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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 September 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 November 10, 2023, the number of shares outstanding of the registrant’s common stock, $0.0001 par value per share, was 43,519,719.

 

 

 

 
 

 

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 September 30, 2023 (unaudited) and December 31, 2022 (Successor)   1
     
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 (Successor) and September 30, 2022 (Predecessor)   2
     
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the Three and Nine Months Ended September 30, 2023 (Successor) and September 30, 2022 (Predecessor)   3
     
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 (Successor) and September 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.   26
     
PART II - OTHER INFORMATION   28
     
ITEM 1. Legal Proceedings.   28
     
ITEM 1A. Risk Factors.   28
     
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.   29
     
ITEM 3. Defaults Upon Senior Securities.   29
     
ITEM 4. Mine Safety Disclosures.   29
     
ITEM 5. Other Information.   29
     
ITEM 6. Exhibits.   30
     
SIGNATURES   31

 

i
 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ZYVERSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
Financial Designation, Predecessor and Successor [Fixed List]  Successor   Successor 
   Successor 
   September 30,   December 31, 
   2023   2022 
   (Unaudited)     
Assets        
         
Current Assets:          
Cash  $1,578,721   $5,902,199 
Prepaid expenses and other current assets   426,519    225,347 
Vendor deposits   -    235,000 
Total Current Assets   2,005,240    6,362,546 
Equipment, net   9,533    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   31,078    98,371 
           
Total Assets  $32,852,009   $118,506,271 
           
Liabilities, Temporary Equity and Stockholders’ Equity          
           
Current Liabilities:          
Accounts payable  $8,897,534   $6,025,645 
Accrued expenses and other current liabilities   2,775,485    2,053,559 
Operating lease liability   34,349    108,756 
Total Current Liabilities   11,707,368    8,187,960 
Deferred tax liability   1,440,982    10,323,983 
Total Liabilities   13,148,350    18,511,943 
           
Commitments and contingencies (Note 8)   -    - 
           
Successor redeemable common stock, subject to possible redemption, 0 and 65,783 shares outstanding as of September 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, 50 and 8,635 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   -    1 
Series B preferred stock, 5,062 shares designated, 5,062 shares issued and outstanding as of September 30, 2023 and December 31, 2022   1    1 
Successor common stock, $0.0001 par value, 110,000,000 shares authorized; 43,517,560 and 9,016,139 shares issued at September 30, 2023 and December 31, 2022, respectively, and 43,515,401 and 9,016,139 shares outstanding as of September 30, 2023 and December 31, 2022, respectively   4,353    902 
Additional paid-in-capital   109,587,097    104,583,271 
Accumulated deficit   (89,880,624)   (4,921,178)
Treasury stock, at cost, 2,159 and 0 shares at September 30, 2023 and December 31, 2022, respectively   (7,168)   - 
Total Stockholders’ Equity   19,703,659    99,662,997 
           
Total Liabilities, Temporary Equity and Stockholders’ Equity  $32,852,009   $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 Months Ended
September 30, 2023
   For the Three Months Ended
September 30, 2022
   For the Nine Months Ended
September 30, 2023
   For the Nine Months Ended
September 30, 2022
 
Operating Expenses:                    
Research and development  $673,943   $2,334,120   $2,950,462   $4,120,477 
General and administrative   2,228,735    1,061,046    9,694,097    4,526,428 
Impairment of in-process research and development   -    -    69,280,171    - 
Impairment of goodwill   -    -    11,895,033    - 
Total Operating Expenses   2,902,678    3,395,166    93,819,763    8,646,905 
                     
Loss From Operations   (2,902,678)   (3,395,166)   (93,819,763)   (8,646,905)
                     
Other (Income) Expense:                    
Interest (income) expense   210    69,352    (555)   377,820 
Change in fair value of derivative liabilities   -    228,100    -    420,600 
                     
Pre-Tax Net Loss   (2,902,888)   (3,692,618)   (93,819,208)   (9,445,325)
Income tax benefit   485    -    8,859,762    - 
Net Loss   (2,902,403)   (3,692,618)   (84,959,446)   (9,445,325)
Deemed dividend to preferred stockholders   (32,373)   (9,684,637)   (7,948,209)   (10,015,837)
Net Loss Attributable to Common Stockholders  $(2,934,776)  $(13,377,255)  $(92,907,655)  $(19,461,162)
                     
Net Loss Per Share                    
- Basic and Diluted  $(0.09)  $(0.55)  $(4.79)  $(0.81)
                     
Weighted Average Number of Common Shares Outstanding                    
- Basic and Diluted   30,978,540    24,167,257    19,403,027    24,167,257 

 

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

 

2
 

 

ZYVERSA THERAPEUTICS, INC.

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

 

   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
   For the Three and Nine Months Ended September 30, 2023 
   Series A   Series B               Additional       Total 
   Preferred Stock   Preferred Stock   Common Stock   Treasury Stock   Paid-In   Accumulated   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    1,102    -    -    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    2,368    (2,159)   (7,168)   107,044,662    (86,978,221)   20,061,642 
                                                        
Registered offering of common stock [2]   -    -    -    -    3,256,060    326    -    -    1,575,612    -    1,575,938 
Warrant modification   -    -    -    -    -    -    -    -    181,891    -    181,891 
Redemption of Series A Preferred Stock   (150)   -    -    -    -    -    -    -    (215,048)   -    (215,048)
Exercise of pre-funded warrants   -    -    -    -    9,471,213    947    -    -    -    -    947 
Warrant inducement offer - exercise proceeds [3]   -    -    -    -    7,121,213    713    -    -    756,935    -    757,647 
Stock-based compensation   -    -    -    -    -    -    -    -    243,045    -    243,045 
Net loss   -    -    -    -    -    -    -    -    -    (2,902,403)   (2,902,403)
Balance - September 30, 2023   50   $-    5,062   $1    43,517,560   $4,353    (2,159)  $(7,168)  $109,587,097   $(89,880,624)  $19,703,659 

 

Predecessor  Shares   Amount   Shares   Amount   Capital   Deficit   Deficiency 
   For the Three and Nine Months Ended September 30, 2022 
   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   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 [4]   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)
                                    
Issuance of preferred stock in private placement [5]   317,322    4    -    -    959,196    -    959,200 
                                    
Conversion of convertible notes payable and accrued interest into preferred stock   1,802,193    18    -    -    5,658,870    -    5,658,888 
                                    
Stock-based compensation:   -    -    -    -    494,022    -    494,022 
                                    
Net loss   -    -    -    -    -    (3,692,618)   (3,692,618)
                                    
Balance - September 30, 2022   2,253,056   $23    24,167,257   $242   $50,208,183   $(62,342,142)  $(12,133,694)

 

[1]Includes gross proceeds of $11,015,500 less issuance costs of $1,184,482
[2]Includes gross proceeds of $2,099,053 less issuance costs of $523,115
[3]Includes gross proceeds of $966,349 less issuance costs of $208,702
[4]Includes gross proceeds of $419,320 less issuance costs of $26,019
[5]Includes gross proceeds of $996,400 less issuance costs of $37,200

 

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

 

3
 

 

ZYVERSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   September 30,   September 30, 
   Successor   Predecessor 
   For the Nine   For the Nine 
   Months Ended   Months Ended 
   September 30,   September 30, 
   2023   2022 
         
Cash Flows From Operating Activities:          
Net loss  $(84,959,446)  $(9,445,325)
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   896,248    3,131,708 
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   -    39,492 
Change in fair value of derivative liability   -    420,600 
Depreciation of fixed assets   7,800    7,800 
Non-cash rent expense   67,293    - 
Deferred tax benefit   (8,883,001)   - 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (201,172)   (57,366)
Security deposit   46,659    (1)
Vendor deposits   235,000    160,000 
Accounts payable   2,871,889    3,448,439 
Operating lease liability   (74,407)   - 
Accrued expenses and other current liabilities   1,122,488    1,216,322 
           
Net Cash Used In Operating Activities   (5,933,467)   (1,078,331)
           
Cash Flows From Financing Activities:          
Proceeds from issuance of common stock in public offering   13,114,555    - 
Registration and issuance costs associated with common stock issuance   (1,763,584)   - 
Redemption of Series A Preferred Stock   (10,695,610)   - 
Proceeds from issuance of preferred stock in private placement   -    1,415,720 
Purchase of treasury stock   (7,168)   - 
Exercise of pre-funded warrants   947    - 
Warrant inducement offer - exercise proceeds   966,349    - 
Registration and issuance costs associated with preferred stock issuance   (5,500)   (63,219)
           
Net Cash Provided By Financing Activities   1,609,989    1,352,501 
           
Net (Decrease) Increase in Cash   (4,323,478)   274,170 
           
Cash - Beginning of Period   5,902,199    328,581 
           
Cash - End of Period  $1,578,721   $602,751 
           
Supplemental Disclosures of Cash Flow Information:          
Conversion of convertible notes payable and accrued interest into preferred stock  $-   $5,658,888 
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   $1,506,211 
Warrant modification - incremental value  $181,891   $- 
Warrant inducement offer - incremental value  $134,591   $- 

 

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 nine months ended September 30, 2023, and to the Predecessor for the three and nine months ended September 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 September 30, 2023 and for the nine months ended September 30, 2023 and 2022. The results of operations for the nine months ended September 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.

 

As of September 30, 2023, the Company had cash of approximately $1.6 million and a working capital deficit of approximately $9.7 million. During the nine months ended September 30, 2023, the Company incurred a net loss of approximately $85.0 million and used cash in operations of approximately $5.9 million. The Company has an accumulated deficit of approximately $89.9 million as of September 30, 2023.

 

5
 

 

The Company has not yet achieved profitability and expects to continue to incur cash outflows from operations. The Company will need substantial cash to complete development of its proprietary technologies and is currently managing costs to maintain cash. 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, 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.

 

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 
   September 30,   September 30, 
   2023   2022 
Predecessor warrants [1]   -    8,699,397 
Successor warrants [1]   36,375,319    - 
Predecessor options   -    10,039,348 
Successor options   3,559,342    - 
Successor Series A Convertible Preferred Stock   25,000    - 
Successor Series B Convertible Preferred Stock   723,234    - 
Predecessor Series A Convertible Preferred Stock   -    5,945,045 
Predecessor convertible notes payable [2]   -    2,977,528 
Total potentially dilutive shares   40,682,895    27,661,318 

 

[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 $1.94 per share as of September 30, 2022.

 

6
 

 

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.

 

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 December 31, 2022, 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 were confirmed, do not require measurement period adjustments, and were 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 

 

7
 

 

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 was 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 do not 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.

 

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.

 

8
 

 

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, on June 30, 2023, 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.

 

The Company determined that there were no new events or circumstances as of September 30, 2023 that indicate that the fair value of the IPR&D has decreased below its carrying value and intends to perform its annual impairment testing as of October 1, 2023.

 

Note 5 – Accrued Expenses and Other Current Liabilities

 

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

 

   September 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   894,416    584,226 
Other accrued expenses   31,969    214,229 
Federal income tax payable   129,922    106,683 
Bonus accrual   1,212,359    - 
Registration delay liability [2]   6,819    - 
Total accrued expenses and other current liabilities  $2,775,485   $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 September 30, 2023 or December 31, 2022.

 

During the three and nine months ended September 30, 2022, the Predecessor recorded a loss on the change in the fair value of the derivative liabilities of $228,100 and $420,000, respectively.

 

9
 

 

Note 7 – Income Taxes

 

The tax provisions for the nine months ended September 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 9.44% and 0% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the quarterly rates is primarily the result of changes in its valuation allowance. As of September 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 nine months ended September 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 nine months ended September 30, 2023 of 9.44% 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.

 

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 $38,885 and $116,083 in connection with its operating lease for the three and nine months ending September 30, 2023, respectively, and the Predecessor recognized rent expense of $42,225 and $118,519 in connection with its operating lease for the three and nine months ending September 30, 2022, respectively.

 

10
 

 

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

 

 Financial Designation, Predecessor and Successor [Fixed List]   Successor   Predecessor 
   For the Nine   For the Nine 
   Months Ended   Months Ended 
   September 30,   September 30, 
   2023   2022 
         
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows used in operating activities  $74,405   $67,567 
           
Right-of-use assets obtained in exchange for lease obligations          
Operating leases  $-   $- 
           
Weighted Average Remaining Lease Term          
Operating leases   0.34 Years    1.34 Years 
           
Weighted Average Discount Rate          
Operating leases   6.5%   6.5%

 

Future minimum payments under these operating lease agreements are as follows:

 

   Amount 
     
October 1, 2023 to December 31, 2023  $34,822 
Less: amount representing imputed interest   (472)
Total  $34,349 

 

Note 9 – Stockholders’ Permanent and Temporary Equity

 

Common Stock

 

On June 5, 2023, the Company issued 3,044,152 shares of common stock valued at $1.2 million to certain investors in a private placement (including to certain members of the Company’s sponsor) in exchange for increasing the duration of their lockup period until July 31, 2023 with respect to an aggregate of 1,977,749 shares of common stock underlying all securities of the Company held by such investors. The $1,156,778 fair value of the common stock issued was recorded in general and administrative expense in the Statement of Operations during the nine-months ended September 30, 2023.

 

During the nine months ended September 30, 2023, the Company entered into investor marketing agreements with two vendors in which the Company issued an aggregate of 510,000 shares of common stock and cash in exchange for marketing services. The $605,200 fair value of the common stock was established as a prepaid expense and the Company is recognizing the expense over the terms of the contracts.

 

11
 

 

Equity Offerings

 

On April 28, 2023, the Company completed an offering of 11,015,500 shares of common stock and warrants to purchase 11,015,500 shares of common stock for gross proceeds of $11.0 million (the “Registered Offering”). Each share of common stock was sold together with a five-year warrant to purchase one share of common stock at an exercise price of $1.00 per share, which was exercisable upon issuance. The Company determined that the warrant should be equity-classified, primarily because it is indexed to the Company’s own stock and it met the requirements for equity classification. Accordingly, because both the common stock and the warrant are equity-classified, it wasn’t necessary to allocate the proceeds or the issuance costs to the respective securities. Total issuance costs were $1,184,482 including $440,620 of placement fees, $455,332 of legal fees, $259,774 of accounting and professional service costs related to the offering, and $28,756 of other costs.

 

On July 26, 2023, the Company completed a public offering of 3,256,060 shares of common stock, pre-funded warrants (the “Pre-Funded Warrants”) to purchase 9,471,213 shares of common stock and common warrants (the “July 2023 Warrants”) to purchase 12,727,273 shares of common stock at a combined public offering price of $0.165 per share which resulted in gross proceeds of $2.1 million (the “July 2023 Offering”). The Pre-Funded Warrants are exercisable immediately, may be exercised at any time until all Pre-Funded Warrants are exercised in full, and have an exercise price of $0.0001 per share. The July 2023 Warrants are exercisable immediately for a term of five years and have an exercise price of $0.165 per share. The Company determined that both warrants should be equity-classified, primarily because they are indexed to the Company’s own stock and they met the requirements for equity classification. Accordingly, because the common stock and both warrants are equity-classified, it wasn’t necessary to allocate the proceeds or the issuance costs to the respective securities. Total issuance costs were $523,115 including $125,943 of placement fees, $236,091 of legal fees, $87,037 of accounting and professional service costs related to the offering, $26,744 of other costs, and $47,300 incremental fair value of the modified warrants as compared to the original warrants (see Stock Warrants below).

 

Redemptions of Series A Preferred Stock

 

On or about April 28, 2023, cash proceeds from the Registered Offering in the amount of $10.5 million were used to redeem 8,400 shares of Series A Preferred Stock. The loss on the extinguishment of preferred stock is accounted for in a manner similar to the treatment of dividends paid on preferred stock. The loss on extinguishment is calculated as the difference between (a) the fair value of the negotiated $10.5 million of cash transferred to the holders of the Series A Preferred Stock (which also settled the Company’s obligation to make premium and Effectiveness Failure payments), and (b) the $3.8 million net carrying amount of the Series A Preferred Stock. Accordingly, the redemption resulted in the recognition of a $6.7 million deemed dividend for the purposes of calculating the Company’s loss per common share. Because the Company has an accumulated deficit, both the debit and the credit associated with the dividend are to additional paid-in-capital, so there is no balance sheet effect.

 

On August 3, 2023, the Company entered into a redemption agreement and release with an investor which resulted in the Company, on August 4, 2023, redeeming 150 of the 200 remaining shares of Series A Convertible Preferred Stock and warrants to purchase 86,250 shares of common stock at an exercise price of $2.00 per share for a cash payment of $230,000. The Company recognized an $84,315 deemed dividend during the three months ended September 30, 2023, as a result of the extinguishment accounting associated with the redemption.

 

Triggering of Down Round Provisions

 

As a result of the Registered Offering, (a) the exercise price of the Series A Warrants to purchase 863,500 shares of common stock at an exercise price of $11.50 per share that were issued to participants in the original PIPE financing had the exercise price reset to its floor price of $2.00 per share, while becoming exercisable for 4,965,125 shares of common stock (which resulted in the recognition of a $1.4 million deemed dividend); (b) the remaining 235 shares of Series A Preferred Stock had their $10.00 original conversion price reset to the floor conversion price of $2.00 per share of common stock (which resulted in the recognition of a $37,000 deemed dividend); and (c) the $10.00 original conversion price of the 5,062 shares of Series B Preferred Stock issued in connection with the Business Combination reset to its floor price of $7.00 per share of common stock (which resulted in the recognition of a $0.1 million deemed dividend).

 

12
 

 

Conversion of Series A Preferred Stock

 

Following the triggering of the down round provision, the holders of 35 shares of Series A Preferred Stock converted into 17,500 shares of common stock at the new conversion price of $2.00 per share.

 

Temporary Equity

 

See Note 8 – “Commitments and Contingencies” for discussion of the movement of temporary equity to permanent equity on March 29, 2023.

 

Stock-Based Compensation

 

For the three months ended September 30, 2023, the Successor recorded stock-based compensation expense of $243,045 (of which, ($38,224) was included in research and development and $281,269 was included in general and administrative expense) related to options issued to employees and consultants. For the three months ended September 30, 2022, the Predecessor recorded stock-based compensation expense of $494,022 (of which $67,608 was included in research and development and $426,414 was included in general and administrative expense) related to options issued to employees and consultants.

 

For the nine months ended September 30, 2023, the Successor recorded stock-based compensation expense of $896,249 (of which, $117,320 was included in research and development and $778,929 was included in general and administrative expense) related to options issued to employees and consultants. For the nine months ended September 30, 2022, the Predecessor recorded stock-based compensation expense of $3,131,708 (of which $619,363 was included in research and development and $2,512,345 was included in general and administrative expense) related to options issued to employees and consultants. As of September 30, 2023, there was $1,324,176 of unrecognized stock-based compensation expense, which the Company expects to recognize over a weighted average period of 1.7 years.

 

Stock Options

 

On January 27, 2023, the Company granted ten-year stock options to purchase 100,000 shares of Successor common stock, with an aggregate grant date value of $184,426 to its newly appointed Chief Medical Officer and Senior Vice President of Medical Affairs as inducement for entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4) under the 2022 Omnibus Equity Incentive Plan (the “2022 Plan”). The stock options vest annually over three years and have an exercise price of $2.11 per share.

 

On March 10, 2023, the Company granted ten-year stock options to purchase 13,000 shares of Successor common stock to employees of the Company under the 2022 Plan. The stock options have an aggregate grant date value of $23,770, vest annually over three years and have an exercise price of $2.26 per share. Of the 13,000 shares, 5,000 shares were issued to the son of an executive officer of the Company.

 

On May 24, 2023, the Company granted ten-year stock options to purchase 1,453,107 shares of Successor common stock to employees and directors of the Company under the 2022 Plan. The stock options have an aggregate grant date value of $555,004, of which $499,660 vest annually over three years and $55,344 vest immediately, and have an exercise price of $0.44 per share.

 

The grant date fair value of stock options granted during the three and nine months ended September 30, 2023 and 2022 was determined using the Black Scholes method, with the following assumptions used:

 

   Successor   Predecessor   Successor   Predecessor 
   Successor   Predecessor   Successor   Predecessor 
   For the Three   For the Three   For the Nine   For the Nine 
   Months Ended   Months Ended   Months Ended   Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2023   2022   2023   2022 
Fair value of common stock on date of grant   n/a    n/a   $0.44 - $2.23   $2.27 - $3.00 
Risk free interest rate   n/a    n/a    3.53% - 4.27%   1.68% - 3.01%
Expected term (years)   n/a    n/a    6.00    3.53 - 6.00 
Expected volatility   n/a    n/a    120% - 123%   111% - 119%
Expected dividends   n/a    n/a    0.00%   0.00%

 

A summary of the option activity for the nine months ended September 30, 2023 is presented below:

 

13
 

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Life   Intrinsic 
   Options   Price   In Years   Value 
                 
Outstanding, January 1, 2023   1,993,235   $10.81          
Granted   1,566,107    0.56          
Exercised   -    -          
Forfeited   -    -          
Outstanding, September 30, 2023   3,559,342   $6.30   6.6   $           - 
                    
Exercisable, September 30, 2023   1,968,166   $9.53   5.2   $- 

 

The following table presents information related to stock options as of September 30, 2023:

 

 Options Outstanding   Options Exercisable 
           Weighted      
      Outstanding    Average    Exercisable 
 Exercise    Number of    Remaining Life    Number of 
 Price    Options    In Years    Options 
$0.44    1,453,107    10    150,000 
$2.11    100,000    -    - 
$2.26    13,000    -    - 
$5.03    662,887    2.3    662,887 
$11.33    12,186    8.8    12,186 
$11.58    728,430    5.5    728,430 
$16.36    589,732    7.7    414,663 
      3,559,342    5.2    1,968,166 

 

14
 

 

Stock Warrants

 

On July 26, 2023, in connection with the July 2023 Offering (see Equity Offerings above), the Company amended the exercise price of certain warrants to purchase 1,377,996 shares of common stock for three investors from $1.00 to $0.165 per share and the expiration date was modified from April 28, 2028 to July 28, 2028. The $47,300 incremental fair value of the modified warrants as compared to the original warrants was recognized as an additional issuance cost of the July 2023 Offering.

 

On August 2, August 8 and September 8, 2023, a July 2023 Offering investor exercised pre-funded warrants to purchase 9,471,213 shares of common stock at an exercise price of $0.0001 per share for total proceeds of $947.

 

Between September 13 and September 18, 2023, the Company initiated a limited time program, which at the election of the warrant holder, would permit them to immediately exercise their July 2023 Warrants at a reduced exercise price of $0.1357 per share and they would also be granted new 5.5 year warrants to purchase an equal number of shares of common stock at an exercise price of $0.1357 per share. The new warrants are not exercisable for the first six months. Under the program, warrants to purchase an aggregate of 7,121,213 shares of common stock were exercised on September 14, 2023 for gross proceeds of $966,400 less total issuance costs of $208,702. Issuance costs include placement agent fees of $57,980, legal costs of $16,131, and warrant modification costs of $134,591. Because the modification represented a short-term inducement, modification accounting was only performed on the warrants that were actually exercised under the program. The Company recognized the $134,591 modification date incremental value of the modified warrants and additional warrants issued as compared to the original warrants, as an issuance cost of the warrant exercise.

 

The issuance date fair value of stock warrants issued during the three and nine months ended September 30, 2023 and 2022 was determined using the Black Scholes method, with the following assumptions used:

 

    Successor   Predecessor    Successor    Predecessor 
Financial Designation, Predecessor and Successor [Fixed List]  Successor   Predecessor   Successor   Predecessor 
                     
    Successor   Predecessor    Successor    Predecessor 
    For the Three     For the Three     For the Nine     For the Nine  
    Months Ended     Months Ended     Months Ended     Months Ended  
    September 30, 2023    September 30, 2022    September 30, 2023    September 30, 2022 
Fair value of common stock on date of grant  $0.14 - $0.17    n/a    $0.14 - $1.00    n/a 
Risk free interest rate   4.09% - 4.42%   n/a    3.51% - 4.42%   n/a 
Expected term (years)   4.9 - 5.5 years    n/a    5 years    n/a 
Expected volatility   121 % - 123%   n/a    121% - 123%   n/a 
Expected dividends   n/a    n/a    n/a    n/a 

 

15
 

 

A summary of the warrant activity for the nine months ended September 30, 2023 is presented below:

  

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Life   Intrinsic 
   Warrants   Price   In Years   Value 
                 
Outstanding, January 1, 2023   8,628,706   $10.75           
Issued   40,335,199    0.39           
Exercised   (16,592,426)   0.15           
Forfeited   (97,785)   2.00                      
Repriced - Old [1]   (863,500)   11.50           
Repriced - New [1]   4,965,125    2.00           
Repriced - Old [2]   (1,377,996)   1.00           
Repriced - New [2]   1,377,996    0.17           
Repriced - Old [3]   (7,121,213)   0.17           
Repriced - New [3]   7,121,213    0.14           
Outstanding, September 30, 2023   36,375,319   $2.87    4.6   $- 
                     
Exercisable, September 30, 2023   29,184,304   $3.52    4.4   $- 

 

[1] Warrants represent the reset of the exercise price of the PIPE Warrants to purchase 863,500 shares of common stock to their floor price of $2.00 per share.
   
[2] Warrants represent the reset of the exercise price of certain April 28, 2023 offering warrants to purchase 1,377,996 shares of common stock to a price of $0.165 per share.
   
[3] Warrants represent the reset of the exercise price of certain July 26, 2023 offering warrants to purchase 7,121,213 shares of common stock to a price of $0.1357 per share.

 

16
 

 

The following table presents information related to stock warrants as of September 30, 2023:

 

 Warrants Outstanding    Warrants Exercisable 
      Outstanding    Weighted Average    Exercisable  
 Exercise    Number of    Remaining Life    Number of 
 Price    Warrants    In Years    Warrants 
$0.14    7,121,213    n/a     - 
$0.17    6,984,056    4.8    6,984,056 
$1.00    9,637,504    4.6    9,637,504 
$2.00    4,878,875    4.2    4,878,875 
$5.03    104,704    1.3    34,901 
$6.90    1,271,904    4.2    1,271,904 
$11.50    6,065,562    4.2    6,065,562 
$11.58    311,502    0.2    311,502 
      36,375,319    4.4    29,184,304 

 

Effectiveness Failure

 

In connection with the Business Combination, the Company issued 8,635 shares of Series A Convertible Preferred Stock (the “PIPE Shares”), and common stock purchase warrants (each, a “PIPE Warrant”) to purchase 863,500 shares of common stock, at a purchase price of $1,000 per share and warrant, for an aggregate purchase price of $8,635,000 (the “PIPE Investment”) pursuant to subscription agreements dated July 20, 2022 (collectively, the “PIPE Subscription Agreements”). On or about February 20, 2023, the Company failed to have the SEC declare a registration statement effective (the “Effectiveness Failure”) which covered the Private Investment in Public Equity (“PIPE”) registrable securities within the time period prescribed by the PIPE Securities Purchase Agreement (the “SPA”). The SPA entitles the PIPE investors to receive registration delay payments (“Registration Delay Payments”) equal to 1.5% of each investor’s purchase price on the date of the Effectiveness Failure and every thirty days thereafter that the Effectiveness Failure persists. Failure to make the Registration Delay Payments on a timely basis result in the accrual of interest at the rate of 2.0% per month. On April 28, 2023, the proceeds from the Registered Offering were used to redeem substantially all of the PIPE Shares. (See Redemption of Series A Preferred Stock above.) As of the filing date of this document, the Company expects to have to make additional Registration Delay Payments of approximately $6,819 in the aggregate subsequent to September 30, 2023 and prior to curing the Effectiveness Failure

 

Note 10 – Subsequent Events

 

On September 8, 2023, the Company’s Board of Directors approved the Company’s Amended and Restated 2022 Omnibus Equity Incentive Plan (“the “A&R Plan”), which the stockholders approved on October 31, 2023. The restated plan increases the number of shares of the Company’s common stock reserved for issuance by 4,000,000 shares to 5,453,107.

 

17
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Unless the context otherwise requires, all references in this section to “we,” “us” or “our” refer to the combined business of ZyVersa Therapeutics, Inc., a Florida corporation, prior to the Business Combination and ZyVersa Therapeutics, Inc., a Delaware corporation, and its consolidated subsidiaries after giving effect to the Business Combination.

 

The following discussion and analysis of the results of operations and financial condition of ZyVersa Therapeutics, Inc. (the “Company”) as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis should also be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2022 and for the year then ended, which are included in the Form 10-K (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” in our Annual Report, and other factors that we may not know. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements above, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

 

Business Overview

 

We are a clinical stage specialty biopharmaceutical company leveraging advanced proprietary technologies to develop first-in-class drugs for patients with renal or inflammatory diseases with high unmet medical needs.

 

Our lead renal drug candidate, which we refer to as Cholesterol Efflux MediatorTM VAR 200 (2-hydroxypropyl-beta-cyclodextrin or “2HPβCD”) has potential to treat multiple renal diseases. Our lead anti-inflammatory drug candidate, which we refer to as Inflammasome ASC Inhibitor IC 100, is a humanized monoclonal IgG4 antibody inflammasome ASC inhibitor targeting ASC with potential to treat multiple inflammatory diseases.

 

Business Combination

 

On December 12, 2022 (the “Closing Date”), we consummated the previously announced Business Combination pursuant to the terms of that certain Business Combination Agreement (the “Business Combination Agreement”), by and among ZyVersa Therapeutics, Inc., a Florida corporation (“Old ZyVersa”), the representative of Old ZyVersa’s shareholders named therein (the “Securityholder Representative”), Larkspur Health Acquisition Corp., a Delaware corporation (“Larkspur”) and Larkspur Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Larkspur (“Merger Sub”). Pursuant to the terms of the Business Combination Agreement (and upon all other conditions of the Business Combination Agreement being satisfied or waived), on the Closing Date of the Business Combination and transactions contemplated thereby (the “Business Combination”), (i) Larkspur changed its name to “ZyVersa Therapeutics, Inc.”, a Delaware corporation (the “Company”) and (ii) Merger Sub merged with and into Old ZyVersa (the “Merger”), with Old ZyVersa as the surviving company in the Merger and, after giving effect to such Merger, Old ZyVersa became a wholly-owned subsidiary of the Company (collectively the “Successor”).

 

Prior to the completion of the Business Combination, Larkspur was incorporated in Delaware on March 17, 2021 and ZyVersa Therapeutics, Inc. (“Predecessor”) was incorporated in the State of Florida on March 11, 2014 as Variant Pharmaceuticals, Inc. Merger Sub was incorporated in the state of Delaware on July 13, 2022. References to the “Company” or ZyVersa” refer to the Successor for the three and nine months ended September 30, 2023, and to the Predecessor for the three and nine months ended September 30, 2022.

 

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Financial Operations Overview

 

We have not generated any revenue to date and have incurred significant operating losses. Our net losses were $85.0 million for the period from January 1, 2023 through September 30, 2023 (the “Successor Period”) and $9.4 million for the period from January 1, 2022 through September 30, 2022 (the “Predecessor Period”). As of September 30, 2023, we had an accumulated deficit of approximately $89.9 million and cash of $1.6 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses. We expect our expenses will increase in connection with our ongoing activities as we:

 

  progress development of VAR 200 and IC 100;
     
  prepare and file regulatory submissions;
     
  manufacture our product candidates for clinical trials;
     
  hire additional research and development, finance, and general and administrative personnel;
     
  protect and defend our intellectual property; and
     
  meet the requirements of being a public company.

 

We need additional financing to support our continuing operations. We are seeking to fund our operations through public or private equity or debt financings or other sources, which may include government grants and collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition, ability to pursue our business strategy and ability to continue as a going concern. We will need to raise substantial capital to continue our research and development goals and generate revenues to achieve profitability, and we may never do so.

 

Components of Operating Results

 

Revenue

 

Since inception, we have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements.

 

Operating Expenses

 

Research and Development Expenses

 

Research and development expenses consist of costs incurred in the discovery and development of our product candidates, and primarily include:

 

  expenses incurred under third party agreements with contract research organizations (“CROs”), and investigative sites, that conducted or will conduct our clinical trials and a portion of our pre-clinical activities;
     
  costs of raw materials, as well as manufacturing cost of our materials used in clinical trials and other development testing;
     
  expenses, including salaries, stock-based compensation and benefits of employees engaged in research and development activities;
     
  costs of equipment, depreciation and other allocated expenses; and
     
  fees paid for contracted regulatory services as well as fees paid to regulatory authorities including the U.S. Food and Drug Administration (the “FDA”) for review and approval of our product candidates.

 

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We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid expenses or accrued expenses.

 

Research and development activities are central to our business model. We expect that our research and development expenses will increase for the foreseeable future as we continue clinical development for our product candidates. As products enter later stages of clinical development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Historically, our research and development costs have primarily related to the development of VAR 200 and IC 100. As we advance VAR 200 and IC 100, as well as identify any other potential product candidates, we will continue to allocate our direct external research and development costs to the products. We expect to fund our research and development expenses partially from our current cash and cash equivalents but primarily from any future equity or debt financings, or other capital sources, including potential collaborations with other companies or other strategic transactions.

 

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

 

  the number of clinical sites included in the clinical trials;
     
  the length of time required to enroll suitable patients;
     
  the size of patient populations participating in the clinical trials;
     
  the number of doses a patient receives;
     
  the duration of patient follow-ups;
     
  the development state of the product candidates; and
     
  the efficacy and safety profile of the product candidates.

 

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending, and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory approval for our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay, or modify clinical trials of our product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Product commercialization will take several years and likely millions of dollars in development costs.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, stock-based compensation and related costs for our employees in administrative, executive and finance functions. General and administrative expenses also include professional fees for legal, accounting, audit, tax and consulting services, insurance, human resource, information technology, office, and travel expenses.

 

We expect that our general and administrative expenses will increase in the future as we increase our general and administrative headcount to support our continued research and development and potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services, director and officer insurance, and investor and public relations costs.

 

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Other (Income) Expense

 

Interest expense includes interest on indebtedness and accretion of debt discount which are associated with the unsecured convertible promissory notes which bear interest at a rate equal to 6% per annum.

 

Change in fair value of derivative liability represents the periodic mark-to-market of our derivative liabilities. The Company recorded derivative liabilities that were measured at fair value at issuance, related to the redemption features and put options of certain convertible notes payable.

 

Results of Operations

 

Comparison of the three months ended September 30, 2023 (Successor Period) and the three months ended September 30, 2022 (Predecessor Period)

 

The following table summarizes our results of operations for the Successor for the three months ended September 30, 2023 and for the Predecessor for the three months ended September 30, 2022.

 

   Successor   Predecessor         
   For the Three   For the Three         
   Months Ended   Months Ended         
   September 30,   September 30,   Favorable (Unfavorable) 
(in thousands)  2023   2022   $ Change   % Change 
Operating expenses:                    
Research and development  $674   $2,334   $1,660    71.1%
General and administrative   2,229    1,061    (1,168)   (110.1)%
Total Operating Expenses   2,903    3,395    492    14.5%
                     
Loss from Operations   (2,903)   (3,395)   492    14.5%
                     
Other Income (Expense), Net   -    (298)   298    100.0%
                     
Pre-tax net loss   (2,903)   (3,693)   790    (21.4)%
Income tax benefit   1    -    1    100.0%
Net loss  $(2,902)  $(3,693)  $791    21.4%

 

Research and Development Expenses

 

Research and development expenses were $0.7 million for the three months ended September 30, 2023, a decrease of $1.7 million or 71.1% from the three months ended September 30, 2022. The decrease is primarily attributable to a decrease of $1.7 million in the costs of manufacturing materials of IC 100 for the three months ended September 30, 2022.

 

General and Administrative Expenses

 

General and administrative expenses were $2.2 million for the three months ended September 30, 2023, an increase of $1.2 million or 110.1% from the three months ended September 30, 2022. The increase is primarily attributable to an increase of $0.4 million in professional fees associated with being a public company, a $0.3 million increase in director and officer insurance, a $0.2 million increase for bonus accruals, and $0.1 million increase in marketing costs for investor and public relations.

 

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Other Income (Expense)

 

Total other income (expense), net was zero for the three months ended September 30, 2023, a decrease of $0.3 million or 100.0% from the three months ended September 30, 2022. The change was primarily a result of a decrease in interest and change in fair value of derivative liabilities expense of approximately $0.3 million in the aggregate as a result of convertible debt conversions to equity.

 

Comparison of the nine months ended September 30, 2023 (Successor Period) and the nine months ended September 30, 2022 (Predecessor Period)

 

The following table summarizes our results of operations for the Successor for the nine months ended September 30, 2023 and for the Predecessor for the nine months ended September 30, 2022.

 

   Successor   Predecessor         
   For the Nine   For the Nine         
   Months Ended   Months Ended         
   September 30,   September 30,   Favorable (Unfavorable) 
(in thousands)  2023   2022   $ Change   % Change 
Operating expenses:                    
Research and development  $2,951   $4,120   $1,169    28.4%
General and administrative   9,694    4,526    (5,168)   (114.2)%
Impairment of in-process research and development   69,280    -    (69,280)   (100.0)%
Impairment of goodwill   11,895    -    (11,895)   (100.0)%
Total Operating Expenses   93,820    8,646    (85,174)   (985.1)%
                     
Loss from Operations   (93,820)   (8,646)   (85,174)   (985.1)%
                     
Other Income (Expense), Net   1    (799)   800    100.1%
                     
Pre-tax net loss   (93,819)   (9,445)   (84,374)   893.3%
Income tax benefit   8,860