Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of
the results of operations and financial condition for the three and nine months ended October 31, 2016 and 2015 and should be read
in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report.
Overview
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’s fiscal year end is July 31.
The Company’s strategy is to develop
pharmacological treatments for substance use, addictive and eating disorders based on the Company’s expertise using opioid
antagonists. The Company has worked on developing a treatment for reversing opioid overdoses in collaboration with the National
Institute on Drug Abuse (“NIDA”), part of the National Institutes of Health (“NIH”). This treatment, now
known as NARCAN® (naloxone hydrochloride) Nasal Spray, was approved by the U.S. Food and Drug Administration (“FDA”)
in November 2015, and is marketed by Adapt Pharma Operations Limited (“Adapt”), a wholly owned subsidiary of Adapt
Pharma Limited, an Ireland-based pharmaceutical company.
The Company has not consistently attained profitable
operations and has historically depended upon obtaining sufficient financing to fund its operations. The Company anticipates if
revenues are not sufficient then additional funding will be required in the form of debt financing and/or equity financing from
the sale of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and/or financings from
the sale of interests in the Company’s prospective products and/or royalty transactions. However, the Company may not be
able to generate sufficient revenues or raise sufficient funding to fund the Company’s operations.
The Company has not had a bankruptcy, receivership
or similar proceeding. The Company has not had material reclassifications, mergers, consolidations, or purchase or sale of a significant
amount of assets not in the ordinary course of business. The Company is required to comply with all regulations, rules and directives
of governmental authorities and agencies applicable to the clinical testing and manufacturing and sale of pharmaceutical products.
In December 2014, the Company effected a one-for-one
hundred reverse stock split of its Common Stock (the “1:100 Reverse Stock Split”) 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, all share amounts listed in this Report have been retroactively adjusted for the 1:100 Reverse Stock Split as if such stock
split occurred prior to the issuance of such shares. 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 Company developed NARCAN® (naloxone
hydrochloride) Nasal Spray, a treatment to reverse opioid overdoses, which was conceived, licensed, developed, approved by the
FDA and commercialized in less than three years. The Company plans to replicate this relatively low cost, successful business strategy
primarily through developing nasal opioid antagonists in the field of developing pharmacological treatments for substance use,
addictive, and eating disorders. The Company aims to identify and progress drug development opportunities with the potential to
file additional New Drug Applications (“NDA”) with the FDA within three years. The Company also plans to identify and
progress drug development opportunities with potentially larger markets, potentially larger addressable patient populations and
greater revenue potential. In addition, the Company plans to invest in long-term development opportunities by identifying early
stage product candidates with novel modes of action.
The Company’s current pipeline of product
candidates includes a treatment for Binge Eating Disorder (“BED”), a treatment for Bulimia Nervosa (“BN”),
a treatment for Cocaine Use Disorder (“CocUD”) and a heroin vaccine. The Company also is focused on other treatment
opportunities.
Principal Products or Services and Markets
Opioid Overdose Reversal
Naloxone is a medicine that can reverse the
overdose of prescription and illicit opioids and that historically has been available through injection. The Company’s intranasal
delivery system of naloxone could widely expand its availability and use in preventing opioid overdose deaths.
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, Potomac
acquired a 6.0% interest (the “6.0% Potomac 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. Potomac also has rights with respect to the 6.0% Potomac Interest if the Opioid
Overdose Reversal Treatment Product is sold or the Company is sold.
On May 30, 2013, the Company entered into an
agreement with 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, Potomac acquired an additional
1.5% interest (the “1.5% Potomac Interest”) in the OORT Net Profit generated from the Opioid Overdose Reversal Treatment
Product in perpetuity. Potomac also has rights with respect to the 1.5% Potomac Interest if the Opioid Overdose Reversal Treatment
Product is sold or the Company is sold.
On March 14, 2014, the Company filed U.S. Provisional
Application No. 61/953,379. This application addresses delivery devices and methods of treating opioid overdoses through the administration
of intranasal naloxone.
On May 15, 2014, the Company entered into an
agreement and subsequently received funding from an investor, Ernst Welmers (“Welmers”), in the amount of $300,000
for use by the Company for any purpose. In exchange for this funding, the Welmers acquired a 1.5% interest (the “1.5% Welmers
Interest”) in the OORT Net Profit generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Welmers also
has rights with respect to the 1.5% Welmers 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, Welmers would have had a 60
day option to exchange its 1.5% Welmers 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, Welmers did not realize the option to exchange
its 1.5% Welmers Interest for shares of Common Stock of the Company. During the year ended July 31, 2016, the Company recognized
$300,000 as revenue because Welmer’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 9, 2014, the Company filed U.S. Provisional
Application No. 62/022,268 with respect to the Company’s treating opioid overdoses through the administration of intranasal
naloxone.
On July 22, 2014, the Company received a $3,000,000
commitment from a foundation (the “Foundation”) which later assigned its interest to Valour Fund, LLC (“Valour”),
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% Valour Interest”) generated from the Opioid Overdose Reversal Treatment
Product in perpetuity. Valour also has rights with respect to the 6.0% Valour 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% Valour 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% Valour 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 Foundation did not realize the option to exchange its 6.0% Valour 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 Potomac and subsequently received additional funding from Potomac in the amount of $500,000 for use by the Company
for any purpose. In exchange for this funding, Potomac acquired an additional 0.98% interest in the OORT Net Profit (the “September
2014 0.98% Potomac Interest”) generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Potomac also has
rights with respect to the 0.98% Potomac 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% Potomac 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, Potomac would have had a 60 day option to exchange
the September 2014 0.98% Potomac 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, Potomac did not realize the option to exchange the September
2014 0.98% Potomac 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 October 31, 2014, the Company entered into
an agreement with Potomac and subsequently received additional funding from Potomac in the amount of $500,000 for use by the Company
for any purpose. In exchange for this funding, Potomac acquired an additional 0.98% interest in the OORT Net Profit (the “October
2014 0.98% Potomac Interest”) generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Potomac also has
rights with respect to its October 2014 0.98% Potomac 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% Potomac Interest from Potomac
(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, Potomac would have had a 60 day option to exchange its October
2014 0.98% Potomac 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, Potomac did not realize the option to exchange its October 2014 0.98%
Potomac 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 December 15, 2014, the Company and Adapt
entered into a license agreement (the “Adapt Agreement”). The Adapt Agreement has no set duration but may be terminated,
among other ways, by Adapt in its sole discretion, either in its entirety or in respect of one or more countries, at any time by
providing 60 days prior notice to the Company. Pursuant to the Adapt Agreement, Adapt received from the Company a global license
to develop and commercialize the Company’s intranasal naloxone Opioid Overdose Reversal Treatment Product. In exchange for
licensing its treatment to Adapt, the Company could receive total potential regulatory and sales milestone payments of more than
$55 million, plus up to double-digit percentage royalties on net sales. The Adapt Agreement provided for an upfront and nonrefundable
payment of $500,000, and monthly payments for up to one year for participation in joint development committee calls and the production
and submission of an initial development plan. The Adapt Agreement also required the Company 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. The Company fulfilled its requirement to contribute $2,500,000 during the three months ended October 31, 2015.
Upon termination of the Adapt Agreement, (i) all rights granted by the Company thereunder shall immediately terminate; (ii) Adapt
shall grant the Company an exclusive license, with the right to grant multiple tiers of sublicenses, under the “Adapt Applied
Patents”, “Adapt Applied Know-How”, and Adapt’s rights under the “Joint Patents” and “Joint
Know-How to Exploit Products” (as such terms in quotation marks are defined in the Adapt Agreement); (iii) Adapt shall assign
to the Company, at Adapt’s expense, all of its right, title, and interest in and to all “Regulatory Approvals”
applicable to any “Product”, and all “Regulatory Documentation” specific to such Regulatory Approvals then
owned by Adapt or any of its “Affiliates”, and shall use “Commercially Reasonable Efforts” to cause any
and all “Sublicensees” (as such terms in quotation marks are defined in the Adapt Agreement) to assign to the Company
any such Regulatory Approvals and related Regulatory Documentation then owned by such Sublicensee; (iv) Adapt shall grant the Company
an exclusive, license and right of reference, with the right to grant multiple tiers of sublicenses and further rights of reference,
under all Regulatory Documentation (including any Regulatory Approvals) then owned or “Controlled” by Adapt or any
of its Affiliates that are not assigned to the Company pursuant to (iii) above that are necessary or useful for the Company
or any of its Affiliates or sublicensees to “Exploit” any Product and any improvement to any of the foregoing, as such
Regulatory Documentation exists as of the effective date of such termination of the Adapt Agreement and Adapt shall use Commercially
Reasonable Efforts to cause its “Commercial Sublicensees” (as such terms in quotation marks are defined in the Adapt
Agreement) to grant comparable rights under all Regulatory Documentation (including any Regulatory Approvals) then owned or Controlled
by such Commercial Sublicensees; (v) at the Company’s request, assign to the Company all right, title, and interest of Adapt
in each “Product Trademark” (as defined in the Adapt Agreement) at Adapt’s expense; and (vi) at the Company’s
request, assign to the Company all right, title, and interest in and to the “Development Data” (as defined in the Adapt
Agreement) that Adapt is not precluded from disclosing or assigning to the Company pursuant to the terms of any applicable agreement
with a “Third Party” (as defined in the Adapt Agreement);
provided
,
however
, that Adapt shall use Commercially
Reasonable Efforts (which shall not include any obligation to expend money) to obtain the consent of the applicable Third Party
for such disclosure and/or assignment in the event that Adapt is so precluded.
On February 17, 2015, the Company announced
that Adapt received “Fast Track” designation by the FDA.
On April 22, 2015, the Company announced that
Adapt successfully completed a pharmacokinetic study of intranasal naloxone. This study had been designed and conducted by the
Company in collaboration with NIDA. The pharmacokinetic study compared intranasal naloxone with an injectable formulation of naloxone.
The study met its objectives and demonstrated the intranasal formulation of naloxone delivered the targeted naloxone dose as expected.
On June 3, 2015, the Company announced that
Adapt commenced a rolling submission of a NDA to the FDA for a nasal spray formulation of naloxone. A rolling submission allows
completed portions of the NDA to be submitted and reviewed by the FDA on an ongoing basis.
On July 29, 2015, the Company announced that
Adapt submitted a NDA to the FDA for NARCAN® (naloxone hydrochloride) Nasal Spray, an investigational drug intended to treat
opioid overdose.
On November 18, 2015, the FDA approved NARCAN®
(naloxone hydrochloride) Nasal Spray for the emergency treatment of known or suspected opioid overdose, to be marketed by Adapt.
On December 8, 2015, the Company entered into
an agreement with 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, Potomac acquired an additional 0.75% interest in the OORT Net Profit (the “0.75% Potomac
Interest”) generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Potomac also has rights with respect
to its 0.75% Potomac 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% Potomac Interest, from Potomac (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% Potomac
Interest rather than for the entire interest. Potomac 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
Potomac also would have had 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% Potomac 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.
On December 15, 2015, the Company announced
that it received a $2 million milestone payment from Adapt. This milestone payment was triggered by the FDA approval of NARCAN®
(naloxone hydrochloride) Nasal Spray.
On January 19, 2016, the Company announced
that Adapt announced that it has reached an agreement to facilitate the purchase of NARCAN® (naloxone hydrochloride) Nasal
Spray by offering its discounted public interest price to 62,000 agencies in state and local government and the non-profit sector.
Adapt, in partnership with the National Association of Counties, National Governors Association, National League of Cities, and
United States Conference of Mayors, will offer NARCAN® (naloxone hydrochloride) Nasal Spray at a discounted public interest
price of $37.50 per dose ($75 for a 2 pack carton) through the U.S. Communities Purchasing Alliance and Premier, Inc. Adapt’s
discounted public interest price has been available to qualifying group purchasers, such as law enforcement, firefighters, first
responders, departments of health, local school districts, colleges and universities and community-based organizations.
On January 27, 2016, the Company announced
that Adapt announced two national programs at the Clinton Health Matters Initiative Activation Summit to assist in efforts to address
the growing risk of opioid overdose among American high school students. Adapt offered a free carton of NARCAN® (naloxone hydrochloride)
Nasal Spray to all high schools in the U.S. through the state departments of education. This program will collaborate with the
Clinton Health Matters Initiative, an initiative of the Clinton Foundation, as part of its work to scale naloxone access efforts
nationally. In addition, Adapt has provided a grant to the National Association of School Nurses (NASN) to support their educational
efforts concerning opioid overdose education materials.
On March 7, 2016, the Company announced the
receipt of a $2.5 million milestone payment from Adapt. This milestone payment was triggered by the first commercial sale of NARCAN®
(naloxone hydrochloride) Nasal Spray in the U.S.
On April 29, 2016, the Company received $105,097
in royalty payments due from Adapt from commercial sales of NARCAN® (naloxone hydrochloride) Nasal Spray in the U.S during
the first quarter of Adapt’s fiscal year.
On August 8, 2016, the Company received $234,498
in royalty payments due from Adapt from commercial sales of NARCAN® (naloxone hydrochloride) Nasal Spray in the U.S during
the second quarter of Adapt’s fiscal year.
On May 6, 2016, the Company announced that
Adapt submitted a new drug submission (NDS) for NARCAN® (naloxone hydrochloride) Nasal Spray to Health Canada.
On September 15, 2016, the Company and Adapt
received notice from TEVA Pharmaceuticals USA, Inc. (“TEVA”), pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “Notice
Letter”), that TEVA had filed an Abbreviated New Drug Application (“ANDA”) with the FDA seeking regulatory approval
to market a generic version of NARCAN® (naloxone hydrochloride) Nasal Spray before the expiration of U.S. Patent No. 9,211,253
(the “’253 patent”). The ‘253 patent is listed with respect to NARCAN® (naloxone hydrochloride) Nasal
Spray in the FDA’s Approved Drug Products with Therapeutic Equivalents Evaluation publication (commonly referred to as the
“Orange Book”) and expires on March 16, 2035. TEVA’s Notice Letter asserts that its generic product will not
infringe the ‘253 patent or that the ‘253 patent is invalid or unenforceable. The Company and Adapt have been evaluating
TEVA’s Notice Letter. The Company has full confidence in its intellectual property portfolio related to NARCAN® (naloxone
hydrochloride) Nasal Spray and expects that the ‘253 patent will be vigorously defended from any infringement. The Company
may receive additional Notice Letters from other companies seeking to market generic versions of NARCAN® (naloxone hydrochloride)
Nasal Spray in the future and, after evaluation, the Company may commence patent infringement lawsuits against such companies.
On October 5, 2016, the Company announced that
Health Canada approved Adapt’s naloxone hydrochloride nasal spray to treat opioid overdose, to be marketed as NARCAN®
Nasal Spray.
On October 21, 2016, Adapt, Adapt Pharma Inc.
and the Company (collectively, the “Plaintiffs”) filed a complaint for patent infringement against TEVA and TEVA Pharmaceuticals
Industries Ltd. (collectively, the “Defendants”) in the U.S. District Court for the District of New Jersey arising
from TEVA’s U.S.’s filing of the ANDA with the FDA. The Plaintiffs seek, among other relief, an order that the effective
date of FDA approval of the ANDA be a date later than the expiration of the ‘253 patent, as well as equitable relief enjoining
the Defendants from infringing the ‘253 patent and monetary relief as a result of any such infringement. The Company maintains
full confidence in its intellectual property portfolio related to NARCAN® (naloxone hydrochloride) Nasal Spray and expects
that the ‘253 patent will continue to be vigorously defended from any infringement.
On October 27, 2016, the Company announced
that its patent for NARCAN® Nasal Spray is now listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book, patent number 9468747.
Binge Eating Disorder
The Company is developing a treatment for BED.
BED is defined in the American Psychiatric Association’s (“APA”) fifth edition of the Diagnostic and Statistical
Manual of Mental Disorders (“DSM-5”) chapter on feeding and eating disorders as a diagnosis for individuals who experience
persistent, recurrent episodes of overeating, marked by loss of control and significant clinical distress. DSM-5 is used by clinicians
and researchers to diagnose and classify mental disorders in order to improve diagnoses, treatment and research.
BED is the most common eating disorder in the
U.S. Approximately 8 million Americans are diagnosed with BED and it is correlated with obesity. In addition, according to the
APA, BED is associated with significant physical and psychological problems.”
In 2015, Shire PLC received FDA approval to
use Vyvanse to treat BED in adults. The Company considers naloxone to be a potentially compelling drug for the pharmacological
treatment of BED. It has a well-known safety profile and has the potential to block the reward that patients experience from bingeing.
On May 23, 2013, the Company presented the
results of the Company’s Phase II clinical trial of its nasal spray treatment for BED at the APA Annual Meeting in San Francisco.
On December 17, 2013, the Company entered into
an agreement with Potomac and subsequently received additional funding from Potomac totaling $250,000 for use by the Company for
any purpose. In exchange for this funding, Potomac acquired a 0.5% interest in the Company’s BED treatment product (the “BED
Treatment Product”) and 0.5% of the BED Net Profit in perpetuity (the “2013 0.5% Potomac 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, Potomac will have a 60 day option
to exchange its entire 2013 0.5% Potomac Interest for 31,250 shares of Common Stock of the Company.
On September 17, 2014, the Company entered
into an agreement with Potomac and subsequently received funding totaling $500,000 for use by the Company for any purpose.
In exchange for this funding, Potomac acquired an additional 1.0% interest in the Company’s BED Treatment Product and
1.0% of the BED Net Profit generated from the BED Treatment Product in perpetuity (the “1.0% Potomac Interest”). If
the BED Treatment Product is not approved by the FDA by September 17, 2017, Potomac will have a 60 day option to exchange its entire
1.0% Potomac Interest for 62,500 shares of Common Stock of the Company.
On July 20, 2015, the Company entered into
an agreement with Potomac and subsequently received additional funding from Potomac in the amount of $250,000 for use by the Company
for any purpose. In exchange for this funding, the Potomac acquired an additional 0.50% interest in the BED Net Profit (the “2015
0.5% Potomac Interest”) generated from the BED Treatment Product in perpetuity. Potomac also has rights with respect to the
2015 0.5% Potomac 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, Potomac will have a 60 day
option to exchange the 2015 0.5% Potomac Interest for 25,000 shares of Common Stock of the Company.
The Company now aims to collaborate with other parties and progress
its drug development program for BED and plans to initiate a BED study in 2017.
Bulimia Nervosa
Bulimia Nervosa (“BN”) is an eating
disorder characterized by binging and purging, and is most common in young women. BN is thought to be significantly under-recognized.
According to Hudson, JI, Hirpi, E, Pope, HG, et al. (The Prevalence and Correlates of Eating Disorders in National Comorbidity
Survey Replication. Biol Psychiatry. 2—7;61:348-358), in the U.S., the lifetime prevalence of BN is 1% to 2%. Patients with
BN have a 94.5% comorbidity with other psychiatric illnesses. For example, approximately 50% have major depressive episodes, and
33.7% engage in substance abuse. In extreme cases patients can develop life-threatening complications such as acute pancreatitis
from repeat purging.
The only medication currently approved for
BN is Prozac (fluoxetine). Only with a high dose do patients have a reduction in binge eating of 67% and vomiting of 56%. Only
50% of patients respond to this treatment.
The Company plans to evaluate the use of a
nasal opioid antagonist to treat this condition. The Company aims to initiate a study before May 1, 2017.
Cocaine Use Disorder
The Company has been conducting pilot studies
to explore the potential of a nasal opioid antagonist as a treatment for CocUD. There are approximately 1.5 million current
cocaine users in the U.S., as reported by The Substance Abuse and Mental Health Services Administration (SAMHSA). There are no
FDA-approved pharmacological treatments for CocUD.
Cocaine is a strong central nervous system
stimulant that increases levels of the neurotransmitter dopamine in brain circuits regulating pleasure and movement, with the opioid
system strongly linked to the dopamine reward circuitry. The extraordinary cost of cocaine addiction, financially, medically and
socially, is directly related to relapse: up to 80% of addicted individuals relapse within six months of treatment.
On December 23, 2015, the Company announced
that an opioid antagonist drug will be tested in patients with CocUD at the University of Pennsylvania. The study has been conducted
by the Department of Psychiatry at the Perelman School of Medicine at the University of Pennsylvania, and began recruitment in
December 2015. Funded by a Medications Development Centers of Excellence Cooperative (U54) Program from NIDA, the study uses functional
Magnetic Resonance Imaging (fMRI) to better understand the impact of an opioid antagonist drug in the brain of patients with CocUD.
Using an opioid antagonist and blocking the downstream release of dopamine through blocking the release of endorphins may reduce
the reward patients receive from cocaine use.
Heroin Vaccine
Opioid addiction is a major global health issue,
particularly in the U.S., where opioid painkiller abuse and subsequent addiction has become widespread and driven the increase
in prevalence. As these painkillers have become more expensive, undergone tighter controls for distribution, and abuse deterrent
formulations have become available, there has been an increase in heroin use, which is cheaper and often easier to obtain than
painkillers.
Current FDA-approved treatments for heroin
addiction are based on methadone-based and buprenorphine-based substitution therapies, and the use of naltrexone depot injections.
With respect to these substitution therapies, patients still take opioid-based treatments, which for many is undesirable, and there
is frequently diversion and misuse of these treatments amongst addicts. With respect to naltrexone depot injections, patients must
undergo detoxification before initiating treatment, which for several patients severely limits compliance and willingness to undergo
this method of treatment. Therefore, being able to provide a vaccine to patients that potentially provides specific immunity against
heroin and its metabolites without the need for prior detoxification and enabling patients to remain opioid-free is an attractive
solution.
In October 2016, the Company in-licensed a
heroin vaccine from Walter Reed Army Institute of Research (“Walter Reed”). This is an early stage pre-clinical asset,
based on adjuvant technology, and requires further pre-clinical research before human testing. The Company plans to work alongside
Walter Reed scientists to advance the program into the clinic and to determine whether the product is viable in a heroin addict
population.
Other Activities
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 through 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 through 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 through August 11, 2016. During
February 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
the Restated Aegis Agreement.
On September 22, 2015, the Company received
a $1,600,000 commitment from the Foundation which later assigned its interest to Valour, 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 a 2.1333% interest in the Certain Studies Products Net Profit (the “2.1333% Valour 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 2.1333% Valour 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% Valour 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% Valour 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% Valour 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 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 amended and restated 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 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 development milestones for the Products ranging from $250,000 to $4,000,000. Additionally,
commencing on the first anniversary and through the first Product approval, 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 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.
On February 17, 2016, the Company announced
the convening of a medical advisory board meeting to discuss its development programs in substance use, addictive and eating disorders.
The Company has held other medical advisory board meetings on April 28, 2015, April 19, 2016 and September 14, 2016.
Competition
The Company faces competition from other companies
focused on pharmacological treatments for substance use, addictive and eating disorders. Some of these companies are larger and
better-funded than the Company and there are no assurances that the Company can effectively compete with these competitors. Potential
competitors include Indivior PLC, Alkermes PLC, H. Lundbeck A/S, Shire PLC, Camurus AB, Orexo AB, BioDelivery Services International,
Inc., Titan Pharmaceuticals Inc., Cerecor Inc. In 2015, Shire PLC received FDA approval to use Vyvanse to treat BED in adults.
With respect to NARCAN® (naloxone hydrochloride)
Nasal Spray, the Company faces competition from other treatments, including injectable naloxone, auto-injectors and improvised
nasal kits. Amphastar Pharmaceuticals, Inc. competes with NARCAN® (naloxone hydrochloride) Nasal Spray with their naloxone
injection. Kaléo competes with NARCAN® (naloxone hydrochloride) Nasal Spray with their auto-injector known as EVZIO™
(naloxone HCl injection) Auto-Injector. In 2015, Indivior PLC received a Complete Response Letter from the FDA with respect to
a naloxone nasal spray. In 2016, TEVA filed an NDA with the FDA seeking regulatory approval to market a generic version of NARCAN®
(naloxone hydrochloride) Nasal Spray before the expiration of the ‘253 patent. In 2016, Mundipharma AG announced its European
Union regulatory submission for Nyxoid®, an intranasal naloxone spray for the reversal of opioid overdoses. Although NARCAN®
(naloxone hydrochloride) Nasal Spray was the first FDA-approved naloxone nasal spray for the emergency reversal of opioid overdoses
and has advantages over certain other treatments, the Company expects the treatment to face additional competition.
Results of Operations
The following compares Opiant’s
operations for the three months ended October 31, 2016 to the same period at October 31, 2015.
Revenues
The Company generated $1,121,142 and $120,000 of revenue during the three
months ended October 31, 2016 and 2015, respectively. The Company recognized $1,121,142 of revenue derived from the Adapt
Agreement during the three months ended October 31, 2016, of which $621,142 is royalty revenue and $500,000 is milestone revenue
received as a result of the Health Canada approval of NARCAN® (naloxone hydrochloride) Nasal Spray. During the three month
period ended October 31, 2015, the Company only recorded $120,000 of revenue from Adapt.
General and Administrative Expenses
The Company’s general and administrative
expenses were $1,216,302 and $10,791,380 for the three months ended October 31, 2016 and 2015, respectively.
This decrease of $9,575,078 was primarily due to a decrease in stock-based compensation, as the Company recorded $180,967 of stock-based
compensation during the three months ended October 31, 2016 as compared to $10,278,831 during the three months ended October 31,
2015. This decrease was partially offset by increases in investor relations expenses and employee compensation.
Research and Development Expenses
The Company’s research
and development expenses were $441,834 and $429,450 during the three months ended October 31, 2016 and 2015,
respectively. Research and development costs incurred during the three months ended October 31, 2016 were comparable to the
three months ended October 31, 2015.
Selling Expenses
The Company’s selling expenses were $42,036 and $0 for the three months ended October 31, 2016 and 2015, respectively. This increase was a result
of incurring selling expenses for revenue earned in 2016. The Company did not incur any selling expenses for revenue earned in
2015.
Interest Expense
During the three months ended October 31,
2016, interest expense decreased to $2,244 from $5,828 during the three months ended October 31, 2015. During the three months
ended October 31, 2016, a reduction in debt outstanding resulted in a decrease in interest expense incurred.
Net Loss
The net loss for the three months
ended October 31, 2016 and for the three months ended October 31, 2015 was $600,628 and $11,110,017,
respectively. This decreased net loss was due primarily to the decrease in general and administrative expenses, particularly stock-based
compensation. Net loss also decreased as a result of the increase in revenues. This was offset by a slight increase in research
and development expenses and selling expenses during the three months ended October 31, 2016.
The Company has not consistently
attained profitable operations and has historically depended upon obtaining sufficient financing to fund its operations. In
their report on the Company’s financial statements at July 31, 2016, contained in the Company’s Annual Report on
Form 10-K for the year ended July 31, 2016, as filed with the SEC on October 28, 2016, the Company’s auditors raised
substantial doubt about the Company’s ability to continue as a going concern.
Liquidity and Capital Resources
The Company’s cash balance at October
31, 2016 was $1,184,568 plus $7,102,503 of outstanding liabilities. The Company’s management believes that the Company’s
current cash balance is sufficient to fund the Company’s current operations into the first calendar quarter of 2017. The
Company has initiated certain cost-cutting measures, which are expected to fund the Company’s operations into the second
calendar quarter of 2017. The Company will need to generate sufficient revenues and/or seek additional funding in the near future.
The Company currently does not have a specific plan of how it will obtain such funding; however, the Company anticipates that additional
funding will be in the form of debt financing and/or equity financing from the sale of the Company’s Common Stock and/or
financings from the sale of interests in the Company’s prospective products and/or in the royalty transactions. Such funds
may also be derived pursuant to the terms of the Adapt Agreement.
During the year ended July 31, 2016, the Company
received $1,600,000 in funding from the Foundation in exchange for Certain Studies Products Net Profit interests as related 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. This investment increased the cash
position of the Company. The Company expects to continue to issue debt and/or equity and/or sell interests in the Company’s
prospective products and/or enter into royalty transactions to sustain the implementation of the Company’s business plan,
unless sufficient revenues are generated. During the quarter ended October 31, 2016, the Company received no funding in exchange
for interests in the Company’s Opioid Overdose Reversal Treatment Product or BED treatment.
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. The
Company has no material commitments for capital expenditures as of October 31, 2016.
The financial position of the Company at
October 31, 2016 showed an increase in total assets from July 31, 2016 of $1,881,878 to $1,977,886, respectively. This was
due primarily to an increase in the Company’s accounts receivable amount, which was due to increased revenues
during the period. This was offset by a decrease in cash which decreased as a result of the utilization of cash for
operations. Total liabilities at October 31, 2016 increased to $7,102,503 from $6,586,834 at July 31, 2016. This increase was
the result of an increase in accounts payable.
Going Concern
The Company’s independent auditor has
issued an audit opinion which includes a statement expressing substantial doubt as to the Company’s ability to continue as
a going concern.
The Company has incurred significant losses,
a working capital deficit as of October 31, 2016 of $2,798,915 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. This raises substantial doubt about the Company’s ability
to continue as a going concern.
Plan of Operation
During the fiscal year ending July 31, 2017,
the Company aims to broaden the Company’s product pipeline and anticipates commencing further trials based on the Company’s
existing as well as potential patents.
The Company anticipates receiving revenues
pursuant to the Adapt Agreement. Pursuant to the Adapt Agreement, in exchange for licensing its treatment to Adapt, the Company
could receive total potential development and sales milestone payments of more than $55 million, plus up to double-digit royalties.
On November 18, 2015, the FDA approved NARCAN® (naloxone hydrochloride) Nasal Spray for the emergency treatment of known or
suspected opioid overdose, to be marketed by Adapt. On December 15, 2015, the Company announced that it received a $2 million milestone
payment from Adapt. This milestone payment was triggered by the FDA approval of NARCAN® (naloxone hydrochloride) Nasal Spray.
On March 7, 2016, the Company announced the receipt of a $2.5 million milestone payment from Adapt. This milestone payment was
triggered by the first commercial sale of NARCAN® (naloxone hydrochloride) Nasal Spray in the U.S. 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 NARCAN® (naloxone hydrochloride) Nasal Spray. Pursuant to the Adapt Agreement, the Company
also has received royalty payments. On April 29, 2016, the Company received $105,097 in royalty payments due from Adapt from commercial
sales of NARCAN® (naloxone hydrochloride) Nasal Spray in the U.S during the first calendar quarter of 2016. On August 8, 2016,
the Company received $234,498 in royalty payments due from Adapt from commercial sales of NARCAN® (naloxone hydrochloride)
Nasal Spray in the U.S during the second calendar quarter of 2016. On November 3, 2016, the Company received $524,142 in royalty
payments due from Adapt from commercial sales of NARCAN® (naloxone hydrochloride) Nasal Spray in the U.S during the third calendar
quarter of 2016.
The Company aims to collaborate with other parties and progress
its drug development program for BED and plans to initiate a BED study in 2017.
The Company plans to evaluate the use of a
nasal opioid antagonist to treat BN. The Company aims to initiate a study before May 1, 2017.
The Company has focused on developing a treatment
for CocUD. On December 23, 2015, the Company announced that an opioid antagonist drug will be tested in patients with CocUD at
the University of Pennsylvania. The study has been conducted by the Department of Psychiatry at the Perelman School of Medicine
at the University of Pennsylvania, and began recruitment in December 2015. Funded by a Medications Development Centers of Excellence
Cooperative (U54) Program from NIDA, the study uses functional Magnetic Resonance Imaging (fMRI) to better understand the impact
of an opioid antagonist drug in the brain of patients with CocUD. Using an opioid antagonist and blocking the downstream release
of dopamine through blocking the release of endorphins may reduce the reward patients receive from cocaine use.
Critical Accounting Policies and Estimates
The Company believes that the following critical
policies affect the Company’s more significant judgments and estimates used in preparation of the Company’s financial
statements.
The Company prepares its financial statements
in conformity with generally accepted accounting principles in the United States of America. These principals 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 the reported amounts of revenues and expenses during the reporting
period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors of the Company (the “Board”); however, actual results
could differ from those estimates.
The Company issues restricted stock to consultants
for various services and employees for compensation. Cost for these transactions are measured at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is measurable more reliably measurable. The value of the
Common Stock is measured at the earlier of: (i) the date at which a firm commitment for performance by the counterparty to earn
the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.
The Company issues options and warrants to
consultants, directors, and officers as compensation for services. These options and warrants are valued using the Black-Scholes
model, which focuses on the current stock price and the volatility of moves to predict the likelihood of future stock moves. This
method of valuation is typically used to accurately price stock options and warrants based on the price of the underlying stock.
Long-lived assets such as property, 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 periods presented.
Fair value estimates used in preparation of
the financial statements are based upon certain market assumptions and pertinent information available to management. The respective
carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include
cash, accounts payable, note payable and due to related parties. Fair values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable
or payable on demand.
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
the Adapt Agreement with Adapt. 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.
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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting
Pronouncements
The Company has reviewed
accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods.
The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does
not believe that any new or modified principles will have a material impact on the Company’s reported financial position
or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial
management and certain standards are under consideration. Those standards have been addressed in the notes to the audited financial
statement and in this, the Company’s Annual Report, filed on Form 10-K for the period ended July 31, 2016.