Adial Pharmaceuticals, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 20, 2020. This is an annual report, not a standalone fourth-quarter report.
Business context
Adial is a clinical-stage biopharmaceutical company with no approved products or significant revenue. Its lead candidate, AD04, is low-dose ondansetron being developed with a genetic test for selected patients with alcohol use disorder (AUD). The company’s business and development plans depend primarily on AD04.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | No significant revenue | No significant revenue |
| Research and development expense | $3.97 million | $0.37 million |
| General and administrative expense | $4.28 million | $6.62 million |
| Operating loss | $8.24 million | $6.99 million |
| Net loss | $8.59 million | $11.63 million |
| Net loss per share, basic and diluted | $0.87 | $2.44 |
| Net cash used in operating activities | $6.34 million | $2.50 million |
| Cash and cash equivalents at year-end | $6.78 million | $3.87 million |
| Working capital at year-end | $7.13 million | $4.44 million |
Operating margins are not meaningful because the company had no significant revenue. Total assets were $7.68 million and stockholders’ equity was $7.14 million at December 31, 2019. Reported current liabilities were $0.54 million, consisting of accounts payable and accrued expenses; the balance sheet showed no debt at year-end.
Financing activities provided $9.25 million in 2019, including $8.20 million net proceeds from the February follow-on offering and $1.05 million from warrant exercises. Cash increased by $2.91 million during the year. The company had 10.37 million common shares outstanding at year-end and 6.67 million warrants outstanding.
Changes versus 2018
- R&D expense rose by $3.60 million as the company prepared its Phase 3 program, including CRO costs and additional personnel and consultants.
- Reported G&A expense fell by $2.34 million, largely because 2018 included substantial one-time IPO-related stock compensation. Excluding that 2018 item, management said G&A increased.
- Operating loss widened by $1.26 million, while net loss narrowed by $3.04 million. The improvement in net loss primarily reflected the absence of 2018 debt-extinguishment and financing charges, partly offset by a $0.44 million 2019 warrant-modification expense.
- Operating cash use increased by $3.84 million year over year, despite the lower reported net loss.
Development outlook, risks and unusual items
- Clinical program: The planned first Phase 3 trial targets approximately 294 genotype-positive patients in Europe. The company reported European trial-application submissions in late 2019, favorable Finnish opinions in January 2020, and a first site initiation visit in February 2020. The filing also describes the initial trial as commenced; the precise operational status at December 31, 2019 is not clearly stated.
- Funding and going concern: Management and the auditor expressed substantial doubt about the company’s ability to continue as a going concern. Management said available cash was not expected to fund operations for the 12 months following the financial-statement filing. Without anticipated grant funding, the company projected cash exhaustion by October 2020 and said it would need at least $2.2 million by then to reach database lock. Grants applied for totaled approximately $5.5 million; about $2.5 million was described as applicable to the current trial, with roughly $2.0 million expected to offset planned trial expenses. None was assured.
- Further trial costs: The initial Phase 3 trial was estimated to cost about $8.8 million, with approximately $1.8 million already incurred or prepaid. A second Phase 3 trial was estimated at $20 million in direct costs, plus up to $10 million in other development expenses; a third trial could add about $20 million.
- COVID-19: The company warned that the pandemic could delay site activation, enrollment, monitoring, regulatory interactions and supply shipments, increasing trial costs and funding needs. It said even anticipated grants might not be sufficient if trial activities were significantly delayed.
- Clinical and regulatory uncertainty: Phase 2b results were encouraging in the selected genetic population, but the company cautioned that later-stage results may differ. Long-term safety of chronic ondansetron use has not been comprehensively established. Trial endpoints and the definition of a heavy-drinking day may require regulatory clarification; approval of both AD04 and its companion diagnostic is uncertain, and additional trials may be required.
- Related-party arrangement: PEPCO, owned by Chief Medical Officer and major stockholder Dr. Bankole Johnson, was engaged to provide behavioral-therapy support for the trial. The company reported a fixed payment of $219,823 for remaining services, paid in December 2019, and Dr. Johnson provided a performance guaranty secured by 600,000 shares.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective and identified material weaknesses, including inadequate documentation and review controls, limited GAAP expertise, IT-control deficiencies and insufficient segregation of duties. The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about going concern; it did not audit internal-control effectiveness.
Most important facts for investors to verify
- Whether grant applications were awarded and whether subsequent financing covered the trial through database lock and beyond.
- The actual Phase 3 enrollment, site status, timeline, costs and impact of COVID-19.
- Whether AD04’s efficacy and chronic-use safety are confirmed, and what endpoints and heavy-drinking definition regulators will accept.
- The companion diagnostic’s validation and approval requirements, and whether it can be provided and reimbursed in practice.
- Potential dilution from future financing, options and warrants; related-party payments and the status of remediation of control weaknesses.