Adial Pharmaceuticals, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Adial is a clinical-stage biopharmaceutical company developing AD04, an investigational treatment for alcohol use disorder (AUD), with no approved products and no revenue to date.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $686,914 | $55,508 |
| General and administrative expense | $1,562,352 | $284,005 |
| Total operating expenses / operating loss | $2,249,266 | $339,513 |
| Net loss | $2,682,651 | $378,950 |
| Basic and diluted loss per share | $0.33 | $0.12 |
| Net cash used in operating activities | $1,721,109 | $214,282 |
Gross margin and operating margin are not meaningful because the company had no revenue. At March 31, cash and cash equivalents were $11.39 million, working capital was approximately $11.7 million, total assets were $12.06 million, and current liabilities were $329,192. The company reported no debt outstanding; liabilities consisted of accounts payable and accrued expenses. Accumulated deficit was $14.72 million.
Cash increased $7.53 million during the quarter, primarily from $8.20 million in net proceeds from the February follow-on offering and $1.05 million from warrant exercises. Financing cash inflow was $9.25 million; investing cash flow was zero.
Material changes and unusual items
- Operating expenses rose substantially year over year: R&D increased about $631,000 and G&A about $1.28 million. Management attributed the increases mainly to greater staffing and compensation, clinical-trial activity, financial consulting, and one-time bonuses, including a CMO signing bonus.
- Net loss increased by approximately $2.30 million. Results included a one-time, noncash $441,763 warrant-modification expense; Q1 2018 included a $12,241 gain on debt extinguishment and $51,678 of interest and financing charges.
- The February follow-on offering raised $8.20 million net, issuing 2.845 million shares including the partial over-allotment, together with warrants. Common shares outstanding were 10,168,826 at quarter-end and 10,219,638 as of May 13, 2019.
- The company issued 1,173,000 stock options during the quarter; 1,400,967 options and 6,728,113 warrants were outstanding at March 31. These securities may cause future dilution.
Outlook, risks, and commitments
- Management said available cash was expected to fund operations for at least 12 months after issuance of the statements, with approximately $7.9 million of cash use anticipated over the next 12 months. The company estimated approximately $4.1 million in R&D expense over that period.
- The initial AD04 Phase 3 trial was estimated to cost approximately $8.0 million in total, with about $500,000 incurred or prepaid and approximately $7.5 million still needed. The CRO agreement provides for approximately $3.3 million in fees plus an estimated $2.4 million of pass-through costs. The company reported that none of the listed CRO milestones had been reached by March 31.
- Management stated that current funding would not cover subsequent Phase 3 trials. It estimated a second Phase 3 trial at approximately $20 million in direct expenses plus up to $10 million in other development costs, and a possible third trial at an additional $20 million in clinical-trial expenses. Additional financing, grants, partnerships, or licensing will be needed; availability and terms are uncertain and equity financing could dilute shareholders.
- The company planned to initiate its first Phase 3 trial by December 31, 2019 under its amended University of Virginia license. The license includes milestones, minimum royalties, and termination rights for failure to meet obligations. The company noted that FDA requirements could require two or three Phase 3 trials; the filing describes commercialization as potentially beginning in 2023 or later.
- AD04’s efficacy and safety remain unproven. Management noted that comprehensive evaluation of long-term ondansetron use at the intended AD04 dosage had not been performed to its knowledge. Trial results, regulatory approval, trial costs, and access to funding are material uncertainties.
- A March 2019 consulting agreement with the former board chair, now CMO, provides annual compensation of $375,000, a $250,000 signing bonus, and an option for 250,000 shares; Q1 expense under the agreement was $267,191. CEO and COO/CFO salaries were also increased in March to $400,000 and $150,000, respectively.
- Management concluded that disclosure controls and procedures were ineffective at March 31, 2019 because of material weaknesses, including inadequate documentation and review controls, limited GAAP expertise for complex reporting, and insufficient staffing and segregation of duties.
- No material pending legal proceedings were reported. Approximately $11.1 million of cash was held above FDIC-insured limits at quarter-end.
Important facts for investors to verify
- Whether the planned first Phase 3 trial started on schedule, achieved recruitment and milestones, and stayed within the stated budget.
- Whether cash runway assumptions remain valid and what financing will be needed for later trials, including potential dilution or partnership economics.
- Regulatory expectations for the number and design of Phase 3 trials and the evidence required for approval of AD04 and its companion diagnostic.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.
- The potential dilution and exercise impact of outstanding warrants, options, and future equity awards.