Part I [Business](index=4&type=section&id=Item%201.%20Business) Adial Pharmaceuticals is a clinical-stage biopharmaceutical company developing AD04, a genetically targeted therapeutic for Alcohol Use Disorder [Overview and Strategy](index=4&type=section&id=Overview%20and%20Strategy) - Adial is a clinical-stage biopharmaceutical company focused on developing AD04, a therapeutic agent using ondansetron for Alcohol Use Disorder (AUD), targeted at patients with specific genotypes[6](index=6&type=chunk) - The company holds an exclusive worldwide license from the University of Virginia Patent Foundation (UVA LVG) for AD04, supported by patents in over 40 jurisdictions[7](index=7&type=chunk) - The business strategy involves a two-stage clinical development plan, starting with a Phase 3 trial in Europe, followed by further trials for US and EU approval. The commercialization plan is also two-staged, beginning with a specialty sales force targeting psychiatrists, followed by a potential partnership with a larger pharmaceutical company[44](index=44&type=chunk)[45](index=45&type=chunk) - The total potential market for AD04 is estimated at approximately **$36 billion** in the United States alone, assuming one-third of the 35 million AUD patients are genotype positive[22](index=22&type=chunk) [Clinical Development and Results](index=14&type=section&id=Clinical%20Development%20and%20Results) - The lead product, AD04, is based on ondansetron, a 5-HT3 receptor antagonist. The scientific rationale is that blocking these receptors influences the dopamine reward system activated by alcohol, thereby reducing cravings[46](index=46&type=chunk)[50](index=50&type=chunk) Phase 2b Clinical Trial Efficacy Results for Target Genotypes | Endpoint | Result | Placebo Comparison | Statistical Significance (p-value) | | :--- | :--- | :--- | :--- | | **Primary:** Reduction in Severity of Drinking | 1.71 fewer drinks/drinking day | vs. P3-Genotype on Placebo | p=0.0042 | | **Secondary:** Reduction in Frequency of Drinking | 11.56% increase in days abstinent | vs. P3-Genotype on Placebo | p=0.0352 | | **Post Hoc:** Reduction in Heavy Drinking Days | 11.08% reduction | vs. P3-Genotype on Placebo | p=0.0445 | - The planned Phase 3 program will enroll only genotype-positive patients. The initial trial is planned for 294 patients in Scandinavia and Central/Eastern Europe. The FDA has indicated this trial design is acceptable but would result in labeling restricted to genotype-positive patients[90](index=90&type=chunk) - The company has met with the FDA's CDER and CDRH divisions, which have agreed on the evaluation pathway for the drug and its companion diagnostic test, respectively[92](index=92&type=chunk) [Intellectual Property and Competition](index=26&type=section&id=Intellectual%20Property%20and%20Competition) - The company has an exclusive license from UVA LVG for three patent families covering the use of ondansetron to treat AUD in patients with specified genotypes, with protection expected through **2032**[31](index=31&type=chunk)[94](index=94&type=chunk) - Adial believes the threat of "off-label" use of generic ondansetron (Zofran) is low due to the impracticality of dividing existing high-dose tablets, lack of efficacy data for high doses in AUD, and potential safety concerns with chronic high-dose use[100](index=100&type=chunk)[101](index=101&type=chunk)[103](index=103&type=chunk) - Any competitor attempting to market ondansetron at AD04's dosage for AUD would likely be seen as inducing infringement on Adial's licensed patents, as there is no other approved use for such a low dose[111](index=111&type=chunk)[112](index=112&type=chunk) [Government Regulation](index=29&type=section&id=Government%20Regulation) - The company is subject to extensive regulation by the FDA, governing research, development, testing, manufacturing, and marketing of pharmaceutical products[120](index=120&type=chunk) - Adial intends to submit a 505(b)(2) New Drug Application (NDA), which allows the FDA to rely on data not developed by the applicant, such as existing safety data for the approved drug Zofran (ondansetron)[30](index=30&type=chunk)[142](index=142&type=chunk) - The development of AD04 is dependent on the contemporaneous approval of a companion diagnostic test, which is regulated as a medical device by the FDA's Center for Devices and Radiological Health (CDRH)[139](index=139&type=chunk) - The company is also subject to various healthcare laws, including the Anti-Kickback Statute, False Claims Act, and the Physician Payments Sunshine Act, which regulate interactions with healthcare providers and programs[145](index=145&type=chunk)[146](index=146&type=chunk)[148](index=148&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including net losses, a going concern opinion, and dependence on financing for its sole product AD04's clinical trials - The company has a history of net losses, an accumulated deficit of approximately **$12.0 million** as of December 31, 2018, and does not expect to generate revenue or be profitable in the foreseeable future[179](index=179&type=chunk) - The independent registered public accounting firm has expressed substantial doubt about the company's ability to continue as a going concern due to recurring losses and the need for additional capital[184](index=184&type=chunk)[185](index=185&type=chunk) - The business is entirely dependent on the success of its single product candidate, AD04, and its licensed intellectual property from UVA LVG. Failure of AD04 or termination of the license would have a material adverse effect[191](index=191&type=chunk)[192](index=192&type=chunk) - Significant risks exist regarding clinical development, including the potential for Phase 3 trials to fail, regulatory agencies not accepting planned endpoints, and challenges in getting the companion diagnostic test approved[210](index=210&type=chunk)[215](index=215&type=chunk)[225](index=225&type=chunk) - Material weaknesses in internal control over financial reporting have been identified, including inadequate documentation, lack of proper review processes, insufficient GAAP experience, and poor segregation of duties[327](index=327&type=chunk) [Unresolved Staff Comments](index=84&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - Not applicable[370](index=370&type=chunk) [Properties](index=84&type=section&id=Item%202.%20Properties) The company does not own any real estate, operating from leased office and coworking spaces in Virginia and Hawaii - As of January 2, 2019, the company occupies approximately **250 square feet** of furnished workspace in Charlottesville, Virginia, under an office service agreement with a monthly rent of **$1,150**[371](index=371&type=chunk) [Legal Proceedings](index=84&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently subject to any material legal claims or actions expected to adversely affect its financial position - The company is not currently subject to any material legal proceedings[375](index=375&type=chunk) [Mine Safety Disclosures](index=85&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's business - Not applicable[376](index=376&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=85&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock and warrants began trading on NASDAQ in July 2018 following its IPO, raising **$6.3 million** in net proceeds - The company's common stock and warrants began trading on The NASDAQ Capital Market on **July 27, 2018**, under the symbols "ADIL" and "ADILW," respectively[376](index=376&type=chunk) - On **July 31, 2018**, the company closed its IPO, selling **1,464,000 units** at **$5.00 per unit**, raising aggregate net proceeds of **$6.3 million**[381](index=381&type=chunk) - The company has never paid dividends and does not intend to in the foreseeable future, planning to retain any earnings for business growth[377](index=377&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued upon Exercise of Outstanding Options | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 68,900 | $2.80 | 1,681,100 | [Selected Financial Data](index=89&type=section&id=Item%206.%20Selected%20Financial%20Data) This section is not applicable as the company qualifies as a smaller reporting company - The Company is a smaller reporting company and is not required to provide this information[403](index=403&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=89&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For 2018, the company's net loss significantly increased to **$11.6 million** from **$1.1 million** in 2017, driven by higher G&A expenses and debt extinguishment losses Results of Operations Comparison (2018 vs. 2017) | Line Item | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research and development expenses | $368,000 | $182,000 | $186,000 | 102% | | General and administrative expenses | $6,619,000 | $813,000 | $5,806,000 | 714% | | Loss From Operations | ($6,987,000) | ($995,000) | ($5,992,000) | 602% | | Loss on debt extinguishments | ($3,485,000) | $0 | ($3,485,000) | N/A | | **Net Loss** | **($11,632,000)** | **($1,139,000)** | **($10,493,000)** | **921%** | - The increase in G&A expenses was primarily due to **$5.1 million** in equity compensation expense, including stock issued to cancel a performance bonus plan and stock/warrants issued to consultants[425](index=425&type=chunk) - As of **December 31, 2018**, the company had **$3.9 million** in cash and cash equivalents. Management states this is not sufficient to fund operations for the next **12 months**, with existing cash expected to be exhausted by the end of **Q3 2019**[428](index=428&type=chunk)[435](index=435&type=chunk) - The company estimates it will require an additional **$4.5 million** to complete its initial Phase 3 clinical trial, which has a total estimated direct cost of **$7.5 million**[435](index=435&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=103&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not applicable as the company qualifies as a smaller reporting company - The Company is a smaller reporting company and is not required to provide this information[473](index=473&type=chunk) [Financial Statements and Supplementary Data](index=104&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Audited financial statements for 2018 and 2017 are presented, with the auditor's report highlighting a "Going Concern" due to accumulated deficit and recurring losses - The independent auditor's report contains a "Going Concern" paragraph, citing the company's accumulated deficit of **$12.0 million** as of **December 31, 2018**, recurring losses, and net working capital deficiency[479](index=479&type=chunk) Key Balance Sheet Data (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,869,043 | $18,248 | | Total Current Assets | $4,692,550 | $27,248 | | Total Current Liabilities | $257,974 | $1,032,099 | | Total Stockholders' Equity (Deficit) | $4,441,311 | ($997,553) | Key Statement of Operations Data (Year Ended Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Total Operating Expenses | $6,987,222 | $995,286 | | Net Loss | ($11,631,378) | ($1,139,456) | | Net loss per share, basic and diluted | ($2.44) | ($0.35) | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=128&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[609](index=609&type=chunk) [Controls and Procedures](index=128&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2018, due to identified material weaknesses in internal control - Management concluded that the company's disclosure controls and procedures were ineffective as of the end of the period[610](index=610&type=chunk) - Material weaknesses in internal control over financial reporting were identified, including: (i) inadequately documented policies, (ii) lack of proper approval/review processes, (iii) insufficient GAAP experience, and (iv) insufficient staff for segregation of duties[612](index=612&type=chunk) [Other Information](index=128&type=section&id=Item%209B.%20Other%20Information) There is no other information to report in this section - None[615](index=615&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=129&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company's board consists of seven directors, five independent, with staggered terms, and has established key governance committees - The board of directors consists of **seven members**, with a classified structure where directors serve staggered **three-year terms**[616](index=616&type=chunk) - The key executive officers are William B. Stilley, III (CEO & President) and Joseph Truluck (COO & CFO). Dr. Bankole A. Johnson serves as Chairman of the Board[618](index=618&type=chunk) - The board has determined that **five of its seven directors** are independent under NASDAQ and SEC rules. It has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee[640](index=640&type=chunk)[642](index=642&type=chunk) [Executive Compensation](index=138&type=section&id=Item%2011.%20Executive%20Compensation) Total compensation for CEO William B. Stilley in 2018 was approximately **$1.2 million**, with a significant portion in stock awards, and the report details employment agreements Summary Compensation Table (2018) | Name and Principal Position | Salary | Stock & Option Awards | All Other Compensation | Total | | :--- | :--- | :--- | :--- | :--- | | William B. Stilley (CEO) | $180,833 | $988,365 | $42,458 | $1,211,656 | | Joseph A. M. Truluck (COO/CFO) | $85,183 | $223,180 | - | $308,363 | - The company has employment agreements with its CEO and COO/CFO, effective upon the IPO closing, with base salaries of **$350,000** and **$143,000** (for 50% time commitment), respectively[661](index=661&type=chunk)[662](index=662&type=chunk) - Non-employee directors receive annual cash compensation, with retainers for board membership (**$20,000**), committee membership (**$3,000-$6,000**), and committee chairmanship (**$7,000-$15,000**)[687](index=687&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=146&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of February 13, 2019, the company's directors and executive officers as a group beneficially owned approximately **52.94%** of the outstanding common stock, indicating significant insider control Beneficial Ownership (as of Feb 13, 2019) | Name / Group | Percentage Ownership | | :--- | :--- | | All current executive officers and directors as a group | 52.94% | | Bankole Johnson, DSc, MD (Chairman) | 20.32% | | Kevin Schuyler, CFA (Director) | 17.61% | | William B. Stilley, III (CEO) | 12.47% | | James W. Newman, Jr. (Director) | 8.92% | | Becker Specialty Corporation (>5% Shareholder) | 7.04% | [Certain Relationships and Related Transactions, and Director Independence](index=150&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company discloses several related-party transactions, primarily involving its directors and executive officers, including pre-IPO financing and stock grants for a bonus plan retirement - The company engaged in multiple financing transactions with directors and officers prior to the IPO, including the issuance of Subordinated Notes and Senior Notes[709](index=709&type=chunk)[710](index=710&type=chunk) - On **January 29, 2018**, the company entered into a Medical Translation Services Agreement with a firm controlled by Chairman Dr. Bankole Johnson, involving cash payments of **$68,540** and the issuance of **40,463 shares** of common stock[711](index=711&type=chunk) - On **April 1, 2018**, the company retired its Performance Bonus Plan by issuing restricted common stock to CEO William Stilley (**197,673 shares**), Chairman Bankole Johnson (**50,000 shares**), and COO/CFO Joseph Truluck (**44,636 shares**)[714](index=714&type=chunk) - Several directors, officers, and their affiliates participated significantly in the company's Initial Public Offering[715](index=715&type=chunk)[716](index=716&type=chunk) [Principal Accountant Fees and Services](index=154&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Friedman LLP served as the independent auditor, with total fees of **$146,500** for 2018 and **$118,418** for 2017, consisting entirely of audit fees Auditor Fees | Fee Category | 2018 | 2017 | | :--- | :--- | :--- | | Audit fees and expenses | $146,500 | $118,418 | | All other fees | $0 | $0 | | **Total** | **$146,500** | **$118,418** | Part IV [Exhibits and Financial Statement Schedules](index=156&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements included in Item 8 and provides a comprehensive list of all exhibits filed with the Form 10-K - This section contains a list of all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K[724](index=724&type=chunk)[725](index=725&type=chunk) [Form 10-K Summary](index=162&type=section&id=Item%2016.%20Form%2010-K%20Summary) This section is not applicable to the company - Not applicable[732](index=732&type=chunk)