Item 1A. Risk Factors
Investing in our securities involves
a high degree of risk. In addition to the risks related to our business set forth in this Annual Report on Form 10-K and the other
information included and incorporated by reference in this Annual Report on Form 10-K, you should carefully consider the risks
described below before purchasing our securities. Additional risks, uncertainties and other factors not presently known to us or
that we currently deem immaterial may also impair our business operations.
Risks Relating to our Company
We have incurred net losses every
year and quarter since our inception and anticipate that we will continue to incur net losses in the future.
We are a clinical stage biotechnology pharmaceutical
company that is focused on the discovery and development of medications for the treatment of addictions and related disorders of
AUD in patients with certain targeted genotypes. We have a limited operating history. Investment in biopharmaceutical product development
is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product
candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially
viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we
continue to incur significant research and development and other expenses related to our ongoing operations. To date, we have not
generated positive cash flow from operations, revenues, or profitable operations, nor do we expect to in the foreseeable future.
As of December 31, 2020, we had an accumulated deficit of approximately $31.5 million.
Even if we succeed in commercializing our
product candidate or any future product candidates, we expect that the commercialization of our product will not begin until 2024
or later, we will continue to incur substantial research and development and other expenditures to develop and market additional
product candidates and will continue to incur substantial losses and negative operating cash flow. We may encounter unforeseen
expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our
future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior
losses and expected future losses have had and will continue to have an adverse effect on our shareholders’ equity and working
capital.
We currently have no product revenues and may not generate revenue at any time in the near future, if at all. Currently, we have
no products approved for commercial sale.
We currently have no products for sale
and we cannot guarantee that we will ever have any drug products approved for sale. We and our product candidate are subject to
extensive regulation by the FDA, and comparable regulatory authorities in other countries governing, among other things, research,
testing, clinical trials, manufacturing, labeling, promotion, marketing, adverse event reporting and recordkeeping of our product
candidates. Until, and unless, we receive approval from the FDA or other regulatory authorities for our product candidates, we
cannot commercialize product candidates and will not have product revenues. Even if we successfully develop products, achieve regulatory
approval, and then commercialize our products, we may be unable to generate revenue for many years, if at all. We do not anticipate
that we will generate revenue for at least several years, if at all. If we are unable to generate revenue, we will not become profitable,
and we may be unable to continue our operations. For the foreseeable future, we will have to fund all of our operations from equity
and debt offerings, cash on hand and grants. In addition, changes may occur that would consume our available capital at a faster
pace than expected, including changes in and progress of our development activities, acquisitions of additional candidates and
changes in regulation. Moreover, preclinical and clinical testing may not start or be completed as we forecast and may not achieve
the desired results. Therefore, we expect to seek additional sources of funding, such as additional financing, grant funding or
partner or collaborator funding, which additional sources of funding may not be available on favorable terms, if at all.
We have had limited operations to
date and there can be no assurance that we will be able to execute on our business strategy.
We are a clinical stage company and have
had limited operations to date. We have yet to demonstrate our ability to overcome the risks frequently encountered in our industry
and are still subject to many of the risks common to such enterprises, including our ability to implement our business plan, market
acceptance of our proposed business and lead product, under-capitalization, cash shortages, limitations with respect to personnel,
financing and other resources, competition from better funded and experienced companies, and uncertainty of our ability to generate
revenues. In fact, though individual team members have experience running clinical trials, as a company we have yet to prove that
we can successfully run a clinical trial. There is no assurance that our activities will be successful or will result in any revenues
or profit, and the likelihood of our success must be considered in light of the stage of our development. In addition, no assurance
can be given that we will be able to consummate our business strategy and plans, or that financial, technological, market, or other
limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. We have
insufficient results for investors to use to identify historical trends. Investors should consider our prospects in light of the
risk, expenses and difficulties we will encounter as an early stage company. Our revenue and income potential is unproven and our
business model is continually evolving. We are subject to the risks inherent to the operation of a new business enterprise, and
cannot assure you that we will be able to successfully address these risks.
We and our independent registered
public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
We have suffered recurring losses from
operations based on our development plans and our operating requirements. These conditions, among others, considered in the aggregate
raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the issuance
of the accompanying financial statements. Although the funds raised as a result of the completion of our IPO, the receipt of proceeds
from the exercise of warrants, and completion of various follow on financings have sustained our operations through 2020, based
on our current development plans and operating requirements, we project that, without additional funding we will have fully expended
our funds in the fourth quarter of 2021. We have executed an equity purchase agreement (the “Equity Purchase Agreement”)
with Keystone Capital, LLC (‘Keystone Capital”) , which allows us to obtain, depending on our stock’s market
price and fulfillment of certain conditions, up to $15 million in equity financing, of which we have already raised $2.0 million.
However, since the market price of our stock is volatile, we cannot state with certainty how much, if any, of the remaining funding
will be available. The actual number of shares that are sold to Keystone Capital may depend based on a number of factors, including
the market price of the common stock during the sales period, during which sales cannot take place if the market price of a share
of our common stock is below one dollar. Actual gross proceeds may be less than $15.0 million, which may impact our future liquidity.
Because the price per share of each share sold to Keystone Capital will fluctuate during the sales period, it is not currently
possible to predict the number of shares that will be sold or the actual gross proceeds to be raised in connection with those sales.
Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we cannot raise
the necessary capital to continue as a viable entity, we could experience a material adverse effect on our business and our stockholders
may lose some or all of their investment in us.
We will need to secure additional
financing in order to support our operations and fund our current and future clinical trials. We can provide no assurances that
any additional sources of financing will be available to us on favorable terms, if at all. Our forecast of the period of time through
which our current financial resources will be adequate to support our operations and the costs to support our general and administrative,
selling and marketing and research and development activities are forward-looking statements and involve risks and uncertainties.
If we do not succeed in raising additional
funds on acceptable terms, we may be unable to complete planned product development activities or obtain approval of our product
candidate from the FDA and other regulatory authorities. We do not have any committed sources of capital other than our equity
line with Keystone Capital for which there can be no assurance that we will meet the use requirements. Moreover, if our trial activities
are significantly delayed due to the coronavirus pandemic, we would not be able to reach database lock with cash on hand even with
receipt of the grants to which we have applied. In such case, we would need to obtain additional funding, either through other
grants or through potentially dilutive means. In any case, we will need to raise additional capital to complete our development
program and to meet our long-term business objectives.
Cash and cash equivalents at the date of
this annual report filing on form 10-K will not be sufficient to fund our operations for the next twelve months, given current
expectations. We will require additional financing as we continue to execute our business strategy, including that we will require
additional funds in order for additional Phase 3 trials of AD04, as well as any additional clinical trials or other development
of any products we may acquire or license, including those acquired from Purnovate. Our liquidity may be negatively impacted as
a result of a research and development cost increases in addition to general economic and industry factors. We anticipate that,
to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, additional
equity financings or a combination of these potential sources of liquidity. In addition, we may raise additional funds to finance
future cash needs through grant funding and/or corporate collaboration and licensing arrangements. If we raise additional funds
by issuing equity securities or convertible debt, including pursuant to our Equity Purchase Agreement with Keystone Capital, our
stockholders 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. The covenants under future credit facilities may limit our ability
to obtain additional debt financing. 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.
Additional financing, which is not in place
at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, from a credit
facility or strategic partnership coupled with an investment in us or a combination of both. Our ability to raise capital through
the sale of equity may be limited by the various rules of the Securities and Exchange Commission (the “SEC”) and The
Nasdaq Capital Market (the “Nasdaq”), which place limits on the number of shares of stock that may be sold. Equity
issuances would have a dilutive effect on our stockholders. We may be unable to raise sufficient additional financing on terms
that are acceptable to us, if at all. Our failure to raise additional capital and in sufficient amounts may significantly impact
our ability to expand our business. For further discussion of our liquidity requirements as they relate to our long-term plans,
see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources.”
We have identified weaknesses in
our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional
material weaknesses will not occur in the future.
As a public company, we are subject to
the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act. We expect that the requirements of these rules and
regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult,
time consuming and costly, and place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures, and internal controls over financial reporting.
We do not yet have effective disclosure
controls and procedures, or internal controls over all aspects of our financial reporting. We are continuing to develop and refine
our internal controls over financial reporting . Our management is responsible for establishing and maintaining adequate internal
control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We will be required to expend time and
resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot
assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses
in the future.
We have identified material weaknesses
in our internal control 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) policies and procedures
which are not yet adequately documented, (ii) approval processes and review processes and documentation for such reviews, (iii)
GAAP experience regarding complex transactions and reporting, and (iv) optimal segregation of duties and levels of oversight. As
such, our internal controls over financial reporting were not designed or operating effectively.
We will be required to expend time and
resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot
assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses
in the future.
Our current controls and any new controls
that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting
from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting
may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their
implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result
in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control
over financial reporting could also adversely affect the results of management reports and independent registered public accounting
firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports
that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting
could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative
effect on the market price of our common stock.
Our independent registered public accounting
firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an
“emerging growth company” as defined in the JOBS Act and meet other requirements. At such time, our independent registered
public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal
control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and
internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause
a decline in the market price of our common stock.
We rely on a license to use various
technologies that are material to our business and if the agreement were to be terminated or if other rights that may be necessary
or we deem advisable for commercializing our intended products cannot be obtained, it would halt our ability to market our products
and technology, as well as have an immediate material adverse effect on our business, operating results and financial condition.
Our prospects are significantly dependent
upon the UVA LVG License. The UVA LVG License grants us exclusive, worldwide rights to certain existing patents and related intellectual
property that covers AD04, our lead and currently only product candidate. If we breach the terms of the UVA LVG License, including
any failure to make minimum royalty payments required thereunder or failure to reach certain developmental milestones and completion
of deadlines, including, submitting an NDA by December 31, 2024 and commencing commercialization of an FDA approved product by
December 31, 2025, or other factors, including but not limited to, the failure to comply with material terms of the Agreement,
the licensor has the right to terminate the license. If we were to lose or otherwise be unable to maintain this license on acceptable
terms, or find that it is necessary or appropriate to secure new licenses from other third parties, we would not be able to market
our products and technology, which would likely require us to cease our current operations which would have an immediate material
adverse effect on our business, operating results and financial condition.
Our business is dependent upon the
success of our lead product candidate, AD04, which requires significant additional clinical testing before we can seek regulatory
approval and potentially launch commercial sales. We do not have any other products in clinical development.
Our business and future success depends
upon our ability to obtain regulatory approval of and then successfully commercialize our lead investigational product candidate,
AD04. AD04 is in clinical stage development. To date, our main focus and the investment of a significant portion of our efforts
and financial resources has been in the development of our lead and only investigational product candidate, AD04, for which we
are currently conducting the ONWARD Phase 3 clinical trial with approximately 290 patients in Scandinavia and Central and Eastern
Europe, which targets the reduction of risk drinking (heavy drinking of alcohol) in subjects that possess selected genetics of
the serotonin transporter and/or 5-HT3 receptor gene. We expect that at least one additional Phase 3 clinical trial will be required
for approval, as well as, one or more supportive clinical studies Even though we are pursuing a registration pathway based on specific
FDA input and guidance and the EMA precedents and guidance, there are many uncertainties known and unknown that may affect the
outcome of the trial. These include adequate patient enrollment, adequate supply of our product candidate, potential changes in
the regulatory landscape, and the results of the trial being successful.
All of our future product candidates, as
well as AD04, will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions,
substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can
generate any revenue from product sales. We expect AD04 will need at least two Phase 3 trials (including the ONWARD Phase 3 trial
are conducting in Scandinavia and Central and Eastern Europe) and one or more supportive clinical studies to gain approval in either
the U.S. or Europe for AUD and additional development activity, including, without limitation, clinical trials, in order to seek
approval for the use of AD04 to treat any other indications (e.g., such as opioid use disorder, gambling addiction, smoking cessation,
and other drug addictions). In addition, because AD04 is our most advanced product candidate and there is limited history information
on long-term effects of our proposed dosage, there is always a chance of developmental delays or regulatory issues or other problems
arising, with our development plans and depending on their magnitude, our business could be significantly harmed. In any case,
the costs associated with completion of our ONWARD Phase 3 trial, a second, confirmatory trial, commercialization of AD04, and
the costs of developing AD04 for use in other indications are significant, and will require obtaining funding, possibly through
equity sales, before AD04 generates revenue.
We may apply to the FDA for the AD04 program to be designated
as a fast track development program, accelerated approval, priority review, or breakthrough therapy designation. Designation as
a fast track development program, accelerated approval, priority review, or breakthrough therapy designation is within the discretion
of the FDA. Accordingly, even if we believe that one of our product candidates meets the criteria for designation as a fast track
development program, accelerated approval, priority review, or breakthrough therapy designation, the FDA may disagree and instead
determine not to make such designation. Even if we receive a fast track development program, accelerated approval, priority review,
or breakthrough therapy designation, the receipt of such designation or approval for a product candidate may not result in a faster
development of any product candidate or approval process for product candidate. In addition, even if one or more of our product
candidates qualify as fast track development program, accelerated approval, priority review, or breakthrough therapy designation,
the FDA may later decide that the product candidates no longer meet the conditions for qualification or decide that the time period
for FDA review or approval will not be shortened and the designation may result in no benefit to the Company.
Our future success depends heavily on our
ability to successfully manufacture, develop, obtain regulatory approval, and commercialize AD04, which may never occur. We currently
generate no revenues from our product candidate, and we may never be able to develop or commercialize a marketable drug.
The active ingredient of our product
candidate, ondansetron, is currently available in generic form.
Ondansetron, the active pharmaceutical
ingredient (“API”) of our current drug treatment, was granted FDA approval as Zofran® in January 1991
and is approved in many foreign markets. Ondansetron is commercially available in generic form, but not available: (i) at the formulation/dosage
levels expected to be marketed by us, or (ii) with a requirement to use a diagnostic biomarker, as we expect to be the case with
AD04. Although ondansetron has been approved to treat nausea and emesis it has not been approved to treat AUD and it has not been
approved for daily long-term use as planned by us. Clinical testing to date of ondansetron at the higher doses used to treat nausea/emesis
have not shown effectiveness in treating AUD or any other addictive disorder; however, if a third party conducted a Phase 3 clinical
program and showed success treating AUD at those doses, we could not prevent such third party from marketing ondansetron for AUD
at those doses.
Results from clinical studies suggest that
high intravenous doses of ondansetron may affect the electrical activity of the heart. In a Drug Safety Communication dated June
29, 2012, the FDA stated that: “A 32 mg single intravenous dose of ondansetron (Zofran, ondansetron hydrochloride, and generics)
may affect the electrical activity of the heart (QT interval prolongation), which could pre-dispose patients to develop an abnormal
and potentially fatal heart rhythm known as Torsades de Pointes.” In addition: “No single intravenous dose should exceed
16 mg.” There are also several recent lawsuits claiming that Zofran® used for the unapproved use of morning
sickness causes birth defects. Although we do not believe that our dosage will cause such adverse event there can be no assurance
that the negative side effects of the generic drug that have been found in higher dosages will not occur in our dosage or otherwise
deter potential users of our product candidate and adversely impact sales of our product candidate. If we were to be required to
have such a warning on our drug label, patients may be deterred from using our product candidates.
In addition, we also face the risk, that
doctors will prescribe off label, the generic form of ondansetron to treat AUD despite the different dosage of ondansetron in the
generic form from that in AD04, the lack of demonstrated clinical efficacy against AUD at the currently available doses (i.e.,
the Zofran ® and approved generics), and the potential safety concerns if the currently available/higher doses are
taken chronically as would be needed for AUD or other addictions. Physicians, or their patients, could divide the lowest dose existing
oral tablet into more than ten parts to approximate the necessary AD04 dosage.
Although we believe that any attempt by
competitors to reformulate and market ondansetron at our intended dosage levels, while technically feasible, infringes on our intellectual
property rights, and should, accordingly, be actionable, we cannot give assurances that we would be successful in defending our
rights or that we will have access to sufficient funds necessary to successfully prosecute any such violations of, or infringements
on, our intellectual property rights. Additionally, we cannot ensure investors that other companies will not discover and seek
to commercialize low doses of ondansetron, not currently available, for other indications.
Coronavirus could adversely impact
our business, including our clinical trials.
In December 2019, a novel strain of coronavirus,
COVID-19, was reported to have surfaced in Wuhan, China. Since then, the COVID-19 coronavirus has spread to multiple countries,
including countries in Europe which we have planned or active clinical trial sites. As the COVID-19 coronavirus continues to spread
around the globe, we will likely experience disruptions that could severely impact our business and clinical trials, including:
● delays or difficulties in enrolling patients in our clinical trials;
In addition, the outbreak of the coronavirus
(“COVID-19”) could continue to disrupt our operations due to absenteeism by infected or ill members of management or
other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting
others in our office or laboratory facilities, or due to quarantines. COVID-19 illness could also impact members of our Board of
Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene
the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.
The global outbreak of the COVID-19 coronavirus
continues to rapidly evolve. The extent to which the COVID-19 coronavirus may impact our business and clinical trials will depend
on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread
and possible resurgences of the disease, the duration of the outbreak, travel restrictions and social distancing in the United
States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States
and other countries to contain and treat the disease.
While there exists a large body of
evidence supporting the safety of our primary API, ondansetron, under short-term use, there are currently no long-term use clinical
safety data available.
We intend to market our products, particularly
AD04, for long-term use by patients seeking to reduce their number of days of heavy drinking, and we assume future sales volumes
reflecting such extended use.
Studies of Zofran ® conducted
as part of its FDA and other regulatory agencies review process found that the drug is well-tolerated and results in few adverse
side effects at dosages almost 100 times the dosage expected to be formulated in AD04. However, to the best of our knowledge, no
comprehensive clinical study has been performed to date that has evaluated the safety profile of ondansetron for long-term use.
We expect the FDA will require us to provide safety data in at least 100 patients for 12 months and can offer no assurances that
safety results of these long term use studies will lead to any subsequent approval for long-term use. There can be no assurance
that long-term usage of ondansetron, at dosages anticipated by us, will be safe. Though the FDA has stated it will not require
additional non-clinical testing nor will it require a QT interval prolongation clinical study, such statements by the FDA are not
legally binding on the agency.
All of our current data for our lead
product candidate are the result of Phase 2 clinical trials conducted by third parties and do not necessarily provide sufficient
evidence that our products are viable as potential pharmaceutical products.
Through our proprietary access to relevant
laboratory and clinical trial results of the University of Virginia’s research program, and through our reliance on publicly
available third-party research, we possess toxicology, pharmacokinetic, and other preclinical data and clinical data on AD04. As
of now, AD04 has completed only Phase 2 clinical trials and we are now conducting its first Phase 3 trial. There is no guarantee
that Phase 2 results can or will be replicated by pivotal Phase 3 studies.
To date, long-term safety and efficacy
have not yet been demonstrated in clinical trials for our investigational product candidate. Favorable results in early studies
or trials may not be repeated in later studies or trials. Even if our clinical trials are initiated and completed as planned, we
cannot be certain that the results will support our product candidate claims. Success in preclinical testing and early clinical
trials does not ensure that later clinical trials will be successful. We cannot be sure that the results of later clinical trials
would replicate the results of prior clinical trials and preclinical testing, nor that they would satisfy the requirements of the
FDA or other regulatory agencies. Clinical trials may fail to demonstrate that our product candidate is safe for humans and effective
for indicated uses. Preclinical and clinical results are frequently susceptible to varying interpretations that may delay, limit
or prevent regulatory approvals or commercialization. Any delay in, or termination of, our clinical trials would delay our obtaining
FDA or EMA approval for the affected product candidate and, ultimately, our ability to commercialize that product candidate.
Previous clinical trials using ondansetron
have had different trial designs, doses, parameters and endpoints than the current ONWARD Phase 3 clinical trial that is expected
to serve as a basis for approval of AD04. Though various doses of ondansetron have been tested as treatments for alcohol addiction
(Johnson, BA et al., 2011; Johnson, BA et al., 2000; Kranzler et al, 2003; Sellers, EM et al., 1994), the 283-patient Phase 2b
clinical trial on which we are largely basing our clinical expectations only tested one dosing regimen, which was weight-based
(Johnson, BA et al., 2011). We plan to use a fixed dose in future clinical trials that we believe provides good coverage given
the dose ranges tested clinically; however, it is possible that the dose selected will not be the optimal dose and so drug effects
may be limited or not be demonstrated sufficiently in clinical testing. Additionally, only one genotype in the genetic panel that
will be used to define patients that are genotype positive for treatment with AD04 was used in primary analyses of the Phase 2b
trial and three of the genotypes were added to the panel after a retrospective exploratory analysis of the Phase 2b data. The genotype
in the panel related to the 5-HTT, that was included in the primary analysis (Johnson, BA et al., 2011) appears to make up about
half of the patients that are genotype positive. The three genotypes related to modulation of the 5-HT3 receptor were selected
based on a retrospective analysis that was constrained to 18 single-nucleotide polymorphism (“SNPs”) identified for
analysis (Johnson, BA et al., 2013). Therefore, confidence in the effects of the 5-HT3 genetics is less than that for the 5-HTT
genetics, and this could negatively impact the treatment effect of AD04 in Phase 3 trials for a segment of the patients identified
as genotype positive, which could dilute the overall demonstrated effect of AD04 in the trial.
The endpoints for the Phase 2b clinical
trial of AD04 were reduction in the severity of drinking, measured as drinks per day of drinking alcohol and reduction frequency
of drinking, measured by days of total abstinence from alcohol. These are surrogate endpoints for the endpoints expected to be
required for approval, which, for Europe, are expected to be reduction of heavy drinking days (defined herein), measured in percentage
of heavy drinking days per month, and total average alcohol consumed per month, and, for the United States, is expected to be the
percentage of patients that have no heavy drinking days in the final 2 months of a six month treatment regimen of AD04. Though
the Phase 2b trial showed a statistically significant effect against both pre-specified endpoints and when analyzed for reducing
heavy drinking days, all when compared against the placebo group, it is possible that AD04 could affect the endpoints of the Phase
2b trial while not demonstrating a strong enough effect to gain approval.
The Phase 2b clinical trial was 12 weeks
in duration, including a one week placebo run-in period, and the Phase 3 trials expected to be required for approval will be 24
weeks. Though the effect of AD04 against AUD in the Phase 2b trial appeared to begin in the first month of the trial and appeared
durable throughout the trial, we cannot be sure the effect will extend for the duration of the Phase 3 trials.
The FDA and/or EMA may not accept
our planned Phase 3 endpoints for final approval of AD04 and may determine additional clinical trials are required for approval
of AD04.
The FDA has indicated to us that a comparison
of the percent of patients with no heavy drinking days in the last two months of a six month clinical trial between the drug and
placebo groups will be a satisfactory endpoint for determination of a successful Phase 3 trial of AD04 and has published the draft
guidance Alcoholism: Developing Drugs for Treatment Guidance for Industry dated February 2015 indicating this endpoint for
the development of drugs for AUD. Similarly, the EMA has in the past accepted the co-primary endpoints of reduction from baseline
in days of heavy drinking and reduction total grams of alcohol consumed per month and has published the Guideline on the development
of medicinal products for the treatment of alcohol dependence on February 18, 2010 stating these endpoints as approvable endpoints
for alcohol addiction treatment. Despite these indications, neither the FDA nor the EMA is bound to accept the stated endpoint
if a new drug application for AD04 is submitted and their definitions of a heavy drinking day may change. We, however, can offer
no assurance that the FDA or EMA will approve our primary endpoints, that we can achieve success at the any endpoints they do approve,
or that these potential benefits will subsequently be realized.
We will incur additional costs and
our approvals could be delayed if the FDA or EMA requires additional clinical trials in patients that are negative for the genotypes
targeted by AD04. In addition, clinical trials conducted with only genotype positive subjects will likely result in labeling restricted
to treating patients that are genotype positive.
Although the FDA has indicated that it
sees little evidence of positive effects for the use of AD04 in subjects that are negative for the genotypes targeted by AD04 and
has stated that it would not object to the AD04 Phase 3 clinical trials going forward without including these additional subjects,
the FDA has indicated that some research in this area may be required prior to approval of AD04 for AUD within the marker negative
population. We believe the data supports our hypothesis that no further studies in genotype negative patients need be conducted.
However, the FDA has indicated that any approval based on a trial only in genotype positive subjects would result in labeling restricted
to treating patients that are genotype positive. If further studies are required, we will incur additional costs not anticipated,
and it could delay approval of AD04 or, if the results of such studies are not positive for AD04, it may result in AD04 not being
approved or it may result in AD04’s patents failing to protect AD04 against generic competition.
Under the Pediatric Research Equity Act
(“PREA”), NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the
claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation
for which the drug is safe and effective. We plan to test AD04 in adolescent patients (ages 12-17) as part of our next Phase 3
trial. If successful, we intend to request labeling for treating adolescent patients.
Our use of the currently manufactured
clinical trial material in the plan Phase 3 trial is dependent upon the review and approval of the relevant regulatory agencies
and authorities.
The Company has manufactured additional
clinical trial material for use in the ONWARD trial and other studies that may be required by the FDA or EMA. No assurance can
be given that the CMC plan developed by us will be satisfactory to the regulatory agencies or that the clinical trial material
produced for use in clinical trials of AD04 will be approved for use in the trials, either of which could result in delay of the
clinical trial program and a requirement for increased investment prior to commencement of clinical trials.
Our lead investigational product,
AD04, is dependent on a successful development, approval, and commercialization of a genetic test, which is expected to be classified
as a companion diagnostic.
Treatment with AD04 will be dependent on
identification of patients with a genetic test (i.e., a companion diagnostic). Companion diagnostics and complementary diagnostics
are regulated as medical devices by the FDA and, as such, require either clearance or approval prior to commercialization. While
the technology for the test we plan to use is well established, it cannot be certain the testing laboratory we set up will be able
to conduct the test with the selectivity and sensitivity that will be required or that the genetic test will be approved by FDA
for such use, which could increase the time and cost to develop AD04 and possibly prevent marketing approval. While we have been
party to a joint meeting with the Center for Drug Evaluation and Research (“CDER”, the FDA division responsible for
drug approvals) and the Center for Devices and Radiological Health (“CDRH”, the FDA division responsible for device
approvals, including genetic tests) at which agreement was reached as to the development path for the genetic test, neither CDER
nor CDRH is bound to accept our planned submission package even if the data is positive. We have been instructed by CDER and CDRH
that we need to obtain a separate approval or marketing authorization for the companion diagnostic genetic test from CDRH. We are
collecting and storing additional blood samples from all patients enrolled in the ONWARD Phase 3 trial, and plan to do so for any
future trials that may be conducted, in the event of any difficulties, however, we cannot be certain we can overcome all of the
technological, logistical or regulatory hurdles related to the genetic testing, which include, without limitation, technical validation
of the test (e.g. specificity, sensitivity, reproducibility, robustness of methods), clinical validation acceptable to CDER and
CDRH, all of which are needed for approval of AD04 and its companion diagnostic genetic test. Failure in any of these areas could
delay approval of AD04, increase the cost necessary to achieve approval of AD04 or prevent approval of AD04.
If we obtain approval of AD04 and its genetic
test, we currently plan to distribute the genetic test as widely as possible to third party testing companies with limited attention
to capitalizing on the revenue potential of the genetic test itself in order to achieve wider availability of the genetic test
to drive market uptake of AD04. However, we cannot be sure that third party testing companies will be willing to provide the test,
that reimbursement for the test will be available to make such business profitable, or that taking a genetic test will be acceptable
to patients or physicians. Additionally, our plans may change so that we attempt to make the test a material business of our own.
In this event, the availability of the genetic test in the market could be reduced, limiting market uptake of AD04, the testing
business could fail, and we could be in a position where it never reaches profitability. As one of our products/services, the genetic
test will be subject to all of the risks stated elsewhere herein related to reimbursement of our products and failure to achieve
adequate reimbursement could limit the potential sales of both the genetic test and AD04, and there is no assurance that the diagnostic
will be approved or authorized for marketing.
We have limited experience as a company
conducting clinical trials.
We are a clinical stage company and our
success is dependent upon our ability to obtain regulatory approval for and commercialization of our investigational products,
and we have not demonstrated an ability to perform the functions necessary for the approval or successful commercialization of
any product candidates. The successful commercialization of any product candidates may require us to perform a variety of functions,
including:
● participating in regulatory approval processes;
● formulating and manufacturing products; and
● conducting sales and marketing activities.
We have limited experience conducting and
enrolling patients in clinical trials. While certain members of our management and staff have significant experience in conducting
clinical trials, to date, we have not successfully completed any clinical trials as a company. Until recently, our operations have
been limited primarily to organizing and staffing our company, acquiring, developing and securing our proprietary technology and
preparing for clinical trials of our product candidate. These operations provide a limited basis to assess our ability to develop
and commercialize our product candidate and the advisability of investing in our securities.
All of the preclinical and clinical trials
relating to our product candidate have been conducted by third parties. Although we have recruited a team that has significant
experience with managing clinical trials, we have no experience as a company in conducting our own clinical trials. In part because
of this lack of experience, we cannot guarantee that planned clinical trials will be completed on time, if at all. Large-scale
trials require significant additional financial and management resources, monitoring and oversight, and reliance on third-party
clinical investigators, contract research organizations (“CROs”), or consultants. Relying on third-party clinical investigators,
CROs and manufacturers, which are all also subject to governmental oversight and regulations, may also cause us to encounter delays
that are outside of our control.
Our product candidate is in early
stages of development.
Because our product candidate is in early
stages of development it will require extensive clinical and other testing. Although our lead product candidate has completed a
283-patient Phase 2b clinical trial, we cannot predict with any certainty if or when we might submit an application for regulatory
approval for any of our product candidates or whether any such application will be accepted for review by the FDA or EMA, or whether
any application will be approved upon review.
Even if our clinical trials are completed
as planned, we cannot be certain that their results will support our proposed indications. Success in preclinical testing and early
clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later
clinical trials will replicate the results of prior clinical trials and preclinical testing. Results from earlier clinical trials
may not be repeated in later clinical trials. The clinical trial process may fail to demonstrate that our product candidate is
safe and effective for their proposed uses. This failure could cause us to abandon our product candidate and may delay development
of other product candidates. Any delay in, or termination of, our clinical trials will delay and possibly preclude the filing of
any NDAs with the FDA or EMA and, ultimately, our ability to commercialize our product candidate and generate product revenues.
Our clinical trials may fail to demonstrate
adequately the safety and efficacy of AD04 or any future product candidates, which would likely prevent or delay regulatory approval
and commercialization.
Before obtaining regulatory approvals for
the commercial sale of AD04 or any future product candidates, including AD04, we must demonstrate through lengthy, complex and
expensive preclinical testing and clinical trials that product candidates are both safe and effective for use in each target indication.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at
any time during the clinical trial process. The results of preclinical studies and early clinical trials of product candidates
may not be predictive of the results of later-stage clinical trials. Results from subsequent clinical trials may not be the same
as the results from the Phase 2b clinical trial that was conducted by the University of Virginia. There is typically an extremely
high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages
of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies
and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced
clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. We
can make no assurances that, should our Phase 3 studies provide statistically significant and clinical meaningful results evidencing
that treatment with AD04 results in reduced days of heavy drinking or abstinence, these same results will also provide evidence
of greater patient efficacy rates and or patient benefit ratios vis-à-vis currently marketed drug treatments. Most product
candidates that commence clinical trials are never approved as products.
In addition, even if the trials are successfully
completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials
could be required before we submit product candidates for approval. To the extent that the results of the trials are not satisfactory
to the FDA or foreign regulatory authorities for support of a marketing application, approval of product candidates may be significantly
delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional
trials in support of potential approval of product candidates.
If we experience delays in the enrollment
of patients in our clinical trials our receipt of necessary regulatory approvals could be delayed or prevented.
Although we expect to complete patient
enrollment in our landmark ONWARD pivotal Phase 3 clinical trial in the second or third quarter of 2021, our inability to locate
and continue to enroll a sufficient number of eligible patients in our current or any future clinical trials would result in significant
delays or may require us to abandon one or more clinical trials. Retention of subjects in clinical trials related to AUD can be
challenging relative to trials in some other indications due to the nature of the target population. In addition, COVID-19 has
made trial operation, including, without limitation, patient enrollment, more difficult and more difficult to project. Our ability
to enroll patients in trials is affected by many factors out of our control including the size and nature of the patient population,
the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, the prevalence
and successful recruiting of patients that are genotype positive, competing clinical trials, and clinicians’ and patients’
perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new
drugs that may be approved for the indications we are investigating. Due to the use of a biomarker to determine enrollment in our
current and planned Phase 3 clinical trials, we will have a limited population of patients to draw from for our Phase 3 clinical
trials.
Global health crises may adversely
affect our planned operations.
The conduct of our ongoing ONWARD Phase
3 trial could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or
other health crisis, such as the recent outbreak of novel coronavirus (COVID-19). A significant outbreak of contagious diseases
in the human population could result in a widespread health crisis that could adversely affect our ongoing trial. Such events could
result in the complete or partial closure of one or more of our critical vendors. In addition, an outbreak near our clinical trial
site locations would likely impact our ability to recruit patients, delay our clinical trials, and could affect our ability to
complete our clinical trials within the planned time periods. Also, public health authorities in the jurisdictions in which our
trial is taking place may take steps that would result in significant delay in our trial activities.
Our success will be dependent upon
adoption by physicians and others.
Even if the FDA and/or EMA approves our
product candidate or any future product candidates we may develop or acquire, the product will require acceptance among physicians,
healthcare payers, patients, and the medical community. Our products are to be used in combination with a genetic test targeted
at patients with certain specified genotypes. It is anticipated that physicians will recommend patients for screening prior to
administration of AD04 or future product candidates. Therefore, our business will be substantially dependent upon our ability to
communicate with and obtain support from physicians regarding the benefits of our products relative to alternative treatments available
at that time.
Rapid technological change and substantial
competition may impair the business.
The pharmaceutical industry is subject
to rapid and substantial technological change. Technological competition in the industry from pharmaceutical and biotechnology
companies, universities, governmental entities, and others diversifying into the field is intense and is expected to increase.
Many of these entities have significantly greater research and development capabilities, as well as substantially more marketing,
financial, and managerial resources than we do, and represent significant competition. Acquisitions of, or investments in, competing
biotechnology companies by large pharmaceutical companies could increase these competitors’ financial, marketing, and other
resources. We cannot assure you that developments by others will not render our products or technologies noncompetitive or that
we will be able to keep pace with technological developments. Competitors have developed, or are in the process of developing,
technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely
different approach or means of accomplishing similar therapeutic endpoints than products we are currently developing. These competing
products may be more effective and less costly than the products that we are developing. In addition, conventional behavioral therapies
and other treatment approaches currently in use today may continue to be used instead of, rather than in conjunction with, our
products.
Any product that we successfully develop,
and for which we gain regulatory approval, must compete for market acceptance and market share. Accordingly, important competitive
factors, in addition to completion of clinical testing and the receipt of regulatory approval, will include product efficacy, safety,
timing, and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, pricing,
and patent protection. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits
for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture
and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
We will compete against fully integrated
pharmaceutical companies such as Alkermes and Indivior and smaller companies that are collaborating with larger pharmaceutical
companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors
have drugs already approved or in development. In addition, many of these competitors, either alone or together with their collaborative
partners, operate larger research and development programs or have substantially greater financial resources than we do, as well
as significantly greater experience in:
● developing drugs, and other therapies;
● undertaking preclinical testing and clinical trials;
● formulating and manufacturing drugs, biologics and other therapies; and
● launching, marketing and selling drugs, and other therapies.
Risks Relating to Our Acquisition of
Purnovate
The combined company may not experience
the anticipated strategic benefits of the Acquisition.
We believe the acquisition of Purnovate
will provide certain strategic benefits which would enable Adial to enhance its business and accelerate its business plan through
an increased access to capital in the public equity markets. The market price of our common stock may decline as a result of the
acquisition if the combined company does not achieve the perceived benefits of the Acquisition as rapidly or to the extent anticipated
by us or Purnovate or investors, financial or industry analysts. There can be no assurance that these anticipated benefits of the
Acquisition will materialize or that if they materialize will result in increased stockholder value or revenue stream to the combined
company.
We may be unable to successfully
integrate the Purnovate businesses with its current management and structure.
Our failure to successfully complete the
integration of Purnovate could have an adverse effect on our prospects, business activities, cash flow, financial condition, results
of operations and stock price. Integration challenges may include the following:
● assimilating Purnovate’s technology and retaining personnel;
● minimizing potential adverse effects on existing business relationships; and
● successfully developing the new products and services.
Purnovate has had limited operations to date.
Purnovate is a start-up entity and has
had limited operations to date. As a start-up entity, Purnovate is subject to many of the risks common to such enterprises, including
its ability to implement its business plan, market acceptance of its proposed business and products, under-capitalization, cash
shortages, limitations with respect to personnel, financing and other resources, competition from better funded and experienced
companies, and uncertainty of its ability to generate revenues. There is no assurance that its activities will be successful or
will result in any revenues or profit, and the likelihood of its success must be considered in light of the stage of its development.
Even if it generates revenue, there can be no assurance that it will be profitable. In addition, no assurance can be given that
it will be able to consummate its business strategy and plans, as described herein, or that financial, technological, market, or
other limitations may force it to modify, alter, significantly delay, or significantly impede the implementation of such plans.
Purnovate has insufficient results for investors to use to identify historical trends or even to make quarter-to-quarter comparisons
of its operating results. Purnovate’s revenue and income potential is unproven and its business model is continually evolving.
Purnovate is subject to the risks inherent to the operation of a new business enterprise, and there can be no assurance that Purnovate
will be able to successfully address these risks.
Purnovate has a limited operating history upon which to
evaluate its ability to commercialize its products.
Purnovate is a development-stage company
and its success is dependent upon its ability to develop and commercialize its products and it has not demonstrated an ability
to perform the functions necessary for the successful development and commercialization of any product candidates. The successful
commercialization of any product candidates will require Purnovate to perform a variety of functions, including:
● formulating and manufacturing products; and
● conducting sales and marketing activities.
Purnovate’s operations have been
limited to organizing and staffing Purnovate, acquiring, developing and securing its proprietary technology and undertaking preclinical
studies of its product candidates. Purnovate has yet to engage in any clinical trials and therefore the safety of its product candidates
is uncertain.
Purnovate’s product candidates
are in early stages of clinical trials.
Because Purnovate’s product candidates
are in early stages of development they will require extensive preclinical and clinical testing. Purnovate’s lead product
has not yet entered clinical trials and cost, speed and ability to advance through clinical trials is uncertain. Purnovate cannot
predict with any certainty if or when it might submit an application for regulatory approval for any of its product candidates
or whether any such application will be accepted.
Purnovate’s technology may
not result in any successful drug candidates.
Purnovate has developed what its believes
are lead compounds that could be drug candidates. However, despite there being significant literature and in vitro and in
vivo evidence that adenosine analogs may be effective in treating a number of diseases and disorders, the compounds developed
to date have not been extensively tested in vitro and have not been tested in vivo. It is possible
that any and all compounds or product candidates developed by Purnovate or using its technology may fail or be determined not valuable
to pursue as products for a number of reasons, including, without limitation, due to toxicity, lack of efficacy, lack of stability,
poor manufacturing characteristics or otherwise.
There is uncertainty as to market
acceptance of Purnovate’s technology and products.
Purnovate has conducted its own research
into the markets for its products; however, because it will be a new entrant into the market, it cannot guarantee market acceptance
of its products and has somewhat limited information on which to estimate anticipated level of sales. Purnovate’s products
will require patients and doctors to adopt its technology. Purnovate’s industry is susceptible to rapid technological developments