ADIL Adial Pharmaceuticals Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

AMENDMENT NO.1

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 001-38323

ADIAL PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(434) 422-9800

Registrant’s telephone number, including area code

Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐  No ☒ 

Number of shares of common stock outstanding as of August 18, 2023 was 1,217,981.

ADIAL PHARMACEUTICALS, INC.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item lA. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and those risks identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 (“2022 Form 10-K”). Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “Adial,” the “Company,” “we,” “us” and “our” refer to Adial Pharmaceuticals, Inc.

Explanatory Note:

Adial Pharmaceuticals, Inc. is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission (the “SEC”) on August 21, 2023 (the “Original Form 10-Q Filing”) solely to correct the disclosure in Note 1 and 4 to the Notes to the Financial Statements and the Management’s Discussion and Analysis to clarify the disclosure regarding the closing date of the sale of the Purnovate assets and business to reflect the contractual closing date as opposed to the retroactive effective date of the transaction.

This Amendment No. 1 is limited in scope to make the following changes to the Original 10-Q Filing and no other changes have been made to the Original Form 10-Q. 

This Amendment No. 1 has not been updated or amended to give effect to any subsequent events beyond those that existed as of the original filing date and should thus be read in conjunction with the Original Form 10-Q Filing and any of the company’s other filings with the SEC subsequent to the Original Form 10-Q Filing, together with any amendments to those filings. Other than the filing of the information identified above, this amendment does not modify or update the disclosure in the Original Form 10-Q Filing in any way. Unless otherwise specified or the context otherwise requires, when used in this Amendment No. 1, the terms “we,” “our,” “us,” “Adial,” or the “Company” refer to Adial Pharmaceuticals, Inc. and its subsidiaries.

The Company is concurrently filing Amendment No. 1 to each of its (i) Current Report on Form 8-K filed with the SEC on August 18, 2023 and (ii) the Notification of Late Filing on Form 12B-25 that was filed with the SEC on August 15, 2023.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Unaudited Financial Statements

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited consolidated financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2022 that we filed with the SEC on March 30, 2023 (the “2022 Form 10-K”). ln addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties including, but not limited to, those set forth below under “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of the 2022 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission (“SEC”).

Overview

We are a clinical-stage biopharmaceutical company focused on the development of therapeutics for the treatment or prevention of addiction and related disorders. Our lead investigational new drug product, AD04, is a genetically targeted therapeutic agent being developed for the treatment of alcohol use disorder (“AUD”). AD04 was recently investigated in a Phase 3 clinical trial, designated the ONWARD trial, for the potential treatment of AUD in subjects with certain target genotypes, which were identified using our companion diagnostic genetic test. Based on our analysis of the subgroup data from the ONWARD trial, we are now focused on commercializing AD04 in the U.S. and Europe.

We continue to explore opportunities to expand our portfolio in the field of addiction and related disorders such as pain reduction, both through internal development and through acquisitions. Our vision is to create the world’s leading addiction focused pharmaceutical company.

In January 2021, we expanded our portfolio in the field of addiction with the acquisition of Purnovate, LLC via a merger into our wholly owned subsidiary, Purnovate, Inc., (“Purnovate”) and in January 2023, we entered into an option agreement with Adovate LLC (“Buyer”), pursuant to which we granted to the Buyer an exclusive option for a period of one hundred twenty (120) days from the effective date of the Option Agreement for Buyer or its designated affiliate to acquire all of the assets of Purnovate and to assume related liabilities and expenses. On May 8, 2023, Adovate sent a letter exercising its option effective May 16, 2023 and made payment of the $450,000 in fees due on exercise. Effective June 30, 2023, Adovate issued to the Company the equity stake in Adovate due on exercise of the option agreement. On August 17, 2023, the parties agreed that the effective date of the sale would be retroactive to June 30, 2023 and a Bill of Sale, Assignment and Assumption Agreement (“Bill of Sale”) was executed between Purnovate and Adovate, transferring the Purnovate assets to Adovate, with an agreed to retroactive effective date as of June 30, 2023. On August 17, 2023, Purnovate and Adovate also entered into a Letter Agreement which stated that Adovate acquired the assets of Purnovate with a retroactive effective as of June 30, 2023, pursuant to the Bill of Sale.

We have devoted the vast majority of our resources to development efforts relating to AD04, including preparation for conducting clinical trials, providing general and administrative support for these operations and protecting our intellectual property.

We currently do not have any products approved for sale and we have not generated any significant revenue since our inception. From our inception through the date of this Quarterly Report on Form 10-Q, we have funded our operations primarily through the private and public placements of debt and equity securities and equity lines.

Our current cash and cash equivalents are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based our current projections.

We have incurred net losses in each year since our inception, including net losses of approximately $1.8 million and $6.8 million for the six months ended June 30, 2023 and 2022, respectively. We had accumulated deficits of approximately $65.4 and $63.7 million as of June 30, 2023 and December 31, 2022, respectively. Substantially all our operating losses resulted from costs incurred in connection with our research and development programs, from general and administrative costs associated with our operations, and from financing costs.

We will not generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for AD04, which we expect will take a number of years and is subject to significant uncertainty. We do not believe our current cash and equivalents will be sufficient to fund our operations for the next twelve months from the filing of these financial statements.

Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop AD04.

Recent Developments

Financial Developments

On April 12, 2023, we held a Special Meeting of Stockholders at which our stockholders approved an amendment to our Certificate of Incorporation, at the discretion of our Board of Directors (the “Board”), to effect a reverse stock split (the “Reverse Stock Split”) with respect to our issued and outstanding Common Stock, including stock held by the Company as treasury shares, at a ratio in the range of 1-for-2 to 1-for-50, with the ratio within such range to be determined at the discretion of the Board. On August 4, 2023, the Company effected the authorized reverse stock split of its outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25. As a result of this split, the Company had 1,218,180 shares of common stock outstanding immediately after effecting the reverse stock split. The Company subsequently redeemed 199 fractional shares of common stock for $1,660.72, leaving 1,217,981 shares outstanding. The shares authorized for issue under the Company’s charter remained 50,000,000 common stock.

On May 31, 2023, we entered into a Purchase Agreement with Alumni Capital LP (“Alumni Capital”). Pursuant to the Purchase Agreement, we have the right to sell to Alumni Capital up to the lesser of (i) $3,000,000 of newly issued shares, subject to increase to $10,000,000 at our option. The timing of any sales are solely at our option and we are under no obligation to sell securities pursuant to this arrangement. Pursuant to the Purchase Agreement, we issued Alumni Capital 7,983 (post reverse split) shares of common stock as commitment shares. Under the applicable rules of the Nasdaq Stock Market LLC (“Nasdaq”), in no event may we issue to Alumni Capital under the Purchase Agreement more than 236,663 post reverse stock split (5,916,575 pre-reverse stock split) shares of our Common Stock (including the commitment shares, we issue to Alumni Capital), which represents 19.99% of the shares of the Common Stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless we obtain stockholder approval to issue shares of Common Stock in excess of the Exchange Cap, provided further that the Exchange Cap does not apply to the extent the purchase price is equal to or exceeds the Minimum Price (as defined in the Purchase Agreement).

Results of operations for the three months ended June 30, 2023 and 2022 (rounded to nearest thousand)

The following table sets forth the components of our statements of operations in dollars for the periods presented:

Research and development (“R&D”) expenses

Research and development expenses decreased by $250,000 (37%) in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was driven partly by a reduction of approximately $96,000 in direct development costs of AD04 as trial activities, which were winding down in the second quarter of 2022, were no longer taking place in the second quarter of 2023, replaced by less expensive regulatory consultations and data analysis. In addition, a one-time accrual of a $155,000 for a royalty due the University of Virginia Patent Foundation took place in the second quarter of 2022.

General and administrative expenses (“G&A”) expenses

General and administrative expenses decreased by $1,517,000 (59%) in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was due to lower general and administrative non-equity compensation expenses of approximately $688,000 and lower general and administrative equity compensation expense of approximately $417,000, which were due to reduced bonus payments and headcounts. We also considerably reduced IR/PR expenses by approximately $145,000 and strategic consultant expense by $115,000, along with a number of other, smaller cost reductions.

Total Other income

Total other income decreased by approximately $40,000 in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This decrease was due to the expense of the issuance of commitment shares required to obtain our standby equity purchase agreement, which expense was only partially offset by increased average balance of funds held in our money market account, together with an increase in short term money market interest rates.

Gain (loss) from discontinued operations, net of tax

The gain from discontinued operations increased by approximately $3,208,000 (525%) in the three months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was driven by the one-time gain of sale of approximately $2,662,000 recognized with the sale of Purnovate’s business, amplified by a net decrease of direct R&D expenses, such a lab supplies and preclinical testing, of approximately $217,000 with the transfer of Purnovate’s activities to Adovate after option exercise. Purnovate overhead such as rents and repair costs also decreased with the transfer of operation costs to Adovate in May, 2023. This decrease was augmented by a decrease of Purnovate personnel expenses of approximately $92,000, as Purnovate employees transferred to Adovate.

Due to the timing and availability of Adovate’s financial information, the Company will record its share of losses of Adovate, under the equity method of accounting, on a one quarter lag basis and therefore, did not recognize any proportionate share of Adovate results of operations during the three and six months ended June 30, 2023. Adovate, which began operations in May of 2023 and, as a recently formed entity, financial information of Adovate as of and for the three and six months ended June 30, 2023 is not available at the date of these statements.

Results of operations for the six months ended June 30, 2023 and 2022 (rounded to nearest thousand)

The following table sets forth the components of our statements of operations in dollars for the periods presented:

Research and development (“R&D”) expenses

Research and development expenses increased by $74,000 (10%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was due to a substantial increase in direct development expenses of about $292,000 from increased use of regulatory consultants and final windup CRO fees associated in the second quarter of 2023 along with an increase in equity compensation of research and development employees of about $27,000; these increases were partially offset by reduced cash compensation of research and development employees of about $96,000 and a one-time accrual of a $155,000 royalty due the University of Virginia Patent Foundation that took place in the second quarter of 2022.

General and administrative expenses (“G&A”) expenses

General and administrative expenses decreased by $2,034,000 (41%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The primary driver of this decrease were significant reductions in equity compensation of approximately $914,000 and non-equity compensation of approximately $640,000 to general and administrative employees, which were due to reduced bonus payments and headcounts. We also considerably reduced IR/PR expenses by about $246,000, use of strategic consultants by $163,000, and reduced IT support expense by approximately $58,000.

Total Other income

Total other income decreased by approximately $40,000 in the three months ended June 30, 2023 compared to the six months ended June 30, 2022. This decrease was due to the expense of the issuance of commitment shares required to obtain our standby equity purchase agreement, which expense was somewhat offset by increased average balance of funds held in our money market account, together with an increase in short term money market interest rates.

Loss from discontinued operations, net of tax

The income from discontinued operations increased by approximately $2,992,000 (282%) in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was driven by the one-time gain of sale of approximately $2,662,000 recognized with the sale of Purnovate’s business, amplified by a net decrease of direct R&D expenses, such a lab supplies and preclinical testing, of approximately $413,000 with the transfer of Purnovate’s activities to Adovate after option exercise, which was preceded by a reduction in R&D activity to conserve resources while Adovate obtained funds to exercise its option. Purnovate overhead such as rents and repair costs also decreased with the transfer of operation costs to Adovate in May, 2023. These decreases were somewhat offset by an increase in salary expenses of approximately $160,000, as additional personnel, particularly management, were added to Purnovate in preparation for its purchase.

Liquidity and capital resources at June 30, 2023

Our principal liquidity needs have historically been working capital, R&D, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we develop and eventually commercialize our compound, if approved. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, private placements and our equity line, as well as other equity financings and the issuance of debt securities prior to that. On July 31, 2018, we closed our initial public offering.

On February 23, 2023, we entered into an equity purchase agreement with an accredited investor for the purchase of 73,170 shares of commons stock at at-the-market price of $10.25 per share in a registered direct offering. We realized expected net proceeds from the offering of approximately $610,000 after deducting fees due to the placement agent and our transaction expenses. We also issued the placement agent warrants to purchase 7,317 shares of common stock at an exercise price of $10.25 per share.

On May 8, 2023, we received notice of exercise and an exercise fee of $450,000 for exercise of the Purnovate option agreement from the holder of the option, Adovate, LLC. On June 30, 2023 a prepayment of $350,000 was made by Adovate against its reimbursement obligations. Further reimbursement of previously incurred costs from Adovate of approximately $740,000 are expected. The exercise of the option also transfers a number of our previous obligations to Adovate, including significant ongoing personnel expenses, and pre-clinical research and manufacturing contract obligations from us to Adovate. Nonetheless, our current cash and cash equivalents are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based our current projections. This raises considerable doubt about our ability to continue as a going concern. As of June 30, 2023, cash and cash equivalents were $1.2 million as compared to $4.0 million as of December 31, 2022. With Adovate’s option exercise, our cash burn rate is expected to be significantly reduced, which, together the with the cash exercise fee and partial expense reimbursement already received and an estimated $740 thousand in additional expense reimbursements, is expected to maintain our operations without further funding into the first quarter of 2024. Nonetheless, we will require additional funding to continue development of AD04. There is no assurance that funds could be raised in that period on acceptable terms.

We will also require additional financing as we continue to execute our overall business strategy. Our current planning assumption is that we will need to conduct two Phase 3 trials in order to minimize risk, optimize timing and costs, as well as improve the probability of regulatory authority acceptance and approval in the US and Europe. The trials are expected to cost approximately $25 million in total to complete. We are currently in active discussions with potential commercial partners that have expressed an interest in supporting the trials and advancing commercialization in both the US and European markets. Our liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and industry factors. Our continued operations will depend on our ability to raise additional capital through various potential sources, such as equity and/or debt financings, grant funding, strategic relationships, or out-licensing in order to complete our subsequent clinical trial requirements for AD04. Management is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all. Without additional funding, we would be required to delay, scale back or eliminate some or all of our planned research and development programs, including subsequent clinical trials of AD04, which would likely have a material adverse effect on us and our financial statements.

If we raise additional funds by issuing equity securities or convertible debt, our shareholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.

Cash flows

Net cash used in operating activities

Cash used in operating activities decreased by approximately $1,838,000 in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. This decrease was slightly less than the decrease in operating expenses of approximately $1,961,000 when comparing the two periods. This difference was due to the use of approximately $681,000 more in cash to pay previously accrued expenses in the six months ended June 30, 2023 compared to the six months ended June 30, 2023, which was only partially offset by the use of approximately $347,000 more to reduce accounts payable when comparing the same two periods.

Net cash provided by investing activities

Cash provided by investing activities increased by $800,000 in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. All of this difference was due to the $800,000 in cash provided by the Purnovate sale in the second quarter of 2023.

Net cash provided by financing activities

Cash provided by financing activities decreased by approximately $8,516,000 in the six months ended June 30, 2023, compared to the six months ended June 30, 2022. In the first quarter of 2022, we engaged in a large fundraising round to obtain sufficient cash for completion of our trial activities and the ramp up of Purnovate projects. In the first quarter of 2023, with a lower per share market value, reduced month-to-month cash needs, and the expectation that the sale of Purnovate would provide additional cash, we determined to make a more modest financing.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements, if any.

Critical Accounting Estimates

The preparation of the financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, our expected liquidity needs and expected future cash positions, and the reported amounts of sales and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including those related to prepaid research and development, accruals associated with third party providers supporting clinical trials, realization of income tax assets, as well as the fair value of stock-based compensation to employees and service providers. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our financial statements as they occur.

While our significant accounting policies are more fully described in Note 3 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and in Note 3 to our financial statements included in our annual report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

R&D Expenses

Recognition and accrual of expenses associated with our clinical trial are dependent on the judgment of our contractors and subcontractors in their reporting and communication of information to us. Occurrence of certain fees to our clinical research organization, clinical trial sites, pre-clinical testing vendor, and subcontractors are tied to events, for which the determination of likelihood requires judgment both on our part and on the part of our contractors.

Stock Based Compensation

We estimate the fair value of options and stock warrants granted using the Black Scholes Merton model. We estimate when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of equity-based compensation expense is recognized. If the award is deemed probable of being earned, related equity-based compensation expense is recorded. The fair value of an award ultimately expected to vest is recognized as an expense, net of forfeitures, over the requisite service periods in our statements of operations, which is generally the vesting period of the award.

The Black Scholes Merton model requires the input of certain subjective assumptions and the application of judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, the expected dividend yield, and the expected term of the awards. In addition, the recognition of equity-based compensation expense is impacted by our forfeitures, which are accounted for as they occur.

The assumptions used in our option pricing model represent management’s best estimates. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future. The key assumptions included in the model are as follows:

Commitments and Contingencies

We follow subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Our legal costs associated with contingent liabilities are recorded to expense as incurred.

Equity Method Investments

We apply the equity method of accounting to investments when we have significant influence, but not controlling interest, in the investee. We exercise judgment regarding the level of influence over each equity method investment, including considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions, and material intercompany transactions. We assess investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Determining fair value for investments in privately held entities could, if there is not recent or comparable trading in the investee’s equity, require using a valuation model, which would include significant judgment and estimates.

Equity method investments are measured at cost minus impairment, if any, plus or minus our proportionate share of the equity method investee’s income or loss. The proportionate share of the income or loss from equity method investments is recognized on a lag. Currently we are not obligated to make additional capital contributions for our equity method investments, and therefore only record losses up to the amount of our total investment, inclusive of other investments in and loans to the investee, which are not accounted for as equity method investments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. We have identified material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified to date include (i) lack of formal risk assessment under COSO framework: (ii) policies and procedures which are not adequately documented; (iii) lack of proper approval processes, review processes and documentation for such reviews; (iv) insufficient GAAP experience regarding complex transactions and ineffective review processes over period end financial disclosure and reporting; (v) deficiencies in the risk assessment, design and policies and procedures over information technology general controls; and (vi) insufficient segregation of duties.

Due to the material weaknesses in internal control over financial reporting as described below, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.

Notwithstanding the material weaknesses described above, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that unaudited condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this quarterly report.

Changes in Internal Control

There has been no change in our internal control procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

Item 6. Exhibits

The exhibit index set forth below is incorporated by reference in response to this Item 6.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No.1 to the report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: October 30, 2023

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