The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
Notes to Financial Statements
For the years ended July 31, 2016 and 2015
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1.
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Organization and Basis of Presentation
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Opiant Pharmaceuticals, Inc.
(“we”, “our”, or the “Company”), a Nevada corporation, is a specialty pharmaceutical company
which develops pharmacological treatments for substance use, addictive and eating disorders. The Company was incorporated in the
State of Nevada on June 21, 2005 as Madrona Ventures, Inc. and, on September 16, 2009, the Company changed its name to Lightlake
Therapeutics Inc. On January 28, 2016, the Company again changed its name to Opiant Pharmaceuticals, Inc. The Company is a specialty
pharmaceutical company developing opioid antagonist treatments for substance use, addictive and eating disorders. The Company also
has developed a treatment to reverse opioid overdoses, which is now known as NARCAN® (naloxone hydrochloride) Nasal Spray.
The Company’s fiscal year end is July 31.
Reverse Stock Split
In December 2014, the Company
effected a one-for-one hundred reverse stock split (the “1:100 Reverse Stock Split”) of its common stock, par value,
$0.001 per share (the “Common Stock”) which decreased the number of shares of Common Stock issued and outstanding from
approximately 182.0 million shares to approximately 1.82 million shares. Unless otherwise noted, impacted amounts included in the
financial statements and notes thereto have been retroactively adjusted for the stock splits as if such stock splits occurred on
the first day of the first period presented. Impacted amounts include but are not limited to shares of Common Stock issued and
outstanding, stock options, shares reserved, exercise prices of warrants or options, and loss per share. There was no impact on
preferred or Common Stock authorized resulting from the 1:100 Reverse Stock Split.
The accompanying financial statements
have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the
liquidation of liabilities in the normal course of business. However, the Company has incurred significant losses, a working capital
deficit as of July 31, 2016 of $2,380,539 and is dependent on generating sufficient revenues and/or obtaining adequate capital
to fund operating losses until it becomes profitable. If the Company is unable to generate sufficient revenues and/or obtain the
necessary funding it could cease operations as a new enterprise. This raises substantial doubt about the Company’s ability
to continue as a going concern. These financial statements do not include any adjustments that might result from this uncertainty.
At this time, the Company cannot provide investors with any assurance that it will be able to generate sufficient revenues
and/or obtain sufficient funding from debt financing and/or the sale of its Common Stock and/or the sale of interests in the
Company's prospective products and/or royalty transactions to meet its obligations over the next twelve months. The Company
does not have any arrangements in place for any future financing. The Company may also seek to obtain short-term loans from
its officers and directors to meet its short-term funding needs.
3.
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Summary of Significant Accounting Policies
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Basis of Presentation and
Use of Estimates
The Company prepares its financial
statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which
require 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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents
were $1,481,393 and $434,217 at July 31, 2016 and 2015, respectively. The Company maintains cash balances at financial institutions
insured up to $250,000 by the Federal Deposit Insurance Corporation. Balances in the UK are insured up to £85,000 by the
Financial Services Compensation Scheme (UK Equivalent). The cash balances exceeded these insured amounts during the year.
Accounts Receivable
The
Company routinely assesses the recoverability of receivables to determine their collectability by considering factors such as historical
experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer's
ability to pay.
The Company determines its allowance
for doubtful accounts by considering such factors as the length of time balances are past due, the Company’s previous loss
history, the customer’s current ability to pay its obligations to the Company and the condition of the general economy and
the industry as a whole.
Long-Lived Assets
The Company follows ASC 360,
Property, Plant, and Equipment
, for its fixed assets. Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over estimated useful lives (3 to 7 years). The Company’s capitalizes
all asset purchases greater than $500 having a useful life greater than one year. The Company follows ASC 350,
Intangibles
– Goodwill and Other
for its intellectual property asset. Intellectual property consists of patents which are stated
at their fair value acquisition cost. Amortization is calculated by the straight line method over their estimated useful lives
(20 years).
Long-lived assets such as property
and equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying
value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair
value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets,
if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from
its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of
the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted
at a rate commensurate with the risk associated with the recovery of the assets. The Company did not recognize any impairment
losses for any years presented.
Earnings (Loss) per Share
The Company follows ASC 260,
Earnings
per Share
. Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by
the weighted-average number of shares of Common Stock outstanding during the respective period presented in the Company’s
accompanying financial statements.
Fully diluted earnings (loss)
per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of
Common Stock equivalents (primarily outstanding options and warrants).
Common Stock equivalents represent
the dilutive effect of the assumed exercise of outstanding stock options and warrants, using the treasury stock method, at either
the beginning of the respective period presented or the date of issuance, whichever is later, and only if the Common Stock equivalents
are considered dilutive based upon the Company’s net loss position at the calculation date.
Common Stock equivalents have
not been included in the calculation of dilutive earnings (loss) per share as the result would be anti-dilutive. At July 31, 2016,
potentially dilutive Common Stock equivalents are approximately 5,850,385 (2015 – 4,496,052) which consist of options and
warrants.
Research and Development Costs
The Company follows ASC 730,
Research
and Development
, and expenses all research and development costs as incurred for which there is no alternative future use.
These costs also include the expensing of employee compensation and employee stock based compensation.
Foreign Currency Translation
The Company’s functional
and reporting currency is the United States dollar. Occasional transactions may occur in British Pounds and management has adopted
ASC 830,
Foreign Currency Translation Matters
. Monetary assets and liabilities denominated in foreign currencies are
translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement
of foreign currency denominated transactions or balances are included in the determination of income.
Stock-Based Compensation
ASC 718
Compensation
– Stock Compensation
prescribes accounting and reporting standards for all share-based payment transactions in which
employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and
other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees,
including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair
values. That expense is recognized over the period during which an employee is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period).
The Company accounts for stock-based
compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,
Equity – Based
Payments to Non-Employees.
Measurement of share-based payment transactions with non-employees is based on the fair value
of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value
of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
The Company had stock-based compensation
of $11,496,025 and $1,729,216 for the years ended July 31, 2016 and 2015, respectively.
Fair Value of Financial Instruments
ASC 820
Fair Value Measurements
and Disclosures
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s
own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair
value hierarchy are described below:
Level 1 - Unadjusted quoted prices
in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both
significant to the fair value measurement and unobservable.
The carrying value of certain
on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These
financial instruments include cash, accounts payable, note payable, and due to related parties. The fair value of the Company’s
note payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different
from its stated value.
As of July 31, 2016 and 2015,
the Company did not have any financial liabilities measured and recorded at fair value on the Company’s balance sheets on
a recurring basis.
Related Parties
The Company follows ASC 850,
Related Party Disclosures
,
for the identification of related parties and disclosure of related party transactions. Related
party balance as of July 31, 2016 amount to $0 (2015 - $130,000), and was comprised of loans to the Company. (See Note 4)
Revenue Recognition
The Company recognizes revenues
from nonrefundable, up-front license fees related to collaboration agreements, on a straight-line basis over the contracted or
estimated period of performance. The period of performance over which the revenues are recognized is typically the period over
which the research and/or development is expected to occur or manufacturing services are expected to be provided. When the period
of performance is based on the period over which research and/or development is expected to occur, the Company is required to make
estimates regarding drug development and commercialization timelines. Because of the many risks and uncertainties associated with
the development of drug candidates, these estimates regarding the period of performance may change.
In addition, the Company evaluates
each arrangement to determine whether or not it qualifies as a multiple-deliverable revenue arrangement under ASC 605-25. If one
or more of the deliverables have a standalone value, then the arrangement would be separated into multiple units of accounting.
This normally occurs when the R&D services could contractually and feasibly be provided by other vendors or if the customer
could perform the remaining R&D itself, and when the Company has no further obligations and the right has been conveyed. When
the deliverables cannot be separated, any initial payment received is treated like an advance payment for the services and recognized
over the performance period, as determined based on all of the items in the arrangement. This period is usually the expected research
and development period.
The Company recognizes revenue
from milestone payments upon achievement of the milestones and when the Company has no further involvement or obligation to perform
services, as related to that specific element of the arrangement, provided the milestone is meaningful, and provided that collectability
is reasonably assured and other revenue recognition criteria are met.
The Company recognizes revenue
from royalty revenue when the Company has fulfilled the terms of the contractual agreement and has no material future obligation,
other than inconsequential and perfunctory support, and the amount of the royalty fee is determinable and collection is reasonably
assured.
Licensing Agreement
On December 15, 2014, the Company
entered into a licensing agreement (the “Adapt Agreement”) with Adapt Pharma Operations Limited, a wholly owned subsidiary
of Adapt Pharma Limited (“Adapt”), an Ireland-based pharmaceutical company. Pursuant to the Adapt Agreement, the Company
provided a global license to develop and commercialize the Company’s intranasal naloxone opioid overdose reversal treatment,
now known as NARCAN® (naloxone hydrochloride) Nasal Spray. In exchange for licensing its treatment, the Company received a
nonrefundable, upfront license fee of $500,000 in December 2014. The Company also received a monthly fee for one year for participation
in joint development committee calls and the production and submission of an initial development plan. The initial development
plan was completed and submitted in May 2015. Management evaluated the deliverables of this arrangement and determined that the
licensing deliverable had a standalone value and therefore, the payments were recognized as revenue.
The Company could also receive
additional payments upon reaching various sales and regulatory milestones as well as royalty payments for commercial sales of NARCAN
generated by Adapt. During the year ended July 31, 2016, the Company received $4,500,000 of milestone payments and recognized royalty
revenues of approximately $418,000 pursuant to the Adapt Agreement.
In addition, pursuant to the
Adapt Agreement, the Company is required to contribute $2,500,000 of development, regulatory and commercialization costs, some
of which was credited for costs incurred by the Company prior to the execution of the Adapt Agreement. At July 31, 2016, the Company
had contributed the full $2,500,000. At July 31, 2015, the Company had contributed $2,341,419 of which $204,908 was unpaid and
reported in accounts payable and accrued liabilities in the balance sheets.
The Company recognizes revenue
for fees related to participation in the initial development plan and joint development calls as revenue once the fee is received
and the Company has performed the required services for the period.
Treatment Investments
With respect to investments in
interests in treatments, if an agreement provides an option that allows the investor in the treatment to convert an interest in
a treatment into shares of Common Stock of the Company, then revenue is deferred until such time that the option expires or milestones
are achieved that eliminate the investor’s right to exercise the option. Upon expiration of the exercise option, the deliverables
of the arrangement are reviewed and evaluated under ASC 605. In the event the investor chooses to convert interests into shares
of Common Stock, that transaction will be accounted for similar to a sale of shares of Common Stock for cash.
Recently Issued Accounting
Pronouncements
The Company has implemented all
new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are
any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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4.
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Related Party Transactions
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The Company uses office space
provided by Michael Sinclair and Kevin Pollack free of charge.
At July 31, 2015, the Company
had an aggregate of $130,000 of loans outstanding to a director of the Company Geoffrey Wolf, the Company’s Chief Financial
Officer Kevin Pollack and the Company’s Chairman Dr. Michael Sinclair, in the individual amounts of $65,000, $13,000 and
$52,000, respectively. In December 2012, the Company borrowed an aggregate of $350,000 pursuant to promissory notes with each of
Geoffrey Wolf, Kevin Pollack and Dr. Michael Sinclair, in the individual amounts of $175,000, $35,000 and $140,000, respectively.
Each promissory note accrued interest at 6.0% per year and was due in December 2013. Each promissory note was amended on December
16, 2013 to extend the final maturity date to January 6, 2015 and increase the interest rate to 8.5% per annum. During the year
ended July 31, 2015, an aggregate of $220,000 of the principal amount was repaid. In December 2014, the promissory notes were further
amended to extend the maturity date to April 30, 2016 and increase the annual interest rate to 14.5%, which includes a penalty
rate of 8.5% due to non-payment of the required repayment amounts. The loans were unsecured. On January 22, 2016, the Company repaid
Mr. Wolf all outstanding principal and accrued interest underlying his note, and on January 25, 2016, the Company repaid Dr. Sinclair
and Mr. Pollack all outstanding principal and accrued interest underlying their notes.
During September 2015 and October
2015, the Company received an aggregate of $151,191 of loans from each of the Company’s President Dr. Roger Crystal, the
Company’s Chief Financial Officer Kevin Pollack and the Company’s Chairman Dr. Michael Sinclair, in the individual
amounts of $51,191, $50,000 and $50,000, respectively. The loans each bore interest at 6% per annum until January 31, 2016. The
loans were all unsecured and were due on January 31, 2016 unless the Company received specified funding. If the Company received
the specified funding the loans become due 10 business days after the funding. If the loans were not repaid by January 31, 2016,
the maturity date of the loans shall be changed to May 31, 2016 and a penalty interest of 4% per annum would be added. On December
15, 2015, the Company repaid Dr. Sinclair and Mr. Pollack all outstanding principal and accrued interest underlying their loans,
and on December 16, 2015, the Company repaid Dr. Crystal all outstanding principal and accrued interest underlying his loan.
On June 21, 2016, the Company
entered into a settlement and release agreement with a former advisor pursuant to which, in exchange for prior advisory services
rendered to the Company in full pursuant to an advisory services agreement dated on or about September 17, 2012, the Company has
agreed to pay the $165,000 amount owed to the advisor for the past services rendered. As evidence of the Company’s obligation
to pay the settlement amount, the Company issued a secured promissory note to the advisor on June 21, 2016, earning interest at
the rate of 6% per annum, with the unpaid principal amount and accrued and unpaid interest due and payable in full on the earlier
of (i) the closing by the Company of one or more equity or debt financings with aggregate gross proceeds to the Company of at least
$2,200,000, and (ii) December 15, 2016. In addition, as security for the prompt payment of the note, the Company has pledged 22,916
shares of Common Stock as collateral pursuant to a pledge agreement, dated as of June 21, 2016, by and between the Company and
the advisor. Such 22,916 shares of Common Stock are being held by an escrow agent pursuant to a securities escrow agreement, dated
as of June 21, 2016, by and between the Company and the advisor, and shall be released to the advisor upon an “Event of Default”,
as defined in the note agreement.
On April 16, 2013, the Company
entered into an agreement and subsequently received funding from an investor, Potomac Construction Limited (“Potomac”),
in the amount of $600,000 for the research, development, marketing and commercialization of a product relating to the Company’s
treatment to reverse opioid overdoses (the “Opioid Overdose Reversal Treatment Product”). In exchange for this funding,
the Company agreed to provide the investor with a 6.0% interest (the “6.0% Investor Interest”) in the “OORT Net
Profit” generated from the product in perpetuity. “OORT Net Profit” is defined as any pre-tax profits received
by the Company that was derived from the sale of the Opioid Overdose Reversal Treatment Product less any and all expenses incurred
by and payments made by the Company in connection with the Opioid Overdose Reversal Treatment Product, including but not limited
to an allocation of Company overhead based on the proportionate time, expenses and resources devoted by the Company to product-related
activities, which allocation shall be determined in good faith by the Company. The investor also has rights with respect to the
6.0% Investor Interest if the Opioid Overdose Reversal Treatment Product is sold or the Company is sold. If the Opioid Overdose
Reversal Treatment Product is not introduced to the market and not approved for marketing within 24 months, the investor will have
a 60 day option to exchange its 6.0% Investor Interest for 75,000 shares of Common Stock of the Company. During the year ended
July 31, 2015, the Company recognized $600,000 as revenue because the investor’s option to receive the shares of Common Stock
expired unexercised, and the research and development work related to the product was completed as of July 31, 2015.
On
May 30, 2013, the Company entered into an agreement with an investor, Potomac, and subsequently received additional funding totaling
$150,000 for the research, development, marketing and commercialization of the Opioid Overdose Reversal Treatment Product. In exchange
for this funding, the Company agreed to provide the investor with a 1.5% interest (the “2013 1.5% Investor Interest”)
in the OORT Net Profit generated from the Opioid Overdose Reversal Treatment Product in perpetuity. The investor also has rights
with respect to the 2013 1.5% Investor Interest if the Opioid Overdose Reversal Treatment Product is sold or the Company is sold.
If the Opioid Overdose Reversal Treatment Product was
not introduced to the market and not approved for marketing within 24 months, the investor would have had a 60 day option to exchange
its 2013 1.5% Investor Interest for 18,750 shares of Common Stock of the Company. During the year ended July 31, 2015, the Company
recognized $150,000 as revenue because the investor’s option to receive the shares of Common Stock expired unexercised, and
the research and development work related to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2015.
On December 17, 2013, the Company
entered into an agreement with an investor, Potomac, and subsequently received additional funding totaling $250,000 for use by
the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with a 0.5% interest in the
Company’s BED treatment product (the “BED Treatment Product”) and pay the investor 0.5% of the BED Net Profit
in perpetuity (the “2013 0.5% Investor Interest”). “BED Net Profit” is defined as the pre-tax profit generated
from the BED Treatment Product after the deduction of all expenses incurred by and payments made by the Company in connection with
the BED Treatment Product, including but not limited to an allocation of Company overhead. If the BED Treatment Product is not
approved by the FDA by December 17, 2016, the investor will have a 60 day option to exchange its entire 0.5% Investor Interest
for 31,250 shares of Common Stock of the Company.
On May 15, 2014, the Company
entered into an agreement and subsequently received funding from an investor, Ernst Welmers, in the amount of $300,000 for use
by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with a 1.5% interest (the
“2014 1.5% Investor Interest”) in the OORT Net Profit generated from the Opioid Overdose Reversal Treatment Product
in perpetuity. The investor also has rights with respect to the 2014 1.5% Investor Interest if the Opioid Overdose Reversal Treatment
Product is sold or the Company is sold. If the Opioid Overdose Reversal Treatment Product was not approved by the FDA by May 15,
2016, the investor would have had a 60 day option to exchange its 2014 1.5% Investor Interest for 37,500 shares of Common Stock
of the Company. The Opioid Overdose Reversal Treatment Product was approved by the FDA on November 18, 2015, and, as a result,
the investor did not realize the option to exchange its 2014 1.5% Investor Interest for shares of Common Stock of the Company.
During the year ended July 31, 2016, the Company recognized $300,000 as revenue because the investor’s option to receive
the shares of Common Stock was not realized, and the research and development work related to the Opioid Overdose Reversal Treatment
Product was completed as of July 31, 2016.
On July 22, 2014,
the Company received a $3,000,000 commitment from a foundation (the “Foundation”) which later assigned its invest
to Valour Fund, LLC (“Valour”) in October 2016, from which the Company had the right to make capital calls from the
Foundation for the research, development, marketing, commercialization and any other activities connected to the Opioid
Overdose Reversal Treatment Product, certain operating expenses and any other purpose consistent with the goals of the
Foundation. In exchange for funds invested by the Foundation, Valour currently owns a 6.0% interest in the OORT Net Profit
(the “6.0% Fund Interest”) generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Valour
also has rights with respect to the 6.0% Fund Interest if the Opioid Overdose Reversal Treatment Product is sold or the
Company is sold. Additionally, the Company may buy back, in whole or in part, the 6.0% Fund Interest within 2.5 years or
after 2.5 years of the July 22, 2014 initial investment date at a price of two times or 3.5 times, respectively, the relevant
investment amount represented by the interests to be bought back. If the Opioid Overdose Reversal Treatment Product was not
approved by the FDA or an equivalent body in Europe for marketing and was not actually marketed by July 22, 2016, the
Foundation would have had a 60 day option to receive shares of the Company’s Common Stock in lieu of the 6.0% Fund
Interest in the Opioid Overdose Reversal Treatment Product at an exchange rate of 10 shares for every dollar of its
investment. On July 28, 2014, the Company received an initial investment of $111,470 from the Foundation in exchange for a
0.22294% interest. On August 13, 2014, September 8, 2014, November 13, 2014 and February 17, 2015, the Company made capital
calls of $422,344, $444,530, $1,033,614 and $988,042, respectively, from the Foundation in exchange for 0.844687%, 0.888906%,
2.067228% and 1.976085% interests, respectively, in the OORT Net Profit. The Opioid Overdose Reversal Treatment Product was
approved by the FDA on November 18, 2015, and, as a result, the investor did not realize the option to exchange its 6.0% Fund
Interest for shares of Common Stock of the Company. During the year ended July 31, 2016, the Company recognized $3,000,000 as
revenue because the option to receive the shares of Common Stock was not realized, and the research and development work
related to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2016.
On September 9, 2014, the Company
entered into an agreement with an investor, Potomac, and subsequently received funding from an individual investor in the amount
of $500,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with
a 0.98% interest in the OORT Net Profit (the “September 2014 0.98% Investor Interest”) generated from the Opioid Overdose
Reversal Treatment Product in perpetuity. The investor also has rights with respect to the 0.98% Investor Interest if the Opioid
Overdose Reversal Treatment Product is sold or the Company is sold. Additionally, the Company may buy back, in whole or in part,
the September 2014 0.98% Investor Interest (i) within 2.5 years or (ii) after 2.5 years, but no later than four years, of the September
9, 2014 initial investment date, at a price equal to two times or 3.5 times, respectively, the relevant investment amount represented
by the interests to be bought back. If the Opioid Overdose Reversal Treatment Product was not introduced to the market and not
approved by the FDA or an equivalent body in Europe and not marketed within 24 months of the September 9, 2014 initial investment
date, the investor would have had a 60 day option to exchange the September 2014 0.98% Interest for 50,000 shares of Common Stock
of the Company. The Opioid Overdose Reversal Treatment Product was approved by the FDA on November 18, 2015 and, as a result, the
investor did not realize the option to exchange the September 2014 0.98% Interest for 50,000 shares of Common Stock of the Company.
During the year ended July 31, 2016, the Company recognized $500,000 as revenue because the option to receive the shares of Common
Stock was not realized, and the research and development work related to the Opioid Overdose Reversal Treatment Product was completed
as of July 31, 2016.
On
September 17, 2014, the Company entered into an agreement with an investor, Potomac, and subsequently received funding totaling
$500,000 for use by the Company for any purpose.
In exchange for this funding, the Company
agreed to provide the investor with a 1.0% interest in the Company’s BED Treatment Product and pay the investor 1.0% of the
BED Net Profit generated from the BED Treatment Product in perpetuity (the “1.0% Investor Interest”). “BED Net Profit”
is defined as the pre-tax profit generated from the BED Treatment Product after the deduction of all expenses incurred by and payments
made by the Company in connection with the BED Treatment Product, including but not limited to an allocation of Company overhead.
If the BED Treatment Product is not approved by the FDA by September 17, 2017, the investor will have a 60 day option to exchange
its entire 1.0% Investor Interest for 62,500 shares of Common Stock of the Company.
On October 31, 2014, the Company
entered into an agreement with an investor, Potomac, and subsequently received funding from an individual investor in the amount
of $500,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with
a 0.98% interest in the OORT Net Profit (the “October 2014 0.98% Investor Interest”) generated from the Opioid Overdose
Reversal Treatment Product in perpetuity. The investor also has rights with respect to its 0.98% interest if the Opioid Overdose
Reversal Treatment Product is sold or the Company is sold. Additionally, the Company may buy back, in whole or in part, the October
2014 0.98% Investor Interest from the investor (i) within 2.5 years or (ii) after 2.5 years, but no later than four years, of the
October 31, 2014 investment date at a price equal to two times or 3.5 times, respectively, the relevant investment amount represented
by the interests to be bought back. If the Opioid Overdose Reversal Treatment Product was not introduced to the market and was
not approved by the FDA or an equivalent body in Europe and not marketed by October 31, 2016, the investor would have had a 60
day option to exchange its October 2014 0.98% Interest for 50,000 shares of Common Stock of the Company. The Opioid Overdose Reversal
Treatment Product was approved by the FDA on November 18, 2015 and, as a result, the investor did not realize the option to exchange
its October 2014 0.98% Interest for 50,000 shares of Common Stock of the Company. During the year ended July 31, 2016, the Company
recognized $500,000 as revenue because the option to receive the shares of Common Stock was not realized, and the research and
development work related to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2016.
On July 20, 2015, the Company
entered into an agreement with an investor, Potomac, and subsequently received funding from an individual investor in the amount
of $250,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with
a 0.5% interest in the BED Net Profit (the “2015 0.5% Investor Interest”) generated from the BED Treatment Product
in perpetuity. The investor also has rights with respect to the 2015 0.5% Investor Interest if the BED Treatment Product is sold
or the Company is sold. If the product is not introduced to the market and not approved by the FDA or an equivalent body in Europe
and not marketed by July 20, 2018, the investor will have a 60 day option to exchange the 2015 0.5% Investor Interest for 25,000
shares of Common Stock of the Company.
On
September 22, 2015, the Company received a $1,600,000 commitment from the Foundation which later assigned its interest to
Valour in October 2016, from which the Company had the right to make capital calls from the Foundation for the research,
development, any other activities connected to the Company’s opioid antagonist treatments for addictions and related
disorders that materially rely on certain studies funded by the Foundation’s investment, excluding the Opioid
Overdose Reversal Treatment Product (the “Certain Studies Products”), certain operating expenses, and any other
purpose consistent with the goals of the Foundation.
In exchange for funds
invested by the Foundation, Valour currently owns 2.1333% interest in the Certain Studies Products Net Profit (the
“2.1333% Interest”). The “Certain Studies Net Profit” is defined as any pre-tax revenue received by
the Company that was derived from the sale of the Certain Studies Products less any and all expenses incurred by and payments
made by the Company in connection with the Certain Studies Products, including but not limited to an allocation of Company
overhead based on the proportionate time, expenses and resources devoted by the Company to Certain Studies Product-related
activities, which allocation shall be determined in good faith by the Company. Valour also has rights with respect to its up
to a 2.1333% Interest if the Certain Studies Product is sold or the Company is sold. Additionally, the Company may buy back,
in whole or in part, the 2.1333% Interest from Valour within 2.5 years or after 2.5 years of the initial investment at a
price of two times or 3.5 times, respectively, the relevant investment amount represented by the interests to be bought back.
If an aforementioned treatment is not introduced to the market by September 22, 2018, Valour will have a 60 day option to
exchange its 2.1333% Interest for shares of the Common Stock of the Company at an exchange rate of one-tenth of a share for
every dollar of its investment. On October 2, 2015, December 23, 2015, and May 28, 2016, the Company made capital calls
of $618,000, $715,500 and $266,500 from the Foundation in exchange for 0.824%, 0.954% and 0.355333% interests in
the aforementioned treatments, respectively. The Company will defer recording revenue until such time as
Valour’s option expires or milestones are achieved that eliminates Valour’s right to exercise the option. Upon
expiration of the exercise option, the deliverables of the arrangement will be reviewed and evaluated under Accounting
Standards Codification (ASC) 605. In the event Valour chooses to exchange its 2.1333% Interest, in whole or in part, for
shares of Common Stock of the Company, that transaction will be accounted for similar to a sale of shares of Common Stock for
cash.
On
December 8, 2015, the Company entered into an agreement with an investor, Potomac, to receive $500,000 for use by the Company for
any purpose, which $500,000 was invested by December 18, 2015. In exchange for this funding, the Company granted the investor a
0.75% interest in the OORT Net Profit (the “0.75% Investor Interest”) generated from the Opioid Overdose Reversal Treatment
Product in perpetuity. The investor also has rights with respect to its 0.75% Investor Interest if the Opioid Overdose Reversal
Treatment Product is sold or the Company is sold.
Additionally,
the Company may buy back, in whole or in part, the 0.75% Investor Interest, from the investor (i) within 2.5 years or (ii) after
2.5 years, but no later than four years, of the December 8, 2015 initial investment date, at a price of two times or 3.5 times,
respectively, the relevant investment amount represented by the interests to be bought back. Such buyback can be for a portion
of the 0.75% Investor Interest rather than for the entire interest. The investor also had an option to invest an additional $1,000,000
by February 29, 2016 for use by the Company for any purpose in exchange for a 1.50% interest in the OORT Net Profit. If such investment
were made, then the investor also would have rights with respect to its 1.50% interest if the Opioid Overdose Reversal Treatment
Product was sold or the Company was sold. This investor option expired unexercised. During the year ended July 31, 2016, the Company
recognized $500,000 as revenue because the investment did not contain any option to exchange the 0.75% Investor Interest for shares
of Common Stock of the Company, and the research and development work related to the Opioid Overdose Reversal Treatment Product
was completed as of July 31, 2016.
Common Stock
During the year ended July
31, 2016
Pursuant to an agreement dated
September 1, 2015, the Company issued 10,000 shares of unregistered Common Stock in exchange for services rendered by a consultant.
The shares issued in this transaction were valued using the stock price at issuance date and amounted to $80,500.
On October 6, 2015, the Company
issued 13,697 shares of unregistered Common Stock pursuant to the agreement described in Note 8. The shares issued in this transaction
were using the stock price at issuance date and amounted to $106,152.
On
November 19, 2015, the Company issued 14,327 shares of the unregistered Common Stock upon the execution of a binding letter of
intent to agree to negotiate and enter into an exclusive license agreement and collaboration agreement (“LOI”) with
a pharmaceutical company with certain desirable proprietary information. The shares issued in this transaction were valued using
the stock price at issuance date and amounted to $120,347. Pursuant to the LOI, the Company is obligated to issue up to an additional
92,634 shares of unregistered Common Stock upon the occurrence of various milestones.
A
total of 3,582 shares have been issued as of July 31, 2016 due to achievement of certain milestones (see below).
On
December 16, 2015, the Company entered into a services agreement with a term of one year. Pursuant to the agreement, the
Company issued 7,000, 9,000, and 11,000 shares of restricted unregistered Common Stock in exchange for services rendered by
the consultant on December 18, 2015, March 21, 2016, and June 24, 2016, respectively. The shares issued in this transaction
were valued using the stock price at issuance date and amounted to $64,050, $94,500 and $91,520, respectively.
In
addition, the Company agreed to issue 13,000 shares of unregistered Common Stock by September 30, 2016. On September 23,
2016_the Company terminated the agreement and the remaining 13,000 shares will no longer be issued.
On February 1, 2016, the Company
issued 5,500 shares of the Company’s unregistered Common Stock to a consultant for consulting services. The shares issued
in this transaction were valued using the stock price at issuance date and amounted to $57,750.
On February 8, 2016, the Company
issued 10,746 shares of the Company’s unregistered Common Stock pursuant to the agreement described in Note 8. The shares
issued in this transaction were valued using the stock price at issuance date and amounted to $106,385.
On March 8, 2016, the Company
issued 3,582 shares of unregistered Common Stock to a consultant, pursuant to the terms of the LOI disclosed above,
as a result of the first commercial sale of NARCAN® Nasal Spray by Adapt in the U.S. The shares issued in this transaction
were valued using the stock price at issuance date and amounted to $32,775.
On March 25, 2016, the Company
issued 15,715 shares of unregistered Common Stock as a result of the cashless exercise of 30,000 options.
On April 26, 2016, the Company
issued 50,000 shares of unregistered Common Stock pursuant to the agreement described in Note 8. The shares issued in this transaction
were valued using the stock price at issuance date and amounted to $431,500.
During the year ended July
31, 2015
In August 2014, the Company
issued 7,846 shares of unregistered Common Stock to consultants for services rendered. The shares have a fair value of
$44,723 based on stock prices at issuance dates.
In December 2014, the Company
issued 24,015 shares of unregistered Common Stock to a company for services rendered. The shares have a fair value of $91,258 based on the stock prices at issuance
dates.
In January 2015, the Company
issued a total of 5,000 shares of unregistered Common Stock to two consultants for services rendered. The shares have a fair value of $19,720 based on the stock
prices at issuance dates.
In March 2015, the
Company issued a total of 20,900 shares of unregistered Common Stock to two companies and a consultant for services rendered.
The shares have a fair value of $141,130 based on the stock prices at issuance dates.
In April 2015, the Company issued
1,232 shares of unregistered Common Stock to a consultant for services rendered. The shares have a fair value of $8,994 based on the stock prices at issuance
dates.
In July, 2015, the Company issued
800 shares of unregistered Common Stock to a consultant for services rendered. The shares have a fair value of $5,840 based on the stock prices at the date
performance by the consultant was complete.
Stock Options
As required by the Stock Compensation
Topic, ASC 718, the Company measures and recognizes compensation expense for all share based payment awards made to the officers
and directors based on estimated fair values at the grant date and over the requisite service period.
On August 2, 2014, the Company
granted options to purchase 30,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 5 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $173,999 which have been fully recognized as expense for the year ended July 31, 2015.
On November 12, 2014, the Company
granted options to purchase 30,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 5 years and vest
over 3 years. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $188,825, of which $103,951 has been fully recognized as expense for the year ended July 31, 2015.
On November 12, 2014, the Company
granted options to purchase 20,000 shares of Common Stock ex
ercisable on a cashless basis
with an exercise price of $15.00 per share to a consultant for services rendered. These options have a term of 5 years and vest
over three years. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $127,150, of which $67,984 has been fully recognized as expense for the year ended July 31, 2015.
On January 9, 2015, the Company
granted options to purchase 15,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 5 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $65,163 which have been fully recognized as expense for the year ended July 31, 2015.
On January 25, 2015, the Company
granted options to purchase 10,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 5 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $36,169 which have been fully recognized as expense for the year ended July 31, 2015.
On March 19, 2015, the Company
granted options to purchase 48,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 5 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $282,227 which have been fully recognized as expense for the year ended July 31, 2015.
On March 19, 2015, the Company
granted options to purchase 32,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $15.00 per share to a consultant for services rendered. These options have a term of 5 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $186,655 which have been fully recognized as expense for the year ended July 31, 2015.
On July 15, 2015, the Company
granted options to purchase 10,000 shares of Common Stock
exercisable on a cashless basis
with an exercise price of $10.00 per share to a consultant for services rendered. These options have a term of 3 years and vested
immediately. The Company has valued these options using the Black-Scholes option pricing model which resulted in a fair market
value of $55,043 which have been fully recognized as expense for the year ended July 31, 2015.
On
October 27, 2015, the Company granted options to purchase a total of 1,437,500 shares of Common Stock exercisable on a
cashless basis to the Company’s board of directors (the “Board”) and a senior executive of the Company.
Each of these options have an exercise price of $7.25, a term of 10 years and vested immediately upon grant. Each stock
option may only be exercised between the following dates: (i) the first to occur of: (A) the commencement of three trials on
or subsequent to October 23, 2015; or (B) (1) the approval by the FDA of the NDA with respect to the Opioid Overdose
Reversal Treatment Product, and (2) the commencement of two trials on or subsequent to October 23, 2015; and (ii) the
expiration date. As of April 30, 2016, the conditions for exercisability were met and the options were fully exercisable. The
Company has valued these options using the Black-Scholes option pricing model, resulting in a fair market value of an
aggregate of $10,062,500, which options have been fully recognized as an expense for the year ended July 31, 2016.
On
May 17, 2016, the Company granted options to purchase a total of 70,000 shares of Common Stock exercisable on a cashless basis
to the then-new members of the Company’s Board. These options all have an exercise price of $10.00 and a term of 5 years.
The options for each new director vest as follows: 11,667 shares vest upon the uplisting of the Company to the NASDAQ Stock Market;
11,667 shares vest upon the cumulative funding of the Company of or in excess of $5,000,000 by institutional investors commencing
May 5, 2016; and 11,666 shares vest upon the first submission of a NDA to the FDA for one of the Company’s products by either
the Company or a Company licensee. The Company has valued these options using the Black-Scholes option pricing model which resulted
in an aggregate fair market value of $580,286, of which an aggregate of $149,007 was recognized as expense for the year ended July
31, 2016.
The Company also recognized stock
based compensation expense of $99,039 in connection with vested options granted in prior periods.
The assumptions used in the valuation
for all of the options granted for the year ended July 31, 2016 and 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
Market value of stock on measurement
date
|
|
$
|
7.00
to 10.00
|
|
|
$
|
3.75
to 7.30
|
|
Risk-free interest rate
|
|
|
0.71-2.05
|
%
|
|
|
1.00-1.73
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
124-373
|
%
|
|
|
147-407
|
%
|
Term
|
|
|
3-10
years
|
|
|
|
3-5
years
|
|
Stock option activity for year ended July 31, 2016
and is presented in the table below:
|
|
Number of
Shares
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2014
|
|
|
3,047,500
|
|
|
|
9.00
|
|
|
|
8.56
|
|
|
|
|
|
Granted
|
|
|
195,000
|
|
|
|
11.33
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
(85,000
|
)
|
|
|
11.21
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2015
|
|
|
3,157,500
|
|
|
|
9.42
|
|
|
|
7.58
|
|
|
|
|
|
Granted
|
|
|
1,507,500
|
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,000
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2016
|
|
|
4,635,000
|
|
|
|
8.79
|
|
|
|
7.39
|
|
|
$
|
2,731,250
|
|
Exercisable at July 31, 2016
|
|
|
4,281,666
|
|
|
|
8.37
|
|
|
|
7.82
|
|
|
$
|
2,731,250
|
|
A summary of the status of the Company’s non-vested
options as of July 31, 2016 and changes during the year ended July 31, 2016 are presented below:
Non-vested options
|
|
Number of
Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested at July 31, 2014
|
|
|
17,500
|
|
|
$
|
3.11
|
|
Granted
|
|
|
195,000
|
|
|
|
5.09
|
|
Vested
|
|
|
(175,000
|
)
|
|
|
5.06
|
|
Non-vested at July 31, 2015
|
|
|
37,500
|
|
|
$
|
3.85
|
|
Granted
|
|
|
1,507,500
|
|
|
|
7.06
|
|
Vested
|
|
|
(1,454,167
|
)
|
|
|
7.00
|
|
Non-vested at July 31, 2016
|
|
|
90,833
|
|
|
$
|
7.27
|
|
At July 31, 2016, there was $460,879
of unrecognized compensation costs related to non-vested stock options.
Warrants
On December 16, 2014, the Company
issued warrants to purchase 38,800 shares of Common Stock with an exercise price of $8.00 per share to a consultant for services
rendered. These warrants have a term of 10 years and vested immediately. The Company has valued these warrants using the Black-Scholes
option pricing model which resulted in a fair market value of $144,724 which have been fully recognized as expense for the year
ended July 31, 2015.
On March 19, 2015, the Company
issued warrants to purchase 45,000 shares of Common Stock with an exercise price of $10.00 per share to a consultant for services
rendered. These warrants have a term of 5 years and vested immediately. The Company has valued these warrants using the Black-Scholes
option pricing model which resulted in a fair market value of $264,588 which have been fully recognized as expense for the year
ended July 31, 2015.
Warrant activity for the year ended July 31, 2016
is presented in the table below:
|
|
Number of
Shares
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2014
|
|
|
1,254,752
|
|
|
$
|
20.00
|
|
|
|
4.33
|
|
|
$
|
-
|
|
Issued
|
|
|
83,800
|
|
|
|
9.07
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 31, 2015
|
|
|
1,338,552
|
|
|
$
|
19.53
|
|
|
|
3.55
|
|
|
$
|
-
|
|
Expired
|
|
|
(123,167
|
)
|
|
|
35.55
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 31, 2016
|
|
|
1,215,385
|
|
|
$
|
17.90
|
|
|
|
2.86
|
|
|
$
|
-
|
|
Exercisable at July 31, 2016
|
|
|
490,385
|
|
|
$
|
22.20
|
|
|
|
5.00
|
|
|
$
|
-
|
|
On December 1, 2014, the Company
and Aegis Therapeutics, LLC (“Aegis”), entered into a Material Transfer, Option and Research License Agreement (the
“Aegis Agreement”) that provides the Company with an exclusive royalty-free research license for a period of time to
Aegis’ proprietary delivery enhancement and stabilization agents, including Aegis’ ProTek® and Intravail® technologies
(collectively, the “Technology”) to enable the Company to conduct a feasibility study of opioid antagonists when used
with the Technology (the “Study”). During this period of time, the Company may also evaluate its interest in having
an exclusive license to the Technology for use with opioid antagonists to treat, diagnose, predict, detect or prevent any disease,
disorder, state, condition or malady in humans (the “Possible License”). Aegis has granted the Company an exclusive
option to obtain the Possible License for a certain period after the study is completed. In consideration of the license granted
to the Company pursuant to the Aegis Agreement, the Company is required to pay to Aegis a nonrefundable study fee.
On October 6, 2015, the Company
entered into an amendment to the Aegis Agreement. This amendment had an effective date of May 19, 2015 and allowed the Company
to evaluate the Technology until August 17, 2015. The amendment also provided an opportunity for the Company to elect to further
extend the period of time during which the Company could evaluate the Technology until February 13, 2016. In exchange for electing
to further extend this period of time, the Company paid Aegis $75,000 and issued 13,697 shares of the Company’s Common Stock.
The shares issued in this transaction were using the stock price at issuance date and amounted to $106,152.
During February 2016, the Company
elected to further extend the period of time during which the Company could evaluate Aegis’ Technology until August 11, 2016.
The Company paid Aegis $75,000 and issued 10,746 shares of the Company’s Common Stock. The shares issued in this transaction
were using the stock price at issuance date and amounted to $106,385.
On April 26, 2016, the Company
entered into an amendment to the Aegis Agreement. Pursuant to this agreement, the Company’s license to evaluate Aegis’
Technology was extended through December 31, 2016.
On April 26, 2016, the Company
and Aegis entered into the Amended and Restated Material Transfer, Option and Research License Agreement (the “Restated Aegis
Agreement”) which amends and restates in its entirety the Aegis Agreement. Under the Restated Aegis Agreement, the Company
has been granted an exclusive royalty-free research license to Aegis’ Technology for a period of time (the “Compound
Research Period”), to enable the Company to conduct a feasibility study of opioid antagonists when used with the Technology
and evaluate the Company’s interest in licensing the Technology through use of a “Compound” (as defined in the
Restated Aegis Agreement) in additional studies.
The Company agreed to pay Aegis
(i) an aggregate of $300,000, of which the Company may elect to pay up to 50% by issuing shares of the Company’s Common Stock
to Aegis, with the number of shares to be issued equal to 75% of the average closing price of the Company’s Common Stock
over the 20 trading days preceding the date of payment as consideration for extending the Compound Research Period pursuant to
two separate extension payments of $150,000 each, and (ii) 50,000 shares of Common Stock as partial consideration for entering
into the Restated Aegis Agreement. The Company exercised such extensions through payment of the first and second extension fees
prior to October 13, 2015 and prior to February 13, 2016, respectively. The Restated Aegis Agreement shall expire on the earlier
of (i) the expiration of the “Opiant Negotiation Periods” (as defined in the Restated Aegis Agreement) and (ii) on
30 days’ prior written notice by the Company;
provided
,
however
, that Aegis shall have the right to terminate
the license granted in the event the Company does not pursue commercially reasonable efforts to exploit a “Product”,
defined as (i) pharmaceutical formulations containing the Compound as an active ingredient and (ii) Aegis’s proprietary chemically
synthesizable excipient(s), including without limitation the Intravail® excipients pharmaceutical formulations containing certain
ingredients of Aegis’ proprietary technology.
During the term of
the Restated Aegis Agreement, the Company has a right of first refusal and option to add any, or all of the
“Additional Compounds” (as defined in the Restated Aegis Agreement), which the Company may exercise at any time
upon written notice to Aegis. The Company has granted Aegis a co-exclusive license with the Company to use the data from the
Company’s Studies under the Restated Aegis Agreement for certain purposes. Pursuant to the Restated Aegis Agreement,
Aegis granted the Company an exclusive option (the “Opiant Option”) to obtain an exclusive, worldwide,
royalty-bearing license (with the right to grant sublicenses through multiple tiers) under Aegis’s interests in the
Technology and any “Joint Invention” (as such term is defined in the Restated Aegis Agreement) to the Technology
to research, develop, make, have made, use, sell, offer for sale, and import products containing the Compound or an
Additional Compound. The Company may exercise such Opiant Option with respect to the Compounds by written notice to Aegis
within 90 days of the completion of the Study for (i) the Compounds or (ii) the Additional Compounds. In the event the
Company exercises the Opiant Option, the parties have 120 days to negotiate and execute a definitive license agreement. The
terms of such license agreement have been contemplated and agreed upon by the parties under a letter agreement dated April
26, 2016 (the “Letter Agreement”). In the event the Company exercises the Opiant Option, the Company shall
pay to Aegis a nonrefundable and noncreditable license issuance fee of $300,000 as of April 26, 2016, of which the Company
may elect to pay up to 50% by issuing shares of the Company’s Common Stock to Aegis, with the number of shares to be
issued equal to 75% of the average closing price of the Company’s stock over the prior 20 trading days. In the event
the Company exercises the Opiant Option specific to the “Opioid Field” (as defined in Exhibit 1 to the Letter
Agreement), the Company shall pay Aegis an additional $100,000 fee and any such products in the Opioid Field shall be subject
to the same milestones, royalties and other monetary obligations set forth in the Letter Agreement and summarized below.
Under the Letter Agreement containing
the terms of such license, the Company will pay Aegis upon the achievement of each development milestone for a particular Compound
or Additional Compound, ranging from $250,000 to $4,000,000 per achievement. Additionally, the Company is required to make minimum
quarterly nonrefundable payments to Aegis in the amount of $25,000 (the “Quarterly Payments”), which Quarterly Payments
are fully creditable and treated as a prepayment against future milestones or royalties. During the “Royalty Term”
(as defined in Exhibit 1 to the Letter Agreement), the Company shall pay Aegis royalties (the “Royalties”) on annual
net sales of (i) pharmaceutical formulations containing the Compound as an active ingredient and (ii) Aegis’s proprietary
chemically synthesizable excipient(s), including without limitation the Intravail® excipients ((i) and (ii) together, the “Products”),
ranging from (A) low single digits for Products with an aggregate annual “Net Sales” (as defined in Exhibit 1 to the
Letter Agreement) during a calendar year of $50 million or less to (B) mid-single digits for Products with Net Sales of greater
than $1 billion. Such Royalties are subject to reduction as provided in Exhibit 1 to the Restated Agreement but shall not be reduced
by more than 50% of the regularly scheduled royalty payment.
The foregoing description
of the Restated Aegis Agreement and the Letter Agreement is qualified in its entirety by reference to the complete text of
the Restated Aegis Agreement and the Letter Agreement which were filed as exhibits to the Company’s June 8, 2016 10-Q.
The Company received confidential treatment for certain terms and provisions of the Restated Aegis Agreement and the Letter
Agreement.
On December 18, 2014, the Company
entered into a consulting agreement. Pursuant to the agreement, the consultant agreed to provide financial advisory services with
regard to the licensing agreement with Adapt Pharma Operations Limited described in Note 3. In exchange for these services, the
Company incurred fixed fees of $225,000 and $75,000 during the years ended July 31, 2016 and 2015, respectively. The
Company is also required to pay an additional fee equivalent to 3.75% of all amounts received by the Company pursuant to the licensing
agreement in excess of $3,000,000, in perpetuity. Total fees incurred during the year ended July 31, 2016 amounted to $317,917.
The Company leases office space
in three locations. The Company’s headquarters are located on the 12
th
Floor of 401 Wilshire Blvd., Santa Monica,
CA 90401 for $5,056 per month. The lease with Premier Office Centers, LLC (“Premier”), as amended effective October
1, 2016, has an initial term of five months and shall automatically renew for successive six month periods unless terminated by
the Company in writing 60 days prior to the termination date. Premier may terminate the lease for any reason upon 30 days’
prior notice to the Company.
The Company also leases office
space in Suite 100 of 1180 North Town Center Drive, Las Vegas, NV 89144 for $299 per month. The lease with Regus Management Group,
LLC expires on July 31, 2017.
Additionally, the Company leases
office space in Euston Tower, L32 to L34, 286 Euston Road, London, England, NW1 3DP for a total of €1,932 for the initial
five month term ending March 31, 2017. The Company’s lease is with Euston Tower Serviced Offices Ltd.
The Company recognizes deferred
tax assets and liabilities using the asset and liability method. Deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences
are expected to reverse. This method requires the reduction of deferred tax assets by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
As of July 31, 2016, the Company’s
deferred tax assets relate to net operating loss (“NOL”) carryforwards that were derived from operating losses from
prior years as well as stock based compensation expense. A full valuation allowance has been applied to the Company’s deferred
tax assets. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related
deferred income tax assets will be realized.
The Company’s NOL carryforwards
can be carried forward to offset future taxable income for a period of 20 years for each tax year’s loss. These NOL carryforwards
begin to expire in 2026. No provision was made for federal income taxes as the Company has significant NOLs. All of the Company's income tax years remained open for examination by taxing authorities.
The provision for income taxes differs from the amounts
which would be provided by applying the statutory federal income tax rate to the net loss before provision for income taxes for
the following reasons:
|
|
July 31, 2016
|
|
|
July 31, 2015
|
|
|
|
|
|
|
|
|
Net loss before taxes at statutory rate
|
|
$
|
(3,242,916
|
)
|
|
$
|
(2,744,770
|
)
|
Permanent items
|
|
|
1,764
|
|
|
|
6,508
|
|
Temporary items
|
|
|
4,770,850
|
|
|
|
667,840
|
|
Income tax expense at statutory rate
|
|
|
1,529,698
|
|
|
|
(2,070,422
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,529,698
|
)
|
|
|
2,070,422
|
|
|
|
|
|
|
|
|
|
|
Income tax expense per books
|
|
$
|
-
|
|
|
$
|
-
|
|
Net deferred tax assets consist
of the following components as of:
|
|
July 31, 2016
|
|
|
July 31, 2015
|
|
|
|
|
|
|
|
|
Net operating loss carryover at statutory rate
|
|
$
|
(10,063,523
|
)
|
|
$
|
(11,593,221
|
)
|
Stock-based compensation expense
|
|
|
(9,217,868
|
)
|
|
|
(4,447,018
|
)
|
|
|
|
(19,281,391
|
)
|
|
|
(16,040,239
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
19,281,391
|
|
|
|
16,040,239
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had no uncertain
tax positions at July 31, 2016 or July 31, 2015.
On October 6, 2016 the Company received
$500,000 from Adapt as a regulatory milestone payment pursuant to the Adapt Agreement. This payment was triggered by the Health
Canada approval of Adapt’s naloxone hydrochloride nasal spray to treat opioid overdose, to be marketed as NARCAN® Nasal
Spray.
On October 6, 2016, the Company granted options to purchase a total of 50,000 shares of Common Stock exercisable on a cashless
basis to two employees. These options all have an exercise price of $10.00 and a term of 10 years. The options vest as follows:
1,388 shares vest upon each of the first through twentieth month anniversaries of the grant date; 1,390 shares vest upon each
of the twenty-first through thirty-sixth month anniversaries of the grant date.