Adial Pharmaceuticals(ADIL) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Condensed Consolidated Unaudited Financial Statements Adial's unaudited condensed consolidated financial statements and notes detail business, going concern, accounting policies, and key financial events Consolidated Balance Sheets Balance sheets show decreased assets and liabilities from December 2022 to June 2023, driven by the Purnovate sale and reclassification | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $1,218,206 | $4,001,794 | | Total Current Assets | $2,046,851 | $4,779,935 | | Equity method investment | $1,727,897 | — | | Total Assets | $3,778,943 | $5,732,804 | | Total Current Liabilities | $461,752 | $1,790,866 | | Total Liabilities | $461,752 | $2,456,310 | | Total Stockholders' Equity | $3,317,191 | $3,276,494 | - Cash and cash equivalents decreased by approximately $2.78 million from December 31, 2022, to June 30, 2023[10] - Total assets decreased by approximately $1.95 million, largely influenced by the reclassification and sale of discontinued operations[10] Consolidated Statements of Operations Q2 2023 net income, driven by discontinued operations gain, contrasts with prior-year loss, reducing the six-month net loss | Metric (3 Months Ended June 30) | 2023 | 2022 | Change | | :------------------------------ | :------------ | :------------ | :------------ | | Total Operating Expenses | $1,477,395 | $3,243,810 | $(1,766,415) | | Loss From Operations | $(1,477,395) | $(3,243,810) | $1,766,415 | | Income (loss) from discontinued operations, net of taxes | $2,597,674 | $(610,652) | $3,208,326 | | Net Income (Loss) | $1,087,804 | $(3,847,532) | $4,935,336 | | Net income (loss) per share | $0.96 | $(3.96) | $4.92 | | Metric (6 Months Ended June 30) | 2023 | 2022 | Change | | :------------------------------ | :------------ | :------------ | :------------ | | Total Operating Expenses | $3,746,170 | $5,707,357 | $(1,961,187) | | Loss From Operations | $(3,746,170) | $(5,707,357) | $1,961,187 | | Income (loss) from discontinued operations, net of taxes | $1,931,721 | $(1,060,059) | $2,991,780 | | Net Income (Loss) | $(1,818,032) | $(6,755,371) | $4,937,339 | | Net income (loss) per share | $(1.66) | $(7.24) | $5.58 | - The significant net income for the three months ended June 30, 2023, was primarily due to a $2,662,074 gain on the disposal of discontinued operations[12] Consolidated Statements of Shareholders' Equity Shareholders' equity increased from December 2022 to June 2023, driven by equity compensation, common stock sales, and Q2 net income | Metric (June 30, 2023) | Common Shares | Common Stock Amount | Additional Paid In Capital | Accumulated Deficit | Total Shareholders' Equity | | :------------------------------ | :------------ | :------------------ | :------------------------- | :------------------ | :------------------------- | | Balance, December 31, 2022 | 1,067,491 | $1,067 | $66,949,958 | $(63,674,531) | $3,276,494 | | Equity-based compensation | — | — | $707,705 | — | $707,705 | | Sale of common stock, net | 73,144 | $73 | $609,540 | — | $609,613 | | Issuance of commitment shares | 7,983 | $8 | $51,893 | — | $51,901 | | Warrant Exercise | 432 | $1 | $57 | — | $58 | | Net income (loss) | — | — | — | $(1,818,032) | $(1,818,032) | | Balance, June 30, 2023 | 1,197,630 | $1,198 | $68,808,556 | $(65,492,563) | $3,317,191 | - Total Shareholders' Equity increased by $40,697 from December 31, 2022, to June 30, 2023[15] - The company issued 73,144 shares of common stock, generating net proceeds of $609,613[15] Consolidated Statements of Cash Flows H1 2023 saw decreased cash used in operations, cash provided by Purnovate sale, and reduced cash from financing activities | Cash Flow Activity (6 Months Ended June 30) | 2023 | 2022 | Change | | :------------------------------------------ | :------------ | :------------ | :------------ | | Net cash used in operating activities | $(4,193,259) | $(6,031,144) | $1,837,885 | | Net cash used in investing activities | $800,000 | — | $800,000 | | Net cash provided by financing activities | $609,671 | $9,125,606 | $(8,515,935) | | Net increase (decrease) in cash | $(2,783,588) | $3,094,462 | $(5,878,050) | | Cash and cash equivalents - End of Period | $1,218,206 | $9,156,635 | $(7,938,429) | - The sale of Purnovate assets generated $800,000 in cash from investing activities in 2023[20] - Net cash provided by financing activities decreased significantly in 2023 due to a more modest financing round compared to a large fundraising round in 2022[20] Notes to the Unaudited Condensed Consolidated Financial Statements These notes detail Adial's financial statements, covering business, going concern, accounting policies, Purnovate sale, equity investments, and key financial activities 1 — Description of Business Adial is a clinical-stage biopharmaceutical company developing AD04 for Alcohol Use Disorder, having sold its Purnovate subsidiary - Adial Pharmaceuticals, Inc. develops medications for addiction and related disorders, with AD04 for Alcohol Use Disorder as its lead compound[23][25] - The company sold its wholly-owned subsidiary, Purnovate, Inc., on June 30, 2023, which focused on developing drug candidates for non-opioid pain reduction[24] - Key patents for AD04 have been issued in the U.S., EU, and other jurisdictions, and the company is pursuing regulatory approval based on ONWARD™ Phase 3 trial data[25] 2 — Going Concern and Other Uncertainties Continuous losses and negative cash flows raise substantial doubt about Adial's going concern ability, with insufficient cash for twelve months - Adial has incurred losses and negative cash flows since inception, raising substantial doubt about its ability to continue as a going concern[26] - Existing cash and cash equivalents are not sufficient to fund operations for the next twelve months, even with the Purnovate sale proceeds[27] - The company is actively pursuing additional capital through equity/debt financings, grants, strategic relationships, or out-licensing to fund AD04 clinical trials[29] 3 — Basis of Presentation and Summary of Significant Accounting Policies This section outlines the basis of presentation for interim financial statements, detailing a reverse stock split, use of estimates, and policies for loss per share, cash, and equity investments - The company effected a 1-for-25 reverse stock split on August 4, 2023, retrospectively adjusting all share and per-share data[33] - The company's cash balances at June 30, 2023, exceeded FDIC insurance limits by approximately $137,000, with $812,000 held in non-FDIC insured cash equivalent accounts[36] | Potentially Dilutive Shares Excluded | June 30, 2023 | June 30, 2022 | | :----------------------------------- | :------------ | :------------ | | Warrants to purchase common shares | 491,151 | 483,834 | | Common Shares issuable on options | 208,902 | 167,279 | | Unvested restricted stock awards | 33,333 | 8,611 | | Total potentially dilutive shares | 733,386 | 659,724 | 4 — Sale of Purnovate Adial sold its Purnovate subsidiary to Adovate, LLC on June 30, 2023, for $3.27 million, resulting in a $2.66 million gain - Adial completed the sale of Purnovate, Inc. to Adovate, LLC on June 30, 2023[44] | Consideration for Purnovate Sale | Amount | | :------------------------------- | :---------- | | Cash (upfront & prepaid reimbursements) | $800,000 | | Fair value of shares received | $1,727,897 | | Expense reimbursements receivable| $737,276 | | Total Consideration | $3,265,173| | Gain on sale | $2,662,074| - Adial received a 19.9% equity stake in Adovate, valued at $1,727,897, as part of the consideration[45] 5 — Discontinued Operations Purnovate's assets, liabilities, and operating results are reclassified as discontinued operations, with significant income recognized in Q2 and H1 2023 - All assets, liabilities, and operating results of Purnovate, Inc. are classified as discontinued operations following its sale[49] | Income (Loss) from Discontinued Operations, Net of Tax | | :----------------------------------------------------- | | For the Three Months Ended June 30: | | 2023: $2,597,674 | | 2022: $(610,652) | | For the Six Months Ended June 30: | | 2023: $1,931,721 | | 2022: $(1,060,059) | - The gain on sale of Purnovate contributed $2,662,074 to income from discontinued operations in Q2 2023[51] 6 — Equity Method Investments Adial holds a 19.9% equity stake in Adovate, LLC, valued at $1.73 million, accounted for using the equity method with a one-quarter lag - Adial received a 19.9% equity stake in Adovate, LLC, valued at $1,727,897, as consideration for the Purnovate sale[53] - The company accounts for this investment using the equity method, recognizing proportionate losses on a one-quarter lag[55] - Maximum exposure to loss from this investment is limited to the equity investment ($1,727,897) and the reimbursement receivable ($737,276)[57] 7 — Accrued Expenses Accrued expenses significantly decreased from December 2022 to June 2023, mainly due to reduced employee compensation and clinical research services | Accrued Expense Category | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Clinical research organization services and expenses | $— | $123,386 | | Employee compensation | $276,705 | $761,509 | | Legal and consulting services | $41,890 | $72,616 | | Pre-clinical and manufacturing expenses | $5,816 | $5,816 | | Total accrued expenses | $324,411 | $963,327 | - Total accrued expenses decreased by approximately $638,916 from December 31, 2022, to June 30, 2023[58] 8 — Related Party Transactions Adial has ongoing related party transactions, including a UVA LVG license agreement where payments may be distributed to its Chief Medical Officer - Adial has an exclusive, worldwide license agreement with UVA LVG for patents related to its licensed products[60] - A portion of payments made to UVA LVG may be distributed to the company's Chief Medical Officer, who is an inventor of the licensed patents[60] 9 — Shareholders' Equity This section details changes in shareholders' equity, including a SEPA with Alumni Capital, common stock issuances, and 2017 Equity Incentive Plan activity - The company entered into a Standby Equity Purchase Agreement (SEPA) with Alumni Capital, LLC, allowing it to sell up to $3,000,000 of newly issued shares[61] - 7,983 shares of common stock were issued to Alumni Capital as consideration for its commitment, valued at $51,901[62] | Stock Option Activity (6 Months Ended June 30, 2023) | Total Options | Weighted Average Exercise Price | | :--------------------------------------------------- | :------------ | :------------------------------ | | Outstanding December 31, 2022 | 172,676 | $62.00 | | Issued | 39,800 | $7.50 | | Cancelled | (3,577) | $49.50 | | Outstanding June 30, 2023 | 208,899 | $52.00 | 10 — Commitments and Contingencies Adial has various commitments, including a UVA LVG license agreement for fees, milestones, and royalties, and consulting agreements, committing $412 thousand in future cash - The company is obligated to pay UVA LVG annual minimum royalties of $40,000, milestone payments up to $1,450,000, and royalties on net sales of licensed products[74] - During the six months ended June 30, 2023, the company recognized $20,000 in minimum license royalty expenses[76] - The company has entered into various consulting and vendor agreements committing approximately $412 thousand in future cash[83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Adial's financial condition and operations, focusing on AD04, Purnovate sale, funding needs, operating expenses, liquidity, and critical accounting estimates - Adial is a clinical-stage biopharmaceutical company focused on developing AD04 for Alcohol Use Disorder[87] - The company has incurred net losses since inception, with accumulated deficits of approximately $65.4 million as of June 30, 2023[90] - Current cash and cash equivalents are not expected to fund operations for the next twelve months, necessitating additional financing[89][91] Overview Adial, a clinical-stage biopharmaceutical company, develops AD04 for Alcohol Use Disorder, sold Purnovate, and faces significant funding needs due to ongoing losses - Adial is focused on commercializing AD04 for Alcohol Use Disorder in the U.S. and Europe, based on Phase 3 trial data[87] - The company completed the sale of its Purnovate subsidiary on June 30, 2023[88] - Adial has incurred net losses of approximately $1.8 million and $6.8 million for the six months ended June 30, 2023 and 2022, respectively, and had an accumulated deficit of $65.4 million as of June 30, 2023[90] Recent Developments Recent developments include a 1-for-25 reverse stock split for Nasdaq compliance and a SEPA with Alumni Capital LP to sell up to $3 million in new shares - A 1-for-25 reverse stock split was effected on August 4, 2023, resulting in 1,217,981 shares outstanding[93] - The company entered into a SEPA with Alumni Capital LP, granting the right to sell up to $3,000,000 of newly issued shares[94] - 7,983 commitment shares were issued to Alumni Capital under the SEPA[94] Results of Operations (Three Months Ended June 30) Q2 2023 net income of $1.087 million, driven by a $2.662 million Purnovate sale gain, significantly improved from prior-year loss with reduced operating expenses | Metric | June 30, 2023 | June 30, 2022 | Change (Decrease) | | :-------------------------------- | :------------ | :------------ | :---------------- | | Research and development expenses | $430,000 | $680,000 | $(250,000) | | General and administrative expenses | $1,047,000 | $2,564,000 | $(1,517,000) | | Total Operating Expenses | $1,477,000 | $3,244,000 | $(1,767,000) | | Loss from continuing operations | $(1,510,000) | $(3,237,000) | $1,727,000 | | Loss from discontinued operations, net of tax | $2,597,000 | $(611,000) | $3,208,000 | | Net loss | $1,087,000 | $(3,848,000) | $4,935,000 | - R&D expenses decreased by $250,000 (37%) due to winding down AD04 trial activities and a one-time royalty accrual in 2022[96] - G&A expenses decreased by $1,517,000 (59%) due to lower non-equity and equity compensation, reduced IR/PR, and strategic consultant expenses[97] Results of Operations (Six Months Ended June 30) H1 2023 net loss decreased to $1.819 million from $6.755 million, driven by a $2.662 million Purnovate sale gain and reduced operating expenses | Metric | June 30, 2023 | June 30, 2022 | Change (Decrease) | | :-------------------------------- | :------------ | :------------ | :---------------- | | Research and development expenses | $796,000 | $722,000 | $74,000 | | General and administrative expenses | $2,951,000 | $4,985,000 | $(2,034,000) | | Total Operating Expenses | $3,747,000 | $5,707,000 | $(1,960,000) | | Income (loss) from continuing operations | $(3,751,000) | $(5,695,000) | $1,944,000 | | Loss from discontinued operations, net of tax | $1,932,000 | $(1,060,000) | $2,992,000 | | Net income (loss) | $1,819,000 | $(6,755,000) | $4,936,000 | - R&D expenses increased by $74,000 (10%) due to increased use of regulatory consultants and final CRO fees, partially offset by reduced cash compensation[105] - G&A expenses decreased by $2,034,000 (41%) due to significant reductions in equity and non-equity compensation, IR/PR, and strategic consultant expenses[106] Liquidity and Capital Resources Adial's liquidity is constrained, with $1.2 million cash as of June 30, 2023, insufficient for twelve months, raising going concern doubts, and $25 million needed for AD04 trials - Cash and cash equivalents were $1.2 million as of June 30, 2023, compared to $4.0 million as of December 31, 2022[112] - Current cash is not expected to fund operations for the next twelve months, raising substantial doubt about the company's going concern ability[112] - The company anticipates needing approximately $25 million to complete two Phase 3 trials for AD04 and is actively seeking commercial partners and additional financing[114] Cash Flows H1 2023 saw decreased cash used in operations by $1.84 million, $800,000 from Purnovate sale, and financing cash decreased by $8.52 million | Cash Flow Activity (6 Months Ended June 30) | 2023 | 2022 | | :------------------------------------------ | :------------ | :------------ | | Operating activities | $(4,193,000) | $(6,031,000) | | Investing activities | $800,000 | — | | Financing activities | $610,000 | $9,126,000 | | Net increase (decrease) in cash | $(2,783,000) | $3,095,000 | - Net cash used in operating activities decreased by approximately $1,838,000 in the six months ended June 30, 2023, compared to the same period in 2022[117] - Net cash provided by financing activities decreased by approximately $8,516,000 in the six months ended June 30, 2023, compared to 2022, reflecting a more modest financing strategy[119] Off-Balance Sheet Arrangements The company does not have any off-balance sheet arrangements - Adial Pharmaceuticals, Inc. does not have any off-balance sheet arrangements[120] Critical Accounting Estimates Financial statements involve significant management judgments and estimates for R&D, stock-based compensation, commitments, and equity method investments, materially affecting results - Significant estimates include valuation of equity method investments, stock-based compensation, accruals for clinical trials, and income tax asset realization[34] - R&D expense recognition and accrual depend on contractor reporting and judgment regarding event-tied fees[123] - Stock-based compensation fair value is estimated using the Black-Scholes-Merton model, requiring subjective assumptions for volatility, risk-free interest rate, dividend yield, and expected term[125][126][127] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Adial Pharmaceuticals, Inc. is not required to provide quantitative and qualitative disclosures about market risk - Adial Pharmaceuticals, Inc. is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[133] Item 4. Controls and Procedures Disclosure controls were ineffective as of June 30, 2023, due to material weaknesses in internal control over financial reporting, including risk assessment, documentation, and IT controls - Disclosure controls and procedures were not effective as of June 30, 2023, due to material weaknesses in internal control over financial reporting[134][135] - Identified material weaknesses include lack of formal risk assessment, inadequate documentation, insufficient approval/review processes, insufficient GAAP experience for complex transactions, deficiencies in IT general controls, and insufficient segregation of duties[134] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[136] PART II – OTHER INFORMATION Item 1. Legal Proceedings Adial is not currently a party to any legal proceedings that would materially adversely affect its business or financial condition - The company is not currently involved in any legal proceedings that would materially adversely affect its business[137] Item 1A. Risk Factors Investing in Adial's securities involves high risk due to continuous losses, limited operating history, speculative product development, going concern doubts, and Nasdaq listing risks - Adial has incurred losses from continuing operations every year and quarter since inception and anticipates future losses[139] - The company's independent registered public accounting firm has expressed doubt about its ability to continue as a going concern[142] - Failure to meet Nasdaq Capital Market listing requirements, such as minimum bid price and stockholders' equity, could result in de-listing[145][147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of equity securities during the six months ended June 30, 2023, other than those previously disclosed in SEC filings - No unregistered sales of equity securities occurred during the six months ended June 30, 2023, beyond those already disclosed[152] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[152] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Adial Pharmaceuticals, Inc.[152] Item 5. Other Information No other information is reported under this item - No other information is reported under this item[152] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including Certificate of Incorporation, Bylaws, Option Exercise Agreement, Purchase Agreement, and officer certifications - Exhibits include the Certificate of Incorporation, Amended and Restated Bylaws, Option Exercise Agreement, and Purchase Agreement[154] - Certifications by the principal executive officer and principal financial officer are filed herewith[154] SIGNATURES SIGNATURES The report is duly signed by Adial Pharmaceuticals, Inc.'s President and CEO, Cary J. Claiborne, and CFO, Joseph Truluck, on August 21, 2023 - The report was signed by Cary J. Claiborne, President and CEO, and Joseph Truluck, CFO, on August 21, 2023[156]