ANEBULO PHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk factors" section of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biotechnology company developing novel solutions for
people suffering from acute cannabinoid intoxication ("ACI") and substance
addiction. Our lead product candidate, ANEB-001, is intended to rapidly reverse
the negative effects of ACI within 1 hour of administration. The signs and
symptoms of ACI range from profound sedation to anxiety and panic to psychosis
with hallucinations. There is no approved medical treatment currently available
to specifically alleviate the symptoms of ACI. If approved by the FDA, we
believe ANEB-001 has the potential to be the first FDA approved treatment of its
kind on the market for reversing the effects of THC, the principal psychoactive
constituent of cannabis. Clinical trials completed to date have shown that
ANEB-001 is rapidly absorbed, well tolerated and when administered to obese
subjects leads to weight loss, an effect that is consistent with central CB1
antagonism. We initiated a Phase 2 proof-of-concept clinical trial in the
Netherlands in December 2021 . We received initial topline data from Part A of
the study on June 29, 2022 and announced the results in a press release on July
5, 2022 .
ACI episodes have become a widespread health issue in the United States ,
particularly in the increasing number of states that have legalized cannabis for
medical and recreational use. The ingestion of large quantities of THC is a
major cause of ACI. Excessive ingestion of THC via edible products such as
candies and brownies, and intoxication from synthetic cannabinoids (also known
as "synthetics," "K2" or "spice"), are two leading causes of THC-related
emergency room visits. Synthetic cannabinoids are analogous to fentanyl for
opioids insofar as they are more potent at the cannabinoid receptor than their
natural product congener THC. In recent years, hospital emergency rooms across
the United States have seen a dramatic increase in patient visits with
cannabis-related conditions. Before the legalization of cannabis, an estimated
450,000 patients visited hospital emergency rooms annually for cannabis-related
conditions. In 2014, this number more than doubled to an estimated 1.1 million
patients, according to data published in "Trends and Related Factors of
Cannabis-Associated Emergency Department Visits in the United States :
2006-2014," Journal of Addiction Medicine (May/June 2019 ), which provided a
national estimate analyzing data from The Nationwide Emergency Department Sample
("NEDS"), the largest database of U.S. hospital-owned emergency department
visits. Based on our own analysis of the most recent NEDS data, we believe that
the number of hospitalizations grew to 1.74 million patients in 2018 and was
growing at an approximately 15% compounded annual growth rate between 2012 and
2018. We believe the number of cannabis-related hospitalizations and other
health problems associated with ACIs such as depression, anxiety and mental
disorders will continue to increase substantially as more states pass laws
legalizing cannabis for medical and recreational use. Given the consequences,
there is an urgent need for a treatment to rapidly reverse the symptoms of ACI.
In May 2020 , we entered into a royalty-bearing license agreement with Vernalis
Development Limited ("License Agreement") to exploit its license compounds and
licensed products to combat symptoms of ACI and substance addiction. We are
currently developing our lead product candidate, ANEB-001 to quickly, and
effectively, combat symptoms of ACI.
Our objective is to develop and commercialize new treatment options for patients
suffering from ACI and substance addiction. Our lead product candidate is
ANEB-001, a potent, small molecule cannabinoid receptor antagonist, to address
the unmet medical need for a specific antidote for ACI. ANEB-001 is an orally
bioavailable, rapidly absorbed treatment that we anticipate will reverse the
symptoms of ACI, in most cases within 1 hour of administration. Our proprietary
position in the treatment of ACI is protected by rights to two patent
applications covering various methods of use of the compound and delivery
systems. We initiated a Phase 2 proof-of-concept clinical trial in the
Netherlands in December 2021 . We received initial topline data from the study on
June 29, 2022 and announced the results in a press release on July 5, 2022 .
We were incorporated in Delaware on April 23, 2020 , and commenced operations in
May 2020 . Our operations to date have consisted of organizing and acquiring the
license rights to Vernalis' licensed products, assembling an executive team,
starting preparations for a Phase 2 proof-of-concept trial, including the
synthesis of a new active pharmaceutical ingredient, the development and filing
of a clinical trial protocol with regulatory agencies in Europe and raising
capital. Prior to our initial public offering ("IPO") discussed below, we funded
our operations through a private placement of our series A convertible preferred
stock and issuance of two promissory notes to a related party.
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On October 12, 2021 , the United States Patent and Trademark Office issued to the
Company U.S. Patent No. 11,141,404, titled "Formulations and Methods For
Treating Acute Cannabinoid Overdose." The issued patent describes the use of the
Company's investigational drug ANEB-001 to treat acute cannabinoid overdose and
is expected to provide patent protection through 2040.
On December 31, 2021 , Daniel Schneeberger , M.D. advised the Company of his
resignation as Chief Executive Officer "CEO" of the Company and from the Board
of Directors, effective on February 1, 2022 . On January 3, 2022 , Simon Allen was
appointed to be the Company's CEO and elected a member of the Board of
Directors, both of which became effective on February 1, 2022 .
Components of Results of Operations
Revenue
We have not generated any revenue since inception. If our development efforts for our current lead product candidate, ANEB-001, or other additional product candidates that we may develop in the future, are successful and result in marketing approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We have incurred operating losses since inception and expect to continue to incur significant operating losses and negative cash flows from operations in the future.
Research and Development Expenses
We expect to continue incurring significant research and development costs related to ANEB-001. Our research and development expenses for the years endedJune 30, 2022 and 2021 included research and development consulting expenses, clinical trials, and costs associated with development of our lead product candidate, ANEB-001. We anticipate that our research and development activities will account for a significant portion of our operating expenses and these costs are expensed as incurred. We expect to significantly increase our research and development efforts as we continue to develop ANEB-001 and conduct clinical trials with patients suffering from symptoms of ACI, as well as continue to expand our product-candidate pipeline. Research and development expenses include:
? employee-related expenses, such as salaries, share-based compensation,
benefits and travel expense for research and development personnel that we
plan to hire;
? direct third-party costs such as expenses incurred under agreements with
contract research organizations ("CROs") and contract manufacturing
organizations ("CMOs");
? costs associated with research and development activities of consultants;
? manufacturing costs in connection with producing materials for use in
conducting preclinical studies and clinical trials;
? other third-party expenses directly attributable to the development of our
product candidates; and
? amortization expense for future asset purchases used in research and
development activities.
We currently have one lead product candidate; therefore, we do not track our internal research and development expenses on an indication-by-indication basis.
Research and development activities will continue to be central to our business model. We expect our research and development expenses to be significant over the next several years as we advance our current clinical development program and prepare to seek regulatory approval. 50
General and Administrative Expenses
General and administrative expenses for the years endedJune 30, 2022 and 2021 consisted primarily of professional fees, stock-based compensation, insurance, personnel costs and rent.
Fair Value Adjustment for Milestone Warrants
The Milestone Warrants (as defined in Note 8 to our financial statements included in this Annual Report) were freestanding financial instruments that qualified as liabilities required to be recorded at fair value at the inception date and remeasured each reporting period until settlement or until the underlying shares were converted to shares of our common stock, with gains and losses arising from changes in fair value recognized in the statements of operations.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations:
For the Years ended June 30, Period to Period
2022 2021 Change
Research and development $ 2,961,538 $ 2,269,998 $ 691,540
General and administrative 3,869,636 1,343,755 2,525,881
Total operating expenses 6,831,174 3,613,753 3,217,421
Loss from operations (6,831,174 ) (3,613,753 ) (3,217,421 )
Other (income) expenses:
Interest income (7,332 ) (1,020 ) (6,312 )
Interest expense - 11,767 (11,767 )
Fair value adjustment for Milestone
Warrants - 26,626,710 (26,626,710 )
Other 1,777 1,344 433
Total other (income) expenses, net (5,555 ) 26,638,801
(26,644,356 )
Net loss $ (6,825,619 ) $ (30,252,554 ) $ (23,426,935 ) Research and Development Expenses
For the Years ended June 30 , Period to Period
2022 2021 Change
Pre-clinical and clinical studies
772,011 41,499 730,512
Compensation and related benefits 89,576 24,453 65,123
Stock-based compensation expense 26,604 12,598 14,006
Other research and development 537,417 1,418,765 (881,348 )
Total research and development expenses
The overall increase in research and development expenses was primarily attributable to an increase in activities related to pre-clinical and clinical studies, and direct third-party costs incurred under agreements with CROs for ANEB-001. The increase in pre-clinical and clinical studies was related to Phase 2 clinical studies for ANEB-001. The decrease in other research and development was due to a one-time license fee of$1,350,000 paid (in stock) to Vernalis during the year endedJune 30, 2021 . During the year endedJune 30, 2022 , we fully engaged with our CMOs to produce drug substance and drug product for our clinical trials, thus increasing our contract manufacturing expense. 51
General and Administrative Expenses
General and administrative expenses consisted of the following:
For the Years ended June 30 , Period to Period
2022 2021 Change
Compensation and related benefits $ 715,394 $ 164,359 $ 551,035
Professional and consultant fees 1,089,880 572,760 517,120
Stock-based compensation expense 454,057 187,349 266,708
Directors' and officers' insurance 1,269,918 218,848 1,051,070
Facilities, fees and other costs 340,387 200,439 139,948
Total general and administrative expenses
The overall increase in general and administrative expenses was primarily attributable to an increase of the premium of our directors' and officers' insurance, and our compensation and related benefits (including stock compensation) for additional executives and finance employees to enable the Company to operate as a public company. In addition, there was an increase in professional and consultant fees, including legal and accounting fees, and facilities and other costs related to operating as a public company, because the Company was public for the full year endedJune 30, 2022 , but only for approximately two months during the year endedJune 30, 2021 .
Fair Value Adjustment for Milestone Warrants
As a result of changes in fair value, we recognized a charge of approximately$26,627,000 related to the Milestone Warrants for the year endedJune 30, 2021 . In connection with our IPO, the Milestone Warrants were exercised on a cashless basis. Accordingly, we did not have any fair value adjustments for the Milestone Warrants for the year endedJune 30, 2022 .
Liquidity and Capital Resources
Overview
Since our inception inApril 2020 , we have incurred significant operating losses. We expect to incur significant expenses and operating losses in the future as we advance the clinical development of our programs. InMay 2021 , we completed our IPO in which we sold 3,078,224 shares of our common stock, including the exercise by the underwriter of its option to purchase 78,224 additional shares of common stock, at a public offering price of$7.00 per share. We received net proceeds from our IPO of approximately$19,783,000 , after deducting underwriter discounts and offering expenses paid by us. As ofJune 30, 2022 , we had cash of approximately$14,548,000 . We anticipate that additional capital will be needed to commence and complete a Phase 3 study of our drug candidate ANEB-001. As and if necessary, we will seek to raise these additional funds through various potential sources, such as equity and debt financings or through collaboration, license and development agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations on acceptable terms or at all, or, if such funds are available to us, that such additional financing will be sufficient to meet
our needs. Cash Flows
The following table sets forth a summary of our cash flows:
For the Years ended June 30,
2022 2021
Net cash used in operating activities
- 21,831,854
Net (decrease) increase in cash$ (5,437,174 ) $ 16,960,665 52 During the year endedJune 30, 2022 , we used cash in operating activities of$5,437,174 primarily resulting from our net loss of$6,825,619 , partially offset by the non-cash related stock-based compensation of$480,661 , and a change in operating assets and liabilities of approximately$908,000 . During the year endedJune 30, 2021 , our operating activities used$4,871,189 in cash, which was less than the net loss of$30,252,554 , primarily due to fair value adjustment for Milestone Warrants of$26,626,710 , stock-based compensation of$199,947 , and partially offset by a change in operating assets and liabilities of approximately$1,445,000 . During the year endedJune 30, 2021 , cash provided by financing activities was$21,831,854 . This was primarily due to proceeds received from the IPO of approximately$19,783,000 and issuance of Milestone Warrants of$2,250,000 , partially offset by the repayment of the related party promissory notes of approximately$201,000 .
Funding and Material Cash Requirements
We expect that our cash atJune 30, 2022 will enable us to fund our current and planned operating expenses and capital expenditures into the fourth quarter of calendar year 2023. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates.
Our present and future funding and cash requirements will depend on many factors, including, among other things:
? the progress, timing and completion of our ongoing and planned clinical trials
and nonclinical studies;
? our ability to receive, and the timing of receipt of, future regulatory
approvals for our product candidates and the costs related thereto;
? the scope, progress, results and costs of our ongoing and planned operations;
? the costs associated with expanding our operations and building our sales and
marketing capabilities;
? our ability to establish strategic collaborations;
? the cost and timing of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending any
intellectual property-related claims;
? the revenue, if any, received from commercial sales of our products, if
approved; and
? potential new product candidates we identify and attempt to develop.
Until such time, if ever, as we can generate substantial product revenue from sales of any of our current or future product candidates, we will need to seek additional equity or debt financing or potential collaboration, license or development agreements to provide the capital required to maintain or expand our operations, continue the development of our product candidate, build our sales and marketing capabilities, promote brand identity, develop or acquire complementary technologies, products or businesses, or provide for our working capital requirements and other operating and general corporate purposes. If we raise additional capital by issuing equity securities and/or equity-linked securities, the percentage ownership of our existing stockholders may be reduced, and accordingly these stockholders may experience substantial dilution. We may also issue equity securities and/or equity-linked securities that provide rights, preferences and privileges senior to those of our common stock. Debt financing, if obtained, may involve agreements that include liens on our assets and covenants limiting or restricting our ability to take specific actions such as incurring additional debt. Debt financing could also be required to be repaid regardless of our operating results. If we raise funds through collaborations, license or development agreements, we may be required to relinquish some rights to our current or future products or revenue streams or grant licenses on terms that are not favorable to us. If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back or eliminate the development of our current or future product candidates and other business.
Contractual Obligations and Commitments
License Agreement with
OnMay 26, 2020 , we entered into the License Agreement with Vernalis. Pursuant to the License Agreement, Vernalis granted us an exclusive worldwide royalty-bearing license to develop and commercialize a compound that we refer to as ANEB-001, as well as access to and a right of reference with respect to any regulatory materials under its control. The License Agreement allows us to sublicense the rights thereunder to any person with similar or greater financial resources and expertise without Vernalis' prior consent, provided the proposed sublicensee is not developing or commercializing a product that contains a CB1 antagonist or is for the same indication covered by the trials or market authorization for ANEB-001. In exchange for the exclusive license, we agreed to pay Vernalis a non-refundable signature fee of$150,000 , total potential developmental milestone payments of up to$29,900,000 , total potential sales milestone payments of up to$35,000,000 , and low to mid-single digit royalties on net sales. Subsequently, inMay 2021 as part of the IPO, we issued 192,857 shares of common stock to Vernalis in lieu of future milestone payments of$1,350,000 . Under the License Agreement, we purchased the API for ANEB-001 from Vernalis on an "as is" basis for$20,000 . We have the sole discretion to carry out the development and commercialization of ANEB-001, including obtaining regulatory approvals, and we are responsible for all costs and expenses in connection therewith. We have access to certain regulatory materials, including study reports from clinical and non-clinical trials, under Vernalis' control. We agreed to use commercially reasonable efforts to (i) develop and commercialize ANEB-001 inthe United States and certain European countries and (ii) conduct a Phase 2 and human clinical trial within specified periods, which periods could be extended for a nominal fee. We also agreed to provide Vernalis with periodic reports of our activities and notice of market authorization within specified timeframes. 53
Office Lease, Manufacturing Contract and CRO Contract
We manage our business operations from our principal executive office in
InMarch 2022 , we entered into a manufacturing agreement with a third-party CMO. The total cost for the manufacturing contract is approximately$1,923,000 and is expected to be incurred in calendar 2022. InFebruary 2021 , we entered into an agreement with a third-party CRO to manage and conduct our Phase 2 clinical trial for ANEB-001 inthe Netherlands , which was initiated inDecember 2021 . We received initial topline data from Part A of the study onJune 29, 2022 and announced the results in a press release onJuly 5, 2022 . The total cost for the CRO agreement is approximately €2,235,144 or$2,346,901 . We enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturers and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and therefore, are cancellable contracts.
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our financial statements in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed and some require advanced payments. We make estimates of our accrued expenses of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
? CROs in connection with performing research services on our behalf and any
clinical trials;
? investigative sites or other providers in connection with studies and any
clinical trials;
? vendors in connection with the preparation of our NDA filing, market and
patient awareness programs, market research and analysis and medical
education; and
? vendors related to product manufacturing, development and distribution of
clinical supplies.
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We base our expenses for services rendered on our estimates of the services received and efforts expended pursuant to quotes, contracts and communicating with our vendors. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payments. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid or accrued expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
Stock-Based Compensation Expense
Our 2020 Stock Incentive Plan provides for the grant of qualified incentive stock options and nonqualified stock options or other awards to our employees, officers, directors, advisors, and outside consultants for the purchase of up to 3,650,000 shares of our common stock. Other awards include restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. Other stock-based awards are awards valued in whole or in part by reference to, or are otherwise based on, shares of common stock. Stock options generally vest over a four-year period or at achievement of a performance requirement. The awards expire five to ten years from the date of grant. We estimate the fair value of each stock option grant using the Black-Scholes option pricing model, which uses inputs such as the fair value of our common stock, assumptions we make for the volatility of our common stock the expected term of the stock options, the risk-free interest rate for a period that approximates the expected term, and our expected dividend yield. The fair value of our common stock is used to determine the fair value of restricted stock. Prior to our IPO, the fair value of our common stock was estimated on each grant date by our Board of Directors. In order to determine the fair value of our common stock, our Board of Directors considered, among other things, timely valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants Practice Guide , Valuation of Privately Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock prior to our IPO, our Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including (i) our business, financial condition and results of operations, including related industry trends affecting our operations; (ii) our forecasted operating performance and projected future cash flows; (iii) the illiquid nature of our common stock; (iv) the rights and privileges of our common stock; (v) market multiples of our most comparable public peers; and (vi) market conditions affecting our industry. There are significant judgments and estimates inherent in these valuations. The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. After the closing of the IPO, our Board of Directors now determines the fair value of our shares of common stock underlying stock-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant.
JOBS Act Accounting Election
The Jumpstart Our Business Startups ("JOBS") Act, enacted in April 2012 , permits
an "emerging growth company" such as us to take advantage of an extended
transition period to comply with new or revised accounting standards applicable
to public companies until those standards would otherwise apply to private
companies. We have and intend to continue to take advantage of all of the
reduced reporting requirements and exemptions, including the longer phase-in
periods for the adoption of new or revised financial accounting standards, for
an emerging growth company under Section 107 of the JOBS Act. Our election to
use the phase-in periods may make it difficult to compare our financial
statements to those of non-emerging growth companies and other emerging growth
companies that have opted out of the phase-in periods under Section 107 of the
JOBS Act. See "Risk Factors-General Risk Factors-We are an "emerging growth
company" and our election to delay adoption of new or revised accounting
standards applicable to public companies may result in our financial statements
not being comparable to those of some other public companies. As a result of
this and other reduced disclosure requirements applicable to emerging growth
companies, our securities may be less attractive to investors."
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