SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2020

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of Company’s management, who is responsible for their integrity and objectivity.

Principles of Consolidation

The consolidated financial statements include the accounts of Adhera Therapeutics, Inc. and the wholly-owned subsidiaries, IThena, Cequent, MDRNA, and Atossa, and eliminate any inter-company balances and transactions.

Going Concern and Management’s Liquidity Plans

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2020, the Company had a significant accumulated deficit of approximately $44.6 million and negative working capital of approximately $14.8 million. For the year ended December 31, 2020, the Company had a loss from operations of approximately $2.0 million and negative cash flows from operations. Our operating activities consume the majority of our cash resources. The Company has incurred recurring losses and negative cash flows from operations since inception and has funded its operating losses through the sale of common stock, preferred stock, warrants to purchase common stock, convertible notes and secured promissory notes.

In addition, to the extent that the Company continues its business operations, the Company anticipates that it will continue to have negative cash flows from operations, at least into the near future. However, the Company cannot be certain that it will be able to obtain such funds required for our operations at terms acceptable to us or at all. General market conditions, as well as market conditions for companies in our financial and business position, as well as the ongoing issue arising from the COVID-19 epidemic, may make it difficult for us to seek financing from the capital markets, and the terms of any financing may adversely affect the holdings or the rights of our stockholders. If the Company is unable to obtain additional financing in the future, there may be a negative impact on the financial viability of the Company. The Company plans to increase working capital by managing its cash flows and expenses, divesting development assets and raising additional capital through private or public equity or debt financing. There can be no assurance that such financing or partnerships will be available on terms which are favorable to the Company or at all. While management of the Company believes that it has a plan to fund ongoing operations, there is no assurance that its plan will be successfully implemented. Failure to raise additional capital through one or more financings, divesting development assets or reducing discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not contain any adjustments that might result from the resolution of any of the above uncertainties.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Significant areas requiring the use of management estimates include valuation allowance for accounts receivable and deferred income tax assets, legal contingencies and fair value of financial instruments. Actual results could differ materially from such estimates under different assumptions or circumstances.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents as of December 31, 2020 and $50,000 in cash equivalents as December 31, 2019.

The Company deposits its cash with major financial institutions and may at times exceed the federally insured limit. At December 31, 2020, the Company’s cash balance did not exceed the federal insurance limit.

Fair Value of Financial Instruments

The Company considers the fair value of cash, accounts payable, due to related parties, notes payable, accounts receivable and accrued liabilities not to be materially different from their carrying value. These financial instruments have short-term maturities. The Company follows authoritative guidance with respect to fair value reporting issued by the Financial Accounting Standards Board (“FASB”) for financial assets and liabilities, which defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance does not apply to measurements related to share-based payments. The guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The Company’s cash is subject to fair value measurement and is determined by Level 1 inputs. There were no liabilities measured at fair value as of December 31, 2020 or 2019.

Accounts Receivable, net

During the year ended December 31, 2019, the Company recorded approximately $32,000 of bad debt expense as a result of the write-off of uncollectible accounts receivable related to amounts due from wholesalers and specialty pharmacy providers. No bad debt expense was incurred for the period ended December 31, 2020.

Impairment of Long-Lived Assets

The Company reviews all long-lived assets for impairment indicators throughout the year and perform detailed testing whenever impairment indicators are present. In addition, the Company perform detailed impairment testing for indefinite-lived intangible assets, at least annually, at December 31. When necessary, the Company records charges for impairments. Specifically:

● For finite-lived intangible assets, such as developed technology rights, and for other long-lived assets, the Company compares the undiscounted amount of the projected cash flows associated with the asset, or asset group, to the carrying amount. If the carrying amount is found to be greater, the Company records an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, the Company re-evaluates the remaining useful lives of the assets and modifies them, as appropriate; and

● For indefinite-lived intangible assets, such as acquired in-process R&D assets, each year and whenever impairment indicators are present, the Company determines the fair value of the asset and records an impairment loss for the excess of book value over fair value, if any.

The Company recognized $0.3 million as a loss on impairment for the year ended December 31, 2019. The impairment determination was primarily a result of the decision to divest assets that no longer align with the Company’s strategic objectives. No asset impairment was recognized for the year ended December 31, 2020.

Revenue Recognition

Revenue, Net

The Company records revenue recognition in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606). The Company terminated all commercial operations in December 2019, therefore all revenue and cost of goods sold disclosure only apply to periods prior to the first quarter of 2020.

The Company sold its medicines primarily to wholesale distributors and specialty pharmacy providers under agreements with payment terms typically less than 90 days. These customers subsequently resold the Company’s medicines to health care patients. Revenue was recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts had a single performance obligation to transfer medicines. Accordingly, revenues from medicine sales were recognized when the customer obtained control of the Company’s medicines, which occurred at a point in time, typically upon delivery to the customer. Revenue was measured as the amount of consideration the Company expects to receive in exchange for transferring medicines and was generally based upon a list or fixed price less allowances for medicine returns, rebates and discounts. Company recorded an estimate of unrealized revenue reductions, and the related liability, for bottles sold to pharmacies but not yet prescribed.

Medicine Sales Discounts and Allowances

The nature of the Company’s contracts gave rise to variable consideration because of allowances for medicine returns, rebates and discounts. Allowances for medicine returns, rebates and discounts were recorded at the time of sale to wholesale pharmaceutical distributors and pharmacies. The Company applied significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, the Company would be required to make adjustments to these allowances in the future. The Company’s adjustments to gross sales are discussed further below.

Patient Access Programs

The Company offered discounts to patients under which the patient received a discount on his or her prescription. In circumstances when a patient’s prescription is rejected by a third-party payer, the Company would pay for the full cost of the prescription. The Company reimbursed pharmacies for this discount directly or through third-party vendors. The Company reduced gross sales by the amount of actual co-pay and other patient assistance in the period based on the invoices received. The Company also recorded an accrual to reduce gross sales for estimated co-pay and other patient assistance on units sold to distributors or pharmacies that have not yet been prescribed/dispensed to a patient. The Company calculated accrued co-pay and other patient assistance fee estimates using the expected value method. The estimate was based on contract prices, estimated percentages of medicine that would be prescribed to qualified patients, average assistance paid based on reporting from the third-party vendors and estimated levels of inventory in the distribution channel. Accrued co-pay and other patient assistance fees were included in “accrued expenses” on the consolidated balance sheet. Patient assistance programs include both co-pay assistance and fully bought down prescriptions.

Sales Returns

Consistent with industry practice, the Company maintained a return policy that allows customers to return medicines within a specified period prior to and subsequent to the medicine expiration date. Generally, medicines may be returned for a period beginning nine months prior to its expiration date and up to one year after its expiration date. The right of return expires on the earlier of one year after the medicine expiration date or the time that the medicine is dispensed to the patient. The majority of medicine returns result from medicine dating, which falls within the range set by the Company’s policy and are settled through the issuance of a credit to the customer. The Company calculated sales returns using the expected value method. The estimate of the provision for returns was based upon industry experience. This period is known to the Company based on the shelf life of medicines at the time of shipment. The Company recorded sales returns in “accrued expenses” as a reduction of revenue.

Cost of Goods Sold

Distribution Service Fees

The Company included distribution service fees paid for inventory management services as cost of goods sold. The Company calculated accrued distribution service fee estimates using the most likely amount method. The Company accrued estimated distribution fees based on contractually determined amounts. Accrued distribution service fees were included in “accrued expenses” on the consolidated balance sheet.

Shipping Fees

The Company included fees incurred by pharmacies for shipping medicines to patients as cost of goods sold. The Company calculated accrued shipping fee estimates using the expected value method. The Company recorded accrued shipping fees in “accrued expenses” on the consolidated balance sheet.

Non-Commercial Product

The Company recorded the cost of non-commercial product distributed to patients as a cost of goods sold.

Royalties on Product Sales

The Company recorded royalty fees on the sale of commercial product as a cost of goods sold.

Convertible Debt and Warrant Accounting

Debt with warrants

In accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, recorded as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in the Company’s consolidated balance sheets if the warrants are not treated as a derivative. The Company determines the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) or the Monte Carlo Method based upon the underlying conversion features of the debt. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations.

Convertible debt – derivative treatment

When the Company issues debt with a conversion feature, it first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.

Convertible debt – beneficial conversion feature

If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible and is recorded as additional paid in capital and as a debt discount in the consolidated balance sheets. The Company amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations.

If the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.

Recently Issued Accounting Pronouncements

Recently Adopted

In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350) (“ASU 2017-04”), which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. The new standard does not change how a goodwill impairment is identified. The Company will continue to perform its quantitative goodwill impairment test by comparing the fair value of its reporting unit to its carrying amount, but if the Company is required to recognize a goodwill impairment charge, under the new standard, the amount of the charge will be calculated by subtracting the reporting unit’s fair value from its carrying amount. Under the current standard, if the Company is required to recognize a goodwill impairment charge, Step 2 requires it to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge is calculated by subtracting the reporting unit’s implied fair value of goodwill from the goodwill carrying amount. The standard was effective January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on the Company’s historical financial statements.

Not Yet Adopted

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which will simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. Specifically, the new standard will remove the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features. It will also remove certain settlement conditions that are currently required for equity contracts to qualify for the derivative scope exception and will simplify the diluted earnings per share calculation for convertible instruments. ASU 2020-06 will be effective January 1, 2022 for the Company and may be applied using a full or modified retrospective approach. Early adoption is permitted, but no earlier than January 1, 2021 for the Company. Management has evaluated the impact of adopting ASU 2020-06 and has determined such adoption will not have a material impact on the overall stockholders’ equity (deficit) in the Company’s consolidated financial statements.

Net Loss per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share includes the effect of common stock equivalents (stock options and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net loss is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable.

The following table presents the computation of net loss per share (in thousands, except share and per share data):

	December 31,
(in thousands except share and per share data)	2020			2019
Numerator
Net loss	$	(3,766	)	$	(11,978	)
Preferred stock dividends		(1,540	)		(1,501	)
Net Loss allocable to common stockholders	$	(5,306	)	$	(13,479	)
Denominator
Weighted average common shares outstanding used to compute net loss per share, basic and diluted		10,876,513			10,840,870
Net loss per share of common stock, basic and diluted
Net loss per share, basic and diluted	$	(0.49	)	$	(1.24	)

The following number of shares have been excluded from diluted net (loss) since such inclusion would be anti-dilutive:

	Year Ended December 31,
	2020		2019
Stock options outstanding		391,350		4,071,333
Convertible notes		33,658,590		—
Warrants		78,181,855		35,517,329
Series C Preferred Stock		66,667		66,667
Series D Preferred Stock		50,000		50,000
Series E Preferred Stock		42,055,232		39,508,382
Series F Preferred Stock		4,303,767		3,991,753
Total		158,707,461		83,205,464

Stock-Based Compensation

The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and non-employees, including stock options, in the statements of operations.

For stock options issued, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised if and when a forfeiture becomes probable.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates.