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 addictions and related disorders based on its expertise using opioid antagonists. 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 also has developed a treatment to reverse opioid overdoses, which is now known as NARCAN®.
On October 2, 2017, the Company changed its state of incorporation from the State of Nevada to the State of Delaware pursuant to an Agreement and Plan of Merger, dated October 2, 2017, whereby the Company merged with and into its recently formed, wholly-owned Delaware subsidiary, Opiant Pharmaceuticals, Inc. Pursuant to the Agreement and Plan of Merger, (i) the Company merged with and into its Delaware subsidiary, (ii) the Company's separate corporate existence in Nevada ceased to exist,(iii) the Company's Delaware subsidiary became the surviving corporation, (iv) each share of the Company's common stock,
$0.001
par value per share ("Common Stock"), outstanding immediately prior to the effective time was converted into
one
fully-paid and non-assessable share of Common Stock of Opiant Pharmaceuticals, Inc., a Delaware corporation, and (v) the certificate of incorporation and bylaws of the Company's Delaware subsidiary were adopted as the Company's certificate of incorporation and bylaws at the effective time of the merger. The merger and the Agreement and Plan of Merger were approved by the Company's Board of Directors (the "Board") and stockholders representing a majority of the Company's outstanding Common Stock.
On December 8, 2017, the Board of Directors, acting pursuant to Section 5.1 of the Company’s Bylaws, approved a resolution changing the Company’s fiscal year-end from July 31 to December 31. The Company made this change to align its fiscal year end with other companies within its industry. This Form 10-KT is intended to cover the period August 1, 2017 through December 31, 2017 ("Transition Period"). Subsequent to this, the Company's Form 10-KT will cover the calendar year January 1 to December 31.
Note 2. Liquidity and Financial Condition
The Company had net income of
$1.4 million
for the five months ended December 31, 2017 and has an accumulated deficit of
$53.2 million
at December 31, 2017. The Company has
$15.1 million
of working capital at December 31, 2017 and used
$3.8 million
of cash in its operating activities during the five months ended December 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 ("OORT") (see Note 8 – Deferred Revenue). In addition, during the five months ended December 31, 2017, the Company issued equity as a result of exercise by
two
stockholders of certain warrants and in exchange received
$5.3 million
in proceeds.
In December 2014, the Company and Adapt Pharma Operations Limited ("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 OORT.
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
(the "Capped Royalty Amount"), 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
six
th 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
six
th 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.
As of December 31, 2017, the Company determined that the Capped Royalty Amount provided in the SWK Purchase Agreement has been met. Consequently, the Company recognized
90%
of the milestone payments and royalties earned during the five months ended December 31, 2017, after the Capped Royalty Amount was met, amounting to
$11,696,676
(see Note 5 - Accounts Receivable).
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
$8.1 million
,
$6.9 million
and
$1.5 million
at December 31, 2017, July 31, 2017 and July 31, 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, 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 five months ended December 31, 2017 and the years ended July 31, 2017 and 2016. At December 31, 2017 and July 31, 2016,
100%
of the Company's accounts receivable was concentrated with one party, Adapt. At July 31, 2017,
100%
of the Company's account receivable was concentrated with one party, SWK (see Note 5 - Accounts Receivable).
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
). The Company recorded depreciation and amortization of
$2,142
for the five months ended December 31, 2017 and
$5,140
and
$2,389
for the years ended July 31, 2017 and July 31, 2016, respectively.
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
no
t 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.
At July 31, 2016, dilutive common stock equivalents have not been included because it would be anti-dilutive. 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 December 31, 2017 and July 31, 2017, respectively:
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Five Months Ended December 31, 2017
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For the Year Ended July 31, 2017
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Net Income
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Weighted Average Common Shares Outstanding
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Per Share $
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Net Income
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Weighted Average Common Shares Outstanding
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Per Share $
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Basic:
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Net income attributable to common stock
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$
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1,379,379
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2,077,663
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$
|
0.66
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$
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6,580,613
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2,014,540
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$
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3.27
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Effect of dilutive securities
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Stock option and warrants
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—
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2,315,475
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—
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—
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221,311
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—
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Diluted:
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Net income attributable to common stock and assumed conversions
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$
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1,379,379
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4,393,138
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$
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0.31
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$
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6,580,613
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2,235,851
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$
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2.94
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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
$1.8 million
for the five months ended December 31, 2017 and
$1.7 million
and
$11.5 million
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 and cash equivalents, accounts receivable, 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 December 31, 2017, July 31, 2017 and July 31,
2016
, the Company did
no
t 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 December 31, 2017, July 31, 2017 and July 31, 2016 were
zero
. The Company uses office space free of charge from related parties (see Note 4 - Related Party Transactions).
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
Pursuant to the Adapt Agreement, the Company provided a global license to develop and commercialize the Company’s intranasal naloxone opioid overdose reversal treatment, now known as NARCAN. In exchange for licensing its treatment, the Company received a nonrefundable, upfront license fee of
$500,000
in December 2014. The Company also received a monthly fee for
one year
for participation in joint development committee calls and the production and submission of an initial development plan. The initial development plan was completed and submitted in May 2015. Management evaluated the deliverables of this arrangement and determined that the licensing deliverable had a standalone value and therefore, the payments were recognized as revenue.
In addition, pursuant to the Adapt Agreement, the Company is required to contribute
$2.5 million
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
$2.5 million
.
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. During the year ended July 31, 2016, the Company recognized fees approximately
$180,000
.
The Company also receives payments upon reaching various sales and regulatory milestones, as well as royalty payments for commercial sales of NARCAN generated by Adapt. During the five months ended December 31, 2017, the Company recognized royalty and milestone payments of $
11.7 million
. During the year ended July 31, 2016, the Company received $
4.5 million
of milestone payments and recognized royalty revenues of approximately $
418,000
.
Interest in Treatments
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, the Company 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 has evaluated the impact and timing of the adoption of ASU 2016-18 and has concluded it will not have a material impact on its consolidated financial statements.
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 does not expect this guidance to have a material impact on 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 has evaluated the provisions of Update 2016-15 and expects that it will have no impact on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “
Compensation - Stock Compensation (Topic 718)
: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for financial statements issued for fiscal years beginning December 15, 2016, and interim periods within those fiscal years. The Company recognizes compensation expenses for the value of its awards granted based on the straight-line method over the requisite service period of each of the awards. The guidance provided an entity-wide accounting policy election to account for forfeitures as they occur. The Company has elected to record forfeitures as they occur. The Company has evaluated all requirements of the new guidance and has determined that there is no impact to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
("ASU 2016-02") in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019. Though the Company does not expect the standard to impact its current leases, the Company currently believes the most significant changes will be related to the recognition of any new right-of-use assets and lease liabilities that may be recorded on the Company's balance sheet in the future.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
("ASU 2017-17") to simplify the presentation of deferred income taxes.
ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal
years beginning after December 15, 2016, and interim periods within those fiscal years. The Company has adopted the provisions of Update 2016-15 and determined that there is no impact on its consolidated financial statements.
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.
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 ASU 2014-09, the Company does not expect a material impact on its consolidated financial statements.
The Company will adopt ASU 2014-09 in the first quarter of 2018 and will apply the modified retrospective approach. Since the Company's primary source of revenues is the achievement of royalty and milestones which are recognized when earned, the Company does not expect the impact on its consolidated financial statements to be material.
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. Related Party Transactions
The Company uses office space provided by Dr. Michael Sinclair, the Chairman of the Board and Dr. Phil Skolnick, the Company’s Chief Scientific Officer, free of charge. In addition, the Company used office space provided by Kevin Pollack, the Company’s former Chief Financial Officer, free of charge, prior to his departure in September of 2017.
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.
Note 5. Accounts Receivable
As of December 31, 2017, the Company determined that the Capped Royalty Amount provided in the SWK Agreement has been met (see Note 2 - Liquidity and Financial Condition). As a result,
90%
of any succeeding milestone payments and royalties due from Adapt will revert to the Company while the remaining
10%
will be paid to SWK. As of December 31, 2017, the Company recognized accounts receivable of $
11,696,676
, which is equivalent to
90%
of the milestone payments and royalties earned during the five months ended December 31, 2017.
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 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 6. Prepaid Expenses and Other Current Assets
As of December 31, 2017, the Company had approximately
$0.7 million
recorded as prepaid expenses and other current assets. Approximately
$0.4 million
was related to a deposit made by the Company to Renaissance Lakewood, LLC ("Renaissance") (see Note 10 - Commitments) in August 2017. Per the terms of its agreement with Renaissance, the Company was obligated to make this deposit to fund the initial costs of the product development work to be performed by Renaissance on behalf of the Company. As of December 31, 2017, no work had been performed, nor had any costs been incurred, in relation to this project.
During the five months ended December 31, 2017, the Company purchased approximately
$0.1 million
of research and development supplies related to the above referenced product development work being performed by Renaissance. As provided under the agreement with Renaissance, the Company is obligated to pay for all supplies and materials that are needed to complete this product development work. These supplies were delivered on October 16, 2017 and approximately
$25 thousand
in supplies having been used as of December 31, 2017. The remaining balance consists primarily of prepaid expenses such as rent, insurance, and software licenses.
The Company had recorded approximately
$0.2 million
and
$0.1 million
as prepaid expenses and other current assets at July 31, 2017 and 2016, respectively. The balances at July 31, 2017 and July 31, 2016 consist primarily of prepaid expenses such as rent, insurance, and software licenses.
Note 7. Deferred Financing Costs
During the five months ended December 31, 2017, the Company incurred approximately
$0.2 million
of legal, accounting, and filing fees related to the Company's current fund raising efforts. These expenses will be offset against the future proceeds from the Company's next financing. The Company recorded the
$0.2 million
as deferred financing costs as of December 31, 2017.
Note 8. Deferred Revenue
On December 17, 2013, the Company entered into an agreement with an investor, Potomac, and subsequently received additional funding totaling
$250 thousand
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. On February 17, 2017, the investor’s option to receive the shares of Common Stock terminated by its terms, which resulted in the Company beginning to recognize revenue in relation to this agreement in February 2017. The Company estimates that sufficient research and development will be completed by December 31, 2020 to allow the Company to advance the program into final registration studies. Therefore, the Company recognized revenue on a straight-line basis over the expected completion date. During the five months ended December 31, 2017 and the year ended July 31, 2017, the Company recognized approximately
$36 thousand
and
$39.9 thousand
of revenue relating to the agreement, respectively.
On May 15, 2014, the Company entered into an agreement and subsequently received funding from an investor, Ernst Welmers, in the amount of
$300 thousand
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 thousand
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
$3.0 million
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 approximately
$111.5 thousand
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 approximately
$422.0 thousand
,
$444.5 thousand
,
$1.034 million
, and
$988.0 thousand
, 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
$3.0 million
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 thousand
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 thousand
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 thousand
for use by the Company for any purpose. In exchange for this funding, the Company agreed to provide the investor with a
1.0%
interest in the Company’s BED Treatment Product and pay the investor
1.0%
of the BED Net Profit generated from the BED Treatment Product in perpetuity (the “
1.0%
Investor Interest”). “BED Net Profit” is defined as the pre-tax profit generated from the BED Treatment Product after the deduction of all expenses incurred by and payments made by the Company in connection with the BED Treatment Product, including but not limited to an allocation of Company overhead. If the BED Treatment Product is not approved by the FDA by September 17, 2017, the investor will have a
60
-day option to exchange its entire
1.0%
Investor Interest for
62,500
shares of Common Stock of the Company. On November 15, 2017, the investor’s option to receive the shares of Common Stock terminated by its terms, which resulted in the Company beginning to recognize revenue in relation to this agreement in November 2017. The Company estimates that sufficient research and development will be completed by December 31, 2020 to allow the Company to advance the program into final registration studies. Therefore, the Company recognized revenue on straight-line basis over the expected completion date. During the five months ended December 31, 2017, the Company recognized approximately
$29,400
of revenue related to this agreement. The Company recognized
no
revenue for the fiscal years ended July 31, 2017 and 2016.
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 thousand
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 thousand
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 thousand
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 December 31, 2017,
no
revenue had been recognized in relation to this agreement.
On September 22, 2015, the Company received a
$1.6 million
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 approximately
$618 thousand
,
$715.5 thousand
, and
$266.5 thousand
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 December 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 thousand
for use by the Company for any purpose, which
$500 thousand
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
$1.0 million
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 thousand
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 five months ended December 31, 2017 and the years ended July 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
OORT
|
|
BED
|
|
Other
Opioid
Treatments
|
|
Total
|
Balance as of July 31, 2016
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
1,600
|
|
|
$
|
2,600
|
|
Recognized as revenue
|
|
—
|
|
|
(39
|
)
|
|
—
|
|
|
(39
|
)
|
Balance as of July 31, 2017
|
|
—
|
|
|
961
|
|
|
1,600
|
|
|
2,561
|
|
Recognized as revenue
|
|
—
|
|
|
(66
|
)
|
|
—
|
|
|
(66
|
)
|
Balance as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
895
|
|
|
$
|
1,600
|
|
|
$
|
2,495
|
|
As of December 31, 2017, the Company had recorded approximately
$379 thousand
of its deferred revenue as a current liability because the Company expects to recognize that amount as revenue during the next 12 months. The remaining
$2.1 million
was recorded as a long-term liability as of December 31, 2017, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
OORT
|
|
BED
|
|
Other
Opioid
Treatments
|
|
Total
|
Current portion
|
|
$
|
—
|
|
|
$
|
379
|
|
|
$
|
—
|
|
|
$
|
379
|
|
Long-term portion
|
|
—
|
|
|
516
|
|
|
1,600
|
|
|
2,116
|
|
Total
|
|
$
|
—
|
|
|
$
|
895
|
|
|
$
|
1,600
|
|
|
$
|
2,495
|
|
Note 9. Royalty Payable
The Company entered into various agreements and subsequently received funding from investors for use by the Company for the research and development its OORT Product. In exchange for this funding, the Company agreed to provide investors with interest in the OORT Net Profit generated from its OORT Product in perpetuity. At December 31, 2017, the Company determined an OORT Net Profit as a result of NARCAN sales by Adapt. There was no OORT Net Profit prior to December 31, 2017. The following table sets forth the royalty payable to certain investors at December 31, 2017:
|
|
|
|
|
|
(in thousands)
|
|
Net Profit %
|
|
December 31, 2017
|
|
|
|
|
|
Potomac
|
|
10.2%
|
$
|
860
|
LYL
|
|
5.0%
|
|
421
|
Welmers
|
|
1.5%
|
|
127
|
Royalty payable at December 31, 2017
|
|
16.7%
|
$
|
1,408
|
On February 28, 2018, the Company was notified that Adapt has entered into a license agreement with a Third Party (as defined in the Adapt Agreement) with regard to one or more patents pursuant to which Adapt has invoked its right under Section 5.5 of the Adapt Agreement to offset
50%
, or
$6,250,000
, of the payment paid to such Third Party from the amounts payable by Adapt to the Company under the Adapt Agreement. As provided in the Net Profit Interest agreements, actual payments to the parties listed above will be reduced accordingly (see Note 17 - Subsequent Events).
Note 10. Commitments and Contingencies
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 (the "2014 Agreement") with Torreya Partners LLP ("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 thousand
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
$3.0 million
, in perpetuity. Total fees incurred by the Company to this consultant pursuant to this agreement during the fiscal year ended July 31, 2017 amounted to approximately
$963.6 thousand
, as compared to approximately
$318 thousand
during fiscal year 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. Torreya’s fee will be equal to
5%
of gross funding received by the Company up to
$20 million
plus
3.5%
of any proceeds received in excess of
$20 million
. Total fees incurred by the Company to this consultant pursuant to this agreement during the fiscal year ended July 31, 2017 amounted to
$687.5 thousand
, while
no
such fees were incurred by the Company during fiscal year 2016. As of July 31, 2017, the Company had recorded an accrued liability of approximately
$928.5 thousand
relating to fees owed to Torreya.
On September 8, 2017, the Company and Torreya entered into the Supplemental Engagement Letter to provide financial advisory services with respect to the licensing of the intellectual and property rights to develop and commercialize certain products with Adapt Pharma Operations Limited, an Ireland based pharmaceutical company ("Adapt"). The revised engagement amends total consideration as follows: (i) an aggregate of
$300 thousand
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, equal to an
aggregate value of
$300 thousand
, to be issued by the Company to Torreya in
three
equal installments over a
16
-month period; (iii) if the Earn Out Milestone Payment is paid under the SWK Agreement, approximately
$140.6 thousand
, or
3.75%
of the Earn Out Milestone Payment (as defined in the SWK Agreement), 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, if the Earn Out Milestone Payment (as defined in the SWK Agreement) 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
six
th 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
six
th 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
ten
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 thousand
of fees owed by the Company to Torreya. The Company valued these shares at
$40.58
per share, or approximately
$133 thousand
in the aggregate, which represents the closing price of the Company's Common Stock on September 22, 2017. The Company also paid Torreya approximately
$240.6 thousand
in cash in September 2017 as payment for fees owed. On December 22, 2017, the Company issued
3,455
shares as payment for
$100 thousand
of fees owed by the Company to Torreya. The Company valued these shares at
$24.95
per share, or approximately
$81 thousand
in the aggregate, which represents the closing price of the Company's Common Stock on December 22, 2017. The Company also paid Torreya
$100 thousand
in cash in cash in December 2017 as payment for fees owed.
Both the
$200 thousand
of fees paid via the issuance of Common Stock and the
$340.6 thousand
of fees paid in cash had been recorded as accrued liabilities as of July 31, 2017.
During the five-month period ended December 31, 2017, the Company incurred approximately
$439 thousand
in aggregate fees related to Torreya. As of December 31, 2017, the Company has an accrued liability of
$639 thousand
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 approximately
$120.3 thousand
. 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 approximately
$85.1 thousand
. 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, 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 approximately
$83.3 thousand
. The Company expensed the entire
$83.3 thousand
as non-cash expense during the fiscal year ended July 31, 2017. There were
no
share issuances,
no
r any expenses incurred, by the Company in relation to this LOI during the five months ended December 31, 2017.
|
|
|
c.
|
In October 2016, the Company in-licensed a heroin vaccine from Walter Reed Army Institute of Research ("Walter Reed"). 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 thousand
, as well as fixed payments of up to approximately
$715.7 thousand
if all of the specified milestones are met. During the five months ended December 31, 2017, the Company paid
$60 thousand
in cash to Walter Reed, of which
$50 thousand
was a non-recurring "execution" fee and the remaining
$10 thousand
was the minimum annual royalty for the period of September 2017 through August 2018. The
$10 thousand
minimum annual royalty was recorded as a prepaid expense and is being expensed at the rate of
$833
per month, beginning in September 2017 and ending in August 2018.
|
|
|
d.
|
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
|
with recurring monthly rent initially at
$9,000
, plus any related operating expenses and taxes. On December 1, 2017, the Company added additional space to the sublease increasing monthly rent for the duration of term from
$9,000
to
$11,700
. Commencing September 1, 2017, the Company's headquarters are located at this location.
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 commenced 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 five months ended December 31, 2017, the Company incurred approximately
$150 thousand
of rent expense and approximately
$123 thousand
and
$24 thousand
during the years ended July 31, 2017 and 2016, respectively.
|
|
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 Agreement and/or (ii) Adapt pursuant to that certain license agreement, dated as of December 15, 2014, by and between the Company and Adapt, as amended (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 June 22, 2017, the Company entered into a license agreement (the "License Agreement") and a related supply agreement (the “Supply Agreement”) with Aegis Therapeutics LLC ("Aegis") pursuant to which the Company was granted an exclusive license (the “License”) to Aegis’ proprietary chemically synthesizable delivery enhancement and stabilization agents, including, but not limited to, Aegis’ Intravail® absorption enhancement agents, ProTek® and HydroGel® (collectively, the “Technology”) to exploit (a) the Compounds (as such are defined in the License Agreement) and (b) a product containing a Compound and formulated using the Technology (“Product”), in each case of (a) and (b) for any and all purposes. The License Agreement restricts the Company's ability to manufacture any Aegis excipients included in the Technology (“Excipients”), except for certain instances of supply failure, supply shortage or termination of the Supply Agreement, and the Company shall obtain all supply of such Excipients from Aegis under the Supply Agreement. The License Agreement also restricts Aegis’s ability to compete with the Company worldwide with respect to the Exploitation (as defined in the License Agreement) of any therapeutic containing a Compound or derivative or active metabolite of a Compound without the Company's prior written consent. The effective date of the License Agreement and the Supply Agreement is January 1, 2017.
|
As consideration for the grant of the License, the Company paid Aegis
two
immaterial upfront payments, of which the Company paid
50%
by issuing the Company's Common Stock to Aegis, with the number of shares issued equal to
75%
of the average closing price of the Company's Common Stock over the
20
trading days preceding the date of payment. The License Agreement also provides for (A) additional developmental milestone payments for each Product containing a different Compound equal to up to an aggregate of
$1.8 million
, (B) additional commercialization milestone payments for each Product containing a different Compound equal to up to an aggregate of
$5.0 million
, and (C) single low digit royalties on the Annual Net Sales (as defined in the License Agreement) of all Products during the Royalty Term (as defined in the License Agreement) according to a tiered royalty rate based on Annual Net Sales of the Products by the Company, the Company's sublicensees and affiliates. The Company shall also pay to Aegis a sublicense fee based on a sublicense rate negotiated in good faith by the parties. The License Agreement contains customary representations and warranties, ownership, patent rights, confidentiality, indemnification and insurance provisions. The License Agreement shall expire upon the expiration of the Company's obligation to pay royalties under such License Agreement; provided,
however, that the Company shall have the right to terminate the License granted on a Product-by-Product or country-by-country basis upon
30 days
’ prior written notice to Aegis. For the five months ended December 31, 2017, the Company recorded
$150 thousand
in expense associated with the License Agreement. For the year ended July 31, 2017, the Company recorded
$200 thousand
in expense associated with the License Agreement.
Under the terms of the Supply Agreement, Aegis shall deliver to the Company any preclinical, clinical and commercial supply of the Excipients, which Aegis sources from various contract manufacturers. The Supply Agreement has a term of
20 years
but shall terminate automatically in the event of expiration or termination of the License Agreement or at any time upon the written agreement of both parties. The Supply Agreement contains customary provisions relating to pricing for such materials, forecasts, delivery, inspection, indemnification, insurance and representations, warranties and covenants. The Supply Agreement includes technology transfer provisions for the transfer of all materials and know-how specific to the manufacturing of the Excipients that is necessary or useful for the Company to manufacture such Excipients. The Company does not have the right to manufacture such Excipients except in the event that Aegis is unable to supply and sell any portion of the material to the Company (subject to a
60
-day cure period).
|
|
g.
|
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. During the five months ended December 31, 2017, the Company made a payment of approximately
$418 thousand
to Renaissance (see Note 6 - Prepaid Expenses and Other Current Assets).
|
|
|
h.
|
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 “Separation Agreement”), with such agreement becoming effective on September 12, 2017 (the "Separation Agreement Effective Date"), which represents the date on which Mr. Pollack's
seven
-day revocation period expired.
|
Pursuant to the terms of the Separation Agreement, Mr. Pollack received (i) a payment equal to approximately
$1.13 million
relating to certain accrued obligations, payable in a cash lump sum within
three
business days following the Separation Agreement Effective Date; and (ii) a separation payment equal to approximately
$1.44 million
, payable in
one
or
two
installments in accordance with the terms set forth therein. Mr. Pollack also retained previously granted options to purchase, in the aggregate,
948,000
shares of Common Stock of the Company, which options are fully vested and exercisable. Except as set forth in the Separation Agreement, all other options held by Mr. Pollack were forfeited. Additionally, for a period of no more than
12 months
following the Separation Date, Mr. Pollack will cooperate as an adviser 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 Separation Agreement.
During the five months ended December 31, 2017, the Company paid Mr. Pollack approximately
$1.61 million
in cash pursuant to the terms of the Separation Agreement. In addition, as of December 31, 2017, the Company has recorded an accrued liability of approximately
$962 thousand
, which represents the amount the Company must pay to Mr. Pollack no later than September 14, 2018.
Contingencies
The Company may be subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. If any legal matter, that may arise, were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s would reflect any potential claim in the consolidated financial statements for that reporting period.
Note 11. 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 canceled, 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. There was
no
balance related to this agreement at December 31, 2017 and July 31, 2017.
Note 12. Stockholder's Equity
Common Stock
During the five months ended
December 31, 2017
During the five months ended December 31, 2017, the Company issued
145,630
shares of its Common Stock in relation to the cashless exercise of stock options that were granted outside of the Company's 2017 Long-Term Incentive Stock Plan (the "2017 Plan"). These options were for
217,500
shares of Common Stock with an exercise prices between
$5.00
and
$15.00
per share.
During the five months ended December 31, 2017, the Company issued
345,000
shares of its Common Stock in relation to the exercise of stock purchase warrants with an exercise price of
$15.00
per share for total proceeds of
$5,175,000
.
During the five months ended December 31, 2017, the Company issued
11,790
shares of its Common Stock in relation to the exercise of stock purchase warrants, with an exercise price of
$10.00
per share. The Company received proceeds of
$57,900
relating to the warrant exercises during the five months ended December 31, 2017 and the balance of
$60,000
on January 16, 2018.
On September 23, 2017, the Company issued
3,283
shares of its Common Stock to Torreya. These shares were issued as payment in full for a
$100 thousand
accrued liability owed by the Company to Torreya pursuant to that certain Supplemental Engagement Letter between the Company and Torreya, dated September 8, 2017 (the "Supplemental Engagement Letter"). The Company valued these shares at
$40.58
per share, or approximately
$133 thousand
in the aggregate, which represents the closing price of the Company's Common Stock on September 22, 2017. The Company recognized a loss on the settlement of the accrued liability of
$33 thousand
.
On December 22, 2017, the Company issued
3,455
shares of its Common Stock to Torreya. These shares were issued as payment in full for a
$100 thousand
accrued liability owed by the Company to Torreya pursuant to that certain Supplemental Engagement Letter between the Company and Torreya, dated September 8, 2017 (the "Supplemental Engagement Letter"). The Company valued these shares at
$24.95
per share, or approximately
$81 thousand
in the aggregate, which represents the closing price of the Company's Common Stock on December 22, 2017. The Company recognized a gain on the settlement of the liability of
$19 thousand
.
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 10 – 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, in aggregate,
120,525
shares of unregistered Common Stock in exchange for various services rendered by consultants and third parties. The shares issued in these transactions were valued using the stock price at each issuance date and totaled
$1.1 million
.
During the year ended July 31, 2016, the Company issued
14,327
shares of the unregistered Common Stock upon the execution of a binding letter of intent to agree to negotiate and enter into an exclusive license agreement and collaboration agreement (“LOI”) with a pharmaceutical company with certain desirable proprietary information. The shares issued in this transaction were valued using the stock price at issuance date and amounted to
$120,347
. Pursuant to the LOI, the Company is obligated to issue up to an additional
92,634
shares of unregistered Common Stock upon the occurrence of various milestones. A total of
3,582
shares have been issued as of
December 31, 2017
due to achievement of certain milestones.
During the year ended July 31, 2016, the Company issued
15,715
shares of unregistered Common Stock as a result of the cashless exercise of
30,000
options.
Stock Options
On September 8, 2017, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”), at which time the 2017 Plan was approved by stockholder vote. The 2017 Plan allows the Company to grant both incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”) to purchase a maximum of
400,000
shares of the Company's Common Stock. Under the terms of the 2017 Plan, ISOs may only be granted to Company employees and directors, while NSOs may be granted to employees, directors, advisors, and consultants. The Board has the authority to determine to whom options will be granted, the number of options, the term, and the exercise price. Options are to be granted at an exercise price not less than fair value for an ISO or an NSO. The vesting period is normally over a period of
four years
from the vesting date. The contractual term of an option is no longer than
ten years
.
Prior to adopting the 2017 Plan, the Company did not have a formal long-term incentive stock plan. Prior to the implementation of the 2017 Plan, the Company had discretion to provide designated employees of the Company and its affiliates, certain consultants, and advisors who perform services for the Company and its affiliates, and non-employee members of the Board and its affiliates with the opportunity to receive grants of non-qualified stock options (the "Pre-2017 Non-Qualified Stock Options"). All of the Pre-2017 Non-Qualified Stock Option Grants were intended to qualify as non-qualified stock options. There were no Pre-2017 Non-Qualified Stock Option Grants that were intended to qualify as incentive stock options.
The assumptions used in the valuation for all of the Pre-2017 Non-Qualified Stock Options for the five months ended
December 31, 2017
and for the years ended
July 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
July 31, 2017
|
|
|
July 31, 2016
|
|
Market value of stock on measurement date
|
$
|
36.79
|
|
|
$5.61 to 13.00
|
|
|
$7.00 to 10.00
|
|
Risk-free interest rate
|
1.47
|
%
|
|
0.88-2.55%
|
|
|
0.71-2.05%
|
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Volatility factor
|
96
|
%
|
|
76-348%
|
|
|
124-373%
|
|
Term
|
2.12 years
|
|
|
2.28-10 years
|
|
|
3-10 years
|
|
Stock option activity for the Pre-2017 Non-Qualified Stock Options for the five months ended
December 31, 2017
and the years ended
July 31, 2017
and
July 31, 2016
is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
average
Exercise
Price
|
|
Weighted-
average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 31, 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
|
|
Exercised
|
(217,500
|
)
|
|
10.22
|
|
|
|
|
|
|
Forfeited
|
(572,000
|
)
|
|
11.51
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
2,980,500
|
|
|
7.33
|
|
|
7.06
|
|
$
|
46,606,210
|
|
Exercisable at December 31, 2017
|
2,691,598
|
|
|
7.12
|
|
|
6.92
|
|
$
|
42,659,151
|
|
A summary of the status of the Company's non-vested Pre-2017 Non-Qualified Stock Options as of
December 31, 2017
and changes during the five months ended
December 31, 2017
and the years ended July 31, 2017 and 2017 are presented below:
|
|
|
|
|
|
|
|
|
Non-vested options
|
Number of
Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
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
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(50,969
|
)
|
|
9.29
|
|
|
Non-vested at December 31, 2017
|
288,902
|
|
|
$
|
7.87
|
|
|
During the five months ended
December 31, 2017
, the Company recognized approximately
$0.6 million
of non-cash expense related to vested Pre-2017 Non-Qualified Stock Options granted in prior periods. During the years ended
July 31, 2017
and
July 31, 2016
the Company recognized approximately
$1.3 million
and
$10.3 million
, respectively, of non-cash expense related to vested Pre-2017 Non-Qualified Stock Options granted in prior periods. At
December 31, 2017
, there was
$1.1 million
of unrecognized compensation costs related to non-vested stock options.
The 2017 Plan
The assumptions used in the valuation of options granted under the 2017 Plan during the five months ended
December 31, 2017
are as follows:
|
|
|
|
|
Five Months Ended
12/31/17
|
Market value of stock on measurement date
|
$18.16 to $49.93
|
|
Risk-free interest rate
|
2.06 % to 2.47%
|
|
Dividend yield
|
—
|
%
|
Volatility factor
|
324% to 329%
|
|
Term
|
10.00
|
|
Stock option activity for options granted under the 2017 Plan during the five months ended
December 31, 2017
is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
average
Exercise
Price
|
|
Weighted-
average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value (in Thousands)
|
Outstanding at July 31, 2017 and 2016
|
—
|
|
|
|
|
|
|
|
Total Options authorized
|
400,000
|
|
|
|
|
|
|
|
Granted
|
(214,000
|
)
|
|
$
|
37.62
|
|
|
|
|
|
Expired
|
—
|
|
|
|
|
|
|
|
Forfeited
|
40,000
|
|
|
$
|
49.93
|
|
|
|
|
|
Options available at December 31, 2017
|
226,000
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
174,000
|
|
|
$
|
34.78
|
|
|
9.71
|
|
$
|
14,430
|
|
Exercisable at December 31, 2017
|
—
|
|
|
|
|
|
|
|
A summary of the status of the Company’s non-vested options granted under the 2017 Plan as of
December 31, 2017
and changes during the five months ended
December 31, 2017
are presented in the following table:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value Per Share
|
Non-vested at July 31, 2017 and 2016
|
—
|
|
|
|
Granted
|
214,000
|
|
|
$
|
37.62
|
|
Forfeited
|
(40,000
|
)
|
|
49.93
|
|
Non-vested at December 31, 2017
|
174,000
|
|
|
34.78
|
|
During the five months ended
December 31, 2017
, the Company recognized approximately
$1.2 million
of non-cash expense related to vested options granted during this period. As of
December 31, 2017
, there was approximately
$4.8 million
of unrecognized compensation costs related to non-vested stock options that were granted under the 2017 Plan.
Warrants
Warrant activity for the five months ended
December 31, 2017
and the 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
|
|
|
|
|
|
Outstanding at July 31, 2017
|
768,800
|
|
|
$
|
12.50
|
|
|
3.04
|
|
$
|
1,184,000
|
|
Exercised
|
(356,790
|
)
|
|
14.83
|
|
|
|
|
|
Forfeited
|
(55,000
|
)
|
|
$
|
15.00
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
357,010
|
|
|
$
|
9.78
|
|
|
5.57
|
|
$
|
4,708,020
|
|
Note 13. Sale of Royalties
On December 13, 2016, the Company entered into the SWK Agreement with 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 Agreement) arising from the sale by Adapt, pursuant to the Adapt Agreement of NARCAN or any other intranasal naloxone opioid overdose reversal treatment, up to (i)
$20,625,000
million and then the Residual Royalty thereafter or (ii)$
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
six
th 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
six
th 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
$17.46 million
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
$13.71 million
cash proceeds received in December 2016 were non-refundable, and (v) the
$3,750,000
million 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.
As of December 31, 2017, the Company determined that the Capped Royalty Amount provided in the SWK agreement has been met. After December 31, 2017, SWK's share of the royalty and milestone payments are reduced to
10%
of amounts earned from Adapt.
Note 14. 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 during the year ended July 31, 2017.
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 15. 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 December 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 December 31, 2017, the Company had federal and state net operating loss carry forwards, which are available to offset future taxable income, of
2,869,510
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
July 31, 2017
|
|
July 31, 2016
|
Net loss before taxes at statutory rate
|
$
|
919,111
|
|
|
$
|
2,992,311
|
|
|
$
|
(3,242,916
|
)
|
Permanent items
|
4,056
|
|
|
5,828
|
|
|
1,764
|
|
Temporary items
|
(698,380
|
)
|
|
385,910
|
|
|
4,770,850
|
|
Income tax expense at statutory rate
|
224,787
|
|
|
3,384,049
|
|
|
1,529,698
|
|
Valuation allowance
|
(55,624
|
)
|
|
(2,833,575
|
)
|
|
(1,529,698
|
)
|
Income tax expense per books
|
$
|
169,163
|
|
|
$
|
550,474
|
|
|
$
|
—
|
|
Net deferred tax assets consist of the following components as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
July 31, 2017
|
|
July 31, 2016
|
Net operating loss carryover at statutory rate
|
$
|
2,869,510
|
|
|
$
|
4,936,604
|
|
|
$
|
10,063,523
|
|
Stock-based compensation expense
|
7,404,037
|
|
|
9,922,093
|
|
|
9,217,868
|
|
Fixed asset depreciation
|
(292,140
|
)
|
|
(2,470
|
)
|
|
—
|
|
Total
|
$
|
9,981,407
|
|
|
$
|
14,856,227
|
|
|
$
|
19,281,391
|
|
|
|
|
|
|
|
Valuation allowance
|
$
|
(9,981,407
|
)
|
|
$
|
(14,856,227
|
)
|
|
$
|
(19,281,391
|
)
|
Net deferred tax asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company had
no
uncertain tax positions at
December 31, 2017
, July 31, 2017 or
July 31, 2016
.
On December 22, 2017, H.R. 1, formally known as the Tax Cut and Jobs Act (the "Act") was enacted into law. The Act provides for significant tax law changes and modifications with varying effective dates. The major change that affects the Company is reducing the corporate income tax rate from 35% to 21%. In connection with the Company’s initial analysis of the impact of the Tax Act, no discrete net tax benefit or expense in the period ended December 31, 2017 is recorded. This is primarily due to the change in valuation allowance offsets a net benefit or expense for the corporate rate reduction.
Note 16. Comparative Financials (Unaudited)
The condensed consolidated income statement of operations for the five months ended December 31, 2016 is as follows:
|
|
|
|
|
|
For the Five-Month Period Ended
|
(in thousands)
|
December 31, 2016
|
|
|
(unaudited)
|
Revenue:
|
|
|
Royalty and licensing revenue
|
$
|
14,831
|
|
Total revenue
|
|
14,831
|
|
Operating expenses:
|
|
|
|
General and administrative
|
|
1,854
|
|
Research and development
|
|
709
|
|
Selling expenses
|
|
730
|
|
Total operating expenses
|
|
3,293
|
|
Income from operations
|
|
11,538
|
|
Other expense, net
|
|
(23
|
)
|
Income before provision of income taxes
|
|
11,515
|
|
Provision for income taxes
|
|
—
|
|
Net income
|
$
|
11,515
|
|
|
|
|
Net income per common share
|
|
|
Basic
|
$
|
6
|
|
Diluted
|
$
|
5.21
|
|
Note 17. Subsequent Events
On January 4, 2018, the Company granted options to several employees to purchase, in aggregate,
57,050
shares of the Company’s Common Stock at an exercise price of
$24.84
per share, which represents the per share closing price of the
Company’s Common Stock on the date of grant. These options were issued under the 2017 Plan and has a
ten
year term. The option vests as follows:
25%
on the one year anniversary of the grant date and then 1/48th of the option shares vest on such date every month thereafter through the
four
th anniversary of the grant date.
On February 27, 2018, the Company and Adapt received notice from Teva, pursuant to 21 U.S.C. § 355(j)(2)(B)(ii) (the “Notice Letter”), that Teva had filed an ANDA with the FDA seeking regulatory approval to market a generic version of NARCAN 2 mg/spray Nasal Spray before the expiration of U.S. Patent No. 9,480,644 (the “‘644 patent”) and U.S. Patent No. 9,707,226 (the “‘226 patent”). The ‘644 and ‘226 patents are listed with respect to Adapt’s New Drug Application No. 208411 for NARCAN 2 mg/spray Nasal Spray in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations
publication (commonly known as the “Orange Book”) and each patent expires on March 16, 2035. The Company is the record owner of the ‘644 patent and the Company and Adapt are joint record owners of the ‘226 patent. Teva’s Notice Letter asserts that the commercial manufacture, use or sale of its generic drug product described in its ANDA will not infringe the ‘644 patent or the ‘226 patent, or that the ‘644 patent and ‘226 patent are invalid or unenforceable. The Company and Adapt are evaluating Teva’s Notice Letter.
On February 27, 2018, the Company was issued a Notice of Allowance ("NOA") for the “OPIANT” trademark (Serial No. 87315716) for pharmaceutical services. The issue date of the NOA establishes the due date for the filing of a Statement of Use ("SOU") or a request for extension of time to file a SOU. Every
six months
for the next
five years
, the Company will assess whether it has proof that it is actually using the mark in commerce, or whether it needs to file a request for extension of time to file the SOU.
On February 28, 2018, the Company was notified that Adapt has entered into a license agreement with a Third Party (as defined in the License Agreement) with regard to one or more patents pursuant to which Adapt has invoked its right under Section 5.5 of that certain License Agreement, dated as of December 15, 2014 (the “Initial License Agreement”), by and between the Company and Adapt, as amended (the “License Agreement”), to offset
50%
, or
$6,250,000
, of the payment paid to such Third Party from the amounts payable by Adapt to the Company under the License Agreement. To the extent that the license agreement which Adapt has entered into with the Third Party requires additional payments which fall under the scope of Section 5.5 of the License Agreement, Adapt may seek from the Company future payment offsets of up to
50%
of such amounts that Adapt pays to such Third Party. In accordance with the Adapt Agreement, Adapt may enter into such a licensing arrangement and exercise its right to deduct any payments with respect thereto at any time without the consent of the Company. The Company is not currently aware of any potential future offset payments. Under the License Agreement, royalty or milestone payments for a calendar quarter are payable from Adapt to the Company, and Adapt may not deduct more than
50%
of the amount payable for that calendar quarter. The Company has not been given access to the license agreement between Adapt and the Third Party and Adapt may not give the Company notice of any future offset payments until they are incurred. On March 1, 2018, the Company received net milestone payments of $
6.1 million
.