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ADMP > SEC Filings for ADMP > Form 10-K on 23-Mar-2016All Recent SEC Filings

Show all filings for ADAMIS PHARMACEUTICALS CORP

Form 10-K for ADAMIS PHARMACEUTICALS CORP


23-Mar-2016

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.

General

Company Overview

We are an emerging pharmaceutical company focused on combining specialty pharmaceuticals and biotechnology to provide innovative medicines for patients and physicians. We are currently primarily focused on our specialty pharmaceutical products. We are currently developing several products in the allergy and respiratory markets, including a dry powder inhaler technology that we acquired from 3M Company. Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all specialty pharmaceuticals product lines, we intend to pursue Section 505(b)(2) New Drug Application, or NDA, or Section 505(j) Abbreviated New Drug Application, or ANDA, regulatory approval filings with the U.S. Food and Drug Administration, or FDA, whenever possible in order to potentially reduce the time to market and to save on costs, compared to those associated with Section 505(b)(1) NDAs for new drug products. We also have a number of biotechnology product candidates and technologies, including therapeutic vaccine and cancer product candidates and technologies for patients with unmet medical needs in the global cancer market.

NDA Filing Regarding Epinephrine PFS Product

On May 28, 2014, we submitted a Section 505(b)(2) NDA application to the FDA for approval for sale of our Epinephrine PFS product, for the emergency treatment of acute allergic reactions, including anaphylaxis. We received a complete response letter (CRL) from FDA on March 27, 2015 and resubmitted the application on December 4, 2015. The FDA subsequently confirmed that it considered the resubmission to be a complete class 2 response to the CRL and provided a PDUFA target response date of June 4, 2016.

Private Placement in January 2016

On January 26, 2016, we completed a private placement transaction with a small number of accredited investors pursuant to which we issued 1,183,432 shares of Series A-1 Convertible Preferred Stock and warrants to purchase up to 1,183,432 shares of common stock or Series A-1 Convertible Preferred Stock. 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 for five years. If we grant, issue or sell any Common Stock equivalents pro rata to the record holders of any class of shares of Common Stock, referred to as 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 we declare or make any dividend or other distribution our assets (or rights to acquire our 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 Securities and Exchange Commission within 60 days of the closing date to register the resale from time to time of shares of common stock underlying the Series A-1 Preferred and the warrants.

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 year ended December 31, 2015 and nine-month transition period ended December 31, 2014 indicating that we have sustained substantial losses from continuing operations and have used, rather than provided, cash in its continuing operations, and 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 December 31, 2015, we had cash and cash equivalents of approximately $4.1 million, an accumulated deficit of approximately $69.0 million, and liabilities of approximately $2.7 million. In January 2016, we raised approximately $4,966,000, after deducting approximately $34,000 in fees and transaction expenses payable by us, through a private placement transaction with a small number of accredited investors to which the Company issued preferred stock. However, we will need significant funding to continue operations, satisfy our obligations and fund the future expenditures that will be required to conduct the clinical and regulatory work to develop our product candidates. Such additional funding may not be available, may not be available on reasonable terms, and could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained.

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 December 31, 2015, 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.

Our management intends to attempt to secure additional required funding through equity or debt financings, sales or out-licensing of product candidates or 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 and delay development or commercialization of some or all of our products. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

Funding that we may receive during fiscal 2016 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, without limitation, some or all of the following:

? continue development and commercialization of our Epinephrine PFS product; ? continue development of our allergy and respiratory product candidates; ? continue development of the APC-5000 DPI 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, commercialization and sales capabilities; ? implement additional internal systems and infrastructure; ? maintain, defend and expand the scope of our intellectual property portfolio; ? acquire products, technologies, intellectual property or companies and support continued development and funding thereof; and ? hire additional management, sales, research, development and clinical personnel.

Results of Operations

Our consolidated results of operations are presented for the year ended December 31, 2015 and for the nine-month Transition 2014 Period ended December 31, 2014. We changed our fiscal year to the calendar twelve months ending December 31, effective beginning after our previous fiscal year ended March 31, 2014. As a result, our prior fiscal period was shortened from twelve months to a nine-month transition period ended on December 31, 2014. Unless otherwise indicated, comparisons below are based on results for the 12-month year ended December 31, 2015, to the nine-month Transition 2014 Period from April 1, 2014 through December 31, 2014, and accordingly are not comparing results for comparable periods of time.

Twelve Months Ended December 31, 2015 and Nine Months Ended December 31, 2014

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2015 and Transition 2014 Period were approximately $9.0 million and $4.6 million, respectively. Selling, general and administrative expenses consist primarily of depreciation and amortization, legal fees, accounting and audit fees, consulting, professional fees, stock based compensation, and employee compensation. The higher expenses in 2015 was due in part to the results of operations for the longer 12-month period ending December 31, 2015 compared to the nine months ending December 31, 2014. The increase in expense was also primarily due to activities related to the anticipated commercialization of Epinephrine PFS product, including approximately $980,000 of expenses relating to market research, training, branding, marketing and distribution strategies and payments to third party consultants and contractors pursuant to agreements relating to the foregoing, and approximately $1,310,000 increase in compensation expense for 2015 for Sales and Marketing employees, primarily due to salaries, stock options and employee benefits and bonus accrual. Compensation for General and Administrative employees increased by approximately $1,535,000 for the year ended December 31, 2015 compared to the Transition 2014 Period, primarily due to salary increases, new hires and additional stock options granted. Other increase in expenditures for the year ended December 31, 2015 compared to the nine-month Transition 2014 Period included, in each of the following instances, increases in rent of approximately $133,000, amortization of intangibles of approximately $102,000, insurance of approximately $89,000, accounting and legal expenses of approximately $151,000, and other administrative expenses incurred as a public company of approximately $150,000. Selling, general and administrative expenses are expected to continue to increase especially if the FDA grants marketing approval of our Epinephrine PFS product.

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 $4.8 million and $3.5 million for the year ended December 31, 2015 and Transition 2014 Period, respectively, which were expensed. The increase in expenses for 2015 was due in part to the results of operations for the longer 12-month period ending December 31, 2015 compared to the nine months ending December 31, 2014. The increase in research and development expenses was also primarily due to the increase of $885,000 in compensation expense for Research and Development employees, which includes salaries, benefits, additional stock options and bonus accrual and increased other research and development expenses of approximately $413,000 primarily related to the development of the APC-1000, APC-2000 and APC-5000 products.

Other Income (Expenses). Other expenses for the year ended December 31, 2015 and Transition 2014 Period were approximately $278,000 and $(1,215,000), respectively. Other Income (Expenses) consist primarily of interest expense, change in fair value of warrants and change in fair value of derivative liabilities. Interest expense consists primarily of expense in connection with various notes payable and the amortization of debt issuance costs. The decrease in interest expense by approximately $226,000 for the year ended December 31, 2015, in comparison to the Transition 2014 Period was primarily due to the full payment of the December 2012 Convertible Notes balance in 2014. The net change in fair value of warrants and warrant derivatives resulted in income of approximately $278,000 for the year ended December 31, 2015, compared to expense of approximately $(988,000) for the Transition 2014 Period, primarily due to the fluctuation in the valuation of outstanding warrants. Warrant and warrant derivative values are generally a function of movement in the stock trading price, duration and volatility. Additionally, the probabilities of issuing new stock above or below the exercise price of the warrants will impact the anti-dilution valuation.

Liquidity and Capital Resources

We have incurred net losses of approximately $13.6 million and $9.3 million for year ended December 31, 2015 and the nine-month Transition Period ended December 31, 2014, respectively. Since our inception, June 6, 2006, and through December 31, 2015, we have an accumulated deficit of approximately $69.0 million. Since inception and through December 31, 2015, we have financed our operations principally through debt financing and through private issuances of common stock and preferred stock. Since inception, we have raised a total of approximately $71.8 million in debt and equity financing transactions, consisting of approximately $15.8 million in debt financing and approximately $56.0 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 the year ended December 31, 2015 and the Transition 2014 Period was approximately $10.3 million and $6.4 million, respectively. The higher cash used in operating activities in 2015 was largely due to the results of operations for the longer 12-month period ending December 31, 2015 compared to the nine months ending December 31, 2014. We expect net cash used in operating activities to increase going forward as we continue with product development and other business activities, assuming that we are able to obtain sufficient funding.

We had no investing activities for the year ended December 31, 2015 and the Transition 2014 Period.

Net cash provided by financing activities from continuing operations was approximately $10.6 million in the year ended December 31, 2015 and approximately $4.8 million for the Transition 2014 Period. During the Transition 2014 Period, we repaid outstanding promissory notes. The primary sources of cash provided by financing activities in the year ended December 31, 2015 and in the Transition 2014 Period were from the issuance of common stock with net proceeds of approximately $10.6 million and the issuance of Series A convertible preferred stock with net proceeds of approximately $4.9 million, respectively.

On December 31, 2012, we issued a convertible promissory note in the principal amount of $600,000 and 35,294 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. As amended, all unpaid and unconverted principal and interest on the note was due and payable on June 30, 2014. At any time on or before the maturity date, the investor had the right to convert part or all of the principal and interest owed under the note into common stock at a conversion price, as amended, equal to $6.00 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 note was repaid in June 2014.

For additional information concerning our debt and equity financing transactions, see Notes 8, 9, 13 and 14 accompanying our financial statements included elsewhere herein.

As noted above under the heading "Going Concern and Management Plan," at December 31, 2015, Adamis had incurred substantial losses. The availability of any required additional funding cannot be assured. Even taking into account the net proceeds from the transactions described above, if we do not obtain additional equity or debt funding in the near future, our cash resources would become depleted and we will be required to materially reduce or suspend operations. Even if we are successful in obtaining additional funding to permit us to continue operations at the levels that we desire, substantial time may pass before we obtain regulatory marketing approval for any products and begin to realize revenues from product sales, and we will require additional funds. No assurance can be given as to the timing or ultimate success of obtaining future funding.

Critical Accounting Policies and Estimates

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

We believe the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial results. For further discussion of our accounting policies, see Note 3 in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

Stock-Based Compensation. We account for stock-based compensation transactions in which we receive employee services in exchange for options to purchase common stock. Stock-based compensation cost for restricted stock units ("RSUs") is measured based on the closing fair market value of our common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each option's fair-value as calculated by the Black-Scholes option-pricing model. We recognize stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period.

Derivative Financial Instruments. Derivatives are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair value. The treatment of gains and losses resulting from changes in the fair values of derivative instruments is dependent on the use of the respective derivative instrument and whether they qualify for hedge accounting. As of December 31, 2015, no derivative instruments qualified for hedge accounting.

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. Down-round provisions reduce the exercise price of a convertible instrument if a company either issues equity share for a price that is lower than the exercise price of those instruments, or issues new convertible instruments that have a lower exercise price.

The Company recognizes the derivative assets and liabilities at their respective fair values at inception and on each reporting date. The Company utilized a binomial option pricing model (BOPM) to develop its assumptions for determining the fair value of the conversion and anti-dilution features of its notes. See Note 9 in the accompanying financial statements for further discussion of derivative instruments.

Intangible Assets. Intangible assets, such as patents and unpatented technology, consist of legal fees and other costs needed to acquire the intellectual property. Acquired patents are recorded at cost, based on the relative fair value of the assets as of the date acquired. Patents are amortized on a straight line basis over their estimated remaining useful life.

Off Balance Sheet Arrangements

At December 31, 2015, we did not have any off balance sheet arrangements.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-50): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public businesses, ASU 2015-03 will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of ASU 2015-03 will be allowed for financial statements that have yet to be issued. The amendments must be applied retrospectively, where the balance sheet of each individual period presented is adjusted to reflect the period-specific impact of using the new guidance. Upon transition, a business must adhere to the appropriate disclosures for an adjustment in an accounting principle. Such disclosures include why the change in accounting principle is occurring, the transition method, an explanation of the prior period information that was retrospectively adjusted, and how the change impacts the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement". The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. ASU 2015-05 will be effective for annual periods beginning after December 15, 2015. Early adoption of ASU 2015-05 will be allowed for financial statements that have yet to be issued. The amendment may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

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. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods and services. 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. The Company is currently assessing the impact of adopting ASU 2014-09 and ASU 2015-14 on its consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity". The ASU provides guidance relating to certain hybrid financial instruments when determining whether the characteristics of the embedded derivative feature are clearly and closely related to the host contract. In making that evaluation, the characteristics of the entire hybrid instrument should be considered, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The amendments are effective for our fiscal year ending December 31, 2016; however, early adoption is permitted. Adoption is not expected to have a significant effect on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The new accounting guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods therein. Early adoption is permitted as of the beginning of the interim or annual reporting periods. The new guidance may be applied either on a prospective or retrospective basis. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments under this pronouncement will change the way all leases with a . . .

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