The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals, Inc.
(the “Company” or “Adial”) was converted from a limited liability company formed under the name Adial Pharmaceuticals,
LLC, formed on November 23, 2010 in the Commonwealth of Virginia to a corporation and reincorporated in Delaware on October 1, 2017. Adial
is presently engaged in the development of medications for the treatment or prevention of addictions and related disorders.
The Company’s wholly
owned subsidiary, Purnovate, Inc. (“Purnovate”), was acquired on January 26, 2021, having been formed as Purnovate, LLC in
December of 2019. Purnovate is 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.
The Company has recently released
data from its ONWARD™ Phase 3 pivotal trial of its lead compound AD04 (“AD04”) for the treatment of Alcohol Use Disorder.
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 is believed to have
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
The
unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in
a development stage and has incurred losses each year since inception and has experienced negative cash flows from operations in each
year since inception and has an accumulated deficit of approximately $60.8 million
as of September 30, 2022. Based on the current development plans for AD04 in both the U.S. and international markets, planned R&D
activities to develop Purnovate drug candidates, 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 unaudited condensed consolidated
financial statements, though the Company expects cash on hand to be sufficient to fund operations through the second quarter of 2023.
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 intends to share the results of the trial with the relevant health authorities in Europe
and the United States to discuss the appropriate next steps towards the expeditious development of AD04 and to seek product approval.
The results of these discussions may materially change the Company’s expectations concerning the expected development cost of AD04.
The Company has also initiated a number of research and development projects associated with Purnovate, including Purnovate’s lead
compound, PNV5030, for treatment of pain and potentially for treatment of cancer. Though the Company’s cash on hand at the filing
date is not estimated to be sufficient to fund operations through the twelve months subsequent to the date of this report, the Company
believes funds on hand to be sufficient to bring the Purnovate program to the point of filing an IND for PNV5030. However, there can be
no guarantee that conditions will not change and that the Company will not require additional funding in order to fund these additional
projects, which may not be available on acceptable terms or at all, in which case significant delays or cost increases may result in material
disruption to the Company’s operations. In such case, 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 regulators concerning AD04, which would likely have a material adverse
effect on the Company and its financial statements.
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.
With the results of the ONWARD
trial having been released, the risk of delays to the Company’s development programs from COVID-19 are reduced. However, the ongoing
effects of the ongoing coronavirus pandemic, such as supply chain disruptions and post-stimulus inflation, may increase non-trial costs
such as insurance premiums, increase the demand for and cost of capital, increase loss of work time from key personnel, and negatively
impact our other key vendors and suppliers. The full extent to which the COVID-19 pandemic impacts the clinical development of AD04, preclinical
development of the PNV5030, research and development activities around other Purnovate drug candidates, and the Company’s suppliers
and other commercial partners, will depend on future developments that are still highly uncertain and cannot be predicted with confidence
at this time, all of which could have a material adverse effect on our business, financial condition, and results of operations.
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principals of Consolidation
The accompanying unaudited
interim condensed consolidated financial statements have been prepared in accordance with GAAP as determined by the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management,
the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments
necessary for the fair statement of the balances and results of operations for the periods presented. The interim operating results are
not necessarily indicative of results that may be expected for any subsequent period. These unaudited condensed financial statements should
be read in conjunction with the audited financial statements for the year ended December 31, 2021, included in the 2021 Form 10-K. The
unaudited condensed consolidated financial statements represent the consolidation of the Company and its subsidiary in conformity with
GAAP. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited
condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant items subject
to such estimates and assumptions include the valuation of stock-based compensation, accruals associated with third party providers supporting
clinical trials, estimated fair values of long-lived assets used to record impairment charges related to intangible assets, acquired in-process
research and development (“IPR&D”) and goodwill, allocation of purchase price in business acquisitions, measurement of
contingent liabilities, and income tax asset realization. In particular, the recognition of clinical trial costs is dependent on the Company’s
own judgement, as well as the judgment of our contractors and subcontractors in their reporting of information to us.
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 three and nine months ended September 30, 2022 and 2021 as
the inclusion of all potential common shares outstanding would have an anti-dilutive effect.
The total potentially dilutive
common shares that were excluded for the three and nine month periods ended September 30, 2022 and 2021 were as follows:
| |
Potentially Dilutive Common Shares Outstanding September 30, | |
| |
2022 | | |
2021 | |
Warrants to purchase common shares | |
| 12,095,870 | | |
| 7,884,936 | |
Common Shares issuable on exercise of options | |
| 4,316,977 | | |
| 3,670,866 | |
Shares subject to repurchase | |
| 1,194,444 | | |
| - | |
Total potentially dilutive Common Shares excluded | |
| 17,607,291 | | |
| 11,555,802 | |
Fair Value Measurements
FASB ASC 820, Fair Value Measurement,
(“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability
by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:
|
● |
Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs). |
|
● |
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially). |
|
● |
Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available). |
The fair value of cash and cash equivalents, accounts payable approximate
their carrying value due to their short-term maturities.
Non-financial assets, such
as IPR&D and goodwill, are accounted for at fair value on a nonrecurring basis.
Acquisition-Related Contingent Consideration
In connection with the Purnovate
business combination, the Company may be required to pay future consideration that is contingent upon the achievement of specified development,
regulatory approvals or sales-based milestone events. The Company determines the fair value of these obligations using various estimates
that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. As of September 30, 2022, the
resulting probability-weighted cash flows were discounted using a weighted average cost of capital of 44% for regulatory and sales-based
milestones.
| |
September 30, 2022 | |
Balance, December 31, 2021 | |
$ | (1,014,000 | ) |
Total gains recognized | |
| 197,000 | |
Balance as of September 30, 2022 | |
$ | (817,000 | ) |
Adoption of Recent Accounting Pronouncements
In December 2019, the
FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes: Simplifying the Accounting for Income
Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating
income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies
and simplifies other areas of ASC 740. This ASU is effective for fiscal years beginning after December 15, 2021, and interim
periods within fiscal years beginning after December 15, 2022. Adoption of this guidance did not have any material impact on
the Company’s financial statements.
In August 2020, the FASB issued
ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s
Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting
for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions
that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share
calculation in certain areas. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within
those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must
be as of the beginning of the Company’s annual fiscal year. The Company adopted ASU 2020-06 on January 1, 2021, with no material
impact on our financial statements.
4 — ACCRUED EXPENSES
Accrued expenses consist of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Clinical research organization services and expenses | |
$ | 117,127 | | |
$ | 1,826,479 | |
Employee compensation | |
| 686,501 | | |
| 520,795 | |
Preclinical and manufacturing expenses | |
| 119,839 | | |
| – | |
Legal and consulting services | |
| 31,938 | | |
| 29,656 | |
Total accrued expenses | |
$ | 955,405 | | |
$ | 2,376,930 | |
5 — RELATED PARTY TRANSACTIONS
On December 7, 2020, the Company
entered into an Equity Purchase Agreement with Purnovate, LLC to purchase all of the outstanding membership interests of Purnovate from
the members of Purnovate (the “Members”), such that after the acquisition, Purnovate became a wholly owned subsidiary of the
Company. The Company’s then Chief Executive Officer and board member, William B. Stilley, and another Adial board member, James
W. Newman, Jr. were, directly or indirectly, the members of Purnovate. Messrs. Stilley and Newman agreed to sell their membership interests
on the same terms as the other Members, except that Mr. Stilley is subject to a two (2) year lock up with respect to the sale and transfer
of the stock consideration that he received so long as his employment has not been terminated by the Company without cause prior to the
end of such period. Mr. Stilley owned approximately 28.7% of the membership interest of Purnovate and Mr. Newman controlled two entities
that, together, own less than 1% of the membership interests of Purnovate. As a result of the foregoing, the Company formed a Special
Committee of independent members of its Board of Directors to review and negotiate the acquisition terms. On January 26, 2021 the acquisition
was consummated, and Messrs. Stilley and Newman sold all of their membership interests in Purnovate to the Company (see Note 4).
On March 11, 2021, the Company
entered into Securities Purchase Agreements (the “March 2021 SPAs”) with each of Bespoke, three entities controlled by Mr.
Newman, and Keystone Capital Partners, LLC (“Keystone”), pursuant to which: (i) Bespoke Growth Partners, Inc. (“Bespoke”)
a company controlled by Mark Peikin, the Company’s Chief Strategy Officer who is not an executive officer, agreed to purchase an
aggregate of 336,667 shares of the Company’s common stock at a purchase price of $3.00 per share for aggregate gross proceeds of
$1,010,001; (ii) Mr. Newman agreed to purchase an aggregate of 30,000 shares of the Company’s common stock at a purchase price of
$3.00 per share for aggregate gross proceeds of $90,000; and (iii) Keystone agreed to purchase an aggregate of 333,334 shares of the Company’s
common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $1,000,002. During the year ended December 31, 2021,
the Company issued an aggregate of 700,001 shares of common stock to such individuals for total proceeds of $2,100,003. The shares sold
pursuant to the March 2021 SPAs were registered pursuant to a registration statement on Form S-3 that was filed with the SEC on April
20, 2021 and declared effective on May 26, 2021.
On July 6, 2021, the Company
entered into Securities Purchase Agreements, dated July 6, 2021 (the “June 2021 SPAs”), with three pre-existing investors
for an aggregate investment of $5,000,004 in consideration of the purchase by such investors of an aggregate of 1,666,667 shares of the
Company’s common stock at a purchase price of $3.00 per share. June 2021 SPAs were entered with each of Bespoke , Keystone, and
Richard Gilliam, a private investor (“Gilliam”) (collectively, the “Investors,” and each an “Investor”),
pursuant to which: (i) Bespoke agreed to purchase an aggregate of 833,334 shares of the Company’s common stock at a purchase price
of $3.00 per share for aggregate gross proceeds of $2,500,002; (ii) Keystone agreed to purchase an aggregate of 500,000 shares of the
Company’s common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $1,500,000; and (iii) Gilliam agreed
to purchase an aggregate of 333,334 shares of the Company’s common stock at a purchase price of $3.00 per share for gross proceeds
of $1,000,002. The shares sold pursuant to the June 2021 SPAs were registered pursuant to a registration statement on Form S-3 that was
filed with the SEC on July 20, 2021 and declared effective on July 29, 2021.
See Note 11 for related party vendor, consulting,
and lease agreements.
6 — SHAREHOLDERS’ EQUITY
Common Stock Issuances
On February 10, 2022, the
Company, entered into a securities purchase agreement with an accredited institutional investor (“the Investor”) providing
for the issuance of (i) 2,322,250 shares of the Company’s common stock, par value $0.001, (ii) pre-funded warrants to purchase up
to 1,865,000 shares of common stock with an exercise price of $0.001 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, with
a term of five years and six months from the date of issuance, to purchase an aggregate of up to 3,977,888 shares of common stock at an
exercise price of $2.52 per share. The Company received net proceeds from the offering of $9,123,741 after deducting fees due to the placement
agent and the Company’s transaction expenses. On June 8, 2022, all of the pre-funded warrants issued on February 10, 2022 were exercised
for proceeds of $1,865, resulting in issuance of 1,865,000 shares common stock.
During the three and nine
months ended September 30, 2022, the Company issued no shares of common stock and 470,000 shares of common stock at a cost of $818,350,
respectively, to consultants for services rendered.
During the nine months ended
September 30, 2022, the Company issued employees 1,250,000 shares of common stock as bonuses. The first issuance of 250,000 shares are
subject to forfeiture for nominal consideration to Company on termination of the employee, the shares no longer being liable to forfeiture
(“vesting”) on the following schedule: 1/24 of 166,667 shares vesting on the date of issue and the first of each of the next
twenty-three subsequent months, and 83,333 shares vesting on the third anniversary of the date of issue. The second issuance of 1,000,000
shares are subject to forfeiture on the same conditions, but on the following schedule: 1/6 of the issued shares vesting six months from
date of issue, then 1/12 vesting at the end of each subsequent three month period, the entire grant being vested three years from date
of issue. On September 30, 2022, 55,556 shares were vested and 1,194,444 shares remained subject to repurchase.
2017 Equity Incentive Plan
On October 9, 2017, the Company
adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”); which became effective
on July 31, 2018. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the
2017 Equity Incentive Plan was 1,750,000 shares. On October 13, 2022, by a vote of the shareholders, the number of shares issuable under
the 2017 Equity Incentive Plan was increased to 9,500,000. At September 30, 2022, the Company had issued 2,414,993 shares under the 2017
Equity Incentive Plan and had outstanding 4,177,291 options to purchase shares of our common stock under the 2017 Equity Incentive Plan,
as well as 139,686 options to purchase shares of common stock that were issued before the 2017 Equity Incentive Plan was adopted, leaving
2,907,716 available for issue.
Stock Options
The following table provides
the stock option activity for the nine months ended September 30, 2022:
| |
Total Options Outstanding | | |
Weighted Average Remaining Term (Years) | | |
Weighted Average Exercise Price | | |
Weighted Average Fair Value at Issue | |
Outstanding December 31, 2021 | |
| 3,585,310 | | |
| 7.80 | | |
$ | 2.64 | | |
$ | 2.02 | |
Issued | |
| 731,667 | | |
| | | |
| 1.70 | | |
| 1.39 | |
Cancelled | |
| – | | |
| | | |
| | | |
| | |
Outstanding September 30, 2022 | |
| 4,316,977 | | |
| 7.47 | | |
$ | 2.48 | | |
$ | 1.91 | |
Outstanding September 30, 2022, vested and exercisable | |
| 2,987,820 | | |
| 6.95 | | |
$ | 2.63 | | |
$ | 1.99 | |
At September 30, 2022, the total intrinsic value
of the outstanding options was $0.
The Company used the Black
Scholes valuation model to determine the fair value of the options issued, using the following key assumptions for the nine months ended
September 30, 2022:
|
|
September 30,
2022 |
|
Fair Value per Share |
|
$ |
0.59-2.00 |
|
Expected Term (years) |
|
|
6.0 |
|
Expected Dividend |
|
$ |
— |
|
Expected Volatility |
|
|
107.88-116.54 |
% |
Risk free rate |
|
|
1.89-3.26 |
% |
During the nine months ended
September 30, 2022, 731,667 options to purchase shares of common stock were granted at a fair value of $1,017,095, an approximate weighted
average fair value of $1.39 per option, to be amortized over a service a weighted average period of 2.89 years. As of September 30, 2022,
$2,374,688 in unrecognized compensation expense will be recognized over a weighted average remaining service period of 1.8 years.
The components of stock-based
compensation expense included in the Company’s Statements of Operations for the three and nine months ended September 30, 2022 and
2021 are as follows:
| |
Three months ended
September 30, | | |
Nine months ended
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Research and development options expense | |
| 51,799 | | |
| 79,604 | | |
| 180,627 | | |
| 223,413 | |
Total research and development expenses | |
| 51,799 | | |
| 79,604 | | |
| 180,627 | | |
| 223,413 | |
General and administrative options expense | |
| 426,069 | | |
| 468,281 | | |
| 1,490,246 | | |
| 1,289,192 | |
Stock and warrants issued to consultants and employees | |
| 79,147 | | |
| 640,992 | | |
| 969,476 | | |
| 1,844,254 | |
Total general and administrative expenses | |
| 505,216 | | |
| 1,109,273 | | |
| 2,459,722 | | |
| 3,133,446 | |
Total stock-based compensation expense | |
$ | 557,015 | | |
$ | 1,188,877 | | |
$ | 2,640,349 | | |
$ | 3,356,859 | |
Stock Warrants
The following table provides
the activity in warrants for the respective periods.
| |
Total Warrants | | |
Weighted Average Remaining Term (Years) | | |
Weighted Average Exercise Price | | |
Average Intrinsic Value | |
Outstanding December 31, 2021 | |
| 7,990,271 | | |
| 2.63 | | |
$ | 4.82 | | |
| 0.14 | |
Issued | |
| 6,042,888 | | |
| | | |
| 1.74 | | |
| | |
Exercised | |
| (1,865,000 | ) | |
| | | |
$ | 0.001 | | |
| | |
Outstanding September 30, 2022 | |
| 12,168,159 | | |
| 3.29 | | |
$ | 4.03 | | |
| 0.01 | |
This table includes warrants
to purchase 344,851 shares of common stock issued to consultants, including the 200,000 issued during the nine months ended September
30, 2022, with a total fair value of $263,195 at time of issue, calculated using the Black Scholes model assuming an underlying security
values of $2.06, volatility rate of 107.88% risk-free rate of 1.71%, and an expected term of 6.5 years. During the nine months ended September
30, 2022, the Company recognized $305,230 in expense associated with these warrants with no additional expense remaining to be recognized.
7 — COMMITMENTS AND CONTINGENCIES
License with University of Virginia Patent
Foundation – Related Party
In January 2011, the Company
entered into an exclusive, worldwide license agreement with the University of Virginia Patent Foundation, dba UVA Licensing and Ventures
Group (“UVA LVG”) for rights to make, use or sell licensed products in the United States based upon the ten separate patents
and patent applications made and held by UVA LVG.
As consideration for the rights
granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty
based on net sales of products covered by the patent-related rights. More specifically, the Company paid UVA LVG a license issue fee and
is obligated to pay UVA LVG (i) annual minimum royalties of $40,000 commencing in 2017; (ii) a $20,000 milestone payments upon dosing
the first patient under a Phase 3 human clinical trial of a licensed product, $155,000 upon the earlier of the completion of a Phase 3
trial of a licensed product, partnering of a licensed product, or sale of the Company, $275,000 upon acceptance of an NDA by the FDA,
and $1,000,000 upon approval for sale of AD04 in the U.S., Europe or Japan; as well as (iii) royalties equal to a 2% and 1% of net sales
of licensed products in countries in which a valid patent exists or does not exist, respectively, with royalties paid quarterly. In the
event of a sublicense to a third party, the Company is obligated to pay royalties to UVA LVG equal to a percentage of what the Company
would have been required to pay to UVA LVG had it sold the products under sublicense ourselves. In addition, the Company is required to
pay to UVA LVG 15% of any sublicensing income. A certain percentage of these payments by the Company to the UVA LVG may then be distributed
to the Company’s former Chairman of the Board who currently serves as the Company’s Chief Medical Officer in his capacity
as inventor of the patents by the UVA LVG in accordance with their policies at the time.
The license agreement may
be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to
make any milestone, failure to make required payments, or the failure to exercise diligence to bring licensed products to market. In the
event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination. The Company is required
to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by
December 31, 2024 and commencing commercialization of an FDA approved product by December 31, 2025. If the Company were to fail to use
commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.
The term of the license continues
until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration,
abandonment or invalidation will continue in perpetuity on a royalty-free, fully paid basis.
During both the three and
nine months ended September 30, 2022 and 2021, the Company recognized $10,000 and $30,000 minimum license royalty expenses under this
agreement, respectively. On May 13, 2022, the Company acknowledged that its Phase 3 trial was complete according to the terms of the UVA
LVG license and recognized an accrued license royalty expense of $155,000, which payment was made on September 6, 2022. At September 30,
2022 and December 31, 2021, total accrued royalties and fees due to UVA LVG were $30,000 and $0, respectively, shown on balance sheet
as accrued expenses, related party.
Clinical Research Organization (CRO)
On October 31, 2018, the Company
entered into a master services agreement (“MSA”) with Crown CRO Oy (“Crown”) for contract clinical research and
consulting services. The MSA has a term of five years, automatically renewed for two-year periods, unless either party gives written notice
of a decision not to renew the agreement six months prior to automatic renewal. The MSA or a service agreement under it may be terminated
by the Company, without penalty, on fourteen days written notice for scientific, administrative, or financial reasons, or if the purpose
of the study becomes obsolete. In the event that the MSA or Service Order are terminated, Crown’s actual costs up the date of termination
will be payable by the Company, but any unrealized milestones would not be owed.
On November 16, 2018, the
Company and Crown entered into Service Agreement 1 under the MSA for a 24 week, multi-centered, randomized, double-blind, placebo-controlled,
parallel-group, Phase 3 clinical study of AD04 for fees, as amended, of $3,100,764 (€3,168,895 converted to dollars at the Euro/US
Dollar exchange rate of 0.9785 $/€ as of September 30, 2022), payable upon attainment of certain milestones. On March 22, 2022, the
Company acknowledged the occurrence of the milestone event of 90% of trial case report forms having been monitored, and made a payment
of $148,875. On May 13, 2022, the Company acknowledged the milestone event of the last patient having made the last clinical visit and
made a payment of $146,765, and on June 30, 2022 the Company acknowledged the additional milestone event of the trial database being locked
at which time it recognized a payable of $137,375.
On April 28, 2022, the Company
and Crown settled a previous dispute concerning a putative change order. As part of this agreement, the Company agreed to pay Crown a
total of $454,034 (€410,000) for changes to the services described in Service Order 1. The settlement also altered the schedule of
remaining milestones to be as described in the table below.
At September 30, 2022, the
remaining future milestone payments are shown in the table below, converted to dollars from euros at the exchange rate then prevailing.
Milestone Event | |
Percent Milestone Fees | | |
Amount | |
eTMF Transfer | |
| 5 | % | |
$ | 132,067 | |
| |
| | | |
| | |
During the nine months ended
September 30, 2022, the Company recognized $275,516 in non-cash income associated with the Service Agreement 1 and the settlement described
above, classified as a negative R&D expense. The negative expense was a result of the value of the settlement and total, fully earned
value of milestones being less than the expense previously accrued. On September 30, 2022 there remained an accrued R&D expense of
$117,127 related to direct expenses under this agreement, which expense is expected to be fully paid with the occurrence of the final
milestone payment.
Service Agreement 1 also estimated
approximately $2.1 million (€2.2 million) in pass-through costs, mostly fees to clinical investigators and sites, which are billed
as incurred and the total contingent upon individual site rate and enrollment rates. With clinical enrollment having ended, the Company
has recorded approximately $3.5 million in site fees over the entire conduct of the trial, and does not expect to record material additional
site expenses. During the nine months ended September 30, 2022, the Company recognized non-cash income of $75,319 associated with fees
to investigators and sites, classified as a negative R&D expense, resulting from earned site fees in the quarter being lower than
the those previously accrued.
Lease Commitments – Purnovate lease
The Company has one operating
lease which consists of office space with a remaining lease term of approximately five years.
Leases with an initial term
of twelve months or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components
of contracts. The Company’s lease agreement does not provide for determination of the interest rate implicit in the lease. Therefore,
the Company used a benchmark approach to derive an appropriate incremental borrowing rate. The Company’s incremental borrowing rate
is the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the
lease payments in a similar economic environment. The Company benchmarked itself against other companies of similar credit ratings and
comparable quality and derived an incremental borrowing rate, which was used to discount its lease liabilities. The Company used an estimated
incremental borrowing rate of 9% on January 26, 2021 for its lease contract.
The Company’s lease
agreement does not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not
have any finance leases, any sublease arrangements, or any leases where the Company is considered the lessor.
The components of lease expense,
which are included in general and administrative expense, based on the underlying use of the ROU asset, were as follows:
Components of total lease cost: | |
Three months ended September 30, 2022 | | |
Three months ended September 30, 2021 | | |
Nine months ended September 30, 2022 | | |
Nine months ended September 30, 2021 | |
| |
| | |
| | |
| | |
| |
Operating lease expense | |
$ | 19,634 | | |
$ | 22,231 | | |
$ | 60,490 | | |
$ | 56,090 | |
Short-term lease expense | |
| — | | |
| — | | |
| — | | |
| — | |
Total lease cost | |
$ | 19,634 | | |
$ | 22,231 | | |
$ | 60,490 | | |
$ | 56,090 | |
Supplemental cash flow information
related to leases are as follows:
| |
Nine months ended September 30, 2022 | | |
Nine months ended September 30, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash flows for operating leases | |
$ | 52,595 | | |
$ | 45,146 | |
| |
| | | |
| | |
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | |
$ | 7,895 | | |
$ | 294,294 | |
Supplemental balance sheet information related
to leases was as follows:
| |
As of September 30, 2022 | | |
As of
December 31, 2021 | |
Assets | |
| | |
| |
Lease right of use assets | |
$ | 207,471 | | |
$ | 246,209 | |
Total lease assets | |
$ | 207,471 | | |
$ | 246,209 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Lease liability - current portion | |
$ | 54,961 | | |
$ | 49,585 | |
Noncurrent liabilities: | |
| | | |
| | |
Lease liability, net of current portion | |
| 165,288 | | |
| 207,375 | |
Total lease liability | |
$ | 220,249 | | |
$ | 256,960 | |
The weighted-average remaining
lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating
lease liabilities are as follows:
| |
As of September 30, 2022 | | |
As of September 30, 2021 | |
Weighted average remaining lease term (in years) - operating leases | |
| 3.33 | | |
| 4.33 | |
Weighted average discount rate - operating leases | |
| 9.00 | % | |
| 9.00 | % |
Future lease payments included
in the measurement of lease liabilities on the condensed balance sheet as of September 30, 2022, for the following five fiscal years and
thereafter were as follows:
Year ending December 31, | |
Operating Leases | |
2022 (remaining) | |
| 17,383 | |
2023 | |
| 72,687 | |
2024 | |
| 75,231 | |
2025 | |
| 77,864 | |
2026 and thereafter | |
| 6,508 | |
Total Minimum Lease Payments | |
$ | 249,673 | |
Less effects of discounting | |
| (29,424 | ) |
Present value of future minimum lease payments | |
$ | 220,249 | |
Lease Commitments – Related Party
On March 1, 2020, the Company
entered into a sublease with Purnovate, LLC, a private company in which the Company’s then CEO had a 28.7% equity interest, for
the lease of three offices at 1180 Seminole Trail, Suite 495, Charlottesville, VA 22901. The lease had a term of two years, and the monthly
rent was $1,400. During both the three and nine months ended September 30, 2021, the rent expense associated with this lease was $1,400.
On acquisition of Purnovate, the sublease was terminated and the Company assumed the obligations of Purnovate’s lease.
Consulting Agreements – Related Party
On March 24, 2019, the Company
entered into a consulting agreement (the “Consulting Agreement”) with Dr. Bankole A. Johnson, who at the time of the
agreement was serving as the Chairman of the Board of Directors, for his service as Chief Medical Officer of the Company. The Consulting
Agreement has a term of three years, unless terminated by mutual consent or by the Company for cause, which term was extended on March
22, 2022 for an additional three years commencing as of March 24, 2022. Dr. Johnson resigned as Chairman of the Board of Directors at
the time of execution of the consulting agreement. Under the terms of the Consulting Agreement, Dr. Johnson’s annual fee of $375,000
per year is paid twice per month. The Consulting Agreement had an expiration date of March 31, 2022, which was extended on March 22, 2022
for an additional three years commencing as of March 24, 2022. On September 8, 2022, the Consulting Agreement was amended to increase
Dr. Johnson’s annual fee to $435,000 and to establish a series of payments in cash and stock for the performance of certain milestones.
The Company recognized $103,750 and $291,250 in compensation expense in the both the three and nine months ended September 30, 2022 and
2021, respectively, as a result of this agreement.
On July 5, 2019, the Company
entered into a Master Services Agreement (the “PEPCO MSA”) and statement of work with Psychological Education Publishing Company
(“PEPCO”) to administer a behavioral therapy program during the Company’s upcoming Phase 3 clinical trial. PEPCO is
owned by a related party, Dr. Bankole Johnson. It is anticipated that the compensation to be paid to PEPCO for services under the PEPCO
MSA will total approximately $300,000.
As of September 30, 2022,
the Company had recognized all expenses associated with this agreement. No further expenses associated with the PEPCO MSA work order are
expected.
On April 5, 2021, the Company
entered into another Lock-Up Agreement Extension, which amended the Lock-Up Extension and extended the term of Dr. Johnson’s Lock-Up
from April 1, 2021 until such date as the Company shall have publicly released the data from its ONWARD™ Phase 3 pivotal trial of
AD04, in genetically identified subjects for the treatment of Alcohol Use Disorder.
Preclinical Research Agreement
On June 1, 2022, the Company
entered into an agreement and scope-of-work (“SOW”) specification for research services with IIT Research Institute for a
range of in vitro and preclinical safety studies of PNV5030, Purnovate’s lead drug candidate for treatment of pain and potentially
cancer. The studies are intended to enable a submission of an Investigational New Drug application for PNV5030 to the FDA. In total, this
agreement commits the Company to $1,409,000 in payments. An advance payment of $579,000 was due on execution of the agreement and SOW,
which was made and booked as a pre-paid expense asset on the condensed consolidated balance sheet as of September 30, 2022. At September
30, 2022, the Company had recognized $62,500 in expenses associated with this agreement, categorized and R&D expenses and charged
against the previously booked prepaid expense asset.
Other Consulting and Vendor Agreements
The Company has entered into
a number of agreements and work orders for future consulting, clinical trial support, and testing services, with terms ranging between
12 and 36 months. These agreements, in aggregate, commit the Company to approximately $900,000 in future cash if fully utilized.
Litigation
The Company is subject, from
time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to
any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows. As of September
30, 2022, the Company did not have any pending legal actions.