Adial Pharmaceuticals, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing reports full-year results, not a standalone fourth quarter.
Business context and development
Adial is a clinical-stage biopharmaceutical company with no approved products or product revenue. Its lead candidate, AD04, is low-dose ondansetron being developed with a genetic test to treat alcohol use disorder (AUD) in patients with selected genotypes. The ONWARD pivotal Phase 3 trial was underway in Europe; the filing projected a readout in the first quarter of 2022. The company expects at least one additional Phase 3 trial may be needed for approval.
In January 2021, after year-end, Adial acquired Purnovate, a preclinical drug-development company focused on adenosine analogs and potential non-opioid pain and other applications. The acquisition was not included in the 2020 financial statements.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Product revenue | None | None |
| Research and development expense | $5.853 million | $3.966 million |
| General and administrative expense | $5.075 million | $4.279 million |
| Operating loss | $10.928 million | $8.245 million |
| Net loss | $10.893 million | $8.591 million |
| Basic and diluted loss per share | $0.87 | $0.87 |
| Net cash used in operating activities | $7.633 million | $6.339 million |
| Cash and cash equivalents at year-end | $4.401 million | $6.777 million |
| Total assets | $5.491 million | $7.680 million |
| Total current liabilities | $1.505 million | $0.539 million |
| Stockholders’ equity | $3.986 million | $7.141 million |
There is no product revenue, so product margins are not meaningful. The filing reports no debt balance at December 31, 2020; the $350,000 advance to Purnovate was recorded as an asset and evidenced by a 3.5% promissory note due December 7, 2021. No off-balance-sheet arrangements were reported.
Operating expenses rose 33% year over year, driven principally by Phase 3 trial costs and higher corporate and equity-compensation expenses. Net loss increased about 27%; 2019 included a one-time $442,000 warrant-modification expense, while 2020 did not. Financing activities provided $5.607 million in 2020, versus $9.247 million in 2019. Common shares outstanding increased to 14.393 million from 10.368 million.
Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern. Management said year-end cash was not expected to fund operations for the 12 months after filing, projected funds could be exhausted in Q4 2021, and estimated approximately $3.3 million of additional funding would be needed to reach the expected February 2022 database lock. The Keystone equity purchase agreement allows up to $15 million of stock sales, subject to market-price, Nasdaq and other conditions; access is not assured. After year-end, Adial reported $2.35 million in gross proceeds from Keystone share sales and $1.425 million from warrant exercises.
Material developments, outlook and risks
- ONWARD trial: The filing gives inconsistent enrollment figures at December 31, 2020: one passage reports 35% of 290 subjects enrolled, while another says more than 50%. It also reports all 25 planned sites active and states that enrollment had improved. Verify the trial status and timing against subsequent updates.
- Phase 2b evidence: In the 283-subject study, the target-genotype subgroup showed reported improvements versus placebo of 1.71 fewer drinks per drinking day (p=0.0042), 11.56 percentage points more abstinent days (p=0.0352), and an 11.08-point reduction in heavy-drinking days (p=0.0445). The filing cautions that some genetic findings were based on post hoc analyses and Phase 3 results may differ.
- Regulatory and safety uncertainty: AD04 depends on approval of both the drug and its companion diagnostic. FDA/EMA acceptance of trial endpoints and heavy-drinking-day definitions is not assured. The filing says comprehensive long-term ondansetron safety data are unavailable, despite prior short-term experience.
- COVID-19 and costs: The pandemic had delayed approvals and slowed enrollment in some trial countries, and the filing identified possible further delays, higher costs and supply disruption. Trial costs are substantially denominated in euros, creating foreign-exchange exposure.
- Purnovate acquisition: Consideration included $700,000 cash, including the prior advance, and 700,000 restricted shares valued at approximately $1.638 million at issuance. Additional contingent payments include development and commercialization milestones and 3% royalties on net sales. Final purchase-price allocation was incomplete at filing. Adial’s CEO and a director had interests in Purnovate.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective and identified material weaknesses, including inadequate documentation and review, insufficient GAAP expertise and segregation of duties, and IT-control deficiencies. Related-party arrangements include payments to a company owned by the chief medical officer and the Purnovate transaction.
- Other key risks: The company depends on its AD04 license from the University of Virginia, has no commercial sales or marketing infrastructure, and expects continued financing needs and potential shareholder dilution. No legal proceeding believed material to financial condition or results was reported.
Important facts for investors to verify
- Reconcile the conflicting year-end ONWARD enrollment disclosures and confirm current enrollment, database-lock timing and readout expectations.
- Track cash burn, available Keystone equity-line capacity and conditions, subsequent financing proceeds, and funding required for the current and any further Phase 3 trials.
- Review whether trial endpoints, heavy-drinking-day definitions, long-term safety evidence and companion-diagnostic validation meet FDA and EMA requirements.
- Assess Purnovate integration, final acquisition accounting, related-party terms and potential milestone and royalty obligations.
- Monitor remediation of material weaknesses and the potential effects of future equity issuance, warrants and options on dilution.