UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2017March 31, 2019

OR

For the transition period fromto

Commission File Number: 001-36242

ADAMIS PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, including zip code)

(858) 997-2400

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 14, 2017,May 6, 2019, was 33,386,982.47,442,414.

ADAMIS PHARMACEUTICALS INC.CORPORATION AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY 

(1)  The Company adopted Accounting Standards Update ("ASU") 2016-02, Leases. Refer to the recent accounting pronouncements footnote for further details.

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

ADAMIS PHARMACEUTICALS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Articles 8 andArticle 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 statementpresentation of all periods presented. The results of operations of Adamis Pharmaceuticals Corporation’s operationsCorporation ("the Company") for any interim periods are not necessarily indicative of the results of operations for any other interim periodperiods or for a full fiscal year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.

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

The Company's cash was $24,317,294 and $5,095,760cash equivalents were $9,190,077 and $19,271,642 at September 30, 2017March 31, 2019 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.2018, respectively.  

We

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

The

The Company has significant operating cash flow deficiencies. TheAdditionally, the Company will need additionalsignificant funding for future operations and the expenditures that it believes will be required to support commercialization of its products and conduct the 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.needs during 2019. The preceding conditions raise substantial doubt about ourthe Company's ability to continue as a going concern. The condensed consolidated financial statements included elsewhere herein for the three months ended March 31, 2019, 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 condensed 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 unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management’s plans include attempting to secure additional required funding through equity or debt financings, sales or out-licensing of intellectual property assets, products, product candidates or technologies, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research and development or commercialization efforts, or similar transactions.transactions, and through revenues from existing agreements and sales of prescription compounded formulations. 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, theThe 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 ninethree months ended September 30, 2017March 31, 2019 and September 30, 2016March 31, 2018, consist of outstanding equity classified warrants (3,189,052(2,134,670 and 9,194,044,3,189,052 shares, respectively), outstanding options (6,598,817(8,945,878 and 4,403,519,9,246,202 shares, respectively), and outstanding restricted stock units (1,300,000(3,877,491 and 350,000,1,642,212 shares, respectively).

Prior Periods Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation related to the reserve for inventory obsolescence in the condensed consolidated statement of cash flows and had no effect on cash used in operations or statement of cash flows for the periods ended March 31, 2019 March 31, 2018. The reclassification has no effect on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018, or the condensed consolidated statement of operations for the three months ended March 31, 2019 and March 31, 2018.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 Leases (Topic 842), also referred to as “ASC 842” or “New Lease Standard”, which supersedes ASC 840 Leases (Topic 840), and convertible preferred stock (zeroprovides principles for the recognition, measurement, presentation and 1,724,137, respectively).disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance through the issuance of additional ASUs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less may be accounted for similar to existing guidance for operating leases. ASC 842 was effective for the Company for the year ending December 31, 2019. We reported our financial information for fiscal years ending before December 31, 2018 under the Topic 840 lease accounting standard. The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company recognized the cumulative effect of the transition adjustment as of the effective date and will not provide any new lease disclosures for periods before the effective date. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the Company will, in effect, continue to account for existing leases as classified in accordance with ASC 840, throughout the entire lease term, including periods after the effective date, with the exception that the Company will apply the new balance sheet recognition guidance for operating leases and apply ASC 842 for remeasurements and modifications after the transition date. 

Other key practical expedients elected by the Company (as a lessee) relate to maintaining leases with an initial term of 12 months or less off the balance sheet; not separating lease and non-lease components and the use of the portfolio approach to determine the incremental borrowing rate. For transition purposes, the Company used the incremental borrowing rate based on the total lease term and total minimum rental payments. The Company completed its identification of leases which comprised two building leases and two equipment leases. Further, the Company analyzed service contracts and parts assembly arrangements from suppliers and did not identify any material leases of production equipment. On the date of initial application, the Company recognized right-of-use ("ROU") assets and leasing liabilities on its condensed consolidated balance sheets of approximately $2 million. The adoption had no significant impact on the Company's condensed consolidated statement of operations.

Recent Accounting Pronouncements Note 2: Revenues

In May 2014, the FASB issued ASU 2014-09, “Revenue

Revenue Recognition 

Revenue is recognized pursuant to ASC Topic 606, “Revenue from Contracts with Customers (Topic” (ASC 606).” ASU 2014-09 supersedes the Accordingly, 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 inis recognized at an amount that reflects the consideration to which the entity expectswe expect to be entitled in exchange for thosetransferring goods or services applyingto a customer. This principle is applied using the following steps: (1) identify5-step process:

Adamis is a specialty biopharmaceutical company focused on developing and commercializing products in the contract(s)therapeutic areas of respiratory disease and allergy. Our subsidiary U.S. Compounding, Inc. or USC provides prescription compounded medications, including compounded sterile preparations and nonsterile compounds, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, injectables, urological preparations, topical compounds for pain and men’s and women’s health products.

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

Effective July 1, 2018 (the “Effective Date”), Adamis signed an exclusive distribution and commercialization agreement with Sandoz, Inc. (“Sandoz”).  This agreement grants Sandoz the exclusive rights to market, sell and distribute the Company’s Symjepi™ epinephrine pre-filled syringe injectable products (“Products”) throughout the United States only. There is currently no distributor for markets outside the United States. The Company generates revenue from this agreement by manufacturing and supplying Sandoz with Products.  The Company's performance obligation is to manufacture and supply the Products to Sandoz. 

The initial term for the agreement with Sandoz began on the Effective Date and shall continue for a period of 10 years from the first launch of Product in the United States, unless terminated earlier in accordance with its terms. The term will automatically renew for one year terms after the initial 10-year term and subsequent renewal terms, unless terminated by either party. The revenue arrangement consists of a single performance obligation, which is satisfied at the point in time when the Product is delivered to the carrier, as control, title and risk of loss is passed on to Sandoz upon delivery of the products to the carrier.

 The Company has the following payment considerations with Sandoz: (1) Fixed consideration. One-time milestone payment, which grants Sandoz the material right for the distribution and commercialization of the Product in the United States market only. This one-time milestone payment is a non-refundable up-front fee. Revenue from this up-front fee is recognized over the initial 10-year term of the contract, which is substantially the expected customer life. The period of recognition is subject to adjustment if the expected customer life changes; and (2) identifyVariable considerations which are recognized upon satisfaction of the performance obligationsobligation, comprising of the following:

In accordance to ASC 606, an estimate of the expected net profit share or commercial milestone payments that the Company has present rights to, shall be recognized when there is a basis to reasonably estimate the amount of these considerations and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Revenues do not include any state or local taxes collected from customers on behalf of governmental authorities. The Company made the accounting policy election to continue to exclude these amounts from revenues.

With respect to sales of prescription compounded medications by our USC subsidiary, revenue arrangements consist of a single performance obligation which is satisfied at the point in time when goods are delivered to the contract; (3) determinecustomer. The transaction price is determined based on the transaction price; (4) allocateconsideration to which the Company will be entitled in exchange for transferring goods and services to the customer.

The contracts between the Company and the customers provide that the transaction price for medication sales is adjusted for estimated product returns that the Company expects to occur under its return policy based upon historical return rates, which have historically been immaterial. In rare cases when the performance obligationstransaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the contract; and (5) recognize revenue when (or as)transaction price utilizing the entity satisfies a performance obligation. ASU 2014-09 permitsexpected value method. Any estimates, including 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 defersconstraint on variable consideration, are evaluated at each reporting period for any changes. 

The Company has extensive experience with the effective datetypes of ASU 2014-09contracts entered with customers regarding sales of medications 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 statementsUSC, 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 willdoes not have a material impacthistory of offering a broad range of price concessions or payment term changes. The Company believes a significant reversal in the amount of cumulative revenue recognized from such contracts is neither probable nor significant.  The transaction price for all transactions is based on the price reflected in the individual customer’s purchase order. Variable consideration has not been identified as a significant component of the transaction price for any of our revenue recognition, which currently relates totransactions regarding sales of compounded pharmacy formulations and other pharmacy productsmedications 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 measurementDisaggregation 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. CompoundingRevenue

On April 11, 2016, we acquired the net assets and assumed the principal debt obligations of USC inAs operations under a merger transaction (the “Merger”) pursuant to which we acquired USC and USC continued as a wholly owned subsidiary of the Company. The acquisitionsterile environment is accounted for using the purchase method of accounting.  USC is registered as a drug compounding outsourcing facility undercovered by Section 503B of the U.S. Food, Drug & Cosmetic Act, as amended, and the U.S. Drug Quality and Security Act, USC’s sterile operations are governed by specific regulatory and provides prescription compounded medications, including compounded sterile preparationquality requirements. Any deviation from these exacting standards could result in a stoppage of operations, recall of products, and certain nonsterile drugs,a significant reduction in revenues. The Company employs rigorous quality controls and outside testing facilities to patients, physician clinics, hospitals, surgery centers and other clients throughout mostminimize the likelihood of this occurrence. The Company outsources the manufacturing of the United States.  USC also provides certain veterinary pharmaceutical drugs for animals.  Symjepi™ product to third party manufacturers who bear the responsibility of maintaining a suitable environment as governed by specific regulatory and quality requirements.  

The total considerationfollowing table presents the Company’s revenues disaggregated by outsourced manufacturing, sterile and non-sterile regulatory environments for the transaction was $15,967,942.three months ended March 31, 2019 and 2018.

The principal reasonsCompany's revenues relating to its FDA approved product Symjepi™ are dependent on an exclusive distribution agreement with Sandoz and the Company’s pharmacy formulations rely, in large part, on sales generated from clinics and hospital customers. Adverse economic conditions pose a risk that the Company’s customers may reduce or cancel spending, which would impact the Company’s revenues.

The following table presents the Company’s revenue disaggregated by end market for the acquisitionthree months ended March 31, 2019 and 2018.

Deferred Revenue

Deferred Revenue are contract liabilities that the Company records when cash payments are received or due in advance of USC were (i) to expand the Company’s product portfolio, (ii) providesatisfaction of performance obligations. The Company’s performance obligation is met when control of the promised goods is transferred to the Company’s customers. For the three months ended March 31, 2019 and 2018, $36,246 and $14,758 of the revenues recognized were reported as deferred revenue as of December 31, 2018 and 2017, respectively. Included in the deferred revenue at March 31, 2019 and December 31, 2018 was $975,000 and $1.0 million, respectively, relating to the non-refundable upfront payment received from Sandoz pursuant to the Agreement between the Company and (iii) significantly increaseSandoz.   

Cost to Obtain a Contract 

The Company capitalizes costs related to contracts that would have not been incurred if the contract was not obtained and the Company expects to recover such costs. The deferred costs, reported in the prepaid expenses and other current assets and other non-current assets on the Company’s manufacturing, sales, and marketing capabilities, whichCondensed Consolidated Balance Sheets, will be amortized over 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 periodseconomic benefit period of the previous year, due to the size of the acquisition in relation to our overall consolidated results of operations. 

Note 3:  Inventoriescontract. 

The inventoriesCompany capitalized the $2.0 million fee paid to a financial advisor as an incremental cost of obtaining a contract to commercialize and distribute the Company’s first FDA approved product Symjepi™ with Sandoz. The costs were deferred and will be amortized over the economic benefit period estimated to be approximately 10 years from date of product launch, based on the contract term. The period of recognition is subject to adjustment in future periods if the expected customer life changes. The deferred costs were classified as current or non-current in the Company’s condensed consolidated balance sheets based on the timing of when the Company expects to recognize the expense. As of March 31, 2019 and December 31, 2018, the Company had $1,950,000 and $2.0 million, respectively, of deferred costs related to obtaining a contract with $50,000 amortized to Selling, General and Administrative expenses during the quarter ended March 31, 2019. 

Practical Expedients 

As part of the adoption of the ASC Topic 606, the Company consisted primarilyelected to use the following practical expedients (i) incremental costs of inventoriesobtaining a contract in the form of USCsales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within Selling, General and approximately $194,000Administrative expenses; (ii) taxes collected from customers and remitted to government authorities and that are related to the sales of raw materialsthe Company’s products, are excluded from revenues; (iii) shipping and handling activities are accounted for our FDA approved Epinephrine PFS product. Asas fulfillment costs and recorded in cost of September 30, 2017, inventoriessales.

Inventories at March 31, 2019 and December 31, 2018 consisted of the following: 

Reserve for obsolescence as of September 30, 2017,March 31, 2019 and December 31, 2018 was $31,627.

Note 4: Fixed Assets  approximately $781,000 and $526,000, respectively.  

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 Assetsassets at September 30, 2017 isMarch 31, 2019 and December 31, 2018 are summarized in the table below:

For the three months ended March 31, 2019 and nine months ended September 30, 2017,March 31, 2018, depreciation and amortization expense was $139,045approximately $156,000 and $462,246,$152,000, respectively.

Note 5:

Note 5:  Intangible Assets and Goodwill

Intangible assets at March 31, 2019 and December 31, 2018 are summarized in the tables below:

Amortization expense for the three months ended March 31, 2019 and 2018 was approximately $619,000. 

Estimated amortization expense of definite-lived intangible assets at March 31, 2019 for each of the five succeeding years and thereafter is as follows: 

  Goodwill recorded related to the acquisition of USC in 2016 was approximately $7,641,000. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized but rather evaluated for impairment annually or more frequently, if indicators of impairment exist. If the impairment evaluations for goodwill indicate the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to that excess. The carrying value of the Company's goodwill as of March 31, 2019 and December 31, 2018 was approximately $7,641,000. 

Note 6: Leases

The Company’s intangible assets at September 30, 2017, consistedCompany has two operating leases, one for an office space and another for an office space and manufacturing facility; and two finance leases for an office equipment and plant equipment. As of March 31, 2019, the leases have remaining terms between two months and less than five years. The operating leases do not include an option to extend beyond the life of the following:current term. There are no short-term leases, and the lease agreements do not require material variable lease payments, residual value guarantees or restrictive covenants.

The tables below present the operating and financing lease assets and liabilities recognized on the condensed consolidated balance sheets as of March 31, 2019:

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

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

The Company's weighted average remaining lease term and weighted average discount rate for operating and financing leases as of March 31, 2019 are:

Financing lease costs for the three months ended September 30, 2017,March 31, 2019 included approximately $17,000 in right-of-use asset amortization expense was $619,024 and $1,856,171, respectively. 

 Estimated future amortization expense forapproximately $1,000 of interest expense. Financing lease costs are included within selling, general and administrative expenses on the Company's intangible assets at September 30, 2017, is as follows:

Goodwill recorded at the acquisitioncondensed consolidated statements 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.operations.

Note 6: SaleCash paid for amounts included in the measurement 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 warrantsoperating lease liabilities 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 priceapproximately $131,000 for the 2014 warrantsthree months ended March 31, 2019. Cash paid for amounts included in effect for 10 outthe measurement 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 Companyfinancing lease liabilities 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$18,000 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 Decemberthree months ended March 31, 2016, to arrive at the net loss applicable to common stock.2019.

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,

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. 

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 Ben Franklin 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(“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, arewere due and payable on MarchJune 1, 2018, or sooner upon the occurrence of certain events as provided in the loan agreement and related documents.2018. The Company’s obligations under the loan agreement arewere 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,share.  The warrant was exercisable only if the Company is in default under the loan agreement or related loan documents, the Lender delivers a notice to the Company and the Company does not cure the default within the applicable cure period. If the warrant became exercisable, then Lender may exercise the warrant in whole or in part, from time to time, to acquire warrant shares in a number that the Lender believes will, upon sale of such shares, be sufficient to cure or pay off the Company’s obligations due to the Lender under the loan documents.

Under the terms of the Warrant, the Lender agreed that following any exercise of the warrant, Lender will use its best efforts to sell as promptly as reasonably practicable following such exercise, the shares of common stock acquired by the Lender upon such exercise, and that all of the net proceeds from such sales of warrant shares will be applied in satisfaction of the Company’s obligations under the loan documents. On November 10, 2016,June 28, 2018, the Company and the Lender amended the warrant and the loan and security agreement to provide that effective as of June 1, 2018, if the Company has not paid in full all amounts that are required to be paid to the Lender under the loan documents on or before the maturity date of the loan, then the Lender may exercise the Warrant, in whole or in part, to acquire a number of warrant shares as described above. In July 2018, the Lender delivered a notice of exercise of the warrant and sold warrant shares in an amount sufficient to satisfy substantially all of the outstanding principal balance of the loan. The Company paid in cash the remaining principal and accrued unpaid interest, and there is no outstanding balance under the Adamis Working Capital Line. There was no gain or loss upon extinguishment of the debt. The Adamis Working Capital Line was not renewed and the account was closed as of December 31, 2018. In addition, the Lender released the Company’s $1.0 million restricted Certificate of Deposit that had served as additional collateral for the Adamis Working Capital Line, withand 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.amount is no longer restricted cash. 

As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the loan balance on the Adamis Working Capital Line of credit was $2,000,000.$0. Interest expense for the three months ended March 31, 2019 and 2018 related to the loan was approximately $21,722$0 and $61,125 for the three and nine months ended September 30, 2017,$23,000, respectively.

Loans Assumed from Acquisition of USC: 

Building Loan  

InIn connection with the closing of the Mergeracquisition of USC by the Company and the transactions contemplated byagreements relating to the Merger Agreement, 4 HIMS, LLC,transaction, an entity of which Eddie Glover, the chief executive officer of USC, and certain otheror former officers or stockholders of USC are members, agreed to sell to the Company, the building and property owned by 4 HIMSthe entity on which USC'sUSC’s offices are located, in consideration of the Company being added as an additional “borrower””borrower” and assuming the obligations under the loan agreement, promissory note and related loan documents that 4 HIMSthe entity and certain other parties previously entered into with the Lender (the "4 HIMS Loan Documents").Lender.

OnOn 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 monthlyballoon payment and any other amounts due under the 4 HIMS Loan Documentsloan documents due and payable in August 2019.    

As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the outstanding principal balance owed on the applicable note was approximately $2,371,000$2,224,000 and $2,441,000,$2,249,000, respectively. The loan currently bears an interest of 3.75% per year and interest expense for the threequarter ended March 31, 2019 and nine months ended September 30, 20172018 was approximately $23,000$21,000 and $68,000,$22,000, 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

EquipmentEquipment Loan, Tribute. In connection with the Merger,Company’s acquisition of USC by means of a merger transaction (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,”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 amortizationpayment 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, 2017March 31, 2019 and December 31, 2016,2018, the outstanding unpaid principal balance was approximately $815,000$235,000 and $1,092,000,$334,000, respectively. Interest expense for the threequarter ended March 31, 2019 and nine months ended September 30, 20172018 was approximately $8,000$3,000 and $27,000,$6,000, respectively. 

Loan Amendment, Forbearance and Assumption Agreement

In connection with ourthe Company's 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, theThe 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

The notes included 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. As of March 31, 2019, the Company was not in breach of any of the debt covenants or subjective acceleration clauses.

At September 30, 2017,March 31, 2019, the outstanding principal maturities of the amended long-term debts were as follows:

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.

TheNote 8: Fair Value Measurement

Fair value measurements adopted by 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 basisare based on the authoritative guidance provided by the FASB which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements,FASB authoritative guidance establishes a fair value hierarchy, thatwhich prioritizes observable and unobservablethe inputs is used to measurein measuring fair value into three broad levels, which are described below:

In determining

The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, inventory, notes receivables, accounts payable, notes payable, accrued liabilities and other payables approximate their fair value, the Company utilizes valuation techniques that maximize the use of observable inputsvalues due to their short-term nature. 

Note 9: Commitments and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.Contingencies

The Company recognizes derivative liabilities at their respective fair values at inceptionmay become involved in or subject to, routine litigation, claims, disputes, proceedings and investigations in the ordinary course of business, which in management’s opinion will not have a material adverse effect on each reporting date.our financial condition, cash flows or results of operations. Any such litigation could divert management time and attention from Adamis, could involve significant amounts of legal fees and other fees and expenses. 

On September 26, 2018, the Company brought action against Belcher Pharmaceuticals, LLC (“Belcher”) in the United States District Court for the Middle District of Florida for a declaratory judgment (“Complaint”) of non-infringement of certain patents in which Belcher claims rights, relating to certain methods of preparing epinephrine solutions and treating allergic reactions using a method of preparing certain epinephrine solutions (collectively the “Patents-in-Suit”).  The Company utilizedComplaint seeks a declaratory judgment that the BOPMcompany’s Symjepi™ (epinephrine) Injection product (“Symjepi”) does not infringe the Patents-in-Suit.  On November 7, 2018, Belcher filed its Answer and Counterclaim to develop its assumptions for determining the fair valueComplaint and alleged that the company infringes the Patents-in-Suit as a result of the WarrantsSymjepi product.  Belcher’s Counterclaim seeks damages and related anti-dilution features.

As of September 30, 2016,injunctive relief in conjunction with the carrying valueinfringement claims.  The company responded to the Counterclaim by generally denying any wrongdoing and asserting the affirmative defense that the Patents-in-Suit are invalid.  The parties exchanged initial disclosures and initiated discovery in January 2019.  On December 28, 2018, Belcher filed a reissue application for one of the Warrants with call options was zeroPatents-in-Suit seeking to amend the asserted claims and correct an improper benefit claim.  On March 29, 2019, the parties agreed to stay the litigation at the District Court pending the outcome of the reissue application and the Company recognized a change in fair value of $1,397,471 in the condensed consolidated statement of operationsCompany’s petition 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 previouslyinter partes review, filed with the SecuritiesU.S. Patent and Exchange Commission (and a related registration statement),Trademark Office in April 2019, to challenge the validity of the remaining Patent-in-Suit.  The Company believes that its Symjepi product does not infringe any valid and a prospectus supplementenforceable patent held by Belcher, and an accompanying prospectus relatingthat Belcher’s Counterclaim is without merit.  The Company intends to defend against Belcher’s claims and pursue all available legal remedies available to the offering filed in April 2017.company against Belcher.

In June 2017,

The Company has a production threshold commitment to a manufacturer of our Symjepi Products where the Company issued common stock upon exercisewould be required to pay for maintenance fees if it does not meet certain periodic purchase order minimums. Any such maintenance fees would be prorated as a percentage of an investor warrant. The warrant holder exercised for cash at an exercise price of $2.98 per share.the required minimum production threshold. The Company received a total proceeds of approximately $321,000 andbelieves that 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 issuedproduction thresholds will be met 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 agreedsucceeding periods, or if not 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 recognizedwill not be material, as an offset to the proceeds received from the warrant exercises. they are prorated based on actual production.

 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

On January 1, 2019, pursuant to the quarter ended September2009 Equity Incentive Plan the number of shares reserved for the issuance of stock awards increased by 2,364,568 shares. 

On January 30, 2017,2019, the Company granted options to purchase 285,00090,000 shares of common stock to the new hiresnon-employee directors of the Company under the 2009 Equity Incentive Plan with an exercise prices ranging from $4.50 to $5.65price of $3.09 per share. TheseThe 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.one year. These options were valued using the Black-Scholes option pricing model, the expected volatility was approximately 58%56%, the term was six years, the dividend rate was 0.0 % and the risk-free interest rate was approximately 2.1%2.6%, which resulted in a calculated fair value of $815,000.approximately $152,000.  

On January 30, 2019, the Company awarded Restricted Stock Units (“RSUs”) covering 2,349,350 shares of common stock to the officers and employees of the Company under the 2009 Plan; as of the date of grant, the market price of the common stock was $3.09 per share. These RSUs vest in equal amounts each quarter on the determined date over a period of three years from grant date provided that the recipient has continued to provide services to the Company, or earlier upon the occurrence of certain events including a Change in Control of the Company (as defined in the 2009 Plan), or earlier upon the recipient’s separation from service to the Company by reason of death or disability (as defined in the 2009 Plan). The calculated fair value of the RSUs was approximately $7,259,000.

On January 30, 2019, the Company awarded RSUs covering 36,985 shares of common stock to an employee of the Company under the 2009 Plan; as of the date of grant, the market price of the common stock was $3.09 per share. These RSUs were vested in full at grant date. The calculated fair value of the RSUs was approximately $114,000.

The following table summarizes the outstanding stock option activity for the ninethree months ended September 30, 2017:March 31, 2019:

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 6,598,8178,945,878 and 4,320,4099,298,101 stock options outstanding at September 30, 2017March 31, 2019 and December 31, 20162018, respectively, was approximately $6,205,000 and approximately $26,000, respectively.$0. The aggregate intrinsic value of 3,373,8296,653,303 and 2,319,9636,130,337 stock options exercisable at September 30, 2017March 31, 2019 and December 31, 20162018, was approximately $2,106,000 and $1,000, respectively.$0.

The following table summarizes warrants outstanding at September 30, 2017:March 31, 2019 and December 31, 2018:  

*Exercisable

The following table summarizes the RSUs outstanding at March 31, 2019 and December 31, 2018:  

(1) The RSUs will fully vest on the seventh anniversary of the date of grant if the recipient has provided continuous service or upon defaultchange of Linecontrol or upon death or disability.

(2) The RSUs vest ratably annually over a period of Credit at Bear State Bank, see Note 7.three years if the recipient has provided continuous service or upon change of control or upon death or disability. 

(3) The RSUs vest ratably quarterly over a period of three years if the recipient has provided continuous service or upon change of control or upon death or disability.

(1) The RSUs will fully vest on the seventh anniversary of the date of grant if the recipient has provided continuous service or upon change of control or upon death or disability.

(2) The RSUs vest ratably annually over a period of three years if the recipient has provided continuous service or upon change of control or upon death or disability. 

Expense related to RSUs for the three months ended March 31, 2019 and 2018 was approximately $802,000 and $258,000, respectively. 

At September 30, 2017,March 31, 2019, 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 grantedincluding all of the warrants in the future under the 2009 Equity Incentive Plan,table above and restricted stock units, as follows:

Note 11: Subsequent Events 

Refer to Note 7 regarding the extension of the term of the USC Working Capital Loan agreement.   

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

Information Relating to Forward-Looking Statements

TThishis Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking”forward-looking statements. These forward-lookingSuch statements are not historical facts, but are based on our current expectations, estimates and projectionsbeliefs about our industry, our beliefsbusiness and our assumptions. Theseindustry. Such forward-looking statements may include, without limitation, statements about our strategies, objectives and our future achievements; our expectations for growth; estimates of future revenue; our sources and uses of cash; our liquidity needs; our current or planned clinical trials or research and development activities; anticipated completion dates for clinical trials; product development timelines; anticipated dates for commercial introduction of products; our future products; regulatory matters; our expectations concerning the timing of regulatory approvals; anticipated dates for meetings with regulatory authorities and submissions to obtain required regulatory marketing approvals; expense, profits,profit, cash flow, or balance sheet items;items or any other guidance regarding future periods; and other statements concerning our future periods.operations and activities.  Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development and/or otherwise are not statements of historical fact.  These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. These In some cases, you can identify forward-looking statements are often, but not always, made through the use of word or phrasesby terminology, such as “believe,” “will,” “expect,” “may,” “anticipate,” “estimate,” “intend,” “plan,” “should,” and “would.“would,” or the negative of such terms or other similar expressions. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Report. These forward-looking statements are not guarantees of future performance and concern matters that could subsequently differ materially from those described in the forward-looking statements. Important risks and factors that could cause actualActual events or results tomay differ materially from those anticipated by these forward-looking statements are discloseddiscussed in this Quarterly Report on Form 10-Q including under the headings “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our most recent Annual Report on Form 10- K, including without limitation under the headings “Item 1A. Risk Factors,” “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission, press releases and other communications.Report. In addition, the statements contained throughout this Quarterly Report concerning future events or developments or our future activities, including concerning, among other matters, current or planned clinical trials, anticipated research and development activities, anticipated dates for commencement of clinical trials, anticipated completion dates of clinical trials, regulatory matters, anticipated dates for commercial introduction of products, and othermany forward-looking statements concerning our anticipated future operations andbusiness activities assume that we are able to obtain sufficient funding in the near term and thereafter to support such activities and continue our operations and planned activitiesactivities. As discussed elsewhere in a timely mannerthis Report, we may require additional funding during 2019 to continue operations, and assume that there are no significant delays in the successful commercialization of our productsassurances that have been approved for marketing. There can be no assurance that thissuch funding will be the case. Also, such statements assume that there are no significant unexpected developments or events that delay or prevent such activities from occurring.available. Failure to timely obtain sufficientrequired funding or unexpected developments or events,would adversely affect and could delay the occurrence of such events or prevent our ability to realize the events anticipatedresults contemplated by such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.  In addition, we cannot assess the impact of each factor on our business or the extent to which any suchfactor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Because factors referred to elsewhere in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2018 (sometimes referred to as the “2018 Form 10-K”) that we previously filed with the Securities and Exchange Commission, including without limitation the “Risk Factors” section in this Report and in the 2018 Form 10-K, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements from occurring.made by us, you should not place undue reliance on any forward-looking statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and except as may be required by applicable law, we undertake no obligation to updaterelease publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date of this Report. Important risks and factors that could cause actual results to differ materially from those in these forward-looking statements are disclosed in this Report including, without limitation, under the headings “Part II, Item 1A. Risk Factors,” and “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our 2018 Form 10-K, including, without limitation, under the headings “Part I, Item 1A. Risk Factors,” “Part I, Item 1. Business,” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in our subsequent filings with the Securities and Exchange Commission, press releases and other communications.

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

��

General

Company Overview

WWee are a specialty biopharmaceutical company focused on developing and commercializing products in the therapeutic areas of respiratory disease and allergy. We are currently developing severalOur products and product candidates in the allergy, respiratory, opioid overdose and respiratoryerectile dysfunction or ED markets including our Epinephrineinclude:  Symjepi™ (epinephrine) Injection pre-filled syringe,0.3mg, which was approved by the U.S. Food and Drug Administration, or PFS, productFDA, in 2017 for use in the emergency treatment of acute allergic reactions, including anaphylaxis; albuterol (APC-2000)Symjepi™ (epinephrine) Injection 0.15mg which was approved by the FDA in September 2018, for use in the treatment of anaphylaxis for patients weighing 33-65 pounds; a naloxone injection product candidate (APC-6000) based on the approved Symject™ injection device and fluticasone (APC-4000) Dry Powder Inhaler, or DPI, productsintended for the treatment of bronchospasm and asthma, respectively; andopioid overdose for which the company submitted a steroid hydrofluoroalkane,New Drug Application, or HFANDA, in December 2018 which was accepted for review by the FDA in March 2019; a fast-disintegrating sublingual tablet containing tadalafil (APC-8000), a drug used for treating ED, for which the company submitted an NDA for ED in December 2018 which was the subject of a refusal to file letter from the FDA in February 2019; a Beclomethasone metered dose inhaler product candidate (APC-1000) intended for the treatment of asthma for which the company submitted an Investigational New Drug application, or IND, in January 2018 and has initiated the start-up phase of  Phase 3 studies; and a fluticasone (APC-4000) dry powder inhaler, or DPI, product candidate for the treatment of asthma. Our goal is to create low cost therapeutic alternatives to existing treatments. Consistent across all specialty pharmaceuticals product lines, we intend to submit NDAs under Section 505(b)(2) New, of the U.S. Food, Drug Applications,& Cosmetic Act, as amended, or NDAs,FDCA, or Section 505(j) Abbreviated New Drug Applications, or ANDAs, to 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.

Our U.S. Compounding, Inc., subsidiary, or USC, subsidiary,which we acquired in April 2016 and which is registered as a drug compounding outsourcing facility under Section 503B of the U.S. Food, Drug & Cosmetic Act, as amendedFDCA and the U.S. Drug Quality and Security Act, or DQSA, compoundsprovides prescription compounded medications, including compounded sterile prescription drugs,preparations and certain nonsterile drugs,compounds, to patients, physician clinics, hospitals, surgery centers and other clients throughout most of the United States. USC’s product offerings broadly include, among others, corticosteroids, hormone replacement therapies, hospital outsourcing products, injectables, urological preparations, topical compounds for pain and men’s and women’s health products. USC’s compounded formulations in many circumstances are offered as alternatives to drugs approved by the FDA. USC also provides certain veterinary pharmaceutical products for animals.

Recent Developments

Epinephrine Injection USP 1:1000 0.3mg Pre-filledPre-Filled Single Dose Syringe

OOn n June 15, 2017, the U.S. Food & Drug Administration, or FDA approved the Company’s EpinephrineSymjepi™ (epinephrine) Injection USP, 1:1000 (0.3 mg Pre-filled single dose syringe), or PFS,0.3mg product for the emergency treatment of allergic reactions (Type I) including anaphylaxis. The FDA approved also the trade nameSymjepi™ (epinephrine) Injection 0.3mg is intended to deliver a dose of “Symjepi™” for the product. The approval was pursuant to the FDA’s review of the Company’s New Drug Application, or NDA, which was amended and resubmitted in December 2016, pursuant to the Food, Drug & Cosmetic Act, as amended, relating to the Epinephrine PFS product. Symjepi provides two single dose syringes of epinephrine, (adrenaline), which is used for emergency, immediate administration in acute anaphylactic reactions to insect stings or bites, allergic reaction to certain foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis.anaphylaxis for patients weighing 66 pounds or more.

On September 27, 2018, FDA approved our lower dose version (0.15mg) of Symjepi™ (epinephrine) Injection, for the emergency treatment of allergic reactions (Type I) including anaphylaxis in patients weighing 33 to 65 pounds. In connectionJuly 2018, we entered into a Distribution and Commercialization Agreement with Sandoz Inc., a division of Novartis AG, to commercialize our processSymjepi™ (epinephrine) Injection 0.3 mg product, as well as the lower dose Symjepi™ (epinephrine) Injection 0.15mg product. Under the terms of exploring commercialization options forthe agreement, we appointed Sandoz as the exclusive distributor of Symjepi in the U.S.United States and related territories, or the Territory, in all fields including both the retail market afterand other markets, and granted Sandoz an exclusive license under our patent and other intellectual property rights and know-how to market, sell, and otherwise commercialize and distribute the FDA approvalproduct in June 2017, we retained an investment bankthe Territory, subject to assist us.  We determined to engage in a process with the goal of maximizing the valueprovisions of the asset.agreement, in partial consideration of an upfront fee by Sandoz and potential performance-based milestone payments. The process has been ongoing and asagreement provides that Sandoz will pay to us 50% of the date of this Report on Form 10-Q, we areNet Profit from Net Sales, as each such term is defined in active discussions with several potential partners regarding commercializationthe agreement, of the product.  We have begun building inventoryproduct in anticipation of a commercial launch.  However, the timing of a launch will dependTerritory to third parties, determined on a number of factors, including without limitation whether we enter into an agreement with a commercialization partner and, if we enter into such an agreement,quarterly basis. We will be the planssupplier of the commercialization partner.  Asproduct to Sandoz, and Sandoz will order and pay us a result, there are no assurances regarding whether wesupply price for quantities of products ordered. We will enter into an agreement with a commercialization partner, when we may enter into any such agreement, orbe responsible for all manufacturing and, prior to Sandoz paying the date of a commercial launch of Symjepi.supply price, the component and supply costs related to manufacturing and supplying the product to Sandoz.  

APC-1000 

We are continuing developmentSandoz has agreed to use commercially reasonable efforts to commercialize the product, subject to various conditions and to the other provisions of the agreement. The agreement does not include minimum payments to us by Sandoz, minimum requirements for sales of product by Sandoz or, with certain exceptions, minimum purchase commitments by Sandoz. Under the agreement, Sandoz has sole discretion in determining pricing, terms of sale, marketing, and selling decisions relating to the product.

On January 16, 2019, we announced that Sandoz had launched Symjepi™ (epinephrine) 0.3 mg Injection in the U.S. market. Symjepi™ will be rolled out via a phased launch and will initially be available in the institutional setting, an established channel where Sandoz has a significant experience and knowledge, followed by anticipated introduction into the retail market. We also anticipate that Sandoz will launch the lower dose Symjepi™ 0.15 mg Injection product in the U.S. markets. See Note 2 to the financial statements for further information about the agreement.

Asthma; APC-1000 Metered Dose Inhaler

Our APC-1000 product candidate is a steroid hydrofluoroalkane, or HFA, metered dose inhaler product, intended for the treatment of asthma. Our product candidate, if developed and approved for marketing, will target a small niche within the larger market for respiratory products. We estimate that the annual global sales of prescription steroid HFA and similar products were approximately $2.7 billion in 2018, of which we intend to target a subset of that market.

In February 2015, we announced the result of our pharmacokinetic study, or PK study, comparing our beclomethasone dipropionate HFA, 80 mcg Inhalation Aerosol, product, APC-1000, with Teva Respiratory, LLC’s Qvar® (Beclomethasone Dipropionate HFA, 80 mcg Inhalation Aerosol) product. The study was a Phase I open label, randomized, single-dose, four-way crossover PK study comparing APC-1000 to Qvar. The purpose of this PK study was to compare the bioavailability of APC-1000 to Qvar.  The results showed the extent of absorption of APC-1000 to be equivalent to Qvar. Following discussions with the FDA and additional consideration of the development pathway for the product, we have decided to conduct additional development work for APC-1000. Our

In January 2018, we submitted an IND application to the FDA to begin Phase 3 efficacy studies for a new formulation of APC-1000. We received approval from the agency to proceed with the Phase 3 studies, and in December 2018, we initiated the start-up phase of the phase 3 studies of APC-1000. We anticipate that trial enrollment could commence in 2019.  However, we have delayed the continuation of the start-up phase and start of patent enrollment for the studies in light of, among other factors, the availability of adequate funding to continue and complete the studies.  The timing of enrollment for, and the pace of conduct, progress, and completion of, such studies, and our decisions concerning such matters, are affected by a number of factors, including without limitation the availability of adequate funding, the absence of unexpected regulatory issues or delays, the time period required to enroll a sufficient number of patients in the study, and the time required to complete and analyze the results of the studies. As discussed elsewhere in this Report, we will require additional funding to continue all of our anticipated product development timelinesactivities, and product development times are subject to a number of risks and uncertainties, which can delay the actual development time.  Our development plans concerningtime beyond our allergyestimates.  

Naloxone Injection (APC-6000)

Naloxone is an opioid antagonist used to treat narcotic overdoses. Naloxone, which is generally considered the drug of choice for immediate administration for opioid overdose, blocks or reverses the effects of the opioid, including extreme drowsiness, slowed breathing, or loss of consciousness. Common opioids include morphine, heroin, tramadol, oxycodone, hydrocodone and respiratory products, including APC-1000,fentanyl.

As announced in December 2018, the Company filed an NDA relating to its higher dose naloxone injection product for the treatment of opioid overdose.  On March 14, 2019, the Company received notice from the FDA that it had determined the NDA was sufficiently complete to permit a substantive review, and the agency provided a target agency action date of October 31, 2019.  The Company is currently exploring commercialization options for the Naloxone product and is engaged in discussions with potential commercialization and marketing partners.

Tadalafil (APC-8000)

Tadalafil (Cialis®) is in a class of drugs called phosphodiesterase-5, or PDE5, inhibitors which includes, among others, sildenafil (Viagra®) and vardenafil (Levitra®). All of these oral tablets are affected by developmentsFDA approved and clinically indicated for the treatment of ED. Tadalafil and sildenafil are also indicated for pulmonary hypertension, but among PDE5 drugs, only tadalafil is approved for the treatment of BPH. We estimate that annual sales of Cialis in the marketplace, includingUnited States in 2018 were approximately $2.5 billion, based on publicly available information. 

On December 28, 2018, we filed an NDA for fast-disintegrating sublingual version of tadalafil (APC-8000) with the introductionFDA. On February 26, 2019, we received a refusal to file letter from the FDA, indicating that upon its preliminary review, the FDA determined that the submitted NDA was not sufficiently complete to permit a substantive review.  The FDA requested that we supplement and include in any resubmitted NDA (i) longer real-time (versus accelerated) stability data and (ii) additional dissolution data for both the clinical and registration batches. The agency indicated that it would refund 75% of potentially competing newthe total user fee that we submitted with the NDA. After reviewing and considering the FDA’s comments, we have determined that the information, data and deliverables that the agency would require for a resubmitted NDA to be deemed complete would require significant additional time and resources to complete.  For that reason and to prioritize our financial resources among our activities, products byand product candidate pipeline, we have determined not to devote significant resources to further development work on APC-8000 at the present time.  We intend to continue to evaluate the market potential for this product candidate relative to our competitors. For example, certain productsother pipeline product candidates, and we could determine in the future to continue development of APC-8000. However, we cannot provide any assurances concerning the likelihood of continuing the development of APC-8000, or the amount of time or costs that previously have been available by prescription only have been approvedmay be associated with the activities and data that may be required to enable a resubmission of the NDA. If we determine to resubmit the NDA, there can be no assurances concerning the acceptance of the NDA by the FDA, and introduced for sale over-the-counter without a prescription at a lower price than competing prescription products, and other new allergythe review time by FDA, or respiratory products have been or could in the future also be approved as “branded generic” products or as over-the-counter products. Such products could be sold at lower prices than prescription products, could adversely affect the willingness of health insurers or other third party payorsFDA’s response to reimburse patients for the cost of prescription products, and could adversely affect our ability to successfully develop and market product candidates in our pipeline. As a result, our product development plans could be affected by such considerations. The anticipated dates for development and introduction of products in our allergy and respiratory product pipeline will depend on a number of factors, including the availability of adequate funding to support product development efforts. We believe that should we decide to pursue such applications, we would be required to submit data for an application for approval to market APC-1000 pursuant to Section 505(b)(2), although there are no assurances that this will be the case. We believe that the next pivotal trial for APC-1000 would be a Phase 3 pivotal trial, although there are no assurances that this will be the case or concerning the timing of any regulatory filings that we may make relating to commencement of clinical trials regarding the APC-1000 product.resubmitted NDA. 

Going Concern and ManagementManagement’s Plan

Our independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our consolidated financial statements for the years ended December 31, 20162018 and 20152017 indicating that we have sustained substantial losses from continuing operations and have used, rather than provided, cash in our continuing operations, and incurred recurring losses from operations and have limited working capitalare dependent on additional financing to pursuefund operations, and that these conditions raise substantial doubt about our business alternatives.ability to continue as a going concern.  As of September 30, 2017,March 31, 2019, we had cash of approximately $24.3$9.2 million, including approximately $1.0 million in restricted cash, an accumulated deficit of approximately $106.0$161.9 million, and liabilities of approximately $10.3$12.9 million. As noted below under the heading “Liquidity and Capital Resources” appearing elsewhere herein, in April 2017, we completed an underwritten public offering of shares of common stock resulting in estimated net proceeds, after underwriting discounts and estimated offering expenses, of approximately $16.0 million. In addition, in July and August 2017, we received approximately $16.5 million of proceeds from the exercise of certain warrants (see Note 9). However,We anticipate that we will need additionalsignificant funding forduring 2019 to continue operations, satisfy our obligations and fund the future operations and the expenditures that we believe will be required to support commercialization of our products and conduct the clinical development and regulatory activities relatingwork to develop our product candidates, commercially launch any products that may be approved by applicable regulatory authorities, market and sell products, satisfy existing obligations and liabilities, and otherwise support our intended business activities and working capital needs.candidates. Such additional funding may not be available, may not be available on reasonable terms, and, in the case of equity funding, 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.

T

Thehe above conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements included elsewhere herein for the three months and nine months ended September 30, 2017,March 31, 2019, 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 condensed 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 unaudited condensed consolidated 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 in 2019 from debt or equity financing, sales of assets, sales or out-licenses of intellectual property, products, product candidates or technologies, or from a business combination or a similar transaction, after expenditure of our existing cash resources and revenues from existing agreements and sales of prescription compounded formulations, we would exhaust our resources and would 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 intellectual property assets, products, product candidates or technologies, seeking partnerships with other pharmaceutical companies or third parties to co-develop and fund research and development efforts, or similar transactions, and through revenues from existing agreements and sales of prescription compounded sterile formulations. However, there can be no assurance that we will be able to obtain any required additional funding. If we are unsuccessful in securing sufficient funding from any of these sources, we will defer, reduce or eliminate certain planned expenditures, delay development or commercialization of some or all of our products and reduce the scope of our operations. 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.

Results of Operations

NineThree Months Ended September 30, 2017March 31, 2019 and 20162018

In the discussion below, amounts of our revenues

Revenues.  Revenues were approximately $4,906,000 and expenses$3,179,000 for the ninethree months ended September 30, 2016, do not include revenuesMarch 31, 2019 and expenses of USC for2018, respectively.  Revenues increased by approximately $1,727,000 in the first quarter of 2016 and through April 11, 2016, the date on which we acquired USC, but do include revenues and expenses relating to USC after the date of acquisition.

Revenues

Revenues were approximately $10,231,000 and $4,004,000 for the nine months ended September 30, 2017 and 2016, respectively.  Revenues for the nine-month period ending September 30, 2016 were adversely affected by the suspension of production of USC’s sterile compounded formulations, product recall and remediation efforts in the third and fourth quarters of 2015 and the first quarter of 2016. USC resumed production and sales of compounded sterile formulations in March and April 2016. The suspension of production and sales of compounded sterile formulations adversely affected USC’s relationships with certain of its customers and adversely affected sales of compounded sterile formulations in 2016. The increase in revenues for the first nine months of 20172019 compared to the comparable period of 2016 was primarily due to the2018. The increase in revenues of USC for the first quarter of 2016 and through the April 11, 2016, acquisition date not being included in our revenues for 2016 as well asreflected an increase in the volume of sales of USC’s compoundedsterile pharmaceutical formulations resulting in part from increased salesan increase in production capacity in order to meet product demand and marketing personnel and efforts. The increase in revenue for the three-month period 2019 was supplemented by approximately $465,000 of outsourced manufacturing revenue relating to sales of Symjepi™ (epinephrine) Injection 0.3mg. There was no revenue relating to sales of that product for the three months ended March 31, 2018.

Cost of Goods Sold. C

Costost of goods sold was approximately $5,638,000$3,625,000 and $3,167,000$2,063,000 for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively.  The cost of goods sold for the nine-month period ended September 30, 2016 consists of cost of goods sold of compounded formulations by USC after the April 11, 2016 acquisition date, but does not include the cost of goods sold of USC before the closing date of the acquisition.  Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. The gross margin percentage for the three months ended March 31, 2019 was approximately 26% compared to approximately 35% for the three months ended March 31, 2018. The cost of goods sold did notfor the three-month 2019 period compared to the three-month period of 2018 increased primarily due to the increase proportionately withof approximately $573,000 in compensation, consulting services and other employee benefits as a result of new hires related to the increase in revenue fromproduction and added shifts at USC. Approximately $989,000 of the nineincrease was due to an increase in direct materials, supplies and obsolete inventory; caused by an increase in production of compounded formulations and Symjepi™ (epinephrine) Injection 0.3mg. 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) consist primarily of depreciation and amortization, legal fees, accounting and audit fees, professional/consulting fees and employee compensation. SG&A expenses for the three months ended September 30, 2016March 31, 2019 and 2018 were approximately $8,021,000 and $6,474,000, respectively. Compensation expense for SG&A employees increased by approximately $841,000 for the three-month period in 2019 year compared to 2017,the same period in 2018, primarily becausedue to new hires, increase in sales commissions related to the increase in sales, increases in salary expenses and bonus accruals, and expenses associated with equity compensation and other employee benefits.  Approximately $498,000 of production efficiencies achievedthe increase for the three-month period in 2017.2019 compared to the same period in 2018 was primarily due to the PDUFA fees for the Symjepi™ (epinephrine) Injection 0.15mg approved in September 2018; expenses related to certain of our product candidates; and outside services and professional fees related to business development, legal and other related services.  Approximately $208,000 of the increase for the first quarter of 2019 compared to the same period of 2018 was due to increases in patent expenses primarily related to our product candidates and Symjepi™ (epinephrine) Injection; and increases in rent expense, supplies, and other related expenses.

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 $3,944,000$2,197,000 and $8,325,000$2,249,000 for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The decrease in research and development expenses for the ninethree months ended September 30, 2017,March 31, 2019, compared to the comparable2018 period of the prior year was primarily due to a reductiondecrease of approximately $5,057,000$1,409,000 in development costs of our product candidates, including our Dry Powder Inhaler (DPI) products, Epinephrine PFS, APC-2000, APC-100,APC-5000, APC-6000, APC-7000, and TeloBVax product candidates. This amountAPC-8000, including approximately $970,000 of refunded filing fees for an NDA for APC-8000 filed in December 2018.  The decrease was partially offset by an increase of approximately $614,000$836,000 in development costs attributed to the APC-1000 product candidate. 

Selling, General and Administrative Expenses 

Selling, general and administrative expenses ("SG&A") consist primarily of depreciation and amortization, legal fees, accounting and audit fees, professional/consulting fees and employee compensation. SG&A expenses for the nine months ended September 30, 2017 and 2016 were approximately $16,975,000 and $12,535,000, respectively. The increase in the 2017 period compared to 2016 was primarily due to an increase in SG&A expenses relating to our USC subsidiary, which to a significant extent resulted from the fact that SG&A expenses of USC for the first quarter of 2016 and through April 11, 2016, before the date of our acquisition of USC, are not included in our SG&A expenses for the 2016 period. The increase in SG&A expenses relating to USC was also attributable to increases in compensation expenses associated with increased sales revenues from USC compounded formulations; compensation expenses of USC employees,Symjepi™ (epinephrine) Injection products, which includes salariesadditional maintenance and wages, stock optionsvalidation costs of its assembly lines; and employee benefits;general research and expenses associated withdevelopment consulting and other salesrelated expenses.  Compensation for research and marketing activities. SG&A expenses related to the commercialization activities of the Epinephrine PFS product candidate decreased by approximately $131,000 for the first nine months of 2017 compared to the comparable period of 2016.  Compensation expense for General and Administrativedevelopment employees increased by approximately $505,000$408,000 for the nine month periodthree months ended September 30, 2017,March 31, 2019, compared to the comparable2018 three-month period, of 2016, primarily due to new hires, increases in salary increases, stock options grantedexpenses and monthly accrual of bonus. Decreases in SG&Abonus accruals, and expenses associated with equity compensation and other employee benefits. Research and development costs for the first ninethree months of 2017 compared to the comparable period of 2016ended March 31, 2019 also included decreasesan increase of approximately $262,000 for business development, USC acquisition related expenses, travel, office expenses, taxes, facility and other expenses.  

Impairment Expense$113,000 of obsolete Symjepi™ inventory that is expected to expire before its sale.  

Impairment expenses for the nine months ended September 30, 2017 and 2016 were approximately $96,000 and $0.  The impairment expense was attributable to assets damaged during a flood at an off-site facility at USC. 

Other Expense. Other Income (Expense)

Other Income (Expense) for the nine month period ended September 30, 2017 and 2016, was approximately ($1,091,000) and $1,256,000, respectively. Other Income (Expense)(Expenses) consists primarily of expense on inducement to exercise warrants, interest expense, change in fair value of warrantsincome and change in fair value of derivative liabilities.interest expense. Other income (expense) for the three months ended March 31, 2019 and 2018 was approximately $50,000 and ($12,000), respectively.  The increase in other expensesincome and decrease in 2017other expense during the three-month period in 2019, compared to the same period in 2018, was primarily due to the exercise and cancellation of warrants and derivatives in 2016 which accounted for the approximately $1,397,000 of income, offset by debt related expense (Interest Expense)decrease of approximately $141,000 for the nine months ended September 30, 2016,$27,000 in interest expense and to approximately $960,000a $35,000 increase in expenses incurred by the Company for the nine month period ended September 30, 2017, relating to inducement to exercise warrants, and $180,000 in debt related expenses, partially offset by recorded interest income from deposits of approximately $49,000.income.  The expenses on inducement to exercise warrants was in connection with the transactions entered into by the Company in the third quarter of 2017 with certain warrant holders to exercise certain warrants at a reduced exercise price. The increasedecrease in debt related expenses for the nine monththree-month period ended September 30, 2017,March 31, 2019, compared to the comparable period in 20162018 was due to interest payments related to the working capital loan in the principal amount of $2.0 million and other bank liabilitiesloan obligations assumed in connection with the acquisition of USC in April 2016. 

Three Months Ended September 30, 2017 and 2016

Revenues

Revenues were approximately $3,388,000 and $2,076,000 for the three months ended September 30, 2017 and 2016 respectively. Revenues for the three-month period ending September 30, 2016 were adversely affected by ongoing effect of the suspension of production of USC’s sterile compounded formulations, product recall and remediation efforts in the third and fourth quarters of 2015 and the first quarter of 2016. USC resumed production and sales of compounded sterile formulations in March and April 2016. The suspension of production and sales of compounded sterile formulations adversely affected USC’s relationships with certain of its customers and adversely affected sales of compounded sterile formulations in 2016. The increase in revenues for the third quarter of 2017 compared to the comparable period of 2016 also reflected an increase in the volume of sales of USC’s compounded pharmaceutical formulations resulting in part from increased sales and marketing personnel and efforts.   

Cost of Goods Sold

Cost of goods sold was approximately $2,092,000 and $1,821,000 for the three months ended September 30, 2017 and 2016, respectively. Our cost of goods sold includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, shipping and handling costs, the write-off of obsolete inventory and other related expenses. The cost of goods sold did not increase proportionately with the increase in revenue from the third quarter of 2016 compared to 2017, primarily because of production efficiencies achieved in 2017. 

 Research and Development Expenses

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 $1,248,000 and $1,494,000 for the three months ended September 30, 2017 and 2016, respectively. The decrease in research and development expenses for the third quarter of 2017 compared to the third quarter of 2016 was primarily due to a reduction of approximately $467,000 in development costs of our product candidates, including our Dry Powder Inhaler (DPI) products and our Epinephrine PFS product, which was approved by the FDA in June 2017, partially offset by an increase of approximately $221,000 in compensation expense related to research and development activities.  

Selling, General and Administrative Expenses 

Selling, general and administrative ("SG&A") expenses consist primarily of depreciation and amortization, legal fees, accounting and audit fees, professional/consulting fees and employee compensation. SG&A expenses for the three months ended September 30, 2017 and 2016, were approximately $5,748,000 and $5,335,000, respectively. The increase was primarily due to the increase in compensation expense for SG&A employees of approximately $274,000 for the three month period ended September 30, 2017, compared to the comparable period of 2016, as a result of salary increases, new hires, stock options granted and accrual of bonus. SG&A expenses for the third quarter of 2017 compared to the comparable period of 2016 also increased by approximately $87,000 related to the commercialization activities of the Epinephrine PFS product candidates, and by approximately $159,000 related to business development, insurance, IT consulting, facility and other expenses, partially offset by a decrease of approximately $107,000 in legal expenses.

Impairment Expense

Impairment expenses for the three months ended September 30, 2017 and 2016 were approximately $96,000 and $0.  The impairment expense is attributable to assets damaged during a flood at an off-site facility at USC.

Other Income (Expense)

Other Expense for the three month period ended September 30, 2017 and 2016, was approximately $973,000 and $69,000, respectively. Other Income (Expense) consists primarily of expense on inducement to exercise warrants and interest expense, offset by interest income earned from deposits. The increase was primarily due to the inducement expense of approximately $960,000, resulting from the transaction entered into by the Company in the third quarter of 2017 with certain warrant holders to exercise certain warrants at a reduced exercise price. The decrease in interest income (expense) for the three month period ended September 30, 2017 compared to the comparable period of 2016 is attributed to debt related expenses, full payment of our USC working capital loan and an offset by interest earned from deposits.

being fully paid off.  

Liquidity and Capital Resources

We have incurred net losses of approximately $17.5$8.9 million and $20.1$7.6 million for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. Since inception, and through September 30, 2017,March 31, 2019, we have an accumulated deficit of approximately $106.0$161.9 million. Since inception and through September 30, 2017,March 31, 2019, we have financed operations principally through debt financing and through public and private issuances of common stock and preferred stock, and through public offerings of common stock. We have primarily devotedanticipate that if our resources for general corporate purposes, which have includedexisting cash together with revenues in future quarters during 2019 are not sufficient to cover our expenses, we will need additional funding for researchduring 2019 to satisfy our obligations 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. In April 2017,fund the future expenditures that we completed an underwritten public offering of 4,928,572 shares of common stock at a public offering price of $3.50 per share, resulting in net proceeds, after underwriting discounts and estimated offering expenses, of approximately $16.0 million. In July 2017, a total of 3,680,014 investor warrants were exercised for cash that resulted in gross proceeds of approximately $10.6 million.   In August 2017, a total of 2,035,648 investor warrants were exercised for cash that resulted in gross proceeds of approximately $5.9 million. As partbelieve will be required to support commercialization of our acquisition of USC in April of 2016, we assumed debt of approximately $5.7 million, of which approximately $3.2 million remains outstanding,products and entered into a secured $2 million line of credit agreement.conduct the clinical and regulatory work to develop our product candidates. We expect to finance future cash needs primarily through proceeds from equity or debt financings, loans,sales or out-licensing or intellectual property assets, products, product candidates or technologies, seeking partnerships with other pharmaceuticals companies or third parties to co-develop and fund research and development efforts, or similar transactions, and through revenues from existing agreements and sales of assets, out-licensing transactions, and/or collaborative agreements with corporate partners.prescription compounded formulations.

Total assets were approximately $56.3$52.7 million and $37.8$58.4 million as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively.   Current assets exceed current liabilities by approximately $19.8$6.1 million at September 30, 2017.and $14.2 million as of March 31, 2019 and December 31, 2018, respectively. 

Net cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, was approximately $9.9$8.3 million and $17.9$7.9 million, respectively. Net cash used in operating activities declinedincreased primarily due to the increase in revenueoperating losses; increase in accounts receivable and reductionprepaid expenses; and a decrease in researchaccounts payable and development spending.accrued expenses as compared to 2018.

NetNet cash provided by (used in)used in investing activities was approximately $(1,483,000)$1,666,000 and $365,000$201,000 for ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The net cash used in investing activities increased primarily due to the acquisitionpurchase of newadditional equipment.

Net cash provided byused in financing activities was approximately $30.6 million$142,000 and $22.2 million$120,000 for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. Net cash flows provided byused in financing activities increased for the period ended September 30, 2017 due to the issuanceconsisted of common stockprincipal payments of finance leases and warrant exercises generating net proceeds of approximately $32.8 million offset by the payment of loans of approximately $2.2 million; in 2016, capital raised from issuance of preferred stock, common stockUSC's building and warrant exercises totaled approximately $20.2 million and proceeds of bank loan amounted to approximately $2 million.equipment loans.   

As

As noted above under the heading “Going Concern and Management Plan,” through September 30, 2017,March 31, 2019, Adamis had incurred substantial losses. The availability of any required additional funding cannot be assured. If we do not obtain required additional equity or debt funding, that mayour cash resources could be required in the future,depleted and we could be required to materially reduce or suspend operations. Even if we are successful in obtaining required additional funding to permit us to continue operations at the levels that we desire, substantial time may pass before we obtain regulatory marketing approval for any of our product candidates other than our Epinephrine PFS product oradditional specialty pharmaceutical products and begin to realize revenues from sales of any of oursuch additional products, and during this period we willAdamis could require additional funds to continue operations and development of our product candidates.funds. No assurance can be given as to the timing or ultimate success of obtaining any required future funding that mayfunding. The Company will be required.  

As we have previously disclosedrequired to devote additional cash resources, which could be significant, in our SEC filings, in connection with our acquisition of USCorder to continue development and the transactions contemplated by the Merger Agreement relating to the USC acquisition, we assumed approximately $5,722,000 principal amount of debt obligations under two loan agreements and related loan documents relating to the building, real property and equipment that certain third parties agreed to transfer to the Company or USC in connection with the Merger, as well as the two loan agreements to which USC is a party, a working capital loan and an equipment loan, and related loan documents evidencing loans previously made to USC, and we agreed to become an additional co-borrower under the USC Loan Documents.  The lender in all of the USC Loan Documents was First Federal Bank and/or its successor Bear State Bank, referred to as Lender or the Bank.  In November 2016, we entered into amendmentscommercialization of our loan agreements with the Bank. Under the loan agreementsproduct candidates and with the full pay off of the USC Working Capital Line, we are required to make current periodic interestsupport our other operations and principal payments under the Amended Loan Documents, in an amount of approximately $49,000 per month; the amount of required interest payments is subject to change depending on future changes in interest rates.  The balances of the Building Loan and Equipment Loan are due and payable on August 8, 2019 and October 1, 2019, respectively. We also entered into a loan and security agreement with the Lender, referred to as the Adamis Working Capital Line, pursuant to which we 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 our loan agreement with the Bank, 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. Our obligations under the Adamis Working Capital Line are secured by certain collateral, including without limitation our interest in amounts that we have loaned to USC; a warrant that we issued to the Lender to purchase up to 1,000,000 shares of our common stock at an exercise price equal to par value per share, only exercisable by Lender if we are in default under the loan documents and if the Lender delivers a notice to us and we do not cure the default within the applicable cure period; and our Certificate of Deposit (“CD”) with the Lender of approximately $1,000,000.activities.  

Critical Accounting Policies and Estimates

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

The Company’s critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162018 have not significantly changed. Refer tochanged, except as described in Note 1 to the accompanying financial statements ofincluded in this Quarterly Report on Form 10-Q, forincluding regarding the updates to certain policiesadditional policy adopted during the ninethree months ended September 30, 2017.March 31, 2019.

Recent Accounting Pronouncements

Recent

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

Off Balance Sheet Arrangements

At September 30, 2017,March 31, 2019, Adamis did not have any off balance sheet arrangements. 

ITEM 3. Quantitative and Qualitative Disclosure of Market Risk

Not required.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We

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

As

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

Changes in Internal Controls Over Financial Reporting

There has been no change during the quarter ended September 30, 2017March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

 From time to time, we

We are and may bebecome involved in or subject to various legalroutine litigation, claims, disputes, proceedings that ariseand investigations in the ordinary course of business. Any such litigation could divert management time and attention from Adamis, could involve significant amounts of legal fees and other fees and expenses, or could have a material adverse effect on our financial condition, cash flows or results of operations. 

On September 26, 2018, the company brought action against Belcher Pharmaceuticals, LLC (“Belcher”) in the United States District Court for the Middle District of Florida for a declaratory judgment (“Complaint”) of non-infringement of certain patents in which Belcher claims rights, relating to certain methods of preparing epinephrine solutions and treating allergic reactions using a method of preparing certain epinephrine solutions (collectively the “Patents-in-Suit”).  The Complaint seeks a declaratory judgment that the company’s Symjepi™ (epinephrine) Injection product (“Symjepi”) does not infringe the Patents-in-Suit.  On November 7, 2018, Belcher filed its Answer and Counterclaim to the Complaint and alleged that the company infringes the Patents-in-Suit as a result of the Symjepi product.  Belcher’s Counterclaim seeks damages and injunctive relief in conjunction with the infringement claims.  The company responded to the Counterclaim by generally denying any wrongdoing and asserting the affirmative defense that the Patents-in-Suit are invalid.  The parties exchanged initial disclosures and initiated discovery in January 2019.  On December 28, 2018, Belcher filed a reissue application for one of the Patents-in-Suit seeking to amend the asserted claims and correct an improper benefit claim.  On March 29, 2019, the parties agreed to stay the litigation at the District Court pending the outcome of the reissue application and the company’s forthcoming petition for inter partes review, filed with the U.S. Patent and Trademark Office in April 2019, to challenge the validity of the remaining Patent-in-Suit.  The Company believes that its Symjepi product does not infringe any valid and enforceable patent held by Belcher, and that Belcher’s Counterclaim is without merit.  The Company intends to defend against Belcher’s claims and pursue all available legal remedies available to the company against Belcher.

Item 1A. Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business. Our business, financial condition, results of operations and future prospects could be materially and adversely affected by these risks if any of them actually occurs. In these circumstances, the market price of our common stock would likely decline. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business activities. Althoughat this time also may impair our business.

Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.

Our audited financial statements for the year ended December 31, 2018, were prepared under the assumption that we would continue our operations as a going concern. 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, 2018, indicating that we have incurred recurring losses from operations and are dependent on additional financing to fund operations, and that these factors raise substantial doubt about our ability to continue as a going concern. Uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on the market acceptance and success of our products and our ability to obtain additional funding in 2019 if required and thereafter, and there are no assurances that such funding will be available at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. Without additional required funds from debt or equity financings, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions or sources, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our stockholders would likely lose most or all of their investment in us.

We may require additional funding to continue as a going concern.

We incurred net losses of approximately $39.0 million and $8.9 million for the year ended December 31, 2018 and the three months ended March 31, 2019, respectively, and a net loss of approximately $25.5 million for the year ended December 31, 2017.  At March 31, 2019, we had cash and cash equivalents of approximately $9.2 million, accounts receivable of approximately $1.8 million and liabilities of approximately $12.9 million. The development of our business will require additional funds in 2019 to help fund the development and commercialization of our products and product candidates and conduct research and development of other product candidates, as well as to fund capital expenditures and our ongoing operations at USC and satisfy our obligations and liabilities. In addition to product revenues, we have historically relied upon sales of our equity or debt securities to fund our operations. We currently have no available balance in our credit facility or committed sources of capital. Delays in obtaining required funding could adversely affect our ability to develop and commercially introduce products and cause us to be unable to comply with our obligations under outstanding instruments. 

Our ability to obtain financing if required will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms, 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, and which could result in additional dilution to our stockholders. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all of their investment in us.

Statements in this Report concerning our future plans and operations are dependent on our ability to secure adequate funding and the absence of unexpected delays or adverse developments. We may not be able to secure required funding.

The statements contained in this Report concerning future events or developments or our future activities, such as concerning current or planned clinical trials, anticipated research and development activities, anticipated dates for commencement of clinical trials, anticipated completion dates of clinical trials, anticipated meetings with the FDA or other regulatory authorities concerning our product candidates, anticipated dates for submissions to obtain required regulatory marketing approvals, anticipated dates for commercial introduction of products, and other statements concerning our future operations and activities, are forward-looking statements that in each instance assume that we have or are able to obtain sufficient funding to support such activities and continue our operations and planned activities in a timely manner. There can be no assurance that this will be the case. Also, such statements assume that there are no significant unexpected developments or events that delay or prevent such activities from occurring. Failure to timely obtain any required additional funding, or unexpected developments or events, could delay the occurrence of such events or prevent the events described in any such statements from occurring which could adversely affect our business, financial condition and results of legal proceedings cannotoperations. 

We have incurred losses since our inception, and we anticipate that we will continue to incur losses. We may never achieve or sustain profitability.

We incurred net losses of approximately $39.0 million and $8.9 million for the year ended December 31, 2018 and the three months ended March 31, 2019, respectively, and a net loss of approximately $25.5 million for the year ended December 31, 2017.  From inception through March 31, 2019, we have an accumulated deficit of approximately $161.9 million.  We expect that these losses could increase as we continue our research and development activities, seek regulatory approvals for our product candidates and commercialize any approved products.  These losses will cause, among other things, our stockholders’ equity and working capital to decrease.  Any future earnings and cash flow from operations of our business are dependent on our ability to further develop our products and on revenue and profitability from sales of products.

There can be predictedno assurance that we will be able to generate sufficient product revenue and amounts payable to us under our commercialization agreement with certainty,Sandoz or other commercialization agreements that we may enter into to become profitable at all or on a sustained basis. We expect to have quarter-to-quarter fluctuations in revenue and expenses, some of which could be significant, due in part to variations in expenses and activities relating to research, development, clinical trial, marketing and manufacturing. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our products do not achieve market acceptance, we may never become profitable. As we commercialize and market products, we will need to incur expenses for product marketing and brand awareness and conduct significant research, development, testing and regulatory compliance activities that, together with general and administrative expenses, could result in substantial operating losses for the foreseeable future. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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

Except for our Symjepi products, we have not received regulatory approval for any drugs or products.  Since our fiscal 2010 year, except for revenues from sales of compounded pharmacy formulations after our acquisition of USC in 2016 and amounts that we may receive pursuant to our commercialization agreement with Sandoz, we have not generated commercial revenue from marketing or selling any drugs or other products.  We expect to incur substantial net losses for the foreseeable future.  We may never be able to commercialize any additional product candidates that are subject to regulatory approval or be able to generate revenue from sales of such products.  Because of the risks and uncertainties associated with developing and commercializing our specialty pharmaceuticals and other product candidates, we are not awareunable to predict when we may commercially introduce such products, the extent of any pending legal proceedingsfuture losses or when we will become profitable, if ever.  

Our limited operating history may make it difficult to evaluate our business and our future viability.

We are in the relatively early stage of operations and development of our current product candidates (other than our Symjepi products) and have only a limited operating history on which to base an evaluation of our business and prospects. Even if we successfully obtain additional funding, we are subject to the risks associated with early stage companies with a limited operating history, including without limitation: the need for additional financing; the uncertainty of research and development efforts resulting in successful commercial products, as well as the marketing and customer acceptance of such products; unexpected issues with the FDA or other federal or state regulatory authorities; regulatory setbacks and delays; unexpected delays in commercialization of products; competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; fluctuations in expenses; and dependence on corporate partners and collaborators. Any failure to successfully address these risks and uncertainties could seriously harm our business and prospects. We may not succeed given the technological, marketing, strategic and competitive challenges we will face. The likelihood of our success must be considered in light of the expenses, difficulties, complications, problems and delays frequently encountered in connection with the growth of a new business, the continuing development of new drug technologies, and the competitive and regulatory environment in which we are a partyoperate or of which anymay choose to operate in the future.

Many of our propertypotential products and technologies are in early stages of development.

The development of new pharmaceutical products is subjecta highly risky undertaking, and there can be no assurance that any future research and development efforts we might undertake will be successful. Many of our potential products will require significant additional research and development before any commercial introduction. There can be no assurance that any future research, development or clinical trial efforts will result in viable products or meet efficacy standards. Future clinical or preclinical results may be negative or insufficient to allow us to successfully market our product candidates. Obtaining needed data and results may take longer than planned or may not be obtained at all. Any such delays or setbacks could have a material adverse effect on our ability to achieve our financial goals.

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

The anticipated dates for development and introduction of products in our product pipeline will depend on a number of factors, including the availability of adequate funding to support product development efforts.

Our product development plans concerning our allergy and respiratory products and product candidates, including APC-1000, APC-4000, APC-6000 and APC-8000, are affected by many factors, many of which are difficult to predict.  Some of the factors that could affect our development plans for our products and product candidates include: the availability of adequate funding to support product development efforts and sales and marketing efforts for approved products; general market conditions and developments in the marketplace including the introduction of potentially competing new products by our competitors; the outcome of discussions with the FDA concerning the number and kind of clinical trials that the FDA will require before the FDA will consider regulatory approval of the applicable product; the outcome of discussions with the FDA concerning the regulatory approval pathway of the applicable product; the FDA’s review and acceptance of NDAs that we may file concerning our product candidates; any unexpected difficulties in licensing or sublicensing intellectual property rights that may be required for other components of the product; patent infringement lawsuits relating to Paragraph IV certifications as part of any Section 505(b)(2) or ANDA filings; any unexpected difficulties in the ability of our suppliers to timely supply quantities for commercial launch of the product; and unexpected delays or difficulties in assembling and deploying an adequate sales force to market the product if determined adverselywe decide to market a product ourselves rather than seek a commercialization partner.

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain, or may experience delays in obtaining, regulatory approval, or may not be successful in commercializing our planned and future products.

Like many companies our size, we do not have the ability to conduct preclinical or clinical studies for our product candidates without the assistance of third parties who conduct the studies on our behalf. These third parties are usually toxicology facilities and clinical research organizations, or CROs, that have significant resources and experience in the conduct of pre-clinical and clinical studies. The toxicology facilities conduct the pre-clinical safety studies as well as associated tasks connected with these studies. The CROs typically perform patient recruitment, project management, data management, statistical analysis, and other reporting functions. We intend to rely on third parties to conduct clinical trials of our product candidates and to use third-party toxicology facilities and CROs for our pre-clinical and clinical studies. We may also rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our products.

Our reliance on these third parties for development activities will reduce our control over these activities. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, we may be required to replace them, and our clinical trials may be extended, delayed or terminated. Although we believe there are a number of third-party contractors that we could engage to continue these activities, replacing a third-party contractor may result in a delay of the affected trial.

Delays in the commencement or completion of clinical testing of our product candidates could result in increased costs and delay our ability to generate significant revenues.

The actual timing of commencement and completion of clinical trials can vary dramatically from our anticipated timing due to factors such as funding limitations, scheduling conflicts with participating clinicians and clinical institutions, and the rate of patient enrollment. Clinical trials involving our product candidates may not commence or be completed as forecast. Delays in the commencement or completion of clinical testing could significantly impact our product development costs. We do not know whether current or planned clinical trials will begin on time or be completed on schedule, if at all. The commencement of clinical trials can be delayed for a variety of reasons, including delays in:

In addition, once a clinical trial has begun, it may be suspended or terminated by us or the FDA or other regulatory authorities due to a number of factors, including:

Clinical trials require sufficient participant enrollment, which is a function of many factors, including the size of the target patient population, the nature of the trial protocol, the proximity of participants to clinical trial sites, the availability of effective treatments for the relevant disease, the eligibility criteria for our clinical trials and competing trials. Delays in enrollment can result in increased costs and longer development times. Our failure to enroll participants in our clinical trials could delay the completion of the clinical trials beyond current expectations. In addition, the FDA could require us to conduct clinical trials with a larger number of participants than we may project for any of our product candidates. As a result of these factors, we may not be able to enroll a sufficient number of participants in a timely or cost-effective manner.

Furthermore, enrolled participants may drop out of clinical trials, which could impair the validity or statistical significance of the clinical trials. A number of factors can influence the discontinuation rate, including, but not limited to: the inclusion of a placebo in a trial; possible lack of effect of the product candidate being tested at one or more of the dose levels being tested; adverse side effects experienced, whether or not related to the product candidate; and the availability of numerous alternative treatment options that may induce participants to withdraw from the trial.

We may be required to suspend, repeat or terminate our clinical trials if the trials are not well designed, do not meet regulatory requirements or the results are negative or inconclusive, which may result in significant negative repercussions on business and financial condition.

Before regulatory approval for a potential product can be obtained, we must undertake clinical testing on humans to demonstrate the tolerability and efficacy of the product. We cannot assure you that we will obtain authorization to permit product candidates that are in the preclinical development phase to enter the human clinical testing phase. In addition, we cannot assure you that any authorized preclinical or clinical testing will be completed successfully within any specified time period by us, or without significant additional resources or expertise to those originally expected to be necessary. We cannot assure you that such testing will show potential products to be safe and efficacious or that any such product will be approved for a specific indication. Further, the results from preclinical studies and early clinical trials may not be indicative of the results that will be obtained in later-stage clinical trials. In addition, we or regulatory authorities may suspend clinical trials at any time on the basis that the participants are being exposed to unacceptable health risks.

We are subject to the risk of clinical trial and product liability lawsuits.

The testing of human health care product candidates entails an inherent risk of allegations of clinical trial liability, while the marketing and sale of approved products entails an inherent risk of allegations of product liability and associated adverse publicity. We currently maintain liability insurance coverage of up to a general aggregate of $3,000,000, with a $1,000,000 limit for each occurrence; and an excess liability insurance coverage of up to a general aggregate of $6,000,000, with a $4,000,000 limit for each occurrence. Such insurance policies are expensive and may not be available in the future on acceptable terms, or at all. As we conduct additional clinical trials and introduce products into the United States market, the risk of adverse events increases and our requirements for liability insurance coverage are likely to increase. We are subject to the risk that substantial liability claims from the testing or marketing of pharmaceutical products could be asserted against us in the future. There can be no assurance that we will be able to obtain or maintain insurance on acceptable terms, particularly in overseas locations, for clinical and commercial activities or that any insurance obtained will provide adequate protection against potential liabilities. An inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could inhibit our business. 

Moreover, our current and future coverages may not be adequate to protect us from all of the liabilities that we may incur. If losses from liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, a product or clinical trial liability action against us would individuallybe expensive and time-consuming to defend, even if we ultimately prevailed. If we are required to pay a claim, we may not have sufficient financial resources and our business and results of operations may be harmed. A product liability claim brought against us in excess of our insurance coverage, if any, could have a material adverse effect upon our business, financial condition and results of operations. 

We do not have commercial-scale manufacturing capability, and we lack commercial manufacturing experience. We will likely rely on third parties to manufacture and supply our product candidates for which we will be seeking FDA approval.

Except for our facilities at USC that are utilized to prepare compounded formulations, we do not own or operate manufacturing facilities for clinical or commercial production of pharmaceutical product candidates, we do not have any experience in drug formulation or manufacturing, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. Accordingly, we expect to depend on third-party contract manufacturers for the foreseeable future. Any performance failure on the part of our contract manufacturers could delay clinical development, regulatory approval or commercialization of our current or future product candidates, depriving us of potential product revenue and resulting in additional losses.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production.

These problems can include difficulties with production costs and yields, quality control (including stability of the product candidate and quality assurance testing), shortages of qualified personnel, and compliance with strictly enforced federal, state and foreign regulations. If our third-party contract manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations or under applicable regulations, our ability to provide product candidates to patients in our clinical trials or commercially would be jeopardized. If we file an application for marketing approval of the product and the FDA grants marketing approval, any delay or interruption in the aggregatesupply of product could delay the commercial launch of the product or impair our ability to meet demand for the product. Difficulties in supplying products for clinical trials could increase the costs associated with our clinical trial programs and, depending upon the period of delay, require us to commence new trials or qualify new manufacturers at significant additional expense, possibly causing commercial delays or termination of the trials.

Our products can only be reasonably expectedmanufactured in a facility that has undergone a satisfactory inspection by the FDA and other relevant regulatory authorities. For these reasons, we may not be able to replace manufacturing capacity for our products quickly if we or our contract manufacturer(s) were unable to use manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure, or other difficulty, or if such facilities were deemed not in compliance with the regulatory requirements and such non-compliance could not be rapidly rectified. An inability or reduced capacity to manufacture our products could have a material adverse effect on our business, financial condition, orand results of operations. Regardless

We are subject to substantial government regulation, which could materially adversely affect our business. If we do not receive regulatory approvals, we may not be able to develop and commercialize our technologies.

We need FDA approval to market our products in the United States that are subject to regulatory approval, and similar approvals from foreign regulatory authorities to market products outside the United States. The production and marketing of such products and potential products and our ongoing research and development, pre-clinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities in the United States and will face similar regulation and review for overseas approval and sales from governmental authorities outside of the United States. The regulatory review and approval process, which may include evaluation of preclinical studies and clinical trials of our products that are subject to regulatory review, as well as the evaluation of manufacturing processes and contract manufacturers’ facilities, is lengthy, expensive and uncertain. We have limited experience in filing and pursuing applications necessary to gain regulatory approvals. Many of the product candidates that we are currently developing must undergo rigorous pre-clinical and clinical testing and an extensive regulatory approval process before they can be marketed. This process makes it longer, more difficult and more costly to bring our potential products to market, and we cannot guarantee that any of our potential products will be approved. Many products for which FDA approval has been sought by other companies have never been approved for marketing. In addition to testing and approval procedures, extensive regulations also govern marketing, manufacturing, distribution, labeling, and record-keeping procedures. If we or our collaboration partners do not comply with applicable regulatory requirements, such violations could result in non-approval, suspensions of regulatory approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecution.