(EDGAR Online via COMTEX) -- Item 2. 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 unaudited consolidated financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2021 that we filed with the SEC on March 28, 2022 (the "2021 Form 10-K") . ln 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 including, but not limited to, those set forth below under "Risk Factors" and elsewhere herein, and those identified under Part I, Item 1A of the 2021 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission ("SEC").
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 being developed as a therapeutic agent for the treatment of alcohol use disorder ("AUD"). 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 we continue to explore opportunities to expand our portfolio in the field of addiction and related disorders such as pain reduction, both through internal development and through acquisitions. Our vision is to create the world's leading addiction focused pharmaceutical company. Additionally, we are using Purnovate's adenosine drug discovery and development platform to invent and develop novel chemical entities as drug candidates for large unmet medical needs with the intention of spinning off or licensing drug candidates and development programs not related to the field of addiction.
We have devoted substantially all 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 this Quarterly Report on Form 10-Q, we have funded our operations primarily through the private and public placements of debt and equity securities and an equity line.
We have incurred net losses in each year since our inception, including net losses of approximately $2.9 million and $4.8 for the three months ended March 31, 2022 and 2021, respectively. We had accumulated deficits of approximately $53.9 and $50.9 million as of March 31, 2022 and December 31, 2021, respectively. Substantially all our operating losses resulted from costs incurred in connection with our 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, because we have incurred various expenses related to adding personnel and other corporate resources and experienced delays in certain countries in obtaining regulatory approval required to commence the trial in such countries due to COVID-19, resulting in significantly slowed trial enrollment and additional expense.
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.
On February 24, 2022, we provided the following highlighted updates on our landmark ONWARD pivotal Phase 3 clinical trial of AD04 for the treatment of AUD:
? All subjects have completed dosing in the ONWARD trial;
? 302 subjects were enrolled in the ONWARD trial; this exceeded the 290 subjects targeted for enrollment; and
? Subjects were enrolled across 25 clinical sites in six countries.
On February 10, 2022, we entered into a securities purchase agreement (the "2022 Purchase Agreement") with an accredited institutional investor providing for the issuance of (i) 2,322,250 shares of Common Stock, (ii) pre-funded warrants (the "Pre-Funded Warrants") to purchase up to 1,865,000 shares of Common Stock (the "Pre-Funded Warrant Shares") with an exercise price of $0.001 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
Results of operations for the three months ended March 31, 2022 and 2021
The following table sets forth the components of our statements of operations in dollars for the periods presented:
For the Three Months Ended March 31, Change 2022 2021 (Decrease) Research and development expenses $ 596,000 $ 2,052,000 $ (1,456,000 ) General and administrative expenses 2,463,000 2,789,000 (326,000 ) Total Operating Expenses 3,059,000 4,841,000 (1,782,000 ) Loss From Operations (3,059,000 ) (4,841,000 ) (1,782,000 ) Gain on change of fair value of contingent liability 146,000 6,000 140,000 Interest Income 5,000 1,000 4,000 Total other income 151,000 7,000 144,000 Net Loss $ (2,908,000 ) $ (4,834,000 ) $ (1,926,000 )
Research and development ("R&D") expenses
Research and development expenses decreased by approximately $1,456,000 (71%) during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. This decrease was due to the very large decrease in clinical trial expenses of $1,750,000 and use of consultants of $24,000 with the winding down of clinical activity as the ONWARD trial neared completion and a dispute with our Clinical Research Organization vendor was settled on better-than-expected terms. The decrease was also due to a significant decrease of $118,000 in CMC expenses reflecting the completion in 2021 of a project for the productions of additional clinical drug supplies. These decreases were only partially offset by increased costs of new Purnovate research and development projects of $458,000.
General and administrative expenses ("G&A") expenses
General and administrative expenses decreased by approximately $326,000 (12%) during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. We saw a decrease in use of financial and strategic consultants of $144,000, PR/IR expenses of $37,000, and G&A equity compensation expense, which was partially offset by an increase in G&A employee expenses of $205,000, reflecting a continuing effort on our part to increase our internal capabilities, especially with respect to strategic planning and public relations.
Change in Fair Value of Contingent Consideration
The gain on change of fair value of the contingent liability increased by $140,000 (2333%) during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The contingent liability was only established in January of 2021, with the purchase of Purnovate, and there was little time for the value to change relative to its initial valuation. During the three months ended March 31, 2022, however, there were factored into the value of the contingent liability changes to the expected timing of contingent payments and an increase in the discount rate applied due to changes information available concerning comparable companies.
Total Other income
Excluding the gain on change of fair value of the contingent liability, other income increased by $4,000 (400%) during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. This change was entirely due to the increase in prevailing interest rates from the very low rates prevailing in early 2021 increasing the return on the money market accounts in which we hold our working capital.
Liquidity and capital resources at March 31, 2022
Our principal liquidity needs have historically been working capital, R&D, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we develop and eventually commercialize our compound, if approved. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate and as we further develop product candidates acquired from Purnovate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, private placements and our equity line, as well as other equity financings and exercise of warrants and the issuance of debt securities prior to that. On July 31, 2018, we closed our initial public offering.
On February 10, 2022, we entered into a securities purchase agreement with an accredited institutional investor providing for the issuance of (i) 2,322,250 shares of our common stock, (ii) pre-funded warrants to purchase up to 1,865,000 shares of common stock with an exercise price of $0.001 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
Our current cash and cash equivalents are expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based our current projections. We expect to use approximately $10.2 million in cash during the twelve months ended March 31, 2023 for both trial costs, other R&D project costs, and general corporate expenses. We expect to exhaust funds on hand near the beginning of the third quarter of 2023, given our expected trial costs, other project costs, and costs of Company overhead. There is no assurance that funds could be raised by that time on acceptable terms.
We will also require additional financing as we continue to execute our overall business strategy, including an estimated $20 million for a second phase three trial of AD04. We will also require at least $1.4 million for a phase one safety trial of our Purnovate pain program, which we expect to begin in 2023. Our liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and industry factors. We anticipate that, our future liquidity requirements will be funded through the incurrence of indebtedness, additional equity financings or a combination. In addition, we may raise additional funds through grants and/or corporate collaboration and licensing arrangements.
If we raise additional funds by issuing equity securities or convertible debt, our shareholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.
For the Three Months Ended (rounded to nearest thousand) March 31, 2022 2021 Provided by (used in) Operating activities $ (2,497,000 ) (2,843,000 ) Investing activities - (1,000 ) Financing activities 9,124,000 4,081,000 Net increase in cash and cash equivalents $ 6,627,000 1,237,000
Net cash used in operating activities
Net cash used in the three months ended March 31, 2022 decreased by $346,000 compared to the three months ended March 31, 2021. The favorable impact from the operating loss decrease of $1,782,000, was mostly offset by reduced non-cash equity compensation expense (a decrease of $341,000) and a large reduction in accrued expenses of $1,157,000, which resulted from the payment of previously recognized CRO and clinical site fees.
Net cash provided by investing activities
Cash used in investing activities changed minimally for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Essentially no cash was used in activities classified as investment during the first quarter of 2022, and in the corresponding period of 2021 cash gained through the acquisition of Purnovate was used in the same period for acquisition of capital equipment for Purnovate.
Net cash provided by financing activities
Cash provided by financial activities for the three months ended March 31, 2022 increased by $5,043,000 compared to the three months ended March 31, 2021. The Company engaged in substantial fundraising activity in both periods. However the fundraising during the three months ended March 31, 2022 was much larger than the fundraising during the three months ended March 31, 2021, reflecting our strategic decision to obtain funds for working capital and general corporate purposes.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements, if any.
The preparation of the financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, our expected liquidity needs and expected future cash positions, and the reported amounts of sales and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including those related to prepaid research and development, accruals associated with third party providers supporting clinical trials, realization of income tax assets, as well as the, fair value of stock based compensation to employees and service providers. We use historical experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected in our financial statements as they occur.
While our significant accounting policies are more fully described in Note 3 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
Recognition and accrual of expenses associated with our clinical trial are dependent on the judgment of our contractors and subcontractors in their reporting and communication of information to us. Occurrence of certain fees to our clinical research organization, clinical trial sites, and subcontractors are tied to events, for which the determination of likelihood requires judgment both on our part and on the part of our contractors.
Fair Value of Financial Instruments and Fair Value Measurements
Our financial instruments consist primarily of cash, accounts payable and accrued liabilities, and, prior to our initial public offering, debt instruments and derivative liabilities.
FASB Accounting Standards Codification ("ASC") Topic 820, "Fair Value Measurements and Disclosures," requires disclosure of the fair value of financial instruments held by us. ASC Topic 825, "Financial Instruments," defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables, current liabilities, convertible notes, payable senior notes, and bridge notes each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
The three levels of valuation hierarchy are defined as follows:
? Level 1: Observable inputs such as quoted prices in active markets;
? Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
? Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. As of December 31, 2021, the significant inputs to our contingent consideration recorded at fair value were considered level 3 inputs.
Stock Based Compensation
We estimate the fair value of options and stock warrants granted using the Black Scholes Merton model. We estimate when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of equity-based compensation expense is recognized. If the award is deemed probable of being earned, related equity-based compensation expense is recorded. The fair value of an award ultimately expected to vest is recognized as an expense, net of forfeitures, over the requisite service periods in our statements of operations, which is generally the vesting period of the award.
The Black Scholes Merton model requires the input of certain subjective assumptions and the application of judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, the expected dividend yield, and the expected term of the awards. In addition, the recognition of equity-based compensation expense is impacted by our forfeitures, which are accounted for as they occur.
The assumptions used in our option pricing model represent management's best estimates. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future. The key assumptions included in the model are as follows:
? Expected volatility - We determine the expected price volatility based on the historical volatilities of a peer group as we do not have a sufficient trading history for our shares of common stock to determine expected volatility for the entire expected life of our options and other equity based awards. We therefore blend our available historical volatility data with volatility data on our industry peers. Industry peers consist of several public companies in the bio-tech industry similar to us in size, stage of life cycle and financial leverage. We intend to continue to blend peer data with our own using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation. Starting in 2020, we have begun blending data on our historical volatility together with this peer group of companies, the proportion of our volatility used growing as the period of our historical volatility becomes longer.
? Risk-free interest rate - The risk free rate was determined based on yields of U.S. Treasury Bonds of comparable terms.
? Expected dividend yield - We have not previously issued dividends and do not anticipate paying dividends in the foreseeable future. Therefore, we used a dividend rate of zero based on our expectation of additional dividends.
? Expected term -The expected term of the options was estimated using the simplified method.
We account for our business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. For transactions that are business combinations, we evaluate the existence of goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.
The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the context of purchase accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The estimated fair values reflected in the purchase accounting rely on management's judgment.
We record contingent consideration resulting from a business combination at fair value on the acquisition date. On a quarterly basis, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses. Changes to contingent consideration obligations can result from adjustments to discount rates, accretion of the liability due to the passage of time, changes in our estimates of the likelihood or timing of achieving development or commercial milestones, changes in the probability of certain clinical events or changes in the assumed probability associated with regulatory approval.
Intangible assets generally consist of patents, purchased technology, acquired IPR&D and other intangibles. Intangible assets with definite lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment.
Intangible assets related to acquired IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a potential impairment. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.
Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We are organized in one reporting unit and evaluate the goodwill for our company as a whole. We review goodwill for impairment on a reporting unit basis annually during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill might not be recoverable. Under the authoritative guidance issued by the FASB, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed. The goodwill impairment test requires us to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, then no impairment is recognized. If the carrying amount recorded exceeds the fair value calculated, then an impairment charge is recognized for the difference. The judgments made in determining the projected cash flows used to estimate the fair value can materially impact our financial condition and results of operations. There was no impairment of goodwill for the period ended March 31, 2022.
Research and Development
Research and development costs are charged to expense as incurred and include supplies and other direct trial expenses such as fees due to contract research organizations, consultants which support our research and development endeavors, the acquisition of technology rights without an alternative use, and . . .
May 16, 2022
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