Adial Pharmaceuticals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The interim financial statements are unaudited.
Business context
Adial is a clinical-stage biotechnology company developing AD04, a genetically targeted treatment candidate for alcohol use disorder. The company has no approved products and has generated no revenue. In March 2020, the first patient was dosed in its initial Phase 3 trial.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Revenue | None | None reported |
| Research and development expense | $1.060 million | $0.687 million in Q1 2019 |
| General and administrative expense | $1.241 million | $1.562 million in Q1 2019 |
| Total operating expenses | $2.300 million | $2.249 million in Q1 2019 |
| Net loss | $2.277 million | $2.683 million in Q1 2019 |
| Net loss per share, basic and diluted | $0.22 | $0.33 in Q1 2019 |
| Net cash used in operating activities | $1.825 million | $1.721 million in Q1 2019 |
| Cash and cash equivalents | $4.952 million | $6.777 million at December 31, 2019 |
| Working capital | Approximately $5.5 million | Approximately $7.1 million at December 31, 2019 |
| Current liabilities | $0.390 million | $0.539 million at December 31, 2019 |
| Accumulated deficit | $22.904 million | $20.627 million at December 31, 2019 |
No debt was reported; liabilities consisted of accounts payable and accrued expenses. Profit margins are not applicable because the company reported no revenue. No investing cash flow was reported in either period.
Changes versus Q1 2019
- R&D expense rose approximately 54%, primarily reflecting CRO, subcontractor, regulatory consulting, and manufacturing costs as the Phase 3 trial began.
- G&A expense fell approximately 21%, mainly because Q1 2019 included one-time officer bonus and follow-on offering-related costs.
- Operating expenses increased modestly, while net loss narrowed largely because Q1 2019 included a $441,763 warrant modification expense that did not recur.
- Operating cash use increased by approximately $104,000 despite the lower net loss. Q1 2019 financing provided $9.246 million; there was no financing cash flow in Q1 2020.
Outlook, risks, and notable items
- Going concern and funding: Management stated that cash was not expected to fund operations for the 12 months following filing, raising substantial doubt about the company’s ability to continue as a going concern. Cash was expected to support operations into Q4 2020 without grant funding. If anticipated grants were received, management estimated funds could extend into Q1 2021, but still would not be sufficient to reach database lock in the initial Phase 3 trial given enrollment delays.
- Trial costs and grants: The initial Phase 3 trial was estimated to cost approximately $9.0 million in total, with about $2.6 million incurred or prepaid and approximately $6.4 million in direct expenses remaining. The company had applied for grants totaling approximately $5.5 million; it described $2.5 million as potentially usable for the trial and expected $2.0 million to defray planned trial expenses. Grants were not assured. A second Phase 3 trial was estimated to cost approximately $20 million, with up to $10 million in additional development expenses; a possible third trial could require a further $20 million.
- COVID-19: Slowed trial enrollment was already affecting timelines. Further disruption could increase costs and extend the cash runway required, while complicating recruitment, site operations, supply, and regulatory interactions.
- Capital and dilution: Management was pursuing grants, equity or debt financing, strategic relationships, and out-licensing, without assurance of availability or acceptable terms. Equity or convertible financing could dilute shareholders; debt could add fixed obligations and covenants.
- Other risks and obligations: The Phase 3 trial depends on CROs and other vendors; many costs are denominated in euros, creating currency exposure. The UVA license includes royalties and milestone payments. No pending legal actions were reported at March 31, 2020.
- Internal controls: Management identified material weaknesses, including inadequate documentation and review processes, limited GAAP expertise for complex reporting, and insufficient staffing for segregation of duties. Disclosure controls and procedures were deemed ineffective as of March 31, 2020.
- Potential dilution: At March 31, 2020, 6.670 million warrants and 2.621 million options were outstanding. The company also issued 261,251 shares during the quarter through stock-based compensation and consultant/employee issuances.
Important facts for investors to verify
- Whether grant applications or other financing were secured, and the resulting cash runway and ability to reach database lock.
- Phase 3 enrollment progress, COVID-19 effects, updated timelines, and any changes to estimated trial costs.
- Regulatory requirements for further trials and the funding needed to complete the development program.
- Progress in addressing the disclosed internal-control material weaknesses.
- Potential dilution from outstanding warrants, options, and any future capital raises.