Notes to Consolidated Financial
Statements
For the years ended July 31, 2017
and 2016
Note 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.
Note 2. Liquidity
and Financial Condition
The
Company had net income of $6,580,613 for the year ended July 31, 2017 and has an accumulated deficit of $54,604,729 at July 31,
2017 from having incurred losses, with the exception of the year ended July 31, 2017, since its inception. The Company has $6,620,493
of working capital at July 31, 2017 and provided $5,556,162 of cash in its operating activities during the year ended July 31,
2017. The Company has financed its operations primarily through non-equity cash investments by a number of investors, in exchange
for an interest in 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 (see Note 7 – Deferred Revenue).
In
December 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 $20 million, plus up to double-digit percentage royalties on net sales.
On
December 13, 2016, the Company entered into a Purchase and Sale Agreement (the “SWK 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 (as defined in the SWK Purchase Agreement) arising from the sale by Adapt 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 SWK 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 SWK Closing Date, 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 SWK Closing Date, then SWK shall receive 3.93% of all Royalties after such date. Under the
SWK Purchase Agreement, the Company received an upfront purchase price of $13,750,000 less $40,000 of legal fees on the SWK Closing
Date, and received an additional $3,750,000 from SWK on August 10, 2017 after the Earn Out Milestone was achieved during the first
two calendar quarters in 2017.
For
the year ended July 31, 2016, the Company concluded that there was substantial doubt about the Company’s ability to continue
as a going concern. During the year ended July 31, 2017, the Company received $17,460,000 in milestone and royalty payments.
These payments have increased liquidity in order to provide sufficient working capital for the Company to continue the advancement
of its programs. In addition, the royalties and milestones from the Adapt Agreement could generate meaningful revenue and corresponding
cash. Lastly, with the uplisitng to NASDAQ, the Company will have access to capital resources through possible public or private
equity offerings, debt financings, corporate collaborations or other means. The Company believes that in totality these
factors have resolved the substantial doubt regarding the Company’s ability to continue as a going concern.
The
Company believes that it has sufficient capital resources to sustain operations through at least the next twelve months from the
date of this filing.
Note 3. Summary
of Significant Accounting Policies
Basis
of Presentation and Use of Estimates
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission
(“SEC”).
Principles
of Consolidation
The
consolidated financial statements have been prepared in accordance with GAAP and include the accounts for the Company and its
wholly-owned subsidiary, Opiant Pharmaceuticals UK Limited. All intercompany transactions and balances have been eliminated in
consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents were $6,872,555 and $1,481,393 at July 31, 2017 and 2016, respectively. The Company maintains cash balances
at financial institutions insured up to $250,000 by the Federal Deposit Insurance Corporation. Balances in the UK are insured
up to £85,000 by the Financial Services Compensation Scheme (UK Equivalent). Although the Company’s cash balances
exceeded these insured amounts at various times during the year ended July 31, 2017, the Company has not experienced any losses
on its deposits of cash and cash equivalents for the periods presented.
Accounts
Receivable
The
Company routinely assesses the recoverability of receivables to determine their collectability by considering factors such as
historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect
a customer's ability to pay. The Company determines its allowance for doubtful accounts by considering such factors as the length
of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations
to the Company and the condition of the general economy and the industry as a whole.
The
Company has evaluated its accounts receivable history and determined that no allowance for doubtful accounts is required for the
years ended July 31, 2017 and 2016.
Long-Lived
Assets
The
Company follows ASC 360,
Property, Plant, and Equipment
, for its fixed assets. Property and equipment is stated at cost
less accumulated depreciation. Depreciation is computed by the straight-line method over estimated useful lives (3 to 7 years).
The Company’s capitalizes all asset purchases greater than $2,500 having a useful life greater than one year. The Company
follows ASC 350,
Intangibles – Goodwill and Other
for its intellectual property asset. Intellectual property
consists of patents which are stated at their fair value acquisition cost. Amortization is calculated by the straight-line method
over their estimated useful lives (20 years).
Long-lived
assets such as property and equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances
indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market
value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset
is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying
amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected
future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. The Company
did not recognize any impairment losses for any years presented.
Earnings
(Loss) per Share
The
Company follows ASC 260,
Earnings per Share
. Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding during the respective
period presented in the Company’s accompanying consolidated financial statements.
Fully
diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased
to include the number of Common Stock equivalents (primarily outstanding options and warrants).
Common
Stock equivalents represent the dilutive effect of the assumed exercise of outstanding stock options and warrants, using the treasury
stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only
if the Common Stock equivalents are considered dilutive based upon the Company’s net income position at the calculation
date.
The
following table illustrates the dilutive effect of the assumed exercise of the Company’s outstanding stock options and warrants,
using the treasury stock method, as of July 31, 2017 and 2016, respectively:
|
|
For
the Year Ended July 31, 2017
|
|
|
For
the Year Ended July 31, 2016
|
|
|
|
Net
Income
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per
Share
$
|
|
|
Net
Loss
|
|
|
Weighted
Average
Common
Shares
Outstanding
|
|
|
Per
Share
$
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to common stock
|
|
$
|
6,580,613
|
|
|
|
2,014,540
|
|
|
$
|
3.27
|
|
|
$
|
(7,814,256
|
)
|
|
|
1,910,489
|
|
|
$
|
(4.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
-
|
|
|
|
221,311
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
stock, including assumed conversions
|
|
$
|
6,580,613
|
|
|
|
2,235,851
|
|
|
$
|
2.94
|
|
|
$
|
(7,814,256
|
)
|
|
|
1,910,489
|
|
|
$
|
(4.09
|
)
|
As
of July 31, 2017, potentially dilutive Common Stock equivalents were 221,311 and consisted of options and warrants. Common Stock
equivalents were not included in the calculation of dilutive loss per share as of July 31, 2016 because the result would have
been anti-dilutive.
Research
and Development Costs
The
Company follows ASC 730,
Research and Development
, and expenses all research and development costs as incurred for
which there is no alternative future use. These costs also include the expensing of employee compensation and employee stock based
compensation.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar. Occasional transactions may occur in British Pounds
and management has adopted ASC 830,
Foreign Currency Translation Matters
. Monetary assets and liabilities denominated
in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising
on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
Stock-Based
Compensation
ASC
718
Compensation – Stock Compensation
prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the consolidated
financial statements based on their fair values. That expense is recognized over the period during which an employee is required
to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50,
Equity – Based Payments to Non-Employees.
Measurement of share-based payment transactions with
non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b)
the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance
commitment date or performance completion date.
The
Company had stock-based compensation of $1,696,926 and $11,496,025 for the years ended July 31, 2017 and 2016, respectively.
Fair
Value of Financial Instruments
ASC
820
Fair Value Measurements and Disclosures
defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources
(observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels,
which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3).
The
three levels of the fair value hierarchy are described below:
Level
1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 - Inputs that are both significant to the fair value measurement and unobservable.
The
carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of
these instruments. These financial instruments include cash, accounts payable and note payable. The fair value of the Company’s
note payable is estimated based on current rates that would be available for debt of similar terms which is not significantly
different from its stated value.
As
of July 31, 2017 and 2016, the Company did not have any financial liabilities measured and recorded at fair value on the Company’s
balance sheets on a recurring basis.
Related
Parties
The
Company follows ASC 850,
Related Party Disclosures
, for the identification of related parties and disclosure of related
party transactions. Related party balances as of July 31, 2017 and July 31, 2016 were zero.
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, has no
material future obligation and the amount of the royalty fee is determinable and collection is reasonably assured.
Licensing
Agreement
On
December 15, 2014, the Company entered into a licensing agreement (the “Adapt Agreement”) with Adapt Pharma Operations
Limited, a wholly owned subsidiary of Adapt Pharma Limited (“Adapt”), an Ireland-based pharmaceutical company. Pursuant
to the Adapt Agreement, the Company provided a global license to develop and commercialize the Company’s intranasal naloxone
opioid overdose reversal treatment, now known as NARCAN® (naloxone hydrochloride) Nasal Spray. In exchange for licensing its
treatment, the Company received a nonrefundable, upfront license fee of $500,000 in December 2014. The Company also received a
monthly fee for one year for participation in joint development committee calls and the production and submission of an initial
development plan. The initial development plan was completed and submitted in May 2015. Management evaluated the deliverables
of this arrangement and determined that the licensing deliverable had a standalone value and therefore, the payments were recognized
as revenue.
The
Company could also receive additional payments upon reaching various sales and regulatory milestones as well as royalty payments
for commercial sales of NARCAN generated by Adapt. During the year ended July 31, 2016, the Company received $4,500,000 of milestone
payments and recognized royalty revenues of approximately $418,000.
In
addition, as provided under the Adapt Agreement, the Company was required to contribute $2,500,000 of development, regulatory
and commercialization costs, some of which was credited for costs incurred by the Company prior to the execution of the Adapt
Agreement. At July 31, 2016, the Company had contributed the full $2,500,000. During the year ended July 31, 2016, the Company
recognize fees of approximately $180,000.
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.
Sale
of Royalties
Under
the SWK Purchase Agreement, we received an upfront purchase price of $13,750,000 less $40,000 of legal fees, and recognized an
additional $3,750,000 when certain milestones were achieved during the fiscal year ended July 31, 2017.
During
the fiscal year ended July 31, 2017, the Company recognized total proceeds of $17,460,000 as revenue associated with the SWK Purchase
Agreement 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.
Recently
Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard
setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued
standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations
upon adoption.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”
“(ASU
2016-18”). The update is effective for fiscal years beginning after December 15, 2017, including interim reporting periods
within those fiscal years. Early adoption is permitted. The purpose of Update No. 2016-18 is to clarify guidance and presentation
related to restricted cash in the statement of cash flows. The amendment requires beginning-of-period and end-of-period total
amounts shown on the statement of cash flows to include cash and cash equivalents as well as restricted cash and restricted cash
equivalents. The Company is in the process of determining the effect that the adoption will have on its financial position, results
of operations or financial statement disclosures.
In
October 2016, the FASB issued updated guidance related to the recognition of income tax consequences of an intra-entity transfer
of an asset other than inventory. This guidance will be effective for the first quarter of tax year 2018; however, early adoption
is permitted. The Company is evaluating the impact that this guidance will have its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230)”
(“ASU 2016-15”),
which seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. For public entities, Update 2016-15 becomes effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating
the provisions of Update 2016-15 and assessing the impact, if any, it may have on its financial position, results of operations,
cash flows or financial statement disclosures.
In
August 2014, the FASB issued ASU 2014-15, "
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
." The amendments in this ASU are intended
to provide guidance on the responsibility of reporting entity management. Specifically, this ASU provides guidance to management
related to evaluating whether there is substantial doubt about the reporting entity’s ability to continue as a going concern
and about related financial statement note disclosures. Although the presumption that a reporting entity will continue to operate
as a going concern is fundamental to the preparation of financial statements, prior to the issuance of this ASU, there was no
guidance in U.S. generally accepted accounting principles (U.S. GAAP) related to the concept. Due to the lack of guidance in U.S.
GAAP, practitioners and their clients often faced challenges in determining whether, when, and how a reporting entity should disclose
the relevant information in its financial statements. As a result, the FASB issued this guidance to require management evaluation
and potential financial statement disclosures. This ASU will be effective for financial statements with periods ending after December
15, 2016. The Company adopted the ASU during the year and performed going concern evaluations for its 2017 fiscal year-end financial
statements.
In
May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”
and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts.”
The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in
an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also
requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would
require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company
to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will
be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date," which was issued by the FASB in August 2015 and extended the original effective
date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14
upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is
in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition,
and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to
systems and controls may be warranted.
There
have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08,
"Principal versus Agent Considerations
(Reporting Revenue Gross Versus Net),"
was issued in March 2016 to clarify certain aspects of the principal versus
agent guidance in ASU 2014-09. In addition, ASU 2016-10,
"Identifying Performance Obligations and Licensing,"
issued
in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations
and licensing implementation. ASU 2016-12,
"Revenue from Contracts with Customers - Narrow Scope Improvements and
Practical Expedients"
provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of
assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and
clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20,
“Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with Customers,”
was issued in December 2016, and provides
elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical
corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider
the impact on its financial statements related to the updated guidance provided by these four new ASUs.
The Company has considered
all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material
impact on its consolidated financial statements.
Note 4. Accounts
Receivable
The
Company had accounts receivable of $3,750,000 as of July 31, 2017, with the entire amount being related to the Earn Out Milestone
(see Note 10 – Sale of Royalties) from SWK. As provided under the Company’s agreement with SWK, the Company was to
receive a milestone payment in the amount of $3,750,000 if Adapt had 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®.
This milestone was achieved as of July 31, 2017, therefore the Company recorded the $3,750,000 as an account receivable, with
the actual cash payment being received by the Company on August 9, 2017.
The
Company had accounts receivable of $312,498 as of July 31, 2016, which consisted entirely of NARCAN® royalties due to the
Company from Adapt.
Note 5. Related
Party Transactions
The
Company uses office space provided by Dr. Michael Sinclair, the Executive Chairman of the Board of Directors of the Company (the
“Board”), Kevin Pollack, the Company’s former Chief Financial Officer, and Dr. Phil Skolnick, the Company’s
Chief Scientific Officer, free of charge.
On
March 31, 2017, Dr. Michael Sinclair 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.
During
the fiscal year ended July 31, 2017, the Company did not borrow any funds from related parties, nor did it have any outstanding
related party debt and/or accrued and unpaid interest owed to related parties as of July 31, 2017.
On
January 22, 2016, the Company repaid Mr. Wolf the outstanding principal and accrued interest underlying the loans he had made
to the Company and on January 25, 2016, the Company repaid Dr. Sinclair and Mr. Pollack all outstanding principal and accrued
interest underlying the loans that they had made to the Company.
During
September and October 2015, the Company received an aggregate of $151,191 loans from Dr. Crystal, Mr. Pollack and Dr. Sinclair,
in the individual amounts of $51,191, $50,000 and $50,000, respectively. Each loan bore interest at 6% per annum and were
unsecured. On December 15, 2015, the Company repaid Dr. Sinclair and Mr. Pollack all outstanding principal and accrued interest
underlying their loans, and on December 16, 2015, the Company repaid Dr. Crystal all outstanding principal and accrued interest
underlying his loan.
Note
6. Note Payable
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 provided to the Company in full under 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 by issuing a promissory
note which is subject to interest at 6% per annum and secured by 22,916 shares of the Company’s Common Stock.
On
December 12, 2016, the Company repaid the entire $165,000 principal balance plus $4,828 of accrued and unpaid interest. On June
27, 2017, the 22,916 shares that were being held in escrow as collateral were cancelled, as the Company had fully satisfied the
terms of this promissory note when payment in full was remitted to the note holder on December 12, 2016.
Note
7. Deferred Revenue
On
December 17, 2013, the Company entered into an agreement with an investor, Potomac, and subsequently received additional funding
totaling $250,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor
with a 0.5% interest in the Company’s BED treatment product (the “BED Treatment Product”) and pay the investor
0.5% of the BED Net Profit in perpetuity (the “2013 0.5% Investor Interest”). “BED Net Profit” is defined
as the pre-tax profit generated from the BED Treatment Product after the deduction of all expenses incurred by and payments made
by the Company in connection with the BED Treatment Product, including but not limited to an allocation of Company overhead. If
the BED Treatment Product was not approved by the FDA by December 17, 2016, the investor had a 60-day option to exchange its entire
0.5% Investor Interest for 31,250 shares of Common Stock of the Company. During the fiscal year ended July 31, 2017, the Company
recognized $39,854 of revenue because the investor’s option to receive the shares of Common Stock terminated by its terms.
The Company estimates that the research and development for this treatment will be completed by December 31, 2019, therefore the
Company will be recognizing revenue in the amount of $7,246 per month through December 31, 2019.
On
May 15, 2014, the Company entered into an agreement and subsequently received funding from an investor, Ernst Welmers, in the
amount of $300,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor
with a 1.5% interest (the “2014 1.5% Investor Interest”) in the OORT Net Profit generated from the Opioid Overdose
Reversal Treatment Product in perpetuity. The investor also has rights with respect to the 2014 1.5% Investor Interest if the
Opioid Overdose Reversal Treatment Product is sold or the Company is sold. If the Opioid Overdose Reversal Treatment Product was
not approved by the FDA by May 15, 2016, the investor would have had a 60-day option to exchange its 2014 1.5% Investor Interest
for 37,500 shares of Common Stock of the Company. The Opioid Overdose Reversal Treatment Product was approved by the FDA on November
18, 2015, and, as a result, the investor did not realize the option to exchange its 2014 1.5% Investor Interest for shares of
Common Stock of the Company. During the year ended July 31, 2016, the Company recognized $300,000 as revenue because the investor’s
option to receive the shares of Common Stock terminated by its terms, and the research and development work related to the Opioid
Overdose Reversal Treatment Product was completed as of July 31, 2016.
On
July 22, 2014, the Company received a $3,000,000 commitment from a foundation (the “Foundation”) which later assigned
its invest to Valour Fund, LLC (“Valour”) in October 2016, from which the Company had the right to make capital calls
from the Foundation for the research, development, marketing, commercialization and any other activities connected to the Opioid
Overdose Reversal Treatment Product, certain operating expenses and any other purpose consistent with the goals of the Foundation.
In exchange for funds invested by the Foundation, Valour currently owns a 6.0% interest in the OORT Net Profit (the “6.0%
Fund Interest”) generated from the Opioid Overdose Reversal Treatment Product in perpetuity. Valour also has rights with
respect to the 6.0% Fund Interest if the Opioid Overdose Reversal Treatment Product is sold or the Company is sold. Additionally,
the Company may buy back, in whole or in part, the 6.0% Fund Interest within 2.5 years or after 2.5 years of the July 22, 2014
initial investment date at a price of two times or 3.5 times, respectively, the relevant investment amount represented by the
interests to be bought back. If the Opioid Overdose Reversal Treatment Product was not approved by the FDA or an equivalent body
in Europe for marketing and was not actually marketed by July 22, 2016, the Foundation would have had a 60-day option to receive
shares of the Company’s Common Stock in lieu of the 6.0% Fund Interest in the Opioid Overdose Reversal Treatment Product
at an exchange rate of 10 shares for every dollar of its investment. On July 28, 2014, the Company received an initial investment
of $111,470 from the Foundation in exchange for a 0.22294% interest. On August 13, 2014, September 8, 2014, November 13, 2014
and February 17, 2015, the Company made capital calls of $422,344, $444,530, $1,033,614 and $988,042, respectively, from the Foundation
in exchange for 0.844687%, 0.888906%, 2.067228% and 1.976085% interests, respectively, in the OORT Net Profit. The Opioid Overdose
Reversal Treatment Product was approved by the FDA on November 18, 2015, and, as a result, the investor did not realize the option
to exchange its 6.0% Fund Interest for shares of Common Stock of the Company. During the year ended July 31, 2016, the Company
recognized $3,000,000 as revenue because the option to receive the shares of Common Stock terminated by its terms, and the research
and development work related to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2016.
On
September 9, 2014, the Company entered into an agreement with an investor, Potomac, and subsequently received funding from an
individual investor in the amount of $500,000 for use by the Company for any purpose. In exchange for this funding, the Company
agreed to provide the investor with a 0.98% interest in the OORT Net Profit (the “September 2014 0.98% Investor Interest”)
generated from the Opioid Overdose Reversal Treatment Product in perpetuity. The investor also has rights with respect to the
0.98% Investor Interest if the Opioid Overdose Reversal Treatment Product is sold or the Company is sold. Additionally, the Company
may buy back, in whole or in part, the September 2014 0.98% Investor Interest (i) within 2.5 years or (ii) after 2.5 years, but
no later than four years, of the September 9, 2014 initial investment date, at a price equal to two times or 3.5 times, respectively,
the relevant investment amount represented by the interests to be bought back. If the Opioid Overdose Reversal Treatment Product
was not introduced to the market and not approved by the FDA or an equivalent body in Europe and not marketed within 24 months
of the September 9, 2014 initial investment date, the investor would have had a 60-day option to exchange the September 2014 0.98%
Interest for 50,000 shares of Common Stock of the Company. The Opioid Overdose Reversal Treatment Product was approved by the
FDA on November 18, 2015 and, as a result, the investor did not realize the option to exchange the September 2014 0.98% Interest
for 50,000 shares of Common Stock of the Company. During the year ended July 31, 2016, the Company recognized $500,000 as revenue
because the option to receive the shares of Common Stock terminated by its terms, and the research and development work related
to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2016.
On
September 17, 2014, the Company entered into an agreement with an investor, Potomac, and subsequently received funding totaling
$500,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with
a 1.0% interest in the Company’s BED Treatment Product and pay the investor 1.0% of the BED Net Profit generated from the
BED Treatment Product in perpetuity (the “1.0% Investor Interest”). “BED Net Profit” is defined as the
pre-tax profit generated from the BED Treatment Product after the deduction of all expenses incurred by and payments made by the
Company in connection with the BED Treatment Product, including but not limited to an allocation of Company overhead. If the BED
Treatment Product is not approved by the FDA by September 17, 2017, the investor will have a 60-day option to exchange its entire
1.0% Investor Interest for 62,500 shares of Common Stock of the Company. As of July 31, 2017, no revenue had been recognized in
relation to this agreement.
On
October 31, 2014, the Company entered into an agreement with an investor, Potomac, and subsequently received funding from an individual
investor in the amount of $500,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to
provide the investor with a 0.98% interest in the OORT Net Profit (the “October 2014 0.98% Investor Interest”) generated
from the Opioid Overdose Reversal Treatment Product in perpetuity. The investor also has rights with respect to its 0.98% interest
if the Opioid Overdose Reversal Treatment Product is sold or the Company is sold. Additionally, the Company may buy back, in whole
or in part, the October 2014 0.98% Investor Interest from the investor (i) within 2.5 years or (ii) after 2.5 years, but no later
than four years, of the October 31, 2014 investment date at a price equal to two times or 3.5 times, respectively, the relevant
investment amount represented by the interests to be bought back. If the Opioid Overdose Reversal Treatment Product was not introduced
to the market and was not approved by the FDA or an equivalent body in Europe and not marketed by October 31, 2016, the investor
would have had a 60-day option to exchange its October 2014 0.98% Interest for 50,000 shares of Common Stock of the Company. The
Opioid Overdose Reversal Treatment Product was approved by the FDA on November 18, 2015 and, as a result, the investor did not
realize the option to exchange its October 2014 0.98% Interest for 50,000 shares of Common Stock of the Company. During the year
ended July 31, 2016, the Company recognized $500,000 as revenue because the option to receive the shares of Common Stock terminated
by its terms, and the research and development work related to the Opioid Overdose Reversal Treatment Product was completed as
of July 31, 2016.
On
July 20, 2015, the Company entered into an agreement with an investor, Potomac, and subsequently received funding from an individual
investor in the amount of $250,000 for use by the Company for any purpose. In exchange for this funding, the Company agreed to
provide the investor with a 0.5% interest in the BED Net Profit (the “2015 0.5% Investor Interest”) generated from
the BED Treatment Product in perpetuity. The investor also has rights with respect to the 2015 0.5% Investor Interest if the BED
Treatment Product is sold or the Company is sold. If the product is not introduced to the market and not approved by the FDA or
an equivalent body in Europe and not marketed by July 20, 2018, the investor will have a 60-day option to exchange the 2015 0.5%
Investor Interest for 25,000 shares of Common Stock of the Company. As of July 31, 2017, no revenue had been recognized in relation
to this agreement.
On
September 22, 2015, the Company received a $1,600,000 commitment from the Foundation which later assigned its interest to Valour
in October 2016, from which the Company had the right to make capital calls from the Foundation for the research, development,
any other activities connected to the Company’s opioid antagonist treatments for addictions and related disorders that materially
rely on certain studies funded by the Foundation’s investment, excluding the Opioid Overdose Reversal Treatment Product
(the “Certain Studies Products”), certain operating expenses, and any other purpose consistent with the goals of the
Foundation. In exchange for funds invested by the Foundation, Valour currently owns 2.1333% interest in the Certain Studies Products
Net Profit (the “2.1333% Interest”). The “Certain Studies Net Profit” is defined as any pre-tax revenue
received by the Company that was derived from the sale of the Certain Studies Products less any and all expenses incurred by and
payments made by the Company in connection with the Certain Studies Products, including but not limited to an allocation of Company
overhead based on the proportionate time, expenses and resources devoted by the Company to Certain Studies Product-related activities,
which allocation shall be determined in good faith by the Company. Valour also has rights with respect to its up to a 2.1333%
Interest if the Certain Studies Product is sold or the Company is sold. Additionally, the Company may buy back, in whole or in
part, the 2.1333% Interest from Valour within 2.5 years or after 2.5 years of the initial investment at a price of two times or
3.5 times, respectively, the relevant investment amount represented by the interests to be bought back. If an aforementioned treatment
is not introduced to the market by September 22, 2018, Valour will have a 60-day option to exchange its 2.1333% Interest for shares
of the Common Stock of the Company at an exchange rate of one-tenth of a share for every dollar of its investment. On October
2, 2015, December 23, 2015, and May 28, 2016, the Company made capital calls of $618,000, $715,500 and $266,500 from the Foundation
in exchange for 0.824%, 0.954% and 0.355333% interests in the aforementioned treatments, respectively. The Company will defer
recording revenue until such time as Valour’s option expires or milestones are achieved that eliminates Valour’s right
to exercise the option. Upon expiration of the exercise option, the deliverables of the arrangement will be reviewed and evaluated
under Accounting Standards Codification (ASC) 605. In the event Valour chooses to exchange its 2.1333% Interest, in whole or in
part, for shares of Common Stock of the Company, that transaction will be accounted for similar to a sale of shares of Common
Stock for cash. As of July 31, 2017, no revenue had been recognized in relation to this agreement.
On
December 8, 2015, the Company entered into an agreement with an investor, Potomac, to receive $500,000 for use by the Company
for any purpose, which $500,000 was invested by December 18, 2015. In exchange for this funding, the Company granted the investor
a 0.75% interest in the OORT Net Profit (the “0.75% Investor Interest”) generated from the Opioid Overdose Reversal
Treatment Product in perpetuity. The investor also has rights with respect to its 0.75% Investor Interest if the Opioid Overdose
Reversal Treatment Product is sold or the Company is sold. Additionally, the Company may buy back, in whole or in part, the 0.75%
Investor Interest, from the investor (i) within 2.5 years or (ii) after 2.5 years, but no later than four years, of the December
8, 2015 initial investment date, at a price of two times or 3.5 times, respectively, the relevant investment amount represented
by the interests to be bought back. Such buyback can be for a portion of the 0.75% Investor Interest rather than for the entire
interest. The investor also had an option to invest an additional $1,000,000 by February 29, 2016 for use by the Company for any
purpose in exchange for a 1.50% interest in the OORT Net Profit. If such investment were made, then the investor also would have
rights with respect to its 1.50% interest if the Opioid Overdose Reversal Treatment Product was sold or the Company was sold.
This investor option expired unexercised. During the year ended July 31, 2016, the Company recognized $500,000 as revenue because
the investment did not contain any option to exchange the 0.75% Investor Interest for shares of Common Stock of the Company, and
the research and development work related to the Opioid Overdose Reversal Treatment Product was completed as of July 31, 2016.
The following is a summary
of the Company’s deferred revenue activity for the fiscal years ended July 31, 2017 and 2016:
|
|
OORT
|
|
|
BED
|
|
|
Other
Opioid
Treatments
|
|
|
Total
|
|
Balance as of July 31, 2015
|
|
$
|
4,300,000
|
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
|
$
|
5,300,000
|
|
Recognized as revenue
|
|
|
(4,800,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,800,000
|
)
|
Investment from Potomac
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Investment from
the Foundation
|
|
|
|
|
|
|
-
|
|
|
|
1,600,000
|
|
|
|
1,600,000
|
|
Balance as of July 31, 2016
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1,600,000
|
|
|
|
2,600,000
|
|
Recognized as revenue
|
|
|
-
|
|
|
|
(39,854
|
)
|
|
|
-
|
|
|
|
(39,854
|
)
|
Balance as of July 31, 2017
|
|
$
|
-
|
|
|
$
|
960,146
|
|
|
$
|
1,600,000
|
|
|
$
|
2,560,146
|
|
As
of July 31, 2017, the Company had recorded $253,619 of its deferred revenue as a current liability because the Company expects
to recognize that amount as revenue during the next twelve (12) months. The remaining $2,306,527 was recorded as a long-term liability
as of July 31, 2017, as detailed in the following table:
|
|
OORT
|
|
|
BED
|
|
|
Other
Opioid
Treatments
|
|
|
Total
|
|
Current portion
|
|
$
|
-
|
|
|
$
|
253,619
|
|
|
$
|
-
|
|
|
$
|
253,619
|
|
Long-term portion
|
|
|
-
|
|
|
|
706,527
|
|
|
|
1,600,000
|
|
|
|
2,306,527
|
|
Total
|
|
$
|
-
|
|
|
$
|
960,146
|
|
|
$
|
1,600,000
|
|
|
$
|
2,560,146
|
|
Note 8. Stockholders’
Equity
Common
Stock
During
the year ended July 31, 2017
During
the year ended July 31, 2017, the Company issued 2,875 unregistered shares of the Company’s Common Stock to consultants
in exchange for services provided by the consultants. The shares issued were valued using the stock price on the issuance date,
ranging from $7.52 to $7.75. The Company recorded a non-cash expense of $22,051.
During
the year ended July 31, 2017, the Company issued 25,072
shares of unregistered
Common Stock pursuant to the LOI described in Note 9 – Commitments. Per the terms of the LOI, the Company was obligated
to issue these shares on the one year anniversary of the LOI and upon the one year anniversary of receipt, by the Company, of
a milestone payment from Adapt 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 using the stock price on the issuance dates ranging
from $5.94 to $7.75 per share. The Company recorded the aggregate fair value of $168,376 as non-cash expense during the year ended
July 31, 2017.
The
Company made a reconciling adjustment to record the issuance of 6,228 shares of unregistered Common Stock that were issued in
fiscal years prior to both 2017 and 2016. Of this total, 6,168 were issued in relation to a conversion of debt into shares of
the Company’s common stock. The remaining 60 shares were issued in relation to the Company’s one-for-one hundred reverse
stock split of its Common Stock (the “1:100 Reverse Stock Split”) that was effected in December 2014. The 6,228 shares
are on a post-split basis and after recording this adjustment the number of shares of the Company’s common stock listed
as outstanding on the accompanying Consolidated Statement of Stockholders' Equity (Deficit) reconciles to the actual number of
shares outstanding as of July 31, 2017.
During
the year ended July 31, 2016
During the year ended July 31, 2016, the Company
issued 42,500 unregistered shares of the Company’s Common Stock to consultants in exchange for services provided by the
consultants. The shares issued were valued using the stock price on the issuance date, ranging from $7.75 to $10.50. The Company
recorded the aggregate fair value of $388,320 as non-cash expense during the year ended July 31, 2016
.
During
the year ended July 31, 2016, the Company issued 74,443 shares of unregistered Common Stock pursuant to the agreement described
in Note 9 – Commitments. The shares issued were valued using the stock price on the issuance date, ranging from $7.75 to
$9.90. The Company recorded the aggregate fair value of $644,037 as non-cash expense during the year ended July 31, 2016.
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. On March 8, 2016, the Company issued 3,582 shares of unregistered Common Stock related
to the achievement of certain milestones (see below). The shares issued in this transaction were valued using the stock price
at issuance date and amounted to $32,775. The Company recorded the aggregate fair value of $153,122 as non-cash expense during
the year ended July 31, 2016. 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.
On
March 25, 2016, the Company issued 15,715 shares of unregistered Common Stock as a result of the cashless exercise of 30,000 options.
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.
During the year ended July 31, 2016, the Company
granted a total of 1,507,500 options to the Company’s board of directors and officers. These options have exercise prices
between $7.25 and $10.00 and terms ranging from 5 to 10 years, and are exercisable on a cashless basis. These options vest as
follows: (i) 1,437,500 shares vested immediately; (ii) 23,334 shares
vested
on August 29, 2017 upon the uplisting of the Company to Nasdaq
; (iii) 23,334 shares
vested
on December 13, 2016
upon the cumulative funding of the Company of or in excess of $5,000,000
by institutional investors commencing May 5, 2016; and (iv) 23,332 shares vest upon the first submission of a NDA to the FDA for
one of the Company’s products by either the Company or a Company licensee. The Company has valued these options using the
Black-Scholes option pricing model which resulted in a fair market value of $10,642,786. During the year ended July 31, 2016,
the Company recognized stock based compensation expense of $10,211,507 related to these options.
The Company also recognized
stock based compensation expense of $99,039 in connection with vested options granted in prior periods.
During the year ended July 31, 2017, the Company
granted a total of 320,000 options to certain members of the Board, an officer and employees. These options had exercise prices
between $9.00 and $10.00, terms ranging from 5 to 10 years, and are exercisable on a cashless basis.
These
options vest as follows: (i) 100,000 shares vest on the eighteenth month from the February 6, 2017 grant date, with the remaining
100,000 shares vesting over the next eighteen months; (ii) 85,000 shares vest over thirty-six months from the date of grant; (iii)
11,667 shares vested on August 29, 2017 upon the uplisting of the Company to Nasdaq; (iv) 11,667 shares vested on December
13, 2016 upon the cumulative funding of the Company of or in excess of $5,000,000 by institutional investors starting from November
4, 2016; and (v) 11,666 shares vest upon the first submission of an NDA to the FDA for one of Company’s products by Company
itself or a Company licensee. The Company has valued these options using the Black-Scholes option pricing model which resulted
in a fair market value of $2,464,566. During
the year ended July 31,
2017, Company recognized stock based compensation expense of $981,494 related to these options. The Company also recognized stock
based compensation expense of $295,645 in connection with vested options granted in periods prior to the year ended July 31, 2017.
The
assumptions used in the valuation for all of the options granted for the years ended July 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Market value of stock on measurement date
|
|
$
|
5.61
to 13.00
|
|
|
$
|
7.00
to 10.00
|
|
Risk-free interest rate
|
|
|
0.88-2.55
|
%
|
|
|
0.71-2.05
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
76-348
|
%
|
|
|
124-373
|
%
|
Term
|
|
|
2.28-10
years
|
|
|
|
3-10
years
|
|
Stock option activity for
the years ended July 31, 2017 and 2016 are presented in the table below:
|
|
Number
of
Options
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2015
|
|
|
3,157,500
|
|
|
$
|
9.42
|
|
|
|
7.58
|
|
|
|
|
|
Granted
|
|
|
1,507,500
|
|
|
$
|
7.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,000
|
)
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2016
|
|
|
4,635,000
|
|
|
$
|
8.79
|
|
|
|
7.39
|
|
|
$
|
2,731,250
|
|
Granted
|
|
|
320,000
|
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(5,000
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,180,000
|
)
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2017
|
|
|
3,770,000
|
|
|
$
|
8.13
|
|
|
|
6.87
|
|
|
$
|
19,139,625
|
|
Exercisable at July 31, 2017
|
|
|
3,312,629
|
|
|
$
|
7.76
|
|
|
|
6.96
|
|
|
$
|
17,925,016
|
|
A
summary of the status of the Company’s non-vested options as of July 31, 2017 and changes during the fiscal years ended
July 31, 2017 and 2016 are presented below:
Non-vested
options
|
|
Number
of
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested at July 31, 2015
|
|
|
37,500
|
|
|
$
|
3.85
|
|
Granted
|
|
|
1,507,500
|
|
|
$
|
7.06
|
|
Vested
|
|
|
(1,454,167
|
)
|
|
$
|
7.00
|
|
Non-vested at July 31, 2016
|
|
|
90,833
|
|
|
$
|
7.27
|
|
Granted
|
|
|
320,000
|
|
|
$
|
7.70
|
|
Vested
|
|
|
(70,962
|
)
|
|
$
|
6.70
|
|
Non-vested at July 31, 2017
|
|
|
339,871
|
|
|
$
|
7.93
|
|
As
of July 31, 2017, there was $1,622,019 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. The warrant 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 year ended July 31, 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, 285,000 and 40,000 warrants of the Company, respectively, as related to unexercised warrants previously granted
by the Company.
Warrant activity for the
fiscal years ended July 31, 2017 and 2016 is presented in the table below:
|
|
Number
of
Warrants
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2015
|
|
|
1,338,552
|
|
|
$
|
19.53
|
|
|
|
3.55
|
|
|
$
|
-
|
|
Expired
|
|
|
(123,167
|
)
|
|
$
|
35.55
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at July 31, 2016
|
|
|
1,215,385
|
|
|
$
|
17.90
|
|
|
|
2.86
|
|
|
|
-
|
|
Granted
|
|
|
45,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(166,585
|
)
|
|
$
|
46.37
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(325,000
|
)
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2017
|
|
|
768,800
|
|
|
$
|
12.50
|
|
|
|
3.04
|
|
|
$
|
1,184,000
|
|
Exercisable at July 31, 2017
|
|
|
368,800
|
|
|
$
|
9.79
|
|
|
|
5.88
|
|
|
$
|
1,184,000
|
|
Note
9. Commitments
The
Company has entered into various agreements related to its business activities. The following is a summary of the Company’s
commitments:
|
a)
|
On
December 18, 2014, the Company entered into a consulting agreement with Torreya, a financial
advisory firm, under which Torreya 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 during the years ended July 31, 2016. The Company is also required
to pay an additional fee equivalent to 3.75% of all amounts received by the Company in
excess of $3,000,000, in perpetuity. Total fees incurred to the consultant pursuant to
the agreement during the fiscal year ended July 31, 2017 amounted to $963,599, as compared
to $317,917 of total fees incurred in 2016. On April 25, 2016, the Company entered into
a consulting agreement with Torreya, under which Torreya agreed to provide financial
advisory services for financing activities. 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. The Torreya’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 during the year ended July 31,
2017 amounted to $687,500, as compared to zero total fees incurred in 2016. As of July
31, 2017, the Company has an accrued liability balance of $928,500 relating to fees owed
to Torreya
|
|
b)
|
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. The Company
was obligated to issue these shares upon the one year anniversary of receipt by the Company
of a milestone payment from Adapt 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 fiscal year ended July 31, 2017.
|
|
c)
|
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.
|
|
d)
|
The
Company’s headquarters through August 31, 2017 are located on the 12
th
Floor of 401 Wilshire Blvd., Santa Monica, CA 90401 and are leased for $5,056 per month.
The lease with Premier Business Centers, LLC (“Premier”), has been terminated
by the Company effective September 30, 2017.
|
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, Suite 500, Santa Monica, CA 90401. Per the terms of the Sublease, the term commenced
on August 1, 2017 and will end on August 31, 2018. The monthly rent for August 2017 was $5,000 and the monthly rent for the duration
of the term is be $9,000, plus any related operating expenses and taxes. Commencing September 1, 2017, the Company’s headquarters
are located at this location.
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 ended 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.
During
the year ended July 31, 2017, the Company incurred approximately $122,588 of rent expense as compared to approximately $23,505
during the year ended July 31, 2016.
|
e)
|
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).
|
|
f)
|
On
July 14, 2017, Renaissance Lakewood, LLC (“Renaissance”) and the Company
entered into a Research and Development Agreement (the “Renaissance Agreement”).
Under the Renaissance Agreement, Renaissance will perform product development work on
a naltrexone multi-dose nasal product for the treatment of alcohol use disorder pursuant
to the terms set forth in a proposal agreed upon by the parties. The Company will bear
the costs of all development services, including all raw materials and packaging components,
in connection with the performance of the development work under the Renaissance Agreement
and in accordance with financials agreed upon through the proposal. Renaissance will
conduct quality control and testing, including non-stability, stability, in-use, raw
material, and packaging component testing as part of the services provided to the Company
under the Renaissance Agreement. The Company will own all formulations provided to Renaissance
and any formulations developed in connection with the Renaissance Agreement. Renaissance
will own all know-how developed in connection with the performance of the services that
is not solely related to a product. The Company has the right to seek patent protection
on any invention or know-how that relates solely to a product developed under the Renaissance
Agreement or any our formulation, excluding general manufacturing or product development
know-how of Renaissance. The Renaissance Agreement is effective until terminated by either
party in accordance with its terms. The Company or Renaissance may terminate the
project under a proposal to the Renaissance Agreement due to unforeseen circumstances
in the development. The Renaissance Agreement may be terminated by the Company,
with or without cause, upon 45 days written notice. There are also mutual customary
termination provisions relating to uncured breaches of material provisions. In August
2017, the Company made a $417,555 payment to Renaissance relating to the Renaissance
Agreement.
|
Note 10. Sale
of Royalties
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 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 will 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 will 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 will 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 fiscal year ended July 31, 2017, the Company recognized $17,460,000 as revenue because (i) the executed agreement constituted
persuasive evidence of an arrangement, (ii) the Company had no current or future performance obligations, (iii) the total consideration
was fixed and known at the time of its execution and there were no rights of return, (iv) the $13,710,000 cash proceeds received
in December 2016 were non-refundable, and (v) the $3,750,000 Earn Out Milestone that was accrued as an account receivable as of
July 31, 2017, and subsequently paid to the Company on August 9, 2017, was earned as of July 31, 2017.
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 $20 million in the aggregate plus certain royalties.
Note
11. Potomac Amendment
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 will 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 will 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 will 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.
Note 12. Income
Taxes
The
Company recognizes deferred tax assets and liabilities using the asset and liability method. Deferred tax assets and liabilities
are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates
in effect when these differences are expected to reverse. This method requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
As
of July 31, 2017, the Company’s deferred tax assets relate to net operating loss (“NOL”) carryforwards that
were derived from operating losses and stock based compensation from prior years. A full valuation allowance has been applied
to the Company’s deferred tax assets. The valuation allowance will be reduced when and if the Company determines it is more
likely than not that the related deferred income tax assets will be realized.
At
July 31, 2017, the Company had federal and state net operating loss carry forwards, which are available to offset future taxable
income, of 4,936,604.
The Company’s NOL carryforwards can be carried
forward to offset future taxable income for a period of 20 years for each tax year’s loss. These NOL carryforwards begin
to expire in 2026. No provision was made for federal income taxes as the Company has significant NOLs. All of the Company's income
tax years remained open for examination by taxing authorities.
The provision for income
taxes differs from the amounts which would be provided by applying the statutory federal income tax rate to the net loss before
provision for income taxes for the following reasons:
|
|
July
31, 2017
|
|
|
July
31, 2016
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes at statutory rate
|
|
$
|
2,992,311
|
|
|
$
|
(3,242,916
|
)
|
Permanent items
|
|
|
5,828
|
|
|
|
1,764
|
|
Temporary items
|
|
|
385,910
|
|
|
|
4,770,850
|
|
Income tax expense at statutory rate
|
|
|
3,384,049
|
|
|
|
1,529,698
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,833,575
|
)
|
|
|
(1,529,698
|
|
|
|
|
|
|
|
|
|
|
Income tax expense per books
|
|
$
|
550,474
|
|
|
$
|
-
|
|
Net
deferred tax assets consist of the following components as of:
|
|
July
31, 2017
|
|
|
July
31, 2016
|
|
|
|
|
|
|
|
|
Net operating loss carryover at statutory rate
|
|
$
|
4,936,604
|
|
|
$
|
10,063,523
|
|
Stock-based compensation expense
|
|
|
9,922,093
|
|
|
|
9,217,868
|
|
Fixed asset depreciation
|
|
|
(1,143
|
)
|
|
|
-
|
|
Intangible asset amortization
|
|
|
(1,327
|
)
|
|
|
-
|
|
|
|
|
14,856,227
|
|
|
|
19,281,391
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(14,856,227
|
)
|
|
|
(19,281,391
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company had no uncertain tax positions at July 31, 2017 or July 31, 2016.
Note
13. Subsequent Events
On
September 5, 2017, the Company accepted, effective September 11, 2017 (the “Separation Date”), the resignation of
Kevin Pollack as (i) the Company’s Chief Financial Officer, Treasurer and Secretary, and (ii) a director of Opiant Pharmaceuticals
UK Limited, a wholly owned subsidiary of the Company. On September 5, 2017, the Company and Mr. Pollack entered into a Separation
Agreement and General Release (the “Agreement”). The Agreement shall not be effective or enforceable until after the
seven-day revocation period ends on September 12, 2017 without Mr. Pollack’s revocation (the “Agreement Effective
Date”).
Mr.
Pollack will receive (i) a payment equal to $1,130,815 relating to certain accrued obligations, payable in a cash lump sum within
three business days following the Agreement Effective Date; and (ii) a separation payment equal to $1,442,500, payable in one
or two installments in accordance with the terms set forth. Mr. Pollack will retain previously granted options to purchase, in
the aggregate, 948,000 shares of common stock, $0.001 par value per share of the Company, which options are currently each fully
vested and exercisable. Except as set forth in the Agreement, all other options held by Mr. Pollack will be forfeited. Additionally,
for a period of no more than 12 months following the Separation Date, Mr. Pollack will cooperate as an advisor with the Company
in connection with matters arising out of Mr. Pollack’s service with the Company, in accordance with the terms set forth
in the Agreement.
On
September 12, 2017, the Company hired David D. O’Toole to succeed Kevin Pollack as the Chief Financial Officer. Mr. O’Toole
is entitled to an annual base salary of $360,000 and an annual target bonus equal to 40% of his annual base salary. Mr. O’Toole
received a one-time signing bonus equal to $45,000 on September 29, 2017. Furthermore, Mr. O’Toole was granted an incentive
stock option to purchase 150,000 shares of the Company’s common stock, par value $0.001 per share with an exercise price
per share no less than the fair market value of a share of Common
Stock
on the date of grant, pursuant to the Company’s 2017 Long-Term Incentive Plan. The shares of Common Stock underlying Mr.
O’Toole’s option shall vest and become exercisable over a four-year period commencing on the September 12, 2017, subject
to Mr. O’Toole’s continued employment with the Company or its affiliate through each such vesting date.
On
September 8, 2017, the Company and Torreya entered into a revised engagement to provide financial advisory services with respect
to the licensing of the intellectual and property rights to develop and commercialize certain products with Adapt. The revised
engagement amends total consideration as follows: (i) an aggregate of $300,000 in cash payments to be paid by the Company to Torreya
in three equal installments over a 16-month period; (ii) shares of common stock of the Company, $0.001 par value per share (“Common
Stock”), equal to an aggregate value of $300,000, to be issued by the Company to Torreya in three equal instalments over
a 16-month period; (iii) if the Earn Out Milestone Payment (as defined in the SWK Agreement) is paid under the SWK Agreement,
$140,625, or $3.75% of the Earn Out Milestone Payment, shall be paid by the Company to Torreya within 15 days of the date that
the Earn Out Milestone (as defined in the SWK Agreement) has been paid to the Company; (iv) once SWK has received the Capped Royalty
Amount (as defined in the SWK Agreement), if the Earn Out Milestone Payment is paid, Torreya shall receive 3.375% of the Total
Consideration (as defined in the 2014 Agreement) received thereafter or 3.5625% of the Total Consideration received thereafter
if no generic version of Narcan® is commercialized prior to the sixth anniversary of the Closing Date (as defined in the SWK
Agreement) as per the terms of the SWK Agreement; and (v) once SWK has received the Capped Royalty Amount, if the Earn Out Milestone
Payment has not been paid, Torreya shall receive 3.45525% of the Total Consideration received thereafter or 3.602625% of the Total
Consideration received thereafter if no generic version of Narcan® is commercialized prior to the sixth anniversary of the
Closing Date as per the terms of the SWK Agreement. Payments made by the Company in the form of shares of Common Stock will be
a defined number of shares calculated based upon the average closing price of the Common Stock for the 10 trading days prior to
the relevant date for the payment. On September 23, 2017, the Company issued 3,283 shares of its common stock to Torreya as payment
for $100,000 of fees owed by the Company to Torreya. The Company also paid Torreya $240,625 in cash on September 23, 2017 as payment
for fees owed, which had been recorded as an accrued liability by the Company as of July 31, 2017.
On
September 8, 2017, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”) At the Annual Meeting,
the following proposals, among others, were approved:
|
1.
|
Decrease
the number of shares of Common Stock which the Company is authorized to issue from 1,000,000,000
to 200,000,000 shares;
|
|
2.
|
The
Opiant Pharmaceuticals, Inc. 2017 Long-Term Incentive Plan;
|
|
3.
|
The
change of domicile of the Company from the State of Nevada to the State of Delaware through
the merger of the Company with and into Opiant Pharmaceuticals, Inc., a newly-organized,
wholly-owned subsidiary of the Company organized under the laws of the State of Delaware;
and
|
|
4.
|
The
establishment of a classified board of directors.
|
On
September 11, 2017, the Company issued 7,997 shares of its Common Stock in relation to the cashless exercise of an option that
was granted in July 2015. The option was for 10,000 shares of the Company’s Common Stock at an exercise price of $10.00
per share, with the fair value of the option having been fully expensed prior to the year ended July 31, 2017. The cashless exercise
was calculated using the per share price of $49.93, which represents the closing price of the Company’s Common Stock on
September 8, 2017, which was the last trading day prior to the option being exercised.