Azora Therapeutics, Inc. (DE) 10-Q/A for FY2023 Q2
Azora Therapeutics, Inc. (DE) (AZR)
About this 10-Q/A
Azora Therapeutics, Inc. (DE) filed this 10-Q/A on October 30, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $1.09M
- compared with a net loss of $3.85M a year earlier
- Diluted EPS
- $0.96
- compared with -$3.96 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___________ to ___________
Commission File Number:
(Exact name of registrant as specified in its charter)
| State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. |
| | ||
| Address of principal executive offices | Zip Code |
Registrant’s telephone number, including area code
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐ |
| 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 whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
Number of shares of common
stock outstanding as of August 18, 2023 was
ADIAL PHARMACEUTICALS, INC.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item lA. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and those risks identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 (“2022 Form 10-K”). Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Adial,” the “Company,” “we,” “us” and “our” refer to Adial Pharmaceuticals, Inc.
Explanatory Note:
Adial Pharmaceuticals, Inc. is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission (the “SEC”) on August 21, 2023 (the “Original Form 10-Q Filing”) solely to correct the disclosure in Note 1 and 4 to the Notes to the Financial Statements and the Management’s Discussion and Analysis to clarify the disclosure regarding the closing date of the sale of the Purnovate assets and business to reflect the contractual closing date as opposed to the retroactive effective date of the transaction.
This Amendment No. 1 is limited in scope to make the following changes to the Original 10-Q Filing and no other changes have been made to the Original Form 10-Q.
| ● | To amend Part I-Item 1- Notes 1 and 4 to the Notes to the Unaudited Condensed Consolidated Financial Statements. | |
| ● | To amend Part I-Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
| ● | To amend Part II - Item 6. Exhibits to include the following currently dated documents: certifications from the Company’s Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002, which certifications are filed herewith as Exhibits 31.1, 31.2, 32.1 and 32.2. |
This Amendment No. 1 has not been updated or amended to give effect to any subsequent events beyond those that existed as of the original filing date and should thus be read in conjunction with the Original Form 10-Q Filing and any of the company’s other filings with the SEC subsequent to the Original Form 10-Q Filing, together with any amendments to those filings. Other than the filing of the information identified above, this amendment does not modify or update the disclosure in the Original Form 10-Q Filing in any way. Unless otherwise specified or the context otherwise requires, when used in this Amendment No. 1, the terms “we,” “our,” “us,” “Adial,” or the “Company” refer to Adial Pharmaceuticals, Inc. and its subsidiaries.
The Company is concurrently filing Amendment No. 1 to each of its (i) Current Report on Form 8-K filed with the SEC on August 18, 2023 and (ii) the Notification of Late Filing on Form 12B-25 that was filed with the SEC on August 15, 2023.
FORM 10-Q
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Unaudited Financial Statements
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Purnovate sale payments receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Current assets of discontinued operations | ||||||||
| Total Current Assets | ||||||||
| Intangible assets, net | ||||||||
| Equity method investment | ||||||||
| Assets of discontinued operations | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued expenses, related party | ||||||||
| Other current liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Deferred tax liability | ||||||||
| Long-term liabilities of discontinued operations | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and contingencies – see Note 10 | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, | ||||||||
| Common Stock, | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development expenses | $ | $ | $ | $ | ||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other expenses | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) Before Provision For Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Loss from Continuing Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations, net of taxes, including gain on disposal of $2,662,074 | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | $ | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
| Common Stock | Additional Paid In |
Accumulated | Total Shareholders’ |
|||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||
| Equity-based compensation – stock issuances to consultants and employees | — | |||||||||||||||||||
| Sale of common stock, net of transaction costs | ||||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||
| Equity-based compensation – stock issuances to consultants and employees | ||||||||||||||||||||
| Issuance of commitment shares | ||||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Common Stock | Additional Paid In | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||
| Equity-based compensation – stock issuances to consultants and employees | ||||||||||||||||||||
| Sale of common stock and warrants, net of transaction costs | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||
| Equity-based compensation – stock issuances to consultants and employees | ||||||||||||||||||||
| Warrants exercised | ||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Equity-based compensation | ||||||||
| Issuance of commitment shares | ||||||||
| Depreciation of fixed assets | ||||||||
| Change in value of deferred tax liability | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued expenses, related party | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Net cash used in continuing operating activities – continuing operations | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase consideration received for sale of assets | ||||||||
| Net cash used in investing activities – continuing operations | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from sale of common stock | ||||||||
| Proceeds from warrant exercise | ||||||||
| Net cash provided by financing activities – continuing operations | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS-END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Equity consideration received for sale of Purnovate | $ | $ | ||||||
| Reimbursement receivable in connection with sale of Purnovate | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ADIAL PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals, Inc. (“Adial”) was converted from a limited liability company formed on November 23, 2010 under the name Adial Pharmaceuticals, LLC in the Commonwealth of Virginia to a corporation and reincorporated in Delaware on October 1, 2017. Adial is presently engaged in the development of medications for the treatment or prevention of addictions and related disorders.
Adial’s wholly owned
subsidiary, Purnovate, Inc. (“Purnovate”), was acquired on January 26, 2021, having been formed as Purnovate, LLC in December
of 2019. Purnovate was a drug development company with a platform focused on developing drug candidates for non-opioid pain reduction
and other diseases and disorders potentially targeted with adenosine analogs that are selective, potent, stable, and soluble. On May
8, 2023, Adovate, LLC (“Adovate”), a Virginia limited liability company and related party sent a letter exercising its option
effective May 16, 2023 for the purchase of the assets and business of the Company’s wholly owned subsidiary, Purnovate, Inc. and
made payment of the $
In July of 2022, the Company released data from its ONWARD™ Phase 3 pivotal trial of its lead compound AD04 (“AD04”) for the treatment of Alcohol Use Disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”) have indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of Alcohol Use Disorder rather than the previously required abstinence-based endpoints. The Company has held meetings with the FDA and national medicines authorities in Europe to determine the path toward approval of AD04. Key patents have been issued in the United States, the European Union, and other jurisdictions for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist. Due to its mechanism of action, AD04 has the potential to be used for the treatment of other addictive disorders, such as Opioid Use Disorder, obesity, smoking, and other drug addictions.
2 — GOING CONCERN AND OTHER UNCERTAINTIES
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred losses each year since inception and has experienced negative cash flows from operations in each year since inception. Based on the current development plans for AD04 in both the U.S. and international markets and other operating requirements, the Company does not believe that the existing cash and cash equivalents are sufficient to fund operations for the next twelve months following the filing of these consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company has held meetings
with the FDA and various European national authorities to discuss, based on the announced results of its ONWARD Phase 3 trial, the appropriate
next steps towards the expeditious development of AD04 and to seek product approval. In January 2023, the Company entered into a 120 day
exclusive option agreement for the sale of the Purnovate assets and related liabilities. On May 16, this option was exercised for a fee
of $
5
The Company’s continued operations will depend on its ability to raise additional capital through various sources, such as equity and/or debt financings, grant funding, strategic relationships, or out-licensing in order to complete its subsequent clinical trial requirements for AD04. Management is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all. Without additional funding, the Company would be required to delay, scale back or eliminate some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial statements.
Other Uncertainties
Generally, the industry in which the Company operates subjects the Company to a number of other risks and uncertainties that can affect its operating results and financial condition. Such factors include, but are not limited to: the timing, costs and results of clinical trials and other development activities versus expectations; the ability to obtain regulatory approval to market product candidates; the ability to manufacture products successfully; competition from products sold or being developed by other companies; the price of, and demand for, Company products once approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.
With the results of the ONWARD trial having been released and regulatory approaches underway, the risk of delays to the Company’s development programs from COVID-19 are reduced. However, the ongoing effects of the ongoing coronavirus pandemic, such as supply chain disruptions and post-stimulus inflation, may increase non-trial costs such as insurance premiums, increase the demand for and cost of capital, increase loss of work time from key personnel, and negatively impact our other key vendors and suppliers.
3 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principals of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results of operations for the periods presented. The interim operating results are not necessarily indicative of results that may be expected for any subsequent period. These unaudited condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2022, included in the 2022 Form 10-K. The unaudited condensed consolidated financial statements represent the consolidation of the Company and its subsidiary in conformity with GAAP. All intercompany transactions have been eliminated in consolidation.
Reverse Stock Split
On August 4, 2023, the Company
effected a reverse stock split of its outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25.
As a result of the reverse split, the Company had
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include the valuation of the equity method investment, the valuation of stock-based compensation, accruals associated with third party providers supporting clinical trials and pre-clinical activities, estimated fair values of long-lived assets used to assess the value of intangible assets, acquired in-process research and development (“IPR&D”), and goodwill, measurement of contingent liabilities, and income tax asset realization.
6
Basic and Diluted Loss per Share
Basic and diluted loss per share are computed based on the weighted-average outstanding shares of common stock, which are all voting shares. Diluted net loss per share is computed giving effect to all proportional shares of common stock, including stock options and warrants to the extent dilutive. Basic and diluted net income and loss per share for the three and six months ended June 30, 2023 and 2022, were consistent, as the inclusion of all potential common shares outstanding would have an anti-dilutive effect Loss per share from continuing operations for all periods presented.
| Potentially Dilutive Common Shares Outstanding June 30, | ||||||||
| 2023 | 2022 | |||||||
| Warrants to purchase common shares | ||||||||
| Common Shares issuable on exercise of options | ||||||||
| Unvested restricted stock awards | ||||||||
| Total potentially dilutive Common Shares excluded | ||||||||
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At times, the Company’s cash balances may exceed the current insured amounts under
the Federal Deposit Insurance Corporation. At June 30, 2023, the Company exceeded FDIC insurance limits by approximately $
Equity Method Investments
The Company utilizes the equity method to account for investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial decisions of the investee.
Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s proportionate share of the equity method investee’s income or loss. The proportionate share of the income or loss from equity method investments is recognized on a lag.
Currently the Company is not obligated to make additional capital contributions for its equity method investments, and therefore only records losses up to the amount of its total investment, inclusive of other investments in and loans to the investee, which are not accounted for as equity method investments.
Fair Value Measurements
FASB ASC 820, Fair Value Measurement, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:
| ● | Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs). |
| ● | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially). |
| ● | Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available). |
7
The fair value of cash and cash equivalents and accounts payable approximate their carrying value due to their short-term maturities. Financial instruments not recorded at fair value on a recurring basis include an equity method investment that has not be remeasured or impaired in the current period.
Recent Accounting Pronouncements
The FASB has recently issued various updates, most of which represented technical corrections to the accounting literature or application to specific industries. Management does not expect these updates to a have a material impact on the Company’s financial position, results of operations or cash flows.
4 — SALE OF PURNOVATE
On May 8, 2023, Adovate
sent a letter exercising its option effective May 16, 2023 for the purchase of the assets and business of the Company’s wholly
owned subsidiary, Purnovate, Inc. and made payment of the $
Under the terms of the option agreement, on option exercise Adovate
became liable for reimbursement of all Purnovate operating expenses incurred and paid after December 1, 2022, such reimbursement to be
paid within thirty days of execution of the final acquisition agreement with the Company holding a security interest in the assets of
Adovate until the expense reimbursement is paid in full. The Company estimated that, at option exercise, the total reimbursement due was
approximately $
The assets, liabilities, and results of operations of Purnovate, Inc. have been classified as discontinued for purposes of these financial statements and have been retroactively reclassified for past periods.
| Consideration: | ||||
| Cash, including upfronts exercise payments and expense reimbursements prepaid | $ | |||
| Fair value of shares received | ||||
| Expense reimbursements receivable | ||||
| Total consideration | ||||
| Assets sold: | ||||
| Fixed assets, net of depreciation | ||||
| In process R&D | ||||
| Goodwill | ||||
| Operating lease right-of-use asset | ||||
| Deposits and prepaid expenses on assumed contracts | ||||
| Total assets sold | ||||
| Liabilities transferred: | ||||
| Contingent liability | ||||
| Lease liability | ||||
| Payables and accrued liabilities | ||||
| Liabilities transferred | ||||
| Net assets sold | ||||
| Gain on sale | ||||
8
5 — DISCONTINUED OPERATIONS
The business of the Company’s wholly owned subsidiary, Purnovate, Inc., was sold in the three months ended June 30, 2023 (see Note 4.). As a result, all the assets and liabilities and the operating results of Purnovate, Inc. have been classified as discontinued operations.
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid research and development | ||||||||
| Total Current Assets | ||||||||
| Fixed Assets, net | ||||||||
| Acquired in-process research and development | ||||||||
| Right-to-use Asset | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Lease liability, current | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Contingent liabilities | ||||||||
| Lease liability, non-current | ||||||||
| Deferred tax liability | ||||||||
| Total Liabilities | $ | $ | ||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development expenses | $ | ( | ) | $ | $ | $ | ||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income (expense) | ( | ) | ( | ) | ||||||||||||
| Change in value of contingent liability | ( | ) | ( | ) | ||||||||||||
| Gain on sale | ||||||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| Income (loss) before provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ||||||||||||||||
| Gain (loss) from discontinued operations, net of tax | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
9
6 — EQUITY METHOD INVESTMENTS
On June 30, 2023, Adovate, issued
to the Company a
In accordance with ASC 810, the Company determined that Adovate does not qualify as a variable interest entity, nor does the Company have a controlling financial interest in Adovate. The Company has influence over, but does not control, Adovate through its equity interest in Adovate. The Company has determined that the equity it owns is in-substance common stock. The Company is not the primary beneficiary as it does not have the power to direct the activities of Adovate that most significantly impact Adovate’s economic performance. Accordingly, the Company does not consolidate the financial statements of Adovate with those of the Company.
The Company recorded the initial investment in Adovate of $
| Equity investment carrying amount at January 1, 2023 | $ | |||
| Fair value of equity method investment at issue | ||||
| Equity investment carrying amount at June 30, 2023 | $ |
At June 30, 2023, the Company’s maximum exposure to loss is limited
to the Company’s equity investment in Adovate and its reimbursement receivable of $
7 — ACCRUED EXPENSES
| June 30, 2023 | December 31, 2022 | |||||||
| Clinical research organization services and expenses | $ | $ | ||||||
| Employee compensation | ||||||||
| Legal and consulting services | ||||||||
| Pre-clinical and manufacturing expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
10
8 — RELATED PARTY TRANSACTIONS
In January 2011, the Company entered into an exclusive, worldwide license agreement with The University of Virginia Patent Foundation d/b/a the University of Virginia Licensing and Ventures Group (the “UVA LVG”) for rights to make, use or sell licensed products in the United States based upon patents and patent applications made and held by UVA LVG (the “UVA LVG License”). The Company is required to pay compensation to the UVA LVG, as described Note 10. A certain percentage of these payments by the Company to the UVA LVG may then be distributed to the Company’s former Chairman of the Board who currently serves as the Company’s Chief Medical Officer in his capacity as inventor of the patents by the UVA LVG in accordance with their policies at the time.
See Note 10 for related party vendor, consulting, lease, and option agreements.
9 — SHAREHOLDERS’ EQUITY
Standby Equity Purchase Agreement
On May 31, 2023, the Company
entered into an Equity Purchase Agreement with Alumni Capital, LLC (“Alumni”). This agreement constituted a standby equity
purchase agreement (a “SEPA”). Pursuant to the SEPA, the Company has the right, but not the obligation, to sell to Alumni
up to $
Upon the Company’s
entry into and subject to the terms and conditions set forth in the SEPA,
Common Stock Issuances
On February 23, 2023, the
Company entered into a securities purchase agreement (the “2023 Purchase Agreement”) with an accredited institutional investor
(the “Investor”) providing for the issuance of
The Company issued to the
Placement Agent a warrant (the “Placement Agent Warrants”) to purchase up to an aggregate of
2017 Equity Incentive Plan
On October 9, 2017, the Company
adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”); which became effective
on July 31, 2018. On October 13, 2022, by a vote of the shareholders, the number of shares issuable under the 2017 Equity Incentive Plan
was increased to
Stock Options
| Total Options Outstanding | Weighted Average Remaining Term (Years) | Weighted Average Exercise Price | Weighted Average Fair Value at Issue | |||||||||||||
| Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding June 30, 2023 | $ | $ | ||||||||||||||
| Outstanding June 30, 2023, vested and exercisable | $ | $ | ||||||||||||||
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At June 30, 2023, the intrinsic value total of
the outstanding options was
During the six months ended
June 30, 2023,
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Research and development options expense | ||||||||||||||||
| Total research and development expenses | ||||||||||||||||
| General and administrative options expense | ||||||||||||||||
| Stock and warrants issued to consultants and employees | ||||||||||||||||
| Total general and administrative expenses | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
Stock Warrants
| Total Warrants |
Weighted Average Remaining Term (Years) |
Weighted Average Exercise Price |
Average Intrinsic Value |
|||||||||||||
| Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Outstanding June 30, 2023 | $ | $ | ||||||||||||||
10 — COMMITMENTS AND CONTINGENCIES
License with University of Virginia Patent Foundation – Related Party
In January 2011, the Company entered into an exclusive, worldwide license agreement with the University of Virginia Patent Foundation, dba UVA Licensing and Ventures Group (“UVA LVG”) for rights to make, use or sell licensed products in the United States based upon the ten separate patents and patent applications made and held by UVA LVG.
As consideration for the rights
granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty
based on net sales of products covered by the patent-related rights.
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The license agreement may be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to make any milestone, failure to make required payments, or the failure to exercise diligence to bring licensed products to market. In the event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination. The Company is required to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by December 31, 2024 and commencing commercialization of an FDA approved product by December 31, 2025. If the Company were to fail to use commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.
The term of the license continues until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration, abandonment or invalidation will continue in perpetuity on a royalty-free, fully paid basis.
During both the six months
ended June 30, 2023 and 2022, the Company recognized $
Clinical Research Organization (CRO)
On October 31, 2018, the Company
entered into a master services agreement (“MSA”) with Crown CRO Oy (“Crown”) for contract clinical research and
consulting services.
During the six months ended
June 30, 2023, the Company acknowledged and paid the final milestone of $
Service Agreement 1 also estimated
approximately $
Consulting Agreements – Related Party
On March 24, 2019, the Company entered into a consulting agreement
(the “Consulting Agreement”) with Dr. Bankole A. Johnson, who at the time of the agreement was serving as the Chairman
of the Board of Directors, for his service as Chief Medical Officer of the Company. The Consulting Agreement had an initial term of three
years, which was extended in March 2022 for an additional three years, subject to earlier termination by either party with a 30 day notice,
or by the Company for cause. Dr. Johnson resigned as Chairman of the Board of Directors at the time of execution of the consulting agreement.
Under the terms of the Consulting Agreement, Dr. Johnson’s annual fee of $
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Consulting Agreement – Related Party
On October 24, 2022, the Company entered into a Master Services Agreement
(the “MSA”) with Abuwala & Company, LLC, dba as Orbytel, for provision of strategic consulting services. Orbytel made
it known that it intended to utilize the services of the Keswick Group, LLC as a subcontractor in the provision of these services. Tony
Goodman, a director of Company, is the founder and principal of Keswick Group, LLC, therefore Orbytel was considered a related party.
Statement of work #1 (“SOW #1”), executed with the MSA, committed the Company to $
Consulting Agreement – Related Party
On March 15, 2023, the Company
entered into a Master Services Agreement (the “MSA”) with the Keswick Group, LLC for provision of consulting services. Tony
Goodman, a director, is the founder and principal of Keswick Group. Under the terms of this agreement, the Keswick Group is to be paid
$
Other Consulting and Vendor Agreements
The Company has entered into
a number of agreements and work orders for future consulting, clinical trial support, and testing services, with terms ranging between
Litigation
The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of June 30, 2023, the Company did not have any pending legal actions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited consolidated financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2022 that we filed with the SEC on March 30, 2023 (the “2022 Form 10-K”). ln addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties including, but not limited to, those set forth below under “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of the 2022 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission (“SEC”).
Overview
We are a clinical-stage biopharmaceutical company focused on the development of therapeutics for the treatment or prevention of addiction and related disorders. Our lead investigational new drug product, AD04, is a genetically targeted therapeutic agent being developed for the treatment of alcohol use disorder (“AUD”). AD04 was recently investigated in a Phase 3 clinical trial, designated the ONWARD trial, for the potential treatment of AUD in subjects with certain target genotypes, which were identified using our companion diagnostic genetic test. Based on our analysis of the subgroup data from the ONWARD trial, we are now focused on commercializing AD04 in the U.S. and Europe.
We continue to explore opportunities to expand our portfolio in the field of addiction and related disorders such as pain reduction, both through internal development and through acquisitions. Our vision is to create the world’s leading addiction focused pharmaceutical company.
In January 2021, we expanded our portfolio in the field of addiction with the acquisition of Purnovate, LLC via a merger into our wholly owned subsidiary, Purnovate, Inc., (“Purnovate”) and in January 2023, we entered into an option agreement with Adovate LLC (“Buyer”), pursuant to which we granted to the Buyer an exclusive option for a period of one hundred twenty (120) days from the effective date of the Option Agreement for Buyer or its designated affiliate to acquire all of the assets of Purnovate and to assume related liabilities and expenses. On May 8, 2023, Adovate sent a letter exercising its option effective May 16, 2023 and made payment of the $450,000 in fees due on exercise. Effective June 30, 2023, Adovate issued to the Company the equity stake in Adovate due on exercise of the option agreement. On August 17, 2023, the parties agreed that the effective date of the sale would be retroactive to June 30, 2023 and a Bill of Sale, Assignment and Assumption Agreement (“Bill of Sale”) was executed between Purnovate and Adovate, transferring the Purnovate assets to Adovate, with an agreed to retroactive effective date as of June 30, 2023. On August 17, 2023, Purnovate and Adovate also entered into a Letter Agreement which stated that Adovate acquired the assets of Purnovate with a retroactive effective as of June 30, 2023, pursuant to the Bill of Sale.
We have devoted the vast majority of our resources to development efforts relating to AD04, including preparation for conducting clinical trials, providing general and administrative support for these operations and protecting our intellectual property.
We currently do not have any products approved for sale and we have not generated any significant revenue since our inception. From our inception through the date of this Quarterly Report on Form 10-Q, we have funded our operations primarily through the private and public placements of debt and equity securities and equity lines.
Our current cash and cash equivalents are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based our current projections.
We have incurred net losses in each year since our inception, including net losses of approximately $1.8 million and $6.8 million for the six months ended June 30, 2023 and 2022, respectively. We had accumulated deficits of approximately $65.4 and $63.7 million as of June 30, 2023 and December 31, 2022, respectively. Substantially all our operating losses resulted from costs incurred in connection with our research and development programs, from general and administrative costs associated with our operations, and from financing costs.
We will not generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for AD04, which we expect will take a number of years and is subject to significant uncertainty. We do not believe our current cash and equivalents will be sufficient to fund our operations for the next twelve months from the filing of these financial statements.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop AD04.
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Recent Developments
Financial Developments
On April 12, 2023, we held a Special Meeting of Stockholders at which our stockholders approved an amendment to our Certificate of Incorporation, at the discretion of our Board of Directors (the “Board”), to effect a reverse stock split (the “Reverse Stock Split”) with respect to our issued and outstanding Common Stock, including stock held by the Company as treasury shares, at a ratio in the range of 1-for-2 to 1-for-50, with the ratio within such range to be determined at the discretion of the Board. On August 4, 2023, the Company effected the authorized reverse stock split of its outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25. As a result of this split, the Company had 1,218,180 shares of common stock outstanding immediately after effecting the reverse stock split. The Company subsequently redeemed 199 fractional shares of common stock for $1,660.72, leaving 1,217,981 shares outstanding. The shares authorized for issue under the Company’s charter remained 50,000,000 common stock.
On May 31, 2023, we entered into a Purchase Agreement with Alumni Capital LP (“Alumni Capital”). Pursuant to the Purchase Agreement, we have the right to sell to Alumni Capital up to the lesser of (i) $3,000,000 of newly issued shares, subject to increase to $10,000,000 at our option. The timing of any sales are solely at our option and we are under no obligation to sell securities pursuant to this arrangement. Pursuant to the Purchase Agreement, we issued Alumni Capital 7,983 (post reverse split) shares of common stock as commitment shares. Under the applicable rules of the Nasdaq Stock Market LLC (“Nasdaq”), in no event may we issue to Alumni Capital under the Purchase Agreement more than 236,663 post reverse stock split (5,916,575 pre-reverse stock split) shares of our Common Stock (including the commitment shares, we issue to Alumni Capital), which represents 19.99% of the shares of the Common Stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless we obtain stockholder approval to issue shares of Common Stock in excess of the Exchange Cap, provided further that the Exchange Cap does not apply to the extent the purchase price is equal to or exceeds the Minimum Price (as defined in the Purchase Agreement).
Results of operations for the three months ended June 30, 2023 and 2022 (rounded to nearest thousand)
The following table sets forth the components of our statements of operations in dollars for the periods presented:
| For the Three Months Ended June 30, | Change | |||||||||||
| 2023 | 2022 | (Decrease) | ||||||||||
| Research and development expenses | $ | 430,000 | $ | 680,000 | $ | (250,000 | ) | |||||
| General and administrative expenses | 1,047,000 | 2,564,000 | (1,517,000 | ) | ||||||||
| Total Operating Expenses | 1,477,000 | 3,244,000 | (1,767,000 | ) | ||||||||
| Loss From Operations | (1,529,000 | ) | (3,244,000 | ) | 1,767,000 | |||||||
| Interest income | 19,000 | 7,000 | 12,000 | |||||||||
| Other expenses | (52,000 | ) | — | (52,000 | ) | |||||||
| Total other income (expenses) | (33,000 | ) | 7,000 | (40,000 | ) | |||||||
| Loss from continuing operations | $ | (1,510,000 | ) | $ | (3,237,000 | ) | $ | 1,727,000 | ||||
| Loss from discontinued operations, net of tax | 2,597,000 | (611,000 | ) | 3,208,000 | ||||||||
| Net loss | 1,087,000 | (3,848,000 | ) | 4,935,000 | ||||||||
Research and development (“R&D”) expenses
Research and development expenses decreased by $250,000 (37%) in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was driven partly by a reduction of approximately $96,000 in direct development costs of AD04 as trial activities, which were winding down in the second quarter of 2022, were no longer taking place in the second quarter of 2023, replaced by less expensive regulatory consultations and data analysis. In addition, a one-time accrual of a $155,000 for a royalty due the University of Virginia Patent Foundation took place in the second quarter of 2022.
General and administrative expenses (“G&A”) expenses
General and administrative expenses decreased by $1,517,000 (59%) in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was due to lower general and administrative non-equity compensation expenses of approximately $688,000 and lower general and administrative equity compensation expense of approximately $417,000, which were due to reduced bonus payments and headcounts. We also considerably reduced IR/PR expenses by approximately $145,000 and strategic consultant expense by $115,000, along with a number of other, smaller cost reductions.
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Total Other income
Total other income decreased by approximately $40,000 in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was due to the expense of the issuance of commitment shares required to obtain our standby equity purchase agreement, which expense was only partially offset by increased average balance of funds held in our money market account, together with an increase in short term money market interest rates.
Gain (loss) from discontinued operations, net of tax
The gain from discontinued operations increased by approximately $3,208,000 (525%) in the three months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was driven by the one-time gain of sale of approximately $2,662,000 recognized with the sale of Purnovate’s business, amplified by a net decrease of direct R&D expenses, such a lab supplies and preclinical testing, of approximately $217,000 with the transfer of Purnovate’s activities to Adovate after option exercise. Purnovate overhead such as rents and repair costs also decreased with the transfer of operation costs to Adovate in May, 2023. This decrease was augmented by a decrease of Purnovate personnel expenses of approximately $92,000, as Purnovate employees transferred to Adovate.
Due to the timing and availability of Adovate’s financial information, the Company will record its share of losses of Adovate, under the equity method of accounting, on a one quarter lag basis and therefore, did not recognize any proportionate share of Adovate results of operations during the three and six months ended June 30, 2023. Adovate, which began operations in May of 2023 and, as a recently formed entity, financial information of Adovate as of and for the three and six months ended June 30, 2023 is not available at the date of these statements.
Results of operations for the six months ended June 30, 2023 and 2022 (rounded to nearest thousand)
The following table sets forth the components of our statements of operations in dollars for the periods presented:
| For the Six Months Ended June 30, | Change | |||||||||||
| 2023 | 2022 | (Decrease) | ||||||||||
| Research and development expenses | $ | 796,000 | $ | 722,000 | $ | 74,000 | ||||||
| General and administrative expenses | 2,951,000 | 4,985,000 | (2,034,000 | ) | ||||||||
| Total Operating Expenses | 3,747,000 | 5,707,000 | (1,960,000 | ) | ||||||||
| Loss From Operations | (3,799,000 | ) | (5,707,000 | ) | 1,960,000 | |||||||
| Interest income | 48,000 | 12,000 | 36,000 | |||||||||
| Other expense | (52,000 | ) | — | (52,000 | ) | |||||||
| Total other income (expenses) | (4,000 | ) | 12,000 | (33,000 | ) | |||||||
| Income (loss) from continuing operations | $ | (3,751,000 | ) | (5,695,000 | ) | 1,944,000 | ||||||
| Loss from discontinued operations, net of tax | 1,932,000 | (1,060,000 | ) | 2,992,000 | ||||||||
| Net income (loss) | 1,819,000 | (6,755,000 | ) | 4,936,000 | ||||||||
Research and development (“R&D”) expenses
Research and development expenses increased by $74,000 (10%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was due to a substantial increase in direct development expenses of about $292,000 from increased use of regulatory consultants and final windup CRO fees associated in the second quarter of 2023 along with an increase in equity compensation of research and development employees of about $27,000; these increases were partially offset by reduced cash compensation of research and development employees of about $96,000 and a one-time accrual of a $155,000 royalty due the University of Virginia Patent Foundation that took place in the second quarter of 2022.
General and administrative expenses (“G&A”) expenses
General and administrative expenses decreased by $2,034,000 (41%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The primary driver of this decrease were significant reductions in equity compensation of approximately $914,000 and non-equity compensation of approximately $640,000 to general and administrative employees, which were due to reduced bonus payments and headcounts. We also considerably reduced IR/PR expenses by about $246,000, use of strategic consultants by $163,000, and reduced IT support expense by approximately $58,000.
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Total Other income
Total other income decreased by approximately $40,000 in the three months ended June 30, 2023 compared to the six months ended June 30, 2022. This decrease was due to the expense of the issuance of commitment shares required to obtain our standby equity purchase agreement, which expense was somewhat offset by increased average balance of funds held in our money market account, together with an increase in short term money market interest rates.
Loss from discontinued operations, net of tax
The income from discontinued operations increased by approximately $2,992,000 (282%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was driven by the one-time gain of sale of approximately $2,662,000 recognized with the sale of Purnovate’s business, amplified by a net decrease of direct R&D expenses, such a lab supplies and preclinical testing, of approximately $413,000 with the transfer of Purnovate’s activities to Adovate after option exercise, which was preceded by a reduction in R&D activity to conserve resources while Adovate obtained funds to exercise its option. Purnovate overhead such as rents and repair costs also decreased with the transfer of operation costs to Adovate in May, 2023. These decreases were somewhat offset by an increase in salary expenses of approximately $160,000, as additional personnel, particularly management, were added to Purnovate in preparation for its purchase.
Liquidity and capital resources at June 30, 2023
Our principal liquidity needs have historically been working capital, R&D, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we develop and eventually commercialize our compound, if approved. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, private placements and our equity line, as well as other equity financings and the issuance of debt securities prior to that. On July 31, 2018, we closed our initial public offering.
On February 23, 2023, we entered into an equity purchase agreement with an accredited investor for the purchase of 73,170 shares of commons stock at at-the-market price of $10.25 per share in a registered direct offering. We realized expected net proceeds from the offering of approximately $610,000 after deducting fees due to the placement agent and our transaction expenses. We also issued the placement agent warrants to purchase 7,317 shares of common stock at an exercise price of $10.25 per share.
On May 8, 2023, we received notice of exercise and an exercise fee of $450,000 for exercise of the Purnovate option agreement from the holder of the option, Adovate, LLC. On June 30, 2023 a prepayment of $350,000 was made by Adovate against its reimbursement obligations. Further reimbursement of previously incurred costs from Adovate of approximately $740,000 are expected. The exercise of the option also transfers a number of our previous obligations to Adovate, including significant ongoing personnel expenses, and pre-clinical research and manufacturing contract obligations from us to Adovate. Nonetheless, our current cash and cash equivalents are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based our current projections. This raises considerable doubt about our ability to continue as a going concern. As of June 30, 2023, cash and cash equivalents were $1.2 million as compared to $4.0 million as of December 31, 2022. With Adovate’s option exercise, our cash burn rate is expected to be significantly reduced, which, together the with the cash exercise fee and partial expense reimbursement already received and an estimated $740 thousand in additional expense reimbursements, is expected to maintain our operations without further funding into the first quarter of 2024. Nonetheless, we will require additional funding to continue development of AD04. There is no assurance that funds could be raised in that period on acceptable terms.
18
We will also require additional financing as we continue to execute our overall business strategy. Our current planning assumption is that we will need to conduct two Phase 3 trials in order to minimize risk, optimize timing and costs, as well as improve the probability of regulatory authority acceptance and approval in the US and Europe. The trials are expected to cost approximately $25 million in total to complete. We are currently in active discussions with potential commercial partners that have expressed an interest in supporting the trials and advancing commercialization in both the US and European markets. Our liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and industry factors. Our continued operations will depend on our ability to raise additional capital through various potential sources, such as equity and/or debt financings, grant funding, strategic relationships, or out-licensing in order to complete our subsequent clinical trial requirements for AD04. Management is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all. Without additional funding, we would be required to delay, scale back or eliminate some or all of our planned research and development programs, including subsequent clinical trials of AD04, which would likely have a material adverse effect on us and our financial statements.
If we raise additional funds by issuing equity securities or convertible debt, our shareholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.
Cash flows
| For the Six Months Ended June 30, | ||||||||
| (rounded to nearest thousand) | 2023 | 2022 | ||||||
| Provided by (used in) | ||||||||
| Operating activities | $ | (4,193,000 | ) | (6,031,000 | ) | |||
| Investing activities | 800,000 | – | ||||||
| Financing activities | 610,000 | 9,126,000 | ||||||
| Net increase in cash and cash equivalents | $ | (2,783,000 | ) | 3,095,000 | ||||
Net cash used in operating activities
Cash used in operating activities decreased by approximately $1,838,000 in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. This decrease was slightly less than the decrease in operating expenses of approximately $1,961,000 when comparing the two periods. This difference was due to the use of approximately $681,000 more in cash to pay previously accrued expenses in the six months ended June 30, 2023 compared to the six months ended June 30, 2023, which was only partially offset by the use of approximately $347,000 more to reduce accounts payable when comparing the same two periods.
Net cash provided by investing activities
Cash provided by investing activities increased by $800,000 in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. All of this difference was due to the $800,000 in cash provided by the Purnovate sale in the second quarter of 2023.
Net cash provided by financing activities
Cash provided by financing activities decreased by approximately $8,516,000 in the six months ended June 30, 2023, compared to the six months ended June 30, 2022. In the first quarter of 2022, we engaged in a large fundraising round to obtain sufficient cash for completion of our trial activities and the ramp up of Purnovate projects. In the first quarter of 2023, with a lower per share market value, reduced month-to-month cash needs, and the expectation that the sale of Purnovate would provide additional cash, we determined to make a more modest financing.
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Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements, if any.
Critical Accounting Estimates
The preparation of the financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, our expected liquidity needs and expected future cash positions, and the reported amounts of sales and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including those related to prepaid research and development, accruals associated with third party providers supporting clinical trials, realization of income tax assets, as well as the fair value of stock-based compensation to employees and service providers. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our financial statements as they occur.
While our significant accounting policies are more fully described in Note 3 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and in Note 3 to our financial statements included in our annual report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
R&D Expenses
Recognition and accrual of expenses associated with our clinical trial are dependent on the judgment of our contractors and subcontractors in their reporting and communication of information to us. Occurrence of certain fees to our clinical research organization, clinical trial sites, pre-clinical testing vendor, and subcontractors are tied to events, for which the determination of likelihood requires judgment both on our part and on the part of our contractors.
Stock Based Compensation
We estimate the fair value of options and stock warrants granted using the Black Scholes Merton model. We estimate when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of equity-based compensation expense is recognized. If the award is deemed probable of being earned, related equity-based compensation expense is recorded. The fair value of an award ultimately expected to vest is recognized as an expense, net of forfeitures, over the requisite service periods in our statements of operations, which is generally the vesting period of the award.
The Black Scholes Merton model requires the input of certain subjective assumptions and the application of judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, the expected dividend yield, and the expected term of the awards. In addition, the recognition of equity-based compensation expense is impacted by our forfeitures, which are accounted for as they occur.
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The assumptions used in our option pricing model represent management’s best estimates. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future. The key assumptions included in the model are as follows:
| ● | Expected volatility — We determine the expected price volatility based on the historical volatilities of a peer group as we do not have a sufficient trading history for our shares of common stock to determine expected volatility for the entire expected life of our options and other equity based awards. We therefore blend our available historical volatility data with volatility data on our industry peers. Industry peers consist of several public companies in the bio-tech industry similar to us in size, stage of life cycle and financial leverage. We intend to continue to blend peer data with our own using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation. Starting in 2020, we have begun blending data on our historical volatility together with this peer group of companies, the proportion of our volatility used growing as the period of our historical volatility becomes longer. |
| ● | Risk-free interest rate — The risk free rate was determined based on yields of U.S. Treasury Bonds of comparable terms. |
| ● | Expected dividend yield — We have not previously issued dividends and do not anticipate paying dividends in the foreseeable future. Therefore, we used a dividend rate of zero based on our expectation of additional dividends. |
| ● | Expected term —The expected term of the options was estimated using the simplified method. |
Commitments and Contingencies
We follow subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Our legal costs associated with contingent liabilities are recorded to expense as incurred.
Equity Method Investments
We apply the equity method of accounting to investments when we have significant influence, but not controlling interest, in the investee. We exercise judgment regarding the level of influence over each equity method investment, including considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions, and material intercompany transactions. We assess investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Determining fair value for investments in privately held entities could, if there is not recent or comparable trading in the investee’s equity, require using a valuation model, which would include significant judgment and estimates.
Equity method investments are measured at cost minus impairment, if any, plus or minus our proportionate share of the equity method investee’s income or loss. The proportionate share of the income or loss from equity method investments is recognized on a lag. Currently we are not obligated to make additional capital contributions for our equity method investments, and therefore only record losses up to the amount of our total investment, inclusive of other investments in and loans to the investee, which are not accounted for as equity method investments.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. We have identified material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified to date include (i) lack of formal risk assessment under COSO framework: (ii) policies and procedures which are not adequately documented; (iii) lack of proper approval processes, review processes and documentation for such reviews; (iv) insufficient GAAP experience regarding complex transactions and ineffective review processes over period end financial disclosure and reporting; (v) deficiencies in the risk assessment, design and policies and procedures over information technology general controls; and (vi) insufficient segregation of duties.
Due to the material weaknesses in internal control over financial reporting as described below, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.
Notwithstanding the material weaknesses described above, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that unaudited condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this quarterly report.
Changes in Internal Control
There has been no change in our internal control procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 6. Exhibits
The exhibit index set forth below is incorporated by reference in response to this Item 6.
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No.1 to the report to be signed on its behalf by the undersigned thereunto duly authorized.
| ADIAL PHARMACEUTICALS, INC. | ||
| By: | /s/ Cary J. Claiborne | |
| Name: | Cary J. Claiborne | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |
| By: | /s/ Joseph Truluck | |
| Name: | Joseph Truluck | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
Dated: October 30, 2023
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cary J. Claiborne, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q/A of Adial Pharmaceuticals, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 30, 2023 | By: | /s/ Cary J. Claiborne |
| Cary J. Claiborne | ||
| President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph Truluck, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q/A of Adial Pharmaceuticals, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 30, 2023 | By: | /s/ Joseph Truluck |
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Adial Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q/A for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cary J. Claiborne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| Date: October 30, 2023 | By: | /s/ Cary J. Claiborne |
| Name: | Cary J. Claiborne | |
| Title: |
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Adial Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q/A for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph Truluck, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| Date: October 30, 2023 | By: | /s/ Joseph Truluck |
| Name: | Joseph Truluck | |
| Title: |
Chief Financial Officer (Principal Financial Officer) |