Business context and reporting period
Adial Pharmaceuticals, Inc. is a clinical-stage biotechnology company developing treatments for addiction and related disorders. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Its lead candidate, AD04, is in a Phase 3 trial for Alcohol Use Disorder (AUD); the company acquired drug-development subsidiary Purnovate in January 2021. Adial reported no revenue from product sales.
Key financial metrics
| Metric | Q3 2021 / September 30, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Revenue | None reported | None reported |
| Net loss | $4.32 million for Q3; $13.59 million for the first nine months | $3.34 million for Q3 2020; $7.42 million for the first nine months of 2020 |
| Operating expenses | $4.06 million for Q3; $13.31 million year to date | $3.34 million for Q3 2020; $7.46 million year to date |
| Cash and cash equivalents | $7.18 million | $4.40 million at December 31, 2020 |
| Operating cash flow | $(9.58) million for the first nine months | $(5.02) million for the first nine months of 2020 |
| Financing cash flow | $12.39 million for the first nine months | $5.61 million for the first nine months of 2020 |
| Total liabilities | $3.25 million, including $268,068 of lease liabilities and $1.07 million of acquisition-related contingent consideration | $1.51 million |
| Accumulated deficit | $45.11 million | $31.52 million |
As a pre-revenue development-stage company, product margins are not applicable. The filing reports no income-tax provision. Adial had no conventional borrowing reported at quarter-end; lease liabilities and contingent acquisition consideration are recorded liabilities.
Material changes versus prior comparable period
- Q3 net loss increased by about $982,000 year over year. Operating expenses rose $726,000: general and administrative expense increased $881,000, partly offset by a $155,000 decrease in research and development expense as trial activity eased after enrollment completion. The quarter also included a $275,000 expense from revaluing Purnovate contingent consideration.
- For the first nine months, net loss increased about $6.17 million. R&D expense rose $2.27 million, principally from higher trial costs, manufacturing and distribution, added personnel, and Purnovate research. General and administrative expense rose $3.58 million, including higher compensation, equity-based compensation, public relations and business-development costs.
- Operating cash use increased about $4.56 million year over year. Equity financing, warrant exercises and option exercises generated $12.39 million of financing cash flow, leaving cash up $2.78 million from year-end 2020.
- The Purnovate acquisition added acquired research supplies, in-process R&D, goodwill and lease obligations. It was a related-party transaction: Adial’s CEO held approximately 28.7% of Purnovate before the acquisition. Acquisition consideration included cash, Adial shares and contingent payments.
Outlook, risks and unusual items
- ONWARD Phase 3 enrollment was complete at 302 patients across 25 sites. The company projected completion of patient dosing in Q1 2022, with trial data to follow; an earlier stated projection anticipated data release in Q2 2022. The filing does not give a definitive updated data-release date.
- Management expected September 30 cash to fund operations for at least 12 months after filing and stated it did not expect additional funding to reach database lock under its current cost assumptions. It also estimated approximately $6.8 million of cash use over the next 12 months and said cash could be exhausted near the end of 2022 if contemplated projects proceed and no further capital is raised.
- Further financing will be needed for additional development, including an estimated $20 million for a second Phase 3 trial and up to $10 million in other development costs to bring AD04 to market. Financing may dilute shareholders or involve debt obligations or the surrender of product rights; availability and terms are uncertain.
- COVID-19 previously delayed regulatory approvals and trial enrollment. Further delays, cost increases, supplier or vendor disruption, or other pandemic effects could jeopardize trial timing and the company’s cash projections.
- Adial recorded a $335,727 nine-month expense from changes in the fair value of Purnovate contingent consideration, which is based on Level 3 estimates. It also recognized $29,088 of other income when Purnovate’s PPP loan was forgiven.
- Management reported material weaknesses in internal controls, including inadequate documentation and review procedures, insufficient GAAP expertise for complex reporting, and insufficient staffing for segregation of duties. It concluded disclosure controls were not effective as of September 30, 2021.
- The company reported no pending legal actions with a material adverse effect. It has incurred losses since inception and cautioned that clinical, regulatory, financing, manufacturing, safety and market risks could materially affect results.
Important facts for investors to verify
- Whether AD04 patient dosing and database lock are completed on schedule, and when trial results will be released.
- Whether current cash and projected spending are sufficient through database lock and the stated runway, particularly if trial costs or COVID-related delays increase.
- How and when Adial expects to fund the second Phase 3 trial and other development, and the potential dilution or financing terms.
- The clinical and regulatory prospects of AD04 and Purnovate programs, including long-term safety and the companion diagnostic strategy.
- Progress in remediating internal-control material weaknesses and the assumptions underlying Purnovate contingent consideration and related-party arrangements.