Item 1.
Financial
Statements (Unaudited).
Opiant Pharmaceuticals, Inc.
Index to Financial Statements
April 30, 2017 and 2016
Opiant Pharmaceuticals, Inc.
Consolidated Balance Sheets
As of April 30, 2017 (Unaudited) and July 31, 2016
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,680,454
|
|
|
$
|
1,481,393
|
|
Accounts receivable
|
|
|
-
|
|
|
|
312,498
|
|
Prepaid expenses
|
|
|
98,911
|
|
|
|
62,404
|
|
Total current assets
|
|
|
9,779,365
|
|
|
|
1,856,295
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Computer equipment (net of accumulated amortization of $3,842 at April 30, 2017 and $1,016 at July 31, 2016)
|
|
|
3,695
|
|
|
|
6,521
|
|
Patents and patent applications (net of accumulated amortization of $9,417 at April 30, 2017 and $8,388 at July 31, 2016)
|
|
|
18,033
|
|
|
|
19,062
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,801,093
|
|
|
$
|
1,881,878
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,390,780
|
|
|
$
|
140,584
|
|
Accrued salaries and wages
|
|
|
1,543,142
|
|
|
|
3,681,250
|
|
Note payable
|
|
|
-
|
|
|
|
165,000
|
|
Deferred revenue
|
|
|
194,800
|
|
|
|
250,000
|
|
Total current liabilities
|
|
|
3,128,722
|
|
|
|
4,236,834
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
2,387,084
|
|
|
|
2,350,000
|
|
Total liabilities
|
|
|
5,515,806
|
|
|
|
6,586,834
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
|
|
|
|
|
|
|
|
Common stock; par value $0.001; 1,000,000,000 shares
authorized; 2,020,380 shares issued and outstanding at April 30, 2017 and 1,992,433 shares issued and outstanding at July 31,
2016
|
|
|
2,020
|
|
|
|
1,992
|
|
Additional paid-in capital
|
|
|
58,549,055
|
|
|
|
56,478,394
|
|
Accumulated deficit
|
|
|
(54,265,788
|
)
|
|
|
(61,185,342
|
)
|
Total stockholders' equity (deficit)
|
|
|
4,285,287
|
|
|
|
(4,704,956
|
)
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
9,801,093
|
|
|
$
|
1,881,878
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
Opiant Pharmaceuticals, Inc.
Consolidated Statements of Operations (Unaudited)
For the three and nine months ended April 30, 2017 and 2016
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and licensing revenue
|
|
$
|
-
|
|
|
$
|
2,605,097
|
|
|
$
|
14,656,142
|
|
|
$
|
4,785,097
|
|
Treatment investment revenue
|
|
|
18,116
|
|
|
|
-
|
|
|
|
18,116
|
|
|
|
4,800,000
|
|
Total revenue
|
|
|
18,116
|
|
|
|
2,605,097
|
|
|
|
14,674,258
|
|
|
|
9,585,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,995,892
|
|
|
|
1,040,608
|
|
|
|
4,567,898
|
|
|
|
13,155,931
|
|
Research and development
|
|
|
1,103,319
|
|
|
|
1,059,627
|
|
|
|
1,889,989
|
|
|
|
2,814,520
|
|
Selling expenses
|
|
|
84,375
|
|
|
|
93,000
|
|
|
|
1,322,974
|
|
|
|
302,251
|
|
Total operating expenses
|
|
|
3,183,586
|
|
|
|
2,193,235
|
|
|
|
7,780,861
|
|
|
|
16,272,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,165,470
|
)
|
|
|
411,862
|
|
|
|
6,893,397
|
|
|
|
(6,687,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
10,673
|
|
|
|
-
|
|
|
|
9,306
|
|
|
|
(11,319
|
)
|
Income (loss) on foreign exchange
|
|
|
25,189
|
|
|
|
4,266
|
|
|
|
16,851
|
|
|
|
(24,925
|
)
|
Total other income (expense)
|
|
|
35,862
|
|
|
|
4,266
|
|
|
|
26,157
|
|
|
|
(36,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(3,129,608
|
)
|
|
|
416,128
|
|
|
|
6,919,554
|
|
|
|
(6,723,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,129,608
|
)
|
|
$
|
416,128
|
|
|
$
|
6,919,554
|
|
|
$
|
(6,723,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
(1.55
|
)
|
|
$
|
0.22
|
|
|
$
|
3.45
|
|
|
$
|
(3.57
|
)
|
Diluted income (loss) per common share
|
|
$
|
(1.55
|
)
|
|
$
|
0.15
|
|
|
$
|
3.07
|
|
|
$
|
(3.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
2,014,141
|
|
|
|
1,916,554
|
|
|
|
2,004,143
|
|
|
|
1,882,088
|
|
Diluted weighted average common shares outstanding
|
|
|
2,014,141
|
|
|
|
2,734,760
|
|
|
|
2,251,127
|
|
|
|
1,882,088
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
Opiant Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity (Deficit) (Unaudited)
For the nine months ended April 30, 2017
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2016
|
|
|
1,992,433
|
|
|
$
|
1,992
|
|
|
$
|
56,478,394
|
|
|
$
|
(61,185,342
|
)
|
|
$
|
(4,704,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
|
27,947
|
|
|
|
28
|
|
|
|
190,399
|
|
|
|
-
|
|
|
|
190,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation from issuance of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
889,076
|
|
|
|
-
|
|
|
|
889,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation from issuance of stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
229,360
|
|
|
|
-
|
|
|
|
229,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of related party debt
|
|
|
-
|
|
|
|
-
|
|
|
|
761,826
|
|
|
|
-
|
|
|
|
761,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,919,554
|
|
|
|
6,919,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2017
|
|
|
2,020,380
|
|
|
$
|
2,020
|
|
|
$
|
58,549,055
|
|
|
$
|
(54,265,788
|
)
|
|
$
|
4,285,287
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements
Opiant Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended April 30, 2017 and 2016
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows used in operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,919,554
|
|
|
$
|
(6,723,849
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
3,855
|
|
|
|
1,187
|
|
Issuance of common stock for services
|
|
|
190,427
|
|
|
|
1,215,719
|
|
Stock based compensation from issuance of options
|
|
|
889,076
|
|
|
|
10,183,555
|
|
Stock based compensation from issuance of warrants
|
|
|
229,360
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in prepaid expenses
|
|
|
(36,507
|
)
|
|
|
(37,233
|
)
|
Decrease in accounts receivable
|
|
|
312,498
|
|
|
|
-
|
|
Decrease in deferred revenue
|
|
|
(18,116
|
)
|
|
|
(4,300,000
|
)
|
Increase (decrease) in accounts payable
|
|
|
1,250,196
|
|
|
|
(108,639
|
)
|
Increase (decrease) in accrued salaries and wages
|
|
|
(1,376,282
|
)
|
|
|
501,536
|
|
Net cash provided by operating activities
|
|
|
8,364,061
|
|
|
|
732,276
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
(6,528
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(6,528
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities
|
|
|
|
|
|
|
|
|
Proceeds from related parties notes payable
|
|
|
-
|
|
|
|
151,191
|
|
Repayment of related parties notes payable
|
|
|
-
|
|
|
|
(281,191
|
)
|
Repayment of note payable
|
|
|
(165,000
|
)
|
|
|
-
|
|
Investment received in exchange for royalty agreement
|
|
|
-
|
|
|
|
1,333,500
|
|
Net cash provided (used) by financing activities
|
|
|
(165,000
|
)
|
|
|
1,203,500
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
8,199,061
|
|
|
|
1,929,248
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,481,393
|
|
|
|
434,217
|
|
Cash and cash equivalents, end of period
|
|
$
|
9,680,454
|
|
|
$
|
2,363,465
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
4,828
|
|
|
$
|
78,865
|
|
Taxes paid during the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Transactions
|
|
|
|
|
|
|
|
|
Forgiveness of related party debt
|
|
$
|
761,826
|
|
|
$
|
-
|
|
Cashless exercise of options
|
|
$
|
-
|
|
|
$
|
15
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
Opiant Pharmaceuticals, Inc.
Notes to Unaudited Consolidated Financial Statements
For the periods ended April 30, 2017 and 2016
1.
|
Organization and Basis of Presentation
|
Opiant Pharmaceuticals, Inc. (the
“Company”), a Nevada corporation, is a specialty pharmaceutical company which develops pharmacological treatments for
substance use, addictive, and eating disorders. The Company was incorporated in the State of Nevada on June 21, 2005 as Madrona
Ventures, Inc. and on September 16, 2009, the Company changed its name to Lightlake Therapeutics Inc. On January 28, 2016, the
Company again changed its name to Opiant Pharmaceuticals, Inc. The Company is developing opioid antagonist treatments for substance
use, addictive, and eating disorders. The Company also has developed a treatment to reverse opioid overdoses, which is now known
as NARCAN® (naloxone hydrochloride) Nasal Spray. The Company’s fiscal year end is July 31.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“U.S.”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly,
these consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for
a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements
should be read in conjunction with the financial statements for the year ended July 31, 2016 and notes thereto and other pertinent
information contained in the Form 10-K the Company has filed with the Securities and Exchange Commission (the “SEC”).
The results of operations for the
three months and nine months ended April 30, 2017 are not necessarily indicative of the results for the full fiscal year ending
July 31, 2017.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Use
of Estimates
The Company prepares its consolidated
financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”), which require
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Opiant Pharmaceuticals UK Limited, a company incorporated
on November 4, 2016 under the England and Wales Companies Act of 2006. Intercompany balances and transactions are eliminated upon
consolidation.
Basic and Diluted Net Income (Loss)
Per Share
Earnings (loss) per share is calculated
by dividing the net income (loss) available to common stockholders by the weighted average number of shares outstanding during
the period. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity.
Diluted income per share reflects the potential dilution that would occur if outstanding stock options and warrants were exercised
utilizing the treasury stock method. In a loss year, dilutive common equivalent shares are excluded from the loss per share calculation
as the effect would be anti-dilutive.
A reconciliation of the components
of basic and diluted net income (loss) per common share is presented in the tables below:
|
|
For the Three Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Loss
$
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per Share
$
|
|
|
Income
$
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per Share
$
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock
|
|
|
(3,129,608
|
)
|
|
|
2,014,141
|
|
|
|
(1.55
|
)
|
|
|
416,128
|
|
|
|
1,916,554
|
|
|
|
0.22
|
|
Effective of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
818,206
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock, including assumed conversions
|
|
|
(3,129,608
|
)
|
|
|
2,014,141
|
|
|
|
(1.55
|
)
|
|
|
416,128
|
|
|
|
2,734,760
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Income
$
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per Share
$
|
|
|
Loss
$
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per Share
$
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock
|
|
|
6,919,554
|
|
|
|
2,004,143
|
|
|
|
3.45
|
|
|
|
(6,723,849
|
)
|
|
|
1,882,088
|
|
|
|
(3.57
|
)
|
Effective of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
–
|
|
|
|
246,984
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock, including assumed conversions
|
|
|
6,919,554
|
|
|
|
2,251,127
|
|
|
|
3.07
|
|
|
|
(6,723,849
|
)
|
|
|
1,882,088
|
|
|
|
(3.57
|
)
|
Reclassification of Financial
Statement Accounts
Certain amounts in the April 30,
2016 financial statements have been reclassified to conform to the presentation in the April 30, 2017 consolidated financial statements.
Recently Issued Accounting Pronouncements
The Company has implemented all new
accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that
there are any other new pronouncements that have been issued that might have a material impact on its financial position or results
of operations.
3.
|
Related Party Transactions
|
The Company uses office space provided
by Dr. Michael Sinclair and Kevin Pollack free of charge.
On March 31, 2017, Dr. Michael Sinclair,
the Executive Chairman of the Board of Directors of the Company (the “Board”), and Dr. Roger Crystal, the Company’s
Chief Executive Officer, each voluntarily entered into separate employment agreement acknowledgements whereby they elected to forfeit,
unconditionally and irrevocably, $175,498 and $586,328, respectively, of certain owed amounts pursuant to their respective existing
employment agreements, representing 35% of the total compensation currently owed to each of Dr. Sinclair and Dr. Crystal on such
date. As the debt forgiven was owed to a related party, the Company recognized the amount forgiven as an equity transaction recorded
in additional paid-in capital.
Furthermore, on March 31, 2017, pursuant
to their respective employment agreement acknowledgements, Dr. Sinclair and Dr. Crystal each voluntarily elected to forfeit, unconditionally
and irrevocably, 680,000 and 825,000 shares of common stock, par value $0.001 per share (“Common Stock”), of the Company
underlying stock options and warrants previously issued by the Company, respectively, representing approximately 55% of the total
number of options and warrants previously issued by the Company to each of Dr. Sinclair and Dr. Crystal.
On June 21, 2016, the Company entered
into a settlement and release agreement with a former advisor pursuant to which, in exchange for prior advisory services rendered
to the Company in full pursuant to an advisory services agreement dated on or about September 17, 2012, the Company has agreed
to pay the $165,000 amount owed to the advisor for the past services rendered. As evidence of the Company’s obligation to
pay the settlement amount, the Company issued a secured promissory note to the advisor on June 21, 2016, earning interest at the
rate of 6% per annum, with the unpaid principal amount and accrued and unpaid interest due and payable in full on the earlier of
(i) the closing by the Company of one or more equity or debt financings with aggregate gross proceeds to the Company of at least
$2,200,000, and (ii) December 15, 2016. In addition, as security for the prompt payment of the note, the Company has pledged 22,916
shares of Common Stock as collateral pursuant to a pledge agreement, dated as of June 21, 2016, by and between the Company and
the advisor. Such 22,916 shares of Common Stock are being held by an escrow agent pursuant to a securities escrow agreement, dated
as of June 21, 2016, by and between the Company and the advisor, and shall be released to the advisor upon an “Event of Default”,
as defined in the note agreement. During the nine-month period ended April 30, 2017, the Company repaid the entire $165,000 balance
and all accrued and unpaid interest.
Common Stock
On November 2, 2016, the Company
granted 1,000 restricted shares of Company’s Common Stock to a consultant pursuant to a consulting agreement dated October
12, 2016 for consulting services provided by the consultant. The shares issued in this transaction were valued using the stock
price on the issuance date, which was $7.52 per share, and resulted in a value of $7,520. Accordingly, the Company recorded a $7,520
non-cash expense during the nine-month period ended April 30, 2017.
On November 10, 2016, the Company
issued 14,327 shares of unregistered Common Stock pursuant to the LOI described in Note 6 – Commitments. Pursuant to the
terms of the LOI, the Company was obligated to issue these shares on the one year anniversary of the effective date of the LOI.
The shares issued in this transaction were valued using the stock price at issuance date, which was $5.94 per share, and resulted
in a value of $85,102. The Company recorded the entire $85,102 as a non-cash expense during the nine-month period ended April 30,
2017.
On March 16, 2017, the Company issued
10,745 shares of unregistered Common Stock pursuant to the LOI described in Note 6 – Commitments. Per the terms of the LOI,
the Company was obligated to issue these shares upon the one year anniversary of receipt, by the Company, of a milestone payment
from Adapt Pharma Limited for the first commercial sale of the Company’s product, NARCAN® (naloxone hydrochloride) Nasal
Spray, in the U.S. The shares issued in this transaction were valued on the date of issuance using the March 16, 2017 closing price
of $7.75 per share, which resulted in an aggregate value of $83,274. The Company expensed the entire $83,274 as non-cash expense
during the nine-month period ended April 30, 2017.
On March 16, 2017, the Company issued
1,875 shares of unregistered Common Stock to Brad Miles, who serves as an advisor to the Company. The shares issued in this transaction
were valued on the date of issuance using the March 16, 2017 closing price of $7.75 per share, which resulted in an aggregate value
of $14,531. The Company expensed the entire $14,531 as non-cash expense during the nine-month period ended April 30, 2017.
Stock Options
As required by the Stock Compensation
Topic, ASC 718, the Company measures and recognizes compensation expense for all share based payment awards made to the officers
and directors based on estimated fair values at the grant date and over the requisite service period.
On October 6, 2016, the Company granted
options to purchase a total of 50,000 shares of Common Stock exercisable on a cashless basis to two employees. These options all
have an exercise price of $10.00 and a term of 10 years. The options vest as follows: 1,388 shares vest upon each of the first
through twentieth month anniversaries of the grant date; 1,390 shares vest upon each of the twenty-first through thirty-sixth month
anniversaries of the grant date. The Company has valued these options using the Black-Scholes option pricing model which resulted
in a fair market value of $425,000, of which $213,282 has been recognized as non-cash expense for the nine months ended April 30,
2017.
On November 4, 2016, the Company
appointed Thomas T. Thomas to the Board and granted Mr. Thomas an option to purchase 35,000 shares of Common Stock exercisable
on a cashless basis. This option has an exercise price of $10.00, a term of 5 years and vests as follows: (i) 11,667 shares vest
upon the uplisting of the Company to the NASDAQ Stock Market; (ii) 11,667 shares vest upon the cumulative funding of the Company
of or in excess of $5,000,000 by institutional investors starting from November 4, 2016; and 11,666 shares vest upon the first
submission of a New Drug Application to the U.S. Food and Drug Administration for one of Company’s products by Company itself
or a Company licensee. The Company has valued this option using the Black-Scholes option pricing model which resulted in an aggregate
value of $220,116, of which $134,188 has been recognized as expense for the nine months ended April 30, 2017.
On December 24, 2016, the Company
granted an option to purchase a total of 35,000 shares of Common Stock exercisable on a cashless basis to an employee. The option
has an exercise price of $10.00 and a term of 10 years. The option vests as follows: 972 shares vest upon each of the first through
twenty-eighth month anniversaries of the grant date; 973 shares vest upon each of the twenty-ninth through thirty-sixth month anniversaries
of the grant date. The Company has valued this option using the Black-Scholes which resulted in an aggregate value of $219,450,
of which $75,363 has been recognized as non-cash expense for the nine months ended April 30, 2017.
On February 6, 2017, the Company
granted an option to purchase 200,000 shares of the Company’s Common Stock to Phil Skolnick, the Company’s Chief Scientific
Officer. This option was granted pursuant to Dr. Skolnick’s employment agreement (the “Skolnick Employment Agreement”)
described in Note 6 – Commitments. Per the terms of Dr. Skolnick’s option agreement, the option shall expire on the
day that is the earlier of: (a) 90 calendar days after Dr. Skolnick ceases to provide services to the Company, (b) 90 calendar
days after the expiration of the Skolnick Employment Agreement, (c) the date Dr. 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)
10 years from the date of issuance. Each share of Common Stock underlying the Option shall be exercisable on a cashless basis at
an exercise price equal to $9.00. The option shall vest as follows: (i) 100,000 shares of Common Stock shall vest on the eighteen
month anniversary of the grant date; (ii) 5,555 shares of Common Stock shall vest on each of the nineteen, twenty, twenty-one,
twenty-two, twenty-three, twenty-four, twenty-five and twenty-six month anniversaries of the date of grant; and (iii) 5,556 shares
of Common Stock shall vest on each of the twenty-seven, twenty-eight, twenty-nine, thirty, thirty-one, thirty-two, thirty-three,
thirty-four, thirty-five and thirty-six month anniversaries of the grant date. The Company valued Dr. Skolnick’s option using
the Black-Scholes option pricing model, which resulted in an aggregate value of $1,600,000, which the Company will expense on a
non-cash basis over the three-year vesting schedule. During the three-month period ended April 30, 2017, the Company recorded $223,925
of non-cash expense related to this option. As of April 30, 2017, the Company had an additional $1,376,075 of non-cash expense
to record over the remaining 33 months of vesting.
The Company also recognized stock
based compensation expense of $242,318 in connection with vested options granted in prior periods.
On March 31, 2017, pursuant to their
respective employment agreement acknowledgements, Dr. Sinclair and Dr. Crystal each voluntarily elected to forfeit, unconditionally
and irrevocably, 395,000 and 785,000 shares of Common Stock of the Company, respectively, underlying stock options previously issued
by the Company.
The assumptions used in the valuation
for all of the options granted for the nine months ended April 30, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Market value of stock on measurement date
|
|
|
$5.61 to 8.71
|
|
|
$
|
7.00
|
|
Risk-free interest rate
|
|
|
0.88-2.55
|
%
|
|
|
2.05
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
97-348
|
%
|
|
|
373
|
%
|
Term
|
|
|
2.53-10.00 years
|
|
|
|
10 years
|
|
Stock
option activity for nine months ended April 30, 2017 is presented in the table below:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2016
|
|
|
4,635,000
|
|
|
$
|
8.79
|
|
|
|
7.39
|
|
|
$
|
2,731,250
|
|
Granted
|
|
|
320,000
|
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,500
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,180,000
|
)
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2017
|
|
|
3,772,500
|
|
|
$
|
8.13
|
|
|
|
7.12
|
|
|
$
|
975,000
|
|
Exercisable at April 30, 2017
|
|
|
3,303,882
|
|
|
$
|
7.75
|
|
|
|
7.21
|
|
|
$
|
975,000
|
|
A summary of the status of the Company’s
non-vested options as of April 30, 2017 and changes during the nine months ended April 30, 2017 are presented below:
Non-vested options
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
Non-vested at July 31, 2016
|
|
|
90,833
|
|
|
$
|
7.27
|
|
Granted
|
|
|
320,000
|
|
|
$
|
7.70
|
|
Vested
|
|
|
(59,717
|
)
|
|
$
|
6.93
|
|
Non-vested at April 30, 2017
|
|
|
351,116
|
|
|
$
|
7.73
|
|
At April 30, 2017, there was $2,001,413 of unrecognized
compensation costs related to non-vested stock options.
Warrants
On March 13, 2017, the Company
granted a warrant to purchase 45,000 shares of the Company’s Common Stock to Brad Miles, an advisor to the Company.
Pursuant to the terms of the warrant, it is fully vested on the date of grant, has an exercise price of $10.00, an expiration
date of three years from the date of grant, and may be exercised solely by payment of cash. The Company valued Mr.
Miles’ warrant using the Black-Scholes option pricing model using the following criteria: (i) a per share stock price
of $8.00, which represents the closing price of the Company’s Common Stock on March 13, 2017, (ii) a per share exercise
price of $10.00, (iii) a term of three (3) years, (iv) volatility of 111%, (v) a dividend yield of zero, and (vi) a risk-free
rate of 1.63%, which represents the yield on a three-year Treasury bond as of March 16, 2017. This resulted in an aggregate
value of $229,360, which the Company expensed during the nine-month period ended April 30, 2017. The Company expensed the
entire $229,360 because the warrant was fully vested as of the date of grant.
On March 31, 2017, Dr. Michael Sinclair,
the Executive Chairman of the Board, and Dr. Roger Crystal, the Company’s Chief Executive Officer, each voluntarily entered
into separate employment agreement acknowledgements whereby they elected to forfeit, unconditionally and irrevocably, 285,000 and
40,000 shares of common stock of the Company, respectively, as related to unexercised warrants previously granted by the Company.
Warrant activity for the nine months ended April 30, 2017
is presented in the table below:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2016
|
|
|
1,215,385
|
|
|
$
|
17.90
|
|
|
|
2.86
|
|
|
$
|
-
|
|
Granted
|
|
|
45,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(162,300
|
)
|
|
$
|
47.23
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(325,000
|
)
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2017
|
|
|
773,085
|
|
|
$
|
12.51
|
|
|
|
3.27
|
|
|
$
|
-
|
|
Exercisable at April 30, 2017
|
|
|
373,085
|
|
|
$
|
9.84
|
|
|
|
6.06
|
|
|
$
|
-
|
|
|
a)
|
On December 18, 2014, the Company entered into a consulting agreement. Pursuant to the agreement,
the consultant agreed to provide financial advisory services with regard to a licensing agreement. In exchange for these services,
the Company incurred fixed fees of $225,000 and $75,000 during the years ended July 31, 2016 and 2015, respectively. The Company
is also required to pay an additional fee equivalent to 3.75% of all amounts received by the Company pursuant to the licensing
agreement in excess of $3,000,000, in perpetuity. Total fees incurred to the consultant pursuant to the agreement during the nine
months ended April 30, 2017 amounted to $635,474, as compared to $209,251 of total fees incurred in 2016.
|
|
b)
|
On April 25, 2016, the Company entered into a consulting agreement. Pursuant to the agreement, the consultant
agreed to provide financial advisory services. In exchange for these services, the Company is required to pay a fee on all funding
received by the Company as a result of assistance provided by the consultant. Pursuant to the agreement, the consultant’s
fee will be equal to 5% of gross funding received by the Company up to $20,000,000 plus 3.5% of any proceeds received in excess
of $20,000,000. Total fees incurred to the consultant pursuant to the agreement during the nine months ended April 30, 2017 amounted
to $687,500, as compared to zero total fees incurred in 2016.
|
|
c)
|
On November 19, 2015, the Company issued 14,327 shares of unregistered Common Stock upon the execution
of a binding letter of intent to agree to negotiate and enter into an exclusive license agreement and collaboration agreement (“LOI”)
with a pharmaceutical company with certain desirable proprietary information. The shares issued in this transaction were valued
using the stock price at issuance date and amounted to $120,347. Pursuant to the LOI, the Company is obligated to issue up to an
additional 92,634 shares of unregistered Common Stock upon the occurrence of various milestones. A total of 3,582 shares had been
issued as of July 31, 2016 due to achievement of certain milestones. On November 10, 2016, the Company issued an additional 14,327
shares of the unregistered Common Stock pursuant to the LOI. The shares issued in this transaction were valued using the stock
price at issuance date and amounted to $85,102. On March 16, 2017, the Company issued an additional 10,745 shares of unregistered
Common Stock pursuant to the LOI. Per the terms of the LOI, the Company was obligated to issue these shares upon the one year anniversary
of receipt by the Company of a milestone payment from Adapt Pharma Limited for the first commercial sale of the Company’s
product, NARCAN® (naloxone hydrochloride) Nasal Spray, in the U.S. The shares issued on March 16, 2017 were valued on the date
of issuance using the March 16, 2017 closing price of the Company’s Common Stock of $7.75 per share, which resulted in an
aggregate value of $83,274. The Company expensed the entire $83,274 as non-cash expense during the nine-month period ended April
30, 2017.
|
|
d)
|
In October 2016, the Company in-licensed a heroin vaccine from Walter Reed Army Institute of Research.
In consideration for the license the Company agreed to pay a royalty of 3% of net sales if the Company commercializes the vaccine,
or 4% if the vaccine is sublicensed. In addition, the Company agreed to pay a minimum annual royalty of $10,000, as well as fixed
payments of up to $715,672 if all of the specified milestones are met.
|
|
e)
|
The Company leases office space in four locations. The Company’s headquarters are located
on the 12th Floor of 401 Wilshire Blvd., Santa Monica, CA 90401, which the Company leases from Premier Office Centers, LLC (“Premier”).
Per the terms of the amended lease dated October 1, 2016, the initial lease term is for five months with a monthly rent of $5,056.
On December 15, 2016, the Company entered into a new office license agreement (the “New Lease”) with Premier. The New
Lease became effective March 1, 2017, the date after which the term of the current lease with Premier expires. Pursuant to the
terms of the New Lease, the Company will pay $5,157 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.
|
The Company also leases office space
in Suite 100 of 1180 North Town Center Drive, Las Vegas, NV 89144 for $299 per month. The lease with Regus Management Group, LLC
expires on July 31, 2017.
Additionally, the Company leases
office space in Euston Tower, L32 to L34, 286 Euston Road, London, England, NW1 3DP for a total of €1,932 for the initial
five-month term ending March 31, 2017. The Company’s lease is with Euston Tower Serviced Offices Ltd. In March 2017, the
Company extended the term of the lease through July 2017 with the monthly rent remaining the same. The Company has given the required
notice to Euston Tower Serviced Offices Ltd informing them that the Company will not extend the lease beyond July 31, 2017.
On April 20, 2017, the Company entered
into an Office Service Agreement (the “Office Service Agreement”) with Regus to lease office space at 83 Baker Street,
London, England, W1U 6AG. Per the terms of the Office Service Agreement, the first month’s rent is £2,473 with monthly
rental payments of £7,521 thereafter. The Company was required to pay a security deposit of £15,042, which is the equivalent
of two months of rent. The Office Service Agreement commences on May 22, 2017 and terminates on May 31, 2018, with either party
being able to terminate this agreement as of May 31, 2018 by providing written notice three months in advance of the termination
date of May 31, 2018.
|
f)
|
On February 3, 2017, the Company entered into the Skolnick Employment Agreement whereby Dr. 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, Dr. Skolnick (i) received a one-time cash sign-on
bonus of $40,000; (ii) will receive a pro-rated annual base salary of $410,000; (iii) will be eligible to earn an incentive bonus
in an amount and structure as agreed upon by Dr. Skolnick and the Board, with achievement of such bonus to be determined in the
sole discretion of the Board; and (iv) was granted an option to purchase 200,000 shares of the Company’s Common Stock, which
shall expire on the day that is the earlier of: (a) 90 calendar days after Dr. Skolnick ceases to provide services to the Company,
(b) 90 calendar days after the expiration of the Skolnick Employment Agreement, (c) the date Dr. 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) 10 years from the date of issuance.
In addition, the Skolnick Employment
Agreement provides for benefits if Dr. Skolnick’s employment is terminated under certain circumstances. In the event the
Company terminates Dr. Skolnick’s employment for Cause (as defined in the Skolnick Employment Agreement), Dr. 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 Dr. Skolnick’s employment or if Dr. Skolnick resigns within twelve months of a Constructive
Termination (as defined in the Skolnick Employment Agreement) of Dr. Skolnick’s employment, and in either case such termination
is not for Cause, then the Company shall pay Dr. Skolnick the sum of: (i) accrued but unpaid base salary and vacation through the
Termination Date; (ii) one times his annual salary; and (iii) one times his bonus cash compensation, excluding the signing bonus,
awarded to Dr. Skolnick in 2017. In the event of such termination, all outstanding stock options, warrants, restricted share awards,
performance grants held by Dr. 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, Dr. Skolnick shall be entitled to receive the
sum of: (i) accrued but unpaid base salary and vacation through the Termination Date; (ii) one times his annual salary; and (iii)
one times his bonus cash compensation, excluding the signing bonus, awarded to Dr. Skolnick in 2017. In the event of a Fundamental
Transaction, all outstanding stock options, warrants, restricted share awards, performance grants held by Dr. Skolnick shall become
fully vested and remain exercisable for the life of such award and shall not be forfeited for any reason whatsoever.
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g)
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On March 13, 2017, the Company entered into a third amendment (the “Third Miles Amendment”)
to that certain Senior Advisor Agreement with Brad Miles, dated January 22, 2013 (the “Initial Miles Agreement”), as
previously amended on February 24, 2015 (the “First Miles Amendment”) and March 19, 2015 (the “Second Miles Amendment”
and, together with the Initial Miles Agreement, the First Miles Amendment and the Third Miles Amendment, the “Miles Agreement”).
Pursuant to the Third Miles Amendment, and in consideration for Mr. Miles’ continued service to the Company as an advisor
through December 31, 2017, the Company: (i) paid Mr. Miles $107,805 in cash and issued Mr. Miles 1,875 shares of Common Stock;
(ii) granted to Mr. Miles the right to receive, subject to adjustment per the terms of the Third Miles Amendment, 1.25% of the
Net Profit generated from the Product from the Effective Date (which amounts shall be paid quarterly per the terms of the Third
Amendment), and, in the event of a Divestiture of the Company, 1.25% of the net proceeds of such sale, subject to adjustment per
the terms of the Third Amendment, and, in the event of a sale of the Company, the Fair Market Value of the Product; (iii) shall
pay Mr. Miles $17,000 per calendar quarter during 2017; and (iv) granted to Mr. Miles a warrant to purchase 45,000 shares of Common
Stock (the “Miles Warrant”). The Warrant, which is fully vested on the date of grant, has an exercise price of $10.00,
an expiration date of three years from the date of grant and may be exercised solely by payment of cash. Additionally, pursuant
to the Third Amendment, from the Effective Date until the fourth anniversary of the Effective Date, the Company shall have the
right to buyback the Interest or any portion thereof from Mr. Miles upon written notice at a price of $187,500 per 1.25% of Interest
(the “Miles Buyback Amount”); provided, however, that, in the event that such written notice is provided within 2.5
years after the Effective Date, the Company shall pay Mr. Miles two times the Miles Buyback Amount within ten business days after
the provision of such notice; provided, further, that, in the event the Company provides such notice to Mr. Miles after 2.5 years
after the Effective Date and prior to the four year anniversary of the Effective Date, the Company shall pay Mr. Miles 3.5 times
the Miles Buyback Amount within ten business days after the provision of such notice. Furthermore, pursuant to the Third Amendment,
the Company is required to provide to Mr. Miles, following the end of each calendar year, an annual audit of Net Profit once the
Product begins generating Net Profit. Capitalized terms not otherwise defined in this paragraph shall have the meanings ascribed
to such terms in the Third Amendment.
|
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 that certain License Agreement between the Company and Adapt, dated as of December
15, 2014, as amended (the “Adapt Agreement”), of NARCAN® (naloxone hydrochloride) Nasal Spray (“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 herein shall have the meanings
ascribed to such terms in the Purchase Agreement.
During the nine months ended April
30, 2017, the Company recognized proceeds of $13,710,000 as revenue immediately as a result of (i) the executed agreement constituting
persuasive evidence of an arrangement, (ii) the Company having no current or future performance obligations, (iii) the total consideration
being fixed and known at the time of its execution and there being no rights of return, and (iv) the cash having been received
and non-refundable.
On December 13, 2016, the Company
and Adapt entered into Amendment No. 1 to the Adapt Agreement (the “Adapt Amendment”) which amends the terms of the
Adapt Agreement relating to the grant of a commercial sublicense outside of the Unites States and diligence efforts for commercialization
of the Company’s intranasal naloxone opioid overdose reversal treatment (the “Product”). Under the terms of the
Adapt 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 December 15, 2014, in connection
with the Purchase Agreement, the Company and Adapt entered into the Adapt Agreement which provides Adapt with a global license
to develop and commercialize the Product in exchange for the Company receiving potential development and sales milestone payments
that could exceed $55 million in the aggregate plus certain royalties.
On April 12, 2017 (the “Potomac
Effective Date”), the Company and Potomac Construction Limited (“Potomac”) entered into an amendment (the “Potomac
Amendment”) to the following investment agreements with Potomac to provide for (in the case of Potomac Agreement No. 1 and
Potomac Agreement No. 2 (each as defined below)), or modify (in the case of Potomac Agreement No. 3, Potomac Agreement No. 4 and
Potomac Agreement No. 5 (each as defined below)), the Company’s right to buyback the Interest (as defined in each Potomac
Amendment) in each Potomac Agreement (as defined below) from Potomac: (i) that certain Investment Agreement, dated as of April
16, 2013, as clarified by that certain letter agreement dated October 15, 2014 (“Potomac Agreement No. 1”); (ii) that
certain Investment Agreement, dated as of May 30, 2013, as clarified by that certain letter agreement dated October 15, 2014 (“Potomac
Agreement No. 2”); (iii) that certain Investment Agreement, dated as of September 9, 2014, as clarified by that certain letter
agreement dated October 15, 2014 (“Potomac Agreement No. 3”); (iv) that certain Investment Agreement, dated as of October
31, 2014, as clarified by that certain letter agreement dated October 31, 2014 (“Potomac Agreement No. 4”); and (v)
that certain Investment Agreement, dated as of December 8, 2015 (“Potomac Agreement No. 5”) ((i)–(v) collectively,
the “Potomac Agreements” and, each, a “Potomac Agreement”).
Pursuant to the Potomac Amendment,
from the Potomac Effective Date until April 22, 2018, the five year anniversary of the date of the Investment (as defined in Potomac
Agreement No. 1), the Company shall have the right to buyback all or any portion of the Interest (as defined in Potomac Agreement
No. 1) from Potomac upon written notice to Potomac (the “Potomac Interest No. 1 Buyback Notice”), at the price of $600,000
per 6.0% of Interest (the “Potomac Interest No. 1 Buyback Amount”);
provided
, that in the event the Potomac
Interest No. 1 Buyback Notice is provided within 3.25 years of the date of the Investment, the Company shall pay Potomac 1.8 times
the Potomac Interest No. 1 Buyback Amount within ten business days of providing the Potomac Interest No. 1 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest No. 1 Buyback Notice is provided after 3.25 years of the date of the Investment
and no later than 4.25 years from the date of the Investment, the Company shall pay Potomac 3.15 times the Potomac Interest No.
1 Buyback Amount within ten business days of providing the Potomac Interest No. 1 Buyback Notice.
Pursuant to the Potomac Amendment,
from the Potomac Effective Date until July 5, 2018, the five year anniversary of the latest date of the Investment (as defined
in Potomac Agreement No. 2), the Company shall have the right to buyback all or any portion of the Interest (as defined in Potomac
Agreement No. 2) from Potomac upon written notice to Potomac (the “Potomac Interest No. 2 Buyback Notice”), at the
price of $150,000 per 1.5% of Interest (the “Potomac Interest No. 2 Buyback Amount”);
provided
, that in the
event the Potomac Interest No. 2 Buyback Notice is provided within 3.25 years of the date of the Investment, the Company shall
pay Potomac 1.8 times the Potomac Interest No. 2 Buyback Amount within ten business days of providing the Potomac Interest No.
2 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest No. 2 Buyback Notice is provided after
3.25 years of the date of the Investment and no later than 4.25 years from the date of the Investment, the Company shall pay Potomac
3.15 times the Potomac Interest No. 2 Buyback Amount within ten business days of providing the Potomac Interest No. 2 Buyback Notice.
Pursuant to the Potomac Amendment,
from the Potomac Effective Date until September 30, 2019, the five year anniversary of the date of the Investment (as defined in
Potomac Agreement No. 3) (the “Potomac Interest No. 3 Buyback Expiration Date”), the Company shall have the right to
buyback all or any portion of the Interest (as defined in Potomac Agreement No. 3) from Potomac upon written notice to Potomac
(the “Potomac Interest No. 3 Buyback Notice”), at the price of $500,000 per 0.98% of Interest (the “Potomac Interest
No. 3 Buyback Amount”);
provided
, that in the event the Potomac Interest No. 3 Buyback Notice is provided within 3.25
years of the date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 3 Buyback Amount within ten
business days of providing the Potomac Interest No. 3 Buyback Notice;
provided
,
further
, that in the event the Potomac
Interest No. 3 Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Potomac Interest
No. 3 Buyback Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest No. 3 Buyback Amount within ten business
days of providing the Potomac Interest No. 3 Buyback Notice.
Pursuant to the Potomac Amendment,
from the Potomac Effective Date until November 28, 2019, the five year anniversary of the date of the Investment (as defined in
Potomac Agreement No. 4) (the “Potomac Interest No. 4 Buyback Expiration Date”), the Company shall have the right to
buyback all or any portion of the Interest (as defined in Potomac Agreement No. 4) from Potomac upon written notice to Potomac
(the “Potomac Interest No. 4 Buyback Notice”), at the price of $500,000 per 0.98% of Interest (the “Potomac Interest
No. 4 Buyback Amount”);
provided
, that in the event the Potomac Interest No. 4 Buyback Notice is provided within 3.25
years of the date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 4 Buyback Amount within ten
business days of providing the Potomac Interest No. 4 Buyback Notice;
provided
,
further
, that in the event the Potomac
Interest No. 4 Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Potomac Interest
No. 4 Buyback Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest No. 4 Buyback Amount within ten business
days of providing the Potomac Interest No. 4 Buyback Notice.
Pursuant to the Potomac Amendment,
from the Potomac Effective Date until December 17, 2020, the five year anniversary of the date of the Investment (as defined in
Potomac Agreement No. 5) (the “Potomac Interest No. 5 Buyback Expiration Date”), the Company shall have the right to
buyback all or any portion of the Interest (as defined in Potomac Agreement No. 5) from Potomac upon written notice to Potomac
(the “Potomac Interest No. 5 Buyback Notice”), at the price of $500,000 per 0.75% of Interest (the “Potomac Interest
No. 5 Buyback Amount”);
provided
, that in the event the Potomac Interest No. 5 Buyback Notice is provided within 3.25
years of the date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 5 Buyback Amount within ten
business days of providing the Potomac Interest No. 5 Buyback Notice;
provided
,
further
, that in the event the Potomac
Interest No. 5 Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Potomac Interest
No. 5 Buyback Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest No. 5 Buyback Amount within ten business
days of providing the Potomac Interest No. 5 Buyback Notice.
Pursuant to the Potomac Amendment,
if the Additional Investment (as defined in Potomac Agreement No. 5) is funded by Potomac, then, from the date of funding of such
Additional Investment until the five year anniversary of such funding date (the “Potomac Additional Interest Buyback Expiration
Date”), the Company shall have the right to buyback all or any portion of the Additional Interest (as defined in Potomac
Agreement No. 5) upon written notice to Potomac (the “Potomac Additional Interest Buyback Notice”), at the price of
$500,000 per 0.75% of Additional Interest (the “Potomac Additional Interest Buyback Amount”);
provided
, that
in the event the Potomac Additional Interest Buyback Notice is provided within 3.25 years of the date of the Additional Investment,
the Company shall pay Potomac 1.8 times the Potomac Additional Interest Buyback Amount within ten business days of providing the
Potomac Additional Interest Buyback Notice;
provided
,
further
, that in the event the Potomac Additional Interest
Buyback Notice is provided after 3.25 years of the date of the Additional Investment and on or prior to the Potomac Additional
Interest Buyback Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Additional Interest Buyback Amount within
ten business days of providing the Potomac Additional Interest Buyback Notice. However, Potomac opted, at its sole discretion,
not to make the $1,000,000 Additional Investment, and the deadline for Potomac to make the Additional Investment has passed.
In consideration for Potomac entering
into the Potomac Amendment, the Company has agreed to pay Potomac, within 15 business days of the Potomac Effective Date, $159,500.
The Company recorded the $159,500 payment to Potomac as a non-recurring general and administrative expense.
Furthermore, the Company shall grant
Potomac the right to receive 2.5525% of the Net Profit (as defined in the Potomac Agreements) generated from DAVINCI (as defined
in the Potomac Amendment). In the event that the Company is sold, Potomac shall receive 2.5525% of the net proceeds of such sale,
after the deduction of all expenses and costs related to such sale. Additionally, from the Potomac Effective Date until the four
year anniversary of the Potomac Effective Date (the “Potomac DAVINCI Interest Buyback Expiration Date”), the Company
may buyback all or any portion of the DAVINCI Interest (as defined in the Potomac Amendment) upon written notice to Potomac (the
“Potomac DAVINCI Interest Buyback Notice), at the price of $382,875 per 2.5525% of DAVINCI Interest (the “Potomac DAVINCI
Interest Buyback Amount”);
provided
, that in the event the Potomac DAVINCI Interest Buyback Notice is provided within
2.5 years of the Potomac Effective Date, the Company shall pay Potomac two times the Potomac DAVINCI Interest Buyback Amount within
ten business days of providing the Potomac DAVINCI Interest Buyback Notice;
provided
,
further
,
that
, in the
event the Potomac DAVINCI Interest Buyback Notice is provided after 2.5 years of the Potomac Effective Date and on or prior to
the Potomac DAVINCI Interest Buyback Expiration Date, the Company shall pay Potomac 3.5 times the Potomac DAVINCI Interest Buyback
Amount within ten business days of providing the Potomac DAVINCI Interest Buyback Notice.
Furthermore, pursuant to the Potomac
Amendment, the Company and Potomac agree that, upon the Company’s receipt after the Potomac Effective Date of at least $3
million from (i) SWK pursuant to the Purchase Agreement with SWK, or (ii) Adapt pursuant to the Adapt Agreement, fifty percent
of all actual amounts received by the Company from SWK shall be used in determining the Net Profit.
On September 15, 2016, the Company
and Adapt Pharma, Inc. (“Adapt Inc.”) received notice from Teva Pharmaceuticals Industries Ltd. (“Teva Ltd.”)
and Teva Pharmaceuticals USA, Inc., a wholly owned subsidiary of Teva Ltd. (“Teva USA” and, together with Teva Ltd.,
“Teva”), pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “September 2016 Notice Letter”), that Teva
USA had filed ANDA No. 209522 (the “Teva 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 owned by the Company (the “’253 patent”).
The ‘253 patent is listed with respect to NARCAN® in the FDA’s Approved Drug Products with Therapeutic Equivalents
Evaluations 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 and/or that the ‘253
patent is invalid or unenforceable. On October 21, 2016, Adapt Inc., Adapt Pharma Operations Limited (“Adapt”) and
the Company (collectively, the “Plaintiffs”) filed a complaint for patent infringement against Teva in the United
States District Court for the District of New Jersey arising from Teva USA’s filing of the Teva ANDA with the FDA with respect
to the ‘253 patent. The Plaintiffs seek, among other relief, an order that the effective date of FDA approval of the ‘253
ANDA be a date not earlier than the expiration of the ‘253 patent, as well as equitable relief enjoining Teva from making,
using, offering to sell, selling, or importing the product that is the subject of the Teva ANDA until after the expiration of
the ‘253 patent, and monetary relief as a result of any such infringement.
On January 3, 2017, the Company and
Adapt Inc. received notice from Teva, pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “January 2017 Notice Letter”),
that Teva USA is 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 FDA’s
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. On February 8, 2017, the Plaintiffs filed a complaint
for patent infringement against Teva in the United States District Court for the District of New Jersey arising from Teva USA’s
filing of the Teva ANDA with the FDA with respect to the ‘747 patent. The Plaintiffs seek, among other relief, an order that
the effective date of FDA approval of the Teva ANDA be a date not earlier than the expiration of the ‘747 patent, as well
as equitable relief enjoining Teva from
making, using, offering to sell, selling, or importing the product that is the subject
of the Teva ANDA until after the expiration of the ‘747 patent
, and monetary relief as a result of any such infringement.
On March 17, 2017, the Company
and Adapt Inc. received notice from Teva, pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “March 2017 Notice Letter”),
that Teva USA is seeking regulatory approval to market a generic version of NARCAN® before the expiration of U.S. Patent No.
9,561,177 (the “’177 patent”). The ‘177 patent is listed with respect to NARCAN® in the FDA’s
Orange Book and expires on March 16, 2035. Teva’s March 2017 Notice Letter asserts that its generic product will not infringe
the ‘177 patent and/or that the ‘177 patent is invalid or unenforceable. On April 26, 2017, the Plaintiffs filed a
complaint for patent infringement against Teva in the United States District Court for the District of New Jersey arising from
Teva USA’s filing of the Teva ANDA with the FDA with respect to the ‘177 patent. The Plaintiffs seek, among other
relief, an order that the effective date of FDA approval of the Teva ANDA be a date not earlier than the expiration of the ‘177
patent, as well as equitable relief enjoining Teva from making, using, offering to sell, selling, or importing the product that
is the subject of the Teva ANDA until after the expiration of the ‘177 patent, and monetary relief as a result of any such
infringement.
Compensation Committee Addition
On May 26, 2017, the Board voted
to expand the Compensation Committee of the Board (the “Compensation Committee”) from two independent members to three
independent members and appointed Gabrielle A. Silver, MD to the Compensation Committee. Following Dr. Silver’s appointment,
the Compensation Committee is comprised of Ann MacDougall, JD (Chairperson), Dr. Silver, and Thomas T. Thomas.
Sublease
On May 29, 2017, the Company entered
into a Sublease (the “Sublease”) with Standish Management, LLC to sublease office space located at 201 Santa Monica
Boulevard, Santa Monica, CA 90401. Per the terms of the Sublease, the term will commence on September 1, 2017 and end on August
31, 2018 and the monthly rent will be $9,000, plus any related operating expenses and taxes.
Welmers Investment Agreement Amendment
On June 1, 2017 (the “Welmers
Effective Date”), the Company and Ernst Welmers (“Welmers”) entered into an amendment (the “Welmers Amendment”)
to that certain Investment Agreement, dated as of May 15, 2014, as clarified by that certain letter agreement dated October 15,
2014 (the “Welmers Agreement”), to provide for the Company’s right to buyback the Interest (as defined in the
Welmers Agreement) from Welmers. Pursuant to the Welmers Amendment, from the Welmers Effective Date until May 27, 2019, the five
year anniversary of the date of the Investment (as defined in the Welmers Agreement) (the “Welmers Interest Buyback Expiration
Date”), the Company shall have the right to buyback all or any portion of the Interest from Welmers upon written notice to
Welmers (the “Welmers Interest Buyback Notice”), at the price of $300,000 per 1.5% of Interest (the “Welmers
Interest Buyback Amount”);
provided
, that in the event the Welmers Interest Buyback Notice is provided within
3.25 years of the date of the Investment, the Company shall pay Welmers 1.8 times the Welmers Interest Buyback Amount within ten
business days of providing the Welmers Interest Buyback Notice;
provided
,
further
, that in the event the
Welmers Interest Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Welmers Interest
Buyback Expiration Date, the Company shall pay Welmers 3.15 times the Welmers Interest Buyback Amount within ten business days
of providing the Welmers Interest Buyback Notice.
In consideration for Welmers entering
into the Welmers Amendment, the Company has agreed to pay Welmers, within 15 business days of the Welmers Effective Date, $30,000.
Furthermore, the Company shall grant Welmers the right to receive 0.375% of the Net Profit (as defined in the Welmers Agreement)
generated from DAVINCI (as defined in the Welmers Amendment). In the event that the Company is sold, Welmers shall receive 0.375%
of the net proceeds of such sale, after the deduction of all expenses and costs related to such sale. Additionally, from the Welmers
Effective Date until the four year anniversary of the Welmers Effective Date (the “Welmers DAVINCI Interest Buyback Expiration
Date”), the Company may buyback all or any portion of the DAVINCI Interest (as defined in the Welmers Amendment) upon written
notice to Welmers (the “Welmers DAVINCI Interest Buyback Notice), at the price of $56,250 per 0.375% of DAVINCI Interest
(the “Welmers DAVINCI Interest Buyback Amount”);
provided
, that in the event the Welmers DAVINCI Interest
Buyback Notice is provided within 2.5 years of the Welmers Effective Date, the Company shall pay Welmers two times the Welmers
DAVINCI Interest Buyback Amount within ten business days of providing the Welmers DAVINCI Interest Buyback Notice;
provided
,
further
,
that
,
in the event the Welmers DAVINCI Interest Buyback Notice is provided after 2.5 years of the Welmers Effective Date and on or prior
to the Welmers DAVINCI Interest Buyback Expiration Date, the Company shall pay Welmers 3.5 times the Welmers DAVINCI Interest Buyback
Amount within ten business days of providing the Welmers DAVINCI Interest Buyback Notice.
Furthermore, pursuant to the Welmers
Amendment, the Company and Welmers agree that, upon the Company’s receipt after the Welmers Effective Date of at least $3
million from (i) SWK pursuant to the SWK Purchase Agreement, and/or (ii) Adapt pursuant to the Adapt Agreement, fifty percent of
all actual amounts received by the Company from SWK shall be used in determining the Net Profit.
Amendment to LYL Holdings Amended and Restated Consulting
Agreement
On June 1, 2017 (the “LYL Effective
Date”), the Company and LYL Holdings Inc. (“LYL”) entered into an amendment (the “LYL Amendment”)
to that certain Amended and Restated Consulting Agreement, dated October 25, 2016 and effective as of July 17, 2013 (the “LYL
Agreement”), to provide for the Company’s right to buyback the Interest (as defined in the LYL Agreement) from LYL.
Pursuant to the LYL Amendment, from the LYL Effective Date until 4.5 years after July 17, 2013 (the “LYL Interest Buyback
Expiration Date”), the Company shall have the right to buyback all or any portion of the Interest from LYL upon written notice
to LYL (the “LYL Interest Buyback Notice”), at the price of $500,000 per 5.0% of Interest (the “LYL Interest
Buyback Amount”);
provided
, that in the event the LYL Interest Buyback Notice is provided within 3.25 years of
the LYL Effective Date, the Company shall pay LYL 1.8 times the LYL Interest Buyback Amount within ten business days of providing
the LYL Interest Buyback Notice;
provided
,
further
, that in the event the LYL Interest Buyback Notice is
provided after 3.25 years after the Effective Date and on or prior to the LYL Interest Buyback Expiration Date, the Company shall
pay LYL 3.15 times the LYL Interest Buyback Amount within ten business days of providing the LYL Interest Buyback Notice.
In consideration for LYL entering
into the LYL Amendment, the Company and LYL agree that, upon the Company’s receipt after the LYL Effective Date of at least
$3 million from (i) SWK pursuant to the SWK Purchase Agreement and/or (ii) Adapt pursuant to the Adapt Agreement, fifty percent
of all actual amounts received by the Company from SWK shall be used in determining the Net Profit (as defined in the LYL Agreement).
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 April 30, 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 that
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,
and/or similar proceeding. The Company has not had material reclassifications, mergers, consolidations, and/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 and/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 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”), 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 (“Potomac Agreement No. 1”) 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 April 12, 2017, the Company
and Potomac entered into an amendment (see Note 8 – Potomac Amendment) whereby, from April 12, 2017 until April 22, 2018,
the five year anniversary of the date of the Investment (as defined in Potomac Agreement No. 1), the Company shall have the right
to buyback all or any portion of the Interest (as defined in Potomac Agreement No. 1) from Potomac upon written notice to Potomac
(the “Potomac Interest No. 1 Buyback Notice”), at the price of $600,000 per 6.0% of Interest (the “Potomac Interest
No. 1 Buyback Amount”);
provided
, that in the event the Potomac Interest No. 1 Buyback Notice is provided within 3.25
years of the date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 1 Buyback Amount within ten
business days of providing the Potomac Interest No. 1 Buyback Notice;
provided
,
further
, that in the event the Potomac
Interest No. 1 Buyback Notice is provided after 3.25 years of the date of the Investment and no later than 4.25 years from the
date of the Investment, the Company shall pay Potomac 3.15 times the Potomac Interest No. 1 Buyback Amount within ten business
days of providing the Potomac Interest No. 1 Buyback Notice.
On May 30, 2013, the Company entered into an
agreement with Potomac (“Potomac Agreement No. 2”) 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 April 12, 2017, the Company and Potomac entered
into an amendment (see Note 8 – Potomac Amendment) whereby, from the April 12, 2017 until July 5, 2018, the five year anniversary
of the latest date of the Investment (as defined in Potomac Agreement No. 2), the Company shall have the right to buyback all or
any portion of the Interest (as defined in Potomac Agreement No. 2) from Potomac upon written notice to Potomac (the “Potomac
Interest No. 2 Buyback Notice”), at the price of $150,000 per 1.5% of Interest (the “Potomac Interest No. 2 Buyback
Amount”);
provided
, that in the event the Potomac Interest No. 2 Buyback Notice is provided within 3.25 years of the
date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 2 Buyback Amount within ten business days
of providing the Potomac Interest No. 2 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest
No. 2 Buyback Notice is provided after 3.25 years of the date of the Investment and no later than 4.25 years from the date of the
Investment, the Company shall pay Potomac 3.15 times the Potomac Interest No. 2 Buyback Amount within ten business days of providing
the Potomac Interest No. 2 Buyback Notice.
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 (the “Welmers 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 June 1, 2017, the Company and Welmers entered into an amendment (the “Welmers Amendment”) (see Note 10
- Welmers Investment Agreement Amendment) to the Welmers Agreement to provide for the Company’s right to buyback the Interest
(as defined in the Welmers Agreement) from Welmers. Pursuant to the Welmers Amendment, from June 1, 2017 until May 27, 2019, the
five year anniversary of the date of the Investment (as defined in the Welmers Agreement) (the “Welmers Interest Buyback
Expiration Date”), the Company shall have the right to buyback all or any portion of the Interest from Welmers upon written
notice to Welmers (the “Welmers Interest Buyback Notice”), at the price of $300,000 per 1.5% of Interest (the “Welmers
Interest Buyback Amount”);
provided
, that in the event the Welmers Interest Buyback Notice is provided within
3.25 years of the date of the Investment, the Company shall pay Welmers 1.8 times the Welmers Interest Buyback Amount within ten
business days of providing the Welmers Interest Buyback Notice;
provided
,
further
, that in the event the
Welmers Interest Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Welmers Interest
Buyback Expiration Date, the Company shall pay Welmers 3.15 times the Welmers Interest Buyback Amount within ten business days
of providing the Welmers Interest Buyback Notice. In consideration for Welmers entering into the Welmers Amendment, the Company
has agreed to pay Welmers, within 15 business days of June 1, 2017, $30,000. Furthermore, the Company shall grant Welmers the right
to receive 0.375% of the Net Profit (as defined in the Welmers Agreement) generated from DAVINCI (as defined in the Welmers Amendment).
In the event that the Company is sold, Welmers shall receive 0.375% of the net proceeds of such sale, after the deduction of all
expenses and costs related to such sale. Additionally, from the Welmers Effective Date until the four year anniversary of the Welmers
Effective Date (the “Welmers DAVINCI Interest Buyback Expiration Date”), the Company may buyback all or any portion
of the DAVINCI Interest (as defined in the Welmers Amendment) upon written notice to Welmers (the “Welmers DAVINCI Interest
Buyback Notice), at the price of $56,250 per 0.375% of DAVINCI Interest (the “Welmers DAVINCI Interest Buyback Amount”);
provided
,
that in the event the Welmers DAVINCI Interest Buyback Notice is provided within 2.5 years of the Welmers Effective Date, the Company
shall pay Welmers two times the Welmers DAVINCI Interest Buyback Amount within ten business days of providing the Welmers DAVINCI
Interest Buyback Notice;
provided
,
further
,
that
, in the event the Welmers DAVINCI Interest
Buyback Notice is provided after 2.5 years of the Welmers Effective Date and on or prior to the Welmers DAVINCI Interest Buyback
Expiration Date, the Company shall pay Welmers 3.5 times the Welmers DAVINCI Interest Buyback Amount within ten business days of
providing the Welmers DAVINCI Interest Buyback Notice. Furthermore, pursuant to the Welmers Amendment, the Company and Welmers
agree that, upon the Company’s receipt after the Welmers Effective Date of at least $3 million from (i) SWK pursuant to the
SWK Purchase Agreement, and/or (ii) Adapt pursuant to the Adapt Agreement, fifty percent of all actual amounts received by the
Company from SWK shall be used in determining the Net Profit.
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,
certain operating expenses, and any other purpose consistent with the goals of the Foundation and/or connected to the Opioid Overdose
Reversal Treatment Product. 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 buyback, 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 (“Potomac Agreement No. 3”) 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 buyback, 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 April 12, 2017, the Company and Potomac entered into an amendment (see Note 8 – Potomac Amendment) whereby,
from April 12, 2017 until September 30, 2019, the five year anniversary of the date of the Investment (as defined in Potomac Agreement
No. 3) (the “Potomac Interest No. 3 Buyback Expiration Date”), the Company shall have the right to buyback all or any
portion of the Interest (as defined in Potomac Agreement No. 3) from Potomac upon written notice to Potomac (the “Potomac
Interest No. 3 Buyback Notice”), at the price of $500,000 per 0.98% of Interest (the “Potomac Interest No. 3 Buyback
Amount”);
provided
, that in the event the Potomac Interest No. 3 Buyback Notice is provided within 3.25 years of the
date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 3 Buyback Amount within ten business days
of providing the Potomac Interest No. 3 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest
No. 3 Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Potomac Interest No. 3 Buyback
Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest No. 3 Buyback Amount within ten business days of
providing the Potomac Interest No. 3 Buyback Notice.
On October 31, 2014, the Company entered into
an agreement with Potomac (“Potomac Agreement No. 4”) 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 buyback, 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 April 12, 2017, the Company and Potomac entered into an amendment (see Note 8 – Potomac Amendment) whereby,
from April 12, 2017 until November 28, 2019, the five year anniversary of the date of the Investment (as defined in Potomac Agreement
No. 4) (the “Potomac Interest No. 4 Buyback Expiration Date”), the Company shall have the right to buyback all or any
portion of the Interest (as defined in Potomac Agreement No. 4) from Potomac upon written notice to Potomac (the “Potomac
Interest No. 4 Buyback Notice”), at the price of $500,000 per 0.98% of Interest (the “Potomac Interest No. 4 Buyback
Amount”);
provided
, that in the event the Potomac Interest No. 4 Buyback Notice is provided within 3.25 years of the
date of the Investment, the Company shall pay Potomac 1.8 times the Potomac Interest No. 4 Buyback Amount within ten business days
of providing the Potomac Interest No. 4 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest
No. 4 Buyback Notice is provided after 3.25 years of the date of the Investment and on or prior to the Potomac Interest No. 4 Buyback
Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest No. 4 Buyback Amount within ten business days of
providing the Potomac Interest No. 4 Buyback Notice.
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 (“Potomac Agreement No. 5”) 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 buyback, 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 April 12, 2017, the Company and Potomac entered into an amendment
(see Note 8 – Potomac Amendment) whereby, from April 12, 2017 until December 17, 2020, the five year anniversary of the date
of the Investment (as defined in Potomac Agreement No. 5) (the “Potomac Interest No. 5 Buyback Expiration Date”), the
Company shall have the right to buyback all or any portion of the Interest (as defined in Potomac Agreement No. 5) from Potomac
upon written notice to Potomac (the “Potomac Interest No. 5 Buyback Notice”), at the price of $500,000 per 0.75% of
Interest (the “Potomac Interest No. 5 Buyback Amount”);
provided
, that in the event the Potomac Interest No.
5 Buyback Notice is provided within 3.25 years of the date of the Investment, the Company shall pay Potomac 1.8 times the Potomac
Interest No. 5 Buyback Amount within ten business days of providing the Potomac Interest No. 5 Buyback Notice;
provided
,
further
, that in the event the Potomac Interest No. 5 Buyback Notice is provided after 3.25 years of the date of the Investment
and on or prior to the Potomac Interest No. 5 Buyback Expiration Date, the Company shall pay Potomac 3.15 times the Potomac Interest
No. 5 Buyback Amount within ten business days of providing the Potomac Interest No. 5 Buyback Notice. Pursuant to the Potomac Amendment,
if the Additional Investment (as defined in Potomac Agreement No. 5) was funded by Potomac, then, from the date of funding of such
Additional Investment until the five year anniversary of such funding date (the “Potomac Additional Interest Buyback Expiration
Date”), the Company would have had the right to buyback all or any portion of the Additional Interest (as defined in Potomac
Agreement No. 5) upon written notice to Potomac (the “Potomac Additional Interest Buyback Notice”), at the price of
$500,000 per 0.75% of Additional Interest (the “Potomac Additional Interest Buyback Amount”);
provided
, that
in the event the Potomac Additional Interest Buyback Notice was provided within 3.25 years of the date of the Additional Investment,
the Company would have been obligated to pay Potomac 1.8 times the Potomac Additional Interest Buyback Amount within ten business
days of providing the Potomac Additional Interest Buyback Notice;
provided
,
further
, that in the event the Potomac
Additional Interest Buyback Notice was provided after 3.25 years of the date of the Additional Investment and on or prior to the
Potomac Additional Interest Buyback Expiration Date, the Company would have been obligated to pay Potomac 3.15 times the Potomac
Additional Interest Buyback Amount within ten business days of providing the Potomac Additional Interest Buyback Notice. However,
Potomac opted, at its sole discretion, not to make the $1,000,000 Additional Investment, and the deadline for Potomac to make the
Additional Investment has passed.
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 Pharma, Inc. (“Adapt Inc.”) received notice from
Teva Pharmaceuticals Industries Ltd. (“Teva Ltd.”) and Teva Pharmaceuticals USA, Inc., a wholly owned subsidiary of
Teva Ltd. (“Teva USA” and, together with Teva Ltd., “Teva”), pursuant to 21 U.S.C. § 355(j)(2)(B)(ii)
(the “September 2016 Notice Letter”), that Teva USA had filed ANDA No. 209522 (the “Teva 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 owned
by the Company (the “’253 patent”). The ‘253 patent is listed with respect to NARCAN® in the FDA’s
Approved Drug Products with Therapeutic Equivalents Evaluations 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 and/or that the ‘253 patent is invalid or unenforceable. On October 21, 2016, the Plaintiffs filed
a complaint for patent infringement against Teva in the United States District Court for the District of New Jersey arising from
Teva USA’s filing of the Teva ANDA with the FDA with respect to the ‘253 patent. The Plaintiffs seek, among other relief,
an order that the effective date of FDA approval of the ‘253 ANDA be a date not earlier than the expiration of the ‘253
patent, as well as equitable relief enjoining Teva from making, using, offering to sell, selling, or importing the product that
is the subject of the Teva ANDA until after the expiration of the ‘253 patent, and monetary relief as a result of any such
infringement.
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, 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 USA’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
Inc. received notice from Teva, pursuant to the January 2017 Notice Letter, that Teva USA is seeking regulatory approval to market
a generic version of NARCAN® before the expiration of the ’747 patent. The ‘747 patent is listed with respect to
NARCAN® in the FDA’s 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. On February
8, 2017, the Plaintiffs filed a complaint for patent infringement against Teva in the United States District Court for the District
of New Jersey arising from Teva USA’s filing of the Teva ANDA with the FDA with respect to the ‘747 patent. The Plaintiffs
seek, among other relief, an order that the effective date of FDA approval of the Teva ANDA be a date not earlier than the expiration
of the ‘747 patent, as well as equitable relief enjoining Teva from making, using, offering to sell, selling, or importing
the product that is the subject of the Teva ANDA until after the expiration of the ‘747 patent, and monetary relief as a
result of any such 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 USA’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.
On March 17, 2017, the Company and Adapt Inc. received notice from Teva, pursuant to 21 U.S.C. § 355(j)(2)(B)(ii)
(the “March 2017 Notice Letter”), that Teva USA is seeking regulatory approval to market a generic version of NARCAN®
before the expiration of U.S. Patent No. 9,561,177 (the “’177 patent”). The ‘177 patent is listed with
respect to NARCAN® in the FDA’s Orange Book and expires on March 16, 2035. Teva’s March 2017 Notice Letter asserts
that its generic product will not infringe the ‘177 patent and/or that the ‘177 patent is invalid or unenforceable.
On April 26, 2017, the Plaintiffs filed a complaint for patent infringement against Teva in the United States District Court for
the District of New Jersey arising from Teva USA’s filing of the Teva ANDA with the FDA with respect to the ‘177 patent.
The Plaintiffs seek, among other relief, an order that the effective date of FDA approval of the Teva ANDA be a date not earlier
than the expiration of the ‘177 patent, as well as equitable relief enjoining Teva from making, using, offering to sell,
selling, or importing the product that is the subject of the Teva ANDA until after the expiration of the ‘177 patent, and
monetary relief as a result of any such infringement.
On April 26, 2017, the Plaintiffs filed a complaint
for patent infringement against Teva in the United States District Court for the District of New Jersey arising from Teva USA’s
filing of the ‘177 ANDA with the FDA with respect to the ‘177 patent. The Plaintiffs seek, among other relief, an order
that the effective date of FDA approval of the ‘177 ANDA be a date later than the expiration of the ‘177 patent, as
well as equitable relief enjoining Teva from infringing the ‘177 patent and monetary relief as a result of any such infringement.
On June 1, 2017 (the “LYL Effective Date”),
the Company and LYL Holdings Inc. (“LYL”) entered into an amendment (the “LYL Amendment”) to that certain
Amended and Restated Consulting Agreement, dated October 25, 2016 and effective as of July 17, 2013 (the “LYL Agreement”),
to provide for the Company’s right to buyback the Interest (as defined in the LYL Agreement) from LYL. Pursuant to the LYL
Amendment, from the LYL Effective Date until 4.5 years after July 17, 2013 (the “LYL Interest Buyback Expiration Date”),
the Company shall have the right to buyback all or any portion of the Interest from LYL upon written notice to LYL (the “LYL
Interest Buyback Notice”), at the price of $500,000 per 5.0% of Interest (the “LYL Interest Buyback Amount”);
provided
,
that in the event the LYL Interest Buyback Notice is provided within 3.25 years of the LYL Effective Date, the Company shall pay
LYL 1.8 times the LYL Interest Buyback Amount within ten business days of providing the LYL Interest Buyback Notice;
provided
,
further
,
that in the event the LYL Interest Buyback Notice is provided after 3.25 years after the Effective Date and on or prior to the
LYL Interest Buyback Expiration Date, the Company shall pay LYL 3.15 times the LYL Interest Buyback Amount within ten business
days of providing the LYL Interest Buyback Notice. In consideration for LYL entering into the LYL Amendment, the Company and LYL
agree that, upon the Company’s receipt after the LYL Effective Date of at least $3 million from (i) SWK pursuant to the SWK
Purchase Agreement and/or (ii) Adapt pursuant to the Adapt Agreement, fifty percent of all actual amounts received by the Company
from SWK shall be used in determining the Net Profit (as defined in the LYL Agreement).
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.
On March 20, 2017, the Company announced
that it has initiated a Phase 2 clinical trial evaluating its novel nasally-delivered opioid antagonist candidate, OPNT001, as
a potential treatment for BN. This Phase 2 randomized, double-blind, placebo-controlled study will enroll up to 80 patients in
the UK who have been diagnosed with BN. The study is designed to evaluate OPNT001’s safety and tolerability, as
well as its impact on clinical outcomes, including changes in eating behavior. The Company expects to report topline data from
this study in the first half of 2018.
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.”
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 is 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 further advance OPNT002
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 some 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 while also 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.
Positron Emission Tomography
On March 27, 2017, the Company announced the
completion of a study evaluating two doses of a naloxone nasal spray on the occupation of brain opiate receptors using positron
emission tomography (“PET”) imaging. The study was commissioned by the National Institute for Health and Welfare
of Finland and was carried out by researchers at Clinical Research Services Turku (CRST) and Turku PET Centre, a leading international
PET center. The purpose of the study was to determine the extent and time course of brain mu opioid receptor occupancy following
the administration of two doses (four milligrams and two milligrams) in healthy volunteers. Mu opioid receptors mediate the actions
of both prescription opioids and illicit drugs such as heroin, and high occupancy of these receptors by opioids is responsible
for the clinical symptoms of overdose such as respiratory depression that can often be fatal. This study was the first use of PET
imaging to assess nasal naloxone on opioid receptor dynamics. The four milligram dose resulted in a larger degree of receptor occupancy
in the brain than the two milligram dose, and receptor occupancy was also achieved more rapidly with the four milligram dose. Nasal
naloxone was safe and well tolerated at both dose levels.
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 valued 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 valued 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 buyback, 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 Dr. Skolnick became the Company’s Chief Scientific Officer effective February 6, 2017.
The Skolnick Employment Agreement has an initial
term of six 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, Dr. Skolnick will (i) receive a one-time cash sign-on bonus of
$40,000; (ii) receive a pro-rated annual base salary of $410,000; (iii) be eligible to earn an incentive bonus in an amount and
structure as agreed upon by Dr. 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 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 Dr. Skolnick ceases to provide
services to the Company, (b) ninety (90) calendar days after the expiration of the Skolnick Employment Agreement, (c) the date
Dr. 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 nineteen, twenty, twenty-one, twenty-two, twenty-three, twenty-four, twenty-five and
twenty-six month anniversaries of the date of grant; and (iii) 5,556 shares of Common Stock shall vest on each of the twenty-seven,
twenty-eight, twenty-nine, thirty, thirty-one, thirty-two, thirty-three, thirty-four, thirty-five and thirty-six month anniversaries
of the grant date.
In addition, the Skolnick Employment Agreement
provides for benefits if Dr. Skolnick’s employment is terminated under certain circumstances. In the event the Company terminates
Dr. Skolnick’s employment for Cause (as defined in the Skolnick Employment Agreement), Dr. 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 Dr. Skolnick’s employment or if Dr. Skolnick resigns within twelve (12) months of a Constructive
Termination (as defined in the Skolnick Employment Agreement) of Dr. Skolnick’s employment, and in either case such termination
is not for Cause, then the Company shall pay Dr. 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 Dr. Skolnick in 2017. In the event of such termination, all outstanding stock options, warrants, restricted share
awards, performance grants held by Dr. 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, Dr. 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 Dr. Skolnick in 2017. In the
event of a Fundamental Transaction, all outstanding stock options, warrants, restricted share awards, performance grants held by
Dr. Skolnick shall become fully vested and remain exercisable for the life of such award and shall not be forfeited for any reason
whatsoever.
The Company valued Dr. Skolnick’s options
using the Black-Scholes option pricing model, which resulted in an aggregate value of $1,600,000 (see Note 5 – Stockholders’
Equity), which the Company will expense on a non-cash basis over the three-year vesting schedule. During the three-month period
ended April 30, 2017, the Company recorded $223,925 of non-cash expense related to this option. As of April 30, 2017, the Company
had an additional $1,376,075 of non-cash expense to record over the remaining 33 months of vesting.
On March 13, 2017, the Company entered into
a third amendment (the “Third Miles Amendment”) to that certain Senior Advisor Agreement with Brad Miles, dated January
22, 2013 (the “Initial Miles Agreement”), as previously amended on February 24, 2015 (the “First Miles Amendment”)
and March 19, 2015 (the “Second Miles Amendment” and, together with the Initial Miles Agreement, the First Miles Amendment
and the Third Miles Amendment, the “Miles Agreement”). Pursuant to the Third Miles Amendment, and in consideration
for Mr. Miles’ continued service to the Company as an advisor through December 31, 2017, the Company: (i) paid Mr. Miles
$107,805 in cash and issued Mr. Miles 1,875 shares of Common Stock; (ii) granted to Mr. Miles the right to receive, subject to
adjustment per the terms of the Third Miles Amendment, 1.25% of the Net Profit generated from the Product from the Effective Date
(which amounts shall be paid quarterly per the terms of the Third Amendment), and, in the event of a Divestiture of the Company,
1.25% of the net proceeds of such sale, subject to adjustment per the terms of the Third Amendment, and, in the event of a sale
of the Company, the Fair Market Value of the Product; (iii) shall pay Mr. Miles $17,000 per calendar quarter during 2017; and (iv)
granted to Mr. Miles a warrant to purchase 45,000 shares of Common Stock (the “Miles Warrant”). The Warrant, which
is fully vested on the date of grant, has an exercise price of $10.00, an expiration date of three years from the date of grant
and may be exercised solely by payment of cash. Additionally, pursuant to the Third Amendment, from the Effective Date until the
fourth anniversary of the Effective Date, the Company shall have the right to buyback the Interest or any portion thereof from
Mr. Miles upon written notice at a price of $187,500 per 1.25% of Interest (the “Miles Buyback Amount”); provided,
however, that, in the event that such written notice is provided within 2.5 years after the Effective Date, the Company shall pay
Mr. Miles two times the Miles Buyback Amount within ten business days after the provision of such notice; provided, further, that,
in the event the Company provides such notice to Mr. Miles after 2.5 years after the Effective Date and prior to the four year
anniversary of the Effective Date, the Company shall pay Mr. Miles 3.5 times the Miles Buyback Amount within ten business days
after the provision of such notice. Furthermore, pursuant to the Third Amendment, the Company is required to provide to Mr. Miles,
following the end of each calendar year, an annual audit of Net Profit once the Product begins generating Net Profit. Capitalized
terms not otherwise defined in this paragraph shall have the meanings ascribed to such terms in the Third Amendment.
The Company valued the Miles Warrant using
the Black-Scholes option pricing model, which resulted in a value of $229,360 (see Note 5 – Stockholders’ Equity).
The Company recorded the entire $229,360 as a non-recurring, and non-cash, expense during the three-month period ended April 30,
2017. Furthermore, the Company paid Mr. Miles $34,000 in cash compensation, which represents payment in full for the first two
calendar quarters of 2017.
On March 31, 2017, Dr. Michael Sinclair, the
Executive Chairman of the Board, and Dr. Roger Crystal, the Company’s Chief Executive Officer, each voluntarily entered into
separate employment agreement acknowledgements whereby they elected to forfeit, unconditionally and irrevocably, $175,498 and $586,328,
respectively, of certain owed amounts pursuant to their respective existing employment agreements, representing 35% of the total
compensation currently owed to each of Dr. Sinclair and Dr. Crystal. Furthermore, on March 31, 2017, pursuant to their respective
employment agreement acknowledgements, Dr. Sinclair and Dr. Crystal each voluntarily elected to forfeit, unconditionally and irrevocably,
680,000 and 825,000 shares of Common Stock of the Company underlying stock options and warrants previously issued by the Company,
respectively, representing approximately 55% of the total number of options and warrants previously issued by the Company to each
of Dr. Sinclair and Dr. Crystal.
On April 20, 2017, the Company entered into
an Office Service Agreement (the “Office Service Agreement”) with Regus to lease office space at 83 Baker Street, London,
England, W1U 6AG. Per the terms of the Office Service Agreement, the first month’s rent is £2,473 with monthly rental
payments of £7,521 thereafter. The Company was required to pay a security deposit of £15,042, which is the equivalent
of two months of rent. The Office Service Agreement commences on May 22, 2017 and terminates on May 31, 2018, with either party
being able to terminate this agreement as of May 31, 2018 by providing written notice three months in advance of the termination
date of May 31, 2018.
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., and Cerecor Inc.
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 April 30, 2017 to the same period at April 30, 2016.
Revenues
The Company recorded net revenue of $18,116
during the three-month period ended April 30, 2017, which represents a decrease of $2,586,981 from net revenue of $2,605,097 recorded
during the same three-month period in fiscal year 2016. The entire $18,116 of net revenue was related to the Company’s Binge
Eating Disorder (“BED”) treatment program. The Company did not record any revenue related to NARCAN® during the
three-month period ended April 30, 2017.
During the three-month period ended April 30,
2016, the Company recognized $2,605,097 of revenue, all of which was related to the sale of NARCAN® pursuant to the Company’s
licensing agreement with Adapt. The Company received a $2,500,000 milestone payment from Adapt that was due to the Company upon
the first commercial sale of NARCAN® in the United States (“U.S.”). The Company also received $105,097 in royalty
payments from Adapt for commercial sales of NARCAN® in the U.S. during the first quarter of Adapt’s fiscal year.
General and Administrative Expenses
The Company’s general and administrative
expenses totaled $1,995,892 and $1,040,608 during the three-month periods ended April 30, 2017 and 2016, respectively. This represents
an increase of $955,284, or approximately 91.8%, and includes expenses such as wages and related taxes, legal fees, accounting
fees, and rent expense. The increase in general and administrative expenses also included a $159,500 non-recurring expense related
to the Potomac Amendment (see note 8 – Potomac Amendment). During the current fiscal year the Company has hired several employees.
The increased number of employees and related increase in operations during the three-month period ended April 30, 2017 resulted
in an increase in general and administration expense, particularly in wages and related taxes.
Research and Development Expenses
The Company’s research and development
expenses totaled $1,103,319 and $1,059,627 during the three-month periods ended April 30, 2017 and 2016, respectively. Research
and development expenses increased $43,692, or approximately 4.1%, on a year-to-year basis. The increase in research and development
expenses is related to the on-going development of the Company’s product pipeline.
Selling Expenses
The Company’s selling expenses for the
three-month periods ended April 30, 2017 and 2016 were $84,375 and $93,000, respectively, representing a year-over-year decrease
of 9.3%. The Company’s selling expenses for the three-month periods ended April 30, 2017 and 2016 where related entirely
to NARCAN®.
Interest Income
During the three-month period ended April 30,
2017, the Company earned interest income of $10,673 as compared to zero interest income during the three-month period ended April
30, 2016. During the three months ended April 30, 2017, net interest income consisted entirely of interest earned on the Company’s
cash deposits.
Gain on Foreign Currency Exchange Rates
During the three-month periods ended April
30, 2017 and 2016, the Company recorded gains on foreign currency exchange rates of $25,189 and $4,266, respectively. The Company
maintains cash balances in several currencies and also incurs expenses in several currencies, both of which subject the Company
to foreign currency exchange rate fluctuations.
Net Income (Loss)
The Company’s net loss for the three-month
period ended April 30, 2017 was $3,129,608, which represents a $3,545,736 decrease from the $416,128 net income recorded during
the same three-month period in fiscal year 2016. This decrease is due primarily to the $2,586,981 decrease in net revenue and
the $955,284 increase in general and administrative expenses for the three-month period ended April 30, 2017 as compared to the
same three-month period ended April 30, 2016.
The following compares Opiant’s
operations during the nine months ended April 30, 2017 to the same period at April 30, 2016.
Revenues
The Company recorded net revenue of $14,674,258
and $9,585,097 during the nine-month periods ended April 30, 2017 and 2016, respectively. This increase of $5,089,161, which represents
an increase of 53.1%, 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 nine
months ended April 30, 2017 was decreased by revenue accrued for October 2016 which was assigned to SWK.
During the nine-month period ended April 30,
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 nine months ended April 30, 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 April 30, 2016. The Company also recognized $4,785,097 of revenue derived from the Adapt License
Agreement, which included a $2,000,000 milestone payment related to the FDA’s approval of NARCAN® for the emergency treatment
of known or suspected opioid overdose and a $2,500,000 milestone payment from Adapt that was due to the Company upon the first
commercial sale of NARCAN® in the U.S.
General and Administrative Expenses
General and administrative expenses totaled
$4,567,898 during the nine-month period ended April 30, 2017. This represents a decrease of $8,588,033 from the $13,155,931 incurred
during the same three-month period ended April 30, 2016. The decrease in general and administrative expenses was due primarily
from the $9,215,411 decrease in non-cash stock based compensation expense. During the nine-month period ended April 30, 2016,
the Company recorded non-cash expense totaling $8,750,000 related to three stock option grants, with these three stock option
grants contributing no such expense during the same nine-month period ended April 30, 2017. The $9,215,411 decrease in non-cash
stock based compensation expense was partially offset by an increase in legal fees, an increase in wages and related taxes, the
non-recurring expense related to the Potomac Amendment (see note 8 – Potomac Amendment), an increase in accounting fees,
an increase in insurance expense, and an increase in rent expense.
Research and Development Expenses
Research and development expenses totaled
$1,889,989 and $2,814,520 during the nine-month periods ended April 30, 2017 and 2016, respectively. Research and development
costs incurred during the nine months ended April 30, 2017 decreased by $924,531, or approximately 32.8%, as compared to the same
nine-month period ended April 30, 2016. The decrease in research and development expenses was due primarily to $875,000 of non-cash
expense related to the granting of stock options during the nine-month period ended April 30, 2016. These stock options were fully
expensed on the date granted in fiscal year 2016 and contributed zero expense during the nine-month period ended April 30, 2017.
Selling Expenses
The Company’s selling expenses totaled
$1,322,974 and $302,251 during the nine-month periods ended April 30, 2017 and 2016, respectively. The Company’s selling
expenses for the nine-month periods ended April 30, 2017 and 2016 were related entirely to NARCAN®. The $1,020,723 increase
in selling expenses is due to the $5,089,161 increase in net revenue during the nine months ended April 30, 2017 as compared to
the same nine-month period in fiscal year 2016. The increase in net revenue resulted in additional selling expenses during the
period related to the sale of Royalties (as defined in the Purchase Agreement) to SWK (see Note 7 – Sale of Royalties).
Net Interest Income (Expense)
During the nine-month period ended April 30,
2017, net interest income was $9,306, which represents an increase of $20,625 from the net interest expense of $11,319 recorded
during the same nine-month period ended April 30, 2016. Interest income of $13,022 was partially offset by interest expense of
$3,716 during the nine-month period ended April 30, 2017. During the same period in fiscal year 2016, interest expense was $11,319
while zero interest income was earned. Interest income increased on a year-to-year basis due to the Company’s increase in
cash deposits, while interest expense decreased on a year-to-year basis due to the Company having repaid, in full, its outstanding
notes payable as of April 30, 2017.
Gain (Loss) on Foreign Currency Exchange
Rates
During the nine-month period ended April
30, 2017, the Company recorded a $16,851 gain on foreign currency exchange rates, which represents an increase of $41,776 from
the $24,925 loss on foreign currency exchange rates that the Company recorded during the nine-month period ended April 30, 2016.
The Company maintains cash balances in several currencies and also incurs expenses in several currencies, both of which subject
the Company to foreign currency exchange rate fluctuations.
Net Income (Loss)
The Company recorded net income in the amount
of $6,919,554 for the nine-month period ended April 30, 2017. During the same nine-month period in fiscal year 2016, the Company
recorded a net loss of $6,723,849. The increase in net income of $13,643,403 was due primarily to the $10,090,411 decrease in
non-cash stock based compensation expense during the nine-months ended April 30, 2017 as compared to the same nine-month period
in fiscal year 2016. The $5,089,161 increase in net revenue during the nine-month period ended April 30, 2017 as compared to the
same nine months in fiscal year 2016, which was partially offset by the $1,020,723 increase in selling expenses, further contributed
to the increase in net income.
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 April 30,
2017 was $9,680,454, which represents an increase of $8,199,061 from the $1,481,393 cash balance as of July 31, 2016. The Company
had total outstanding liabilities of $5,515,806 as of April 30, 2017 as compared to total outstanding liabilities of $6,586,834
as of July 31, 2016.
During the nine-month period ended April
30, 2017, the Company reduced its outstanding liabilities by $2,176,649 by paying Dr. Michael Sinclair, the Company’s Executive
Chairman and Chairman of the Board, and Dr. Roger Crystal, the Company’s Chief Executive Officer, $1,414,823, in the aggregate,
of accrued and unpaid wages that were owed to them. The remaining $761,826, in the aggregate, was forfeited by Dr. Sinclair
and Dr. Crystal per the terms of their respective employment agreement acknowledgements dated March 31, 2017. The Company further
reduced its outstanding liabilities by repaying, in full, a $165,000 note payable (see Note 4 – Note Payable) that was outstanding
as of July 31, 2016. These reductions were partially offset by the $1,250,196 increase in accounts payable and accrued liabilities
as of April 30, 2017 as compared to July 31, 2016.
The Company’s management believes that
the Company’s current cash balance is sufficient to fund the Company’s current operations through at least April 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 nine-month period ended April 30, 2017, the Company received $13,710,000 of
funding pursuant to the terms of the Purchase Agreement with SWK. During the nine-month period ended April 30, 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 currently have any arrangements in
place for additional financing. The Company has no material commitments for capital expenditures as of April 30, 2017.
The financial position of the Company as of
April 30, 2017 showed an increase in total assets, as compared to July 31, 2016, of $7,919,215. This was due primarily to an increase
in cash as a result of the sale of royalties to SWK (see Note 7 – Sale of Royalties). This was partially offset by the $312,498
decrease in royalties receivable as of April 30, 2017, which was the result of the Company no longer receiving royalties from Adapt
pursuant to the Adapt Agreement. Total liabilities as of April 30, 2017 were $5,515,806, which represents a decrease of $1,071,028,
or approximately 16.3%, as compared to total liabilities of $6,586,834 at July 31, 2016.
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 in excess of $55 million, plus certain 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 and on March 20, 2017, the Company announced that it has initiated a Phase 2 clinical
trial evaluating its novel nasally-delivered opioid antagonist candidate, OPNT001, as a potential treatment for BN. The Company
also plans to advance OPNT002, for the treatment of AUD, into additional clinical trials, aims to collaborate with other parties
and progress its drug development program for BED, and is 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 U.S. 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 nine months ended April 30, 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 April 30, 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 April 30, 2017.