Annual report pursuant to Section 13 and 15(d)

Stockholders' Deficit

v3.10.0.1
Stockholders' Deficit
12 Months Ended
Dec. 31, 2018
Equity [Abstract]  
STOCKHOLDERS' DEFICIT

9 — STOCKHOLDERS’ DEFICIT

 

Corporate Conversion/Reincorporation

 

On October 1, 2017, ADial Pharmaceuticals, LLC converted from a Virginia limited liability company to a Virginia corporation, APL Conversion Corp. On October 11, 2017, APL Conversion Corp. was merged into Adial Pharmaceuticals, Inc., a Delaware corporation. The Certificate of Incorporation of Adial Pharmaceuticals, Inc. authorizes the issuance of fifty million (50,000,000) shares of common stock and five million (5,000,000) shares of preferred stock. No shares of preferred stock have been issued or designated by Adial Pharmaceuticals, Inc. Three million, two hundred sixty-eight thousand five (3,268,005) shares of a single series of common stock were issued to the former equity unit holders of ADial Pharmaceuticals, LLC following the limited liability company’s conversion to a Virginia corporation and subsequent reincorporation by merger in Delaware in the following ratios and total amounts:

 

Equity Unit Class   Units in
Unit Class
    Common Shares
Issued
per Unit
    Shares
Issued
Unit Class
 
Class A Unit     14,100,334       0.18600       2,622,673  
Profits Interest Unit, $1.42 distribution reduction     397,335       0.06862       27,264  
Profits Interest Unit, $0.50 distribution reduction, voting     1,372,167       0.14466       198,504  
Profits Interest Unit, $0.50 distribution reduction, non-voting     446,806       0.14466       64,637  
Class B Unit     1,908,205       0.18600       354,927  
                      3,268,005  

 

Options to purchase 937,000 Class A units, warrants to purchase 723,916 Class A units, and warrants to purchase 1,870,469 Class B units were converted to options and warrants to purchase an aggregate of six hundred fifty-six thousand eight hundred thirty-seven (656,837) shares of common stock of Adial Pharmaceuticals, Inc. and were assumed in proportion to the number of shares to be issued to former unit holders of the class of units underlying the option or warrant, with the exercise price of the newly issued options or warrants being divided by the same ratio. All references to the former member’s initial capital contribution in ADial Pharmaceuticals, LLC has been retroactively adjusted to reflect the equivalent number of Adial Pharmaceuticals, Inc. shares of common stock. Additionally, upon completion of the conversion, the Company calculated a net adjustment to deferred income tax asset, which was deemed immaterial, and reclassified $10.7 million from accumulated deficit to additional paid in capital.

 

Equity Issuances/Repurchases

 

In 2017, the Company issued 7,018 shares of common stock at a price of $5.70 per share, with zero financing cost, aggregating $40,000.

 

In 2018, the Company issued shares of common stock as follows:

 

On April 1, 2018, the Company issued 292,309 shares of common stock to Company officers and a director in compensation for termination, by mutual agreement of the Performance Bonus Plan. At the time of this issuance, the company recognized an equity-based compensation expense of $1,461,545.

 

On July 31, 2018, the Company concluded its initial public offering of 1,464,000 units, each unit consisting of one share of common stock and a warrant for the purchase of one share of common stock with an exercise price of $6.25 (the “Offering Warrants”). The units were sold to the public at a price of $5.00 per unit. The underwriters were granted an overallotment option to purchase up to 219,600 shares of common stock at $4.99 per share and up to 219,600 Offering Warrants for $0.01 per Offering Warrant. The underwriters exercised their overallotment option to purchase 170,652 Offering Warrants for $1,707. The Company also issued 58,560 warrants to the underwriter as compensation. Gross proceeds of the offering, totaled $7,321,706, which after offering expenses, resulted in net proceeds of $6,267,932.

 

On July 31, the Company issued 700,855 shares of common stock as part of units to holders of the 2016 Convertible Notes upon conversion of the 2016 Convertible Notes at consummation of the IPO, resulting in $545,307 recorded in equity upon conversion.

 

On July 31, the Company issued 388,860 shares of common stock and 444,608 warrants to consultants, employees, and contractors upon consummation of the IPO, which resulted in equity-based compensation expenses of $3,436,406. Additionally, the Company issued 442,220 shares of common stock, 480,600 warrants in units and 497,330 warrants in common stock resulting in $4,132,398 recorded in equity due to stock and warrants issuances in connection with debt settlements.

 

On November 26, the Company issued 100,000 shares of common stock to a consultant at the market price of $1.66 per share for a total cost of $166,000.

 

On December 15, the Company issued 18,750 shares of common stock to a consultant at the market price of $2.80 per share for a total cost of $52,500.

 

On December 26, the Company issued 25,000 shares of common stock on exercise of 25,000 previously issued tradeable warrants for the warrant exercise price of $6.25 per share, for a total cash receipt of $156,250.

 

On October 9, 2017, the Company adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 equity incentive plan”). Initially, the aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2017 equity incentive plan is 1,750,000 shares. At December 31, 2018, there remained 1,681,000 shares issuable under the 2017 equity incentive plan.

 

On August 16, 2018, the Company filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-8 registering 1,750,000 shares available for issuance under the 2017 equity incentive plan.

 

Stock Options

 

The following table provides the activity in options for the respective periods:

 

    Total Options Outstanding     Weighted Average Remaining Term (Years)     Weighted Average Exercise Price     Weighted Average Fair Value at Issue  
Outstanding December 31, 2016       NA     NA     NA  
Issued     179,862       10.00     $ 5.70     $ 4.84  
Cancelled     (5,580 )     9.85       5.70       4.84  
Outstanding December 31, 2017     174,282       9.50       5.70       4.84  
Issued     68,900       10.00     $ 2.80     $ 2.21  
Outstanding December 31, 2018     243,182       8.93     $ 4.88     $ 4.09  
Outstanding December 31, 2018, non-vested     155,789       9.09     $ 4.52     $ 3.41  

 

At December 31, 2018, the intrinsic value totals of the outstanding options were $159,848.

 

The Company used the Black Scholes valuation model to determine the fair value of the options issued, using the following key assumptions for the years ended December 31, 2018 and 2017:

 

    2018     2017  
Fair Value per Share   $ 2.80     $ 5.56-5.67  
Expected Term     6.5 years       6.5 years  
Expected Volatility     95.77 %     90-92 %
Risk free rate     2.79 %     2.26-2.35 %

 

Compensation expense associated with issuance of options was recognized using the straight line method over the requisite service period, which is the implied service period. During the years ended December 31, 2018 and 2017, total equity-based compensation expense from the options issued was $251,903 and $135,891, respectively, of which $52,452 and $0 were classified as R&D expense and $199,451 and $135,891 were classified as G&A expense in the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, $511,285 in further compensation expense resulting from issued options remained to be recognized.

 

See Equity Issuances section in the Note for additional stock based compensation expense incurred in 2018. The components of stock-based compensation expense included in the Company’s statements of operations for the years ended December 31, 2018 and 2017 are as follows:

 

   

Year ended

December 30

 
    2018     2017  
R&D Options Expense     52,452        
Total research and development expenses     52,452        
G&A PIU Issuance Expense           69,505  
G&A Options Issuance Expense     199,451       135,891  
Stock granted for Performance Bonus Plan Cancellation     1,461,545        
Stock and warrants granted in IPO     3,436,406        
Stock issued to consultants     218,500        
Total general and administrative expenses     5,315,902       205,396  
Total stock-based compensation expense   $ 5,368,354     $ 205,396  

 

Stock Warrants

 

The following table provides the activity in warrants for the respective periods.

 

   

Total

Warrants

    Weighted Average Remaining Term (Years)    

Weighted

Average

Exercise

Price

    Average Intrinsic Value  
Outstanding December 31, 2016     482,555       12.20       5.51       1.38  
Issued           NA       NA       NA  
Cancelled           NA       NA       NA  
Outstanding December 31, 2017     482,555       11.20     $ 5.51     $ 1.38  
Issued     4,547,204       5.00       5.82       0.00  
Cancelled           NA       NA       NA  
Exercised     (25,000 )     4.59       6.25       0.06  
Outstanding December 31, 2018     5,054,759       5.07     $ 5.72       0.61  

 

Of warrants issued during the year ended on December 31, 2018, 2,846,266 were issued as part of the units issued in the IPO. The Company valued warrants using the Black-Scholes option pricing model, based on weighted average assumptions of an expected term on issue of 5 years, exercise price of $5.87 per share, underlying stock price per share of $5.00, annual volatility of the underlying stock price of 98.75% and risk free rate of 1.72%. Warrants issued in exchange for unit warrants were estimated as being an exchange of equal values.