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ADMP > SEC Filings for ADMP > Form 10-K on 3-Jul-2013All Recent SEC Filings

Show all filings for ADAMIS PHARMACEUTICALS CORP

Form 10-K for ADAMIS PHARMACEUTICALS CORP


3-Jul-2013

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read together with the consolidated financial statements and accompanying notes of the Company appearing elsewhere in this Report. This discussion of our financial condition and results of operations contains certain statements that are not strictly historical and are "forward-looking" statements and involve a high degree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in our operations, development efforts and business environment, including those set forth in this Item 7, and in the sections entitled "1A. Risk Factors" and "1. Business" in this Report and uncertainties described elsewhere in this Report. All forward-looking statements included in this Report are based on information available to the Company as of the date hereof, and except as may be required under the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, the Company assumes no obligation to update any such forward-looking statement.

General

Company Overview

We are an emerging pharmaceutical company engaged in the development and commercialization of a variety of specialty pharmaceutical products. Our products are concentrated in major therapeutic areas including oncology (cancer), immunology and infectious diseases (viruses) and allergy and respiratory.

We are focused on the development of preventive and therapeutic vaccine products and cancer drugs for patients with unmet medical needs. During 2010, we acquired rights under three exclusive license agreements covering three small molecule compounds, named APC-100, APC-200 and APC-300, that we believe are promising drug candidates for the potential treatment of human prostate cancer (PCa). The intellectual property covered by the agreements was licensed from the Wisconsin Alumni Research Foundation, or WARF.

On August 11, 2011, we announced that we had enrolled the first patient in a Phase 1/2a prostate cancer clinical study relating to the use of the APC-100 product to treat men with castrate-resistant prostate cancer. The study began at the University of Wisconsin Carbone Cancer Center and has been extended to the Wayne State University Karmanos Cancer Institute, assuming adequate funding.

In April 2011, we acquired exclusive rights to patented telomerase-based cancer vaccine technology from the Regents of the University of California. At the same time, we acquired exclusive rights to a related patent from the Dana-Farber/Harvard Cancer Center. We intend to pursue development of the technology initially for what we believe may be a novel cell-based vaccine product for prostate cancer, tentatively named TeloB-VAX.

We have also acquired exclusive license rights to other patented potentially preventative and therapeutic vaccine technology. The vaccine technology may be applicable to certain viral-induced diseases such as influenza and hepatitis B and C, as well as prostate cancer. However, we currently intend to focus initially on the development of one or more of the other recently licensed prostate cancer product candidates and technologies, and as a result the timing of development of this viral vaccine technology is subject to uncertainty.

We are also focused on developing and commercializing products in the anti-inflammatory, allergy and respiratory field. We have developed an Epinephrine Injection USP 1:1000 (0.3mg Pre-Filled Single Dose Syringe) product, or the single dose PFS Syringe product, a pre-filled epinephrine syringe product for use in the emergency treatment of extreme acute allergic reactions, or anaphylactic shock. If launched, the product will compete in a well-established U.S. market. Once we obtain sufficient funding to support the costs of proceeding with the FDA filing for regulatory approval and the costs of a commercial launch of the product, we intend to submit an application to the FDA for marketing approval of the product and to commercially market the product as soon as reasonably practicable after the FDA allows for marketing of the product.


Additional product candidates in our allergy and respiratory product pipeline include a steroid HFA (hydrofluoroalkane) metered dose inhaler product, referred to as APC-1000, for asthma and chronic obstructive pulmonary disease, or COPD; and an HFA pressurized metered dose nasal steroid for the treatment of seasonal and perennial allergic rhinitis, referred to as APC-3000.

We also have a contraceptive gel product candidate named Savvy (C31GŪ). In December 2010, we announced the successful completion of a Phase 3 contraceptive trial of Savvy. The Phase 3 trial was a randomized, double-masked, controlled comparator study to assess whether a gel containing the spermicide C31G was non-inferior to ConceptrolŪ, a commercially available product containing nonoxynol-9 (N-9). The clinical investigators found that C31G was not inferior in contraceptive efficacy to the comparator drug. In considering commercialization alternatives, we will likely focus on seeking to enter into an out-licensing or similar transaction with organizations that have a focus or business unit in the area of contraception. There are no assurances that any third party will have an interest in pursuing discussions concerning a transaction regarding C31G, or that any C31G product will ever be developed or commercialized.

Our general business strategy is to generate revenue through launch of our allergy and respiratory products in development, in order to generate cash flow to help fund expansion of our allergy and respiratory business, as well as support our future cancer and vaccine product development efforts. To achieve our goals and support our overall strategy, we will need to raise a substantial amount of funding and make substantial investments in equipment, new product development and working capital.

Recent Developments

As described in greater detail below under the heading "Liquidity and Capital Resources," on June 26, 2013, we completed a private placement financing transaction pursuant to which we issued the Secured Notes and common stock purchase warrants to a small number of institutional investors and received gross cash proceeds of $5,300,000, excluding transactions costs, fees and expenses. The Secured Notes have an aggregate principal amount of $6,502,158, including $613,271 of principal amount resulting in the exchange of an outstanding convertible note for the Secured Notes and warrants. The maturity date of the Secured Notes is December 26, 2013. The Secured Notes are convertible into shares of common stock at any time at the discretion of the investor at an initial conversion price per share of $0.50, subject to adjustment for stock splits, stock dividends and other similar transactions, and to possible price anti-dilution adjustments. Our obligations under the Secured Notes and the other transaction agreements are guaranteed by our principal subsidiaries, and are secured by a security interest in substantially all of our assets and those of the subsidiaries, pursuant to a Security Agreement.

Going Concern and Management Plan

Our independent registered public accounting firm has included a "going concern" explanatory paragraph in its report on our financial statements for the years ended March 31, 2013 and 2012 indicating that we have incurred recurring losses from operations and have limited working capital to pursue our business alternatives, and that these factors raise substantial doubt about our ability to continue as a going concern. As of March 31, 2013, we had no cash, an accumulated deficit of approximately $38 million and substantial liabilities and obligations. We have no cash reserves, liabilities that exceed our assets and significant cash flow deficiencies. Additionally, we will need significant funding in the short term to continue operations and for the future operations and the expenditures that will be required to conduct the clinical and regulatory work to develop our product candidates.

As previously reported, after the end of our fiscal 2013 year, on April 5, 2013 we completed private placement financing transactions with two investors pursuant to securities purchase agreements, pursuant to which we issued an aggregate of two 12% convertible debentures in the aggregate principal amount of $575,000 and received gross proceeds of $575,000, excluding transaction costs and expenses. A portion of the debentures were converted into Common Stock in June 2013, and the remainder of the amount payable at maturity of the debentures was paid in full with a portion of the proceeds from the issuance of the Secured Notes and Warrants, and the debentures are no longer outstanding. In addition, as discussed under the heading "Liquidity and Capital Resources" below, in June 2013 we completed a private placement transaction in which we received $5.3 milion of gross proceeds. However continued operations are dependent on our ability to complete other equity or debt funding transactions. Such capital formation activities may not be available or may not be available on reasonable terms. If we do not obtain additional equity or debt funding in the near future, our cash resources will rapidly be depleted and we will be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained.

The above conditions raise substantial doubt about our ability to continue as a going concern. The financial statements included elsewhere herein for the year ended March 31, 2013, 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. In preparing these consolidated financial statements, consideration was given to our future business as described elsewhere herein, which may preclude us from realizing the value of certain assets. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. Without additional funds from debt or equity financing, sales of assets, sales or out-licenses of intellectual property or technologies, or from a business combination or a similar transaction, we will soon exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us.


Our management intends to attempt 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 and development efforts, or similar transactions. However, there can be no assurance that we will be able to obtain any sources of funding. If we are unsuccessful in securing funding from any of these sources, we will defer, reduce or eliminate certain planned expenditures. There is no assurance that any of the above options will be implemented on a timely basis or that we will be able to obtain additional financing on acceptable terms, if at all. If adequate funds are not available on acceptable terms, we could be required to delay development or commercialization of some or all of our products, to license to third parties the rights to commercialize certain products that we would otherwise seek to develop or commercialize internally, or to reduce resources devoted to product development. In addition, one or more licensors of patents and intellectual property rights that we have in-licensed could seek to terminate our license agreements, if our lack of funding made us unable to comply with the provisions of those agreements. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us. Any failure to dispel any continuing doubts about our ability to continue as a going concern could adversely affect our ability to enter into collaborative relationships with business partners, make it more difficult to obtain required financing on favorable terms or at all, negatively affect the market price of our common stock and could otherwise have a material adverse effect on our business, financial condition and results of operations.

Funding that we may receive during fiscal 2014 is expected to be used to satisfy existing obligations and liabilities and working capital needs, to begin building working capital reserves and to fund a number of projects, which may include some or all of the following:

? continue development of our PFS epinephrine syringe product;

? continue development of our generic nasal steroid product candidate;

? pursue the development of other product candidates that we may develop or acquire;

? fund clinical trials and seek regulatory approvals;

? expand research and development activities;

? access manufacturing and commercialization capabilities;

? implement additional internal systems and infrastructure;

? maintain, defend and expand the scope of our intellectual property portfolio; and

? hire additional management, sales, research, development and clinical personnel.

Results of Operations

Our consolidated results of operations are presented for the fiscal year ending March 31, 2013 and for the fiscal year ending March 31, 2012.

Year Ended March 31, 2013 and Year Ended March 31, 2012

Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2013 and 2012 were approximately $2.0 million and $2.6 million, respectively. Selling, general and administrative expenses consist primarily of legal fees, accounting and audit fees, consulting expenses, and employee salaries. The elimination of a reserve for product returns accounted for approximately $168,000 of the decrease in selling, general and administrative expenses. Reductions in salaries and consulting expenses accounted for approximately $168,000 and $261,000, respectively, of the decrease during the twelve months ended March 31, 2013.

Research and Development Expenses. Our research and development costs are expensed as incurred. Non-refundable advance payments for goods and services to be used in future research and development activities are recorded as an asset and are expensed when the research and development activities are performed. Research and development expenses were approximately $1.2 million and $2.2 million for the fiscal years ended March 31, 2013 and 2012, respectively, which were expensed. The decrease in research and development expenses for fiscal 2013 compared to fiscal 2012 was primarily due to insufficient capital in fiscal 2013.

Other Income (Expenses). Other income (expense) for fiscal 2013 and 2012 were approximately $(3,800,000) and $(30,000), respectively. Other income (expense) consist primarily of changes in the value of derivative and conversion features of our convertible notes payable as well as interest expense paid in connection with various notes payable. The increase in the value of derivative and conversion features of our convertible notes payable, as well as interest expense for fiscal 2013, in comparison to fiscal 2012 was due to the issuance of convertible notes payable in fiscal 2013.


Liquidity and Capital Resources

We have incurred net losses of approximately $7.2 million and $4.9 million for the years ended March 31, 2013 and 2012, respectively. Since our inception, June 6, 2006, and through March 31, 2013, we have an accumulated deficit of approximately $38.0 million. Since inception and through March 31, 2013, we have financed our operations principally through debt financing and through private issuances of common stock. Since inception, we have raised a total of approximately $22.7 million in debt and equity financing transactions, consisting of approximately $9.4 million in debt financing and approximately $13.3 million in equity financing transactions. We expect to finance future cash needs primarily through proceeds from equity or debt financings, loans, sales of assets, out-licensing transactions, and/or collaborative agreements with corporate partners. We have used the net proceeds from debt and equity financings for general corporate purposes, which have included funding for research and development, selling, general and administrative expenses, working capital, reducing indebtedness, pursuing and completing acquisitions or investments in other businesses, products or technologies, and for capital expenditures.

Net cash used in operating activities from continuing operations for fiscal 2013 and 2012 was approximately $2.6 million and $3.3 million, respectively. The decrease in the use of cash was due primarily to an increase in accounts payable and accrued other expenses. We expect net cash used in operating activities to increase going forward as we continue product development and other business activities, assuming that we are able to obtain sufficient funding.

Net cash provided by financing activities from continuing operations was approximately $2.6 million in fiscal 2013 and approximately $2.1 million in fiscal 2012. Results for fiscal 2013, were affected by proceeds from the issuance of four notes.

As of March 31, 2013, we had outstanding a total of 12 secured promissory notes to executives of the Company, in the aggregate outstanding principal amount of $97,122. Each of these notes bears interest at an annual rate of 10% on the total outstanding balance remaining under these loan agreements.

On November 10, 2010, we completed a private placement transaction with Eses Holdings (FZE), a foreign investor (the "Purchaser"), pursuant to a Common Stock Purchase Agreement and a registration rights agreement. The purchase agreement provided for the sale of up to 40 million shares of our common stock to the Purchaser at a price of $0.25 per share, for up to $10 million of gross proceeds. An initial closing was held on November 10, 2010, pursuant to which we received $5 million in gross proceeds and issued 20 million shares of common stock. At subsequent closings linked to the achievement of various milestones, the last of which occurred in February 2012, we received an additional $2.5 million and issued an additional 10 million shares of common stock.

On May 1, 2012, we exercised our option to terminate the Common Stock Purchase Agreement by sending notice to the Purchaser. Termination of the Common Stock Purchase Agreement means that Purchaser will no longer have the option to purchase the remaining 10 million shares of stock at $0.25 per share. Certain provisions of the Common Stock Purchase Agreement survive termination, including the Purchaser's right to have an observer attend meetings of the board of directors and to receive certain materials that are provided to the directors in connection with such meetings.

On April 2, 2012, we completed the closing of a private placement financing transaction with Gemini Master Fund, Ltd. ("Gemini")pursuant to a securities purchase agreement. We issued a 10% Senior Convertible Note (the "Gemini April Note") in the aggregate principal amount of $1.0 million and 1,000,000 shares of our common stock, and received gross proceeds of $1.0 million, excluding transaction costs and expenses. Interest on the Gemini Note payable at a rate of 10% per annum and was payable on the maturity date. On December 31, 2012, the Gemini April Note was converted in full into 3,869,260 shares of common stock before its maturity date and is no longer outstanding. During the quarter ended December 31, 2012, the Gemini Note and accrued interest payable of approximately $73,000 was converted at $.25 per share into 4,293,370 shares of common stock.

On June 11, 2012, we completed the closing of a private placement financing transaction with Gemini. We issued a 10% Senior Convertible Note in the aggregate principal amount of $500,000 and 500,000 shares of common stock, and received gross proceeds of $500,000, excluding transaction costs and expenses. As amended the maturity date is July 11, 2013. At March 31, 2013, the net carrying value of this note was $500,000. In connection with the closing of the June 2013 secured convertible note and warrant financing transaction described below, the Gemini note was exchanged for $613,271 principal amount of Secured Notes and warrants, and the June 2012 Gemini note is no longer outstanding.

On June 11, 2012, we issued a convertible promissory note in the aggregate principal amount of $500,000 and 500,000 shares of common stock to The G-Max Trust, and received gross proceeds of approximately $500,000, excluding transaction costs and expenses. Interest on the outstanding principal balance of the note accrued at a rate of 10% per annum compounded monthly and was payable monthly commencing July 1, 2012. The note was convertible into shares of common stock at any time at a conversion price per share of $0.55. During January 2013, G-Max elected to convert all of the remaining unconverted principal of the note and related interest into 913,384 shares of common stock, and the note is no longer outstanding.


On October 25, 2012, we issued a zero coupon secured promissory note to the G-Max Trust, evidencing a loan from G-Max to the Company, and received gross proceeds of approximately $500,000. The note was due and payable on or before six months after the date of the note. At maturity, we agreed to pay G-Max the sum of $588,000. We issued 176,000 shares as part of the consideration for the loaned proceeds. On December 31, 2012, the note was repaid in full and is no longer outstanding.

On December 31, 2012, we issued a convertible promissory note in the principal amount of $600,000 and 600,000 shares of common stock to a private investor, and received gross proceeds of $600,000, excluding transaction costs and expenses. Interest on the outstanding principal balance of the note accrues at a rate of 10% per annum compounded monthly and is payable monthly commencing February 1, 2013. All unpaid principal and interest on the note is due and payable on September 30, 2013. In connection with our June 2013 financing transaction, the holder of the note agreed to extend the maturity date to March 26, 2014. At any time on or before the maturity date, the investor has the right to convert part or all of the principal and interest owed under the note into common stock at a conversion price equal to $0.55 per share (subject to adjustment for stock dividends, stock splits, reverse stock splits, reclassifications or other similar events affecting the number of outstanding shares of common stock). The proceeds from the note were used to retire the October 25, 2012 note. At March 31, 2013, the net carrying value of this note was $482,997.

On April 5, 2013, we completed the closing of a private placement financing transaction with two accredited investors pursuant to a Securities Purchase Agreement. Pursuant to the purchase agreement, we issued 12% Convertible Debentures in the aggregate principal amount of $575,000, and received gross proceeds of $575,000, excluding transaction costs, fees and expenses. Interest on the debentures is payable in the amount of 12% of the principal amount, regardless of how long the debentures remain outstanding. Principal and interest was due and payable October 5, 2013. The debentures were convertible into shares of common stock at any time at the discretion of the investor at an initial conversion price per share of $0.50. In June 2013, the noteholders converted a portion of the notes into 208,000 shares of common stock, and $644,000 of the net proceeds from the Secured Note and warrant private placement transaction discussed below was used to redeem and pay the outstanding amounts due under the notes. As a result, the April 2013 notes are no longer outstanding.

On June 26, 2013, we completed the closing of a private placement financing transaction with a small number of accredited institutional investors. Pursuant to a subscription agreement (the "Purchase Agreement") and other transaction documents, we issued Secured Convertible Promissory Secured Notes, or the Secured Notes, and common stock purchase warrants (the "Warrants") to purchase up to 13,004,316 shares of common stock, and received gross cash proceeds of $5,300,000, excluding transactions costs, fees and expenses. The Secured Notes have an aggregate principal amount of $6,502,158, including a $613,271 principal amount Secured Note issued to Gemini Master Fund Ltd. in exchange for its previously outstanding June 2012 convertible note, which is no longer outstanding. The maturity date of the Secured Notes is December 26, 2013. Our obligations under the Secured Notes and the other transaction documents are guaranteed by our principal subsidiaries and, pursuant to a Security Agreement entered into with the investors, are secured by a security interest in substantially all of our assets and those of the subsidiaries. The Secured Notes are convertible into shares of common stock at any time at the discretion of the investor at an initial conversion price per share of $0.50. The exercise price of the Warrants is $0.715 per share, subject to adjustment.

Under the transaction documents, we have agreed to file a registration statement with the Securities and Exchange Commission, or the SEC, within 60 days following the closing to register the resale of the shares issuable upon conversion of the Secured Notes and exercise of the Warrants, and to have the registration statement declared effective within 120 days of the closing date. The transaction documents provide for a variety of monetary penalties, which could be material, if the registration statement is not filed or declared effective by the times contemplated in the transaction documents, or does not continue to be effective thereafter.

The transaction documents include restrictions on our ability to engage in certain kinds of transactions while the Secured Notes are outstanding without the consent of the investors, including without limitation: (a) incurring, paying or repaying certain kinds of indebtedness; (b) other than certain permitted liens, creating or incurring any liens, security interests or encumbrances on our property or assets; (c) amending our charter documents (with certain exceptions) in any manner that materially and adversely affects the investors' rights; (d) repurchasing shares of common stock, or repurchasing or reacquiring shares of common stock (with certain exceptions); (e) entering into certain kinds of related party transactions with our officers, directors, employees or affiliates; (f) paying or redeeming any financing related debt or securities, with certain permitted exceptions; (g) entering into any equity line of credit arrangements or issuing any variable priced equity linked instruments;
(h) filing any registration statements relating to the offer and sale of shares until the registration statement contemplated by the transaction documents is declared effective; (i) selling, leasing or otherwise disposing of any significant portion of our assets outside the ordinary course of business; or ( j ) entering into transactions with any of our affiliates (with certain exceptions).

In connection with the closing of a registered underwritten public offering or a registered direct public offering resulting in at least $10 million of gross proceeds to us, the investors must elect to either have the Secured Notes redeemed at a price equal to 115% of the outstanding principal amount and interest, if any, or convert the Secured Notes effective at the closing of the . . .

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