Item 2.

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements as of, and for, the three months ended March 31, 2016 and 2015 and our Annual Report for the year ended December 31, 2015 on Form 10-K, filed with the U.S. Securities and Exchange Commission, or the SEC, on March 23, 2016.

 

Forward-Looking Statements

 

This quarterly report for the quarterly period ended March 31, 2016 on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.   Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and may contain the words “estimate,” “project,” “intend,” “forecast,” “target,” “anticipate,” “plan,” “planning,” “expect,” “believe,” “will,” “will likely,” “is likely,” “should,” “could,” “would,” “may” or, in each case, their negative, or words or expressions of similar meaning.  These forward-looking statements include, but are not limited to, statements concerning our plans and timing to develop, market, launch and build our own commercial infrastructure and commercialize RI-002 and the success of such efforts, the expected timing of and our ability to obtain and maintain regulatory approvals for RI-002 and any other of our product candidates, and the labeling or nature of any such approvals; the timeframe within which we may receive approval from the U.S. Food and Drug Administration, or FDA, if at all, of our Biologics License Application, or BLA for RI-002, our dependence upon one manufacturer for RI-002 and the effect any adverse events on such manufacturer could have on us or our business; our ability to generate revenue, if any, from the potential commercialization of RI-002, if approved by the FDA;  the expected timing, progress and results of the clinical development, trials and regulatory approval; our plans to increase our supplies of plasma; the potential indications for our product candidates; regulatory processes; interpretations of final data; possible characteristics of RI-002; acceptability of RI-002 for any purpose by physicians patients or payers; concurrence by FDA with our conclusions and the satisfaction by us of its guidance;  the potential indications for our product candidates; the likelihood and timing of FDA action with respect to any further filings by us, results of the clinical development, continuing demonstrations of safety, comparability of results of RI-002 to other comparably run Injectable Immune Globulin (human), or IVIG trials; improvements in clinical outcomes; potential of RI-002 to provide meaningful clinical improvement for patients living with Primary Immune Deficiency Disease, or PIDD, as well as to offer clinicians an option for their immune compromised patients; market data and incidence of infection; potential clinical trial initiations; potential investigational new product applications; our intellectual property position; biologics license applications; expansion plans; the achievement or timing of clinical and regulatory milestones; our manufacturing capability, third-party contractor capabilities and strategy; our plans relating to manufacturing, supply and other collaborative agreements; our estimates regarding expenses, capital requirements and needs for additional financing; possible or likely reimbursement levels, if any, if and when RI-002 is approved for marketing; estimates regarding market size; projected growth and sales as well as our expectations of market acceptance of RI-002; and commercialization efforts relating to our product candidates and the runway and limitation of our available cash and our ability to identify alternative sources of cash.  The forward-looking statements contained in this report represent our estimates and assumptions only as of the date of this report and we undertake no duty or obligation to update or revise publicly any forward-looking statements contained in this report as a result of new information, future events or changes in our expectations, except as required by applicable law or rules.  Forward-looking statements are subject to many risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in our Annual Report for the year ended December 31, 2015 on Form 10-K as filed with the SEC on March 23, 2016, our Current Report on Form 8-K, dated April 27, 2016 and in other filings with the SEC.

 

 

In addition to the risks identified under the heading “Risk Factors” in the SEC filings referenced previously, many important factors affect our ability to achieve our plans and objectives and to successfully develop and commercialize our product candidates.   In addition, our results may be affected by our ability to manage our financial resources, difficulties or delays in developing manufacturing processes for our product candidates, preclinical and toxicology testing and regulatory developments. Delays in clinical programs, whether caused by competitive developments, adverse events, patient enrollment rates, regulatory issues or other factors, could adversely affect our financial position and prospects. Prior clinical trial program designs and results are not necessarily indicative of future clinical trial designs or results. If our product candidates do not meet safety or efficacy endpoints in clinical evaluations, they will not receive regulatory approval and we will not be able to market them. The FDA may not approve our BLA for RI-002, our data, our results, or permit us to proceed.  We may not be able to enter into any strategic partnership agreements. Operating expenses and cash flow projections involve a high degree of uncertainty, including variances in future spending rates due to changes in corporate priorities, the timing and outcomes of clinical trials, competitive developments and the impact on expenditures and available capital from licensing and strategic collaboration opportunities. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our drug development or discovery research programs and delay or abandon potential commercialization efforts. We may not ever have any products that generate significant revenue.

 

Therefore, current and prospective security holders are cautioned that there can be no assurance that the forward-looking statements included in this document will prove to be accurate.

 

Overview

 

We are a late-stage biopharmaceutical company that develops, manufactures, and intends to commercialize specialty plasma-based biologics for the treatment and prevention of certain infectious diseases. Our targeted patient populations include immune-compromised individuals who suffer from an underlying immune deficiency disorder or who may be immune-suppressed for medical reasons. Our product candidates are intended to be used by physician specialists focused on caring for immune-compromised patients with infectious diseases.

Our lead product candidate, RI-002, is intended for the treatment of PIDD, and has completed a pivotal Phase III clinical study.  In the third quarter of 2015, the FDA accepted for review, a BLA, for RI-002 for the treatment of PIDD.  The FDA could approve this BLA within approximately one year of its filing, in which case potential first commercial sales could occur as early as the fourth quarter of 2016. During the first half of 2016, we had mid-cycle and late-cycle communications with FDA regarding our BLA application. We continue to interact with the FDA in the normal course of business relating to their review of our BLA for RI-002.

 

 

As part of our current ongoing commercialization efforts, we plan to hire a small, specialty sales force to market RI-002 to hospitals, physician offices/clinics, and other specialty treatment organizations. We anticipate staffing additional personnel for patient support, medical affairs, quality assurance, regulatory affairs, scientific affairs, reimbursement, inventory and logistics, human resources, financial and operational management. If and when we receive FDA approval, we may also use a network of national distributors to fulfill orders for RI-002 for use by healthcare professionals and hospitals.

RI-002 demonstrated positive results in a Phase III study in patients with PIDD, meeting its primary endpoint, of no Serious Bacterial Infections, or SBI reported. RI-002 has been administered for a total of 793 infusions with zero serious adverse events to 59 patients in 9 treatment centers throughout the United States.  These results, included in the submission, more than meet the requirement specified by the FDA guidance of ≤ 1 SBI per patient-year.  RI-002 is intended for the treatment of PIDD. PIDD, a genetic disorder that causes a deficient or absent immune system, is caused by hereditary or genetic defects and can affect anyone regardless of age or gender.  PIDD patients are more vulnerable to infections and more likely to suffer complications from these infections.  IVIG is a plasma derived product that is used to prevent serious infections in patients with PIDD.  It is comprised of polyclonal antibodies, which are proteins produced by B-cells that are used by the body’s immune system to neutralize foreign objects such as bacteria and viruses.  RI-002, a specialty IVIG, derived from human plasma, which contains immune globulins extracted from source plasma in a manufacturing process called fractionation and is enriched with high levels of naturally occurring polyclonal antibodies (e.g., streptococcus pneumonia, H. influenza type B, Cytomegalovirus or CMV, measles, tetanus, etc.) as well as standardized levels of antibodies targeted to Respiratory Syncytial Virus, or RSV, is intended to prevent infections in PIDD patients. RSV is a common virus that ordinarily leads to mild, cold-like symptoms in healthy adults and children. In high-risk groups, such as the immune-compromised, RSV can lead to a more serious infection and may even cause death. The polyclonal antibodies which are present in RI-002 are expected to prevent infections in immune-compromised patients.  It is estimated that there are about 250,000 diagnosed PIDD patients in the United States, approximately half of whom are treated with IVIG regularly.  In the United States, sales of immune globulin products for all its uses were reported to be approximately $4.8 billion in 2014.

On February 22, 2015, at the 2015 American Academy of Allergy, Asthma & Immunology Annual Meeting, scientific investigators reported on the secondary outcomes that included: a total of 93 days, or 1.66 days per patient per year lost from work or school due to infection; one hospitalization due to an infection of only five days duration in the entire study and IgG trough levels above those required by the FDA for IVIG products. Additionally, there was a marked increase in all of the measured specific anti-pathogen antibodies in PK subjects (n=31). The mean of maximum fold increases in specific antibody levels after infusion of RI-002 ranged from 1.9 fold (S. pneumonia type 19A) to 5.3 fold (RSV), which were statistically significant fold increases from the pathogen's specific measured baselines. The safety profile of RI-002 is comparable to that of other immunoglobulins. These secondary outcome results follow the prior announcement that the trial achieved its primary endpoint with zero reported acute SBIs.

 

 

The RI-002 pivotal  trial was conducted as a single arm study in which patients were treated approximately once per month for a period of 12 months plus 90 days for follow up. Fifty-nine patients were enrolled in 9 treatment centers in the United States. The pivotal Phase III primary endpoint followed published FDA industry guidance, which provides for a reduction in the incidence of serious infections to less than one per year in each subject receiving IVIG. The secondary outcome was safety and included other pharmacokinetic, or PK, data collection points including antibody titers for certain agents, including RSV antibody levels at various time points after infusion.

We previously conducted a randomized, double-blind, placebo-controlled Phase II clinical trial to evaluate RI-001, RI-002’s predecessor product candidate, in immune-compromised, RSV-infected patients. This trial was conducted with 21 patients in the United States, Canada, Australia, and New Zealand. The Phase II dose-ranging trial demonstrated a statistically significant improvement in the change from baseline RSV titers to day 18 in the high dose and low dose treatment groups when compared with placebo (p=0.0043 and p=0.0268, respectively). The mean fold increase for high dose was 9.24 (95% CI 4.07, 21.02) and the observed mean fold increase for low dose was 4.85 (95% CI 2.22, 10.59). The mean fold change for placebo treated patients was 1.42 (95% CI 0.64, 3.17). In addition, more patients in the high dose (85.7%) and low dose (42.9%) groups experienced greater than a 4-fold increase from baseline to day 18 in RSV titer levels compared to placebo (0%). There were no serious drug-related adverse events reported during the trial.

From April 2009 through February 2011, RI-001 was also administered to 15 compassionate use patients where physicians requested access to the product for treating their patients with documented lower respiratory tract RSV infections. Serum samples were obtained from 13 patients. Samples showed that patients had a 4-fold or greater rise in RSV antibody titers from baseline. Serum samples were not obtained from two patients that received Palivizumab. The drug was well-tolerated in these 15 patients and there were no reports of serious adverse events attributable to RI-001. Data from our Phase II trial, compassionate use experience and testing of RI-002 in the cotton rat RSV animal model has been presented at various conferences during 2014, 2015 and 2016 which can be accessed on our website at www.admabiologics.com. .

During the second quarter of 2015, we received a notice of allowance from the United States Patent Office, or USPTO, for our RI-002 patent filed under U.S. patent application 14/592,721 entitled ‘Compositions and Methods for the Treatment of Immunodeficiency,’ which extends through January 2035. During the third quarter  our U.S. Patent 9,107,906 was issued by the USPTO.  Our proprietary microneutralization assay allows us to effectively identify and isolate donor plasma with high-titer RSV antibodies, to standardize RI-002’s antibody profile and thereby potentially garner a premium price.

We operate ADMA BioCenters , which are  two FDA-licensed, German Health Authority, or GHA, and Korean Ministry of Food and Safety, or MFDS, certified source plasma collection facilities located in Norcross, Georgia and Marietta, Georgia, which provide us with a portion of our blood plasma for the manufacture of RI-002. During the third quarter of 2014, we completed the expansion of our Norcross, Georgia ADMA BioCenters facility by securing additional rented space to increase our donor and collection screening areas to meet an increase in market demand for source plasma.  In 2014, we entered into another lease for a second plasma collection center in Marietta, Georgia, and we completed construction of this new facility during the fourth quarter of 2014. In November 2014, we announced the opening of this second plasma collection center in Marietta, Georgia, which received FDA approval in the third quarter of 2015. A typical plasma collection center, such as those operated by ADMA BioCenters, can collect approximately 30,000 to 50,000 liters of source plasma annually, which may be sold for different prices depending upon the type of plasma, quantity of purchase, and market conditions at the time of sale. Plasma collected from ADMA BioCenters' two Georgia facilities that is not used for making RI-002 is sold to third party customers in the United States, and other locations where we are approved globally under supply agreements or in the open "spot" market. We have entered into long term manufacturing and licensing agreements with Biotest AG and their United States subsidiary, Biotest Pharmaceuticals, Inc., together referred to as Biotest, that provide for the exclusive manufacture of RI-002. At the same time, we granted Biotest an exclusive, royalty-bearing license to market and sell RSV antibody-enriched IVIG in Europe and in other selected territories in North Africa and the Middle East.

 

 

Financial Operations Overview

 

Revenues

 

Revenues for the three months ended March 31, 2016 are comprised of product revenues from the sale of normal source human plasma collected from our plasma collection center segment and license revenues attributable to the out-licensing of RI-002, to Biotest AG to market and sell in Europe and selected countries in North Africa and the Middle East.  In exchange for the out-licensing of RI-002, Biotest AG and Biotest Pharmaceuticals Corporation, or Biotest, a subsidiary of Biotest AG, has provided us with certain financial payment and services in accordance with the related license agreement and is obligated to pay us certain amounts in the future if certain milestones are achieved.  

 

Our revenues are substantially attributable to a single customer.  Depending on the agreement with the customer, revenues from the sale of human plasma collected at our FDA licensed plasma collection centers are recognized at the time of transfer of title and risk of loss to the customer, which occurs at the time of shipment.  Revenue is recognized at the time of delivery if we retain the risk of loss during shipment.  Revenue from license fees and research and development services rendered are recognized as revenue when the performance obligations under the terms of the license agreement have been completed.

Research and Development Expenses

 

Research and development, or R&D expenses, attributable to our R&D segment, consists of clinical research organization costs, clinical trial costs related to our clinical trial, consulting expenses relating to regulatory and medical affairs, quality assurance and control, manufacturing, assay development, ongoing testing costs, drug product manufacturing including the cost of plasma, plasma storage and transportation costs, as well as wages and benefits for employees including stock-based compensation directly related to the R&D of RI-002.  All R&D is expensed as incurred.

 

The process of conducting pre-clinical studies, clinical trials and regulatory activities necessary to obtain FDA approval is costly and time consuming.  The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s early clinical data, investment in the program, competition, regulatory, manufacturing capabilities and commercial viability.  As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates.  Development timelines, probability of success and development costs vary widely. 

 

 

General and Administrative Expenses

 

General and administrative, or G&A expenses, consist of wages, stock-based compensation, benefits for senior management and staff unrelated to R&D, legal fees, accounting and auditing fees, commercialization and marketing activities, information technology, investor relations fees, rent, maintenance and utilities, insurance, travel and other expenses related to the general operations of the business.  The increased G&A expenses for the three months ended March 31, 2016 are primarily attributable to marketing, commercial planning, increased headcount, wages and benefits for employees, including stock-based compensation and consulting expenses associated with commercialization activities in preparation for anticipated product launch of RI-002 during the second half of 2016, assuming we receive FDA approval of our BLA during such period.  We expect that our G&A expenses will continue to increase throughout 2016 as a result of pre-launch, commercial planning activities, market research costs and the hiring of additional staff as part of the commercial development of RI-002.

 

Other Income and Expense

 

Interest income consists of interest earned on our cash and cash equivalents and short-term investments.  Interest expense consists of interest incurred on our notes payable, as well as the amortization of end of term fees, back end fees, value of warrants issued, facility and financing fees.

Results of Operations

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

Summary table

 

The following table presents a summary of the changes in our results of operations for the three months ended March 31, 2016 compared to the three months ended March 31, 2015:

 

 

 

Revenues

 

We recorded total revenues of $2,123,886 for the three months ended March 31, 2016 and $1,503,106 for the three months ended March 31, 2015. Product revenue was $2,088,178 for the three months ended March 31, 2016, compared to product revenue of $1,484,217 for the three months ended March 31, 2015.  Product revenue is attributable to our plasma collection centers segment and derived from the sale of human source plasma collected from our FDA-licensed plasma collection centers. The increase of $603,961 in product revenue was primarily a result of our second plasma collection center receiving FDA approval during the third quarter of 2015. Product revenue for the three months ended March 31, 2016 was primarily attributable to sales made pursuant to our plasma supply agreement with Biotest under which Biotest purchases normal source plasma from ADMA BioCenters to be used in their manufacturing.  License and other revenue was $35,708 for the three months ended March 31, 2016 and $18,889 for the three months ended March 31, 2015, which primarily relates to services for third parties and a financial payment by Biotest in accordance with our license agreement.  We have not generated any revenue from our therapeutics, research and development business segment.

Cost of Product Revenue

 

Cost of product revenue was $1,266,421 for the three months ended March 31, 2016, and $909,629 for the three months ended March 31, 2015.  The increase in cost of product revenue of $356,792 for the three months ended March 31, 2016 was directly related to the increase in product revenue primarily related to our second plasma center operations.

 

Research and Development Expenses

 

R&D expenses, which are attributable to our R&D segment, were $2,027,712 for the three months ended March 31, 2016, an increase of $625,989 from $1,401,723 for the three months ended March 31, 2015.  The increase in R&D expenses during the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was primarily attributable to increased testing and validation expenses for our lead product candidate, RI-002, along with increased headcount, wages and benefits for employees, including stock-based compensation.

 

 

Plasma Center Operating Expenses

 

Operating expenses for our plasma collection centers segment attributed solely to ADMA BioCenters were $1,280,419 for the three months ended March 31, 2016, an increase of $232,325 from $1,048,094 for the three months ended March 31, 2015.  These operating expenses consist of G&A overhead, comprised of: rent, maintenance, utilities, wages and benefits for center staff, plasma collection supplies, plasma transportation and storage (off-site), advertising and promotion expenses, and computer software fees related to donor collections.  The increase in expenses was attributable to the higher costs in wages, rent, maintenance and plasma collection supplies related to our second plasma collection facility, which received FDA approval to sell plasma in the U.S in the third quarter of 2015.  We expect that as plasma collection increases, our operating expenses will also increase accordingly.

General and Administrative Expenses

 

G&A expenses were $1,707,870 for the three months ended March 31, 2016, an increase of $361,873 from $1,345,997 for the three months ended March 31, 2015.  The increase in G&A expenses was attributable to consulting expenses associated with pre-launch, commercial planning activities, increased headcount, wages and benefits for employees, including stock-based compensation, market research and analysis in preparation for anticipated product launch for RI-002 during the second half of 2016.  We expect that our G&A expenses will increase throughout the remainder of 2016 as a result of pre-launch, commercial planning activities, market research costs and the hiring of additional staff as part of the commercialization efforts for RI-002.

 

Total Operating Expenses

 

Total operating expenses were $6,282,422 for the three months ended March 31, 2016, an increase of $1,576,979 from $4,705,443 for the three months ended March 31, 2015, for the reasons stated above.

 

Other Income (Expense); Interest Expense

 

Other expense, net was $453,933 for the three months ended March 31, 2016, compared to $403,198 for the three months ended March 31, 2015.  The increase in other expense, net is attributed to a “mark-to-market” valuation adjustment feature for warrants we issued to our previous debt lender. The warrant protection feature was terminated as of February 24, 2015, which was the end of the one-year period following the amended loan closing on February 24, 2014 and as a result the warrant liability of $408,900 was reclassified to additional paid-in capital.

 

Net Loss

 

Net loss was $4,612,469 for the three months ended March 31, 2016, an increase of $1,006,934 from $3,605,535 for the three months ended March 31, 2015 for the reasons stated above.

 

 

Cash Flows

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $5,167,930 for the three months ended March 31, 2016.  The net loss for this period was lower than net cash used in operating activities by $555,461, which was primarily attributable to an increase in prepaid expenses of $633,883 for vendor payments related to insurance premiums, prepayments to third party manufacturing vendors for commercial manufacturing of RI-002, increased inventories of $603,466 related to allocating additional plasma to inventory in preparation for commercial manufacturing activities anticipated in 2016,  an increase in accounts payable of $377,061 and a decrease in accrued expenses of $306,462, offset by stock-based compensation of $422,180, and depreciation and amortization of $251,940.

 

Net cash used in operating activities was $4,220,775 for the three months ended March 31, 2015.  The net loss for this period was less than net cash used in operating activities by $615,240, which was primarily attributable to increases in prepaid expenses of $469,771 for vendor payments related to insurance premiums, inventories of $232,171, a decrease in accrued expenses of $514,564 related to payments made to our vendors and service providers, offset by stock-based compensation of $387,069 and depreciation and amortization of $117,122.

 

Net Cash Used in Investing Activities

 

Net cash provided by investing activities was $3,655,762 for the three months ended March 31, 2016, which was related to the maturity of short-term investments of $3,673,199 and $17,437 in purchases of computers and equipment.

 

Net cash used in investing activities was $6,873,725 for the three months ended March 31, 2015, which was related to the increase in short-term investments of $6,859,539 and purchases of equipment of $14,186.

 

Net Cash Provided by Financing Activities

 

Net cash used in financing activities totaled $3,659 for the three months ended March 31, 2016, for payments on our leasehold improvement loan for ADMA BioCenters.

 

Net cash provided by financing activities totaled $10,459,660 for the three months ended March 31, 2015, which primarily consisted of $10,463,005 of net proceeds received from the issuance of common stock and payments on our leasehold improvement loan for our ADMA BioCenters facility.

 

Liquidity and Capital Resources

 

Overview

 

We have had limited revenue from operations and we have incurred cumulative losses of $92.0 million since inception.  We have funded our operations to date primarily from equity investments, loans from venture debt lenders and loans from our primary stockholders.  During May 2016, we completed a public underwritten offering for gross proceeds of approximately $14.1 million from the sale of our common stock.  In May 2016, we amended our LSA with Oxford and borrowed an additional $4.0 million of debt.  In March 2015, we received net cash proceeds of approximately $10.2 million from the sales of our common stock.  In October 2013, we received net cash proceeds of approximately $26.6 million  from our Initial Public Offering, or IPO.  In various financings since 2012 we received a total of $20.0 million from venture debt lenders.  In February 2012, we received  net cash proceeds of approximately $15.3 million from a private placement of our common stock.

 

 

As of March 31, 2016, we had working capital of $13.1 million, consisting primarily of $8.9 million of cash and cash equivalents, $2.7 million of short-term investments, $1.0 million of accounts receivable, $4.0 million of inventories, and $0.7 million of prepaid expenses, offset primarily by $2.4 million of accounts payable,  $1.7 million of accrued expenses and $0.1 million of deferred revenue. Because we do not anticipate receiving FDA approval for RI-002 earlier than the second half of 2016, if at all, we would not expect to generate revenue from the commercialization of RI-002 earlier than such time, if at all. See also “Future Financing Needs” below.

 

  Future Financing Needs

 

We expect to continue to spend substantial amounts on product development, including commercialization activities, procuring raw material plasma, manufacturing, conducting potential future clinical trials for our product candidates and purchasing clinical trial materials from our suppliers. Based upon our projected revenue and expenditures for 2016 and 2017, including the ongoing implementation of our commercialization and expansion activities, we currently believe that our cash, cash equivalents, short-term investments and accounts receivable as of the date of this report are sufficient to fund our operations, as currently conducted,  into the second half of 2017.  Because we do not anticipate receiving FDA approval for RI-002 earlier than the second half of 2016, if at all, we would not expect to generate revenue from the commercialization of RI-002 earlier than such time, if at all.  This time frame may change based upon the timing of our commercial manufacturing scale up activities, how aggressively we execute on our commercial initiatives and when the FDA approves our BLA for RI-002, if at all.  We cannot predict with certainty that we will not need to raise additional funds in the future or when we will reach profitability, if at all.  Furthermore, if our assumptions underlying our estimated expenses, the timing of FDA approval for RI-002 and revenues from RI-002 are incorrect, we may have to raise additional capital sooner than anticipated.  Due to numerous risks and uncertainties associated with the research and development and potential future commercialization of our product candidate, we are unable to estimate with certainty the amounts of increased capital outlays and operating expenditures associated with our development activities.  Our current estimates may be subject to change as circumstances regarding our business requirements evolve. We may decide to raise capital through public or private equity offerings, such financings may only be available on unattractive terms, resulting in significant dilution of stockholders’ interests and, in such event, the value and potential future market price of our common stock may decline, or obtain debt financings, or obtain a bank credit facility, or corporate collaboration and licensing arrangements. Other than our option to borrow an additional $5.0 million through our current LSA with Oxford, as amended, based upon receiving BLA approval by the FDA for RI-002 by January 31, 2017, we do not have any existing commitments for future external funding.  The sale of additional equity or debt securities, if convertible, could result in dilution to our current stockholders.  The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations or other future financing alternatives.  Additional equity or debt financing, grants, or corporate collaboration and potential licensing arrangements may not be available on acceptable terms, if at all.  If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned clinical trials and delay or abandon potential commercialization efforts of our lead product candidate or other product candidates. We have reported losses since inception in June 2004 through March 31, 2016 of $92.0 million.

 

    

Financial markets in the United States, Canada, Europe and Asia continue to experience disruption, including, among other things, significant volatility in security prices, declining valuations of certain investments, as well as severely diminished liquidity and credit availability.  Business activity across a wide range of industries and regions continues to be greatly reduced and local governments and many businesses are still suffering from the lack of consumer spending and the lack of liquidity in the credit markets.  The continued instability in the credit and financial market conditions may negatively impact our ability to access capital and credit markets and our ability to manage our cash balance.  While we are unable to predict the continued duration and severity of the adverse conditions in the United States and other countries, any of the circumstances mentioned above could adversely affect our business, financial condition, operating results and cash flow or cash position.

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board or FASB issued Accounting Standards Update or ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact the standard may have on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17 , Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes , which includes amendments that require deferred tax liabilities and assets be classified as non-current in a classified statement of financial position.  The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  Earlier application is permitted as of the beginning of an interim or annual reporting period.  The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.   The adoption of this ASU is not expected to have a material impact on the Company’s financial statements and related disclosures.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments , which includes amendments that require an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the changes   to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.  The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of the ASU with earlier application permitted for financial statements that have not yet been made available for issuance.

 

 

In July 2015, the Financial Accounting Standards Board or FASB issued Accounting Standards or ASU ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . The standard requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The standard is effective for us prospectively beginning January 1, 2017. The adoption of ASU 2015-11 is not expected to have a material impact on our consolidated financial statements.

In May 2014, FASB issued ASU, 2014-09,  Revenue from Contracts with Customers , which requires that an entity recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to its customers. In order to achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will replace existing revenue recognition guidance under Accounting Principles Generally Accepted in the United States of America, or GAAP, when it becomes effective for us beginning January 1, 2018, with early adoption permitted in the first quarter of 2017. The updated standard will permit the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of this update on our condensed consolidated financial statements.

Critical Accounting Policies and Estimates

On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was signed into law.  The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.  As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies.  We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of this extended transition period.  We have elected to take advantage of the benefits of this extended transition period.  Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.  Until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in accordance with  GAAP.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, we evaluate these estimates and assumptions, including those described below.  We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results and experiences may differ materially from these estimates.

 

 

Some of the estimates and assumptions we have to make under GAAP require difficult, subjective and/or complex judgments about matters that are inherently uncertain and, as a result, actual results could differ from those estimates.  Due to the estimation processes involved, the following summarized accounting policies and their application are considered to be critical to understanding our business operations, financial condition and results of operations.

Stock-Based Compensation

 

Stock-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period on a straight-line basis.

 

We account for stock options granted to non-employees on a fair value basis using the Black-Scholes option pricing method.  The noncash charge to operations for non-employee options with vesting are revalued at the end of each reporting period based upon the change in the fair value of the options and amortized to consulting expense over the related contract service period.

 

For purposes of valuing stock options granted to our employees, non-employees and directors and officers through the three months ended March 31, 2016, we used the Black-Scholes option pricing model.  We granted options to purchase an aggregate of 85,984 and 230,000 shares of common stock during the three months ended March 31, 2016 and March 31, 2015, respectively.   To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of the grant with a term consistent with the expected term of our awards.  The expected term of the options granted is in accordance with Staff Accounting Bulletins 107 and 110, which is based on the average between vesting terms and contractual terms.  The expected dividend yield reflects our current and expected future policy for dividends on our common stock.  The expected stock price volatility for our stock options was calculated by examining the pro rata historical volatilities for similar publicly traded industry peers and the trading history for our common stock.  We will continue to analyze the expected stock price volatility and expected term assumptions.  We have not experienced any material forfeitures of stock options and, as such, have not established a forfeiture rate since the stock options currently outstanding are primarily held by our senior management and directors.  We will continue to evaluate the effects of such future potential forfeitures, as they may arise, to evaluate our estimated forfeiture rate.

 

Research and Development Costs

Our expenses include all R&D costs as incurred, of which such expenses include costs associated with planning and conducting clinical trials, regulatory consulting and filing fees and the disposition of plasma and equipment for which there is no alternative future use.

 

 

Revenue Recognition

Depending on the agreement with the customer, revenue from the sale of human plasma collected by ADMA BioCenters is recognized at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if we retain the risk of loss during shipment. Our revenues are substantially attributable to one customer.  Revenue from license fees and research and development services rendered are recognized as revenue when the performance obligations under the terms of the license agreement with Biotest AG have been completed.  During the third quarter 2015, we recorded deferred revenue of $1.5 million in accordance with a license agreement payment we received related to the filing of our BLA with the FDA.  Deferred revenue of $1.7 million was recorded in 2013 as a result of certain research and development services provided in accordance with a license agreement. Deferred revenue is recognized over the term of the license.  Deferred revenue is amortized into income for a period of approximately 20 years, the term of the license agreement.

 

Accounting for Loan and Security Agreement

 

On June 19, 2015, we entered into the LSA with Oxford for up to $21.0 million and refinanced our existing loan with Hercules.  The first tranche of $16.0 million from the Oxford loan was primarily used to repay our existing facility with Hercules and the remaining $5.0 million is available at our option upon RI-002’s BLA being approved from the FDA on or before January 31, 2017, which funding would also extend our interest only period for an additional six months pursuant to the May 2016 amendment to the LSA.  The LSA bears interest at a rate per annum equal to the greater of (i) 7.80% and (ii) the sum of (a) the three (3) month U.S. LIBOR rate (as reported in The Wall Street Journal ) on the date occurring on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 7.54% on the outstanding principal balance.  We are obligated to begin to repay the principal over 36 months beginning February 1, 2017, unless accelerated as a result of certain events of default.  A final payment equal to 8.95% of the funded loan amount is due at the earlier of loan maturity or prepayment.  In the event of the six-month interest only extension, the final payment will be 9.95% of the funded loan, which shall also be due at the earlier of loan maturity or prepayment. In addition, a facility fee of $105,000 was paid at closing.  In the event we prepay a loan for any reason, we are obligated to pay a prepayment charge corresponding to a percentage of the principal amount of the loan prepaid, with such percentage being: 3.0% if prepayment occurs through the first anniversary of its funding, 2.0% if prepayment occurs after the first anniversary through the second anniversary of the applicable funding date, and  1.0% if prepayment occurs after the second anniversary of its funding date and prior to its maturity date.  The loan matures no later than January 1, 2020.  The loan is secured by our assets, except for our intellectual property (which is subject to a negative pledge).

In connection with the LSA, on June 19, 2015, we issued to Oxford a seven year warrant, expiring on June 19, 2022, to purchase 74,309 shares of common stock at an exercise price of $8.51 per share.  We recorded $367,700 as the fair value of the warrant to additional paid-in capital and as a debt discount to the carrying value of the loan.  The key assumptions used to value the warrants included, volatility of 57% on our common stock based upon a pro rata percentage of our common stock’s volatility and similar public companies’ volatilities for comparison, an expected dividend yield of 0.0%, a risk-free interest rate of 1.99% and a term of seven years.  As a result of prepaying the Hercules loan prior to maturity, we incurred a loss on extinguishment of debt of $0.7 million comprised of debt issuance costs, debt discount related to the warrants issued to Hercules along with a prepayment penalty.

 

In May 2016, we entered into an amendment to our LSA with Oxford, pursuant to which we borrowed an additional $4.0 million, as an extension to the original LSA entered into on June 19, 2015, which brings the total principal borrowed to $20.0 million. In connection therewith, we issued warrants to purchase an aggregate of up to 24,800 shares of our Common Stock at an exercise price equal to $6.37, which will expire seven years after their issuance on May 13, 2023 and incurred facility fees of $20,000 as part of accessing the additional financing.

 

 

In connection with our Prior Loan Agreement and as amended, we issued to Hercules a warrant to purchase 31,750 shares of common stock in December 2012, with an exercise price of $7.56 and in connection with the Prior Loan Agreement and as amended, we issued to Hercules a warrant to purchase an additional 58,000 shares of our common stock, comprised of a warrant to purchase 23,200 shares of common stock issued in February 2014 and a warrant to purchase 34,800 shares of common stock issued in December 2014, each warrant issued under the Prior Loan Agreement and as amended, having an exercise price of $7.50.  The warrants expire after 10 years and have piggyback registration rights with respect to the shares of common stock underlying the warrant.  The fair value of the Prior Loan Agreement and as amended, warrants were calculated using a lattice-based option model in order to account for features in the warrant that could cause the exercise price to reset (“down round protection”) as a result of the next issuance of our common stock (“the next round of equity financing”). We initially recorded the fair value of the warrant of $219,588 as warrant liability and as a debt discount to the carrying value of the loan.  The key assumptions used to value the warrants included the expected date of the next round of equity financing, volatility of 59% for our common stock based upon similar public companies’ volatilities for comparison, an expected dividend yield of 0.0%, a risk-free interest rate of 2.53% and a term of 10 years.  As of December 31, 2014, we recorded $476,760 as the fair value of the warrant for the purchase of 58,000 shares of common stock. As a result of the increase in warrant liability, we recorded an expense of $74,356 from the change in the fair value of warrant liability.  During the first quarter ended March 31, 2015, we recorded $408,900 as the fair value of the warrant for the purchase of 58,000 shares of common stock. As a result of the decrease in warrant liability, we recorded a change in the fair value of stock warrants of $67,860 from the December 31, 2014 balance.  The key assumptions used to value the warrants included the expected date of the next round of equity financing, volatility of 58% based upon a pro rata percentage of our common stock and similar public companies’ volatilities, an expected dividend yield of 0.0%, a risk-free rate of 1.99% and a term of 10 years.  This warrant liability was adjusted from the date of the Prior Loan Agreement on February 24, 2014, to fair value each reporting period using a lattice-based option model and the debt discount will be amortized to interest expense over the term of the loan. The down round warrant protection feature resulting in the warrant liability’s quarterly “mark-to-market” valuation has terminated as of February 24, 2015, which was the end of the one-year period following the amended loan closing on February 24, 2014 and as a result the warrant liability of $408,900 was reclassified to additional paid-in capital.

Off-Balance Sheet Arrangements

 

We have entered into leases for our ADMA BioCenters’ facilities in Norcross, Georgia and Marietta, Georgia.  The Norcross, Georgia lease expires on September 30, 2023, and the Marietta, Georgia lease expires on January 31, 2024.  There is a total minimum rent due under these leases of $2.9 million through the end of the lease terms.