The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals, Inc.
(“Adial”) was converted from a limited liability company formed on November 23, 2010 under the name Adial Pharmaceuticals,
LLC in the Commonwealth of Virginia to a corporation and reincorporated in Delaware on October 1, 2017. Adial is presently engaged in
the development of medications for the treatment or prevention of addictions and related disorders.
Adial’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. In January 2023, the Company entered
into a 120 day exclusive option agreement for the sale of the Purnovate assets and related liabilities.
In June of 2022, the Company
released data from its ONWARD™ Phase 3 pivotal trial of its lead compound AD04 (“AD04”) for the treatment of Alcohol
Use Disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”)
have indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of Alcohol Use Disorder rather
than the previously required abstinence-based endpoints. The Company has held meetings with the FDA and national medicines authorities
in Europe to determine the path toward approval of AD04. Key patents have been issued in the United States, the European Union, and other
jurisdictions for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist.
Due to its mechanism of action, AD04 has the potential to be used for the treatment of other addictive disorders, such as Opioid Use Disorder,
obesity, smoking, and other drug addictions.
2 — GOING CONCERN AND OTHER UNCERTAINTIES
These unaudited condensed
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development stage
and has incurred losses each year since inception and has experienced negative cash flows from operations in each year since inception.
Based on the current development plans for AD04 in both the U.S. and international markets and other operating requirements, the Company
does not believe that the existing cash and cash equivalents are sufficient to fund operations for the next twelve months following the
filing of these consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue
as a going concern.
The Company has held meetings
with the FDA and various European national authorities to discuss, based on the recently announced results of its ONWARD Phase 3 trial,
the appropriate next steps towards the expeditious development of AD04 and to seek product approval. The Company will analyze the results
of these meetings once it has received written feedback from the regulatory agencies. The Company has also initiated a number of research
and development projects associated with Purnovate, including Purnovate’s lead compound, PNV5030, for treatment of pain and potentially
for treatment of cancer. In January 2023, the Company entered into a 120 day exclusive option agreement for the sale of the Purnovate
assets and related liabilities. On May 8, this option was exercised for a fee of $450,000. Additional funds for the reimbursement of previously
sunk Purnovate project costs are also expected. However, even with the receipt of the exercise fee and estimated expense reimbursement,
the Company will not have sufficient cash on hand to fund its operations for the twelve months following the filing of these financial
statements and will require additional capital to fund its operations. There is no certainty that the Company will be able to access additional
capital on acceptable terms, if at all, with or without the option having been exercised. If unable to access sufficient capital, the
Company would be required to delay, scale back or eliminate some or all of its research and development programs or delay its approach
to regulators concerning AD04, which would likely have a material adverse effect on the Company and its financial statements.
The Company’s continued
operations will depend on its ability to raise additional capital through various sources, such as equity and/or debt financings, grant
funding, strategic relationships, or out-licensing in order to complete its subsequent clinical trial requirements for AD04. Management
is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will
be available on acceptable terms, or at all. Without additional funding, the Company would be required to delay, scale back or eliminate
some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial
statements.
Other Uncertainties
Generally, the industry in
which the Company operates subjects the Company to a number of other risks and uncertainties that can affect its operating results and
financial condition. Such factors include, but are not limited to: the timing, costs and results of clinical trials and other development
activities versus expectations; the ability to obtain regulatory approval to market product candidates; the ability to manufacture products
successfully; competition from products sold or being developed by other companies; the price of, and demand for, Company products once
approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.
With the results of the ONWARD
trial having been released and regulatory approaches underway, the risk of delays to the Company’s development programs from COVID-19
are reduced. However, the ongoing effects of the ongoing coronavirus pandemic, such as supply chain disruptions and post-stimulus inflation,
may increase non-trial costs such as insurance premiums, increase the demand for and cost of capital, increase loss of work time from
key personnel, and negatively impact our other key vendors and suppliers.
3 — BASIS OF PRESENTATION AND 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,
these 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, 2022, included in the 2022 Form 10-K. The
unaudited condensed consolidated financial statements represent the consolidation of the Company and its subsidiary in conformity with
GAAP. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited
condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant items subject
to such estimates and assumptions include the valuation of stock-based compensation, accruals associated with third party providers supporting
clinical trials and pre-clinical activities, estimated fair values of long-lived assets used to assess the value of intangible assets,
acquired in-process research and development (“IPR&D”), and goodwill, measurement of contingent liabilities, and income
tax asset realization.
Basic and Diluted Loss per Share
Basic and diluted loss per
share are computed based on the weighted-average outstanding shares of common stock, which are all voting shares. Diluted net loss
per share is computed giving effect to all proportional shares of common stock, including stock options and warrants to the extent dilutive.
Basic net loss per share was the same as diluted net loss per share for the three months ended March 31, 2023 and 2022 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 month periods ended March 31, 2023 and 2022 were as follows:
| |
Potentially
Dilutive Common Shares Outstanding March 31, | |
| |
2023 | | |
2022 | |
Warrants to purchase common shares | |
| 12,278,797 | | |
| 12,095,870 | |
Common Shares issuable on exercise of options | |
| 4,316,977 | | |
| 4,146,977 | |
Unvested restricted stock awards | |
| 916,666 | | |
| 236,112 | |
Total potentially dilutive Common Shares excluded | |
| 17,512,440 | | |
| 16,478,959 | |
Cash and Cash Equivalents
The Company considers all
highly liquid investments with original maturities of three months or less to be cash equivalents. At times, the Company’s cash
balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation. At March 31, 2023, the Company exceeded
FDIC insurance limits by approximately $246,000 and held approximately $1.8 million in non-FDIC insured cash equivalent accounts. Included
in cash equivalents are money market investments with maturity dates less than ninety days and are carried at fair value. Unrealized gain
or loss are included in the interest income and are immaterial to the financial statements. At December 31, 2022, the Company did not
exceed FDIC insurance limits but held approximately $3.8 million in non-FDIC insured cash equivalent investments.
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 and accounts payable approximate their carrying value due to their short-term maturities.
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 March 31, 2023, the resulting
probability-weighted cash flows were discounted using a weighted average cost of capital of 44% for regulatory and sales-based milestones.
| |
March 31, 2023 | |
Balance as of December 31, 2022 | |
$ | (492,000 | ) |
Total losses recorded | |
| (14,000 | ) |
Balance as of March 31, 2023 | |
$ | (506,000 | ) |
4 —
ACCRUED EXPENSES
Accrued expenses consist of the following:
| |
March 31, 2023 | | |
December 31, 2022 | |
Clinical research organization services and expenses | |
$ | — | | |
$ | 123,386 | |
Employee compensation | |
| 1,094,010 | | |
| 761,509 | |
Pre-clinical and manufacturing expenses | |
| 43,106 | | |
| 197,306 | |
Legal and consulting services | |
| 47,222 | | |
| 72,616 | |
Total accrued expenses | |
$ | 1,184,338 | | |
$ | 1,154,817 | |
5 — 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 7. 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.
See Note 7 for related party vendor, consulting,
lease, and option agreements.
6 — SHAREHOLDERS’ EQUITY
Common Stock Issuances
On February 23, 2023, the
Company entered into a securities purchase agreement (the “2023 Purchase Agreement”) with an accredited institutional investor
(the “Investor”) providing for the issuance of 1,829,269 shares of the Common Stock, par value $0.001 (the “Common Stock”).
Pursuant to the 2023 Purchase Agreement, the Investor purchased the Shares for an aggregate purchase price of $750,000 with net proceeds
of $609,613, after placement agent fees and expenses. Pursuant to the Purchase Agreement, an aggregate of 1,829,269 Shares were issued
to the Investor.
The Company issued to the
Placement Agent a warrant (the “Placement Agent Warrants”) to purchase up to an aggregate of 182,927 shares of common stock,
representing 10% of the aggregate number of shares of Common Stock sold in the Registered Offering. The Placement Agent Warrants have
an exercise price equal to $0.41 and are exercisable two months after the closing date and expire five years after the date of issuance.
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. On October 13, 2022, by a vote of the shareholders, the number of shares issuable under the 2017 Equity Incentive Plan
was increased to 9,500,000. At March 31, 2023, the Company had issued 2,248,326 shares and had outstanding 4,177,291 options to purchase
shares of our common stock under the 2017 Equity Incentive Plan, as well as 139,686 options to purchase shares of common stock that were
issued before the 2017 Equity Incentive Plan was adopted, leaving 1,199,713 available for issue.
Stock Options
The following table provides
the stock option activity for the three months ended March 31, 2023:
| |
Total Options Outstanding | | |
Weighted Average Remaining Term (Years) | | |
Weighted Average Exercise Price | | |
Weighted Average Fair Value at Issue | |
Outstanding December 31, 2022 | |
| 4,316,977 | | |
| 7.21 | | |
$ | 2.48 | | |
$ | 1.91 | |
Issued | |
| — | | |
| | | |
| | | |
| | |
Cancelled | |
| — | | |
| | | |
| | | |
| | |
Outstanding March 31, 2023 | |
| 4,316,977 | | |
| 6.97 | | |
$ | 2.48 | | |
$ | 1.91 | |
Outstanding March 31, 2023, vested and exercisable | |
| 3,498,695 | | |
| 6.65 | | |
$ | 2.53 | | |
$ | 1.93 | |
At March 31, 2023, the intrinsic value total of
the outstanding options was zero dollars.
During the three months ended
March 31, 2023, no options to purchase shares of common stock were granted. As of March 31, 2023, $1,541,996 in unrecognized compensation
expense will be recognized over a weighted average remaining service period of 1.41 years.
The components of stock-based
compensation expense included in the Company’s Statements of Operations for the three months ended March 31, 2023 and 2022 are as
follows:
| |
Three months ended March 31, | |
| |
2023 | | |
2022 | |
Research and development options expense | |
$ | 48,913 | | |
$ | 76,390 | |
Total research and development expenses | |
| 48,913 | | |
| 76,390 | |
General and administrative options and warrants expense | |
| 348,529 | | |
| 490,799 | |
Stock issued to consultants and employees | |
| 62,135 | | |
| 416,423 | |
Total general and administrative expenses | |
| 410,664 | | |
| 907,222 | |
Total stock-based compensation expense | |
$ | 459,577 | | |
$ | 983,612 | |
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, 2022 | |
| 12,168,159 | | |
| 3.04 | | |
$ | 4.03 | | |
| 0.01 | |
Issued | |
| 182,927 | | |
| 5.00 | | |
$ | 0.41 | | |
| 0.00 | |
Outstanding March 31, 2023 | |
| 12,351,086 | | |
| 2.82 | | |
$ | 3.97 | | |
| 0.01 | |
7 — COMMITMENTS AND CONTINGENCIES
License with University of Virginia Patent
Foundation – Related Party
In January 2011, the Company
entered into an exclusive, worldwide license agreement with the University of Virginia Patent Foundation, dba UVA Licensing and Ventures
Group (“UVA LVG”) for rights to make, use or sell licensed products in the United States based upon the ten separate patents
and patent applications made and held by UVA LVG.
As consideration for the rights
granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty
based on net sales of products covered by the patent-related rights. More specifically, the Company paid UVA LVG a license issue fee and
is obligated to pay UVA LVG (i) annual minimum royalties of $40,000 commencing in 2017; (ii) a $20,000 milestone payments upon dosing
the first patient under a Phase 3 human clinical trial of a licensed product, $155,000 upon the earlier of the completion of a Phase 3
trial of a licensed product, partnering of a licensed product, or sale of the Company, $275,000 upon acceptance of an NDA by the FDA,
and $1,000,000 upon approval for sale of AD04 in the U.S., Europe or Japan; as well as (iii) royalties equal to a 2% and 1% of net sales
of licensed products in countries in which a valid patent exists or does not exist, respectively, with royalties paid quarterly. In the
event of a sublicense to a third party, the Company is obligated to pay royalties to UVA LVG equal to a percentage of what the Company
would have been required to pay to UVA LVG had it sold the products under sublicense itself. In addition, the Company is required to pay
to UVA LVG 15% of any sublicensing income. A certain percentage of these payments by the Company to the UVA LVG may then be distributed
to the Company’s former Chairman of the Board who currently serves as the Company’s Chief Medical Officer in his capacity
as inventor of the patents by the UVA LVG in accordance with their policies at the time.
The license agreement may
be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to
make any milestone, failure to make required payments, or the failure to exercise diligence to bring licensed products to market. In the
event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination. The Company is required
to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by
December 31, 2024 and commencing commercialization of an FDA approved product by December 31, 2025. If the Company were to fail to use
commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.
The term of the license continues
until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration,
abandonment or invalidation will continue in perpetuity on a royalty-free, fully paid basis.
During both the three months
ended March 31, 2023 and 2022, the Company recognized $10,000 minimum license royalty expenses under this agreement, both of which were
in accrued expenses, related party as of March 31, 2023 and 2022, 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.
During the three months ended
March 31, 2023, the Company acknowledged and paid the final milestone of $143,685 occurring with database transfer and recognized $20,299
in previously unaccrued expense associated with the Service Agreement 1, classified as a R&D expense. At March 31 2023, all milestones
associated with Service Agreement 1 had been paid, and no further material CRO fee expenses associated with this agreement were expected.
Service Agreement 1 also estimated
approximately $2.1 million (€2.2 million) in pass-through costs, mostly fees to clinical investigators and sites, which were billed
as incurred and the total contingent upon individual site rate and enrollment rates. With clinical enrollment having ended, the Company
has recorded approximately $3.5 million in site fees over the entire conduct of the trial and does not expect to record material additional
site expenses.
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:
| |
Three months ended March 31, 2023 | | |
Three months ended March 31, 2022 | |
Components of total lease cost: | |
| | |
| |
Operating lease expense | |
$ | 18,207 | | |
$ | 19,376 | |
Short-term lease expense | |
| — | | |
| — | |
Total lease cost | |
$ | 18,207 | | |
$ | 19,376 | |
Supplemental cash flow information
related to leases are as follows:
| |
Three months ended March 31, 2023 | | |
Three months ended March 31, 2022 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash flows for operating leases | |
$ | 18,018 | | |
$ | 17,606 | |
| |
| | | |
| | |
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | |
$ | — | | |
$ | 1,770 | |
Supplemental balance sheet information related
to leases was as follows:
| |
As of March 31, 2023 | | |
As of December 31, 2022 | |
Assets | |
| | |
| |
Lease right of use assets | |
$ | 180,229 | | |
$ | 193,997 | |
Total lease assets | |
$ | 180,229 | | |
$ | 193,997 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Lease liability - current portion | |
$ | 58,751 | | |
$ | 56,828 | |
Noncurrent liabilities: | |
| | | |
| | |
Lease liability, net of current portion | |
| 135,045 | | |
| 150,547 | |
Total lease liability | |
$ | 193,796 | | |
$ | 207,375 | |
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 March 31, 2023 | | |
As of March 31, 2022 | |
Weighted average remaining lease term (in years) - operating leases | |
| 2.83 | | |
| 3.83 | |
Weighted average discount rate - operating leases | |
| 9.00 | % | |
| 9.00 | % |
Future lease payments included
in the measurement of lease liabilities on the condensed balance sheet as of March 31, 2023, for the following five fiscal years and thereafter
were as follows:
Year ending December 31, | |
Operating Leases | |
2023 (remaining) | |
| 54,669 | |
2024 | |
| 75,231 | |
2025 | |
| 77,864 | |
2026 and thereafter | |
| 6,508 | |
Total Minimum Lease Payments | |
$ | 214,272 | |
Less effects of discounting | |
| (20,476 | ) |
Present value of future minimum lease payments | |
$ | 193,796 | |
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 had an initial term of three years, which was extended in March 2022 for an additional three years, subject to earlier termination
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 September 8, 2022, Dr. Johnson’s consulting agreement was amended to increase his annual compensation to $430,000
annually and to pay him series of bonuses in cash and shares on the occurrence of certain milestones. The Company recognized $108,750
and $93,750 in compensation expense in the years ended March 31, 2023 and 2022, respectively, associated with Dr. Johnson’s consulting
agreement.
Consulting Agreement – Related Party
On October 24, 2022, the Company
entered into a Master Services Agreement (the “MSA”) with Abuwala & Company, LLC, dba as Orbytel, for provision of strategic
consulting services. Orbytel made it known that it intended to utilize the services of the Keswick Group, LLC as a subcontractor in the
provision of these services. Tony Goodman, a director, is the founder and principal of Keswick Group, LLC, therefor Orbytel was considered
a related party. Statement of work #1 (“SOW #1”), executed with the MSA, committed the Company to $209,250 in payments. During
the three months ended March 31, 2023, the Company recognized the remaining $57,750 in expenses under SOW #1.
Preclinical Research Agreement
On June 1, 2022, the Company
entered into an agreement and scope-of-work (“SOW”) specification for research services with IIT Research Institute for a
range of in vitro and preclinical safety studies of PNV5030, Purnovate’s lead drug candidate for treatment of pain and potentially
cancer. The studies are intended to enable a submission of an Investigational New Drug application for PNV5030 to the FDA. In total, this
agreement commits the Company to $1,409,000 in payments. An advance payment of $579,000 was due on execution of the agreement and SOW,
which was made and booked as a pre-paid expense asset. In the three months ended March 31, 2023, the Company did not recognize any expenses
associated with this agreement. At March 31, 2023, the Company recognized a $428,700 prepaid expense asset, reflecting the remaining deposit.
Consulting Agreement – Related Party
On March 15, 2023, the Company
entered into a Master Services Agreement (the “MSA”) with the Keswick Group, LLC for provison of consulting services. Tony
Goodman, a director, is the founder and principal of Keswick Group. Under the terms of this agreement, the Keswick Group is to be paid
$22,000 per month for its services for a period of one year from execution of the MSA. In addition, should the Company execute a material
partnering agreement on or before December 15, 2023, Keswick Group will be granted 100,000 shares of common stock. In the three months
ended March 31, 2023, the Company recognized $18,333 in expenses associated with this agreement, of which $11,020 is in accrued expenses,
related party as of March 31, 2023.
Other Consulting and Vendor Agreements
The Company has entered into
a number of agreements and work orders for future consulting, clinical trial support, and testing services, with terms ranging between
12 and 36 months. These agreements, in aggregate, commit the Company to approximately $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. As of March
31, 2023, the Company did not have any pending legal actions.
8 — SUBSEQUENT EVENTS
On May 8, 2023, Adovate LLC
(formerly known as Adenomed LLC) (“Adovate”) exercised its option (the “Option”) under the Option Agreement for
the Acquisition of Purnovate, Inc. by Adenomed, LLC, dated as of January 27, 2023 (the “Option Agreement”), to acquire all
of the assets of Purnovate, Inc. (“Purnovate”). In connection with exercise of the Option, the Company received from Adovate
a non-refundable option exercise fee and upfront payment of $450,000 and entered into an option exercise agreement with Adovate (the “Option
Exercise Agreement”) providing that the exercise of the Option will be effective as of May 16, 2023 and that any Purnovate expenses
incurred subsequent to May 16, 2023 will become the responsibility of Adovate.
Pursuant to the Option Agreement,
the Company will be reimbursed by Adovate for any Purnovate expenditures incurred and paid commencing December 1, 2022, to be paid within
thirty (30) days of execution of the final acquisition agreement, and will hold a security interest in the assets of Adovate until the
expense reimbursement is paid in full and the equity in Adovate described below is issued to Company.
The Option Agreement sets
forth the terms of the final acquisition agreement to be negotiated in good faith by the parties after exercise of the Option which include:
(i) the issuance by Adovate to the Company of 19.99% of the equity of Adovate within thirty (30) days of execution of the final acquisition
agreement (such 19.99% to be subject to anti-dilution protection until Adovate has raised $4,000,000); (ii) the assumption by Adovate
of the obligations of Company under that certain Equity Purchase Agreement by and among Company, Purnovate, the members of Purnovate,
and Robert D. Thompson as the member’s representative, dated December 7, 2020 and amended January 25, 2021; (iii) the assumption
by Adovate of the obligations of the Company under that certain Employment Agreement, dated July 31, 2018, as amended, by and between
Company and William Stilley; (iv) low, single digit royalty payments on net sales; (v) cash payments of up to approximately $11 million
in development and approval milestones for each compound after payments to the prior members of Purnovate pursuant to the PNV EPA; and
(vi) cash payments of up to an aggregate of $50,000,000 upon the achievement of certain commercial milestones.