Adial Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The unaudited statements are for a pre-revenue, clinical-stage biotechnology company developing AD04 for alcohol use disorder (AUD). The company completed its IPO after quarter-end, on July 31, 2018.
Financial results and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Prior-year comparable |
|---|---|---|---|
| Revenue | No product revenue | No product revenue | No product revenue |
| Research and development | $76,895 | $132,403 | $57,863 and $102,339 |
| General and administrative | $133,391 | $348,235 | $161,200 and $247,928 |
| Equity-based compensation | $1,531,181 | $1,600,342 | $22,422 and $60,818 |
| Net loss | $1,792,356 | $2,171,306 | $264,273 and $442,838 |
| Basic and diluted loss per share | $0.50 | $0.64 | $0.08 and $0.14 |
The substantial year-over-year increase in losses was principally driven by noncash equity compensation, including a one-time $1.46 million charge for shares issued to retire the Performance Bonus Plan. No income-tax provision was recorded. Operating margins are not meaningful because the company had no product revenue.
At June 30, 2018, cash and cash equivalents were $150,026, total assets $187,087, current liabilities $1,480,604, and stockholders’ deficit $1,293,517. Management reported negative working capital of approximately $1.3 million. The balance sheet included $510,000 of senior secured notes, a $225,000 senior secured bridge-note balance, $234,341 of convertible notes net of discount, and a $28,676 senior note net of discount. The notes and other obligations were affected by financing-related discounts and conversion or settlement terms.
For the first six months, operating cash use was $403,222, financing provided $535,000, and cash increased $131,778 to $150,026. The prior-year period used $235,976 in operations, received $250,000 from financing, and ended with $137,134 in cash. The company reported no interest or income taxes paid during either period.
Changes versus the prior comparable period
- Six-month net loss increased from $442,838 to $2.17 million. Equity compensation rose by approximately $1.54 million, largely due to the Performance Bonus Plan cancellation award.
- Six-month R&D expense increased 29% to approximately $132,000. General and administrative expense increased 40% to approximately $348,000, mainly due to European patent validation costs.
- Six-month interest expense rose to $102,567 from $32,129, reflecting increased debt and amortization of debt discounts. The company also recorded a $12,241 gain on debt extinguishment.
- Cash at quarter-end increased from $18,248 at December 31, 2017, but liabilities grew faster, leaving the company with substantial negative working capital.
Outlook, risks, and unusual items
- Funding and runway: The July 2018 IPO generated approximately $6.3 million in net proceeds. After repayment of obligations and other spending, the company reported approximately $5.0 million cash at financial-statement issuance and expected that amount to fund operations for at least 12 months. Management nevertheless said available funds would not complete the planned first Phase 3 trial.
- Clinical development estimates: Management estimated approximately $2.7 million of R&D expense over the next 12 months and approximately $7 million to complete the initial Phase 3 trial; it expected to allocate about $2.4 million of IPO proceeds to that trial, leaving at least $4.6 million to raise. A second Phase 3 trial was estimated at approximately $20 million; FDA requirements could necessitate a third trial.
- Trial and regulatory uncertainty: The company planned a Phase 3 trial in Scandinavia and Central and Eastern Europe, but its IND program remained on clinical hold pending submission of a satisfactory chemistry, manufacturing and controls package. The company said it believed it could submit that package, but had not yet done so. Trial outcomes, enrollment, endpoints, companion-diagnostic approval, long-term safety, and regulatory requirements remain uncertain.
- License milestone: The UVA license required initiation of Phase 3 trials by December 31, 2018; failure to meet obligations or milestones could give the licensor termination rights. The license also provides for royalties, milestone payments, and a share of non-royalty sublicensing income.
- Post-quarter financing and dilution: The IPO sold 1,464,000 units at $5 each, each comprising one share and one warrant. IPO proceeds triggered conversion of convertible debt and repayment or settlement of several secured obligations. Settlements included $548,160 cash and equity-linked issuances to secured-note holders, and a reported $3.52 million loss on extinguishment. Additional post-IPO shares, warrants, and compensation issuances were also disclosed.
- Related parties: Related-party directors and other insiders held or participated in secured-note financings and other arrangements. The filing describes compensation, consulting, backstop, and debt-settlement transactions involving insiders or affiliated entities.
- Controls and contingencies: Management concluded disclosure controls were ineffective at June 30, 2018, citing insufficient segregation of duties, limited GAAP expertise, and inadequately designed financial controls. The company reported no pending material legal proceedings and no off-balance-sheet arrangements.
- Company risk profile: Adial has no approved products or product-sales revenue and expects continuing losses. It depends substantially on AD04 and external financing; failure to raise capital could delay, reduce, or stop development. Management’s statements about cash sufficiency and development timing are forward-looking and subject to risk.
Important facts for investors to verify
- Current cash, burn rate, and financing progress against the stated $4.6 million minimum gap for the first Phase 3 trial and the larger expected funding needs thereafter.
- Whether the FDA accepts the CMC submission and lifts the clinical hold, and whether the company meets the UVA license’s December 31, 2018 Phase 3 initiation milestone.
- Phase 3 protocol, enrollment progress, accepted endpoints, companion-diagnostic pathway, and the evidence supporting long-term safety and efficacy of AD04.
- Post-IPO share and warrant counts, potential dilution from debt-related issuances and equity plans, and the accounting and cash impact of all settlements and compensation grants.
- Remediation of the disclosed material weaknesses, including whether the company has added adequate accounting expertise and strengthened financial-reporting controls.
- Terms, balances, and conflicts of interest relating to insider and related-party financings, compensation, consulting, and licensing arrangements.