Adial Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Adial is a pre-revenue, clinical-stage biopharmaceutical company developing AD04 for alcohol use disorder (AUD). Its shares began trading on Nasdaq after its July 2018 IPO.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | No product revenue | No product revenue | No product revenue | No product revenue |
| Research and development | $188,435 | $27,797 | $320,838 | $130,136 |
| General and administrative | $160,173 | $160,737 | $507,727 | $408,656 |
| Equity-based compensation | $3,467,491 | $73,882 | $5,068,514 | $134,700 |
| Operating loss | $(3,816,099) | $(262,416) | $(5,897,079) | $(673,492) |
| Net loss | $(8,190,924) | $(292,626) | $(10,362,230) | $(735,464) |
| Net loss per share, basic and diluted | $(1.48) | $(0.09) | $(2.51) | $(0.23) |
At September 30, 2018, cash and cash equivalents were $4.82 million, working capital was $4.92 million, total assets were $5.25 million, and accumulated deficit was $10.77 million. Cash was $18,248 and working capital was negative $1.01 million at December 31, 2017. Nine-month operating cash use was $1.39 million; financing activities provided $6.19 million, primarily from the IPO. No meaningful operating margin is reported because the company has no product revenue.
IPO net proceeds are reported as $6.27 million in the cash flow statement and $6.30 million in other filing disclosures. The filing attributes the difference to how offering expenses are presented; investors should reconcile the amounts.
Changes and unusual items
- Nine-month net loss increased by $9.63 million year over year. Higher equity compensation, R&D costs, interest and financing charges, and debt-extinguishment losses drove the increase.
- Equity compensation included a $3.44 million charge for shares and warrants issued to employees and consultants at the IPO and a $1.46 million charge for stock issued to retire the performance bonus plan.
- The company recorded a $3.48 million loss on debt extinguishments for the nine months, largely related to repayment and settlement of secured notes in connection with the IPO. These charges and debt discount amortization materially increased reported losses.
- At September 30, current liabilities included a $138,603 net carrying amount for the June 2018 senior note, due March 2019 or earlier upon specified events. The note is secured by substantially all company assets, convertible at $2 per share, and includes a potential conversion-price reset.
- The IPO and related settlements substantially changed the capital structure: common shares outstanding increased from 3.27 million at year-end 2017 to approximately 6.56 million at September 30, 2018, with significant warrants also outstanding.
Outlook, risks, and other material matters
- Management said cash at the financial statement issuance date was expected to fund operations for at least 12 months, but would not fund completion of the planned first Phase 3 trial. The filing estimates approximately $7.0–$7.1 million to complete that trial, with at least $4.5 million of additional funding needed after expected IPO funding; it also estimates about $2.7 million of R&D spending over the next 12 months.
- Adial plans a Phase 3 trial of AD04 for AUD, but the filing says its clinical program was on hold pending a satisfactory FDA submission on chemistry, manufacturing, and controls (CMC); the submission had not yet been made. The license agreement identifies initiating Phase 3 by December 31, 2018 as an immediate milestone, with potential license-termination consequences if obligations are not met.
- Management expects at least two Phase 3 trials for approval; it estimates the second at approximately $20 million and says a third may be required in some circumstances. Additional financing, partnerships, grants, or licensing may be needed, and availability is uncertain. Failure to obtain funding could delay, scale back, or end development.
- Key development risks include failure to reproduce Phase 2 results, patient enrollment and genotype-screening challenges, regulatory or companion-diagnostic requirements, and the lack of comprehensive long-term safety data for ondansetron at the intended use. The FDA and EMA are not bound to accept anticipated endpoints or development plans.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2018, citing insufficient segregation of duties, limited GAAP expertise for complex transactions, and inadequately designed financial controls. Management said additional staff or consultants would be needed; remediation was not assured.
- The company reported no pending material legal proceedings and no off-balance-sheet arrangements. It disclosed approximately $4.3 million of cash held above federally insured limits.
- After quarter-end, on November 12, 2018, Adial exchanged 480,600 unit warrants for two warrant types; the filing says the exchange did not change fully diluted shares.
Important facts for investors to verify
- Reconcile the IPO net-proceeds figures ($6.27 million versus $6.30 million) and the estimated first-trial cost ($7.0 million versus $7.1 million).
- Confirm the status and timing of the FDA CMC submission, lifting of the clinical hold, Phase 3 initiation, and compliance with the December 31, 2018 license milestone.
- Assess the company’s ability to raise the additional funding required for the first trial and later trials, and review the June 2018 note’s secured, conversion, and dilution terms.
- Evaluate the scale and timing of clinical, regulatory, companion-diagnostic, enrollment, and long-term safety risks for AD04.
- Monitor remediation of the disclosed control weaknesses and verify share and warrant counts: the filing reports 6,556,248 shares in one equity statement, 6,556,249 in other disclosures, and substantial outstanding warrants.