Adial Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company is a clinical-stage biopharmaceutical developer focused on AD04, an investigational ondansetron-based treatment for alcohol use disorder (AUD), intended for patients selected using a genetic biomarker. It has no approved products and has generated no product revenue.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $1.210 million | $0.077 million | $1.897 million | $0.132 million |
| General and administrative | $0.949 million | $1.665 million | $2.511 million | $1.949 million |
| Total operating expenses | $2.159 million | $1.741 million | $4.408 million | $2.081 million |
| Net loss | $2.134 million | $1.792 million | $4.817 million | $2.171 million |
| Basic and diluted loss per share | $0.21 | $0.50 | $0.52 | $0.64 |
Gross profit and operating margins are not meaningful because the company had no revenue. Q2 research and development costs rose by about $1.133 million year over year as clinical-trial preparation, consulting, manufacturing-related work, and personnel costs increased. Six-month R&D rose by $1.765 million. Q2 G&A fell by about $0.716 million, primarily because Q2 2018 included a one-time $1.461 million charge related to retirement of the performance bonus plan; six-month G&A increased by $0.562 million as staffing and other public-company costs grew.
- Cash and liquidity: Cash and cash equivalents were $10.254 million at June 30, 2019, versus $3.869 million at December 31, 2018. Current assets were $10.681 million and current liabilities $0.627 million; management reported working capital of approximately $10.1 million.
- Cash flow: Six-month operating cash use was $2.861 million, compared with $0.403 million in 2018. Financing provided $9.246 million, including $8.196 million net proceeds from the February follow-on offering and $1.051 million from warrant exercises. Cash increased by $6.385 million.
- Debt: No debt was outstanding at June 30, 2019; liabilities consisted of accounts payable and accrued expenses. Interest income was $33,000 for the six months, while a noncash $442,000 warrant-modification expense contributed to other expense.
- Equity and potential dilution: Common shares outstanding increased to 10,242,449 from 6,862,499 at year-end 2018. At June 30, outstanding warrants covered 6,723,240 shares and options covered 1,400,967 shares.
Material changes and notable items
- The February 2019 follow-on offering generated approximately $8.2 million in net proceeds. The company also received cash from warrant exercises.
- R&D spending increased substantially as the company prepared its first Phase 3 trial. The Crown CRO service agreement fee was increased to approximately $3.602 million, plus estimated pass-through costs of approximately $2.5 million. A $505,960 prepayment had been made; $271,687 remained prepaid at June 30, and none of the listed future milestones had yet been reached.
- The company entered a three-year consulting agreement with its Chief Medical Officer, a related party, with annual fees of $375,000, a $250,000 signing bonus and an option grant. A subsequent July 2019 related-party agreement with a company owned by the CMO was expected to cost approximately $300,000, subject to the stated terms and Nasdaq approval.
- There were no pending legal actions reported and no off-balance-sheet arrangements.
Outlook, risks and contingencies
- Management said June 30 cash was expected to fund operations for at least 12 months after issuance of the financial statements; it estimated total cash use of approximately $8.7 million over the next 12 months. Management also said additional financing would be needed for longer-term development and further trials.
- The filing estimates approximately $5.0 million of R&D expense over the next 12 months. It estimates the first Phase 3 trial will cost approximately $8.8 million in total, with approximately $7.9 million still needed after costs incurred or prepaid. Elsewhere, the risk-factor discussion gives different figures for costs through database lock and remaining grant funding needs; these estimates are not fully reconciled in the filing text.
- The company said grants already applied for could help fund completion of the initial trial to database lock, but grant outcomes are uncertain. If grants are not obtained, costs exceed estimates, or further trials are required, the company may need additional equity, debt, grants, partnerships or licensing. Additional equity could dilute shareholders; debt or collaborations could impose other costs or restrict rights.
- Management expected a second Phase 3 trial to cost approximately $20 million, with up to $10 million in additional development expenses; a possible third Phase 3 trial could require another approximately $20 million. The filing notes that additional trials may be needed for regulatory approval.
- The FDA clinical hold remained in place pending a satisfactory Chemistry, Manufacturing and Controls submission. The company said it believed it could make the submission, but had not yet done so; regulatory acceptance and trial timing were uncertain. The license agreement requires initiation of a Phase 3 trial by December 31, 2019 and contains termination provisions tied to specified obligations and diligence.
- Long-term safety of ondansetron at the anticipated chronic AD04 dose had not been comprehensively assessed, according to the company. Clinical results, regulatory approval, manufacturing, trial costs and access to capital remain significant risks.
- Management concluded disclosure controls and procedures were ineffective at June 30, 2019, citing material weaknesses including inadequate documentation and review processes, insufficient GAAP expertise for complex reporting, and limited staffing and segregation of duties.
- Approximately $10.0 million of cash at June 30 exceeded federal deposit-insurance limits. The company also disclosed significant ownership concentration and substantial outstanding warrants and options.
Important facts for investors to verify
- Whether and when the company submitted an acceptable CMC filing, obtained release of the FDA clinical hold, and initiated the Phase 3 trial before the December 31, 2019 license deadline.
- How management reconciles the different disclosed estimates for initial-trial costs, remaining cash requirements and grant funding, and whether the stated cash runway remains achievable.
- The status and terms of grant applications, partnership discussions and other financing plans, including potential dilution or licensing consequences.
- Progress against the CRO trial milestones and pass-through-cost estimates, along with the company’s related-party arrangements and outstanding equity-linked securities.
- Remediation of the disclosed internal-control material weaknesses and the effect of cash balances exceeding insured limits.