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 of addictions and related
disorders.
The
Company has commenced its first Phase 3 clinical trial of its lead compound AD04 (“AD04”) for the treatment of alcohol use
disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”) have
indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of alcohol use disorder rather than
the previously required abstinence-based endpoints. Key patents have been issued in the United States, the European Union, and other
jurisdictions for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist.
Due to its mechanism of action, AD04 has the potential to be used for the treatment of other addictive disorders, such as opioid use
disorder, obesity, smoking, and other drug addictions.
The
Company’s wholly owned subsidiary, Purnovate, Inc., 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.
2
— LIQUIDITY AND OTHER UNCERTAINTIES
The
unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles
in the United States (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development
stage and has incurred losses each year since inception and has experienced negative cash flows from operations in each year since inception
and has an accumulated deficit of approximately $40.8 million as of June 30, 2021. Based on the current development plans for AD04 in
both the U.S. and international markets and other operating requirements, the Company believes that the existing cash and equivalents
are sufficient to fund operations, including the Company’s ongoing trial of its lead compound AD04 as well as a number of additional,
discretionary research and development projects, for at least the next twelve months following the filing of these unaudited condensed
financial statements and through the third quarter of 2022.
Due
to the COVID-19 pandemic, during the first three quarters of 2020, the Company experienced delays in certain countries in obtaining regulatory
approval required to commence the trial in such countries, resulting in significantly slowed trial enrollment (see Other Uncertainties
below). Enrollment has since improved, though enrollment in higher cost sites in Scandinavia have recovered more quickly than in lower
cost sites in Central and Eastern Europe. The Company presently projects completion of its Phase 3 clinical trial in the first quarter
of 2022. There continues to be uncertainties regarding the potential impact of COVID-19 on our clinical trial and the associated cash
projections. While the Company’s current estimates include the overhead costs necessary to support operations during the remaining
trial period and other costs increases associated with conducting trial activities impacted by the pandemic, additional delays and cost
increases could add to those estimates.
The Company’s cash
on hand at the filing date is estimated to be sufficient to fund operations to achieve database lock. In addition, the Company has an
active equity purchase agreement (See Note 10) with Keystone Capital, LLC, which allows the sale of up to $15 million of securities,
which amount, if fully accessible, would be sufficient to fund the Company’s operations for an additional period if completion
of the trial is delayed or if costs increase. Under this equity purchase agreement, $3.85 million has already been raised as of this
filing. However, there can be no guarantee that the Company will meet the conditions to use the equity line and, without access to this
equity line and/or additional funding, 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. Moreover, a trial delay or cost increase may be of
greater magnitude than can be offset by the funds available through the equity line. In either of these cases the Company would be required
to delay, scale back or eliminate some or all of its research and development programs, which would likely have a material adverse effect
on the Company and its financial statements.
The
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 its lead compound, 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.
The
Company also faces the ongoing risk that the coronavirus pandemic may further slow, for an unforeseeable period, the conduct of the Company’s
trial. The effects of the ongoing coronavirus pandemic may also increase non-trial costs such as insurance premiums, increase the demand
for and cost of capital, increase loss of work time from key personnel, and negatively impact our key clinical trial vendors and supplier
of our active pharmaceutical ingredient. The full extent to which the COVID-19 pandemic impacts the clinical development of AD04, 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, 2020,
included in the Annual Report on Form 10-K filed on March 22, 2021. 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 our own judgement, as well as the judgment of our contractors and subcontractors in their reporting of information
to us.
Basic
and Diluted Earnings (Loss) per Share
Basic
and diluted earnings (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 six months
ended June 30, 2021 and 2020 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 six month periods ended June 30, 2021, and 2020 were as
follows:
|
|
Potentially
Dilutive Common
Shares Outstanding
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Warrants to purchase common shares
|
|
|
7,884,936
|
|
|
|
8,782,631
|
|
Common Shares issuable on exercise of options
|
|
|
3,670,866
|
|
|
|
2,678,533
|
|
Total potentially dilutive Common Shares excluded
|
|
|
11,555,802
|
|
|
|
11,461,164
|
|
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, prepaid and other current assets, accounts payable and accrued liabilities approximate their
carrying value due to their short-term maturities. The lease liability are presented at their carrying value, which based on borrowing
rates currently available to the Company for leases with similar terms, approximate their fair values.
Non-financial
assets, such as R&D supplies, 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 June 30, 2021, the resulting probability-weighted cash flows were discounted using a weighted average cost of capital
of 43% for regulatory and sales-based milestones.
|
|
June 30,
2021
|
|
Opening balance
|
|
$
|
–
|
|
Additions
|
|
|
(732,287
|
)
|
Total losses recognized
|
|
|
(61,203
|
)
|
Balance as of June 30, 2021
|
|
$
|
(793,490
|
)
|
Business
Combinations
The
Company accounts for its business combinations under the provisions of Accounting Standards Codification (“ASC”) Topic 805-10,
Business Combinations (“ASC 805-10”), which requires that the purchase method of accounting be used for all business combinations.
Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. For transactions that
are business combinations, the Company evaluates the existence of goodwill. Goodwill represents the excess purchase price over the fair
value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are
recognized separately from the business combinations and are expensed as incurred.
The
estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined
using established valuation techniques. A fair value measurement is determined as the price the Company would receive to sell an asset
or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the context of purchase
accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection
of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies.
The estimated fair values reflected in the purchase accounting are subject to management’s judgment.
Contingent
Consideration
The
Company records contingent consideration resulting from a business combination at fair value on the acquisition date. On a quarterly
basis, the Company revalues these obligations and record increases or decreases in their fair value as an adjustment to operating expenses.
Changes to contingent consideration obligations can result from adjustments to discount rates, accretion of the liability due to the
passage of time, changes in our estimates of the likelihood or timing of achieving development or commercial milestones, changes in the
probability of certain clinical events or changes in the assumed probability associated with regulatory approval.
Intangible
Assets
Intangible
assets generally consist of patents, purchased technology, acquired IPR&D and other intangibles. Intangible assets with definite
lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment.
Intangible
assets related to acquired IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated
research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be
tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a potential
impairment. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the
associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these
assets.
Goodwill
Goodwill,
which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized;
rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. The Company is organized in one reporting
unit and evaluates the goodwill for the Company as a whole. The Company reviews goodwill for impairment on a reporting unit basis annually
during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill might
not be recoverable. Under the authoritative guidance issued by the FASB, the Company has the option to first assess the qualitative factors
to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to perform a quantitative goodwill impairment test. If the Company determines that it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed.
The goodwill impairment test requires the Company to estimate the fair value of the reporting unit and to compare the fair value of the
reporting unit with its carrying amount. If the fair value exceeds the carrying amount, then no impairment is recognized. If the carrying
amount recorded exceeds the fair value calculated, then an impairment charge is recognized for the difference. The judgments made in
determining the projected cash flows used to estimate the fair value can materially impact the Company’s financial condition and
results of operations. There was no impairment of goodwill for the six months ended June 30, 2021.
Leases
The
Company determines if an arrangement is a lease at inception and on the lease commencement date, the Company recognizes an asset for
the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.
As
the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on a third-party
analysis, which is updated periodically. The incremental borrowing rate is determined using the remaining lease term as of the lease
commencement date.
The
Company elected the package of practical expedients included in this guidance, which allows us (i) to not reassess whether any expired
or existing contracts contain leases; (ii) to not reassess the lease classification for any expired or existing leases; (iii) to account
for a lease and non-lease component as a single component for both its real estate and non-real estate leases; and (iv) to not reassess
the initial direct costs for existing leases.
Amortization
and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the
lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded
amortization pattern resulting in higher single lease expense in earlier periods.
The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition,
the Company does not have any finance leases, any material sublease arrangements or any material leases where the Company is considered
the lessor.
Research
and Development
Research
and development costs are charged to expense as incurred and include supplies and other direct trial expenses such as fees due to contract
research organizations, consultants which support the Company’s research and development endeavors, the acquisition of technology
rights without an alternative use, and compensation and benefits of clinical research and development personnel. Certain research and
development costs, in particular fees to contract research organizations (“CROs”), are structured with milestone payments
due on the occurrence of certain key events. Where such milestone payments are greater than those earned through the provision of such
services, the Company recognizes a prepaid asset which is recorded as expense as services are incurred.
Stock-Based
Compensation
The
Company measures the cost of option 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 awardee 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 expected volatility of the Company’s
common stock, the risk-free rate of return, and expected term of the options. The Company’s estimates of these assumptions are
primarily based on historical data, peer company data, government data, and the judgment of management regarding future trends.
Common
shares issued are valued based on the fair value of the Company’s common shares as determined by the market closing price of a
share of our common stock on the date of the commitment to make the issuance.
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.
A
valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized. The Company recognizes the
effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition and measurement
are reflected in the period in which the change in judgment occurs. Interest and penalties related to unrecognized tax benefits are included
in income tax expense. The Company has generally recorded a full valuation allowance for its tax carryforwards, reflecting the judgment
of Company management that they are more likely than not to expire unused.
4
— ACQUISITION
Purnovate,
Inc. Acquisition – Related Party
On
January 26, 2021 the Company completed its business acquisition of 100% of the equity interests of Purnovate, Inc. (“Purnovate”),
pursuant to the Equity Purchase Agreement, dated December 7, 2020, as amended. Mr. Stilley, Adial’s CEO, owned 28.73% of the membership
interests in Purnovate and, therefore, the acquisition of Purnovate is considered a related party transaction. The acquisition of Purnovate
included an in-place workforce comprised of four employees, ongoing research and development projects and pending patents, certain net
working capital assets and an assumed operating lease for laboratory and office space (“Assumed Lease”).
Purnovate
began occupying the premises of the Assumed Lease in January, 2020 and, as a term of its lease, gained access and use to a significant
library of chemical compounds and certain laboratory equipment had been abandoned by the prior tenant. On January 19, 2021, Purnovate,
modified and agreed to amend the lease agreement with the landlord (a third party) of the Assumed Lease, which transferred legal title
to Purnovate for all assets on the premises of the Assumed Lease while simultaneously extending its term. The Company concluded that
the Purnovate Lease Amendment was completed for the benefit of the Company and therefore the acquisition of the assets were considered
a separate transaction and apart from the acquisition of Purnovate in accordance with ASC 805-10-25-21.
The
purchase price of Purnovate consisted of cash consideration of $350,000 (excludes an $350,000 initial working capital loan to Purnovate,
which assumed by Adial at acquisition through its ownership of Purnovate, Purnovate’s liability and Adial’s asset being eliminated
in consolidation), the issuance 699,980 shares of Adial common stock ($2.34 at date of closing, less a discount of 35% for a discount
for lack of marketability related to the restrictions on the stock-based consideration) and contingent consideration for (i) certain
development milestones in an aggregate amount of up to $2,100,000 for the first time any product or compound has achieved the relevant
milestone within forty five (45) days after such occurrence (ii) milestones in an aggregate amount of up to $20,000,000 for each compound
commercialized, and (iii) royalties of 3.0% of Net Sales (as defined in the Purchase Agreement). The equity consideration has been placed
into escrow to secure certain indemnification and other obligations of Purnovate and the Members and will be released, subject to certain
terms.
The
Company utilized a relative fair value approach to allocate the fair value of the assets acquired in connection with the Purnovate Lease
Amendment and the fair value of Purnovate’s business to the purchase price of Purnovate. Assets acquired and liabilities assumed
are recorded at the date of acquisition at their respective fair values. The estimated fair value of net assets acquired, including the
allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques.
The
estimated fair value of the acquired IPR&D was determined using a method which reflects the present value of the operating cash flows
generated by this asset after taking into account the cost to realize the revenue, and an appropriate discount rate to reflect the time
value and risk associated with the invested capital. These assets are subject to impairment testing until completion or abandonment of
each project.
The
estimated fair value of the acquired research and development supplies (library of chemical compounds and certain laboratory equipment)
was determined by discounting the replacement cost of the supplies for probability of use and salvage value if unused. Book value was
determined by assigning a portion of the value of consideration paid to the supplies according to the relative fair value of the supplies
compared to the fair value of Purnovate’s business. The Company believes that the book value of the supplies is materially lower
than their replacement cost, and that therefore the research and development expenses reported as the supplies are utilized is likely
be less than the costs defrayed by their acquisition.
Certain
adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement
period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded
in income.
In
connection with the business acquisition, the Company incurred acquisition costs of approximately $46,000 that were recognized in selling,
general and administrative expense.
Total consideration paid
|
|
|
|
Cash consideration
|
|
$
|
350,000
|
|
Stock consideration
|
|
|
1,060,150
|
|
Contingent consideration
|
|
|
732,287
|
|
Total
|
|
|
2,142,437
|
|
Less: Assets acquired through Purnovate Lease Amendment
|
|
|
|
|
Research and development supplies
|
|
|
(1,548,397
|
)
|
Remaining consideration
|
|
$
|
594,040
|
|
The
table below sets forth the allocation of the fair value of the Purnovate Net Acquired Assets and the corresponding line item in the Company’s
consolidated balance sheet at the date of acquisition.
|
|
|
|
Cash
|
|
$
|
380,589
|
|
Property and equipment
|
|
|
6,954
|
|
Lease right of use assets
|
|
|
294,294
|
|
In-process research and development
|
|
|
455,000
|
|
Total identifiable assets acquired
|
|
|
1,136,837
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
910
|
|
Notes payable
|
|
|
350,000
|
|
Lease liability
|
|
|
294,294
|
|
Paycheck protection program loan
|
|
|
29,088
|
|
Total liabilities assumed
|
|
|
674,292
|
|
|
|
|
|
|
Total identifiable net assets acquired
|
|
|
462,545
|
|
|
|
|
|
|
Goodwill
|
|
|
131,495
|
|
Net assets acquired
|
|
$
|
594,040
|
|
The
Company’s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021 include the results
of operations of Purnovate since January 26, 2021 during which period Purnovate contributed net losses of approximately $25,000 and $107,000,
respectively. On an unaudited pro forma basis, the revenues and net income of the Company assuming the acquisition had occurred on January
1, 2020, are shown below. The unaudited pro forma information does not purport to present what the Company’s actual results would
have been had the acquisition occurred on January 1, 2020, nor is the financial information indicative of the results of future operations.
Since Purnovate’s contribution to the Company’s loss for the three months ended June 30, 2021 is included in the actual results,
a pro forma is not presented here.
|
|
Three months ended
June 30,
2020
|
|
Net revenue
|
|
$
|
–
|
|
Net loss
|
|
$
|
(1,901,988
|
)
|
|
|
Six months ended
June 30,
2021
|
|
|
Six months ended
June,
2020
|
|
Net revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
Net loss
|
|
$
|
(9,285,829
|
)
|
|
$
|
(4,255,302
|
)
|
5
– NOTE PAYABLE
Note
Payable – Paycheck Protection Program Loan
In
connection with the acquisition of Purnovate (See Note 4), the Company assumed $29,088 in loan funding from the Paycheck Protection Program
(the “PPP”), established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
and administered by the U.S. Small Business Administration (“SBA”). Under the terms of the PPP Note and the PPP Loan, interest
accrued on the outstanding principal at the rate of 1% per annum, and there is a deferment period until installment payments of principal
and interest are due. The term of the PPP Note was two years. In April of 2021, the PPP Loan was forgiven in accordance with the terms
established for such loans under the CARES Act, on which forgiveness the Company recognized an gain of $29,088, classified as other income.
6
— GOODWILL
The
Company recorded goodwill in connection with the acquisition of Purnovate. The changes in the carrying value of goodwill for the six
months June 30, 2021 are as noted in the table below:
|
|
Carrying
Value
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
Goodwill acquired during the period
|
|
|
131,495
|
|
Balance at June 30, 2021
|
|
$
|
131,495
|
|
7
— ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Clinical research organization services and expenses
|
|
$
|
1,346,054
|
|
|
$
|
470,991
|
|
Employee compensation
|
|
|
278,951
|
|
|
|
322,437
|
|
Legal and consulting services
|
|
|
44,719
|
|
|
|
6,151
|
|
Minimum license royalties Clinical research organization services and expenses
|
|
|
20,000
|
|
|
|
40,000
|
|
Manufacturing expenses
|
|
|
–
|
|
|
|
17,060
|
|
Total accrued expenses
|
|
$
|
1,689,724
|
|
|
$
|
856,639
|
|
8
— 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 9. 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.
On
September 21, 2020, the Company concluded a private placement of 357,143 unregistered shares of common stock at an above market price
of $1.40 per share with Bespoke Growth Partners, Inc. (“Bespoke”). Bespoke is controlled by Mark Peikin, who serves as the
Company’s non-executive Chief Development Officer (and who is neither an executive officer nor director of the Company). Net proceeds
of the offering was $500,000.
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 would be
a wholly owned subsidiary of Adial. The Company’s Chief Executive Officer and board member, William B. Stilley, and another Adial
board member, James W. Newman, were, directly or indirectly, 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 receives 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 “SPAs”) with each of Bespoke, three entities
controlled by James W. Newman, Jr., a member of the Company’s Board of Directors (“Newman”), and Keystone Capital Partners,
LLC (“Keystone”), pursuant to which: (i) Bespoke 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) 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. In the six months ended June 30, 2021, the Company issued 700,001 shares of common
stock for total proceeds of $2,100,003.
In
connection with the SPAs, the Company entered into Registration Rights Agreements (“RRAs”), dated March 11, 2021, with each
of the Investors pursuant to which the Company was obligated to file a registration statement (the “Registration Statement”)
with the U.S. Securities and Exchange Commission (the “SEC”) within thirty (30) days following the date upon which the Company
filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and use all commercially reasonable efforts to have
the Registration Statement declared effective by the SEC within thirty (30) days after the Registration Statement is filed (or, in the
event of a “full review” by the SEC, within sixty (60) days after the Registration Statement is filed). A registration statement
on Form S-3 was filed with the SEC on April 20, 2021 and declared effective on May 26, 2021.
See
Note 10 for related party vendor, consulting, and lease agreements, Note 4 for Advance to Seller, and Note 11 for an additional Securities
Purchase agreement.
9
— SHAREHOLDERS’ EQUITY
Common
Stock Issuances
On
January 26, 2021, 669,980 unregistered shares of common stock were issued to the shareholders of Purnovate, Inc., including William B.
Stilley, the Company’s CEO and entities controlled by James Newman, a Director, in consideration of purchase of Purnovate, Inc.,
at a total cost of $1,060,150 (See Note 4.)
On
February 8, 2021, option to purchase 10,000 shares of common stock at an exercise price of $1.45 per share was exercised for total proceeds
of $14,500.
On
February 25, 2021, previously registered warrants to purchase 712,500 shares at an exercise fee of $2.00 per share were exercised for
a total of $1,425,000.
During
the three and six months ended June 30, 2021, the Company issued 432,849 and 1,440,145 shares of common stock under the Keystone equity
purchase agreement for total proceeds of $1,000,000 and $3,350,000, respectively.
During
the six months ended June 30, 2021, the Company issued 700,001 shares of common stock for total proceeds of $2,100,003 under a securities
purchase agreement.
During
the six months ended June 30, 2021, the Company issued 450,000 shares of common stock to consultants for services rendered and to employees
at a total cost of $1,125,900.
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 September 1, 2020, by a vote of the shareholders, the number
of shares issuable under the 2017 Equity Incentive Plan was increased to 5,500,000. At June 30, 2021, the Company had issued 1,259,438
shares and had outstanding 3,531,180 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.
Stock
Options
The
following table provides the stock option activity for the six months ended June 30, 2021:
|
|
Total
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Term
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair Value
at Issue
|
|
Outstanding December 31, 2020
|
|
|
2,668,866
|
|
|
|
8.09
|
|
|
$
|
2.48
|
|
|
$
|
1.13
|
|
Issued
|
|
|
1,012,000
|
|
|
|
|
|
|
|
2.40
|
|
|
|
2.41
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
1.45
|
|
|
|
0.66
|
|
Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2021
|
|
|
3,670,866
|
|
|
|
8.05
|
|
|
$
|
2.61
|
|
|
$
|
1.95
|
|
Outstanding June 30, 2021, vested and exercisable
|
|
|
1,776,456
|
|
|
|
7.57
|
|
|
$
|
2.81
|
|
|
$
|
2.05
|
|
At
June 30, 2021, the intrinsic value totals of the outstanding options were $1,534,168.
The
Company used the Black Scholes valuation model to determine the fair value of the options issued, using the following key assumptions
for the six months ended June 30, 2021:
|
|
|
June 30,
2021
|
|
Fair Value per Share
|
|
$
|
2.21-3.13
|
|
Expected Term
|
|
|
5.75 years
|
|
Expected Dividend
|
|
$
|
—
|
|
Expected Volatility
|
|
|
109.29-110.15
|
%
|
Risk free rate
|
|
|
0.41-0.49
|
%
|
During
the six months ended June 30, 2021, 1,012,000 options to purchase shares of common stock were granted at a fair value of $2,428,907,
an approximate weighted average fair value of $2.41 per option, to be amortized over a service a weighted average period of three years.
As of June 30, 2021, $3,806,495 in unrecognized compensation expense will be recognized over a weighted average remaining service period
of 1.51 years.
The
components of stock-based compensation expense included in the Company’s Statements of Operations for the six months ended June
30, 2021 and 2020 are as follows:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development options expense
|
|
|
77,177
|
|
|
|
54,079
|
|
|
|
143,809
|
|
|
|
140,518
|
|
Total research and development expenses
|
|
|
77,177
|
|
|
|
54,079
|
|
|
|
143,809
|
|
|
|
140,518
|
|
General and administrative options expense
|
|
|
491,118
|
|
|
|
331,569
|
|
|
|
898,273
|
|
|
|
587,137
|
|
Stock and warrants issued to consultants and employees
|
|
|
275,000
|
|
|
|
9,804
|
|
|
|
1,125,900
|
|
|
|
238,430
|
|
Total general and administrative expenses
|
|
|
766,118
|
|
|
|
341,373
|
|
|
|
2,024,173
|
|
|
|
825,567
|
|
Total stock-based compensation expense
|
|
$
|
843,295
|
|
|
$
|
395,452
|
|
|
$
|
2,167,982
|
|
|
$
|
966,085
|
|
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, 2020
|
|
|
8,649,625
|
|
|
|
3.46
|
|
|
$
|
4.60
|
|
|
$
|
0.02
|
|
Issued
|
|
|
20,100
|
|
|
|
|
|
|
|
1.99
|
|
|
|
|
|
Exercised
|
|
|
(712,500
|
)
|
|
|
|
|
|
|
2.00
|
|
|
|
|
|
Outstanding June 30, 2021
|
|
|
7,957,225
|
|
|
|
2.88
|
|
|
$
|
4.83
|
|
|
$
|
0.02
|
|
This
table includes warrants to purchase 91,705 shares of common stock issued to consultants, including the 20,100 shares of common stock
issued during the six months ended June 30, 2021, with a total fair value of $140,254 at time of issue, calculated using the Black Scholes
model assuming an underlying security values of ranging between $1.30 and $2.03, volatility rate ranging between 103.8% and 109.64%,
a risk-free rate of 0.49%, and an expected term of 5.75 years. In the three and six months ended June 30, 2021, the Company recognized
$42,698 and $77,159 in expense associated with these warrants, respectively, with $10,406 remaining to be recognized at June 30, 2021.
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 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.
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
the three and six months ended June 30, 2021 and 2020, the Company recognized $10,000 and $20,000 minimum license royalty expenses under
this agreement, respectively.
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 the Company’s lead compound, AD04. On June 28, 2019, the Company
and Crown executed a change order to Service Agreement 1 increasing Crown’s fee from $3,507,995 (€2,958,835 converted to dollars
at the Euro/US Dollar exchange rate of 1.1856 as of June 30, 2021) to $3,757,042 (€3,168,895) and rescheduling future milestone
payments as shown below.
On
November 21, 2018, the Company made the initial prepayment under the agreement of $505,960, after exchange to US dollars at the rate
then prevailing. The fees are to be paid as milestones are reached on the following schedule. On September 30, 2019, the Company received
an invoice for the 10% milestone payment associated with the first submission of a trial application to a national regulatory authority
and recorded a prepaid expense of $294,124. On February 1, 2020, the first site initiation visit (“SIV”) of a study site
had been completed and the second milestone of €269,938, was recognized as a prepaid expense of $299,496. On February 27, 2020,
the first potential patient for the study had been screened and the third milestone payment of €269,938 was recognized as a prepaid
expense of $297,013. On June 15, 2020, 50% of sites had been initiated and a fourth milestone payment of €269,938 was recognized
as a prepaid expense of $302,843. On October 20, 2020, 100% of sites had been initiated and a fifth milestone $319,310 was paid. On November
10, 2020, 30% of patients had been enrolled and a sixth milestone payment of $319,013 was paid. Finally, on March 24, 2021, 60% of patients
had been rolled and a seventh milestone payment of $318,905 was made.
At
June 30, 2021, 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
|
|
100% of patients randomized
|
|
|
10
|
%
|
|
$
|
320,038
|
|
90% of case report form pages monitored
|
|
|
5
|
%
|
|
$
|
160,019
|
|
PE analysis
|
|
|
5
|
%
|
|
$
|
160,019
|
|
Database is locked
|
|
|
10
|
%
|
|
$
|
320,038
|
|
During
the six months ended June 30, 2021, the Company recognized $938,632 in direct expenses associated with the Service Agreement 1, classified
as R&D expense, including amortization of milestone payments and change order fees immediately recognized as expenses. On December
31, 2020 there was accrued R&D expense of $53,065 related to such direct expenses under this agreement, and on June 30, 2021 the
Company had an accrued expense liability of $581,700.
Service Agreement 1 also estimated
approximately $2.6 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. Based on current enrollment rates and the various
active clinical sites, the Company has increased its total estimated future site costs to a total of approximately $3.0 million, an estimate
that could increase or decrease based on changes to individual site enrollment rates. During the three and six months ended June 30,
2021, the Company recognized $979,096 and $1,552,152 in costs associated with fees to investigators and sites, respectively.
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
June 30,
2021
|
|
|
Six months
ended
June 30,
2021
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
18,942
|
|
|
$
|
33,859
|
|
Short-term lease expense
|
|
|
—
|
|
|
|
—
|
|
Total lease cost
|
|
$
|
18,942
|
|
|
$
|
33,859
|
|
Supplemental
cash flow information related to leases are as follows:
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Six months ended
June 30,
2021
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
33,859
|
|
|
|
|
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets
|
|
$
|
294,294
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
As of
June 30,
2021
|
|
Assets
|
|
|
|
Lease right of use assets
|
|
$
|
270,733
|
|
Total lease assets
|
|
$
|
270,733
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Lease liability - current portion
|
|
$
|
46,092
|
|
Noncurrent liabilities:
|
|
|
|
|
Lease liability, net of current portion
|
|
|
227,195
|
|
Total lease liability
|
|
$
|
273,287
|
|
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
June 30,
2021
|
|
Weighted average remaining lease term (in years) - operating leases
|
|
|
4.58
|
|
Weighted average discount rate - operating leases
|
|
|
9.00
|
%
|
Future
lease payments included in the measurement of lease liabilities on the condensed balance sheet as of June 30, 2021, for the following
five fiscal years and thereafter were as follows:
Year ending December 31,
|
|
Operating Leases
|
|
2021 (remaining)
|
|
|
33,859
|
|
2022
|
|
|
70,202
|
|
2023
|
|
|
72,687
|
|
2024
|
|
|
75,231
|
|
2025
|
|
|
77,864
|
|
2026 and thereafter
|
|
|
6,508
|
|
Total Minimum Lease Payments
|
|
$
|
336,351
|
|
Less effects of discounting
|
|
|
(63,064
|
)
|
Present value of future minimum lease payments
|
|
$
|
273,287
|
|
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 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 the six months ended June 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. 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 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) and 2017 Equity Incentive Plan continue unaffected. The Company recognized $46,875 and $93,750 in compensation expense, respectively,
in the both the three and six months ended June 30, 2021 and 2020 as a result of this agreement.
On
July 5, 2019, the Company entered into a Master Services Agreement (the “MSA”) and attached 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 MSA will total approximately $300,000, of which shares of the Company’s common stock having a value equal
to twenty percent (20%) of this total can be issued to Dr. Johnson in lieu of cash payment.
On
December 12, 2019, the Company entered into an Amendment (the “Amendment”) to the statement of work (“SOW”).
The Company had paid PEPCO $39,064 under the SOW for services rendered as of the Amendment date, leaving as estimated balance of $274,779
to be paid under the SOW. The Amendment provided the Company with a 20% discount on the remaining fees owed for services and fixed the
price of any remaining services at a total of $219,823 for all services required for the use of Brief Behavioral Compliance Enhancement
Treatment (BBCET) in support of the Trial. In addition, Dr. Johnson executed a guaranty, dated December 12, 2019, of PEPCO’s
performance under the MSA and SOW (the “Guaranty”), together with a pledge and security agreement, dated December 12, 2019
(the “Pledge and Security Agreement”), to secure the Guaranty with 600,000 shares of the Company’s common stock beneficially
owned by him and a lock-up agreement, dated December 12, 2019 (the “Lock-Up”), pursuant to which he agreed not to transfer
or dispose of, directly or indirectly, any shares of the Company’s common stock, as currently owned by him, until after January
1, 2021. On August 19, 2020, the Company entered into a Lock-Up Agreement Extension and Right of First Refusal with Dr. Johnson (the
“Lock-Up Extension”), which amended the Lock-Up Agreement that had been entered into dated December 12, 2019 (the “Lock-Up”).
The Lock-Up Extension extended the term of Dr. Johnson’s Lock-Up from January 1, 2021 until April 1, 2021. In connection with the
Lock-Up Extension, Dr. Johnson was released from his Lock-Up restrictions with respect to 350,000 shares of the Company’s common
stock. During the six months ended June 30, 2021, the Company recognized no expenses associated with this agreement. As of June 30, 2021,
the Company had recognized $181,495 in expenses, of which $108,056 were charged against cash advanced under the terms of the Amendment,
leaving a net prepaid expense asset of $111,767 associated with this vendor agreement. On April 5, 2021, the Company entered into another
Lock-Up Agreement Extension (the “Second Lock-Up 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 its lead drug candidate, AD04, in genetically identified subjects for the treatment of Alcohol Use Disorder.
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
cash.
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 June 30, 2021, the Company did not have any pending legal actions.
11
— SUBSEQUENT EVENTS
On
July 6, 2021, the Company entered into Securities Purchase Agreements, dated July 6, 2021 (the “SPAs”), with three pre-existing
investors for an aggregate investment of $5,000,000 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. SPAs were entered with each of Bespoke Growth Partners, Inc.
(“Bespoke”), a company controlled by Mark Peikin, the Company’s Chief Strategy Officer, Keystone Capital Partners,
LLC (“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.
In
connection with the SPAs, the Company entered into Registration Rights Agreements (“RRAs”), dated July 6, 2021, with each
of the Investors pursuant to which the Company is obligated to file a registration statement (the “Registration Statement”)
with the U.S. Securities and Exchange Commission (the “SEC”) within thirty (30) days following the date of the RRA, and use
all commercially reasonable efforts to have the Registration Statement declared effective by the SEC within thirty (30) days after the
Registration Statement is filed (or, in the event of a “full review” by the SEC, within sixty (60) days after the Registration
Statement is filed). Accordingly, the Company filed a Registration Statement with the SEC on July 20, 2021, which was declared effective
July 29, 2021.
Under
the terms of the SPAs, on July 7: (i) Bespoke purchased 83,334 shares of the Company’s common stock and agreed to purchase an additional
750,000 shares of the Company’s common stock upon the effectiveness of the Registration Statement; (ii) Keystone purchased 50,000
shares of the Company’s common stock and agreed to purchase an additional 450,000 shares of the Company’s common stock upon
the effectiveness of the Registration Statement; and (iii) Gilliam purchased 33,334 shares of the Company’s common stock and agreed
to purchase an additional 300,000 shares of the Company’s common stock upon the effectiveness of the Registration Statement.
Pursuant to the terms of the
SPAs, if during the period commencing from the initial closing under the SPA until 30 days after the Registration Statement is declared
effective by the SEC, the Company issues or sells any shares of common stock at a price per shares that is less than $3.00 per share (a
“Share Dilutive Issuance”), except for certain excluded issuances, then the Company shall, within two (2) business days after
such issuance, pay to the Investors as a penalty an amount in cash equal to the number of shares purchased by the Investors multiplied
by the difference between the greater of the price per share of common stock paid in the Share Dilutive Issuance and $2.48.
On
August 2, 2021, under the terms of the SPAs, (i) Bespoke purchased 750,000 shares of the Company’s common stock for proceeds of
$2,250,000; (ii) Keystone purchased 450,000 shares of the Company’s common stock for proceeds of $1,350,000; and (iii) Gilliam
purchased 300,000 shares of the Company’s common stock for proceeds of $900,000.
On
July 14, 2021 205,762 registered shares of common stock were sold under the terms of the Company’s equity purchase agreement with
Keystone at a price of $2.43 per share for total proceeds of $500,000.