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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

For the transition period from to  

 

Commission File Number: 001-36242

 

 

 

ADAMIS PHARMACEUTICALS CORPORATION  

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   82-0429727

(State or other jurisdiction 

of incorporation or organization)

 

(I.R.S. Employer 

Identification Number)

     

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

(Address of principal executive offices, including zip code) 

 

(858) 997-2400

(Registrant’s telephone number, including area code)

 

 

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ADMP

NASDAQ Capital Market

 

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

 

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

 

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

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

 

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

 

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

  

The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 22, 2021, was 148,886,141.

 

 

 

 

 

 

 

ADAMIS PHARMACEUTICALS, INC. 

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at September 30, 2021 (Unaudited) and December 31, 2020 5
     
  Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2021 and 2020 6
     
  Condensed Consolidated Statements Of Stockholders’ Equity (Unaudited) for the Three Months and Nine Months Ended September 30, 2021 and 2020 7
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2021 and 2020 8 -9
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosure of Market Risk 35
     
Item 4. Controls and Procedures 35
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 37
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 62
     
Item 3. Defaults Upon Senior Securities 62
     
Item 4. Mine Safety Disclosures 62
     
Item 5. Other Information 62
     
Item 6. Exhibits 63
     
Signatures 64

 

 

  2  

 

 

Summary of Material Risks Associated With Our Business

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  3  

 

 

 

We have received a grand jury subpoena issued in connection with a criminal investigation.  As we have previously disclosed, on May 11, 2021, each of the company and our USC subsidiary received a grand jury subpoena from the U.S. Attorney’s Office (“USAO”) for the Southern District of New York issued in connection with a criminal investigation, requesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC. The Audit Committee of the board of directors (the “Board”) has engaged outside counsel to conduct an independent internal investigation to review these and other matters. The company has also received a request from the Securities and Exchange Commission (“SEC”) that the company voluntarily provide documents and information relating to certain matters including the subject matter of the subpoena from the USAO.  The Company has produced and will continue to produce and provide documents in response to the subpoena and requests. The company intends to cooperate with the USAO and SEC. At this time, the company is unable to determine what, if any, additional actions the USAO, SEC or other federal or state authorities may take, what, if any, remedies or remedial measures the USAO, SEC or other federal or state authorities may seek, or what, if any, impact the foregoing matters may have on the Company’s business, previously reported financial results, financial results included in this Report, or future financial results. We could receive additional requests from the USAO, SEC or other authorities, which may require further investigation. The foregoing matters may divert management’s attention, cause the company to suffer reputational harm, require the company to devote significant financial resources, subject the company and its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, result in fines, penalties, equitable remedies, and affect the company’s business, previously reported financial results, financial results included in this Report, future financial results. The occurrence of any of these events could have a material adverse effect on the company’s business, financial condition and results of operations.

 

  Changes in healthcare laws could adversely affect the ability or willingness of customers to purchase our products and, as a result, adversely impact our business and financial results.
     
  We identified a material weakness in our internal control over financial reporting, concluded that our internal control over financial reporting was not effective and that our disclosure controls and procedures were not effective at the reasonable assurance level, and restated our unaudited condensed consolidated financial statements for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020, which may lead to additional risks and uncertainties, including loss of investor confidence, legal investigations or proceedings, and negative impacts on our business, financial condition and stock price. In addition, we identified a material weakness in our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of March 31, 2021, June 30, 2021 and September 30, 2021. If we fail to effectively remediate material weaknesses in our internal control over financial reporting, it could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
     
  Our business depends on complex information systems, and any failure to successfully maintain these systems or implement new systems to handle our changing needs could materially harm our operations.  Cybersecurity or other system failures could disrupt our business, result in liabilities, and adversely affect our business, financial condition and results of operations.
     
  Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders and may have the effect of entrenching, and making it difficult to remove, management.
     
  Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock, which could negatively impact the market price and liquidity of our common shares and our ability to access the capital markets.

 

 

  4  

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                 
   

September 30,

2021

   

December 31,

2020

 
ASSETS     (Unaudited)          
CURRENT ASSETS                
Cash and Cash Equivalents   $ 28,731,894     $ 6,748,945  
Restricted Cash     30,011        
Accounts Receivable, net     734,962       242,221  
Receivable from Fagron     6,362,509        
Inventories           1,227,061  
Prepaid Expenses and Other Current Assets     891,460       1,289,667  
Current Assets of Discontinued Operations, Note 2     5,147,464       3,016,227  
Total Current Assets     41,898,300       12,524,121  
LONG TERM ASSETS                
Fixed Assets, net     2,348,799       2,497,878  
Right-of-Use Assets     731,550       969,999  
Other Non-Current Assets     97,549       52,174  
Long-Term Assets of Discontinued Operations, Note 2           14,823,290  
Total Assets   $ 45,076,198     $ 30,867,462  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts Payable   $ 2,453,470     $ 1,780,104  
Deferred Revenue, current portion     100,000       100,000  
Accrued Other Expenses     3,111,460       1,640,512  
Accrued Bonuses     752,575     1,047,719  
Contingent Loss Liability             7,900,000  
Lease Liabilities, current portion     343,735       325,766  
Paycheck Protection Plan (PPP) Loans, current portion             2,300,253  
Current Liabilities of Discontinued Operations, Note 2     2,434,915     4,831,372  
Total Current Liabilities     9,196,155       19,925,726  
                 
LONG TERM LIABILITIES                
Deferred Revenue      775,000       850,000  
Lease Liabilities, net of current portion     432,018       692,433  
PPP Loan, net of current portion             891,447  
Warrant Liabilities, at fair value     202,299       4,485,000  
 Long-Term Liabilities of Discontinued Operations, Note 2             525,316  
Total Liabilities     10,605,472       27,369,922  
                 
COMMITMENTS AND CONTINGENCIES (Note 9)                
STOCKHOLDERS’ EQUITY                
Common Stock - Par Value $ .0001 ; 200,000,000 Shares Authorized; 149,409,098 and 94,365,015 Issued, 148,886,141 and 93,842,058 Outstanding at September 30, 2021 (Unaudited) and December 31, 2020, Respectively.     14,941       9,437  
Additional Paid-in Capital     303,772,662       233,404,968  
Accumulated Deficit     (269,311,627 )     (229,911,615 )
Treasury Stock, at cost - 522,957 and 522,957 Shares at September 30, 2021 (Unaudited) and December 31, 2020, Respectively.     (5,250 )     (5,250 )
Total Stockholders’ Equity     34,470,726       3,497,540  
  Total Liabilities and Stockholders’ Equity   $ 45,076,198     $ 30,867,462  

 

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

 

 

  5  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

                             
    Three Months Ended     Nine Months Ended  
    September 30,
2021
    September 30,
2020
    September 30,
2021
    September 30,
2020
 
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
REVENUE, net   $ 759,962     $ 868,077     $ 3,368,115     $ 2,096,796  
COST OF GOODS SOLD     1,235,603       1,414,086       4,877,083       4,987,271  
Gross Loss     (475,641     (546,009     (1,508,968     (2,890,475 )
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES     4,794,485       3,308,686       13,247,027       9,620,501  
RESEARCH AND DEVELOPMENT     4,620,143       1,647,746       9,066,608       6,610,586  
Loss on Derecognition of Inventory     330,319           330,319        
IMPAIRMENT EXPENSE - Write-off  of Contract Asset                       1,750,000  
Loss from Operations     (10,220,588 )     (5,502,441 )     (24,152,922 )     (20,871,562 )
OTHER INCOME (EXPENSE)                              
Interest Expense     (1,865 )     (1,722 )     (6,649 )     (3,213 )
Interest/Other Income     1,932       2,180       5,283       34,836  
Gain on Forgiveness of PPP Loans     5,009,590               5,009,590          
Change in Fair Value of Warrant Liabilities     42,525       (4,500,000 )     (7,642,949 )     (3,135,000
Total Other Income (Expense), net    

5,052,182

       (4,499,542     (2,634,725      (3,103,377 )
Net Loss from Continuing Operations before Income Taxes     (5,168,406      (10,001,983     (26,787,647     (23,974,939
Income Taxes                        
Net Loss from Continuing Operations     (5,168,406 )     (10,001,983 )     (26,787,647 )     (23,974,939 )
DISCONTINUED OPERATIONS                                
Net Loss from Discontinued Operations before Income Taxes     (7,192,642 )     (1,359,215 )     (10,266,365 )     (7,557,341 )
Income Taxes - Discontinued Operations                        
Net Loss from Discontinued Operations     (7,192,642 )     (1,359,215 )     (10,266,365 )     (7,557,341
Net Loss Applicable to Common Stock   $ (12,361,048 )   $ (11,361,198 )   $ (37,054,012 )   $ (31,532,280 )
         
Basic and Diluted Loss Per Share:                                
Continuing Operations   $ (0.03 )    (0.13   (0.19   $ (0.33
Discontinued Operations (0.05 ) (0.02 )   (0.07 )   (0.11 )
Basic and Diluted Net Loss Per Share $ (0.08 ) $ (0.15 ) $ (0.26 ) $ (0.44 )
                                 
Basic and Diluted Weighted Average Shares Outstanding     148,886,141       76,044,862       142,483,194       72,137,685  

 

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

 

  6  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

                                               
    Convertible Preferred Stock   Common Stock   Additional 
Paid-In
  Treasury Stock   Accumulated    
For the Three Months Ended September 30, 2021   Shares   Amount   Shares   Amount   Capital   Shares   Amount   Deficit   Total
Balance June 30, 2021     —       $          149,409,098     $ 14,941     $ 303,620,101       522,957     $ (5,250 )   $ (256,950,579 )   $ 46,679,213  
Share Based Compensation     —                  —                  152,561       —                           152,561  
Net Loss     —                  —                           —                  (12,361,048 )     (12,361,048 )
Balance September 30, 2021     —       $          149,409,098     $ 14,941     $ 303,772,662       522,957     $ (5,250 )   $ (269,311,627 )   $ 34,470,726  

 

For the Three Months Ended September 30, 2020

                                                                       
Balance June 30, 2020     1,000,000     $ 100       74,443,722     $ 7,444     $ 220,762,294       522,957     $ (5,250 )   $ (200,691,608 )   $ 20,072,980  
Series B Convertible Preferred Stock Conversion to common Stock     (1,000,000 )     (100     1,000,000       100                —                               
Common Stock Issued, Net of Issuance Costs of $839,387     —                  18,548,386       1,855       10,658,757       —                           10,660,612  
Issuance of Restricted Stock Units (RSUs)     —                  188,477       19     (19 )     —                               
Share Based Compensation     —                  —                  1,098,648       —                           1,098,648  
Net Loss     —                  —                           —                  (11,361,198 )     (11,361,198 )
Balance September 30, 2020     —       $          94,180,585     $ 9,418     $ 232,519,680       522,957     $ (5,250 )   $ (212,052,806 )   $ 20,471,042  

 

For the Nine Months Ended September 30, 2021

                                                                       
Balance December 31, 2020, as reported     —       $          94,365,015     $ 9,437     $ 233,404,968       522,957     $ (5,250 )   $ (229,911,615 )   $ 3,497,540  
Adjustment, conversion of 2019 Warrant Liability upon Adoption of ASU 2020-06     —                  —                  4,830,000       —                  (2,346,000 )     2,484,000  
Balance, December 31, 2020, as adjusted     —                  94,365,015       9,437       238,234,968       522,957       (5,250   )   (232,257,615 )     5,981,540  
Common Stock Issued, Net of Issuance Costs of $ 3,330,752     —                  46,621,621       4,661       48,414,585       —                           48,419,246  
Exercise of Warrants     —              8,356,000       836       15,292,714       —                           15,293,550  
Issuance of Restricted Stock Units (RSUs)     —                  66,462       7       (7 )     —                               
Share Based Compensation     —                  —                  1,830,402       —                           1,830,402  
Net Loss     —                  —                         —                  (37,054,012     (37,054,012 )
Balance September 30, 2021     —       $          149,409,098     $ 14,941     $ 303,772,662       522,957     $ (5,250 )   $ (269,311,627 )   $ 34,470,726  

 

For the Nine Months Ended September 30, 2020

                                                                       
Balance December 31, 2019     —       $          62,352,465     $ 6,235     $ 213,520,785       522,957     $ (5,250 )   $ (180,520,526 )   $ 33,001,244  
Common Stock Issued, Net of Issuance Costs of $1,334,289     —                  30,148,386       3,016       16,890,695       —                           16,893,711  
Issuance of February 2020 Warrants     —                  —                  (1,914,000 )     —                           (1,914,000 )
Series B Convertible Preferred Stock Issue     1,000,000       100       —                  589,900       —                           590,000  
Preferred Stock conversion to Common Stock     (1,000,000     (100     1,000,000       100                —                           
Issuance of Restricted Stock Units (RSUs)     —                  679,734       67       (67 )     —                               
Share Based Compensation     —                  —                  3,432,367       —                           3,432,367  
Net Loss     —                  —                           —                  (31,532,280 )     (31,532,280 )
Balance September 30, 2020     —       $          94,180,585     $ 9,418     $ 232,519,680       522,957     $ (5,250 )   $ (212,052,806 )   $ 20,471,042  

 

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

  7  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

               
    Nine Months Ended
September 30,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (37,054,012 )   $ (31,532,280 )
Less: Loss from Discontinued Operations     10,266,365       7,557,341  
Adjustments to Reconcile Net Loss to Net              
Cash Used in Operating Activities:                
Stock Based Compensation     1,830,402       3,432,367  
Acquired IPR&D            840,000  
Provision for Excess and Obsolete Inventory     587,824       (97,307
Change in Fair Value of Warrant Liabilities     7,642,949       3,135,000  
(Cash Payments in Excess of Lease Expense) Lease Expense in Excess of Cash     (3,997     3,852  
Depreciation and Amortization Expense     1,071,830       1,753,745  
Impairment of Contract Assets             1,750,000  
Gain in Forgiveness of PPP Loans     (5,009,589 )        
Change in Assets and Liabilities:                
 Accounts Receivable - Trade     (492,741 )     594,892
 Receivable from Fagron    

(6,492,321

)      
 Inventories     639,237     120,316
 Prepaid Expenses and Other Current Assets     352,833       (848,226 )
Accounts Payable     730,759     (692,773 )
Contingent Loss Liability     (7,900,000 )        
Deferred Revenue     (75,000 )     75,000
Accrued Other Expenses and Bonuses     1,203,498       1,940,873
Net Cash Used in Operating Activities of Continuing Operations     (32,701,963 )     (11,967,200 )
Net Cash Provided by (Used in) Operating Activities of Discontinued Operations     1,590,310     (3,522,542 )
Net Cash Used in Operating Activities     (31,111,653 )     (15,489,742 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of Equipment     (996,268 )     (481,006 )
Proceeds from Sale of Non-financial Asset     129,811          
Purchase of IPR&D         (250,000 )
Net Cash Used in Investing Activities of Continuing Operations     (866,457 )     (731,006 )
Net Cash Used in Investing Activities of Discontinued Operations     (15,999 )     (233,691 )
 Net Cash Used in Investing Activities     (882,456     (964,697
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from Issuance of Common Stock     51,749,998       18,228,000  
Costs of Issuance of Common Stock     (3,330,752 )     (1,334,289 )
Proceeds from Exercise of Warrants       5,851,900        
Proceeds of PPP Loan     1,765,495       3,191,700  
Net Cash Provided by Financing Activities of Continuing Operations     56,036,641       20,085,411  
Net Cash Used In Financing Activities of Discontinued Operations     (2,057,948 )     (64,425
Net Cash Provided by Financing Activities     53,978,693       20,020,986  
Increase in Cash and Cash Equivalents and Restricted Cash     21,984,584       3,566,547  
Cash and Cash Equivalents: and Restricted Cash                
Beginning     6,748,945       8,418,382  
Change in Cash and Cash Equivalents of Discontinued Operations     28,376     57,688
Ending   $ 28,761,905     $ 12,042,617  

 

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

 

 

  8  

 

 

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

               
    Nine Months Ended
September 30,
 
    2021     2020  
    (Unaudited)     (Unaudited)  
RECONCILIATION OF CASH & CASH EQUIVALENTS AND RESTRICTED CASH          
Cash & Cash Equivalents   $  28,731,894      12,042,617  
Restricted Cash      30,011         
Total Cash & Cash Equivalents and Restricted Cash    $  28,761,905      12,042,617  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash Paid for Income Taxes   $ 4,125     $ 11,300  
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, FINANCING AND INVESTING ACTIVITIES                
Decrease in Accrued Capital Expenditures   $ (73,517   $ (90,587
Forgiveness of PPP Loans   $ 5,009,590           
Series B Preferred Stock Issuance for License Agreement   $       $ 590,000  

 

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

 

  9  

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note 1: Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented. The results of operations of Adamis Pharmaceuticals Corporation (“the Company”) for any interim periods are not necessarily indicative of the results of operations for any other interim periods or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). 

 

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

 

For fiscal years 2021 and 2020, the assets, liabilities, income, and cash flows of the Company’s subsidiary, US Compounding, Inc. (“USC”), have been separated from the comparative period amounts to conform to the current period presentation as discontinued operations as the result of the Company’s decision to wind down and cease operations of USC and liquidate its remaining assets. Moreover, for fiscal years 2021 and 2020, all gains and losses on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to discontinued locations, have been aggregated in a single caption entitled “net loss from discontinued operations” in our consolidated statements of operations for all periods presented. See Note 2.

 

Liquidity and Capital Resources

 

The Company’s cash and cash equivalents was $28,731,894 at September 30, 2021.

 

The Company prepared the condensed consolidated financial statements assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. In preparing these condensed consolidated financial statements, consideration was given to the Company’s future business as described below, which may preclude the Company from realizing the value of certain assets.    

The Company has significant operating cash flow deficiencies. Additionally, the Company may need additional funding in the future to help support commercialization of its products and conduct the clinical and regulatory activities relating to the Company’s product candidates, satisfy existing obligations and liabilities, and otherwise support the Company’s intended business activities and working capital needs. The preceding conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements for the nine months ended September 30, 2021, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management’s plans include attempting to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property or other assets, products, product candidates or technologies, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research and development efforts, or similar transactions, and through revenues from existing agreements. There is no assurance that the Company will be successful in obtaining the necessary funding to meet its business objectives. In addition, the COVID-19 pandemic has had an adverse impact on the Company.   A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all. 

 

10

 

On May 11, 2021, the Company and USC each received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York (“USAO”).  The USAO issued the subpoenas in connection with a criminal investigation and requested a broad range of documents and materials relating to, among other matters, certain veterinary products sold by USC, certain practices, agreements, and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC.  The Audit Committee of the company’s Board of Directors (the “Board”) engaged outside counsel to conduct an independent internal investigation to review the matters brought forth in the subpoenas and certain other matters. See Note 9 for additional information.

In addition to the subpoenas from the USAO, the Company has also received requests from the SEC for the voluntary production of documents and information relating to the subject matter of the USAO’s subpoenas and certain other matters.  The Company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests.  The Company intends to cooperate with the USAO and the SEC. At this time, the Company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, or other agencies, or determine what, if any, proceedings the USAO, SEC, or other federal or state authorities may initiate, what, if any, remedies or remedial measures the USAO, SEC, or other federal or state authorities may seek, or what, if any, impact the foregoing matters may have on the company’s business, previously reported financial results, financial results included in this Report, or future financial results.  The foregoing matters may divert management’s attention, cause the Company to suffer reputational harm, require the Company to devote significant financial resources, subject the company and its officers and directors to civil or criminal proceedings, and depending on the resolution of the matters or any proceedings, result in fines, penalties or equitable remedies, and affect the Company’s business, previously reported financial results, financial results included in this Report, or future financial results.  The occurrence of any of these events, or any determination that our activities were not in compliance with existing laws or regulations, could have a material adverse effect on the Company’s business, liquidity, financial condition, and results of operations. 

 

Basic and Diluted Loss per Share 

 

The Company computes basic loss per share by dividing the loss attributable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The diluted loss per share calculation is based on the treasury stock method and gives effect to dilutive options, warrants and other potential dilutive common stock. The effect of common stock equivalents was anti-dilutive and was excluded from the calculation of weighted average shares outstanding. Potential dilutive securities, which are not included in diluted weighted average shares outstanding for the nine months ended September 30, 2021 and September 30, 2020, consist of 14,202,824 shares and 24,634,670 shares, respectively, issuable upon exercise of outstanding equity classified warrants; 5,844,239 shares and 6,590,387 shares, respectively, issuable upon exercise of outstanding options; 1,747,124 shares and 2,345,630 shares, respectively, issuable following vesting of outstanding restricted stock units.  

 

 

Discontinued Operations

In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component/s of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes, shall be reported as components of net loss separate from the net loss of continuing operations. 

The Company disposed of a component of its business in August 2021 and met the definition of a discontinued operation as of September 30, 2021. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompanying unaudited condensed statements of operations for the three month and nine month periods ended September 30, 2021 and 2020. For additional information, see Note 2 - Discontinued Operations.

 

Recent Accounting Pronouncement 

 

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options which provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. The amendment currently has no impact to the Company as the effect will largely depend on the terms of written call options or financings issued or modified in the future.

 

 

  11  

 

 

Note 2: Discontinued Operations and Assets Held for Sale

In August 2021, we announced our agreement with Fagron Compounding Services, LLC (“Fagron”) to sell to Fagron certain assets of our subsidiary, US Compounding, Inc. ("USC"), related to its human compounding pharmaceutical business including certain customer information and information on products sold to such customers by USC, including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products. The agreement includes fixed consideration of approximately $107,000 and variable consideration estimated at approximately $6,385,000, and the Company has recorded a gain of approximately $4,637,000 within discontinued operations related to this asset sale to Fagron, which was the total consideration net of approximately $1,856,000 of allocated costs related to USC’s customer relationships intangible that was sold to Fagron. The variable consideration is tied to Fagron’s sales to former USC customers over the twelve-month-period commencing on the agreement date. The Company used the expected value method to estimate Fagron’s sales over the twelve-month period following the agreement date. Additionally, the Company relied on historical data and its judgement to make estimates, and as such, the total variable consideration is subject to change as more information comes to light, which would result in adjustments to the gain originally recorded within discontinued operations. In connection with the transaction, the Company accrued a $700,000 liability for a transaction fee payable to a financial advisor as of September 30, 2021 which was recorded in selling, general and administrative expenses of continuing operations.

In July 2021, the Company decided to approve a restructuring process to wind down and cease the remaining operations at USC, with the remaining USC assets to be sold, liquidated or otherwise disposed of. As of September 30, 2021, the Company has begun shutting down the operations of USC and is also engaged in the process of selling or attempting to sell or otherwise dispose of USC’s remaining assets. The Company’s current goal is to attempt to substantially complete winding down the operations of USC by the end of December 2021, except for such activities as may be necessary to wind up and resolve USC’s affairs, and the employment of substantially all of USC’s employees is expected to be terminated by that time.

In August 2021, the Company and its wholly-owned USC subsidiary entered into an Asset Purchase Agreement effective as of August 31, 2021 with a third party buyer, providing for the sale and transfer by USC of certain assets related to USC’s veterinary compounded pharmaceuticals business. The sale covers the transfer of all the veterinary business customers’ information belonging to USC or in USC’s control and possession and USC’s know how, information and expertise regarding the veterinary business. Pursuant to the agreement, the buyer agreed to pay the Company, for any sales of products in USC’s veterinary products list or equivalent products made to the customers included in the agreement during the five-year period after the date of the agreement, an amount equal to twenty percent (20%) of the amount actually collected by the buyer on such sales during the period ending three months after the end of such five year period. The Company did not record a receivable related to the variable consideration as it was deemed immaterial.

Discontinued operations comprise those activities that were disposed of during the period, abandoned or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that was previously distinguished as Compounded Pharmaceuticals segment for operational and financial reporting purposes in prior reported financial statements.

Assets Held for Sale

The Company considers assets to be held for sale when management approves and commits to a plan to actively market the assets for sale at a reasonable price in relation to its fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company ceases to record depreciation and amortization expenses and measures the assets at the lower of their carrying value or estimated fair value less costs to sell. Assets held for sale are included as other current assets in the Company’s consolidated balance sheets and the gain or loss from sale of assets held for sale is included in the Company’s general and administrative expenses.

 

The major assets and liabilities associated with discontinued operations included in our condensed consolidated balance sheets are as follows:

 

    September 30,
2021
  December 31
2020
Carrying amounts of major classes of assets included as part of discontinued operations                
                 
Cash and Cash Equivalents   $ 78,034     $ 106,410  
Accounts Receivable, net     202,697       850,636  
Inventories     121,900       1,888,865  
Fixed Assets, Held for Sale     6,888,118       7,088,715  
Intangible Assets, net              6,280,010  
Goodwill              868,412  
Right-of-Use Assets              573,998  
Other Assets     34,559       182,471  
Less: Loss recognized on classification as held for sale     (2,177,844 )      
Total assets of the disposal group classified as discontinued operations in the statement of financial position   $ 5,147,464     $ 17,839,517  
                 
Carrying amounts of major classes of liabilities included as part of discontinued operations                
Accounts Payable     798,017       1,711,613  
Accrued Other Expenses     659,162       883,900  
Lease Liabilities     455,206       581,362  
 Contingent Loss Liability      410,000            
Deferred Revenue              70  
Bank Loans - Building              2,067,213  
Deferred Tax Liability, net     112,530       112,530  
Total liabilities of the disposal group classified as discontinued operations in the statement of financial position   $ 2,434,915     $ 5,356,688  

 

 

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The revenues and expenses associated with discontinued operations included in our condensed consolidated statements of operations were as follows:

 

       
   Three Months Ended
September 30,
   2021  2020
Major line items constituting pretax loss of discontinued operations      
REVENUE, net  $705,143   $3,432,436 
COST OF GOODS SOLD   (1,882,558)   (2,232,256)
Gross Loss   (1,177,415)   1,200,180 
           
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES   (2,457,162)   (2,485,272)
RESEARCH AND DEVELOPMENT   (42,076)   (51,664)
Impairment Expense – Intangible Assets   (3,835,158)      
Impairment Expense – Goodwill   (868,412)      
Impairment Expense – Inventory   (837,414)      
Impairment Expense – Right of Use Asset   (448,141)      
Loss from Held for Sale Classification   (2,177,844)      
    (11,843,622)   (1,336,756)
OTHER INCOME (EXPENSE)          
Interest Expense         (44,321)
Interest Income   8,619    21,862 
Gain on Sale of Assets to Fagron   4,636,702       
Other Income   5,659       
Net Loss from discontinued operations before income taxes  $(7,192,642)  $(1,359,215)

 

       
   Nine Months Ended
September 30,
   2021  2020
Major line items constituting pretax loss of discontinued operations      
REVENUE, net  $6,216,826   $10,793,269 
COST OF GOODS SOLD   (5,753,658)   (7,029,950)
    463,168    3,763,319 
           
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES   (7,055,739)   (7,880,920)
RESEARCH AND DEVELOPMENT   (89,710)   (211,380)
Impairment Expense – Intangible   (3,835,158)      
Impairment Expense – Goodwill   (868,412)   (3,143,200)
Impairment Expense – Inventory   (837,414)      
Impairment Expense – Right of Use Asset   (448,141)      
Impairment Expense – Fixed Assets   (9,346)      
Loss from Held for Sale Classification   (2,177,844)      
    (14,858,596)   (7,472,181)
OTHER INCOME (EXPENSE)          
Interest Expense   (70,903)   (114,042)
Interest Income   34    28,882 
Gain on Sale of Assets to Fagron   4,636,702       
Other Income   26,398       
Net Loss from discontinued operations before income taxes  $(10,266,365)  $(7,557,341)

 

Discontinued Operations - Impairments 

 

Impairment of Intangibles - In the third quarter of 2021, USC’s intangible assets were fully impaired as a result of the decision to wind down and cease USC’s operations. Prior to that impairment, approximately $1,856,000 of USC’s customer relationships intangible asset was allocated to the asset sale to Fagron. That amount is recorded within the gain from sale of assets of discontinued operations. The remaining intangibles had a carrying balance of approximately $3,835,000, which were fully impaired during the three months ended September 30, 2021. USC’s intangible assets had a carrying value of approximately $0 and $6,280,000 at September 30, 2021 and December 31, 2020, respectively.

 

 

  13  

 

 

Impairment of Goodwill—In the third quarter of 2021, USC’s Goodwill was completely impaired, since there are no more expected future cash flows relating to USC’s Goodwill as a result of the decision to wind down and cease operations. USC recognized an impairment expense of approximately $868,000 related to USC’s Goodwill for the three months ended September 30, 2021. The carrying value of Goodwill at September 30, 2021 and December 31, 2020 was $0 and $868,412, respectively. 

Loss from Held for Sale Classification— In the third quarter of 2021, USC’s fixed assets were impaired as a result of the decision to wind down and cease operations. USC determined that the fair value, less costs to sell, of the disposal group was lower than the book values of certain assets, thus USC recorded fixed asset impairments related to the held for sale classification of approximately $2,178,000 for the three and nine months ended September 30, 2021. The Company made certain estimates and relied on its appraisals, vendor quotes, and its judgement in order to estimate the fair value of USC’s fixed assets and believes USC’s fixed assets are fairly valued as of September 30, 2021. Due to the nature of estimates, the actual amounts realized upon sale may be more than or less than estimated fair value of the fixed assets. Any difference will be recognized as a gain or loss in discontinued operations of future financial statements.

Impairment of Right of Use (ROU) Assets—In the third quarter of 2021, USC’s ROU assets related to leases were impaired as a result of the decision to wind down and cease operations. USC determined that the future expected cash flows to be generated by those ROU assets were $0, thus USC recorded a full impairment totaling approximately $448,000 in the third quarter of 2021. The balance of USC’s ROU assets at September 30, 2021 and December 31, 2020 was $0 and $573,998, respectively.

Impairment of Inventory—In the third quarter of 2021, USC’s Inventory was impaired as a result of the decision to wind down and cease operations. USC determined that certain inventories needed to be destroyed or that the net realizable value (NRV) for certain inventories was lower than cost, resulting in an impairment expense recognition of approximately $837,000 related to its inventory for the three months and nine months ended September 30, 2021. Approximately $598,000 of the impairment was related to chemicals and non-sellable finished goods that were destroyed, and approximately $239,000 of the impairment was related to devices which were impaired based on a NRV analysis that showed the device costs exceeded recent sales prices. The balance of USC’s inventory at September 30, 2021 and December 31, 2020 was $121,900 and $1,888,865, respectively.

Inventories at September 30, 2021 and December 31, 2020 consisted of the following:

    September 30, 2021   December 31, 2020
Finished Goods   $        $ 1,166,198  
Devices     121,900       722,667  
Inventories   $ 121,900     $ 1,888,865  

 

Reserve for obsolescence as of September 30, 2021 and December 31, 2020 was approximately $0 and $191,000, respectively.  

Restructuring Costs

 

Due to the facts and circumstances detailed above, the Company has identified three major types of restructuring activities related to the disposal of USC in addition to the $8.2 million of asset impairments detailed above. These three types of activities are employee terminations, contract termination costs, and chemical destruction costs. For those restructuring activities, the Company recorded approximately $827,000 for employee termination costs, approximately $410,000 for contract termination costs, and approximately $294,000 for chemical destruction costs for the three and nine months ended September 30, 2021 within selling, general and administrative expenses of discontinued operations. The Company expects the remaining restructuring costs of approximately $93,000 for employee termination costs and approximately $127,000 for chemical destruction costs to be incurred by the end of the fourth quarter of 2021. The estimated amount of approximately $410,000 of contract termination cost was related to the termination of a contract between USC and a vendor. The amount for contract termination cost was recorded as a loss contingency as the Company believes a loss is probable and can be reasonably estimated. The Company records accruals for loss contingencies associated with legal matters when the Company determines it is probable that a loss has been or will be incurred and the amount of the loss can be reasonably estimated. Where a material loss contingency is reasonably possible and the reasonably possible loss or range of possible loss can be reasonably estimated, U.S. GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. The following summarizes the restructuring activities and their related accruals as of September 30, 2021:

 

 

    Employee   Contract   Chemical      
    Termination Costs   Termination Cost   Destruction Costs   Total
Balance at December 31, 2020   $                              -      $                     -      $                       -      $                  -   
Restructuring charges                        826,523               410,000                 293,554          1,530,077
Payments                       (610,523)                         -                    (47,056)           (657,579)
Balance at September 30, 2021   $                    216,000   $           410,000   $             246,498   $         872,498

 

 

The liabilities of approximately $216,000 related to employee termination costs and approximately $227,000 related to chemical destruction costs were recorded in accrued other expenses of discontinued operations. The liability of approximately $410,000 related to contract termination costs was recorded in contingent loss liability of discontinued operations. The liability of approximately $19,000 related to chemical destruction costs was recorded in accounts payable of discontinued operations.

 

14

 

Discontinued Operations - Debt

Building Loan

In connection with the sale of certain USC assets to Fagron, the Company paid to the lending bank the outstanding principal balance, accrued unpaid interest and other obligations under the Company’s loan agreement, promissory note and related loan documents relating to the outstanding building loan relating to the building and property on which USC’s offices are located.

As of September 30, 2021 and December 31, 2020, the outstanding principal balance owed on the applicable note was approximately $0 and $2,067,000, respectively.

Note 3: Revenues 

Revenue Recognition 

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

 

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

 

Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease. The Company’s USC subsidiary provides compounded sterile prescription medications and certain nonsterile preparations and compounds, for human and veterinary use by patients, physician clinics, hospitals, surgery centers, vet clinics and other clients throughout most of the United States. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, and injectables.

 

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

Compounded Pharmaceuticals Facility Revenue Recognition

 

With respect to sales of prescription compounded medications by the Company’s USC subsidiary, revenue arrangements consist of a single performance obligation which is satisfied at the point in time when goods are delivered to the customer. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer which is the price reflected in the individual customer’s order. Additionally, the transaction price for medication sales is adjusted for estimated product returns that the Company expects to occur under its return policy. The estimate is based upon historical return rates, which has been immaterial.  The standard payment terms are 2%/10 and Net 30. The Company does not have a history of offering a broad range of price concessions or payment term changes, however, when the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes.  Variable consideration is not a significant component of the transaction price for sales of medications by USC. 

 

Drug Development and Commercialization Revenue Recognition

 

Sandoz 

 

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

USWM 

The Company has determined that there are two performance obligations in its exclusive distribution and commercialization agreement (the “USWM Agreement”) with USWM, LLC (“USWM” or “US WorldMeds”): (i) the manufacture and supply of SYMJEPI™ and ZIMHI™ products to USWM; and (ii) the exclusive distribution and commercialization in the United States. 

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

  15  

 

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. 

Revenue 

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 Company’s revenues relating to its FDA approved product SYMJEPI are dependent on an exclusive distribution agreement with USWM, which replaced the previous Sandoz Agreement in May 2020.        

Deferred Revenue   

Deferred Revenue are contract liabilities that the Company records when cash payments are received or due in advance of the Company’s satisfaction of performance obligations.  The Company’s performance obligation is met when control of the promised goods is transferred to the Company’s customers.   For the three months ended September 30, 2021 and 2020, $25,000 and $462,500 of the revenues recognized were reported as deferred revenue as of June 30, 2021 and 2020, respectively, and for the nine months ended September 30, 2021 and 2020, $75,000 and $900,000 of the revenues recognized were reported as deferred revenue as of December 31, 2020, and 2019, respectively. Included in the deferred revenue at September 30, 2021 and December 31, 2020 was $875,000 and $950,000, respectively, relating to the non-refundable upfront payment received from USWM pursuant to the USWM Agreement. On May 11, 2020, the Company entered into a termination agreement with Sandoz which resulted in the acceleration of recognition of the upfront payment from Sandoz revenue over the transition service agreement period.

Cost to Obtain a Contract

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

 

In 2018, the Company capitalized the $2.0 million fee paid to a financial advisor as an incremental cost of obtaining a contract to commercialize and distribute the Company’s first FDA approved product SYMJEPI with Sandoz.   On May 11, 2020, the Company entered into a termination agreement with Sandoz. As a result of entering into the termination agreement, the Company determined that its financial results for the quarter ending September 30, 2020 included the recognition of a full $1,750,000 impairment of the capitalized cost to obtain a contract that was reflected on its condensed consolidated balance sheet as of March 31, 2020.  

 

 

  16  

 

 

 

Note 4: Inventories

 

Inventories at September 30, 2021 and December 31, 2020 consisted of the following

 

         
    September 30, 
2021
  December 31, 
2020
Finished Goods   $        $ 892,897  
Work-in-Process              334,164  
Inventories   $        $ 1,227,061  

 

Reserve for obsolescence as of September 30, 2021 and December 31, 2020 was approximately $0 and $255,000, respectively. 

 

Inventory Derecognition

 

In the third quarter of 2021, approximately $776,000 of certain inventory returned to a supplier was derecognized. In exchange for the return of inventory, the supplier provided fixed and variable consideration totaling approximately $445,000. The consideration partially offsets the inventory derecognition which resulted in a $330,000 loss for the three and nine months ended September 30, 2021. The Company expects to receive the variable consideration over the course of the next one to two years. The variable amount was based on the Company’s estimates and is subject to change as more information comes to light, which would result in adjustments to the loss originally recorded.  

 

Note 5: Fixed Assets, net

 

Fixed Assets, net at September 30, 2021 and December 31, 2020 are summarized in the table below: 

 

Description   Useful Life (Years)   September 30,  2021   December 31, 2020
Machinery and Equipment     3 - 7     $ 4,519,383     $ 4,072,261  
Less: Accumulated Depreciation             (2,817,652 )     (1,745,823 )
Construction In Progress - Equipment             647,068       171,440  
Fixed Assets, net           $ 2,348,799     $ 2,497,878  

  

Depreciation expense for the three months ended September 30, 2021 and 2020 was approximately $ 375,000 and $342,000, respectively; and for the nine months ended September 30, 2021 and 2020, depreciation expense was approximately $ 1,072,000 and $978,000, respectively.  

 

 

 

  17  

 

   

Note 6: Leases   

 

The Company has one operating lease for an office space. As of September 30, 2021, the lease has a remaining term of approximately 26 months. The operating lease does not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreement does not require material variable lease payments, residual value guarantees or restrictive covenants.

The tables below present the operating lease assets and liabilities recognized on the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020:

 

Right-of Use Assets

 

September 30, 2021

 

December 31, 2020

  Operating Lease

 

$

731,550

 

 

$

  969,999

 

 

 

Lease Liabilities, Current

 

September 30, 2021

 

December 31, 2020

   Operating Lease

 

$

343,735

 

 

$

  325,766