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 six months ended January 31, 2017 and 2016 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 (“NARCAN®”), 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®, 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 four 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 Bulimia Nervosa (“BN”), a treatment for Binge Eating Disorder (“BED”),
a treatment for Alcohol Use Disorder (“AUD”), 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 Welmers’ 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®, an investigational drug intended to treat opioid overdose.
On November 18, 2015, the FDA approved
NARCAN® 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® 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® 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® 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® in the U.S.
On April 29, 2016, the Company received
$105,097 in royalty payments due from Adapt from commercial sales of NARCAN® 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® 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® 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
“September 2016 Notice Letter”), that Teva had filed an Abbreviated New Drug Application No. 209522 (“’253
ANDA”) with the FDA seeking regulatory approval to market a generic version of NARCAN® before the expiration of U.S.
Patent No. 9,211,253 (the “’253 patent”). The ‘253 patent is listed with respect to NARCAN® 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 September 2016 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 September 2016 Notice Letter. The Company has full confidence in its intellectual property portfolio related to NARCAN®
and expects that the ‘253 patent will be vigorously defended from any infringement. The Company may receive additional notice
letters from Teva and other companies seeking to market generic versions of NARCAN® 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 ‘253 ANDA with the FDA. The Plaintiffs seek, among other relief,
an order that the effective date of FDA approval of the ‘253 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® 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® is now listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations,
commonly known as the Orange Book, patent number 9468747.
On November 3, 2016, the Company received
$524,142 in royalty payments in royalty payments due from Adapt from commercial sales of NARCAN® in the U.S during the third
quarter of Adapt’s fiscal year.
On December 13, 2016, the Company entered
into a Purchase and Sale Agreement (the “Purchase Agreement”) with SWK Funding LLC (“SWK”) pursuant to
which the Company sold, and SWK purchased, the Company’s right to receive, commencing on October 1, 2016, all Royalties arising
from the sale by Adapt, pursuant to the Adapt Agreement, of NARCAN® or any other Product, up to (i) $20,625,000 and then the
Residual Royalty thereafter or (ii) $26,250,000, if Adapt has received in excess of $25,000,000 of cumulative Net Sales for any
two consecutive fiscal quarters during the period from October 1, 2016 through September 30, 2017 from the sale of NARCAN®
(the “Earn Out Milestone”), and then the Residual Royalty thereafter. The Residual Royalty is defined in the Purchase
Agreement as follows: (i) if the Earn Out Milestone is paid, then SWK shall receive 10% of all Royalties; provided, however, if
no generic version of NARCAN® is commercialized prior to the sixth anniversary of the Closing, then SWK shall receive 5% of
all Royalties after such date, and (ii) if the Earn Out Milestone is not paid, then SWK shall receive 7.86% of all Royalties; provided,
however, that if no generic version of NARCAN® is commercialized prior to the sixth anniversary of the Closing, then SWK shall
receive 3.93% of all Royalties after such date. Under the Purchase Agreement, the Company received an upfront purchase price of
$13,750,000 less $40,000 of legal fees at Closing, and will receive an additional $3,750,000 if the Earn Out Milestone is achieved
(the “Purchase Price”). The Purchase Agreement also grants SWK (i) the right to receive the statements produced by
Adapt pursuant to Section 5.6 of the Adapt Agreement and (ii) the right, to the extent possible under the Purchase Agreement, to
cure any breach of or default under any Product Agreement by the Company. Under the Purchase Agreement, the Company granted SWK
a security interest in the Purchased Assets in the event that the transfer contemplated by the Purchase Agreement is held not to
be a sale. The Purchase Agreement also contains other representations, warranties, covenants and indemnification obligations that
are customary for a transaction of this nature. Absent fraud by the Company, the Company’s indemnification obligations under
the Purchase Agreement shall not exceed, individually or in the aggregate, an amount equal to the Purchase Price plus an annual
rate of return of 12% (compounded monthly) as of any date of determination, with a total indemnification cap not to exceed 150%
of the Purchase Price, less all Royalties received by SWK, without duplication, under the Purchase Agreement prior to and through
resolution of the applicable claim. All capitalized terms not otherwise defined in this paragraph shall have the meanings ascribed
to such terms in the Purchase Agreement.
In addition, on December 13, 2016, in connection
with the Purchase Agreement, the Company and Adapt entered into Amendment No. 1 to the Adapt Agreement (the “Amendment”)
which amends the terms of the Adapt Agreement relating to the grant of a commercial sublicense outside of the U.S and diligence
efforts for commercialization of the Company’s intranasal-naloxone opioid overdose reversal treatment (the “Product”).
Under the terms of the Amendment, Adapt is required to use commercially reasonable efforts to commercialize the Product in the
U.S. In the event that Adapt wishes to grant a commercial sublicense to a third party in the European Union or the United Kingdom,
the Company and Adapt have agreed to negotiate an additional amendment to the Adapt Agreement to include reduced financial terms
with respect to the commercial sublicense in such territory. Under such terms, the Company would receive an escalating double-digit
percentage of all net revenue received by Adapt from a commercial sublicensee in the European Union or the United Kingdom. Net
revenue received by Adapt from a commercial sublicensee in European Union or the United Kingdom would be included in determining
sales-based milestones due to the Company.
On January 3, 2017, the Company and Adapt
received notice from Teva pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “January 2017 Notice Letter”), that Teva
had filed ANDA No. 209522 (the “’747 ANDA”) with the FDA seeking regulatory approval to market a generic version
of NARCAN® before the expiration of U.S. Patent No. 9,468,747 (the “’747 patent”). The ‘747 patent
is listed with respect to NARCAN® in the Orange Book and expires on March 16, 2035. Teva’s January 2017 Notice Letter
asserts that its generic product will not infringe the ‘747 patent or that the ‘747 patent is invalid or unenforceable.
The Company and Adapt have been evaluating Teva’s January 2017 Notice Letter. The Company has full confidence in its intellectual
property portfolio related to NARCAN® and expects that the ‘747 patent will be vigorously defended from any infringement.
On January 26, 2017, the Company announced
that the FDA has approved the 2mg formulation of NARCAN® for opioid-dependent patients expected to be at risk for
severe opioid withdrawal in situations where there is a low risk for accidental or intentional opioid exposure by household contacts.
On February 8, 2017, the Plaintiffs filed
a complaint for patent infringement against the Defendants in the U.S. District Court for the District of New Jersey arising from
Teva’s U.S.’s filing of the ‘747 ANDA with the FDA. The Plaintiffs seek, among other relief, an order that the
effective date of FDA approval of the ‘747 ANDA be a date later than the expiration of the ‘747 patent, as well as
equitable relief enjoining the Defendants from infringing the ‘747 patent and monetary relief as a result of any such infringement.
The Company has full confidence in its intellectual property portfolio related to NARCAN® (naloxone hydrochloride) Nasal Spray
and expects that the ‘747 patent will continue to be vigorously defended from any infringement.
On March 9, 2017, the Company announced
that the U.S. Patent and Trademark Office issued U.S. Patent Numbers 9,480,644 and 9,561,177 covering methods of
use for NARCAN®. These patents are listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations,
commonly known as the Orange Book.
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.
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 eight 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 2 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. Although the BED Treatment Product was not approved by the FDA by December 17, 2016, Potomac’s
60 day option to exchange its entire 2013 0.5% Potomac Interest for 31,250 shares of Common Stock of the Company expired on February
17, 2017.
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.
Alcohol Use Disorder
The Company has been focused on developing
an opioid antagonist-based treatment, OPNT002, for the treatment of AUD. According to The Substance Abuse and Mental Health Services
Administration (SAMHSA), there are approximately 17 million people in the U.S. who suffer from some form of AUD. While certain
current therapies for AUD have limited efficacy and low levels of adherence, opioid antagonists have an established record of safety
and efficacy, especially in AUD.
The Company has generated Phase 1 clinical
data with OPNT002, demonstrating its rapid intranasal absorption. The Company expects that OPNT002 will be highly differentiated
from other AUD therapies by being used on an ‘as needed’ basis, which represents a significant potential advancement
in the treatment of AUD.
On February 28, 2017, the Company announced
that it received supportive feedback from the FDA on a proposed development plan for OPNT002 for the treatment of AUD. The feedback
was received pursuant to a recent Type B meeting with the FDA.
The Company plans to advance OPNT002 into
additional clinical trials during 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 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 (as defined below).
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
“Aegis 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 Aegis 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 Restated Aegis Agreement expired by its terms during the three months ended January
31, 2017 and Aegis and the Company are actively negotiating a new 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 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, including on April 28, 2015, April 19, 2016 and September 14, 2016.
On November 4, 2016, the Registrar of Companies
of England and Wales certified that Opiant Pharmaceuticals UK Limited (“OPUK”) was incorporated under the Companies
Act of 2006 as a private company. OPUK is a wholly-owned subsidiary of the Company and Kevin Pollack, Chief Financial Officer,
Director, Secretary and Treasurer of the Company, serves as Director of the OPUK.
On December 15, 2016, the Company entered
into a new office license agreement (the “New Lease”) with Premier Office Centers, LLC (“Premier”) for
its headquarters located on the 12th Floor of 401 Wilshire Blvd., Santa Monica, CA 90401. The New Lease became effective on March
1, 2017, the date after which the term of the prior lease with Premier expired. Pursuant to the terms of the New Lease, the Company
will pay $5,157.40 per month to Premier. The New Lease has an initial term of 12 months and shall automatically renew for successive
12 month periods unless terminated by the Company at least 60 days prior to the termination date. Premier may terminate the New
Lease for any reason upon 30 days’ notice to the Company.
On January 31, 2017, the Company announced
that the Company’s Board of Directors (the “Board”) has established an Audit Committee, a Compensation Committee
and a Nominating and Corporate Governance Committee. Copies of the Committee charters, along with the Company’s Code of Business
Conduct and Ethics, can be found on the Investor Relations section of the Company’s website.
On February 6, 2017, the Company announced
its entry into an employment agreement with Phil Skolnick (the “Skolnick Employment Agreement”) on February 3, 2017
whereby Mr. Skolnick became the Company’s Chief Scientific Officer effective February 6, 2017.
The Skolnick Employment Agreement has an
initial term of six (6) months. Following the initial term, the Skolnick Employment Agreement, unless otherwise terminated, shall
extend on a month-to-month basis. Under the Skolnick Employment Agreement, Mr. Skolnick will (i) receive a one-time cash sign-on
bonus of Forty Thousand Dollars ($40,000); (ii) receive a pro-rated annual base salary of Four Hundred Ten Thousand Dollars ($410,000);
(iii) be eligible to earn an incentive bonus in an amount and structure as agreed upon by Mr. Skolnick and the Board, with achievement
of such bonus to be determined in the sole discretion of the Board; and (iv) be granted options to purchase Two Hundred Thousand
(200,000) shares of the Company’s common stock (the “Options”), each of which shall expire on the day that is
the earlier of: (a) ninety (90) calendar days after Mr. Skolnick ceases to provide services to the Company, (b) ninety (90) calendar days
after the expiration of the Skolnick Employment Agreement, (c) the date Mr. Skolnick is terminated or there is a Fundamental Transaction
(as defined in the Skolnick Employment Agreement), each as contemplated in the Skolnick Employment Agreement, or (d) ten (10) years
from the date of issuance. Each Option is exercisable on a cashless basis at an exercise price equal to $9.00. The Options shall
vest as follows: (i) One Hundred Thousand (100,000) shares of common stock shall vest on the eighteenth month anniversary of the
grant date; (ii) Five Thousand Five Hundred Fifty-Five (5,555) shares of common stock shall vest on each of the nineteenth, twentieth,
twenty-first, twenty-second, twenty-third, twenty-fourth, twenty-fifth and twenty-sixth anniversaries of the date of grant; and
(iii) Five Thousand Five Hundred Fifty-Six (5,556) shares of common stock shall vest on each of the twenty-seventh, twenty-eighth,
twenty-ninth, thirtieth, thirty-first, thirty-second, thirty-third, thirty-fourth, thirty-fifth and thirty-sixth anniversaries
of the grant date.
In addition, the Skolnick Employment Agreement
provides for benefits if Mr. Skolnick’s employment is terminated under certain circumstances. In the event the Company terminates
Mr. Skolnick’s employment for Cause (as defined in the Skolnick Employment Agreement), Mr. Skolnick will receive accrued
but unpaid base salary and vacation through the date of termination of his employment (the “Termination Date”). In
the event the Company terminates Mr. Skolnick’s employment or if Mr. Skolnick resigns within twelve (12) months of a Constructive
Termination (as defined in the Skolnick Employment Agreement) of Mr. Skolnick’s employment, and in either case such termination
is not for Cause, then the Company shall pay Mr. Skolnick the sum of: (i) accrued but unpaid base salary and vacation through the
Termination Date; (ii) one (1) times his annual salary; and (iii) one (1) times his bonus cash compensation, excluding the signing
bonus, awarded to Mr. Skolnick in 2017. In the event of such termination, all outstanding stock options, warrants, restricted share
awards, performance grants held by Mr. Skolnick shall become fully vested and remain exercisable for the life of such award and
shall not be forfeited for any reason whatsoever. In the event of a Fundamental Transaction, Mr. Skolnick shall be entitled to
receive the sum of: (i) accrued but unpaid base salary and vacation through the Termination Date; (ii) one (1) times his annual
salary; and (iii) one (1) times his bonus cash compensation, excluding the signing bonus, awarded to Mr. Skolnick in 2017. In the
event of a Fundamental Transaction, all outstanding stock options, warrants, restricted share awards, performance grants held by
Mr. Skolnick shall become fully vested and remain exercisable for the life of such award and shall not be forfeited for any reason
whatsoever.
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®, the Company
faces competition from other treatments, including injectable naloxone, auto-injectors and improvised nasal kits. Amphastar Pharmaceuticals,
Inc. competes with NARCAN® with their naloxone injection. Kaléo competes with NARCAN® 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 the ‘253 ANDA with the FDA seeking regulatory approval to market
a generic version of NARCAN® before the expiration of the ‘253 patent. In 2017, the Company received notice that Teva
filed the ‘747 ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN® before the expiration
of the ‘747 patent. In 2016, Mundipharma AG announced its European Union regulatory submission for Nyxoid®, an intranasal
naloxone spray for the reversal of opioid overdoses. In 2017, Amphastar Pharmaceuticals, Inc. received a Complete Response Letter
from the FDA with respect to a naloxone nasal spray. Although NARCAN® 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 during the three months ended January 31, 2017 to the same period at January 31, 2016.
Revenues
The Company generated $13,535,000 and $6,860,000 of revenue during the three months ended January 31,
2017 and 2016, respectively. This increase of $6,675,000 during the three months ended January 31, 2017 was primarily due
to the Company recognizing net revenue of $13,710,000 from the sale to SWK of the Company’s right to receive, commencing
on October 1, 2016, Royalties (as defined in the Purchase Agreement) arising from the Adapt Agreement between the Company
and Adapt. The revenue received during the three months ended January 31, 2017 was decreased by revenue accrued for October 2016
which was assigned to SWK.
During the three months ended January 31,
2016, the Company recognized $4,800,000 of revenue from the sale of net profit interests in the Company’s treatment to reverse
opioid overdoses. The revenue from these sales was recognized during the three months ended January 31, 2016 because either the
investment did not contain an option to exchange net profit interests for shares or the product was approved by the FDA and marketed,
which negated the investor’s option to exchange net profit interests for shares, and the research and development work related
to the product was completed as of January 31, 2016. The Company also recognized $2,060,000 of revenue derived from the Adapt Agreement
during the period ended January 31, 2016, which included $2,000,000 received as a result of the FDA’s approval of NARCAN®
for the emergency treatment of known or suspected opioid overdose, one of the milestones set forth in the Adapt Agreement.
General and Administrative Expenses
The Company’s general and administrative
expenses were $1,355,704 and $2,394,505 during the three months ended January 31, 2017 and 2016, respectively. This decrease of
$1,038,801 was primarily due to a decrease in management compensation and consulting expenses. Management compensation decreased
as a result of management meeting milestones and incurring bonuses during the three months ended January 31, 2016. The Company
did not incur additional management compensation during the three months ended January 31, 2017.
Research and Development Expenses
The Company’s research and development
expenses were $344,836 and $254,881 during the three months ended January 31, 2017 and 2016, respectively. Research and development
costs incurred during the three months ended January 31, 2017 increased by $89,955 compared to the three months ended January 31,
2016 as a result of increased research and development activity, including with respect to the Company’s BN study and the
AUD treatment.
Selling Expenses
The Company’s selling expenses were
$1,196,563 and $209,251 during the three months ended January 31, 2017 and 2016, respectively. The increase in revenues of $987,312
during the three months ended January 31, 2017 resulted in $987,312 of additional selling expenses due to expenses related to the
sale of Royalties (as defined in the SWK Agreement) to SWK under the Purchase Agreement.
Interest Expense
During the three months ended January 31,
2017, the Company earned net interest income of $877 compared to net interest expense of $5,491 during the three months ended January
31, 2016. During the three months ended January 31, 2017, the reduction of net interest expense of $6,368 was primarily a result
of a reduction in debt outstanding which resulted in a decrease in interest expense incurred and increased cash on hand which increased
interest revenue earned.
Net Income
Net income during the three months
ended January 31, 2017 and during the three months ended January 31, 2016 was $10,649,790 and $3,970,040, respectively. This
increase in net income of $6,679,750 was due primarily to the increase in revenues as a result of the sale of Royalties (as
defined in the SWK Agreement) to SWK under the Purchase Agreement.
The following compares Opiant’s
operations during the six months ended January 31, 2017 to the same period at January 31, 2016.
Revenues
The Company generated $14,656,142 and $6,980,000
of revenue during the six months ended January 31, 2017 and 2016, respectively. This increase of $7,676,142 was primarily due to the
Company recognizing net revenue of $13,710,000 from the sale to SWK of the Company’s right to receive, commencing on October
1, 2016, Royalties (as defined in the Purchase Agreement) arising from the sale by Adapt, pursuant to that certain Adapt Agreement
between the Company and Adapt. The Company also recognized $946,142 of revenue derived from the Adapt Agreement with Adapt prior
to the sale of such Royalties. The revenue received during the six months ended January 31, 2017 was decreased by revenue accrued
for October 2016 which was assigned to SWK.
During the six month period ended January
31, 2016, the Company recognized $4,800,000 of revenue from the sale of net profit interests in the Company’s treatment to
reverse opioid overdoses. The revenue from these sales was recognized during the six months ended January 31, 2016, because either
the investment did not contain an option to exchange net profit interests for shares or the product was approved by the FDA and
marketed, which negated the investor’s option to exchange net profit interests for shares, and the research and development
work related to the product was completed as of January 31, 2016. The Company also recognized $2,180,000 of revenue derived from
the License Agreement during the six months ended January 31, 2016, which included $2,000,000 received as a result of the FDA’s
approval of NARCAN® for the emergency treatment of known or suspected opioid overdose, one of the milestones set forth in the
Adapt Agreement.
General and Administrative Expenses
The Company’s general and administrative
expenses were $2,572,006 and $12,990,324 during the six months ended January 31, 2017 and 2016, respectively. This decrease of
$10,418,318 was primarily due to a decrease in stock-based compensation, as the Company recorded $610,152 of stock-based compensation
during the six months ended January 31, 2017 as compared to $10,622,874 during the six months ended January 31, 2016. A decrease
in management compensation and consulting expenses also contributed to the decrease in general and administrative expenses. This
overall decrease in general and administrative expenses was offset by an increase in professional fees.
Research and Development Expenses
The Company’s research and development
expenses were $786,670 and $879,892 during the six months ended January 31, 2017 and 2016, respectively. Research and development
costs incurred during the six months ended January 31, 2017 decreased by $93,222 compared to the six months ended January 31, 2016
as a result of a decrease in common shares issued for research and development expenses.
Selling Expenses
The Company’s selling expenses were
$1,238,599 and $209,251 during the six months ended January 31, 2017 and 2016, respectively. The increase in revenues of $1,029,348
during the six months ended January 31, 2017 resulted in additional selling expenses during the period related to the sale of Royalties
(as defined in the Purchase Agreement) to SWK.
Interest Expense
During the six months ended January 31,
2017, interest expense decreased to $1,367 from $11,319 during the six months ended January 31, 2016. During the three months ended
January 31, 2017, the reduction of interest expense of $9,952 was primarily a result of a reduction in debt outstanding which resulted
in a decrease in interest expense incurred and increased cash on hand which increased interest revenue earned.
Net Income (Loss)
The net income for the six months ended
January 31, 2017, was $10,049,162. Net loss for the six months ended January 31, 2016 was $7,139,977. The increase in net income
of $17,189,139 was due primarily to the increase in revenue and a decrease in general and administrative expenses, particularly
stock-based compensation during the six months ended January 31, 2017. In particular the increase in net income was due primarily
to the increase in revenues as a result of the sale of Royalties (as defined in the Purchase Agreement) to SWK. This increase in
net income was offset by an increase in selling expenses during the six months ended January 31, 2017.
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 January
31, 2017 was $12,925,829 plus $7,046,501 of outstanding liabilities. The Company’s management believes that the Company’s
current cash balance is sufficient to fund the Company’s current operations through at least March 2018. The Company will
need to generate sufficient revenues and/or seek additional funding in the 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,
subject to the terms of the Purchase Agreement with SWK.
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 January 31, 2017, the Company received $13,710,000 of funding
pursuant to the terms of the Purchase Agreement with SWK. During the quarter ended January 31, 2017, the Company received no other
funding in exchange for interests in the Company’s Opioid Overdose Reversal Treatment Product, BED treatment, or Certain
Studies Products.
At this time, the Company believes it has
sufficient cash on hand to meet its obligations over the next twelve months. The Company does not have any arrangements in
place for any future financing. The Company has no material commitments for capital expenditures as of January 31, 2017.
The financial position of the Company at
January 31, 2017 showed an increase in total assets from July 31, 2016 of $1,881,878 to $13,000,859 at January 31, 2017. This was
due primarily to an increase in cash as a result of the sale of Royalties (as defined in the SWK Agreement) to SWK. This was offset
by a decrease in royalties receivable at the period end as the Company was no longer receiving royalties from Adapt pursuant to
the Adapt Agreement. Total liabilities at January 31, 2017 increased to $7,046,501 from $6,586,834 at July 31, 2016. This increase
was the result of an increase in accounts payable and accrued liabilities.
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.
After certain obligations with respect
to the Purchase Agreement with SWK are satisfied, 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® 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®. 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® 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®. 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® 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®
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® in the U.S during the third calendar quarter of 2016.
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 also plans to advance
OPNT002, for the treatment of AUD, into additional clinical trials during 2017, aims to collaborate with other parties and progress
its drug development program for BED, and has focused on developing a treatment for CocUD and a heroin vaccine.
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; 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.
The Company recognizes revenue from the sale of royalties when
the executed agreement constitutes persuasive evidence of an arrangement, the Company has no current or future performance obligations,
the total consideration is fixed and known, there are no rights of return, collection is reasonably assured and fees are non-refundable.
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®. 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. During the six months ended January 31, 2017, the Company recognized
royalty payments of approximately $946,000 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 and January 31, 2017, 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 Quarterly Report, filed on Form 10-Q for the period ended January 31, 2017.