NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Basis of Presentation
The accompanying
unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation
S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote
disclosures normally included in annual financial statements have been condensed or omitted. In the opinion of management,
the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring
adjustments and the elimination of intercompany accounts) considered necessary for a fair statement of all periods presented.
The results of Adamis Pharmaceuticals Corporation’s operations for any interim periods are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal year. These unaudited interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The
following represents an update for the three and nine months ended September 30, 2017 to the significant accounting policies
described in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
Inventories
Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined using the
first-in, first-out (“FIFO”) method. Inventories consist of compounding formulation raw materials, currently
marketed products, and device supplies. A reserve for obsolescence is recorded monthly based on a review of inventory for
obsolescence. Reserve for obsolescence was $31,627 as of September 30, 2017.
Claims
Liabilities
Our
U.S. Compounding, Inc. (“USC”) subsidiary was self-insured up to certain limits for health insurance through
February 28, 2017. Beginning March 1, 2017, USC elected to participate in a fully insured health insurance plan. The
Claims Payable related to the self-insured plan at September 30, 2017 was $0.
Liquidity
and Capital Resources
Our
cash was $24,317,294 and $5,095,760 at September 30, 2017 and December 31, 2016, respectively, including approximately $1.0
million in restricted cash held by Bear State Bank, N.A. as collateral for a $2.0 million working capital line.
We
prepared the condensed consolidated financial statements assuming that we will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities during the normal course of business. In preparing these condensed
consolidated financial statements, consideration was given to the Company’s future business as described below, which
may preclude the Company from realizing the value of certain assets.
The Company
has significant operating cash flow deficiencies. The Company will need additional funding for future operations and the expenditures
that will be required to conduct clinical, development and regulatory activities relating to the Company’s product candidates,
commercially launch products that may be approved by applicable regulatory authorities, market and sell products, satisfy existing
obligations and liabilities, and otherwise support the Company’s intended business activities and working capital needs.
The preceding conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include
attempting to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property
assets, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research, development
or commercialization efforts, or similar transactions. There is no assurance that the Company will be successful in obtaining
the necessary funding to meet its business objectives.
Basic
and Diluted (Loss) per Share
The
Company computes basic loss per share by dividing the loss attributable to holders of common stock for the period by the weighted
average number of shares of common stock outstanding during the period. The diluted loss per share calculation is based on
the treasury stock method and gives effect to dilutive options, warrants, convertible notes, convertible preferred stock and
other potential dilutive common stock. Except as noted below, the effect of common stock equivalents was anti-dilutive and
was excluded from the calculation of weighted average shares outstanding. Potential dilutive securities, which are not included
in diluted weighted average shares outstanding for the nine months ended September 30, 2017 and September 30, 2016 consist
of outstanding equity classified warrants (3,189,052 and 9,194,044, respectively), outstanding options (6,598,817 and 4,403,519,
respectively), outstanding restricted stock units (1,300,000 and 350,000, respectively), and convertible preferred stock (zero
and 1,724,137, respectively).
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes
the revenue recognition requirements in “Accounting Standard Codification 605 - Revenue Recognition” and most
industry-specific guidance. Under the new guidance, an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify
the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the
performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued
ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” ASU 2015-14
defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including
interim reporting periods within that period. We currently intend to retrospectively adopt ASU 2014-09 utilizing the deferred
effective date of January 1, 2018, as provided by ASU 2015-14. We are in the process of evaluating the impact that adoption
of this new standard will have on our consolidated financial statements and related disclosures. We expect to complete our
implementation process prior to the adoption of ASU 2014-09 on January 1, 2018. Based on our preliminary analysis, we believe
that the new standard will not have a material impact on our revenue recognition, which currently relates to sales of compounded
pharmacy formulations and other pharmacy products by USC.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 simplifies the subsequent measurement
of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its
annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value. This ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We
adopted this guidance prospectively at the beginning of first quarter 2017, which will simplify our future goodwill impairment
testing. The Company is continuing to evaluate the impact of adopting this guidance on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, which clarifies when changes to the terms or conditions of a share-based
payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes
to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting
to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability
instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified
on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted. We do not expect this new guidance to have a material impact
on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features
and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
Part I of this update addresses
public entities that issue warrants, convertible debt or convertible preferred stock that contain down round features.
Part II of this update recharacterizes the indefinite deferral of certain provisions of Topic 480 that now are presented as
pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. This ASU is
effective for public companies for the annual reporting periods beginning after December 15, 2018, and interim periods within
those annual periods. Early adoption is permitted. The Company is currently evaluating the impact that adoption of this standard
may have on its consolidated financial statements.
Note
2: Acquisition of U.S. Compounding
On April 11, 2016, we acquired the net assets and assumed the principal debt obligations of USC in a merger
transaction (the “Merger”) pursuant to which we acquired USC and USC continued as a wholly owned subsidiary
of the Company. The acquisition is accounted for using the purchase method of accounting. USC is registered as a drug
compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act, as amended, and the U.S. Drug
Quality and Security Act, and provides prescription compounded medications, including compounded sterile preparation and certain
nonsterile drugs, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United
States. USC also provides certain veterinary pharmaceutical drugs for animals. The total consideration for the
transaction was $15,967,942.
The principal reasons for the acquisition of USC were (i) to expand the Company’s product portfolio,
(ii) provide revenues to the Company, and (iii) significantly increase the Company’s manufacturing, sales, and marketing
capabilities, which the Company believed would assist in the future in commercializing the Company’s pipeline of product
candidates if they are approved for marketing by applicable regulatory authorities, and diversify the Company’s future
revenue mix.
USC is included in our results of operations for the three and nine months ended September 30, 2017,
and its results of operations after the acquisition date of April 11, 2016, but not before that date, are included in
our results of operations for the three and nine months ended September 30, 2016. The acquisition did have a
significant effect on our consolidated results of operations in the three and nine months ended September 30, 2017 compared
to the comparable periods of the previous year, due to the size of the acquisition in relation to our overall
consolidated results of operations.
Note
3: Inventories
The inventories of the Company consisted primarily of inventories of USC and approximately
$194,000 of raw materials for our FDA approved Epinephrine PFS product. As of September 30, 2017, inventories consisted of
the following:
Finished Goods
|
|
$
|
178,442
|
|
Raw Material
|
|
|
607,759
|
|
Devices
|
|
|
209,887
|
|
|
|
$
|
996,088
|
|
Reserve for obsolescence as
of September 30, 2017, was $31,627.
Note
4: Fixed Assets
In
the third quarter of 2017, certain USC operational assets stored at an off-site location in Arkansas were impaired. The off-site
facility sustained flood damage. Due to the standing water and humidity, it was determined that the equipment would
not meet environmental quality standards required to compound either sterile or nonsterile pharmaceutical, drugs and formulations.
Most of the equipment damaged was larger, bulky equipment including hoods, incubators, table presses, and lyophilizers. The
Company recorded a loss on impairment of approximately $96,000 for the net book value of the damaged assets.
Fixed
Assets at September 30, 2017 is summarized in the table below:
Fixed
Asset Description
|
|
Costs
|
|
Accumulated
Depreciation
|
|
Net
Book Value
|
Land
|
|
$
|
460,000
|
|
|
$
|
—
|
|
|
$
|
460,000
|
|
Building
|
|
|
3,040,000
|
|
|
|
(148,904
|
)
|
|
|
2,891,096
|
|
Machinery & Equipment
|
|
|
2,788,282
|
|
|
|
(673,479
|
)
|
|
|
2,114,803
|
|
Furniture & Fixtures
|
|
|
129,630
|
|
|
|
(50,197
|
)
|
|
|
79,433
|
|
Automobile
|
|
|
9,395
|
|
|
|
(5,594
|
)
|
|
|
3,801
|
|
Leasehold Improvements
|
|
|
284,037
|
|
|
|
(37,914
|
)
|
|
|
246,123
|
|
|
|
$
|
6,711,344
|
|
|
$
|
(916,088
|
)
|
|
$
|
5,795,256
|
|
For
the three months and nine months ended September 30, 2017, depreciation and amortization expense was $139,045 and $462,246,
respectively.
Note
5: Intangible Assets and Goodwill
The
Company’s intangible assets at September 30, 2017, consisted of the following:
Intangible Asset Description
|
|
Amortization Periods
(in years)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
|
|
|
|
|
|
|
|
Taper DPI Intellectual Property
|
|
10 years
|
|
$
|
9,708,700
|
|
|
$
|
(3,640,762
|
)
|
|
$
|
6,067,938
|
|
Non-Competition Agreement
|
|
3 years
|
|
|
1,639,000
|
|
|
|
(802,806
|
)
|
|
|
836,194
|
|
FDA 503B Registration and Compliance
|
|
10 years
|
|
|
3,963,000
|
|
|
|
(582,341
|
)
|
|
|
3,380,659
|
|
Customer Relationships
|
|
10 years
|
|
|
5,572,000
|
|
|
|
(818,774
|
)
|
|
|
4,753,226
|
|
Website Design
|
|
3 years
|
|
|
16,162
|
|
|
|
(3,144
|
)
|
|
|
13,018
|
|
Total Definite-lived Assets
|
|
|
|
|
20,898,862
|
|
|
|
(5,847,827
|
)
|
|
|
15,051,035
|
|
Trade Name and Brand
|
|
Indefinite
|
|
|
1,245,000
|
|
|
|
—
|
|
|
|
1,245,000
|
|
Symjepi Domain Name
|
|
Indefinite
|
|
|
9,675
|
|
|
|
—
|
|
|
|
9,675
|
|
|
|
|
|
$
|
22,153,537
|
|
|
$
|
(5,847,827
|
)
|
|
$
|
16,305,710
|
|
For
the three months and nine months ended September 30, 2017, amortization expense was $619,024 and $1,856,171, respectively.
Estimated
future amortization expense for the Company's intangible assets at September 30, 2017, is as follows:
Remainder of 2017
|
|
$
|
619,022
|
|
2018
|
|
|
2,476,091
|
|
2019
|
|
|
2,083,034
|
|
2020
|
|
|
1,925,268
|
|
2021
|
|
|
1,924,370
|
|
Thereafter
|
|
|
6,023,250
|
|
|
|
$
|
15,051,035
|
|
Goodwill
recorded at the acquisition of USC was approximately $2,225,000. In addition, the Company recorded a deferred tax liability
of approximately $5,416,000 through acquisition goodwill. The carrying value of our goodwill as of September 30, 2017, was
approximately $7,641,000.
Note
6: Sale of Preferred Stock
August 2014 Series A
Preferred Stock and Warrants
In
August 2014, the Company completed a private placement transaction with a small number of sophisticated investors pursuant
to which the Company issued 1,418,439 shares of Series A Convertible Preferred Stock (“Series A Preferred”)
and warrants to purchase up to 1,418,439 shares of common stock or Series A Preferred. The shares of Series A Preferred
and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $3.525 per unit.
The Series A Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1 (subject to stock
splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise price of
the warrants is $3.40 per share, and the warrants are exercisable for five years. If the Company grants, issues or sells
any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock (the “Purchase
Rights”), then a holder of Series A Preferred or warrants will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number
of shares of Common Stock acquirable upon conversion of the Series A Preferred or exercise of the warrants (without regard
to any limitations on conversion). If the Company declares or makes any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of Common Stock, then a holder of Series A Preferred or warrants is entitled
to participate in such distribution to the same extent as if the holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series A Preferred or exercise of the warrants (without regard to any limitations on conversion).
In accordance with the transaction agreements, the Company filed a registration statement with the SEC, which has been
declared effective, to register the resale from time to time of shares of common stock underlying the Series A Preferred
and the warrants.
The
warrants include call provisions giving the Company the option, subject to various conditions, to call the exercise of any
or all of the 2014 warrants, by giving a call notice to the warrant holders. We may give a call notice only within (i)
if a holder and its affiliates beneficially own 2% or less of our outstanding common stock, then 10 trading days after
any 20-consecutive trading day period during which the daily volume weighted average price of the common stock (the “VWAP”)
is not less than 250% of the exercise price for the 2014 warrants in effect for 10 out of such 20-consecutive trading day
period, and (ii) if holder and its affiliates beneficially own more than 2% of the outstanding common stock, five trading
days after any 30-consecutive trading day period during which the VWAP of the common stock is not less than 250% of the
exercise price then in effect for 25 out of such 30-consecutive trading day period. The exercise price of the 2014 warrants
is $3.40 per share, and accordingly 250% of such exercise price is $8.50 per share. During a “call period”
of 30 trading days following the date on which the call notice is deemed given and effective (with the call period being
extended for one trading day for each trading day during the call period during which the VWAP is less than 225% of the exercise price
then in effect during the call period), a holder may exercise the 2014 warrant and purchase the called warrant shares. Subject
to the foregoing and to the other provisions of the 2014 warrants, if the holder fails to timely exercise the called
2014 warrant, the Company may cancel the unexercised called warrant (or portion thereof that was called). As of
September 30, 2017, the investors have exercised 2014 warrants to acquire 1,418,439 shares of common stock (see
Note 10), with no warrants remaining outstanding.
As
of December 31, 2016, the investors have converted 1,418,439 shares of Series A Preferred into an equal number of shares of
common stock, with zero Series A Preferred shares remaining outstanding.
January
2016 Series A-1 Preferred Stock and Warrants
On
January 26, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant
to which the Company issued 1,183,432 shares of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”)
and warrants to purchase up to 1,183,432 shares of common stock or Series A-1 Preferred. The shares of Series A-1 Preferred
and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $4.225
per unit. The Series A-1 Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1
(subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise
price of the warrants is $4.10 per share, and the warrants are exercisable at any time over the five year term of the
warrants. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class
of shares of Common Stock (the “Purchase Rights”), then a holder of Series A-1 Preferred or warrants will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder
could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-1
Preferred or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes
any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, then a
holder of Series A-1 Preferred or warrants is entitled to participate in such distribution to the same extent as if the
holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-1 Preferred
or exercise of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately
$5,000,000 excluding transactions costs, fees and expenses. In accordance with the transaction agreements, the Company
filed a registration statement with the SEC, which has been declared effective, to register the resale from time to time
of shares of common stock underlying the Series A-1 Preferred and the warrants. The January 2016 warrants include call
provisions that are generally similar to the 2014 warrants. The exercise price of the January 2016 warrants is $4.10 per
share, and accordingly 250% of such exercise price is $10.25 per share. As of September 30, 2017, January 2016 warrants
to purchase 1,183,432 shares remain outstanding.
As
of December 31, 2016, the investors have converted 1,183,432 shares of Series A-1 Preferred into an equal number of shares
of common stock, with no shares of Series A-1 Preferred shares remaining outstanding.
July
2016 Series A-2 Preferred Stock and Warrants
On
July 11, 2016, the Company completed a private placement transaction with a small number of accredited investors pursuant
to which the Company issued 1,724,137 shares of Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”)
and warrants to purchase up to 1,724,137 shares of common stock or Series A-2 Preferred. The shares of Series A-2 Preferred
and warrants were sold in units, with each unit consisting of one share and one warrant, at a purchase price of $2.90
per unit. The Series A-2 Preferred is convertible into shares of common stock at an initial conversion rate of 1-for-1
(subject to stock splits, reverse stock splits and similar events) at any time at the discretion of the investor. The exercise
price of the warrants is $2.90 per share, and the warrants are exercisable at any time over the five year term of the
warrants. If the Company grants, issues or sells any Common Stock equivalents pro rata to the record holders of any class
of shares of Common Stock (the “Purchase Rights”), then a holder of Series A-2 Preferred or warrants will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder
could have acquired if the holder had held the number of shares of Common Stock acquirable upon conversion of the Series A-2
Preferred or exercise of the warrants (without regard to any limitations on conversion). If the Company declares or makes
any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, then a
holder of Series A-2 Preferred or warrants is entitled to participate in such distribution to the same extent as if the
holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A-2 Preferred or exercise
of the warrants (without regard to any limitations on conversion). Gross proceeds to the Company were approximately $5,000,000 excluding
transactions costs, fees and expenses. In accordance with the transaction agreements, the Company filed a registration statement
with the SEC, which has been declared effective, to register the resale from time to time of shares of common stock underlying
the Series A-2 Preferred and the warrants. The July 2016 warrants include call provisions that are generally similar
to the 2014 warrants. The exercise price of the July 2016 warrants is $2.90 per share, and accordingly 250% of such exercise
price is $7.25 per share. As of September 30, 2017, the investors have exercised July 2016 warrants to acquire 1,531,723
shares of common stock (see Note 10), with 192,414 warrants remaining outstanding.
On
the date of the issuance, the fair value of the common stock issuable upon conversion of the Series A-2 preferred stock was
greater than the proceeds received for the Series A-2 Preferred. As such, the Company accounted for the beneficial conversion
feature under ASC 470-20,
Debt with Conversion and Other Options
. The Company identified a deemed dividend charge of
approximately $1,374,000 for the recognition of a discount on the Series A-2 Preferred, resulting from an allocation of the
proceeds received between the warrants and the beneficial conversion feature embedded within the Series A-2 Preferred, which
equals the amount by which the estimated fair value of the common stock issuable upon conversion of the issued Series A-2
convertible preferred stock exceeded the proceeds from such issuance. The deemed dividend on preferred stock was a non-cash
transaction and reflected below the net loss in the Consolidated Statement of Operations for the year ending December 31,
2016, to arrive at the net loss applicable to common stock.
For
the periods ended December 31, 2016 and September 30, 2017, the investors have converted 1,099,124 shares and 625,013 shares,
respectively, of Series A-2 Preferred into an equal number of shares of common stock, with no shares of Series A-2 Preferred
Shares remaining outstanding as of September 30, 2017.
Note
7: Debt
Ben Franklin Note
Biosyn,
Inc., a wholly owned subsidiary of the Company, issued a note payable to Ben Franklin Technology Center of Southeastern Pennsylvania
(“Ben Franklin Note”) in October 1992, in connection with funding the development of Savvy, a compound then
under development to prevent the transmission of HIV/AIDS.
The
Ben Franklin Note was recorded at its estimated fair value of $205,000 and was assumed by the Company as an obligation in
connection with its acquisition of Biosyn in 2004. The repayment terms of the non-interest bearing obligation include
the remittance of an annual fixed percentage of 3.0% applied to future revenues of Biosyn, if any, until the principal
balance of $777,902 (face amount) is satisfied. Under the terms of the obligation, revenues are defined to exclude the
value of unrestricted research and development funding received by Biosyn from nonprofit sources. Absent a material breach
of contract or other event of default, there is no obligation to repay the amounts in the absence of future Biosyn revenues.
The Company accreted the discount of $572,902 against earnings using the interest rate method (approximately 46%) over
the discount period of five years, which was estimated in connection with the Ben Franklin Note’s valuation at
the time of the acquisition.
Accounting
principles generally accepted in the United States emphasize market-based measurement through the use of valuation techniques
that maximize the use of observable or market-based inputs. The Ben Franklin Note’s peculiar repayment terms outlined
above affects its comparability with main stream market issues and also affects its transferability. The value of the
Ben Franklin Note would also be impacted by the ability to estimate Biosyn’s expected future revenues which in
turn hinge largely upon future efforts to commercialize the product candidate, the results of which efforts are not known
by the Company. Given the above factors and therefore the lack of market comparability, the Ben Franklin Note would be valued
based on Level 3 inputs (see Note 8). As such, management has determined that the Ben Franklin Note will have no future
cash flows, as we do not believe the product will create a revenue stream in the future. As a result, the Note had no
fair market value at the time of the merger in April 2009 between the Company (which was then named Cellegy Pharmaceuticals,
Inc.) and the corporation then-named Adamis Pharmaceuticals Corporation.
Working Capital Line
of Credit
On
March 28, 2016, the Company entered into a loan and security agreement (sometimes referred to as the “Adamis Working
Capital Line”) with Bear State Bank, N.A. (the “Lender” or the “Bank”), pursuant to
which the Company may borrow up to an aggregate of $2,000,000 to provide working capital to USC, subject to the terms and
conditions of the loan agreement. Interest on amounts borrowed under the Adamis Working Capital Line accrues at a rate
equal to the prime interest rate, as defined in the agreement. Interest payments are required to be made quarterly. As
amended effective March 31, 2017, the entire outstanding principal balance, and all accrued and unpaid interest and all
other sums payable pursuant to the loan documents, are due and payable on March 1, 2018, or sooner upon the occurrence of
certain events as provided in the loan agreement and related documents. The Company’s obligations under the loan
agreement are secured by certain collateral, including without limitation its interest in amounts that it has loaned
to USC, and a warrant that the Company issued to the Bank to purchase up to 1,000,000 shares of the Company’s
common stock at an exercise price equal to par value per share, exercisable only if the Company is in default under the
loan agreement or related loan documents.
On
November 10, 2016, the Adamis Working Capital Line with the Bank was amended to include a Certificate of Deposit for $1.0
million as additional collateral to the working capital line of credit, and to make certain other amendments to the loan documents
relating to the Adamis Working Capital Line. The $1.0 million in Certificate of Deposit with the Bank, included as collateral,
was recorded as Restricted Cash.
As
of September 30, 2017 and December 31, 2016, the loan balance on the Adamis Working Capital Line of credit was $2,000,000.
Interest expense related to the loan was approximately $21,722 and $61,125 for the three and nine months ended September
30, 2017, respectively.
Loans
Assumed from Acquisition of USC:
Building
Loan
In
connection with the closing of the Merger and the transactions contemplated by the Merger Agreement, 4 HIMS, LLC, an
entity of which Eddie Glover, the chief executive officer of USC, and certain other former stockholders of USC are members,
agreed to sell to the Company, the building and property owned by 4 HIMS on which USC's offices are located, in consideration
of the Company being added as an additional “borrower” and assuming the obligations under the loan agreement,
promissory note and related loan documents that 4 HIMS and certain other parties previously entered into with the Lender (the
"4 HIMS Loan Documents").
On November 10, 2016, a Loan Amendment and Assumption Agreement was entered with into the Bank. Pursuant
to the agreement, the Company agreed to pay the Bank monthly payments of principal and interest of $15,411, with a final monthly
payment and any other amounts due under the 4 HIMS Loan Documents due and payable in August 2019.
As of September 30, 2017 and December 31, 2016, the outstanding principal balance owed on the applicable note was approximately
$2,371,000 and $2,441,000, respectively. The loan currently bears an interest of 3.75% per year and interest expense for the
three and nine months ended September 30, 2017 was approximately $23,000 and $68,000, respectively.
USC
Working Capital Loan
In
connection with our acquisition of USC, Adamis agreed to be added as a Borrower and to assume the obligations as a Borrower
under the USC Working Capital Loan Agreement and related promissory note and other related loan documents (the “USC
Working Capital Loan Documents”). Under the USC Working Capital Loan Agreement, Lender agreed to loan funds to
USC, as the “Borrower,” up to an aggregate principal amount of $2,500,000, evidenced by the USC Working
Capital Note. Borrowings are limited to 80% of qualified trade accounts receivables and 50% of qualified inventories as
determined under the USC Working Capital Loan Documents, and are collateralized with trade accounts receivables and inventory.
On
November 10, 2016, the Company and Lender agreed to amend the USC Working Capital Loan Documents to provide that the personal
property securing the Borrower’s obligations under the loan documents will also secure the Borrower’s obligations
under the other USC Loan Documents with the Lender. In addition, a new financial covenant replaced the previous financial
covenants, providing that USC will, at all times during the term of the loan, maintain a “Cash Flow Coverage Ratio”
of not less than 1.2:1. “Cash Flow Coverage Ratio” is defined as: (i) net income plus non-cash expense items
including, but not limited to, depreciation expense, amortization expense and option expense for the month in which the measurement
date occurs times 12; divided by (ii) the cash required for payments of interest for the prospective twelve (12) month period
and current maturities of principal on all outstanding debt to any person or entity, including without limitation to debt
by the Company to the Lender. The Cash Flow Coverage Ratio will be measured on the last day of each December, March, June
and September, commencing on December 31, 2016. Under the amendment, in lieu of compliance with the foregoing covenant,
Borrower has the option, at the time of each quarterly measuring period, of making a principal reduction in the amount of
Two Hundred Fifty Thousand Dollars ($250,000).
In
addition, pursuant to the amendment, Borrower and Lender agreed that certain other financial covenants set forth in the loan
agreement included in the 4 HIMS Loan Documents, the loan agreement included in the Tribute Loan Documents, and the loan
agreement included in the USC Equipment Loan Agreement, as well as the original USC Working Capital Loan Agreement described
above, are waived for the remainder of the term of the respective loans. The USC Working Capital Loan has no outstanding
balance, and its term expired on September 30, 2017. In November 2017, the Company agreed with the Lender to extend the term
of the USC Working Capital Loan agreement to February 28, 2018.
As of September 30, 2017 and December 31, 2016, the
outstanding unpaid principal balance under the USC Working Capital Loan Agreement was approximately $0 and $1,864,000, respectively.
The note accrued interest at 3.75% per year, and interest expense for the three and nine months ended September 30, 2017 was approximately
$0 and $29,000, respectively.
Equipment
Loans, Consolidated
Equipment
Loan, Tribute
. In connection with the Merger, Tribute Labs, LLC, a Nevada limited liability company and former related
party of USC (“Tribute” or “Borrower”) assigned to Adamis all of its rights under the loan agreement,
promissory note and related loan documents that Tribute and certain other parties previously entered into with the Lender
(the “Tribute Loan Documents”). Adamis agreed to become an additional co-borrower and to assume Borrower’s
obligations under the Tribute Loan Documents, in consideration of the transfer to USC of laboratory equipment owned by Tribute
and used to perform testing services for USC’s formulations, and Lender consented to such assignment. The outstanding
unpaid principal balance under the applicable note that was consolidated, as described below, to one equipment loan was approximately
$518,000. Prior to the consolidation, the loan had an interest rate of 4.75% per year.
USC
Equipment Loan.
In connection with the Merger, Adamis agreed to become a Borrower and to assume the obligations as
a Borrower under the USC Equipment Loan Agreement and the related USC Equipment Loan Documents. Under the USC Equipment
Loan Agreement, Lender agreed to loan funds to USC, as the “Borrower,” up to an aggregate principal amount of
$700,000, with amounts loaned evidenced by the Commercial Line of Credit Agreement and Note (the “USC Equipment
Note”). The loan is collateralized by USC’s property and equipment. The outstanding unpaid principal balance
under the USC Equipment Note that was consolidated to one equipment loan was approximately $635,000. The note had an interest
rate of 3.25% per year.
Consolidated
Equipment Loans
. On November 10, 2016, the Company and the Lender agreed to the amendment and consolidation of the above
USC and Tribute equipment loans. The principal amount of the consolidated loans is $1,152,890 with an interest rate of 3.75%
per annum. The loan is payable in three years at an equal monthly amortization of $33,940 commencing on November 1, 2016,
and continuing on the first day of each succeeding month through October 1, 2019. As of September 30, 2017 and December 31,
2016, the outstanding unpaid principal balance was approximately $815,000 and $1,092,000, respectively. Interest expense for
the three and nine months ended September 30, 2017 was approximately $8,000 and $27,000, respectively.
Loan
Amendment, Forbearance and Assumption Agreement
In
connection with our acquisition of USC in April 2016, Lender, Adamis, USC, 4 HIMS and Tribute (USC, 4 HIMS and Tribute sometimes
referred to as the “Initial Loan Parties” and together with Adamis, collectively the “Loan Parties”),
and certain individual guarantors, entered into a Loan Amendment, Forbearance and Assumption Agreement (the “Loan Amendment
Agreement”).
Pursuant
to the Loan Amendment Agreement, Adamis was added as a “Borrower” and co-borrower under the loan agreements
and related loan documents between USC (and certain other entities) and Lender (the “USC Loan Documents”), and
assumed all of the rights, duties, liabilities and obligations as a Borrower and a party under the USC Loan Documents, jointly
and severally with the current borrower or borrowers under each of the USC Loan Documents. As part of the Loan Amendment Agreement,
the parties also agreed that the real and personal property securing each of the USC Loans will also secure each of the other
USC Loans, as well as the Adamis Working Capital Line of $2.0 million. Except as expressly set forth in the Loan Amendment
Agreement, as amended, the terms and provisions set forth in the USC Loan Documents were not modified and remain in full force
and effect.
The notes evidencing the foregoing loans from the Lender are subject to customary subjective acceleration clauses, effective
upon a material impairment in collateral, a material adverse change in the Company’s business or financial condition, or
a material impairment in the Company’s ability to repay the note.
At September 30, 2017, the outstanding
principal maturities of the amended long-term debts were as follows:
Years ending December
31,
|
|
Building
Loan
|
|
Equipment
Loan
|
|
Total
|
2017
|
$
|
23,837
|
$
|
94,396
|
$
|
118,233
|
2018
|
|
97,396
|
|
386,596
|
|
483,992
|
2019
|
|
2,249,508
|
|
333,594
|
|
2,583,102
|
Total
|
$
|
2,370,741
|
$
|
814,586
|
$
|
3,185,327
|
Note
8: Derivative Liabilities and Fair Value Measurements
Accounting
Standards Codification (“ASC”) 815 - Derivatives and Hedging, provides guidance to determine what types of instruments,
or embedded features in an instrument, are considered derivatives. This guidance can affect the accounting for convertible instruments
that contain provisions to protect holders from a decline in the stock price, or down-round provisions.
The
Company recognizes the derivative liabilities at their respective fair values at inception and on each reporting date. The
Company values its financial assets and liabilities on a recurring basis and certain nonfinancial assets and nonfinancial
liabilities on a nonrecurring basis based on the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability
in fair value measurements, a fair value hierarchy that prioritizes observable and unobservable inputs is used to measure
fair value into three broad levels, which are described below:
Level
1:
|
Quoted
prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
Level
2:
|
Observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive
markets; or model-derived valuations in which all significant inputs are observable or can be derived principally
from or corroborated with observable market data.
|
|
|
Level
3:
|
Unobservable
inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to
Level 3 inputs.
|
In
determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair
value.
The
Company recognizes derivative liabilities at their respective fair values at inception and on each reporting date. The Company
utilized the BOPM to develop its assumptions for determining the fair value of the Warrants and related anti-dilution features.
As
of September 30, 2016, the carrying value of the Warrants with call options was zero and the Company recognized a change in
fair value of $1,397,471 in the condensed consolidated statement of operations for the nine months ended September 30, 2016.
As of December 31, 2016, all of the outstanding Warrants with call options were either exercised or canceled.
As
of September 30, 2017, the fair values of the liability classified warrants and warrant derivatives were zero.
Note
9: Common Stock
On
January 19, 2017, the Company issued 18,157 shares of common stock to an institutional investor in exchange for the cancellation
of warrants to acquire 181,575 shares of common stock.
In March
2017, 625,013 shares of Series A-2 Convertible Preferred were converted into shares of common stock at a 1:1 ratio, with
0 shares of Series A-2 Preferred Shares remaining outstanding.
In
April 2017, the Company completed the closing of an underwritten public offering of 4,928,572 shares of common stock at a
public offering price of $3.50 per share. Net proceeds were approximately $16.0 million, after deducting approximately $1,214,000
in underwriting discounts and commissions and estimated offering expenses payable by the Company. Raymond James &
Associates, Inc. acted as the sole book-running manager of the offering and Maxim Group LLC acted as co-manager for the offering.
The securities were issued by the Company pursuant to a “shelf” registration statement on Form S-3 that the
Company previously filed with the Securities and Exchange Commission (and a related registration statement), and a prospectus
supplement and an accompanying prospectus relating to the offering filed in April 2017.
In
June 2017, the Company issued common stock upon exercise of an investor warrant. The warrant holder exercised for cash at
an exercise price of $2.98 per share. The Company received a total proceeds of approximately $321,000 and the warrant holder
received 107,755 shares of common stock.
In
July 2017, the Company issued common stock upon exercise of investor warrants. The warrant holders exercised for cash at exercise
prices ranging from $2.90 to $3.40 per share. The Company received a total of approximately $2,921,000 and the warrant holders
received 914,514 shares of common stock.
On
July 20, 2017, the Company and certain holders of warrants issued in the Company’s registered direct offering transaction
in July 2016 (the “July Warrants”) agreed to reduce the exercise price of the July Warrants held by such holders
from $2.98 to $2.78 per share (the “July Reduced Exercise Price”) in consideration for the exercise in full of the
July Warrants held by such holders. The Company entered into a Warrant Repricing Letter Agreement (the “Exercise Agreement”)
with two holders of the July Warrants (the “Exercising Holders”), which Exercising Holders owned, in the aggregate,
July Warrants exercisable for 2,765,500 shares of common stock. Pursuant to the Exercise Agreements, the Exercising Holders and
the Company agreed that the Exercising Holders would exercise their July Warrants with respect to all of the shares of common
stock underlying such July Warrants for the July Reduced Exercise Price, subject to the 4.99% beneficial ownership limitations
contained in the July Warrants. The Company received aggregate gross proceeds of approximately $7,688,000 from the exercise
of the July Warrants by the Exercising Holders. In connection with the transaction, the Company recognized an expense for
the inducement to exercise the warrants of approximately $553,000. The Company also incurred approximately $77,000 in agent
fees, which have been recognized as an offset to the proceeds received from the warrant exercises.
In
August 2017, the Company and certain holders of warrants issued in the Company’s private placement transactions in
August 2014 (the "2014 Warrants") and July 2016 (the “2016 Warrants”) agreed to reduce the exercise price of
the 2014 Warrants and the 2016 Warrants held by such holders from $3.40 to $3.20 per share and from $2.90 to $2.70 per share,
respectively, (the “August Reduced Exercise Price”) in consideration for the exercise of the 2014 Warrants and
2016 Warrants held by such holders. The Company entered into a Warrant Repricing Letter Agreement (the “Exercise Agreement”)
with holders of the 2014 Warrants and the 2016 Warrants (the “Exercising Holders”), which Exercising Holders
owned, in the aggregate, 2014 Warrants and 2016 Warrants exercisable for 880,672 and 1,154,976 shares of common stock, respectively.
Pursuant to the Exercise Agreements, the Exercising Holders and the Company agreed that the Exercising Holders would exercise
their 2014 Warrants and 2016 Warrants with respect to all of the shares of common stock underlying such 2014 Warrants and
2016 Warrants for the August Reduced Exercise Price, subject to the 4.99% beneficial ownership limitations contained in the
2014 Warrants and 2016 Warrants. The Company received aggregate gross proceeds of approximately $5,937,000 from the
exercise of the 2014 Warrants and 2016 Warrants by the Exercising Holders. In connection with the transaction, the Company
recognized an expense for the inducement to exercise the warrants of approximately $407,000.
Note
10: Stock Option Plans, Shares Reserved and Warrants
During
the quarter ended September 30, 2017, the Company granted options to purchase 285,000 shares of common stock to the new hires
of the Company under the 2009 Equity Incentive Plan with exercise prices ranging from $4.50 to $5.65 per share. These options
will vest with respect to the one-sixth of the option shares on the date that is six months after the vesting commencement
date and one thirty-sixth of the option shares thereafter on each subsequent monthly anniversary of the vesting commencement
date, so that the option is exercisable in full over a period of three years. These options were valued using the Black-Scholes
option pricing model, the expected volatility was approximately 58%, the term was six years, the dividend rate was 0.0 % and
the risk-free interest rate was approximately 2.1%, which resulted in a calculated fair value of $815,000.
The
following table summarizes the stock option activity for the nine months ended September 30, 2017:
|
|
2009
Equity
Incentive Plan
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contract
Life
|
Balance
as of December 31, 2016
|
|
|
4,320,409
|
|
|
$
|
6.06
|
|
|
|
7.98
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Granted
|
|
|
2,506,750
|
|
|
|
3.48
|
|
|
|
9.48
years
|
|
Options
Exercised
|
|
|
(833
|
)
|
|
|
3.35
|
|
|
|
—
|
|
Options
Canceled/Expired
|
|
|
(227,509
|
)
|
|
|
6.23
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2017
|
|
|
6,598,817
|
|
|
$
|
5.08
|
|
|
|
8.33
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at September 30, 2017
|
|
|
3,373,829
|
|
|
$
|
5.54
|
|
|
|
7.30
years
|
|
The
aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the
period and the exercise price, multiplied by the number of in-the-money options) of the 6,598,817 and 4,320,409 stock options
outstanding at September 30, 2017 and December 31, 2016 was approximately $6,205,000 and approximately $26,000, respectively.
The aggregate intrinsic value of 3,373,829 and 2,319,963 stock options exercisable at September 30, 2017 and December 31,
2016 was approximately $2,106,000 and $1,000, respectively.
The following table summarizes warrants outstanding at September 30, 2017:
|
|
Warrant
Shares
|
|
Exercise
Price
Per
Share
|
|
Date
Issued
|
|
Expiration
Date
|
Old
Adamis Warrants
|
|
|
58,824
|
|
|
$
|
8.50
|
|
|
November
15, 2007
|
|
November
15, 2017
|
2013
Investor Warrants
|
|
|
22,057
|
|
|
$
|
12.16
|
|
|
June
26, 2013
|
|
June
26, 2018
|
Underwriter
Warrants
|
|
|
28,108
|
|
|
$
|
7.44
|
|
|
December
12, 2013
|
|
December
12, 2018
|
Underwriter
Warrants
|
|
|
4,217
|
|
|
$
|
7.44
|
|
|
January
16, 2014
|
|
January
16, 2019
|
Preferred Stock
Series A-1 Warrants
|
|
|
1,183,432
|
|
|
$
|
4.10
|
|
|
January
26, 2016
|
|
January
26, 2021
|
Bear State Bank,
Collateral to Line of Credit
|
|
|
1,000,000
|
*
|
|
$
|
0.0001
|
|
|
March
28, 2016
|
|
|
Preferred
Stock Series A-2 Warrants
|
|
|
192,414
|
|
|
$
|
2.90
|
|
|
July
11, 2016
|
|
July
11, 2021
|
2016
Private Placement
|
|
|
700,000
|
|
|
$
|
2.98
|
|
|
August
3, 2016
|
|
August
3, 2021
|
Total
Warrants
|
|
|
3,189,052
|
|
|
|
|
|
|
|
|
|
*Exercisable
upon default of Line of Credit at Bear State Bank, see Note 7.
At
September 30, 2017, the Company has reserved shares of common stock for issuance upon exercise of outstanding options and
warrants, and options and other awards that may be granted in the future under the 2009 Equity Incentive Plan, as follows:
Warrants
|
|
|
3,189,052
|
|
RSU
|
|
|
1,300,000
|
|
2009
Equity Incentive Plan
|
|
|
8,494,277
|
|
Total
Shares Reserved
|
|
|
12,983,329
|
|
Note
11: Subsequent Events
Refer to Note 7 regarding the extension of the term of the USC Working Capital Loan agreement.