Business context and reporting period
Adial Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company with no approved products or product-sales revenue. This Form 10-K reports the fiscal year ended December 31, 2018, with 2017 as the comparable period; it does not provide standalone fourth-quarter results.
The company is developing AD04, an ultra-low-dose oral formulation of ondansetron, for alcohol use disorder (AUD) in patients selected through a genetic test. Its planned next step was a Phase 3 trial in Europe. Adial’s common stock began trading on Nasdaq in July 2018.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Product revenue | None | None |
| Research and development expense | $368,459 | $182,107 |
| General and administrative expense | $6,618,763 | $813,179 |
| Total operating expenses / operating loss | $6,987,222 / ($6,987,222) | $995,286 / ($995,286) |
| Net loss | ($11,631,378) | ($1,139,456) |
| Basic and diluted loss per share | ($2.44) | ($0.35) |
| Cash used in operating activities | ($2,498,387) | ($494,862) |
| Cash and cash equivalents at year-end | $3,869,043 | $18,248 |
| Working capital at year-end | $4,434,576 | ($1,004,851) |
| Total liabilities at year-end | $257,974 | $1,032,099 |
Operating margins are not meaningful because the company reported no product revenue. The 2018 net loss included $3.48 million of loss on debt extinguishments, $1.17 million of interest and financing charges, and $5.37 million of equity-based compensation. G&A expense rose sharply, primarily reflecting equity compensation, including stock and warrants issued in connection with the IPO, debt settlements, consulting services, and retirement of the performance bonus plan.
Financing activities provided $6.35 million in 2018, principally from the IPO; investing activities provided no cash. The IPO generated approximately $6.27 million net proceeds. The company repaid or converted several debt obligations during the year; its balance sheet showed no notes payable at December 31, 2018, with accounts payable and accrued expenses of $257,974.
The company had an accumulated deficit of $12.04 million at year-end. Its cash balance included approximately $3.4 million above FDIC-insured limits. The filing reports no off-balance-sheet arrangements.
Material changes versus 2017
- Net loss increased to $11.63 million from $1.14 million, while operating expenses increased to $6.99 million from $995,286.
- G&A expense increased by approximately $5.81 million; equity-based compensation accounted for most of the increase. R&D expense approximately doubled as clinical-development preparation increased.
- Operating cash use rose to $2.50 million from $495,000. IPO proceeds and other financing lifted year-end cash from $18,248 to $3.87 million and working capital from a deficit to a surplus.
- In July, the company completed its IPO, issuing 1,464,000 units at $5.00 per unit and receiving approximately $6.3 million in net proceeds. Certain debt was repaid, and convertible notes converted into equity.
Outlook, risks and unusual items
- Funding and going concern: The auditor expressed substantial doubt about Adial’s ability to continue as a going concern. Management estimated that existing cash could be exhausted by the end of the third quarter of 2019 without additional funding. The company estimated it needed a further $4.5 million to complete the initial Phase 3 trial, whose direct cost was projected at $7.5 million; a second Phase 3 trial was estimated at $20 million, with up to $10 million in additional development costs. No additional financing was committed in the filing.
- Clinical and regulatory outlook: The company planned a 24-week, 294-patient Phase 3 trial in Scandinavia and Central and Eastern Europe. It expected at least one additional Phase 3 trial for approval and said a third might be required for U.S. approval. Trial results, enrollment, endpoint definitions, long-term safety, regulatory acceptance, and companion-diagnostic validation remain uncertain.
- Phase 2b evidence: In a 283-patient study, the targeted-genotype group showed reductions versus placebo of 1.71 drinks per drinking day (p=0.0042), an 11.56 percentage-point improvement in percentage of days abstinent (p=0.0352), and an 11.08 percentage-point reduction in heavy-drinking days (p=0.0445). The heavy-drinking-days analysis was post hoc; parts of the target genetic panel were identified through retrospective analyses. Phase 3 outcomes may not replicate these findings.
- Safety: Adial stated that comprehensive long-term safety data for ondansetron at the anticipated chronic-use regimen were not available. The filing describes known cardiovascular/QT concerns with higher doses and acknowledges that long-term safety, labeling, or regulatory requirements could affect development.
- License and trial commitments: Adial’s exclusive UVA license includes milestone obligations, including initiating a Phase 3 trial by December 31, 2019, and deadlines for NDA submission and commercialization. Failure to meet obligations or make required payments could put the license at risk. A clinical research agreement with Crown CRO estimated about $3.4 million in CRO fees plus approximately $2.5 million in pass-through costs.
- Controls: Management concluded disclosure controls were ineffective and identified material weaknesses involving documentation, approvals and review, GAAP expertise, and staffing/segregation of duties. The auditor did not audit internal-control effectiveness.
- Potential dilution and governance: At December 31, 2018, 5,054,759 warrants and 243,182 options were outstanding. The filing also reports concentrated insider ownership and related-party financing and service transactions.
Important facts for investors to verify
- Whether Adial subsequently secured sufficient funding to complete Phase 3 and whether its cash-runway assumptions changed.
- Whether the planned European trial began on schedule, enrolled adequately, and met agreed EMA and FDA endpoints; also whether additional trials or safety studies were required.
- The progress and regulatory pathway for the companion diagnostic, including whether separate device authorization is required.
- The status of the UVA license milestones, minimum royalties, and any potential termination or amendment.
- The auditor’s going-concern statement refers to a “net working capital deficiency,” although the balance sheet shows positive working capital of approximately $4.43 million for 2018. Reconcile this apparent inconsistency with the audited statements and notes.
- The scale and terms of potential dilution from outstanding warrants, options, future equity issuance, and financing arrangements.