NOTES
TO CONDENSED FINANCIAL STATEMENTS
1
— DESCRIPTION OF BUSINESS
Adial
Pharmaceuticals, Inc. (the “Company” or “Adial”) was converted from a limited liability company to a corporation
and reincorporated in Delaware on October 1, 2017 from ADial Pharmaceuticals, LLC, which was formed on November 23, 2010 in the
Commonwealth of Virginia. Adial is presently engaged in the development of medications for the treatment of addictions and related
disorders.
The
Company is planning to commence its first Phase 3 clinical trial of its lead compound AD04 (“AD04”) for the treatment
of alcohol use disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”)
have indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of alcohol use disorder
rather than the previously required abstinence-based endpoints. Key patents have been issued in the United States, the European
Union, and other jurisdictions for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron,
a serotonin-3 antagonist. Due to its mechanism of action, AD04 has the potential to be used for the treatment of other addictive
disorders, such as opioid use disorder, obesity, smoking, and other drug addictions.
In
July 2018, the Company raised proceeds of $6.3 million in an initial public offering (the “IPO”) of common stock and
warrants, net of offering expenses. On July 27, 2018, the shares of common stock and offering warrants began trading on the Nasdaq
Capital Market under the symbols “ADIL” and “ADILW”, respectively. In February 2019, the Company raised
proceeds of $8.2 million in a follow-on underwritten public offering (the “Follow-on Offering”) of shares of common
stock and warrants, net of offering expenses.
2
— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Other Uncertainties
The condensed financial
statements have been prepared in conformity with generally accepted accounting principles (“GAAP”), which contemplate
continuation of the Company as a going concern. To date, the Company has not generated any revenues. The Company had an accumulated
deficit of approximately $14.7 million and $12.0 million for the three months ended March 31, 2019 and year ended December 31,
2018, respectively, and had incurred net losses of approximately $2.7 million and $0.4 million, for the three months ended March
31, 2019 and 2018, respectively. Based on the current development plans for AD04 in both the U.S. and foreign markets and the Company’s
other operating requirements, management believes that the existing cash at March 31, 2019 will be sufficient to fund operations
for at least the next twelve months following the issuance of these financial statements.
However, while the Company’s
existing cash is sufficient to fund the Company’s operations over the next twelve months, the Company continues to face
significant uncertainly as to its longer term liquidity needs, which depend upon a number of factors, including, but not limited
to, trial costs, the time required to complete planned trials, and the use of cash in pursuit of non-dilutive funding sources
and the success or failure of such pursuit. The Company’s longer term, continued operations will depend on its ability to
raise additional capital through equity and/or debt financings, grant funding, strategic relationships, or out-licensing of its
products in order to complete its ongoing research and development efforts for its lead compound, AD04.
The
financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Generally,
the Company’s operations are subject to a number of factors that can affect its operating results and financial condition.
Such factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s product
candidates; the ability to obtain regulatory approval to market the Company’s products; the ability to manufacture the Company’s
products successfully; competition from products manufactured and sold or being developed by other companies; the price of, and
demand for, Company products; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for
its products; and the ability to raise capital to support its operations.
Basis
of Presentation
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q
and Article 8 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed financial statements reflect
all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
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, 2018, included in the Annual Report on Form 10-K filed on February 19, 2019.
Use
of Estimates
The
preparation of condensed 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 equity-based compensation, intangible assets useful life,
and contingent liabilities. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates
require the exercise of judgment. Accounting estimates used in the preparation of these condensed financial statements change
as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.
Basic
and Diluted Earnings (Loss) per Share
Basic
and diluted earnings (loss) per share are computed based on the weighted-average outstanding shares of stock, which are all voting
shares.
Common
stock equivalents consist of outstanding warrants and options. Stock equivalents of warrants to purchase approximately 6,728,113
common shares and 1,400,967 common shares to be issued upon exercise of options outstanding on March 31, 2019, and stock equivalents
of warrants to purchase approximately 482,555 common shares and 174,282 common shares to be issued upon exercise of options outstanding
on March 31, 2018 were all excluded from the computation of diluted earnings (loss) per share for the three months ended March
31, 2019 and 2018, respectively, because their effect on the loss per share is anti-dilutive.
Cash
and Cash Equivalents
The Company considers
all highly liquid investments with original maturities of three months or less to be cash equivalents. At times, the Company’s
cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation. At March 31, 2019, the Company
held a balance in a checking and a money market account that exceeded federally insured limits by approximately $11.1 million.
These same accounts exceeded federally insured limits by approximately $3.6 million on December 31, 2018.
Intangible
Assets
Intangible
assets consist primarily of the trademarks and copyrights. The trademarks and copyrights will be amortized using the straight-line
method based on an estimated useful life of 20 years.
Impairment
of Long-Lived Assets
The
Company’s long-lived assets (consisting primarily of trademarks) are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated
by that asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Research
and Development
Research
and development costs are charged to expense as incurred. Research and development expenses includes fees associated with direct
trial expenses such as fees due to contract research organizations, consultants supporting the Company’s research and development
endeavors, the acquisition of certain technology rights, and compensation of clinical development personnel.
Embedded
Derivative Liability — Convertible Notes
The
Company had convertible notes outstanding at March 31, 2018 with a default payment provision (a default provision that requires
payment of three times the outstanding principal amount plus accrued interest). The Company determined that the default provision
is an embedded component that qualifies as a derivative which should be bifurcated from the convertible notes and separately accounted
for in accordance with
FASB ASC 815, “Derivatives and Hedging”
. ASC 815 – 15 – 25 – 42 establishes
criteria to determine whether puts are closely and clearly related to a debt host should the debt contain a substantial premium
or default provision (one that is greater than 10% of the principal resulting from puts that require payoff for more than 110%
of principal amount outstanding). The embedded derivative is recorded at fair value on the date of issuance and marked-to-market
at each balance sheet date with the change in the fair value recorded as income or expense in the statement of operations (see
Note 7). On July 31, 2018, these notes were converted to equity, paying them in full and discharging the embedded derivative liability.
Equity-Based
Compensation
The Company measures the
cost of awards based on the grant date fair value of the awards. That cost is recognized on a straight-line basis over the period
during which the employee was required to provide service in exchange for the entire award. The fair value of options is calculated
using the Black-Scholes option pricing model, based on key assumptions such as the fair value of shares of common stock, expected
volatility, and expected term. The Company’s estimates of these assumptions are primarily based on third-party valuations,
historical data, peer company data and the judgment of management regarding future trends.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and tax carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. See Note 10.
Fair
Value of Financial Instruments and Fair Value Measurements
The fair value of financial
instruments held by the Company are disclosed using the three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements. The carrying amounts reported in the balance sheets for current liabilities, convertible
notes, Senior Notes, Senior Secured Bridge Notes, and Subordinated Notes (all as defined below) are a reasonable estimate of their
fair values because of the short period of time between the origination of such instruments and their expected realization and
their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.
The Company has adopted
ASU 2018-07 for the purposes of recognizing expenses associated with stock-based compensation of employees and non-employees. Accordingly,
the value of financial instruments issued in compensation is estimated at the time of grant, and the expense amortized over the
term of service for which the grant is compensation.
The
three levels of valuation hierarchy are defined as follows:
|
●
|
Level
1: Observable inputs such as quoted prices in active markets;
|
|
●
|
Level
2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
●
|
Level
3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Recent
Accounting Pronouncements
Leases
—
In February 2016, the FASB issued ASU 2016-02 which amends existing lease accounting guidance and requires recognition
of most lease arrangements on the balance sheet. The adoption of this standard resulted in the Company recognizing a right-of-use
asset representing rights to use the underlying asset for the lease term with an offsetting lease liability for any leases. ASU
2016-02 will be effective for fiscal years beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-10, “Codification
Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02.
The Company adopted ASU 2016-02 effective January 1, 2019. There was no material impact on its condensed financial statements
as a result of early adopting this guidance. The Company recognized no right-of-use assets or corresponding liabilities as a result
of early adopting this guidance, since the Company was not party to any leases with term of more than 12 months at March 31, 2019.
Earnings
per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging
— In July 2017, the FASB issued ASU 2017-11,
"Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),"
which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis
of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial
instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the
entire instrument or conversion option. The amendments in Part I of this Update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018 with early adoption permitted. The Company early adopted ASU 2017-11
at the beginning of the second quarter of 2018; there was no effect on the financial statements at the time of adoption.
Fair Value
—
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). ASU 2018-07 amends the FASB Accounting Standards Codification (“ASC”)
to expand the scope of FASB ASC Topic 718, Compensation-Stock Compensation, to include accounting for share-based payment
transactions for acquiring goods and services from non-employees. The amendments in ASU 2018-07 are effective for all entities
for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. There was no material
effect on the financial statements as a result of this adoption.
Fair Value
—
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. ASU 2018-13 amends guidance concerning disclosure of transfers between the Levels 1, 2,
and 3 for the fair value hierarchy used to disclose the fair value of financial instruments. ASU 2018-13 also adds additional requirements
that reporting entities disclose unrealized gains or losses in the value of financial instruments as a result of changes to recurring
fair Level 3 fair value measurements and the range and weighted averages of significant unobservable inputs used to develop fair
value measurements. The amendments in ASU 2018-13 are effective for all entities required under existing GAAP to disclose fair
value measurements, and is effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
3
— INTANGIBLE ASSETS, NET
Intangible
assets, net consist of the following:
|
|
Useful
life
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Trademarks
and Copyrights
|
|
|
20
years
|
|
|
$
|
11,300
|
|
|
$
|
11,300
|
|
Less:
Accumulated amortization
|
|
|
|
|
|
|
(4,707
|
)
|
|
|
(4,565
|
)
|
Intangible
Assets, net
|
|
|
|
|
|
$
|
6,593
|
|
|
$
|
6,735
|
|
Amortization
of trademarks and copyrights amounted to $142 and $141 for the three months ended March 31, 2019 and 2018, respectively. At March
31, 2019, the future remaining amortization periods for trademarks and copyrights are approximately 12 years.
4
— SENIOR SECURED NOTES
Senior
Secured Bridge Note
Effective
May 1, 2017, the Company entered into a senior secured bridge note financing with a third party investment fund (the “Senior
Holder”) for the original principal sum of $287,500 (the “Senior Secured Bridge Note”) of which $250,000 was
received as proceeds and $37,500 was recorded as original issue discount. The interest on the principal amount was at the rate
of two percent per annum. The maturity date at issue was November 1, 2017, at which time the principal and accrued and unpaid
interest and other fees therein, was due and payable. The Senior Secured Bridge Note was secured by all the assets held by the
Company.
On February 22, 2018,
the Company executed a settlement agreement with the Senior Holder, paying $150,000 at time of execution of the settlement and
agreement to pay an additional $100,000 and issue a number of shares of common stock and warrants to purchase shares of common
at the Company’s next financing.
On
July 31, 2018, on completion of the IPO and as required under the terms of the settlement agreement, the Company made a cash payment
of $100,000 to the holder of the Senior Secured Bridge Note and issued 10,020 shares of common stock and warrants to purchase
65,130 shares of common stock at an exercise price of $4.99 per share. The net loss on extinguishment of the Senior Secured Bridge
Note was $97,593.
Interest
expense on the Senior Secured Note during the three months ended March 31, 2018 was $23,363.
Senior Secured
Notes (Related Parties $470,000)
On
February 22, 2018 and March 1, 2018, the Company entered Security Purchase Agreements to issue Secured Notes (the “Secured
Notes”) to a number of Company directors and a consultant in the aggregate principal amount of $510,000. The Secured Notes
ranked
pari passu
with respect to seniority to one another, were senior to all other debt, and were secured against all
assets of the Company. The Secured Notes matured on July 1, 2018 and bore 18% interest, payable at maturity or at the time of
the Company’s next equity or debt, including, without limitation, an IPO or a change of control. Additionally, the Company
agreed to issue a number of warrants to the holders of the Senior Secured Notes on completion of its next financing. On June 8,
2018, the Secured Notes were amended, extending the maturity date to August 1, 2018.
On
July 31, 2018, upon the consummation of the IPO and as required by the terms of the Secured Notes, the principal and interest
outstanding of the Secured Notes was paid in full and 408,000 units (376,000 units to related parties), each unit consisting each
of a share of common stock and a warrant to purchase of a share of common stock at an exercise price of $6.25 per share and 408,000
Unit Warrants (376,000 Unit Warrants to related parties) were issued, as a result of which the obligation of the Company with
respect to Senior Secured Notes were fully satisfied. The loss on extinguishment of the Secured Notes was $3,399,902.
For
the three months ended March 31, 2018, interest expense for the Secured Notes was $7,560.
Senior
Note
On
June 3, 2018, the Company entered into a Security Purchase Agreement pursuant to which it issued a note in the principal amount
of $325,000 to one accredited institutional investor (the “June 2018 Senior Note”). The June 2018 Senior Note ranked
pari passu
with respect to seniority as to payment with the $510,000 in then outstanding other Secured Notes, senior as
to payment as to all other outstanding debt and was secured by a lien on substantially all of the Company’s assets. The
June 2018 Senior Note was issued at an original issue discount of 15.4%, or $50,000, did not bear interest and was payable on
March 5, 2019 or upon an earlier event of default, including, without limitation, a change of control of the Company. The June
2018 Senior Note was convertible into shares of the Company’s common stock at a conversion price of $2.00 per share, subject
to adjustment for certain dilutive issuances. The Company also issued to the investor a warrant to purchase 300,000 shares of
its common stock exercisable at $3.75 per share which will be exercisable for a term of five years. As a result of this beneficial
conversion feature and issuance of warrants, additional discounts of $275,000 were recognized.
On
December 19, 2018, the holder of the June 2018 Senior Note elected to convert the entire outstanding principal of $325,000 into
shares of common stock at the conversion price of $2.00 per share, as a result of which the Company issued to the holder 162,500
shares of common stock and the Company’s obligations under the June 2018 Senior Note were fully satisfied. At the time of
conversion the amortization of the remaining discounts to the June 2018 Senior Note was accelerated and recognized as interest
expense of $186,397.
5
— SUBORDINATED NOTES — RELATED PARTIES
On
November 20, 2017, the Company entered into subordinated notes (the “Subordinated Notes”), subordinate to the Senior
Secured Bridge Note, with certain insiders, including directors and a consultant, (the “Subordinated Holders”) in
the aggregate principal amount of $115,000, of which $100,000 was received as proceeds and $15,000 was recorded as original issue
discount. In addition, upon repayment, the Subordinated Holders were to receive a number of warrants to purchase shares of common
stock.
On
February 22, 2018 the Subordinated Holders settled the Subordinated Notes for newly issued Senior Secured Notes in the principal
amount of $100,000, in full and complete satisfaction of the all obligations, including the principal sum of the Subordinated
Notes, all accrued and unpaid interest thereon, and warrant issuance obligations. As a result of this settlement, the Company
realized a gain of $12,241. As a result of the settlement of these securities for newly issued Secured Notes, no stock or warrants
were issued as a result of these provisions of the Subordinated Notes.
For
the three months ended March 31, 2018, interest expense on the Subordinated Notes was $8,287.
6
— CONVERTIBLE NOTES — RELATED PARTIES
In
September and December, 2016, the Company issued convertible notes (the “2016 Convertible Notes”) with an outstanding
unsecured principal amount of $235,000 to its members, including directors and officers. The principal and interest was originally
due in 2029, and the 2016 Convertible Notes bore interest at a rate of 15% per annum. The 2016 Convertible Notes were to automatically
convert to common stock in the event the Company issued and sold either common or preferred stock of $2,000,000 or more, excluding
the value of the conversion of the 2016 Convertible Notes.
On
July 31, 2018, as a result of the completion of the IPO and as required under the terms of the 2016 Convertible Notes, the outstanding
principal and accrued interest on the 2016 Convertible Notes was converted to 700,854 shares of common stock and 700,845 warrants
to purchase shares of common stock at an exercise price of $6.25 per share, of which 395,118 share of common stock and 395,118
warrants to purchase shares of common stock at an exercise price of $6.25 per share were issued to related parties.
The
interest expense on these notes for the three months ended March 31, 2018 was $10,781.
7
— RELATED PARTY TRANSACTIONS
In
January 2011, the Company entered into an exclusive, worldwide license agreement with The University of Virginia Patent Foundation
d/b/a the University of Virginia Licensing and Ventures Group (the “UVA LVG”) for rights to make, use or sell licensed
products in the United States based upon patents and patent applications made and held by UVA LVG (the “UVA LVG License”).
The Company is required to pay compensation to the UVA LVG, as described Note 11. A certain percentage of these payments by the
Company to the UVA LVG may then be distributed to the Chairman of the Board in his capacity as inventor of the patents by the
UVA LVG in accordance with their policies at the time.
On
January 29, 2018, the Company entered a Medical Translations services agreement with Medico-Trans Company, LLC (“MTC”),
a company under the control of the Chairman of the Board, whereby MTC agreed to perform $67,304 in medical translation services,
to be paid on occurrence of a qualified financing of $2,000,000 or more; or, in the event that a qualified financing had not taken
place by February 10, 2018, for installment payments of $22,000 on February 10, 2018, $22,000 on March 10, 2018, and the remaining
balance on April 10, 2018, and to issue to MTC on consummation of a qualified financing a number of shares of common stock equal
to $201,911 divided by the price per share of the qualified financing. The Company made $68,540 in payments to MTC, paying the
entire balance and accrued interest thereon. Of these payments, $51,540 were in cash, and the remaining $17,000 payment was converted
to the principal balance of a Secured Note (see Note 4). On consummation of the IPO, MTC was issued 40,463 shares of common stock,
as required under the terms it the agreement.
On
January 29, 2018, the CEO made a payment of $21,000 to Kilburn & Strode, a patent firm, on behalf of the Company for expenses
relating to validation of Company patents, and for which he submitted an expense report. On March 1, 2018 the expense payable
was converted to the principal balance of a Senior Note (see Note 4).
On
February 22, 2018, the Company executed a Backstop Commitment Agreement (“BCA”) with MVA 151 Investors, LLC (“MVA”),
a company controlled by a Company director, Kevin Schuyler, pursuant to which MVA agreed to guarantee the purchase of up to $242,000
(“the Backstop Amount”) in the principal amount of Secured Notes then offered for subscription and unsubscribed on
March 1, 2018 (the “Backstop Commitment”). In consideration of this backstop commitment, at such time as the Company
completed the Next Financing, the Company agreed to issue MVA (i) warrants to purchase a number of shares of the Company’s
common stock equal to 150% of the Backstop Amount divided by the price per share of the Next Financing and (ii) a number of units
of Company common stock equal to 50% of the Backstop Amount divided by the price per share of the Next Financing. The warrants
were to have an exercise price equal to the price per share of the Next Financing and a term of five years. On March 1, MVA invested
$92,000 in Secured Notes as a result of the BCA, this amount being the $242,000 backstop amount less $150,000 in additional subscriptions
received between February 22, 2018 and March 1, 2018. This investment fully satisfied the Backstop Commitment and left MVA with
no further associated obligation to invest. At the time of the IPO, the Company issued MVA 151 Investors 24,200 shares of common
stock, 24,200 warrants to purchase a share of common stock at an exercise price of $6.25, and 72,600 warrants to purchase a unit
(each unit consisting of a share of common stock and a warrant to purchase a share of common stock at an exercise price of $6.25)
at an exercise price of $5.00 per unit. The total cost of the issuances made as a result of the backstop agreement was $385,181,
included in the net loss recognized on the Senior Secured Notes (see Note 4).
On
April 25, 2016, the Company entered into a Consulting Agreement with a consultant, who now serves as the Company’s Chief
Operating Officer and Chief Financial Officer, to provide consulting services at a compensation rate of $2,000 per month. This
amount was raised to $2,200 per month on June 1, 2017 and to $3,200 per month December 31, 2017. This consultant was granted 29,992
shares of common stock in the Company during the year ended December 31, 2016, and was to be awarded 0.5% of a transaction, as
defined by and under the terms of the Company’s PBP, but was issued 44,636 shares of common stock on retirement of the plan
(see Note 11). For the period ended March 31, 2018 , total fees charged by this consultant were $25,600 . Effective July 25, 2018,
this consultant was employed as COO/CFO under the terms of an employment agreement (see Note 11) that superseded the consulting
agreement.
On July 31, 2018, the
Company completed its initial public offer of units, with each unit consisting of one share of common stock and one warrant to
purchase one share of common stock. Related parties that participated in this offering included: (i) William Stilley, the CEO,
who purchased 80,000 units consisting of 80,000 shares of common stock and warrants to purchase 80,000 shares of common stock at
an exercise price of $6.25 per share; (ii) Kevin Schuyler, Vice Chairman of the Board of Directors and Lead Independent Director,
who purchased 90,000 units consisting of 90,000 shares of common stock and warrants to purchase 90,000 shares of common stock at
an exercise price of $6.25 per; (iii) James Newman, a director, who purchased 10,000 units, consisting of 10,000 shares of common
stock and warrants to purchase 10,000 shares of common stock at an exercise price of $6.25 per share, personally and 10,000 units,
consisting of 10,000 shares of common stock and warrants to purchase 10,000 shares of common stock at an exercise price of $6.25
per share though a Roth IRA for his benefit; (iv) Bankole Johnson, the then Chairman of the Board, who purchased 1,400 units consisting
of 1,400 shares of common stock and warrants to purchase 1,400 shares of common stock at an exercise price of $6.25 per share;
(v) Keller Enterprises LLC, an affiliate of Robertson Gilliland, a director, which purchased 14,000 units consisting of 14,000
shares of common stock and warrants to purchase 14,000 shares of common stock at an exercise price of $6.25 per share; (vi) Tony
Goodman, a director, who purchased 7,000 units consisting of 7,000 shares of common stock and warrants to purchase 1,400 shares
of common stock at an exercise price of $6.25 per share.
See Notes 4, 5, 6,
and 8 for related party debt transactions. See Note 10 for additional information regarding a related party consulting agreement.
8
— STOCKHOLDERS’ DEFICIT
Equity Issuances/Repurchases
In
2018, the Company issued shares of common stock as follows:
On
April 1, 2018, the Company issued 292,309 shares of common stock to Company officers and a director in compensation for termination,
by mutual agreement of the Performance Bonus Plan. At the time of this issuance, the company recognized an equity-based compensation
expense of $1,461,545.
During the first three
months of 2019, 93,100 previously-registered shares of common stock were issued as a result of the exercise of tradeable warrants
to purchase 93,100 shares of common stock at an exercise price of $6.25 per share (ADILW) for cash payments of $581,875.
During
the first three months of 2019, 2,166 unregistered shares of common stock were issued as a result of the exercise of tradeable
warrants to purchase 2,166 shares of common stock at an exercise price of $0.005 per share for cash payments of $12.
On January 22, 2019,
the Company issued 250,000 unregistered shares of common stock upon the exercise of the warrant to purchase 300,000 shares of
common stock at an exercise price of $3.75 per share for a cash payment of $468,750 and the cashless exercise of the remaining
warrant.
On
January 31, 2019, the Company issued 22,311 unregistered shares of common stock upon the full cashless exercise of a warrant to
purchase 65,130 shares of common stock at an exercise price of $4.99 per share.
On
February 22, 2019, the Company concluded the Follow-on Offering of 2,475,000 shares of common stock and warrants to purchase 1,856,250
shares of common stock at an exercise price of $4.0625 per share. The shares of common stock and accompanying warrants were sold
to the public at a price of $3.25 per share and three quarters warrant. The underwriters were granted an over-allotment option
to purchase up to 371,250 shares of common stock and 278,437 warrants at a price of $3.25 per share of common stock and three
quarters warrant. The underwriters partially exercised their over-allotment option by purchasing 370,000 shares of common stock
and warrants to purchase 277,500 shares common stock. Gross proceeds of the offering, totaled $9,246,249, which after offering
expenses, resulted in net proceeds of $8,195,673.
During the three months
ended March 31, 2019, the Company issued 93,750 shares of common stock to consultants at a total cost of $154,854.
Stock
Options
The
following table provides the activity in options for the respective periods:
|
|
Total Options Outstanding
|
|
|
Weighted Average Remaining Term (Years)
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Fair Value at Issue
|
|
Outstanding December 31, 2017
|
|
|
174,282
|
|
|
|
9.50
|
|
|
|
5.70
|
|
|
|
4.84
|
|
Issued
|
|
|
68,900
|
|
|
|
10.00
|
|
|
$
|
2.80
|
|
|
$
|
2.21
|
|
Outstanding December 31, 2018
|
|
|
243,182
|
|
|
|
8.93
|
|
|
$
|
4.88
|
|
|
$
|
4.09
|
|
Issued
|
|
|
1,173,000
|
|
|
|
10.00
|
|
|
|
3.31
|
|
|
|
2.56
|
|
Cancelled
|
|
|
(15,215
|
)
|
|
|
8.26
|
|
|
|
5.70
|
|
|
|
4.23
|
|
Outstanding March 31, 2019
|
|
|
1,400,967
|
|
|
|
9.62
|
|
|
|
3.55
|
|
|
|
2.81
|
|
Outstanding March 31, non-vested
|
|
|
1,293,006
|
|
|
|
9.87
|
|
|
$
|
3.40
|
|
|
$
|
2.62
|
|
All
1,173,000 options issued in the three months ended March 31, 2019 were issued under the 2017 equity incentive plan, under which
508,100 options remain issuable at March 31, 2019. At March 31, 2019, the intrinsic value totals of the outstanding options were
$188,927.
The
Company used the Black Scholes valuation model to determine the fair value of the options issued, using the following key assumptions
for the three months ended March 31, 2019 and year ended December 31, 2018:
|
|
Q1
2019
|
|
2018
|
Fair Value per Share
|
|
$3.01-3.39
|
|
$2.80
|
Expected Term
|
|
6.5 years
|
|
6.5 years
|
Expected Volatility
|
|
97.37-97.48%
|
|
95.77%
|
Risk free rate
|
|
2.32-2.51%
|
|
2.79%
|
Compensation
expense associated with issuance of options was recognized using the straight line method over the requisite service period, which
is the implied service period. During the three months ended March 31, 2019 and 2018, total equity-based compensation expense
from the options issued was $129,150 and $69,161, respectively, which were classified as R&D and G&A expense as presented
in the table below. As of March 31, 2019, $3,381,987 in further compensation expense resulting from issued options remained to
be recognized over a weighted average remaining service period of 2.74 years.
See
Equity Issuances section in the Note for additional stock based compensation expense incurred in the first quarter of 2019. The
components of stock-based compensation expense included in the Company’s Statements of Operations for the three months ended
March 31, 2019 and 2018 are as follows:
|
|
Three Months ended
March 31
|
|
|
|
2019
|
|
|
2018
|
|
Research and development Options Expense
|
|
|
43,174
|
|
|
|
-
|
|
Total research and development expenses
|
|
|
43,174
|
|
|
|
-
|
|
General and administrative Options Issuance Expense
|
|
|
85,976
|
|
|
|
69,161
|
|
Stock issued to consultants
|
|
|
154,854
|
|
|
|
-
|
|
Total general and administrative expenses
|
|
|
240,830
|
|
|
|
69,161
|
|
Total stock-based compensation expense
|
|
$
|
284,004
|
|
|
$
|
69,161
|
|
Stock
Warrants
On January 18, 2019, the
Company exchanged a previously issued warrant to purchase 300,000 shares of common stock with an exercise price of $3.75 per share
for a new warrant to purchase 300,000 shares of common stock. The terms of the new warrant were substantially the same as those
of the old warrant, except for the cashless exercise terms of the new warrant, which differed with old warrant to the benefit of
the warrant holder. The Company recognized a non-cash expense of $441,763 as a result of this exchange.
On February 22, 2019, the
Company issued 2,132,750 warrants for the purchase of 2,133,750 shares common stock at an exercise price of $4.0625 per share of
common stock on the conclusion of its Follow-on Offering. See Equity Issuances/Repurchases above.
In three months ended March
31, 2019, 93,100 warrants with an exercise price of $6.25 per share of common stock were exercised for $581,875, 125,000 warrants
with an exercise price of $3.75 per share of common stock were exercised for $468,750, 2,166 warrants with an exercise price of
$0.005 per share of common stock were exercised for $12, and 240,130 warrants were exercised cashlessly for the issue of 147,311
shares of common stock. The total received in exercise fees for exercise of warrants was $1,050,637, resulting in the issue of
a total of 367,577 shares of common stock on the exercise of 460,396 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, 2017
|
|
|
482,555
|
|
|
|
11.20
|
|
|
|
5.51
|
|
|
|
1.38
|
|
Issued
|
|
|
4,547,204
|
|
|
|
5.00
|
|
|
|
5.82
|
|
|
|
0.00
|
|
Cancelled
|
|
|
–
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Exercised
|
|
|
(25,000
|
)
|
|
|
4.59
|
|
|
|
6.25
|
|
|
|
0.06
|
|
Outstanding December 31, 2018
|
|
|
5,054,759
|
|
|
|
5.07
|
|
|
$
|
5.72
|
|
|
|
0.61
|
|
Issued
|
|
|
2,133,750
|
|
|
|
5.00
|
|
|
|
4.0625
|
|
|
|
0.00
|
|
Cancelled
|
|
|
–
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Exercised
|
|
|
460,396
|
|
|
|
4.41
|
|
|
|
4.59
|
|
|
|
1.28
|
|
Outstanding March 31, 2019
|
|
|
6,728,113
|
|
|
|
4.85
|
|
|
|
5.27
|
|
|
|
0.07
|
|
9
— INCOME TAXES
The Company has a net operating
loss carry-forward for federal and state tax purposes of approximately $9.7 million at March 31, 2019, that is potentially available
to offset future taxable income. The 20-year limitation was eliminated for losses generated after January 1, 2018, giving the
taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now
be limited to 80 percent of taxable income. For financial reporting purposes, no deferred tax asset was recognized because at
March 31, 2019 and 2018, management estimated that it was more likely than not that substantially all of the net operating losses
would remain unused through a change in control. The timing and manner in which we can utilize our net operating loss carryforward
and future income tax deductions in any year may be limited by provisions of the Internal Revenue Code regarding the change in
ownership of corporations. Such limitation may have an impact on the ultimate realization of our carryforwards and future tax
deductions.
10
— COMMITMENTS AND CONTINGENCIES
License
with University of Virginia Patent Foundation
In
January 2011, the Company entered into an exclusive, worldwide license agreement with (the “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 itself. In addition, the Company is required to pay to UVA LVG 15% of any sublicensing income.
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, the most immediate being initiating Phase 3 clinical trials by December 31, 2019, making
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
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.
The
Company executed an amendment, dated December 14, 2017, to the license agreement. This amendment changed the dates by which the
Company, using commercially reasonable efforts, was to achieve the goals of submitting a New Drug Application to the FDA for a
licensed product to December 31, 2024 (from December 31, 2023) and commencing commercialization of an FDA approved product by
December 31, 2025 (from December 31, 2024). 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
Company executed a further amendment to the license agreement, dated December 18, 2018, changing the date at which the Company
must have initiated a Phase 3 trial to December 31, 2019.
At
December 31, 2018, the Company had accrued $40,000 in minimum royalties due under this agreement, which were subsequently paid.
At March 31, 2019, the Company had accrued $10,000 in minimum royalties.
Crown
CRO Master Services Agreement & Service Order
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 three months prior to automatic renewal. The
agreement can be terminated by the Company if, in the Company’s reasonable opinion, clinical or non-clinical data support
termination of the clinical research for safety reasons.
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 the Company’s lead compound, AD04. The MSA or
a service agreement under it may be terminated by the Company, without penalty, on fourteen days written notice.
Crown’s Fee for completion
of the trial under the Service Order is approximately $3.3 million (€2,952,355 at the Euro/US Dollar exchange rate of 1.1221
as of March 31, 2019). On November 21, 2018, the Company made the prepayment under the agreement, at a cost of $505,960, after
exchange to US dollars at the rate then prevailing, capitalized as a prepaid expense. The remaining fees are to be paid as milestones
are reached on the following schedule (converted to dollars at the Euro/US Dollar exchange rate of 1.1221 as of March 31, 2019).
At March 31, 2019, none of these milestones had yet been reached.
Milestone Event
|
|
Percent
Fee
|
|
|
Amount
|
|
Five of five national regulatory submissions done
|
|
|
10
|
%
|
|
$
|
332,010
|
|
First patient randomized
|
|
|
10
|
%
|
|
$
|
332,010
|
|
30% of patients randomized
|
|
|
10
|
%
|
|
$
|
332,010
|
|
50% of clinical sites initiated
|
|
|
5
|
%
|
|
$
|
166,006
|
|
60% of patients randomized
|
|
|
10
|
%
|
|
$
|
332,010
|
|
100% of clinical sites initiated
|
|
|
10
|
%
|
|
$
|
332,010
|
|
50% of CRF pages monitored
|
|
|
5
|
%
|
|
$
|
166,006
|
|
100% of patients randomized
|
|
|
10
|
%
|
|
$
|
332,010
|
|
90% of CRF pages monitored
|
|
|
5
|
%
|
|
$
|
166,006
|
|
Database is locked
|
|
|
5
|
%
|
|
$
|
166,006
|
|
PE analysis
|
|
|
5
|
%
|
|
$
|
166,006
|
|
Service Agreement 1
also estimates approximately $2.4 million (€2,172,000) in pass-through costs, mostly fees to clinical investigators and sites,
which will be billed as incurred. In the event that the MSA or Service Order are terminated, the Crown’s actual costs up
the date of termination will be payable by the Company, but any unrealized milestones shall not be.
In
the three months ended March 31, 2019, the Company recognized $126,290 in expenses associated with the Service Agreement 1, classified
as R&D expense, leaving a $379,670 prepaid expense asset.
Lease
Commitments
On
January 1, 2019, the Company adopted, ASU 2016-02 which amends existing lease accounting guidance, and requires recognition of
most lease arrangements on the balance sheet. (See Note 2.) The adoption of this standard would result in the Company recognizing
a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability
for all leases with term greater than twelve months. At March 31, 2019, the Company was not party to any leases of term greater
than 12 months, and therefore did not record any right-to-use assets as a result of adopting this guidance.
On
October 9, 2018, the Company entered into a license and membership agreement with Jelly Works X Zero-Ten, LLC for membership in
a coworking space and use of an office located at 307A Kamani Street, Honolulu, HI 96813. The Company agreed to pay a monthly
fee of $1,152 for membership and use of these facilities, committing to do so for a term of one year. The agreement is not a lease
and does not create a tenancy relationship. In the three months ended March 31, 2019, the Company rent expense associated with
this agreement was approximately $3,455.
On
December 19, 2018, the Company entered into an office service agreement with the University of Virginia Foundation for the use
of an office and a workstation located at 1001 Research Park Boulevard, Suite 100, Charlottesville, VA 22911. The Company agreed
to pay a fee of $1,150 per month for use of these facilities. The agreement does not create a lease interest or tenancy relationship,
and is on a month-to-month basis. For the three months ended March 31, 2019, the Company rent expense associated with this agreement
was approximately $3,450.
Performance
Bonus Plan
On
February 17, 2015, the Company adopted a performance bonus plan (“PBP”) to provide incentive for Company personnel,
which was modified on January 25, 2016 and April 15, 2017. Under the PBP, 5.25% of the first $14.7 million of a strategic transaction
(one or more transactions that provide funds to the Company and/or its members that enable the commencement of the clinical development
of AD04) will be set aside for Company’s personnel with 1.25% of funds to be awarded to the Chairman of the Board and the
remainder to be awarded at the CEO’s discretion, with no more than 3.15% payout to the CEO of the Company. The maximum bonus
amount to be paid out of the PBP was $771,750. The Company had the right to pay up to 65% of the amounts due under the PBP with
equity of the Company, valued at a future investors round equity price, with the balance paid in cash in order to potentially
pay taxes that may be due by the recipients due to the award under the PBP.
On
April 1, 2018, the Company retired by mutual agreement with the participating directors and officers, Bankole Johnson, William
Stilley, and Joseph Truluck, the PBP. In consideration of their agreement to retire the PBP, Mr. Stilley, Dr. Johnson, and Mr.
Truluck were issued 197,673, 50,000, and 44,636 shares of common stock, respectively, and the Company incurred an associated charge
to operations in the year ended December 31, 2018 of approximately $1.5 million.
Consulting Agreements – Related Party
On March 24, 2019, the Company
entered into a 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. 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. On execution, Dr. Johnson also received a signing bonus of $250,000 and option to
purchase 250,000 shares of common stock. Dr. Johnson’s participation in the Grant Incentive Plan (see below) continues unaffected.
The total expense to the company under this agreement in the three months ended March 31, 2019 was $267,191.
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 30 months. These agreements, in aggregate, commit the Company to approximately $1.1 million in future payments
and future issuance of 87,500 shares of common stock over their respective terms.
Employment
Agreements
Following
the consummation of the IPO on July 31, 2018, the CEO and COO/CFO executed their respective employment agreements for terms ranging
from three to five years, salaries ranging from $325,000 per year to $143,000 per year (at a 50% time commitment), with customary
terms of severance.
On
March 11, 2019, in accord with resolution of the Board of Directors, the employment agreement of the CEO and COO/CFO were amended,
raising their salaries to $400,000 per year and $150,000 per year (at a 50% time commitment), respectively.
Grant
Incentive Plan
On
April 1, 2018, the board of directors approved a Grant Incentive Plan to provide incentive for Bankole A. Johnson (together, the
“Plan Participant”), to secure grant funding for the Company. Under the Grant Incentive Plan, the Company will make
a yearly payment to the Plan Participant, based on the grant funding received by the Company in the preceding year from grants
originated by the Plan Participants, in an amount equal to 10% of the first $1 million of grant funding received and 5% of grant
funding received in the preceding year above $1 million. Amounts to be paid to the Plan Participants will be paid to each as follows:
50% in cash and 50% in stock no later than March 31, each year. During the three months ended March 31, 2019, no grant funding
that would result in a payment to the Plan Participants had been obtained.
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. At March 31, 2019, the Company did not have any pending legal actions.
11
— SUBSEQUENT EVENTS
On April 22, 2019, the
Company issued 50,000 shares of common stock to a consultant a cost of $83,000.