Item 7. 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 financial statements and the notes presented herein. In 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. See “Risk Factors” and “Cautionary Note Regarding
Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K. Our actual results could differ significantly
from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein
and any other periodic reports filed and to be filed by us with the Securities and Exchange Commission.
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 being developed as a therapeutic agent for the treatment of alcohol use disorder (“AUD”).
The active ingredient in AD04 is ondansetron, a selective serotonin-3 antagonist (i.e., a “5-HT3 antagonist”) that
is also the active ingredient in Zofran®, an approved drug for treating nausea and emesis. We have commenced Phase
3 clinical trial using AD04 for the potential treatment of AUD in subjects with certain target genotypes. We believe our approach
is unique in that it targets the serotonin system and individualizes the treatment of AUD, through the use of genetic screening
(i.e., a companion diagnostic genetic biomarker). We have created an investigational companion diagnostic biomarker test for the
genetic screening of patients with certain biomarkers that, as reported in the American Journal of Psychiatry (Johnson,
et. al. 2011 & 2013), we believe will benefit from treatment with AD04. Our strategy is to integrate the pre-treatment genetic
screening into AD04’s label to create a patient-specific treatment in one integrated therapeutic offering. Our goal is to
develop a genetically targeted, effective and safe product candidate to treat AUD by reducing or eliminating the patients’
consumption of alcohol. We are also exploring expanding or portfolio in the field of addiction.
We have a worldwide, exclusive license
from the University of Virginia Patent Foundation (d.b.a the Licensing & Venture Group) (“UVA LVG”), which is the
licensing arm of the University of Virginia, to commercialize our investigational drug candidate, AD04, subject to Food and Drug
Administration (“FDA”) approval of the product, based upon three separate patent application families, with patents
issued in over 40 jurisdictions, including three issued patents in the U.S. Our investigational agent has been used in several
investigator-sponsored trials and we possess or have rights to use toxicology, pharmacokinetic and other preclinical and clinical
data that supports our Phase 3 clinical trial. Our therapeutic agent was the product candidate used in a University of Virginia
investigator sponsored Phase 2b clinical trial of 283 patients. In this Phase 2b clinical trial, ultra-low dose ondansetron, the
active pharmaceutical agent in AD04, patients with the target genotypes showed a statistically significant difference between ondansetron
and placebo for both the primary endpoint and secondary endpoint, which were reduction in severity of drinking measured in drinks
per drinking day (1.71 drinks/drinking day; p=0.0042), and reduction in frequency of drinking measured in days of abstinence/no
drinking (11.56%; p=0.0352), respectively. Additionally, and importantly, the Phase 2b results showed a significant decrease in
the percentage of heavy drinking days (11.08%; p=0.0445) with a “heavy drinking day” defined as a day with four (4)
or more alcoholic drinks for women or five (5) or more alcoholic drinks for men consumed in the same day.
The active pharmaceutical agent in AD04,
our lead investigational new drug product, is ondansetron (the active ingredient in Zofran®), which was granted
FDA approval in 1991 for nausea and vomiting post-operatively and after chemotherapy or radiation treatment and is now commercially
available in generic form. In studies of Zofran®, conducted as part of its FDA review process, ondansetron was given
acutely at dosages up to almost 100 times the dosage expected to be formulated in AD04 with the highest doses of Zofran®
given intravenously (“i.v.”), which results in approximately 160% of the exposure level as oral dosing. Even at high
doses given i.v. the studies found that ondansetron is well-tolerated and results in few adverse side effects at the currently
marketed doses, which reach more than 80 times the AD04 dose and are given i.v. The formulation dosage of ondansetron used in our
drug candidate (and expected to be used by us in our Phase 3 clinical trials) has the potential advantage that it contains a much
lower concentration of ondansetron than the generic formulation/dosage that has been used in prior clinical trials, is dosed orally,
and is available with use of a companion diagnostic genetic biomarker. Our development plan for AD04 is designed to demonstrate
both the efficacy of AD04 in the genetically targeted population and the safety of ondansetron when administered chronically at
the AD04 dosage. However, to the best of our knowledge, no comprehensive clinical study has been performed to date that has evaluated
the safety profile of ondansetron at any dosage for long-term use as anticipated in our Phase 3 clinical trial.
According to the National Institute of
Alcohol Abuse and Alcoholism (the “NIAAA”) and the Journal of the American Medical Association (“JAMA”),
in the United States alone, approximately 35 million people each year have AUD (such number is based upon the 2012 data provided
in Grant et. al. the JAMA 2015 publication and has been adjusted to reflect a compound annual growth rate of 1.13%, which is the
growth rate reported by U.S. Census Bureau for the general adult population from 2012-2017), resulting in significant health, social
and financial costs with excessive alcohol use being the third leading cause of preventable death and is responsible for 31% of
driving fatalities in the United States (NIAAA Alcohol Facts & Statistics). AUD contributes to over 200 different diseases
and 10% of children live with a person that has an alcohol problem. According to the American Society of Clinical Oncologists,
5-6% of new cancers and cancer deaths globally are directly attributable to alcohol. And, The Lancet published that alcohol
is the leading cause of death in people ages 15-49 globally. The Centers for Disease Control (the “CDC”) has reported
that AUD costs the U.S. economy about $250 billion annually, with heavy drinking accounting for greater than 75% of the social
and health related costs. Despite this, according to the article in the JAMA 2015 publication, only 7.7% of patients (i.e., approximately
2.7 million people) with AUD are estimated to have been treated in any way and only 3.6% by a physician (i.e., approximately 1.3
million people). In addition, according to the JAMA 2017 publication, the problem in the United States appears to be growing with
almost a 50% increase in AUD prevalence between 2002 and 2013.
We have devoted substantially all 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 Annual
Report on Form 10-K, we have funded our operations primarily through the private placement of debt and equity securities and most
recently, our initial public offering, follow-on offering and equity line.
We have incurred net losses in each year
since our inception, including net losses of approximately $10.9 million and $8.6 million for the years ended December 31, 2020
and 2019. We had accumulated deficits of approximately $31.5 million as of December 31, 2020. 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, because we have incurred various
expenses related to adding personnel and other corporate resources and experienced delays in certain countries in obtaining regulatory
approval required to commence the trial in such countries due to COVID-19, resulting in significantly slowed trial enrollment and
additional expense. We expect that we will need additional funding to complete our first Phase 3 clinical trial.
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.
Clinical Trials — Research
and Development Schedule
We currently anticipate that we, working
in collaboration with our vendors, upon execution of collaborative research and development agreements with them, will be able
to execute the following timeline:
AD04 — Two-Stage Clinical Development Strategy —
Conduct the Phase 3 clinical trials sequentially
We current estimate the total cost to complete
our initial Phase 3 clinical trial of AD04 for the treatment of AUD to be approximately $10.7 million (versus a previous estimate
of $8.8 million), of which approximately $5.3 million has already been incurred or been pre-paid, leaving approximately $5.4 million
in direct trial expenses that we will be required to pay in the future. This estimate is subject to many factors, some of which
are beyond our control. These factors include, but are not limited to, the following:
● the progress and cost of our research and development activities;
● the number and scope of our research and development programs;
● the progress and cost of our preclinical and clinical development activities;
● our ability to achieve our milestones under licensing arrangements;
● the costs and timing of regulatory approvals;
● changes in the value of the Euro relative to the US Dollar.
Additional funds are expected to be raised
through grants, partnerships with other pharmaceutical companies or through additional debt or equity financings, including pursuant
to the terms of our equity line. We expect the second Phase 3 Trial to cost approximately $20 million, such estimate subject to
the factors stated above.
As we advance our clinical programs, we
are in close contact with our CROs and clinical sites and are assessing the impact of COVID-19 on our studies and current timelines
and costs.
2020 Financing Developments
On June 11, 2020, we concluded a registered
direct offering of 2,820,000 shares of common stock and in a concurrent private placement the sale of warrants to purchase 2,115,000
shares of common stock at an exercise price of $2.00 per share. The shares of common stock and accompanying warrants were sold
directly to the buyers at a combined at-the-market price of $1.85 for a share and three quarters warrant. Gross proceeds of the
offering, totaled $5,217,000, which after offering expenses, resulted in net proceeds of $4,657,215.
On September 21, 2020, we concluded a private
placement with a related party of 357,143 unregistered shares of common stock and above market price of $1.40 per share. Gross
proceeds of the offering, totaled $500,000, with no material expenses.
On September 29, 2020, previously registered
warrants to purchase 225,000 shares at an exercise fee of $2.00 per share were exercised for a total of $450,000.
On November 18, 2020, we entered into a
purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”)
with Keystone Capital. Pursuant to the Purchase Agreement, we have the right to sell Keystone Capital the lesser of (i) $15,000,000
in shares of our common stock and (ii) the number of shares of common stock equal to the Exchange Cap (as defined below), subject
to certain limitations and conditions set forth in the Purchase Agreement, including a closing market price of Adial stock of greater
than $1.00 on the business day sales under the agreement are made. The purchase price of the shares of our common stock that may
be sold to Keystone Capital under the Purchase Agreement will be based on the market price of our common stock at the time of sale
as computed under the Purchase Agreement. specifically, the purchase price per share of the common stock that may be sold to Keystone
Capital under the Purchase Agreement is such fixed purchases equal ninety percent (90%) of the arithmetic average of the closing
sale prices of our common stock during the five (5) consecutive trading-day period ending on the fixed purchase date for the fixed
purchase, so long as the common stock is listed on Nasdaq or any nationally recognized successor thereto (to be appropriately adjusted
for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction that occurs on or after the
date of this Purchase Agreement). There is no upper limit on the price per share that Keystone Capital could be obligated to pay
for the common stock under the Purchase Agreement.
Under the applicable rules of the Nasdaq
Stock Market LLC (“Nasdaq”), in no event may we issue more than 2,842,198 shares of our common stock to Keystone Capital
under the Purchase Agreement (including 175,000 shares of our common stock that we issued to Keystone Capital upon execution of
the Purchase Agreement, the cost of which issuance was capitalized as a cost of equity), which represents 19.99% of the shares
of our common stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”),
unless (i) we obtain stockholder approval to issue shares of our common stock in excess of the Exchange Cap or (ii) the average
price of all applicable sales of common stock to Keystone Capital under the Purchase Agreement equals or exceeds $1.8222, which
represents the lower of (i) the Nasdaq official closing price immediately preceding the execution of the Purchase Agreement and
(ii) the average of the five Nasdaq official closing prices for the common stock immediately preceding the execution of the Purchase
Agreement, plus an incremental amount such that the transactions contemplated by the Purchase Agreement are exempt from the Exchange
Cap limitation under applicable Nasdaq rules. In any event, the Purchase Agreement specifically provides that we may not issue
or sell any shares of our Common Stock under the Purchase Agreement if such issuance or sale would breach any applicable rules
or regulations of the Nasdaq. The Company has also limited the aggregate number of shares of common stock reserved for issuance
under the Purchase Agreement to 15,000,000 shares without subsequent approval from our board of directors.
Pursuant
to the terms of the Registration Rights Agreement, we agreed to file with the SEC one or more registration statements on Form S-1
to register for resale under the Securities Act the shares of our common stock that may be issued to Keystone Capital under the
Purchase Agreement, including the commitment shares that we issued to Keystone Capital. The Purchase Agreement and the Registration
Rights Agreement contain customary representations, warranties, conditions and indemnification obligations of the parties. The
registration statement registering such shares of common stock was declared effective on December 15, 2020. During the year
ended December 31, 2020, we did not sell any shares of our common stock pursuant to the Purchase Agreement. Subsequent to the year-end
we sold 1,007,296 shares of our common stock for gross proceeds of $2,350,000 pursuant to the Purchase Agreement.
On March 11, 2021, we entered into a Securities
Purchase Agreement (the “Securities Purchase Agreements”) with each of Keystone Capital Partners, LLC (“Keystone”),
Bespoke Growth Partners, Inc. (“Bespoke”), a company controlled by Mark Peikin, our Chief Strategy Officer and entities
controlled by James W. Newman, Jr., a member of our board of directors (“Newman” and collectively with Keystone and
Bespoke the “Investors,” and each an “Investor”), pursuant to which: (i) Keystone has agreed to purchase
an aggregate of 333,334 shares of our common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $1,000,002;
(ii) Bespoke has agreed to purchase an aggregate of 336,667 shares of our common stock at a purchase price of $3.00 per share for
aggregate gross proceeds of $1,010,001; and (iii) Newman has agreed to purchase an aggregate of 30,000 shares of our common stock
at a purchase price of $3.00 per share for aggregate gross proceeds of $90,000. Under the terms of the Securities Purchase Agreements:
(i) Keystone has purchased 33,334 shares of our common stock and paid us $100,002 and agreed to purchase an additional 300,000
shares of our common stock upon the effectiveness of a registration statement registering the shares of common stock acquired and
to be acquired (the “Registration Statement”); (ii) Bespoke has purchased 33,337 shares of our common stock and paid
us $100,011 and agreed to purchase an additional 300,000 shares of our common stock upon the effectiveness of the Registration
Statement; and (iii) Newman has purchased 30,000 shares of our common stock and paid us $90,000. In connection with the Securities
Purchase Agreements, we entered into Registration Rights Agreements, dated March 11, 2021 (“Registration Rights Agreements”),
with each of the Investors pursuant to which we are obligated to file a registration statement (the “Registration Statement”)
with the SEC within thirty (30) days following the date upon which we file this Annual Report on Form 10-K with the SEC and use
all commercially reasonable efforts to have the Registration Statement declared effective by the SEC within thirty (30) days after
the Registration Statement is filed (or, in the event of a “full review” by the SEC, within thirty (30) days after
the Registration Statement is filed).
Recent Developments
Acquisition of Purnovate, Inc.
On December 7, 2020, we closed the Acquisition
contemplated by that Equity Purchase Agreement pursuant to which we purchased all of the outstanding membership interests of Purnovate
from the members of Purnovate, such that after the Acquisition, Purnovate became our wholly owned subsidiary. Purnovate is a pre-clinical
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. Prior to the acquisition,
our CEO and a Director owned equity in Purnovate and the transaction was considered to be one with a related party.
Pursuant to the terms of the Equity Purchase
Agreement, in exchange for the outstanding membership interests of Purnovate, we paid the members an aggregate of $350,000 (the
“Cash Consideration”) at the closing and issued to the Members an aggregate of 700,000 shares of our restricted common
stock (the “Stock Consideration”) with an approximate fair market value of $1,638,000 at time of issuance, which issuance
was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. Prior to the closing of the
transaction, we loaned Purnovate $350,000 in working capital for use during the due diligence period. In addition, members will
receive development milestone payments in an aggregate amount of up to $2,100,000 for each compound developed, development milestone
payments in an aggregate amount of up to $20,000,000 for each compound commercialized, and royalties of 3.0% of net sales.
Clinical Developments
In January 2020, we announced that we had
received favorable opinions from the Finnish Medicines Agency (FIMEA) and National Committee
on Medical Research Ethics (TUKIJA) to commence our Phase 3 clinical trial to investigate AD04 as a genetically targeted therapeutic
agent for the treatment of AUD.
On June 11, 2020, we announced that we
had received all necessary approvals to commence our landmark Phase 3 clinical trial to investigate
AD04 as a genetically targeted therapeutic agent for the treatment of AUD.
On July 17, 2020, we received notice that
the European Medicines Agency (EMA) had accepted the Pediatric Investigation Plan (PIP) submitted by us for development of our
lead drug candidate, AD04, for the treatment of alcohol use disorder in the pediatric population, ages 12 to 17.
On July 30, 2020, we announced that we
had received approval to commence our Phase 3 clinical trial of AD04 for the treatment of AUD in Croatia. As a result, we had secured
approvals to run the trial in all of the Scandinavian and Eastern European countries in which we intend to run the clinical trial.
On September 14, 2020, we filed with the
FDA to take our Investigational New Drug (IND) Application for the use of our lead product candidate, AD04, as a treatment for
Alcohol Use Disorder (AUD) off inactive status with the United States Food and Drug Administration (FDA) and on October 15, 2020
we announced that that the FDA had reactivated the IND.
On November 3, 2020, we providing the following
highlighted updates on our Phase 3 clinical trial of AD04 for the treatment of AUD
● All 25 planned investigative sites are active.
● Data readout is expected in Q4 2021 or earlier.
Antibody
Tests
In order to protect our patients in the
ONWARD Phase 3 trial and potentially increase retention rates, we secured distribution rights to certain SARS-CoV-2 antibody tests
to administer to patients in the trial and various time points. In an effort to make the antibody tests more widely available in
the United States, we entered engagements with third parties for sell tests provided by Adial as their distributor. Significant
resources have not been devoted to this effort and the impact on the Company is not expected to be material.
Results of operations for the years
ended December 31, 2020 and 2019 (rounded to nearest thousand)
The following table sets forth the components
of our statements of operations in dollars for the periods presented:
For the Year Ended December 31, Change
Research and development (“R&D”) expenses
Research and development expenses increased
by approximately $1,887,000 (48%) during the year ended December 31, 2020 as compared to the year ended December 31, 2019. This
change was primarily due to a large increase in direct trial expenses (approximately $2,967,000) consisting of CRO fees and expenses,
site fees and related vendor expenses with an increase in trial sites open to enrollment, partially offset by decreases in regulatory
consulting fees due to decreased trial preparation time, decreased compensation expense for R&D employees, decreased manufacturing
expenses, and decreased license expenses. In the latter months of the year ended December 31, 2020, patient enrollment costs increased
as a result of the impact of the COVID-19 pandemic resulting in the opening of higher cost sites in Scandinavia as opposed lower
cost sites in Central and Eastern Europe.
General and administrative expenses
General and administrative expenses increased
by approximately $796,000 (19%) from in the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase
was due to increased expense in a several areas, including business development and financial consulting (approximately $141,000),
public and shareholder relations (approximately $83,000), insurance expenses (approximately $46,000), and equity compensation expense
(approximately $222,000) with the increased use of option and share grants.
Other income (expenses)
Other income increased by $382,000 (110%)
in the year ended December 31, 2020 compared to the year ended December 31, 2019. This was mostly due to the presence in the first
quarter of 2019 of a one-time warrant modification expense of $442,000, which was offset by a decrease in interest income of approximately
$63,000, which was in turn due to the combination of substantially lower money market returns during the COVID-19 pandemic and
somewhat reduced cash balances as we expend capital in the course of completing its trial.
Liquidity and capital resources
Overview
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 and as we further develop
product candidates acquired from Purnovate. To date, we have funded our operations primarily with the proceeds from our initial
and secondary public offerings 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 25, 2019, we closed a follow
on a public offering pursuant to which we raised approximately $8.2 million net of underwriting discounts and commissions and estimated
offering expenses.
On June 11, 2020, we concluded a registered
direct offering of 2,820,000 shares of common stock and in a concurrent private placement the sale of warrants to purchase 2,115,000
shares of common stock at an exercise price of $2.00 per share. The shares of common stock and accompanying warrants were sold
directly to the buyers at a combined at-the-market price of $1.85 for a share and three quarters warrant. Gross proceeds of the
offering, totaled $5,217,000, which after offering expenses, resulted in net proceeds of $4,657,215.
On September 21, 2020, we concluded a private
placement with a related party of 357,143 shares of common stock at an above-market price of $1.40 per share, for total proceeds
of $500,000.
On September 30, 2020, warrants to purchase
225,000 shares of common stock an exercise price of $2.00 per share were exercised for a total cash payment of $450,000.
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 form 10-K, based our current
projections. We have recently executed an equity purchase agreement with Keystone Capital, LLC, which allows us to obtain depending
on our stock’s market price and us meeting other conditions, up to $15 million in equity financing. We did not sell any shares
of our common stock pursuant to the equity line with Keystone Capital during the year ended December 31, 2020; however, subsequent
to the end of the year, we sold 1,007,296 shares of our common stock for gross proceeds of $2.35 million. We also received approximately
$1.4 million in proceeds from exercise of warrants to purchase 712,500 shares of common stock for an exercise price of $2.00 per
share.
We expect to use approximately $8.6 million
in cash during the twelve months ended December 31, 2021 for both trial costs, other R&D project costs, and general corporate
expenses. We expect to exhaust funds on hand in the fourth quarter of 2021, given our expected trial costs, other project costs,
and costs of Company overhead, and will require approximately $3.3 million in additional funding to reach the current expected
database lock in February of 2022. Our ability to access funds under the equity purchase agreement is dependent upon the market
price of our common stock, so access to these funds is not guaranteed. If we are unable to access funds under the equity purchase
agreement, we would need to raise funds through other sources. There is no assurance that such funds could be raised by that time
on acceptable terms. 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.
We will also require additional financing
as we continue to execute our overall business strategy, including an estimated $20 million for a second phase three trial. Our
liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and
industry factors. We anticipate that, our future liquidity requirements will be funded through the incurrence of indebtedness,
additional equity financings or a combination. In addition, we may raise additional funds through grants and/or corporate collaboration
and licensing arrangements.
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 Year Ended December 31,
Provided by (used in)
Investing activities (350,000 ) –
Net increase (decrease) in cash and cash equivalents $ (2,376,000 ) $ 2,908,000
Net cash used in operating activities
Net cash used in operating activities for
the year ended December 31, 2020 consists primarily of net loss adjusted for certain non-cash items (including amortization and
share-based compensation), and the effect of changes in working capital and other activities. The increase in cash used in operating
activities ($1,294,000) for the year ended December 31, 2020 as compared to the year ended December 31, 2019, despite the larger
increase in net loss between the same periods (of approximately $2,301,000), is due to the larger proportion of costs being non-cash
costs, such as equity compensation expense, and to a large increase in accrued expenses in the year ended December 31, 2020 compared
to the year ended December 31, 2019. Non-cash assets, such as pre-paid research and development, also increased substantially (by
about $162,000) in the year ended December 31, 2020, compared to the year ended December 31, 2019.
Net cash provided by investing activities
Net cash provided by investing activities
during the year ended December 31, 2020 consists of the $350,000 loan that we made to Purnovate prior to the closing of the Acquisition
to be used for further research and development efforts.
Net cash provided by financing activities
Net cash provided by financing activities
during the years ended December 31, 2020 and 2019 primarily consist of capital raising activities through debt and equity financing.
Net cash provided by financing activities decreased $3,640,000 during the year ended December 31, 2020, and was primarily attributable
to the lesser net proceeds of the registered direct offering, private placement, and warrant exercises compared to the public offering
completed in 2019.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 2 to the financial statements
for a discussion of recent accounting pronouncements.
Critical accounting policies and 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 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 CRO, clinical trial sites, 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.
Fair Value of Financial Instruments
and Fair Value Measurements
Our financial instruments consist primarily
of cash, accounts payable and accrued liabilities, and, prior to our initial public offering, debt instruments and derivative liabilities.
FASB Accounting Standards Codification
(“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of
financial instruments held by us. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level
valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The
carrying amounts reported in the balance sheets for receivables, current liabilities, convertible notes, payable senior notes,
and bridge notes each qualify as financial instruments and are a reasonable estimate of their fair values because of the short
period of time between the origination of such instruments and their expected realization and their current market rate of interest.
The three levels of valuation hierarchy
are defined as follows:
● Level 1: Observable inputs such as quoted prices in active markets;
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.
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:
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.
Income taxes
We account for income taxes using the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation
allowance, if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. We have no history of being able to generate a profit, and no certainty as to our ability to do so in the
future.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
The Company is 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 8. Financial Statements and Supplemental Data
ADIAL PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS
Contents
Page
Report of Independent Registered Public Accounting Firm F-2
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Adial Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the
accompanying balance sheets of Adial Pharmaceuticals, Inc. (the “Company”) as of December 31, 2020 and 2019, and the
related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended
December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and
the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying financial
statements have been prepared assuming the Company will continue as a going concern. As described in Note 2, the Company has an
accumulated deficit of $31.5 million as of December 31, 2020 and has suffered recurring losses since inception. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 2. The financial statements do not include any adjustments that may result from the outcome
of these uncertainties.
Basis for Opinion
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express
no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2017.
East Hanover, New Jersey
F-2
ADIAL PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS
Current Assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Commitments and contingencies
Stockholders’ Equity
The accompanying notes are an integral part
of these financial statements.
F-3
ADIAL PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Operating Expenses:
Other Income (Expense)
Warrant modification expense — (441,763 )
Benefit from income taxes — —
Net loss per share, basic and diluted $ (0.87 ) $ (0.87 )
The accompanying notes are an integral part
of these financial statements.
F-4
ADIAL PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020
and 2019
Common Stock Additional Paid In Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
The accompanying notes are an integral part
of these financial statements.
F-5
ADIAL PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash warrant modification expense — 441,763
Amortization of intangible assets 564 565
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (142,190 ) (41,952 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities (350,000 ) —
CASH FLOWS FROM FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,375,938 ) 2,908,009
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ — $ —
Income taxes paid $ — $ —
Reclassification of stock-based comp from accrued expenses $ 117,001 $ —
Non-cash cost of commitment shares $ 295,750 $ —
The accompanying notes are an integral part
of these financial statements.
F-6
ADIAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals,
Inc. (the “Company” or “Adial”) was converted from a limited liability company formed on November 23, 2010
to a corporation and reincorporated in Delaware on October 1, 2017. Adial is presently engaged in the development of medications
for the treatment and prevention of addictions and related disorders.
The Company has commenced
its first Phase 3 clinical 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. 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 — LIQUIDITY, GOING CONCERN AND OTHER UNCERTAINTIES
These financial statements
have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”), which
contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred losses and negative
cash flows from operations each year since inception and has an accumulated deficit of approximately $31.5 million as of December
31, 2020. Based on the current development plans for AD04 and other operating requirements, existing cash and equivalents are not
sufficient to fund operations for the next twelve months following the financial statement filing date. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
Due to the COVID-19
pandemic, during the first three quarters of 2020, the Company experienced delays in certain countries in obtaining regulatory
approval required to commence the trial in such countries, resulting in significantly slowed trial enrollment (see Other Uncertainties
below). Enrollment has since improved, though enrollment in higher cost sites in Scandinavia have recovered more quickly than in
lower cost sites in Central and Eastern Europe. The Company presently projects completion of its phase three trial during the first
quarter of 2022 with available cash currently projected into the fourth quarter of 2021. As such, cash on hand is not projected
to be sufficient to reach database lock.
The Company’s
plans include raising additional capital from various potential sources, including equity and/or debt financings, grant funding,
and strategic relationships. In addition, the Company has an active equity purchase agreement (See Notes 7 and 10) with Keystone
Capital, LLC, which allows the sale of up to $15 million, which amount, if fully accessible, would be sufficient to fund the Company’s
operations beyond one year from the filing date of these statements. However, there can be no guarantee that the Company will meet
the conditions to use the equity line and without access to this credit line and/or additional funding, which may not be available
on acceptable terms or at all, 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.
The accompanying financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might result from the outcome of the uncertainties described above.
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.
F-7
The Company also faces
the ongoing risk that the coronavirus pandemic may further slow, for an unforeseeable period, the conduct of the Company’s
trial. The effects of the ongoing coronavirus pandemic may also 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 key clinical trial vendors
and supplier of our active pharmaceutical ingredient. The full extent to which the COVID-19 pandemic further impacts the clinical
development of AD04, the Company’s suppliers and other commercial partners, will depend on future developments that cannot
be predicted.
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of
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 stock-based compensation, expense recognition and accruals associated
with third party providers supporting clinical trials and other research and development, and income tax asset realization.
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 net loss per share was the same as diluted net loss per share for the years ended December 31, 2020 and
2019 as the inclusion of all potential common shares outstanding would have an anti-dilutive effect. “Penny
warrants” were not excluded from calculation of outstanding shares for purposes of basic earnings per share.
The total potentially
dilutive common shares that were excluded for the years ended December 31, 2020 and 2019 were as follows:
Potentially Dilutive Common Shares Outstanding December 31,
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 December 31, 2020, the
Company did not exceed FDIC insurance limits but held approximately $4.2 million in non-FDIC insured cash accounts. Included in
cash equivalents are equity securities with maturity dates less than ninety days and are carried at fair value. Unrealized gain
or loss are included in the interest income and are immaterial to the financial statements. At December 31, 2019, the Company exceeded
FDIC insurance limits by approximately $0.4 million and held approximately $6.1 million in non-FDIC insured cash equivalent investments.