Business context and reporting period
Adial Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The clinical-stage company is developing AD04, an investigational ondansetron-based treatment for alcohol use disorder (AUD), intended for patients selected using genetic biomarkers. Adial had no approved products and generated no product revenue.
Financial performance and position
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $864,280 for Q3; $2,761,630 for nine months | $188,435 and $320,838, respectively, in 2018 |
| General and administrative expense | $881,462 for Q3; $3,392,388 for nine months | $3,627,664 and $5,576,241, respectively, in 2018 |
| Net loss | $1,715,883 for Q3; $6,532,941 for nine months | $8,190,924 and $10,362,230, respectively, in 2018 |
| Cash and cash equivalents | $8,529,681 | $3,869,043 at December 31, 2018 |
| Working capital | Approximately $8.7 million | Approximately $4.4 million at December 31, 2018 |
| Liabilities and debt | $776,946 of current liabilities, all accounts payable and accrued expenses; no other liabilities reported | $257,974 of current liabilities at December 31, 2018 |
For the first nine months of 2019, operating cash use was $4.59 million, financing cash inflow was $9.25 million, and cash increased by $4.66 million. Financing was principally the February 2019 follow-on offering, which generated approximately $8.20 million net, plus warrant exercises of approximately $1.05 million. Profit margins are not meaningful because the company had no revenue.
Changes versus the prior comparable periods
- Q3 research and development expense rose approximately $676,000 year over year as AD04 trial preparations advanced. Nine-month R&D expense increased approximately $2.44 million, including clinical-trial, regulatory, staffing, consulting, and manufacturing-related costs.
- Q3 G&A expense fell approximately $2.75 million year over year; nine-month G&A fell approximately $2.18 million. The 2018 comparison included substantial one-time IPO-related equity compensation and performance-plan cancellation expense.
- Nine-month net loss improved approximately $3.83 million, despite a $257,000 increase in operating loss. The improvement largely reflects 2018 debt-extinguishment and interest charges associated with the IPO; 2019 included $441,763 of warrant-modification expense.
Outlook, risks, contingencies, and unusual items
- Management said September 30 cash should fund operations for at least 12 months after issuance of the statements. It also expects approximately $1.7 million in grant receipts over the next 12 months; without expected grants, it plans to reduce cash use but says available funds would last only through Q4 2020. Additional financing will be needed for longer-term operations and planned trials.
- Management estimates the initial Phase 3 trial will cost approximately $8.6 million in total, with approximately $7.3 million still requiring cash after amounts incurred or prepaid. The filing says grants sought could help fund completion; failure to obtain grants or higher-than-expected costs could require further financing or affect trial execution. A second Phase 3 trial is estimated at approximately $20 million, with up to $10 million in additional development expenses; a third trial may also be required.
- The FDA clinical hold was pending a satisfactory Chemistry, Manufacturing, and Controls submission. The company said it believed it could submit satisfactory materials, but the submission had not yet been made. The UVA license also requires Phase 3 initiation by December 31, 2019; the company expected to meet that deadline.
- Adial reported material weaknesses in internal control over financial reporting, including insufficiently documented policies, approval and review processes, GAAP expertise for complex transactions, and staffing/segregation of duties. Management concluded disclosure controls were not effective as of September 30, 2019; it hired an outside consultant to assist.
- Related-party arrangements included a three-year Chief Medical Officer consulting agreement with a $375,000 annual fee, a $250,000 signing bonus and options, and a services agreement with a company owned by the CMO, anticipated to total approximately $300,000. The filing reports $552,080 of expense under the CMO agreement and $39,064 under the related-party services agreement for the nine months.
- Approximately $8.3 million of cash balances exceeded federal deposit-insurance limits. The company reported no pending legal actions and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether grant funding or other financing is secured, and whether cash will cover the initial Phase 3 trial and subsequent development.
- Whether the CMC submission resolves the FDA clinical hold and whether required regulators approve the trial materials and planned trial.
- Actual Phase 3 costs, timing, and progress against the December 31, 2019 license milestone.
- Remediation of the disclosed internal-control material weaknesses and the terms and oversight of related-party arrangements.
- Potential dilution: at September 30, 2019, 6,689,579 warrants and 1,400,967 options were outstanding; common shares outstanding were 10,318,352 as of November 14, 2019.