
For the Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2022 | — | $ | — | — | $ | — | 2,150,051 | $ | 215 | $ | 303,884,827 | 7,470 | $ | (5,250 | ) | $ | (296,837,649 | ) | $ | 7,042,143 | ||||||||||||||||||||||||||||
Issuance of Series C Preferred Stock, net of issuance costs of $8,300 | 3,000 | 157,303 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Issuance of $6,700 Warrants, pursuant to the Series C Preferred Stock issuance, net of issuance costs of | — | — | — | — | 127,697 | — | — | — | 127,697 | |||||||||||||||||||||||||||||||||||||||
Stock Based Compensation | 74,488 | — | — | — | 74,488 | |||||||||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | — | (4,398,901 | ) | (4,398,901 | ) | ||||||||||||||||||||||||||||||||||||
Balance September 30, 2022 | 3,000 | $ | 157,303 | — | $ | — | 2,150,051 | $ | 215 | $ | 304,087,012 | 7,470 | $ | (5,250 | ) | $ | (301,236,550 | ) | $ | 2,845,427 | ||||||||||||||||||||||||||||
For the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2021 | — | $ | — | — | $ | — | 2,144,494 | $ | 214 | $ | 303,973,627 | 7,470 | $ | (5,250 | ) | $ | (278,085,813 | ) | $ | 25,882,778 | ||||||||||||||||||||||||||||
Issuance of Series C Preferred Stock, net of issuance costs of $8,300 | 3,000 | 157,303 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Issuance of $6,700 Warrants, pursuant to the Series C Preferred Stock issuance, net of issuance costs of | — | — | — | — | — | — | 127,697 | — | — | — | 127,697 | |||||||||||||||||||||||||||||||||||||
Issuance of Common Stock upon Vesting of Restricted Stock Units (RSUs) | — | — | — | — | 5,557 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Share Based Compensation | — | — | — | — | (14,311 | ) | — | — | — | (14,311 | ) | |||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | (23,150,737 | ) | (23,150,737 | ) | |||||||||||||||||||||||||||||||||||||
Balance September 30, 2022 | 3,000 | $ | 157,303 | — | $ | — | 2,150,051 | $ | 215 | $ | 304,087,012 | 7,470 | $ | (5,250 | ) | $ | (301,236,550 | ) | $ | 2,845,427 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
5
ADAMISDMK PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Loss | $ | (23,150,737 | ) | $ | (37,054,012 | ) | ||
Less: Loss from Discontinued Operations | 354,320 | 10,266,365 | ||||||
Adjustments to Reconcile Net Loss to Net | — | |||||||
Cash Used in Operating Activities: | ||||||||
Stock Based Compensation | (14,311 | ) | 1,830,402 | |||||
Provision for Excess and Obsolete Inventory | — | 587,824 | ||||||
Gain on Repayment of PPP2 Loan Contingent Loss Liability | 62,583 | — | ||||||
Change in Fair Value of Warrant Liabilities | (87,618 | ) | 7,642,949 | |||||
Cash Payments in Excess of Lease Expense | (12,081 | ) | (3,997 | ) | ||||
Depreciation and Amortization Expense | 1,111,495 | 1,071,830 | ||||||
Gain on Forgiveness of PPP Loans | — | (5,009,589 | ) | |||||
Change in Assets and Liabilities: | ||||||||
Accounts Receivable - Trade | (490,940 | ) | (492,741 | ) | ||||
Receivable from Fagron | 919,413 | (6,492,321 | ) | |||||
Inventories | (673,838 | ) | 639,237 | |||||
Prepaid Expenses and Other Current Assets | 567,094 | 352,833 | ||||||
Accounts Payable | 1,319,707 | 730,759 | ||||||
Contingent Loss Liability | — | (7,900,000 | ) | |||||
PPP2 Loan Contingent Loss Liability Payment | (1,850,000 | ) | — | |||||
PPP2 Loan Contingent Loss Liability | 1,787,417 | — | ||||||
Product Recall Liability | (1,591,870) | — | ||||||
Deferred Revenue | (637,030 | ) | (75,000 | ) | ||||
Accrued Other Expenses and Bonuses | (1,552,766) | 1,203,498 | ||||||
Net Cash Used in Operating Activities of Continuing Operations | (23,939,162 | ) | (32,701,963 | ) | ||||
Net Cash (Used in) Provided by Operating Activities of Discontinued Operations | (439,301 | ) | 1,590,310 | |||||
Net Cash Used in Operating Activities | (24,378,463 | ) | (31,111,653 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of Equipment | (588,923 | ) | (996,268 | ) | ||||
Proceeds from Sale of Non-financial Asset | — | 129,811 | ||||||
Proceeds from Receivable from Fagron | 3,917,530 | — | ||||||
Net Cash Provided by Investing Activities of Continuing Operations | 3,328,607 | (866,457 | ) | |||||
Net Cash Used in Investing Activities of Discontinued Operations | — | (15,999 | ) | |||||
Net Cash Provided by (Used in) Investing Activities | 3,328,607 | (882,456 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from Issuance of Common Stock, net of issuance costs of $3,330,752 | — | 48,419,246 | ||||||
Proceeds from Issuance of Preferred Stock and Warrants, net of issuance costs of $15,000 | 285,000 | — | ||||||
Proceeds from Exercise of Warrants | — | 5,851,900 | ||||||
Proceeds of PPP Loan | — | 1,765,495 | ||||||
Net Cash Provided by Financing Activities of Continuing Operations | 285,000 | 56,036,641 | ||||||
Net Cash Used In Financing Activities of Discontinued Operations | — | (2,057,948 | ) | |||||
Net Cash Provided by Financing Activities | 285,000 | 53,978,693 | ||||||
(Decrease) Increase in Cash and Cash Equivalents and Restricted Cash | (20,764,856 | ) | 21,984,584 | |||||
Cash and Cash Equivalents, and Restricted Cash | ||||||||
Beginning | 23,250,793 | 6,748,945 | ||||||
Change in Cash and Cash Equivalents of Discontinued Operations | (35,921 | ) | 28,376 | |||||
Ending | $ | 2,450,016 | $ | 28,761,905 |
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Loss | $ | (18,905,075 | ) | $ | (23,150,737 | ) | ||
Less: Loss from Discontinued Operations | 1,150,827 | 354,320 | ||||||
Adjustments to Reconcile Net Loss to Net | — | |||||||
Cash Used in Operating Activities: | ||||||||
Acquired IPR&D | 6,539,675 | — | ||||||
Stock Based Compensation | 76,799 | (14,311 | ) | |||||
Excess of March 2023 Warrant Fair Value over Offering Proceeds | 2,476,109 | — | ||||||
Change in Fair Value of Warrant Liability | (4,656,292 | ) | (87,618 | ) | ||||
Cash Payments in Excess of Lease Expense | (78,665 | ) | (12,081 | ) | ||||
Impairment of Right-of-Use Assets | 116,934 | — | ||||||
Depreciation Expense | 264,012 | 1,111,495 | ||||||
Receivable from Fagron | — | 919,413 | ||||||
Change in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | 1,054,058 | (490,940 | ) | |||||
Inventories | 575,816 | (673,838 | ) | |||||
Prepaid Expenses and Other Current & Non-Current Assets | 1,318,090 | 567,094 | ||||||
Accounts Payable | 1,580,139 | 1,319,707 | ||||||
Product Recall Liability | (305,806 | ) | (1,591,870 | ) | ||||
Deferred Revenue (including $145,000 and $0 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively) | (22,952 | ) | (637,030 | ) | ||||
Accrued Other Expenses | 1,108,448 | (1,552,766 | ) | |||||
Net Cash Used in Operating Activities of Continuing Operations | (7,707,883 | ) | (23,939,162 | ) | ||||
Net Cash Used in Operating Activities of Discontinued Operations | (145,429 | ) | (439,301 | ) | ||||
Net Cash Used in Operating Activities | (7,853,312 | ) | (24,378,463 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of Equipment | — | (588,923 | ) | |||||
Cash Acquired in DMK Acquisition | 136,089 | — | ||||||
Proceeds from Receivable from Fagron | 12,104 | 3,917,530 | ||||||
Net Cash Provided by Investing Activities of Continuing Operations | 148,193 | 3,328,607 | ||||||
Net Cash Provided by Investing Activities of Discontinued Operations | 2,599,267 | — | ||||||
Net Cash Provided by Investing Activities | 2,747,460 | 3,328,607 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from March 2023 Offering related to Common Stock Warrant | 2,099,862 | — | ||||||
Proceeds from March 2023 Offering related to Prefunded Warrant | 899,388 | — | ||||||
March 2023 Offering Issuance Costs | (275,000 | ) | — | |||||
Proceeds from Exercise of Prefunded Warrant | 790 | — | ||||||
Proceeds from August 2023 Financing | 8,005,387 | — | ||||||
August 2023 Financing Issuance Costs | (912,751 | ) | — | |||||
Proceeds from Exercise of August 2023 Common Stock Warrants | 870,750 | — | ||||||
Proceeds from Issuance of Preferred Stock and Warrants, net | — | 285,000 | ||||||
Net Cash Provided by Financing Activities of Continuing Operations | 10,688,426 | 285,000 | ||||||
Net Cash Provided by Financing Activities of Discontinued Operations | — | — | ||||||
Net Cash Provided by Financing Activities | 10,688,426 | 285,000 | ||||||
Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash | 5,582,574 | (20,764,856 | ) | |||||
Cash and Cash Equivalents, and Restricted Cash | ||||||||
Beginning Balance | 1,111,432 | 23,250,793 | ||||||
Decrease in Cash and Restricted Cash Equivalents of Discontinued Operations | (30,085 | ) | (35,921 | ) | ||||
Ending Balance | $ | 6,663,921 | $ | 2,450,016 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
6
ADAMISDMK PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
RECONCILIATION OF CASH & CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||||||||||
Cash & Cash Equivalents | $ | 2,419,960 | $ | 28,731,894 | $ | 6,663,921 | $ | 2,419,960 | ||||||||
Restricted Cash | 30,056 | 30,011 | — | (30,056 | ) | |||||||||||
Total Cash & Cash Equivalents and Restricted Cash | $ | 2,450,016 | $ | 28,761,905 | $ | 6,663,921 | $ | 2,450,016 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
Cash Paid for Income Taxes | $ | 3,625 | $ | 4,125 | $ | — | $ | 3,625 | ||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, FINANCING AND INVESTING ACTIVITIES | ||||||||||||||||
Fixed Asset Additions included in Accrued Expenses | $ | 217,340 | $ | (73,517 | ) | |||||||||||
Forgiveness of PPP Loans | $ | — | 5,009,590 | |||||||||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES | ||||||||||||||||
Liabilities of DMK assumed from DMK Merger | $ | 157,461 | $ | — | ||||||||||||
Issuance of common stock for DMK Merger | $ | (757,038 | ) | $ | — | |||||||||||
Issuance of Series E preferred stock for DMK Merger | $ | (4,853,000 | ) | $ | — | |||||||||||
DMK options assumed and replaced by the Company in connection with the DMK Merger | $ | (415,809 | ) | $ | — | |||||||||||
Fixed asset additions included in accrued expenses | $ | — | $ | 217,340 | ||||||||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES | ||||||||||||||||
Accretion on Series C Preferred Stock | $ | 172,697 | $ | — | ||||||||||||
Conversion of Series E Preferred Stock to Common Stock | $ | 73 | $ | — | ||||||||||||
Cashless Exercise of August 2023 Prefunded Warrants | $ | 73 | $ | — | ||||||||||||
Exercise of March 2023 Prefunded Warrants | $ | 524,379 | $ | — |
The accompanying notes are in an integral part of these Condensed Consolidated Financial Statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DMK Pharmaceuticals Corporation (“DMK” or the “Company”) is a specialty biopharmaceutical company focused on developing and commercializing products in the substance use disorder space including treatment of opioid use disorder. Effective September 6, 2023, pursuant to a certificate of amendment to the Company’s restated certificate of incorporation, the Company changed its name from Adamis Pharmaceuticals Corporation to DMK Pharmaceuticals Corporation.
Reverse Stock Split
Effective May 22, 2023, the Company effected a 1-for-70 reverse stock split of its outstanding common stock (the “Reverse Stock Split”). Pursuant to the Reverse Stock Split, every 70 shares of issued and outstanding common stock were automatically combined into one share of common stock, without any change in the par value per share. The Company did not issue any fractional shares in the Reverse Stock Split. The number of authorized shares of common stock under the Company’s restated certificate of incorporation remained unchanged at shares. Unless otherwise indicated, share numbers, per share data and earnings per share data throughout this Report have been recast retroactively to reflect the Reverse Stock Split.
DMK Merger
On February 24, 2023, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with DMK Pharmaceuticals Corporation, a New Jersey corporation (“Legacy DMK”), and Aardvark Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”). The Merger Agreement provided for the merger (the “Merger”) of Legacy DMK with and into Merger Sub, with Merger Sub surviving as a wholly-owned subsidiary of the Company. Prior to the Merger, Legacy DMK was a privately-held, clinical stage biotechnology company focused on the development and commercialization of potential products for a variety of central nervous disorders. Pursuant to the Merger, each share of common stock of Legacy DMK was converted into the right to receive a number of shares of the Company’s common stock and, in the case of certain Legacy DMK stockholders, shares of our Series E Convertible Preferred Stock, or Series E Preferred.
On May 25, 2023, following a special meeting of stockholders of the Company, the Merger was completed in accordance with the terms of the Merger Agreement. In connection with the Merger, the name of Merger Sub as the surviving corporation was changed to DMK Pharmaceuticals Corporation. In connection with the September 2023 change of the Company’s corporate name, Merger Sub’s corporate name was changed to Adamis Pharmaceuticals Corporation.
As a result of the consummation of the Merger, and after giving effect to the Reverse Stock Split, effective at the closing of the Merger (the “Effective Time”), the shares of Legacy DMK common stock then outstanding were canceled and automatically converted into and became the right to receive a total of 9.99%).
shares of the Company’s common stock and, with respect to certain former Legacy DMK stockholders, shares of Series E Convertible Preferred Stock (“Series E Preferred”) of the Company. The Series E Preferred is convertible into shares of the Company’s common stock at a conversion rate of common shares for one Series E Preferred share (subject to beneficial ownership limitations ofNote 2: Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented. The results of operations of Adamis Pharmaceuticals Corporation (“the Company”)Company for any interim periods are not necessarily indicative of the results of operations for any other interim periods or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 Form 10-K”).
ForPrinciples of Consolidation
The condensed consolidated financial statements include the accounts of DMK and its wholly-owned and controlled subsidiaries, Merger Sub (a variable interest entity wherein the Company is the primary beneficiary) and US Compounding, Inc (a discontinued operation) (“USC”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior Periods Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation related to the receivable from Fagron included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Such reclassification had no effect on the total current assets as of December 31, 2022. The reclassification had no effect on the condensed consolidated statement of operations or condensed consolidated statement of cash flows for the periods ended September 30, 2022.
Certain amounts in prior periods have been reclassified to conform with current period presentation related to interest income which was presented separately from the other income (expenses) on the accompanying condensed consolidated statements of operations. Such reclassification had no effect on the total other income (expense), net for the three and nine months ended September 30, 2022 and September 30, 2021, and year ended2022. The reclassification had no effect on the condensed consolidated balance sheet as of December 31, 2021, the assets, liabilities, operations, and2022 or condensed consolidated statement of cash flows of the Company’s subsidiary, US Compounding, Inc. (“USC”), have been separated from the comparative period amounts to conform to the current period presentation as discontinued operations as the result of the Company’s decision to wind down and cease operations of USC and liquidate its remaining assets. See Note 2.
Going Concern
The Company’s cash and cash equivalents were $2,419,960 and $23,220,770 at September 30, 2022 and December 31, 2021, respectively.
The condensed consolidated financial statements were prepared under the assumption that the Company will 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 the Company’s future business as described below, which may preclude the Company from realizing the value of certain assets.
The Company has significant operating cash flow deficiencies. Additionally, the Company will need additional funding in the near term and thereafter in the future to sustain operations, satisfy existing and future obligations and liabilities, and otherwise support the Company’s operations and business activities and working capital needs. The preceding conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements for the nine monthsperiods ended September 30, 2022, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management’s plans include attempting to secure additional required funding through equity or debt financings if available, seeking to enter into one or more strategic agreements regarding, or sales or out-licensing of, intellectual property or other assets, products, product candidates or technologies, seeking to enter into agreements with third parties to co-develop and fund research and development efforts, revenues from existing agreements, a merger, sale or reverse merger of the Company, or other strategic transaction. There is no assurance that the Company will be successful in obtaining the necessary funding to sustain its operations or meet its business objectives. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. In addition, a severe or prolonged economic downturn, political disruption or pandemic, such as the COVID-19 pandemic, could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all.2022.
8
Basic and Diluted Loss per Share
Variable Interest Entity
Under ASC 260,
The purpose of the Merger with Legacy DMK is to expand the Company’s potential product pipeline. The Company intends to focus on developing therapies with novel mechanisms of action to treat conditions, including substance abuse disorders.
The Company has 100% ownership of Merger Sub. In the event Merger Sub requires additional funding to support its operations, the Company is required to applywould provide such financial support; and any benefits from the two-class method to compute earnings per share (or, EPS). Under the two-class method both basic and diluted EPS are calculated for each classdevelopment of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings. The two-class method results in an allocation of all undistributed earnings as if all those earnings were distributed. Considering the Company has generated losses in each reporting period since its inception through September 30, 2022, the Company also considered the guidance related to the allocationany of the undistributed losses under the two-class method. The contractual rights and obligations of the preferred stock shares were evaluated to determine if they have an obligation to share in the losses ofpotential product candidates would be realized by the Company. AsAdditionally, as with any product development program there is no obligationare risks that could materially impact the Company’s financial condition negatively. Conversely, positive outcomes during product development and/or achieving regulatory approval on a product or drug could materially impact the Company’s financial condition positively. See Note 3, DMK Merger for additional information regarding the preferred stock shareholders to fund the losses of the Company nor is the contractual principal or mandatory redemption amount of the preferred stock shares reducedVIE.
Assets recognized as a result of losses incurred byconsolidating Merger Sub do not represent additional assets that could be used to satisfy claims against the Company, under the two-class method, the undistributed losses willCompany’s general assets. Cash specifically must be allocated entirely to the common stock securities.
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 isutilized based on the if-converted method for convertible preferred shares and gives effect to dilutive if-converted shares and the treasury stock method and gives effect to dilutive options, warrants and other potentially dilutive common stock. The preferred stock, however, is not considered potentially dilutive due to the contingency on the conversion feature not being tied to stock price or pricespecific terms of the convertible instrument. The common stock equivalentsrespective grant in which the monies were anti-dilutivereceived; and were excluded from the calculation of weighted average shares outstanding. Potentially dilutive securities, which are not included in diluted weighted average shares outstanding for the nine months ended September 30, 2022 and September 30, 2021, consist of outstanding warrants covering shares and shares, respectively, outstanding options covering shares and shares, respectively and outstanding restricted stock units covering shares and shares, respectively.
Discontinued Operations
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity isany unspent grant funds would be required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component/s of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes, shall be reported as components of net loss separate from the net loss of continuing operations. The Company disposed of a component of its business in August 2021 and met the definition of a discontinued operation with respect to that business. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompany unaudited condensed statements of operations for the nine months and year ended September 30, 2022 and December 31, 2021.
Recent Accounting Pronouncement
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options which provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. The amendment currently has no impact to the Company as the effect will largely depend on the terms of written call options or financings issued or modified in the future.
9
Note 2: Discontinued Operations and Assets Held for Sale
In August 2021, the Company announced an agreement with Fagron Compounding Services, LLC (“Fagron”) to sell to Fagron certain assets of the Company’s subsidiary, US Compounding, Inc. (“USC”), related to the Company’s human compounding pharmaceutical business including certain customer information and information on products sold to such customers by USC, including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products. The agreement included fixed consideration of approximately $107,000 and variable consideration estimated at approximately $6,385,000. The variable consideration was tied to Fagron’s sales to former USC customers for the twelve-month-period commencing on the agreement date. The Company used the expected value method to estimate Fagron’s sales over the twelve-month period following the agreement date. For the twelve-month agreement period the Company relied on historical data and its judgement to make estimates, and as such, the total variable consideration changed as more information became available, which resulted in adjustments to the receivable during the twelve-month period. During the three and nine months ended September 30, 2022, the Company recognized an increase (decrease) in variable consideration of $278,000 and $(919,000), respectively, which was included in net loss from continuing operations, as the change occurred subsequent to the disposal of the USC business. In connection with the transaction, the Company accrued as of December 31, 2021 and paid in January 2022 a $700,000 liability for a transaction fee payable to a financial advisor which was recorded in selling, general and administrative expenses of continuing operations.
In July 2021, the Company approved a restructuring process to wind down and cease the remaining operations at USC, with the remaining USC assets to be sold, liquidated or otherwise disposed of. The Company disposed of a component of its business in August 2021 and met the definition of a discontinued operation as of September 30, 2021. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompany unaudited condensed statements of operations for the three months and nine months ended September 30, 2022 and 2021. As of December 31, 2021, the Company had shut down the operations of USC, terminated all of USC’s employees and was engaged in the process of selling or attempting to sell or otherwise dispose of USC’s remaining assets.
Discontinued operations comprise those activities that were disposed of during the period, abandoned or which were classified as held for salereturned at the end of the period andrespective grant term. Conversely, liabilities recognized as a result of consolidating Merger Sub do not represent a separate major lineadditional claims of business or geographical area that was previously distinguished as Compounded Pharmaceuticals segment for operational and financial reporting purposes in prior reported financial statements.the Company’s general assets; they represent claims against the specific assets of Merger Sub.
Assets Held for Sale
The Company considers assets to be held for sale when management approves and commits to a plan to actively market the assets for sale at a reasonable price in relation to its fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company ceases to record depreciation and amortization expenses and measures the assets at the lower of their carrying value or estimated fair value less costs to sell. Assets held for sale are included as other current assets of discontinued operations in the Company’s consolidated balance sheets and the gain or loss from sale of assets held for sale is included in the Company’s general and administrative expenses.
Accrued Other Expenses
Accrued Other Expenses consists of the following as of September 30, 2023 and December 31, 2022:
September 30, 2023 | December 31, 2022 | |||||||
Accrued Expenses – R&D | $ | 145,806 | $ | 42,400 | ||||
Accrued Expenses – COGS | 1,392,810 | 1,099,571 | ||||||
Accrued Expenses - Other | 601,000 | 200,363 | ||||||
Accrued PTO | 184,122 | 167,719 | ||||||
Total Accrued Other Expenses | $ | 2,323,738 | $ | 1,510,053 |
Going Concern
The Company’s cash and cash equivalents were approximately $6.7 million and $1.1 million at September 30, 2023 and December 31, 2022, respectively.
The condensed consolidated financial statements were prepared under the assumption that the Company will continue 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 the Company’s future business as described below, which may preclude the Company from realizing the value of certain assets.
The Company has incurred substantial recurring losses from continuing operations, negative cash flows from operations, and is dependent on additional financing to fund operations. The Company incurred a net loss of approximately $1.4 million and $18.9 million for the three months and nine months ended September 30, 2023, respectively. As of September 30, 2023, the Company had an accumulated deficit of approximately $323.5 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Management’s plans include attempting to secure additional required funding through equity or debt financing, if available, seeking to enter into a partnership or other strategic agreement regarding, or sales or out-licensing of, its commercial products, product candidates or intellectual property assets or other assets, revenues relating to supply and sale of SYMJEPI and ZIMHI products and share of net profits received relating to sales in the U.S. of our SYMJEPI and ZIMHI products, seeking partnerships or commercialization agreements with other pharmaceutical companies or third parties to co-develop and fund research and development or commercialization efforts of its products. There can be no assurance that we will be able to obtain required funding in the future. If the Company does not obtain required funding, the Company’s cash resources will be depleted in the near term and the Company would be required to materially reduce or suspend operations, which would likely have a material adverse effect on the Company’s business, stock price and our relationships with third parties with whom the Company have business relationships. If the Company does not have sufficient funds to continue operations, the Company could be required to seek bankruptcy protection, dissolution or liquidation, or other alternatives that could result in the Company’s stockholders losing some or all of their investment in us. The Company has implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction or discontinuation of certain product development programs. Additionally, the Company is not in compliance with certain listing standards of the Nasdaq National Market and there can be no assurance that the Company will be successful in curing the deficiencies and regaining compliance by the applicable cure dates. (See Note 11 for additional information).
9
Under ASC 260, the Company is required to apply the two-class method to compute earnings per share (“EPS”). Under the two-class method both basic and diluted EPS are calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings. The two-class method results in an allocation of all undistributed earnings as if all those earnings were distributed. Considering the Company has generated losses in each reporting period since its inception through September 30, 2023, the Company also considered the guidance related to the allocation of the undistributed losses under the two-class method. The contractual rights and obligations of the preferred stock shares and the warrants were evaluated to determine if they have an obligation to share in the losses of the Company. As there is no obligation for the preferred stock shareholders or the holders of the warrants to fund the losses of the Company nor is the contractual principal or redemption amount of the preferred stock shares or the warrants reduced as a result of losses incurred by the Company, under the two-class method, the undistributed losses are allocated entirely to the common stock securities.
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. Adjustments to the loss attributable to holders of common stock include the accretion on Series C Preferred treated as a dividend. During the three and nine months ended September 30, 2023, the Series C Preferred was accreted $0 and $172,697, respectively. As of September 30, 2023, the carrying value of the Series C Preferred stock represents its full redemption value of $330,000. The numerator in calculating the loss attributable to the holders of common stock was adjusted as follows:
Three Months Ended | Nine Months Ended September 30, 2023 | |||||||||||
Net loss | $ | (1,388,046 | ) | $ | (18,905,075 | ) | ||||||
Accretion on Series C Preferred | — | (172,697 | ) | |||||||||
Adjusted Net Loss | $ | (1,388,046 | ) | $ | (19,077,772 | ) |
The Series E common stock equivalents are not included in the calculation of diluted EPS as this would be anti-dilutive (since the Company generates net losses). The diluted loss per share calculation is based on the if-converted method for convertible preferred shares and gives effect to dilutive if-converted shares and the treasury stock method and gives effect to dilutive options, warrants and other potentially dilutive common stock. The preferred stock is not considered potentially dilutive due to the contingency on the conversion feature not being tied to stock price or price of the convertible instrument.
Common share equivalents outstanding, determined using the treasury stock method, are comprised of shares that may be issued under the Company’s stock option and warrant agreements. For the warrants accounted as liabilities, at each reporting period the Company evaluates the combined effect of the adjustment to the numerator (assumed beginning of the period exercise) and inclusion of the warrants in the denominator, with the warrants included for the purposes of diluted EPS calculation if such effect is dilutive. The warrants and options were determined to be anti-dilutive for all periods presented.
September 30, 2023 | September 30, 2022 | |||||||||||
Outstanding Warrants | 6,184,323 | 213,612 | ||||||||||
Outstanding Options | 33,886 | 63,377 | ||||||||||
Legacy DMK Options assumed by the Company | 231,490 | — | ||||||||||
Outstanding Restricted Stock Units | 7,143 | 9,286 | ||||||||||
Series C Preferred stock (if converted) | 697,674 | — | ||||||||||
Series E Preferred stock (if converted) | 1,212,000 |
The Company accounts for transactions in which the Company receives services in exchange for restricted stock units (“RSUs”) or options to purchase common stock as stock-based compensation cost based on estimated fair value. Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes option-pricing model. The Company accounts for forfeitures as they occur and will reduce compensation cost at the time of forfeiture.
Discontinued Operations
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, the Company reports a disposal of a component of an entity or a group of components of an entity as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results when the component/s meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria, the Company reports the major current assets, noncurrent assets, current liabilities, and noncurrent liabilities as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the Company reports the results of all discontinued operations, less applicable income taxes, as components of net loss separate from the net loss of continuing operations.
10
Note 3: DMK Merger
On May 25, 2023, the Company completed the merger transaction with Legacy DMK. The Company determined that the acquired group, Legacy DMK, is a variable interest entity, or VIE, as Legacy DMK's total equity at risk is not sufficient to permit Legacy DMK to finance its activities without additional subordinated financial support. In accordance with FASB Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations”, the consolidation of Legacy DMK was considered an asset acquisition as substantially all of the fair value of the gross assets acquired were concentrated in DPI-125, a single identifiable asset. The Company was determined to be the primary beneficiary of Legacy DMK (as the Company holds 100% equity ownership in Legacy DMK post-merger, will receive the returns from its operations and is also obligated to absorb any losses of Legacy DMK). Based on applicable accounting guidance, the Company was required to record Legacy DMK's assets and liabilities at fair value. At acquisition date, based on the provisions of ASC Topic 730 "Research and Development", the Company expensed the purchase consideration allocated to the early-stage acquired in-process research and development (acquired IPR&D) because there is no alternative future use related to DPI-125 asset in IPR&D stage. The Company incurred approximately $1.4 million of transaction costs that were included within selling, general and administrative expenses on the condensed consolidated statement of operations.
The fair value of the acquired IPR&D was determined based upon the income approach using a multi period excess earnings model which included a forecast of the expected cash flows of DPI-125. The discount rate associated with this forecast was 27%.
The purchase price, or total consideration transferred, to acquire Legacy DMK in the Merger was comprised of the following:
Fair Value of the Company's Common Stock issued to Legacy DMK shareholders | $ | 757,038 | ||||||||||
Fair Value of the Company's Series E Preferred issued to Legacy DMK shareholders | 4,853,000 | |||||||||||
Fair Value of Legacy DMK options assumed and replaced by the Company | 415,809 | |||||||||||
Legacy DMK incurred Merger-related costs paid for by the Company | 492,456 | |||||||||||
Total Consideration Transferred | $ | 6,518,303 |
The fair value of the
shares of common stock issued in connection with the Merger is based on the closing price of the Company's common stock on the date of acquisition multiplied by the number of common shares issued.The fair value of the shares of Series E Preferred issued in connection with the Merger is based on inputs that are observable or can be corroborated by observable market data (the Company’s closing stock price), and, as such, qualify as Level 2 measurement. The fair value of the Series E Preferred is based on the closing price of the Company's common stock as the Series E Preferred have no preferences over common stock.
Pursuant to the Merger Agreement, at the effective time, the outstanding Legacy DMK stock options to purchase shares of Legacy DMK common stock were assumed by the Company and became options to purchase a total of shares of the Company’s common stock, with proportionate adjustments to the exercise prices per share of such options based on the exchange ratio determined pursuant to the Merger Agreement. The assumed options continue to be governed by the terms of the Legacy DMK 2016 Stock Plan, which was assumed by the Company in connection with the closing of the Merger. The assumed options were fully vested and the fair value of the replacement awards was treated as additional purchase price consideration.
The fair value of the replacement awards is based primarily on inputs that are observable or can be corroborated by observable market data (such as the Company’s closing stock price and the published treasury par yield curves from the US Department of the Treasury). The estimated fair value of the replacement options of $415,809 at the merger closing date was calculated using the Black Scholes Option Pricing Model. The valuation assumptions include the volatility of , the Company’s stock price on the date of closing of , expected dividend yield of , and the terms ranging from years to years and average risk-free interest rate of .
The allocation of the total purchase price is estimated as follows:
Assets Acquired: |
|
| |||
Cash |
| $ | 136,089 |
|
|
Total assets acquired |
|
| 136,089 |
|
|
Liabilities Assumed: |
|
|
|
|
|
Accounts Payable |
|
| 30 |
|
|
Due to Related Party |
|
| 1,698 |
|
|
Accrued Expenses |
|
| 8,615 |
|
|
Deferred Grant Revenue |
|
| 147,118 |
|
|
Total liabilities assumed |
|
| 157,461 |
|
|
Net Liabilities acquired |
|
| (21,372 | ) |
|
Acquired IPR&D (DPI-125) |
|
| 6,539,675 |
|
|
Total Purchase Price |
| $ | 6,518,303 |
|
|
11
Note 4: Discontinued Operations
In July 2021, the Company approved a restructuring process to wind down and cease the remaining operations at USC, with the remaining USC assets to be sold, liquidated or otherwise disposed of.
In August 2021, the Company entered into a purchase agreement with Fagron Compounding Services, LLC (“Fagron”) to sell to Fagron certain assets of USC, related to its human compounding pharmaceutical business including certain customer information and information on products sold to such customers by USC, including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products. Fagron made monthly payments to the Company based on formulas related to the amounts actually collected by Fagron or its affiliates for sales of products or services made through July 30, 2022. As of September 30, 2023, the total amount received in connection with this purchase agreement was approximately $5.5 million. At September 30, 2023, the remaining receivable from Fagron was approximately $19,000.
Discontinued operations comprise those activities that were disposed of during the period, abandoned or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that was previously distinguished as Compounded Pharmaceuticals segment for operational and financial reporting purposes in prior reported financial statements.
The major assets and liabilities associated with discontinued operations included in our condensed consolidated balance sheets are as follows (unaudited):follows:
Carrying amounts
September 30, 2023 | December 31, 2022 | |||||||
Cash and Cash Equivalents | $ | — | $ | 30,085 | ||||
Fixed Assets held for sale | — | 6,719,252 | ||||||
Other assets | 5,406 | 5,407 | ||||||
Loss recognized on classification as held for sale | — | (2,801,828 | ) | |||||
Total assets of the disposal group classified as held for sale in the statement of financial position | $ | 5,406 | $ | 3,952,916 | ||||
Carrying amounts of major classes of liabilities included as part of discontinued operations | ||||||||
Accounts Payable | $ | 673,335 | $ | 649,633 | ||||
Accrued Other Expenses | 55,959 | 75,602 | ||||||
Lease Liabilities | 200,034 | 243,008 | ||||||
Contingent Loss Liability | — | 50,000 | ||||||
Other Current Liabilities | — | 208,000 | ||||||
Deferred Tax Liability | — | 45,930 | ||||||
Total liabilities of the disposal group classified as held for sale in the statement of financial position | $ | 929,328 | $ | 1,272,173 |
12
In January 2023, the Company received approximately $832,000 from the sale of major classescertain fixed assets to a third party. This amount plus the $208,000 of earnest money received as a deposit in December 2022 (previously recorded as other current liability), resulted in the recognition of a gain of $68,339 which was recorded as a gain on sale of fixed assets included as part ofin discontinued operations (unaudited):during the three month period ended March 31, 2023.
During the second quarter of 2023, in connection with a third party’s offer to purchase USC’s land and building (the “USC Property”) for $1,525,000, the Company recorded an impairment charge of approximately $1.5 million (inclusive of broker commissions) to bring the carrying value of the USC property down to its net sales price. On July 25, 2023, the Company received net proceeds of approximately $1.5 million from the sale of USC’s land and building. On July 25, 2023, the Company sold previously impaired USC equipment and received the net proceeds of approximately $349,000. During the three months ended September 30, 2023, the Company recorded the gain on disposal of fixed assets in discontinued operations of $20,500 and $348,500, on the sale of the USC Property and USC equipment, respectively, representing the excess of the net proceeds over the carrying value of the equipment.
September 30, 2022 | December 31 2021 | |||||||
Carrying amounts of major classes of assets included as part of discontinued operations | ||||||||
Cash and Cash Equivalents | $ | 1,928 | $ | 37,849 | ||||
Accounts Receivable, net | — | 693 | ||||||
Inventories | — | 12,000 | ||||||
Fixed Assets, net | 6,779,252 | 6,799,090 | ||||||
Other Assets | 8,501 | 72,469 | ||||||
Loss recognized on classification as held for sale | (2,601,442 | ) | (2,601,442 | ) | ||||
Total assets of the disposal group classified as discontinued operations in the statement of financial position | $ | 4,188,239 | $ | 4,320,659 | ||||
Carrying amounts of major classes of liabilities included as part of discontinued operations | ||||||||
Accounts Payable | 621,466 | 681,646 | ||||||
Accrued Other Expenses | 67,183 | 133,313 | ||||||
Lease Liabilities | 285,346 | 412,357 | ||||||
Contingent Loss Liability | 410,000 | 410,000 | ||||||
Deferred Tax Liability | 45,930 | 45,930 | ||||||
Total liabilities of the disposal group classified as discontinued operations in the statement of financial position | $ | 1,429,925 | $ | 1,683,246 |
The revenues and expenses associated with discontinued operations included in our condensed consolidated statements of operations were as follows (unaudited):follows:
Three Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Major line items constituting pretax loss of discontinued operations | ||||||||
REVENUE, net | $ | — | $ | 705,143 | ||||
COST OF GOODS SOLD | — | (1,882,558 | ) | |||||
Gross Loss | — | (1,177,415 | ) | |||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (125,722 | ) | (2,457,162 | ) | ||||
RESEARCH AND DEVELOPMENT | — | (42,076 | ) | |||||
Impairment Expense – Intangible Assets | — | (3,835,158 | ) | |||||
Impairment Expense – Goodwill | — | (868,412 | ) | |||||
Impairment Expense – Inventory | — | (837,414 | ) | |||||
Impairment Expense – Right of Use Asset | — | (448,141 | ) | |||||
Loss from Held for Sale Classification | — | (2,177,844 | ) | |||||
(125,722 | ) | (11,843,622 | ) | |||||
OTHER INCOME (EXPENSE) | ||||||||
Interest Income | 22 | 8,619 | ||||||
Gain on Sale of Assets to Fagron | — | 4,636,702 | ||||||
Loss on Disposal of Assets | (1,992 | ) | — | |||||
Other Income | — | 5,659 | ||||||
Net Loss from discontinued operations before income taxes | $ | (127,692 | ) | $ | (7,192,642 | ) |
Three Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Major line items constituting pretax loss of discontinued operations: | ||||||||
Selling, General and Administrative Expenses | $ | (20,798 | ) | $ | (125,722 | ) | ||
Interest Income | — | 22 | ||||||
Gain (Loss) on Disposal of Assets | 369,000 | (1,992 | ) | |||||
Gain (Loss) from discontinued operations before income taxes | 348,202 | (127,692 | ) | |||||
Income Tax Benefit | — | — | ||||||
Gain (Loss) from discontinued operations | $ | 348,202 | $ | (127,692 | ) |
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Major line items constituting pretax loss of discontinued operations | ||||||||
REVENUE, net | $ | — | $ | 6,216,826 | ||||
COST OF GOODS SOLD | — | (5,753,658 | ) | |||||
— | 463,168 | |||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | (390,105 | ) | (7,055,739 | ) | ||||
RESEARCH AND DEVELOPMENT | — | (89,710 | ) | |||||
Impairment Expense – Intangible | — | (3,835,158 | ) | |||||
Impairment Expense – Goodwill | — | (868,412 | ) | |||||
Impairment Expense – Inventory | — | (837,414 | ) | |||||
Impairment Expense – Right of Use Asset | — | (448,141 | ) | |||||
Impairment Expense – Fixed Assets | — | (9,346 | ) | |||||
Loss from Held for Sale Classification | — | (2,177,844 | ) | |||||
(390,105 | ) | (14,858,596 | ) | |||||
OTHER INCOME (EXPENSE) | ||||||||
Interest Expense | — | (70,903 | ) | |||||
Interest Income | 34 | 34 | ||||||
Gain on Sale of Assets to Fagron | — | 4,636,702 | ||||||
Gain on Disposal of Assets | 27,138 | |||||||
Other Income | 8,613 | 26,398 | ||||||
Net Loss from discontinued operations before income taxes | $ | (354,320 | ) | $ | (10,266,365 | ) |
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Major line items constituting pretax loss of discontinued operations: | ||||||||
Selling, General and Administrative Expenses | $ | (83,721 | ) | $ | (390,105 | ) | ||
Impairment Expense - USC Property | (1,512,263 | ) | — | |||||
Other Income | 7,818 | 8,647 | ||||||
Gain on Disposal of Assets | 437,339 | 27,138 | ||||||
Loss from discontinued operations before income taxes | (1,150,827 | ) | (354,320 | ) | ||||
Income tax benefit | — | — | ||||||
Loss from discontinued operations | $ | (1,150,827 | ) | $ | (354,320 | ) |
Discontinued Operations - Revenue
Compounded Pharmaceuticals Facility Revenue Recognition. With respect to sales of prescription compounded medications by the Company’s USC subsidiary, revenue arrangements consisted of a single performance obligation which was satisfied at the point in time when goods were delivered to the customer. The transaction price was determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer which was the price reflected in the individual customer’s order. Additionally, the transaction price for medication sales was adjusted for estimated product returns that the Company expected to occur under its return policy. The estimate was based upon historical return rates, which has been immaterial. The standard payment terms were 2%/10 and Net 30. The Company does not have a history of offering a broad range of price concessions or payment term changes, however, when the transaction price included variable consideration, the Company estimated the amount of variable consideration that should have been included in the transaction price utilizing the expected value method. Any estimates, including the effect of the constraint on variable consideration, were evaluated at each reporting period for any changes. Variable consideration was not a significant component of the transaction price for sales of medications by USC.
1113
Discontinued Operations - Lease
USC has twoNote 5: Revenues operating leases, one for an office space and one for office equipment. As of September 30, 2022, the leases have remaining terms between more than one year and less than four years, respectively. The operating leases do not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreements do not require material variable lease payments, residual value guarantees or restrictive covenants. The Company leases a building which requires monthly base rent of $10,824 through December 31, 2023.
As part of the restructuring process to wind down and cease the operations at USC, the Company is working to cancel or transfer the leases of the discontinued operations. During the year ended December 31, 2021, the Right-of-Use assetsRevenues are related to the leases of approximately $448,000 were fully impaired because there is no benefit expected from the subject leases. As of September 30, 2022, and December 31, 2021 the liabilitiessales of the discontinued operations included approximately $285,000Company's commercial products which include: ZIMHI® (naloxone HCL Injection, USP) 5 mg/0.5 mL, which was approved by the U.S. Food and $412,000 in lease liabilities, respectively.
Discontinued Operations - Contingent Loss Liability
AsDrug Administration, or FDA, for the treatment of September 30, 2022, and December 31, 2021,opioid overdose; SYMJEPI® (epinephrine) Injection 0.3mg, which was approved by the outstanding liabilities related to the contract termination costs recorded in contingent loss liability of discontinued operations was approximately $410,000, reflecting estimated costs of termination of a contract between USC and a vendor.
Discontinued Operations - Building Loan
On November 10, 2016, a Loan Amendment and Assumption Agreement was entered with into the lender. Pursuant to the agreement, as subsequently amended, the Company agreed to pay the lender monthly payments of principal and interest which were approximately $19,000 per month, with a final payment due and payable in August 2021.
In July 2021, the Company, in connection with the sale of certain USC assets to Fagron, paid to the lender the outstanding principal balance, accrued unpaid interest and other obligations under the Company’s loan agreement, promissory note and related loan documents relating to the outstanding building loan relating to the building and property on which USC’s offices are located. The land and building were includedFDA for use in the assetsemergency treatment of discontinued operations.
The loan bore an interestacute allergic reactions, including anaphylaxis, for patients weighing 66 pounds or more; and SYMJEPI (epinephrine) Injection 0.15mg, which was approved by the FDA for use in the treatment of 6.00% per year and interest expenseanaphylaxis for the three months ended September 30, 2022 and September 30, 2021, was approximately $0 and $0, respectively. Interest expense for the nine months ended September 30, 2022 and 2021 was approximately $0 and $71,000 respectively. The amount of interest allocated to the discontinued operations was based on the legal obligations of USC.
Note 3: Revenues
Revenue Recognition
Revenue is recognized pursuant to ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606). Accordingly, revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:
Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease. The Company’s subsidiary US Compounding, Inc. or USC, (a discontinued operation - see Note 2) provided compounded sterile prescription medications and certain nonsterile preparations and compounds, for human and veterinary use by patients physician clinics, hospitals, surgery centers, vet clinics and other clients throughout most of the United States. USC’s product offerings broadly included, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, and injectables. In July 2021, the Company sold certain assets relating to USC’s human compounding pharmaceutical business and approved a restructuring process to wind down the remaining USC business and sell, liquidate or otherwise dispose of the remaining USC assets. Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products.
Adamis and USC (prior to the sale of certain of its assets) have contracts with customers when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. weighing 33-65 pounds.
Exclusive Distribution and Commercialization Agreement for SYMJEPI®™ and ZIMHI™ with US WorldMeds (“USWM”)
On May 11, 2020 (the “Effective Date”) the Company entered into an exclusive distribution and commercialization agreement (the “USWM Agreement”) with USWM for the United States commercial rights for the SYMJEPI products, as well as for the Company’s ZIMHI (naloxone HCI Injection, USP) 5mg/0.5mL product intended for the emergency treatment of opioid overdose. The Company’s revenues relating to its FDA approved products SYMJEPI and ZIMHI are dependent on the USWM Agreement.
Under the terms of the USWM Agreement, the Company appointed USWM as the exclusive (including as to the Company) distributor of SYMJEPI in the United States and related territories (“Territory”) effective upon the termination of a Distribution and Commercialization Agreement previously entered into with Sandoz Inc., and of the ZIMHI product if approved by the U.S. Food and Drug Administration (“FDA”) for marketing, and granted USWM an exclusive license under the Company’s patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, subject to the provisions of the USWM Agreement, in partial consideration of an initial payment by USWM and potential regulatory and commercial based milestone payments totaling up to $26$26 million, if the milestones are achieved. There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to the Company. The Company retains rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory. In addition, the Company may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize the Company’s Symject™ syringe product platform.
The initial term for the USWM Agreement began on the Effective Date and continues for a period of 10 years from the launch by USWM of the first product in the United States pursuant to the agreement, unless terminated earlier in accordance with its terms.
12 Revenue Recognition
The Company has determined thatevaluated the individual purchase orders, whose terms and conditions takenUSWM Agreement under ASC Topic 606, “Revenue from Contracts with the distribution and commercialization agreement, creates a contract according to ASC 606. The term will automatically renew for five-year terms after the initial 10-year term, unless terminated by either party.Customers” (ASC 606).
The Company has determined that there are multiple performance obligations in the contract which are the following: the manufacture and supply of SYMJEPI™ and ZIMHI™ products to USWM, the license to distribute and commercialize SYMJEPI™ and ZIMHI™ products in the United States and the clinical development of ZIMHI™.
The Company utilized significant judgement to develop estimates of the stand-alone selling price for each distinct performance obligation based upon the relative stand-alone selling price. The transaction price allocated to the clinical development of ZIMHI was immaterial.
Revenues from the manufacture and supply of SYMJEPI™ and ZIMHI™ are recognized at a point in time upon delivery to the carrier. The licenses to distribute and commercialize SYMJEPI™ and ZIMHI™ products in the United States is distinct from the other performance obligations identified in the arrangement and has stand-alone functionality; the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to benefit from the license.
Payments received under USWM Agreement may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements and net-profit sharing payments based on certain percentages of net profit generated from the sales of products over a given quarter. At the inception of arrangements that include milestone payments, the Company uses judgement to evaluate whether the milestones are probable of being achieved and estimates the amount to include in the transaction price utilizing the most likely amount method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within the Company or the licensee’s control, such as regulatory approvals are not included in the transaction price until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of development milestones and any related constraint and adjusts the estimate of the overall transaction price, if necessary. The Company recognizes aggregate sales-based milestones, and net-profit sharing as royalties from product sales at the later of when the related sales occur or when the performance obligation to which the sales-based milestone or royalty has been allocated has been satisfied. The amounts receivable from USWM have a payment term of Net 30.
Revenues do not include any state or local taxes collected from customers on behalf of governmental authorities. The Company made the accounting policy election to continue to exclude these amounts from revenues.
Product Recall
On March 21, 2022, wethe Company announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level, due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM will handle the entire recall process forIn February 2023, the Company with Company oversight.received notice from the FDA that the FDA considers the voluntary recall of our SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. The costs ofproducts to be terminated. Such notice does not preclude the FDA from taking action in the future related to the recall, and the allocation of costs of the recall, including the costs to us resulting from the recall, were estimated at approximately $2.0 million; moreover, the recall could cause the Company to suffer reputational harm, depending on the resolution of mattersremains responsible for compliance with applicable laws relating to the product and the recall.
As of September 30, 2023 and December 31, 2022, the recall could result inliability was $0 and $0.3 million, respectively. During the three and nine months ended September 30, 2023, the Company incurring financialexpensed $25,000 and $81,000, respectively, in product recall costs, which were included in selling, general and expenses which could be material, could adversely affectadministrative expenses. During the supply of SYMJEPI products until manufacturing is resumed,three and depending on the resolution of matters relating to the recall could have a material adverse effect on our business, financial condition, and results of operations.
For the periodnine months ended September 30, 2022, and December 31, 2021, a liability of approximately the Company expensed $408,000388,000 and $22.4.0 million, respectively, associated with the recall is reflected in the balance sheet. The estimated costs of the recall were reflected in the consolidated statement of operations for the year ended December 31, 2021 as a reduction of net sales because we expect to offer the customers a cash refund or credit. Approximately, $388,000 of additional product recall costs, which were reflectedincluded in the consolidated results of operations as a reduction to net sales based on recall-related products returned during the quarter-ended September 30, 2022.selling, general and administrative expenses. Total product recall costs from inception of the recall through September 30, 2022,2023, were approximately $2.42.6 million. The Company may be able to be reimbursed by certain third parties for some of the costs of the recall under the terms of its manufacturing agreements or insurance policies, but there are no assurances regarding the amount or timing of any such recovery.
Deferred Revenue
Deferred revenue are contract liabilities that the Company records when cash payments are received or due in advance of the Company’s satisfaction of performance obligations. The Company’s performance obligation is met when control of the promised goods is transferred to the Company’s customers. For the three months ended September 30, 2022 and 2021, approximately $587,000 and $25,000 of the revenues recognized were reported as deferred revenue as of December 31, 2021 and 2020, respectively, and for the nine months ended September 30, 2022 and 2021, approximately $587,000 and $75,000 of the revenues recognized were reported as deferred revenue as of December 31, 2021, and 2020, respectively. Included in the deferred revenue at September 30, 2022 and December 31, 2021 was approximately $213,000 and $850,000, respectively, relating to the non-refundable upfront payment received from USWM pursuant to the USWM Agreement. The increase of approximately $562,000 in recognition of deferred revenue for the three and nine months ended September 30,2022, was due to the Company's reassessment of performance obligations met under the USWM agreement.
Cost to Obtain a Contract
The Company capitalizes incremental costs of obtaining a contract with a customer if the Company expects to recover those costs and that it would not have been incurred if the contract had not been obtained. The deferred costs, reported in the prepaid expenses and other current assets and other non-current assets on the Company’s consolidated balance sheets, will be amortized over the economic benefit period of the contract.
Practical Expedients
As part of the adoption of the ASC Topic 606, the Company elected to use the following practical expedients: (i) incremental costs of obtaining a contract in the form of sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within Selling, General and Administrative expenses; (ii) taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products, are excluded from revenues; and (iii) shipping and handling activities are accounted for as fulfillment costs and recorded in cost of sales.
1314
Note 4:6: Inventories
Inventories at September 30, 20222023 and December 31, 2021 consisted of the following: 2022 were as follows:
September 30, 2022 | December 31, 2021 | |||||||||||
Work-in-Process | $ | 386,827 | $ | 386,610 | ||||||||
Raw Materials | 705,618 | 31,997 | ||||||||||
Inventories | $ | 1,092,445 | $ | 418,607 |
There was no reserve for obsolescence as of September 30, 2022 and December 31, 2021.
September 30, 2023 | December 31, 2022 | |||||||||||
Finished Goods | $ | — | $ | 267,554 | ||||||||
Work-in-Process | — | 261,720 | ||||||||||
Raw Materials | 662,962 | 709,504 | ||||||||||
Inventories | $ | 662,962 | $ | 1,238,778 |
Note 5:7: Fixed Assets, net
Fixed Assets,assets, net at September 30, 20222023 and December 31, 2021 are summarized in the table below:2022 were as follows:
Description | Useful Life (Years) | September 30, 2022 | December 31, 2021 | Useful Life (Years) | September 30, 2023 | December 31, 2022 | ||||||||||||||||||
Machinery and Equipment | 3 - 7 | $ | 5,224,025 | $ | 4,522,583 | 3 - 7 | $ | 5,156,377 | $ | 5,209,575 | ||||||||||||||
Less: Accumulated Depreciation | (4,293,062 | ) | (3,181,567 | ) | (4,080,701 | ) | (4,665,067 | ) | ||||||||||||||||
Construction In Progress - Equipment | 663,893 | 993,752 | — | 744,386 | ||||||||||||||||||||
Fixed Assets, net | $ | 1,594,856 | $ | 2,334,768 | $ | 1,075,676 | $ | 1,288,894 |
Depreciation expense for the three months ended September 30, 20222023 and 20212022 was approximately $399,00067,000 and $375,000399,000, respectively;respectively, included in costs of goods sold and Selling, General and Administrative in the accompanying condensed consolidated statements of operations. Depreciation expense for the nine months ended September 30, 20222023 and 2021, depreciation expense2022 was approximately $1,111,000264,000 and $1,072,0001,111,000, respectively.
14
Note 6: Leases
The Company has one operating lease for an office space. Asrespectively, included in costs of September 30, 2022, the lease has a remaining term of approximately 14 months. The operating lease does not include an option to extend beyond the life of the current term. There are no short-term leases,goods sold and the lease agreement does not require material variable lease payments, residual value guarantees or restrictive covenants.
The amortizable lives of operatingSelling, General and financing leased assets are limited by the expected lease term.
The Company’s lease does not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for leases that commenced prior to that date.
The Company’s weighted average remaining lease term and weighted average discount rate for operating and financing leases as of September 30, 2022 and December 31, 2021 were:
|
| ||||
|
| ||||
|
|
|
| ||||
|
| ||||
|
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year andAdministrative in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the unaudited condensed consolidated balance sheets as of September 30, 2022:
Year Ending December 31, |
| Operating |
| ||
Remainder of 2022 |
| $ | 93,431 |
|
|
2023 |
|
| 349,365 |
|
|
Undiscounted Future Minimum Lease Payments |
|
| 442,796 |
|
|
Less: Difference between undiscounted lease payments and discounted lease liabilities |
|
| 10,778 |
|
|
Total Lease Liabilities |
| $ | 432,018 |
|
|
Short-Term Lease Liabilities |
| $ | 368,809 |
|
|
Long-Term Lease Liabilities |
| $ | 63,209 |
|
|
Operating lease expense for the three months ended September 30, 2022 and 2021 was approximately $88,000 and $88,000, respectively; and for the nine months ended September 30, 2022 and 2021, operating lease expense was approximately $265,000 and $265,000, respectively. Operating lease costs are included within selling, general and administrative expenses on theaccompanying condensed consolidated statements of operations.
Cash paid for amounts included in the measurement of operating lease liabilities were approximately $
93,000 and $90,000 for the three months ended September 30, 2022, and 2021, respectively, and approximately $278,000 and $269,000 for the nine months ended September 30, 2022 and 2021, respectively.
16
Note 7:8: Debt
First Draw Paycheck Protection Program (PPP) Loan
On April 13, 2020,March 15, 2021, the Company received entered into a Note (the “PPP2 Note”) in favor of Arvest Bank (the “Bank”), as lender, in the principal amount of $3,191,7001,765,495 inrelating to funding under a Second Draw loan funding from(the “Second PPP Loan”) pursuant to the terms of the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company (the “Note”), in the principal amount of $3,191,700, to Arvest Bank (the “Bank”), the lender. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequent guidance from the SBA and the Department of the Treasury indicated that in assessing the economic need for the loan, a borrower must take into account its current activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds pursuant to the PPP Loan, and the forgiveness of the PPP Loan attendant to these funds, is dependent on the Company having initially qualified for the loan and, in the case of forgiveness, qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, unless sooner provided in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note (or later if a timely loan forgiveness application has been submitted), until the maturity date.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during a specified period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week or 24-week period will qualify for forgiveness.
In December 2020, the Company submitted an application for the forgiveness of our PPP Loan. In August 2021, the Company received notification through the Bank that as of August 5, 2021, the PPP Loan, including principal and interest thereon, has been fully forgiven by the SBA and that the remaining PPP Loan balance is zero. The Company recognized the amount forgiven as other income.
Second Draw PPP Loan
On March 15, 2021, the Company entered into a Note (the “PPP2 Note”) in favor of the Bank, in the principal amount of $1,765,495 relating to funding under a Second Draw loan (the “Second Draw Loan”) pursuant to the terms of the PPP, the CARES Act, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act enacted in December 2020. Under the terms of the PPP2 Note and Second Draw Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP2 Note was five years, unless sooner provided in connection with an event of default under the PPP2 Note. The Company may prepay the Second Draw Loan at any time prior to maturity with no prepayment penalties. Under the PPP, the proceeds of the Second Draw Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments. The Company may apply for forgiveness of some or all of the Second Draw Loan pursuant to the PPP. In order to obtain full or partial forgiveness of the Second Draw Loan, the borrower must timely request forgiveness, must provide satisfactory documentation in accordance with applicable SBA guidelines, and must satisfy the criteria for forgiveness under the PPP and applicable SBA requirements. The Company applied for forgiveness of the PPP2 Loan, and in October 2021 the Company received notification through the Bank that as of September 28, 2021, the Second Draw PPP Loan, including principal and interest thereon, was fully forgiven by the SBA. The Company recognized $1,765,495, the amount forgiven, as other income in the third quarter of 2021. However, as described further in Note 9 below, inIn March 2022 the Company was informed that the Civil Division of the U.S. Attorney’s Office for the Southern District of New York was investigating the Company’s Second Draw PPP Loan and eligibility for that loan, and the Company’s financial statements for the quarter ended March 31, 2022, included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank.loan. In June 2022, following the inquiry, the Company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees.
Even though the PPP Loan has been forgiven and the Second Draw PPP Loan repaid, our PPP loans and applications for forgiveness of loan amounts remain subject to review and audit by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form, including without limitation the required economic necessity certification by the Company that was part of the PPP loan application process. Accordingly, the Company is subject to audit or review by federal or state regulatory authorities as a result of applying for and obtaining the PPP Loan and Second Draw PPP Loan or obtaining forgiveness of those loans. If the Company were to be audited or reviewed and receive an adverse determination or finding in such audit or review, including a determination that the Company was ineligible to receive the applicable loan, the Company could be required to return or repay the full amount of the applicable loan and could be subject to additional fines or penalties, which could reduce the Company's liquidity and adversely affect our business, financial condition and results of operations.
.
1815
Note 8:9: Fair Value of Financial InstrumentsMeasurement
The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to the short-term nature of these items.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:
Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities; |
Level 2: | Inputs other than quoted prices included within Level |
Level 3: | Unobservable inputs that are supported by little or no market activity for the related assets or liabilities. |
TheThe carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to the short-term nature of these items.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:
Fair Value Measurements at September 30, 2022 | Fair Value Measurements at September 30, 2023 | |||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
2020 Warrant liability | $ | 12,037 | $ | — | $ | — | $ | 12,037 | ||||||||||||||||||||||||||
2020 Warrant Liability | $ | Less than $1 | $ | — | $ | Less than $1 | $ | — | ||||||||||||||||||||||||||
March 2023 Common Stock Warrants | 302,170 | — | 302,170 | — | ||||||||||||||||||||||||||||||
Total Common Stock Warrants Liabilities | $ | 302,170 | $ | — | $ | 302,170 | $ | — | ||||||||||||||||||||||||||
Fair Value Measurements at December 31, 2022 | |||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
Liabilities | |||||||||||||||||
2020 Warrant Liability | $ | 7,492 | $ | — | $ | 7,492 | $ | — | |||||||||
The fair value measurement of the warrants issued by the Company in February 2020 (the “2020 Warrants”(“2020 Warrant Liability”) and March 16, 2023 Common Stock Warrant ("March 2023 Common Stock Warrants") are based on significant inputs that are unobservableobservable or can be corroborated by observable market data (such as the Company’s daily closing stock price and thus represents athe published treasury par yield curves from the US Department of the Treasury), and, as such, qualify as Level 32 measurement. The Company’s estimated fair value of the Warrant liability iswarrant liabilities was calculated using the Black Scholes Option Pricing Model. Key assumptions at
As of September 30, 2023, the valuation assumptions include the expected volatility of the Company’s stock ranging from approximately 70% - 134.65%, the Company’s stock price at valuation date of , expected dividend yield of 0.0%, expected term ranging from 1.93 to 4.96 years and average risk-free interest rate ranging from 4.721% - 5.253%.
As of December 31, 2022, the valuation assumptions include the expected volatility of the Company’s stock of approximately 70% (based on calculated volatility and management’s judgement), the Company’s stock price at valuation date of $ , expected dividend yield of 0.0%, expected term of 2.932.68 years and average risk-free interest rate of approximately 4.2554.362%. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs.
Note 10: Prepaid Expenses and Other Current Assets
Fair Value Measurements at December 31, 2021 | |||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
Liabilities | |||||||||||||||||
2020 Warrant liability | $ | 99,655 | $ | — | $ | — | $ | 99,655 | |||||||||
The fair value measurement of the warrants issued by the Company in February 2020 (the “2020 Warrants”) are based on significant inputs that are unobservablePrepaid expenses and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions at December 31, 2021 include the expected volatility of the Company’s stock of approximately 70%, the Company’s stock price at valuation date of $, expected dividend yield of 0.0%, expected term of 3.68 years and average risk-free interest rate of approximately 1.038%. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs.
The following table sets forth a summary of changes in the fair value of the Company's Level 3 financial instruments, which are treated as liabilities,other current assets were as follows:
2020 Warrant | ||||
Number of Warrants | Liability | |||
Balance at December 31, 2021 | 350,000 | $ | 99,655 | |
Change in Fair Value, March 31, 2022 | — | (9,387) | ||
Change in Fair Value, June 30, 2022 | — | (19,540) | ||
Change in Fair Value, September 30, 2022 | — | (58,690) | ||
Balance at September 30, 2022 | 350,000 | $ | 12,037 |
September 30, 2023 | December 31, 2022 | |||||||||||
Employee Retention Credit | $ | — | $ | 875,307 | ||||||||
Prepaid Insurance | 86,436 | 323,143 | ||||||||||
Prepaid - Research and Development | 326,854 | 588,354 | ||||||||||
Other Prepaid | 59,275 | 78,590 | ||||||||||
Other Current Assets | 67,207 | 49,572 | ||||||||||
$ | 539,772 | $ | 1,914,966 |
Employee Retention Credit
The Company applied for the Employee Retention Credit (ERC) which was available under the CARES Act. The ERC is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers paid their employees. The ERC applied to wages paid after March 12, 2020 and before January 1, 2021. The Company received the full amount from the original ERC from the Department of Treasury in January 2023. The Company amended its ERC application due to its repayment of the PPP loans (discussed in Note 7) and was subsequently awarded an additional refund of approximately $463,000, which the Company received in full during the second quarter of 2023, and is included in other income in the condensed consolidated statement of operations for the nine months ended September 30, 2023.
1918
Note 9:11: Legal MattersProceedings
The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. WeThe Company may also become party to litigation in federal and state courts relating to opioid drugs. Any litigation could divert management time and attention from Adamis,the Company, could involve significant amounts of legal fees and other fees and expenses, or could result in an adverse outcome having a material adverse effect on ourthe Company’s financial condition, cash flows or results of operations. Actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty. Except as described below, we arethe Company is not currently involved in any legal proceedings that we believethe Company believes are, individually or in the aggregate, material to our business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on usthe Company because of associated cost and diversion of management time.
Investigations
On May 11, 2021, each of the Company and its USC eachsubsidiary received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York (“USAO”(the “USAO”). The USAO issued the subpoenas in connection with a grand jurycriminal investigation, and requestedrequesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the Company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the Company and USC. The Audit Committee of the Board engaged outside counsel to conduct an independent internal investigation to review the matters brought forth in the subpoenasthese and certain other matters. In addition, following the commencement of the investigation, as disclosed elsewhere in these interim condensed consolidated financial statements, the Company has sold assets relating to its compounding pharmacy business, ceased selling human and veterinary compounded pharmaceutical products, has wound down USC’s business, and the employment of USC employees has ended. As a result, the Company is no longer engaged in the sale of human or veterinary compounded pharmaceutical products. The Company is also considering a number of additional actions in response to the internal investigation and the USAO investigation. As of the date of these interim condensed consolidated financial statements, we believe that the investigation initially commenced by the Audit Committee is substantially complete. However, additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the Audit Committee’s investigation.
The Company has also received requests from the U.S. Securities and Exchange Commission (“SEC”) forthat the voluntary production ofCompany voluntarily provide documents and information in connection with the SEC’s investigation relating to certain matters including matters arising from the subject matter of the USAO’s subpoenas and certain other matters.from the USAO. The Company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests for voluntary production of documents as needed. Additionally, on March 16, 2022, the Company was informed that the Civil Division of the USAO (“Civil Division”) wasis investigating the Company’s Second Draw PPP Loan application and the company’s eligibility for the Second Draw PPP Loan.disclosed in previous reports. The Audit Committee of the Board engaged outside counsel to conduct an internal inquiry into the matter. As a result of the investigation by the Civil Division, the Company’s financial statements for the first quarter of 2022 included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry the Company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees. The Company previously disclosed that the lending bank waived the processing fee of approximately $63,000; however, the Company has recently been made aware by the Civil Division that the lending bank did receive a processing fee of approximately $53,000 and that it may need to be repaid. The Company is awaiting confirmation from the Civil Division on the potential repayment of the above-referenced processing fee and as to whether any additional action is required to conclude the investigation into the Second Draw PPP Loan. The Company intends to continue cooperating with the USAO and the SEC, and Civil Division. At this time,has continued to engage in communications with the SEC and USAO regarding their investigations. The Company has received additional requests for production of documents from the SEC and the USAO, have responded to those requests, could receive additional requests from the USAO, SEC, or other authorities, and continue to engage in communications with the SEC and the USAO regarding their investigations. Additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the investigation. The Company is unable to predict the duration, scope, or final outcome of the investigations by the USAO, SEC, Civil Division, or other agencies; what, if any, proceedings the USAO, SEC, Civil Division, or other federal or state authorities may initiate; what if any,penalties, payments, by the Company, remedies or remedial measures the USAO, SEC, Civil Division or other federal or state authorities may seek;seek or may require in order to resolve the investigations; what, if any, impact the foregoing matters may have on the Company’s business, financial condition, previously reported financial results, financial results included in these interim condensed consolidated financial statements,this Report, or future financial results. The Company could receive additional requestsresults; or subpoenas from the USAO, SEC, Civil Division, or other authorities, which may require further investigation. There can be no assurance that any discussions withwhat proceedings the USAO, SEC, or Civil Divisionother federal or state authorities may initiate if the foregoing matters are not resolved. However, in connection with resolution of these matters, the Company or its USC subsidiary may be found to have violated one or more laws arising from the subject matter of the subpoenas, and to resolve the matters and investigations with the USAO and the SEC the Company may be required to pay material amounts in penalties or other payments, and to agree to other remedies or remedial measures. Payment of material amounts in connection with resolution of the foregoing matters would reduce the amount of financial resources that the Company has available to support product development programs and commercialization activities and would adversely impact the Company’s development programs. Depending in part on the amount and timing of any payments that the Company may be required to make or other remedial measures that may be implemented in connection with resolution of these matters, will be successful.a resolution of these matters with the USAO or SEC could have a material and adverse impact on the company. The foregoing matters mayhave diverted and will likely continue to divert management’s attention, causehave caused the Companycompany to suffer reputational harm, have required and will continue to require the company to devote significant financial resources, could subject the Company andcompany, one or more of its subsidiaries, or its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, could result in fines, penalties, payments, or financial remedies in amounts that would have a material adverse effect on the Company’s financial condition, or equitable remedies, and adversely affect the Company’scompany’s business, previously reported financial results, financial results included in these interim condensed consolidated financial statements,or incorporated by reference herein, or future financial results.
Nasdaq Compliance
On October 4, 2023, the Company received notice (the “Prior Notice”) from the Listing Qualifications Department (the “Staff”) of The occurrenceNasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it failed to evidence a minimum closing bid price of per share, as required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), for the previous 30 consecutive days and that the Company was provided a grace period of 180 calendar days from the date of the Prior Notice, or until April 1, 2024, to regain compliance with the Bid Price Rule, in accordance with Listing Rule 5810(c)(3)(A). Also as previously disclosed, on October 11, 2023, the Company received notice from the Staff that, due to the Company’s failure to regain compliance with the minimum $35 million market value of listed securities (“MVLS”) requirement set forth in Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”) during the 180-day grace period previously granted to the Company that expired on October 9, 2023, the Company’s common stock was subject to delisting unless the Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”).
In response, the Company timely requested a hearing before the Panel, which request stayed any further action by Nasdaq at least until the hearing is held and any extension the Panel may grant to the Company following the hearing expires.
On October 18, 2023, the Company received a superseding notice from the Staff (the “Subsequent Notice”), indicating that the Prior Notice was issued in error. The Subsequent Notice indicated that because the Company was subject to a one-year Mandatory Panel Monitor as a result of a prior hearing before the Panel, the Company was not eligible for the automatic 180-day compliance grace period provided by Listing Rule 5810(c)(3)(A) and that the Company’s non-compliance with the Bid Price Rule serves as an additional basis for delisting from Nasdaq.
At the hearing before the Panel, the Company will address its plan to regain compliance with both the Bid Price Rule and the MVLS Rule as well as its continued compliance with all other applicable criteria for continued listing on The Nasdaq Capital Market. There can be no assurance, however, that the Panel will grant the Company’s request for continued listing or that the Company will evidence compliance with the listing rules prior to the expiration of any of these events, or any determinationextension that our activities were not in compliance with existing laws or regulations, could have a material adverse effect onmay be granted by the Company’s business, liquidity, financial condition, and results of operations. Panel following the hearing.
19
Jerald Hammann
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in our subsequent Quarterly Reports on Form 10-Q for the first two quarters of 2022, onOn June 8, 2021, Jerald Hammann filed a complaint against the Company and each of its directors in the Court of Chancery of the State of Delaware, captioned Jerald Hammann v. Adamis Pharmaceuticals Corporation et al., C.A. No. 2021-0506-PAF (the “Complaint”), seeking injunctive and declaratory relief. The Complaint alleges, among other things, that the defendants (i) violated Rule 14a-5(f) and 14a-9(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the Company’s 2021 annual meeting of stockholders—which was subsequently held on July 16, 2021 (the “2021 annual meeting”)—and disseminated false and misleading information in the Company’s proxy materials relating to the 2021 annual meeting, (ii) violated certain provisions of the Company’s bylaws relating to the 2021 annual meeting, (iii) violated section 220 of the Delaware General Corporation Law (“DGCL”) in connection with a request for inspection of books and records submitted by the plaintiff, and (iv) breached their fiduciary duties of disclosure and loyalty, including relating to establishing and disclosing the date of the Company’s 2021 annual meeting and to the Company’s determination that a solicitation notice delivered to the Company by plaintiff was not timely and was otherwise deficient. TheOn April 4, 2022, the plaintiff has also filed various motions with the Court, which have been resolved. The Company has filed a motion for summary judgment with respect to oneamend the Complaint. The proposed amended Complaint added additional allegations relating to the manner in which the defendants established and disclosed the date of the counts inCompany’s 2021 annual meeting of stockholders and to statements the complaint and a motiondefendants made about the plaintiff to dismiss certain other counts of the plaintiff's amended complaint. Those motions are pending before the Court, and the case continues to proceed.Company’s stockholders. On October 13,April 28, 2022, the Court entered an order scheduling oral arguments ongranted the motion for summary judgment and motion to dismiss for December 19, 2022.motion. Trial on the merits of the plaintiff’s claims should one be necessary, is currently scheduled forwas held on March 16, 2023. On August 23, 2023, the Court entered its opinion rendering judgment in favor of the Company and the other defendants and against the plaintiff as to all of the plaintiff’s claims. On August 30, 2023, the plaintiff filed a motion for re-argument. On October 16, 2023, the Court denied the plaintiff’s motion except with respect to an issue of nominal damages but concluded that nominal damages were not warranted. On October 9, 2023, the plaintiff filed a motion for a temporary restraining order seeking to enjoin the defendants from distributing proxy materials and holding the Company’s 2023 annual meeting of stockholders. On October 12, 2023, the Court denied the plaintiff’s motion for a temporary restraining order, and on October 16, 2023, the Court issued an order denying the plaintiff’s motion for re-argument. On November 3, 2023, plaintiff filed a notice of appeal to the Supreme Court of the State of Delaware.
CVI Investments
On October 19, 2023, a purported shareholder of the Company filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, captioned CVI Investments vs. DMK Pharmaceuticals Corporation f/k/a Adamis Pharmaceuticals Corporation, Index No. 655184/2023 (the “Complaint”). The Complaint alleges that the Company breached two warrant agreements that Plaintiff entered into with the Company in connection with Plaintiff’s previous purchases of shares of Adamis stock. Specifically, the Complaint alleges that the Company failed to repurchase two warrants previously issued to the Plaintiff for the repurchase price specified in the warrants, allegedly in violation of the terms of the warrants that provide for the repurchase of the warrants following timely notice from the warrant holder following the occurrence of certain specified events. The Complaint seeks (i) actual and compensatory damages from the purported breaches, (ii) reasonable attorneys’ fees and other costs and expenses incurred in connection with the Complaint, and (iii) pre- and post-judgment interest. The Company’s deadline to respond to the Complaint is November 22, 2023. The Company believesdisputes that it was obligated to repurchase the claims in the plaintiff’s complaint are without meritwarrants and intends to vigorously dispute them.the claim.
Arbitration
On October 20, 2023, David J. Marguglio, a former executive officer of the Company, filed a demand for arbitration with Judicial Arbitration and Mediation Services, Inc. (JAMS) challenging the grounds of the separation of his employment, alleging that he is entitled to severance under the terms of his employment agreement, and demanding that the Company pay the costs of the arbitration. The Company contends that Mr. Marguglio is not entitled to severance under the terms of his employment agreement.
Turbare Real Estate Holdings
On May 26, 2023, Turbare Real Estate Holdings, LLC filed a complaint against the Company in the Circuit Court of Faulkner County Arkansas, captioned Turbare Real Estate Holdings, LLC v Adamis Pharmaceutical Corporation 23CV-23-796. The suit alleges breach of contract, seeking $1,414,943.08, with additional amounts still being incurred, plus costs and attorney fees, for alleged required repairs under a lease agreement between the parties. The Company has not recordedfiled a contingent liability relatedcounter suit, alleging as to this matter.Turbare Real Estate Holdings, LLC, claims for breach of lease agreement, conversion, civil conspiracy for conversion, replevin, and unjust enrichment. Additionally, the Company has added, as third party defendant, Turbare Manufacturing, LLC, alleging claims of breach of an access agreement for the leased real estate, conversion, civil conspiracy for conversion, replevin, tortious interference with contract, and unjust enrichment. On November 3, 2023, plaintiff filed a notice of appeal to the Supreme Court of the State of Delaware.
Supplemental Proxy Disclosures
On April 11, 2023, a purported stockholder of the Company filed a complaint against the Company and each of its directors in the United States District Court for the Southern District of New York, captioned Lapin vs. Adamis Pharmaceuticals Corporation, Case No. 1:23-cv-03023 (the “Complaint”). The Complaint alleged that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, by causing a materially incomplete and misleading Preliminary Proxy Statement to be filed with the SEC. Specifically, the Complaint alleged that the Preliminary Proxy Statement contains materially incomplete and misleading information concerning the sales process, financial projections prepared by management, as well as the financial analysis conducted by Raymond James & Associates, Inc., the Company’s financial advisor. The Complaint sought, among other things, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement or the filing of a definitive proxy statement with the SEC or causing a definitive proxy statement to be disseminated to the Company’s stockholders unless and until the material information described in the Complaint is included in the definitive proxy statement or otherwise disseminated to the Company’s stockholders, and (ii) in the event that the Merger transaction is consummated without the alleged material omissions referenced in the Complaint being remedied, damages and costs and disbursements of the action including reasonable plaintiff’s attorneys’ and experts’ fees and expenses. On July 6, 2023, the plaintiff filed a notice of voluntary dismissal, dismissing the claims in the complaint without prejudice, which was entered by the court on July 7, 2023.
In addition, the Company has received additional demand letters from counsel (the “Demand Letters”), each representing a purported stockholder of the Company, asserting that the Preliminary Proxy Statement and/or Proxy Statement was deficient and demanding that the alleged deficiencies be rectified. The Demand Letters allege, among other matters, that the Proxy Statements contain materially incomplete and misleading information concerning the sales process, financial projections prepared by the Company's management, and the financial analysis conducted by Raymond James & Associates, Inc. In addition, each purported shareholder has reserved his or her rights, including the right to alter or amend the demands at any time, and/or seek monetary damages following the consummation of the Merger.
The Company believes that the allegations in the Complaint and the Demand Letters are without merit and that the disclosures set forth in the Proxy Statement comply fully with applicable law. However, in order to moot the unmeritorious claims, avoid nuisance and possible expense and delay, and to provide additional information to the Company’s shareholders, the Company provided a voluntary supplement to the Proxy Statement with the supplemental disclosures filed with the SEC on May 5, 2023. Nothing in the Supplemental Disclosures shall be deemed an admission of the legal necessity or materiality under applicable laws of any of the disclosures set forth in the Supplemental Disclosures. To the contrary, the Company specifically denies all allegations that any additional disclosure was or is required. Nevertheless, resolution of these matters may involve payments by the Company to the parties submitting the Demand Letters or other claims.
The Company records accruals for loss contingencies associated with legal matters when the Company determines it is probable that a loss has been or will be incurred and the amount of the loss can be reasonably estimated. Where a material loss contingency is reasonably possible and the reasonably possible loss or range of possible loss can be reasonably estimated, U.S. GAAP requires usthe Company to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made.
Nasdaq Compliance
On December 31, 2021, we received a notice from the Nasdaq Listing Qualifications Department of The NASDAQ Capital Market (“Nasdaq”) informing us that because the closing bid price of our common stock had been below $ per share for 30 consecutive business days, we no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) (the “Rule”) requires listed securities to maintain a minimum bid price of $ per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial compliance period of 180 calendar days, or until June 29, 2022, to regain compliance. To regain compliance, the closing bid price of our common stock must meet or exceed $ per share for a minimum of 10 consecutive business days during the 180 calendar day grace period. The notice letter also disclosed that if we doCompany has not regain compliance within the initial compliance period, we may be eligible for an additional 180-day compliance period. To qualify for additional time, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exceptionaccrued any amount in respect of the bid price requirement, and would need to provide written notice of a plan to curematters described under the deficiency during the second compliance period, including by effecting a reverse stock split if necessary. We did not regain compliance with the Rule by June 29, 2022. We requested additional time to regain compliance and provided notice to Nasdaq of our intention to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary. On June 30, 2022, Nasdaq notified us that we were granted an additional 180-day compliance period,headings “Investigation,” “Jerald Hammann,” “Supplemental Proxy Disclosures,” “CVI Investments,” “Arbitration,” or until December 27, 2022, to regain compliance with the Rule. The letter also indicated that if at any time before December 27, 2022, the bid price of the Company’s Common Stock closes at $ per share or more for a minimum of 10 consecutive business days,“Turbare Real Estate Holdings,” as the Company will regain compliance withcannot estimate the Rule. Ifprobable loss or the Company does not meet the minimum bid requirement at some time during the additional 180-day grace period, Nasdaq will provide written notification to the Companyrange of probable losses that its shares will be subject to delisting. At such time, the Company may appeal the delisting determination to a Nasdaq Hearings Panel.incur. The Company would remain listed pendingis unable to make such an estimate because (i) with respect to the Panel’s decision. There can be no assurance that ifmatters described under the heading “Investigation,” the Company does appeal a subsequent delisting determination, that such appeal would be successful. The letter and notification from Nasdaq had no immediate effect on the listing or trading of the Company’s shares, which will continueis unable to trade on the Nasdaq Capital Market under the symbol “ADMP.” There are no assurances that wepredict whether any proceedings will be ableinitiated by the USAO, SEC or other authorities arising from such matters, what, if any, relief, remedies or remedial measures the USAO, SEC, or other authorities may seek if proceedings are commenced, and the duration, scope, or outcome of any such proceedings, if they are commenced, (ii) litigation, arbitration, and other proceedings are inherently uncertain and unpredictable, and (iii) with respect to regain compliance with the minimum bid price requirements“Supplemental Proxy Disclosures” the Demand Letters have not specified any amount for monetary damages and a reasonably possible loss or will otherwiserange of loss cannot be in compliance with other Nasdaq listing rules. estimated. Because legal proceedings and investigations are uncertain and unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires significant judgments about future events, including determining both the probability and reasonably estimated amount of a possible loss or range of loss. The amount of any ultimate loss may differ from any accruals or estimates that the Company may make.
20
Note 10:12: Stock TransactionsStockholders' Equity
Common Stock
On March 14, 2023, the Company entered into a Securities Purchase Agreement or, SPA, with an investor providing for the purchase and sale of (i) an aggregate of $3.0 million, before deducting offering expenses of approximately $0.3 million.
common stock shares, at a price of per share, (ii) a warrant to purchase up to an aggregate of shares of the Company’s common stock at an exercise price of per share (the “Common Stock Warrants”), and (iii) a prefunded warrant at a price of per share to purchase up to an aggregate of shares of the Company’s common stock (the “Prefunded Warrants” and, collectively with the Common Stock Warrant, the “Warrants”), which represents the per share price for the shares less the per share exercise price for the Prefunded Warrant, pursuant to a previously filed and effective registration statement in a registered direct offering (the “March 2023 Offering”). Gross proceeds from the March 2023 Offering were approximatelyThe Prefunded Warrants are immediately exercisable and will expire five years from the date of issuance. The Common Stock Warrants are exercisable on or after the six month and one day anniversary of the date of issuance and will expire five years and six months from the date of issuance. The terms of the Warrants provide that at the request of the holder following a change of control or certain other fundamental transactions, the Company or the successor entity, has to purchase the Warrant from the holder for an amount in cash equal to the Black Scholes Value (as defined in the Warrant). Due to this cash redemption feature, the Company determined that the Warrants should be classified as liabilities based on the authoritative guidance in ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”). The liability-classified Warrants are measured initially and subsequently at fair value each reporting period, with the changes in fair value recorded in the income statement.
At the closing of the Offering on March 16, 2023, the Company determined the fair value of the Warrants (based on the Black Scholes Option Pricing Model) was in excess of the proceeds and, as such, a day-one loss was recognized in earnings. The issuance costs of $225,000 were fully allocated to the Warrants and expensed in the condensed consolidated statement of operations.
The following table provides the initial allocation of the offering proceeds between the common stock and the Warrants issued:
Allocation | ||||||||||||
Common Stock Issued | $ | — | ||||||||||
107,142 Prefunded Warrant Issued | 899,388 | |||||||||||
685,714 Common Stock Warrant Issued | 4,575,971 | |||||||||||
Day-one Loss due to Excess Warrant Fair Value | (2,476,109 | ) | ||||||||||
Gross Proceeds | $ | 2,999,250 |
In May 2023, the Prefunded Warrants were exercised in full, which resulted in the reclassification of the fair value of the Prefunded Warrants of $524,379, net of the cash proceeds of $750, at the exercise date into equity.
Commons Stock Transactions:August 2023 Offering
In January and February 2021,On August 4, 2023, the Company issuedcompleted an offering of (i) shares of the common stock, upon exercise(ii) pre-funded warrants to purchase up to shares of investor warrants. The warrant holders exercised for cash at exercise prices ranging from $Common Stock (the “August 2023 Prefunded Warrants”), and (iii) common stock purchase warrants to purchase up to to $ per share.shares of the Company’s common stock (the “August 2023 Common Stock Warrants” and together with the August 2023 Prefunded Warrants, the “August 2023 Warrants”) (the “August 2023 Offering”). The Company received totalnet proceeds of approximately $5,852,0007.1 million from the August 2023 Offering, net of approximately $0.9 million of placement agent commissions and the warrant holders receivedother offering expenses.
The August 2023 Prefunded Warrants are immediately exercisable at shares of common stock.
On February 2, 2021, the Company completed the closing of an underwritten public offering of shares of common stock at a public offering price of $ per share which includedand do not expire until exercised in full. All August 2023 Prefunded Warrants were exercised in full on August 4, 2023. Of the shares pursuant toAugust 2023 Prefunded Warrants exercised on August 4, 2023, resulted in cash proceeds of approximately $40, representing the full exercisepar value of the over-allotment option granted to Common Stock shares issued. The remaining of the underwriters. NetAugust 2023 Prefunded Warrants were exercised on a cashless basis, resulting in the issuance of Common Stock shares.
The August 2023 Common Stock Warrants are exercisable at five years from the issuance date. During the three months ended September 30, 2023, August 2023 Common Stock Warrants were exercised, resulting in cash proceeds of $870,750.
per share beginning on the issuance date, and expireThe August 2023 Warrants were approximately $48.4 million, after deducting approximately $3.3 million in underwriting discountsaccounted for as equity instruments as they meet all of the requirements for equity classification under ASC Topic 815 “Derivatives and commissions and estimated offering expenses payable by the Company. Hedging” (“ASC 815").
Series C Convertible Preferred Stock Transaction
On July 5, 2022, the Company entered into a private placement transaction with Lincoln Park Capital Fund, LLC, (or, "Lincoln Park"(“Lincoln Park”) pursuant to which the Company issued an aggregate of shares of Series C Convertible Preferred Stock, par value
The Series C Preferred is entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when, as and if actually paid on shares of common stock (subject to adjustments pursuant to the related Certificate of Designation.) The Series C Preferred will have no voting rights (other than the right to vote as a class on certain matters as provided in the related Certificate of Designation). However, each share of Series C Preferred entitles the holder thereof (i) to vote exclusively on the Proposal (as defined in the related documents) and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal, and (ii) to 1,000,000 votes per each share of Series C Preferred.
The Series C Preferred shall, except as required by law, vote together with the common stock and any other issued and outstanding shares of preferred stock of the Company entitled to vote, as a single class; provided, however, that such shares of Series C Preferred shall, to the extent cast on the Proposal, be automatically and without further action of the holders thereof voted in the same proportion as shares of common stock (excluding any shares of common stock that are not voted) and any other issued and outstanding shares of preferred stock of the Company entitled to vote (other than the Series C Preferred or shares of such preferred stock not voted) are voted on the Proposal and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal. The Series C Preferred has a “Stated Value” of $ per share of Series C Preferred. (i) Upon any liquidation, dissolution or winding up of the Company (a “Liquidation”), the holders of Series C Preferred are entitled to be paid in cash an amount per share of Series C Preferred equal to 110% of the Stated Value (the “Liquidation Amount”), or (ii) in the event of a “Deemed Liquidation Event” as defined in the Certificate of Designation, which generally includes certain merger transactions or a sale, lease or other disposition of all or substantially all of the assets of the Company, the holders of Series C Preferred are entitled to paid out of the consideration payable to stockholders in such Deemed Liquidation Event or out of the “Available Proceeds” (as defined in the Certificate of Designation), in each case before any payment may be made to the holders of Common Stock by reason of their ownership thereof, an amount per share of Series C Preferred equal to the Liquidation Amount. Upon certain of the Deemed Liquidation Events, if the Company does not effect a dissolution within 90 days after such event, then the holders of Series C Preferred may require the Company to redeem the Series C Preferred for an amount equal to the Liquidation Amount.
The Series C Preferred is convertible into shares of common stock at the option of the holder, any time after the effective date of a reverse stock split of the outstanding shares of the Common Stock at a ratio set forth in a reverse stock split proposal by means of an amendment to the Company’s certificate of incorporation approved by the board of directors and the stockholders of the Company (a “Reverse Stock Split”), into that number of shares common stock (subject to certain beneficial ownership limitations applicable to each holder, and to compliance with the rules and regulations of the Nasdaq Capital Market) determined by dividing the Stated Value of such share of Series C Preferred by the conversion price then in effect, rounded down to the nearest whole share (with cash paid in lieu of any fractional shares). The conversion price for the Series C Preferred equals 90% of the lesser of (i) the closing sale price of the Common Stock on the trading day immediately prior to the Closing Date and (ii) the average of the closing sale prices for the common stock on the five trading days immediately prior to the closing date, subject to adjustment as provided in the certificate of designation; provided, that the conversion price may not fall below the par value per share of the common stock and may not exceed $ per share. Based on the initial conversion price of $ per share, the Shares of Series C Preferred are initially convertible into approximately shares of common stock. The conversion price is subject to adjustment as set forth in the certificate of designation for stock dividends, stock splits, reverse stock splits, and similar events. The Series C Preferred also contain redemption features by the holder at 110%, at any time after the effective date of a Reverse Stock Split and by the issuer at 105%, at any time after the effective date of a Reverse Stock Split. Additionally, in accordance with the transaction agreement, 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 C Preferred and the Warrants.
The Company determined that the Series C Preferred should be classified as mezzanine equity (temporary equity outside of permanent equity), that the Series C Preferred more closely aligned with debt as the intent is for redemption by either the holder or issuer, mostly likely the issuer (the Company) due to the more favorable redemption terms. The embedded conversion feature was determined to meet the derivative scope exception. The Company did not separately account for the redemption features as the fair value of such feature is not material. The Warrants are freestanding and detachable; and the Company determined that the warrants meet the criteria for equity classification in the Company’s consolidated balance sheet. With the equity classification of both the Series C Preferred and the warrants, the $15,000 in transaction costs were allocated between the Series C Preferred and the Warrants, which netted the proceeds received. Net proceeds were allocated between the Series C Preferred and the Warrants based on their relative fair values.
22
Fair value for both the Series C Preferred and the related warrants were based on significant inputs that were unobservable and thus represented Level 3 measurements. Fair value for the Series C Preferred was based on the weighted value of the Reverse Stock Split approval and the value of the Reverse Stock Split rejection times the probability of each scenario as assessed by management at the time of the Series C Preferred stock issuance. Fair value of the Warrants was based on the Black-Scholes pricing model, using the following inputs: $ stock price, $ exercise, 5.5 years remaining expected term, 70% volatility, 0% dividend rate and 2.82% risk free rate. The relative fair value ascribed to the Series C Preferred was approximately $157,300 and the relative fair value ascribed to the Warrants was approximately $127,700.
Subsequent to the issuance of the Series C Preferred, in connection with the Company’s 2022 annual meeting of stockholders, in September 2022 the Company’s stockholders voted on a reverse stock split proposal, and the proposal was not approved. Pursuant to the Series C Preferred transaction agreements, at September 30, 2022, in the consolidated balance sheet, the Company accrued paid $15,000 owed to Lincoln Park resulting from the failure of the reverse stock split proposal to be approved at the meeting. Based onIn connection the failure,approval of the Reverse Stock Split in May 2023 at the Company's special meeting of stockholders, redemption of the Series C Preferred became probable. As a result, the Company recorded accretion of approximately $173,000 in the second quarter of 2023, which is not probable atreflected in the accompanying condensed consolidated statements of mezzanine equity and stockholders’ deficit for the nine months ended September 30, 2022, and, as such, no accretion was recorded to the redemption value. The warrants are equity-classified, and, as such do not require revaluation and 750,000 warrants remain outstanding as2023. As of September 30, 2022.
The Company accounts for stock-based compensation transactions in which2023, neither the holder nor the Company receives employee services in exchange for restricted stock units (“RSUs”) or optionshave elected to purchase common stockredeem the Series C Preferred and the Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. Stock-based compensation cost for RSUsSeries C Preferred stock is measured basedreflected on the closing fair marketcondensed consolidated balance sheet at the 110% redemption value of $330,000.
Series E Preferred Stock
Pursuant to the DMK Merger, onat a conversion rate of common shares for 1 Series E Preferred share, and conversion is subject to certain beneficial ownership limitations. During the datethree and nine months ended September 30, 2023, 729.2 Series E Preferred shares have been converted into 729,200 shares of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair-value as calculated by the Black-Scholes option-pricing model. The Company accounts for forfeitures as they occur and will reduce compensation cost at the time of forfeiture. Cash-settled Common Stock.
Stock Appreciation Rights (“SARs”) provide for the cash payment of the excess of the fair market value of the Company’s common stock price on the date of exercise over the grant price. The fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model. The SARs will vest over a period of and are accounted for as liability awards since they will be settled in cash. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of the Company’s common stock over the grant price is paid in cash and not in common stock. The Company accounts for forfeiture as they occur and reduces the compensation cost at the time of forfeiture.
At the Company’s 2020 annual meeting of stockholders, the stockholders approved theThe Company’s 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation (collectively “stock awards”). In addition, the 2020 Plan provides for the grant of cash awards. The initial aggregate number of shares of common stock that may be issued initially pursuant to stock awards under the 2020 Plan is shares. The number of shares of common stock reserved for issuance automatically increases on January 1 of each calendar year during the term of the 2020 Plan, commencing January 1, 2021, by % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares of common stock determined by the Company’s board of directors before the start of a calendar year for which an increase applies. One ofIn December 2022, the provisions ofBoard determined and resolved, that the 2020 Plan isshare reserve shall not be increased effective January 1, 2023, and that no award maythere shall not be granted, issued or made underany increase in share reserve for the 2020 Plan until such time as the fair market value2023 year by virtue of the common stock, which is generally the closing sales price of the common stock on the principal stock market on which the common stock is traded, has been equal to or greater than $ perannual share (subject to proportionate adjustment for stock splits, reverse stock splits, and similar events) for at least ten consecutive trading days, after which time awards may be made under the 2020 Plan without regard to any subsequent increase or decrease in the fair market value of the common stock.reserve increase. No awards werehad been made pursuant to the 2020 Plan as of September 30, 2022. 2023.
On January 1, 2022, pursuant to the 2020The Company had a 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan terminated effective February 2019 and no new awards may be made under the number of shares reserved2009 Plan. The maximum contractual term for the issuance of stock awards increased byoptions is shares.
23
.
Stock Options
2009 Equity Incentive Plan:2023:
2009 Equity Incentive Plan | Weighted-Average Exercise Price | Weighted-Average Remaining Contract Life | ||||||||||
Total Outstanding Vested and Expected to Vest as of December 31, 2021 | 4,985,415 | $ | 4.21 | years | ||||||||
Options Canceled/Expired | (679,053 | ) | — | — | ||||||||
Total Outstanding Vested and Expected to Vest as of September 30, 2022 | 4,306,362 | $ | 4.21 | years | ||||||||
Vested at September 30, 2022 | 4,301,429 | $ | 4.21 | years |
Non-Plan Awards: | Non-Plan Awards | Weighted-Average Exercise Price | Weighted-Average Remaining Contract Life | |||||||||
Total Outstanding Vested and Expected to Vest as of December 31, 2021 | — | $ | — | — | ||||||||
Granted | 130,000 | 0.62 | years | |||||||||
Options Canceled/Expired | — | — | — | |||||||||
Total Outstanding Vested and Expected to Vest as of September 30, 2022 | 130,000 | $ | 0.62 | years | ||||||||
Vested at September 30, 2022 | 46,666 | $ | 0.62 | years |
2009 Equity Incentive Plan | Weighted-Average Exercise Price | Weighted-Average Remaining Contract Life | ||||||||||
Outstanding Vested and Expected to Vest as of December 31, 2022 | 61,525 | $ | 291.41 | years | ||||||||
Cancelled/Expired | (29,068 | ) | 280.26 | — | ||||||||
Outstanding and Vested as of September 30, 2023 | 32,457 | 306.44 | years |
As of September 30, 2022,2023, the unamortized compensation expense related to stock options issued under the Company’s 2009 Equity Incentive Plan has been fully recognized.awards was .
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the yearperiod and the exercise price, multiplied by the number of in-the-money options) of all options outstanding at September 30, 2023 and December 31, 2022 and 2021 was $ .
Restricted Stock Units
Number of Shares/Units | Weighted Average Grant Date Fair Value | |||||||
Non-vested RSUs as of December 31, 2021 | 1,039,003 | $ | 4.16 | |||||
RSUs vested during the period | (389,003 | ) | $ | 3.35 | ||||
Non-vested RSUs as of September 30, 2022 | 650,000 | $ | 4.64 |
Non-Plan Awards | Weighted-Average Exercise Price | Weighted-Average Remaining Contract Life | ||||||||||
Outstanding as of December 31, 2022 | 1,857 | $ | 43.40 | years | ||||||||
Cancelled | (429 | ) | 43.40 | — | ||||||||
Outstanding as of September 30, 2023 | 1,428 | 43.40 | years | |||||||||
Vested and Expected to Vest at September 30, 2023 | 952 | 43.40 | years |
22
Non-plan awards are granted pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules, as a material inducement to the willingness of such person to join the Company as a new employee, effective upon the effective date of Board of Director-approved resolutions to grant nonqualified stock options to such person (an inducement grant). Inducement grants, although granted outside of the Company’s 2020 Plan, are subject to the terms and conditions set forth in that plan. The terms of inducement grants are generally the same as terms would be under the 2020 Plan, wherein the exercise price of the options is equal to the fair value of the Company’s common stock at date of grant, with vesting commencing on date of grant, and a vesting schedule consisting of one-sixth (
) of the options becoming exercisable six ( ) months after vesting commences, and one thirty-sixth ( ) of the options on becoming exercisable each subsequent monthly anniversary of the vesting commencement date, such that the option is exercisable in full after three years from the vesting commencement date of the option grant, subject to the option holder providing continuous service.As of September 30, 2023, the unamortized compensation expense related to non-plan awards was
.Pursuant to the Merger Agreement with Legacy DMK, the Company assumed the outstanding options of Legacy DMK. Based on the conversion mechanism in the Merger Agreement, the Company assumed
options with an exercise price of . The assumed options were fully vested and will continue to be governed by the terms of the DMK 2016 Stock Plan, which was assumed by the Company in connection with the closing of the Merger. Additionally, the assumed options were converted into an equivalent option to acquire shares of the Company’s common stock. The DMK 2016 Stock Plan provides for the grant of incentive stock options ("ISOs"), nonstatutory stock options, stock bonus and opportunities to make direct purchase of the Company’s common stock to employees and directors. The total number of shares of common stock reserved for the Stock Plan is .The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of all options outstanding at September 30, 2023 and December 31, 2022, was
.Restricted Stock Units
Number of Shares/Units | Weighted Average Grant Date Fair Value | |||||||
Non-vested as of December 31, 2022 | 9,286 | $ | 325.13 | |||||
Vested during the period | (2,143 | ) | 592.20 | |||||
Forfeited during the period | — | — | ||||||
Non-vested as of September 30, 2023 | 7,143 | 245.00 | ||||||
Expected to vest as of September 30, 2023 | 7,143 | $ | 245.00 |
The RSU's have cliff vesting after
of continuous service or upon change of control from date of grant or upon death or disability. As of September 30, 2023, the unamortized compensation expense related to RSUs was approximatelyStock-Based Compensation
Stock-basedThe following summarizes stock-based compensation recognized as selling, general and administrative costs (or, SG&A) for the three months ended September 30, 20222023 and 2021, was approximately $ and $, respectively.2022:
For the Three Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Research and Development | $ | (69,835 | ) | $ | 3,654 | |||
Selling, General and Administrative | 25,142 | 70,834 | ||||||
Total | $ | (44,693 | ) | $ | 74,488 |
Stock-basedThe following summarizes stock-based compensation recognized as researchR&D costs and developmentSG&A costs (or, R&D) for three months ended September 30, 2022 and 2021, was approximately $ and $, respectively.
Stock-based compensation recognized as SG&A forthe nine months ended September 30, 20222023 and 2021, was approximately $ and $, respectively.2022:
For the Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Research and Development | $ | (69,835 | ) | $ | 122,746 | |||
Selling, General and Administrative | 146,634 | (137,057 | ) | |||||
Total | $ | 76,799 | $ | (14,311 | ) |
Stock-based compensation recognized as R&D for nine months ended September 30, 2022 and 2021, was approximately $ and $, respectively.
2423
Warrants
Warrants
The following table summarizes warrants issued and outstanding atas of September 30, 2022:2023:
September 30, 2022 | Warrant Shares | Exercise Price Per Share | Date Issued | Expiration Date | ||||||||
Old Adamis Warrants | $ | November 15, 2007 | November 15, 2023 | |||||||||
2019 Warrants | $ | August 5, 2019 | August 5, 2024 | |||||||||
2020 Warrants | * | $ | February 25, 2020 | September 3, 2025 | ||||||||
Series C Preferred Warrants | $ | July 5, 2022 | January 5, 2028 | |||||||||
Total Warrants |
|
Warrant Shares | Exercise Price Per Share | Date Issued | Expiration Date | |||||||||
Old Adamis Warrants | $ | November 15, 2007 | November 15, 2023 | |||||||||
2019 Warrants | $ | August 5, 2019 | August 5, 2024 | |||||||||
2020 Warrants | $ | February 25, 2020 | September 3, 2025 | |||||||||
Series C Preferred Warrants | $ | July 5, 2022 | January 5, 2028 | |||||||||
March 2023 Common Stock Warrants | $ | March 16, 2023 | September 16, 2028 | |||||||||
August 2023 Common Stock Warrants | $ | August 4, 2023 | August 4, 2028 | |||||||||
Total |
AtShares Reserved
Warrants | ||||
Non-Plan Awards | ||||
2009 Equity Incentive Plan | ||||
Legacy DMK Options Assumed by the Company | 231,490 | |||
Conversion of Series C Preferred stock | 697,674 | |||
Conversion of Series E Preferred stock | 1,212,000 | |||
Total Shares Reserved |
Note 12:13: Commitments and Contingencies
Firm Purchase Commitments
The Company has a production threshold commitment to a manufacturer of our SYMJEPI products pursuant to whichProducts where the Company would be required to pay for maintenance fees if it does not meet certain periodic purchase order minimums. Any such maintenance fees would be prorated as a percentage of the required minimum production threshold. For the three and nine month periods ended September 30, 2023 and 2022, there were no purchases under firm purchase commitments. The maintenance fees for the three and nine months ended September 30, 2023 were approximately $268,000 and $804,000, respectively, and were recorded as cost of sales in the condensed consolidated statement of operations. There were no maintenance fees recordedincurred during the three and nine months ended September 30, 2022.
Abandonment of ROU Assets
The Company has one operating lease for an office space in San Diego, CA with the lease term through November 30, 2023 and base rent of $32,000 per month. The Company ceased the use of this space in August 2023 and the related right-of-use asset was deemed abandoned. The ROU asset was reduced to its salvage value of zero as of September 30, 2022its cease-use date which resulted in an impairment charge of $116,934 included in general and 2021.
For information concerning contingencies relating to legal proceedings, see Note 9 of the notes toadministrative expenses in the condensed consolidated financial statements.statements of operations for the three and nine months ended September 30, 2023.
Note 13:14: Subsequent EventsIncome Taxes
Officer Resignation
On October 1, 2022, Ronald B. Moss, M.D.,The Company did not record any income tax provision or benefit for the Chief Medical Officerthree and nine months ended September 30, 2023 and 2022. The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its history of gross losses and has concluded that it is not more likely than not that the Company will realize the benefits of the Company, resigneddeferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as an officerof September 30, 2023 and employee ofDecember 31, 2022. Management reevaluates the Company effective October 14, 2022.
Strategic Review
On October 3, 2022, the Company announced that following the previously announced halting of the Company’s Phase 2/3 clinical trial examining the effects of Tempol in high risk subjects with early COVID-19 infection, it has initiated a process to explore a range of strategicpositive and financing alternatives focused on maximizing stockholder value. Potential alternatives that may be explored or evaluated include a partnership or other agreements regarding or sale of one or both of the Company’s commercial products SYMJEPI® and ZIMHI®, a merger, sale, or reverse merger of the Company, and/or seeking additional financing. As part of this process, the Company has engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist the Company in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions. There can be no assurance regarding the schedule for completion of the strategic review process, that this strategic review process will result in the Company pursuing any transaction or that any transaction, if pursued, will be completed. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. The Company is also reviewing and implementing expense reduction alternatives and measures including, without limitation, employee headcount reductions and reduction or discontinuation of certain product development programs.
negative evidence at each reporting period.
25
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information Relating to Forward-Looking Statements
ThisThe following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements and accompanying notes of the Company appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”) includesand the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Our financial results for the three- and nine- months ended September 30, 2023, are not necessarily indicative of results that may occur in future interim periods or for the full fiscal year.
Information Relating to Forward-Looking Statements
This Report, and the discussion of our financial condition and results of operations, contain and include forward-looking statements. Such statements are not historical facts, but are based on our current expectations, estimates and beliefs about our business and industry. Such forward-looking statements may include, without limitation, statements about our strategies, objectives and our future achievements; the outcome of our strategic alternatives review process; our expectations for growth; estimates of future revenue; our current or future expenses, commitments, obligations or liabilities; our sources and uses of cash; our liquidity needs; our current or planned clinical trials or research and development activities; anticipated completion dates for clinical trials; product development timelines; anticipated dates for resumptioncommercial introduction of manufacturing concerning certain of our commercial products; our future products; regulatory matters; our expectations concerning the timing of regulatory actions relating to our products and product candidates; anticipated dates for meetings with regulatory authorities and submissions to obtain required regulatory marketing approvals; expense, profit, cash flow, or balance sheet items or any other guidance regarding future periods; the impact of broad-based business or economic disruptions, including relating to the COVID-19 pandemic,health emergencies, on our ongoing business and prospects; our expectations concerning the outcome of proceedings discussed in this Report under Item 1 of Part II of this Report under the caption “Legal Proceedings”; and other statements concerning our future operations and activities. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. In some cases, you can identify forward-looking statements by terminology, such as “believe,” “will,” “expect,” “may,” “anticipate,” “estimate,” “intend,” “plan,” “should,” and “would,” or the negative of such terms or other similar expressions. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Report. These forward-looking statements are not guarantees of future performance and concern matters that could subsequently differ materially from those described in the forward-looking statements. Actual events or results may differ materially from those discussed in this Report. In addition, many forward-looking statements concerning our anticipated future business activities assume that we have or are able to obtain sufficient funding to support such activities and continue our operations and planned activities. As discussed elsewhere in this Report, we will require additional funding to continue operations, and there are no assurances that such funding will be available. Failure to timely obtain required funding would adversely affect and could delay or prevent our ability to realize the results contemplated by such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Because factors referred to elsewhere in this Report and in our Annual Report on2022 Form 10-K, for the year ended December 31, 2021 (sometimes referred to as the “2021 Form 10-K”) that we previously filed with the Securities and Exchange Commission, including without limitation the “Risk Factors” section in this Report and in the 20212022 Form 10-K, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as may be required by applicable law, we undertake no obligation to release publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date of this Report. Important risks and factors that could cause actual results to differ materially from those in these forward-looking statements are disclosed in this Report including, without limitation, under the headings “Part II, Item 1A. Risk Factors,” and “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our 20212022 Form 10-K, including, without limitation, under the headings “Part I, Item 1A. Risk Factors,” “Part I, Item 1. Business,” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our subsequent filings with the Securities and Exchange Commission, press releases and other communications.
Unless the context otherwise requires, the terms “we,” “our,” “the company” and “the Company” refer to AdamisDMK Pharmaceuticals Corporation, a Delaware corporation, and its subsidiaries.
Investors and others should note that we may announce material information to our investors using our website ( www.adamispharmaceuticals.com)(www.dmkpharmaceuticals.com), SEC filings, press releases, public conference calls and webcasts, as well as social media and blogs. We use these channels as a means of disclosing material non-public information and making disclosures pursuant to Regulation FD, and to communicate with our members and the public about our company. It is possible that the information we post on our website or social media and blogs could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on our website social media channels and blogs listed on our investor relations website.
General
Company Overview
Adamis Pharmaceuticals Corporation (“we,” “us,” “our,” “Adamis” or the “company”) is
We are a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas,the substance use disorder space including allergy,treatment of opioid use disorder. Our two commercial products are designed to treat opioid overdose respiratory and inflammatory disease. Our products and product candidates in the allergy, respiratory, and opioid overdose markets include: SYMJEPI (epinephrine)anaphylactic shock. The first is ZIMHI® (naloxone HCL Injection, 0.3mg,USP) 5 mg/0.5 mL, which was approved by the U.S. Food and Drug Administration, or FDA, in 2017for the treatment of opioid overdose, and the second is SYMJEPI® (epinephrine) Injection 0.3mg, which was approved by the FDA for use in the emergency treatment of acute allergic reactions, including anaphylaxis, for patients weighing 66 pounds or more;more, and SYMJEPI (epinephrine) Injection 0.15mg, which was approved by the FDA in September 2018, for use in the treatment of anaphylaxis for patients weighing 33-65 pounds; ZIMHI (naloxone HCL Injection, USP) 5 mg/0.5 mL, which was approved by the FDA in October 2021pounds. The foundation of our development pipeline is a proprietary portfolio of approximately 750 small molecule neuropeptide analogues. Our lead clinical-stage product candidate is for the treatment opioid use disorder and acute and chronic pain. The portfolio also has the potential to generate other compounds for treatment of opioid overdose;various substance use disorders and Tempol,compounds for life cycle management and backup molecules.
On May 25, 2023, we completed a merger transaction, or the Merger, with DMK Pharmaceuticals Corporation, a New Jersey corporation (“Legacy DMK”), pursuant to an investigational drug. In June 2020, we entered intoAgreement and Plan of Merger and Reorganization dated as of February 24, 2023, or the Merger Agreement, by and among the Company, Legacy DMK, Aardvark Merger Sub, Inc., a license agreement withDelaware corporation and a third party to license rights under patents, patent applications and related know-howwholly-owned subsidiary of the licensor relating to Tempol.Company (“Merger Sub”). The exclusive license includes the worldwide use under the licensed patent rights and related rightsMerger Agreement provided for the fieldsmerger (the “Merger”) of COVID-19 infection, asthma, respiratory syncytial virus infection,Legacy DMK with and influenza infection, as well as the use of Tempolinto Merger Sub, with Merger Sub surviving as a therapeuticwholly-owned subsidiary of the Company. Prior to the Merger, Legacy DMK was a privately-held, clinical stage biotechnology company focused on the development and commercialization of potential products for reducing radiation-induced dermatitis in patients undergoing treatment for cancer. We commenced Phase 2/3 clinical trial start-up activitiesa variety of central nervous disorders. Pursuant to examine the safetyMerger, each share of common stock of Legacy DMK was converted into the right to receive a number of shares of the Company’s common stock and, efficacy of Tempol in high risk subjects with early COVID-19 infection and on September 2, 2021, we announced the initiation of patient dosing in the trial.case of certain Legacy DMK stockholders, shares of our Series E Convertible Preferred Stock, or Series E Preferred. Additionally, Merger Sub changed its name to DMK Pharmaceuticals Corporation.
Effective September 6, 2023, pursuant to a certificate of amendment to the Company’s restated certificate of incorporation, Adamis Pharmaceuticals Corporation changed its name to DMK Pharmaceuticals Corporation. In February 2022 we announcedconnection with the enrollment and dosing of more than 100 subjects in the Phase 2/3 trial, and on March 14, 2022, we announced that the Data Safety Monitoring Board, or DSMB, overseeing the Phase 2/3 clinical trial met to evaluate the clinical and safety data from the first planned interim analysis and, following its evaluation, recommended that the study continue without modification. The DSMB is composed of subject matter experts and can unblind the data to determine the treatment effectschange of the subjects in the trial. On June 1, 2022, we announced that the DSMB had met againCompany’s corporate name, Merger Sub’s corporate name was changed to evaluate interim clinical and safety data for the trial and based on an interim review of the data, determined that the study can continue as planned. Adamis Pharmaceuticals Corporation.
On September 21, 2022, we announced that the DSMB’s third interim analysis of the Phase 2/3 clinical trial, which was the first interim review where the DSMB evaluated the primary efficacy endpoint, determined that the trial did not achieve its primary endpoint, as measured by comparing the rate of sustained clinical resolution of symptoms of COVID-19 at day 14 of Tempol versus placebo. The DSMB conducting the interim review recommended that the study be halted early due to lack of efficacy. The DSMB noted that no safety concerns were identified in the subjects that received Tempol. Based on the recommendation from the DSMB, we have halted the trial and have stopped further development of Tempol.
2625
On October 3, 2022, we announced that following the previously announced halting of our Phase 2/3 clinical trial examining the effects of Tempol in high risk subjects with early COVID-19 infection, we have initiated a process to explore a range of strategic and financing alternatives focused on maximizing stockholder value. Potential alternatives that may be explored or evaluated include a partnership or other agreement regarding or sale of one or both of the company’s commercial products SYMJEPI® and ZIMHI®, a merger, sale, or reverse merger of the company, and/or seeking additional financing. As part of this process, we have engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist us in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions. There can be no assurance regarding the timing for completion of the strategic review process, that this strategic review process will result in the company pursuing any transaction or that any transaction, if pursued, will be completed. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. We have implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction or discontinuation of certain product development programs.
Our US Compounding Inc. subsidiary, or USC, which we acquired in April 2016, and whichis a discontinued operation, was previously registered as a human drug compounding outsourcing facility under Section 503B of the FDCA and the U.S. Drug Quality and Security Act, or DQSA, and provided prescription compounded medications, including compounded sterile preparations and nonsterile compounds, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States. In July 2021, we sold certain assets relating to USC’s human compounding pharmaceutical business and approved a restructuring process to wind down the remaining USC business and sell, liquidate or otherwise dispose of the remaining USC assets. Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products.
To achieve our goals and support our overall strategy, we will need to raise additional funding to sustain operations, satisfy our obligations and liabilities and enable further product development.
Products and Product Candidates
Opioid Overdose; ZIMHI (naloxone) Injection
Naloxone is an opioid antagonist used to treat narcotic overdoses. Naloxone, which is generally considered the drug of choice for immediate administration for opioid overdose, blocks or reverses the effects of the opioid, including extreme drowsiness, slowed breathing, or loss of consciousness and eventually, death. Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and fentanyl. Since the COVID-19 pandemic, the opioid crisis has become significantly worse, and this increase has disproportionately affected adolescents. According to Bloomberg industry data, the U.S. naloxone market grew by about 15% in 2022 and according to the December 31, 2022 Form 10-K of Emergent BioSolutions, Inc. filed in March 2023, sales of Narcan®, the leading naloxone product for treatment of opioid overdoses, were approximately $374 million for 2022.
The Centers for Disease Control and Prevention, or CDC, estimates that between 1999 and 2020 more than 932,000 people have died of drug overdoses, with annual deaths increasing during the COVID-19 pandemic. More recent statistics published by the CDC reported that drug overdoses resulted in approximately 107,081 deaths in the United States during the 12-month period ending December 2022, which was an approximately 51% increase over the approximately 71,030 deaths for the 12-month period ending December 2019. Overdose deaths involving opioids (including both prescription and synthetic) accounted for 81,045 of the overdose deaths in 2022 and are now the leading cause of death for Americans under age 50. More powerful synthetic opioids, like fentanyl and its analogues, are responsible for approximately 90% of those opioid deaths. These statistics are even more stark for adolescents according to the CDC. Comparing July-December 2019 to July-December 2021, overdose deaths among youngsters aged 10 to 19 years increased by 109% and in that same time period, deaths involving illicitly manufactured fentanyl increased by 182% in the same age group. In June 2021, the National Institute on Drug Abuse; National Institutes of Health; U.S. Department of Health and Human Services, published the policy brief, “Naloxone for Opioid Overdose: Life-Saving Science,” which reported that statistical modeling suggests that high rates of naloxone distribution among laypersons and emergency personnel could avert approximately 21% of opioid deaths. The brief also stated that overdoses involving highly potent synthetic opioids such as fentanyl or large quantities of opioids may require multiple doses of naloxone, and if respiratory function does not improve, naloxone doses may be repeated every two to three minutes. With the increasing prevalence of illicit fentanyl on the streets, we believe the need for ZIMHI as a product that results in rapid increase in higher blood levels of naloxone is becoming ever more important.
On October 18, 2021, we announced that the FDA had approved ZIMHI (naloxone hydrocholoride 5mg) for the treatment of opioid overdose, and it was commercially launched in the U.S. on March 31, 2022.
The results of a study sponsored by the FDA was recently presented by Dr. David Strauss, M.D., Ph.D. Dr. Straus at a virtual public meeting of the Reagan–Udall Foundation addressing fatal overdoses. Dr. Straus is the Director of the Division of Applied Regulatory Science at the Center for Drug Evaluation and Research. The current standard of care is a single intranasal 4mg dose of naloxone, as contained in Narcan. Given the fentanyl crisis, the investigators tested this single dose against two and four doses to reverse a simulated fentanyl overdose. They showed that the most effective reversal was achieved by four administrations of 4mg intranasal naloxone given within 2.5 minutes. We believe that this data from the FDA sponsored study suggests that rapid delivery of naloxone is necessary to help counter a fentanyl overdose and that a single administration of ZIMHI, based on its pharmacokinetic profile, could be an effective agent to counter a fentanyl overdose.
On July 28, 2023, we issued a press release announcing that we had committed to fund an unrestricted research grant to the Leiden University Medical Center Anesthesia and Pain Research Unit. The funding will support the work of Albert Dahan, MD, PhD, an expert on opioid-induced respiratory depression (opioid overdose) and professor of anesthesiology at the University. Dr. Dahan has been working with the FDA to understand better methods of reversing fentanyl overdoses. The objective of the work will be to assess the efficacy of the Company’s ZIMHI product compared to 4mg of intranasal naloxone, and the respective number of doses required to reverse fentanyl-induced respiratory depression.
Anaphylaxis; SYMJEPI; Epinephrine Injection Pre-Filled Single Dose Syringe
The American Academy of Allergy Asthma and Immunology, or AAAAI, defines anaphylaxis as a serious life-threatening allergic reaction. The most common anaphylactic reactions are to foods, insect stings, medications and latex. According to information published by AAAAI reporting on findings from a 2009-2010 study, up to 8% of U.S. children under the age of 18 had a food allergy, and approximately 38% of those with a food allergy had a history of severe reactions. Anaphylaxis requires immediate medical treatment, with epinephrine as the first course of treatment to open airways and maintain blood pressure.
We estimate that sales of prescription epinephrine products were more than approximately $1.75 billion in 2022, based on assumptions and estimates using industry data. While we cannot provide any assurances concerning whether annual prescription sales will decline or grow, we believe that the epinephrine market has the potential to grow in the future, based in part on the prevalence of medical conditions, such as anaphylaxis, cardiovascular diseases, respiratory diseases (asthma), and the increased awareness about the treatment options for the management of these diseases. The market for prescription epinephrine products is competitive. Our SYMJEPI (epinephrine) Injection 0.15mg and 0.3mg products allow users to administer a pre-measured epinephrine dose quickly with a device that we believe, based on human factors studies, to be intuitive to use.
On June 15, 2017, the FDA approved our SYMJEPI (epinephrine) Injection 0.3mg product for the emergency treatment of allergic reactions (Type I) including anaphylaxis. SYMJEPI (epinephrine) Injection 0.3mg is intended to deliver a dose of epinephrine, which is used for emergency, immediate administration in acute anaphylactic reactions to insect stings or bites, allergic reaction to certain foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis for patients weighing 66 pounds or more. On September 27, 2018, the FDA approved our lower dose SYMJEPI (epinephrine) Injection 0.15mg product, for the emergency treatment of allergic reactions (Type I) including anaphylaxis in patients weighing 33 to 6566 pounds. Our SYMJEPI injection products were fully launched in July 2019 by our then-commercialization partner Sandoz Inc.
Our SYMJEPI products are currently marketed and sold by USWM, LLC, or USWM or US WorldMeds, with which we entered into an exclusive distribution and commercialization agreement, or the USWM Agreement, in May 2020 for the United States commercial rights for the SYMJEPI products, as well as for our ZIMHI product. Under the terms of the USWM Agreement, USWM
SYMJEPI is the exclusive distributor of SYMJEPI in the United Statesmanufactured and related territories, or Territory, and USWM has an exclusive license under our patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, in partial consideration of an initial payment of $1,000,000 by USWM and potential additional regulatory and commercial based milestone payments. There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to us. We retain rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory. In addition, we may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize our Symject™ syringe product platform.
The USWM Agreement provides that, after deducting the supply price and subject to certain other deductions and adjustments, including an allocationtested for USWM sales and distribution expenses from net sales of the products, USWM will pay to us 50% of the net profit from net sales, as each such term is defined in the USWM Agreement, of the product in the Territory to third parties, determined on a quarterly basis. We will be the supplier of the products to USWM, and USWM will order and pay us a supply price for quantities of products ordered. The agreement does not include minimum payments to us by USWM, minimum requirements for salesCatalent Belgium S.A. During Catalent’s routine testing, a small number of product by USWM or,syringes with certain exceptions, minimum purchase commitments by USWM.
clogged needles were identified. On March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level. The four lots were recalled due to the potential clogging of the needle preventing the dispensing of epinephrine. The recall is beingwas conducted with the knowledge of the FDA, and USWM is handlinghandled the entire recall process for the company,Company, with companyCompany oversight. As of the date of this Report, neither USWM nor we have received, ornor are aware of, any adverse events related to this recall and in February 2023, the Company received notice from the FDA that the agency considers the voluntary recall of our SYMJEPI products to be terminated. Such notice does not preclude the FDA from taking action in the future related to the recall, and we remain responsible for compliance with applicable laws relating to the product and the recall.
SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. For the manufacture of SYMJEPI, the company utilizes “Ready-to-Fill,” or RTF, syringes that consist of a pre-assembled glass syringe barrel with a staked-in stainless steel needle. During routine inspection of epinephrine pre-filled syringe batches, a small number of syringes with clogged needles were identified. An initialCatalent’s investigation suggested a syringe component issue as the likely cause of the observed needle clogging. Further investigation confirmeddetermined the steel used in onea specific stainless steel needle batch as the root cause for the clogged syringes observed. The company and the manufacturer have developedCompany worked with Catalent to develop corrective and preventive actions. New RTFHowever, despite the corrective actions and sourcing syringes which have been manufactured usingused a different batch of steel for theirthe needles, Catalent’s attempt to resume manufacturing of SYMJEPI at its Belgium facility has resulted in similar product defects. Therefore, as of the date of this Report, the Company remains unable to manufacture product. While we are being sourced. The company is committed to returning SYMJEPI to the market, after all stakeholderswe will not do so until we are satisfied that thesesufficient corrective actions should preventhave been implemented to avoid a repeat of the observed failurecircumstances which led to the voluntary recall. We are evaluating a range of options to restore SYMJEPI production, including a critical assessment of Catalent.
26
Product Candidates
As a result of our Merger with Legacy DMK, we acquired a portfolio of approximately 750 novel small molecule neuropeptide analogues and a number of product candidates and technologies in future batches. Catalent has now resumed operations at its Belgium facilitydevelopment for opioid use disorder and asother neuro-based disorders. We intend to focus on developing therapies with novel mechanisms of action to treat these important conditions where patients are currently underserved, including substance abuse disorders. We intend to develop mono, bi- and tri-functional small molecules that simultaneously modulate critical networks in the datenervous system with the goal of this Report is scheduledcreating treatments that are efficacious, safe, and tolerable and could address several unmet or underserved medical needs by taking the novel approach to manufacture a new batchintegrate with the body’s own efforts to regain balance of SYMJEPI during November 2022. Assuming no additional interruptionsdisrupted physiology. By designing small molecule analogs of neuropeptides, one or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although theremultiple receptors can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the end of the first quarter of 2023. targeted by a single molecule to support a transition back to a balanced neurophysiological state.
ZIMHI (naloxone) Injection
NaloxoneOur lead clinical stage product candidate, DPI-125, is an opioid antagonist used to treat narcotic overdoses. Naloxone, which is generally considered the drug of choice for immediate administrationbeing developed as a potential novel treatment for opioid overdose, blocksuse disorder, or reverses the effects of the opioid, including extreme drowsiness, slowed breathing, or loss of consciousness. Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and fentanyl.
On December 31, 2018, we filed an NDA with the FDA relatingOUD. We also plan to our higher dose naloxone injection product, ZIMHI,study this compound for the treatment of moderate to severe pain, where it could potentially offer a product with competitive advantages compared to currently marketed opioids (pain killers) and hence help prevent opioid overdose. Followingaddiction. Other product candidates include DPI-221, for treating bladder control problems, and DPI-289 for treating severe end stage Parkinson’s disease. We generally intend to focus on the receiptdevelopment programs that target substance use disorder described above and to seek to out-license product candidates targeting indications outside of this focus.
DPI-125
DPI-125 is a small molecule that is currently being developed for two Complete Response Letters,potential uses. The first is for the rapid stabilization of OUD patients actively using prescription or CRLs, fromstreet opioids, including deadly fentanyl and its analogues. The second potential use is as a potent, acute analgesic, with a potentially reduced risk of respiratory depression and addiction compared to currently marketed opioids.
We have completed a human Phase 1 dose escalation study with DPI-125, and the FDA regarding our NDA for ZIMHI and our resubmissions of the NDA, on October 18, 2021, we announcedpharmacokinetic data showed that the FDA had approved ZIMHIdrug was well tolerated in the human study, with no serious adverse events, deaths or dropouts. The next anticipated development step, assuming available funding and no unexpected developments, will be human proof of concept studies, which will attempt to confirm what has been demonstrated in preclinical studies in terms of reduced or absent respiratory depression and abuse liability. Following these proof-of-concept studies, we believe that the next development step, assuming available funding and no unexpected developments, will be to proceed into Phase 2 trials for the treatment of opioid overdose. On March 31, 2022, our commercial partner USWMOUD and acute pain, where the company issuedfocus of the trials will not only be on efficacy, but also safety and tolerability. We believe that the same characteristics and mechanism of action that may make DPI-125 a press release announcinguseful product in the commercial launchfight against addiction could also make it a significant alternative to currently marketed opioids used for treating pain.
DPI-221
DPI-221 is a small molecule as what we believe is a unique alternative to surgery for benign prostatic hyperplasia, or BPH, by reestablishing bladder control. BPH is a common problem with approximately six million men seeking treatment annually, with an estimated market size of ZIMHI. USWM has indicatedapproximately $5.4 billion annually in the United States. BPH is a common, chronic disease caused by an enlarged prostate. DPI-221 may offer a novel approach to the companytreatment of BPH by acting on the central nervous system to suppress abnormal activity without interfering with normal bladder function. In preclinical studies, DPI-221 was effective at reestablishing neural control of the bladder, which returns the bladder to more normal function, allowing coordinated bladder contractions and efficient voiding.
A first-in-human Phase 1 oral dose escalation study, showed that the drug was safe and tolerable in the study. There were no serious adverse events, deaths or study dropouts. The pharmacokinetic, or PK, characteristics have allowed planning of a proof-of-concept study, which, assuming available funding and no unexpected developments, is anticipated to be a human urodynamic study to determine the efficacious dose that will inform dosing in a subsequent Phase 2 study. We believe that if successfully developed, this medication could prevent or reduce the need for BPH surgery.
DPI-289
DPI-289, also a small molecule, has been developed to treat patients suffering from severe Parkinson’s disease, or PD. Many of these patients will have been treated with a current leading treatment product called levodopa, or L-DOPA. Unfortunately, after a few years of treatment, the duration of effect is markedly curtailed (reduced “on-time”) and patients can exhibit severe abnormal movements called levodopa induced dyskinesia, or LID, which make it difficult or impossible to lead a normal life. Preclinical studies have demonstrated DPI-289’s ability to treat parkinsonian disability in rodent and non-human primate models to dramatically increase on-time without causing dyskinesia. Our initial feedbackgoal with respect to this product candidate is to target patients late in their disease who require deep brain stimulation (DBS-brain surgery) to prevent such surgeries and also treat those patients who are not eligible for DBS. Given this target population, we plan to seek orphan drug status from the field has been positive. A recently launched website enables institutional customersFDA and international regulatory agencies. Initially, assuming available funding and no unexpected developments, we intend to orderdevelop the compound as monotherapy, but we anticipate that future studies will examine its utility in PD patients as combination therapy with L-DOPA to increase “on-time” without increasing the debilitating side effect of dyskinesia.
We anticipate that the next step for this program, assuming adequate funding and receive product directly. USWM has indicatedno unexpected developments, will be to carry out IND-enabling toxicology studies to allow the company that progress has continuedfiling of an Investigational New Drug Application, or IND, for the first in-person studies. If orphan drug status is conferred by the FDA or other international regulatory bodies, the cost and duration of the clinical development program may be significantly reduced, allowing for approval in adding ZIMHI to formularies for payors and PBMs, and that in many states ZIMHI has been added to the standing orders, which permits pharmacies to dispense ZIMHI without a prescription.
27
an accelerated time frame.
Tempol (APC400)Other
OnIn June 12, 2020, we entered into a license agreement with a third partythird-party entity or the Licensor, to licensein-license rights under patents, patent applications and related know-how of Licensorlicensor relating to Tempol, an investigational drug. The exclusive license includes the worldwide use under the licensed patent rights and related rights of Tempol for the fields of COVID-19 infection, asthma, respiratory syncytial virus infection, and influenza infection. In addition, the exclusive license includes the use of Tempol as a therapeutic for reducing radiation-induced dermatitis in patients undergoing treatment for cancer.
Tempol is a redox cycling nitroxide that promotes the metabolism of many reactive oxygen species and improves nitric oxide bioavailability. It has been studied extensively in animal models of oxidative stress and inflammation. Overall, Tempol acts as both a super-oxide dismutase mimetic and also has demonstrated anti-inflammatory, anticoagulant activity and antiviral activity. Inflammation and oxidative stress occur in various disease states including COVID-19. Both inflammatory cytokines and reactive oxygen species (ROS) from cells of the immune system called macrophages and neutrophils damage the lung in Acute Respiratory Distress Syndrome (ARDS). Many published articles describing animal models of ARDS show Tempol caused a decrease in lung inflammation and preserved lung pathology associated with acute and chronic lung injury. In animal models, Tempol has been shown to decrease proinflammatory cytokines (cytokine storm), and through its antioxidant activity has been shown to decrease the harmful effects of ROS. In addition, Tempol has been shown to decrease platelet aggregation, a problem observed in many COVID-19 patients. More recently, Tempol has been shown to have antiviral activity against the virus that causes COVID-19 in-vitro and may have synergy with the antiviral remdesivir. On January 28,September 2021 we announced thatcommenced patient dosing in collaboration with the Human Immune Monitoring Center at Stanford University we conducted a study to investigate the effects of Tempol on immune cells from COVID-19 patients, and that preliminary data from that study showed that Tempol decreases cytokines from stimulated cells from COVID-19 patients. In March 2021, we announced that in studies conducted at Galveston National Laboratory, or GNL, University of Texas Medical Branch, hamsters challenged with the virus that causes COVID-19 (SARS-CoV-2) showed decreased inflammation in the lungs when treated with Tempol compared to controls, and on March 22, 2022, we announced that in studies conducted at the GNL, hamsters challenged with high levels of the Omicron variant of the SAR-CoV-2 virus, resulted in significant decrease of inflammation in the lungs of animals treated with Tempol compared to controls.
In January 2021, we submitted an IND to the FDA for the investigational use and proposed Phase 2/3 clinical trial of Tempol for the treatment of COVID-19, with the goal of the study to examine the safety and activityefficacy of Tempol in COVID-19 patients early in the infection. In addition to safety, the study examined markers of inflammation and the rate of hospitalization for patients taking Tempol versus placebo early in COVID-19 infection. On June 11, 2021, we announced the start-up ofpatients. The Data Safety Monitoring Board, or DSMB, overseeing the Phase 2/3 clinical trial met in March and by FebruaryJune 2022 we announced the enrollment and dosing of more than 100 subjects in the Phase 2/3 trial. On March 14, 2022, we announced that the DSMB, which is composed of infectious disease experts that oversee and review the safety and efficacy of the trial, met to evaluate theinterim clinical and safety data from the first planned interim analysis and, following its evaluation, recommended that the study continue without modification. During the trial and interim review process, the company did not have access to unblinded trial data and did not have access to unblinded data until the final study data was compiled and reviewed. The DSMB met again on May 31, 2022, to evaluate interim clinical and safety data for the trial and based on an interim review of the data, determined that the study can continue as planned. On September 12, 2022, we announced that the clinical trial reached the initial planned enrollment of 248 subjects.
On September 21, 2022, we announced that the DSMB’s third interim analysis of the Phase 2/3 clinical trial, which was the first interim review where the DSMB evaluated the primary efficacy endpoint, determined that the trial did not achieve its primary endpoint as measured by comparing the rate of sustained clinical resolution of symptoms of COVID-19 at day 14 of Tempol versus placebo. The DSMB conducting the interim reviewand recommended that the study be halted early due to lack of efficacy. The DSMB noted that no safety concerns were identified in the subjects that received Tempol. Based on the recommendation from the DSMB, we have halted the trial and have stopped all further development of Tempol. Tempol in October 2022.
On October 27, 2022, we received a communication from the Licensor asserting that the license agreement between the Licensor and us relating to Tempol has terminated by virtue of alleged noncompliance by us with certain financial covenants contained in the agreement. We dispute, and do not agree, that the agreement has terminated. We are also evaluating potential claims against the Licensor including possible breach of its obligations under the agreement, and we intend to vigorously defend our rights relating to the agreement. We do not believe that the agreement or any termination of the agreement is material to the Company’s current or presently anticipated future business, financial conditions or results of operations.
28
US Compounding, Inc. Agreement
On July 30, 2021, the company and its wholly-owned USC subsidiary entered into an Asset Purchase Agreement, or the USC Agreement, effective as of July 30, 2021, or the Effective Date, with Fagron Compounding Services, LLC d/b/a Fagron Sterile Services (the “Purchaser”), providing for the sale and transfer by USC and the purchase by the Purchaser, effective as of the Effective Date, of certain assets of USC related to its human compounding pharmaceutical business, or the Business, including certain customer information and information on products sold to such customers by USC, together, the “Book of Business,” including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products, collectively referred to as the “Assets.” After the Effective Date, Purchaser may use the Book of Business to secure customers for its products and services and may otherwise use the Book of Business. Pursuant to the USC Agreement, the Purchaser did not assume any liabilities of USC, and the transaction did not include the sale or transfer of any USC equipment, buildings or real property, or any products, information, agreements, relationships or other assets relating to the veterinary business of USC.
The USC Agreement provides that the consideration payable by the Purchaser to the company for the Assets sold and transferred consisted of the following amounts: (i) a payment of $107,500 on the Effective Date; and (ii) monthly payments in an amount equal to (a) two (2.0) times the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain identified customers included in the Book of Business during the 12-month period following the Effective Date, or the “Payment Term.” and (b) a lower multiple of the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain other customers included in the Book of Business. The final payment amount due from Fagron, recorded in the company's condensed consolidated balance sheet at September 30, 2022, was approximately $248,000. The USC Agreement includes certain restrictive covenants of the company and USC, including noncompetition provisions. The transaction agreements include standard indemnification provisions, and a number of other covenants and agreements of the parties concerning the transactions contemplated by the agreements.
Plan for the Remaining Operations, Business and Assets of USC
In light of a number of factors including the sale of assets to the Purchaser pursuant to the USC Agreement, in August 2021 the Board approved a restructuring process of winding down the remaining operations and business of USC and selling, transferring or disposing of the remaining assets of USC. Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products. The restructuring and winding down includes, without limitation, the termination of USC’s veterinary business and USC sales to veterinary customers; the termination of employment of all or substantially all employees engaged in the USC business (except as determined to be necessary or appropriate in connection with the company’s and USC’s performance of their obligations under the USC Agreement and the transactions contemplated thereby, or in connection with resolving matters relating to the winding down of USC’s business), and providing such notices and making such payments to such employees as the officers of the company determine are necessary or appropriate, including as maybe required by law or as maybe provided for pursuant to any retention agreement, severance agreement, incentive agreement, or other written agreement with such employees; the sale or other disposition from time to time of the remaining equipment, real property, buildings and tangible and intangible assets relating to USC’s business that are unrelated to the USC Agreement; the termination, assignment or other resolution of agreements with third parties relating to the USC business; making regulatory filings and taking appropriate actions with federal and state regulatory authorities in connection with the winding down and winding up of USC’s business; and taking such other actions as the officers of the company or USC (as appropriate) determine are necessary or appropriate in connection with the restructuring and the winding down and winding up of the remaining business, operations and assets of USC. The company has sold and disposed of certain customer information and other assets related to USC’s veterinary compounded pharmaceuticals business, and will continue the process of selling or otherwise disposing of the remaining assets relating to USC’s business.
In connection with the winding down of the USC business, we incurred significant expenses and made a number of payments. The substantial majority of cash payments related to personnel-related restructuring charges, including without limitation costs associated with providing termination payments to USC employees, employee salaries and incentive payments during a transition period after the effective date of the sale of the Assets pursuant to the USC Agreement, severance or other termination benefits or payments in connection with workforce reduction and termination of employment, and payments pursuant to retention agreements or incentive agreements with certain employees, were made during the third and fourth quarters of 2021 and were approximately $1.6 million. In addition, as part of the winding down of USC’s business, we have incurred other costs. We also expect to incur commissions and other costs associated with the sale or other disposition of certain USC tangible assets such as building, property and certain equipment.
As a result of the transactions contemplated by the USC Agreement and the restructuring activities described above, the company’s financial results for the third and fourth quarters of 2021 include approximately $8.6 million for the impairment charges of inventory, fixed assets, intangibles, goodwill and right of use assets. The impairment charges that the company incurred and expects to incur in connection with the matters described above are subject to a number of assumptions, and the actual amount of impairment charges may differ materially from those estimated by the company. In addition, the company may determine in the future that additional impairments of assets are appropriate in connection with the matters described above.
Going Concern and Management’sManagement Plan
The financial statements included elsewhere herein for the three and nine months ended September 30, 2023 and 2022, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. However, as of September 30, 2023, we had cash and cash equivalents of approximately $6.7 million, an accumulated deficit of approximately $323.5 million, and liabilities of approximately $13.9 million. We have incurred substantial recurring losses from continuing operations, have used, rather than provided, cash in our continuing operations, and are dependent on additional financing to fund operations. We incurred a net loss of approximately $23.2 million and $37.1 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022, we had cash and cash equivalents of approximately $2.4 million, an accumulated deficit of approximately $301.2 million and liabilities of approximately $9.1 million. These conditions raise substantial doubt about our ability to continue as a going concern.concern within one year after the date the financial statements are issued. The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Our management intends to attempt to secure additional required funding through equity or debt financing if available, seeking to enter into a partnership or other strategic agreement regarding, or sales or out-licensing of, our commercial products, product candidates or intellectual property assets or other assets, including assets used in connection with the former USC business, revenues relating to supply and sale of SYMJEPIZIMHI and ZIMHISYMJEPI products and share of net profits received relating to sales in the U.S. of our SYMJEPIZIMHI and ZIMHISYMJEPI products, seeking partnerships or commercialization agreements with other pharmaceutical companies or third parties to co-develop and fund research and development or commercialization efforts of our products, from a merger, reverse merger or other business combination, or similar transactions. As part of this process, we have engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist us in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions. However, thereproducts. There can be no assurance regarding the timing of the strategic review process or that we will be able to obtain any sources of funding. As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving issuances of equity securities. Such additional funding may not be available, may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders. There is no assurance that we will be successful in obtaining the necessary funding to sustain our operations or meet our business objectives. In addition, obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders.required funding. If we do not obtain required funding, our cash resources will be depleted in the near term and we would 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. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection, dissolution or liquidation, or other alternatives that could result in our stockholders losing some or all of their investment in us. We have implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction or discontinuation of certain product development programs.
Any funding that we may receive during the remainder of fiscal 2022 or thereafter is expected to be used to satisfy existing and future obligations and liabilities and working capital needs, and for general working capital purposes.27
Results of Operations
Our consolidated results of operations are presented for the three months and nine months ended September 30, 20222023 and 2021.2022. Certain financial results (revenues and expenses) relating to the business formerly conducted by USC are reflected in Note 2,4, Discontinued Operations and Assets Held for Sale, of the notes to the condensed consolidated financial statements appearing elsewhere in this Report. Unless otherwise noted, the discussion below, and the revenue and expense amounts discussed below, are based on and relate to the continuing operations of the company,Company, which we sometimes refer to asincludes the operations of Legacy DMK from the date of acquisition.
The following table summarizes the significant items within our drug developmentresults of operations for the three and commercialization business. nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Revenue, net | $ | 9 | $ | 1,506 | $ | (1,497) | $ | 1,469 | $ | 2,605 | $ | (1,136) | |||||||||||
Cost of goods sold | 338 |
|
| 1,648 |
|
| (1,310) |
|
| 2,488 |
|
| 3,706 |
|
| (1,218) | |||||||
Gross loss | (329) |
|
| (142) |
|
| (187) |
|
| (1,019) |
|
| (1,101) |
|
| 82 | |||||||
Selling, general and administrative expenses | 2,517 |
|
| 2,508 |
|
| 9 |
|
| 11,332 |
|
| 10,097 |
|
| 1,235 | |||||||
Research and development expenses | 419 |
|
| 1,978 |
|
| (1,559) |
|
| 2,106 |
|
| 9,520 |
|
| (7,414) | |||||||
Acquired in-process research & development (IPR&D) | — |
|
| — |
|
| — |
|
| 6,540 |
|
| — |
|
| 6,540 | |||||||
Other income (expense), net | 1,529 |
|
| 357 |
|
| 1,172 |
|
| 3,243 |
|
| (2,079) |
|
| 5,322 |
| ||||||
Net loss from continuing operations | (1,736) |
|
| (4,271) |
|
| 2,535 |
|
| (17,754) |
|
| (22,797) |
|
| 5,043 |
| ||||||
Net income (loss) from discontinued operations | 348 |
|
| (128) |
|
| 476 |
|
| (1,151) |
|
| (354) |
|
| (797) | |||||||
Net Loss Applicable to Common Stock | (1,388) |
|
| (4,399) |
|
| (3,011) |
|
| (18,905) |
|
| (23,151) |
|
| (4,246) |
|
28
Three Months Ended September 30, 20222023 and 20212022
Revenues.Revenues were approximately $1,506,000$9,000 and $760,000$1,506,000 for the three months ended September 30, 20222023 and 2021,2022, respectively. The $746,000 increaserevenues recognized during the three months ended September 30, 2023 represent license fees received in relation to the USWM Agreement, which are recognized as revenue forratably over the third quarterterm of the license. The revenues recognized during the three months ended September 30, 2022 waswere primarily attributable to approximately $1,306,000$1.3 million of sales of ZIMHI to USWM recognized in that quarter (which was not yet FDA approved during the same period of 2021) and an increase of approximately $562,000 in recognition of deferred revenue due to the Company's reassessment of performance obligations met under the USWM Agreement, offset primarily by a decrease in SYMJEPI sales of approximately $736,000 due to the manufacturing hold and voluntary product recall announced in March 2022. Additionally, revenues for the three months ended September 30, 2022, were reduced by additional product recall costs of approximately $388,000, which were recorded as contra-revenue. As disclosed elsewhere in this Report, including above under the heading “General - SYMJEPI (epinephrine) Injection Product,” the manufacturing of SYMJEPI continues to be on hold. The Company and the manufacturer have developed corrective and preventive actions. New RTF syringes, which have been manufactured using a different batch of steel for their needles, are being sourced. Catalent has now resumed operations at its Belgium facility and as of the date of this Report is scheduled to manufacture a new batch of SYMJEPI during November 2022. Assuming no additional interruptions or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although there can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the end of the first quarter of 2023.
Cost of goods sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. Consolidatedcost of goods sold was approximately $1,648,000 and $1,566,000 for the three months ended September 30, 2022 and 2021, respectively. The gross loss for the three months ended September 30, 2022 was approximately $142,000 compared to approximately $806,000 for the three -months ended September 30, 2021. The $82,000 increase in cost of goods sold in the third quarter of 2022 was primarily due to an increase in direct material costs of approximately $1,199,000 related to ZIMHI production, offset primarily by a decrease in direct material costs and obsolescence and wastage charges related to SYMJEPI production of approximately $795,000 due to its continuing manufacturing hold and voluntary product recall. Additionally, for the three months ended September 30, 2021 a loss on derecognition of inventory of $330,000 was recorded due to a return of inventory to our supplier. The supplier agreed to repurchase the inventory at an amount lower than our cost. There was no return of inventory during the three months ended September 30, 2022.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of consulting and employee compensation, professional fees which include legal, accounting and audit fees, and depreciation and amortization expenses. SG&A expenses for the three months ended September 30, 2022 and 2021 were approximately $2,508,000 and $4,794,000, respectively. The $2,286,000 decrease in SG&A expenses during the three months ended September 30, 2022, was primarily due to a decrease in legal expenses of approximately $1,220,000 related principally to the ongoing investigations, a decrease of approximately $792,000 primarily related to a financial advisor fee related to the sale of certain USC assets to Fagron and a decrease of approximately $514,000 related to compensation expenses principally resulting from a reversal of bonus accrual expenses, offset by an increase of approximately $240,000 in other SG&A costs primarily insurance, IT and recruiting expenses.
Research and development expenses. Our research and development, or R&D, costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. R&D expenses were approximately $1,978,000 and $4,620,000 for the three months ended September 30, 2022 and 2021, respectively. The $2,642,000 decrease in R&D expenses during the quarter-ended September 30, 2022, was principally due to a decrease in development spending for Tempol of approximately $1,144,000, a decrease in development spending for ZIMHI of approximately $1,088,000 and a decrease of approximately $464,000 related to compensation expense principally resulting from a reversal of bonus accrual expenses, offset by approximately $54,000 related to increased development spending on SYMJEPI and other R&D projects.
Other Income (Expense). Other Income (Expenses) consists primarily of interest income, interest expense, and changes to the fair value of warrant liabilities. Other income (expense) for the three months ended September 30, 2022 and 2021 was approximately $357,000 and $5,052,000, respectively. The $4,695,000 decrease in other income for the three months ended September 30, 2022, was primarily due to no gain recorded in the consolidated statement of operations for the quarter-ended September 30, 2022, related to the forgiveness of the PPP loan debts, whereas in the comparable quarter in 2021 there was gain recorded of approximately $5,010,000 related to the forgiveness of debt. Additionally, there was a gain of approximately $278,000 recorded during the three months ended September 30, 2022, due to change in estimate of variable consideration related to the sale of certain assets to Fagron, pursuant to the USC Agreement.
Loss from Discontinued Operations. The company recorded a net loss from discontinued operations, after taxes, of approximately $128,000 and $7,193,000 related to its US Compounding Inc. subsidiary for the three months ended September 30, 2022 and 2021. The $7,065,000 decrease in net loss from discontinued operations was due to management's decision to discontinue the operations of USC in the third quarter of 2021. The $128,000 net loss from discontinued operations in the third quarter of 2022, primarily related to SG&A expenses as the company continues the wind-down of USC. The main components of the third quarter loss in 2021 were asset impairments totaling approximately $8,167,000 primarily related to adjustments associated with the winding down of the business of USC. Also contributing to that loss was gross loss of approximately $1,177,000, approximately $2,499,000 of other operating expenses, partially offset by approximately $4,637,000 of gain from the sale of non-financial asset to Fagron, approximately $8,000 for interest income, and other income of approximately $5,000.
31
Nine Months Ended September 30, 2022 and 2021
Revenues. Revenues were approximately $2,605,000 and $3,368,000 for the nine months ended September 30, 2022 and 2021, respectively. The $763,000 decrease in revenue for the nine months ended September 30, 2022 was primarily attributable to approximately $2,355,000 of sales of ZIMHI to USWM recognized in that period (which was not yet FDA approved during the same period of 2021) and an increase of approximately $562,000$0.6 million in recognition of deferred revenue due to the Company's reassessment of performance obligations met under the USWM Agreement, offset by a decrease in SYMJEPI sales of approximately $3,292,000. No revenues relating to SYMJEPI were reported during the nine months ended September 30, 2022, due to the manufacturing hold and the voluntary product recall announced in March 2022. Additionally, revenues for the nine months ended September 30, 2022, were reduced by additional product recall costs of approximately $388,000,$0.4 million, which were recorded as contra-revenue. As disclosed elsewhereThere were no product revenues for SYMJEPI or ZIMHI during the three months ended September 30, 2023 due to continued sourcing issues with the syringes for SYMJEPI, and due to the lack of orders for ZIMHI from USWM. The Company has been evaluating the disappointing results of USWM’s commercialization efforts in this Report, including above under the heading “General - SYMJEPI (epinephrine) Injection Product,” the manufacturing of SYMJEPI is currently on hold. The companycreating market access and the manufacturer have developed correctivesales for ZIMHI and preventive actions. New RTF syringes, which have been manufactured using a different batch of steel for their needles, are being sourced. Catalent has now resumed operations at its Belgium facility and astaken additional steps to bolster USWM’s work. As of the date of this Report, is scheduledthe Company remains unable to manufacture SYMJEPI. While we are committed to returning SYMJEPI to the market, we will not do so until we are satisfied that sufficient corrective actions have been implemented to avoid a new batch of SYMJEPI during November 2022. Assuming no additional interruptions or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although there can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the endrepeat of the first quarter of 2023. circumstances which led to the voluntary recall.
Cost of Goods Sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory, assembly line depreciation and other related expenses. Cost of goods sold was approximately $3,706,000$338,000 and $5,207,000$1,648,000 for the nine-monthsthree months ended September 30, 20222023 and 2021,2022, respectively. The gross loss for the ninethree months ended September 30, 20222023 was approximately $1,101,000$329,000 compared to approximately $1,839,000$142,000 for the nine-monthsthree months ended September 30, 2021. The $1,501,000 decrease in cost2022. Cost of goods sold for the nine-month period ending September 30,third quarter of 2023 compared to the third quarter of 2022 wasdecreased approximately $1.3 million primarily due to a decrease of direct material costs and obsolescence and wastagein assembly line depreciation of approximately $3,213,000 related to SYMJEPI resulting from the lack$0.4 million which was fully depreciated in May 2023, a decrease in ZIMHI production costs of production due to the manufacturing hold and voluntary product recall,approximately $1.2 million, offset by an increase in direct materials costsmaintenance fees to USWM of approximately $2,258,000 related to ZIMHI product manufactured during the nine-month period of 2022. Additionally, for the nine months ended September 30, 2021 a loss on derecognition of inventory of $330,000 was recorded$0.3 million due to a returnthe lack of inventory to our supplier. The supplier agreed to repurchase the inventory at an amount lower than our cost. There was no return of inventory during the nine months ended September 30, 2022.product production.
Selling, General and Administrative Expenses.Selling, general and administrative, or SG&A, expenses consist primarily of depreciationconsulting and amortization,employee compensation, professional fees which include legal, accounting and audit fees, consulting and employee compensation.fixed assets depreciation and amortization expenses. SG&A expenses for the ninethree months ended September 30, 20222023 and 20212022 were approximately $10,096,000$2,517,000 and $13,247,000,$2,508,000, respectively. The $3,151,000 decreaseincrease in SG&A during the nine months ended September 30, 2022,expenses of approximately $9,000 was primarily due to a decreasean increase in legal expenses of approximately $2,138,000 principally related to the ongoing investigations and a decrease of approximately $1,279,000 in compensation expenses,$0.1 million, offset by an increase in other SG&A costs of approximately $267,000 primarily insurance, IT and recruiting expenses. Thea decrease in compensation and accounting related expenses during the nine months ended September 30, 2022, compared to the same period in 2021, was due to the reversal of bonus accrual expenses and a lower stock-based compensation expense resulting primarily from the modification of certain outstanding equity awards in connection with accelerated vesting pursuant to a separation agreement, offset mainly by employment separation payments made during the first half of 2022.approximately $0.1 million.
Research and Development Expenses. Our research and development, or R&D, costs are expensed as incurred.incurred and include costs to conduct clinical trials, contract research costs, R&D consulting and R&D employee compensation and R&D supplies. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. R&D expenses were approximately $9,520,000$419,000 and $9,067,000$1,978,000 for the three months ended September 30, 2023 and 2022, respectively. The decrease of approximately $1.6 million was primarily attributable to a decrease in costs of approximately $1.6 million related to the Tempol product candidate clinical trial that was halted in the third quarter of fiscal year 2022. The research and development expenses of approximately $0.4 million incurred during the three months ended September 30, 2023 is primarily attributable to continued development of our ZIMHI product.
Other Income or Expense. Other Income or Expense consists primarily of interest income, interest expense, penalty fees, changes to the fair value of warrant liabilities, and other miscellaneous transactions. Other income was approximately $1,529,000 and $357,000 for the three months ended September 30, 2023 and 2022, respectively. The increase in Other Income of approximately $1.2 million is primarily due to the increase in the gains from the revaluation of the warrant liabilities of approximately $0.7 million and an increase of approximately $0.2 million in insurance proceeds received related to a legal matter. Additionally, an Other Expense of approximately $0.3 million related to the loss on Fagron variable consideration was recognized in the prior year’s third quarter, compared to $0 in the third quarter of 2023.
Income (Loss) from Discontinued Operations. The Company recorded a net income (loss) from discontinued operations, after taxes, of approximately $348,000 and $(128,000) for the three months ended September 30, 2023 and 2022, respectively. The increase in income from discontinued operations of approximately $0.5 million during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to the gain on asset disposal of approximately $0.4 million recorded upon the sale of the USC land, building, and equipment during the third quarter of 2023. Additionally, the SG&A costs attributable to the discontinued operations decreased approximately $0.1 million in the third quarter of 2023 as compared to the third quarter of 2022 as the Company continues the winding down of USC's former business operations.
29
Nine Months Ended September 30, 2023 and 2022
Revenues. Revenues were approximately $1,469,000 and $2,605,000 for the nine months ended September 30, 20212023 and 2020,2022, respectively. The $453,000 increase in research and development for the nine-month period ending September 30, 2022, was principally due to an increasedecrease of approximately $2,756,000$1.1 million was primarily attributable to a decrease in development costs for Tempol resulting from the progressionsales of our Phase 2/3 clinical trial relatingZIMHI to Tempol,USWM of approximately $0.9 million, offset by a decrease in product recall costs of approximately $1,140,000$0.4 million, which were recorded as contra-revenue during the nine months ended September 30, 2022. The Company has been evaluating the disappointing results of USWM’s commercialization efforts in creating market access and sales for ZIMHI development costs,and has taken additional steps to bolster USWM’s work. Additionally, a decrease of $404,000 in SYMJEPIapproximately $0.6 million is attributable to the recognition of deferred revenue during the nine months ended September 30, 2022, due to the Company's reassessment of performance obligations met under the USWM Agreement.
Cost of Goods Sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory, assembly line depreciation and other R&D projects development costsrelated expenses. Cost of goods sold was approximately $2,488,000 and $3,706,000 for the nine months ended September 30, 2023 and 2022, respectively. The gross loss for the nine months ended September 30, 2023 was approximately $1,019,000 compared to approximately $1,101,000 for the nine months ended September 30, 2022. Cost of goods sold for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 decreased by approximately $1.2 million, primarily due to a decrease in assembly line depreciation of approximately $0.9 million, a decrease in defective and obsolete inventory expenses of approximately $0.2 million, and a decrease of approximately $758,000$0.9 million in ZIMHI production costs, offset by an increase in maintenance fees of approximately $0.8 million due to the lack of product production.
Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of consulting and employee compensation, professional fees which include legal, accounting and audit fees, and fixed assets depreciation and amortization. SG&A expenses for the nine months ended September 30, 2023 and 2022 were approximately $11,332,000 and $10,097,000 respectively. The increase in SG&A expenses of approximately $1.2 million was primarily attributable to increases of approximately $1.4 million of the costs related to the Merger, approximately $0.9 million related to legal expenses, offset by a decrease in compensation and employment separation expenses of approximately $1.1 million.
Research and Development Expenses. Our research and development, or R&D, costs are expensed as incurred and include costs to conduct clinical trials, contract research costs, R&D consulting and R&D employee compensation and R&D supplies. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed.R&D expenses were approximately $2,106,000 and $9,520,000 for the nine months ended September 30, 2023 and 2022, respectively. The decrease of approximately $7.4 million was primarily attributable to a decrease in development spending on the Tempol product candidate in which the related clinical trial was halted in the third quarter of 2022 of approximately $5.5 million, a decrease in other development spending of approximately $0.4 million on other product candidates, and a decrease in compensation expenses principally related to the reversalfor research and development employees of bonus accrual expenses and lower stock-based compensation expensesapproximately $1.5 million primarily due to the modificationreduction in work force.
Acquired In-Process Research & Development (IPR&D). We elected to expense the fair value of certain outstanding equity awards.the Acquired IPR&D from the DMK Merger due to its early stage and its lack of alternative future use. Acquired IPR&D was approximately $6,540,000 and $0, for the nine months ended September 30, 2023 and 2022, respectively. There was no asset acquisition completed during the nine months ended September 30, 2022.
Other Income (Expense).or Expense. Other Income (Expenses)(Expense) consists primarily of interest income, interest expense, changes to the fair value of warrant liabilities, and other transactions. Other income (expense) totaled approximately $3,243,000 and $(2,079,000) for the nine months ended September 30, 2023 and 2022, respectively. The increase in other income (expense) of approximately $5.3 million was primarily attributable to the increase in the gain recognized from the change in the fair value of warrants of approximately $4.6 million, an increase in the gain recognized due to additional Employee Retention Credit received during the second quarter of 2023 of approximately $0.5 million, and an increase in insurance proceeds received of approximately $0.3 million. This increase in other income (expense) was offset by an increase of approximately $0.3 million in interest expense and contingent loss liability related to the USC lease, and approximately $2.5 million in losses related to the excess of the fair value of the March 2023 warrants over the proceeds received from that transaction. Additionally, for the nine months ended September 30, 2022, losses on Fagron variable consideration of approximately $0.9 million were recorded, and 2021a contingent accrual loss related to the PPP2 loan of approximately $1.8 million was approximately ($2,079,000) and $(2,635,000), respectively. The $556,000 decrease in other expensesrecorded, as compared to no such losses recorded during the nine months ended September 30, 2022, compared to the same period in 2021, was primarily attributable to a decrease in expense primarily associated with the change in fair value of warrants of approximately $7,668,000, an increase in other income of approximately $500,000 from insurance proceeds, offset by an increase in expense related to the contingent loss accrual associated with the Second Draw PPP Loan, or PPP2 Loan of approximately $1,787,000 and additional expense of approximately $919,000 due to change in estimate of variable consideration related to the sale of certain assets to Fagron, pursuant to the USC Agreement. The decrease in variable consideration was due to lower level of sales by Fagron to covered customers covered in the USC Agreement, in part due to certain supply and materials difficulties and increased competitive conditions. Additionally, during the nine months ended September 30, 2022, there was approximately $63,000 of gain recorded in the consolidated statement of operations related to the forgiveness of the PPP2 Loan repayment, whereas in the comparable period of 2021, a gain of approximately $5,010,000 was recorded related to the forgiveness of the PPP loan debts.2023.
Loss from Discontinued Operations.The Companycompany recorded a net loss from discontinued operations of approximately $354,000$1,151,000 and $10,266,000$354,000 for the nine months ended September 30, 20222023, and 2021,2022, respectively. The $9,912,000 decreaseincrease in net loss from discontinued operations was primarily due to management's decision to discontinue the operations of USC, offset by a gain on the sale of non-financial assets of USCapproximately $0.8 million during the same period of 2021. The $354,000 net loss from discontinued operations fornine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily relatedattributable to the impairment charge taken on the USC land and building of approximately $1.5 million during the second quarter of 2023 to reduce the carrying value of the property to the anticipated sales price less commissions, offset by the gain on asset disposal of approximately $0.4 million recorded upon the sale of the USC land, building, and equipment during the nine months ended September 30, 2023, as well as the decrease of approximately $0.3 million in SG&A expenses as the companyCompany continues the wind-down of USC. The main components of the loss for the nine months ended September 30,2021 were asset impairments totaling approximately $8,176,000 primarily related to adjustments associated with the winding down of theUSC's former business of USC, approximately $7,145,000 of SG&A and R&D operating expenses, and approximately $71,000 of interest expense, partially offset by approximately $4,637,000 of gain from the sale of non-financial asset to Fagron, approximately $463,000 gross profit on sales and approximately $26,000 of other income.
operations.
3230
Liquidity and Capital Resources
We have incurred net losses from our continuing and discontinued operations of approximately $23.2$18.9 million and $37.1$23.2 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Since inception, and through September 30, 2022,2023, we have an accumulated deficit of approximately $301.2$323.5 million. Since inception and through September 30, 2022,2023, we have financed operations principally through product sales, public and private issuances of common stock, preferred stock and warrants and through debt financing. On July 25, 2023, we closed a transaction involving the sale of a building and real property located in Conway, Arkansas, formerly utilized by our discontinued USC compounding pharmacy business, as well as certain related personal property equipment and assets and intellectual property, to an unaffiliated third-party purchaser, for total aggregate net proceeds of approximately $1.8 million. In addition, on August 4, 2023, we completed an offering of 4,800,000 shares of our common stock, 1,130,000 prefunded warrants and common stock purchase warrants to purchase up to 5,930,000 shares of our common stock and received net proceeds of approximately $7.1 million. However, we will need additional funding in the future to satisfy our existing and future obligations, liabilities and working capital needs, to support commercialization of our products and conduct clinical and regulatory work to develop our product candidates, to begin building working capital reserves, and for other purposes. We intend to seek to finance future cash needs primarily through proceeds from equity or debt financings, loans, share of profits anticipated to be received relating to sales in the U.S. of our SYMJEPI and ZIMHI products, sales of assets, out-licensing transactions, and/or collaborative agreements with corporate partners.
We will need additional funding in the near future to satisfy our existing and future obligations and liabilities and working capital needs, to support commercialization of our products and conduct clinical and regulatory work to develop our product candidates, to begin building working capital reserves, and for other purposes. We intend to seek to satisfyfinance future cash needs primarily through proceeds from equity or debt financings, if available, loans, a partnership or other agreement regarding our commercial products, revenuesshare of profits anticipated to be received relating to sales in the U.S. of our SYMJEPI and ZIMHI products, sales of assets, out-licensing transactions, and/or out-licensing of intellectual property assets or other assets, products, product candidates or technologies, a merger, sale or reverse merger of the Company, or other strategic transaction. As described elsewhere in this Report, we have initiated and are engaged in a review of strategic alternatives. However, there is no assurance that the Company will be successful in obtaining the necessary funding to sustain its operations or meet its business objectives. collaborative agreements with corporate partners.
As of September 30, 2022,2023, we had cash and cash equivalents of approximately $2.4$6.7 million. Total assets were approximately $12.1 million and $38.3 million as
The following table provides a summary of September 30, 2022 and December 31, 2021, respectively. Current assets exceeded current liabilities by approximately $1.2 million asthe net cash flow activity for each of September 30, 2022. the periods set forth below (in thousands):
For the Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Net cash used in operating activities | $ | (7,853 | ) | $ | (24,378 | ) | ||
Net cash provided by investing activities | 2,747 | 3,329 | ||||||
Net cash provided by financing activities | 10,688 | 285 | ||||||
Increase (decrease) in cash, cash equivalents and restricted cash | $ | 5,582 | $ | (20,764 | ) |
Net cash used in operating activities for the nine months ended September 30, 20222023 and 2021,2022, was approximately $(24.4)$7.9 million and $(31.1)$24.4 million, respectively. NetOur net cash used in operating activities decreased by approximately $16.5 million primarily due to thea decrease in operatingour net losses offset by product recall payments of approximately $2.04.3 million, an increase in noncash expenses of approximately $1.4$3.3 million, severance payment madeand a decrease in connection with a separation agreement in 2022 and an approximately $1.8 million repayment of the Second Draw PPP Loan principal and such related interest and fees, as compared to 2021. As part of our previously announced strategic review process, we have implemented expense reduction measures including, without limitation, employee headcount reductions and reduction or discontinuation of certain product development programs.net operating assets.
Net cash provided by (used in) investing activities was approximately $3.3 million and $(0.9) million for the nine months ended September 30, 2023 and 2022, was approximately $2.7 million and 2021,$3.3 million, respectively. The netNet cash provided by investing activities decreased by approximately $0.6 million. Net cash provided by investing activities for the nine months ended September 30, 2023 is primarily related to the proceeds of approximately $2.6 million related to the sale of certain fixed assets which were classified in discontinued operations, and approximately $0.1 million of cash acquired in the DMK Merger. Net cash provided by investing activities for the nine months ended September 30, 2022 wasis primarily duerelated to paymentsthe proceeds of approximately $3.9 million received from Fagron from the sale of USC assets and net cash usedto Fagron in investing activities for both periods were primarily due to the purchasefirst half of capital2022, offset by the purchases of equipment with more capital equipment purchased inof approximately $0.6 million during the nine months ended September 30, 2021, compared to the same period in 2022.
Net cash provided by financing activities was approximately $0.3$10.7 million and $54.0$0.3 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Net cash provided by financing activities forincreased by approximately $10.4 million due to the net proceeds of approximately $2.7 million from the March 2023 Offering, net proceeds of approximately $7.1 million from the August 2023 Offering, and approximately $0.9 million of proceeds received upon the exercise of common stock warrants. During the nine months ended September 30, 2022, was due tonet cash provided by financing activities included approximately $0.3 million of proceeds received from the issuance of Series C Preferred Stock, as compared to proceeds from the issuance of commonpreferred stock in an underwritten public offering, exercise of investor warrants and proceeds from the Second Draw PPP Loan during the nine months ended September 30, 2021.
PPP Loans. As discussed in Note 7 to the financial statements included elsewhere herein, we applied for and obtained loan funding under the PPP pursuant to the PPP Loan and PPP Note in the principal amount of $3,191,700, the balance of which has been forgiven, and under the Second Draw PPP Loan and PPP2 Note in the principal amount of $1,765,495, the balance of which was also initially forgiven. However, as a result of the investigation by the Civil Division described elsewhere under the heading “Legal Proceedings” and in Note 9 to the consolidated financial statements included elsewhere herein, in June 2022, the company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and related interest and fees. Our PPP loans and applications for forgiveness of loan amounts remain subject to future review and audit by SBA or other federal or state regulatory authorities for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return or repay the full amount of the applicable loan and could be subject to additional fines or penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations.
warrants.
As noted above under the heading “Going Concern and Management Plan,” through September 30, 20222023, we have incurred substantial losses. We will be required to obtain additionaldevote significant cash resources in the near term in order to support our intended development programs and sustain operations and activities. The availability of any required additional funding cannot be assured. As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving the issuance of equity securities. In addition, an adverse outcome in legal or regulatory proceedings in which we are or in the future could be involved could adversely affect our liquidity and financial position. See Note 911 of the notes to our consolidated financial statements included elsewhere herein. If in the future we are not able to obtain additional required equity or debt funding, or funding from other sources, our cash resources could be depleted, and we could be required to materially reduce or suspend operations or seek dissolution and liquidation, or bankruptcy protection. No assurance can be given as to the timing or ultimate success of obtaining future funds.funding. Even if we are successful in obtaining required additional funding to permit us to continue operations at the levels that we desire, substantial time may pass before we realize additional significant revenues from our commercial products or obtain regulatory marketing approval for any additional pharmaceutical products and begin to realize revenues from sales of such additional products. No assurance can be given as to the timing or ultimate success of obtaining any required future funding. In addition, as a result of the COVID-19 pandemic and actions taken to slow its spread, national or global developments, inflation or other economic considerations or other factors, there can be no assurance that deterioration in credit and financial markets will not occur, which would make it more difficult, or more costly or dilutive, to obtain any necessary debt or equity financing.
As In addition, as disclosed elsewhere in this Report, including in Part II, Item 1, “Legal Proceedings,” on May 11, 2021, eachboth the USAO and the SEC have initiated investigations of the company and its USC subsidiary received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York issued in connection with a criminal investigation, requesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC. The Audit CommitteeWe have received additional requests for production of the Board engaged outside counsel to conduct an independent internal investigation to review these and other matters. In addition to the subpoenas from the USAO, the company has also received requestsdocuments from the SEC forand the voluntary production of documentsUSAO and information relatingcontinue to engage in communications with the SEC and the USAO regarding their investigations. We or our USC subsidiary may be found to have violated one or more laws arising from the subject matter of the USAO’s subpoenassubpoenas. There can be no assurance that any resolution of these matters and certain other matters in connection with the SEC’s investigation. The company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests. The company intends to cooperateinvestigations with the USAO theor SEC will not have a material and the Civil Division. At this time, the company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, Civil Division or other agencies, or determine what, if any, proceedings the USAO, SEC, Civil Division or other federal or state authorities may initiate, what, if any, remedies or remedial measures the USAO, SEC, the Civil Division, or other federal or state authorities may seek, or what, if any, impact the foregoing matters may haveadverse effect on the company’s business, previously reported financial results, financial results included in this Report, or future financial results.company. The foregoing matters may divert management’s attention, cause the company to suffer reputational harm, require the company to devote significant financial resources,could subject the company and its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, could result in fines, penalties,payments, or financial remedies in amounts that may be material to our financial condition, or equitable remedies, and materially and affect the company’s business, previously reported financial results, financial results included in this Report, or future financial results. The occurrence of any of these events could have a material adverse effect on the company’s business, financial condition and results of operations.
31
Material Cash Requirements
Based on our current and anticipated level of operations, we do not believe that our cash and cash equivalents and short-term investments, together with anticipated revenues from operations and cash inflows from other sources and amounts that we expect to receive as a result of our sales of assets relating to our former USC business, will be sufficient to meet our anticipated operating expenses, capital expenditures and obligations for at least 12 months from the date of this Report. We anticipate that beforeEven giving effect to our sale of the endbuilding and real property in Conway, Arkansas, for total aggregate estimated net proceeds of 2022,approximately $1.8 million and the net proceeds of approximately $7.1 million from our equity offering completed in August 2023, we will require additional funding in the near term to sustain operations, satisfy our obligationssubstantial accounts payable balance and liabilities, fund our ongoing operations, or for other purposes.sustain operations. We maywill seek to raise additional funds or seek funding from a variety of sources including proceeds from equity or debt financings if available, loans, revenues relating to sales of our SYMJEPI product (after relaunch) and our ZIMHI products,product, sales or out-licensing of intellectual property assets or other assets, products, product candidates or technologies, during the remainder of 2022, and thereafter. As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving the issuance of equity securities.technologies. Additional required capital may not be available on a timely basis, on favorable terms, or at all, and such funding, if raised, may not be sufficient to meet our obligations or enable us to continue to implement our long-term business strategy. In addition, obtaining additional funding or entering into other strategic transactions could result in significant dilution to our stockholders. If we do not receive required funding and are not able to engage in a merger, sale reverse merger or other strategic transaction, we would likely be required to reduce or cease operations or seek dissolution and liquidation or bankruptcy protection.
33
As of September 30, 2022, we had an operating lease for office space for our offices in San Diego, California, with a remaining term expiring in November 2023. Monthly rent through the remaining term of the lease is approximately $32,000 per month. We also have a lease agreement for space located in Conway, Arkansas, relating to the compounding pharmaceutical products business formerly conducted by our USC subsidiary, with a current term expiring December 31, 2023. As a result of the sale of assets pursuant to the USC Agreement and the winding down of USC’s remaining business, the company will not need the leased property. Monthly rent for the remaining term of this lease is approximately $10,800 per month. See Note 6 of the notes to the consolidated financial statements included elsewhere herein for additional information about our lease obligations.
We have entered into arrangements with clinical sites and clinical research organizations, or CROs, for the conduct of our clinical trials. We make payments to these clinical sites and CROs based in part on the number of eligible patients enrolled, the length of their participation in the clinical trials and activities undertaken by the clinical sites and CROs. At this time, due to the variability associated with clinical site agreements, CRO agreements and manufacturing agreements, we are unable to estimate with certainty the future costs we will incur, including in connection with the close-out of the Phase 2/3 clinical trial relating to Tempol which was halted followingsubstantially completed in December 2022, and we are in the DSMB's September 2022 recommendation, but such expenses may be material.process of completing the final reconciliation of costs related to the Tempol clinical trial. In addition, we have entered into agreements and arrangements with third parties for the manufacture and supply of clinical and commercial materials and drug products, including for our SYMJEPI and ZIMHI products and our halted clinical trial for our Tempol product candidate. In some of our agreements with manufacturers, we have a production threshold commitment where we would be required to pay for maintenance fees if we do not meet certain periodic purchase order minimums.minimums or we have firm purchase commitments we would be liable for. Maintenance fees for the three months and nine months ended September 30,202230, 2023 and 2022 were $0.approximately $804,000 and $0, respectively. There were no purchases under the firm purchase commitments for the three or nine months ended September 30, 2023 and 2022. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. We intend to use our current financial resources to fund our obligations under these commitments.
As disclosed elsewhere in this Report, on March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level, due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM is handling the entire recall process for the company, with company oversight. SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. The ultimate costs of the recall and the allocation of costs of the recall, including the costs to us resulting from the recall, are unknown as of the date of this Report; however, the FDA has notified us that the FDA considers the voluntary recall terminated. Additionally, the recall could cause the company to suffer reputational harm, depending on the resolution of matters relating to the recall could result in the company incurring additional financial costs and expenses which could be material, has adversely affected and could continue to adversely affect the supply of SYMJEPI products until manufacturing is resumed, and depending on the resolution of matters relating to the recall could have a material adverse effect on our business, financial condition, and results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting estimates related to the DMK Merger are as follows:
We determined that the acquired group, DMK, is a variable interest entity, or VIE, as DMK’s total equity at risk is not sufficient to permit DMK to finance its activities without additional subordinated financial support. Additionally, DMK did not constitute a business because substantially all of the fair value of the gross assets acquired were concentrated in a single identifiable asset (DP-125). In accordance with accounting guidance, the consolidation of DMK (the VIE) is considered an asset acquisition. Additionally, we determined that we were the primary beneficiary and legal acquirer. Based on applicable accounting guidance, we were required to record DMK’s assets and liabilities at fair value. At acquisition date, we elected to expense the purchase consideration allocated to the early-stage acquired in-process research and development (acquired IPR&D) because there is no alternative future use related to the acquired IPR&D, and, as such, no further impairment assessments would be necessary for these assets. The Company incurred approximately $1.4 million of transaction costs were recorded within selling, general and administrative expenses on the condensed consolidated statement of operations.
The company’s critical accounting policies and estimatesfair value of the acquired IPR&D was determined based upon the income approach using a multi period excess earnings model which included a forecast of the expected cash flows of DPI-125. The discount rate associated with this forecast was 27%.
The purchase price, or total consideration transferred, to acquire DMK in our Annual Report on Form 10-K for the year ended December 31, 2021, filed withMerger was comprised of the SEC on March 31, 2022, have not materially changed. following:
Fair Value of the Company's Common Stock issued to Legacy DMK shareholders | $ | 757,038 | ||||||||||
Fair Value of the Company's Series E Preferred issued to Legacy DMK shareholders | 4,853,000 | |||||||||||
Fair Value of Legacy DMK options assumed and replaced by the Company | 415,809 | |||||||||||
Legacy DMK incurred Merger-related costs paid for by the Company | 492,456 | |||||||||||
Total Consideration Transferred | $ | 6,518,303 |
32
The fair value of the 302,815 shares of common stock issued in connection with the Merger was based on the closing price of our common stock on the date of acquisition multiplied by the number of common shares issued.
The fair value of the 1,941.2 shares of Series E Preferred issued in connection with the Merger was based on the closing price of our common stock on the date of acquisition multiplied by the number of common shares the Series E preferred stock is convertible into (1,941,200). The same fair value basis was utilized as our common stock for the Series E Preferred because the Series E Preferred have no preferences over common stock.
Pursuant to the Merger agreement, at the effective time, the outstanding DMK stock options to purchase shares of DMK common stock were assumed by us and became options to purchase a total of 231,490 shares of the Company’s common stock, with proportionate adjustments to the exercise prices per share of such options based on the exchange ratio determined pursuant to the Merger Agreement. The assumed options continue to be governed by the terms of the DMK 2016 Stock Plan, which was assumed by us in connection with the closing of the Merger. The assumed options were fully vested and the replacement awards was treated as additional purchase price consideration paid by us.
The fair value of the replacement awards is based primarily on inputs that are observable or can be corroborated by observable market data (such as our closing stock price and the published treasury par yield curves from the US Department of the Treasury). The estimated fair value of the replacement options of $415,809 was calculated using the Black Scholes Option Pricing Model. Key inputs at the date of closing, include expected volatility of 119.5% based on a 50/50 weighting of calculated volatility of our stock of approximately 107% (based on calculated volatility) and DMK's implied volatility of 132%, our stock price on the date of closing of $2.50, expected dividend yield of 0.0%, expected term ranging from 2.3699 years to 4.3726 years and average risk-free interest rate (based on the published treasury par yield curves from the US Department of Treasury) of approximately 4.06%.
Recent Accounting Pronouncements
RecentWe periodically monitor and review all current accounting pronouncements are disclosed in Note 1and standards from the Financial Accounting Standards Board for applicability to our operations. We do not expect the condensed consolidatedadoption of accounting pronouncements recently issued during the third quarter of calendar year 2023 to have a significant impact on our results of operations, financial statements included in this Quarterly Report on Form 10-Q. position or cash flow.
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
Not required.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We 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’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.
As 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 as of September 30, 2022.2023.
Changes in InternalLimitations on the Effectiveness of Controls Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. AAll internal control system,systems, no matter how well conceiveddesigned, have inherent limitations and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
3433
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
We may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. We may also become party to litigation in federal and state courts relating to opioid drugs. Any litigation could divert management time and attention from Adamis,the Company, could involve significant amounts of legal fees and other fees and expenses, or could result in an adverse outcome having a material adverse effect on our financial condition, cash flows or results of operations. Actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty. Except as described below, we are not currently involved in any legal proceedings that we believe are, individually or in the aggregate, material to our business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on us because of associated cost and diversion of management time. For additional information regarding legal proceedings involving the company and the proceedings discussed below, please see the discussion of legal proceedings in Note 9--Legal Matters, of the notes to our consolidated financial statements included elsewhere in this Report, which discussion is incorporated herein by reference.
InvestigationInvestigations
On May 11, 2021, each of the Company and its USC eachsubsidiary received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York (“USAO”(the “USAO”). The USAO issued the subpoenas in connection with a grand jurycriminal investigation, and requestedrequesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the Company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the Company and USC. The Audit Committee of the Board engaged outside counsel to conduct an independent internal investigation to review these and other matters. The Company has also received requests from the Securities and Exchange Commission (“SEC”) that the Company voluntarily provide documents and information in connection with the SEC’s investigation relating to certain matters brought forth inincluding matters arising from the subject matter of the subpoenas and certain other matters. In addition, followingfrom the commencement of the investigation, as disclosed elsewhere in these interim condensed consolidated financial statements, theUSAO. The Company has sold assets relatingproduced and will continue to its compounding pharmacy business, ceased selling humanproduce and veterinary compounded pharmaceutical products, has wound down USC’s business, and the employment of USC employees has ended. As a result, the Company is no longer engaged in the sale of human or veterinary compounded pharmaceutical products. The Company is also considering a number of additional actionsprovide documents in response to the subpoenas and requests as needed. Additionally, on March 16, 2022, we were informed that the Civil Division of the USAO (“Civil Division”) is investigating the Company’s Second Draw PPP Loan application disclosed in previous reports. The Audit Committee of the Board engaged outside counsel to conduct an internal investigationinquiry into the matter. In June 2022, following the inquiry the Company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees. The Company intends to continue cooperating with the USAO and the SEC, and has continued to engage in communications with the SEC and USAO regarding their investigations. We have received additional requests for production of documents from the SEC and the USAO, investigation. As ofhave responded to those requests, could receive additional requests from the date of this Report,USAO, SEC, or other authorities, and continue to engage in communications with the Company believes thatSEC and the investigation initially commenced by the Audit Committee is substantially complete. However, additionalUSAO regarding their investigations. Additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the Audit Committee’s investigation.
The Company has also received requests from the U.S. Securities and Exchange Commission (“SEC”) for the voluntary production of documents and information in connection with the SEC’s investigation relating to the subject matter of the USAO’s subpoenas and certain other matters. The Company has produced documents and will continue to produce and provide documents in response to subpoenas and requests for voluntary production of documents as needed. Additionally, on March 16, 2022, the Company was informed that the Civil Division of the USAO (“Civil Division”) was investigating the Company’s Second Draw PPP Loan application and the company’s eligibility for the Second Draw PPP Loan. The Audit Committee of the Board engaged outside counsel to conduct an internal inquiry into the matter. As a result of the investigation by the Civil Division, the Company’s financial statements for the first quarter of 2022 included a $ 1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry the Company paid a total of $ 1,787,417 in repayment of the Second Draw PPP Loan principal and related interest and fees. The Company previously disclosed that the lending bank waived the processing fee of approximately $63,000; however, the Company has recently been made aware by the Civil Division that the lending bank did receive a processing fee of approximately $53,000 and that it may need to be repaid. The Company is awaiting confirmation from the Civil Division on the potential repayment of the above-referenced processing fee and as to whether any additional action is required to conclude the investigation into the Second Draw PPP Loan. The Company intends to continue cooperating with the USAO, SEC, and Civil Division. At this time, the Company isWe are unable to predict the duration, scope, or final outcome of the investigations by the USAO, SEC, Civil Division, or other agencies; what, if any, proceedings the USAO, SEC, Civil Division, or other federal or state authorities may initiate; what if any,penalties, payments, by the Company, remedies or remedial measures the USAO, SEC, Civil Division or other federal or state authorities may seek;seek or may require in order to resolve the investigations; what, if any, impact the foregoing matters may have on the Company’s business, financial condition, previously reported financial results, financial results included in these interim condensed consolidated financial statements,this Report, or future financial results. The Company could receive additional requestsresults; or subpoenas from the USAO, SEC, Civil Division, or other authorities, which may require further investigation. There can be no assurance that any discussions withwhat proceedings the USAO, SEC, or Civil Divisionother federal or state authorities may initiate if the foregoing matters are not resolved. However, in connection with resolution of these matters, we or our USC subsidiary may be found to have violated one or more laws arising from the subject matter of the subpoenas, and to resolve the matters and investigations with the USAO and the SEC we may be required to pay material amounts in penalties or other payments, and to agree to other remedies or remedial measures. Payment of material amounts in connection with resolution of the foregoing matters would reduce the amount of financial resources that we have available to support our product development programs and commercialization activities and would adversely impact our development programs. Depending in part on the amount and timing of any payments that we may be required to make or other remedial measures that may be implemented in connection with resolution of these matters, will be successful.a resolution of these matters with the USAO or SEC could have a material and adverse impact on the company. The foregoing matters mayhave diverted and will likely continue to divert management’s attention, causehave caused the Companycompany to suffer reputational harm, have required and will continue to require the company to devote significant financial resources, could subject the Company andcompany, one or more of its subsidiaries, or its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, could result in fines, penalties, payments, or financial remedies in amounts that would have a material adverse effect on our financial condition, or equitable remedies, and adversely affect the Company’scompany’s business, previously reported financial results, financial results included in these interim condensed consolidated financial statements,or incorporated by reference herein, or future financial results. The occurrence of any of these events, or any determination that our activities were not in compliance with existing laws or regulations, could have a material adverse effect on the Company’s business, liquidity, financial condition, and results of operations.
As a result of the investigation by the Civil Division, the company’s financial statements for the first quarter of 2022 included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry, the company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees.
Nasdaq Compliance
On December 31, 2021, weAs previously disclosed, on October 4, 2023, the Company received a notice (the “Prior Notice”) from the Nasdaq Listing Qualifications Department (the “Staff”) of The NASDAQ CapitalNasdaq Stock Market LLC (“Nasdaq”) informing usnotifying the Company that because theit failed to evidence a minimum closing bid price of our Common Stock had been below $1.00 per share, as required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), for the previous 30 consecutive business days we no longer compliedand that the Company was provided a grace period of 180 calendar days from the date of the Prior Notice, or until April 1, 2024, to regain compliance with the Bid Price Rule, in accordance with Listing Rule 5810(c)(3)(A). Also as previously disclosed, on October 11, 2023, the Company received notice from the Staff that, due to the Company’s failure to regain compliance with the minimum bid price$35 million market value of listed securities (“MVLS”) requirement set forth in Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”) during the 180-day grace period previously granted to the Company that expired on October 9, 2023, the Company’s common stock was subject to delisting unless the Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”).
In response, the Company timely requested a hearing before the Panel, which request stayed any further action by Nasdaq at least until the hearing is held and any extension the Panel may grant to the Company following the hearing expires.
On October 18, 2023, the Company received a superseding notice from the Staff (the “Subsequent Notice”), indicating that the Prior Notice was issued in error. The Subsequent Notice indicated that because the Company was subject to a one-year Mandatory Panel Monitor as a result of a prior hearing before the Panel, the Company was not eligible for the automatic 180-day compliance grace period provided by Listing Rule 5810(c)(3)(A) and that the Company’s non-compliance with the Bid Price Rule serves as an additional basis for delisting from Nasdaq.
At the hearing before the Panel, the Company will address its plan to regain compliance with both the Bid Price Rule and the MVLS Rule as well as its continued compliance with all other applicable criteria for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) (the “Rule”) requires listed securities to maintain a minimum bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial compliance period of 180 calendar days, or until June 29, 2022, to regain compliance. To regain compliance, the closing bid price of our Common Stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period. The notice letter also disclosed that if we do not regain compliance within the initial compliance period, we may be eligible for an additional 180-day compliance period. To qualify for additional time, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of a plan to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary. We did not regain compliance with the Rule by June 29, 2022. We requested additional time to regain compliance and provided notice to Nasdaq of our intention to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary. On June 30, 2022, Nasdaq notified us that we were granted an additional 180-day compliance period or until December 27, 2022, to regain compliance with the Rule. The notice also indicated that if at any time before December 27, 2022, the bid price of the Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Company will regain compliance with the Rule. If the Company does not meet the minimum bid requirement at some time during the additional 180-day grace period, Nasdaq will provide written notification to the Company that its shares will be subject to delisting. At such time, the Company may appeal the delisting determination to a Nasdaq Hearings Panel. The Company would remain listed pending the Panel’s decision. There can be no assurance, however, that ifthe Panel will grant the Company’s request for continued listing or that the Company does appeal a subsequent delisting determination, that such appeal would be successful. The letter and notification from Nasdaq had no immediate effect on the listing or trading of the Company’s shares, which will continue to trade on the Nasdaq Capital Market under the symbol “ADMP.” There are no assurances that we will be able to regainevidence compliance with the minimum bid price requirements or will otherwiselisting rules prior to the expiration of any extension that may be in compliance with other Nasdaq listing rules.granted by the Panel following the hearing.
3534
Jerald Hammann
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in our subsequent Quarterly Reports on Form 10-Q for the first two quarters of 2022, onOn June 8, 2021, Jerald Hammann filed a complaint against the Company and each of its directors in the Court of Chancery of the State of Delaware, captioned Jerald Hammann v. Adamis Pharmaceuticals Corporation et al., C.A. No. 2021-0506-PAF (the “Complaint”), seeking injunctive and declaratory relief. The Complaint alleges, among other things, that the defendants (i) violated Rule 14a-5(f) and 14a-9(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the Company’s 2021 annual meeting of stockholders—which was subsequently held on July 16, 2021 (the “2021 annual meeting”)—and disseminated false and misleading information in the Company’s proxy materials relating to the 2021 annual meeting, (ii) violated certain provisions of the Company’s bylaws relating to the 2021 annual meeting, (iii) violated section 220 of the Delaware General Corporation Law (“DGCL”) in connection with a request for inspection of books and records submitted by the plaintiff, and (iv) breached their fiduciary duties of disclosure and loyalty, including relating to establishing and disclosing the date of the Company’s 2021 annual meeting and to the Company’s determination that a solicitation notice delivered to the Company by plaintiff was not timely and was otherwise deficient. TheOn April 4, 2022, the plaintiff has also filed various motions with the Court, which have been resolved. The Company has filed a motion for summary judgment with respect to oneamend the Complaint. The proposed amended Complaint added additional allegations relating to the manner in which the defendants established and disclosed the date of the counts inCompany’s 2021 annual meeting of stockholders and to statements the complaint and a motiondefendants made about the plaintiff to dismiss certain other counts of the plaintiff's amended complaint. Those motions are pending before the Court, and the case continues to proceed.Company’s stockholders. On October 13,April 28, 2022, the Court entered an order scheduling oral arguments ongranted the motion for summary judgment and motion to dismiss for December 19, 2022.motion. Trial on the merits of the plaintiff’s claims should one be necessary, is currently scheduled forwas held on March 16, 2023. On August 23, 2023, the Court entered its opinion rendering judgment in favor of the Company and the other defendants and against the plaintiff as to all of the plaintiff’s claims. On August 30, 2023, the plaintiff filed a motion for re-argument. On October 16, 2023, the Court denied the plaintiff’s motion except with respect to an issue of nominal damages but concluded that nominal damages were not warranted. On October 9, 2023, the plaintiff filed a motion for a temporary restraining order seeking to enjoin the defendants from distributing proxy materials and holding the Company’s 2023 annual meeting of stockholders. On October 12, 2023, the Court denied the plaintiff’s motion for a temporary restraining order, and on October 16, 2023, the Court issued an order denying the plaintiff’s motion for re-argument. On November 3, 2023, plaintiff filed a notice of appeal to the Supreme Court of the State of Delaware.
CVI Investments
On October 19, 2023, a purported shareholder of the Company filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, captioned CVI Investments vs. DMK Pharmaceuticals Corporation f/k/a Adamis Pharmaceuticals Corporation, Index No. 655184/2023 (the “Complaint”). The Complaint alleges that the Company breached two warrant agreements Plaintiff entered into with the Company in connection with Plaintiff’s previous purchases of shares of Adamis stock. Specifically, the Complaint alleges that the Company failed to repurchase two warrants previously issued to the Plaintiff for the repurchase price specified in the warrants, allegedly in violation of the terms of the warrants that provide for the repurchase of the warrants following timely notice from the warrant holder following the occurrence of certain specified events. The Complaint seeks (i) actual and compensatory damages from the purported breaches, (ii) reasonable attorneys’ fees and other costs and expenses incurred in connection with the Complaint, and (iii) pre- and post-judgment interest. The Company’s deadline to respond to the Complaint is November 22, 2023. The Company believesdisputes that it was obligated to repurchase the claims in the plaintiff’s complaint are without meritwarrants and intends to vigorously dispute them. the claim.
Arbitration
On October 20, 2023, David Marguglio filed a demand for arbitration with Judicial Arbitration and Mediation Services, Inc. (JAMS) challenging the grounds of the separation of his employment, alleging that he is entitled to severance under the terms of his employment agreement, and demanding that the Company pay the costs of the arbitration. The Company contends that Mr. Marguglio is not entitled to severance under the terms of his employment agreement.
Turbare Real Estate Holdings
On May 26, 2023, Turbare Real Estate Holdings, LLC filed a complaint against the Company in the Circuit Court of Faulkner County Arkansas, captioned Turbare Real Estate Holdings, LLC v Adamis Pharmaceutical Corporation 23CV-23-796. The suit alleges breach of contract, seeking $1,414,943.08, with additional amounts still being incurred, plus costs and attorney fees, for alleged required repairs under a lease agreement between the parties. The Company has filed a counter suit, alleging as to Turbare Real Estate Holdings, LLC, claims for breach of lease agreement, conversion, civil conspiracy for conversion, replevin, and unjust enrichment. Additionally, the Company has added, as third party defendant, Turbare Manufacturing, LLC, alleging claims of breach of an access agreement for the leased real estate, conversion, civil conspiracy for conversion, replevin, tortious interference with contract, and unjust enrichment. On November 3, 2023, plaintiff filed a notice of appeal to the Supreme Court of the State of Delaware.
Supplemental Proxy Disclosures
On April 11, 2023, a purported stockholder of the Company filed a complaint against the Company and each of its directors in the United States District Court for the Southern District of New York, captioned Lapin vs. Adamis Pharmaceuticals Corporation, Case No. 1:23-cv-03023 (the “Complaint”). The Complaint alleged that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, by causing a materially incomplete and misleading Preliminary Proxy Statement to be filed with the SEC. Specifically, the Complaint alleged that the Preliminary Proxy Statement contains materially incomplete and misleading information concerning the sales process, financial projections prepared by management, as well as the financial analysis conducted by Raymond James & Associates, Inc., the Company’s financial advisor. The Complaint sought, among other things, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement or the filing of a definitive proxy statement with the SEC or causing a definitive proxy statement to be disseminated to the Company’s stockholders unless and until the material information described in the Complaint is included in the definitive proxy statement or otherwise disseminated to the Company’s stockholders, and (ii) in the event that the Merger transaction is consummated without the alleged material omissions referenced in the Complaint being remedied, damages and costs and disbursements of the action including reasonable plaintiff’s attorneys’ and experts’ fees and expenses. On July 6, 2023, the plaintiff filed a notice of voluntary dismissal, dismissing the claims in the complaint without prejudice, which was entered by the court on July 7, 2023.
In addition, the Company has received additional demand letters from counsel (the “Demand Letters”), each representing a purported stockholder of the Company, asserting that the Preliminary Proxy Statement and/or Proxy Statement was deficient and demanding that the alleged deficiencies be rectified. The Demand Letters allege, among other matters, that the Proxy Statements contain materially incomplete and misleading information concerning the sales process, financial projections prepared by the Company's management, and the financial analysis conducted by Raymond James & Associates, Inc. In addition, each purported shareholder has reserved his or her rights, including the right to alter or amend the demands at any time, and/or seek monetary damages following the consummation of the Merger.
The Company believes that the allegations in the Complaint and the Demand Letters are without merit and that the disclosures set forth in the Proxy Statement comply fully with applicable law. However, in order to moot the unmeritorious claims, avoid nuisance and possible expense and delay, and to provide additional information to our shareholders, the Company provided a voluntary supplement to the Proxy Statement with the supplemental disclosures filed with the SEC on May 5, 2023. Nothing in the Supplemental Disclosures shall be deemed an admission of the legal necessity or materiality under applicable laws of any of the disclosures set forth in the Supplemental Disclosures. To the contrary, the Company specifically denies all allegations that any additional disclosure was or is required. Nevertheless, resolution of these matters may involve payments by the Company to the parties submitting the Demand Letters or other claims.
Item 1A. Risk Factors
You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business. The risk factors set forth below with an asterisk (*) next to the title contain substantive changes to the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.2022. Our business, financial condition, results of operations and future prospects could be materially and adversely affected by these risks if any of them actually occurs. In these circumstances, the market price of our common stock would likely decline. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business.
Risk Factors Summary
The business of Adamis Pharmaceuticals Corporation (“we,” “us,” “our,” “Adamis,” or the “company”) is subject to numerous risks and uncertainties that you should be aware of before making an investment decision, including those highlighted in the section entitled “Risk Factors.” These risks include, but are not limited to, the following:
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
36
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Risks Related to Our Financial Condition
*There is substantial doubt about our ability to continue as a going concern, which may hinder ourout ability to obtain further financing.financing.
Our consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as shown in our consolidated financial statements for the year ended December 31, 2021,2022, included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022 and the condensed consolidated financial statements included in this Report, we have sustained substantial recurring losses from operations.operations, have a substantial accumulated deficit, have limited cash resources and significant liabilities. In addition, we have used, rather than provided, cash in our continuing operations. As of September 30, 2022, we had cash and cash equivalents of approximately $2.4 million. The above conditions raise substantial doubt about our ability to continue as a going concern.concern within one year after such date. Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Uncertainty concerning our ability to continue as a going concern, among other factors, may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent, among other factors, on our ability to successfully develop and commercialize products, the market acceptance and success of our products and our ability to obtain additional required funding in the near term and thereafter. If we cannot continue as a viable entity, we might be required to reduce or cease operations or seek dissolution and liquidation or bankruptcy protection, and our stockholders would likely lose most or all of their investment in us.
Our ability to obtain required financing will be subject to a number of factors, including without limitation market conditions, our capitalization, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates, restrict our operations or attempt to obtain funds by entering into agreements on unattractive terms, 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, and which could result in additional dilution to our stockholders. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all of their investment in us.
36
*We have incurred losses since our inception, and we anticipate that we will continue to incur losses. We may never achieve or sustain profitability.
We incurred significant net losses for the periods covered in this Report. We expect that these losses will continue as we continue our research and development activities, support commercialization of our approved products, and continue to conduct our business. These losses will cause, among other things, our stockholders’ equity and working capital to decrease. Any future earnings and cash flow from operations of our business are dependent on our ability to further develop our products and on revenue and profitability from sales of products. There can be no assurance that we will be able to generate sufficient revenue and amounts payable to us under our commercialization agreement relating to our SYMJEPI and ZIMHI products or other commercialization agreements that we may enter into to become profitable at all or on a sustained basis. We expect to have quarter-to-quarter fluctuations in revenue and expenses, some of which could be significant. If our products do not achieve market acceptance, we may never become profitable. As we commercialize and market products, we may incur expenses for product marketing and brand awareness and conduct significant research, development, testing and regulatory compliance activities that, together with general and administrative expenses, could result in substantial operating losses for the foreseeable future. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
We will require additional funding to continue as a going concern.
We incurred significant net losses for the nine months ended September 30, 2022, and for the years ended December 31, 2021 and December 31, 2020. As of September 30, 2022, we had cash and cash equivalents of approximately $2.4 million.
Our continued operations and the development of our business will require additional capital. Based on our current and anticipated level of operations, we do not believe that our cash, cash equivalents and short-term investments, together with anticipated revenues from operations and amounts that we have received or expect to receive as a result of our sales of assets relating to our former USCU.S. Compounding, Inc. business or from other sources, will be sufficient to meet our anticipated operating expenses, liabilities and obligations for at least 12 months from the date of this Report. Before the end of 2022, as well as thereafter, weWe will require additional funds to sustain operations, satisfy our obligations and liabilities, fund our ongoing operations, or for other purposes, and we intend to seek additional funds during the fourth quarter of 2022 and/or thereafter.purposes. There are no assurances that required funding will be available at all or will be available in sufficient amounts or on reasonable terms. In addition to product revenues, we have historically relied upon sales of our equity or debt securities to fund our operations. As of the date of this Report, we have a limited number of authorized shares available for issuance in any funding transactions involving the issuance of equity securities. We currently have no available balance in our credit facility or committed sources of capital, and a number of factors may limit or prevent our current ability to access capital markets to obtain any required equity or debt funding. Delays in obtaining, or the inability to obtain, required funding from revenues relating to sales of our commercial products, debt or equity financings, sales of assets, sales or out-licenses of intellectual property assets, products, product candidates or technologies, or other transactions or sources, would materially and adversely affect our ability to satisfy our current and future liabilities and our obligations, under outstanding instruments, and would materially and adversely affect our ability to continue operations.
Our ability to obtain required debt or equity financing or funds from other transactions will be subject to a number of factors, including without limitation market conditions, our capitalization, our operating performance and investor sentiment. The terms of any such funding, or the terms of any strategic transaction that we might enter into, could result in significant dilution to our stockholders. If we are unable to raise additional funds when required or on acceptable terms, we may have to significantly restrict our operations or seek to obtain funds by entering into agreements on unattractive terms, 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, and which could result in additional dilution to our stockholders. If we do not have sufficient funds to continue operations, we could be required to seek dissolution and liquidation, bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all of their investment in us.
37
*Statements in this Report concerning our future plans and operations are dependent on our ability to secure adequate funding and the absence of unexpected delays or adverse developments. We may not be able to secure required funding.
The
Any statements contained in this Report concerning future events or developments or our future activities, such as concerning current or planned clinical trials, anticipated research and development activities anticipated dates foror regulatory matters, commercial introduction of any products that we may develop in the future, anticipated outcome of any legal proceedings in which we are involved, the possibility of entering into a strategic transaction regarding our products or a merger, reverse merger or other strategic transaction, and other statements concerning our future operations and activities, are forward-looking statements that in each instance assume that we have or are able to obtain sufficient funding to support such activities and continue our operations and planned activitiessatisfy our liability and obligations in a timely manner. 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 any required additional funding, or unexpected developments or events, could delay the occurrence of such events or prevent the events described in any such statements from occurring which could adversely affect our business, financial condition and results of operations.
We have restated our unaudited condensed consolidated financial statements for the interim periods of 2020, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our business, financial condition and stock price.
On April 14, 2021, we concluded that, because of a misapplication of valuation principles used to determine the amount of our non-cash warrant liabilities and the associated gain or loss recognized as a result of the change in the fair value of the warrant liabilities, relating to warrants that we issued in August 2019 (the “2019 Warrants”) and February 2020 (the “2020 Warrants” and, together with the 2019 Warrants, the “Warrants”), our previous quarterly and year-to-date unaudited condensed consolidated financial statements for the periods ended March 31, 2020, June 30, 2020 and September 30, 2020 (the “Affected Periods”), should no longer be relied upon. As a result, we restated our unaudited condensed consolidated financial statements for the Affected Periods. The issues identified were all non-cash and did not impact our revenues, operating expenses, operating loss, cash and cash equivalents, assets, liquidity or cash position for the Affected Periods or the year ended December 31, 2020. As a result of the foregoing matters, or if we determine in the future that other financial restatements are required, we may become subject to additional risks and uncertainties, including, among others, unanticipated costs for accounting and legal fees, the increased possibility of legal proceedings, shareholder lawsuits, governmental agency investigations, and inquiries by the Nasdaq Stock Market or other regulatory bodies, which could cause investors to lose confidence in our reported financial information and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to decline. If any such actions occur, they will, regardless of the outcome, consume a significant amount of management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs. In addition, any restatement or related matters could impair our reputation. Each of these occurrences could have a material adverse effect on our business, results of operations, financial condition and stock price.
*We have incurred losses since our inception, and we anticipate that we will continue to incur losses. We may never achieve or sustain profitability.
We incurred significant net losses for the nine months ended September 30, 2022, as reflected in the financial statements included elsewhere in this Report, and for the years ended December 31, 2021 and December 31, 2020. We expect that these losses may continue as we continue our research and development activities, support commercialization of our approved products, and continue to conduct our business. These losses will cause, among other things, our stockholders’ equity and working capital to decrease. Any future earnings and cash flow from operations of our business are dependent on our ability to further develop our products and on revenue and profitability from sales of products.
38
There can be no assurance that we will be able to generate sufficient product revenue and amounts payable to us under our commercialization agreement relating to our SYMJEPI and ZIMHI products or other commercialization agreements that we may enter into to become profitable at all or on a sustained basis. We expect to have quarter-to-quarter fluctuations in revenue and expenses, some of which could be significant, due in part to variations in expenses and activities relating to research, development, clinical trials, marketing and manufacturing. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our products do not achieve market acceptance, we may never become profitable. As we commercialize and market products, we may incur expenses for product marketing and brand awareness and conduct significant research, development, testing and regulatory compliance activities that, together with general and administrative expenses, could result in substantial operating losses for the foreseeable future. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
*We have received grand jury subpoenas issued in connection with a criminal investigation and are subject to other investigations.investigations and legal proceedings.
As we have previously disclosed, on May 11, 2021, each of the company and its USC subsidiary received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York (the “USAO”) issued in connection with a criminal investigation, requesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC. The Audit Committee of the Board engaged outside counsel to conduct an independent internal investigation to review these and other matters. Additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the investigation. The company has also received requests from the Securities and Exchange Commission (“SEC”) forSEC that the voluntary production ofcompany voluntarily provide documents and information in connection with the SEC’s investigation relating to certain matters including matters arising from the subject matter of the USAO’s subpoenas and certain other matters in connection withfrom the SEC's investigation.USAO. The company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests as needed. Additionally, on March 16, 2022, we were informed that the Civil Division of the USAO (“Civil Division”) is investigating the company’s Second Draw PPP Loan application disclosed in previous reports. The Audit Committee of the Board engaged outside counsel to conduct an internal inquiry into the matter. In June 2022, following the inquiry the company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees.requests. The company intends to continue cooperating with the USAO and the SEC, and Civil Division. At this time,has continued to engage in communications with the company is unable to predict the duration, scope, or outcome of the investigations by theSEC and USAO SEC, Civil Division, or other agencies; what, if any, proceedings the USAO, SEC, Civil Division, or other federal or state authorities may initiate; what, if any, remedies or remedial measures the USAO, SEC, Civil Division or other federal or state authorities may seek; or what, if any, impact the foregoing matters may have on the company’s business, previously reported financial results, financial results included in this Report, or future financial results.regarding their investigations. We could receive additional requests from the USAO, SEC, Civil Division, or other authorities, which may require further investigation, and additional issues or facts could arise or be determined, which could expand the scope, duration or outcome of the investigation. There can be no assurance that any discussions withWe are unable to predict the duration, scope, or final outcome of the investigations by the USAO, SEC, or Civil Divisionother agencies or what proceedings the USAO, SEC, or other federal or state authorities may initiate if the foregoing matters are not resolved. However, in connection with resolution of these matters, we or our USC subsidiary may be found to have violated one or more laws arising from the subject matter of the subpoenas, and to resolve the matters and investigations with the USAO and the SEC we may be required to pay material amounts in penalties or other payments, and to agree to other remedies or remedial measures. Payment of material amounts in connection with resolution of the foregoing matters would reduce the amount of financial resources that we have available to support our product development programs and commercialization activities and would adversely impact our development programs. Depending in part on the amount and timing of any payments that we may be required to make or other remedial measures that may be implemented in connection with resolution of these matters, will be successful.a resolution of these matters with the USAO or SEC could have a material and adverse impact on the company. The foregoing matters mayhave diverted and will likely continue to divert management’s attention, causehave caused the company to suffer reputational harm, have required and will continue to require the company to devote significant financial resources, could subject the company, andone or more of its subsidiaries, or its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, could result in fines, penalties, payments, or financial remedies in amounts that would have a material adverse effect on our financial condition, or equitable remedies, and adversely affect the company’s business, previously reported financial results, financial results included in this Report,or incorporated by reference herein, or future financial results.
The occurrenceabove matters, or the resolutions of anyother matters discussed in this Report under the heading of “Legal Proceedings,” or other legal proceedings that may arise, could require the Company to spend material amounts to defend, settle or resolve, and an adverse outcome in one or more of these eventsproceedings could have a material adverse effect on the company’sCompany’s business and financial condition and results of operations. position.
* Our PPP loans may be audited or reviewed by federal or state regulatory authorities. We repaid our Second Draw PPP Loan.
We applied for and obtained loan funding under the PPP pursuant to thean initial PPP Loanloan and PPP Note,note, the balance of which has been forgiven, and under the Second Draw PPP Loan and PPP2 Note in the principal amount of $1,765,495, the balance of which was initially forgiven. However, in connection with an investigation by the Civil Division, in June 2022 we paid a total of $1,787,417 in repayment of our Second Draw PPP Loan principal and related interest and fees. Our PPP loans and applications for forgiveness of loan amounts remain subject to future review and audit by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form, including without limitation the required economic necessity certification by the company that was part of the PPP loan application process. Accordingly, the company is subject to audit or review by federal or state regulatory authorities as a result of applying for and obtaining the PPP Loan and Second Draw PPP Loan or obtaining forgiveness of those loans.that loan. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return or repay the full amount of the applicable loan and could be subject to additional fines or penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations.
Certain of our securities issued in prior offerings include a right to receive the Black-Scholes value of the unexercised portion of those securities in the event of a fundamental transaction, which payment could be significant.
Most of our outstanding warrants to purchase shares of common stock issued by us in prior offerings provide that, in the event of a “fundamental transaction,” as defined in the applicable warrant, including, among other things, certain mergers or consolidations of our company, sale of all or substantially all of our assets or a sale of a certain percentage of our common stock, the holders of such warrants have the option, subject to the terms of the applicable warrant, to require us to pay to such holders an amount of cash equal to the Black-Scholes value of the warrants. Such amount could be significantly more than the warrant holders would otherwise receive if they were to exercise their warrants and receive the same consideration as the other holders of common stock, which in turn could reduce the consideration that holders of common stock would be concurrently entitled to receive in such fundamental transaction. Additionally, any future equity financing that we conduct may require us to issue securities that have a similar feature.
Risk Relating to Our Business and Industry
*We may never commercialize additional product candidates that are subject to regulatory approval or earn a profit.
Except for our SYMJEPI and ZIMHI products, we have not received regulatory approval for any drugs or products. Since our fiscal 2010 year, except for revenues from sales of compounded pharmacy formulations after our acquisition of USC in 2016 and amounts that we have received and may receive in the future pursuant to our commercialization agreements relating to our SYMJEPI and ZIMHI products, we have not generated commercial revenue from marketing or selling any drugs or other products. We expect to incur substantial net losses for the foreseeable future. We may never be able to commercialize any additional product candidates that are subject to regulatory approval or be able to generate revenue from sales of such products. Because of the risks and uncertainties associated with developing and commercializing our specialty pharmaceuticals and other product candidates, we are unable to predict when we may commercially introduce such products, the extent of any future losses or when we will become profitable, if ever.
*Our development plans concerning our products and product candidates are affected by many factors, the outcome of which are difficult to predict.
The development of new pharmaceutical products is a highly risky undertaking. OurAny potential productsproduct that we might determine to research or develop in the future may require significant additional research and development before any commercial introduction. Our productintroduction, and our development plans concerning our products andany such product candidates arecandidate will be affected by many factors, many of which are difficult to predict. Some of the factors that could affect our development plans for our products andconcerning any product candidates that we might determine to research or develop in the future include: general market conditions and developments in the marketplace including the introduction of potentially competing new products by our competitors; the availability of adequate funding to support product development efforts and sales and marketing efforts for approved products; the outcome of discussions with the FDA concerning the regulatory pathway for our products and the number and kind of clinical trials that the FDA will require before the FDA will consider regulatory approval of the applicable product;product candidate; the time required to conduct required clinical trials and unexpected delays in the anticipated timing of the commencement, conduct or completion of clinical trials; the outcome and results of pre-clinical or clinical trials; the FDA’s review and acceptance of NDAs that we may file concerning ourany such product candidates;candidate; any unexpected difficulties in licensing or sublicensing intellectual property rights that may be required for other components of the product; patent infringement lawsuits relating to Paragraph IV certifications as part of any Section 505(b)(2) or ANDA filings; any unexpected difficulties in the ability of our suppliers to timely supply quantities for commercial launch of the product; and our ability to successfully market and sell our products or enter into commercialization arrangements with third parties to market our products. There can be no assurance that any future research, development or clinical trial efforts, if any, will be successful or result in viable products or meet efficacy standards. FutureWe cannot assure you that any testing or clinical trials will show potential products to be safe and efficacious or that any such product will be approved for a specific indication. Further, the results from preclinical results may be negative or insufficient to allow us to successfully developstudies and market our product candidates. Obtaining needed data and results may take longer than planned orearly clinical trials may not be indicative of the results that will be obtained at all. Any such delaysin later-stage clinical trials. Delays or setbacks in development efforts that we might determine to undertake could have a material adverse effect on our ability to achieve our financial goals.
39
*Business or economic disruptions or global health concerns, including the COVID-19 pandemic, could harm our business.
Business or economic disruptions or global health concerns such as the COVID-19 pandemic,could harm our business.
Business or economic disruptions or global health concerns could adversely affect our business. The novel strain of coronavirus and the related COVID-19 pandemic, which the World Health Organization announced in January 2020 was a global health emergency and which has continued, has spread throughout most of the world including the United States. The outbreak resulted in extended shutdowns of businesses in the United States and elsewhere and has had ripple effects on businesses and activities around the world.
The COVID-19 outbreak and continued spread of COVID-19, including the identification of novel strains of COVID-19, has affected and may continue to affect our operations, our customers and third parties on which we rely. Restrictions on outpatient surgeries and other medical procedures due to the COVID-19 pandemic, in part due to reductions or cancellations of elective surgeries and reductions in office visits to physicians’ offices, healthcare facilities or clinics by patients, decreased demand from USC’s customers for certain of USC’s products and adversely affected revenues from sales of USC products in 2020 and 2021. In addition, weWe could experience delays in obtaining products or services from our third partythird-party manufacturers or suppliers as a result of the impact of the COVID-19 pandemic or other similar health emergencies on such parties. The pandemic and related matters also could result in interruptions or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines relating to our NDAs or other actions relating to our products or product candidates, or could result in delays relating to patient enrollment or the conduct of clinical trials that we undertake. The outbreak and any preventative or protective actions that we, our customers, our respective manufacturers, suppliers or other third parties with which we have business relationships, or governments may take in respect of the coronavirus and COVID-19 pandemic could disrupt our business and the business of our customers or third parties with which we have business relationships. The extent to which the COVID-19 pandemichealth emergencies will continue to impact our business is difficult to predict and subject to change, and will depend on future developments, which are highly uncertain and cannot be predicted, including without limitation the severity of the disease and duration of the outbreak, travel restrictions and social distancing requirements in the United States and other countries, future mutations and variations of the coronavirus, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease and address its impact.change. In addition, a severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay making purchases or payments for our products. Any of the foregoing could harm our business. In addition, the COVID-19 pandemic has resultedAny future health emergencies could result in significant governmental measures being implemented to control the spread of the virus, including, at various times, quarantines, shelter-in-place or work-from-home orders or policies, travel restrictions, social distancing and business shutdowns. The effects of suchany future governmental measures implemented to control the spread of health emergencies could negatively impact productivity of our employees and disrupt our business activities, the magnitude of which will depend, in part, on the length and severity of the restrictions and our ability to conduct business in the ordinary course. Although we have taken precautions intended to avoid the spread of the coronavirus among our employees, our operations could be adversely affected by outbreaks of COVID-19 among our employees. If we, our customers, or any of the third parties with whom we engage, including the suppliers, manufacturers, regulators and other third parties with whom we conduct business or have business relationships, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner presently anticipated could be materially and negatively impacted.
We intend to rely on third parties to conduct ourany clinical trials.trials that we may conduct in the future. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain, or may experience delays in obtaining, trial results or regulatory approval, or may not be successful in commercializing our planned and future products.approval.
Like many companies our size, we do not have the ability to conduct preclinical or clinical studies for our product candidates that we may in the future determine to develop without the assistance of third parties who conduct the studies on our behalf. These third parties are often toxicology facilities and clinical research organizations, or CROs, that have significant resources and experience in the conduct of pre-clinical and clinical studies. The toxicology facilities conduct the pre-clinical safety studies as well as associated tasks connected with these studies. The CROs typically perform patient recruitment, project management, data management, statistical analysis, and other reporting functions. In the past we have relied on third parties to conduct clinical trials of our product candidates and to use third party toxicology facilities and CROs for our pre-clinical and clinical studies, and if we undertake clinical trials for any product candidate that we may in the future develop we similarly intend to rely on such third parties in connection with any future pre-clinical or clinical trials that we may conduct.parties. We may also rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of any clinical trials involving our products
that we might undertake in the future. Our reliance on these third parties for development activities will reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, we may be required to replace them, and our clinical trials may be extended, delayed or terminated. Although we believe there are a number of third-partythird party contractors that we could engage to conduct or continue these activities, replacing a third-partythird party contractor may result in a delay of the affected trial. trials.
* If there are injuries or deaths associated with use of our products, or if there is a product recall affecting one or more of our products, we may be exposed to significant liabilities, or a prolonged failure to supply, one or more of our products, we may be exposed to significant liabilities.
The testing of human product candidates entails an inherent risk of allegations of clinical trial liability, while the marketing and sale of approved products entails an inherent risk of allegations of product liability and associated adverse publicity. The production, manufacturing, labeling of pharmaceutical products and compounded pharmaceutical preparations is inherently risky. We could be adversely affected if any of our products or the formulations or other products previously sold by USC, prove to be, or are asserted to be, harmful to patients. There are a number of factors that could result in the injury or death of a patient who receives one of our products, or one of the compounded formulations previously sold by USC, including quality issues, manufacturing or labeling flaws, improper packaging or unanticipated or improper uses of the products, any of which could result from human or other error. Any of these situations could lead to a recall of, safety alert, or other proceedings or actions, relating to one or more of such products. On March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes, due to the potential clogging of the needle preventing the dispensing of epinephrine. Our consolidated financial statements for the year ended December 31, 2021, included in our annual report on Form 10-K for the year ended December 31, 2021, included and reflected a reserve of approximately $2.0 million associated with the SYMJEPI recall. As of the date of this Report, the manufacturing of SYMJEPI is currently on hold. There can be no assurance concerning the timing of resumption of manufacturing or resupplying USWM with product to enable a relaunch of SYMJEPI. The recall may have an adverse effect onUnder the amount or the timingterms of our revenues,commercial agreement with USWM, if after a prolonged period of time we are unable to resume the supply of SYMJEPI to USWM, USWM may elect to terminate the agreement and on our financial results and liquidity, for fiscal quarters in 2022 or thereafter. In addition, current or future insurance coveragewe may prove insufficientbe required to cover any liability claims brought against USC or us with respectmake certain payments to the SYMJEPI recall, products previously sold by USC, or other matters.USWM, which could be material. If adverse events or deaths or a product recall, either voluntarily or as required by the FDA or a state board of pharmacy, were associated with our products, or one of the formulations or compounds previously sold by USC, we could become subject to product and professional liability lawsuits or other proceedings, including enforcement actions by state and federal authorities or other healthcare self-regulatory bodies or product liability claims or lawsuits. In addition, such matters could result in indemnification claims by third parties or claims relating to the product recall or associated expenses, including third parties that have purchased our SYMJEPI products or that may purchase our ZIMHI product, or to which we have sold certain assets of USC, including claims pursuant to our agreements with third parties. The recall may have an adverse effect on the amount or the timing of our revenues, and on our financial results and liquidity. In addition, current or future insurance coverage may prove insufficient to cover any liability claims brought against us with respect to the SYMJEPI recall, products previously sold by USC, or other matters. Any of the foregoing matters could result in a material adverse effect on our business, results of operations, financial condition and liquidity.
40
Delays in the commencement or completion of clinical testing of our product candidates could result in increased costs and delay our ability to generate significant revenues.
The actual timing of commencement and completion of clinical trials can vary substantially from our anticipated timing due to factors such as funding limitations, scheduling conflicts with participating clinicians and clinical institutions, and the rate of patient enrollment. Clinical trials involving our product candidates may not commence or be completed as forecast. Delays in the commencement or completion of clinical testing could significantly impact our product development costs. The commencement of clinical trials can be delayed for a variety of reasons, including delays in:
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
In addition, once a clinical trial has begun, it may be suspended or terminated by us or the FDA or other regulatory authorities due to a number of factors, including:
|
| |
|
| |
|
| |
|
|
Clinical trials require sufficient participant enrollment, which is a function of many factors, including the size of the target patient population, the nature of the trial protocol, the proximity of participants to clinical trial sites, the availability of effective treatments for the relevant disease, the eligibility criteria for our clinical trials and competing trials. Delays in enrollment can result in increased costs and longer development times. Our failure to enroll participants in our clinical trials could delay the completion of the clinical trials beyond current expectations. In addition, the FDA could require us to conduct clinical trials with a larger number of participants than we may project for any of our product candidates. As a result of these factors, we may not be able to enroll a sufficient number of participants in a timely or cost-effective manner.
Furthermore, enrolled participants may drop out of clinical trials, which could impair the validity or statistical significance of the clinical trials. A number of factors can influence the discontinuation rate, including, but not limited to: the inclusion of a placebo in a trial; possible lack of effect of the product candidate being tested at one or more of the dose levels being tested; adverse side effects experienced, whether or not related to the product candidate; and the availability of numerous alternative treatment options that may induce participants to withdraw from the trial.
*We may be required to suspend, repeat or terminate our clinical trials if the trials are not well designed, do not meet regulatory requirements or the results are negative or inconclusive, which may result in significant negative repercussions on business and financial condition.
Before regulatory approval for a potential product can be obtained, we must undertake clinical testing on humans to demonstrate the tolerability and efficacy of the product. We cannot assure you that we will obtain authorization to permit any product candidates that are in the preclinical development phase to enter the human clinical testing phase. In addition, we cannot assure you that any authorized preclinical or clinical testing will be completed successfully within any specified time period by us, or without significant additional resources or expertise to those originally expected to be necessary. For example, in September 2022, the DSMB evaluated interim data for our Phase 2/3 trial relating to our Tempol product candidate and determined that the trial did not achieve its primary end point, and we subsequently stopped the trial and development work concerning Tempol. We cannot assure you that any testing or clinical trials will show potential products to be safe and efficacious or that any such product will be approved for a specific indication. Further, the results from preclinical studies and early clinical trials may not be indicative of the results that will be obtained in later-stage clinical trials. In addition, we or regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks.
41 40
We are subject to the risk of clinical trial and product liability lawsuits.
The testing of human health care product candidates entails an inherent risk of allegations of clinical trial liability, while the marketing and sale of approved products entails an inherent risk of allegations of product liability and associated adverse publicity. We currently maintain liability insurance. However, such insurance policies are expensive, may not provide sufficient coverage, and may not be available in the future on acceptable terms, or at all. AsIf we conduct additional clinical trials and introduce products into the United States market, the risk of adverse events increaseswill increase and our requirements for liability insurance coverage are likely to increase. We are subject to the risk that substantial liability claims from the testing or marketing of pharmaceutical products could be asserted against us in the future. There can be no assurance that we will be able to obtain or maintain insurance on acceptable terms, particularly in overseas locations, for clinical and commercial activities or that any insurance obtained will provide adequate protection against potential liabilities. An inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could inhibit our business.
Moreover, our current and future coverages may not be adequate to protect us from all of the liabilities that we may incur. If losses from liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, a product or clinical trial liability action against us would be expensive and time-consuming to defend, even if we ultimately prevailed. If we are required to pay a claim, we may not have sufficient financial resources and our business and results of operations may be harmed. A product liability claim brought against us in excess of our insurance coverage, if any, could have a material adverse effect upon our business, financial condition and results of operations.
We do not have commercial-scale manufacturing capability, and we lack commercial manufacturing experience. We will likely rely on third parties to manufacture and supply our commercial products and our product candidates for which we will be seeking FDA approval.
Except for our facilities at USC that were previously utilized to prepare compounded formulations, weWe do not own or operate manufacturing facilities for clinical or commercial production of pharmaceutical products and product candidates, we do not have any experience in drug formulation or manufacturing, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. Accordingly, we expect to depend on third-party contract manufacturers for the foreseeable future. Any performance failure on the part of our contract manufacturers could delay clinical development, regulatory approval or commercialization of our current or future product candidates, or result in product recalls or shortages or manufacturing halts or delays, depriving us of potential product revenue and resulting in additional losses. Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we rely on third parties to supply the raw materials needed to manufacture our existing and potential products. Any business interruptions resulting from geopolitical actions, including war and terrorism, adverse public health developments such as the outbreak of the COVID-19 coronavirus,pandemic or other health emergencies, or natural disasters including earthquakes, typhoons, floods and fires, could adversely affect our supply chain. These risks and uncertainties are compounded in the presence of the COVID-19 pandemic. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to our manufacturers or suppliers could delay shipment of any of our products, increase our cost of goods sold and result in lost sales.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems can include difficulties with production costs and yields, quality control (including stability of the product candidate and quality assurance testing), shortages of qualified personnel, and compliance with strictly enforced federal, state and foreign regulations. If our third-party contract manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations or under applicable regulations, our ability to provide product candidates to patients in our clinical trials or to provide commercial products would be jeopardized. If we file an application for marketing approval of the product and the FDA grants marketing approval, any delay or interruption in the supply of product could delay the commercial launch of the product or impair our ability to meet demand for the product. Difficulties in supplying products for clinical trials could increase the costs associated with our clinical trial programs and, depending upon the period of delay, require us to commence new trials or qualify new manufacturers at significant additional expense, possibly causing commercial delays or termination of the trials.
These problems can include difficulties with production costs and yields, quality control (including stability of the product candidate and quality assurance testing), shortages of qualified personnel, and compliance with strictly enforced federal, state and foreign regulations. If our third-party contract manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations or under applicable regulations, our ability to provide product candidates to patients in our clinical trials or commercially would be jeopardized. If we file an application for marketing approval of the product and the FDA grants marketing approval, any delay or interruption in the supply of product could delay the commercial launch of the product or impair our ability to meet demand for the product. Difficulties in supplying products for clinical trials could increase the costs associated with our clinical trial programs and, depending upon the period of delay, require us to commence new trials or qualify new manufacturers at significant additional expense, possibly causing commercial delays or termination of the trials.
Our products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA and other relevant regulatory authorities. For these reasons, we may not be able to replace manufacturing capacity for our products quickly if we or our contract manufacturer(s) were unable to use manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure, or other difficulty, or if such facilities were deemed not in compliance with the regulatory requirements and such non-compliance could not be rapidly rectified. An inability or reduced capacity to manufacture our products could have a material adverse effect on our business, financial condition, and results of operations.
42 41
*We are subject to substantial government regulation, which could materially adversely affect our business. If we do not receive regulatory approvals, we may not be able to develop and commercialize our technologies.
We need FDA approval to market our products in the United States that are subject to regulatory approval, and similar approvals from foreign regulatory authorities to market products outside the United States. The production and marketing of such products and potential products and our ongoing research and development, pre-clinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities in the United States and will face similar regulation and review for overseas approval and sales from governmental authorities outside of the United States. The regulatory review and approval process, which may include evaluation of preclinical studies and clinical trials of our products that are subject to regulatory review, as well as the evaluation of manufacturing processes and contract manufacturers’ facilities, is lengthy, expensive and uncertain. We have limited experience in filing and pursuing applications necessary to gain regulatory approvals. ProductMany of the product candidates usuallythat we are currently developing must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process before they can be marketed. This process makes it longer, more difficult and more costly to bring our potential products to market, and we cannot guarantee that any of our potential products will be approved. Many products for which FDA approval has been sought by other companies have never been approved for marketing. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling, and record-keeping procedures. If we or our collaboration partners do not comply with applicable regulatory requirements, such violations could result in non-approval, suspensions of regulatory approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution.
Regulatory authorities generally have substantial discretion in the approval process and may either refuse to accept an application, or may decide after review of an application that the data submitted is insufficient to allow approval of the proposed product, as we have experienced with previous CRLsComplete Response Letters that we have received from the FDA. If regulatory authorities do not accept or approve our applications, they may require that we conduct additional clinical, preclinical or manufacturing studies and submit that data before regulatory authorities will reconsider such application. We may need to expend substantial resources to conduct further studies to obtain data that regulatory authorities believe is sufficient. Depending on the extent of these studies, acceptance or approval of applications may be delayed by several years, or may require us to expend more resources than we may have available. It is also possible that additional studies may not suffice to make applications approvable. If any of these outcomes occur, we may be forced to abandon our applications for approval.
Failure to obtain FDA or other required regulatory approvals, or withdrawal of previous approvals, would adversely affect our business. Even if regulatory approval of a product is granted, this approval may entail limitations on uses for which the product may be labeled and promoted, or may prevent us from broadening the uses of products for different applications.
Following regulatory approval of any of our drug candidates, we will be subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit our ability to commercialize our potential products.
With regard to our drug candidates that are approved by the FDA or by another regulatory authority, we are held to extensive regulatory requirements over product manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping. Regulatory approvals may also be subject to significant limitations on the indicated uses or marketing of the drug candidates. Potentially costly follow-up or post-marketing clinical studies may be required as a condition of approval to further substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory authority. Previously unknown problems with the drug candidate, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market. In addition, the law or regulatory policies governing pharmaceuticals may change. New statutory requirements may be enacted or additional regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or elsewhere. If we are not able to maintain regulatory compliance, we might not be permitted to market our drugs and our business could suffer.
43 42
We intend to pursue Section 505(b)(2) regulatory approval filings with the FDA for our products where applicable. Such filings involve significant costs, and we may also encounter difficulties or delays in obtaining regulatory approval for our products. Similar difficulties or delays may also arise in connection with any Abbreviated New Drug Applications that we may file.
We submitted a Section 505(b)(2) NDA regulatory filing to the FDA in connection with our approved SYMJEPI products, we submitted Section 505(b)(2) NDA regulatory filings to the FDA in connection with our ZIMHI (naloxone) Injection product, and we may pursue Section 505(b)(2) NDA filings with the FDA in connection with one or more future product candidates that we may develop. A Section 505(b)(2) NDA is a special type of NDA that enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of an existing previously approved product, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Such filings involve significant filing costs, including filing fees.
To the extent that a Section 505(b)(2) NDA relies on published literature relating to a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product, where the underlying studies were not conducted by or for the applicant and the applicant lacks a right of reference or use to the underlying data, the Section 505(b)(2) applicant must submit in its Section 505(b)(2) application a patent certification or statement with respect to any patents that are subject to the Orange Book listing requirement in connection with the previously approved product on which the applicant’s application relies. Specifically, the applicant must certify for each such patent that, in relevant part, (1) the required patent information has not been filed; (2) the patent has expired; (3) the patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (4) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product. Alternatively, with respect to a method of use patent, the applicant may submit a statement that the patent does not claim a use for which the applicant is seeking approval. A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification. If the applicant does not challenge the listed patents through a Paragraph IV certification or submit a statement that a method of use patent does not claim a use for which the applicant is seeking approval, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents for the previously approved product have expired. Further, the FDA will also not approve a Section 505(b)(2) NDA until any applicable non-patent exclusivity, such as, for example, five-year exclusivity for obtaining approval of a new chemical entity, three-year exclusivity for an approval based on new clinical trials, or pediatric exclusivity, listed in the Orange Book for the referenced product, has expired.
If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA for 30 months beginning on the date the patent holder receives notice, unless, before the end of the 30-month period, a court determines that the patent is invalid, unenforceable or not infringed; a court enters a settlement order or consent decree stating that the patent is invalid, unenforceable, or not infringed; the patent owner or exclusive licensee consents to approval of the Section 505(b)(2) NDA; or the court enters an order of dismissal without a finding of infringement.
If we rely in our Section 505(b)(2) regulatory filings on published literature relating to a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product where the underlying studies were not conducted by or for us and we lack a right of reference or use to the underlying data, and that involves patents referenced in the Orange Book, then we will need to make the patent certifications or the Paragraph IV certification described above. If we make a Paragraph IV certification and the holder of the previously approved product that we referenced in our application initiates patent litigation within the time periods described above, then any FDA approval of our 505(b)(2) application would be delayed until the earlier of 30 months, resolution of the lawsuit, or the other events described above. Accordingly, our anticipated dates relating to review and approval of a product that was subject to such litigation would be delayed. In addition, we would incur the expenses, which could be material, involved with any such patent litigation. As a result, we may invest a significant amount of time and expense in the development of our product only to be subject to significant delay and patent litigation before our product may be commercialized, if at all.
In addition, even if we submit a Section 505(b)(2) application, such as we may submit for other future products, that relies on published literature relating to a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product where there are no patents referenced in the Orange Book for such other product with respect to which we have to provide certifications, we are subject to the risk that the FDA could disagree with our reliance on the particular previously approved product that we chose to rely on, conclude that such previously approved product is not an acceptable reference product, and require us instead to rely as a reference product on another previously approved product that involves patents referenced in the Orange Book, requiring us to make the certifications described above and subjecting us to additional delay, expense and the other risks described above.
Similarly, if we submit one or more ANDA applications to the FDA pursuant to Section 505(j) of the FDCA in connection with one or more of our product candidates, we could encounter generally similar difficulties or delays, including difficulties or delays resulting from the Paragraph IV certification process or from any clinical trials that might be required in connection with any such ANDAs.
44
*If we fail to obtain acceptable prices or appropriate reimbursement for our products, our ability to successfully commercialize our products will be impaired.
Government and insurance reimbursements for healthcare expenditures play an important role for all healthcare providers, including physicians and pharmaceutical companies such as Adamis,the Company, that plan to offer various products in the United States and other countries in the future. Physicians and patients may decide not to order our products unless third-partythird- party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid, pay a substantial portion of the price of the products. Market acceptance and sales of our specialty pharmaceutical products and potential products will depend in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health coverage insurers, managed care organizations, and other organizations. In the United States, our ability to have our products eligible for Medicare, Medicaid or private insurance reimbursement will be Med
an important factor in determining the ultimate success of our products. If, for any reason, Medicare, Medicaid or the insurance companies decline to provide reimbursement for our products, our ability to commercialize our products would be adversely affected.
Third-party payors may challenge the price of medical and pharmaceutical products. Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that our product candidates are:are experimental or not effective, medically necessary, appropriate for the specific patient, cost-effective, supported by peer-reviewed publications, or included in clinical practice guidelines.
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
If purchasers or users of our products and related treatments are not able to obtain appropriate reimbursement for the cost of using such products, they may forego or reduce such use. Significant uncertainty exists as to the reimbursement status of newly approved pharmaceutical products, and there can be no assurance that adequate third-partythird- party coverage will be available for any of our products. Even if our products are approved for reimbursement by Medicare, Medicaid and private insurers, of which there can be no assurance, the amount of reimbursement may be reduced at times or even eliminated, which could have a material adverse effect on our business, financial condition and results of operations.
Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.
In both the United States and certain foreign jurisdictions, there have been and are expected to be a number of legislative and regulatoryregu
icare, Medicaid or private insurance reimbursement will be latory changes to the healthcare system in ways that could impact our ability to sell our products profitably, including the Patient Protection and Affordable Care Act, or ACA. Given the enactmentprofitably. The impact of these laws and other federal and state legislation and regulations relating to the healthcare system, their impactchanges on the biotechnology and pharmaceutical industries and our business is uncertain.
On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, into law, which sets forth meaningful changes to drug product reimbursement by Medicare. Among other actions, the IRA permits HHS to engage in price-capped negotiation to set the price of certain drugs and biologics reimbursed under Medicare Part D. The IRA also establishes a rebate obligation for drug manufacturers that increase prices of Medicare Part D covered drugs at a rate greater than the rate of inflation. The inflation rebates may require us to pay rebates if we increase the cost of a covered Medicare Part D approved product faster than the rate of inflation. In addition, the law eliminates the “donut hole” under Medicare Part D beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost and requiring manufacturers to subsidize, through a newly established manufacturer discount program, 10% of Part D enrollees’ prescription costs for brand drugs below the out-of-pocket maximum and 20% once the out-of-pocket maximum has been reached. Our cost-sharing responsibility for any approved product covered by Medicare Part D could be significantly greater under the newly designed Part D benefit structure compared to the pre-IRA benefit design. Additionally, manufacturers that fail to comply with certain provisions of the IRA may be subject to penalties, including civil monetary penalties. The IRA is anticipated to have significant effects on the pharmaceutical industry and may reduce the prices we can charge and reimbursement we can receive for our products, among other effects.
The U.S. Congress continues to consider issues relating to the healthcare system, and future legislation or regulations may affect our ability to market and sell products on favorable terms, which would affect our results of operations, as well as our ability to raise capital, obtain additional collaborators or profitably market our products. Such legislation or regulation may reduce our revenues, increase our expenses or limit the markets for our products. In particular, we expect to experience pricing pressures in connection with the sale of our products due to the influence of health maintenance and managed health care organizations and additional legislative proposals.
We are subject to a variety of federal, state and local laws and regulations relating to the general healthcare industry, which are subject to frequent change.
Participants in the healthcare industry, including the company and, before the winding downdiscontinuance of its business, as described elsewhere in this Report, USC, are subject to a variety of federal, state, and local laws and regulations. Laws and regulations in the healthcare industry are extremely complex and, in many instances, industry participants do not have the benefit of significant regulatory or judicial interpretation. Such laws and regulations are subject to change and often are uncertain in their application. There can be no assurance that we will not be subject to scrutiny or challenge under one or more of these laws or regulations or that any such challenge would not be successful. Any such challenge, whether or not successful, could adversely affect our business, financial condition or results of operations.
In addition, we
Laws that may affect our ability to operate include, but are subjectnot limited to, the federal anti-kickback statute, which prohibits, among other things, knowinglyAnti-Kickback Statute, federal civil and willfully offering, paying, soliciting or receiving remuneration to induce or in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service reimbursable under a federal healthcare program, or purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under a federal healthcare program. We are also subject tocriminal false claims laws, state anti-kickback and false claims laws, HIPAA, as amended by HITECH, and the federal Physician Payments Sunshine Act, created under the ACA and its implementing regulations. Violations of the anti-kickback statutesthese laws can result in imprisonment, civil or criminal fines, and fines and disciplinary actions relating to our state licensure. Anylicensure, disgorgement, exclusion of products from reimbursement under U.S. federal or state healthcare programs, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations. Moreover, any violation or alleged violation of such federal or state laws could harm our reputation, customer relationships or otherwise have a material adverse effect on our business, financial condition and results of operations.
We have limited sales, marketing and distribution experience.
We have limited experience in the sales, marketing, and distribution of pharmaceutical products. There can be no assurance that we will be able to establish sales, marketing, and distribution capabilities or make arrangements with collaborators or others to perform such activities or that such efforts will be successful. If we decide to market any products directly ourselves, we would be required to either acquire or internally develop a marketing and sales force with technical expertise and with supporting distribution capabilities. The acquisition or development of a sales, marketing and distribution infrastructure would require substantial resources, which may not be available to us or, even if available, could divert the attention of our management and key personnel and have a negative impact on further product development efforts.
We may seek to enter into arrangements to develop and commercialize our products. These collaborations, even if secured, may not be successful.
We have entered and sought to enter into arrangements with third parties regarding development or commercialization of some of our products or product candidates and may in the future seek to enter into collaborative arrangements to develop and commercialize some of our products or potential products both in North America and international markets. There can be no assurance that we will be able to negotiate commercialization or collaborative arrangements on favorable terms or at all or that our current or future collaborative arrangements will be successful. The amount and timing of resources such third parties will devote to these activities may not be within our control. There can be no assurance that such parties will perform their obligations as expected. There can be no assurance that our collaborators will devote adequate resources to our products.
45 43
*Even if they are approved and commercialized, if our potential products are unable to compete effectively with current and future products targeting similar markets as our potential products, our commercial opportunities will be reduced or eliminated.
The markets for our SYMJEPI products and ZIMHI product, and forour other product candidates, that we may develop, are intensely competitive and characterized by rapid technological progress. We face competition from numerous sources, including major biotechnology and pharmaceutical companies worldwide. Many of our competitors have substantially greater financial and technical resources, and development, production and marketing capabilities, than we do. Our SYMJEPI products competeproduct competes with a number of other currently marketed epinephrine products for use in the emergency treatment of acute allergic reactions, including anaphylaxis.
Our ZIMHI product competes with a number of other currently marketed products utilizing naloxone, for the treatment of acute opioid overdose. Certain companies have established technologies that may be competitive with our product candidatesproducts and any future productsproduct candidates that we may determine to develop or acquire. Some of these products may use different approaches or means to obtain results, which could be more effective or less expensive than our products for similar indications. In addition, many of these companies have more experience than we do in pre-clinical testing, performance of clinical trials, manufacturing, and obtaining FDA and foreign regulatory approvals. They may also have more brand name exposure and expertise in sales and marketing. We also compete with academic institutions, governmental agencies and private organizations that are conducting research in the same fields.
Competition among these entities to recruit and retain highly qualified scientific, technical and professional personnel and consultants is also intense. As a result, there is a risk that one or more of our competitors will develop a more effective product for the same indications for which we are developing a product or, alternatively, bring a similar product to market before we can do so. Failure to successfully compete will adversely impact the ability to raise additional capital and ultimately achieve profitable operations.
Our product candidates may not gain acceptance among physicians, patients, or the medical community, thereby limiting our potential to generate revenue, which will undermine our future growth prospects.
Even if our pharmaceutical product candidates are approved for commercial sale by the FDA or other regulatory authorities, the degree of market acceptance of any approved product candidate by physicians, health care professionals and third-party payors, and our profitability and growth will depend on a number of factors, including:
If any product candidate that we develop does not provide a treatment regimen that is at least as beneficial as the current standard of care or otherwise does not provide some additional patient benefit over the current standard of care, that product will likely not achieve market acceptance and we will not generate sufficient revenues to achieve profitability.
If we suffer negative publicity concerning the safety of our products in development, our sales may be harmed and we may be forced to withdraw such products. If concerns should arise about the safety of any of our products that are marketed, regardless of whether or not such concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect the market for these products. Similarly, negative publicity could result in an increased number of product liability claims, whether or not these claims are supported by applicable law.
Our success depends in part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technologies and products. The patents and patent applications in our existing patent portfolio are either owned by us or licensed to us. Our ability to protect our product candidates from unauthorized use or infringement by third parties depends substantially on our ability to obtain and maintain, or license, valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions for which important legal principles are unresolved. There is a substantial backlog of patent applications at the United States Patent and Trademark Office, or USPTO. There can be no assurance that any patent applications relating to our products or methods will be issued as patents, or, if issued, that the patents will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide a competitive advantage. We may not be able to obtain patent rights on products, treatment methods or manufacturing processes that we may develop or to which we may obtain license or other rights. Even if we do obtain In addition, many other organizations are engaged in research and product development efforts that may overlap with our products. Such organizations may currently have, or may obtain in the future, legally blocking proprietary rights, including patent rights, in one or more products or methods under development or consideration by us. These rights may prevent us from commercializing technology, or may require us to obtain a license from the organizations to use the technology. We may not be able to obtain any such licenses that may be required on reasonable financial terms, if at all, and we cannot be sure that the patents underlying any such licenses will be valid or enforceable. As with other companies in the pharmaceutical industry, we are subject to the risk that persons located in other countries will engage in development, marketing or sales activities of products that would infringe our patent rights if such activities were conducted in the United States. Our patents also may not afford protection against competitors with similar technology. We may not have identified all patents, published applications or published literature that affect our business either by blocking our ability to commercialize our product candidates, by preventing the patentability of our products or by covering the same or similar technologies that may affect our ability to market or license our product candidates. We may become involved in patent litigation or other intellectual property proceedings relating to our future product approvals, which could result in liability for damages or delay or stop our development and commercialization efforts. The pharmaceutical industry has been characterized by significant litigation and other proceedings regarding patents, patent applications, trademarks, and other intellectual property rights. The situations in which we may become parties to such litigation or proceedings may include any third parties initiating litigation claiming that our products infringe their patent or other intellectual property rights, or that one of our trademarks or trade names infringes the third party’s trademark rights; in such case, we will need to defend against such proceedings. For example, the field of generic pharmaceuticals is characterized by frequent litigation that occurs in connection with the regulatory filings under Section 505(b)(2) of the FDCA and attempts to invalidate the patent of the reference drug. The costs of resolving any patent litigation or other intellectual property proceeding, even if resolved in our favor, could be substantial. Many of our potential competitors will be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other intellectual property proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other intellectual property proceedings may also consume significant management time. In the event that a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult, and time-consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time-consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patent or other intellectual property rights against a challenge. If we are unsuccessful in enforcing and protecting our intellectual property rights and protecting our products, it could materially harm our business.
We are subject to certain data privacy and security requirements, which are very complex and difficult to comply with at times. Any failure to ensure adherence to these requirements could subject us to fines and penalties, and damage our reputation. We are required to comply, as applicable, with numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, which govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who may prescribe products we may sell in the future and from whom we may obtain patient health information are subject to privacy and security requirements under HIPAA and comparable state laws. These laws could create liability for us or increase our cost of doing business, and any failure to comply could result in harm to our reputation, and potentially fines and penalties. There are significant limitations on our ability in the future to utilize any net operating loss carryforwards for federal and state income tax purposes. At December 31,
Risks Related to Our Former Compounding Pharmacy Business
As previously disclosed in our reports with the SEC and as disclosed elsewhere in this Report,
Other matters may
The compounding pharmaceuticals business formerly conducted by USC is subject to federal, state and local laws, regulations and administrative
Risks Related to Our Common Stock Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders and may have the effect of entrenching, and making it difficult to remove, management. Provisions of our restated certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us, even if a change of control would benefit our stockholders. For example, shares of our preferred stock may be issued in the future without further stockholder approval, and upon such terms and conditions, and having such rights, privileges and preferences, as our board of directors may determine, including, for example, rights to convert into our common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any of our preferred stock that may be issued in the future. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire control of us. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock and discourage those investors from acquiring a majority of our common stock. Similarly, our bylaws include a prohibition on stockholder action by written consent, which means that all stockholder action must be taken at an annual or special meeting of stockholders. Moreover, our charter documents do not provide for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates. Our bylaws require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations. The existence of these charter provisions could have the effect of entrenching management and making it more difficult to change our management. Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us, unless one or more exemptions from such provisions apply. These provisions under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future.
The market price of our common stock may fluctuate substantially. For example, from January
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation. Furthermore, market volatility may lead to increased shareholder activism if we experience a market valuation that activists believe is not reflective of our intrinsic value. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition.
Trading of our common stock is limited. Trading of our common stock is limited, and trading restrictions imposed on us by applicable regulations may further reduce our trading, making it difficult for our stockholders to sell their shares. The foregoing factors may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock. In addition, without a large public float, our common stock is less liquid than the stock of companies with broader public ownership, and as a result, the trading price of our common stock may be more volatile. In the absence of an active public trading market, an investor may be unable to liquidate his or her investment in our common stock. Trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger. We cannot predict the price at which our common stock will trade at any given time. Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common shares and our ability to access the capital markets. Our common stock is currently listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements,
As previously disclosed, on October 4, 2023, the In response, the Company timely requested a hearing before the Panel, which request stayed any further action by Nasdaq at least until the hearing is held and any extension the Panel may grant to the Company following the hearing expires. On October 18, 2023, the Company received a superseding notice from the Staff (the “Subsequent Notice”), indicating that the Prior Notice was issued in error. The Subsequent Notice indicated that because the Company was subject to a one-year Mandatory Panel Monitor as a result of a prior hearing before the Panel, the Company was not eligible for the automatic 180-day compliance grace period provided by Listing Rule 5810(c)(3)(A) and that the Company’s non-compliance with the Bid Price Rule serves as an additional basis for delisting from Nasdaq. At the hearing before the Panel, the Company will address its plan to regain compliance with both the Bid Price Rule and the MVLS Rule as well as its continued compliance with all other applicable criteria for continued listing on The Nasdaq Capital Market.
Our common stock could become subject to additional trading restrictions as a “penny stock,” which could adversely affect the liquidity and price of such stock. If our common stock became subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
Unless our common stock is listed on a national securities exchange, such as the NASDAQ Capital Market, our common stock may also be subject to the regulations regarding trading in “penny stocks,” which are those securities trading for less than $5.00 per share, and that are not otherwise exempted from the definition of a penny stock under other exemptions provided for in the applicable regulations. The following is a list of the general restrictions on the sale of penny stocks:
These requirements can severely limit the liquidity of securities in the secondary market because fewer brokers or dealers are likely to be willing to undertake these compliance activities. If our common stock is not listed on a national securities exchange, the rules and restrictions regarding penny stock transactions may limit an investor’s ability to sell to a third party and our ability to raise additional capital. We make no guarantee that market-makers will make a market in our common stock, or that any market for our common stock will continue. Our stockholders may experience significant dilution as a result of any additional financing using our securities, or as the result of the exercise or conversion of our outstanding securities. In the future, to the extent that we raise additional funds by issuing equity securities or securities convertible into or exercisable for equity securities, our stockholders may experience significant dilution. In addition, conversion or exercise of other outstanding options, warrants or convertible securities could result in there being a significant number of additional shares outstanding and dilution to our stockholders. If additional funds are raised through the issuance of preferred stock, holders of preferred stock could have rights that are senior to the rights of holders of our common stock, and the agreements relating to any such issuance could contain covenants that would restrict our operations. We have not paid cash dividends on our common stock in the past and do not expect to pay cash dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock. No cash dividends have been paid on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on a
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock. Our restated certificate of incorporation gives our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock.
If in the future we sell additional equity securities to help satisfy funding requirements, those securities may be subject to registration rights or may include warrants with anti-dilutive protective provisions. Future sales in the public market of our common stock, or shares issued upon exercise of our outstanding stock options, warrants or convertible securities, or the perception by the market that these issuances or sales could occur, could lower the market price of our common stock or make it difficult for us to raise additional capital. Our stockholders may experience substantial dilution and a reduction in the price that they are able to obtain upon the sale of their shares. Also, new equity securities issued may have greater rights, preferences or privileges than our existing common stock.
We have outstanding warrants stockholders.
Our Bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for a wide variety of disputes between us and our stockholders, and that the federal district courts of the United States of the America are the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Exclusive forum provisions in our Bylaws could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. Our Bylaws, as amended, provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, including (i) any derivative action or proceeding brought on behalf of the company; (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the company to the company or the company’s stockholders; (iii) any action asserting a claim against the company or any director or officer or other employee of the company arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the Bylaws of the company, or as to which the Delaware General Corporation Law confers jurisdiction on the Courts of Chancery of the State of Delaware; or (iv) any action asserting a claim against the company or any director or officer or other employee of the company governed by the internal affairs doctrine, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants (including without limitation as a result of the consent of such indispensable party to the personal jurisdiction of such court). The Bylaws provide that the foregoing provisions do not apply to actions or suits brought to enforce any liability or duty created by the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our Bylaws do not relieve us of our duties to comply with federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations. In addition, our Bylaws, as amended, provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and to have consented to these provisions. Under the Securities Act, federal and state courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act. There is uncertainty as to whether a court (other than state courts in the State of Delaware, where the Supreme Court of the State of Delaware decided in March 2020 that exclusive forum provisions for causes of action arising under the Securities Act are facially valid under Delaware law) would enforce forum selection provisions and whether investors can waive compliance with the federal securities laws and the rules and regulations thereunder. We believe the forum selection provisions in Bylaws, as amended, may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, these provisions may have the effect of discouraging lawsuits against us and/or our directors, officers and employees as it may limit any stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for disputes with us or our directors, officers or employees. In addition, stockholders who do bring a claim in the Court of Chancery in the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a future court could find the choice of forum provisions contained in our Bylaws to be inapplicable or unenforceable in such action. If a court were to find the choice of forum provision contained in our Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, identify or discover material weaknesses in our internal control over financial reporting or fail to effectively remediate any identified material weaknesses, our business and financial condition could be materially and adversely affected and our stock price could decline. Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any material changes and weaknesses identified through such evaluation. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and our business and financial condition could be adversely affected. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could decline significantly.
We take responsive actions to address identified material weaknesses in our internal control over financial reporting. However, we can give no assurance that such measures will remediate any material weakness that are identified or that any additional material weaknesses or restatements of financial results will not arise in the future. In the future, our management may determine that our disclosure controls and procedures are ineffective or that there are one or more material weaknesses in our internal controls over financial reporting, resulting in a reasonable possibility that a material misstatement to the annual or interim financial statements would not have been prevented or detected. Accordingly, a material weakness increases the risk that the financial information we report contains material errors. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Efforts to correct any material weaknesses or deficiencies that may be identified could require significant financial resources to address. Moreover, if remedial measures are insufficient to address the deficiencies that are determined to exist, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements could contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, and we could become subject to class action litigation or investigations or proceedings from regulatory authorities. Any of these matters could adversely affect our business, reputation, revenues, results of operations, financial condition and stock price.
General Risk Factors
Our success will be dependent upon the efforts of our management team and
We may experience difficulties in managing growth. We are a small company. Any significant growth
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results. Our business and operations would suffer in the event of cybersecurity or other system failures. Our business depends on complex information systems, and any failure to successfully maintain these systems or implement new systems to handle our changing needs could materially harm our operations. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers, as well as personally identifiable information of employees. Similarly, our third-party providers possess certain of our sensitive data. The secure maintenance of this information is material to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. Thus, any access, disclosure or other loss of information, including our data being breached at our partners or third-party providers, could result in legal claims or proceedings and liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline and may impair our ability to raise capital in the future. There have been and may continue to be periods when our common stock could be considered “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. Finance transactions resulting in a large amount of newly issued shares that become readily tradable, conversion of outstanding convertible notes or exercise of outstanding warrants and sale of the shares issuable upon conversion of such notes or exercise of such warrants, issuance of shares following vesting of outstanding restricted stock units, or other events that cause stockholders to sell shares, could place downward pressure on the trading price of our stock. In addition, the lack of a robust resale market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock. If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market, the market price of our common stock could decline. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We may never obtain substantial research coverage by industry or financial analysts. If no or few analysts commence or continue coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
ITEM 2. Unregistered Sales of Equity Securities, Information concerning our sales of unregistered securities during the quarter ended September 30, ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
The following exhibits are attached hereto or incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|