Anebulo Pharmaceuticals(ANEB) - 2024 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section provides a cautionary note regarding forward-looking statements, advising readers of inherent risks and uncertainties Forward-Looking Statements Overview This section highlights that the report contains forward-looking statements subject to substantial risks and uncertainties, which could cause actual results to differ materially - Forward-looking statements are identified by terminology such as 'believe,' 'may,' 'could,' 'will,' 'estimate,' 'continue,' 'anticipate,' 'intend,' 'seek,' 'plan,' 'expect,' 'should,' 'would,' 'potentially' or the negative of these terms or similar expressions[9] - These statements are based largely on current expectations, beliefs, estimates, and projections, and various assumptions, many of which are inherently uncertain and beyond the company's control[10] - The company undertakes no obligation to update or revise any forward-looking statements to reflect new information or future events or developments, unless required by law[11] - Forward-looking statements include expectations regarding capital requirements, regulatory submissions, clinical trials, selonabant's clinical utility and market opportunity, future growth, intellectual property, licensing arrangements, commercial potential, third-party performance, competition, and the impact of economic/political events and regulations[12] Risk Factors Summary This section summarizes key investment risks, including lack of revenue, dependence on selonabant, and funding needs Key Investment Risks This section provides a concise overview of the main risks associated with investing in the company's common stock, emphasizing that it is not exhaustive and directs readers to the full 'Risk Factors' section - The company has not generated any revenue since its inception and expects to incur future losses, with no guarantee of profitability[13] - The business is highly dependent on its lead product candidate, selonabant, requiring successful clinical testing and regulatory approval before commercialization[13] - Substantial additional funding will be needed, and an inability to raise capital could force delays, reductions, or elimination of product discovery and development programs[13] - The company depends substantially on intellectual property licensed from third parties, and termination of these licenses could result in the loss of significant rights[13] - A Loan and Security Agreement (LSA) with 22NW and JFL provides a debt facility that may be secured by substantially all company assets, with a default having material adverse consequences[13] - Clinical drug development is a lengthy, expensive process with an uncertain outcome, and results from early trials are not necessarily predictive of future success[13] - The company faces substantial competition, and its product candidates may cause undesirable side effects, potentially delaying or preventing regulatory approval[14] - The company currently lacks a marketing and sales organization and depends on third parties for manufacturing, which could halt or delay commercialization[14] PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's discussion and analysis of financial condition Item 1. Financial Statements (Unaudited) This item includes the company's unaudited condensed balance sheets, statements of operations, stockholders' equity, and cash flows Condensed Balance Sheets Presents the company's financial position as of December 31, 2023, and June 30, 2023, showing a decrease in total assets and stockholders' equity, primarily driven by a reduction in cash and cash equivalents | Metric | Dec 31, 2023 | Jun 30, 2023 | | :------------------------ | :----------- | :----------- | | Cash and cash equivalents | $6,644,517 | $11,247,403 | | Prepaid expenses | $171,740 | $422,748 | | Total current assets | $6,816,257 | $11,670,151 | | Loan commitment fees | $684,516 | - | | Total assets | $7,500,773 | $11,670,151 | | Accounts payable | $318,679 | $534,545 | | Accrued expenses | $694,877 | $534,256 | | Total liabilities | $1,013,556 | $1,068,801 | | Common stock | $25,934 | $25,634 | | Additional paid-in capital| $68,861,516 | $67,777,757 | | Accumulated deficit | $(62,400,233)| $(57,202,041)| | Total stockholders' equity| $6,487,217 | $10,601,350 | | Total liabilities and stockholders' equity | $7,500,773 | $11,670,151 | - Total assets decreased by $4,169,378 from June 30, 2023, to December 31, 2023, primarily due to a reduction in cash and cash equivalents[16] - Total stockholders' equity decreased by $4,114,133, largely influenced by the accumulated deficit increasing to $(62,400,233)[16] Condensed Statements of Operations Details the company's operating results for the three and six months ended December 31, 2023, and 2022, showing a reduced net loss in the current periods primarily due to lower research and development and general and administrative expenses Operating Results (Three Months Ended December 31) | Metric | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Research and development | $1,062,672 | $1,869,920 | $(807,248) | | General and administrative| $1,697,787 | $1,943,202 | $(245,415) | | Total operating expenses | $2,760,459 | $3,813,122 | $(1,052,663) | | Loss from operations | $(2,760,459) | $(3,813,122) | $1,052,663 | | Other (income) expenses, net | $(43,090) | $13,830 | $(56,920) | | Net loss | $(2,717,369) | $(3,826,952) | $1,109,583 | | Net loss per share | $(0.11) | $(0.15) | $0.04 | Operating Results (Six Months Ended December 31) | Metric | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Research and development | $2,332,892 | $3,093,696 | $(760,804) | | General and administrative| $2,971,245 | $3,331,473 | $(360,228) | | Total operating expenses | $5,304,137 | $6,425,169 | $(1,121,032) | | Loss from operations | $(5,304,137) | $(6,425,169) | $1,121,032 | | Other (income) expenses, net | $(105,945) | $13,618 | $(119,563) | | Net loss | $(5,198,192) | $(6,438,787) | $1,240,595 | | Net loss per share | $(0.20) | $(0.26) | $0.06 | - Interest income increased significantly from $(8,816) to $(75,522) for the three months ended December 31, and from $(13,249) to $(130,720) for the six months ended December 31, year-over-year[19] Condensed Statements of Stockholders' Equity Outlines changes in stockholders' equity for various periods, showing a decrease in total equity from $10.6 million at June 30, 2023, to $6.5 million at December 31, 2023, primarily due to net losses, partially offset by stock-based compensation and issuance of common stock Stockholders' Equity Changes (Six Months Ended December 31, 2023) | Metric | Jun 30, 2023 | Dec 31, 2023 | Change | | :------------------------ | :----------- | :----------- | :------- | | Total Stockholders' Equity| $10,601,350 | $6,487,217 | $(4,114,133) | | Accumulated Deficit | $(57,202,041)| $(62,400,233)| $(5,198,192) | | Additional Paid-in Capital| $67,777,757 | $68,861,516 | $1,083,759 | | Common Stock Shares | 25,633,217 | 25,933,217 | 300,000 | - Net loss for the six months ended December 31, 2023, was $(5,198,192)[22] - Stock-based compensation expense contributed $430,059 to additional paid-in capital during the six months ended December 31, 2023[22] - Issuance of common stock added $654,000 to additional paid-in capital during the six months ended December 31, 2023[22] Condensed Statements of Cash Flows Details the cash flow activities, indicating a net decrease in cash of approximately $4.6 million for the six months ended December 31, 2023, primarily due to cash used in operating activities, contrasting with a net increase in cash in the prior year period due to financing activities Cash Flow Summary (Six Months Ended December 31) | Metric | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Net cash used in operating activities | $(4,540,532) | $(4,643,342) | | Net cash (used in) provided by financing activities | $(62,354) | $6,450,221 | | Net (decrease) increase in cash | $(4,602,886) | $1,806,879 | | Cash, beginning of period | $11,247,403 | $14,548,471 | | Cash, end of the period | $6,644,517 | $16,355,350 | - Net cash used in operating activities for the six months ended December 31, 2023, was approximately $4.5 million, primarily from a net loss of $5.2 million, partially offset by non-cash adjustments of $0.5 million and changes in operating assets/liabilities of $0.2 million[84] - In 2023, noncash investing and financing activities included a $654,000 financing commitment fee funded through the issuance of common stock[25] Notes to Unaudited Condensed Financial Statements This section provides detailed notes explaining the company's accounting policies and specific financial statement line items Note 1. Nature of business and basis of presentation Describes Anebulo Pharmaceuticals as a clinical-stage biotechnology company focused on treatments for Acute Cannabis Intoxication (ACI) and addiction, highlighting its ongoing development phase, accumulated deficit, and reliance on future funding - Anebulo Pharmaceuticals, Inc. is a clinical-stage biotechnology company focused on developing and commercializing new treatments for Acute Cannabis Intoxication (ACI) and addiction[27] - The company incurred a net loss of approximately $5.2 million for the six-month period ended December 31, 2023, and had an accumulated deficit of $62.4 million as of December 31, 2023[28] - Current cash, along with access to a $10 million debt facility (LSA), is expected to fund operating expenses and capital expenditure requirements for at least 12 months from the financial statements' issuance date[28] - Future funding will be sought through equity and debt financings or collaboration agreements, with no assurance of obtaining funding on acceptable terms[28] - Key risks include uncertainty regarding clinical trial results, regulatory approval, market acceptance, competition, intellectual property protection, strategic relationships, and dependence on key individuals and sole source suppliers[29] Note 2. Summary of Significant Accounting Policies States that there have been no material changes to the company's significant accounting policies since the filing of its Annual Report on Form 10-K for the year ended June 30, 2023 - No material changes to significant accounting policies have occurred since the audited financial statements for the year ended June 30, 2023, were filed[35] Note 3. Prepaid Expenses Details the composition of prepaid expenses, which primarily consist of prepaid insurance and other prepaid items, showing a decrease from June 30, 2023, to December 31, 2023 Prepaid Expenses (December 31, 2023 vs. June 30, 2023) | Category | Dec 31, 2023 | Jun 30, 2023 | | :--------------- | :----------- | :----------- | | Prepaid insurance| $156,700 | $391,750 | | Prepaid other | $15,040 | $30,998 | | Total | $171,740 | $422,748 | - Total prepaid expenses decreased by $251,008 from June 30, 2023, to December 31, 2023[37] Note 4. Accrued Expenses Provides a breakdown of accrued expenses, indicating an increase in accrued payroll-related expenses and a decrease in accrued research and development expenses from June 30, 2023, to December 31, 2023 Accrued Expenses (December 31, 2023 vs. June 30, 2023) | Category | Dec 31, 2023 | Jun 30, 2023 | | :------------------------ | :----------- | :----------- | | Accrued payroll related expenses | $436,651 | $190,121 | | Accrued research and development | $258,226 | $344,135 | | Total | $694,877 | $534,256 | - Total accrued expenses increased by $160,621 from June 30, 2023, to December 31, 2023[38] Note 5. Other Assets States that other assets primarily consist of loan commitment fees, which were $0.7 million as of December 31, 2023, and are being amortized over the three-year term of the loan - Other assets include loan commitment fees, totaling approximately $0.7 million ($684,516) as of December 31, 2023, compared to zero at June 30, 2023[39] - These loan commitment fees are being amortized over the three-year term of the loan[39] Note 6. License Agreement Details the company's license agreement with Vernalis Development Limited, under which it licensed intellectual property for selonabant, including potential development and sales milestone payments and single-digit royalties - In May 2020, the company licensed intellectual property, know-how, and clinical trial data from Vernalis Development Limited[40] - The license agreement includes potential development milestone payments ranging from $0.4 million to $3.0 million, up to a total of $29.9 million, and sales milestone payments of $10.0 million and $25.0 million[40] - The company is also required to pay single-digit royalties on product sales over the contract term[40] - As part of its IPO in May 2021, the company issued 192,857 shares of common stock to Vernalis in lieu of approximately $1.4 million in future milestone payments[41] - No further milestone payments are considered probable as of December 31, 2023[41] Note 7. Stockholders' Equity Describes changes in the company's authorized capital stock and common stock issuances, including an increase in authorized common stock to 50 million shares and the issuance of 300,000 shares in conjunction with a Loan and Security Agreement in November 2023 - On November 20, 2023, the company increased the authorized number of shares of its common stock from 40,000,000 to 50,000,000 shares[43] - On September 28, 2022, the company completed a private placement financing, issuing 2,264,650 units (common stock and warrants) for approximately $6.6 million in gross proceeds[44] - On November 13, 2023, the company issued 300,000 shares of common stock in conjunction with a Loan and Security Agreement[45] Note 8. Stock-Based Compensation Details the company's 2020 Stock Incentive Plan, which authorizes the grant of various stock awards, provides key assumptions for valuing stock options, and summarizes stock option activity - The 2020 Stock Incentive Plan authorizes the grant of stock options and other awards for up to 3,650,000 shares of common stock[46] - As of December 31, 2023, 270,327 shares were available for future issuance under the plan[46] - The fair value of stock-based compensation is estimated using the Black-Scholes option pricing model, based on subjective variables like risk-free interest rate, expected term, and expected volatility[48] Key Assumptions for Stock Options (Six Months Ended December 31) | Metric | 2023 | 2022 | | :-------------------- | :----------- | :----------- | | Risk-free interest rate | 4.6%-4.8% | 2.9% – 4.3% | | Expected term (in years)| 6.25 | 4.5 – 6.25 | | Expected volatility | 60% | 50.0% – 60.0%| | Expected dividend yield | – | – | Stock Option Activity (Six Months Ended December 31, 2023) | Metric | Number of Shares | Weighted Average Exercise Price | | :------------------------ | :--------------- | :---------------------------- | | Outstanding at Jun 30, 2023 | 2,049,313 | $4.54 | | Granted | 776,097 | $3.03 | | Forfeited/cancelled | (452,237) | $6.58 | | Outstanding at Dec 31, 2023 | 2,373,173 | $3.66 | | Options exercisable at Dec 31, 2023 | 1,008,057 | $4.33 | - Unrecognized stock-based compensation expense related to unvested stock options totaled approximately $3.4 million as of December 31, 2023, to be recognized over a weighted average period of 2.0 years[51] Note 9. Net Loss Per Share Attributable to Common Stockholders Provides the number of common stock equivalents (stock options and warrants) excluded from the net loss per share calculation due to their anti-dilutive effect Anti-Dilutive Common Stock Equivalents (December 31) | Category | 2023 | 2022 | | :-------------------- | :----------- | :----------- | | Stock options outstanding | 2,373,173 | 2,060,113 | | Warrants outstanding | 2,264,650 | 2,264,650 | | Total | 4,637,823 | 4,324,763 | - These common stock equivalents were excluded from the net loss per share calculation due to their anti-dilutive effect[53] Note 10. Loan and Security Agreement Describes the Loan and Security Agreement (LSA) entered into on November 13, 2023, allowing the company to draw up to $10 million, with no outstanding balance as of December 31, 2023 - On November 13, 2023, the company entered into a Loan and Security Agreement (LSA) with 22NW, LP and JFL Capital Management LLC[54] - The LSA allows the company to draw up to $10 million (Facility Amount) to fund future operations until the third anniversary of the LSA (Maturity Date)[54] - The outstanding balance will accrue interest at 0.25% per annum, with no fee on the unused balance[54] - Upon drawing at least $3 million, the LSA will be collateralized by substantially all of the company's assets[54] - The company issued 300,000 shares of common stock to 22NW upon signing the LSA and will issue additional shares based on advances[55] - There was no balance outstanding under the LSA as of December 31, 2023[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This item provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources Overview Anebulo Pharmaceuticals is a clinical-stage biotech company developing selonabant for Acute Cannabinoid Intoxication (ACI) and substance addiction, with ongoing clinical trials and an expanding market due to cannabis legalization - Anebulo Pharmaceuticals is a clinical-stage biotechnology company developing selonabant (formerly ANEB-001) for acute cannabinoid intoxication (ACI) and substance addiction[58] - Selonabant is intended to rapidly reverse the negative effects of ACI, for which there is currently no approved medical treatment[58] - The company completed Phase 2 of the Netherlands Trial (Parts A, B, and C) in 134 subjects, evaluating selonabant's safety, tolerability, pharmacokinetics, and effectiveness[58] - The FDA indicated that a single well-controlled study in ACI patients combined with a larger THC challenge study could potentially support a new drug application for selonabant[58] - An observational study in ACI patients presenting to emergency departments is currently ongoing[58] - The company is advancing an IV formulation of selonabant for patients unable to take oral doses[58] - Cannabis-related emergency department visits are estimated to have grown to approximately 1.7 million patients in 2019, with a 15% compounded annual growth rate between 2011 and 2019[60] - U.S. Patent No. 11,141,404 (through 2040) and U.S. Patent No. 11,795,146 (through 2042) protect selonabant's use and crystalline forms for ACI treatment[66] - Richard Anthony Cunningham was appointed Chief Executive Officer on October 6, 2023[69] - The USAN Council adopted 'selonabant' as the generic name for ANEB-001 on January 31, 2024[70] Components of Results of Operations Outlines the key components of the company's financial results: Revenue, Research and Development Expenses, and General and Administrative Expenses, with no revenue generated since inception - The company has not generated any revenue since inception and expects to incur significant operating losses and negative cash flows in the future[71] - Research and development expenses are expected to remain significant, covering consulting, nonclinical and clinical study costs, and other development costs for selonabant[73][74] - R&D expenses include employee-related costs, third-party CRO/CMO expenses, consultant fees, CDMO costs for drug substance/product manufacturing, and amortization for asset purchases[77] - General and administrative expenses primarily consist of professional fees, stock-based compensation, insurance, personnel costs, and rent[76] Results of Operations This section provides a detailed analysis of the company's financial performance, focusing on operating expenses and net loss for the reported periods Comparison of the Three and Six Months Ended December 31, 2023 and 2022 Provides a comparative analysis of operating expenses and net loss for the three and six months ended December 31, 2023, and 2022, showing a decrease in total operating expenses and a reduced net loss in the current periods Operating Expenses and Net Loss (Three Months Ended December 31) | Metric | 2023 | 2022 | Period to Period Change | | :------------------------ | :----------- | :----------- | :---------------------- | | Research and development | $1,062,672 | $1,869,920 | $(807,248) | | General and administrative| $1,697,787 | $1,943,202 | $(245,415) | | Total operating expenses | $2,760,459 | $3,813,122 | $(1,052,663) | | Net loss | $(2,717,369) | $(3,826,952) | $1,109,583 | Operating Expenses and Net Loss (Six Months Ended December 31) | Metric | 2023 | 2022 | Period to Period Change | | :------------------------ | :----------- | :----------- | :---------------------- | | Research and development | $2,332,892 | $3,093,696 | $(760,804) | | General and administrative| $2,971,245 | $3,331,473 | $(360,228) | | Total operating expenses | $5,304,137 | $6,425,169 | $(1,121,032) | | Net loss | $(5,198,192) | $(6,438,787) | $1,240,595 | - The net loss decreased by $1,109,583 for the three months ended December 31, 2023, and by $1,240,595 for the six months ended December 31, 2023, compared to the prior year periods[77] Research and Development Expenses Research and development expenses decreased for both the three and six months ended December 31, 2023, compared to the prior year, primarily due to the completion of the Phase 2 proof-of-concept trial for ACI Research and Development Expenses (Three Months Ended December 31) | Category | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Pre-clinical and clinical studies | $300,659 | $759,979 | $(459,320) | | Contract manufacturing | $498,230 | $653,066 | $(154,836) | | Compensation and related benefits | - | - | - | | Other research and development | $263,783 | $456,875 | $(193,092) | | Total research and development expenses | $1,062,672 | $1,869,920 | $(807,248) | Research and Development Expenses (Six Months Ended December 31) | Category | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Pre-clinical and clinical studies | $1,141,792 | $1,491,264 | $(349,472) | | Contract manufacturing | $641,532 | $839,233 | $(197,701) | | Compensation and related benefits | - | $44,681 | $(44,681) | | Other research and development | $549,568 | $718,518 | $(168,950) | | Total research and development expenses | $2,332,892 | $3,093,696 | $(760,804) | - The overall decrease in research and development expenses was primarily attributable to the completion of the Phase 2 proof-of-concept trial for ACI and awaiting the start of Phase 3[78] General and Administrative Expenses General and administrative expenses decreased for both the three and six months ended December 31, 2023, primarily due to strategic cost reductions in professional/consultant fees and lower directors' and officers' insurance premiums General and Administrative Expenses (Three Months Ended December 31) | Category | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Compensation and related benefits | $848,171 | $602,341 | $245,830 | | Professional and consultant fees | $414,043 | $739,837 | $(325,794) | | Stock-based compensation expense | $219,262 | $225,621 | $(6,359) | | Directors' and officers' insurance | $117,525 | $235,000 | $(117,475) | | Facilities, fees and other costs | $98,786 | $140,403 | $(41,617) | | Total general and administrative expenses | $1,697,787 | $1,943,202 | $(245,415) | General and Administrative Expenses (Six Months Ended December 31) | Category | 2023 | 2022 | Change | | :------------------------ | :----------- | :----------- | :------- | | Compensation and related benefits | $1,112,881 | $957,972 | $154,909 | | Professional and consultant fees | $1,028,003 | $1,205,195 | $(177,192) | | Stock-based compensation expense | $430,059 | $437,521 | $(7,462) | | Directors' and officers' insurance | $235,050 | $476,877 | $(241,827) | | Facilities, fees and other costs | $165,252 | $253,908 | $(88,656) | | Total general and administrative expenses | $2,971,245 | $3,331,473 | $(360,228) | - The decrease in general and administrative expenses was primarily due to strategic cost reductions in professional and consultant fees and a decrease in directors' and officers' insurance premiums[79] - This decrease was partially offset by an increase in compensation and related benefits due to severance accrued for the former CEO[79] Liquidity and Capital Resources This section discusses the company's cash position, funding needs, and the Loan and Security Agreement Liquidity and Capital Resources Overview The company has incurred significant operating losses since inception and expects to continue doing so, with current cash of approximately $6.6 million, and plans to raise additional funds through equity, debt, or collaborations - The company has incurred significant operating losses since its inception in April 2020 and expects to continue incurring significant expenses and operating losses[80] - As of December 31, 2023, the company had cash of approximately $6.6 million[80] - The company plans to raise additional funds through equity and debt financings or collaboration, license, and development agreements, but cannot assure securing such funds on acceptable terms or at all[80] Loan and Security Agreement (Liquidity) The company entered into an LSA on November 13, 2023, providing access to up to $10 million for future operations until November 13, 2026, with no balance outstanding as of December 31, 2023 - On November 13, 2023, the company entered into a Loan and Security Agreement (LSA) with 22NW, LP and JFL Capital Management LLC[81] - The LSA allows the company to draw up to $10 million (Facility Amount) to fund future operations until November 13, 2026 (Maturity Date)[81] - The outstanding balance will accrue interest at 0.25% per annum, with no fee on the unused balance[81] - Upon drawing at least $3 million, the LSA will be collateralized by substantially all of the company's assets[81] - The company issued 300,000 shares of common stock to 22NW upon signing the LSA and will issue additional shares (up to 300,000 total Advance Shares) based on advances[82] - There was no balance outstanding under the LSA as of December 31, 2023[83] Cash Flows For the six months ended December 31, 2023, net cash used in operating activities was approximately $4.5 million, primarily due to net loss, partially offset by non-cash adjustments and changes in operating assets/liabilities Summary of Cash Flows (Six Months Ended December 31) | Metric | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Net cash used in operating activities | $(4,540,532) | $(4,643,342) | | Net cash (used in) provided by financing activities | $(62,354) | $6,450,221 | | Net (decrease) increase in cash | $(4,602,886) | $1,806,879 | - Net cash used in operating activities for the six months ended December 31, 2023, was approximately $4.5 million, primarily from a net loss of $5.2 million, partially offset by $0.5 million in non-cash stock-based compensation and loan commitment amortization, and $0.2 million from changes in operating assets and liabilities[84] - In the prior year (2022), net cash provided by financing activities was approximately $6.5 million, primarily from the issuance of common stock and warrants[85] Funding and Material Cash Requirements The company expects its current cash and the LSA facility to fund operations for at least the next 12 months, but anticipates needing additional financing due to high drug development costs and uncertainties - Current cash and access to the LSA Facility Amount are expected to fund operating expenses and capital expenditures for at least the next 12 months from the report filing date[86] - Additional equity or debt financing, or collaboration agreements, will be needed to maintain/expand operations, continue product development, build sales/marketing capabilities, and for general corporate purposes[88] - Raising additional capital through equity may reduce existing stockholders' ownership and cause substantial dilution[88] - Debt financing, including the LSA, may involve liens on assets and covenants limiting specific actions[88] - Failure to secure satisfactory financing could lead to delays, scaling back, or elimination of product development and other business activities[88] - Future funding requirements depend on factors such as clinical trial progress, regulatory approvals, operational expansion, strategic collaborations, intellectual property costs, and commercial sales revenue[89] Contractual Obligations and Commitments This section outlines the company's significant contractual obligations, including license agreements and operational contracts License Agreement with Vernalis Development Limited (Contractual) The company holds an exclusive worldwide royalty-bearing license from Vernalis for selonabant, involving potential development and sales milestone payments, and low to mid-single digit royalties - The company entered into an exclusive worldwide royalty-bearing license agreement with Vernalis Development Limited on May 26, 2020, for selonabant[90] - The agreement includes potential development milestone payments up to $29.9 million and sales milestone payments up to $35.0 million, plus low to mid-single digit royalties on net sales[90] - The company is solely responsible for the development and commercialization of selonabant, including obtaining regulatory approvals and covering all associated costs[92] - The company agreed to use commercially reasonable efforts to develop and commercialize selonabant in the United States and certain European countries[92] Office Lease, Manufacturing Contract and CRO Contract The company has an office lease for $400/month, a manufacturing agreement for approximately $2.9 million, and a CRO agreement for its Phase 2 clinical trial for approximately €2.8 million - The company leases its principal executive office in Lakeway, Texas, under a sublease with a related party for approximately $400 per month[93] - A manufacturing agreement with a third-party CMO has a total cost of approximately $2.9 million; the manufacturing aspect is expected to be fully incurred by Q1 2024, and the stability study aspect during calendar 2026[94] - An agreement with a third-party CRO to manage the Phase 2 clinical trial for selonabant in the Netherlands had a total cost of approximately €2.8 million and was substantially completed as of December 31, 2023[95] Critical Accounting Policies and Significant Judgments and Estimates This section details the key accounting policies and estimates that require significant management judgment Accrued Research and Development Expenses The company estimates accrued R&D expenses by reviewing contracts, communicating with personnel, and estimating service levels for unbilled services, acknowledging potential variations from actual incurred amounts - The company estimates accrued research and development expenses by reviewing open contracts, purchase orders, communicating with personnel, and estimating service levels for unbilled services[99] - Examples of estimated accrued R&D expenses include fees paid to CROs, investigative sites, vendors for NDA filing/marketing/medical education, and product manufacturing/clinical supplies[100] - Estimates are based on facts and circumstances known at each balance sheet date, and while material differences are not expected, actual results may vary[101] Stock-Based Compensation Expense (Accounting Policy) The company grants stock options and other awards under its 2020 Stock Incentive Plan, valuing options using the Black-Scholes model based on subjective assumptions and Nasdaq closing prices - The 2020 Stock Incentive Plan allows for the grant of qualified incentive stock options, nonqualified stock options, and other awards[102] - The fair value of stock options is estimated using the Black-Scholes option pricing model, which relies on subjective assumptions including expected stock price volatility, expected term, risk-free interest rate, and expected dividends[103] - The fair value of common stock used in the model is based on the quoted closing market price on Nasdaq on the grant date[103] - No significant changes to Black-Scholes assumptions occurred during the six months ended December 31, 2023, except for stock and exercise prices[104] JOBS Act Accounting Election As an 'emerging growth company' under the JOBS Act, the company has elected to use extended transition periods for complying with new or revised accounting standards, which may affect comparability with other companies - The company qualifies as an 'emerging growth company' under the JOBS Act[105] - The company has elected to take advantage of extended transition periods for complying with new or revised financial accounting standards, which may make its financial statements less comparable to other public companies[105] - As an EGC, the company benefits from reduced reporting requirements, including no auditor attestation for internal controls, less detailed compensation disclosure, and presenting only two years of audited financial statements[243][246] - The company also qualifies as a 'smaller reporting company' and a 'non-accelerated filer,' providing additional reduced disclosure requirements[244][245] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Anebulo Pharmaceuticals is not required to provide disclosures regarding quantitative and qualitative market risk - As a smaller reporting company, the registrant is not required to provide disclosure for this item[106] Item 4. Controls and Procedures This item details the evaluation of the company's disclosure controls and procedures and any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of December 31, 2023, and concluded they were effective at a reasonable assurance level - As of December 31, 2023, management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of disclosure controls and procedures[107] - Based on this evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective at a reasonable assurance level[108] - Any controls and procedures, no matter how well designed, can provide only reasonable assurance, and management applies judgment in evaluating cost-benefit[108] Changes in Internal Control over Financial Reporting There were no changes in the company's internal control over financial reporting during the three months ended December 31, 2023, that materially affected or are reasonably likely to materially affect it - There were no changes in internal control over financial reporting during the three months ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[109] PART II. OTHER INFORMATION This part covers legal proceedings, detailed risk factors, equity sales, and other miscellaneous information Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings and believes that the final outcome of any ordinary course claims will not have a material adverse effect on its business - The company is not currently a party to any material legal proceedings[112] - Management believes that the final outcome of ordinary course litigation or claims will not have a material adverse effect on the business[112] - Litigation can have an adverse impact due to defense and settlement costs, and diversion of management resources[112] Item 1A. Risk Factors This item provides a comprehensive discussion of the various risks that could materially affect the company's business, financial condition, and results of operations Risks Related to our Business, Financial Condition and Capital Requirements The company faces significant risks due to its lack of revenue, accumulated deficit, and expected future losses, with success highly dependent on selonabant's development and commercialization, requiring substantial additional funding - The company has not generated any revenue since inception and had an accumulated deficit of approximately $62.4 million as of December 31, 2023, expecting to incur significant future losses[114] - The business is highly dependent on its lead product candidate, selonabant, and must complete clinical testing and obtain regulatory approval for commercialization[114] - The company will need substantial additional funding, and if unable to raise capital, it could be forced to delay, reduce, or eliminate product development programs[124] - The Loan and Security Agreement (LSA) with 22NW and JFL may be secured by substantially all of the company's assets, and a default would have material adverse consequences[129] - The company is highly dependent on its founder and CEO, and its ability to attract and retain other key personnel is crucial for implementing its business strategy[132] - Adverse developments in the financial services industry could significantly impair the company's access to cash and liquidity, impacting its operations and financial condition[134][136][137] Risks Related to Our Intellectual Property The company's commercial success depends on obtaining and maintaining broad patent protection for selonabant, facing risks of invalidation, circumvention, high prosecution costs, and limited international protection - Commercial success depends on obtaining and maintaining patent protection for selonabant; existing patents include U.S. Patent No. 11,141,404 (through 2040) and U.S. Patent No. 11,795,146 (through 2042)[139] - There is no assurance that new patent applications will issue as granted patents or provide sufficient protection, and existing patents may be found invalid or unenforceable[140][141] - The patent prosecution process is expensive and time-consuming, with risks of failing to identify patentable aspects or competitors circumventing patents[142][143] - The company relies on a license from Vernalis, and failure to comply with obligations or termination of the license could result in the loss of significant intellectual property rights[117][118] - Patent term extensions may not be granted or may be shorter than requested, allowing competitors to enter the market sooner[151] - Protecting intellectual property rights globally is expensive and challenging, as foreign laws may offer less extensive protection[153] - Changes in patent law, such as the America Invents Act, could increase uncertainties and costs surrounding patent prosecution and enforcement[155][157] Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization Clinical drug development is a lengthy, expensive, and uncertain process, with delays or failures in selonabant's trials potentially harming the business, as regulatory approval and commercial success are not guaranteed - Clinical trials are expensive, time-consuming, unpredictable, and difficult to design and implement, with delays or termination adversely affecting the business[160] - Regulatory approval for selonabant is not guaranteed and requires successful completion of clinical trials, which may be unsuccessful, materially harming the business[162][163] - Even if approved, commercial success depends on market acceptance by physicians, patients, and healthcare payors, which is influenced by factors like safety, efficacy, pricing, and competition[168][173] - Interim, topline, and preliminary data from clinical trials are subject to change and audit, and adverse differences from final data could harm business prospects[172] - Selonabant may have undesirable side effects, which could delay or prevent marketing approval, or lead to product withdrawal or restrictive safety warnings if approved[196][197] - The company has no internal marketing and sales organization and relies on third parties, which could limit its ability to generate product revenues if favorable agreements are not secured[199] - New drugs developed by competitors could render selonabant non-competitive or obsolete, impairing the company's ability to grow[200] Risks Related to Our Reliance on Third Parties The company heavily relies on third parties for preclinical testing, clinical trials, and manufacturing of selonabant, which reduces control and introduces risks such as delays, increased costs, and supply interruptions - The company depends on third parties for preclinical testing and clinical trials, which reduces control and may result in costs and delays preventing regulatory approval[202] - Third parties' ability to manufacture and supply product candidates can be impacted by raw material availability, facility capacity, regulatory compliance, and other factors, leading to delayed shipments or supply constraints[203] - The company is completely dependent on third parties to manufacture selonabant, and commercialization could be halted or delayed if manufacturers fail to obtain regulatory approval or provide sufficient quantities at acceptable quality/prices[205][206] - Reliance on collaborations with third parties is subject to inherent risks, including potential termination of agreements, reduced payments, and loss of control over product development, which could adversely affect profitability[212][214][216] Risks Related to Government Regulation of our Industry The pharmaceutical industry is heavily regulated, and legislative or regulatory reforms, such as the ACA and IRA, could significantly impact the company's ability to commercialize products profitably, affecting pricing, coverage, and relationships with healthcare stakeholders - Legislative or regulatory reforms of the healthcare system, such as the ACA and IRA, may adversely affect the company's ability to sell products profitably, impacting pricing and coverage[219][220][222] - The Inflation Reduction Act (IRA) directs HHS to negotiate drug prices and imposes rebates for price increases, which is likely to have a significant impact on the pharmaceutical industry[222] - Clinical trials for selonabant conducted outside the United States and not under an IND may not be accepted by the FDA, potentially requiring additional costly and time-consuming trials[225] Risks Related to Ownership of Our Common Stock The company's common stock trading price is highly volatile due to various factors beyond its control, including operational results, analyst expectations, and general market conditions, with future sales and principal stockholder control posing additional risks - The trading price and volume of the common stock have experienced, and may in the future experience, volatility due to various factors beyond the company's control, including operational results, analyst expectations, and general economic conditions[226][227][228] - Future sales, or the perception of future sales, of a substantial number of common shares by the company or its stockholders could depress the trading price[229] - Principal stockholders and management own a substantial majority of the stock, enabling them to exert significant control over matters subject to stockholder approval[230] - Anti-takeover provisions in charter documents and Delaware corporate law could discourage, delay, or prevent a change in control of the company[231][232][233] - The certificate of incorporation designates specific forums for disputes, which could limit stockholders' ability to obtain a favorable judicial forum[234][235] - The company does not expect to pay any dividends on its common stock, as future earnings are expected to be retained for operations and debt repayment[236] General Risk Factors The company faces increased costs and management time for public company compliance, including internal control over financial reporting, with changes in accounting principles or tax laws, economic instability, and data privacy risks posing additional challenges - Operating as a public company incurs significantly increased costs and requires substantial management time for compliance efforts, including internal control over financial reporting[238][240] - Changes in accounting principles or guidance, or their interpretations, could result in unfavorable accounting charges or effects, potentially causing the stock price to decline[241] - As an 'emerging growth company,' the election to delay adoption of new accounting standards may make financial statements less comparable and securities less attractive to investors[242][243][247] - Changes in tax laws or regulations, or their adverse application, may materially affect the business, cash flow, and financial condition, potentially limiting the use of net operating loss carryforwards[248][249] - Health epidemics or pandemics, unstable market and economic conditions, and inflation may adversely affect the business, financial condition, and results of operations[252][254][255] - The company is subject to stringent and evolving U.S. and foreign data privacy and security laws, with actual or perceived failure to comply potentially leading to regulatory investigations, litigation, fines, and business disruptions[256][257][259][264] - Compromise of information technology systems or sensitive information, including through cyberattacks, could result in material disruption of product development, regulatory actions, and reputational harm[267][268][270][273] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports on unregistered equity sales and the utilization of proceeds from the initial public offering Unregistered Sales of Equity Securities On November 13, 2023, the company issued 300,000 shares of common stock to 22NW as partial consideration for entering into the Loan and Security Agreement, relying on Section 4(a)(2) and/or Regulation D exemptions from registration - On November 13, 2023, the company issued 300,000 shares of common stock to 22NW, LP[276] - These shares were issued as partial consideration for entering into the Loan and Security Agreement[276] - The securities were issued in reliance on the exemption from registration requirements of the Securities Act by Section 4(a)(2) and/or Regulation D[276] Use of Proceeds from our Initial Public Offering The company received approximately $19.8 million in net proceeds from its May 2021 IPO and has used approximately $19.4 million through December 31, 2023, primarily for research and development expenses for selonabant - The company received approximately $19.8 million in net proceeds from its Initial Public Offering (IPO) on May 11, 2021[277] - Through December 31, 2023, approximately $19.4 million of the net proceeds have been used[278] - Proceeds were primarily allocated to research and development expenses for selonabant, working capital, and other general corporate purposes, including costs associated with being a public company[278] - There has been no material change in the planned use of net proceeds from the IPO[278] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[279] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[280] Item 5. Other Information The company reported no other information - None[281] Item 6. Exhibits Lists the exhibits filed as part of the Form 10-Q, including various corporate documents, agreements, and certifications - Exhibits include corporate organizational documents (e.g., Certificate of Incorporation, Bylaws)[282] - Key agreements such as the Securities Purchase Agreement, Common Stock Purchase Warrant, Executive Employment Agreement, and Loan and Security Agreement are filed as exhibits[283] - Certifications of the Principal Executive Officer and Principal Financial Officer, pursuant to the Sarbanes-Oxley Act, are included[283] - Inline XBRL Instance Document and Taxonomy Extension Documents are also part of the exhibits[283] Signatures This section contains the official signatures of the company's principal executive and financial officers Report Signatures The report is signed by Richard Anthony Cunningham, Chief Executive Officer, and Daniel George, Chief Financial Officer, on February 13, 2024 - The report was signed on February 13, 2024[286] - Signed by Richard Anthony Cunningham, Chief Executive Officer (Principal Executive Officer)[286] - Signed by Daniel George, Chief Financial Officer (Principal Financial and Accounting Officer)[286]