DMK PHARMACEUTICALS Corp - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2022

OR

For the transition period from to  

Commission File Number: 001-36242

ADAMIS PHARMACEUTICALS CORPORATION  

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, including zip code) 

(858) 997-2400

(Registrant’s telephone number, including area code)

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

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.

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

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

The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 8, 2022, was 149,983,265.

ADAMIS PHARMACEUTICALS, INC. 

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (UNAUDITED)  

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 8 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented. The results of operations of Adamis Pharmaceuticals Corporation (“the Company”) 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, 2021 (the “2021 Form 10-K”). 

For the three and nine months ended September 30, 2022 and September 30, 2021, and year ended December 31, 2021, the assets, liabilities, operations, 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. See Note 2. 

Going Concern 

The Company’s cash and cash equivalents were $2,419,960 and $23,220,770 at September 30, 2022 and December 31, 2021, respectively.  

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

The Company has significant operating cash flow deficiencies. Additionally, the Company will need additional funding in the near term and thereafter in the future to sustain operations, satisfy existing and future obligations and liabilities, and otherwise support the Company’s operations and business activities and working capital needs. The preceding conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements for the nine months ended September 30, 2022, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management’s plans include attempting to secure additional required funding through equity or debt financings if available, seeking to enter into one or more strategic agreements regarding, or sales or out-licensing of, intellectual property or other assets, products, product candidates or technologies, seeking to enter into agreements with third parties to co-develop and fund research and development efforts, revenues from existing agreements, a merger, sale or reverse merger of the Company, or other strategic transaction. There is no assurance that the Company will be successful in obtaining the necessary funding to sustain its operations or meet its business objectives. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. In addition, a severe or prolonged economic downturn, political disruption or pandemic, such as the COVID-19 pandemic, could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all.

Basic and Diluted Loss per Share   

            Under ASC 260, the Company is required to apply the two-class method to compute earnings per share (or, EPS). Under the two-class method both basic and diluted EPS are calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings. The two-class method results in an allocation of all undistributed earnings as if all those earnings were distributed. Considering the Company has generated losses in each reporting period since its inception through September 30, 2022, the Company also considered the guidance related to the allocation of the undistributed losses under the two-class method. The contractual rights and obligations of the preferred stock shares were evaluated to determine if they have an obligation to share in the losses of the Company. As there is no obligation for the preferred stock shareholders to fund the losses of the Company nor is the contractual principal or mandatory redemption amount of the preferred stock shares reduced as a result of losses incurred by the Company, under the two-class method, the undistributed losses will be allocated entirely to the common stock securities.

             The Company computes basic loss per share by dividing the loss attributable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The diluted loss per share calculation is based on the if-converted method for convertible preferred shares and gives effect to dilutive if-converted shares and the treasury stock method and gives effect to dilutive options, warrants and other potentially dilutive common stock. The preferred stock, however, is not considered potentially dilutive due to the contingency on the conversion feature not being tied to stock price or price of the convertible instrument. The common stock equivalents were anti-dilutive and were excluded from the calculation of weighted average shares outstanding. Potentially dilutive securities, which are not included in diluted weighted average shares outstanding for the nine months ended September 30, 2022 and September 30, 2021, consist of outstanding warrants covering 14,952,824 shares and 14,202,824 shares, respectively, outstanding options covering 4,436,362 shares and 5,844,239 shares, respectively and outstanding restricted stock units covering 650,000 shares and 1,747,124 shares, respectively.     

Discontinued Operations

            In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity 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 with respect to that business. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompany unaudited condensed statements of operations for the nine months and year ended September 30, 2022 and December 31, 2021.            

Recent Accounting Pronouncement 

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

Note 2: Discontinued Operations and Assets Held for Sale

               In August 2021, the Company announced an agreement with Fagron Compounding Services, LLC (“Fagron”) to sell to Fagron certain assets of the Company’s subsidiary, US Compounding, Inc. (“USC”), related to the Company’s human compounding pharmaceutical business including certain customer information and information on products sold to such customers by USC, including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products. The agreement included fixed consideration of approximately $107,000 and variable consideration estimated at approximately $6,385,000. The variable consideration was tied to Fagron’s sales to former USC customers for the twelve-month-period commencing on the agreement date. The Company used the expected value method to estimate Fagron’s sales over the twelve-month period following the agreement date. For the twelve-month agreement period the Company relied on historical data and its judgement to make estimates, and as such, the total variable consideration changed as more information became available, which resulted in adjustments to the receivable during the twelve-month period. During the three and nine months ended September 30, 2022, the Company recognized an increase (decrease) in variable consideration of $278,000 and $(919,000), respectively, which was included in net loss from continuing operations, as the change occurred subsequent to the disposal of the USC business.  In connection with the transaction, the Company accrued as of December 31, 2021 and paid in January 2022 a $700,000 liability for a transaction fee payable to a financial advisor which was recorded in selling, general and administrative expenses of continuing operations.          

                In July 2021, the Company approved a restructuring process to wind down and cease the remaining operations at USC, with the remaining USC assets to be sold, liquidated or otherwise disposed of. The Company disposed of a component of its business in August 2021 and met the definition of a discontinued operation as of September 30, 2021. Accordingly, the operating results of the business disposed are reported as loss from discontinued operations in the accompany unaudited condensed statements of operations for the three months and nine months ended September 30, 2022 and 2021. As of December 31, 2021, the Company had shut down the operations of USC, terminated all of USC’s employees and was engaged in the process of selling or attempting to sell or otherwise dispose of USC’s remaining assets.

Discontinued operations comprise those activities that were disposed of during the period, abandoned or which were classified as held for 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 current assets of discontinued operations in the Company’s consolidated balance sheets and the gain or loss from sale of assets held for sale is included in the Company’s general and administrative expenses.

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

          Carrying amounts of major classes of assets included as part of discontinued operations (unaudited):

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

Discontinued Operations - Revenue

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

 Discontinued Operations - Lease

              USC has two operating leases, one for an office space and one for office equipment. As of September 30, 2022, the leases have remaining terms between more than one year and less than four years, respectively. The operating leases do not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreements do not require material variable lease payments, residual value guarantees or restrictive covenants. The Company leases a building which requires monthly base rent of $10,824 through December 31, 2023.

             As part of the restructuring process to wind down and cease the operations at USC, the Company is working to cancel or transfer the leases of the discontinued operations. During the year ended December 31, 2021, the Right-of-Use assets related to the leases of approximately $448,000 were fully impaired because there is no benefit expected from the subject leases. As of September 30, 2022, and December 31, 2021 the liabilities of the discontinued operations included approximately $285,000 and $412,000 in lease liabilities, respectively.

Discontinued Operations - Contingent Loss Liability 

           As of September 30, 2022, and December 31, 2021, the outstanding liabilities related to the contract termination costs recorded in contingent loss liability of discontinued operations was approximately $410,000, reflecting estimated costs of termination of a contract between USC and a vendor.

 Discontinued Operations - Building Loan

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

           In July 2021, the Company, in connection with the sale of certain USC assets to Fagron, paid to the lender the outstanding principal balance, accrued unpaid interest and other obligations under the Company’s loan agreement, promissory note and related loan documents relating to the outstanding building loan relating to the building and property on which USC’s offices are located. The land and building were included in the assets of discontinued operations.

         The loan bore an interest of 6.00% per year and interest expense for the three months ended September 30, 2022 and September 30, 2021, was approximately $0 and $0, respectively. Interest expense for the nine months ended September 30, 2022 and 2021 was approximately $0 and $71,000 respectively. The amount of interest allocated to the discontinued operations was based on the legal obligations of USC. 

Note 3: Revenues 

Revenue Recognition 

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

            Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease. The Company’s subsidiary US Compounding, Inc. or USC, (a discontinued operation - see Note 2) provided compounded sterile prescription medications and certain nonsterile preparations and compounds, for human and veterinary use by patients, physician clinics, hospitals, surgery centers, vet clinics and other clients throughout most of the United States. USC’s product offerings broadly included, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, and injectables.  In July 2021, the Company sold certain assets relating to USC’s human compounding pharmaceutical business and approved a restructuring process to wind down the remaining USC business and sell, liquidate or otherwise dispose of the remaining USC assets.  Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products.  

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

Exclusive Distribution and Commercialization Agreement for SYMJEPI^® and ZIMHI^™ with US WorldMeds 

             On May 11, 2020 (the “Effective Date”) the Company entered into an exclusive distribution and commercialization agreement (the “USWM Agreement”) with USWM for the United States commercial rights for the SYMJEPI products, as well as for the Company’s ZIMHI (naloxone HCI Injection, USP) 5mg/0.5mL product intended for the emergency treatment of opioid overdose.  The Company’s revenues relating to its FDA approved products SYMJEPI and ZIMHI are dependent on the USWM Agreement.    

             Under the terms of the USWM Agreement, the Company appointed USWM as the exclusive (including as to the Company) distributor of SYMJEPI in the United States and related territories (“Territory”) effective upon the termination of a Distribution and Commercialization Agreement previously entered into with Sandoz Inc., and of the ZIMHI product if approved by the U.S. Food and Drug Administration (“FDA”) for marketing, and granted USWM an exclusive license under the Company’s patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, subject to the provisions of the USWM Agreement, in partial consideration of an initial payment by USWM and potential regulatory and commercial based milestone payments totaling up to $26 million, if the milestones are achieved. There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to the Company.  The Company retains rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory.  In addition, the Company may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize the Company’s Symject™ syringe product platform.

            The initial term for the USWM Agreement began on the Effective Date and continues for a period of 10 years from the launch by USWM of the first product in the United States pursuant to the agreement, unless terminated earlier in accordance with its terms.
   

             The Company has determined that the individual purchase orders, whose terms and conditions taken with the distribution and commercialization agreement, creates a contract according to ASC 606. The term will automatically renew for five-year terms after the initial 10-year term, unless terminated by either party.   

             The Company has determined that there are multiple performance obligations in the contract which are the following: the manufacture and supply of SYMJEPI™ and ZIMHI™ products to USWM, the license to distribute and commercialize SYMJEPI™ and ZIMHI™ products in the United States and the clinical development of ZIMHI™.

              The Company utilized significant judgement to develop estimates of the stand-alone selling price for each distinct performance obligation based upon the relative stand-alone selling price. The transaction price allocated to the clinical development of ZIMHI was immaterial.

Revenues from the manufacture and supply of SYMJEPI™ and ZIMHI™ are recognized at a point in time upon delivery to the carrier. The licenses to distribute and commercialize SYMJEPI™ and ZIMHI™ products in the United States is distinct from the other performance obligations identified in the arrangement and has stand-alone functionality; the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to benefit from the license.

              Payments received under USWM Agreement may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements and net-profit sharing payments based on certain percentages of net profit generated from the sales of products over a given quarter. At the inception of arrangements that include milestone payments, the Company uses judgement to evaluate whether the milestones are probable of being achieved and estimates the amount to include in the transaction price utilizing the most likely amount method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within the Company or the licensee’s control, such as regulatory approvals are not included in the transaction price until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of development milestones and any related constraint and adjusts the estimate of the overall transaction price, if necessary. The Company recognizes aggregate sales-based milestones, and net-profit sharing as royalties from product sales at the later of when the related sales occur or when the performance obligation to which the sales-based milestone or royalty has been allocated has been satisfied. The amounts receivable from USWM have a payment term of Net 30.

            Revenues do not include any state or local taxes collected from customers on behalf of governmental authorities. The Company made the accounting policy election to continue to exclude these amounts from revenues. 

Product Recall    

              On March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level, due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM will handle the entire recall process for the Company, with Company oversight. SYMJEPI is manufactured and tested for us by Catalent Belgium S.A.  The costs of the recall and the allocation of costs of the recall, including the costs to us resulting from the recall, were estimated at approximately $2.0 million; moreover, the recall could cause the Company to suffer reputational harm, depending on the resolution of matters relating to the recall could result in the Company incurring financial costs and expenses which could be material, could adversely affect the supply of SYMJEPI products until manufacturing is resumed, and depending on the resolution of matters relating to the recall could have a material adverse effect on our business, financial condition, and results of operations.

           For the period ended September 30, 2022 and December 31, 2021, a liability of approximately $408,000 and $2.0 million, respectively, associated with the recall is reflected in the balance sheet. The estimated costs of the recall were reflected in the consolidated statement of operations for the year ended December 31, 2021 as a reduction of net sales because we expect to offer the customers a cash refund or credit. Approximately, $388,000 of additional product recall costs were reflected in the consolidated results of operations as a reduction to net sales based on recall-related products returned during the quarter-ended September 30, 2022. Total product recall costs from inception of the recall through September 30, 2022, were approximately $2.4 million. The Company may be able to be reimbursed by certain third parties for some of the costs of the recall under the terms of its manufacturing agreements or insurance policies, but there are no assurances regarding the amount or timing of any such recovery.

Deferred Revenue   

Deferred revenue are contract liabilities that the Company records when cash payments are received or due in advance of the Company’s satisfaction of performance obligations.  The Company’s performance obligation is met when control of the promised goods is transferred to the Company’s customers.   For the three months ended September 30, 2022 and 2021, approximately $587,000 and $25,000 of the revenues recognized were reported as deferred revenue as of December 31, 2021 and 2020, respectively, and for the nine months ended September 30, 2022 and 2021, approximately $587,000 and $75,000 of the revenues recognized were reported as deferred revenue as of December 31, 2021, and 2020, respectively. Included in the deferred revenue at September 30, 2022 and December 31, 2021 was approximately $213,000 and $850,000, respectively, relating to the non-refundable upfront payment received from USWM pursuant to the USWM Agreement. The increase of approximately $562,000 in recognition of deferred revenue for the three and nine months ended September 30,2022, was due to the Company's reassessment of performance obligations met under the USWM agreement.

Cost to Obtain a Contract

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

Practical Expedients 

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

Note 4: Inventories

Inventories at September 30, 2022 and December 31, 2021 consisted of the following: 

There was no reserve for obsolescence as of September 30, 2022 and December 31, 2021.

Note 5: Fixed Assets, net

Fixed Assets, net at September 30, 2022 and December 31, 2021 are summarized in the table below: 

Depreciation expense for the three months ended September 30, 2022 and 2021 was approximately $399,000 and $375,000, respectively; and for the nine months ended September 30, 2022 and 2021, depreciation expense was approximately $1,111,000 and $1,072,000, respectively.  

Note 6: Leases   

The Company has one operating lease for an office space. As of September 30, 2022, the lease has a remaining term of approximately 14 months. The operating lease does not include an option to extend beyond the life of the current term. There are no short-term leases, and the lease agreement does not require material variable lease payments, residual value guarantees or restrictive covenants.

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

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

The Company’s weighted average remaining lease term and weighted average discount rate for operating and financing leases as of September 30, 2022 and December 31, 2021 were:

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the unaudited condensed consolidated balance sheets as of September 30, 2022:

Operating lease expense for the three months ended September 30, 2022 and 2021 was approximately $88,000 and $88,000, respectively; and for the nine months ended September 30, 2022 and 2021, operating lease expense was approximately $265,000 and $265,000, respectively. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations.  

Cash paid for amounts included in the measurement of operating lease liabilities were approximately $93,000 and $90,000 for the three months ended September 30, 2022, and 2021, respectively, and approximately $278,000 and $269,000 for the nine months ended September 30, 2022 and 2021, respectively.

Note 7: Debt 

First Draw Paycheck Protection Program Loan 

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

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

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during a specified period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week or 24-week period will qualify for forgiveness.

In December 2020, the Company submitted an application for the forgiveness of our PPP Loan.  In August 2021, the Company received notification through the Bank that as of August 5, 2021, the PPP Loan, including principal and interest thereon, has been fully forgiven by the SBA and that the remaining PPP Loan balance is zero. The Company recognized the amount forgiven as other income. 

Second Draw PPP Loan

On March 15, 2021, the Company entered into a Note (the “PPP2 Note”) in favor of the Bank, in the principal amount of $1,765,495 relating to funding under a Second Draw loan (the “Second Draw Loan”) pursuant to the terms of the PPP, the CARES Act, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act enacted in December 2020. Under the terms of the PPP2 Note and Second Draw Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP2 Note was five years, unless sooner provided in connection with an event of default under the PPP2 Note. The Company may prepay the Second Draw Loan at any time prior to maturity with no prepayment penalties. Under the PPP, the proceeds of the Second Draw Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments. The Company may apply for forgiveness of some or all of the Second Draw Loan pursuant to the PPP. In order to obtain full or partial forgiveness of the Second Draw Loan, the borrower must timely request forgiveness, must provide satisfactory documentation in accordance with applicable SBA guidelines, and must satisfy the criteria for forgiveness under the PPP and applicable SBA requirements. The Company applied for forgiveness of the PPP2 Loan, and in October 2021 the Company received notification through the Bank that as of September 28, 2021, the Second Draw PPP Loan, including principal and interest thereon, was fully forgiven by the SBA. The Company recognized the amount forgiven as other income in the third quarter of 2021.  However, as described further in Note 9 below, in March 2022 the Company was informed that the Civil Division of the U.S. Attorney’s Office for the Southern District of New York was investigating the Company’s Second Draw PPP Loan and eligibility for that loan, and the Company’s financial statements for the quarter ended March 31, 2022, included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank.  In June 2022, following the inquiry, the Company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees.

Even though the PPP Loan has been forgiven and the Second Draw PPP Loan repaid, our PPP loans and applications for forgiveness of loan amounts remain subject to review and audit by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form, including without limitation the required economic necessity certification by the Company that was part of the PPP loan application process. Accordingly, the Company is subject to audit or review by federal or state regulatory authorities as a result of applying for and obtaining the PPP Loan and Second Draw PPP Loan or obtaining forgiveness of those loans.  If the Company were to be audited or reviewed and receive an adverse determination or finding in such audit or review, including a determination that the Company was ineligible to receive the applicable loan, the Company could be required to return or repay the full amount of the applicable loan and could be subject to additional fines or penalties, which could reduce the Company's liquidity and adversely affect our business, financial condition and results of operations.  

.   

Note 8: Fair Value of Financial Instruments 

The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to the short-term nature of these items.

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

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

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

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

The fair value measurement of the warrants issued by the Company in February 2020 (the “2020 Warrants”) are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions at September 30, 2022 include the expected volatility of the Company’s stock of approximately 70%, the Company’s stock price at valuation date of $0.199, expected dividend yield of 0.0%, expected term of 2.93 years and average risk-free interest rate of approximately 4.255%. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. 

The fair value measurement of the warrants issued by the Company in February 2020 (the “2020 Warrants”) are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions at December 31, 2021 include the expected volatility of the Company’s stock of approximately 70%, the Company’s stock price at valuation date of $0.605, expected dividend yield of 0.0%, expected term of 3.68 years and average risk-free interest rate of approximately 1.038%. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs.

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

Note 9: Legal Matters

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

Investigations

            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 grand jury 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 Board engaged outside counsel to conduct an independent internal investigation to review the matters brought forth in the subpoenas and certain other matters.  In addition, following the commencement of the investigation, as disclosed elsewhere in these interim condensed consolidated financial statements, the Company has sold assets relating to its compounding pharmacy business, ceased selling human and veterinary compounded pharmaceutical products, has wound down USC’s business, and the employment of USC employees has ended.  As a result, the Company is no longer engaged in the sale of human or veterinary compounded pharmaceutical products.  The Company is also considering a number of additional actions in response to the internal investigation and the USAO investigation.  As of the date of these interim condensed consolidated financial statements, we believe that the investigation initially commenced by the Audit Committee is substantially complete.  However, additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the Audit Committee’s investigation. 

            The Company has also received requests from the U.S. Securities and Exchange Commission (“SEC”) for the voluntary production of documents and information in connection with the SEC’s investigation relating to the subject matter of the USAO’s subpoenas and certain other matters.  The Company has produced documents and will continue to produce and provide documents in response to subpoenas and requests for voluntary production of documents as needed.   Additionally, on March 16, 2022, the Company was informed that the Civil Division of the USAO (“Civil Division”) was investigating the Company’s Second Draw PPP Loan application and the company’s eligibility for the Second Draw PPP Loan.  The Audit Committee of the Board engaged outside counsel to conduct an internal inquiry into the matter.  As a result of the investigation by the Civil Division, the Company’s financial statements for the first quarter of 2022 included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry the Company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and related interest and fees.  The Company previously disclosed that the lending bank waived the processing fee of approximately $63,000; however, the Company has recently been made aware by the Civil Division that the lending bank did receive a processing fee of approximately $53,000 and that it may need to be repaid. The Company is awaiting confirmation from the Civil Division on the potential repayment of the above-referenced processing fee and as to whether any additional action is required to conclude the investigation into the Second Draw PPP Loan. The Company intends to continue cooperating with the USAO, SEC, and Civil Division. At this time, the Company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, Civil Division, or other agencies; what, if any, proceedings the USAO, SEC, Civil Division, or other federal or state authorities may initiate; what, if any, remedies or remedial measures the USAO, SEC, Civil Division or other federal or state authorities may seek; or what, if any, impact the foregoing matters may have on the Company’s business, previously reported financial results, financial results included in these interim condensed consolidated financial statements, or future financial results.  The Company could receive additional requests or subpoenas from the USAO, SEC, Civil Division, or other authorities, which may require further investigation.  There can be no assurance that any discussions with the USAO, SEC or Civil Division to resolve these matters will be successful.  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 these interim condensed consolidated financial statements, 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. 

Jerald Hammann

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in our subsequent Quarterly Reports on Form 10-Q for the first two quarters of 2022, on June 8, 2021, Jerald Hammann filed a complaint against the Company and each of its directors in the Court of Chancery of the State of Delaware, captioned Jerald Hammann v. Adamis Pharmaceuticals Corporation et al., C.A. No. 2021-0506-PAF (the “Complaint”), seeking injunctive and declaratory relief. The Complaint alleges, among other things, that the defendants (i) violated Rule 14a-5(f) and 14a-9(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the Company’s 2021 annual meeting of stockholders—which was subsequently held on July 16, 2021 (the “2021 annual meeting”)—and disseminated false and misleading information in the Company’s proxy materials relating to the 2021 annual meeting, (ii) violated certain provisions of the Company’s bylaws relating to the 2021 annual meeting, (iii) violated section 220 of the Delaware General Corporation Law (“DGCL”) in connection with a request for inspection of books and records submitted by the plaintiff, and (iv) breached their fiduciary duties of disclosure and loyalty, including relating to establishing and disclosing the date of the Company’s 2021 annual meeting and to the Company’s determination that a solicitation notice delivered to the Company by plaintiff was not timely and was otherwise deficient. The plaintiff has also filed various motions with the Court, which have been resolved. The Company has filed a motion for summary judgment with respect to one of the counts in the complaint and a motion to dismiss certain other counts of the plaintiff's amended complaint. Those motions are pending before the Court, and the case continues to proceed. On October 13, 2022, the Court entered an order scheduling oral arguments on the motion for summary judgment and motion to dismiss for December 19, 2022. Trial on the merits of the plaintiff’s claims, should one be necessary, is currently scheduled for March 16, 2023. The Company believes the claims in the plaintiff’s complaint are without merit and intends to vigorously dispute them. The Company has not recorded a contingent liability related to this matter.

           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. 

Nasdaq Compliance

            On December 31, 2021, we received a notice from the Nasdaq Listing Qualifications Department of The NASDAQ Capital Market (“Nasdaq”) informing us that because the closing bid price of our common stock had been below $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) (the “Rule”) requires listed securities to maintain a minimum bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.   Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial compliance period of 180 calendar days, or until June 29, 2022, to regain compliance.  To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period.   The notice letter also disclosed that if we do not regain compliance within the initial compliance period, we may be eligible for an additional 180-day compliance period.  To qualify for additional time, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of a plan to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary.  We did not regain compliance with the Rule by June 29, 2022.  We requested additional time to regain compliance and provided notice to Nasdaq of our intention to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary.  On June 30, 2022, Nasdaq notified us that we were granted an additional 180-day compliance period, or until December 27, 2022, to regain compliance with the Rule.  The letter also indicated that if at any time before December 27, 2022, the bid price of the Company’s Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Company will regain compliance with the Rule.  If the Company does not meet the minimum bid requirement at some time during the additional 180-day grace period, Nasdaq will provide written notification to the Company that its shares will be subject to delisting. At such time, the Company may appeal the delisting determination to a Nasdaq Hearings Panel. The Company would remain listed pending the Panel’s decision. There can be no assurance that if the Company does appeal a subsequent delisting determination, that such appeal would be successful.  The letter and notification from Nasdaq had no immediate effect on the listing or trading of the Company’s shares, which will continue to trade on the Nasdaq Capital Market under the symbol “ADMP.” There are no assurances that we will be able to regain compliance with the minimum bid price requirements or will otherwise be in compliance with other Nasdaq listing rules. 

Note 10: Stock Transactions

Commons Stock Transactions:

In January and February 2021, the Company issued common stock upon exercise of investor warrants. The warrant holders exercised for cash at exercise prices ranging from $0.70 to $1.15 per share. The Company received total proceeds of approximately $5,852,000 and the warrant holders received 8,356,000 shares of common stock.

On February 2, 2021, the Company completed the closing of an underwritten public offering of 46,621,621 shares of common stock at a public offering price of $1.11 per share, which included 6,081,081 shares pursuant to the full exercise of the over-allotment option granted to the underwriters. Net proceeds were approximately $48.4 million, after deducting approximately $3.3 million in underwriting discounts and commissions and estimated offering expenses payable by the Company.  

  Preferred Stock Transaction

            On July 5, 2022, the Company entered into a private placement transaction with Lincoln Park Capital Fund, LLC, (or, "Lincoln Park") pursuant to which the Company issued an aggregate of 3,000 shares of Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred”), together with warrants (the "Warrants") to purchase up to an aggregate of 750,000 shares of common stock of the Company, at an exercise price of $0.47 per share (subject to adjustment as provided in the Warrants). Gross proceeds were $300,000, excluding transaction costs, fees and expenses of $15,000. The Warrants become exercisable commencing January 3, 2023 and have a term ending on January 5, 2028.

            The Series C Preferred is entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when, as and if actually paid on shares of common stock (subject to adjustments pursuant to the related Certificate of Designation.) The Series C Preferred will have no voting rights (other than the right to vote as a class on certain matters as provided in the related Certificate of Designation). However, each share of Series C Preferred entitles the holder thereof (i) to vote exclusively on the Proposal (as defined in the related documents) and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal, and (ii) to 1,000,000 votes per each share of Series C Preferred.

            The Series C Preferred shall, except as required by law, vote together with the common stock and any other issued and outstanding shares of preferred stock of the Company entitled to vote, as a single class; provided, however, that such shares of Series C Preferred shall, to the extent cast on the Proposal, be automatically and without further action of the holders thereof voted in the same proportion as shares of common stock (excluding any shares of common stock that are not voted) and any other issued and outstanding shares of preferred stock of the Company entitled to vote (other than the Series C Preferred or shares of such preferred stock not voted) are voted on the Proposal and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal. The Series C Preferred has a “Stated Value” of $100 per share of Series C Preferred. (i) Upon any liquidation, dissolution or winding up of the Company (a “Liquidation”), the holders of Series C Preferred are entitled to be paid in cash an amount per share of Series C Preferred equal to 110% of the Stated Value (the “Liquidation Amount”), or (ii) in the event of a “Deemed Liquidation Event” as defined in the Certificate of Designation, which generally includes certain merger transactions or a sale, lease or other disposition of all or substantially all of the assets of the Company, the holders of Series C Preferred are entitled to paid out of the consideration payable to stockholders in such Deemed Liquidation Event or out of the “Available Proceeds” (as defined in the Certificate of Designation), in each case before any payment may be made to the holders of Common Stock by reason of their ownership thereof, an amount per share of Series C Preferred equal to the Liquidation Amount. Upon certain of the Deemed Liquidation Events, if the Company does not effect a dissolution within 90 days after such event, then the holders of Series C Preferred may require the Company to redeem the Series C Preferred for an amount equal to the Liquidation Amount.

            The Series C Preferred is convertible into shares of common stock at the option of the holder, any time after the effective date of a reverse stock split of the outstanding shares of the Common Stock at a ratio set forth in a reverse stock split proposal by means of an amendment to the Company’s certificate of incorporation approved by the board of directors and the stockholders of the Company (a “Reverse Stock Split”), into that number of shares common stock (subject to certain beneficial ownership limitations applicable to each holder, and to compliance with the rules and regulations of the Nasdaq Capital Market) determined by dividing the Stated Value of such share of Series C Preferred by the conversion price then in effect, rounded down to the nearest whole share (with cash paid in lieu of any fractional shares). The conversion price for the Series C Preferred equals 90% of the lesser of (i) the closing sale price of the Common Stock on the trading day immediately prior to the Closing Date and (ii) the average of the closing sale prices for the common stock on the five trading days immediately prior to the closing date, subject to adjustment as provided in the certificate of designation; provided, that the conversion price may not fall below the par value per share of the common stock and may not exceed $0.60 per share. Based on the initial conversion price of $0.43 per share, the 3,000 Shares of Series C Preferred are initially convertible into approximately 697,674 shares of common stock. The conversion price is subject to adjustment as set forth in the certificate of designation for stock dividends, stock splits, reverse stock splits, and similar events. The Series C Preferred also contain redemption features by the holder at 110%, at any time after the effective date of a Reverse Stock Split and by the issuer at 105%, at any time after the effective date of a Reverse Stock Split. Additionally, in accordance with the transaction agreement, the Company filed a registration statement with the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying the Series C Preferred and the Warrants.

             The Company determined that the Series C Preferred should be classified as mezzanine equity (temporary equity outside of permanent equity), that the Series C Preferred more closely aligned with debt as the intent is for redemption by either the holder or issuer, mostly likely the issuer (the Company) due to the more favorable redemption terms. The embedded conversion feature was determined to meet the derivative scope exception. The Company did not separately account for the redemption features as the fair value of such feature is not material. The Warrants are freestanding and detachable; and the Company determined that the warrants meet the criteria for equity classification in the Company’s consolidated balance sheet. With the equity classification of both the Series C Preferred and the warrants, the $15,000 in transaction costs were allocated between the Series C Preferred and the Warrants, which netted the proceeds received. Net proceeds were allocated between the Series C Preferred and the Warrants based on their relative fair values.

            Fair value for both the Series C Preferred and the related warrants were based on significant inputs that were unobservable and thus represented Level 3 measurements. Fair value for the Series C Preferred was based on the weighted value of the Reverse Stock Split approval and the value of the Reverse Stock Split rejection times the probability of each scenario as assessed by management at the time of the Series C Preferred stock issuance. Fair value of the Warrants was based on the Black-Scholes pricing model, using the following inputs: $0.53 stock price, $0.47 exercise, 5.5 years remaining expected term, 70% volatility, 0% dividend rate and 2.82% risk free rate. The relative fair value ascribed to the Series C Preferred was approximately $157,300 and the relative fair value ascribed to the Warrants was approximately $127,700.

            Subsequent to the issuance of the Series C Preferred, in connection with the Company’s annual meeting of stockholders, in September 2022 the Company’s stockholders voted on a reverse stock split proposal, and the proposal was not approved. Pursuant to the Series C Preferred transaction agreements, at September 30, 2022, in the consolidated balance sheet, the Company accrued $15,000 owed to Lincoln Park resulting from the failure of the reverse stock split proposal to be approved at the meeting. Based on the failure, redemption of the Series C Preferred is not probable at September 30, 2022, and, as such, no accretion was recorded to the redemption value. The warrants are equity-classified, and, as such do not require revaluation and 750,000 warrants remain outstanding as of September 30, 2022.

Note 11: 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 (“SARs”) provide for the cash payment of the excess of the fair market value of the Company’s common stock price on the date of exercise over the grant price.  The fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model. The SARs will vest over a period of 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 accounts for forfeiture as they occur and reduces the compensation cost at the time of forfeiture.

At the Company’s 2020 annual meeting of stockholders, the stockholders approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation (collectively “stock awards”). In addition, the 2020 Plan provides for the grant of cash awards. The initial aggregate number of shares of common stock that may be issued pursuant to stock awards under the 2020 Plan is 2,000,000 shares. The number of shares of common stock reserved for issuance automatically increases on January 1 of each calendar year during the term of the 2020 Plan, commencing January 1, 2021, by 5.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares of common stock determined by the Company’s board of directors before the start of a calendar year for which an increase applies. One of the provisions of the 2020 Plan is that no award may be granted, issued or made under the 2020 Plan until such time as the fair market value of the common stock, which is generally the closing sales price of the common stock on the principal stock market on which the common stock is traded, has been equal to or greater than $3.00 per share (subject to proportionate adjustment for stock splits, reverse stock splits, and similar events) for at least ten consecutive trading days, after which time awards may be made under the 2020 Plan without regard to any subsequent increase or decrease in the fair market value of the common stock. No awards were made pursuant to the 2020 Plan as of September 30, 2022. 

On January 1, 2022, pursuant to the 2020 Equity Incentive Plan the number of shares reserved for the issuance of stock awards increased by 7,479,713 shares.   

In June 2022, the Company issued 250,000 shares of common stock to a former executive officer of the Company pursuant to a separation agreement between the Company and the officer. The separation agreement resulted to the modification of the RSU previously issued to the officer, accelerating the RSU vesting upon his separation. As a result of this Type III modification, the Company determined the cumulative compensation cost that should have been recognized at that date as if the fair value of the modified award had been recognized from the original grant date over his requisite service period, which resulted in the reversal of approximately $540,000 in expense.  

Stock Options

The following table summarizes the stock option activity for the nine months ended September 30, 2022:

2009 Equity Incentive Plan:

As of September 30, 2022, the compensation expense related to stock options issued under the Company’s 2009 Equity Incentive Plan has been fully recognized.

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 all options outstanding at September 30, 2022 and 2021 was $0.

Restricted Stock Units

The following summarizes the restricted stock unit activity for the nine months ended September 30, 2022 below: 

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As of September 30, 2022, the unamortized compensation expense related to RSUs was approximately $366,000 and will be recognized over 1.17 years.

Total Stock-Based Compensation:

Stock-based compensation recognized as selling, general and administrative costs (or, SG&A) for three months ended September 30, 2022 and 2021, was approximately $71,000 and $(59,000), respectively.

Stock-based compensation recognized as research and development costs (or, R&D) for three months ended September 30, 2022 and 2021, was approximately $4,000 and $212,000, respectively.

Stock-based compensation recognized as SG&A for nine months ended September 30, 2022 and 2021, was approximately $(137,000) and $1,012,000, respectively.

Stock-based compensation recognized as R&D for nine months ended September 30, 2022 and 2021, was approximately $123,000 and $818,000, respectively.

Warrants

The following table summarizes warrants outstanding at September 30, 2022:

At September 30, 2022, the Company has reserved shares of common stock for issuance upon exercise of outstanding options, warrants including all of the warrants in the table above, restricted stock units and convertible preferred stock, as follows:

 Note 12: Commitments and Contingencies

            The Company has a production threshold commitment to a manufacturer of our SYMJEPI products pursuant to which 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. There were no maintenance fees recorded as of September 30, 2022 and 2021.

            For information concerning contingencies relating to legal proceedings, see Note 9 of the notes to the condensed consolidated financial statements.

 Note 13: Subsequent Events

Officer Resignation

            On October 1, 2022, Ronald B. Moss, M.D., the Chief Medical Officer of the Company, resigned as an officer and employee of the Company effective October 14, 2022.

Strategic Review

            On October 3, 2022, the Company announced that following the previously announced halting of the Company’s Phase 2/3 clinical trial examining the effects of Tempol in high risk subjects with early COVID-19 infection, it has initiated a process to explore a range of strategic and financing alternatives focused on maximizing stockholder value. Potential alternatives that may be explored or evaluated include a partnership or other agreements regarding or sale of one or both of the Company’s commercial products SYMJEPI® and ZIMHI®, a merger, sale, or reverse merger of the Company, and/or seeking additional financing. As part of this process, the Company has engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist the Company in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions. There can be no assurance regarding the schedule for completion of the strategic review process, that this strategic review process will result in the Company pursuing any transaction or that any transaction, if pursued, will be completed. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. The Company is also reviewing and implementing expense reduction alternatives and measures including, without limitation, employee headcount reductions and reduction or discontinuation of certain product development programs.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information Relating to Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements. Such statements are not historical facts, but are based on our current expectations, estimates and beliefs about our business and industry. Such forward-looking statements may include, without limitation, statements about our strategies, objectives and our future achievements; the outcome of our strategic alternatives review process; our expectations for growth; estimates of future revenue; our current or future expenses, commitments, obligations or liabilities; our sources and uses of cash; our liquidity needs; our current or planned clinical trials or research and development activities; product development timelines; anticipated dates for resumption of manufacturing concerning certain of our commercial products; our future products; regulatory matters; our expectations concerning the timing of regulatory actions relating to our products and product candidates; expense, profit, cash flow, or balance sheet items or any other guidance regarding future periods; the impact of broad-based business or economic disruptions, including relating to the COVID-19 pandemic, on our ongoing business and prospects; our expectations concerning the outcome of proceedings discussed in this Report under Item 1 of Part II of this Report under the caption “Legal Proceedings” and other statements concerning our future operations and activities.  Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development and/or otherwise are not statements of historical fact.  These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. In some cases, you can identify forward-looking statements by terminology, such as “believe,” “will,” “expect,” “may,” “anticipate,” “estimate,” “intend,” “plan,” “should,” and “would,” or the negative of such terms or other similar expressions. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Report. These forward-looking statements are not guarantees of future performance and concern matters that could subsequently differ materially from those described in the forward-looking statements. Actual events or results may differ materially from those discussed in this Report. In addition, many forward-looking statements concerning our anticipated future business activities assume that we have or are able to obtain sufficient funding to support such activities and continue our operations and planned activities. As discussed elsewhere in this Report, we will require additional funding to continue operations, and there are no assurances that such funding will be available. Failure to timely obtain required funding would adversely affect and could delay or prevent our ability to realize the results contemplated by such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.  In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Because factors referred to elsewhere in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2021 (sometimes referred to as the “2021 Form 10-K”) that we previously filed with the Securities and Exchange Commission, including without limitation the “Risk Factors” section in this Report and in the 2021 Form 10-K, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any forward-looking statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and except as may be required by applicable law, we undertake no obligation to release publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date of this Report. Important risks and factors that could cause actual results to differ materially from those in these forward-looking statements are disclosed in this Report including, without limitation, under the headings “Part II, Item 1A. Risk Factors,” and “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our 2021 Form 10-K, including, without limitation, under the headings “Part I, Item 1A. Risk Factors,” “Part I, Item 1. Business,” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our subsequent filings with the Securities and Exchange Commission, press releases and other communications. 

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

Investors and others should note that we may announce material information to our investors using our website ( www.adamispharmaceuticals.com), SEC filings, press releases, public conference calls and webcasts, as well as social media and blogs.  We use these channels as a means of disclosing material non-public information and making disclosures pursuant to Regulation FD, and to communicate with our members and the public about our company. It is possible that the information we post on our website or social media and blogs could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on our website, social media channels and blogs listed on our investor relations website.

General

Company Overview

            Adamis Pharmaceuticals Corporation (“we,” “us,” “our,” “Adamis” or the “company”) is a specialty biopharmaceutical company focused on developing and commercializing products in various therapeutic areas, including allergy, opioid overdose, respiratory and inflammatory disease.  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, for patients weighing 66 pounds or more; SYMJEPI (epinephrine) Injection 0.15mg, which was approved by the FDA in September 2018, for use in the treatment of anaphylaxis for patients weighing 33-65 pounds; ZIMHI (naloxone HCL Injection, USP) 5 mg/0.5 mL, which was approved by the FDA in October 2021 for the treatment of opioid overdose; and Tempol, an investigational drug.  In June 2020, we entered into a license agreement with a third party to license rights under patents, patent applications and related know-how of the licensor relating to Tempol.  The exclusive license includes the worldwide use under the licensed patent rights and related rights for the fields of COVID-19 infection, asthma, respiratory syncytial virus infection, and influenza infection, as well as the use of Tempol as a therapeutic for reducing radiation-induced dermatitis in patients undergoing treatment for cancer.  We commenced Phase 2/3 clinical trial start-up activities to examine the safety and efficacy of Tempol in high risk subjects with early COVID-19 infection and on September 2, 2021, we announced the initiation of patient dosing in the trial. In February 2022 we announced the enrollment and dosing of more than 100 subjects in the Phase 2/3 trial, and on March 14, 2022, we announced that the Data Safety Monitoring Board, or DSMB, overseeing the Phase 2/3 clinical trial met to evaluate the clinical and safety data from the first planned interim analysis and, following its evaluation, recommended that the study continue without modification. The DSMB is composed of subject matter experts and can unblind the data to determine the treatment effects of the subjects in the trial. On June 1, 2022, we announced that the DSMB had met again to evaluate interim clinical and safety data for the trial and based on an interim review of the data, determined that the study can continue as planned.  

On September 21, 2022, we announced that the DSMB’s third interim analysis of the Phase 2/3 clinical trial, which was the first interim review where the DSMB evaluated the primary efficacy endpoint, determined that the trial did not achieve its primary endpoint, as measured by comparing the rate of sustained clinical resolution of symptoms of COVID-19 at day 14 of Tempol versus placebo. The DSMB conducting the interim review recommended that the study be halted early due to lack of efficacy. The DSMB noted that no safety concerns were identified in the subjects that received Tempol. Based on the recommendation from the DSMB, we have halted the trial and have stopped further development of Tempol. 

On October 3, 2022, we announced that following the previously announced halting of our Phase 2/3 clinical trial examining the effects of Tempol in high risk subjects with early COVID-19 infection, we have initiated a process to explore a range of strategic and financing alternatives focused on maximizing stockholder value. Potential alternatives that may be explored or evaluated include a partnership or other agreement regarding or sale of one or both of the company’s commercial products SYMJEPI^® and ZIMHI^®, a merger, sale, or reverse merger of the company, and/or seeking additional financing. As part of this process, we have engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist us in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions. There can be no assurance regarding the timing for completion of the strategic review process, that this strategic review process will result in the company pursuing any transaction or that any transaction, if pursued, will be completed. The process of obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. We have implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction or discontinuation of certain product development programs. 

 Our US Compounding Inc. subsidiary, or USC, which we acquired in April 2016 and which was registered as a human drug compounding outsourcing facility under Section 503B of the FDCA and the U.S. Drug Quality and Security Act, or DQSA, provided prescription compounded medications, including compounded sterile preparations and nonsterile compounds, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States.  In July 2021, we sold certain assets relating to USC’s human compounding pharmaceutical business and approved a restructuring process to wind down the remaining USC business and sell, liquidate or otherwise dispose of the remaining USC assets.  Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products.

SYMJEPI (epinephrine) Injection

            On June 15, 2017, the FDA approved our SYMJEPI (epinephrine) Injection 0.3mg product for the emergency treatment of allergic reactions (Type I) including anaphylaxis.  SYMJEPI (epinephrine) Injection 0.3mg is intended to deliver a dose of epinephrine, which is used for emergency, immediate administration in acute anaphylactic reactions to insect stings or bites, allergic reaction to certain foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis for patients weighing 66 pounds or more.  On September 27, 2018, the FDA approved our lower dose SYMJEPI (epinephrine) Injection 0.15mg product, for the emergency treatment of allergic reactions (Type I) including anaphylaxis in patients weighing 33 to 65 pounds.  Our SYMJEPI injection products were fully launched in July 2019 by our then-commercialization partner Sandoz Inc.

            Our SYMJEPI products are currently marketed and sold by USWM, LLC, or USWM or US WorldMeds, with which we entered into an exclusive distribution and commercialization agreement, or the USWM Agreement, in May 2020 for the United States commercial rights for the SYMJEPI products, as well as for our ZIMHI product.  Under the terms of the USWM Agreement, USWM is the exclusive distributor of SYMJEPI in the United States and related territories, or Territory, and USWM has an exclusive license under our patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the products in the Territory, in partial consideration of an initial payment of $1,000,000 by USWM and potential additional regulatory and commercial based milestone payments.  There can be no assurances that any of these milestones will be met or that any milestone payments will be paid to us.  We retain rights to the intellectual property subject to the USWM Agreement and to commercialize both products outside of the Territory.  In addition, we may continue to use the licensed intellectual property (excluding certain of the licensed trademarks) to develop and commercialize other products (with certain exceptions), including products that utilize our Symject™ syringe product platform.  

             The USWM Agreement provides that, after deducting the supply price and subject to certain other deductions and adjustments, including an allocation for USWM sales and distribution expenses from net sales of the products, USWM will pay to us 50% of the net profit from net sales, as each such term is defined in the USWM Agreement, of the product in the Territory to third parties, determined on a quarterly basis.  We will be the supplier of the products to USWM, and USWM will order and pay us a supply price for quantities of products ordered.  The agreement does not include minimum payments to us by USWM, minimum requirements for sales of product by USWM or, with certain exceptions, minimum purchase commitments by USWM.   

             On March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level. The four lots were recalled due to the potential clogging of the needle preventing the dispensing of epinephrine. The recall is being conducted with the knowledge of the FDA and USWM is handling the entire recall process for the company, with company oversight. As of the date of this Report, neither USWM nor we have received, or are aware of, any adverse events related to this recall. 

SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. For the manufacture of SYMJEPI, the company utilizes “Ready-to-Fill,” or RTF, syringes that consist of a pre-assembled glass syringe barrel with a staked-in stainless steel needle.  During routine inspection of epinephrine pre-filled syringe batches, a small number of syringes with clogged needles were identified. An initial investigation suggested a syringe component issue as the likely cause of the observed needle clogging. Further investigation confirmed the steel used in one specific stainless steel needle batch as the root cause for the clogged syringes observed. The company and the manufacturer have developed corrective and preventive actions. New RTF syringes, which have been manufactured using a different batch of steel for their needles, are being sourced.  The company is committed to returning SYMJEPI to the market after all stakeholders are satisfied that these corrective actions should prevent a repeat of the observed failure in future batches. Catalent has now resumed operations at its Belgium facility and as of the date of this Report is scheduled to manufacture a new batch of SYMJEPI during November 2022. Assuming no additional interruptions or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although there can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the end of the first quarter of 2023. 

ZIMHI (naloxone) Injection 

            Naloxone is an opioid antagonist used to treat narcotic overdoses.  Naloxone, which is generally considered the drug of choice for immediate administration for opioid overdose, blocks or reverses the effects of the opioid, including extreme drowsiness, slowed breathing, or loss of consciousness.  Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and fentanyl.

            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.  Following the receipt of two Complete Response Letters, or CRLs, from the FDA regarding our NDA for ZIMHI and our resubmissions of the NDA, on October 18, 2021, we announced that the FDA had approved ZIMHI for the treatment of opioid overdose. On March 31, 2022, our commercial partner USWM and the company issued a press release announcing the commercial launch of ZIMHI. USWM has indicated to the company that initial feedback from the field has been positive. A recently launched website enables institutional customers to order and receive product directly.  USWM has indicated to the company that progress has continued in adding ZIMHI to formularies for payors and PBMs, and that in many states ZIMHI has been added to the standing orders, which permits pharmacies to dispense ZIMHI without a prescription.

Tempol (APC400) 

            On June 12, 2020, we entered into a license agreement with a third party entity, or the Licensor, to license rights under patents, patent applications and related know-how of Licensor relating to Tempol, an investigational drug.  The exclusive license includes the worldwide use under the licensed patent rights and related rights of Tempol for the fields of COVID-19 infection, asthma, respiratory syncytial virus infection, and influenza infection.  In addition, the exclusive license includes the use of Tempol as a therapeutic for reducing radiation-induced dermatitis in patients undergoing treatment for cancer.  

            Tempol is a redox cycling nitroxide that promotes the metabolism of many reactive oxygen species and improves nitric oxide bioavailability.  It has been studied extensively in animal models of oxidative stress and inflammation.  Overall, Tempol acts as both a super-oxide dismutase mimetic and also has demonstrated anti-inflammatory, anticoagulant activity and antiviral activity.  Inflammation and oxidative stress occur in various disease states including COVID-19.  Both inflammatory cytokines and reactive oxygen species (ROS) from cells of the immune system called macrophages and neutrophils damage the lung in Acute Respiratory Distress Syndrome (ARDS).  Many published articles describing animal models of ARDS show Tempol caused a decrease in lung inflammation and preserved lung pathology associated with acute and chronic lung injury.  In animal models, Tempol has been shown to decrease proinflammatory cytokines (cytokine storm), and through its antioxidant activity has been shown to decrease the harmful effects of ROS.  In addition, Tempol has been shown to decrease platelet aggregation, a problem observed in many COVID-19 patients.  More recently, Tempol has been shown to have antiviral activity against the virus that causes COVID-19 in-vitro and may have synergy with the antiviral remdesivir. On January 28, 2021, we announced that in collaboration with the Human Immune Monitoring Center at Stanford University we conducted a study to investigate the effects of Tempol on immune cells from COVID-19 patients, and that preliminary data from that study showed that Tempol decreases cytokines from stimulated cells from COVID-19 patients.  In March 2021, we announced that in studies conducted at Galveston National Laboratory, or GNL, University of Texas Medical Branch, hamsters challenged with the virus that causes COVID-19 (SARS-CoV-2) showed decreased inflammation in the lungs when treated with Tempol compared to controls, and on March 22, 2022, we announced that in studies conducted at the GNL, hamsters challenged with high levels of the Omicron variant of the SAR-CoV-2 virus, resulted in significant decrease of inflammation in the lungs of animals treated with Tempol compared to controls.

           In January 2021, we submitted an IND to the FDA for the investigational use and proposed Phase 2/3 clinical trial of Tempol for the treatment of COVID-19, with the goal of the study to examine the safety and activity of Tempol in COVID-19 patients early in the infection.  In addition to safety, the study examined markers of inflammation and the rate of hospitalization for patients taking Tempol versus placebo early in COVID-19 infection.  On June 11, 2021, we announced the start-up of the Phase 2/3 clinical trial and by February 2022 we announced the enrollment and dosing of more than 100 subjects in the Phase 2/3 trial.  On March 14, 2022, we announced that the DSMB, which is composed of infectious disease experts that oversee and review the safety and efficacy of the trial, met to evaluate the clinical and safety data from the first planned interim analysis and, following its evaluation, recommended that the study continue without modification. During the trial and interim review process, the company did not have access to unblinded trial data and did not have access to unblinded data until the final study data was compiled and reviewed. The DSMB met again on May 31, 2022, to evaluate interim clinical and safety data for the trial and based on an interim review of the data, determined that the study can continue as planned. On September 12, 2022, we announced that the clinical trial reached the initial planned enrollment of 248 subjects.

On September 21, 2022, we announced that the DSMB’s third interim analysis of the Phase 2/3 clinical trial, which was the first interim review where the DSMB evaluated the primary efficacy endpoint, determined that the trial did not achieve its primary endpoint, as measured by comparing the rate of sustained clinical resolution of symptoms of COVID-19 at day 14 of Tempol versus placebo. The DSMB conducting the interim review recommended that the study be halted early due to lack of efficacy. The DSMB noted that no safety concerns were identified in the subjects that received Tempol. Based on the recommendation from the DSMB, we have halted the trial and have stopped further development of Tempol. 

On October 27, 2022, we received a communication from the Licensor asserting that the license agreement between the Licensor and us relating to Tempol has terminated by virtue of alleged noncompliance by us with certain financial covenants contained in the agreement. We dispute, and do not agree, that the agreement has terminated. We are also evaluating potential claims against the Licensor including possible breach of its obligations under the agreement, and we intend to vigorously defend our rights relating to the agreement.  We do not believe that the agreement or any termination of the agreement is material to the Company’s current or presently anticipated future business, financial conditions or results of operations. 

US Compounding, Inc. Agreement 

            On July 30, 2021, the company and its wholly-owned USC subsidiary entered into an Asset Purchase Agreement, or the USC Agreement, effective as of July 30, 2021, or the Effective Date, with Fagron Compounding Services, LLC d/b/a Fagron Sterile Services (the “Purchaser”), providing for the sale and transfer by USC and the purchase by the Purchaser, effective as of the Effective Date, of certain assets of USC related to its human compounding pharmaceutical business, or the Business, including certain customer information and information on products sold to such customers by USC, together, the “Book of Business,” including related formulations, know-how, and expertise regarding the compounding of pharmaceutical preparations, clinical support knowledge and other data and certain other information relating to the customers and products, collectively referred to as the “Assets.”  After the Effective Date, Purchaser may use the Book of Business to secure customers for its products and services and may otherwise use the Book of Business.  Pursuant to the USC Agreement, the Purchaser did not assume any liabilities of USC, and the transaction did not include the sale or transfer of any USC equipment, buildings or real property, or any products, information, agreements, relationships or other assets relating to the veterinary business of USC.

            The USC Agreement provides that the consideration payable by the Purchaser to the company for the Assets sold and transferred consisted of the following amounts: (i) a payment of $107,500 on the Effective Date; and (ii) monthly payments in an amount equal to (a) two (2.0) times the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain identified customers included in the Book of Business during the 12-month period following the Effective Date, or the “Payment Term.” and (b) a lower multiple of the amount actually collected by Purchaser or its affiliates for sales of products or services made to certain other customers included in the Book of Business. The final payment amount due from Fagron, recorded in the company's condensed consolidated balance sheet at September 30, 2022, was approximately $248,000. The USC Agreement includes certain restrictive covenants of the company and USC, including noncompetition provisions.  The transaction agreements include standard indemnification provisions, and a number of other covenants and agreements of the parties concerning the transactions contemplated by the agreements. 

Plan for the Remaining Operations, Business and Assets of USC 

                In light of a number of factors including the sale of assets to the Purchaser pursuant to the USC Agreement, in August 2021 the Board approved a restructuring process of winding down the remaining operations and business of USC and selling, transferring or disposing of the remaining assets of USC.  Effective October 31, 2021, USC surrendered its Arkansas retail pharmacy permit and wholesaler/outsourcer permit and is no longer selling compounded pharmaceutical or veterinary products. The restructuring and winding down includes, without limitation, the termination of USC’s veterinary business and USC sales to veterinary customers; the termination of employment of all or substantially all employees engaged in the USC business (except as determined to be necessary or appropriate in connection with the company’s and USC’s performance of their obligations under the USC Agreement and the transactions contemplated thereby, or in connection with resolving matters relating to the winding down of USC’s business), and providing such notices and making such payments to such employees as the officers of the company determine are necessary or appropriate, including as maybe required by law or as maybe provided for pursuant to any retention agreement, severance agreement, incentive agreement, or other written agreement with such employees; the sale or other disposition from time to time of the remaining equipment, real property, buildings and tangible and intangible assets relating to USC’s business that are unrelated to the USC Agreement; the termination, assignment or other resolution of agreements with third parties relating to the USC business; making regulatory filings and taking appropriate actions with federal and state regulatory authorities in connection with the winding down and winding up of USC’s business; and taking such other actions as the officers of the company or USC (as appropriate) determine are necessary or appropriate in connection with the restructuring and the winding down and winding up of the remaining business, operations and assets of USC.  The company has sold and disposed of certain customer information and other assets related to USC’s veterinary compounded pharmaceuticals business, and will continue the process of selling or otherwise disposing of the remaining assets relating to USC’s business.   

                In connection with the winding down of the USC business, we incurred significant expenses and made a number of payments.  The substantial majority of cash payments related to personnel-related restructuring charges, including without limitation costs associated with providing termination payments to USC employees, employee salaries and incentive payments during a transition period after the effective date of the sale of the Assets pursuant to the USC Agreement, severance or other termination benefits or payments in connection with workforce reduction and termination of employment, and payments pursuant to retention agreements or incentive agreements with certain employees, were made during the third and fourth quarters of 2021 and were approximately $1.6 million.  In addition, as part of the winding down of USC’s business, we have incurred other costs.  We also expect to incur commissions and other costs associated with the sale or other disposition of certain USC tangible assets such as building, property and certain equipment.

 As a result of the transactions contemplated by the USC Agreement and the restructuring activities described above, the company’s financial results for the third and fourth quarters of 2021 include approximately $8.6 million for the impairment charges of inventory, fixed assets, intangibles, goodwill and right of use assets. The impairment charges that the company incurred and expects to incur in connection with the matters described above are subject to a number of assumptions, and the actual amount of impairment charges may differ materially from those estimated by the company.  In addition, the company may determine in the future that additional impairments of assets are appropriate in connection with the matters described above.

Going Concern and Management’s Plan    

                The financial statements included elsewhere herein for the three and nine months ended September 30, 2022, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. We have incurred substantial recurring losses from continuing operations, have used, rather than provided, cash in our continuing operations, and are dependent on additional financing to fund operations. We incurred a net loss of approximately $23.2 million and $37.1 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022, we had cash and cash equivalents of approximately $2.4 million, an accumulated deficit of approximately $301.2 million and liabilities of approximately $9.1 million. These conditions raise substantial doubt about our ability to continue as a going concern.  The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 

Our management intends to attempt to secure additional required funding through equity or debt financing if available, seeking to enter into a partnership or other strategic agreement regarding, or sales or out-licensing of, our commercial products, product candidates or intellectual property assets or other assets including assets used in connection with the former USC business, revenues relating to supply and sale of SYMJEPI and ZIMHI products and share of net profits received relating to sales in the U.S. of our SYMJEPI and ZIMHI products, seeking partnerships or commercialization agreements with other pharmaceutical companies or third parties to co-develop and fund research and development or commercialization efforts of our products, from a merger, reverse merger or other business combination, or similar transactions.  As part of this process, we have engaged the investment bank Raymond James & Associates, Inc. to act as strategic advisor to assist us in evaluating certain alternatives. As of the date of this Report, we are presently engaged in communications with third parties regarding this process concerning one or more possible transactions.  However, there can be no assurance regarding the timing of the strategic review process or that we will be able to obtain any sources of funding.  As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving issuances of equity securities. Such additional funding may not be available, may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders.  There is no assurance that we will be successful in obtaining the necessary funding to sustain our operations or meet our business objectives. In addition, obtaining funding, or the terms of a strategic transaction, could result in significant dilution to our existing stockholders. If we do not obtain required funding, our cash resources will be depleted in the near term and we would be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships.  If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection, dissolution or liquidation, or other alternatives that could result in our stockholders losing some or all of their investment in us.  We have implemented expense reduction measures including, without limitation, employee headcount reductions and the reduction or discontinuation of certain product development programs. 

            Any funding that we may receive during the remainder of fiscal 2022 or thereafter is expected to be used to satisfy existing and future obligations and liabilities and working capital needs, and for general working capital purposes. 

Results of Operations  

Our consolidated results of operations are presented for the three months and nine months ended September 30, 2022 and 2021. Certain financial results (revenues and expenses) relating to the business formerly conducted by USC are reflected in Note 2, Discontinued Operations and Assets Held for Sale, of the notes to the consolidated financial statements appearing elsewhere in this Report.  Unless otherwise noted, the discussion below, and the revenue and expense amounts discussed below, are based on and relate to the continuing operations of the company, which we sometimes refer to as our drug development and commercialization business. 

Three Months Ended September 30, 2022 and 2021

Revenues. Revenues were approximately $1,506,000 and $760,000 for the three months ended September 30, 2022 and 2021, respectively. The $746,000 increase in revenue for the third quarter of 2022 was primarily attributable to approximately $1,306,000 of sales of ZIMHI to USWM recognized in that quarter (which was not yet FDA approved during the same period of 2021) and an increase of approximately $562,000 in recognition of deferred revenue due to the Company's reassessment of performance obligations met under the USWM Agreement, offset primarily by a decrease in SYMJEPI sales of approximately $736,000 due to the manufacturing hold and voluntary product recall announced in March 2022. Additionally, revenues for the three months ended September 30, 2022, were reduced by additional product recall costs of approximately $388,000, which were recorded as contra-revenue. As disclosed elsewhere in this Report, including above under the heading “General - SYMJEPI (epinephrine) Injection Product,” the manufacturing of SYMJEPI continues to be on hold. The Company and the manufacturer have developed corrective and preventive actions. New RTF syringes, which have been manufactured using a different batch of steel for their needles, are being sourced. Catalent has now resumed operations at its Belgium facility and as of the date of this Report is scheduled to manufacture a new batch of SYMJEPI during November 2022. Assuming no additional interruptions or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although there can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the end of the first quarter of 2023.   

Cost of goods sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. Consolidated cost of goods sold was approximately $1,648,000 and $1,566,000 for the three months ended September 30, 2022 and 2021, respectively. The gross loss for the three months ended September 30, 2022 was approximately $142,000 compared to approximately $806,000 for the three -months ended September 30, 2021. The $82,000 increase in cost of goods sold in the third quarter of 2022 was primarily due to an increase in direct material costs of approximately $1,199,000 related to ZIMHI production, offset primarily by a decrease in direct material costs and obsolescence and wastage charges related to SYMJEPI production of approximately $795,000 due to its continuing manufacturing hold and voluntary product recall. Additionally, for the three months ended September 30, 2021 a loss on derecognition of inventory of $330,000 was recorded due to a return of inventory to our supplier. The supplier agreed to repurchase the inventory at an amount lower than our cost. There was no return of inventory during the three months ended September 30, 2022.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of consulting and employee compensation, professional fees which include legal, accounting and audit fees, and depreciation and amortization expenses.  SG&A expenses for the three months ended September 30, 2022 and 2021 were approximately $2,508,000 and $4,794,000, respectively. The $2,286,000 decrease in SG&A expenses during the three months ended September 30, 2022, was primarily due to a decrease in legal expenses of approximately $1,220,000 related principally to the ongoing investigations, a decrease of approximately $792,000 primarily related to a financial advisor fee related to the sale of certain USC assets to Fagron and a decrease of approximately $514,000 related to compensation expenses principally resulting from a reversal of bonus accrual expenses, offset by an increase of approximately $240,000 in other SG&A costs primarily insurance, IT and recruiting expenses.

Research and development expenses. Our research and development, or R&D, costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. R&D expenses were approximately $1,978,000 and $4,620,000 for the three months ended September 30, 2022 and 2021, respectively. The $2,642,000 decrease in R&D expenses during the quarter-ended September 30, 2022, was principally due to a decrease in development spending for Tempol of approximately $1,144,000, a decrease in development spending for ZIMHI of approximately $1,088,000 and a decrease of approximately $464,000 related to compensation expense principally resulting from a reversal of bonus accrual expenses, offset by approximately $54,000 related to increased development spending on SYMJEPI and other R&D projects.

Other Income (Expense). Other Income (Expenses) consists primarily of interest income, interest expense, and changes to the fair value of warrant liabilities. Other income (expense) for the three months ended September 30, 2022 and 2021 was approximately $357,000 and $5,052,000, respectively. The $4,695,000 decrease in other income for the three months ended September 30, 2022, was primarily due to no gain recorded in the consolidated statement of operations for the quarter-ended September 30, 2022, related to the forgiveness of the PPP loan debts, whereas in the comparable quarter in 2021 there was gain recorded of approximately $5,010,000 related to the forgiveness of debt. Additionally, there was a gain of approximately $278,000 recorded during the three months ended September 30, 2022, due to change in estimate of variable consideration related to the sale of certain assets to Fagron, pursuant to the USC Agreement.

Loss from Discontinued Operations. The company recorded a net loss from discontinued operations, after taxes, of approximately $128,000 and $7,193,000 related to its US Compounding Inc. subsidiary for the three months ended September 30, 2022 and 2021. The $7,065,000 decrease in net loss from discontinued operations was due to management's decision to discontinue the operations of USC in the third quarter of 2021. The $128,000 net loss from discontinued operations in the third quarter of 2022, primarily related to SG&A expenses as the company continues the wind-down of USC. The main components of the third quarter loss in 2021 were asset impairments totaling approximately $8,167,000 primarily related to adjustments associated with the winding down of the business of USC. Also contributing to that loss was gross loss of approximately $1,177,000, approximately $2,499,000 of other operating expenses, partially offset by approximately $4,637,000 of gain from the sale of non-financial asset to Fagron, approximately $8,000 for interest income, and other income of approximately $5,000. 

Nine Months Ended September 30, 2022 and 2021 

Revenues. Revenues were approximately $2,605,000 and $3,368,000 for the nine months ended September 30, 2022 and 2021, respectively. The $763,000 decrease in revenue for the nine months ended September 30, 2022 was primarily attributable to approximately $2,355,000 of sales of ZIMHI to USWM recognized in that period (which was not yet FDA approved during the same period of 2021) and an increase of approximately $562,000 in recognition of deferred revenue due to the Company's reassessment of performance obligations met under the USWM Agreement, offset by a decrease in SYMJEPI sales of approximately $3,292,000. No revenues relating to SYMJEPI were reported during the nine months ended September 30, 2022, due to the manufacturing hold and the voluntary product recall announced in March 2022. Additionally, revenues for the nine months ended September 30, 2022, were reduced by additional product recall costs of approximately $388,000, which were recorded as contra-revenue. As disclosed elsewhere in this Report, including above under the heading “General - SYMJEPI (epinephrine) Injection Product,” the manufacturing of SYMJEPI is currently on hold. The company and the manufacturer have developed corrective and preventive actions. New RTF syringes, which have been manufactured using a different batch of steel for their needles, are being sourced. Catalent has now resumed operations at its Belgium facility and as of the date of this Report is scheduled to manufacture a new batch of SYMJEPI during November 2022. Assuming no additional interruptions or delays, we believe that batch should ship to our third party commercial partner for final assembly in early 2023 and, although there can be no assurances concerning the timing, we anticipate having SYMJEPI relaunched and commercially available before the end of the first quarter of 2023.     

Cost of Goods Sold. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. Cost of goods sold was approximately $3,706,000 and $5,207,000 for the nine-months ended September 30, 2022 and 2021, respectively. The gross loss for the nine months ended September 30, 2022 was approximately $1,101,000 compared to approximately $1,839,000 for the nine-months ended September 30, 2021. The $1,501,000 decrease in cost of goods sold for the nine-month period ending September 30, 2022, was primarily due to a decrease of direct material costs and obsolescence and wastage of approximately $3,213,000 related to SYMJEPI resulting from the lack of production due to the manufacturing hold and voluntary product recall, offset by an increase in direct materials costs of approximately $2,258,000 related to ZIMHI product manufactured during the nine-month period of 2022. Additionally, for the nine months ended September 30, 2021 a loss on derecognition of inventory of $330,000 was recorded due to a return of inventory to our supplier. The supplier agreed to repurchase the inventory at an amount lower than our cost. There was no return of inventory during the nine months ended September 30, 2022.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of depreciation and amortization, professional fees which include legal, accounting and audit fees, consulting and employee compensation. SG&A expenses for the nine months ended September 30, 2022 and 2021 were approximately $10,096,000 and $13,247,000, respectively. The $3,151,000 decrease in SG&A during the nine months ended September 30, 2022, was primarily due to a decrease in legal expenses of approximately $2,138,000 principally related to the ongoing investigations and a decrease of approximately $1,279,000 in compensation expenses, offset by an increase in other SG&A costs of approximately $267,000 primarily insurance, IT and recruiting expenses. The decrease in compensation expenses during the nine months ended September 30, 2022, compared to the same period in 2021, was due to the reversal of bonus accrual expenses and a lower stock-based compensation expense resulting primarily from the modification of certain outstanding equity awards in connection with accelerated vesting pursuant to a separation agreement, offset mainly by employment separation payments made during the first half of 2022. 

Research and Development Expenses. Our research and development, or R&D, costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. R&D expenses were approximately $9,520,000 and $9,067,000 for the nine months ended September 30, 2021 and 2020, respectively. The $453,000 increase in research and development for the nine-month period ending September 30, 2022, was principally due to an increase of approximately $2,756,000 in development costs for Tempol resulting from the progression of our Phase 2/3 clinical trial relating to Tempol, offset by a decrease of approximately $1,140,000 in ZIMHI development costs, a decrease of $404,000 in SYMJEPI  and other R&D projects development costs and a decrease of approximately $758,000 in compensation expenses principally related to the reversal of bonus accrual expenses and lower stock-based compensation expenses due to the modification of certain outstanding equity awards.

Other Income (Expense). Other Income (Expenses) consists primarily of interest income, interest expense, changes to the fair value of warrant liabilities, and other transactions. Other income (expense) for the nine months ended September 30, 2022 and 2021 was approximately ($2,079,000) and $(2,635,000), respectively. The $556,000 decrease in other expenses during the nine months ended September 30, 2022, compared to the same period in 2021, was primarily attributable to a decrease in expense primarily associated with the change in fair value of warrants of approximately $7,668,000, an increase in other income of approximately $500,000 from insurance proceeds, offset by an increase in expense related to the contingent loss accrual associated with the Second Draw PPP Loan, or PPP2 Loan of approximately $1,787,000 and additional expense of approximately $919,000 due to change in estimate of variable consideration related to the sale of certain assets to Fagron, pursuant to the USC Agreement. The decrease in variable consideration was due to lower level of sales by Fagron to covered customers covered in the USC Agreement, in part due to certain supply and materials difficulties and increased competitive conditions.  Additionally, during the nine months ended September 30, 2022, there was approximately $63,000 of gain recorded in the consolidated statement of operations related to the forgiveness of the PPP2 Loan repayment, whereas in the comparable period of 2021, a gain of approximately $5,010,000 was recorded related to the forgiveness of the PPP loan debts.

Loss from Discontinued Operations. The Company recorded a net loss from discontinued operations of approximately $354,000 and $10,266,000 for the nine months ended September 30, 2022 and 2021, respectively. The $9,912,000 decrease in net loss from discontinued operations was primarily due to management's decision to discontinue the operations of USC, offset by a gain on the sale of non-financial assets of USC during the same period of 2021. The $354,000 net loss from discontinued operations for the nine months ended September 30, 2022, primarily related to SG&A expenses as the company continues the wind-down of USC. The main components of the loss for the nine months ended September 30,2021 were asset impairments totaling approximately $8,176,000 primarily related to adjustments associated with the winding down of the business of USC, approximately $7,145,000 of SG&A and R&D operating expenses, and approximately $71,000 of interest expense, partially offset by approximately $4,637,000 of gain from the sale of non-financial asset to Fagron, approximately $463,000 gross profit on sales and approximately $26,000 of other income. 

Liquidity and Capital Resources

We have incurred net losses from our continuing and discontinued operations of approximately $23.2 million and $37.1 million for the nine months ended September 30, 2022 and 2021, respectively. Since inception, and through September 30, 2022, we have an accumulated deficit of approximately $301.2 million. Since inception and through September 30, 2022, we have financed operations principally through public and private issuances of common stock, preferred stock and warrants and through debt financing. 

We will need additional funding in the near future to satisfy our existing and future obligations and liabilities and working capital needs, to support commercialization of our products, and for other purposes.  We intend to seek to satisfy future cash needs primarily through proceeds from equity or debt financings if available, loans, a partnership or other agreement regarding our commercial products, revenues relating to sales of our SYMJEPI and ZIMHI products, sales or out-licensing of intellectual property assets or other assets, products, product candidates or technologies, a merger, sale or reverse merger of the Company, or other strategic transaction. As described elsewhere in this Report, we have initiated and are engaged in a review of strategic alternatives.  However, there is no assurance that the Company will be successful in obtaining the necessary funding to sustain its operations or meet its business objectives. 

As of September 30, 2022, we had cash and cash equivalents of approximately $2.4 million.  Total assets were approximately $12.1 million and $38.3 million as of September 30, 2022 and December 31, 2021, respectively.   Current assets exceeded current liabilities by approximately $1.2 million as of September 30, 2022. 

Net cash used in operating activities for the nine months ended September 30, 2022 and 2021, was approximately $(24.4) million and $(31.1) million, respectively. Net cash used in operating activities decreased primarily due to the decrease in operating losses, offset by product recall payments of approximately $2.0 million, an approximately $1.4 million severance payment made in connection with a separation agreement in 2022 and an approximately $1.8 million repayment of the Second Draw PPP Loan principal and such related interest and fees, as compared to 2021. As part of our previously announced strategic review process, we have implemented expense reduction measures including, without limitation, employee headcount reductions and reduction or discontinuation of certain product development programs. 

Net cash provided by (used in) investing activities was approximately $3.3 million and $(0.9) million for nine months ended September 30, 2022 and 2021, respectively. The net cash provided by investing activities for the nine months ended September 30, 2022, was primarily due to payments received from Fagron from the sale of USC assets, and net cash used in investing activities for both periods were primarily due to the purchase of capital equipment, with more capital equipment purchased in the nine months ended September 30, 2021, compared to the same period in 2022. 

Net cash provided by financing activities was approximately $0.3 million and $54.0 million for the nine months ended September 30, 2022 and 2021, respectively. Net cash provided by financing activities for the nine months ended September 30, 2022, was due to proceeds from the issuance of Series C Preferred Stock, as compared to proceeds from the issuance of common stock in an underwritten public offering, exercise of investor warrants and proceeds from the Second Draw PPP Loan during the nine months ended September 30, 2021.

PPP Loans. As discussed in Note 7 to the financial statements included elsewhere herein, we applied for and obtained loan funding under the PPP pursuant to the PPP Loan and PPP Note in the principal amount of $3,191,700, the balance of which has been forgiven, and under the Second Draw PPP Loan and PPP2 Note in the principal amount of $1,765,495, the balance of which was also initially forgiven.  However, as a result of the investigation by the Civil Division described elsewhere under the heading “Legal Proceedings” and in Note 9 to the consolidated financial statements included elsewhere herein, in June 2022, the company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and related interest and fees.  Our PPP loans and applications for forgiveness of loan amounts remain subject to future review and audit by SBA or other federal or state regulatory authorities for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.  If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return or repay the full amount of the applicable loan and could be subject to additional fines or penalties, which could reduce our liquidity and adversely affect our business, financial condition and results of operations. 

As noted above under the heading “Going Concern and Management Plan,” through September 30, 2022, we have incurred substantial losses.  We will be required to obtain additional cash resources in the near term in order to support our operations and activities.  The availability of required additional funding cannot be assured.  As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving the issuance of equity securities. In addition, an adverse outcome in legal or regulatory proceedings in which we are or in the future could be involved could adversely affect our liquidity and financial position.  See Note 9 of the notes to our consolidated financial statements included elsewhere herein.  If we are not able to obtain additional required equity or debt funding or funding from other sources, our cash resources could be depleted and we could be required to materially reduce or suspend operations, or seek dissolution and liquidation, or bankruptcy protection.  No assurance can be given as to the timing or ultimate success of obtaining future funds.  Even if we are successful in obtaining required additional funding to permit us to continue operations at the levels that we desire, substantial time may pass before we realize additional significant revenues from our commercial products or obtain regulatory marketing approval for any additional pharmaceutical products and begin to realize revenues from sales of such additional products. No assurance can be given as to the timing or ultimate success of obtaining any required future funding. In addition, as a result of the COVID-19 pandemic and actions taken to slow its spread, national or global developments, inflation or other economic considerations or other factors, there can be no assurance that deterioration in credit and financial markets will not occur, which would make it more difficult, or more costly or dilutive, to obtain any necessary debt or equity financing.

          As disclosed elsewhere in this Report, including in Part II, Item 1, “Legal Proceedings,” on May 11, 2021, each of the company and its USC subsidiary received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York issued in connection with a criminal investigation, requesting a broad range of documents and materials relating to, among other matters, certain veterinary products sold by the company’s USC subsidiary, certain practices, agreements and arrangements relating to products sold by USC, including veterinary products, and certain regulatory and other matters relating to the company and USC. The Audit Committee of the Board engaged outside counsel to conduct an independent internal investigation to review these and other matters. 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 in connection with the SEC’s investigation.  The company has produced documents and will continue to produce and provide documents in response to the subpoenas and requests.  The company intends to cooperate with the USAO the SEC and the Civil Division. At this time, the company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, Civil Division or other agencies, or determine what, if any, proceedings the USAO, SEC, Civil Division or other federal or state authorities may initiate, what, if any, remedies or remedial measures the USAO, SEC, the Civil Division, or other federal or state authorities may seek, or what, if any, impact the foregoing matters may 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, 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 could have a material adverse effect on the company’s business, financial condition and results of operations.   

Material Cash Requirements

Based on our current and anticipated level of operations, we do not believe that our cash, cash equivalents and short-term investments, together with anticipated revenues from operations and cash inflows from other sources, and amounts that we expect to receive as a result of our sales of assets relating to our former USC business, will be sufficient to meet our anticipated operating expenses, capital expenditures and obligations for at least 12 months from the date of this Report.  We anticipate that before the end of 2022, we will require additional funding to sustain operations, satisfy our obligations and liabilities, fund our ongoing operations, or for other purposes.  We may seek to raise additional funds or seek funding from a variety of sources including proceeds from equity or debt financings if available, loans, revenues relating to sales of our SYMJEPI and ZIMHI products, sales or out-licensing of intellectual property assets or other assets, products, product candidates or technologies, during the remainder of 2022, and thereafter.  As of the date of this Report, we have a limited number of authorized shares available for issuance in funding transactions involving the issuance of equity securities. Additional required capital may not be available on a timely basis, on favorable terms, or at all, and such funding, if raised, may not be sufficient to meet our obligations or enable us to continue to implement our long-term business strategy. In addition, obtaining additional funding or entering into other strategic transactions could result in significant dilution to our stockholders. If we do not receive required funding and are not able to engage in a merger, sale, reverse merger or other strategic transaction, we would likely be required to reduce or cease operations or seek dissolution and liquidation or bankruptcy protection.

            As of September 30, 2022, we had an operating lease for office space for our offices in San Diego, California, with a remaining term expiring in November 2023.  Monthly rent through the remaining term of the lease is approximately $32,000 per month.  We also have a lease agreement for space located in Conway, Arkansas, relating to the compounding pharmaceutical products business formerly conducted by our USC subsidiary, with a current term expiring December 31, 2023.  As a result of the sale of assets pursuant to the USC Agreement and the winding down of USC’s remaining business, the company will not need the leased property. Monthly rent for the remaining term of this lease is approximately $10,800 per month.  See Note 6 of the notes to the consolidated financial statements included elsewhere herein for additional information about our lease obligations.

            We have entered into arrangements with clinical sites and clinical research organizations, or CROs, for the conduct of our clinical trials. We make payments to these clinical sites and CROs based in part on the number of eligible patients enrolled, the length of their participation in the clinical trials and activities undertaken by the clinical sites and CROs. At this time, due to the variability associated with clinical site agreements, CRO agreements and manufacturing agreements, we are unable to estimate with certainty the future costs we will incur, including in connection with the close-out of the Phase 2/3 clinical trial relating to Tempol which was halted following the DSMB's September 2022 recommendation, but such expenses may be material. In addition, we have entered into agreements and arrangements with third parties for the manufacture and supply of clinical and commercial materials and drug products, including for our SYMJEPI and ZIMHI products and our halted clinical trial for our Tempol product candidate. In some of our agreements with manufacturers, we have a production threshold commitment where we would be required to pay for maintenance fees if we do not meet certain periodic purchase order minimums. Maintenance fees for the three months and nine months ended September 30,2022 were $0. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. We intend to use our current financial resources to fund our obligations under these commitments.

             As disclosed elsewhere in this Report, on March 21, 2022, we announced a voluntary recall of four lots of SYMJEPI (epinephrine) Injection 0.15 mg (0.15 mg/0.3 mL) and 0.3 mg (0.3 mg/0.3 mL) Pre-Filled Single-Dose Syringes to the consumer level, due to the potential clogging of the needle preventing the dispensing of epinephrine. USWM is handling the entire recall process for the company, with company oversight. SYMJEPI is manufactured and tested for us by Catalent Belgium S.A. The ultimate costs of the recall and the allocation of costs of the recall, including the costs to us resulting from the recall, are unknown as of the date of this Report; however, the recall could cause the company to suffer reputational harm, depending on the resolution of matters relating to the recall could result in the company incurring financial costs and expenses which could be material, could adversely affect the supply of SYMJEPI products until manufacturing is resumed, and depending on the resolution of matters relating to the recall could have a material adverse effect on our business, financial condition, and results of operations.

Critical Accounting Policies and Estimates

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

The company’s critical accounting policies and estimates included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022, have not materially changed.  

Recent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 1 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.     

ITEM 3. Quantitative and Qualitative Disclosure of Market Risk

Not required.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

            As required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report.  Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2022.

Changes in Internal Controls Over Financial Reporting

            There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting

Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

 We may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters.  We may also become party to litigation in federal and state courts relating to opioid drugs.  Any litigation could divert management time and attention from Adamis, could involve significant amounts of legal fees and other fees and expenses, or could result in an adverse outcome having a material adverse effect on our financial condition, cash flows or results of operations.  Actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty.  Except as described below, we are not currently involved in any legal proceedings that we believe are, individually or in the aggregate, material to our business, results of operations or financial condition.  However, regardless of the outcome, litigation can have an adverse impact on us because of associated cost and diversion of management time. For additional information regarding legal proceedings involving the company and the proceedings discussed below, please see the discussion of legal proceedings in Note 9--Legal Matters, of the notes to our consolidated financial statements included elsewhere in this Report, which discussion is incorporated herein by reference.  

Investigation

            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 grand jury 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 Board engaged outside counsel to conduct an independent internal investigation to review the matters brought forth in the subpoenas and certain other matters.  In addition, following the commencement of the investigation, as disclosed elsewhere in these interim condensed consolidated financial statements, the Company has sold assets relating to its compounding pharmacy business, ceased selling human and veterinary compounded pharmaceutical products, has wound down USC’s business, and the employment of USC employees has ended.  As a result, the Company is no longer engaged in the sale of human or veterinary compounded pharmaceutical products.  The Company is also considering a number of additional actions in response to the internal investigation and the USAO investigation.  As of the date of this Report, the Company believes that the investigation initially commenced by the Audit Committee is substantially complete.  However, additional issues or facts could arise or be determined, which may expand the scope, duration, or outcome of the Audit Committee’s investigation. 

            The Company has also received requests from the U.S. Securities and Exchange Commission (“SEC”) for the voluntary production of documents and information in connection with the SEC’s investigation relating to the subject matter of the USAO’s subpoenas and certain other matters.  The Company has produced documents and will continue to produce and provide documents in response to subpoenas and requests for voluntary production of documents as needed.   Additionally, on March 16, 2022, the Company was informed that the Civil Division of the USAO (“Civil Division”) was investigating the Company’s Second Draw PPP Loan application and the company’s eligibility for the Second Draw PPP Loan.  The Audit Committee of the Board engaged outside counsel to conduct an internal inquiry into the matter.  As a result of the investigation by the Civil Division, the Company’s financial statements for the first quarter of 2022 included a $ 1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry the Company paid a total of $ 1,787,417 in repayment of the Second Draw PPP Loan principal and related interest and fees.  The Company previously disclosed that the lending bank waived the processing fee of approximately $63,000; however, the Company has recently been made aware by the Civil Division that the lending bank did receive a processing fee of approximately $53,000 and that it may need to be repaid. The Company is awaiting confirmation from the Civil Division on the potential repayment of the above-referenced processing fee and as to whether any additional action is required to conclude the investigation into the Second Draw PPP Loan. The Company intends to continue cooperating with the USAO, SEC, and Civil Division. At this time, the Company is unable to predict the duration, scope, or outcome of the investigations by the USAO, SEC, Civil Division, or other agencies; what, if any, proceedings the USAO, SEC, Civil Division, or other federal or state authorities may initiate; what, if any, remedies or remedial measures the USAO, SEC, Civil Division or other federal or state authorities may seek; or what, if any, impact the foregoing matters may have on the Company’s business, previously reported financial results, financial results included in these interim condensed consolidated financial statements, or future financial results.  The Company could receive additional requests or subpoenas from the USAO, SEC, Civil Division, or other authorities, which may require further investigation.  There can be no assurance that any discussions with the USAO, SEC or Civil Division to resolve these matters will be successful.  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 these interim condensed consolidated financial statements, or future financial results. The occurrence of any of these events, or any determination that our activities were not in compliance with existing laws or regulations, could have a material adverse effect on the Company’s business, liquidity, financial condition, and results of operations. 

            As a result of the investigation by the Civil Division, the company’s financial statements for the first quarter of 2022 included a $1,850,000 contingent loss liability relating to the possible repayment of the full amount of the Second Draw PPP Loan as well as accrued interest and processing fees of the lending bank. In June 2022, following the inquiry, the company paid a total of $1,787,417 in repayment of the Second Draw PPP Loan principal and such related interest and fees.

Nasdaq Compliance

            On December 31, 2021, we received a notice from the Nasdaq Listing Qualifications Department of The NASDAQ Capital Market (“Nasdaq”) informing us that because the closing bid price of our Common Stock had been below $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) (the “Rule”) requires listed securities to maintain a minimum bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.   Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial compliance period of 180 calendar days, or until June 29, 2022, to regain compliance.  To regain compliance, the closing bid price of our Common Stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period.   The notice letter also disclosed that if we do not regain compliance within the initial compliance period, we may be eligible for an additional 180-day compliance period.  To qualify for additional time, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of a plan to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary.  We did not regain compliance with the Rule by June 29, 2022.  We requested additional time to regain compliance and provided notice to Nasdaq of our intention to cure the deficiency during the second compliance period, including by effecting a reverse stock split if necessary.  On June 30, 2022, Nasdaq notified us that we were granted an additional 180-day compliance period or until December 27, 2022, to regain compliance with the Rule.  The notice also indicated that if at any time before December 27, 2022, the bid price of the Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Company will regain compliance with the Rule.  If the Company does not meet the minimum bid requirement at some time during the additional 180-day grace period, Nasdaq will provide written notification to the Company that its shares will be subject to delisting. At such time, the Company may appeal the delisting determination to a Nasdaq Hearings Panel. The Company would remain listed pending the Panel’s decision. There can be no assurance that if the Company does appeal a subsequent delisting determination, that such appeal would be successful.  The letter and notification from Nasdaq had no immediate effect on the listing or trading of the Company’s shares, which will continue to trade on the Nasdaq Capital Market under the symbol “ADMP.” There are no assurances that we will be able to regain compliance with the minimum bid price requirements or will otherwise be in compliance with other Nasdaq listing rules. 

Jerald Hammann

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in our subsequent Quarterly Reports on Form 10-Q for the first two quarters of 2022, on June 8, 2021, Jerald Hammann filed a complaint against the Company and each of its directors in the Court of Chancery of the State of Delaware, captioned Jerald Hammann v. Adamis Pharmaceuticals Corporation et al., C.A. No. 2021-0506-PAF (the “Complaint”), seeking injunctive and declaratory relief. The Complaint alleges, among other things, that the defendants (i) violated Rule 14a-5(f) and 14a-9(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the Company’s 2021 annual meeting of stockholders—which was subsequently held on July 16, 2021 (the “2021 annual meeting”)—and disseminated false and misleading information in the Company’s proxy materials relating to the 2021 annual meeting, (ii) violated certain provisions of the Company’s bylaws relating to the 2021 annual meeting, (iii) violated section 220 of the Delaware General Corporation Law (“DGCL”) in connection with a request for inspection of books and records submitted by the plaintiff, and (iv) breached their fiduciary duties of disclosure and loyalty, including relating to establishing and disclosing the date of the Company’s 2021 annual meeting and to the Company’s determination that a solicitation notice delivered to the Company by plaintiff was not timely and was otherwise deficient. The plaintiff has also filed various motions with the Court, which have been resolved. The Company has filed a motion for summary judgment with respect to one of the counts in the complaint and a motion to dismiss certain other counts of the plaintiff's amended complaint. Those motions are pending before the Court, and the case continues to proceed. On October 13, 2022, the Court entered an order scheduling oral arguments on the motion for summary judgment and motion to dismiss for December 19, 2022. Trial on the merits of the plaintiff’s claims, should one be necessary, is currently scheduled for March 16, 2023. The Company believes the claims in the plaintiff’s complaint are without merit and intends to vigorously dispute them. 

Item 1A. Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business. The risk factors set forth below with an asterisk (*) next to the title contain substantive changes to the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.  Our business, financial condition, results of operations and future prospects could be materially and adversely affected by these risks if any of them actually occurs.  In these circumstances, the market price of our common stock would likely decline.  The risks and uncertainties described below are not the only ones we face.  Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business.

 Risk Factors Summary

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