UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2019
OR
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 000-26372
ADAMIS PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
82-0429727
(I.R.S. Employer Identification No.)
11682 El Camino Real, Suite 300, San Diego, CA 92130
(Address of Principal Executive Offices) (zip code)
Registrant’s telephone number, including area code: (858) 997-2400
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
None
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ☐ NO ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit 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 definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☐
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 Act).
YES ☐ NO ☒
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2019, was $61,031,834.50.
At March 27, 2020, the Company had 73,732,288 shares outstanding.
Documents Incorporated by Reference: Portions of the registrant’s proxy statement for its 2020 annual meeting of stockholders are incorporated
by reference into Part III of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the registrant’s definitive proxy statement
shall not be deemed to be part of this report.
ADAMIS PHARMACEUTICALS CORPORATION
TABLE OF CONTENTS
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
PART IV
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Information Relating to Forward-Looking Statements
This Annual Report on Form 10-K (this “Report”) includes forward-looking statements that involve substantial risks and uncertainties. All
statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial
position, strategy and plans, are forward-looking statements within the meaning of the federal securities laws and are intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995. We have attempted to identify forward-looking statements by
terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,”
“should,” or “will” or the negative of these terms or other comparable terminology. 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; our expectations for growth; estimates of future revenue; 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 commercial introduction of products; our future products; regulatory matters; our expectations concerning the timing of
regulatory approvals; 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; 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. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this
Report.
The following factors, among others, could cause our future results and financial performance to differ materially from that expressed in forward-
looking statements in this Report:
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our need to raise additional capital;
our ability to continue as a going concern;
the commercial success of our SYMJEPI™ (epinephrine) Injection 0.3mg and 0.15 mg products and amounts that we may receive with respect
to sales of such products;
future actions by the FDA and other regulatory agencies regarding our product candidates and our regulatory filings relating to our product
candidates, including without limitation concerning our ZIMHI NDA;
the success of our product development programs and research;
our future development plans concerning our product candidates, and ongoing and planned preclinical or clinical trials for our product
candidates, including the timing of initiation of these trials, the timing of progress of those trials, anticipated completion dates of trials, and the
results of any such trials;
the timing of, or delay in the timing of, commercial introduction of any of our products;
our ability to enter into collaborations and agreements for the development and commercialization of our products and product candidates, and
the potential benefits of any future commercialization or collaboration agreements with third parties;
regulatory and personnel issues;
the ability to generate significant revenue in addition to the sale of our compounded medications and preparations;
competition and market developments;
the failure of any of our product candidates, if approved, to achieve commercial success;
our ability to protect our intellectual property from infringement by third parties;
regulatory and health reform legislation and regulations;
the introduction of technological innovations or new commercial products by our competitors;
the outcome of any legal proceedings in which we are involved or in which we may in the future become involved;
federal and state regulatory matters relating to compounding pharmacy outsourcing facilities;
the effects of public health crises, pandemics and epidemics, such as the COVID-19 coronavirus outbreak; and
other risks and uncertainties detailed from time to time in our SEC filings, including without limitation the risk factors referred to in this
Report under the heading “Risk Factors.”
In addition, many forward-looking statements concerning our anticipated future business activities assume that we are
able to obtain sufficient funding to support such activities and continue our operations and planned activities. As discussed
elsewhere in this Report, we 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. Important risks and factors that could cause actual results to differ materially from those in these forward-looking
statements are disclosed in this Annual Report on Form 10-K, including, without limitation, under the headings “Item 1A. Risk
Factors,” “Item 1. Business” and “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.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of
the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time
they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from what is expressed in or suggested by the forward-looking statements.
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We
assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-
looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference
should be drawn that we will make additional updates with respect to those or other forward-looking statements.
The Adamis Pharmaceuticals logo and other trademarks or service marks of Adamis Pharmaceuticals Corporation appearing in this Annual
Report on Form 10-K are the property of Adamis Pharmaceuticals Corporation. All other brand names or trademarks appearing in this Annual Report on
Form 10-K are the property of their respective owners. Unless the context otherwise requires, the terms “we,” “our,” and “the company” refer to Adamis
Pharmaceuticals Corporation, a Delaware corporation, and its subsidiaries.
ii
ITEM 1.
BUSINESS
Company Overview
PART I
Adamis Pharmaceuticals Corporation (“we,” “us,” “our,” “Adamis” or the “company”) is a specialty biopharmaceutical company focused on
developing and commercializing products in various therapeutic areas, including respiratory disease, allergy and opioid overdose. Our products and product
candidates in the allergy, respiratory, and opioid overdose markets include: SYMJEPI™ (epinephrine) Injection 0.3mg, which was approved by the U.S.
Food and Drug Administration, or FDA, in 2017 for use in the emergency treatment of acute allergic reactions, including anaphylaxis; SYMJEPI
(epinephrine) Injection 0.15mg which was approved by the FDA in September 2018, for use in the treatment of anaphylaxis for patients weighing 33-66
pounds; a naloxone injection product candidate, ZIMHI™ or APC-6000 based on the approved Symject™ injection device and intended for the treatment
of opioid overdose for which the company submitted a New Drug Application, or NDA, to the FDA in December 2018 and with respect to which the
company received a Complete Response Letter, or CRL, from the FDA in November 2019; a beclomethasone metered dose inhaler product candidate
(APC-1000) intended for the treatment of asthma for which the company submitted an Investigational New Drug application, or IND, in January 2018 and
initiated the start-up phase of Phase 3 studies, which has been suspended; and a fluticasone (APC-4000) dry powder inhaler, or DPI, product candidate for
the treatment of asthma. Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all specialty pharmaceuticals
product lines, we intend to submit NDAs under Section 505(b)(2), of the U.S. Food, Drug & Cosmetic Act, as amended, or FDCA, or Section 505(j)
Abbreviated New Drug Applications, or ANDAs, to the FDA, whenever possible, in order to potentially reduce the time to market and to save on costs,
compared to those associated with Section 505(b)(1) NDAs for new drug products.
Our U.S. Compounding, Inc., subsidiary, or USC, which we acquired in April 2016 and which is registered as a drug compounding outsourcing
facility under Section 503B of the FDCA and the U.S. Drug Quality and Security Act, or DQSA, provides 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. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products,
and injectables. USC also provides compounded pharmaceutical products for animals.
To achieve our goals and support our overall strategy, we will need to raise a substantial amount of funding and make significant investments in,
among other things, product development and working capital.
The current status of our development programs is as follows:
Product Portfolio
Specialty Pharmaceutical Products
Target Indication
Status
SYMJEPI (epinephrine) Injection 0.3mg
SYMJEPI (epinephrine) Injection 0.15mg
ZIMHI (naloxone) Injection (APC-6000)
Metered Dose Inhaler Product
Beclomethasone (APC-1000)
Dry Powder Inhaler Product
Fluticasone (APC-4000)
Anaphylaxis
Anaphylaxis
Opioid Overdose
FDA Approved, June 2017
FDA Approved, September 2018
Submitted NDA
Asthma
Asthma
Phase 3 ready (1)
Phase 3 ready (2)
(1)The start-up phase of a Phase 3 study was initiated, but enrollment and the study has been suspended in light of among other factors, the availability of
adequate funding to continue and complete the studies.
(2)Represents the next anticipated development or regulatory stage for the product candidate that we may pursue following completion of product
development, assuming that we have the financial resources to pursue any of these opportunities. There are no assurances that we will pursue these
opportunities, for financial or other reasons. Following completion of product development, one or more Phase 3 trials, without previous Phase 1 or
Phase 2 trials, is the anticipated next product development stage. Additional trials, such as pharmacokinetic, or PK, and/or dose escalation studies, may
be conducted in connection with the Phase 3 trials.
Anaphylaxis; Epinephrine Pre-Filled Syringe
On June 15, 2017, the FDA approved the company’s 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.
1
On September 27, 2018, FDA approved our lower dose SYMJEPI (epinephrine) Injection 0.15mg, for the emergency treatment of allergic
reactions (Type I) including anaphylaxis in patients weighing 33 to 66 pounds.
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, including an injection of epinephrine.
We estimate that sales of prescription epinephrine products in 2019 were more than $2.3 billion, based on assumptions and estimates utilizing
industry data. We cannot provide any assurances concerning any possible future rates of annual growth or whether annual prescription sales will decline or
grow. As discussed elsewhere in this Report, including under the headings “Business – Competition” and “Risk Factors - 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 market for prescription epinephrine products is increasingly competitive, and a number of factors have resulted in, and could
continue to result in, downward pressure on the pricing of, and revenues from sales of, prescription epinephrine products such as our SYMJEPI
(epinephrine) Injection 0.3mg and lower dose version 0.15mg product.
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. If the person using the auto-injector is not familiar with the function of the
device and if not administered properly, there is a risk that it could misfire or be misused.
In July 2018, we entered into a Distribution and Commercialization Agreement with Sandoz Inc., a division of Novartis
AG, to commercialize both of our SYMJEPI products. Under the terms of the agreement, we appointed Sandoz as the exclusive
distributor of SYMJEPI in the United States and related territories, or the Sandoz Territory, in all fields including both the retail
market and other markets, and granted Sandoz an exclusive license under our patent and other intellectual property rights and
know-how to market, sell, and otherwise commercialize and distribute the product in the Sandoz Territory, subject to the
provisions of the agreement, in partial consideration of an upfront fee by Sandoz and potential performance-based milestone
payments. The agreement provides that Sandoz will pay to us 50% of the Net Profit from Net Sales, as each such term is defined
in the agreement, of the product in the Sandoz Territory to third parties, determined on a quarterly basis. We will be the supplier
of the product to Sandoz, and Sandoz will order and pay us a supply price for quantities of products ordered. We will be
responsible for all manufacturing and, prior to Sandoz paying the supply price, the component and supply costs related to
manufacturing and supplying the product to Sandoz. The agreement does not include minimum payments to us by Sandoz,
minimum requirements for sales of product by Sandoz or, with certain exceptions, minimum purchase commitments by
Sandoz. Under the agreement, Sandoz has sole discretion in determining pricing, terms of sale, marketing, and selling decisions
relating to the product.
On January 16, 2019, we announced that Sandoz had launched SYMJEPI (epinephrine) 0.3 mg Injection in the U.S.
market, initially available in the institutional setting. On July 9, 2019, we announced the full launch (institutional and retail) by
Sandoz of both dose forms of the SYMJEPI injection products. We have had discussions with Sandoz regarding marketing
initiatives and alternatives for successful commercialization of SYMJEPI. See Note 4 to the consolidated financial statements for
further information about the agreement.
On October 1, 2019, we entered into an exclusive distribution and commercialization agreement with a company in
Australia to register and commercialize the SYMJEPI products in the Australia and New Zealand markets, after all required
regulatory registration and approvals have been obtained, and that the company anticipates that it could take many months in
order to obtain the required registration and approvals.
2
Opioid Overdose
ZIMHI (naloxone) Injection, APC-6000
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.
Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and fentanyl.
The number of deaths due to opioids has increased over five-fold compared to 1999. According to statistics published by the Centers for Disease
Control and Prevention (CDC), in 2018 drug overdoses resulted in approximately 67,000 deaths in the United States – greater than approximately 185
deaths per day. Drug overdoses are now the leading cause of death for Americans under 50, and the proliferation of more powerful synthetic opioids, such
as fentanyl and its analogues, could result in future increases in the number of deaths resulting from opioid overdoses. Recent studies from 2013 to 2016
have revealed an approximately 87% increase in deaths associated with synthetic opioids, whereas, death rates due to natural and semisynthetic opioids
remained relatively stable. With this significant increase in synthetic opioid abuse are published studies that have suggested that the current recommended
doses of naloxone may be inadequate in that frequent redosing is required. Repeat dosing of the commonly utilized dose of naloxone suggests the need for
a higher dosage product.
On December 31, 2018, we filed an NDA with the FDA relating to our higher dose naloxone injection product, ZIMHI,
for the treatment of opioid overdose. On November 22, 2019, we received a Complete Response Letter, or CRL, from the FDA
regarding our NDA for ZIMHI. The CRL stated that the FDA determined that it could not approve the NDA in its present form
and provided recommendations needed for resubmission. A CRL is issued by the FDA’s Center for Drug Evaluation and
Research when it has completed its review of a file and questions remain that preclude the approval of the NDA in its current
form. The questions raised by the FDA related generally to Chemistry, Manufacturing and Controls (CMC). No other clinical
safety or efficacy issues were raised. In December 2019, we provided responses to the FDA to the comments included in the
CRL. In February 2020, we had a Type A meeting with the FDA to discuss the company’s response to the CRL and the process
and timeline for resubmission of the NDA to the FDA. At the meeting, the Company obtained concurrence from the agency on
the Chemistry, Manufacturing and Controls, or CMC, information required for resubmission of the NDA, including additional
information involving extractables and leachables testing from the syringe and glassware. The company believes it can generate
the additional information and, assuming successful testing, resubmit the NDA in the second quarter of 2020. The FDA
expressed its intent to review the resubmission in a timely manner, consistent with agency guidelines.
However, the FDA’s review processes can extend beyond, and in some cases significantly beyond, anticipated completion
dates due to the timing of the FDA’s review process, FDA requests for additional data, information, materials or clarification,
difficulties scheduling an advisory committee meeting, FDA workload issues, extensions resulting from the submission of
additional information or clarification regarding information already in the submission within the last three months of the target
PDUFA date, or other reasons. As a result, the dates FDA review and action regarding any NDA that we may resubmit
concerning ZIMHI, or of regulatory approval, if obtained, and commercial introduction of our products could be delayed beyond
our expectations. The development of an intramuscular injection of naloxone for the treatment of opioid overdose will require
commercial scale manufacturing subject to review and approval by the FDA.
3
Asthma and Bronchospasm
According to the National Institute of Health, or NIH, asthma is a chronic lung disease that inflames and narrows the airways. Asthma causes
recurring periods of wheezing, chest tightness, shortness of breath, and coughing. Asthma affects people of all ages, but it most often starts during
childhood. According to information published by Centers for Disease Control & Prevention, or CDC, reporting on findings from 2017 the number of
people in the U.S. with asthma is approximately 25.2 million and growing. We estimate that global sales of asthma and bronchospasm prescription products
were in excess of approximately $7.2 billion in 2019, based on industry data.
Asthma; APC-1000 Metered Dose Inhaler
Our APC-1000 product candidate is a steroid hydrofluoroalkane, or HFA, metered dose inhaler product, intended for the treatment of asthma. Our
product candidate, if developed and approved for marketing, will target a small niche within the larger market for respiratory products. We estimate that the
annual global sales of prescription steroid HFA and similar products were approximately $3.0 billion in 2019, of which we intend to target a subset of that
market.
In February 2015, we announced the result of our pharmacokinetic study, or PK study, comparing our beclomethasone dipropionate HFA, 80 mcg
Inhalation Aerosol, product, APC-1000, with Teva Respiratory, LLC’s Qvar® (Beclomethasone Dipropionate HFA, 80 mcg Inhalation Aerosol) product.
The study was a Phase I open label, randomized, single-dose, four-way crossover PK study comparing APC-1000 to Qvar. Twenty-two healthy male and
female subjects who met the study inclusion criteria were enrolled. The study involved a screening period before randomization and four treatment periods
each separated by a minimum of three days. Both inhalation aerosols were administered to each subject for a total dose of 320 mcg BDP (4 inhalations).
Twenty-one subjects completed the study. One subject was withdrawn due to non-compliance. The purpose of this PK study was to compare the
bioavailability of APC-1000 to Qvar. The results showed the extent of absorption of APC-1000 to be equivalent to Qvar. Following discussions with the
FDA and additional consideration of the development pathway for the product, we decided to conduct additional development work for APC-1000.
In January 2018, we submitted an IND application to the FDA to begin Phase 3 efficacy studies for a new formulation of APC-1000. We received
approval from the agency to proceed with the Phase 3 studies, and in December 2018, we initiated the start-up phase of the phase 3 studies of APC-1000.
However, we have delayed the continuation of the start-up phase and start of patient enrollment for the studies, and have suspended the study, in light of,
among other factors, the availability of adequate funding to continue and complete the studies. The timing of enrollment for, and the pace of conduct,
progress, and completion of, such studies, and our decisions concerning such matters, are affected by a number of factors, including without limitation the
availability of adequate funding, the absence of unexpected regulatory issues or delays, the time period required to enroll a sufficient number of patients in
the study, and the time required to complete and analyze the results of the studies. As discussed elsewhere in this Report, we will require additional funding
in 2020 to continue all of our anticipated product development activities, and product development times are subject to a number of risks and uncertainties,
which can delay the actual development time beyond our estimates.
4
Dry Powder Inhaler (DPI) Device Platform
In December 2013, we acquired assets relating to the 3M Company’s patented Taper dry powder inhaler (DPI) technology under development by
3M for the treatment of asthma and bronchospasm. The Taper DPI technology was designed to efficiently deliver dry powder by utilizing a 3M proprietary
microstructured carrier tape. We are utilizing the Taper DPI assets to develop the DPI device. We believe that, if successfully developed, the device can be
utilized to deliver a variety of different drug compounds and be used as a platform delivery device to develop products that will compete in the respiratory
markets, which may include combination products. Our agreement with 3M contemplates that the microstructured carrier tape will be supplied by 3M
under a separate commercial supply agreement to be negotiated with 3M.
We believe that one advantage of the technology is that it can deliver drug particles without the need for lactose or formulation excipients. The
majority of current dry powder products use lactose carrier excipients to enhance flowability; however, they have the disadvantage of increased bulk and
require a mechanism for detaching the drug from the surface of the lactose. Lactose carrier formulations require a complicated blending process and
delivery that is highly sensitive to excipient powder properties. To our knowledge, there are currently no excipient-free dry powder inhalers in the U.S.
market.
Asthma; Fluticasone. Our first product candidate utilizing the DPI technology platform, APC-4000, will deliver
Fluticasone Propionate (fluticasone) as a dry powder formulation for the treatment of asthma. Fluticasone belongs to the family
of medicines known as corticosteroids or steroids. It works by preventing certain cells in the lungs and breathing passages from
releasing substances that cause asthma symptoms. APC-4000 is designed to deliver the same active ingredient as
GlaxoSmithKline’s Flovent® Diskus® for the treatment of asthma. We estimate that Flovent® Diskus® generated more than
$469 million in U.S. sales and $802 million in global sales in 2019, based on GSK’s publicly announced results. We conducted
proof of concept studies with the DPI for APC-4000 in 2018 and 2019. In considering development and commercialization
alternatives for APC-4000, we may seek to enter into development or commercialization agreements, license agreements, or
other strategic agreements with third parties relating to development, commercialization and marketing of this product candidate.
We currently have no in-house manufacturing capabilities, and as a result we intend to rely on third-party contract manufacturers to manufacture
the materials needed to produce DPI and HFA products.
Our development plans concerning our allergy and respiratory products, including APC-1000 and APC-4000, and our other product candidates are
affected by developments in the marketplace, including the introduction of potentially competing new products by our competitors. As a result, our product
development plans could be affected by such considerations. The anticipated dates for development and introduction of products in our product pipeline
will depend on a number of factors, including the availability of adequate funding to support product development efforts and, should we choose to seek
commercialization partners for one or more of our products or product candidates, our success in negotiating and entering into development or
commercialization agreements relating to our products. We believe that should we decide to pursue such applications, we would be required to submit data
for an application for approval to market APC-1000 and APC-4000 pursuant to Section 505(b)(2) of the FDCA, although there are no assurances that this
will be the case. In considering development and commercialization alternatives for our products and product candidates and technologies, we may seek to
enter into development or commercialization agreements, license agreements, or other strategic agreements with third parties relating to development,
commercialization and marketing of one or more of our products or product candidates.
Factors that could affect the development and launch dates for our products and product candidates include general market
conditions, the outcome of discussions with the FDA concerning the regulatory approval pathway of the applicable product
candidate including the number and kind of clinical trials that the FDA will require before the FDA will consider regulatory
approval of the applicable product, 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, see “Government Regulation—Regulation in the United States—Section 505(b)(2) New
Drug Applications,” any unexpected difficulties in the ability of our suppliers to timely supply quantities for commercial launch
of the product, any unexpected delays or difficulties in assembling and deploying an adequate sales force to market the product,
and receipt of adequate funding to support product development and sales and marketing efforts.
5
Prescription Compounded Medications
Overview. Our USC subsidiary, which is registered as a drug compounding outsourcing facility under Section 503B of the FDCA and the DQSA,
provides prescription compounded medications, including compounded sterile preparations or CSPs, and non-sterile compounds to physician clinics,
hospitals, surgery centers and other clients throughout most of the United States. USC’s product offerings broadly include, among others, corticosteroids,
hormone replacement therapies, hospital outsourcing products, and injectables. USC also provides compounded pharmaceutical products for animals.
USC sources raw materials and commercial products only from suppliers registered with the FDA. Utilizing these raw material components, USC
prepares and provides a broad range of customized stock keeping units to meet the individual requirements of customers located throughout most of the
United States.
USC’s business is focused on marketing a portfolio of compounded preparations for hospital outsourcing, animal health, including sterile
injectable and non-sterile integrative therapies. Many of these formulations are offered in different formats than other available alternatives, such as in
suspension or preservative free. Many hospitals and surgery centers look to outsourcing facilities to obtain medications in ready-to-use, or RTU, format,
with the specific packaging, volume, and strength often unique to individual facilities. Many facilities and practitioners also look to outsourcing facilities
when medications are on temporary backorder from the manufacturer or are discontinued. USC’s veterinary products include, without limitation, a
formulation of an equine ulcer product that addresses what we believe is a significant market. Many horses that are competing and under stress have been
shown to have gastric ulcers. We have completed a study comparing a combination formulation of omeprazole and fenbendazole to placebo, and the study
results indicated that the combination formulation was effective in reducing gastric ulcer sores and reducing squamous ulcer disease in horses. We intend
to continue development of this product candidate.
Compounding pharmacies and outsourcing facilities combine different ingredients, some of which may be FDA-approved drugs or components of
FDA-approved drugs, to create specialized preparations prescribed by a physician. Examples of compounded formulations include medications with
alternative dosage strengths or unique dosage forms, such as topical creams or gels, suspensions, or solutions with more tolerable drug delivery vehicles. A
physician may also work together with a pharmacist to repurpose or reformulate FDA-approved drugs via the compounding process to meet a patient’s
specific medical needs. These compounds are distributed to hospitals, surgery centers, and practitioners. Examples of compounded medications prepared by
outsourcing facilities include sterile syringes used by hospital and surgery center operating rooms, sterile injectables administered by the practitioner in the
office, and unit-dosed sterile and non-sterile medications. USC’s outsourcing facility receives its active pharmaceutical ingredients from three main
suppliers, which accounted for the majority of USC’s drug and chemical purchases in 2019 and 2018.
The pharmacy sterile compounding industry arose in part because hospitals and other healthcare providers administering
drugs require concentrations, dosage forms and delivery systems that are not readily commercially available from drug
manufacturers in an RTU form. Historically, safety and quality standards for compounded medications were not well defined or
implemented, leading to demand for safer compounding practices, and the level of state regulation varied significantly. The 2012
nationwide fungal meningitis outbreak caused by a compounding pharmacy led to increased regulatory oversight of the industry
which, among other things, led to the passage of the DQSA and its creation of Section 503B outsourcing facilities as a new, more
highly FDA-regulated category of interstate outsourced CSP providers. Registration as a Section 503B outsourcing facility is
currently voluntary. USC was incorporated in Arkansas in 2004 and registered with the FDA as a Section 503B outsourcing
facility in December 2013.
In recent years, there have been increases in the cost of certain injectable drugs and related products as a result of (i) enhanced oversight by the
FDA and other regulatory bodies of manufacturers of injectable products, and the added costs associated therewith, (ii) decreased competition when drug
manufacturers voluntarily cease producing certain drugs or face temporary regulatory suspension or permanent regulatory shut down of their operations,
and (iii) consolidation among drug manufacturers. These factors have led some manufacturers to raise prices of some products and have also contributed to
market shortages of injectable products, containers and diluents. These shortages and the potential inability to secure an adequate supply of necessary drug
formulations can have a significant impact on the day-to-day business and operations of USC and its customers.
Since we acquired USC in April 2016, we have taken several measures intended to support the growth of the business including hiring additional
personnel, expanding sales channels, and strengthening our production processes. During 2020, assuming sufficient funding and need for additional
production capacity, we intend to move certain aspects of production into a new, larger facility that was in development since 2018. We believe that the
new, larger facility will expand production capacity and allow for increased sales of products.
USC has, and after our acquisition of USC we have, invested capital in efforts to comply with new and anticipated FDA regulations applicable to
its business and outsourcing facilities, to expand product offerings, enhance production capabilities, improve warehouse space, develop new packaging,
labeling and processing solutions, refine quality and safety measures, and develop technology for the intake and management of customer orders.
Historically, research and development costs have consisted primarily of costs associated with the research and development of new CSPs, such as salaries
and other personnel-related expenses for employees involved with research and development activities, pre-launch sterility and stability testing and other
related expenses. Regulatory guidance provided by the FDA, and additional regulatory guidance is expected to increase the validation and development
costs for current and new products.
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Regulatory Matters. Compounding outsourcing facilities have historically been subject to FDA inspections on an irregular basis and are now
subject to FDA inspections on a risk-based schedule in accordance with DQSA Section 503B(b)(4). Observations by the FDA of potentially violative
conditions during inspections are required to be reported to facility management at the close of the inspection on FDA Form 483. It is common for such
reports to be provided in connection with inspections of compounding outsourcing facilities, and observations may be further followed by Warning Letters
and other enforcement actions as the FDA deems warranted. In March 2014, August 2015, July 2016, and February 2019, USC received Form 483
observations following FDA inspections of its outsourcing facility, noting inspectional observations of a number of observed deficiencies relating to USC’s
facility and practices.
Following the August 2015 Form 483 observations, and prior to our acquisition of USC, USC temporarily suspended production of sterile
products and voluntarily recalled certain lots of sterile product. USC determined there was no evidence that any compounded sterile products were
defective but decided to voluntarily recall all sterile product that remained within expiry and temporarily halt sterile production. USC responded to the
August 2015 Form 483 observations and took a number of corrective actions, including enhancing quality control and production systems. Approximately
around the time of its acquisition by Adamis, USC resumed production and sale of its sterile products. In July 2016, USC received Form 483 observations
following FDA inspections of its outsourcing facility, noting inspectional observations of a number of observed deficiencies relating to USC’s facility and
practices. USC responded in writing to the inspectional observations in July 2016 and provided supplemental responses to FDA in April 2017. In October
2017, USC received a Warning Letter referencing the August 2015 and July 2016 Form 483 inspectional observations. USC provided a written response to
the FDA that further described the completed corrective actions that were taken in response to the inspectional observations. In November 2018, FDA
responded to the 2017 Warning Letter response submitted by USC and indicated it would look for evidence of corrective action and further clarification of
policies and procedures on a future inspection. USC was inspected by FDA in the early part of 2019, with a Form 483 issued to site management in
February 2019. USC duly responded to the inspectional observations in writing to the FDA in March 2019, and provided an initial update in April 2019 and
a comprehensive update of completed corrective actions and milestones in August 2019.
Following the suspension and voluntary recall in 2015, state pharmacy regulatory agencies in certain states initiated inquiries or took other actions
regarding sales of USC products in such states. All of these state matters have been resolved; however, future proceedings by the FDA or state regulatory
agencies alleging violation of applicable federal or state laws or regulations, could require significant time and financial resources, and an adverse outcome
in one or more of these proceedings could adversely affect USC’s business, results of operations and financial condition.
The suspension of sterile production and voluntary product recall had an adverse effect on USC’s revenues, income, and financial condition for
calendar years 2015 and 2016 and adversely affected its relationships with certain of its customers that established relationships with other suppliers during
USC’s suspension of sterile production.
We cannot predict when or if we will receive additional Form 483 observations or other communications from the FDA or state regulatory
authorities regarding USC’s compounding outsourcing facility or CSPs. We could be subject to additional regulatory action by the FDA and civil or
criminal enforcement action by the Department of Justice under the FDCA, Federal False Claims Act, or other applicable statutes, as well as related private
actions, as a result of previous, current or future FDA observations. USC’s suppliers and customers may negatively consider the Form 483 observations
issued to us when deciding to award contracts or continue or renew agreements. Other state and federal regulators and agencies may also consider the Form
483 observations when conducting their own inspections, enforcement actions or approvals, including license renewals. Any such actions could
significantly disrupt USC’s business and harm its and our reputation, resulting in a material adverse effect on our business, results of operations and
financial condition.
In 2018 and 2019, FDA published statements outlining its compounding priorities for 2018 and 2019, respectively. Included in these statements
were references to forthcoming regulations on compounding from bulk drug substances, determination of clinical need, and a revised memorandum of
understanding between FDA and State Boards of Pharmacy setting forth limits on interstate compounding under Section 503A of the FDCA. The draft
guidance documents published in 2018, which are of general application to compounding pharmacies, or other FDA regulations and guidance, potentially
could limit the number and type of products USC is permitted to compound as well as interstate shipping of compounded medications, and could adversely
affect sales of our compounded medications. In December 2018 and January 2020, FDA published revised draft guidances on cGMP for 503B Outsourcing
Facilities. USC is currently assessing the newest guidance and any required improvements or changes to its processes, procedures, policies, or facility to
achieve the expected level of compliance.
Other Technologies
We also have a microbicide product candidate, named C31G. In December 2010, we announced the successful completion of a Phase 3
contraceptive trial of C31G. The study met its primary endpoint and was conducted by the Eunice Kennedy Shriver National Institute of Child Health and
Human Development (NICHD), NIH, in the Contraceptive Clinical Trials Network at 14 sites in the United States. The clinical investigators found that
C31G was not inferior in contraceptive efficacy to the comparator drug Conceptrol. Moreover, the gel was well-tolerated and had a high degree of
acceptability in women who completed the study. No drug-related serious adverse events were observed with C31G. C31G does not contain nonoxynol-9
and, if commercialized, could offer an alternative for women who seek a non-hormonal method of contraception. In addition, in September 2013 we
announced that a published study conducted by university researchers at Louisiana State University Health Science Center found that C31G was effective
in treating Herpes Simplex Virus, or HSV, in an eye infection (ocular keratitis) animal model using live rabbits. In the same study the researchers also
reported that ocular administration of C31G was safe and well tolerated, confirming earlier clinical studies that established C31G safety and tolerability in
other applications. HSV-1 is the same virus that causes cold sores and is common in humans. In the eye, it usually causes an infection of the cornea, and
that infection can cause cornea-derived blindness. In previous animal studies, C31G was also active against HSV-2, the cause of genital herpes.
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Before considering any actions to further develop or seek regulatory approval for a C31G product, further meetings with the FDA would be
required to discuss the regulatory pathways for submitting an NDA for marketing approval, including the additional trials that would be required before an
NDA is submitted. In considering commercialization alternatives, we would seek to enter into an out-licensing or similar transaction with third party
entities or organizations. The C31G product candidate is held by our Biosyn, Inc. subsidiary, which we acquired in 2004. Provisions in the agreement
pursuant to which we acquired Biosyn, and/or in certain of the funding or other agreements relating to the C31G product, provide for payments to the
former Biosyn shareholders upon marketing approval by the FDA (or, in certain circumstances, certain foreign regulatory authorities) of C31G for one or
more indications, and for payments to certain other third parties in the event of sales or other revenues relating to C31G or certain other events. In addition,
sale or out-licensing of the C31G product candidate may require the consent of one or more such third parties. As a result, commercialization of the product
could require, among other things, renegotiation with the former Biosyn shareholders and such third parties. Accordingly, there can be no assurances that
we will pursue commercialization of or conclude a transaction involving C31G or concerning the amounts that we might receive from any such transaction,
or that any C31G product will be developed, submitted for regulatory approval, approved or marketed.
Clinical Supplies and Manufacturing
Except for our facilities at USC that are utilized to prepare compounded formulations, we have no in-house manufacturing or distribution
capabilities and have no current plans to establish manufacturing facilities for significant clinical or commercial production. We rely on third-party contract
manufacturers to manufacture our products and make the material used to support the development of our product candidates. Our third-party
manufacturers are subject to extensive governmental regulation. The FDA mandates that drugs be manufactured, packaged and labeled in conformity with
current good manufacturing practices, or cGMP, regulations. In complying with cGMP regulations, manufacturers must continue to expend time, money
and effort in production, record keeping and quality control to ensure that their services and products meet applicable specifications and other requirements.
We intend to continue to outsource the manufacture and distribution of our products for the foreseeable future, and we believe this manufacturing strategy
will enable us to direct our financial resources to development of products without devoting the resources and capital required to build cGMP compliant
manufacturing facilities. Our SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg products are manufactured by a third-party manufacturer, utilizing
materials to complete the manufacturing process obtained from various companies and suppliers, and assembly and final packaging of the product is
implemented by a third-party entity. There are potential sources of supply other than our existing suppliers, but new suppliers would be required to qualify
under applicable regulatory requirements.
Sales and Marketing
Our SYMJEPI (epinephrine) products will be marketed and sold in the U.S. markets by Sandoz pursuant to our commercialization agreement with
Sandoz. We sell compounded pharmacy formulations through USC’s sales and marketing employees and arrangements with third parties for sales and
marketing support. Sales and marketing activities consist primarily of efforts to educate doctors, ambulatory surgery centers, healthcare systems, hospitals,
veterinarians, and other users throughout the U.S. about USC’s products and services. USC’s sales and marketing team is focused on customer retention as
well as generating sales from new and existing customers.
Customers and Distribution
On January 16, 2019, we announced that Sandoz had launched SYMJEPI (epinephrine) 0.3 mg Injection in the U.S. market, initially available in
the institutional setting. On July 9, 2019, we announced the full launch (institutional and retail) by Sandoz of both dose forms of the SYMJEPI injection
products. Pursuant to our agreement with Sandoz, we are responsible for supplying the SYMJEPI products to Sandoz at a supply price for quantities of
products ordered. Revenues from sales of the company’s compounded pharmacy medications and compounds consist, in large part, of sales to clinics and
hospitals.
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Competition
The biotechnology and pharmaceutical industries are extremely competitive. Our potential competitors in the field are many in number and
include major pharmaceutical and specialized biotechnology companies. Many of our potential competitors have significantly more financial, technical and
other resources than we do, which may give them a competitive advantage. In addition, they may have substantially more experience in effecting strategic
combinations, in-licensing technology, developing drugs, obtaining regulatory approvals and manufacturing and marketing products. We cannot give any
assurances that we can compete effectively with these other biotechnology and pharmaceutical companies. Our potential competitors in these markets may
succeed in developing products that could render our products and those of our collaborators obsolete or non-competitive. In addition, many of our
competitors have significantly greater experience than we do in the fields in which we compete.
Our products and product candidates, if developed, approved and launched, will compete with numerous prescription and non-prescription over-
the-counter products targeting similar conditions, as well as prescription generic products. In addition, a number of large pharmaceuticals companies
produce similar pharmaceutical products for similar indications. Moreover, certain products that previously have been available by prescription only have
been or could in the future be approved by the FDA for sale over-the-counter without a prescription at a lower price than competing prescription products,
which could adversely affect our ability to successfully develop and market a competing prescription product.
The SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg products compete against other self-administered epinephrine products, including
EpiPen, EpiPen Jr., Auvi-Q and Adrenaclick. In addition, there has been market and regulatory focus in recent years on the prices to consumers of self-
administered epinephrine products, which have exerted downward pressure on the pricing of such products. Competitors may reduce or otherwise modify
the pricing of their existing products at any time. In addition, the company that markets the currently leading auto-injector product, EpiPen, introduced an
authorized generic version of the auto-injector product at a lower price than the EpiPen. Additionally, in late 2018 a generic, or A/B rated, competitor to
EpiPen was approved and launched. Other competing products have been introduced or prices on existing competing products have been reduced, and if
additional competing products are introduced in the future, including additional generic versions of one or more existing spring-loaded auto-injector
devices, at lower prices than the current market leading products, the competitive success of our SYMJEPI products could be adversely affected. The
competitive success of our products could also be adversely affected by changes in the willingness of insurance companies and other third-party payors to
cover or reimburse some or all of the costs to consumers of our products. Our high dose naloxone injection product candidate ZIMHI (APC-6000) for
opioid overdose, if approved and introduced, is expected to compete with other pharmaceuticals in the markets for opioid overdose. Moreover, our APC-
1000 and APC-4000 products, if developed and commercialized, are expected to compete with allergy inhaler and other products offered by several
companies, including without limitation GlaxoSmithKline and Teva Respiratory, LLC.
Compounded Pharmacy Formulations. The compounded pharmaceutical and pharmacy industries are highly competitive. We compete against
other FDA-registered outsourcing facilities, branded drug companies, generic drug companies, regional compounders that provide patient-specific
compounding that decide to expand to 503B outsourcing, non-patient-specific compounding, large hospitals and integrated delivery networks, other
compounding pharmacies, and new entrants to the industry. Many competitors that market and sell compounded preparations have longer operating
histories and may have greater financial, marketing and other resources than we do. We are significantly smaller than some of such competitors, and we
may lack the financial and other resources needed to develop, produce, distribute, market and commercialize any of USC’s formulations or compete for
market share in these sectors. These potential competitors could leverage existing resources and experience operating in industries that are subject to
significant regulatory oversight in order to overcome certain barriers to entry. Consequently, competitors may be able to develop products and services
competitive with, or superior to, USC’s products and services. Furthermore, we may not be able to differentiate USC’s compounded preparations and
services from those of our competitors, successfully develop or introduce new services—on a timely basis or at all—that are less costly than those of our
competitors or offer customers payment and other commercial terms as favorable as those offered by our competitors. We expect competition to intensify
as technology advances, such as those in the field of robotics and automation, and consolidation continues. Also, new developments by pharmaceutical
manufacturers, such as increasing the number of abbreviated new drug applications, to cover less frequently used drug formulations, could render some or
many of USC’s products or services obsolete. In addition, the drug products available through branded and generic drug companies with which USC’s
formulations compete have been approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP
standards. USC’s compounded formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result, some
physicians may be unwilling to prescribe, and some patients may be unwilling to use, USC’s formulations. Increased competition could reduce revenue and
gross profit and otherwise materially adversely affect our business, results of operations and financial condition. In addition, guidance documents published
by the FDA in 2018 require certain attestation of clinical need on behalf of the ordering physician or his or her delegate, and some entities may be
unwilling or logistically unable to accommodate this new requirement.
Pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future success will depend in large
part on our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved
drugs and compounded formulations created by other pharmacies and outsourcing facilities, could render USC’s products and technologies obsolete or
unable to compete effectively. Other competitive factors include the safety and efficacy of a product, the size of the market for a product, the timing of
market entry relative to competitive products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to
alternative products, the availability of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the availability of
scientific and technical information about a product.
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Intellectual Property
Our success will depend in part on our ability to:
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obtain and maintain international and domestic patents and other legal protections for the proprietary technology, inventions and improvements
we consider important to our business;
prosecute and defend our patents;
preserve our trade secrets; and
operate without infringing on the patents and proprietary rights of other parties.
We intend to continue to seek appropriate patent protection for product candidates in our research and development programs where applicable
and their uses by filing patent applications in the United States and other selected countries. We intend for these patent applications to cover, where
possible, claims for composition of matter, medical uses, processes for preparation and formulations. As of December 31, 2019, the company had: (i) 21
issued patents in the United States and 11 pending applications; (ii) 77 issued and 42 pending foreign patent applications, four of which have been allowed,
relating to our Symject™ injection device, DPI and C31G products and product candidates, among other things. The issued patents and allowed patents
applications expire between 2020 and 2041, not taking into account any potential patent-term extensions that may be available in the future.
Although we believe that our rights under patents and patent applications provide a competitive advantage, the patent positions of pharmaceutical
and biotechnology companies are highly uncertain and involve complex legal and factual questions. We may not be able to develop patentable products or
processes, and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of
issuance, may not be sufficient to protect the technology owned by or licensed to us. It is possible that any patents or patent rights that we obtain may be
circumvented, challenged or invalidated by our competitors.
We also rely on trade secrets, proprietary know-how and continuing innovation to develop and maintain our competitive position, especially when
we do not believe that patent protection is appropriate or can be obtained. We seek protection of these trade secrets, proprietary know-how and any
continuing innovation, in part, through confidentiality and proprietary information agreements. However, these agreements may not provide meaningful
protection for, or adequate remedies to protect, our technology in the event of unauthorized use or disclosure of information. Furthermore, our trade secrets
may otherwise become known to, or be independently developed by, our competitors.
Government Regulation
Pharmaceutical Regulation
The marketing of any pharmaceutical products in the United States is subject to extensive government regulation. Likewise, if we seek to market
and distribute any such products abroad, they would also be subject to extensive foreign government regulation.
In the United States, the FDA regulates pharmaceutical products. FDA regulations govern the testing, manufacturing, advertising, promotion,
labeling, sale and distribution of pharmaceutical products, and generally require a rigorous process for the approval of new drugs. We also may be subject
to foreign regulatory requirements governing clinical trials and drug product sales if products are tested or marketed abroad. The approval process outside
the United States varies from jurisdiction to jurisdiction and the time required may be longer or shorter than that required for FDA approval.
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Regulation in the United States
The FDA testing and approval process requires substantial time, effort and money. Our product candidates that require marketing approval by the
FDA will be regulated as drugs. In the United States, drugs are subject to regulation under the FDCA. The statute and related regulations govern, among
other things, testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, and other promotional practices. The FDA approval
process for new drugs generally includes, without limitation:
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preclinical studies;
submission of an Investigational New Drug application, or IND, for clinical trials;
adequate and well-controlled human clinical trials to establish safety and efficacy of the product;
review of a New Drug Application, or NDA; and
inspection of the facilities used in the manufacturing of the drug to assess compliance with the FDA’s current Good Manufacturing Practices,
or cGMP, regulations.
Preclinical studies include laboratory evaluation of the product, as well as animal studies to assess the potential safety and effectiveness of the
product. Most of these studies must be performed according to good laboratory practices, a system of management controls for laboratories and research
organizations to ensure the consistency and reliability of results. The results of the preclinical studies, existing clinical and/or human use data (if
applicable), together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which we are required to file before
we can commence any clinical trials for our product candidates in the United States. Clinical trials may begin 30 days after an IND is received, unless the
FDA raises concerns or questions about the conduct of the clinical trials. If concerns or questions are raised, an IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. We cannot assure you that submission of any additional IND for any of our preclinical product
candidates will result in authorization to commence clinical trials.
Clinical trials involve the administration of the product candidate that is the subject of the trial to volunteers or patients under the supervision of a
qualified principal investigator. Each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at each institution
at which the study will be conducted. The IRB will consider, among other things, ethical factors, safety of human subjects and the possible liability of the
institution arising from the conduct of the proposed clinical trial. Also, clinical trials must be performed according to good clinical practices, which are
enumerated in FDA regulations and guidance documents.
Clinical trials typically are conducted in sequential phases: Phases 1, 2 and 3. The phases may overlap. The FDA may require that we suspend
clinical trials at any time on various grounds, including if the FDA makes a finding that the subjects participating in the trial are being exposed to an
unacceptable health risk. In Phase 1 clinical trials, a drug is usually tested on patients to determine safety, any adverse effects, proper dosage, absorption,
metabolism, distribution, excretion and other drug effects. In Phase 2 clinical trials, a drug is usually tested on a limited number of subjects to
preliminarily evaluate the efficacy of the drug for specific, targeted indications, determine dosage tolerance and optimal dosage, and identify possible
adverse effects and safety risks. In Phase 3 clinical trials, a drug is usually tested on a larger number of subjects in an expanded patient population to
determine efficacy and to further determine safety, usually at multiple clinical sites. We cannot assure you that any of our current or future clinical trials
will result in approval to market additional products.
An NDA must include comprehensive and complete descriptions of the preclinical testing, clinical trials and the chemical, manufacturing and
control requirements of a drug that enable the FDA to determine the drug’s or biologic’s safety and efficacy. An NDA must be accompanied by payment of
a significant user fee unless a waiver or exemption applies, and must be submitted, filed and approved by the FDA before any drug product that we may
successfully develop and that requires marketing approval by the FDA can be marketed commercially in the United States.
The facilities, procedures and operations for any of our contract manufacturers must be determined to be adequate by the FDA before product
approval. Manufacturing facilities are subject to inspections by the FDA for compliance with cGMP, licensing specifications and other FDA regulations
before and after an NDA has been approved. Foreign manufacturing facilities are also subject to periodic FDA inspections or inspections by foreign
regulatory authorities. Among other things, the FDA may withhold approval of NDAs or other product applications if deficiencies are found at the facility.
Vendors that may supply us with finished products or components used to manufacture, package and label products are also subject to similar regulations
and periodic inspections.
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In addition, the FDA imposes a number of complex regulatory requirements on entities that advertise and promote pharmaceuticals, including, but
not limited to, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities,
and promotional activities involving the Internet.
Failure to comply with FDA and other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of
products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of NDAs injunctions and criminal prosecution. Any
of these actions could have a material adverse effect on us.
Once the FDA receives an NDA, it has 60 days to review the application to determine if it is substantially complete and the data is readable,
before it accepts the NDA for filing. The FDA can refuse to file any NDA that it deems incomplete or not properly reviewable. Once the submission is
accepted for filing, the FDA begins an in-depth review of the submission to determine, among other things, whether the proposed product is safe and
effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity,
strength, quality and purity.
Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA agrees to specific goals for
NDA review time through a two-tiered classification system, Priority Review and Standard Review. A Priority Review designation is given to drugs that
are intended to treat serious conditions, offer major advances in treatment, or provide a treatment where no adequate therapy exists. The FDA also has
established other special programs for NDAs that are intended to expedite or simplify the process for reviewing drugs or provide for approval based on
surrogate endpoints. For example, the fast track designation is designed to facilitate the development, and expedite the review, of drugs that are intended to
treat serious conditions and address an unmet medical need. The FDA generally attempts to facilitate early and frequent meetings with sponsors of fast
track drugs. For a Priority Review application, the FDA aims to complete the initial review cycle for New Molecular Entities, or NMEs, within six months
of the 60 day filing date, and for non-NMEs within six months of the date of receipt. Standard Review applies to all applications that are not eligible for
Priority Review. The FDA aims to complete Standard Review NDAs for NMEs within ten months of the 60 day filing date, and for Non-NMEs within ten
months of the date of receipt. Such dates are often referred to as the PDUFA dates. The FDA does not always meet its PDUFA dates for either Standard
Reviews or Priority Reviews of NDAs. The review process and the PDUFA date may be extended by three months if the FDA requests or the sponsor
otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the
PDUFA date. In addition, the FDA’s review processes can extend beyond, and in some cases significantly beyond, anticipated completion dates due to FDA
requests for additional information or clarification, issuance of a complete response letter, difficulties scheduling an advisory committee meeting,
negotiations regarding any required risk evaluation and mitigation strategies, FDA workload issues or other reasons. As a condition of approval, the FDA
may require an applicant to develop a risk evaluation and mitigation strategy, or REMS. A REMS uses risk minimization strategies beyond the
professional labeling to ensure that the benefits of the product outweigh the potential risks. REMS can include medication guides, communication plans
for healthcare professional, and elements to assure safe use. The FDA may refer the application to an advisory committee for review, evaluation and
recommendation as to the application’s approval. The amount of time taken for the approval process is a function of a number of variables, including
whether the product has received priority review, the quality of the submission and studies presented, the potential contribution that the compound will
make in improving the treatment of the disease in question, and the workload at the FDA.
The FDA may, during its review of an NDA, ask for additional test data or the conducting of additional clinical trials. If the FDA does ultimately
approve the product, it may require post-marketing testing to monitor the safety and effectiveness of the product. In addition, the FDA may in some
circumstances impose restrictions on the use of the product, which may be difficult and expensive to administer and may require prior approval of
promotional materials.
Prior to regulatory approval, the FDA may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications
under FDA review. These outside experts are convened through the FDA’s Advisory Committee process. An Advisory Committee will report to the FDA
and make recommendations. Views of the Advisory Committee may differ from those of the FDA, and the FDA is not bound by the recommendations of
an Advisory Committee.
Before approving an NDA, the FDA can inspect the facilities at which the product is manufactured. The FDA will not approve the submission
unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent
production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites
to assure that the clinical studies were conducted in compliance with GCP requirements. If the FDA determines that the processes and procedures used are
not acceptable, it will outline the deficiencies in the submission and often will request additional clinical testing or information before an NDA can be
approved. The FDA may also inspect one or more of the preclinical toxicology research sites to assure that the preclinical studies were conducted in
compliance with GLP requirements. If the FDA determines that the studies were not performed in compliance with applicable GLP rules and regulations,
the FDA may request additional preclinical testing or information before an NDA can be approved.
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The FDA will issue a complete response letter if the agency decides not to approve the NDA. The complete response letter describes all of the
specific deficiencies in the submission identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or more
significant, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant
might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may resubmit the NDA, addressing all
of the deficiencies identified in the letter, or withdraw the application.
If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may
otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or
precautions be included in the product labeling. In addition, the FDA may require post marketing studies, sometimes referred to as Phase 4 testing, which
involves clinical trials designed to further assess drug safety and effectiveness and may require testing and surveillance programs to monitor the safety of
approved products that have been commercialized. After approval, certain changes to the approved drug or biologic, such as adding new indications,
manufacturing changes or additional labeling claims, are subject to further FDA review and approval. Depending on the nature of the change proposed, an
NDA supplement must be filed and approved before the change may be implemented. For many proposed post-approval changes to an NDA, the FDA
review period can be lengthy and is often significantly extended by FDA requests for additional information or clarification.
Following receipt of regulatory approval, any products that we market continue to be subject to extensive regulation including, among other
things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information,
product storage, sampling and distribution requirements, complying with certain electronic records and signature requirements, complying with FDA
promotion and advertising requirements, which include, among others, restrictions on direct-to-consumer advertising, promoting biologics for uses or in
patient populations that are not described in the product’s approved labeling, known as “off-label” use, and requirements relating to industry-sponsored
scientific and educational activities and promotional activities involving the internet. These regulations impact many aspects of our operations, including
the manufacture, labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion and record keeping related to the products. The
FDA also frequently requires post-marketing testing and surveillance to monitor the effects of approved products or places conditions on any approvals that
could restrict the commercial applications of these products. If we fail to comply with applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, disgorgement of money, operating restrictions and criminal
prosecution.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict
certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal
healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to
induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under
Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by
imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of
statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and
safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to
scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal
government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Several pharmaceutical and other healthcare
companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn are used by the
government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the
customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims
laws. Many states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services
reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may
include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and
imprisonment.
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The Patient Protection and Affordable Care Act, or PPACA, enacted in 2010, was intended to broaden access to health insurance, reduce or
constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health
insurance industries, impose taxes and fees on the health industry and impose additional health policy reforms. The PPACA imposes new reporting and
disclosure requirements for pharmaceutical and device manufacturers with regard to payments or other transfers of value made to physicians and teaching
hospitals. In addition, pharmaceutical and device manufacturers will also be required to report and disclose investment interests held by physicians and
their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties for
payments, transfers of value or ownership or investment interests not reported in an annual submission. The PPACA substantially changed the way that
healthcare is financed by both governmental and private insurers. Among other cost containment measures, PPACA established: an annual nondeductible
fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount
program; and a new formula that increased the rebates that a manufacturer must pay under the Medicaid Drug Rebate Program. The reforms imposed by
the PPACA have significantly impacted and will significantly impact the pharmaceutical industry. In addition, although the PPACA was previously upheld
by the U.S. Supreme Court, it is possible that the PPACA or portions thereof may be modified, challenged or repealed in the future, or that future judicial
decisions, executive orders or regulatory actions could affect the impact of the law on the pharmaceutical industry. In addition, there has been heightened
governmental scrutiny over the manner in which manufacturers set prices for their commercial products, including several U.S. Congressional inquiries and
proposed and enacted federal and state legislation designed to, among other things bring more transparency to drug pricing, review the relationship between
pricing and manufacturing patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for
drugs.
If not preempted by federal law, several states require pharmaceutical companies to report expenses relating to the marketing and promotion of
pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing various other marketing
related activities. Other states require the posting of information relating to clinical studies and their outcomes. In addition, certain states require
pharmaceutical companies to implement compliance programs or marketing codes. Additional states may consider similar proposals. Compliance with
these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties. If in the future some of our business
activities were subject to challenge under one or more of such laws, an adverse outcome could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
In addition, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians.
This practice is regulated by the FDA and other governmental authorities, including, in particular, requirements concerning record keeping and control
procedures. Any failure to comply with the regulations may result in significant criminal and civil penalties as well as damage to our credibility in the
marketplace.
The FDA closely regulates the post-approval marketing and promotion of drugs. While physicians may choose to prescribe drugs for uses that are
not described in the product’s labeling and for uses that differ from those tested in clinical studies and approved by the regulatory authorities, our ability to
promote the products is limited to those indications that are specifically approved by the FDA. These “off-label” uses are not unusual across certain
medical specialties and may constitute an appropriate treatment for many patients in varied circumstances. Regulatory authorities in the U.S. generally do
not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical
companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings
from, or enforcement action by, these authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and advertising may
cause the FDA to delay its approval or refuse to approve a product, suspend or withdraw of an approved product from the market, and could result in other
consequences such as recalls, fines, disgorgement of money, operating restrictions, injunctions, civil or criminal prosecution or penalties, or other possible
legal or regulatory actions, such as warning letters, suspension of manufacturing, seizure of product, mandated corrective advertising or communications
with healthcare professionals, or criminal penalties or other negative consequences, including adverse publicity. Any of these consequences could harm our
business.
We will rely, and expect to continue to rely, on third-parties for the production of clinical and commercial quantities of our products. Our
collaborators may also utilize third-parties for some or all of a product we are developing with such collaborator. Manufacturers are required to comply
with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. cGMP regulations require among other things, quality control
and quality assurance as well as the corresponding maintenance of records and documentation. Drug manufacturers and other entities involved in the
manufacture and distribution of approved biologics are required to register their establishments with the FDA and certain state agencies and are subject to
periodic inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend
time, money and effort in the area of production and quality control to maintain cGMP compliance.
Section 505(b)(2) New Drug Applications
Most drug products obtain FDA marketing approval pursuant to a Section 505(b)(1) NDA filing or an Abbreviated NDA, or ANDA. An
alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s findings
of safety and efficacy of an existing 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. Section 505(b)(2) permits the filing of an NDA where at
least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a
right of reference. The applicant may rely upon the FDA’s findings with respect to certain pre-clinical or clinical studies conducted for an approved
product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA
may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any
new indication sought by the Section 505(b)(2) applicant.
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In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s
product or a method of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.
To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings
of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2)
application with respect to any patents for the previously approved product on which the applicant’s application relies that are listed in the Orange Book.
Specifically, the applicant must certify for each listed patent that, in relevant part, (1) the required patent information has not been filed; (2) the listed patent
has expired; (3) the listed 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. 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
one or more listed patents through a Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents
claiming the referenced product have expired. Further, the FDA will also not approve, as applicable, a Section 505(b)(2) NDA application until any 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 until the earliest to occur of 30 months beginning on the date the patent holder
receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed. Even if a patent
infringement claim is not brought within the 45-day period, a patent infringement claim may be brought under traditional patent law, but it does not invoke
the 30-month stay. Moreover, in cases where a Section 505(b)(2) application containing a Paragraph IV certification is submitted after the fourth year of a
previously approved drug’s five-year exclusivity period and the patent holder brings suit within 45 days of notice of certification, the 30-month period is
automatically extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval of the
previously approved reference product. The court also has the ability to shorten or lengthen either the 30 month or the seven and one-half year period if
either party is found not to be reasonably cooperating in expediting the litigation.
As a result, we may invest a significant amount of time and expense in the development of a product and our Section 505(b)(2) applications only
to be subject to significant delay and patent litigation before our product may be commercialized. Alternatively, if the prior NDA applicant or relevant
patent holder does not file a patent infringement lawsuit within the specified 45-day period, the FDA may approve the Section 505(b)(2) application at any
time, assuming the application is otherwise approvable.
Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical
companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the
FDA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we
submit.
We successfully pursued a Section 505(b)(2) regulatory pathway for our SYMJEPI (epinephrine) Injection 0.3mg product and our lower dose 0.15
mg version, we are pursuing Section 505(b)(2) regulatory filings in connection with our ZIMHI naloxone injection product, for which we filed an NDA in
December 2018, and we intend to pursue a Section 505(b)(2) regulatory filing in connection with our beclomethasone HFA and fluticasone DPI product
candidates, if successfully developed. Accordingly, if we rely in our regulatory filing on clinical trials conducted, or the FDA’s prior findings of safety and
effectiveness, for a previously approved drug product 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 we will be subject to the risks of patent
litigation, with the accompanying delay described above and potentially material expense of patent litigation, before we could commercially market our
product.
In addition, even if we submit a 505(b)(2) application, such as we submitted for the SYMJEPI (epinephrine) Injection 0.3mg product and as we
may submit for other future products, that relies on clinical trials conducted for a previously approved product where there are no patents 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 reference another previously approved product that involves patents referenced in the Orange Book, requiring us to make the certifications
described above and subjecting us to the risks of delay and expense described above.
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Abbreviated New Drug Applications
In contrast to the kind of clinical trial and other data that is required for an NDA submitted pursuant to Section 505(b)(1) of the FDCA, an
Abbreviated New Drug Application, or ANDA, contains data that, when submitted to the FDA pursuant to Section 505(j) of the FDCA, provides for the
review and ultimate approval of a product commonly referred to as a “generic equivalent” or a “generic” drug product. These kinds of drug applications are
called “abbreviated” because ANDA applicants are generally not required to conduct or submit preclinical (animal) and clinical (human) data to establish
safety and effectiveness of their product, other than the requirement for bioequivalence testing. Instead, a generic applicant must scientifically demonstrate
that its product is bioequivalent, that is, that the product performs in the same manner as the listed drug. For locally acting inhaled products, we believe that
demonstration of bioequivalence in most cases will require human clinical studies that demonstrate that the generic product performs in the same manner as
the listed drug. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed
drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Drugs approved in this way are commonly
referred to as “generic equivalents” to the listed drug and can often be substituted by pharmacists under prescriptions written for the original listed drug.
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s
product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the Orange Book. Drugs listed in the Orange
Book can, in turn, be cited by potential competitors in support of approval of an ANDA. The ANDA applicant is required to certify to the FDA concerning
any patents listed for the approved product in the FDA’s Orange Book, in a manner generally similar to the certifications that are required in connection
with Section 505(b)(2) regulatory filings as described above. As with Section 505(b)(2) regulatory filings, if the applicant does not challenge the listed
patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.
If the ANDA applicant has provided a Paragraph IV certification to the FDA, then the procedures described above in connection with Section
505(b)(2) regulatory filings also apply, and the risks of the patent holder initiating a patent infringement lawsuit as described above also apply. The ANDA
application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired. Federal law provides a period of five years following approval of a drug containing no previously
approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a Paragraph IV
challenge to a listed patent, in which case the submission may be made four years following the original product approval. Federal law provides for a
period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients, but is approved in a new
dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials conducted
by or for the sponsor, during which FDA cannot grant effective approval of an ANDA based on that listed drug.
Regulation Outside the United States
If we market our products in foreign countries, we also will be subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product approval, pricing and reimbursement
vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained before manufacturing or marketing the product in those countries. The approval process varies from country to country
and the time required for such approvals may differ substantially from that required for FDA approval. There is no assurance that any future FDA approval
of any of our clinical trials or drugs will result in similar foreign approvals or vice versa.
Additional Regulation
Third-Party Reimbursement
In the United States, physicians, hospitals and other healthcare providers that purchase pharmaceutical products generally rely on third-party
payors, principally private health insurance plans, Medicare and, to a lesser extent, Medicaid, to reimburse all or part of the cost of the product and
procedure for which the product is being used. Even if a product is approved for marketing by the FDA, there is no assurance that third-party payors will
cover the cost of the product and related medical procedures. If they do not, end-users of the drug would not be eligible for any reimbursement of the cost,
and our ability to successfully market any such drug would be materially and adversely impacted.
Reimbursement systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals
must be obtained on a country-by-country basis. In many foreign markets, including markets in which we hope to sell our products, the pricing of
prescription pharmaceuticals is subject to government pricing control. In these markets, once marketing approval is received, pricing negotiations could
take significant additional time. As in the United States, the lack of satisfactory reimbursement or inadequate government pricing of any of our products
would limit their widespread use and lower potential product revenues.
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Fraud and Abuse Laws
Federal and state anti-kickback and anti-fraud and abuse laws, as well as the federal Civil False Claims Act may apply to certain drug and device
research and marketing practices. The Civil False Claims Act prohibits knowingly presenting or causing to be presented a false, fictitious or fraudulent
claim for payment to the United States. Actions under the Civil False Claims Act may be brought by the Attorney General or by a private individual acting
as an informer or whistleblower in the name of the government. Violations of the Civil False Claims Act can result in significant monetary penalties. The
federal government is using the Civil False Claims Act, and the threat of significant liability, in its investigations of healthcare providers, suppliers and drug
and device manufacturers throughout the country for a wide variety of drug and device marketing and research practices, and has obtained multi-million
dollar settlements. The federal government may continue to devote substantial resources toward investigating healthcare providers’, suppliers’ and drug and
device manufacturers’ compliance with the Civil False Claims Act and other fraud and abuse laws. We may have to expend significant financial resources
and management attention if we ever become the focus of such an investigation, even if we are not guilty of any wrongdoing.
HIPAA
We may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical
Health Act, or HITECH, and its implementing regulations, addresses the privacy and transmission of individually identifiable health information and,
among other things, requires the use of standard transactions, privacy and security standards and other administrative simplification provisions, by covered
entities which include many healthcare providers, health plans and healthcare clearinghouses. HIPAA instructs the Secretary of the Department of Health
and Human Services to promulgate regulations implementing these standards in the United States. HITECH makes HIPAA’s privacy and security standards
directly applicable to business associates, such as independent contractors or agents of covered entities, that receive or obtain protected health information
in connection with providing a service on behalf of a covered entity. Material monetary penalties and other remedies can result from violation of these laws
and regulations. In addition, many state laws also address the privacy and security of health information, and many of these laws differ from each other in
significant ways, thus complicating compliance efforts. In addition, the European Union, or EU, has a separate data security and privacy legal framework,
including the European General Data Protection Regulation, or GDPR, which was adopted in 2018, which contains new provisions specifically directed at
the processing of health information. To the extent that we conduct clinical trials in the EU or otherwise expand our business operations to include
operations in the EU, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the GDPR.
Other Laws
We are also subject to other federal, state and local laws of general applicability, such as laws regulating working conditions, and various federal,
state and local environmental protection laws and regulations, including laws such as the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other similar federal and state laws regarding, among
other things, occupational safety, the use and handling of radioisotopes, environmental protection and hazardous substance control. Although as of the date
of this Report we have not been required to take any action to correct any noncompliance, there can be no assurance that we will not be required to incur
significant costs to comply with environmental and health and safety regulations in the future. Our research and development activities may involve the
controlled use of hazardous materials, including chemicals that cause cancer, volatile solvents, radioactive materials and biological materials that have the
potential to transmit disease, and our operations may produce hazardous waste products. If we fail to comply with these laws and regulations, we could be
subjected to criminal sanctions and substantial financial liability or be required to suspend or modify our operations. We cannot completely eliminate the
risk of accidental contamination or injury from these materials. In the event of contamination or injury, we could be held liable for damages or penalized
with fines in an amount exceeding our resources.
In addition, as an owner and operator of real property, we may also be subject to liability for environmental investigations and cleanups, including
at properties currently or previously owned or operated by us, even if such contamination was not caused by us, as well as to claims for harm to health or
property or for natural resource damages arising out of contamination or exposure to hazardous substances. Liability in many situations may be imposed
not only without regard to fault, but may also be joint and several, so that we may be held responsible for more than our share of the contamination or other
damages, or even for the entire share. We may also be subject to similar liabilities and claims in connection with locations at which hazardous substances or
wastes that has generated have been stored, treated, otherwise managed or disposed. The costs of complying with, or other impact of, current or future
environmental, health and safety requirements could adversely affect our business, financial condition and results of operations.
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Pharmacy Regulation
Our compounding pharmacy business conducted by USC is subject to federal, state and local laws, regulations, and administrative practices,
including, among others: federal, state and local licensure and registration requirements concerning the operation of pharmacies and the practice of
pharmacy; HIPAA; PPACA and the Health Care and Education Reconciliation Act of 2012, collectively referred to as the Health Reform Law; statutes and
regulations of the FDA and the U.S. Drug Enforcement Administration, or DEA; and state laws and regulations promulgated by comparable state agencies
concerning the preparation, sale, advertisement and promotion of the compounded formulations that USC sells. Some of the various federal and state laws
and regulations which may govern or impact USC’s operations are described below.
USC’s pharmacy operations are regulated by both individual states and the federal government. Every state has laws and regulations addressing
pharmacy operations, including regulations relating specifically to compounding pharmacy operations. These regulations generally include licensing
requirements for pharmacists, pharmacy technicians and pharmacies, as well as regulations related to compounding processes, safety protocols, purity,
sterility, storage, controlled substances, recordkeeping and regular inspections, among other things. State rules and regulations are updated periodically,
generally under the jurisdiction of individual state boards of pharmacy. Failure to comply with the state pharmacy regulations of a particular state could
result in a pharmacy being prohibited from operating in that state, financial penalties and/or becoming subject to additional oversight from that state’s board
of pharmacy. In addition, many states are considering imposing, or have already begun to impose, more stringent requirements on compounding
pharmacies. Revisions to United States Pharmacopeia Chapters <800> “Hazardous Drugs – Handling in Healthcare Setting,” <795> “Pharmaceutical
Compounding – Non-Sterile Preparations,” and <797> “Pharmaceutical Compounding – Sterile Preparations” were published in July 2019. The effective
dates of the revised chapters USP <795> and USP <797> has been postponed indefinitely. New and revised chapter USP <800> is incorporated by
reference in most state regulations, and compliance with these revisions may require significant changes to procedures, policies, and facility design. If our
pharmacy operations become subject to additional licensure requirements or, are unable to maintain their required licenses or if states place burdensome
restrictions or limitations on pharmacies, USC's ability to operate in some states could be limited. At this time, there are no material operating restrictions
on USC’s licensure in any of the states where it is licensed, and none are pending or expected in the foreseeable future. The company believes that all
permits are in good standing in all material respects.
Most of the states into which USC delivers its formulations have laws and regulations that require out-of-state pharmacies to register with, or be
licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws
of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have enacted laws and/or adopted rules or
regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the
states into which the out-of-state pharmacy dispenses or distributes medications, whether or not those laws conflict with the laws of the state in which the
pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state.
The DQSA also contained new Section 503B of the FDCA, which established an outsourcing facility as a new form of entity that is permitted to
compound large quantities of drug formulations without a prescription, thus permitting the practice of anticipatory compounding, and distribute them out of
state without limitation, if the drug formulations appear on the FDA’s drug shortage list or the bulk drug substances contained in the formulations appear on
a list to be established by the FDA. Entities voluntarily registering as outsourcing facilities are subject to cGMP requirements and regular FDA inspection,
among other requirements. USC currently operates as a 503B outsourcing facility and cannot predict when FDA will issue, finalize, or enforce new
guidance documents that affect our business practices. Several guidance documents from FDA are currently in draft form, which does not preclude them
from being enforceable by FDA, and USC cannot predict or control when Final Guidance might be issued or if any changes from draft versions will be
introduced. Specifically, in December 2018, FDA published a revised draft guidance on cGMP for 503(b) Outsourcing Facilities and USC is currently
assessing this new guidance and any required improvements or changes to its processes, procedures, policies, or facility to achieve the expected level of
compliance. The DQSA prohibits compounding facilities, both 503A and 503B, from compounding products that are "essentially a copy" of approved drug
products offered by traditional pharmaceutical manufacturers. In January 2018, the FDA published a Final Guidance on compounding from bulk
ingredients and what it considers to be “essentially a copy” of approved drug products. This policy added the requirement that purchasers and prescribers
document on each order and prescription the specific clinical need for the compounded medication. Some purchasers and prescribers may be unwilling to
complete this additional documentation resulting in decrease demand for the compounded drug products. Additionally, in January 2018, the FDA published
a statement outlining its compounding priorities for 2018. Included in this statement were references to forthcoming regulations on compounding from bulk
drug substances, determination of clinical need, and a memorandum of understanding between FDA and State Boards of Pharmacy. The draft guidance
documents published in 2018 which are of general application to compounding pharmacies, potentially could limit the number and type of products USC is
permitted to compound and interstate shipping of compounded medications, and could adversely affect sales of our compounded medications.
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USC initiated actions in 2018 to separate a portion of its business activities into 503A prescriptions dispensed to individual patients and 503B
compounds distributed to facilities and practitioners without a specific patient identified. In December 2016, FDA issued Final Guidance for Industry
entitled “Prescription Requirement Under Section 503A of the Federal Food, Drug, & Cosmetic Act.” This guidance document outlines that traditional
503A pharmacies can only dispense prescriptions pursuant to receipt of a valid prescription for a specifically identified individual patient. This December
2016 Guidance, in combination with the August 2015 Final Guidance for Industry “For Entities Considering Whether to Register as Outsourcing Facilities
Under Section 503B of the Federal Food, Drug, & Cosmetic Act,” and the May 2018 Guidance for Industry “Facility Definition Under Section 503B of the
Federal Food, Drug, & Cosmetic Act” effectively make compounding prescriptions for individual patients impractical as a 503B Outsourcing Facility and
require separate physical operations for 503A and 503B operations that are not logistically feasible in USC’s existing facility. The process to open,
commission, and license the new facility is dependent on the availability of sufficient funding and need for additional production capacity.
Confidentiality, Privacy and HIPAA
To the extent that USC’s pharmacy operations, may involve the receipt, use and disclosure of confidential medical, pharmacy and other health-
related information, it may be subject to HIPAA. The federal privacy regulations under HIPAA are designed to protect the medical information of a
healthcare patient or health plan enrollee that could be used to identify the individual. Among other things, HIPAA limits certain uses and disclosures of
protected health information and requires compliance with federal security regulations regarding the storage, utilization and transmission of and access to
electronic protected health information. The requirements imposed by HIPAA are extensive. In addition, most states have enacted privacy and security laws
that protect identifiable patient information that is not health-related. The recently adopted European General Data Protection Regulation, or GDPR,
contains new provisions specifically directed at the processing of health information, higher sanctions and extra-territoriality measures that are intended to
bring non-EU companies under the data security and privacy legal framework specified in the regulation. If we expand our business operations to include
operations in the European Union, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the
GDPR.
Additionally, effective January 1, 2020, the California Consumer Privacy Act (“CCPA”) created individual privacy rights
for California consumers (as that word is broadly defined in the law) and placed increased privacy and security obligations on
entities handling personal data of consumers or households. The CCPA requires covered companies to provide new disclosures to
California consumers, provides such consumers new ways to opt-out of certain sales of personal information, and allows for a
new cause of action for data breaches. The CCPA could impact our business activities and create additional risks relating to cyber
security and the evolving regulatory environment related to personal data and protected health information.
Medicare Reimbursement
Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older and for some disabled
persons with certain specific conditions. Currently, most of USC’s formulations are sold in cash transactions. Many third-party payors have imposed
significant restrictions on reimbursement for compounded formulations in recent years. Moreover, third-party payors, including Medicare, are increasingly
attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide
coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further, the Health Reform Law may
have a considerable impact on the existing U.S. system for the delivery and financing of health care and could conceivably adversely affect USC’s
business. As a result, reimbursement from Medicare and other third-party payors may never be available for any of USC’s products or, if available, may not
be sufficient to allow USC to sell the products on a competitive basis and at desirable price points.
Food and Drug Administration
As a drug compounding outsourcing facility, USC is registered with, and regulated by, the FDA under the FDCA. In particular, the DQSA, which
sets forth standards applicable to compounding outsourcing facilities such as USC’s, was enacted in November 2013, creating a new Section 503B in the
FDCA, under which a compounder can voluntarily register as an outsourcing facility. USC has registered as an outsourcing facility.
In July 2014, the FDA issued a draft guidance entitled: Industry Current Good Manufacturing Practice—Interim Guidance for Human Drug
Compounding Outsourcing Facilities Under Section 503B of the FD&C Act. According to the FDA, this “interim guidance describes the FDA’s
expectations regarding compliance with cGMP requirements” for Section 503B compounding facilities. The guidance also notes that the FDA intends to
promulgate more specific cGMP regulations for such facilities, but that until “final regulations are promulgated, this guidance describes the FDA’s
expectations” regarding outsourcing facility compliance with cGMP requirements for drugs during the interim period. In December 2018, FDA published a
revised draft guidance on cGMP for 503B Outsourcing Facilities. USC continues to assess this guidance and any required improvements or changes to its
processes, procedures, policies, or facility to achieve the expected level of compliance. We cannot predict when the guidance will be finalized. The revised
guidance for 503B outsourcing facilities regarding vendor qualification and incoming raw materials testing is onerous and could increase the cost of USC’s
compounded medications.
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In June 2016, the FDA issued guidance entitled: “Interim Policy on Compounding Using Bulk Drug Substances Under
Section 503B of the Federal Food, Drug, and Cosmetic Act – Guidance for Industry.” According to the FDA, this guidance sets
forth the FDA’s interim regulatory policy concerning compounding by outsourcing facilities registered under section 503B of the
FDCA using bulk drug substances. Section 503B of the FDCA includes certain restrictions on the bulk drug substances that
outsourcing facilities can use in compounding and directs the FDA to develop a list of bulk drug substances that can be used in
compounding under that section. The FDA is developing that list of bulk drug substances, and this guidance describes the FDA’s
interim regulatory policy regarding outsourcing facilities that compound human drug products using bulk drug substances while
the list is being developed. In 2017, a pharmaceutical company filed suit against FDA in a federal district court alleging that the
interim policy described above on compounding from bulk drug substances was an improper implementation of the 2013 Drug
Quality & Security Act. In March 2018, the FDA published the draft guidance “Evaluation of Bulk Drug Substances Nominated
for Use in Compounding Under Section 503B of the Federal Food, Drug, & Cosmetic Act.” FDA also updated its interim lists of
bulk drug substances on multiple occasions in 2018. In September 2018, the FDA and the pharmaceutical company that filed the
suit agreed to an additional stay of the lawsuit until December 31, 2018, pending the FDA’s continued evaluation of its
preliminary assessment that outsourcing facilities should not be able to compound drugs products that contain any of three
specific bulk drug ingredients. In March 2019, the FDA issued final guidance and moved to formally remove two substances
from the interim list that permitted their use, and a decision regarding a third substance is still pending. While the three specific
substances at issue in FDA’s updated interim list were not of material importance to USC, the potential exists for the FDA to take
similar action in the future relative to other bulk drug substances that may be more significant to USC’s business, without
extended notice, solicitation of comments, or Administrative Procedures Act procedures, which could result in a loss of revenue
resulting from any affected USC products. USC is working proactively with industry stakeholders and regulatory authorities
regarding the FDA’s guidance and actions, and believes that the impact on USC and other 503B outsourcing facilities of the
regulatory expectations regarding bulk substances will depend in part on how the guidance is implemented, interpreted and
applied over time.
Compounding outsourcing facilities have historically been subject to FDA inspections on an irregular basis and are now subject to FDA
inspections on a risk-based schedule in accordance with DQSA Section 503B(b)(4). Observations by the FDA of potentially violative conditions during
inspections are required to be reported to facility management at the close of the inspection on FDA Form 483. It is common for such reports to be
provided in connection with inspections of compounding outsourcing facilities, and observations may be further followed by Warning Letters and other
enforcement actions as the FDA deems warranted. As described elsewhere under the heading “Business of U.S. Compounding, Inc. – Overview –
Regulatory Matters,” USC has received Form 483 observations in the past following FDA facility inspections, including in 2014, 2015, and 2016.
Following the August 2015 Form 483 observations, USC temporarily suspended production of sterile products and voluntarily recalled all lots of sterile
products aseptically compounded and packaged by USC that remained within expiry, due to the FDA’s concern over a lack of sterility assurance. Issuance
of a Form 483 from FDA has the potential to result in additional regulatory restrictions from the various State Boards of Pharmacy that could limit business
in those states on a temporary or permanent basis. Following the 2016 inspection, USC was issued a Form 483 listing inspectional observations. USC
responded in writing in July 2016 and again in April 2017. In October 2017, FDA issued a Warning Letter to USC summarizing its concerns from the 2015
and 2016 inspections. USC provided FDA with a written response detailing corrective actions taken, including regarding differential pressures, facility
design, environmental monitoring, product specifications, and suspension quality. In November 2018, FDA responded to the 2017 Warning Letter
Response submitted by USC and indicated that it would look for evidence of corrective action and further clarification of policies and procedures on a
future inspection. USC was inspected by FDA in the early part of 2019, with a Form 483 issued to site management in February 2019. USC duly responded
to the inspectional observations in writing to the FDA in March 2019, and provided an initial update in April 2019 and a comprehensive update of
completed corrective actions and milestones in August 2019.
In November 2019, FDA issued a draft Guidance for Industry #256: Compounding Animal Drugs from Bulk Drug
Substances (the “Draft GFI #256”). This guidance describes the FDA’s policy regarding the compounding of animal drugs from
bulk substances and limits the circumstances in which a compounder may use bulk substances to compound animal medication.
Industry comments to the Draft GFI #256 were due by February 22, 2020. As with other FDA regulations and guidance, when
finalized, this guidance could limit the number and type of products USC is permitted to compound for animal use. USC
currently compounds animal medication in its registered Section 503B outsourcing facility. With respect to office use orders
placed by veterinarians from an outsourcing facility, the FDA has contemplated that outsourcing facilities may compound both
human and veterinary medication. FDA indicated in a guidance that outsourcing facilities that only compound animal drugs
should not register as an outsourcing facility, but understands that there are 503B facilities that compound both human and animal
drugs. Nevertheless, the FDA could in the future enforce new drug approval requirements on animal medication compounding in
Section 503B outsourcing facilities.
Drug Enforcement Administration
USC maintains registrations with the DEA that enables USC to receive, manufacture, store and distribute controlled substances. Controlled
substances are those drugs that appear on one of five schedules promulgated and administered by the DEA under the Controlled Substances Act, or CSA.
DEA drug scheduling is based on the potential for abuse. Laws enforced by the DEA, as well as similar state agencies, require each location that handles
controlled substances to separately register.
The CSA governs, among other things, the distribution, recordkeeping, handling, security and disposal of controlled substances. USC’s
compounding outsourcing facilities that handle controlled substances are subject to periodic and ongoing inspections by the DEA and similar state drug
enforcement authorities to assess ongoing compliance with DEA and state controlled substances regulations.
Procurement quota requirements imposed by the DEA on USC’s purchases of materials containing controlled substances necessitate regular
applications to the DEA for permission to purchase materials essential to the production of many of USC’s CSPs. Any inability to obtain authorization
from the DEA to procure controlled drugs for use in USC’s business could adversely affect our business, financial condition and results of operations. In
2017, the DEA issued a statement indicating it would significantly decrease the procurement quotas it issued for opiates in an effort to curb the national
opioid abuse crisis. This decrease could limit USC’s ability to procure controlled substances and adversely impact our revenues and results of operations;
however, USC works with both DEA and customers to address these issues.
Environmental and Other Matters
USC is or may become subject to environmental laws and regulations governing, among other things, any use and disposal by USC of hazardous
or potentially hazardous substances in connection with research and preparation of compounded formulations. USC is subject to work safety and labor laws
that govern certain of its operations and employee relations. In each of these areas, as above, the FDA and other government agencies have broad
regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties, suspend or delay issuance of approvals,
licenses or permits, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect on our business,
financial condition and results of operations.
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Employees
As of December 31, 2019, we had 131 full-time employees, including one located outside of the United States, and 40 part-time employees. None
of our employees is subject to a collective bargaining agreement or represented by a labor or trade union, and we believe that our relations with our
employees are good.
Corporate Background; Investor Information
Adamis Pharmaceuticals Corporation was founded in June 2006 as a Delaware corporation. Effective April 1, 2009, the company formerly named
Adamis Pharmaceuticals Corporation, or Old Adamis, completed a business combination transaction with Cellegy Pharmaceuticals, Inc., or Cellegy. Before
the merger, Cellegy was a public company and Old Adamis was a private company. In connection with the consummation of the merger and pursuant to the
terms of the definitive merger agreement relating to the transaction, Cellegy was the surviving corporation in the merger and changed its name from
Cellegy Pharmaceuticals, Inc. to Adamis Pharmaceuticals Corporation, and Old Adamis survived as a wholly-owned subsidiary and changed its corporate
name to Adamis Corporation. We have three wholly-owned subsidiaries: Adamis Corporation, USC and Biosyn, Inc.
On April 11, 2016, we completed the acquisition of USC, pursuant to the terms of an Agreement and Plan of Merger dated March 28, 2016.
Pursuant to the terms of the merger agreement, a new-created wholly-owned subsidiary merged with and into USC, with USC surviving as a wholly owned
subsidiary of the company.
Our corporate headquarters are located at 11682 El Camino Real, Suite 300, San Diego, CA 92130, and our telephone number is (858) 997-2400.
Financial and other information about us is available on our website at www.adamispharmaceuticals.com. We have included our website address as a
factual reference and do not intend it to be an active link to our website. We make available on our website, free of charge, copies of our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and
Exchange Commission (“SEC”). In addition, we have previously filed registration statements and other documents with the SEC. Any document we file
may be inspected, without charge, at the SEC’s website at www.sec.gov. (These website addresses are not intended to function as hyperlinks, and the
information contained in our website and in the SEC’s website is not intended to be a part of this filing.)
ITEM 1A.
RISK FACTORS
You should consider carefully the following information about the risks described below, together with the other information contained in this
Annual Report on Form 10-K and in our other public filings in evaluating our business. 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.
Risks Related to Our Business, Industry and Financial Condition
There is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further 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, 2019 accompanying this Report, we have sustained substantial recurring losses from operations. In addition,
we have used, rather than provided, cash in our continuing operations. We will need significant funding to continue operations, satisfy our obligations and
fund the future expenditures that will be required to conduct the clinical and regulatory work to develop our product candidates. Without obtaining
additional capital, it would be unlikely for us to continue as a going concern. The above conditions raise substantial doubt about our ability to continue as a
going concern. 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 may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are
dependent on the market acceptance and success of our products and our ability to obtain additional required funding, and there are no assurances that such
funding will be available at all or will be available in sufficient amounts or on reasonable terms. Without additional required funds from debt or equity
financings, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions or sources, we will exhaust our resources and
will be unable to continue operations. If we cannot continue as a viable entity, our stockholders would likely lose most or all of their investment in us.
We may require additional financing to continue as a going concern.
We incurred a net loss of approximately $29.3 million for the year ended December 31, 2019, and a net loss of approximately $39.0 million for the
year ended December 31, 2018. At December 31, 2019, we had cash and cash equivalents of approximately $8.8 million, accounts receivable of
approximately $1.9 million and liabilities of approximately $11.8 million. In February 2020, we completed an equity financing transaction resulting in
estimated net proceeds of approximately $6.1 million. However, the development of our business may require additional capital in 2020 and the future to
help fund the development and commercialization of our products and product candidates and conduct research and development of other product
candidates, as well as to fund capital expenditures and our ongoing operations at USC and satisfy our obligations and liabilities. In addition to product
revenues, we have historically relied upon sales of our equity or debt securities to fund our operations. We currently have no available balance in our credit
facility or committed sources of capital. Delays in obtaining required funding could adversely affect our ability to develop and commercially introduce
products and cause us to be unable to comply with our obligations under outstanding instruments.
Our ability to obtain financing if required will be subject to a number of factors, including market conditions, 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 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, at least until additional funding is obtained, 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.
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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 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 for commencement of clinical trials, anticipated completion dates of
clinical trials, anticipated meetings with the FDA or other regulatory authorities concerning our product candidates, anticipated dates for submissions to
obtain required regulatory marketing approvals, anticipated dates for commercial introduction of products, and other statements concerning our future
operations and activities, are forward-looking statements that in each instance assume that we have or are able to obtain sufficient funding to support such
activities and continue our operations and planned activities 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.
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 listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of
Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to
delist our common stock. Such a delisting would have a negative effect on the price of our common stock and would impair the
ability to sell or purchase our common stock when persons wish to do so.
On October 11, 2019, we received a notice from Nasdaq that, because the closing bid price of our common stock had been
below $1.00 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) 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. The Notice had no immediate effect
on the listing or the trading of our common stock on The Nasdaq Capital Market. Pursuant to Nasdaq Marketplace Rule 5810(c)
(3)(A), we have been provided an initial compliance period of 180 calendar days, or until April 8, 2020, to regain compliance
with the minimum bid price requirement. 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. In the event we are not
in compliance with the minimum bid price requirement by April 8, 2020, we may be afforded a second 180 calendar day grace
period. To qualify, we would be required to meet the continued listing requirements for market value of publicly held shares and
all other initial listing standards for The Nasdaq Capital Market, with the exception of the minimum bid price requirement. In
addition, we would be required to provide written notice of our intention to cure the minimum bid price deficiency during this
second 180 day compliance period.
In addition, on October 15, 2019, we notified The Nasdaq Stock Market that as a result of the resignation of one of its
directors from the company’s board of directors, the company was no longer in compliance with Nasdaq Listing Rule 5605(c)(2)
(A), which requires the company’s Audit Committee to be composed of at least three independent directors. The resignation left
the Audit Committee with two directors. This had no immediate effect on the company’s Nasdaq listing or the trading of its
common stock. In accordance with Nasdaq Listing Rule 5605(c)(4)(B), the company has a cure period to regain compliance with
Nasdaq Listing Rule 5605(c)(2)(A), until the earlier to occur of the next annual shareholders meeting or September 30, 2020;
provided, however, that if the annual shareholders meeting is held before March 30, 2020, then the company must evidence
compliance no later than March 30, 2020. On October 16, 2019, Nasdaq issued a letter to the company confirming the company’s
noncompliance with the audit committee requirements of Nasdaq Listing Rule 5605 as a result of the resignation and the cure
period for the company to regain compliance under Nasdaq Listing Rule 5605(c)(4).
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 net losses of approximately $29.3 million for the year ended year ended December 31, 2019, and a net loss of approximately $39.0
million for the year ended December 31, 2018. From inception through December 31, 2019, we have an accumulated deficit of approximately $182.3
million. We expect that these losses may increase as we continue our research and development activities, seek regulatory approvals for our product
candidates and seek to commercialize any approved products. 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 product revenue and amounts payable to us under our commercialization
agreement with Sandoz 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 trial, 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 will need to 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 may never commercialize additional product candidates that are subject to regulatory approval or earn a profit.
Except for our SYMJEPI product, 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 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.
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Our limited operating history may make it difficult to evaluate our business and our future viability.
We are in the relatively early stage of operations and development of our current product candidates (other than our SYMJEPI and ZIMHI
products) and have only a limited operating history on which to base an evaluation of our business and prospects. Even if we successfully obtain additional
funding, we are subject to the risks associated with early stage companies with a limited operating history, including without limitation: the need for
additional financing; the uncertainty of research and development efforts resulting in successful commercial products, as well as the marketing and
customer acceptance of such products; unexpected issues with the FDA or other federal or state regulatory authorities; regulatory setbacks and delays;
unexpected delays in commercialization of products; competition from larger organizations; reliance on the proprietary technology of others; dependence
on key personnel; uncertain patent protection; fluctuations in expenses; and dependence on corporate partners and collaborators. Any failure to successfully
address these risks and uncertainties could seriously harm our business and prospects. We may not succeed given the technological, marketing, strategic
and competitive challenges we will face. The likelihood of our success must be considered in light of the expenses, difficulties, complications, problems
and delays frequently encountered in connection with the growth of a new business, the continuing development of new drug technologies, and the
competitive and regulatory environment in which we operate or may choose to operate in the future.
Many of our potential products and technologies are in early stages of development, or have been discontinued or are suspended.
The development of new pharmaceutical products is a highly risky undertaking, and there can be no assurance that any future research and
development efforts we might undertake will be successful. In addition, development of some of our potential products candidates has been discontinued or
suspended. Many of our potential products will require significant additional research and development before any commercial introduction. There can be
no assurance that any future research, development or clinical trial efforts will result in viable products or meet efficacy standards. Future clinical or
preclinical results may be negative or insufficient to allow us to successfully market our product candidates. Obtaining needed data and results may take
longer than planned or may not be obtained at all. Any such delays or setbacks could have a material adverse effect on our ability to achieve our financial
goals.
Our development plans concerning our products and product candidates are affected by many factors, the outcome of which
are difficult to predict.
The anticipated dates for development and introduction of products in our product pipeline will depend on a number of
factors, including the availability of adequate funding to support product development efforts.
Our product development plans concerning our allergy and respiratory products and product candidates, including APC-
1000, APC-4000 and APC-6000, are affected by many factors, many of which are difficult to predict. Some of the factors that
could affect our development plans for our products and product candidates 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 number and kind of clinical trials that the FDA will require before the FDA will
consider regulatory approval of the applicable product; the outcome of discussions with the FDA concerning the regulatory
approval pathway of the applicable product; the FDA’s review and acceptance of NDAs that we may file concerning our product
candidates; 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 unexpected delays or difficulties in assembling and deploying an adequate sales force to market the product if we
decide to market a product ourselves rather than seek a commercialization partner.
We rely on third parties to conduct our clinical trials. 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, regulatory approval, or may not be successful in commercializing our
planned and future products.
Like many companies our size, we do not have the ability to conduct preclinical or clinical studies for our product candidates without the
assistance of third parties who conduct the studies on our behalf. These third parties are usually 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. We intend to rely 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. We may also rely on academic institutions or clinical research
organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our products.
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-party contractors that we could engage to continue these activities, replacing a third-party
contractor may result in a delay of the affected trial.
Business or economic disruptions or global health concerns could harm our business and increase our costs and expenses.
Broad-based business or economic disruptions could adversely affect our ongoing business and research, development and commercial activities
and could include disruptions to the productivity of our employees working remotely or their ability to travel on matters relating to the Company’s business
activities. The novel strain of coronavirus reported to have surfaced in China in December 2019, and the related COVID-19 outbreak in 2019 and 2020,
has spread to many other countries including the United States. As of the date of this Report, this outbreak has resulted in extended shutdowns of certain
businesses in the United States and elsewhere and has had ripple effects on businesses and activities around the world. 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 outbreak could disrupt our business and the business of our customers or third parties
with which we have business relationships. Global health concerns, such as coronavirus, could also result in social, economic, and labor instability in the
countries in which we or the third parties with whom we engage operate. In addition, the COVID-19 outbreak could result in a severe economic downturn
and has already significantly affected the financial markets of many countries. 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. As of the date of this Report, we have not experienced any known
material business disruptions or material adverse effect on our business or financial condition resulting from the COVID-19 outbreak. However, we cannot
presently predict the scope and severity of any potential business shutdowns or disruptions, but 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.
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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 dramatically 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. We do not know whether current or planned clinical trials will begin on time or be completed on schedule, if at all.
The commencement of clinical trials can be delayed for a variety of reasons, including delays in:
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obtaining required funding;
obtaining regulatory approval to commence a clinical trial;
reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites;
obtaining sufficient quantities of clinical trial materials for product candidates;
obtaining institutional review board approval to conduct a clinical trial at a prospective site; and
recruiting participants for a clinical trial.
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:
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failure to conduct the clinical trial in accordance with regulatory requirements;
inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical
hold;
failure to achieve certain efficacy and/or safety standards; or
lack of adequate funding to continue the clinical trial.
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 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, we have suspended additional clinical trials relating to our APC-1000 product candidate. We cannot assure you that such testing 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.
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
coverage of up to a general aggregate of $3,000,000, with a $1,000,000 limit for each occurrence; and an excess liability insurance coverage of up to a
general aggregate of $6,000,000, with a $4,000,000 limit for each occurrence. Such insurance policies are expensive and may not be available in the future
on acceptable terms, or at all. As we conduct additional clinical trials and introduce products into the United States market, the risk of adverse events
increases 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.
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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 product candidates for which we will be seeking FDA approval.
Except for our facilities at USC that are utilized to prepare compounded formulations, we 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, 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, or natural disasters including
earthquakes, typhoons, floods and fires, could adversely affect our supply chain. 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 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.
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. Many of the product candidates that 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. 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.
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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.
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 candidate, and we intend to pursue Section
505(b)(2) NDA filings with the FDA in connection with our beclomethasone HFA and fluticasone DPI product candidates. 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 clinical trials conducted for a previously approved drug product or the FDA’s prior findings
of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2)
application with respect to any patents for the previously approved product on which the applicant’s application relies and that are listed in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Specifically, the applicant must certify for
each listed patent that, in relevant part, (1) the required patent information has not been filed; (2) the listed patent has expired; (3) the listed 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. 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 one or more listed patents through a
Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product
have 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 until the earliest to occur of 30 months beginning on the date the patent holder
receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed.
If we rely in our Section 505(b)(2) regulatory filings on clinical trials conducted, or the FDA’s prior findings of safety and effectiveness, for a
previously approved drug product 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.
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In addition, even if we submit a Section 505(b)(2) application, such as we may submit for other future products, that relies on clinical trials
conducted for a previously approved 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.
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, 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-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, other than our
compounding formulations sold by USC, which are less affected by the willingness of third-party payors to pay a substantial portion of the price of such
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 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:
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not experimental or investigational;
effective;
medically necessary;
appropriate for the specific patient;
cost-effective;
supported by peer-reviewed publications; and
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-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.
This would 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 regulatory 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
signed into law in the United States in March 2010. Given the enactment of these laws and other federal and state legislation and regulations relating to the
healthcare system, their impact on the biotechnology and pharmaceutical industries and our business is uncertain. 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.
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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 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.
If our products and 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 candidate, our allergy and respiratory product candidates, and our other product
candidates, 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 product will compete with a number of other currently marketed
epinephrine products for use in the emergency treatment of acute allergic reactions, including anaphylaxis. Our ZIMHI product, if commercialized, will
compete 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 candidates and any future products that we may 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:
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the ability to provide acceptable evidence of safety and efficacy;
pricing and cost effectiveness, which may be subject to regulatory control;
our ability to obtain sufficient third-party insurance coverage or reimbursement;
effectiveness of our or our collaborators’ sales and marketing strategy;
relative convenience and ease of administration;
the prevalence and severity of any adverse side effects; and
availability of alternative treatments.
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.
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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 failure to adequately protect or to enforce our intellectual property rights or secure rights to third party patents could materially harm our
proprietary position in the marketplace or prevent the commercialization of our products.
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 patents, rights under any
issued patents may not provide us with sufficient protection for our product candidates or provide sufficient protection to afford us a commercial advantage
against our competitors or their competitive products or processes. It is possible that no patents will be issued from any pending or future patent
applications owned by us or licensed to us. Others may challenge, seek to invalidate, infringe or circumvent any patents we own or license. Alternatively,
we may in the future be required to initiate litigation against third parties to enforce our intellectual property rights. The defense and prosecution of patent
and intellectual property claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse outcome could subject us to
significant liabilities, require us to license disputed rights from others, or require us to cease selling our future products.
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. Many
companies have encountered difficulties in protecting and defending their intellectual property rights in foreign jurisdictions. If we encounter such
difficulties or are otherwise precluded from effectively protecting our intellectual property rights in either the United States or foreign jurisdictions, our
business prospects could be substantially harmed. In addition, because of funding limitations and our limited cash resources, we may not be able to devote
the resources that we might otherwise desire to prepare or pursue patent applications, either at all or in all jurisdictions in which we might desire to obtain
patents, or to maintain already-issued patents.
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, such as the litigation described elsewhere in
this Report under Item 3, “Legal Proceedings,” 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.
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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.
If we determine that our intangible assets have become impaired in the future, our total assets and earnings could be adversely affected.
Goodwill represents the purchase price of acquisitions in excess of the amounts assigned to acquired tangible or intangible assets and assumed
liabilities. Goodwill and indefinite lived intangible assets are not amortized but rather are evaluated for impairment annually or more frequently, if
indicators of impairment exist. Finite lived intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If the impairment evaluations for goodwill and intangible assets indicate the carrying amount exceeds the
estimated fair value, an impairment loss is recognized in an amount equal to that excess. If in the future we determine that our intangible assets have
become impaired, our total assets, financial results, and earnings could be adversely affected.
We depend on our officers. If we are unable to retain our key employees or to attract additional qualified personnel, our product operations and
development efforts may be seriously jeopardized.
Our success will be dependent upon the efforts of our management team and staff, including Dennis J. Carlo, Ph.D., our chief executive officer.
The employment of Dr. Carlo may be terminated at any time by either us or Dr. Carlo. We currently do not have key person life insurance policies covering
any of our executive officers or key employees. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not
quickly recruited. There is competition for qualified personnel in all functional areas, which makes it difficult to attract and retain the qualified personnel
necessary for the operation of our business. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and
administrative personnel. If we are unable to attract new employees and retain existing key employees, the development and commercialization of our
product candidates could be delayed or negatively impacted. In addition, any staffing interruptions resulting from geopolitical actions, including war and
terrorism, adverse public health developments such as the outbreak of the COVID-19 coronavirus, or natural disasters including earthquakes, typhoons,
floods and fires, could have an adverse effect on our business.
We may experience difficulties in managing growth.
We are a small company. Future growth will impose significant added responsibilities on members of management, including the need to identify,
attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress of our
development of our products and technologies. Our future financial performance and our ability to compete effectively will depend, in part, on our ability
to manage any future growth effectively. To that end, we must be able to:
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manage our clinical studies effectively;
integrate additional management, administrative, manufacturing and regulatory personnel;
maintain sufficient administrative, accounting and management information systems and controls; and
hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
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, 2019, we had federal and state net operating loss carryforwards, or NOLs, and credit carryforwards
which, subject to certain limitations, we may use to reduce future taxable income or offset income taxes due. Insufficient future
taxable income will adversely affect our ability to utilize these NOLs and credit carryforwards. Pursuant to Internal Revenue
Code Section 382, the annual use of the NOLs and research and development tax credits could be limited by any greater than
50% ownership change during any three-year testing period. As noted in Note 20 to the consolidated financial statements
appearing elsewhere in this Report, our existing NOLs are subject to limitations arising from previous ownership changes, and if
we undergo additional ownership changes, our ability to use our NOLs could be further limited by Section 382 of the Code. As a
result of these limitations, we may be materially limited in our ability to utilize our NOLs and credit carryforward.
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.
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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.
Risks Related to Our Compounding Pharmacy Business
Our Inability to Successfully Manage USC’s Operations Could Adversely Affect Our Operations.
Our acquisition of USC represented a significant investment. Managing USC’s operations requires significant attention and resources, which could
reduce the likelihood of achievement of other corporate goals. There is no assurance that we will realize the benefits of the USC acquisition that we hope
will be achieved.
USC could receive additional Form 483 inspectional observations from the FDA, warning letters or other communications from the FDA or state
regulatory authorities, and federal or state proceedings alleging non-compliance with FDA requirements and other applicable federal or state
regulatory legal requirements could adversely affect our business, financial condition and results of operations.
Human drug compounding outsourcing facilities have historically been subject to FDA inspections on an irregular basis and are now subject to
FDA inspections on a risk-based schedule in accordance with DQSA Section 503B(b)(4). Observations by the FDA of potentially violative conditions
during inspections are required to be reported to facility management at the close of the inspection on FDA Form 483. It is common for such reports to be
provided in connection with inspections of compounding outsourcing facilities, and observations may be further followed by warning letters and other
enforcement actions as the FDA deems warranted. In March 2014, August 2015, July 2016, and February 2019, USC received Form 483 inspectional
observations following FDA inspections of its outsourcing facility, noting inspectional observations of a number of observed potential deficiencies relating
to USC’s facility and practices.
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Following the August 2015 Form 483 observations, and prior to our acquisition of USC, USC temporarily suspended production of sterile
products and voluntarily recalled certain lots of sterile product. USC determined there was no evidence that any compounded sterile products were
defective, but decided to voluntarily recall all sterile product that remained within expiry and temporarily halt sterile production. USC responded to the
August 2015 Form 483 observations and took a number of corrective actions, including enhancing quality control and production systems. Approximately
around the time of its acquisition by Adamis, USC resumed production and sale of its sterile products. In July 2016, USC received Form 483 observations
following FDA inspections of its outsourcing facility, noting inspectional observations of a number of observed deficiencies relating to USC’s facility and
practices. USC responded in writing to the inspectional observations in July 2016 and provided supplemental responses to FDA in April 2017. In October
2017, USC received a Warning Letter referencing the August 2015 and July 2016 Form 483 inspectional observations. USC provided a written response to
the FDA that further described the completed corrective actions that were taken in response to the inspectional observations. In November 2018, FDA
responded to the 2017 Warning Letter Response submitted by USC and indicated it would look for evidence of corrective action and further clarification of
policies and procedures on a future inspection. USC was inspected by FDA in the early part of 2019, with a Form 483 issued to site management in
February 2019. USC duly responded to the inspectional observations in writing to the FDA in March 2019, and provided an initial update in April 2019 and
a comprehensive update of completed corrective actions and milestones in August 2019.
Following the suspension and voluntary recall in 2015, state pharmacy regulatory agencies in certain states initiated inquiries or took other actions
regarding sales of USC products in such states. All of these state matters have been resolved; however, future proceedings by the FDA or state regulatory
agencies alleging violation of applicable federal or state laws or regulations, could require significant time and financial resources, and an adverse outcome
in one or more of these proceedings could adversely affect USC’s business, results of operations and financial condition. The suspension of sterile
production and voluntary product recall had an adverse effect on USC’s revenues, income, and financial condition for calendar years 2015 and 2016 and
adversely affected its relationships with certain of its customers that established relationships with other suppliers during USC’s suspension of sterile
production.
USC’s compounded preparations and the pharmacy compounding industry are subject to regulatory and customer scrutiny, which may impair our
growth and sales.
Compounded drugs are not FDA-approved. As a 503B drug compounding outsourcing facility, USC’s compounded human formulations are not
subject to the FDA drug approval process. This means that FDA does not verify the safety or effectiveness of the medications compounded and distributed
by USC, but rather FDA establishes standards for manufacturing processes controls to ensure drug quality. Consumers and health professionals rely on the
drug approval process to ensure that drugs are safe and effective and made in accordance with Federal quality standards. Compounded drugs also lack an
FDA finding of manufacturing quality before such drugs are marketed. Drugs available through branded and generic drug companies have been approved
for marketing and sale by the FDA and are subject to many more requirements than drugs compounded in outsourcing facilities. In addition, some
compounding pharmacies have been the subject of widespread negative media coverage in recent years. As a result, some physicians may be hesitant to
prescribe, and some patients may be hesitant to purchase and use, compounded drugs. Other reasons physicians may be unwilling to prescribe or patients
may be unwilling to use USC’s compounded formulations could include the following, among others: applicable law limits our ability to discuss the
efficacy or safety of USC’s formulations with potential users to the extent applicable data is available; and our compounded preparations are primarily sold
on a cash-pay basis and reimbursement may or may not be available from third-party payors, including the private payors and government programs such
as Medicare and Medicaid programs. Failure by physicians, patients, other potential customers, or third-party payors, to accept compounded drugs could
substantially limit USC’s market and cause its and our business and operations to suffer.
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Formulations prepared and dispensed by compounding pharmacies contain ingredients purchased from FDA-registered suppliers, but the finished
compounded drug products are not themselves approved by the FDA. The drug products available through branded and generic drug companies have been
approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. In addition, certain
compounding pharmacies have been the subject of widespread negative media coverage in recent years, and the actions of these pharmacies have resulted
in increased scrutiny of compounding pharmacy activities from the FDA and state governmental agencies. For example, the FDA has in the past requested
that a number of compounding pharmacies conduct a recall of all non-expired, purportedly sterile drug products and cease sterile compounding operations
due to lack of sterility assurance, and additional compounding pharmacies have suspended sterile production or voluntarily recalled certain sterile
compounding products after an FDA inspection of the relevant facilities. As a result, some physicians may be hesitant to prescribe, and some patients may
be hesitant to purchase and use, these compounded formulations. Other reasons physicians may be unwilling to prescribe or patients may be unwilling to
use USC’s compounded formulations could include the following, among others: applicable law limits our ability to discuss the efficacy or safety of USC’s
formulations with potential users to the extent applicable data is available; our compounded preparations are primarily sold on a cash-pay basis and
reimbursement may or may not be available from third-party payors, including the government Medicare and Medicaid programs; or ordering physicians or
their delegates may be unwilling or logistically unable to provide attestation of clinical need as required by FDA pursuant to guidance documents published
in 2018. Any failure by physicians, patients, or third-party payors, to accept compounded formulations could substantially limit USC’s market and cause its
and our business and operations to suffer. An incident similar to the fungal meningitis outbreak in 2012, which was caused by a compounding pharmacy,
could cause USC’s customers to reduce their use of outsourced compounded medications significantly or even stop using outsourced compounded
medications altogether. States have in the past enacted, and could in the future enact, regulations prohibiting or restricting the use of outsourcing
compounded medication service providers in response to such incidents. Such prohibitions or restrictions on outsourced compounded preparations by
states, or reduced customer demand as a result of an incident with compounded medication providers, could have a material adverse effect on USC’s and
our business, results of operations and financial condition.
In addition, in 2017, a lawsuit was filed by a pharmaceutical company, Endo International plc, alleging that FDA has improperly enforced DQSA
related to its interim draft guidance on compounding from bulk drug ingredients. In September 2019, Endo withdrew this lawsuit based on the FDA’s
evaluation that outsourcing facilities should not be able to compound drugs products that contain vasopressin, the basis of Endo’s complaint. FDA has
indicated it intends to take similar action relative to nine other bulk drug substances, including ephedrine sulfate. Ephedrine sulfate represents a portion of
USC’s hospital outsourcing business, which could result in a loss of revenue resulting from affected USC products. USC is working proactively with
industry stakeholders and regulatory authorities regarding the FDA’s guidance and actions, and believes that the impact on USC and other 503B
outsourcing facilities of the regulatory expectations regarding bulk substances will depend in part on how the guidance is implemented, interpreted, and
applied over time.
We expect increased competition in the future regarding USC’s compounded pharmacy products. If we fail to respond to such competition successfully,
USC’s and our business, results of operations and financial condition could be materially and adversely affected.
The pharmaceutical and pharmacy industries are highly competitive. We compete against other registered outsourcing facilities, branded drug
companies, generic drug companies, regional compounders that provide patient-specific compounding that decide to expand to 503B outsourcing, non-
patient-specific compounding, large hospitals and integrated delivery networks, other compounding pharmacies, and new entrants to the industry. Increased
competition could reduce revenue and gross profit and otherwise materially adversely affect our business, results of operations and financial condition.
Many competitors that market and sell compounded preparations have longer operating histories and may have greater financial, marketing, and
other resources than we do. We are significantly smaller than some of such competitors, and we may lack the financial and other resources needed to
develop, produce, distribute, market, and commercialize any of USC’s formulations or compete for market share in these sectors. These potential
competitors could leverage existing resources and experience operating in industries that are subject to significant regulatory oversight in order to
overcome certain barriers to entry. Consequently, competitors may be able to develop products and services competitive with, or superior to, USC’s
products and services. Furthermore, we may not be able to differentiate USC’s compounded preparations and services from those of our competitors,
successfully develop or introduce new services—on a timely basis or at all—that are less costly than those of our competitors or offer customers payment
and other commercial terms as favorable as those offered by our competitors. We expect competition to intensify as technology advances, such as those in
the field of robotics and automation, and consolidation continues. Also, new developments by pharmaceutical manufacturers, such as increasing the
number of abbreviated new drug applications, to cover less frequently used drug formulations, could render some or most of USC’s products or services
obsolete. In addition, the drug products available through branded and generic drug companies with which USC’s formulations compete have been
approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. USC’s compounded
formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result, some physicians may be unwilling to
prescribe, and some patients may be unwilling to use, USC’s formulations. The DQSA prohibits compounding facilities, both 503A and 503B, from
compounding products that are considered “essentially a copy” of approved drug products offered by traditional pharmaceutical manufacturers. In January
2018, FDA published Final Guidance on what it considers to be “essentially a copy” of approved drug products for outsourcing facilities. This guidance
documents added the requirement that purchasers and prescribers document on each order and prescription the specific clinical need for the compounded
medication. Some purchasers and prescribers may be unwilling to complete this additional documentation, resulting in decreased demand for the
compounded drug products.
Our failure to anticipate or appropriately adapt to changes or trends within the pharmaceutical industry could have a significant negative impact on
our ability to compete successfully.
The pharmaceutical and pharmacy industries are highly competitive. We compete against other registered outsourcing facilities, branded drug
companies, generic drug companies, regional compounders that provide patient-specific compounding that decide to expand to 503B outsourcing, non-
patient-specific compounding, large hospitals and integrated delivery networks, other compounding pharmacies, and new entrants to the industry.
Increased competition could reduce revenue and gross profit and otherwise materially adversely affect our business, results of operations and financial
condition.
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Many competitors that market and sell compounded preparations have longer operating histories and may have greater financial, marketing and
other resources than we do. We are significantly smaller than some of such competitors, and we may lack the financial and other resources needed to
develop, produce, distribute, market and commercialize any of USC’s formulations or compete for market share in these sectors. These potential
competitors could leverage existing resources and experience operating in industries that are subject to significant regulatory oversight in order to
overcome certain barriers to entry. Consequently, competitors may be able to develop products and services competitive with, or superior to, USC’s
products and services. Furthermore, we may not be able to differentiate USC’s compounded preparations and services from those of our competitors,
successfully develop or introduce new services—on a timely basis or at all—that are less costly than those of our competitors or offer customers payment
and other commercial terms as favorable as those offered by our competitors. We expect competition to intensify as technology advances, such as those in
the field of robotics and automation, and consolidation continues. Also, new developments by pharmaceutical manufacturers, such as increasing the
number of abbreviated new drug applications, to cover less frequently used drug formulations, could render some or most of USC’s products or services
obsolete. In addition, the drug products available through branded and generic drug companies with which USC’s formulations compete have been
approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. USC’s compounded
formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result, some physicians may be unwilling to
prescribe, and some patients may be unwilling to use, USC’s formulations. The DQSA prohibits compounding facilities, both 503A and 503B, from
compounding products that are considered “essentially a copy” of approved drug products offered by traditional pharmaceutical manufacturers.
If a compounded drug formulation provided through our compounding services leads to patient injury or death or results in a product recall, we may
be exposed to significant liabilities and reputational harm.
The production, labeling and packaging of compounded sterile preparations, or CSPs, is inherently risky. The success of USC’s compounded
formulations and pharmacy operations depends to a significant extent upon medical and patient perceptions of USC and us and the safety and quality of
USC’s products. We could be adversely affected if USC, any other compounding pharmacies or USC’s formulations and technologies, are subject to
negative publicity. We could also be adversely affected if any of USC’s formulations or other products, any similar products sold by other companies, or
any products sold by other compounding pharmacies, 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 USC’s compounded formulations, 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, or safety alert relating to, one or more of USC’s products. Similarly, to the extent any of the components of approved drugs or other
ingredients used by USC to produce compounded formulations have quality or other problems that adversely affect the finished compounded preparations,
USC’s and our sales could be adversely affected. In addition, in the ordinary course of business, we may voluntarily retrieve products in response to a
customer complaint. Because of our dependence upon medical and patient perceptions, any adverse publicity associated with illness or other adverse effects
resulting from the use or misuse of USC’s products, any similar products sold by other companies or any other compounded formulations, could have a
material adverse impact on our business, results of operations and financial condition.
We could become subject to product recalls and termination or suspension of our state pharmacy licenses if laboratory testing does not identify all
contaminated products or if our products otherwise cause or appear to have caused injury or harm to patients. In addition, such laboratory testing may
produce false positives, which could harm our business and impact our pharmacy operations even if the impacted formulations are ultimately found to be
sterile and no patients are harmed by them. 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 one of USC’s formulations or compounds, USC’s and our reputation could suffer, physicians may be unwilling to prescribe
USC’s products or order any prescriptions from such pharmacies, we could become subject to product and professional liability lawsuits, and USC’s or our
state pharmacy or other required licenses could be terminated or restricted.
Any retrieval or recall, whether voluntary or requested by the FDA or state regulatory authorities, could result in
significant costs and lead to product withdrawals and harm USC’s or our ability to successfully launch new products and services.
These problems could also result in enforcement actions by state and federal authorities or other healthcare self-regulatory
bodies, or product liability claims or lawsuits, including those brought by individuals or groups seeking to represent a class or
establish multi-district litigation proceedings. Any such action, litigation, recall or reputational harm, even recalls or negative
publicity resulting from patient harm or death caused by compounded medications prepared by a competitor or a hospital
pharmacy, could result in a material adverse effect on USC’s and our business, results of operations, financial condition and
liquidity. Current or future insurance coverage may prove insufficient to cover any liability claims brought against USC or us.
Because of the increasing cost of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or
obtain insurance coverage that will be adequate to satisfy any liability that may arise.
USC’s ability to generate revenues will be diminished if it fails to obtain acceptable prices.
Currently, USC is paid directly by most of its customers and does not submit large amounts of claims for reimbursement
through Medicare, Medicaid or other third-party payors, although its customers may choose to seek available reimbursement
opportunities to the extent that they exist. Many third-party payors have imposed significant restrictions on reimbursement for
compounded formulations in recent years. Moreover, third-party payors, including Medicare, are increasingly attempting to
contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases, to
provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. The
continued efforts of health maintenance organizations, managed care organizations, government programs (such as Medicare,
Medicaid and other federal and state-funded programs) and other third-party payors to limit reimbursements to USC’s customers
may adversely impact our financial results. Further, HIPAA and the Health Reform Law may have a considerable impact on the
existing U.S. system for the delivery and financing of health care and could conceivably adversely affect USC’s business. As a
result, reimbursement from Medicare, Medicaid and other third-party payors may cease to be available for USC’s products or
may not be sufficient to allow USC to sell products on a competitive basis and at desirable price points. If government and other
third-party payors do not provide adequate coverage and reimbursement levels for USC’s formulations, the market acceptance for
USC’s formulations may be limited. We expect cost pressures from third party payors to continue, and USC’s customers have
limited bargaining power to counter payor demands for reduced reimbursement rates. If USC’s customers increasingly insource
pharmaceutical preparations or use alternative third-party providers due to these pressures, USC’s and our business, results of
operations and financial condition may be materially adversely impacted.
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Consolidation in the health care industry could lead to demands for price concessions, which could have an adverse effect on our business, financial
condition and results of operations.
Because health care costs have risen significantly, numerous initiatives and reforms by legislatures, regulators, and third-party payors to curb these
cost increases have resulted in a trend in the health care industry to consolidate product suppliers and purchasers. Many healthcare industry participants are
consolidating to create integrated healthcare delivery systems with significant market power, and we expect this trend to continue. As provider networks
consolidate, thereby decreasing the number of market participants, competition to provide products and services such as those offered by USC will become
more intense, and the importance of establishing relationships with key industry participants will become greater. In addition, industry participants may try
to use their increased market power to negotiate price reductions for USC’s products and services. If we are forced to reduce prices as a result of either an
imbalance of market power or decreased demand for USC’s products, our business, financial conditions and results of operations would be adversely
affected.
If we are unable to maintain our GPO relationships, our revenue could decline.
USC currently derives, and expects to continue to derive, a significant portion of its revenue from end-user customers that
are members of group purchasing organizations, or GPOs. USC is also a member of one or more GPOs. GPOs negotiate pricing
arrangements that are then made available to a GPO’s affiliated hospitals and other members. GPOs provide end-users access to
a broad range of pharmaceutical products and services from multiple suppliers at competitive prices and, in certain cases,
exercise influence over the purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their
choice for their purchasing needs in an effort to lower costs. Maintaining USC’s contractual relationships with GPOs will, we
believe, help allow USC to continue to provide outsourced compounded formulations, offer a broad product line, and remain
price competitive, and failure to maintain such relationships could adversely affect USC’s ability to obtain supplies at competitive
prices. The GPOs with which USC currently has contractual relationships, or other GPS, may have relationships with USC’s
customers, and as such the GPOs may influence the customers’ buying patterns regarding USC’s products or those of our
competitors. If we are unable to maintain USC’s relationships with GPOs, USC’s and our business, financial condition and
results of operations could be adversely affected.
USC relies on third parties to provide active pharmaceutical ingredients and components. If these third parties do not deliver as expected, if USC’s
agreements with them terminate or if the FDA prohibits use of these active pharmaceutical ingredients, USC’s and our business, financial condition,
and results of operations could be adversely affected.
USC has contractual relationships with pharmaceutical manufacturers and other suppliers of active pharmaceutical ingredients and containers.
Any changes to these relationships, including, but not limited to, a loss of a supplier relationship, product shortages or changes in pricing, could have an
adverse effect on USC’s and our business, financial condition and results of operations.
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USC’s business depends to a significant extent on the reliable delivery of drugs from its key suppliers, some of which provide favorable terms in
exchange for USC’s or our commitment to purchase minimum volumes of, or in some cases all of USC’s needs for, one or more drugs. We strive to identify
and maintain relationships with more than one source for active pharmaceutical ingredients and containers used in USC’s CSPs. If a drug for which we
have not qualified an alternative source becomes unavailable, we may not be able to identify and qualify a replacement supplier or may suffer a delay in
doing so, which could adversely affect USC’s and our revenues. Further, we may not receive the same pricing from an alternative supplier. A price increase
resulting from using alternative suppliers or due to a shortage of a particular drug, a manufacturer gaining an exclusive right to market and sell a given
drug, or any other reason could make USC’s compounded preparations containing that drug more expensive, and therefore potentially less attractive, to
USC’s customers. In addition, active pharmaceutical ingredients and containers that we purchase may not always be available in sufficient quantities to
meet USC’s needs and the needs of USC’s customers. Some pharmaceutical ingredients are only available through a single supplier and may be subject to
limits on distribution. Additionally, some of the containers that USC uses in its compounded preparations are particular to a supplier, and USC’s customers
may use a drug delivery system of a particular supplier. Therefore, if there is a shortage or interruption in the supply of a certain supplier’s containers, USC
may not be able to sell compounded preparations in alternative containers to certain of its customers. USC regularly searches for and qualifies backup
vendors for ingredients and components to improve supply chain security and business continuity. In addition, there is a risk that one or more suppliers
could be acquired by another company that owns registered 503B outsourced compounding facilities, in which case we could be required to purchase
ingredients or containers from a competitor, which could harm our business.
In 2018, the FDA published a number of draft guidance materials that could have a substantial impact on USC’s business. In March 2018, the
FDA published the draft guidance “Evaluation of Bulk Drug Substances Nominated for Use in Compounding Under Section 503 of the Federal Food,
Drug, & Cosmetic Act.” The FDA also updated its interim lists of bulk drug substances on several occasions in 2018. In March 2019, the FDA issued final
guidance and moved to formally remove two substances from the interim list that permitted their use; while the specific substances at issue in FDA’s March
2019 guidance were not of material importance to USC, FDA has announced its intent to take similar action regarding nine other bulk drug substances,
including ephedrine sulfate, that represent a portion of USC’s hospital outsourcing business, which could result in a loss of revenue resulting from affected
USC products. USC is working proactively with industry stakeholders and regulatory authorities regarding the FDA’s guidance and actions, and believes
that the impact on USC and other 503B outsourcing facilities of the regulatory expectations regarding bulk substances will depend in part on how the
guidance is implemented, interpreted and applied over time.
USC experiences supply interruptions and shortages from time to time. USC retains inventory of drug components and containers in order to help
provide our customers continuity of service, but its inventory may not be sufficient. If a supply disruption results in the inability to obtain compounding
components, USC’s and our business, financial condition and results of operations could be adversely affected.
USC’s reliance on suppliers also exposes USC and us to risks that are not within our control, including the following:
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USC relies on suppliers to provide it with drugs, diluents and containers of an acceptable quality in a timely fashion. Any quality issues,
recalls, or supply delay or interruption could harm USC’s ability to sell products and may subject USC or us to product liability claims.
USC’s suppliers’ facilities must satisfy production and quality standards set by the FDA and other regulatory authorities that periodically
inspect facilities to determine compliance. If our suppliers fail to satisfy these requirements, their facilities could be shut down permanently or
for an extended period of time.
USC’s suppliers may not be able to produce the volume that USC requires or may experience disruptions or delays due to market conditions,
natural disasters, labor-related disruptions, failure in supply or other logistical channels or other reasons.
A supplier could decide to terminate its contract or supply arrangement with USC due to a disagreement with USC or us.
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Each of these risks could delay the production of USC’s products or result in higher costs or deprive USC and us of potential revenues. Further,
delays or interruptions in supply could limit or curtail USC’s ability to meet customer demand for its CSPs. Any such delay or interruption could harm
USC’s reputation as a provider of outsourced CSPs, cause USC’s customers to find alternative sources for CSPs or reduce their use of outsourced CSPs,
any of which could have a material adverse effect on USC’s and our business, financial condition, and results of operations.
A disruption in USC’s operations, including as a result of cybersecurity or other system failures, or the delivery of compounded preparations to
customers could damage relations with customers.
USC’s success depends upon its ability to provide timely, reliable and consistent services and products to its customers.
Natural disasters or other catastrophic events, including tornadoes, hurricanes, blizzards and other weather conditions, terrorist
attacks, power and data interruptions, fires as well as logistical or delivery disruptions could disrupt USC’s or its suppliers’ and
vendors’ operations and impede USC’s ability to provide services and deliver products to customers, which could adversely
impact USC’s and our results of operations. For example, USC’s CSPs have expiration dates, and USC’s compounded
preparations must remain under specified storage conditions, including some items that must remain refrigerated or frozen or
those that are sensitive to excessive heat. Any disruption or delay in delivery may cause spoilage and the need to retrieve and
replace products. In the event that USC experiences a temporary or longer term interruption in its ability to deliver services or
products, USC’s and our revenues could be reduced, USC’s reputation could be damaged and USC’s and our business could be
materially and adversely affected. For example, USC’s suspension of sterile product production during portions of the second
half of 2015 and the first quarter of 2016 adversely affected its relationships with some of its customers and sales personnel, and
resulted in revenues in 2016 that were below our expectations. In addition, any continuing disruption in either USC’s or our
computer systems or telephone system could adversely affect USC’s or our ability to receive and process customer orders and
ship products on a timely basis, and could adversely affect USC’s or our relations with customers, potentially resulting in
reduction in orders or loss of customers.
We have incurred significant indebtedness, which will require substantial cash to service and which subjects us to certain financial requirements and
business restrictions.
As we have previously disclosed in our SEC filings, in connection with our acquisition of USC and the transactions
contemplated by the merger agreement relating to the USC acquisition, we assumed approximately $5,722,000 principal amount
of debt obligations under two loan agreements and related loan documents relating to the building, real property and equipment
that certain third parties agreed to transfer to the Company or USC in connection with the merger, as well as the two loan
agreements to which USC is a party, a working capital loan and an equipment loan, and related loan documents evidencing loans
previously made to USC, and we agreed to become an additional co-borrower under the Loan Documents. The lender in all of the
Loan Documents was First Federal Bank and/or its successor Bear State Bank, and/or Arvest Bank, as successor in interest to
Bear State Bank, referred to as Lender or the Bank. We have previously entered into amendments of these loan agreements with
the Bank, or the Amended Loan Documents. We are required to make current periodic interest and principal payments under the
Amended Loan Documents, in an amount of approximately $23,000 per month; the amount of required interest payments is
subject to change depending on future changes in interest rates.
The Amended Loan Documents with the Bank include a variety of representations, warranties and covenants that we are
required to comply with. If we do not comply with the provisions of such agreements and documents and the Bank declares an
event of default, the Bank would be entitled to accelerate the maturity date of the loans, the principal and accrued interest would
become due and payable, and the Bank could elect to exercise its remedies as a secured creditor under the loan documents and
applicable law. At December 31, 2019, our aggregate indebtedness under the Amended Loan Documents was approximately
$2,153,000.
Our ability to make scheduled payments on our indebtedness depends on our future performance and ability to raise
additional capital if required, which is subject to economic, financial, competitive and other factors, some of which are beyond
our control. If we are unable to generate sufficient cash to service our debt, we may be required to adopt one or more alternatives,
such as selling assets, attempting to restructure our debt or obtaining additional capital through sales of equity or incurrence of
additional debt on terms that may be onerous or highly dilutive to our stockholders. Our ability to engage in any of these
activities would depend on the capital markets and our financial condition at such time, and we may not be able to do so when
needed, on desirable terms or at all, which could result in a default on our debt obligations. Additionally, the Amended Loan
Documents contain various restrictive covenants, including, among others, our obligation to deliver to the Bank certain financial
and other information, our obligation to comply with certain notice and insurance requirements, and our inability, without the
Bank’s prior consent, to dispose of certain of our assets, incur certain additional indebtedness, enter into certain merger,
acquisition or change of control transactions, pay certain dividends or distributions on or make certain repurchases of our capital
stock or incur any lien or other encumbrance on our assets, subject to certain permitted exceptions. Any failure by us to comply
with any of these covenants, subject to certain cure periods, or to make all payments under the debt instruments when due, would
cause us to be in default under the applicable debt instrument. In the event of any such default, the Bank may be able to foreclose
on the assets that secure the debt or declare all borrowed funds, together with accrued and unpaid interest, immediately due and
payable, thereby potentially causing all of our available cash to be used to pay our indebtedness or forcing us into bankruptcy or
liquidation if we do not then have sufficient cash available. Any such event or occurrence could severely and negatively impact
our business, financial conditions or results of operations.
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If we are unable to maintain an effective sales and marketing infrastructure, USC’s success in selling products will be inhibited.
If USC’s sales increase in the future, it may need to expend significant resources to further grow its sales and marketing
employees and internal infrastructure and properly train sales personnel, including without limitation with respect to regulatory
compliance matters. We may not be able to secure sales personnel or relationships that are adequate in number or expertise to
successfully market and sell USC’s products and services. A failure to maintain compliant and adequate sales and marketing
capabilities could have a material adverse effect on USC’s and our business, financial conditions, and results of operations.
USC’s formulations and technologies could potentially conflict with the rights of others.
The preparation or sale of USC’s formulations and use of USC’s technologies may infringe on the patent or other
intellectual property rights of others. If USC’s products infringe or conflict with the patent or other intellectual property rights of
others, third parties could bring legal actions against us claiming damages and seeking to enjoin our manufacturing and
marketing of the affected products. Patent litigation is costly and time consuming and may divert management’s attention and our
resources. We may not have sufficient resources to bring any such actions to a successful conclusion. If we are not successful in
defending against these legal actions should they arise, we may be subject to monetary liability or be forced to alter our products,
cease some or all of our operations relating to the affected products, or seek to obtain a license in order to continue manufacturing
and marketing the affected products, which may not available on acceptable terms or at all. The lawsuit filed against FDA by
Endo in 2017 and the suits filed by Allergan against a number of compounding facilities indicate the traditional pharmaceutical
manufacturing industry is aggressively defending its patent and intellectual property rights as they perceive them. This trend
could progress to include some of USC’s compounded drug product formulations, resulting in legal expenses and potential
product discontinuation.
Risks Related to Regulation
Our business is significantly impacted by state and federal statutes and regulations, including regulatory risks associated with operation of USC’s 503B
registered outsourcing facility.
The marketing and sale of compounded formulations is subject to and must comply with extensive and evolving state and
federal statutes and regulations governing compounding entities. These statutes and regulations include, among other things, for
certain kinds of compounding pharmacies restrictions on compounding for office use or in advance of receiving a patient-specific
prescription or, for outsourcing facilities registered under Section 503B of the FDCA such as USC’s registered outsourcing
facility, requirements regarding preparation, such as regular FDA inspections and cGMP requirements, prohibitions on
compounding drugs that are essentially copies of FDA-approved drugs, restrictions on the use of bulk active ingredients,
limitations on the volume of compounded formulations that may be sold across state lines, prohibitions on wholesaling or
reselling, and how FDA treats the compounding of animal drugs from a 503B registered outsourcing facility. These and other
restrictions on the activities of compounding pharmacies and outsourcing facilities may limit the market available for
compounded formulations, as compared to the market available for FDA-approved drugs.
USC’s pharmacy business is impacted by federal and state laws and regulations governing, among other things: the
purchase, distribution, management, compounding, dispensing, reimbursement, marketing, and labeling of prescription drugs and
related services; FDA and/or state regulation affecting the pharmacy and pharmaceutical industries, including state pharmacy,
manufacturer, wholesaler and distribution licensure and registration or permit standards; rules and regulations issued pursuant to
HIPAA, and other state and federal laws related to the use, disclosure and transmission of health information; and state and
federal controlled substance laws. USC’s or our failure to comply with any of these laws and regulations could severely limit or
curtail USC’s or our pharmacy operations, which could materially harm USC’s and our business, financial conditions and results
of operations. Further, our business could be adversely affected by changes in these or any newly enacted laws and regulations, as
well as federal and state agency interpretations of such statutes and regulations. We could incur significant costs in order to
comply with such regulations.
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We are subject to significant costs and uncertainties related to compliance with the extensive regulations that govern the compounding, labeling and
distribution of pharmaceutical products and services, in general, and compounded formulations, in particular. If our compounding facility fails to
comply with the Controlled Substances Act, FDCA, or state statutes and regulations, USC could be required to cease operations or become subject to
restrictions that could adversely affect our business.
The production, distribution, processing, formulation, packaging and labeling of pharmaceutical products and services
such as USC’s compounded formulations are subject to extensive regulation by federal agencies, including the FDA and the
DEA. We and USC are also subject to a significant number of state and local laws and regulations. Compliance with these
federal, state and local laws and regulations, including compliance with any newly enacted regulations, requires the substantial
expenditure of time, money and effort. Failure to comply with FDA requirements and other federal or state governmental laws
and regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, exposure
to product liability claims, total or partial suspension of production or distribution, enforcement actions, injunctions and civil or
criminal prosecution, any of which could have a material adverse effect on USC’s and our business, financial condition or results
of operations. Further, the publicity of any violations or perceived violations of these laws and regulations could result in
significant reputational harm to USC’s or our business.
The federal, state and local laws and regulations applicable to the pharmaceutical and compounding industries are subject
to frequent change, whether through change in law or through interpretation. Changes in these laws and regulations may require
changes to USC’s or our business and operations that may be difficult to implement and require significant expenditures. For
example, as a result of the increased scrutiny resulting from the 2012 meningitis outbreak that was traced to a Massachusetts
compounding pharmacy, in 2013 the U.S. Congress passed the DQSA, which sets forth new standards applicable to outsourcing
facilities such as USC’s and invites voluntary registration with the FDA. The DQSA also permits states to continue to impose
separate regulatory requirements. Under the DQSA, USC has registered with the FDA as a Section 503B outsourcing facility and
has implemented policies and procedures that are intended to achieve compliance with the DQSA requirements for such facilities.
However, there can be no assurance that we or USC are fully compliant with these requirements, and any failure to comply may
result in additional costs to bring such facilities into compliance. Moreover, the FDA continues to issue draft and final guidance
under the DQSA, including those relating to cGMPs, which may require further changes to USC’s business, facilities or
processes, some of which may be significant.
State legislatures and regulatory authorities also reacted to the fungal meningitis outbreak by imposing additional
regulatory requirements on compounding activities for outsourcing compounders and reminding outsourcing compounders of
regulatory requirements already in effect. Since 2012, the FDA has convened a number of inter-governmental working meetings
with government officials from each state, the District of Columbia and Puerto Rico, to discuss topics such as oversight of
compounding, including the implementation of the DQSA, and opportunities to better protect public health by strengthening
oversight of compounders through improved collaboration between the FDA and the states. As a result of such meetings, the
FDA and the states committed, among other things, to enhance inter-agency communication surrounding the implementation of
the DQSA, which may lead to additional guidance or regulation in the future. If federal, state or local regulatory authorities place
new restrictions or limitations on USC’s or our operations, USC’s or our business, financial conditions or results of operations
could be materially adversely affected.
State pharmacy laws require facilities dispensing or distributing into that state to be licensed accordingly, and many states require separate licenses
for the various activities that USC performs. Various state pharmacy boards have enacted laws and/or adopted rules or regulations directed at restricting the
operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy
dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge
to be licensed in that state.
Pharmacy and controlled substance laws often address the qualification of an applicant’s personnel, the adequacy of its
prescription fulfillment and inventory control practices and the adequacy of its facilities, and subject pharmacies to oversight by
state boards of pharmacy and other regulators that could impose burdensome requirements or restrictions on operations if a
pharmacy is found not to comply with these laws. If our or USC’s activities fail to comply with such requirements, we could be
forced to permanently or temporarily cease or limit the applicable compounding operations, which could severely limit USC’s
ability to market and sell formulations in such states and could materially harm USC’s and our business, financial condition and
results of operations. Any such noncompliance could also result in complaints or adverse actions by other state boards of
pharmacy, FDA inspection of the facility to determine compliance with the FDCA, loss of FDCA exemptions provided under
Section 503A or 503B, warning letters, injunctions, prosecution, fines and loss of required government licenses, certifications
and approvals, any of which could involve significant costs and adversely affect our business, financial condition, and results of
operations.
Further, the FDA seeks to limit, under Section 503A of the FDCA, the amount of compounded products that a pharmacy
not registered as an outsourcing facility under Section 503B of the FDCA can dispense interstate. The interpretation and
enforcement of this provision is dependent on the FDA entering into a Memorandum of Understanding (“MOU”) with each state
setting forth limits on interstate compounding. The first draft of the MOU presented by the FDA in February 2015 limited
interstate shipments of compounded drug units to 30% of all compounded and non-compounded units dispensed or distributed by
the pharmacy per month, with the excess considered by the FDA as an “inordinate amount.” The FDA stated in guidance issued
in February 2015 that it would not enforce interstate restrictions until after it published a final MOU and made it available to
states for signature for some designated period of time. If the final MOU was released but not signed by a particular state, then
interstate shipments of compounded preparations from a pharmacy located in that state and not registered as an outsourcing
facility would be limited to quantities not greater than 5% of total prescription orders dispensed or distributed by the pharmacy
(the 5% rule); however, we are not aware that the FDA currently enforces or has in the past enforced the 5% rule and, under
current draft guidance, the FDA has stated that it would not enforce the 5% rule until a final MOU has been made available to
states for signature. The FDA originally proposed a 180-day period for states to agree to a final MOU after the final version was
presented, after which it would begin to enforce the 5% rule.
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In January 2018, the FDA published a statement outlining its compounding priorities for 2018 (the “2018 Compounding
Plan”) which provided an overview of the key priorities the FDA plans to focus on in 2018 in connection with compounding
regulations. Included in the 2018 Compounding Plan were references to forthcoming regulations on compounding from bulk drug
substances, determination of clinical need, and a revised memorandum of understanding between the FDA and State Boards of
Pharmacy setting forth limits on interstate compounding under Section 503A of the FDCA. In keeping with this 2018
Compounding Plan, in March 2018 the FDA issued a draft guidance proposing a framework for determining the clinical need
sufficient to permit an outsourcing facility to compound from bulk drug substances (“Bulks Guidance”), and in September 2018
the FDA issued a revised draft MOU (“Revised Draft MOU”). As with other FDA regulations and guidance, when finalized, this
guidance and MOU potentially could limit the number and type of products USC is permitted to compound as well as interstate
shipping of compounded medications thereby adversely affecting sales of our compounded medications. The Bulks Guidance
received numerous comments, and final guidance was published in March 2019 relating to the method by which the FDA will
evaluate bulk drug substances for inclusion/exclusion on the final bulk substances lists. With the exception of two substances that
have been excluded, the final bulk substances lists have not been developed and no timeline is currently available for which the
lists are expected to be finalized. Until then, the interim bulk substances lists are effective, and USC does not compound with
bulk drug substances not on the interim list as approved for use. We believe that the impact on USC and other 503B outsourcing
facilities of the regulatory expectations regarding bulk substances will depend in part on how the guidance is implemented,
interpreted and applied over time. Similarly, if finalized, the Revised Draft MOU could also limit our pharmacy’s interstate sales.
Although the Revised Draft MOU removed any requirement that states take action against a pharmacy dispensing more than 30%
of its compounded preparations interstate, it still requires that the state report to the FDA any pharmacy shipping more than 50%
of its compounded products out of state. The Revised Draft MOU also changed the method of calculation: the percentage is now
calculated using compounded products only. Under the Revised Draft MOU, for pharmacies that are dispensing more than 50%
interstate, the FDA will analyze if the risk posed by the pharmacy’s interstate dispensing practices may weigh in favor of
additional federal oversight using a variety of risk factors. Moreover, if the state in which the pharmacy is located determines it
will not enter into an MOU with FDA, the 5% rule will apply. In the Federal Register notice accompanying the Revised Draft
MOU, the FDA continued to advise that it will not enforce the 5% limitation until some time period (it is proposing 180 days)
after FDA has finalized the MOU. Nevertheless, the finalization of any MOU and the accompanying process could limit USC’s
ability to ship its compounded drug products interstate. The comment period for the Revised Draft MOU ended in December
2018.
In November 2019, FDA issued a draft Guidance for Industry #256: Compounding Animal Drugs from Bulk Drug
Substances (the “Draft GFI #256”). This guidance describes the FDA’s policy regarding the compounding of animal drugs from
bulk substances and limits the circumstances in which a compounder may use bulk substances to compound animal medication.
Industry comments to the Draft GFI #256 were due by February 22, 2020. As with other FDA regulations and guidance, when
finalized, this guidance could limit the number and type of products USC is permitted to compound for animal use. USC
currently compounds animal medication in its registered Section 503B outsourcing facility. With respect to office use orders
placed by veterinarians from an outsourcing facility, the FDA has contemplated that outsourcing facilities may compound both
human and veterinary medication. FDA indicated in a guidance that outsourcing facilities that only compound animal drugs
should not register as an outsourcing facility, but understands that there are 503B facilities that compound both human and animal
drugs. Nevertheless, the FDA could in the future enforce new drug approval requirements on animal medication compounding in
Section 503B outsourcing facilities.
In the future, we may not be able to satisfy applicable federal and state licensing and other requirements for USC’s
pharmacy business in a timely manner or at all, changes to federal and state pharmacy regulations may restrict compounding
operations or make them more costly, we may be unable to achieve a sufficient physician and patient customer base to sustain our
pharmacy operations, or market acceptance of compounding pharmacies generally may be curtailed or delayed.
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We must compound in conformity with applicable cGMP requirements; failure to maintain compliance with applicable cGMP requirements may
prevent or delay the compounding or marketing of our compounded preparations.
USC’s 503B outsourcing facility operations must continually adhere to (i) applicable cGMP requirements, which are
issued and enforced by the FDA through regulations and guidance and interpreted and enforced through its inspection programs,
and (ii) sterile product requirements under applicable state law, such as General Chapter <797> (“USP <797>”), published by the
U.S. Pharmacopeia or USP Convention, a scientific standard-setting organization, which have been codified in many states and
which have historically been enforced by applicable state boards of pharmacy through inspection programs but are also
enforceable by the FDA. In complying with applicable cGMPs and USP <797>, we must expend time, money and effort in
production, record-keeping, and quality control to ensure that USC’s products and services meet applicable specifications and
requirements. Revisions to USP <797> have been proposed by USP, but postponed for the foreseeable future and current USP
<797> remains in effect. In July 2014, the FDA issued draft guidance for cGMPs for human drug compounding outsourcing
facilities, such as USC’s. This draft guidance was revised in December 2018. USC has assessed this revised draft guidance and is
implementing pertinent improvements or changes to its processes, procedures, policies, or facility to achieve the expected level of
compliance. Because this cGMP draft guidance has not been finalized and may be significantly changed prior to being made
final, we may need to expend substantial additional resources to comply with the final applicable cGMPs, along with any
additional modifications over time.
The FDA and other governmental entities enforce compliance with regulations and guidance through periodic risk-based
inspections. We received FDA Form 483 observations following inspections in 2014, 2015, 2016, and 2019. If any of these
entities were to deem inspectional observations at USC’s facilities or our responses to such observations to be unsatisfactory,
operations at such facility could be interrupted or halted, and we may incur unanticipated compliance expenditures and be subject
to enforcement actions such as recall or seizure of USC products, injunctions, civil penalties and criminal prosecution. In
addition, any regulatory deficiencies or suspension resulting in compounding interruptions or halts may disrupt USC’s or our
ability to meet our production and contractual obligations to USC’s customers and lead to significant delays in the availability of
USC’s compounded preparations, which could have a material adverse effect on USC’s and our business, results of operations
and financial condition. Similarly, any adverse publicity associated with any such events could have a material impact on USC’s
and our reputation and results of operations.
Certain of USC’s customers are contractually permitted to inspect USC’s facilities to ensure compliance with industry
standards. The failure to achieve a compliance level satisfactory to such customers may result in immediate contract termination,
penalties or volume reductions or loss of customers immediately or upon the expiration of existing contracts.
Certain of USC’s compounded preparations contain controlled substances, and extensive regulation of such controlled substances could have a
negative effect on our business, financial conditions or results of operations.
Certain of USC’s compounded preparations contain controlled substances or “certain list I chemicals,” which are subject
to extensive regulation by the DEA regarding procurement, manufacture, storage, shipment, sale, and use. These regulations are
also imposed on USC and its suppliers, vendors and customers and add additional complications and costs to the storage, use,
sale and distribution of such products. Government quotas on controlled substances limit the supply of components for certain of
USC’s compounded preparations and restrict the ability to distribute those preparations. Our inability to obtain authorization from
the DEA to procure the controlled or listed substances used in USC’s compounded preparations could have an adverse impact on
USC’s and our business, financial condition, and results of operations.
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The FDA reviews the safety of controlled substances on an ongoing basis, and it is possible that these regulatory agencies
could impose additional restrictions on marketing or distribution of such products, or could withdraw regulatory approval for
materials that USC uses as components in its products. Failure to comply with relevant regulations governing controlled
substances could result in civil penalties, refusal to renew necessary registrations, initiation of proceedings to revoke such
registrations, reductions of the amounts of controlled substances that USC may obtain and, in certain circumstances, criminal
prosecution. If the FDA or the DEA withdraw the approval of, or placed additional significant restrictions on, USC’s products or
the components used in them, sales of USC products and the ability to promote USC products and services could be materially
and adversely affected. Also, the DEA or applicable state regulatory bodies may in the future seek to regulate additional
ingredients in USC’s compounded preparations as controlled substances or listed chemicals.
USC and its customers 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 USC and its suppliers and customers, 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. Though certain of these
healthcare laws and regulations are not directly applicable to USC or us, they may be applicable to USC’s customers, third-party
vendors, and other supply chain partners. For example, the PPACA was enacted in 2010, and many of the structural changes
enacted by the PPACA were implemented in 2014. However, some of the applicable regulations and sub-regulatory guidance
under the PPACA have not yet been issued or finalized. These reforms affect the coverage and plan designs that are or will be
provided by many of USC’s customers’ third-party payors. As a result, such reforms could affect the ability of our USC’s to
purchase USC products or services and, as a result, adversely impact our revenues. We cannot predict what effect, if any, the
PPACA, related regulations and sub-regulatory guidance may have on USC’s or our business.
In addition, we are subject to the federal anti-kickback statute, which prohibits the knowing and willful offer, payment,
solicitation or receipt of any form of remuneration in return for, or to induce, the referral of business or ordering of services paid
for by Medicare or other federal programs. We are also subject to state anti-kickback laws and regulations. Violations of the anti-
kickback statutes can result in imprisonment, civil, criminal fines, and fines and disciplinary actions relating to our state
licensure. Any violation or alleged violation of such federal or state laws could harm USC’s or our reputation, customer
relationships or otherwise have a material adverse effect on our business, financial condition and results of operations.
Such laws and regulations are subject to change and often are uncertain in their application. As controversies continue to
arise in the healthcare industry, federal, state and local regulation and enforcement priorities may increase. There can be no
assurance that USC, or one of its customers, third party vendors or other supply chain partners, 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 USC’s or our business, financial condition or results of operations.
Changes in the healthcare industry that are beyond our control may have an adverse impact on our business.
The healthcare industry is changing rapidly as consumers, governments, medical professionals and the pharmaceutical
industry examine ways to broaden medical coverage while controlling the increase in healthcare costs. Such changes could
include changes to make the government’s Medicare reimbursement programs more restrictive, which could limit or curtail the
potential for USC’s formulations to obtain eligibility for reimbursement from such payors, or changes to expand the reach of
HIPAA or other health privacy laws, which could make compliance with these laws costlier and more burdensome. Further, the
Health Reform Law may have a considerable impact on the existing U.S. system for the delivery and financing of health care and
could adversely affect USC’s or our business. Any changes to laws and regulations affecting the healthcare industry could impose
significant additional costs on USC’s and our operations in order to maintain compliance or could otherwise negatively affect
USC’s or our business, financial conditions or results of operations.
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 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.
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The price of our common stock may be volatile.
The market price of our common stock may fluctuate substantially. For example, from January 2018 to December 31, 2019, the market price of
our common stock has fluctuated between $0.48 and $5.10. Market prices for securities of early-stage pharmaceutical, biotechnology and other life
sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate
include:
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relatively low trading volume, which can result in significant volatility in the market price of our common stock based on a relatively smaller
number of trades and dollar amount of transactions;
the timing and results of our current and any future preclinical or clinical trials of our product candidates;
our ability to successfully expand sales of our compounded pharmacy formulations;
the entry into or termination of key agreements, including, among others, key collaboration and license agreements;
the results and timing of regulatory reviews relating to the approval of our product candidates;
the timing of, or delay in the timing of, commercial introduction of any of our products;
the initiation of, material developments in, or conclusion of, litigation to enforce or defend any of our intellectual property rights;
failure of any of our product candidates, if approved, to achieve commercial success;
general and industry-specific economic conditions that may affect our research and development expenditures;
the results of clinical trials conducted by others on products that would compete with our product candidates;
issues in manufacturing our product candidates or any approved products;
the loss of key employees;
the introduction of technological innovations or new commercial products by our competitors;
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
future sales of our common stock;
publicity or announcements regarding regulatory developments relating to our products;
period-to-period fluctuations in our financial results, including our cash and cash equivalents balance, operating expenses, cash burn rate or
revenue levels;
common stock sales in the public market by one or more of our larger stockholders, officers or directors;
our filing for protection under federal bankruptcy laws;
a negative outcome in any litigation or potential legal proceeding;
effects of public health crises, pandemics and epidemics, such as COVID-19 coronavirus; or
other potentially negative financial announcements, such as a review of any of our filings by the SEC, changes in accounting treatment or
restatement of previously reported financial results or delays in our filings with the SEC.
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.
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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.
Prior to the listing of our common stock on the NASDAQ Capital Market, trading of our common stock was conducted on the OTCQB. The
liquidity of our common stock is limited, not only in terms of the number of shares that can be bought and sold at a given price, but also as it may be
adversely affected by delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us, if at all.
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.
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We intend to monitor the closing bid price for our common stock between now and April 8, 2020, and will consider
available strategies in an effort to satisfy the minimum bid price requirement.
On October 15, 2019, we notified Nasdaq that as a result of the previously disclosed resignation of William C. Denby, III
from our board of directors, or the Board, the company was no longer in compliance with Nasdaq Listing Rule 5605(c)(2)(A),
which requires the company’s Audit Committee to be composed of at least three independent directors. The resignation of Mr.
Denby left the Audit Committee with two independent directors. This has no immediate effect on the company’s Nasdaq listing
or the trading of our common stock. In accordance with Nasdaq Listing Rule 5605(c)(4)(B), the company has a cure period to
regain compliance with Nasdaq Listing Rule 5605(c)(2)(A), until the earlier to occur of the next annual shareholders meeting or
September 30, 2020; provided, however, that if the annual shareholders meeting is held before March 30, 2020, then the company
must evidence compliance no later than March 30, 2020. On October 16, 2019, Nasdaq issued a letter to the company
confirming the company’s noncompliance with the audit committee requirements of Nasdaq Listing Rule 5605 as a result of Mr.
Denby’s resignation and the cure period for the company to regain compliance under Nasdaq Listing Rule 5605(c)(4). The
company expects to regain compliance by or before the end of the cure period.
There is no assurance that we will be able to regain and maintain compliance with NASDAQ continued listing standards[,
and Nasdaq has the ability to suspend trading in our common stock or remove our common stock from listing on the Nasdaq
Capital Market for a variety of reasons under its continued listing standards]. Any delisting from Nasdaq could result in further
reductions in the market prices of our common stock, substantially limit the liquidity of our common stock, and materially
adversely affect our ability to raise capital or pursue strategic restructuring, refinancing or other transactions on acceptable terms,
or at all. Delisting from the Nasdaq Capital Market could also have other negative results, including the potential loss of
institutional investor interest and fewer business development opportunities. In the event of a delisting, we would attempt to take
actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken
by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common
stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-
compliance with Nasdaq’s listing requirements.
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.
Prior to the listing of our common stock on the NASDAQ Capital Market, our common stock was traded on the OTCQB. The OTCQB, the OTC
Bulletin Board and Pink Sheets are viewed by most investors as a less desirable, and less liquid, marketplace. As a result, if our common stock was delisted
from the NASDAQ Capital Market and was traded on the OTCQB, the OTC Bulletin Board or the Pink Sheets, an investor could find it more difficult to
purchase, dispose of or obtain accurate quotations as to the value of our common stock.
45
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:
●
●
●
●
Before the sale of penny stock by a broker-dealer to a new purchaser, the broker-dealer must determine whether the purchaser is suitable to
invest in penny stocks. To make that determination, a broker-dealer must obtain, from a prospective investor, information regarding the
purchaser’s financial condition and investment experience and objectives. Subsequently, the broker-dealer must deliver to the purchaser a
written statement setting forth the basis of the suitability finding and obtain the purchaser’s signature on such statement.
A broker-dealer must obtain from the purchaser an agreement to purchase the securities. This agreement must be obtained for every purchase
until the purchaser becomes an “established customer.”
The Securities Exchange Act of 1934, or the Exchange Act, requires that before effecting any transaction in any penny stock, a broker-dealer
must provide the purchaser with a “risk disclosure document” that contains, among other things, a description of the penny stock market and
how it functions, and the risks associated with such investment. These disclosure rules are applicable to both purchases and sales by investors.
A dealer that sells penny stock must send to the purchaser, within 10 days after the end of each calendar month, a written account statement
including prescribed information relating to the security.
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 stockholder’s investment will only occur
if our stock price appreciates.
46
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, exercise of outstanding
warrants, issuance of shares following vesting of outstanding restricted stock units, and sale of the shares issuable upon conversion of such notes, exercise
of such warrants or vesting of such 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.
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.
47
Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the market 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.
As of December 31, 2019, we had 61,829,508 shares of common stock issued and outstanding, substantially all of which we believe may be sold
publicly, subject in some cases to volume and other limitations, provisions or limitations in registration rights agreements, or prospectus-delivery or other
requirements relating to the effectiveness and use of registration statements registering the resale of such shares.
As of December 31, 2019, we had reserved for issuance 7,837,245 shares of our common stock issuable upon the exercise of outstanding stock
options under our equity incentive plans at a weighted-average exercise price of $4.40 per share, we had outstanding restricted stock units covering
3,090,397 shares of common stock, and we had outstanding warrants to purchase 15,934,670 shares of common stock at a weighted-average exercise price
of $1.50 per share. Subject to applicable vesting requirements, upon exercise of these options or warrants or issuance of shares following vesting of the
restricted stock units, the underlying shares may be resold into the public market, subject in some cases to volume and other limitations or prospectus
delivery requirements pursuant to registration statements registering the resale of such shares. In the case of outstanding options or warrants that have
exercise prices that are below the market price of our common stock from time to time, or upon issuance of shares following vesting of restricted stock
units, our stockholders would experience dilution upon the exercise of these options.
Some of our outstanding warrants may result in dilution to our stockholders.
As of December 31, 2019, we had outstanding warrants, other than the warrants described in the next sentence, to purchase 58,824 shares of
common stock, at an exercise price of $8.50 per share. As of December 31, 2019, 13,800,000 shares of our common stock were issuable (subject to certain
beneficial ownership limitations) upon exercise of warrants, at an exercise price of $1.15 per share, that we issued in connection with our underwritten
public offering of common stock and warrants in August 2019; and 2,075,846 shares of our common stock were issuable (subject to certain beneficial
ownership limitations) upon exercise of warrants that we issued in the following transactions: warrants to purchase 1,183,432 shares at an exercise price of
$4.10 per share in our January 2016 Series A-1 Convertible Preferred Stock transaction; warrants to purchase 192,414 shares at an exercise price of $2.90
per share in our July 2016 Series A-2 Convertible Preferred transaction; and warrants to purchase 700,000 shares at an exercise price of $2.98 per share in
our August 2016 registered direct offering of common stock and warrants.
Our principal stockholders have significant influence over us, they may have significant influence over actions requiring stockholder approval, and
your interests as a stockholder may conflict with the interests of those persons.
Based on the number of outstanding shares of our common stock held by our stockholders as of December 31, 2019, our directors, executive
officers and their respective affiliates owned approximately 1.1% of our outstanding shares of common stock and our largest stockholder owned
approximately 6.7% of the outstanding shares of our common stock. As a result, those stockholders have the ability to exert a significant degree of
influence with respect to the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger,
consolidation or sale of all or substantially all of our assets. The interests of these persons may not always coincide with our interests or the interests of our
other stockholders. This concentration of ownership could harm the market price of our common stock by (i) delaying, deferring or preventing a change in
corporate control, (ii) impeding a merger, consolidation, takeover or other business combination involving us, or (iii) discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us. The significant concentration of stock ownership may adversely affect the trading
price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
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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 controls over financial reporting, our stock price could
decline and raising capital could be more difficult.
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 raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual
management assessments of the effectiveness of our internal control over financial reporting. If material weaknesses or
significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal controls, 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 drop significantly.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act. 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. 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 financial statements will not be
prevented or detected on a timely basis. 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. Internal control deficiencies and ineffective disclosure controls and procedures could also cause
investors to lose confidence in our reported financial information. We can give no assurance that any material weaknesses or
restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control
over financial reporting or adequate disclosure controls and procedures or circumvention of these controls. In addition, controls
and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our
consolidated financial statements. 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. Failure to comply with reporting requirements could also subject us to sanctions and/or
investigations by the SEC, the Nasdaq Stock Market or other regulatory authorities.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The company’s principal headquarters consisting of approximately 7,525 square feet of leased premises is located at 11682 El Camino Real, Suite
300, San Diego, CA 92130. The company previously entered into a lease agreement to lease the space with a term commencing December 1, 2014 (as
amended, the “Lease”). The lease has a basic term expiring four years after the commencement date, and the company has an option to extend the term of
the lease for an additional three years. Average rent during the term was $23,304 per month, with a deposit of $170,000 paid in November 2014. Through
December 2018, $127,500 of the deposit was applied to rent and the balance of deposit as of December 31, 2018, was $42,500.
On December 29, 2017, the company entered into a First Amendment to Lease (the “Amendment”) with the Lessor of the space, amending the
Lease. Pursuant to the Amendment, the company and Lessor agreed to extend the term of the Lease through November 30, 2023. Commencing on
December 1, 2018 with one month free rent, base rent will initially be $28,219 per month for the succeeding 11 months and will increase annually to
$31,760 for the 12 months ending November 30, 2023. The Amendment also provides for one option to expand pursuant to which the company has a right
of first refusal for an additional 3,457 square feet of certain office space within the property.
The company’s wholly owned subsidiary, USC, occupies a company-owned property consisting of approximately 16,065 square feet, two-story,
office building/laboratory in a lot of approximately 1.65 acres located at 1270 Don’s Lane, Conway, Arkansas 72032. The company has entered into a lease
agreement for the planned expansion of the company’s compounding business, to lease a building consisting of approximately 44,880 square feet located in
Conway, Arkansas. The agreement provides for an initial base rent of $12,155 per month for the first 12 months and will increase to $12,895 for the 12
months ending November 30, 2020. Average rent during the term will be $12,523 per month, with a previously paid deposit of $12,155.
On May 28, 2019, USC entered into a Second Amendment to Lease (the “USC Amendment”) with the Lessor of the space, amending the Lease.
Pursuant to the USC Amendment, the company and Lessor agreed to extend the term of the Lease through December 31, 2023. Commencing on January 1,
2019, base rent will initially be $10,000 per month for the succeeding 12 months and will increase annually to $10,824 for the 12 months ending December
31, 2023.
ITEM 3.
LEGAL PROCEEDINGS
We may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary
course of its 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 further litigation in federal and state courts relating to opioid
drugs. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be
predicted with certainty, other than the matters set forth above, we are not currently involved in any matters that we believe may
have a material adverse effect on 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.
On September 26, 2018, the company brought action against Belcher Pharmaceuticals, LLC (“Belcher”) in the United
States District Court for the Middle District of Florida (the “Patent Case”) for a declaratory judgment (“Complaint”) of non-
infringement of certain patents in which Belcher claims rights, relating to certain methods of preparing epinephrine solutions and
treating allergic reactions using a method of preparing certain epinephrine solutions (collectively the “Patents-in-Suit”). The
Complaint sought a declaratory judgment that the company’s SYMJEPI (epinephrine) Injection product (“SYMJEPI”) does not
infringe the Patents-in-Suit. On November 7, 2018, Belcher filed its Answer and Counterclaim to the Complaint and alleged that
the company infringed the Patents-in-Suit as a result of the SYMJEPI product. Belcher’s Counterclaim sought damages and
injunctive relief in conjunction with the infringement claims. The company responded to the Counterclaim by generally denying
any wrongdoing and asserting the affirmative defense that the Patents-in-Suit were invalid. The parties exchanged initial
disclosures and initiated discovery in January 2019. On December 28, 2018, Belcher filed a reissue application for one of the
Patents-in-Suit seeking to amend the asserted claims and correct an improper benefit claim. On March 29, 2019, the parties
agreed to stay the litigation at the District Court pending the outcome of the reissue application and the company’s forthcoming
petition for inter partes review, filed with the U.S. Patent and Trademark Office in April 2019, to challenge the validity of the
remaining Patent-in-Suit (the “IPR”).
On July 24, 2019, the Company announced that the company and Belcher agreed to settle all previously filed litigation
between the parties, including the Patent Case and the IPR. Under the terms of the settlement agreement, the company agreed to
voluntarily withdraw both the Patent Case and IPR and Belcher agreed to provide the company a worldwide, non-exclusive, fully
paid-up, royalty-free license relating to Belcher’s patents for the company’s epinephrine injection product, SYMJEPI, and agreed
not to make future claims of infringement relating to the company’s naloxone injection product candidate, ZIMHI. Pursuant to
the settlement agreement, the Patent Case and the IPR have been dismissed.
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On May 20, 2019, the company received notice that it had been named and served as a defendant in a lawsuit filed by
kaléo Inc. in the United States District Court for the District of Delaware regarding the company’s higher dose naloxone injection
product candidate for the treatment of opioid overdose, ZIMHI, for which the company has previously submitted an NDA to the
FDA. The complaint alleged, among other things, that the company’s product candidate infringed patents purportedly held by
kaléo relating to its naloxone auto-injector product. On June 21, 2019, the company filed a motion to dismiss the lawsuit for lack
of subject matter jurisdiction, in light of an amendment filed by the company to its original NDA removing any reference to
kaléo’s EVZIO® product, which the company contended prevented kaléo from claiming infringement under the Hatch-Waxman
Act. On the same day, the company filed a separate lawsuit in the United States District Court for the Eastern District of
Virginia against kaléo for cybersquatting under 15 U.S.C. § 1125(d), unfair competition under 15 U.S.C. § 1125(a), and common
law unfair competition and trademark infringement for kaléo’s use of Adamis’ SYMJEPI trademark.
On July 18, 2019, the company announced that the company and kaléo agreed to settle all previously announced litigation
between the parties, including the cases described above. As part of the resolution of the litigation, kaléo agreed not to bring
future action against the company relating to ZIMHI so long as the company does not reference kaléo’s product in a future filing
with the FDA.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
Common Stock
Our common stock is traded on the Nasdaq Capital Market under the trading symbol “ADMP.” As of December 31, 2019, we had approximately
81 common stock holders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial
owners of our common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never declared or paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future. Accordingly,
our stockholders will not receive a return on their investment unless the value of our shares increases, which may or may not occur. Any future
determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results,
capital requirements, any applicable contractual restrictions and such other factors as our deems relevant.
Recent Sales of Unregistered Securities
Information concerning our sales of unregistered securities during the year ended December 31, 2019, has previously been reported in reports on
Form 10-Q and reports on Form 8-K that we filed during that fiscal year.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 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 Report. This discussion of our financial condition and results of operations
contains certain statements that are not strictly historical and are “forward-looking” statements and involve a high degree of risk and uncertainty. Actual
results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in our operations,
development efforts and business environment, including those set forth in this Item 7, and in the sections entitled “1A. Risk Factors” and “1. Business” in
this Report and uncertainties described elsewhere in this Report. All forward-looking statements included in this Report are based on information available
to the company as of the date hereof.
General
Company Overview
We are a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including
respiratory disease, allergy and opioid overdose. Our products and product candidates in the allergy, respiratory, and opioid overdose markets include:
SYMJEPI (epinephrine) Injection 0.3mg, which was approved by the U.S. Food and Drug Administration, or FDA, in 2017 for use in the emergency
treatment of acute allergic reactions, including anaphylaxis; SYMJEPI (epinephrine) Injection 0.15mg which was approved by the FDA in September 2018,
for use in the treatment of anaphylaxis for patients weighing 33-66 pounds; a naloxone injection product candidate, ZIMHI, based on the approved
Symject™ injection device and intended for the treatment of opioid overdose for which the company submitted an NDA to the FDA in December 2018 and
with respect to which the company received a Complete Response Letter, or CRL, from the FDA in November 2019; a Beclomethasone metered dose
inhaler product candidate (APC-1000) intended for the treatment of asthma for which the company submitted an Investigational New Drug application, or
IND, in January 2018 and initiated the start-up phase of Phase 3 studies, which has been suspended; and a fluticasone (APC-4000) dry powder inhaler, or
DPI, product candidate for the treatment of asthma. Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all
specialty pharmaceuticals product lines, we intend to submit NDAs under Section 505(b)(2), of the U.S. Food, Drug & Cosmetic Act, as amended, or
FDCA, or Section 505(j) Abbreviated New Drug Applications, or ANDAs, to the FDA, whenever possible, in order to potentially reduce the time to market
and to save on costs, compared to those associated with Section 505(b)(1) NDAs for new drug products.
Our U.S. Compounding, Inc., subsidiary, or USC, which we acquired in April 2016 and which is registered as a drug compounding outsourcing
facility under Section 503B of the FDCA and the U.S. Drug Quality and Security Act, or DQSA, provides 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. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products,
injectables, urological preparations, topical compounds for pain and men’s and women’s health products. USC’s compounded formulations in many
circumstances are offered as alternatives to drugs approved by the FDA. USC also provides certain veterinary pharmaceutical products for animals.
To achieve our goals and support our overall strategy, we will need to raise a substantial amount of funding and make significant investments in,
among other things, new product development and working capital.
SYMJEPI (epinephrine) Injection Product
On June 15, 2017, the FDA approved the company’s 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, to patients weighing 66 pounds or greater.
On September 27, 2018, the FDA approved our lower dose version (0.15mg) of SYMJEPI (epinephrine) Injection, which is intended for patients
weighing 33 to 66 pounds.
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In July 2018, we entered into a Distribution and Commercialization Agreement with Sandoz Inc., a division of Novartis
AG, to commercialize our SYMJEPI product. Under the terms of the agreement, we appointed Sandoz as the exclusive
distributor of SYMJEPI in the United States and related territories, or the Territory, in all fields including both the retail market
and other markets, and granted Sandoz an exclusive license under our patent and other intellectual property rights and know-how
to market, sell, and otherwise commercialize and distribute the product in the Territory, subject to the provisions of the
agreement, in partial consideration of an upfront fee by Sandoz and potential performance-based milestone payments.
The agreement provides that Sandoz will pay to us 50% of the Net Profit from Net Sales, as each such term is defined in
the agreement, of the product in the Sandoz Territory to third parties, determined on a quarterly basis. We will be the supplier of
the product to Sandoz, and Sandoz will order and pay us a supply price for quantities of products ordered. We will be responsible
for all manufacturing and, prior to Sandoz paying us the supply price, the component and supply costs related to manufacturing
and supplying the product to Sandoz. Under the agreement, Sandoz has sole discretion in determining pricing, terms of sale,
marketing, and selling decisions relating to the product.
On January 16, 2019, we announced that Sandoz had launched SYMJEPI (epinephrine) 0.3 mg Injection in the U.S.
market, initially available in the institutional setting. On July 9, 2019, we announced the full launch (institutional and retail) by
Sandoz of both dose forms of the SYMJEPI injection products. We have had discussions with Sandoz regarding marketing
initiatives and alternatives for successful commercialization of SYMJEPI.
On October 1, 2019, we entered into an exclusive distribution and commercialization agreement with a company in
Australia to register and commercialize the SYMJEPI products in the Australia and New Zealand markets, after all required
regulatory registration and approvals have been obtained, and that the company anticipates that it could take many months in
order to obtain the required registration and approvals.
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ZIMHI (naloxone) Injection Product
On December 31, 2018, we filed an NDA with the FDA relating to our higher dose naloxone injection product, ZIMHI,
for the treatment of opioid overdose.
On November 22, 2019, we received a Complete Response Letter, or CRL, from the FDA regarding our NDA for
ZIMHI. The CRL stated that the FDA determined that it could not approve the NDA in its present form and provided
recommendations needed for resubmission. A CRL is issued by the FDA's Center for Drug Evaluation and Research when it has
completed its review of a file and questions remain that preclude the approval of the NDA in its current form. The questions
raised by the FDA related generally to Chemistry, Manufacturing and Controls (CMC). No other clinical safety or efficacy issues
were raised, and the New Drug Application will remain open until the CMC issues are resolved. In December 2019, we provided
responses to the FDA to the comments included in the CRL. In February, we had a Type A meeting with the FDA to discuss the
company’s response to the CRL and the process and timeline for resubmission of the NDA to the FDA. At the meeting, the
Company obtained concurrence from the agency on the Chemistry, Manufacturing and Controls, or CMC, information required
for resubmission of the NDA. The additional information involves extractables and leachables testing from the syringe and
glassware. In addition, the potential public health role of ZIMHI in the current opioid epidemic was also discussed. The
company believes it can generate the additional information and, assuming successful testing, resubmit the NDA in the second
quarter of 2020. The FDA expressed its intent to review the resubmission in a rapid and timely manner, consistent with agency
guidelines.
Going Concern and Management Plan
The financial statements included elsewhere herein for the year ended December 31, 2019, 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 December 31, 2019, we had cash and cash equivalents of approximately $8.8 million, an accumulated deficit of approximately
$182.3 million, and liabilities of approximately $11.8 million. We have incurred substantial recurring losses from operations, have used, rather than
provided, cash in our continuing operations, and are dependent on additional financing to fund operations. These conditions raise substantial doubt about
our ability to continue as a going concern. 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.
In February 2020, we completed a registered direct offering of common stock, and a concurrent private placement of warrants, resulting in estimated net
proceeds of approximately $6.1 million. However, we anticipate that we will need additional funding before the end of fiscal 2020 to continue operations,
satisfy our obligations, fund the future expenditures that we believe will be required to support commercialization of our products and conduct the clinical
and regulatory work to develop our product candidates.
Our management intends to attempt to secure additional required funding through equity or debt financing, sales or out-
licensing of product candidates or intellectual property assets, revenues from sales of compounded sterile formulations, share of
profits received relating to sales in the U.S. of our SYMJEPI 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 business combination, or similar transactions. However, there can be no assurance that we will be
able to obtain any sources of funding. 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. If we do not
obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially
reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships
with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have
sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result
in our stockholders losing some or all of their investment in us.
Funding that we may receive during fiscal 2020 is expected to be used to satisfy existing obligations and liabilities and working capital needs, to
support commercialization of our products and conduct the clinical and regulatory work to develop our product candidates, to begin building working
capital reserves and to fund a number of projects, which may include, without limitation, some or all of the following:
●
●
●
●
●
●
●
●
●
●
●
continue development and commercialization of our ZIMHI (naloxone) product candidate;
continue development of our allergy and respiratory product candidates;
pursue the development of other product candidates that we may develop or acquire;
fund clinical trials and seek regulatory approvals;
expand research and development activities;
access manufacturing, commercialization and sales capabilities;
implement additional internal systems and infrastructure;
maintain, defend and expand the scope of our intellectual property portfolio;
acquire products, technologies, intellectual property or companies and support continued development and funding thereof;
hire additional management, sales, research, development and clinical personnel; and
help fund the operations and capital expenditures of USC.
54
Results of Operations
Our consolidated results of operations are presented for the year ending December 31, 2019 and for the year ending December 31, 2018.
Years Ended December 31, 2019 and 2018
Revenues
Revenues were approximately $22,114,000 and $15,087,000 for the years ended December 31, 2019 and 2018,
respectively, representing an increase of approximately $7,027,000. Approximately $4,379,000 of the increase in revenues
resulted from an increase in sales of USC’s sterile pharmaceutical formulations resulting in part from an increase in production in
order to meet product demand and from marketing personnel efforts. This amount was partially offset by a decrease of
approximately $1,115,000 in sales of USC’s non-sterile pharmaceutical formulations primarily due to the ceasing of sales of
certain formulations and 503A products. The increase in revenue for 2019 compared to 2018 was also impacted by approximately
$3,763,000 of outsourced manufacturing revenue relating to sales of SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg. There
was no revenue relating to the sale of those products for the year ended December 31, 2018.
Cost of Goods Sold
Cost of goods sold was approximately $15,479,000 and $9,798,000 for the years ended December 31, 2019 and 2018,
respectively. 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. The gross margin percentage for the year ended December 31, 2019 was approximately
30% compared to approximately 35% for the year ended December 31, 2018. The cost of goods sold increase of approximately
$5,681,000 for 2019 compared to 2018 was primarily related to $5,056,000 of direct materials, supplies, obsolete inventory and
other related expenses associated with the production of SYMJEPI (epinephrine) Injection 0.3mg and 0.15mg. Approximately
$1,500,000 of the increase in costs of goods sold for 2019 compared to 2018 was primarily related to the overall increase in
USC’s production of sterile pharmaceutical formulations. This amount was partially offset by a decrease of approximately
$875,000 primarily attributed to the ceasing of sales of certain formulations and 503A products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) consist primarily of depreciation and amortization, legal fees,
accounting and audit fees, professional/consulting fees and employee compensation. SG&A expenses for the years
ending December 31, 2019 and 2018 were approximately $25,288,000 and $25,948,000, respectively. The decrease was
primarily attributable to decreases in compensation expenses of approximately $1,569,000, occupancy costs of approximately
$504,000, and other related expenses of approximately $32,000. These amounts were partially offset by increases in PDUFA
fees of approximately $399,000, legal expenses of approximately $326,000, patent expenses of approximately $299,000,
consulting expenses of approximately $229,000, and approximately $192,000 in other related expenses.
Research and Development Expenses
Our research and development costs are expensed as incurred. Non-refundable advance payments for goods and services
to be used in future research and development activities are recorded as an asset and are expensed when the research and
development activities are performed. Research and development expenses were approximately $10,376,000 and $18,794,000 for
the years ended December 31, 2019 and 2018, respectively. The decrease in research and development expenses for the year
ended December 31, 2019, compared to the 2018 year was primarily due to decreases of approximately $4,085,000 in
development costs of our APC-8000 product candidate caused by a suspension in development activities, approximately
$2,966,000 in development costs of our APC-6000 product candidate as most of development activities were undertaken in 2018,
and approximately $318,000 in other related product development expenses. This amount was partially offset by increases of
approximately $382,000 in development costs attributed to our APC-1000 product candidate, approximately $130,000 in
development costs attributed to the Symjepi™ (epinephrine) Injection 0.3mg and 0.15mg products, and approximately $405,000
in other product development expenses. Compensation for research and development employees increased by approximately
$1,086,000 for the year ended December 31, 2019, compared to the 2018 year, primarily due to increases of approximately
$696,000 in options expense and approximately $390,000 in wages and benefits. This amount was partially offset by a decrease
of approximately $664,000 in bonus expenses as 2019 bonuses, with respect to the 2019 year, are not expected to be paid. Write-
offs related to obsolete SYMJEPI inventory that is expected to expire before resale decreased approximately $2,388,000 for the
2019 year compared to the same period in 2018.
55
Impairment Expense
Impairment expenses for the years ended December 31, 2019 and 2018 were approximately $322,000 and $11,000,
respectively. The impairment expense in 2019 was attributable to assets damaged at the USC facility caused by a water leak. The
impairment expense in 2018 was attributable to assets damaged at the USC facility caused by flooding.
Other Income (Expense)
Other Income (Expense) consists of interest expense and interest income. Other income (expense) for the years ended
December 31, 2019 and 2018 was approximately $53,000 and $88,000, respectively. The decrease in other income (expense)
during the year ended December 31, 2019, compared to the comparable period of 2018 was primarily due to a decrease in interest
income of approximately $70,000 and a decrease of debt related expense (interest expense) of approximately $35,000 for the year
ended December 31, 2019.
Income Tax (Expense) Benefit
The income tax (expense) benefit for the years ended December 31, 2019 and 2018 was approximately ($9,000) and
$369,000 respectively. The income tax (provision) benefit for 2019 and 2018 reflected the reassessment of the company’s
valuation allowance related to the portion of the deferred tax asset that the company determined to be more-likely-than-not to be
recognized. The reassessment resulted from the fact that the company’s indefinite lived taxable temporary differences are now
available as a source of future taxable income to offset NOLs generated in the current year which, under the Tax Cuts and Jobs
Act, do not expire. This reassessment resulted in a (provision) benefit of approximately ($9,000) and $369,000, respectively.
Liquidity and Capital Resources
We have incurred net losses of approximately $29.3 million and $39.0 million for the years ended December 31, 2019 and 2018, respectively.
Since our inception, June 6, 2006, and through December 31, 2019, we have an accumulated deficit of approximately $182.3 million. Since inception and
through December 31, 2019, we have financed our operations principally through debt financing and through public and private issuances of common stock
and preferred stock. Since inception, we have raised a total of approximately $189.0 million in debt and equity financing transactions, consisting of
approximately $23.5 million in debt financing and approximately $165.5 million in equity financing transactions. In February 2020, we completed a
registered direct offering of 11,600,000 shares of common stock, and a concurrent private placement of warrants to purchase 8,700,000 shares of common
stock, to a small number of accredited institutional investors, resulting in estimated net proceeds of approximately $6.1 million. We will need significant
additional funding before the end of fiscal 2020 to satisfy our obligations and fund the future expenditures that we believe will be required to support
commercialization of our products and conduct the clinical and regulatory work to develop our product candidates. We may 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
products, sales of assets, out-licensing transactions, and/or collaborative agreements with corporate partners, and from revenues from our sale of
compounded pharmacy formulations. We have used the net proceeds from debt and equity financings for general corporate purposes, which have included
funding for research and development, selling, general and administrative expenses, working capital, reducing indebtedness, pursuing and completing
acquisitions or investments in other businesses, products or technologies, and for capital expenditures. Assuming adequate funding, we anticipate that we
may make capital expenditures before the end of fiscal 2020 of at least approximately $2.0 million to $2.5 million including, without limitation,
expenditures relating to a new USC facility and the construction of manufacturing assembly lines for our SYMJEPI (epinephrine) Injection 0.3mg and
0.15mg products and our ZIMHI naloxone (APC-6000) product candidate.
Net cash used in operating activities for the years ended December 31, 2019 and 2018, was approximately $19.9 million and $32.7 million,
respectively. Net cash used in operating activities decreased primarily due to the decrease in operating losses, and decrease in prepaid expenses, inventories
and other current assets, compared to 2018.
Net cash used in investing activities was approximately $2,866,000 and $3,535,000 for the years ended December 31, 2019 and 2018,
respectively. The net cash used in investing activities decreased primarily due to the reduction in purchasing of additional equipment.
Net cash provided by financing activities was approximately $12,291,000 and $37,132,000 for the years ended December 31, 2019 and 2018,
respectively. The decrease in cash provided by financing was primarily due to a lower amount of proceeds raised from equity financing transactions in 2019
compared to 2018.
56
Loan Agreements
In connection with our acquisition of USC and the transactions contemplated by the merger agreement relating to the
USC acquisition, we assumed approximately $5,722,000 principal amount of debt obligations under two loan agreements and
related loan documents relating to the building, real property and equipment that certain third parties agreed to transfer to the
company or USC in connection with the merger transaction, as well as the two loan agreements to which USC is a party, a
working capital loan and an equipment loan, and related loan documents evidencing loans previously made to USC, and we
agreed to become an additional co-borrower under the loan agreement and related documents, such documents as amended
referred to as the “Loan Documents.” The lender in all of the Loan Documents was First Federal Bank and/or its successor Bear
State Bank, referred to as Lender or the Bank. In November 2016, we entered into amendments of our loan agreements with the
Bank. The balances of the USC working capital line, building loan and equipment loan were due and payable on February 28,
2018, August 9, 2020 and October 1, 2019, respectively. There was no outstanding balance on the USC Working Capital Line at
its maturity date, and that agreement has not currently been renewed or extended. In addition, amounts owed under the
equipment loan have been previously paid and there is no outstanding balance under those loan documents. Periodic interest and
principal payments under the building loan agreement are approximately $23,000 per month. We also entered into a loan and
security agreement with the Lender, referred to as the Adamis Working Capital Line, pursuant to which we may borrow up to an
aggregate of $2,000,000 to provide working capital to USC, subject to the terms and conditions of the loan agreement. Our
obligations under the Adamis Working Capital Line were secured by certain collateral, including without limitation our interest in
amounts that we have loaned to USC; a warrant that we issued to the Lender to purchase up to 1,000,000 shares of our common
stock at an exercise price equal to par value per share, only exercisable by Lender if we were in default under the loan documents
and if the Lender delivered a notice to us and we do not cure the default within the applicable cure period; and our Certificate of
Deposit (“CD”) with the Lender of approximately $1,000,000. On June 28, 2018, the company and the Lender amended the
warrant and the loan and security agreement to provide that effective as of June 1, 2018, if the company has not paid in full all
amounts that are required to be paid to the Lender under the loan documents on or before the maturity date of the loan, then the
Lender may exercise the Warrant. In July 2018, the Lender delivered a notice of exercise of the warrant and sold warrant shares
in an amount sufficient to satisfy substantially all of the outstanding principal balance of the loan. The Company paid the
remaining principal and accrued unpaid interest, and there is no outstanding balance under the Adamis Working Capital Line. In
addition, the Lender released the company’s $1.0 million restricted Certificate of Deposit that had served as additional collateral
for the Adamis Working Capital Line, and the amount is no longer restricted cash.
The building loan agreement included in the amended Loan Documents with the Bank include a variety of representations, warranties and
covenants that we are required to comply with. If we do not comply with the provisions of such agreements and documents and the Bank declares an event
of default, the Bank would be entitled to accelerate the maturity date of the loans, the principal and accrued interest would become due and payable, and the
Bank could elect to exercise its remedies as a secured creditor under the loan documents and applicable law.
Our ability to make scheduled payments on our indebtedness depends on our future performance and ability to raise additional capital if required,
which is subject to economic, financial, competitive and other factors, some of which are beyond our control. If we are unable to generate sufficient cash to
service our debt, we may be required to adopt one or more alternatives, such as selling assets, attempting to restructure our debt or obtaining additional
capital through sales of equity or incurrence of additional debt on terms that may be onerous or highly dilutive to our stockholders. Our ability to engage in
any of these activities would depend on the capital markets and our financial condition at such time, and we may not be able to do so when needed, on
desirable terms or at all, which could result in a default on our debt obligations. Additionally, the building loan included in the Loan Documents contains
various restrictive covenants, including, among others, our obligation to deliver to the Bank certain financial and other information, our obligation to
comply with certain notice and insurance requirements, and our inability, without the Bank’s prior consent, to dispose of certain of our assets, incur certain
additional indebtedness, enter into certain merger, acquisition or change of control transactions, pay certain dividends or distributions on or make certain
repurchases of our capital stock or incur any lien or other encumbrance on our assets, subject to certain permitted exceptions. Any failure by us to comply
with any of these covenants, subject to certain cure periods, or to make all payments under the debt instruments when due, would cause us to be in default
under the applicable debt instrument. In the event of any such default, the Bank may be able to foreclose on the assets that secure the debt or declare all
borrowed funds, together with accrued and unpaid interest, immediately due and payable, thereby potentially causing all of our available cash to be used to
pay our indebtedness or forcing us into bankruptcy or liquidation if we do not then have sufficient cash available. Any such event or occurrence could
severely and negatively impact our business, financial conditions or results of operations.
57
For additional information concerning our debt and equity financing transactions, and our loan agreements, see Notes 10, 11, 12, 15 and 16
accompanying our financial statements included elsewhere herein.
As noted above under the heading “Going Concern and Management Plan,” through December 31, 2019, Adamis had incurred substantial losses.
The availability of any required additional funding cannot be assured. If we do not obtain additional equity or debt funding in the near future, our cash
resources will be depleted and we will be required to materially reduce or suspend operations. Even if we are successful in obtaining additional funding to
permit us to continue operations at the levels that we desire, substantial time will pass before we obtain regulatory marketing approval for any products and
begin to realize revenues from sales of specialty pharmaceutical products, and during this period Adamis will require additional funds. No assurance can be
given as to the timing or ultimate success of obtaining future funding. As noted under the heading Recent Developments, the Company will be required to
devote additional cash resources, which could be significant, in order to continue development and commercialization of our product candidates and to
support our other operations and activities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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.
We believe the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial
results. For further discussion of our accounting policies, see Note 3 in the accompanying notes to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
Segment Information. The company is engaged primarily in the discovery, development and sales of pharmaceutical, specialty biopharmaceutical
and other drug products. Accordingly, the company has determined that it operates in one operating segment.
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 five-step process:
1.
2.
3.
4.
5.
Identify the contract with the customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) each performance obligation is satisfied
Cost of Sales. Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including
active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, the write-off of
obsolete inventory and other related expenses.
Accounts Receivable. Accounts receivable are reported at the amount management expects to collect on outstanding balances. Management
provides for probable uncollectible amounts through a charge to earnings and credit to allowance for doubtful accounts. Uncollectible amounts are based on
USC’s history of past write-offs and collections and current credit conditions.
Inventories. Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined using the first-in, first-out
(“FIFO”) method. Inventories consist of compounding formulation raw materials, work-in-process, currently marketed products, and device supplies.
Monthly, the company reviews the expiration dates of the raw materials, work-in-process and finished goods inventory, and a reserve for obsolescence is
recorded based on the expiration dates.
Acquisitions and Intangibles. The accounting for business combinations requires management to make judgments and estimates of the fair value
of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed. Such judgments and estimates directly
impact the amount of goodwill recognized in connection with each acquisition, as goodwill represents the excess of the purchase price of an acquired
business over the fair value of its net tangible and identifiable intangible assets.
58
Goodwill and Other Long-Lived Assets. Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair
value of net assets acquired. Goodwill is reviewed for impairment at least annually as of December 31 each year, or more frequently if events occur
indicating the potential for impairment. During its goodwill impairment review, the company may assess qualitative factors to determine whether it is more
likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited
to, macroeconomic conditions, industry and market considerations, and the overall financial performance and outlook of the company. If, after assessing
the totality of these qualitative factors, the company determines that it is not more likely than not that the fair value of its reporting unit is less than its
carrying amount, then no additional assessment is deemed necessary. Otherwise, the company proceeds to perform the two-step test for goodwill
impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying
amount of the reporting unit exceeds its fair value, the company performs the second step of the goodwill impairment test to determine the amount of loss,
which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill.
The company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer
relationships, patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and
estimated future entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the
estimate of the life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by
comparison of the assets’ book value to future net undiscounted cash flows that the assets are expected to generate.
We performed an impairment analysis as of December 31, 2019 and 2018, and no impairment of goodwill or acquired intangibles was
identified. The coronavirus pandemic and the related significant market decline, including the market price of the common stock of Adamis, may constitute
a triggering event that requires an assessment of the company's goodwill and other intangible assets as of March 31, 2020.
Deferred Income Taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the tax basis of such assets and liabilities. The company maintains a valuation allowance against its deferred
tax assets due to the uncertainty regarding the future realization of such assets, which is based on historical taxable income, projected future taxable income
and the expected timing of the reversals of existing temporary differences. Until such time as the company can demonstrate that it will no longer incur
losses, or if the company is unable to generate sufficient future taxable income, it could be required to maintain the valuation allowance against its
deferred tax assets.
Stock-Based Compensation. We account for stock-based compensation transactions in which we receive employee services in exchange for
options to purchase common stock. Stock-based compensation cost for restricted stock units or RSUs is measured based on the closing fair market value of
our 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. We recognize stock-based compensation cost as expense ratably on a straight-line basis over the
requisite service period.
Derivative Instruments and Hedging Activities. Derivatives are recognized as either assets or liabilities in the consolidated balance sheets and are
measured at fair value. The treatment of gains and losses resulting from changes in the fair values of derivative instruments is dependent on the use of the
respective derivative instrument and whether they qualify for hedge accounting.
Off Balance Sheet Arrangements
At December 31, 2019, we did not have any off balance sheet arrangements.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 3 to the accompanying consolidated financial statements included in Item 15 of this
Annual Report on Form 10-K.
59
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information required by Item 8 are set forth below commencing on page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, an evaluation was carried out by our management, with the participation
of the Principal Executive Officer and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of December 31, 2019. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the
Principal Executive Officer and Accounting Officer, to allow timely decisions regarding required disclosures.
Based on their evaluation, our Principal Executive Officer and Accounting Officer concluded that disclosure controls and procedures were
effective as of December 31, 2019.
Internal Control over Financial Reporting
Management’s report on our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) in the Exchange
Act), is included in this Annual Report on Form 10-K, under the heading “Management’s Report on Internal Control Over Financial Reporting”. This
report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, unless we
specifically state that the report is to be considered “filed” under the Exchange Act or incorporate it by reference into a filing under the Securities Act of
1933, as amended, or under the Exchange Act.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s
principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those policies and procedures that:
●
●
●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, particularly those related to subjective measurements and complex transactions, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets
that could have a material effect on the financial statements.
60
All internal control systems, no matter how well designed, have inherent limitations and 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. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Framework in Internal
Control - Integrated Framework and Internal Control over Financial Reporting-Guidance for Smaller Public Companies. As a result of this assessment,
management has concluded that our internal control over financial reporting was effective as of December 31, 2019, based on those criteria. Effectiveness
of our internal control over financial reporting as of December 31, 2019 has been audited by Mayer Hoffman McCann, P.C., an independent registered
public accounting firm, as stated in their report which appears elsewhere herein.
The independent registered public accounting firm that audited the consolidated financial statements that are included in this Annual Report on
Form 10-K has issued an audit report on our internal control over financial reporting. The report appears below.
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Adamis Pharmaceuticals Corporation and Subsidiaries:
Opinion on Internal Control over Financial Reporting
We have audited Adamis Pharmaceuticals Corporation and Subsidiaries’ (“Company”) internal control over financial reporting as of December 31, 2019,
based on criteria established in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, of the
Company and our report dated March 30, 2020, expressed an unqualified opinion that included an explanatory paragraph
regarding the existence of substantial doubt about the Company’s ability to continue as a going concern.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 30, 2020
61
Changes in Internal Controls
There has been no change during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
Not Applicable.
ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by Item 10 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the
registrant’s fiscal year end, or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 11:
EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the
registrant’s fiscal year end, or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Item 12 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the
registrant’s fiscal year end, or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the
registrant’s fiscal year end, or will be included in an amendment to this Annual Report on Form 10-K.
ITEM 14:
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Part III is incorporated by reference to the registrant’s proxy statement, to be filed within 120 days of the
registrant’s fiscal year end, or will be included in an amendment to this Annual Report on Form 10-K.
62
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits
The following exhibits are attached hereto or incorporated herein by reference.
PART IV
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed
Herewith
Form/
File No.
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
*10.1
*10.2
*10.3
*10.4
*10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Agreement and Plan of Share Exchange dated as of October 7, 2004, by and between the
Company and Biosyn, Inc.
Restated Certificate of Incorporation of the Registrant
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible
Preferred Stock dated August 19, 2014
Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible
Preferred Stock
Certificate of Designation of Preferences, Rights and Limitations of Series A-2 Convertible
Preferred Stock
Amended and Restated Bylaws of the Company
Specimen stock certificate for common stock
Form of Common Stock Purchase Warrant dated August 19, 2014
Form of Amended and Restated Warrant dated January 26, 2016
Form of Common Stock Purchase Warrant
Description of the Registrant's Common Stock
Form of Common Stock Purchase Warrant
2009 Equity Incentive Plan
Form of Stock Option Agreement for option awards
Form of Option Agreement for Non-Employee Directors*
Form of Restricted Stock Unit Agreement
Form of Indemnity Agreement with directors and executive officers
Agreement dated as of October 8, 1996 by and among Biosyn, Inc., Edwin B. Michaels and
E.B. Michaels Research Associates, Inc. (Confidential treatment has been granted with
respect to portions of this agreement.)
Funding Agreement dated October 12, 1992, by and between Ben Franklin Technology
Center of Southeastern Pennsylvania and Biosyn, Inc.
License Agreement dated July 28, 2006, by and between Nevagen, LLC and Adamis
Pharmaceuticals Corporation
Amendment to License Agreement dated December 29, 2008, by and between Nevagen, LLC
and Adamis Pharmaceuticals Corporation
Common Stock Purchase Agreement dated as of November 10, 2010, by and between
Adamis Pharmaceuticals Corporation and the Purchaser named therein (Confidential
treatment has been granted for portions of this exhibit.)
Registration Rights Agreement dated as of November 10, 2010, by and between Adamis
Pharmaceuticals Corporation and the Purchaser named therein
Executive Employment Agreement between the Company and Dennis J. Carlo dated
December 31, 2015*
Executive Employment Agreement between the Company and David J. Marguglio dated
December 31, 2015*
Executive Employment Agreement between the Company and Robert O. Hopkins dated
December 31, 2015*
Executive Employment Agreement between the Company and Karen K. Daniels dated
December 31, 2015*
Executive Employment Agreement between the Company and Thomas H. Moll, Ph.D. dated
December 31, 2015*
63
X
8-K
S-8
8-K
8-K
8-K
S-4/A 333-
155322
8-K
8-K
8-K
8-K
8-K
S-8
8-K
8-K
10-K
8-K
10-K
S-4/A 333-
155322
S-4/A 333-
155322
S-4/A 333-
155322
8-K
8-K
10-K
10-K
10-K
10-K
10-K
Date
10/26/04
03/17/14
08/20//14
01/26/16
07/12/16
01/12/09
04/03/09
08/20/14
01/26/16
08/01/19
02/21/20
07/18/18
09/16/11
01/13/11
03/30/17
01/13/11
03/31/05
01/12/09
01/12/09
01/12/09
11/12/10
11/12/10
03/23/16
03/23/16
03/23/16
03/23/16
03/23/16
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed
Herewith
Form/
File No.
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Product Development and Contract Manufacturing Agreement dated November 1, 2010,
between the Company and Beximco Pharmaceuticals Ltd.
First Amendment to Common Stock Purchase Agreement dated as of June 30, 2011, by and
between the Company and Eses Holdings (FZE)
Second Amendment to Common Stock Purchase Agreement dated as of November 10, 2011,
by and between the Company and Eses Holdings (FZE)
Third Amendment to Common Stock Purchase Agreement dated as of January 31, 2012, by
and between the Company and Eses Holdings (FZE)
Securities Purchase Agreement dated as of June 11, 2012
10% Senior Convertible Note dated as of June 11, 2012
Form of Subsidiary Guarantee dated as of June 11, 2012
Convertible Promissory Note dated as of June 11, 2012
Amendment to Convertible Promissory Note dated March 26, 2014
Securities Purchase Agreement dated as of April 5, 2013
12% Convertible Debenture dated April 5, 2013
Subscription Agreement dated as of June 26, 2013
Form of Secured Convertible Notes dated June 26, 2013
Form of Warrants dated June 26, 2013
Consent and Waiver
Exclusive License and Asset Purchase Agreement dated as of August 1, 2013, by and among
the Registrant, 3M Corp. and 3M Innovative Properties Company
64
10-Q
10-K
8-K
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-Q
8-K
8-K
Date
02/14/11
07/07/11
11/21/11
02/14/12
06/15/12
06/15/12
06/15/12
06/15/12
04/01/14
04/08/13
04/08/13
07/01/13
07/01/13
11/14/14
10/31/13
08/06/13
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed
Herewith
Form/
File No.
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
*10.64
10.65
*10.66
10.67
*10.68
10.69
*10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
Lease Agreement dated April 1, 2014, between the Registrant and Pacific North Court
Holdings, L.P.
Purchase Agreement dated August 19, 2014 by and between the Company and Sio Partners
QP LP and Sio Partners Offshores, Ltd.
Registration Rights Agreement dated August 18, 2014, by and between the Company and Sio
Partners LP, Sio Partners QP LP and Sio Partners Offshores, Ltd.
Form of Warrants dated June 26, 2013
Form of Warrant dated January 26, 2016
Purchase Agreement
Registration Rights Agreement dated as of January 26, 2016
Business Loan Agreement dated July 14, 2014, between First Federal Bank and U.S.
Compounding, Inc., and related loan documents
Business Loan Agreement between 4 HIMS, LLC and First Federal Bank dated August 8,
2014, and related loan documents
Business Loan Agreement between Tribute Labs, LLC and First Federal Bank dated March
21, 2014, and related loan documents
Loan Amendment, Forbearance and Assumption Agreement between the Company and Bear
State Bank, N.A.
Development, License and Commercialization Agreement dated as of May 9, 2016, between
the Company and Watson Laboratories, Inc. [Confidential treatment has been granted for
portions of this exhibit]
Loan Amendment and Assumption Agreement and related Agreements and Instruments
dated as of November 3, 2016
September 2016 Loan Amendment and Consolidation Agreement among Bear State Bank,
N.A., U.S. Compounding, Inc., Tribute Labs, LLC, and the Company
Amendment to Loan Agreement dated as November 3, 2016 between Bear State Bank, N.A.,
and the Company
September 2016 Amendment to Commercial Line of Credit Agreement and Note
Loan Release Agreement dated as of November 14, 2016
Form of Common Stock Purchase Warrant dated January 26, 2016
Amended and Restated Common Stock Purchase Warrant dated August 19, 2014
Purchase Agreement dated January 26, 2016
Amended and Restated Registration Rights Agreement dated January 26, 2016
Agreement and Plan of Merger by and among the Company, US Compounding, Inc., Ursula
MergerSub Corp. and Eddie Glover dated as of March 28, 2016
Form of Joinder Agreement and General Release dated March 28, 2016
Loan and Security Agreement by and between the Company and Bear State Bank, N.A.,
dated March 28, 2016
Common Stock Purchase Warrant dated March 28, 2016
Purchase Agreement dated July 11, 2016
Registration Rights Agreement dated July 11, 2016
Form of Common Stock Purchase Warrant dated July 11, 2016
Form of Common Stock Purchase Warrant dated August 3, 2016
Placement Agency Agreement between Maxim Group LL and the Company dated July 29,
2016
Form of Securities Purchase Agreement dated July 29, 2016
2017 Bonus Plan
Executive Employment Agreement between the Company and Eddie W. Glover dated March
28, 2016*
2018 Bonus Plan
Compensation Committee Authorization Regarding Discretionary Payments
2019 Bonus Plan
Underwriting Agreement dated January 9, 2015
Executive Employment Agreement between the Company and Ronald B. Moss, M.D., dated
as of February 28, 2017.
March 2017 Amended and Restated Line of Credit Promissory Note
March 2017 Amendment to Loan and Security Agreement between the Company and Bear
State Bank
March 2018 Amendment to Loan and Security Agreement
March 2018 Amended and Restated Line of Credit Promissory Note
June 2018 Amendment to Loan and Security Agreement and Warrant
Underwriting Agreement dated August 2, 2018
Distribution and Commercialization Agreement between the Company and Sandoz, Inc.
(Confidential treatment has been granted for portions of this exhibit)
65
10-KT
8-K
8-K
10-Q
8-K
8-K
8-K
10-Q
10-Q
10-Q
10-Q
10-Q
10-K
10-K
10-K
10-K
10-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
8-K
8-K
10-K
10-K
10-K
10-K
10-K
10-Q
8-K
10-Q
Date
03/26/15
08/20/14
08/20/14
11/14/14
01/26/16
01/26/16
01/26/16
08/15/16
08/15/16
08/15/16
08/15/16
08/15/16
03/30/17
03/30/17
03/30/17
03/30/17
03/30/17
01/26/16
01/26/16
01/26/16
01/26/16
03/29/16
03/29/16
03/29/16
03/29/16
07/12/16
07/12/16
07/12/16
07/29/16
07/29/16
07/29/16
03/30/17
03/30/17
02/27/18
02/27/18
2/5/2019
01/09/15
03/30/17
03/30/17
03/30/17
12/31/2017
12/31/2017
08/19/18
08/02/18
11/9/2018
Incorporated by Reference
Exhibit
Number
Exhibit Description
Filed
Herewith
Form/
File No.
10.78
Placement Agency Agreement between Maxim Group LLC and the Company dated February
20, 2020
Form of Securities Purchase Agreement dated February 21, 2020
Subsidiaries of the Registrant
Consent of Mayer Hoffman McCann P.C., Independent Registered Public Accounting Firm
Power of Attorney (See signature page)
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
10.79
21.1
23.1
24.1
31.1
31.2
32.1
32.2
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
8-K
8-K
10-K
X
X
X
X
X
X
Date
02/21/2020
02/21/2020
03/30/17
*
Represents a compensatory plan or arrangement.
ITEM 16.
FORM 10-K SUMMARY
None.
66
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California.
SIGNATURES
Dated: March 30, 2020
ADAMIS PHARMACEUTICALS CORPORATION
By: /s/ DENNIS J. CARLO
Dennis J. Carlo
Chief Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints each of Dennis J. Carlo and Robert O. Hopkins, true and lawful attorney-in-
fact, with the power of substitution, for him in any and all capacities, to sign amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the
capacities and on the dates indicated:
Name
Principal Executive Officer:
/s/ DENNIS J. CARLO
Dennis J. Carlo
Principal Financial Officer
and Principal Accounting Officer:
/s/ ROBERT O. HOPKINS
Robert O. Hopkins
Directors:
/s/ DAVID J. MARGUGLIO
David J. Marguglio
/s/ RICHARD C. WILLIAMS
Richard C. Williams
/s/ ROSHAWN A. BLUNT
Roshawn A. Blunt
/s/ HOWARD C. BIRNDORF
Howard C. Birndorf
Title
Date
Chief Executive Officer and Director
March 30, 2020
Senior Vice President, Finance,
Chief Financial Officer and Secretary
March 30, 2020
Director
Chairman
Director
Director
67
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
DECEMBER 31, 2019 AND 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
PAGE
F-1
F-2
F-3
F-4
F-5 - F-6
F-7 - F-28
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Adamis Pharmaceuticals Corporation and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Adamis Pharmaceuticals Corporation and Subsidiaries (the “Company”) as of December
31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period
ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 30, 2020, expressed an unqualified opinion.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has incurred recurring losses from operations and is dependent on
additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are described in Note 2 to the financial statements. The financial
statements 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.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mayer Hoffman McCann P.C.
We have served as the Company’s auditor since 2007.
San Diego, California
March 30, 2020
F- 1
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2019
December 31, 2018
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
Accounts Receivable, net
Inventories, net
Prepaid Expenses and Other Current Assets
LONG TERM ASSETS
Security Deposits
Intangible Assets, net
Goodwill
Fixed Assets, net
Right-of-Use Assets
Other Non-Current Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable
Deferred Revenue
Accrued Other Expenses
Accrued Bonuses
Lease Liabilities, current portion
Bank Loans - Building and Equipment, current portion
LONG TERM LIABILITIES
Deferred Tax Liability, net
Lease Liabilities, net of current portion
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stock - Par Value $0.0001; 10,000,000 Shares Authorized; Series A-2 convertible,
Zero and Zero Issued and Outstanding at December 31, 2019 and December 31, 2018,
respectively.
Common Stock - Par Value $0.0001; 100,000,000 Shares Authorized; 62,352,465 and
47,814,315 Issued, 61,829,508 and 47,291,358 Outstanding at December 31, 2019 and
December 31, 2018, respectively.
Additional Paid-in Capital
Accumulated Deficit
Treasury Stock, at cost - 522,957 Shares at December 31, 2019 and December 31, 2018.
Total Stockholders’ Equity
$
$
$
$
8,810,636 $
1,877,655
2,061,097
1,127,322
13,876,710
54,655
11,127,562
7,640,622
11,667,416
1,873,552
1,600,000
47,840,517 $
4,267,654 $
915,671
2,428,619
—
444,621
2,153,182
10,209,747
112,530
1,480,996
11,803,273
19,271,642
1,155,166
3,279,032
2,078,413
25,784,253
54,655
13,210,596
7,640,622
9,867,921
—
1,800,000
58,358,047
4,170,720
1,011,246
2,340,095
1,448,505
—
2,583,134
11,553,700
112,530
—
11,666,230
—
—
6,235
218,350,785
(182,314,526)
(5,250)
36,037,244
47,840,517 $
4,781
199,696,656
(153,004,370)
(5,250)
46,691,817
58,358,047
The accompanying notes are an integral part of these Consolidated Financial Statements
F- 2
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
REVENUE, net
COST OF GOODS SOLD
Gross Profit
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
RESEARCH AND DEVELOPMENT
LOSS ON IMPAIRMENT
Loss from Operations
OTHER INCOME (EXPENSE)
Interest Expense
Interest Income
Total Other Income (Expense)
(Loss) Before Income Taxes
Income Tax (Expense) Benefit
Net (Loss)
Basic & Diluted (Loss) Per Share:
Basic & Diluted (Loss) Per Share
Basic & Diluted Weighted Average Shares Outstanding
Year Ended
December 31,
2019
22,113,869 $
15,478,815
6,635,054
Year Ended
December 31,
2018
15,086,643
9,797,988
5,288,655
$
25,287,568
10,375,991
322,106
(29,350,611)
25,948,062
18,793,836
10,517
(39,463,760)
(123,258)
175,772
52,514
(29,298,097)
(8,672)
(29,306,769) $
(157,765)
245,403
87,638
(39,376,122)
369,340
(39,006,782)
(0.55) $
53,263,918
(1.00)
39,085,490
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements
F- 3
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Series A-2
Convertible
Preferred Stock
Common Stock
Treasury
Stock
Balance December
Shares Amount
Shares
Amount
Additional
Paid-
In Capital
Shares Amount
Accumulated
Deficit
Total
— $ —
33,696,920 $
3,369 $
153,546,932 307,540 $
(5,229) $ (113,997,588) $ 39,547,484
31, 2017
Common Stock
Issued, net of
issuance cost
of $2,630,242
Common Stock
Issued for
Exercised
Options
Common Stock
Issued for
Exercised
Warrants
Payment of
Bank Loan -
Line of Credit
—
—
13,416,667
1,342
37,618,416
—
—
— 37,619,758
—
—
750
—
—
—
—
—
—
—
—
699,978
70
(70)
—
—
—
—
—
—
—
—
1,996,062
—
—
—
1,996,062
Purchase of
Treasury
Stock
Share Based
— —
— —
21 215,417
(21)
—
—
Compensation
Net (Loss)
Balance
December 31,
2018
Common Stock
Issued, net of
issuance cost
of $1,012,130
Cumulative
effect from
adoption of
Topic 842 (1)
Issuance of
Restricted
Stock Units
Share Based
Compensation
Net (Loss)
Balance December
31, 2019
—
—
—
—
—
—
—
—
6,535,295
—
—
—
—
—
—
6,535,295
(39,006,782) (39,006,782)
— $
—
47,814,315 $
4,781 $
199,696,656 522,957 $
(5,250) $ (153,004,370) $ 46,691,817
—
—
13,800,000
1,380
12,786,490
—
—
—
12,787,870
—
—
—
—
—
—
—
(3,387)
(3,387)
—
—
738,150
74
(74)
— —
—
—
—
—
—
—
—
—
—
—
5,867,713
—
—
—
—
—
—
5,867,713
(29,306,769) (29,306,769)
— $
—
62,352,465 $
6,235 $
218,350,785 522,957 $
(5,250) $ (182,314,526) $ 36,037,244
(1)
The Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases. Refer to the recent accounting pronouncements footnote for further
details.
The accompanying notes are an integral part of these Consolidated Financial Statements
F- 4
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)
Adjustments to Reconcile Net (Loss) to Net
Cash (Used in) Operating Activities:
Stock Based Compensation
Provision for Bad Debts
Provision for Excess and Obsolete Inventory
Non-Cash Operating Lease Expense
Depreciation and Amortization Expense
Loss on Impairment of Inventory
Loss on Impairment of Fixed Assets
Gain on Sale of Fixed Assets
Deferred Tax Provision
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable
Inventories
Prepaid Expenses and Other Current Assets
Other Non-Current Assets
Increase (Decrease) in:
Accounts Payable
Deferred Revenue
Accrued Other Expenses and Bonuses
Net Cash (Used in) Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment
Net Cash (Used in) Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock, net of issuance cost
Principal Payment of Finance Leases
Payments of Bank Loan
Net Cash Provided by Financing Activities
(Decrease) Increase in Cash and Cash Equivalents
Cash:
Beginning, Cash and Cash Equivalents
Ending, Cash and Cash Equivalents
Year Ended
December 31, 2019
Year Ended
December 31, 2018
$
(29,306,769) $
(39,006,782)
5,867,713
22,660
871,066
18,460
2,944,516
322,106
—
(9,000)
—
(745,149)
24,763
951,091
—
574,510
(95,575)
(1,326,060)
(19,885,668)
(2,866,418)
(2,866,418)
12,787,870
(66,838)
(429,952)
12,291,080
(10,461,006)
19,271,642
8,810,636 $
6,535,295
95,937
3,525,783
—
3,098,916
—
10,517
(758)
(372,472)
(421,013)
(4,980,257)
(1,604,233)
(1,800,000)
846,123
996,488
418,907
(32,657,549)
(3,535,364)
(3,535,364)
37,619,758
—
(487,905)
37,131,853
938,940
18,332,702
19,271,642
$
The accompanying notes are an integral part of these Consolidated Financial Statements
F- 5
ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Income Taxes
Cash Paid for Interest
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES
Increase (Decrease) in Accrued Capital Expenditures
Exercise of Warrants for Payment of Working Capital Line
Acquisition of Treasury Shares in Connection with Warrant Exercise
Year Ended
December 31, 2019
Year Ended
December 31, 2018
9,001
106,784
$
$
5,613
181,277
(477,576) $
—
$
—
405,477
1,996,062
21
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements
F- 6
Notes to the Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS
The company formerly named Adamis Pharmaceuticals Corporation, or Old Adamis, was founded in June 2006 as a Delaware corporation.
Effective April 1, 2009, Old Adamis completed a business combination transaction with Cellegy Pharmaceuticals, Inc., or Cellegy. Before the merger,
Cellegy was a public company and Old Adamis was a private company. In connection with the consummation of the merger and pursuant to the terms of
the definitive merger agreement relating to the transaction, Cellegy was the surviving corporation in the merger and changed its name from Cellegy
Pharmaceuticals, Inc. to Adamis Pharmaceuticals Corporation (the “Company,” “Adamis Pharmaceuticals” or “Adamis”), and Old Adamis survived as a
wholly-owned subsidiary and changed its corporate name to Adamis Corporation. The Company has three wholly-owned subsidiaries: Adamis
Corporation; U.S. Compounding, Inc.; and Biosyn, Inc.
On April 11, 2016, the Company completed its acquisition of U.S. Compounding, Inc., an Arkansas corporation (“USC”), pursuant to the terms of
the Agreement and Plan of Merger dated March 28, 2016 (the “Merger Agreement”) and entered into by and among the Company, USC and Ursula
MergerSub Corp., an Arkansas corporation and a wholly owned subsidiary of the Company (“MergerSub”). Pursuant to the terms of the Merger
Agreement, MergerSub merged with and into USC (the “Merger”), with USC surviving as a wholly owned subsidiary of the Company.
USC, which is registered as a drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act and the U.S.
Drug Quality and Security Act, provides prescription compounded medications, including compounded sterile preparations and non-sterile compounds, to
patients, physician clinics, hospitals, surgery centers and other clients in many states throughout the United States. USC also provides certain veterinary
pharmaceutical products for animals.
NOTE 2:
GOING CONCERN
The Company’s 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, the Company has incurred substantial recurring losses from operations, has used, rather than provided, cash
in the Company’s continuing operations, and is dependent on additional financing to fund operations. As of December 31, 2019,
the Company had cash and cash equivalents of approximately $8.8 million, an accumulated deficit of approximately $182.3
million, and liabilities of approximately $11.8 million. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. The 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. The Company will need additional funding before the end of fiscal 2020 to continue operations,
satisfy its obligations and fund the future expenditures that will be required to conduct the clinical and regulatory work to develop
its product candidates. Management intends to attempt to secure additional required funding through equity or debt financings,
sales or out-licensing of product candidates or other intellectual property assets, revenues from sales of compounded sterile
formulations, share of profits received relating to sales in the U.S. of the Company’s SYMJEPI products, seeking partnerships or
commercialization agreements with other pharmaceutical companies or third parties to co-develop and fund research and
development or commercialization efforts relating to the Company’s products, from a business combination, or similar
transactions. However, there can be no assurance that the Company will be able to obtain any sources of funding.
NOTE 3:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include Adamis Pharmaceuticals and its wholly-owned operating subsidiaries. All significant
intra-entity balances and transactions have been eliminated in consolidation.
Segment Information
The Company is engaged primarily in the discovery, development and sales of pharmaceutical, biotechnology and other drug products.
Accordingly, the Company has determined that it operates in one operating segment.
F- 7
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates, and the differences could be material.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash
equivalents. Cash equivalents are comprised of money market funds and certificates of deposit.
Accounts Receivable
Accounts receivable are reported at the amount management expects to collect on outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and credit to allowance for doubtful accounts. Uncollectible amounts are based on the Company’s
history of past write-offs and collections and current credit conditions. Allowance for doubtful accounts as of December 31, 2019 and 2018 was
approximately $99,000 and $175,000, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. The costs of inventories are determined using the first-in, first-out (“FIFO”)
method. Inventories consist of compounding formulation raw materials, work-in-process, currently marketed products, and device supplies. Monthly, the
Company reviews the expiration dates of the raw materials, work-in-process and finished goods inventory, and a reserve for obsolescence is recorded based
on the expiration dates. Reserve for obsolescence as of December 31, 2019 and 2018 was approximately $473,000 and $526,000, respectively.
Fixed Assets
Fixed assets are recorded at historical cost or fair value as of the date acquired, and depreciated on a straight line basis with useful lives ranging
from 3-30 years.
Acquisitions
The Company has previously engaged in business combination activity. The accounting for business combinations requires management to make
judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities assumed.
Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill represents the excess of
the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.
F- 8
Goodwill and Other Long-Lived Assets
Goodwill, which has an indefinite useful life, represents the excess of purchase consideration over fair value of net assets acquired. Goodwill is
reviewed for impairment at least annually as of December 31 each year, or more frequently if events occur indicating the potential for impairment. During
its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its
reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions,
industry and market considerations, and the overall financial performance of the Company.
In performing the Company's goodwill impairment tests during 2019, the Company utilized the approach prescribed under the Accounting
Standard Codification, or ASC, 350, as amended by Accounting Standard Update, or ASU, 2017-04, Intangibles — Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which the Company adopted on January 1, 2017. ASU 2017-04 requires that an entity
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
The Company evaluates its long-lived assets with definite lives, such as property and equipment, acquired technology, customer relationships,
patent and license rights, for impairment by considering competition by products prescribed for the same indication, the likelihood and estimated future
entry of non-generic and generic competition with the same or similar indication and other related factors. The factors that drive the estimate of the life are
often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparison of the assets’
book value to future net undiscounted cash flows that the assets are expected to generate.
The Company performed an annual impairment analysis as of December 31, 2019 and 2018, and no impairment of goodwill or other long-lived
assets was identified.
Derivative Instruments and Hedging Activities
Derivatives are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair value. The treatment of gains
and losses resulting from changes in the fair values of derivative instruments is dependent on the use of the respective derivative instrument and whether
they qualify for hedge accounting. As of December 31, 2019 and 2018, there were no derivative instruments.
Revenue Recognition
The Company recognizes revenues pursuant to ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606). Accordingly, revenue is
recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a
customer. This principle is applied using the following 5-step process: (1) identify the contract with the customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize
revenue when (or as) each performance obligation is satisfied. Revenue arrangements consist of a single performance obligation of which control is
transferred at a point in time, and represents the amount of consideration the Company expects to receive in exchange for transferring the goods.
Cost of Goods Sold
The Company's 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.
F- 9
Stock-Based Compensation
The Company accounts for stock-based compensation transactions in which the Company receives employee services in exchange for restricted
stock units ("RSUs") or options to purchase common stock 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 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.
Research and Development
Research and development costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research
and development activities are recorded as an asset and are expensed when the research and development activities are performed. For the years ended
December 31, 2019 and 2018, the Company incurred approximately $10.4 million and $18.8 million, respectively, on all research and development
activities.
Legal Expense
Legal fees are expensed as incurred and are included in selling, general and administrative expenses on the consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the deferred income tax method. Under this method, deferred income taxes are determined based
on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax
laws.
Deferred income tax provisions and benefits are based on changes to the assets and liabilities from year to year. In providing for deferred taxes, the
Company considers tax regulations of the jurisdictions in which they operate, estimates of future taxable income, and available tax planning strategies. If
tax regulations, operating results or the ability to implement tax planning strategies vary, adjustments to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more-likely-than-not” criteria.
The Company accounts for uncertain tax positions in accordance with accounting guidance which requires the Company to recognize the financial
statement benefit of a tax position only after determining that the relevant tax authority would, more likely than not, sustain the position following an audit.
For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company is subject to income taxes in the United States and various states. Tax years since the Company’s inception remain open to
examination by the major taxing jurisdictions to which the Company is subject. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in its income tax expense, if any. No interest or penalties have been accrued for any presented periods.
Basic and Diluted Net Loss Per Share
The Company computes basic loss per share by dividing the loss attributable to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. The diluted loss per share calculation is based on the treasury stock method and gives
effect to dilutive options, warrants, convertible notes, convertible preferred stock and other potential dilutive common stock. The effect of common stock
equivalents was anti-dilutive and was excluded for all periods presented from the calculation of weighted average shares outstanding. Potential dilutive
securities for the years ended December 31, 2019 and 2018 consist of outstanding warrants (15,934,670 shares and 2,138,887 shares, respectively),
outstanding options (7,837,245 shares and 9,298,101 shares, respectively), and outstanding restricted stock units (3,090,397 shares and 1,642,212 shares,
respectively).
F- 10
Loss per Share - Basic & Diluted
Numerator for basic & diluted loss per share
Denominator for basic & diluted loss per share
Loss per common share - basic & diluted
Recently Adopted Accounting Pronouncements
For the Years Ended December 31,
2019
2018
$
$
(29,306,769) $
53,263,918
(0.55) $
(39,006,782)
39,085,490
(1.00)
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 Leases (Topic 842), also referred to as “ASC
842” or “New Lease Standard”, which supersedes ASC 840 Leases (Topic 840), and provides principles for the recognition, measurement, presentation and
disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance through the issuance of additional ASUs. The new
standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease
is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with
a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less may be accounted for similar to existing
guidance for operating leases. ASC 842 was effective for the Company for the year ending December 31, 2019. The Company reported its financial
information for fiscal years ending before December 31, 2018 under the Topic 840 lease accounting standard. The Company applied the modified
retrospective transition method and elected the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company
recognized the cumulative effect of the transition adjustment as of the effective date and will not provide any new lease disclosures for periods before the
effective date. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the
Company will, in effect, continue to account for existing leases as classified in accordance with ASC 840, throughout the entire lease term, including
periods after the effective date, with the exception that the Company will apply the new balance sheet recognition guidance for operating leases and apply
ASC 842 for remeasurements and modifications after the transition date.
Other key practical expedients elected by the Company (as a lessee) relate to maintaining leases with an initial term of 12
months or less off the balance sheet; not separating lease and non-lease components and the use of the portfolio approach to
determine the incremental borrowing rate. For transition purposes, the Company used the incremental borrowing rate based on
the total lease term and total minimum rental payments. The Company completed its identification of leases which comprised
two building leases and two equipment leases. Further, the Company analyzed service contracts and parts assembly arrangements
from suppliers and did not identify any material leases of production equipment. On the date of initial application, the Company
recognized right-of-use ("ROU") assets and leasing liabilities on its consolidated balance sheets of approximately $2 million. The
adoption had no significant impact on the Company's consolidated statement of operations.
Recent Accounting Pronouncements
In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes
meant to simplify interim disclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a
reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim
periods. In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections – Amendments to SEC Paragraphs Pursuant to SEC Final
Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and
Miscellaneous Updates (SEC Update).” ASU 2019-07 codifies Final Rule Release No. 33-10532. ASU 2019-07 is effective immediately and did not have
a material impact on the company's Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for income Taxes”. The amendments in
the ASU eliminate certain exceptions under current guidance for investments, intra-period allocations, and the methodology for
calculating interim income tax. In addition, the amendments also add new guidance to simplify accounting for income taxes.
The amendments are effective January 1. 2021, but early adoption is permitted. The Company is still currently assessing the
impact of this new guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes
to the Disclosure Requirements for Fair Value Measurement. The amendments modify the disclosure requirements in Topic 820
to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain
disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of
ASU 2018-13 to have a material impact on our consolidated financial statements.
F- 11
NOTE 4:
REVENUES
Revenue from Contracts with Customers
Revenue is recognized pursuant to ASC Topic 606, “Revenue from Contracts with Customers” (ASC 606). Accordingly,
revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for
transferring goods or services to a customer. This principle is applied using the following 5-step process:
1.
2.
3.
4.
5.
Identify the contract with the customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when (or as) each performance obligation is satisfied.
Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in various
therapeutic areas, including respiratory disease, allergy and opioid overdose. The Company's subsidiary U.S. Compounding, Inc.
or USC provides 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. USC’s product
offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products,
injectables, urological preparations, topical compounds for pain and men’s and women’s health products.
Adamis and USC have contracts with customers when (i) the Company enters into an enforceable contract with a
customer that defines each party’s rights regarding the goods or services to be transferred and identifies the related payment
terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all
consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the
promised consideration.
Effective July 1, 2018 (the “Effective Date”), Adamis signed an exclusive distribution and commercialization agreement
with Sandoz, Inc. (“Sandoz”). This agreement grants Sandoz the exclusive rights to market, sell and distribute the Company’s
SYMJEPI epinephrine pre-filled syringe injectable products (“Products”) throughout the United States only. The Company
generates revenue from this agreement by manufacturing and supplying Sandoz with Products. The Company's performance
obligation is to manufacture and supply the Products to Sandoz based on the Purchase Orders received.
The initial term for the agreement with Sandoz began on the Effective Date and shall continue for a period of 10 years
from the first launch of Product in the United States, unless terminated earlier in accordance with its terms. We have determined
that the individual Purchase Orders, whose terms and conditions taken with the distribution and commercialization agreement,
create the Topic 606 contracts. The term will automatically renew for one year terms after the initial 10-year term and subsequent
renewal terms, unless terminated by either party. The revenue arrangements (including Purchase Orders) generally consists of a
single performance obligation, which is satisfied at the point in time when the Product is delivered to the carrier, as control, title
and risk of loss is passed on to Sandoz upon delivery of the products to the carrier.
The Company has the following payment considerations with Sandoz: (1) One-time milestone payment, which grants
Sandoz the option for the distribution and commercialization of the Product in the United States market only. This one-time
milestone payment is a non-refundable up-front fee and is considered a material right. Revenue from this up-front fee is
recognized as the option to distribute is exercised, which is substantially the expected customer life, estimated as 10 years. The
period of recognition is subject to adjustment if the expected customer life changes; and (2) Considerations which are recognized
upon satisfaction of the performance obligation, comprised of the following:
(i)
(ii)
Firm Orders based on Purchased Orders received, specifying quantities ordered by Sandoz. Sandoz is obligated to pay Adamis for
Products ordered based on a supply pricing arrangement plus additional cost of shipping and distribution. This fixed consideration does
not require estimation, as the terms of the fixed payment relate to the Company's efforts to satisfy distinct goods in the contract;
Profit sharing arrangement, which requires Sandoz to pay Adamis 50% of the net profit generated from the sale of Products by Sandoz
over a given quarter. The variable consideration from profit sharing is estimated based on current sales levels and historical experience
using the expected value method, subject to constraint; and
The arrangement with Sandoz also includes sales-based royalties in the form of commercial milestone payments that are
payable upon successful achievement of certain milestone events specified under the agreement. There are five commercial
milestone events, based on certain revenue thresholds from Products sold over the term. The variable consideration from
milestone payments is estimated using the most likely amount method, subject to constraint.
F- 12
In accordance to ASC 606, an estimate of the expected net profit share or commercial milestone payments that the
Company has present rights to, shall be recognized when there is a basis to reasonably estimate the amount of these
considerations and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur,
taking into consideration historic activity, performance against established targets and other factors affecting the estimates.
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.
With respect to sales of prescription compounded medications by the Company's USC subsidiary, revenue arrangements
consist of a single performance obligation which is satisfied at the point in time when goods are delivered to the customer. The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods and services to the customer.
The contracts between the Company and the customers provide that the transaction price for medication sales is adjusted
for estimated product returns that the Company expects to occur under its return policy based upon historical return rates, which
have historically been immaterial. In rare cases when the transaction price includes variable consideration, the Company
estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value
method. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for
any changes.
The Company has extensive experience with the types of contracts entered with customers regarding sales of medications
by USC, and does not have a history of offering a broad range of price concessions or payment term changes. The Company
believes a significant reversal in the amount of cumulative revenue recognized from such contracts is neither probable nor
significant. The transaction price for all transactions is based on the price reflected in the individual customer’s purchase order.
Variable consideration has not been identified as a significant component of the transaction price for any of the Company's
transactions regarding sales of medications by USC.
Disaggregation of Revenue
As operations under a sterile environment is covered by Section 503B of the U.S. Food, Drug & Cosmetic Act, as
amended, and the U.S. Drug Quality and Security Act, USC’s sterile operations are governed by specific regulatory and quality
requirements. Any deviation from these standards could result in a stoppage of operations, recall of products, and a significant
reduction in revenues. The Company employs rigorous quality controls and outside testing facilities to minimize the likelihood of
this occurrence. The Company outsources the manufacturing of the SYMJEPI product to third party manufacturers who bear the
responsibility of maintaining a suitable environment as governed by specific regulatory and quality requirements.
The following table presents the Company's revenues disaggregated by outsourced manufacturing, sterile and non-sterile
regulatory environments for the twelve months ended December 31, 2019 and 2018.
Outsourced Manufacturing
Sterile
Non-Sterile
Total
For the Years Ended
December 31,
2019
3,762,967 $
13,495,344
4,855,558
22,113,869 $
2018
—
9,116,123
5,970,520
15,086,643
$
$
The Company's revenues relating to its FDA approved SYMJEPI products are dependent on an exclusive distribution
agreement with Sandoz and the Company’s pharmacy formulations rely, in large part, on sales generated from clinics and hospital
customers. Adverse economic conditions pose a risk that the Company’s customers may reduce or cancel spending, which would
impact the Company’s revenues.
The following table presents the Company’s revenue disaggregated by end market for the years ended December 31, 2019
and 2018.
Distribution Channel - Sandoz
Clinics/Hospitals
Direct to Patients
Total
For the Years Ended
December 31,
2019
3,762,967 $
17,247,663
1,103,239
22,113,869 $
2018
—
13,405,933
1,680,710
15,086,643
$
$
F- 13
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 years ended December 31, 2019 and 2018, $111,246 and
$14,758 of the revenues recognized were reported as deferred revenue as of December 31, 2018 and 2017, respectively.
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.
During 2018, the Company capitalized the $2.0 million fee paid to a financial advisor as an incremental cost of obtaining
a contract to commercialize and distribute the Company’s first FDA approved product SYMJEPI with Sandoz. The costs were
deferred and will be amortized over the economic benefit period estimated to be approximately 10 years from date of product
launch, based on the term of the arrangement with Sandoz. The period of recognition is subject to adjustment in future periods if
the expected period of benefit changes. The deferred costs of $0.2 million and $0.2 million; and $1.6 million and $1.8 million
were respectively classified as current or non-current as of December 31, 2019 and December 31, 2018 in the Company’s
consolidated balance sheets based on the timing of when the Company expects to recognize the expense. As of December 31,
2019 and December 31, 2018, the Company had $1.8 million and $2.0 million, respectively, of deferred costs related to obtaining
a contract with $200,000 and $0 amortized to Selling, General and Administrative expenses during the years ended December 31,
2019 and 2018, respectively. Periodically, the Company evaluates for impairment the carrying book value of the Cost to Obtain a
Contract asset, no impairment was identified in fiscal 2019 or 2018.
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.
NOTE 5:
CONCENTRATIONS
Financial instruments that potentially subject the Company to credit risk consist principally of cash and accounts payable.
Cash and Cash Equivalents
The Company at times may have cash in excess of the Federal Deposit Insurance Corporation (“FDIC”) limit. The Company maintains its cash
with larger financial institutions. The Company has not experienced losses on these accounts and management believes that the Company is not exposed to
significant risks on such accounts.
Sales and Trade Receivables
Trade receivables are primarily short-term receivables from sales of compounded products to clinics/hospitals and directly
to patients, and of the FDA approved SYMJEPI products through a distribution channel. The Company had one customer that
had a balance greater than 10% of the accounts receivables or accounted for more than 10% of total sales for the year ended
December 31, 2019. Customer A had a balance that accounted for approximately 30% of the total trade receivables at December
31, 2019 and approximately 17% or $3.8 million of total sales for the year. Customer A is a reputable distribution firm and has
generally paid its obligations to the Company in a timely manner. Moreover, due diligence and review of credit worthiness were
made prior to entering into the distribution contract with the customer. The Company mitigates its credit risks by performing
ongoing credit evaluations of its customers’ financial conditions.
Purchases and Accounts Payable
The Company had one vendor that had balances greater than 10% of trade accounts payable or accounted for more than 10% of total purchases for
the year ended December 31, 2019. Vendor A had a balance that accounted for 21% of the total accounts payable at December 31, 2019 and approximately
13% or $3.9 million of total purchases for the year. The Company has minimal or no exposure to the elimination of Vendor A, there are a number of
companies which could provide the same services, and management believes, on comparable terms. Comparatively, the Company had three vendors that
had balances greater than 10% of trade accounts payable or accounted for more than 10% of total purchases for the year ended December 31, 2018. Vendor
B and Vendor C had balances that accounted for 10% each of the total accounts payable at December 31, 2018 but did not account for more than 10% of
total purchases for the year. Vendor D accounted for approximately 11% or $4.4 million of total purchases for the year.
F- 14
NOTE 6:
INVENTORIES
Inventories at December 31, 2019 and December 31, 2018 consisted of the following:
Finished Goods
Raw Material
Devices
December 31,
2019
1,158,637 $
360,609
541,851
2,061,097 $
December 31,
2018
1,320,738
527,308
1,430,986
3,279,032
$
$
Reserve for obsolescence as of December 31, 2019 and December 31, 2018 was approximately $473,000 and $526,000, respectively.
NOTE 7:
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2019 and December 31, 2018:
Prepaid Insurance
Prepaid - Research and Development
Other Prepaid
Other Current Assets
NOTE 8: FIXED ASSETS
December 31,
2019
December 31,
2018
$
$
193,613 $
137,727
792,542
3,440
1,127,322 $
175,253
1,308,517
591,203
3,440
2,078,413
Fixed assets at December 31, 2019 and December 31, 2018 are summarized in the table below:
Description
Useful Life
(Years)
December 31,
2019
Building
Machinery and Equipment
Furniture and Fixtures
Automobile
Leasehold Improvements
Total Fixed Assets
Less: Accumulated Depreciation
Land
Construction In Progress - Equipment
Fixed Assets, net
30 $
3 - 7
7
5
7 - 15
$
F- 15
December 31,
2018
3,040,000
2,244,744
126,654
9,395
284,037
5,704,830
(1,578,049)
460,000
5,281,140
9,867,921
3,040,000 $
2,437,525
156,259
9,500
342,330
5,985,614
(2,050,697)
460,000
7,272,499
11,667,416 $
For the years ended December 31, 2019 and 2018, depreciation expense was approximately $598,000 and $623,000,
respectively. During 2019, the additions to fixed assets of approximately $2,398,000 were primarily due to the construction of
the assembly line for the Company's SYMJEPI (epinephrine) Injection 0.3 mg and 0.15 mg products, which is scheduled to be
placed into service in January of 2020, and additional fixed assets purchased by USC for the relocation of the 503b operations,
which are expected to be placed into service in the latter half of 2020. The additions to fixed assets of approximately $3,941,000
during 2018 were primarily due to the USC relocation of the 503B operations into a new facility and the construction of the
assembly line for SYMJEPI. The disposals of fixed assets for the years ended December 31, 2019 and 2018 were $126,000 and
$0, respectively. For the year ended December 31, 2018, the Company recorded a loss of approximately $11,000, related to the
impairment of fixed assets of approximately $15,000 with accumulated depreciation of approximately $4,000.
NOTE 9:
INTANGIBLE ASSETS AND GOODWILL
Intangible assets at December 31, 2019 and December 31, 2018 are summarized in the table below:
December 31, 2019
Definite-lived Intangible assets, estimated lives in years:
Patents, Taper DPI Intellectual Property, 10 years
Transition Services Agreement, 1 year
FDA 503B Registration & Compliance, 10 years
Non-compete Agreement, 3 years
Customer Relationships, 10 years
Website Design, 3 years
Total Definite-lived Assets
Trade Name and Brand, Indefinite
SYMJEPI Domain Name
Balance, December 31, 2019
December 31, 2018
Definite-lived Intangible assets, estimated lives in years:
Patents, Taper DPI Intellectual Property, 10 years
Transition Services Agreement, 1 year
FDA 503B Registration & Compliance, 10 years
Non-compete Agreement, 3 years
Customer Relationships, 10 years
Website Design, 3 years
Total Definite-lived Assets
Trade Name and Brand, Indefinite
SYMJEPI Domain Name
Balance, December 31, 2018
Gross
Carrying
Value
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
9,708,700 $
194,200
3,963,000
1,639,000
5,572,000
16,163
21,093,063
1,245,000
9,674
22,347,737 $
(5,825,220) $
(194,200)
(1,474,015)
(1,639,000)
(2,072,475)
(15,265)
(11,220,175)
—
—
(11,220,175) $
3,883,480
—
2,488,985
—
3,499,525
898
9,872,888
1,245,000
9,674
11,127,562
Gross
Carrying
Value
Accumulated
Amortization
Net Carrying
Amount
9,708,700 $
194,200
3,963,000
1,639,000
5,572,000
16,163
21,093,063
1,245,000
9,674
22,347,737 $
(4,854,350) $
(194,200)
(1,077,716)
(1,485,721)
(1,515,274)
(9,880)
(9,137,141)
—
—
(9,137,141) $
4,854,350
—
2,885,284
153,279
4,056,726
6,283
11,955,922
1,245,000
9,674
13,210,596
Amortization expense for years ended December 31, 2019 and 2018 was approximately $2,083,000 and $2,476,000, respectively.
Estimated amortization expense of definite-lived intangible assets at December 31, 2019 for each of the five succeeding years and thereafter is as
follows:
Year ending
December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
1,925,268
1,924,370
1,924,370
1,924,370
953,500
1,221,010
9,872,888
F- 16
Goodwill recorded related to the acquisition of USC in 2016 was approximately $7,641,000. Goodwill is calculated as the excess of the
consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be
individually identified and separately recognized. Goodwill is not amortized but rather evaluated for impairment annually or more frequently, if indicators
of impairment exist. If the impairment evaluations for goodwill indicate the carrying amount exceeds the estimated fair value, an impairment loss is
recognized in an amount equal to that excess. The carrying value of the Company's goodwill as of December 31, 2019 and 2018 was approximately
$7,641,000.
The Company performs an annual impairment test as of December 31 each year. As of December 31, 2019 and 2018, no impairment of goodwill
or acquired intangibles was identified. The Company is not aware of an event or change in circumstances that would indicate the carrying value of any
assets held by USC may be impaired as of the measurement date. The coronavirus pandemic and the related significant market decline, including the
market price of the common stock of Adamis, may constitute a triggering event that requires an assessment of the company's goodwill and other intangible
assets as of March 31, 2020.
NOTE 10:
LEASES
The Company has two operating leases, one for an office space and another for an office space and manufacturing facility; and two finance leases
for office equipment and plant equipment. As of December 31, 2019, the leases have remaining terms between one year and less than five years. The
operating leases do not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreements do not
require material variable lease payments, residual value guarantees or restrictive covenants.
The tables below present the operating and financing lease assets and liabilities recognized on the consolidated balance
sheets as of December 31, 2019:
Right-of-Use Assets
Operating Leases
Financing Leases
Lease Liabilities, Current
Operating Leases
Financing Leases
Lease Liabilities, Non-Current
Operating Leases
Financing Leases
Total Lease Liabilities
December
31, 2019
$ 1,867,205
6,347
$ 1,873,552
December 31,
2019
440,127
4,494
444,621
$
$
$
1,479,458
1,538
$ 1,480,996
1,925,617
$
The amortizable lives of operating and financing leased assets are limited by the expected lease term.
F- 17
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental
borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate
represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the
lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used
incremental borrowing rates as of January 1, 2019 for leases that commenced prior to that date.
The Company's weighted average remaining lease term and weighted average discount rate for operating and financing
leases as of December 31, 2019 are:
Weighted Average Remaining Lease Term
Weighted Average Discount Rate
Operating
Financing
3.96 Years
3.95%
1.42 Years
3.95%
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate)
under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the audited consolidated
balance sheets as of December 31, 2019:
December 31, 2019
2020
2021
2022
2023
Undiscounted Future Minimum Lease Payments
Operating
$
508,056 $
520,993
534,295
515,257
2,078,601
159,016
1,919,585 $
440,127
1,479,458
Financing
4,651
1,550
—
—
6,201
169
6,032
4,494
1,538
Less: Difference between undiscounted lease payments and discounted lease liabilities
Total Lease Liabilities
Short-Term Lease Liabilities
Long-Term Lease Liabilities
$
Operating lease expense was approximately $514,000 for the year ended December 31, 2019. Operating lease costs are
included within selling, general and administrative expenses on the consolidated statements of operations.
Financing lease costs for the year ended December 31, 2019 included approximately $67,000 in right-of-use asset
amortization and approximately $1,400 of interest expense. Financing lease costs are included within selling, general and
administrative expenses on the consolidated statements of operations.
Cash paid for amounts included in the measurement of operating lease liabilities were approximately $495,000 for the
year ended December 31, 2019. Cash paid for amounts included in the measurement of financing lease liabilities were
approximately $68,000 for the year ended December 31, 2019.
F- 18
The Company previously entered into a lease agreement to occupy approximately 7,525 square feet leased premises with
a term commencing December 1, 2014 (as amended, the “Lease”) and expiring on November 30, 2018. Average rent expense is
approximately $23,000 per month, with a deposit of $170,000 which was paid in November 2014. In December 2017, $42,500 of
the deposit was applied to rent and the balance of deposit as of December 31, 2018 was $42,500 which rolled as deposit to the
amended lease. The base rent expense over the life of the lease was approximately $1,119,000.
On December 29, 2017, the Company entered into a First Amendment to Lease (the “Amendment”) with the Lessor of the
space, amending the Lease. Pursuant to the Amendment, the Company and Lessor agreed to extend the term of the Lease through
November 30, 2023. The Amendment provides that the Company will pay its current base rent through November 30, 2018.
Commencing on December 1, 2018 base rent will initially be approximately $28,000 per month for the first 12 months and will
increase annually to approximately $32,000 for the 12 months ending November 30, 2023. The Amendment also provides for one
option to expand pursuant to which the Company has a right of first refusal for an additional 3,457 square feet of certain office
space within the property. Total annual rent expense for the year ended December 31, 2018 was approximately $286,000.
On November 22, 2017, the Company has entered into a lease agreement for the planned expansion of the Company’s
compounding business, to lease a building consisting of approximately 44,880 square feet located in Conway, Arkansas. The
agreement provides for an initial base rent of approximately $12,000 per month for the first 12 months and will increase to
approximately $13,000 for the 12 months ending November 30, 2020. Average rent during the term will be approximately
$13,000 per month, with a previously paid deposit of approximately $12,000. On May 28, 2019, USC entered into a Second
Amendment to Lease (the “USC Amendment”) with the Lessor of the space, amending the Lease. Pursuant to the USC
Amendment, the company and Lessor agreed to extend the term of the Lease through December 31, 2023. Commencing on
January 1, 2019, base rent will initially be $10,000 per month for the succeeding 12 months and will increase annually to $10,824
for the 12 months ending December 31, 2023.
NOTE 11:
ACCRUED OTHER EXPENSES
Accrued other expenses at December 31, 2019 and December 31, 2018:
Accrued Commissions
Accrued Expenses
Accrued PTO
Accrued Salaries
Accrued Sales Taxes
Accrued State Tax
Deferred Rent
December 31,
2019
December 31,
2018
$
$
447,550 $
1,211,364
403,702
242,884
119,224
3,895
—
2,428,619 $
399,971
831,670
421,178
572,402
77,058
3,895
33,921
2,340,095
F- 19
NOTE 12:
DEBT
Ben Franklin Note
Biosyn (a wholly owned subsidiary of the Company and previously a wholly owned subsidiary of Cellegy) issued a note payable to Ben Franklin
Technology Center of Southeastern Pennsylvania (“Ben Franklin Note”) in October 1992, in connection with funding the development of Savvy, a
compound then under development to prevent the transmission of HIV/AIDS.
The Ben Franklin Note was recorded at its estimated fair value of $205,000 and was assumed by Cellegy as an obligation in connection with its
acquisition of Biosyn in 2004. The repayment terms of the non-interest bearing obligation include the remittance of an annual fixed percentage of 3.0%
applied to future revenues of Biosyn, if any, until the principal balance of $777,902 (face amount) is satisfied. Under the terms of the obligation, revenues
are defined to exclude the value of unrestricted research and development funding received by Biosyn from nonprofit sources. Absent a material breach of
contract or other event of default, there is no obligation to repay the amounts in the absence of future Biosyn revenues. Cellegy accreted the discount of
$572,902 against earnings using the effective interest rate method (approximately 46%) over the discount period of five years, which was estimated in
connection with the Ben Franklin Note’s valuation at the time of the acquisition.
Accounting principles generally accepted in the United States emphasize market-based measurement through the use of valuation techniques that
maximize the use of observable or market-based inputs. The Ben Franklin Note’s repayment terms outlined above affects its comparability with main
stream market issues and also affects its transferability. The value of the Ben Franklin Note would also be impacted by the ability to estimate Biosyn’s
expected future revenues which in turn hinge largely upon future efforts to commercialize the product candidate, the results of which efforts are not known
by the Company. Given the above factors and therefore the lack of market comparability, the Ben Franklin Note would be valued based on Level 3 inputs
(see Note 13). As such, management has determined that the Ben Franklin Note will have no future cash flows, as the Company does not believe the
product will create a revenue stream in the future. As a result, the Note had no fair market value at the time of the merger in April 2009 between the
Company (which was then named Cellegy Pharmaceuticals, Inc.) and the corporation then-named Adamis Pharmaceuticals Corporation.
Working Capital Line of Credit
On March 28, 2016, the Company entered into a loan and security agreement (sometimes referred to as the “Adamis Working Capital Line”) with
Bear State Bank, N.A. (the “Lender” or the “Bank”), pursuant to which the Company may borrow up to an aggregate of $2,000,000 to provide working
capital to USC, subject to the terms and conditions of the loan agreement. Interest on amounts borrowed under the Adamis Working Capital Line accrues at
a rate equal to the prime interest rate, as defined in the agreement. Interest payments are required to be made quarterly. As amended, the entire outstanding
principal balance, and all accrued and unpaid interest and all other sums payable pursuant to the loan documents, were due and payable on June 1, 2018.
The Company’s obligations under the loan agreement were secured by certain collateral, including without limitation its interest in amounts that it has
loaned to USC, and a warrant that the Company issued to the Bank to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price
equal to par value per share. The warrant was exercisable only if the Company is in default under the loan agreement or related loan documents, the
Lender delivers a notice to the Company and the Company does not cure the default within the applicable cure period. If the warrant became exercisable,
then Lender may exercise the warrant in whole or in part, from time to time, to acquire warrant shares in a number that the Lender believes will, upon sale
of such shares, be sufficient to cure or pay off the Company’s obligations due to the Lender under the loan documents. Under the terms of the Warrant, the
Lender agreed that following any exercise of the warrant, Lender will use its best efforts to sell as promptly as reasonably practicable following such
exercise, the shares of common stock acquired by the Lender upon such exercise, and that all of the net proceeds from such sales of warrant shares will be
applied in satisfaction of the Company’s obligations under the loan documents. On June 28, 2018, the Company and the Lender amended the warrant and
the loan and security agreement to provide that effective as of June 1, 2018, if the Company has not paid in full all amounts that are required to be paid to
the Lender under the loan documents on or before the maturity date of the loan, then the Lender may exercise the Warrant, in whole or in part, to acquire a
number of warrant shares as described above. In July 2018, the Lender delivered a notice of exercise of the warrant and sold warrant shares in an amount
sufficient to satisfy substantially all of the outstanding principal balance of the loan (Refer to Note 17). The Company paid in cash the remaining principal
and accrued unpaid interest, and there is no outstanding balance under the Adamis Working Capital Line. There was no gain or loss upon extinguishment of
the debt. In addition, the Lender released the Company’s $1.0 million restricted Certificate of Deposit that had served as additional collateral for the
Adamis Working Capital Line, and the amount is no longer restricted cash.
In July 2018, the Adamis Working Capital Line was terminated rendering a $0 balance as of December 31, 2019 and 2018. Interest expense for the
years ended December 31, 2019 and 2018 was approximately $0 and $51,000, respectively.
F- 20
Loans Assumed from Acquisition of USC:
Building Loan
In connection with the closing of the USC Merger and the transactions contemplated by the Merger Agreement, 4 HIMS, LLC, an entity of which
Eddie Glover, who was then the chief executive officer of USC, and certain other former stockholders of USC are members, agreed to sell to the Company,
the building and property owned by 4 HIMS on which USC’s offices are located, in consideration of the Company being added as an additional “borrower”
and assuming the obligations under the loan agreement, promissory note and related loan documents that 4 HIMS and certain other parties previously
entered into with the Lender (the “4 HIMS Loan Documents”).
On November 10, 2016, a Loan Amendment and Assumption Agreement was entered with into the Bank. Pursuant to the agreement, the Company
agreed to pay the Bank monthly payments of principal and interest of $15,411, with a final monthly payment and any other amounts due under the 4 HIMS
Loan Document due and payable in August 2020.
As of December 31, 2019 and 2018, the outstanding principal balance owed on the applicable note was approximately $2,153,000 and $2,249,000,
respectively. The loan currently bears an interest of 7.25% per year and interest expense for the years ended December 31, 2019 and 2018 was
approximately $117,000 and $87,000, respectively.
Equipment Loans, Consolidated
Equipment Loan, Tribute. In connection with the Merger, Tribute Labs, LLC, a Nevada limited liability company and former related party of USC
(“Tribute” or “Borrower”) assigned to Adamis all of its rights under the loan agreement, promissory note and related loan documents that Tribute and
certain other parties previously entered into with the Lender (the “Tribute Loan Documents”). Adamis agreed to become an additional co-borrower and to
assume Borrower’s obligations under the Tribute Loan Documents, in consideration of the transfer to USC of laboratory equipment owned by Tribute and
used to perform testing services for USC’s products, and Lender consented to such assignment. The outstanding unpaid principal balance under the
applicable note that was consolidated to one equipment loan was approximately $518,000. Prior to the consolidation, the loan had an interest rate of 4.75%
per year.
USC Equipment Loan. In connection with the Merger, Adamis agreed to become a Borrower and to assume the obligations as a Borrower under
the USC Equipment Loan Agreement and the related USC Equipment Loan Documents. Under the USC Equipment Loan Agreement, Lender agreed to
loan funds to USC, as the “Borrower,” up to an aggregate principal amount of $700,000, with amounts loaned evidenced by the Commercial Line of Credit
Agreement and Note (the “USC Equipment Note”). The loan is collateralized by USC’s property and equipment. The outstanding unpaid principal balance
under the USC Equipment Note that was consolidated to one equipment loan was approximately $635,000. The note had an interest rate of 3.25% per year.
Consolidated Equipment Loans. On November 10, 2016, the Company and the Lender agreed to the amendment and consolidation of the above
USC and Tribute equipment loans. The principal amount of the consolidated loans is $1,152,890 with an interest rate of 3.75% per annum. The loan is
payable in three years at an equal monthly amortization of $33,940 commencing on November 1, 2016, and continuing on the first day of each succeeding
month through October 1, 2019. As of December 31, 2019 and 2018, the outstanding unpaid principal balance was approximately $0 and $334,000,
respectively. Interest expense for the years ended December 31, 2019 and 2018 was approximately $5,000 and $20,000, respectively.
F- 21
Loan Amendment, Forbearance and Assumption Agreement
In connection with the Company's acquisition of USC in April 2016, Adamis was added as a “Borrower” and co-borrower under the loan
agreements and related loan documents between USC (and certain other entities) and Lender (the “Loan Documents”), and assumed all of the rights, duties,
liabilities and obligations as a Borrower and a party under the Loan Documents, jointly and severally with the current borrowers under each of the Loan
Documents. The parties also agreed that the real and personal property securing each of the USC Loans will also secure each of the other USC Loans, as
well as the Adamis Working Capital Line of $2.0 million.
The notes included in the Loan Documents are subject to customary subjective acceleration clauses, effective upon a material impairment in
collateral, a material adverse change in the Company’s business or financial condition, or a material impairment in the Company’s ability to repay the note.
As of December 31, 2019, the Company was not in breach of any debt covenants or subjective acceleration clauses.
At December 31, 2019 the principal maturity of the amended long-term debt was as follows:
For the Year Ending December 31
2020
Building Loan
$
2,153,182 $
Equipment
Loan
Total
— $
2,153,182
NOTE 13:
FAIR VALUE MEASUREMENTS
Fair value measurements adopted by the Company are based on the authoritative guidance provided by the FASB which defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. FASB authoritative guidance establishes a fair value hierarchy, which prioritizes the
inputs used in measuring fair value into three broad levels, which are described below:
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value
hierarchy gives the highest priority to Level 1 inputs.
Level 2:
Observable inputs other that Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or
model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with
observable market data.
Level 3:
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable, notes
payable, accrued liabilities and other payables approximate their fair values due to their short-term nature.
F- 22
NOTE 14:
LEGAL MATTERS
The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of its
business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. The
Company may also become party to further litigation in federal and state courts relating to opioid drugs. Although actions, claims, suits, investigations and
proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth below, the Company is not
currently involved in any matters that the Company believes may have a material adverse effect on its business, results of operations or financial condition.
However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.
Litigation with Belcher Pharmaceuticals
On September 26, 2018, the Company brought action against Belcher Pharmaceuticals, LLC (“Belcher”) in the United
States District Court for the Middle District of Florida for a declaratory judgment (“Complaint”) of non-infringement of certain
patents in which Belcher claims rights, relating to certain methods of preparing epinephrine solutions and treating allergic
reactions using a method of preparing certain epinephrine solutions (collectively the “Patents-in-Suit”). The Complaint sought a
declaratory judgment that the company’s SYMJEPI (epinephrine) Injection product (“SYMJEPI”) does not infringe the Patents-
in-Suit. On November 7, 2018, Belcher filed its Answer and Counterclaim to the Complaint and alleged that the Company
infringed the Patents-in-Suit as a result of the SYMJEPI product. Belcher’s Counterclaim sought damages and injunctive relief in
conjunction with the infringement claims. The Company responded to the Counterclaim by generally denying any wrongdoing
and asserting the affirmative defense that the Patents-in-Suit were invalid. The parties exchanged initial disclosures and initiated
discovery in January 2019. On December 28, 2018, Belcher filed a reissue application for one of the Patents-in-Suit seeking to
amend the asserted claims and correct an improper benefit claim. On March 29, 2019, the parties agreed to stay the litigation at
the District Court pending the outcome of the reissue application and the Company’s petition for inter partes review, filed with
the U.S. Patent and Trademark Office in April 2019, to challenge the validity of the remaining Patent-in-Suit. The Company
contended that its SYMJEPI product does not infringe any valid and enforceable patent held by Belcher, and that Belcher’s
Counterclaim was without merit.
On July 24, 2019, the Company announced that Adamis and Belcher Pharmaceuticals, LLC (“Belcher”) agreed to settle
all previously filed litigation between the parties, including the case filed by Adamis in the United States District Court for the
Middle District of Florida in which Adamis was seeking a declaratory judgment of non-infringement of certain patents in which
Belcher claimed rights, relating to certain methods of preparing epinephrine solutions (“Patent Case”), and the inter
partes review proceeding filed by Adamis in the United States Patent and Trademark Office requesting a formal review of the
validity of certain aspect of Belcher’s patents (“IPR”). Under the terms of the settlement agreement, Adamis agreed to voluntarily
withdraw both the Patent Case and IPR and Belcher agreed to provide Adamis a worldwide, non-exclusive, fully paid-up,
royalty-free license relating to Belcher’s patents for Adamis’ epinephrine injection product, SYMJEPI, and agreed not to make
future claims of infringement relating to Adamis’ naloxone injection product candidate, ZIMHI™. Pursuant to the settlement
agreement, the Patent Case and the IPR have been dismissed.
Litigation with kaléo Inc.
On May 21, 2019, the Company announced that on May 20, 2019, it received notice that it had been named and served as
a defendant in a lawsuit filed by kaléo Inc. in the United States District Court for the District of Delaware regarding Adamis’
higher dose naloxone injection product candidate, ZIMHI, for the treatment of opioid overdose, for which Adamis has previously
submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA). The complaint alleged, among
other things, that the company’s product candidate infringes patents purportedly held by kaléo relating to its naloxone auto-
injector product. The action was filed under the provisions of the Hatch-Waxman Act in response to Adamis’ Paragraph IV
certification regarding the kaléo patents as part of the company’s NDA process, and resulted in an automatic stay of any final
approval by the FDA of Adamis’ NDA.
On June 21, 2019, the Company filed two motions in the United States District Court for the District of Delaware in
response to kaléo’s patent infringement lawsuit relating to ZIMHI. The first was a motion to disqualify Cooley LLP as counsel to
kaléo based on, among other things, conflicts of interest and violation of applicable ethical rules. The second was a motion to
dismiss the entire lawsuit for lack of subject matter jurisdiction. Adamis filed an amendment to its original new drug application
(“NDA”) removing any reference to kaléo’s EVZIO® product, which Adamis contends prevents kaléo from claiming
infringement under the Hatch-Waxman Act. On the same day, Adamis filed a separate lawsuit in the United States District Court
for the Eastern District of Virginia against kaléo, Inc. for cybersquatting under 15 U.S.C. § 1125(d), unfair competition under 15
U.S.C. § 1125(a), and common law unfair competition and trademark infringement for kaléo’s use of Adamis’ SYMJEPI
trademark. With this lawsuit, Adamis sought injunctive relief to prevent kaléo from using Adamis’ SYMJEPI trademark and
damages for kaléo’s past use of Adamis’ SYMJEPI trademark in commerce.
On July 18, 2019, the Company announced that Adamis and kaléo Inc. agreed to settle all previously announced
litigation between the parties, including the case filed by kaléo in the United States District Court for the District of Delaware in
which kaléo claimed specified aspects of Adamis’ ZIMHI naloxone product infringed certain kaléo-owned patents, and the case
filed by Adamis in the United States District Court for the Eastern District of Virginia in which Adamis claimed specified actions
by kaléo infringed Adamis’ SYMJEPI trademark. As part of the resolution of the current litigation, kaléo agreed not to bring
future action against Adamis relating to ZIMHI so long as Adamis does not reference kaléo’s product in a future filing with the
FDA.
F- 23
NOTE 15:
LICENSING AGREEMENTS
Viral Therapies
On July 28, 2006, the Company entered into a nonexclusive, royalty free license agreement with an entity for the technology used to research and
develop new viral therapies, and an exclusive royalty-bearing license requiring a small percentage of revenue received by the Company on future products
developed and sold with a payment cap of $10,000,000. The Company paid the entity an initial license fee and granted one of the entity’s officers the right
to purchase 1,000,000 shares of common stock of the Company at price of $0.001 pursuant to a separate stock purchase agreement.
Adamis has the right to terminate the agreement if it is determined that no viable product can come from the technology and either party may
terminate the license agreement in the event of a material breach of the agreement by the other party that has not been cured or corrected within 90 days of
notice of the breach. The Company does not currently intend to devote resources to the development of this technology and may consider terminating the
agreement.
Influenza Vaccine
On September 22, 2006, the Company entered into an agreement with an entity to manufacture an influenza vaccine for the Company. The
agreement requires the Company to pay $70,000 upon commencement of the project, followed by monthly payments based upon services performed until
the project is complete. No product has been manufactured and no payments have been made as of December 31, 2019. If the project begins, the total
payments will aggregate $283,420. The project has an open ended start time. Adamis may terminate the agreement upon notice to the other party, other
than reimbursing the other party for non-cancellable materials and supplies ordered, and work in progress, through the date of the termination. The
Company does not currently intend to devote resources to the development of this technology and may consider terminating the agreement.
F- 24
3M License and Asset Acquisition Agreement
On August 1, 2013, the Company entered into an agreement to initially license and, with an additional closing payment fully acquire from 3M
Company and 3M Innovative Properties Company (“3M”), certain intellectual property and assets relating to 3M’s Taper Dry Powder Inhaler (DPI)
technology under development for the treatment of asthma and chronic obstructive pulmonary disease, for total cash consideration of $10 million. The
intellectual property includes patents, patent applications and other intellectual property relating to the Taper assets. The Company granted back to 3M a
license to the intellectual property assets outside of the dry powder inhalation field.
The Company hired an independent valuation specialist to assist management with its determination of the fair value of the tangible and intangible
assets acquired to be used in research and development. Management is responsible for the estimates and valuations. The work performed by the
independent valuation specialist has been considered in management’s estimates of fair value reflected below.
In addition to the patents and intellectual property, the Company also acquired a transition services agreement outlined in the asset purchase
agreement, which provides the buyer certain knowledge transfer rights related to the Taper technology.
The following table summarizes the fair values of the identifiable assets acquired on December 27, 2013:
Taper DPI Intellectual Property
Equipment
3M Transition Services Agreement
Description
$
$
9,708,700
97,100
194,200
10,000,000
The values listed above were determined using the cost savings and discounted cash flow methods. Value is estimated based on the cost savings
attributable to the asset being appraised which in this case was the transition service agreement. As with most income-based valuation methods, the cost (or
royalty) savings method are generally estimated on an after tax basis and discounted using an after tax discount rate. The cost savings method was used to
value the transition services agreement. Discounted cash flow analysis involves projecting monetary benefits directly associated with an asset and factoring
them to reflect present value at a rate that considers the risk and rate of return associated with the subject asset. In the application of this approach, the value
of the asset is considered to be the sum of the present values of the future cash flows received over the expected life of the asset. The Company applied the
discounted cash flow method to estimate the fair value of the acquired intellectual property (patents and unpatented technology associated with the taper
dry powder inhaler IP). In regards to the Taper DPI, the Company calculated the after-tax net income, or cash flow related to the technology and discounted
the future income with a discount rate of 26.5%, a 5.0% premium over the weighted average cost of capital. See Note 9.
NOTE 16: COMMITMENTS AND CONTINGENCIES
The Company has a production threshold commitment to a manufacturer of our SYMJEPI Products where the Company would be required to pay
for maintenance fees if it does not meet certain periodic purchase order minimums. Any such maintenance fees would be prorated as a percentage of the
required minimum production threshold. Maintenance fees for the years ended December 31, 2019 and 2018 were approximately $958,000 and $0,
respectively.
F- 25
NOTE 17:
CAPITAL STRUCTURE
On June 28, 2018, the Company and the Lender amended the Adamis Working Capital Line loan and security agreement and
warrant disclosed in Note 12 above. In July 2018, the Lender delivered a notice of exercise of the warrant to acquire 699,978
shares of common stock and sold shares with proceeds in an amount sufficient to satisfy substantially all of the outstanding
principal balance of the loan, and the remaining 215,417 shares were returned to the Company as treasury stock. Refer to Note
12.
On August 6, 2018, the Company completed the closing of an underwritten public offering of 13,416,667 shares of common
stock at a public offering price of $3.00 per share, which included 1,750,000 shares pursuant to the full exercise of the over-
allotment option granted to the underwriters. Net proceeds were approximately $37.6 million, after deducting approximately
$2,630,000 in underwriting discounts and commissions and estimated offering expenses payable by the Company. The securities
were issued by the Company pursuant to a “shelf” registration statement on Form S-3 that the Company previously filed with the
Securities and Exchange Commission, and a prospectus supplement and an accompanying prospectus relating to the offering.
On August 5, 2019, the Company completed the closing of an underwritten public offering of 13,800,000 shares of
common stock, and warrants to purchase up to 13,800,000 shares of common stock, which included 1,800,000 shares and
warrants to purchase up to 1,800,000 shares pursuant to the full exercise of the over-allotment option granted to the underwriters.
The exercise price of the warrants is $1.15 per share, and the equity classified warrants are exercisable for five years. Each share
of common stock was sold together with a warrant to purchase one share of common stock for a combined public offering price
of $1.00 per unit. Net proceeds were approximately $12.8 million, after deducting underwriting discounts and commissions and
offering expenses of approximately $1.0 million payable by the Company. The securities were issued by the Company pursuant
to a “shelf” registration statement on Form S-3 that the Company previously filed with the Securities and Exchange Commission,
and a prospectus supplement and an accompanying prospectus relating to the offering.
F- 26
NOTE 18:
CONVERTIBLE PREFERRED STOCK
January 2016 Series A-1 Preferred Stock
On January 26, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant to which
the Company issued 1,183,432 shares of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) and warrants to purchase up to 1,183,432
shares of common stock or Series A-1 Preferred. The shares of Series A-1 Preferred and warrants were sold in units, with each unit consisting of one
share and one warrant, at a purchase price of $4.225 per unit. The Series A-1 Preferred is convertible into shares of common stock at an initial
conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of
the warrants is $4.10 per share, and the warrants are exercisable at any time over the five year term of the warrants. If the Company grants, issues or
sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of
Series A-1 Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-1 Preferred
or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes any dividend or other distribution of
its assets (or rights to acquire its assets) to holders of Common Stock, then a holder of Series A-1 Preferred or warrants is entitled to participate in
such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-
1 Preferred or exercise of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately
$5,000,000 excluding transactions costs, fees and expenses. In accordance with the transaction agreements, the Company filed a registration statement with
the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series A-1 Preferred and
the warrants. The January 2016 warrants include call provisions that are generally similar to the 2014 warrants. The exercise price of the January 2016
warrants is $4.10 per share, and accordingly 250% of such exercise price is $10.25 per share. The warrants to purchase 1,183,432 shares remain
outstanding as of December 31, 2019.
For the period ended December 31, 2016, the investors converted 1,183,432 shares of Series A-1 Preferred into an equal number of shares of
common stock, with no shares of Series A-1 Preferred Shares remaining outstanding.
F- 27
July 2016 Series A-2 Preferred Stock
On July 11, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant to which
the Company issued 1,724,137 shares of Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”) and warrants to purchase up to 1,724,137
shares of common stock or Series A-2 Preferred. The shares of Series A-2 Preferred and warrants were sold in units, with each unit consisting of one
share and one warrant, at a purchase price of $2.90 per unit. The Series A-2 Preferred is convertible into shares of common stock at an initial
conversion rate of 1-for-1 (subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of
the warrants is $2.90 per share, and the warrants are exercisable at any time over the five year term of the warrants. If the Company grants, issues or
sells any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then a holder of
Series A-2 Preferred or warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which
the holder could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-2 Preferred
or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes any dividend or other distribution of
its assets (or rights to acquire its assets) to holders of Common Stock, then a holder of Series A-2 Preferred or warrants is entitled to participate in
such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-
2 Preferred or exercise of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately
$5,000,000 excluding transactions costs, fees and expenses. In accordance with the transaction agreements, the Company filed a registration statement with
the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series A-2 Preferred and
the warrants. The July 2016 warrants include call provisions that are generally similar to the 2014 warrants. The exercise price of the July 2016 warrants is
$2.90 per share, and accordingly 250% of such exercise price is $7.25 per share. For the period ended December 31, 2017, the investors have exercised
July 2016 warrants to acquire 1,531,723 shares of common stock. As of December 31, 2019, 192,414 warrants remaining outstanding.
NOTE 19:
STOCK-BASED COMPENSATION, WARRANTS AND SHARES RESERVED
The Company accounts for stock-based compensation transactions in which the Company receives employee services in
exchange for restricted stock units ("RSUs") or options to purchase common stock 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
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. Cash-settled Stock Appreciation Rights 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 three years
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 has a 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 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 2009 Plan provides for the grant of performance cash awards. The initial aggregate number of
shares of common stock that may be issued initially pursuant to stock awards under the 2009 Plan was 411,765 shares. The number of shares of common
stock reserved for issuance automatically increase on January 1 of each calendar year, from January 1, 2010 through and including January 1, 2019, by the
lesser of (a) 5.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year or (b) a lesser number of
shares of common stock determined by the Company’s board of directors before the start of a calendar year for which an increase applies. On November 3,
2014, the number of shares reserved for issuance under the 2009 Plan increased by 1,000,000. On May 25, 2016, upon the approval of the Company’s
stockholders at the annual meeting of stockholders, the number of shares reserved for issuance increased by 4,500,000. At December 31, 2018, the
aggregate balance of shares reserved for issuance under the 2009 plan was 11,335,847 shares. On January 1, 2019, pursuant to the provisions of the 2009
Plan, 2,364,568 shares were added to the shares reserved for issuance pursuant to awards under the 2009 Plan (see Note 21). The 2009 Plan terminated
effective February 2019 and no new awards may be made under the 2009 Plan. Outstanding options awarded under the 2009 Plan will remain outstanding
and continue to be governed by the provisions of the 2009 Plan.
F- 28
On January 30, 2019, the Company granted options to purchase 90,000 shares of common stock to the non-employee
directors of the Company under the 2009 Plan with an exercise price of $3.09 per share. The options will vest over a period of
one year. These options were valued using the Black-Scholes option pricing model, the expected volatility was approximately
56%, the term was six years, the dividend rate was 0.0 % and the risk-free interest rate was approximately 2.6%, which resulted
in a calculated fair value of approximately $152,000.
On January 30, 2019, the Company awarded Restricted Stock Units (“RSUs”) covering 2,349,350 shares of common
stock to the officers and employees of the Company under the 2009 Plan; as of the date of grant, the market price of the common
stock was $3.09 per share. These RSUs vest in equal amounts each quarter on the determined date over a period of three years
from grant date provided that the recipient has continued to provide services to the Company, or earlier upon the occurrence of
certain events including a Change in Control of the Company (as defined in the 2009 Plan), or earlier upon the recipient’s
separation from service to the Company by reason of death or disability (as defined in the 2009 Plan). The calculated fair value of
the RSUs was approximately $7,259,000.
On January 30, 2019, the Company awarded RSUs covering 36,985 shares of common stock to an employee of the
Company under the 2009 Plan; as of the date of grant, the market price of the common stock was $3.09 per share. These RSUs
were vested in full at grant date. The calculated fair value of the RSUs was approximately $114,000 and expensed immediately.
During the quarter ended September 30, 2019, the Company granted SARs with respect to a total of 290,000 reference
units of common stock to certain non-employee directors and non-executive employees of the Company, with initial reference
prices ranging from $0.74 to $0.97 per SAR. The SARs will vest with respect to the one-sixth of the reference units on the date
that is six months after the vesting commencement date and one thirty-sixth of the reference units thereafter on each subsequent
monthly anniversary of the vesting commencement date, and is exercisable in full after the third anniversary of the vesting
commencement date (and earlier upon a change in control of the Company).
F- 29
During the year ended December 31, 2019, vested but unexercised options and unvested options to purchase 1,550,856 shares of common stock
were canceled following the holders’ termination of employment.
The following summarizes the stock option activity for the years ended December 31, 2019 and 2018 below:
Total Outstanding Vested and Expected to Vest as of December 31, 2017
Options Granted
Options Exercised
Options Canceled
2009
Equity
Incentive
Plan
6,726,594 $
2,905,789
(4,166)
(330,116)
Weighted
Average
Exercise
Price
5.05
3.01
3.35
5.47
Weighted
Average
Remaining
Contract
Life
8.17 years
9.17 years
—
—
Total Outstanding Vested and Expected to Vest as of December 31, 2018
9,298,101 $
4.40
7.92 years
Options Granted
Options Canceled
90,000 $
(1,550,856)
3.09
4.26
9.08 years
—
Total Outstanding Vested and Expected to Vest as of December 31, 2019
7,837,245 $
4.40
6.01 years
Vested at December 31, 2019
6,917,685 $
4.57
5.74 years
Stock based compensation expense for the years ended December 31, 2019 and 2018 was approximately $5,868,000 and $6,535,000, respectively.
As of December 31, 2019, unrecognized compensation expense related to these stock options was approximately $1,478,000 and will be recorded as
compensation expense over the next two years.
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price,
multiplied by the number of in-the-money options) of 7,837,245 and 9,298,101 stock options outstanding at December 31, 2019 and 2018 was
approximately $0 and $0, respectively. The aggregate intrinsic value of 6,917,685 and 6,130,337 stock options exercisable at December 31, 2019 and 2018
was approximately $0 and $0, respectively.
F- 30
Restricted Stock Units
The following table summarizes the RSUs outstanding at December 31, 2019 and December 31, 2018:
December 31, 2019
Non-Employee Board of Directors
Company Executives
Company Executives
Company Executives and Employees
Total RSUs
Price
Per Share at
Grant Date
8.46
3.50
2.83
3.09
Date of Grant
May 25, 2016
March 1, 2017
February 21, 2018
January 30, 2019
RSUs
150,000(1) $
950,000(1) $
228,141(2) $
1,762,256(3) $
3,090,397
(1) The RSUs will have cliff vesting after seven years of continuous service or upon change of control from date of grant
or upon death or disability.
(2) The RSUs vest ratably annually over a period of three years if the recipient has provided continuous service or upon
change of control or upon death or disability.
(3) The RSUs vest ratably quarterly over a period of three years if the recipient has provided continuous service or upon
change of control or upon death or disability.
December 31, 2018
Non-Employee Board of Directors
Company Executives
Company Executives
Total RSUs
Price
Per Share at
Grant Date
Date of
Grant
8.46
3.50
2.83
May 25, 2016
March 1, 2017
February 21, 2018
RSUs
350,000(1) $
950,000(1) $
342,212(2) $
1,642,212
(1) The RSUs will have cliff vesting after seven years of continuous service from date of grant or upon change of control
or upon death or disability.
(2) The RSUs vest ratably annually over a period of three years if the recipient has provided continuous service or upon
change of control or upon death or disability.
Expense related to RSUs, included in the stock based compensation above, for the years ended December 31, 2019 and
2018 was approximately $2,597,000 and $1,174,000, respectively. The recorded expense related to RSUs for the year ended
December 31, 2019 was reduced by approximately $798,000, due to the termination of two non-employee members of the board
of directors during the year ended December 31, 2019. The Company accounts for forfeiture as they occur and reduces the
compensation cost at the time of forfeiture.
F- 31
Cash-settled Stock Appreciation Rights
The following table summarizes cash-settled SARS outstanding at December 31, 2019:
Outstanding as of December 31, 2018
Granted
Forfeited
Exercised
Outstanding at December 31, 2019
Number of Units
Weighted-
Average Exercise
Price
Weighted-
Average Remaining
Contractual Term
(Years)
—
290,000
—
—
290,000
$
$
0.00
0.82
0.00
0.00
0.82
6.7 Years
6.7 Years
The Company had a liability, which is included in accrued other expenses in the consolidated balance sheets, associated
with its SARs of approximately $18,000 and $0 at December 31, 2019 and December 31, 2018, respectively. These SARs were
valued using the Black-Scholes option pricing model, the expected volatility was approximately 57%, the term was seven years,
the dividend rate was 0.0% and the risk-free interest rate was approximately 1.8%, which resulted in a calculated fair value of
approximately $103,000. The fair value of these liability awards will be remeasured at each reporting period until the date of
settlement. Increases and decreases in stock-based compensation expense are recognized over the vesting period, or immediately
for vested awards. For the years ended December 31, 2019, the Company recognized compensation expense of $18,000,
associated with these awards, as compared to compensation expense of $0 for the year ended December 31, 2018.
The following table summarizes warrants outstanding at December 31, 2019 and December 31, 2018:
December 31, 2019
Old Adamis Warrants
Preferred Stock Series A-1 Warrants
Preferred Stock Series A-2 Warrants
2016 Warrants
2019 Warrants
Total Warrants
December 31, 2018
Old Adamis Warrants
Underwriter Warrants
Preferred Stock Series A-1 Warrants
Preferred Stock Series A-2 Warrants
2016 Common Stock, Private Placement
Total Warrants
Shares Reserved
Warrant
Shares
Exercise Price
Per Share
Date
Issued
November 15, 2007
January 26, 2016
July 11, 2016
August 3, 2016
August 5, 2019
Expiration
Date
November 15, 2021
January 26, 2021
July 11, 2021
August 3, 2021
August 5, 2024
8.50
4.10
2.90
2.98
1.15
Exercise Price
Per Share
8.50
7.44
4.10
2.90
2.98
Date Issued
November 15, 2007
January 16, 2014
January 26, 2016
July 11, 2016
August 3, 2016
Expiration Date
November 15, 2019
January 16, 2019
January 26, 2021
July 11, 2021
August 3, 2021
58,824
1,183,432
192,414
700,000
13,800,000
15,934,670
Warrant
Shares
58,824
4,217
1,183,432
192,414
700,000
2,138,887
$
$
$
$
$
$
$
$
$
$
At December 31, 2019, the Company has reserved shares of common stock for issuance upon exercise of outstanding
options and warrants, and vesting of RSUs, as follows:
Warrants
RSU
2009 Equity Incentive Plan
Total Shares Reserved
F- 32
15,934,670
3,090,397
7,837,245
26,862,312
NOTE 20:
INCOME TAXES
Net operating losses and tax credit carryforwards as of December 31, 2019 are as follows:
Net operating losses, federal (Post December 31, 2017)
Net operating losses, federal (Pre January 1, 2018)
Net operating losses, state
Tax credits, federal
Tax credits, state
Amount
Expiration Years
$
55,107,861 N/A
86,660,717 2028-2038
51,151,052 2030-2039
2,352,726 2037-2039
1,452,755 N/A
Pursuant to Internal Revenue Code Section 382, the annual use of the net operating loss carry forwards and research and development tax credits
could be limited by any greater than 50% ownership change during any three year testing period. As a result of any such ownership change, portions of the
Company's net operating loss carry forwards and research and development tax credits are subject to annual limitations. The Company completed a Section
382 analysis, and the net operating loss deferred tax assets reflect the results of the analysis. The recoverability of these carry forwards could be subject to
limitations upon future changes in ownership as defined by Section 382 of the Internal Revenue Code.
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carry forwards be recorded as an asset to the extent
that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate
sufficient taxable income within the carry forward period. Because of the Company's recent history of operating losses, management believes that
recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has
provided a valuation allowance.
At December 31, 2019 and 2018, the Company reassessed its need for valuation allowance and decreased the valuation
allowance because a portion of the indefinite lived taxable temporary difference was determined to be a future source of taxable
income. This reassessment resulted in a tax expense (benefit) of $9,000 and ($369,000), respectively.
The expense (benefit) for income taxes from continuing operations consists of the following for the years ended December 31, 2019 and 2018:
Current
Deferred
Total
Change in Valuation Allowance
Tax Expense (Benefit), net
F- 33
December 31, 2019 December 31, 2018
3,000
$
7,128,000
7,131,000
(7,500,000)
(369,000)
9,000 $
7,428,000
7,437,000
(7,428,000)
9,000 $
$
At December 31, 2019 and December 31, 2018 the significant components of the deferred tax assets from continuing operations are
summarized below:
Deferred Tax Assets
Net Operating Losses Carryforwards
Tax Credits
Stock Compensation
Accrued Expenses
Other
Total Deferred Tax Assets
Valuation Allowance
Deferred Tax Liabilities
Intangibles
Fixed Assets
Total Deferred Tax Liabilities
Net Deferred Tax Liability
December 31,
2019
December 31,
2018
$
$
$
$
32,621,000 $
3,805,000
1,689,000
172,000
134,000
38,421,000
(36,989,000)
1,432,000 $
(1,373,000) $
(171,000)
(1,544,000)
(112,000) $
26,322,000
2,117,000
1,037,000
586,000
3,000
30,065,000
(28,338,000)
1,727,000
(1,628,000)
(211,000)
(1,839,000)
(112,000)
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets
and liabilities.
The Company has determined at December 31, 2019 and December 31, 2018 that a full valuation allowance would be required against of all the
Company's operating loss carry forwards and deferred tax assets that the Company do not expect to be utilized by deferred tax liabilities.
The following table reconciles the Company's losses from continuing operations before income taxes for the year ended December 31, 2019 and
December 31, 2018.
Federal Statutory Rate
State Income Tax, net of Federal Tax
Other Permanent Differences
Section 382 Analysis and Other
Tax Cuts and Jobs Act
Research and Development Credits
Change in Valuation Allowance
Expected Tax Expense (Benefit)
December 31,
2019
(6,330,000)
7,000
414,000
—
—
(652,000)
6,570,000
9,000
$
$
December 31,
2018
(8,269,000)
(663,000)
1,962,000
—
—
(899,000)
7,500,000
(369,000)
21.00% $
(0.02%)
(1.37%)
—
—
2.16%
(21.80%)
(0.03%) $
21.00%
1.68%
(4.98%)
—
—
2.28%
(19.04%)
0.94%
Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. For the tax year ended December
31, 2019 and 2018, the Company recognized no interest or penalties.
NOTE 21:
SUBSEQUENT EVENTS
On February 25, 2020, the Company completed a registered direct offering of 11,600,000 shares of common stock,
pursuant to its existing shelf registration statement and a prospectus supplement and accompanying prospectus, and a concurrent
private placement of warrants to purchase 8,700,000 shares of common stock, to a small number of accredited institutional
investors. The combined purchase price for one share and 0.75 warrant was $0.58, and the aggregate gross purchase price was
$6,700,000, excluding any future proceeds from the potential exercise of the warrants and before deducting placement agent fees
and other offering expenses payable by the Company. The warrants have an exercise price of $0.70 per share. The warrants are
exercisable commencing on the later of (i) six months from the date of issuance or (ii) the date that the Company’s stockholders
approve a reverse stock split or an increase in the number of authorized shares of Common Stock of the Company in an amount
sufficient to permit the exercise in full of all of the Warrants (each, a “Capital Event”), and will expire five years after they
become exercisable. Maxim Group LLC acted as the placement agent in connection with the offering and received a fee equal to
6.0% of the gross purchase price of the securities sold in the offering and reimbursement of certain out-of-pocket expenses.
Broad-based business or economic disruptions could adversely affect our ongoing business and research, development
and commercial activities and could include disruptions to the productivity of our employees working remotely or their ability to
travel on matters relating to the Company’s business activities. The novel strain of coronavirus reported to have surfaced in
China in December 2019, and the related COVID-19 outbreak in 2019 and 2020, has spread to many other countries including
the United States. As of the date of this Report, this outbreak has resulted in extended shutdowns of certain businesses in the
United States and elsewhere and has had ripple effects on businesses and activities around the world. 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 outbreak could
disrupt our business and the business of our customers or third parties with which we have business relationships. Global health
concerns, such as coronavirus, could also result in social, economic, and labor instability in the countries in which we or the third
parties with whom we engage operate. In addition, the COVID-19 outbreak could result in a severe economic downturn and has
already significantly affected the financial markets of many countries. 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. As of the date of this Report, we have not experienced any known material business disruptions or material
adverse effect on our business or financial condition resulting from the COVID-19 outbreak. However, we cannot presently
predict the scope and severity of any potential business shutdowns or disruptions, but 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.
F- 34
Adamis Pharmaceuticals Corporation 10-K
EXHIBIT 4.6
General
DESCRIPTION OF CAPITAL STOCK
Adamis Pharmaceuticals Corporation (“we,” “the Company” or “Adamis”) has one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended: our common stock, $0.0001 par value per share. The following description of our capital stock, is not complete. This
description is summarized from, and qualified in its entirety by reference to, our restated certificate of incorporation, as the same may be amended from
time to time, any certificates of designation for our preferred stock, and our amended and restated bylaws, as amended from time to time, which have been
publicly filed with the Securities and Exchange Commission as exhibits to our Annual Report on Form 10-K, and to the applicable provisions of the
Delaware General Corporation Law, or DGCL, which also affects the terms of these securities. Our authorized capital stock consisted of 100,000,000
shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share.
Common Stock
General
Our board of directors (the “Board”) is authorized, without stockholder approval except as required by the listing standards of The Nasdaq Stock
Market LLC (or of any other stock exchange or market on which our common stock is then traded), to issue shares of our common stock from time to time.
Our common stock is currently listed on the Nasdaq Capital Market under the symbol “ADMP.”
Voting Rights
Each holder of our common stock is entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Our
restated certificate of incorporation does not provide for cumulative voting for the election of directors.
Dividends and Distributions
Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably
such dividends, if any, as may be declared by our Board, out of legally available funds. Upon liquidation, dissolution or winding-up, the holders of our
common stock are entitled to share ratably in all of our assets which are legally available for distribution to stockholders, after payment of or provision for
all debts and other liabilities and subject to the prior rights or liquidation preference of any outstanding preferred stock.
Other Rights
The holders of our common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund
provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue.
Preferred Stock
Our restated certificate of incorporation provides that the Board is authorized, without further action by the stockholders (unless such stockholder
action is required by applicable law or the rules of any stock exchange or market on which our securities are then traded), to provide for the issuance of
shares of preferred stock in one or more series and, by filing a certificate of designation pursuant to the applicable law of the State of Delaware, to establish
from time to time for each such series the number of shares to be included in each such series and to fix the designation, powers, rights and preferences of
the shares of each such series, and the qualifications, limitations and restrictions thereof, which may include, among others, dividend rights, voting rights,
liquidation preferences, conversion rights, preemptive rights, and the number of shares constituting any series or the designation of any series, any or all of
which may be greater than the rights of the common stock. Any convertible preferred stock we may issue will be convertible into our common stock or our
other securities. Conversion may be mandatory or at the holder’s option and would be at prescribed conversion rates. Any certificate of designation that
establishes a series of preferred stock may include a description of the rights, powers and preferences of such series including, to the extent applicable:
● the designation of the series, which may be by distinguishing number, letter or title;
● the number of shares of the series, which number the Board may thereafter (except where otherwise provided in the certificate of designation)
increase or decrease (but not below the number of shares thereof then outstanding);
● the purchase price;
● whether dividends, if any, shall be paid, and, if paid, the date or dates upon which, or other times at which, such dividends shall be payable,
whether such dividends shall be cumulative or noncumulative, the rate of such dividends (which may be variable) and the relative preference
in payment of dividends of such series;
● whether shares of such series shall be redeemable, the time or times when, and the price or prices at which, shares of such series shall be
redeemable, the redemption price and the terms and conditions of redemption;
● the terms and amounts of any sinking fund or similar fund provided for the purchase or redemption of shares of the series;
● the amounts payable on shares of such series and the rights of holders of such shares in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of our corporation;
● whether the shares of the series shall be convertible into shares of any other class or series, or convertible into or exchangeable for debt
securities or any other security, of our corporation or any other corporation, and, if so, the specification of such other class or series of such
other security, the conversion or exchange price or prices, or rate or rates, any adjustments thereto, the date or dates on which such shares
shall be convertible or exchangeable and other terms and conditions upon which such conversion may be made;
● the preemptive or preferential rights, if any, of the holders of shares of such series to subscribe for, purchase, receive, or otherwise acquire any
part of any new or additional issue of stock of any class, whether now or hereafter authorized, or of any bonds, debentures, notes, or any of
other securities, whether or not convertible into shares of common stock;
● restrictions on the issuance of shares of the same series or of any other class or series; and
● the voting rights, if any, and whether full or limited, of the holders of shares of the series, which may include no voting rights, one vote per
share, or such higher or lower number of votes per share as may be designated by the Board.
Preferred stock may be issued in the future in connection with acquisitions, financings, or other matters as the Board deems appropriate. In the
event that any shares of preferred stock are to be issued, a certificate of designation containing the rights, privileges and limitations of such series of
preferred stock may be filed with the Secretary of State of Delaware. The effect of such preferred stock is that, subject to federal securities laws and
Delaware law, the Board alone may be able to authorize the issuance of preferred stock, which could have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders or of discouraging a third party from acquiring, a majority of our outstanding voting
stock, and may adversely affect the other rights of the holders of our common stock. The issuance of preferred stock with voting and conversion rights may
also adversely affect the voting power of holders of our common stock, including the loss of voting control to others.
The effects of issuing preferred stock could include one or more of the following:
● decreasing the amount of earnings and assets available for distribution to holders of common stock;
● diluting the voting power of the common stock;
● impairing the liquidation rights of the common stock; or
● delaying, deferring or preventing changes in our control or management.
Anti-Takeover Effects of Certain Provisions of our Certificate of Incorporation, Bylaws and the DGCL
Delaware Law
We are subject to Section 203 of the DGCL. This provision generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless:
● prior to such date, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
● upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
● on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual meeting or special
meeting of stockholders and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not
owned by the interested stockholder.
Section 203 defines a business combination to include:
● any merger or consolidation involving the corporation and the interested stockholder;
● any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
● subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
● any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
● the receipt by the interested stockholder of the direct or indirect benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting
stock of a corporation, or an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of a corporation at
any time within three years prior to the time of determination of interested stockholder status; and any entity or person affiliated with or directly or
indirectly controlling or controlled by such entity or person, who presently holds the power to direct management or is in a director or officer of the
corporation.
These statutory provisions could delay or frustrate the removal of incumbent directors or a change in control of our company, and accordingly,
may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
Restated Certificate of Incorporation and Bylaw Provisions
Our restated certificate of incorporation, as amended, and bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a change in control, including changes a stockholder might consider favorable. In
particular, the restated certificate of incorporation and bylaws, as applicable, among other things:
● permit the Board to issue up to 10,000,000 shares of preferred stock, without further action by the stockholders, with any rights, preferences
and privileges as they may designate;
● provide that all vacancies on the Board, including newly created directorships, may, except as otherwise required by law, or as determined
otherwise by resolution of the Board, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
● do not provide for cumulative voting rights with respect to election of directors;
● provide that no action shall be taken by the stockholders, except at an annual or special meeting of stockholders, and no action shall be taken
by the stockholders by written consent or by electronic transmission;
● set forth an advance notice procedure with regard to the nomination, other than by or at the direction of the Board, of candidates for election
as directors and with regard to business to be brought before a meeting of stockholders; and
● provide the Board with the ability to alter its bylaws without stockholder approval.
Such provisions may make it more difficult for holders of our common stock to replace our board of directors and may have the effect of
discouraging a third-party from making tender offers for our shares or acquiring us, even if doing so would be beneficial to our stockholders. These
provisions also may have the effect of preventing changes in our management.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is American Stock Transfer & Trust Company, LLC.
Indemnification of Directors and Officers
Section 145 of the DGCL provides, in general, that a corporation incorporated under the laws of the State of Delaware, as we are, may indemnify
any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a
derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter
as to which such person will have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.
Our bylaws provide that we will indemnify our directors and officers, to the maximum extent permitted by the DGCL, or any other applicable law,
except that we are not required to indemnify any director or officer in connection with any proceeding initiated by such person, unless (i) such
indemnification is expressly required to be made by law or the bylaws, (ii) the proceeding was authorized by the Board, or (iii) such indemnification is
provided by us pursuant to the powers vested in the company under the DGCL or any other applicable law. In addition, our bylaws provide that we may
indemnify our employees and other agents as set forth in the DGCL or any other applicable law. Our bylaws also provide for the advancement of expenses
incurred by a person who was or is a party or is threatened to be made a party to any threatened, pending or completed proceeding by reason of the fact that
the person is or was a director or officer of the company, or is or was serving at the request of the company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, provided, however, that if the DGCL requires, an
advancement of expenses incurred by a director or officer in his or her capacity as a director or officer shall be made only upon delivery to the company of
an undertaking by or on behalf of the indemnitee to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which
there is no further right to appeal the indemnitee is not entitled to be indemnified for such expenses under the bylaws. In addition, our restated certificate of
incorporation provides that the liability of any of our directors for monetary damages shall be eliminated to the fullest extent under applicable law. We carry
officer and director liability insurance with respect to certain matters, including matters arising under the Securities Act of 1933, as amended.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to our directors, officers and persons controlling us, we
have been advised that it is the Securities and Exchange Commission’s opinion that such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Adamis Pharmaceuticals Corporation 10-K
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Prospectus constituting a part of the Registration Statements on Form S-8 (Nos. 333-159229,
333-169106, 333-175383, 333-196435, 333-201742, 333-211773, 333-218945, 333-226230, and 333-229379), on Form S-1 (Nos. 333-190798, 333-
192372, and 333-192801), and on Form S-3 (Nos. 333-196976, 333-199454, 333-200447, 333-209401, 333-212880, 333-217400, 333-717908, and 333-
226100) of our report dated March 30, 2020, (which includes an explanatory paragraph related to the existence of substantial doubt about the Company’s
ability to continue as a going concern) relating to the consolidated financial statements of Adamis Pharmaceuticals Corporation and Subsidiaries (the
Company), as of and for the years ended December 31, 2019 and 2018, and our report dated March 30, 2020, relating to the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2019, included in this Annual Report on Form 10-K as of December 31, 2019.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 30, 2020
Adamis Pharmaceuticals Corporation 10-K
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dennis J. Carlo, certify that:
1. I have reviewed this annual report on Form 10-K of Adamis Pharmaceuticals Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and (15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 30, 2020
By:
/s/ Dennis J. Carlo
Chief Executive Officer
Adamis Pharmaceuticals Corporation 10-K
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert O. Hopkins, certify that:
1. I have reviewed this annual report on Form 10-K of Adamis Pharmaceuticals Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and (15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 30, 2020
By:
/s/ Robert O. Hopkins
Senior Vice President, Finance and Chief Financial Officer
Adamis Pharmaceuticals Corporation 10-K
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.1
The undersigned, Dennis J. Carlo, the Chief Executive Officer of Adamis Pharmaceuticals Corporation (the “Company”), pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies that, to the best of my knowledge:
(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ DENNIS J. CARLO
Dennis J. Carlo
Chief Executive Officer
Dated: March 30, 2020
This certification is being furnished to the SEC with this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, and is
not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
Adamis Pharmaceuticals Corporation 10-K
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.2
The undersigned, Robert O. Hopkins, as Senior Vice President, Finance and Chief Financial Officer of Adamis Pharmaceuticals, Corporation (the
“Company”), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies that, to the best of my
knowledge:
(1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ ROBERT O. HOPKINS
Robert O. Hopkins
Senior Vice President and Chief Financial Officer
Dated: March 30, 2020
This certification is being furnished to the SEC with this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not,
except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, and is not to
be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language
in such filing.