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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis is intended
as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion
should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information,
the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements
that involve risks and uncertainties. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements"
included elsewhere in the 2022 Annual report on Form 10-K. Our actual results could differ significantly from those expressed, implied
or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed
and to be filed by us with the Securities and Exchange Commission.
On August 4, 2023, we effected a reverse stock
split of our outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25. As a result of the reverse
split, we had 1,197,630 shares of common stock outstanding immediately after effecting the reverse split. The shares authorized for issue
under our charter remained 50,000,000 common stock. We have retrospectively adjusted all references to common stock, stock warrants to
purchase common stock, stock options to purchase common stock, share data, per share data and related information contained in the following
discussion to reflect the effect of the reverse stock split.
Effective June 30, 2023, we sold the business
of our wholly owned subsidiary, Purnovate, Inc., to a third party. As a result, the assets, liabilities, and results of Purnovate were
classified as discontinued operations. We have retrospectively reclassified all assets, liabilities, and results of Purnovate as discontinued
operations in the following discussion and have adjusted all references to Purnovate assets, liabilities, and results accordingly.
We are a clinical-stage
biopharmaceutical company focused on the development of therapeutics for the treatment or prevention of addiction and related disorders.
Our lead investigational new drug product, AD04, is a genetically targeted therapeutic agent being developed for the treatment of alcohol
use disorder ("AUD"). AD04 was recently investigated in a Phase 3 clinical trial, designated the ONWARD trial, for the potential
treatment of AUD in subjects with certain target genotypes, which were identified using our companion diagnostic genetic test. Based on
our analysis of the subgroup data from the ONWARD trial, we are now focused on commercializing AD04 in the U.S. and Europe.
We continue to explore
opportunities to expand our portfolio in the field of addiction and related disorders, both through internal development and through acquisitions.
Our vision is to create the world's leading addiction focused pharmaceutical company.
In January 2021, we expanded our portfolio in
the field of addiction with the acquisition of Purnovate, LLC via a merger into our wholly owned subsidiary, Purnovate, Inc., ("Purnovate")
and in January 2023, we entered into an option agreement with Adovate, LLC (formerly Adenomed, LLC)("Adovate"), pursuant to
which we granted to Adovate an exclusive option for a period of one hundred twenty (120) days from the effective date of the Option Agreement
for Adovate or its designated affiliate to acquire the business and assets of Purnovate. Effective May 16, 2023, Adovate exercised its
option and paid the upfront and exercise fees. Effective June 30, 2023, Adovate issued to the Company the equity stake in Adovate due
on exercise of the option agreement, acquired Purnovate's business and assets, and the transaction was closed.
We have devoted the vast majority of our resources
to development efforts relating to AD04, including preparation for conducting clinical trials, providing general and administrative support
for these operations and protecting our intellectual property.
We currently do not have any products approved
for sale and we have not generated any significant revenue since our inception. From our inception through the date of our 2022 Annual
Report on Form 10-K, we have funded our operations primarily through the private and public placements of debt, equity securities, and
Our current cash and cash equivalents are not
expected to be sufficient to fund operations for the twelve months from the date of filing our 2022 Annual report on Form 10-K, based
our current projections.
We have incurred net losses in each year since
our inception, including net losses of approximately $12.7 million and $19.4 million for the years ended December 31, 2022 and 2021. We
had accumulated deficits of approximately $63.7 and $50.9 million as of December 31, 2022 and 2021, respectively. Most, about 85%, of
our operating losses resulted from costs incurred in continuing operations, including costs in connection with our continuing research
and development programs, from general and administrative costs associated with our operations, and from financing costs.
We will not generate revenue from product sales
unless and until we successfully complete development and obtain marketing approval for AD04, which we expect will take a number of years
and is subject to significant uncertainty. We do not believe our current cash and equivalents will be sufficient to fund our operations
for the next twelve months from the filing of these financial statements.
Until such time, if ever, as we can generate substantial
revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings,
government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic
alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed
on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative
impact on our financial condition and our ability to develop AD04.
Clinical Trials - Research and
Development Schedule
We currently anticipate that we, working in collaboration
with our vendors, upon execution of collaborative research and development agreements with them, will be able to execute the following
AD04 - Two-Stage Clinical Development Strategy - Conduct
the Phase 3 clinical trials sequentially
We have completed initial Phase 3 trial, the ONWARD
pivotal Phase 3 clinical trial using AD04 for the potential treatment of AUD in subjects with certain target genotypes.
We do not anticipate significant additional direct
expenses resulting from the ONWARD trial as of the date of the filing, though continued expenditures relating to data analysis, strategic
planning, and regulatory follow-up resulting from the trial continue.
Additional funds are expected to be raised through
grants, partnerships with other pharmaceutical companies or through additional debt or equity financings, including pursuant to the terms
of our equity line. We expect the second Phase 3 Trial, if required, to cost approximately $8-12 million, such estimate subject to the
factors stated above.
2022 and 2023 Financing Developments
On February 23, 2023, we entered into a securities
purchase agreement (the "2023 Purchase Agreement") with an accredited institutional investor providing for the issuance of
73,170 shares (the "Shares") of the Company's 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 and expected net proceeds
of approximately $550,000. Pursuant to the 2023 Purchase Agreement, we issued an aggregate of 73,170 shares of common stock to the Investor.
10, 2022, we entered into a securities purchase agreement (the "2022 Purchase Agreement") with an accredited institutional
investor providing for the issuance of (i) 92,890 shares of Common Stock, (ii) pre-funded warrants (the "Pre-Funded Warrants")
to purchase up to 74,600 shares of Common Stock (the "Pre-Funded Warrant Shares") with an exercise price of $0.025 per share,
which Pre-Funded Warrants are to be issued in lieu of shares of Common Stock to ensure that the investor does not exceed certain beneficial
ownership limitations, and (iii) warrants (the "2022 Warrants"), with a term of five years and six months from the date
of issuance, to purchase an aggregate of up to 159,115 shares of Common Stock (the "2022 Warrant Shares") at an exercise price
of $63.00 per share, subject to customary adjustments thereunder. The total net proceeds, after expenses, to us were approximately $9.1
million. All 74,600 Pre-Funded Warrants were exercised on June 8, 2022, resulting in the issue of 74,600 shares of common stock for proceeds
Clinical and Research Developments
In March 2023, we announced
an update to our regulatory strategy for AD04. Key highlights included:
On July 20, 2022, we announced the following results
from the Company's ONWARD trial. We also announced our intent to share the results of the ONWARD trial with the relevant
health authorities to discuss the appropriate next steps towards the expeditious development of AD04 and to seek product approval.
Additionally, and consistent with results from
our Phase 2b study, AD04 had a safety and tolerability profile that was similar to placebo:
Results of operations for the years ended December
31, 2022 and 2021 (rounded to nearest thousand)
The following table sets forth the components