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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2023

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to __________

 

Commission file number: 001-41184

 

ZYVERSA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   86-2685744

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2200 N. Commerce Parkway, Suite 208

Weston, FL 33326

 

 

33326

(Address of principal executive offices)   (Zip Code)

 

(754) 231-1688

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, $0.0001 par value per share   ZVSA   The Nasdaq Global Market

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: ☐ No: ☒

 

As of August 16, 2023, the number of shares outstanding of the registrant’s common stock, $0.0001 par value per share, was 30,894,188.

 

 

 

 

 

 

ZYVERSA THERAPEUTICS, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

PART I FINANCIAL INFORMATION   1
     
Item 1. Financial Statements   1
     
Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022 (Successor)   1
     
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2023 (Successor) and June 30, 2022 (Predecessor)   2
     
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 (Successor) and June 30, 2022 (Predecessor)   3
     
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 (Successor) and June 30, 2022 (Predecessor)   4
     
Notes to Unaudited Condensed Consolidated Financial Statements   5
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   18
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.   26
     
ITEM 4. Controls and Procedures.   27
     
PART II - OTHER INFORMATION   28
     
ITEM 1. Legal Proceedings.   28
     
ITEM 1A. Risk Factors.   28
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.   28
     
ITEM 3. Defaults Upon Senior Securities.   28
     
ITEM 4. Mine Safety Disclosures.   28
     
ITEM 5. Other Information.   28
     
ITEM 6. Exhibits.   29
     
SIGNATURES   30

 

i

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ZYVERSA THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
Financial Designation, Predecessor and Successor [Fixed List]  Successor   Successor 
   Successor 
   June 30,   December 31, 
   2023   2022 
   (Unaudited)     
Assets          
           
Current Assets:          
Cash  $228,693   $5,902,199 
Prepaid expenses and other current assets   886,911    225,347 
Vendor deposits   -    235,000 
Total Current Assets   1,115,604    6,362,546 
Equipment, net   12,133    17,333 
In-process research and development   30,806,158    100,086,329 
Goodwill   -    11,895,033 
Security deposit   -    46,659 
Operating lease right-of-use asset   53,898    98,371 
           
Total Assets  $31,987,793   $118,506,271 
           
Liabilities, Temporary Equity and Stockholders’ Equity          
           
Current Liabilities:          
Accounts payable  $8,144,033   $6,025,645 
Accrued expenses and other current liabilities   2,281,026    2,053,559 
Operating lease liability   59,625    108,756 
Total Current Liabilities   10,484,684    8,187,960 
Deferred tax liability   1,441,467    10,323,983 
Total Liabilities   11,926,151    18,511,943 
           
Commitments and contingencies (Note 8)   -     -  
          
Successor redeemable common stock, subject to possible redemption, 0 and 65,783 shares outstanding as of June 30, 2023 and December 31, 2022, respectively   -    331,331 
Stockholders’ Equity:          
Successor preferred stock, $0.0001 par value, 1,000,000 shares authorized:          
Series A preferred stock, 8,635 shares designated, 200 and 8,635 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively   -    1 
Series B preferred stock, 5,062 shares designated, 5,062 shares issued and outstanding as of June 30, 2023 and December 31, 2022   1    1 
Successor common stock, $0.0001 par value, 110,000,000 shares authorized; 23,669,074 and 9,016,139 shares issued at June 30, 2023 and December 31, 2022, respectively, and 23,666,915 and 9,016,139 shares outstanding as of June 30, 2023 and December 31, 2022, respectively   2,367    902 
Additional paid-in-capital   107,044,663    104,583,271 
Accumulated deficit   (86,978,221)   (4,921,178)
Treasury stock, at cost, 2,159 and 0 shares at June 30, 2023 and December 31, 2022, respectively   (7,168)   - 
Total Stockholders’ Equity   20,061,642    99,662,997 
           
Total Liabilities, Temporary Equity and Stockholders’ Equity  $31,987,793   $118,506,271 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

ZYVERSA THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
   Successor   Predecessor   Successor   Predecessor 
   For the Three   For the Three   For the Six   For the Six 
   Months Ended   Months Ended   Months Ended   Months Ended 
   June 30, 2023   June 30, 2022   June 30, 2023   June 30, 2022 
                 
Operating Expenses:                    
Research and development  $1,220,576   $719,395   $2,276,519   $1,786,357 
General and administrative   3,929,225    1,164,013    7,465,362    3,465,382 
Impairment of in-process research and development   69,280,171    -    69,280,171    - 
Impairment of goodwill   11,895,033    -    11,895,033    - 
Total Operating Expenses   86,325,005    1,883,408    90,917,085    5,251,739 
                     
Loss From Operations   (86,325,005)   (1,883,408)   (90,917,085)   (5,251,739)
                     
Other (Income) Expense:                    
Interest (income) expense   314    140,404    (765)   308,468 
Change in fair value of derivative liabilities   -    (19,600)   -    192,500 
                     
Pre-Tax Net Loss   (86,325,319)   (2,004,212)   (90,916,320)   (5,752,707)
Income tax benefit   7,812,226    -    8,859,277    - 
Net Loss   (78,513,093)   (2,004,212)   (82,057,043)   (5,752,707)
Deemed dividend to preferred stockholders   (7,915,836)   (331,200)   (7,915,836)   (331,200)
Net Loss Attributable to Common Stockholders  $(86,428,929)  $(2,335,412)  $(89,972,879)  $(6,083,907)
                     
Net Loss Per Share                    
- Basic and Diluted  $(4.84)  $(0.10)  $(6.66)  $(0.25)
                    
Weighted Average Number of Common Shares Outstanding                    
- Basic and Diluted   17,855,762    24,167,257    13,517,314    24,167,257 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

ZYVERSA THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
   For the Three and Six Months Ended June 30, 2023 
  

Series A

Preferred Stock

  

Series B

Preferred Stock

  

Common

Stock

  

Treasury

Stock

  

Additional

Paid-In

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Successor                                                       
Successor                                                       
                                                        
Balance - January 1, 2023   8,635   $1    5,062   $1    9,016,139   $902    -   $-   $104,583,271   $(4,921,178)  $    99,662,997 
                                                        
Reclassification of formerly redeemable common stock   -    -    -    -    65,783    7    -    -    331,324    -    331,331 
                                                        
Issuance of common stock pursuant to vendor agreements   -    -    -    -    130,000    13    -    -    395,187    -    395,200 
                                                        
Registration costs associated with preferred stock issuance   -    -    -    -    -    -    -    -    (34,674)   -    (34,674)
                                                        
Stock-based compensation   -    -    -    -    -    -    -    -    287,461    -    287,461 
Net loss   -    -    -    -    -    -    -    -    -    (3,543,950)   (3,543,950)
Balance - March 31, 2023   8,635    1    5,062    1    9,211,922    922    -    -    105,562,569    (8,465,128)   97,098,365 
                                                        
Registered offering of common stock [1]   -    -    -    -    11,015,500    1,101    -    -    9,829,917    -    9,831,019 
Redemption of Series A Preferred Stock   (8,400)   (1)   -    -    -    -    -    -    (10,080,000)   -    (10,080,001)
Conversion of Series A Preferred Stock into common stock   (35)   -    -    -    17,500    2    -    -    (2)   -    - 
Shares issued as consideration for extension of lock-up period   -    -    -    -    3,044,152    304    -    -    1,156,474    -    1,156,778 
Issuance of common stock pursuant to vendor agreements   -    -    -    -    380,000    38    -    -    209,962    -    210,000 
Stock-based compensation   -    -    -    -    -    -    -    -    365,742    -    365,742 
Treasury stock acquired, at cost   -    -    -    -    -    -    (2,159)   (7,168)   -    -    (7,168)
Net loss   -    -    -    -    -    -    -    -    -    (78,513,093)   (78,513,093)
Balance - June 30, 2023   200   $-    5,062   $1    23,669,074   $2,367    (2,159)  $(7,168)  $107,044,662   $(86,978,221)  $20,061,642 

 

Predecessor   Shares   Amount   Shares   Amount   Capital   Deficit   Deficiency 
   For the Three and Six Months Ended June 30, 2022 
  

Series A

Preferred Stock

  

Common

Stock

  

Additional

Paid-In

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficiency 
Predecessor                                   
Predecessor                                   
Balance - January 1, 2022   -   $-    24,167,257   $242   $40,065,109   $(52,896,817)  $   (12,831,466)
                                    
Issuance of preferred stock in private placement [2]   133,541    1    -    -    393,300    -    393,301 
                                    
Stock-based compensation   -    -    -    -    1,941,746    -    1,941,746 
                                    
Net loss   -    -    -    -    -    (3,748,495)   (3,748,495)
                                    
Balance - March 31, 2022   133,541         1    24,167,257    242    42,400,155    (56,645,312)   (14,244,914)
                                    
Stock-based compensation   -    -    -    -    695,940    -    695,940 
                                    
Net loss   -    -    -    -    -    (2,004,212)   (2,004,212)
                                    
Balance - June 30, 2022   133,541   $1    24,167,257   $242   $43,096,095   $(58,649,524)  $(15,553,186)

 

[1]Includes gross proceeds of $11,015,500 less issuance costs of $1,011,064
[2]Includes gross proceeds of $419,320 less issuance costs of $26,019

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

ZYVERSA THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   June 30, 2023   June 30, 2022 
   Successor   Predecessor 
   For the Six   For the Six 
   Months Ended   Months Ended 
   June 30, 2023   June 30, 2022 
         
Cash Flows From Operating Activities:          
Net loss  $(82,057,043)  $(5,752,707)
Adjustments to reconcile net loss to net cash used in operating activities:          
Impairment of in-process research and development   69,280,171    - 
Impairment of goodwill   11,895,033    - 
Stock-based compensation   653,203    2,637,686 
Issuance of common stock pursuant to vendor agreements   605,200    - 
Shares issued as consideration for extension of lock-up period   1,156,778    - 
Amortization of debt discount   -    36,469 
Change in fair value of derivative liability   -    192,500 
Depreciation of fixed assets   5,200    5,200 
Non-cash rent expense   44,473    41,486 
Deferred tax benefit   (8,882,516)   - 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (661,565)   (934,853)
Security deposit   46,659    - 
Vendor deposits   235,000    120,000 
Accounts payable   2,118,388    2,204,406 
Operating lease liability   (49,131)   (44,627)
Accrued expenses and other current liabilities   613,077    804,973 
           
Net Cash Used In Operating Activities   (4,997,072)   (689,467)
           
Cash Flows From Financing Activities:          
Proceeds from issuance of common stock in public offering   11,015,500    - 
Registration and issuance costs associated with common stock issuance   (1,213,657)   - 
Redemption of Series A Preferred Stock   (10,465,610)   - 
Proceeds from issuance of preferred stock in private placement   -    419,320 
Purchase of treasury stock   (7,168)   - 
Proceeds from investor deposits   -    296,400 
Registration and issuance costs associated with preferred stock issuance   (5,500)   (26,019)
           
Net Cash (Used In) Provided By Financing Activities   (676,435)   689,701 
           
Net (Decrease) Increase in Cash   (5,673,506)   234 
           
Cash - Beginning of Period   5,902,199    328,581 
           
Cash - End of Period  $228,693   $328,815 
           
Cash and restricted cash consisted of the following:          
Cash  $228,693   $31,465 
Restricted Cash   -    297,350 
   $228,693   $328,815 
           
Supplemental Disclosures of Cash Flow Information:          
Reclassification of formerly redeemable common stock  $331,331   $- 
Recognition of ROU asset and lease liability upon adoption of ASC 842  $-   $182,732 
Accounts payable for deferred offering costs  $44,892   $- 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Note 1 – Business Organization, Nature of Operations and Basis of Presentation

 

Organization and Operations

 

Larkspur Health Acquisition Corp. (“Larkspur”), a blank-check special purpose acquisition company, was incorporated in Delaware on March 17, 2021. On December 12, 2022, Larkspur consummated the Business Combination (as defined below) with ZyVersa Therapeutics, Inc. (“Predecessor”) which was incorporated in the State of Florida on March 11, 2014 as Variant Pharmaceuticals, Inc. Pursuant to the terms of the Business Combination Agreement (the “Business Combination Agreement”) (and upon all other conditions of the Business Combination Agreement being satisfied or waived), on the date of the consummation (the “Closing Date”) of the Business Combination and transactions contemplated thereby (the “Business Combination”), Larkspur (“New Parent”) changed its name to ZyVersa Therapeutics, Inc. and the Predecessor changed its name to ZyVersa Therapeutics Operating, Inc. (the “Operating Company”) after merging with a subsidiary of the New Parent, with the Operating Company being the surviving entity, which resulted in it being incorporated in Delaware and it being a wholly-owned subsidiary of the New Parent (collectively the “Successor”). References to the “Company” or “ZyVersa” refer to the Successor for the three and six months ended June 30, 2023, and to the Predecessor for the three and six months ended June 30, 2022.

 

ZyVersa is a clinical stage biopharmaceutical company leveraging proprietary technologies to develop first-in-class drugs for patients with chronic renal or inflammatory diseases with high unmet medical needs. The Company’s mission is to develop drugs that optimize health outcomes and improve patients’ quality of life.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2023 and for the six months ended June 30, 2023 and 2022. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023.

 

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of the Company and its consolidated subsidiaries. As a result of the Business Combination, for accounting purposes, Larkspur was the acquirer and Predecessor ZyVersa Therapeutics, Inc. was the acquiree and accounting predecessor. Therefore, the financial statement presentation includes the financial statements of the Predecessor for the periods prior to December 13, 2022 and the Successor for the periods including and after December 13, 2022, including the consolidation of the Operating Company. All significant intercompany balances have been eliminated in the unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the accounting rules and regulations of the SEC.

 

Note 2 - Going Concern and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

5

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

As of June 30, 2023, the Company had cash of approximately $0.2 million and a working capital deficit of approximately $9.4 million. During the six months ended June 30, 2023, the Company incurred a net loss of approximately $82.1 million and used cash in operations of approximately $5.0 million. The Company has an accumulated deficit of approximately $87.0 million as of June 30, 2023.

 

The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations. It is expected that its research and development and general and administrative expenses will continue to increase and, as a result, the Company will eventually need to generate significant product revenues to achieve profitability.

 

Consequently, the Company will be required to raise additional funds through equity or debt financing. Management believes that the Company has access to capital resources and continues to evaluate additional financing opportunities; however, and there can be no assurance that it will be successful in securing additional capital or that the Company will be able to obtain funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds the Company might raise will enable the Company to extinguish its working capital deficit, complete its development initiatives or attain profitable operations. The aforementioned conditions raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the issuance date of these financial statements.

 

Note 3 – Summary of Significant Accounting Policies

 

Since the date the Company’s December 31, 2022 financial statements were issued in its 2022 Annual Report on Form 10-K for the year ended December 31, 2022, there have been no material changes to the Company’s significant accounting policies.

 

Use of Estimates

 

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and the amounts disclosed in the related notes to the financial statements. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, fair value calculations for equity securities, derivative liabilities, share based compensation and acquired intangible assets, as well as establishment of valuation allowances for deferred tax assets. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that actual results could differ from those estimates.

 

Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common and dilutive common-equivalent shares outstanding during each period.

 

6

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

The following table sets forth the outstanding potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive:

 

   2023   2022 
   Successor   Predecessor 
   June 30, 2023   June 30, 2022 
Predecessor warrants [1]   -    2,305,184 
Successor warrants [1]   23,742,163    - 
Predecessor options   -    10,039,348 
Successor options   3,559,342    - 
Successor Series A Convertible Preferred Stock   100,000    - 
Successor Series B Convertible Preferred Stock   723,234    - 
Predecessor Series A Convertible Preferred Stock   -    150,832 
Predecessor convertible notes payable [2]   -    4,992,076 
Total potentially dilutive shares   28,124,739    17,487,440 

 

[1] As part of the InflamaCORE, LLC license agreement, warrants to purchase 600,000 Predecessor or 119,125 Successor shares of common stock are to be issued upon the satisfaction of certain milestones and, accordingly, are not included in the amount currently reported. See Note 8 - Commitments and Contingencies - License Agreements for details.

 

[2] The Company’s convertible notes payable have embedded conversion options that result in the automatic issuance of common stock upon the consummation of certain qualifying transactions. The conversion price is a function of the implied common stock price associated with the qualifying transaction. For the purpose of disclosing the potentially dilutive securities in the table above, we used the number of shares of common stock issuable if a qualifying transaction occurred with an implied common stock price equal to the fair value of the common stock of $2.27 per share as of June 30, 2022.

 

Segment Reporting

 

The Company operates and manages its business as one reportable and operating segment. All assets and operations are in the U.S. The Company’s Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.

 

Note 4 – Business Combination, Goodwill and In-Process Research and Development

 

On December 12, 2022, Larkspur consummated the Business Combination with ZyVersa Therapeutics, Inc. (see Note 1 – Business Organization, Nature of Operations and Basis of Presentation). The Company accounted for the Business Combination as a forward acquisition of the Operating Company, as it was determined that the Operating Company was a variable interest entity as of the date of the Business Combination. The New Parent was determined to be the primary beneficiary, as its ownership provides the power to direct the activities of the Operating Company and the obligation to absorb the losses and/or receive the benefits of the Operating Company.

 

Given the non-recurring nature of Larkspur’s activities as a SPAC, pro forma financial data combining the pre-Business Combination results of both Larkspur and the Operating Company would not be meaningful and have not been presented.

 

7

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Purchase Price Allocation

 

The Business Combination was recorded using the acquisition method of accounting and the initial purchase price allocation was based on the Company’s preliminary assessment of the fair value of the purchase consideration and the fair value of the Operating Company’s tangible and intangible assets acquired and liabilities assumed at the date of acquisition. At year end, the purchase price allocation was not complete due to the proximity of the acquisition date to the calendar year end.

 

As of June 30, 2023, the preliminary estimates of the acquisition-date fair value of the purchase consideration and the preliminary estimates of the purchase price allocation have been confirmed, do not require measurement period adjustments, and are now considered final. The acquisition-date fair value of the elements of the purchase consideration were estimated using a market approach with Level 1 inputs (observable inputs) in the case of the fair value of the Successor’s common stock and Level 3 inputs (unobservable inputs) in the case of the fair value attributed to the Successor warrants and options. The acquiror was obligated to replace the Operating Company’s existing warrants and options pursuant to the Business Combination Agreement. Accordingly, it was necessary to allocate the fair value of the replacement warrants and options between purchase consideration (the fair value attributable to pre-combination services) and compensation for post-combination services. The fair value of the replacement warrants and options attributable to post-combination services was $584,260 and $1,731,237, respectively.

 

The final estimates of the acquisition-date fair value of the purchase consideration were as follows:

 

      
Successor common stock  $67,197,300 
Successor warrants   12,190,015 
Successor options   11,864,556 
Total fair value of the purchase consideration  $91,251,871 

 

The final acquisition-date fair values of the assets acquired and liabilities assumed (see the table below) were determined by management, with the assistance of a third-party valuation expert specifically for the in-process research and development (“IPR&D”). The estimated fair value of the IPR&D assets were determined using the “income approach” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life using Level 3 inputs. Some of the more significant assumptions utilized in the valuations include the estimated net cash flows for each year for each asset, the appropriate discount rate necessary to measure the risk inherent in the future cash flows, the life cycle of each asset, the potential regulatory and commercial success risk, royalties on net sales, as well as other factors. There are inherent uncertainties related to these factors and management’s judgment in applying them to arrive at the estimated fair values. The excess of the purchase price over the estimated fair values of the identifiable net assets acquired was recorded as goodwill, which management believes is attributable to the assembled workforce and other intangible assets that don’t qualify for separate recognition.

 

      
Current assets, including cash of $699,324  $1,093,223 
In-process research and development   100,086,329 
Goodwill   11,895,033 
Other non-current assets   64,523 
Total assets acquired   113,139,108 
      
Current liabilities   10,818,204 
Deferred tax liabilities   11,069,033 
Total assumed liabilities   21,887,237 
      
Net assets acquired  $91,251,871 

 

IPR&D recorded for book purposes is considered an indefinite-lived intangible asset until the completion or the abandonment of the research and development efforts. Because the acquisition was structured as a stock sale, the IPR&D and the goodwill do not have any tax basis and will not be deductible for tax purposes.

 

8

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Impairment

 

While management did not identify any unfavorable developments related to its IPR&D assets, management did determine that it was more likely than not that the Company’s single reporting unit’s fair value was below its carrying amount, due to a significant and sustained decline in the Company’s market capitalization. Accordingly, it was necessary to perform interim impairment testing as of June 30, 2023.

 

The fair value of the Company was determined using an income approach. The income approach was based on the present value of the future cash flows, which were derived from financial forecasts and required significant assumptions and judgment, including the estimated net cash flows for each year for each asset, the appropriate discount rate necessary to measure the inherent risk of the future cash flows, the life cycle of each asset, the potential regulatory and commercial success risk, royalties on net sales, as well as other factors. The resulting estimated fair value was reconciled to the Company’s market capitalization.

 

The reconciliation included an estimated implied control premium of approximately 100% above the Company’s market capitalization on June 30, 2023.

 

The summation of the Company’s goodwill and IPR&D fair values, as indicated by the Company’s discounted cash flow calculations, were compared to the Company’s consolidated fair value, as indicated by the Company’s market capitalization, to evaluate the reasonableness of the Company’s calculations. The Company’s determination of a reasonable control premium that an investor would pay, over and above market capitalization for a control position, included a number of factors:

 

Market control premium; The identification of recent public market information of comparable peer acquisition transactions. The selection of comparable peer acquisition transactions is subject to judgment and uncertainty.

 

Impact of low public float and limited trading activity on market capitalization: A significant portion of the Company’s common shares are owned by a concentrated number of investors. The public float of the Company’s common shares, calculated as the percentage of common shares freely traded by public investors divided by the Company’s total shares outstanding, is significantly lower than that of the Company’s publicly traded peers. Based on the Company’s evaluation of third-party market data, we believe there is an inherent discount impacting the Company’s share price due to the low public float and limited trading volume, thus impacting the Company’s market capitalization.

 

As a result of the Company’s analysis, the Company fully impaired its $11.9 million of goodwill and also recorded a $69.3 million impairment charge for its other indefinite-lived intangible assets, namely the IPR&D.

 

9

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Note 5 – Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following as of June 30, 2023 and December 31, 2022:

 

   June 30,   December 31, 
   2023   2022 
L&F milestone payment liability  $500,000   $1,500,000 
L&F Note [1]   -    (351,579)
           
L&F, net   500,000    1,148,421 
Payroll accrual   528,049    584,226 
Other accrued expenses   104,369    214,229 
Federal income tax payable   129,922    106,683 
Bonus accrual   998,778    - 
Registration delay liability [2]   19,908    - 
Total accrued expenses and other current liabilities  $2,281,026   $2,053,559 

 

[1] See Note 8 – “Commitments and Contingencies” for details of the forgiveness of the L&F Note.

 

[2] See Note 9 – “Stockholders’ Permanent and Temporary Equity” for details of the registration delay liability.

 

Note 6 – Derivative Liabilities

 

As of January 1, 2022, the Company had Level 3 derivative liabilities that were measured at fair value at issuance, related to the redemption features and put options of certain convertible notes. The redemption features were valued using a combination of a discounted cash flow and a Black-Scholes valuation technique. There were no derivative liabilities as of June 30, 2023 or December 31, 2022.

 

During the three and six months ended June 30, 2022, the Predecessor recorded a (loss) gain on the change in the fair value of the derivative liabilities of ($19,600) and $192,500, respectively.

 

Note 7 – Income Taxes

 

The tax provisions for the six months ended June 30, 2023 and 2022 were computed using the estimated effective tax rates applicable to the taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s effective tax rate was 9.7% and 0.0% for the six months ended June 30, 2023 and 2022, respectively. The increase in the quarterly rates is primarily the result of changes in its valuation allowance. As of June 30, 2022, the Company recorded a full valuation allowance due to historical and projected losses. As of December 31, 2022, the Company recorded a significant deferred tax liability, which was established in connection with the Business Combination on December 12, 2022, which was a source of future taxable income to realize its net deferred tax assets. During the six months ended June 30, 2023, the Company recorded an impairment on the asset related to the deferred tax liability which decreased the deferred tax liability. Accordingly, the effective tax rate for the six months ended June 30, 2023 of 9.7% is primarily due to the adjustment to the net deferred tax liability.

 

Note 8 – Commitments and Contingencies

 

Litigations, Claims and Assessments

 

In the ordinary course of business, the Company may be involved in legal proceedings, claims and assessments. The Company records contingent liabilities resulting from such claims, if any, when a loss is assessed to be probable and the amount of the loss is reasonably estimable.

 

10

 

 

ZYVERSA THERAPEUTICS, INC.

 

Notes to Condensed Consolidated Financial Statements

 

License Agreements

 

L&F Research LLC

 

The Company entered into a License Agreement with L&F Research LLC (“L&F Research”) effective December 15, 2015, as amended (the “L&F License Agreement”) pursuant to which L&F granted us an exclusive royalty-bearing, worldwide, sublicensable license under the patent and intellectual property rights and know-how specific to and for the development and commercialization of VAR 200, for the treatment, inhibition or prevention of kidney disease in humans and symptoms thereof, including focal segmental glomerulosclerosis. On February 28, 2023, the Company and L&F executed an Amendment and Restatement Agreement that waived L&F’s right to terminate the L&F License Agreement or any other remedies, for non-payment of the First Milestone Payment, until (a) March 31, 2023 as to $1,000,000 of such milestone payments (“Waiver A”) and (b) January 31, 2024 as to $500,000 milestone payments (“Waiver B”). Waiver A was contingent upon (i) forgiveness by the Company of $351,579 in aggregate principal amount outstanding under a certain convertible note, and (ii) a cash payment by the Company to L&F in the amount of $648,421, on or before March 31, 2023. Waiver B is contingent upon a cash payment by the Company to L&F in the amount of $500,000 on or before the earlier of (x) January 31, 2024, and (y) ten business days from the date that the Company receives net proceeds of at least $30,000,000 from the issuance of new equity capital. All other terms of the L&F License remain in effect.

 

On March 29, 2023, the Company forgave $351,579 in aggregate principal amount outstanding on a certain note and paid $648,421 of cash to L&F, thus meeting the conditions of Waiver A. L&F’s put option expired upon meeting the Waiver A conditions, which resulted in a reclassification of 65,783 shares of common stock and $331,331 classified as temporary equity to permanent equity.

 

Operating Leases

 

On January 18, 2019, the Predecessor entered into a lease agreement for approximately 3,500 square feet of office space in Weston, Florida for a term of five years. Under the lease agreement, the annual base rent, which excludes the Predecessor’s share of taxes and operating costs, is approximately $89,000 for the first year and increases approximately 3% every year thereafter for a total base rent lease commitment of approximately $497,000.

 

The Successor recognized right-of-use asset amortization of $38,783 and $77,198 in connection with its operating lease for the three and six months ending June 30, 2023, respectively, and the Predecessor recognized rent expense of $38,141 and $76,294 in connection with its operating lease for the three and six months ending June 30, 2022, respectively.

 

A summary of the Company’s right-of-use assets and liabilities is as follows:

 

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 Financial Designation, Predecessor and Successor [Fixed List]   Successor   Predecessor 
   For the Six   For the Six 
   Months Ended   Months Ended 
   June 30, 2023   June 30, 2022 
         
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows used in operating activities  $49,130   $44,627 
           
Right-of-use assets obtained in exchange for lease obligations