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 consolidated 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 the 2023 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.
On August 4, 2023, we effected a reverse stock
split of our outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25. As a result of the
reverse split, we had 1,197,630 shares of common stock outstanding immediately after effecting the reverse split. The shares authorized
for issue under our charter remained 50,000,000 common stock. We have retrospectively adjusted all references to common stock, stock
warrants to purchase common stock, stock options to purchase common stock, share data, per share data and related information contained
in the following discussion to reflect the effect of the reverse stock split.
Effective June 30, 2023, we sold the business
of our wholly owned subsidiary, Purnovate, Inc., to a third party. As a result, the assets, liabilities, and results of Purnovate were
classified as discontinued operations. We have retrospectively reclassified all assets, liabilities, and results of Purnovate as discontinued
operations in the following discussion and have adjusted all references to Purnovate assets, liabilities, and results accordingly.
63
Overview
We are a clinical-stage
biopharmaceutical company focused on the development of therapeutics for the treatment or prevention of addiction and related disorders.
Our lead investigational new drug product, AD04, is a genetically targeted therapeutic agent being developed for the treatment of alcohol
use disorder (“AUD”). AD04 was recently investigated in a Phase 3 clinical trial, designated the ONWARD trial, for the potential
treatment of AUD in subjects with certain target genotypes, which were identified using our companion diagnostic genetic test. Based on
our analysis of the subgroup data from the ONWARD trial, we are now focused on commercializing AD04 in the U.S. and Europe.
We continue to explore
opportunities to expand our portfolio in the field of addiction and related disorders, both through internal development and through acquisitions.
Our vision is to create the world’s leading addiction focused pharmaceutical company.
In January 2021, we expanded our portfolio in
the field of addiction with the acquisition of Purnovate, LLC via a merger into our wholly owned subsidiary, Purnovate, Inc. (“Purnovate”)
and in January 2023, we entered into an option agreement with Adovate LLC (“Adovate”), pursuant to which we granted to Adovate
an exclusive option for a period of one hundred twenty (120) days from the effective date of the Option Agreement for Adovate or its designated
affiliate to acquire all of the assets of Purnovate and to assume related liabilities and expenses. On May 8, 2023, Adovate sent a letter
exercising its option effective May 16, 2023 and made payment of the $450,000 in fees due on exercise. Effective June 30, 2023, Adovate
issued to us the equity stake in Adovate due on exercise of the option agreement. On August 17, 2023, a Bill of Sale, Assignment and Assumption
Agreement (“Bill of Sale”) was executed between Purnovate and Adovate, transferring the Purnovate assets to Adovate, effective
as of June 30, 2023. On August 17, 2023, Purnovate and Adovate also entered into a Letter Agreement which stated that Adovate acquired
the assets of Purnovate effective as of June 30, 2023, pursuant to the Bill of Sale.
We have devoted the vast majority of our resources
to development efforts relating to AD04, including preparation for conducting clinical trials, providing general and administrative support
for these operations and protecting our intellectual property.
We currently do not have any products approved
for sale and we have not generated any significant revenue since our inception. From our inception through the date of our 2023 Annual
Report on Form 10-K, we have funded our operations primarily through the private and public placements of debt, equity securities, and
an equity line.
Our current cash and cash equivalents are not
expected to be sufficient to fund operations for the twelve months from the date of filing our 2023 Annual report on Form 10-K, based
our current projections.
We have incurred net losses in each year since
our inception, including net losses of approximately $5.1 million and $12.7 million for the years ended December 31, 2023 and 2022. We
had accumulated deficits of approximately $68.8 and $63.7 million as of December 31, 2023 and 2022, respectively. Most, about 90%, of
our operating losses resulted from costs incurred in continuing operations, including costs in connection with our continuing research
and development programs, from general and administrative costs associated with our operations, and from financing costs.
We will not generate revenue from product sales
unless and until we successfully complete development and obtain marketing approval for AD04, which we expect will take a number of years
and is subject to significant uncertainty. We do not believe our current cash and equivalents will be sufficient to fund our operations
for the next twelve months from the filing of these financial statements.
Until such time, if ever, as we can generate substantial
revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings,
government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic
alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed
on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative
impact on our financial condition and our ability to develop AD04.
64
Clinical Trials — Research and
Development Schedule
AD04 — Clinical Development
Strategy — Conduct two additional Phase 3 clinical trials in parallel
The clinical development plan for AD04 is based
on the regulatory feedback received in the meetings that took place in Q2 2023 which indicated that even though a single additional Phase
3 trial with convincing data may suffice for approval, it would be a review issue for the agencies following the trial completion to determine
if the data was sufficient for approval. Therefore, while possible to file for registration with one additional trial, our current planning
assumptions are that we will need to conduct two additional Phase 3 trials with AD04, where the active arm of patients will be compared
to placebo and the second trial may include a biomarker negative patient arm to satisfy any ongoing questions from the regulators regarding
efficacy parameters. This is expected to support potential approval in the shortest time frame possible and removes future regulatory
filing and review risk that would be associated with conducting a single additional trial, as we would plan to run the studies in parallel.
We believe that conducting two trials in parallel is the best strategy to minimize risk, optimize timing and costs, as well as improve
the probability of regulatory authority acceptance and approval in the US and Europe. The new clinical development plan includes both
the US and EU endpoints and will be designed to satisfy both US and EU AD04 submission requirements. Confirmation of the clinical development
plan and pathway is currently being conducted by Adial’s clinical development and regulatory advisors.
Based on the new expectations regarding the patient
population and targeted genotypes and subject to upcoming discussions with regulatory authorities, the two additional Phase 3 trials are
expected to cost a total of between $21-$29 million and each expected to require $8-12 million in direct expenses pending final trial
design, and up to $5 million in additional other development expenses is expected to be required.
2023 and 2022 Financing Developments
On March 1, 2024, we entered into a warrant inducement
agreement (the “Inducement Agreement”) with a certain holder (the “Holder”) of the Company’s warrants to
purchase shares of our common stock, par value $0.001 per share (the “common stock”), issued in a private placement offering
that closed on October 24, 2023 (the “Existing Warrants”). Pursuant to the Inducement Agreement, the Holder of the Existing
Warrants agreed to exercise for cash the Existing Warrants to purchase up to approximately 1,150,000 shares of common stock, at an exercise
price of $2.82 per share. The transactions contemplated by the Inducement Agreement closed on March 6, 2024. The Company received aggregate
gross proceeds of approximately $3.5 million, before deducting placement agent fees and other expenses payable by the Company. Net proceeds
of this transaction were estimated to be approximately $3.1 million.
In consideration of the Holder’s immediate
exercise of the Existing Warrants and the payment of $0.125 per New Warrant (as such term is defined below) in accordance with the Inducement
Agreement, we issued unregistered Series C Warrants (the “New Warrants”) to purchase 2,300,000 shares of common stock (200%
of the number of shares of common stock issued upon exercise of the Existing Warrants) (the “New Warrant Shares”) to the Holder
of Existing Warrants.
On March 1, 2024, warrants to purchase 268,440
warrants to purchase shares for common stock for an exercise price of $2.82 per share were exercised for gross proceeds of approximately
$757 thousand.
On October 19, 2023,
we entered into a securities purchase agreement (the “Purchase Agreement”) with an institutional investor (the “Purchaser”)
for the issuance and sale in a private placement (the “Private Placement”) of (i) pre-funded warrants (the “Pre-Funded
Warrants”) to purchase up to 1,418,440 shares of our common stock, par value $0.001 (the “Common Stock”), at an exercise
price of $0.001 per share, (ii) series A warrants (the “Series A Warrants”) to purchase up to 1,418,440 shares of our Common
Stock at an exercise price of $2.82 per share, and (iii) series B warrants (the “Series B Warrants” and together with the
Series A Warrants, the “Warrants”) to purchase up to 1,418,440 shares of our Common Stock at an exercise price of $2.82 per
share. The Series A Warrants are exercisable at any time on or after the earlier of (i) if permitted by the rules and regulations of the
Nasdaq Stock Market, upon the payment by the Purchaser of $0.125 per share in addition to the exercise price of $2.82 per share, and (ii)
the Stockholder Approval Date (as defined in the Purchase Agreement) (the “Initial Exercise Date”), and have a term
of exercise equal to five and one-half years from the date of issuance. The Series B Warrants are exercisable at any time on or after
the Initial Exercise Date and have a term of exercise equal to eighteen months from the date of issuance. The combined purchase price
for one Pre-Funded Warrant and the accompanying Warrants was $2.819. In addition, 85,106 warrants with an exercise price of $3.52 per
share of common stock were issued to the placement agent.
65
The net proceeds to us
from the Private Placement were approximately $3.4 million, after deducting placement agent fees and expenses and estimated offering expenses
payable by us.
Pursuant
to the terms of the Purchase Agreement, we are prohibited from entering into any agreement to issue or announcing the issuance or proposed
issuance of any shares of Common Stock or securities convertible or exercisable into Common Stock for a period commencing on October 19,
2023 and expiring 60 days from the Effective Date (as defined in the Purchase Agreement). Furthermore, the Company is also prohibited
from entering into any agreement to issue Common Stock or Common Stock Equivalents (as defined in the Purchase Agreement) involving a
Variable Rate Transaction (as defined in the Purchase Agreement), subject to certain exceptions, for a period commencing on October 19,
2023 and expiring one year from such Effective Date. The Effective Date is defined in the Purchase Agreement as the earliest of the date
that (a) the initial registration statement contemplated by the Registration Rights Agreement has been declared effective by the SEC,
(b) all of the Shares have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement for us to be in
compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions, (c) following
the one year anniversary of the closing of the Private Placement provided that the holder of the Shares is not an affiliate of the Company,
or (d) all of the Shares may be sold pursuant to an exemption from registration under Section 4(a)(1) of the Securities Act without volume
or manner-of-sale restrictions and the holders of such Shares shall have received an opinion from Company legal counsel reasonably acceptable
to them. The registration statement was declared effective on November 16, 2023.
At
the date of this report the 1,418,440 shares of common stock had been issued on exercise of pre-funded warrants for proceeds of $1,418,
leaving no pre-funded warrants unexercised.
On May 31, 2023, we entered into an Equity Purchase
Agreement with Alumni Capital, LLC (“Alumni”). This agreement constituted a standby equity purchase agreement (a “SEPA”).
Pursuant to the SEPA, we have the right, but not the obligation, to sell to Alumni up to $3,000,000 of newly issued shares, subject to
increase to $10,000,000 at our option, at our request at any time during the commitment period, which commenced on May 31, 2023 and will
end on the earlier of (i) December 31, 2024, or (ii) the date on which Alumni shall have made payment of advances requested by the Company
totaling up to the commitment amount of $3,000,000. Each sale we request under the SEPA (a “Purchase Notice”) may be for a
number of shares of common stock with an aggregate value of up to $500,000, and up to $2,000,000 provided certain conditions concerning
the average daily trading value are met. The SEPA provides for shares to be sold to Alumni at 95% of the lowest daily volume weighted
average price during the three days after a Purchase Notice is issued to Alumni. Upon our entry into and subject to the terms and conditions
set forth in the SEPA, we issued 7,983 shares of common stock to Alumni as consideration for its irrevocable commitment to purchase shares
of common stock, pursuant to the SEPA. On August 3, 2023, 20,550 shares of common stock were sold under the terms of the SEPA for cash
proceeds $140,330.
On February 23, 2023,
we entered into a securities purchase agreement (the “2023 Purchase Agreement”) with an accredited institutional investor
(the “Investor”) providing for the issuance of 73,144 shares of our common stock. Pursuant to the 2023 Purchase Agreement,
the Investor purchased the shares of our common stock for an aggregate purchase price of $750,000 with net proceeds of $609,613, after
placement agent fees and expenses. Pursuant to the Purchase Agreement, an aggregate of 73,144 shares were issued to the Investor.
We issued to the Placement
Agent a warrant (the “Placement Agent Warrants”) to purchase up to an aggregate of 7,317 shares of common stock, representing
10% of the aggregate number of shares of Common Stock sold pursuant to the Purchase Agreement. The Placement Agent Warrants have an exercise
price equal to $10.25 and are exercisable two months after the closing date and expire five years after the date of issuance. The total
estimated fair value of the Placement agent warrant was $58,540.
66
On February
10, 2022, we entered into a securities purchase agreement (the “2022 Purchase Agreement”) with an accredited institutional
investor providing for the issuance of (i) 92,890 shares of Common Stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”)
to purchase up to 74,600 shares of Common Stock (the “Pre-Funded Warrant Shares”) with an exercise price of $0.025 per share,
which Pre-Funded Warrants are to be issued in lieu of shares of Common Stock to ensure that the investor does not exceed certain beneficial
ownership limitations, and (iii) warrants (the “2022 Warrants”), with a term of five years and six months from the date
of issuance, to purchase an aggregate of up to 159,115 shares of Common Stock (the “2022 Warrant Shares”) at an exercise price
of $63.00 per share, subject to customary adjustments thereunder. The total net proceeds, after expenses, to us were approximately $9.1
million. All 74,600 Pre-Funded Warrants were exercised on June 8, 2022, resulting in the issue of 74,600 shares of common stock for proceeds
of $1,865.
Clinical and Research Developments
In July 2023, we announced
a summary of feedback received following meetings held with both US and EU regulators, as well as an update on the Company’s current
clinical development plan based on guidance received.
Feedback from the FDA
as well as key country-level regulatory agencies in Europe included:
Based on positive feedback received from the relevant
global regulatory bodies and overlapping clinical requirements, we made the strategic decision to focus its efforts on the US as the US
standards should translate to acceptance in other international markets. We have a high level of confidence that AD04 will achieve success
in clinical development based on our post hoc analysis and the regulatory feedback on the pre-specified primary endpoint that the FDA
has now confirmed, specifically, a reduction of heavy drinking days to zero at months 5 and 6. This is also vital for our ongoing partnering
efforts based on discussions with companies active in the US and Europe. Importantly, the regulators acknowledged the valuable insights
of the post hoc analysis, which demonstrated that patients with a specific genetic subtype (AG+), achieved a statistical significance
of p=0.031 and p=0.021 respectively in both the Phase 2 and Phase 3 trials. Additionally, these patients averaged over 17 (17.23) heavy
drinking days per month at the study start and achieved under 3 (2.37) heavy drinking days per month at study completion.
These clinically meaningful results are important
as evidenced by the US healthcare provider research completed after the ONWARD trial, which suggests AD04 would play an important role
as a medication for physicians currently treating patients with AUD.
67
Market research conducted subsequent to completion
of the ONWARD trial suggests unit pricing for AD04 could be significantly higher than previous assumptions which we believe confirms AD04
as an attractive commercial opportunity.
We have assessed the impact of the regulatory
guidance on the future business and operating plan requirements to meet the needs of the FDA and EU regulators for submission and approval
of AD04 to treat genetic subtypes of AUD. While the Company is in the process of confirming the impact on the clinical development plans
and timing with its external advisors and ongoing partnership discussions, the following provides a working summary subject to final discussions
with the regulatory agencies.
Efficacy Requirements:
Safety Requirements:
● A thorough QT study will not be required.
In parallel with the Phase 3 trials, we expect
to conduct any standard Phase 1 studies required by the regulatory agencies. Studies that have been discussed with the FDA as potentially
being required might assess food effects, potentiation of the central nervous system effects of alcohol, and pharmacodynamic impact of
certain cytochrome P450 enzyme variants. We also expect to conduct a 12-month open-label Phase 1 safety study in at least 100 subjects
to evaluate the 12-month safety of AD04.
68
Results of operations for the years ended December
31, 2023 and 2022 (rounded to nearest thousand)
The following table sets forth the components
of our statements of operations in dollars for the periods presented:
For the Year Ended December 31, Change
Change in value of equity method investment (194,000 ) – (194,000 )
Provision for income tax – – –
Research and development (“R&D”) expenses
Research and development expenses decreased by
approximately $683,000 (35%) in the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was led by
a significant decrease in the use of clinical and statistical consultants of approximately $303,000 and clinical materials manufacturing
expenses of $231,000 with the completion of the AD04 trial. Compensation costs for R&D directed employees also decreased, salaries
by approximately $189,000 and equity-based compensation by approximately $25,000, due to reduced use of employee time for R&D activities.
Finally, the cost of our license of AD04 decreased by approximately $145,000, due to a one-time milestone payment in 2022 due on the completion
of the trial. These decreases were somewhat offset by increased CRO fees and expenses of approximately $207,000, with due to occurrence
in 2023 of final milestone payments and windup costs occurring after trial completion and by the cost of access to patient diagnosis information
of approximately $52,000 needed for development planning at the end of 2023.
General and administrative expenses
General and administrative expenses decreased
by approximately $3,288,000 (37%) in the year ended December 31, 2023 compared to the year ended December 31, 2022. The single largest
component of this decrease was the reduction in equity-based compensation of G&A directed employees and consultants of approximately
$1,605,000, resulting from reduced issuances of options and share grants and the completion of the vesting periods of grants made in prior
years. The cost of salaries and other cash compensation of G&A directed employees decreased by approximately $905,000, primarily due
to the reassignment of executives away from management of the Company to management of Purnovate. The year ended December 31, 2023 also
saw substantial decreases in the investor/public relations costs of approximately $358,000, the cost of strategic consultants of approximately
$319,000, and IT and web development costs of approximately $102,000.
Total other income (expense)
In the year ended December 31, 2023, total other income (expense) decreased
by approximately $177,000 (281%), when compared to the year ended December 31, 2022. The change was almost entirely due to recognition
of a portion of the operating loss of Adovate, LLC, equity of which we acquired in 2023 as part of the sale of the Company’s discontinued
operations.
69
Loss from discontinued operations, net
of taxes
Our loss from discontinued operations, net of
taxes, decreased by approximately $3,814,000 in the year ended December 31, 2023, compared to the year ended December 31, 2022. The primary
driver of this change was the one time gain on sale of these operations of approximately $2,625,000. Since these operations were sold
in the middle of 2023, essentially every component of their operating costs decreased substantially compared to the prior year: direct
research and development project costs by approximately $1,548,000, salaries by approximately $51,000, accounting costs by approximately
$52,000, and rent by approximately $45,000. These decreases were somewhat offset by the absence in 2023 of non-cash gains in 2022 of approximately
$536,000 due to changes in the value of a contingent liability associated with these operations.
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. To date, we have funded our operations
primarily with the proceeds from our initial and secondary public offerings, private placements and our equity line, as well as other
equity financings and the issuance of debt securities prior to that. On July 31, 2018, we closed our initial public offering.
During the year ended December 31, 2023, our primary
sources of funding were sales of common stock, pre-funded warrants, and warrants, and option exercises.
On February 10, 2022, we entered into a securities
purchase agreement with an accredited institutional investor providing for the issuance of (i) 92,890 shares of our common stock, par
value $0.001, (ii) pre-funded warrants to purchase up to 74,600 shares of Common Stock with an exercise price of $0.025 per share, which
Pre-Funded Warrants were to be issued in lieu of shares of Common Stock to ensure that the Investor does not exceed certain beneficial
ownership limitations, and (iii) warrants, with a term of five years and six months from the date of issuance, to purchase an aggregate
of up to 159,115 shares of Common Stock at an exercise price of $63.00 per share. We realized net proceeds from the offering of approximately
$9.1 million after deducting fees due to the placement agent and our transaction expenses.
On February 23, 2023, we entered into an equity
purchase agreement with an accredited investor for the purchase of 73,144 shares of Common Stock at at-the-market price of $10.25 per
share in a registered direct offering. We realized net proceeds from the offering of approximately $610,000 after deducting fees due to
the placement agent and our transaction expenses. We also issued the placement agent warrant to purchase 7,317 shares of Common Stock
at an exercise price of $10.25 per share.
On May 31, 2023, we entered into an Equity Purchase
Agreement with Alumni Capital, LLC (“Alumni”). This agreement constituted a standby equity purchase agreement (a “SEPA”).
Pursuant to the SEPA, we have the right, but not the obligation, to sell to Alumni up to $3,000,000 of newly issued shares, subject to
increase to $10,000,000 at our option, at our request at any time during the commitment period, which commenced on May 31, 2023 and will
end on the earlier of (i) December 31, 2024, or (ii) the date on which Alumni shall have made payment of advances requested by the Company
totaling up to the commitment amount of $3,000,000. Each sale we request under the SEPA (a “Purchase Notice”) may be for a
number of shares of common stock with an aggregate value of up to $500,000, and up to $2,000,000 provided certain conditions concerning
the average daily trading value are met. The SEPA provides for shares to be sold to Alumni at 95% of the lowest daily volume weighted
average price during the three days after a Purchase Notice is issued to Alumni. Upon our entry into and subject to the terms and conditions
set forth in the SEPA, we issued 7,983 shares of common stock to Alumni as consideration for its irrevocable commitment to purchase shares
of common stock, pursuant to the SEPA. On August 3, 2023, 20,550 shares of common stock were sold under the terms of the SEPA for cash
proceeds $140,330.
70
On October 19, 2023,
we entered into a securities purchase agreement (the “Purchase Agreement”) with an institutional investor (the “Purchaser”)
for the issuance and sale in a private placement (the “Private Placement”) of (i) pre-funded warrants (the “Pre-Funded
Warrants”) to purchase up to 1,418,440 shares of our common stock, par value $0.001 (the “Common Stock”), at an exercise
price of $0.001 per share, (ii) series A warrants (the “Series A Warrants”) to purchase up to 1,418,440 shares of our Common
Stock at an exercise price of $2.82 per share, and (iii) series B warrants (the “Series B Warrants” and together with the
Series A Warrants, the “Warrants”) to purchase up to 1,418,440 shares of our Common Stock at an exercise price of $2.82 per
share. The Series A Warrants are exercisable at any time on or after the earlier of (i) if permitted by the rules and regulations of the
Nasdaq Stock Market, upon the payment by the Purchaser of $0.125 per share in addition to the exercise price of $2.82 per share, and (ii)
the Stockholder Approval Date (as defined in the Purchase Agreement) (the “Initial Exercise Date”), and have a term
of exercise equal to five and one-half years from the date of issuance. The Series B Warrants are exercisable at any time on or after
the Initial Exercise Date and have a term of exercise equal to eighteen months from the date of issuance. The net proceeds to us from
the Private Placement were approximately $3.4 million, after deducting placement agent fees and expenses and estimated offering expenses
payable by us.
On March 1, 2024, warrants to purchase 268,440
warrants to purchase shares for common stock for an exercise price of $2.82 per share were exercised for gross proceeds of approximately
$757 thousand.
On March 1, 2024, we entered into a warrant inducement
agreement (the “Inducement Agreement”) with a certain holder (the “Holder”) of the Company’s warrants to
purchase shares of our common stock, par value $0.001 per share (the “common stock”), issued in a private placement offering
that closed on October 24, 2023 (the “Existing Warrants”). Pursuant to the Inducement Agreement, the Holder of the Existing
Warrants agreed to exercise for cash the Existing Warrants to purchase up to approximately 1,150,000 shares of common stock, at an exercise
price of $2.82 per share. The transactions contemplated by the Inducement Agreement closed on March 6, 2024. The Company received aggregate
gross proceeds of approximately $3.5 million, before deducting placement agent fees and other expenses payable by the Company. Net proceeds
of this transaction were estimated to be approximately $3.1 million.
Though we have received net proceeds of approximately
$3.8 from these recent warrant exercises, we intend to use this additional funding to accelerate the development of AD04. Therefore, 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
Annual Report on Form 10-K, based our current projections.
Under our accelerated development plans, we expect
to have used approximately $6.5 million in cash during the twelve months ended December 31, 2024 for both AD04 development costs, other
R&D project costs and general corporate expenses, by which time we expect to have nearly exhausted our cash on hand. There is no assurance
that funds could be raised in that period on acceptable terms to continue our operations and AD04 development projects.
We will also require additional financing as we continue to execute
our overall business strategy, including two additional Phase 3 trials for AD04 that are currently expected to require $8-12 million each
in direct expenses, and up to $5 million in additional other development expenses. These estimates may change based on upcoming discussions
with regulatory authorities and final trial designs. Our liquidity may be negatively impacted as a result of research and development
cost increases in addition to general economic and industry factors. Our continued operations will depend on our ability to raise additional
capital through various potential sources, such as equity and/or debt financings, grant funding, strategic relationships, or out-licensing
in order to complete its subsequent clinical trial requirements for AD04. Management is actively pursuing financing and other strategic
plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all. Without
additional funding, we will 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 us and our financial statements.
If we raise additional funds by issuing equity
securities or convertible debt, our shareholders will experience dilution. Debt financing, if available, would result in increased fixed
payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or
product candidates or to grant licenses on terms that may not be favorable to us. We cannot be certain that additional funding will be
available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition
and our ability to pursue our business strategies.
71
Cash flows
For the Year Ended December 31,
Provided by (used in)
Operating activities – continuing operations $ (5,803,000 ) $ (8,594,000 )
Net cash used in operating activities – continuing operations
Cash used in operating activities decreased by
approximately $2,791,000 in the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was driven by
a lower loss from operations of approximately $3,794,000, an increase in loss due to the non-cash change in value of our equity method
investment of $193,884 and a lower change in net operating liabilities of $379,000, partially offset by lower non-cash equity compensation
expense of approximately $1,628,000.
Net cash used in discontinued operations
Net cash used in discontinued operations decreased
by approximately $1,589,000 in the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease is primarily
due to the gain on sale of these operations of approximately $2,625,000, which is classified as part of the loss, was either non-cash,
or was classified as cash provided by investing activities (see below).
Net cash provided by investing activities
In the year ended December 31, 2023, net cash
provided by investing activities increased by approximately $1,500,000 over the year ended December 31, 2022. This difference was entirely
due to the cash provided by the sale of our now discontinued operations in 2023. No such activity took place in 2022.
Net cash provided by financing activities
Cash provided by financing activities decreased
by approximately $4,994,000 in the year ended December 31, 2023 compared to the year ended December 31, 2022. This is due to our reduced
fundraising activities, as we have taken a conservative approach to raising funds with our operational cash needs reduced, cash being
provided through the sale of our discontinued operations, and our equity valuation lower that it has been historically.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3 to the financial statements for a discussion
of recent accounting pronouncements.
Critical Accounting Estimates
Our discussion and analysis of our financial condition
and results of operations is based on our consolidated financial statements. These consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. We evaluate
these estimates and judgments on an ongoing basis. We base our estimates on our historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results and experiences may differ
materially from these estimates. We did not identify any critical accounting estimates. Our significant accounting policies are more fully
described in Note 3 to our financial statements included with this report.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
We are a smaller reporting company as defined
by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
72
Item 8. Financial Statements and Supplemental Data.
ADIAL PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS
Contents
Page
Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 688) F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Stockholders and Board of Directors of
Adial Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Adial Pharmaceuticals, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally
accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant
accumulated deficit, incurred recurring losses and needs to raise additional funds to sustain its operations. 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 audits 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.
Emphasis of Matter
As discussed in Note 3 and Note 5, the accompanying
consolidated financial statements reflect retrospective application of the reverse stock split and of the discontinued operations.
Critical Audit Matters
Critical audit matters are matters arising from
the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum llp
We have served as the Company’s auditor since 2017.
Marlton, New Jersey
April 1, 2024
F-2
ADIAL PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Current assets of discontinued operations — 428,700
Equity method investment 1,534,013 —
Assets of discontinued operations — 948,392
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable, related party 24,062 —
Other current liabilities — 10,387
Current liabilities of discontinued operations — 365,742
Long-term Liabilities:
Long-term liabilities of discontinued operations — 665,444
Commitments and contingencies – see Note 9
Stockholders’ Equity
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
ADIAL PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Operating Expenses:
Other Income (Expense)
Loss on equity method investment (193,884 ) —
Income tax benefit — —
Net loss per share, basic and diluted $ (3.60 ) $ (12.71 )
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
ADIAL PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Common Stock Additional Paid In Accumulated Total Stockholders’
Shares Amount Capital Deficit Equity
Redemption of fractional shares (199 ) (1 ) (1,660 ) — (1,661 )
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
ADIAL PHARMACEUTICALS, INC.
CONSOLIDATED 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:
Amortization of intangible assets 564 564
Cost of Commitment shares issued 51,901 —
Loss on equity method investment 193,884 —
Changes in operating assets and liabilities:
Prepaid research and development — 9,931
Prepaid expenses and other current assets (22,156 ) 40,060
Accounts payable and other current liabilities (183,473 ) 15,826
Accounts payable, related party 24,062 —
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase consideration received for sale of assets 1,500,000 —
Net cash provided by investing activities 1,500,000 —
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceed from warrant offerings 3,383,312
Proceeds from warrant exercises 503 1,865
Redemption of fractional shares (1,661 ) —
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ — $ —
Income taxes paid $ — $ —
Equity consideration received for sale of Purnovate $ 1,727,897 —
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
ADIAL PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals, Inc.
(“Adial”) was converted from a limited liability company formed on November 23, 2010 in the Commonwealth of Virginia under
the name ADial Pharmaceuticals, LLC, to a corporation and reincorporated in Delaware on October 1, 2017. Adial is presently engaged in
the development of medications for the treatment or prevention of addictions and related disorders.
Adial’s wholly owned
subsidiary, Purnovate, Inc. (“Purnovate”), was formed on January 26, 2021 to acquire, having been formed as Purnovate, LLC
in December of 2019. Purnovate was a drug development company with a platform focused on developing drug candidates for non-opioid pain
reduction and other diseases and disorders potentially targeted with adenosine analogs that are selective, potent, stable, and soluble.
On January 27, 2023, the Company entered into an option agreement for the acquisition of Purnovate’s assets and business with Adovate,
LLC (“Adovate”), a Virginia limited liability company that was formed and majority owned by a then Director of the Company
and then CEO of Purnovate and was therefore a related party. On May 8, 2023, Adovate sent a letter to the Company exercising its option
effective May 16, 2023 for the purchase of the assets and business of the Company’s wholly owned subsidiary, Purnovate, Inc. and
made payment of the $450,000 in fees due on exercise. Effective June 30, 2023, Adovate issued to the Company the equity stake in Adovate
due on exercise of the option agreement. On August 17, 2023, a Bill of Sale, Assignment and Assumption Agreement (“Bill of Sale”)
was executed between Purnovate and Adovate, transferring the Purnovate assets to Adovate, effective as of June 30, 2023. On August 17,
2023, Purnovate and Adovate also entered into a Letter Agreement which stated that Adovate acquired the assets of Purnovate effective
as of June 30, 2023, pursuant to the Bill of Sale. On September 18, 2023, the parties executed a final acquisition agreement which memorialized
the terms of the sale of the Purnovate assets to Adovate pursuant to the Option Agreement and Bill of Sale. See Note 4 for additional
information.
In June of 2022, the Company
released data from its ONWARDTM Phase 3 pivotal trial of its lead compound AD04 (“AD04”) for the treatment of Alcohol
Use Disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”)
have indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of Alcohol Use Disorder rather
than the previously required abstinence-based endpoints. The Company has scheduled meetings with the FDA and national medicines authorities
in Europe to determine the path toward approval. Key patents have been issued in the United States, the European Union, and other jurisdictions
for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist. Due to its
mechanism of action, AD04 has the potential to be used for the treatment of other addictive disorders, such as Opioid Use Disorder, obesity,
smoking, and other drug addictions.
2 — GOING CONCERN AND OTHER UNCERTAINTIES
The consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”),
which contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred losses each year
since inception. Based on the current development plans for AD04 in both the U.S. and international markets and other operating requirements,
the Company does not believe that the existing cash and cash equivalents are sufficient to fund operations for the next twelve months
following the filing of these consolidated financial statements. The Company has a significant accumulated deficit, incurred recurring
losses, and needs to raise additional funds to sustain its operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
Based on the recently announced
results of its ONWARD Phase 3 trial, the Company has scheduled meetings with the FDA and various European national authorities to discuss
the appropriate next steps towards the expeditious development of AD04 and to seek product approval. The results of these meetings may
materially change the Company’s expectations concerning the expected development cost of AD04. The Company has sold its Purnovate
programs to a company formed for that purpose, reduced the Company’s operating expenses and provided approximately $1.5 million
in working capital through that third party’s payment of $450 thousand in option exercise fees and a total $1.05 million in cost
reimbursements owed pursuant to the Agreement. In October of 2023, the Company sold warrant for net proceeds of approximately $3.4 million.
Nonetheless, the Company will require additional capital. There is no certainty that the Company will be able to access additional capital
on acceptable terms, if at all, to continue operations after whatever funds are received from the buyer are expended. If unable to access
sufficient capital, the Company would be required to delay, scale back or eliminate some or all of its research and development programs
or delay its approach to commercialization of AD04, which would likely have a material adverse effect on the Company and its financial
statements.
F-7
The Company’s continued
operations will depend on its ability to raise additional capital through various potential sources, such as equity and/or debt financings,
grant funding, strategic relationships, or out-licensing in order to complete its subsequent clinical trial requirements for AD04. Management
is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will
be available on acceptable terms, or at all. Without additional funding, the Company would be required to delay, scale back or eliminate
some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial
statements.
Other Uncertainties
Generally, the industry in
which the Company operates subjects the Company to a number of other risks and uncertainties that can affect its operating results and
financial condition. Such factors include, but are not limited to: the timing, costs and results of clinical trials and other development
activities versus expectations; the ability to obtain regulatory approval to market product candidates; the ability to manufacture products
successfully; competition from products sold or being developed by other companies; the price of, and demand for, Company products once
approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of these consolidated
financial statements in conformity with GAAP requires Company management to make estimates and assumptions the affect the amounts of assets
and liabilities at the date of these consolidated financial statements and the reported amounts of expenses during the reporting period.
Actual results might differ from these estimates.
Significant items subject
to such estimates and assumptions include accruals associated with third party providers supporting clinical trials, income tax asset
realization, and the valuation of equity method investments.
Basis of Presentation and Principals of Consolidation
The accompanying consolidated
financial statements have been prepared in accordance with GAAP. The financial statements represent the consolidation of the Company and
its subsidiary in conformity with GAAP. All intercompany transactions have been eliminated in consolidation.
Reverse Stock Split
On August 4, 2023, the Company
effected a reverse stock split of its outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25.
The shares authorized for issue under the Company’s charter remained 50,000,000 common stock. All references to common stock, stock
warrants to purchase common stock, stock options to purchase common stock, share data, per share data and related information contained
in these financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
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, restricted stock, 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, 2023 and
2022 as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.
F-8
The total potentially dilutive
common shares that were excluded for the years ended December 31, 2023 and 2022 were as follows:
Potentially Dilutive Common Shares Outstanding December 31,