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March 28, 2022, 4:43 p.m. EDT

10-K: ADIAL PHARMACEUTICALS, INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K. Our actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed by us with the Securities and Exchange Commission.

Overview

We are a clinical-stage biopharmaceutical company focused on the development of therapeutics for the treatment or prevention of addiction and related disorders. Our lead investigational new drug product, AD04, is being developed as a therapeutic agent for the treatment of alcohol use disorder ("AUD"). In January 2021, we expanded our portfolio in the field of addiction with the acquisition of Purnovate, LLC via a merger into our wholly owned subsidiary, Purnovate, Inc., ("Purnovate") and we continue to explore opportunities to expand our portfolio in the field of addiction and related disorders such as pain reduction, both through internal development and through acquisitions. Our vision is to create the world's leading addiction focused pharmaceutical company. Additionally, we are using Purnovate's adenosine drug discovery and development platform to invent and develop novel chemical entities as drug candidates for large unmet medical needs with the intention of spinning off or licensing drug candidates and development programs not related to the field of addiction (see Purnovate and the Adenosine Platform below).

We have devoted substantially all of our resources to development efforts relating to AD04, including preparation for conducting clinical trials, providing general and administrative support for these operations and protecting our intellectual property. We currently do not have any products approved for sale and we have not generated any significant revenue since our inception. From our inception through the date of this Annual Report on Form 10-K, we have funded our operations primarily through the private and public placements of debt and equity securities and an equity line.

We have incurred net losses in each year since our inception, including net losses of approximately $19.4 million and $10.9 million for the years ended December 31, 2021 and 2020. We had accumulated deficits of approximately $50.9 and $31.5 million as of December 31, 2021 and 2020, respectively. Substantially all our operating losses resulted from costs incurred in connection with our research and development programs, from general and administrative costs associated with our operations, and from financing costs.

We will not generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for AD04, which we expect will take a number of years and is subject to significant uncertainty. We do not believe our current cash and equivalents will be sufficient to fund our operations for the next twelve months from the filing of these financial statements, because we have incurred various expenses related to adding personnel and other corporate resources and experienced delays in certain countries in obtaining regulatory approval required to commence the trial in such countries due to COVID-19, resulting in significantly slowed trial enrollment and additional expense. We expect that we will need additional funding to complete our first Phase 3 clinical trial.

Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop AD04.

Clinical Trials - Research and Development Schedule

We currently anticipate that we, working in collaboration with our vendors, upon execution of collaborative research and development agreements with them, will be able to execute the following timeline:

AD04 - Two-Stage Clinical Development Strategy - Conduct the Phase 3 clinical trials sequentially

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* Even if the 1st Phase 3 trial is not accepted by the FDA due to the study not being well-powered for the FDA's currently stated end point, we still expect that the EMA will require only one additional trial. In this case, however, a 3rd trial might be required by the FDA (i.e., three Phase 3 trials in total). If two additional trials are required for FDA approval after an initial Phase 3 trial conducted in the EMA, we would expect to run the 2nd and 3rd trials in parallel (i.e., at the same time) so as not to increase the expected time to approval. The 2nd Phase 3 trial is expected to require $20 million in direct expenses, and up to $10 million in additional other development expenses is expected to be required. A possible 3rd Phase 3 trial would be expected to require an additional $20 million in clinical trial related expenditures.

We have completed the patient phase of our initial Phase 3 trial, the ONWARD(TM) pivotal Phase 3 clinical trial using AD04 for the potential treatment of AUD in subjects with certain target genotypes, and the ONWARD trial data is expected to be unblinded and analyzed in the second quarter of 2022. We current estimate the total cost to complete the ONWARD trial to be approximately $11.0 million (versus a previous estimate of $8.8 million), of which approximately $8.9 million has already been incurred or been pre-paid, leaving approximately $2.1 million in direct trial expenses that we will be required to pay in the future. This estimate is subject to many factors, some of which are beyond our control. These factors include, but are not limited to, the following:

? the progress and cost of our research and development activities;

? the number and scope of our research and development programs;

? the progress and cost of our preclinical and clinical development activities;

? our ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements;

? our ability to achieve our milestones under licensing arrangements;

? the costs involved in prosecuting and enforcing patent claims and other intellectual property rights;

? the costs and timing of regulatory approvals;

? The impact of COVID-19 on our ability to timely enroll patients in our Phase 3clinical trial and obtain regulatory approvals; and

? changes in the value of the Euro relative to the US Dollar.

Additional funds are expected to be raised through grants, partnerships with other pharmaceutical companies or through additional debt or equity financings, including pursuant to the terms of our equity line. We expect the second Phase 3 Trial to cost approximately $20 million, such estimate subject to the factors stated above.

As we advance our clinical programs, we are in close contact with our CROs and clinical sites and are assessing the impact of COVID-19 on our studies and current timelines and costs.

2021 Financing Developments

On November 18, 2020, we entered into a purchase agreement (the "Purchase Agreement") and a registration rights agreement (the "Registration Rights Agreement") with Keystone Capital. Pursuant to the Purchase Agreement, we have the right to sell Keystone Capital the lesser of (i) $15,000,000 in shares of our common stock and (ii) the number of shares of common stock equal to the Exchange Cap (as defined below), subject to certain limitations and conditions set forth in the Purchase Agreement, including a closing market price of Adial stock of greater than $1.00 on the business day sales under the agreement are made. The purchase price of the shares of our common stock that may be sold to Keystone Capital under the Purchase Agreement will be based on the market price of our common stock at the time of sale as computed under the Purchase Agreement. specifically, the purchase price per share of the common stock that may be sold to Keystone Capital under the Purchase Agreement is such fixed purchases equal ninety percent (90%) of the arithmetic average of the closing sale prices of our common stock during the five (5) consecutive trading-day period ending on the fixed purchase date for the fixed purchase, so long as the common stock is listed on Nasdaq or any nationally recognized successor thereto (to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction that occurs on or after the date of this Purchase Agreement). There is no upper limit on the price per share that Keystone Capital could be obligated to pay for the common stock under the Purchase Agreement.

Under the applicable rules of the Nasdaq Stock Market LLC ("Nasdaq"), in no event may we issue more than 2,842,198 shares of our common stock to Keystone Capital under the Purchase Agreement (including 175,000 shares of our common stock that we issued to Keystone Capital upon execution of the Purchase Agreement, the cost of which issuance was capitalized as a cost of equity), which represents 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Purchase Agreement (the "Exchange Cap"), unless (i) we obtain stockholder approval to issue shares of our common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of common stock to Keystone Capital under the Purchase Agreement equals or exceeds $1.8222, which represents the lower of (i) the Nasdaq official closing price immediately preceding the execution of the Purchase Agreement and (ii) the average of the five Nasdaq official closing prices for the common stock immediately preceding the execution of the Purchase Agreement, plus an incremental amount such that the transactions contemplated by the Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules. In any event, the Purchase Agreement specifically provides that we may not issue or sell any shares of our Common Stock under the Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of the Nasdaq. The Company has also limited the aggregate number of shares of common stock reserved for issuance under the Purchase Agreement to 15,000,000 shares without subsequent approval from our board of directors.

Pursuant to the terms of the Registration Rights Agreement, we agreed to file with the SEC one or more registration statements on Form S-1 to register for resale under the Securities Act the shares of our common stock that may be issued to Keystone Capital under the Purchase Agreement, including the commitment shares that we issued to Keystone Capital. The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, conditions and indemnification obligations of the parties. The registration statement registering such shares of common stock was declared effective on December 15, 2020. During the year ended December 31, 2021, we sold 1,645,907 shares of our common stock for gross proceeds of $3,850,000 pursuant to the Purchase Agreement.

On March 11, 2021, we entered into a Securities Purchase Agreement (the "3-2021 Securities Purchase Agreements") with each of Keystone Capital Partners, LLC ("Keystone"), Bespoke Growth Partners, Inc. ("Bespoke"), a company controlled by Mark Peikin, our Chief Strategy Officer and entities controlled by James W. Newman, Jr., a member of our board of directors ("Newman" and collectively with Keystone and Bespoke the " 3-2021 Investors," and each a "3-2021Investor"), pursuant to which on March 11, 2021: (i) Keystone purchased 33,334 shares of our common stock and paid us $100,002 and agreed to purchase an additional 300,000 shares of our common stock upon the effectiveness of a registration statement registering the shares of common stock acquired and to be acquired (the "3-2021 Registration Statement"); (ii) Bespoke has purchased 33,337 shares of our common stock and paid us $100,011 and agreed to purchase an additional 300,000 shares of our common stock upon the effectiveness of the 3-2021 Registration Statement; and (iii) Newman has purchased 30,000 shares of our common stock and paid us $90,000. In connection with the 3-2021 Securities Purchase Agreements, we entered into Registration Rights Agreements, dated March 11, 2021 ("3-2021 Registration Rights Agreements"), with each of the 3-2021 Investors pursuant to which we are obligated to file a registration statement (the "3-2021 Registration Statement") with the SEC. Accordingly, we filed a Registration Statement with the SEC on April 20, 2021, which was declared effective May 26, 2021. On June 1, 2021, following the effectiveness of the registration statement on Form S-3 (File No. 333-255352) that we filed with the SEC on April 20, 2021 (the "3-2021 Registration Statement"), we closed the second tranche of our private offering of Common Stock pursuant to which: (i) Bespoke purchased 303,000 shares of the Company's common stock upon the effectiveness of the Registration Statement; and (ii) Keystone purchased 300,000 shares of the Company's common stock upon the effectiveness of the Registration Statement. The shares of common stock issued in the 2nd Tranche were priced at $3.00 per share of common stock for proceeds to the Company of $1,809,000. No warrants were issued and no brokers fees were incurred.

On July 6, 2021, we entered into an additional Securities Purchase Agreement), dated July 6, 2021 (the "7-2021 SPAs"), with three pre-existing investors for an aggregate investment of $5,000,000 in consideration of the purchase by such investors of an aggregate of 1,666,667 shares of our common stock at a purchase price of $3.00 per share. 7-2021 SPAs were entered with each of Bespoke Growth Partners, Inc. ("Bespoke"), a company controlled by Mark Peikin, our non-executive Chief Strategy Officer, Keystone Capital Partners, LLC ("Keystone"), and Richard Gilliam, a private investor ("Gilliam") (collectively, the "Investors," and each an "Investor"), pursuant to which on July 6,2021:

In connection with the 7-2021 SPAs, we entered into 7-2021 Registration Rights Agreements ("7-2021 RRAs"), dated July 6, 2021, with each of the Investors pursuant to which we are obligated to file a registration statement (the "7-2021 Registration Statement") with the U.S. Securities and Exchange Commission (the "SEC") within thirty (30) days following the date of the 7-2021 RRA, and use all commercially reasonable efforts to have the 7-2021 Registration Statement declared effective by the SEC within thirty (30) days after the 7-2021 Registration Statement is filed (or, in the event of a "full review" by the SEC, within sixty (60) days after the Registration Statement is filed). Accordingly, we filed a Registration Statement with the SEC on July 20, 2021, which was declared effective July 29, 2021. On August 3, 2021 and August 4, 2021, under the terms of the 7-2021 SPAs, following the effectiveness of the registration statement on Form S-3 (File No. 333-2258048) that was filed with the SEC on December 6, 2021 (i) Bespoke purchased 750,000 shares of our common stock for proceeds of $2,250,000; (ii) Keystone purchased 450,000 shares of our common stock for proceeds of $1,350,000; and (iii) Gilliam purchased 300,000 shares of our common stock for proceeds of $900,000.

The SPAs and the RRAs contain customary representations, warranties, conditions and indemnification obligations of the parties, which were made only for purposes of such SPAs and RRAs as of specific dates and solely for the benefit of the parties. The SPAs and RRAs may be subject to limitations agreed upon by the contracting parties.

On November 9, 2021 the Company entered into a Securities Purchase Agreement (the "11-9-2021 SPA") with Bespoke for sale of 200,000 shares of common stock at $4.00 per share for total proceeds of $800,000, of which 20,000 shares of Common Stock at a price of $4.00 per share were acquired in the first tranche of the private placement on such date. On December 17, 2021, following the effectiveness of the registration statement on Form S-3 (File No. 333-261509) that was filed with the SEC on December 6, 2021, we closed the second tranche of our private offering of common stock (the "2nd Tranche") pursuant to the 11-9-2021 SPA pursuant to which Bespoke purchased 180,000 shares of Common Stock upon the effectiveness of the Registration Statement at a price of $4.00 per share for gross proceeds to the Company of $720,000. As previously disclosed, on November 9, 2021, Bespoke purchased 20,000 shares of common stock at a price of $4.00 per share in the first tranche of the private placement. No warrants were issued and no brokers fees were incurred.

On the same day 205,556 options were exercised for total proceeds of $455,000.

On February 10, 2022, we entered into a securities purchase agreement (the "2022 Purchase Agreement") with an accredited institutional investor providing for the issuance of (i) 2,322,250 shares of Common Stock, (ii) pre-funded warrants (the "Pre-Funded Warrants") to purchase up to 1,865,000 shares of Common Stock (the "Pre-Funded Warrant Shares") with an exercise price of $0.001 per share, which Pre-Funded Warrants are to be issued in lieu of shares of Common Stock to ensure that the investor does not exceed certain beneficial ownership limitations, and

Acquisition of Purnovate, Inc.

On January 26, 2021, we closed the Acquisition contemplated by that Equity Purchase Agreement that we entered into on December 7, pursuant to which we purchased all of the outstanding membership interests of Purnovate from the members of Purnovate, such that after the Acquisition, Purnovate became our wholly owned subsidiary. Purnovate is a pre-clinical drug development company with a platform focused on developing drug candidates for non-opioid pain reduction and other diseases and disorders potentially targeted with adenosine analogs that are selective, potent, stable, and soluble. Prior to the acquisition, our CEO and a Director owned equity in Purnovate and the transaction was considered to be one with a related party.

Recent Developments

On February 24, 2022, we provided the following highlighted updates on our landmark ONWARD pivotal Phase 3 clinical trial of AD04 for the treatment of AUD

? All subjects have completed dosing in the ONWARD trial

? 302 subjects were enrolled in the ONWARD trial; this exceeded the 290 subjects targeted for enrollment

? Subjects were enrolled across 25 clinical sites in six countries.

Results of operations for the years ended December 31, 2021 and 2020 (rounded to nearest thousand)

The following table sets forth the components of our statements of operations in dollars for the periods presented:







                                                                   For the Year Ended
                                                                      December 31,                  Change
                                                                 2021              2020           (Decrease)
        Research and development expenses                    $   8,396,000         5,853,000        2,543,000
        General and administrative expenses                      9,345,000         5,075,000        4,270,000
        Impairment expenses                                      1,548,000                 -        1,548,000
        Total Operating Expenses                                19,289,000        10,928,000        8,361,000
        Loss From Operations                                   (19,289,000 )     (10,928,000 )     (8,361,000 )
        Interest income                                              7,000            32,000          (25,000 )
        Change in value of contingent liability                   (282,000 )               -         (282,000 )
        Other Income                                                46,000             3,000           43,000
        Total other expenses                                      (229,000 )          35,000         (264,000 )
        Net Loss before provision for income taxes             (19,518,000 )     (10,893,000 )     (8,625,000 )
        Income tax benefit                                          94,000                 -           94,000
        Net loss                                               (19,424,000 )     (10,893,000 )     (8,531,000 )
        


Research and development ("R&D") expenses

Research and development costs increased by approximately $2,543,000 (43%) during the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was due primarily to large increases in trial costs (approximately $1,402,000) with the trial experiencing peak enrollment during the period with an increased number of patients and an increased number of clinical sites, while during 2020 trial enrollment was ramping up. Drug product manufacturing costs also increase by approximately $113,000 with substantial increases in distribution costs of study drug product with increased enrollment. Compensation of research and development employees increased by approximately $648,000, reflecting increased research and development headcount for employees devoted to both AD04 development and newly acquired Purnovate projects. Direct costs of Purnovate research and development also added approximately $271,000 in total research and development costs.

General and administrative expenses

General and administrative expenses increased by approximately $4,270,000 (84%) during the year ended December 31, 2021, as compared to the year ended December 31, 2020. This increase was largely due to substantial increases in general and administrative salaries (approximately $1,073,000) with increased headcounts and increase non-cash general and administrative equity compensation expense of approximately $2,073,000 due to both increase headcounts and increased use of strategic consultants. The year ended December 31, 2021 also saw a substantial increase of approximately $789,000 in combined public relations and business development expense and approximately $170,000 increase in legal expenses as compared to the year ended December 31, 2020. The remainder of the increase resulted from smaller increases in general and administrative expenses increased generally across most categories with the growth of the Company.

Change in Impairment Charges

Impairment charges increased by 1,548,000 in the year ended December 31, 2021 from zero in the year ended December 31 2020. This is entirely due to the impairment of a library of chemical supplies asset acquired as part of the purchase of the Company's Purnovate subsidiary in January of 2021. The Company judged the library of chemical supplies to be useful in Purnovate's ongoing R&D projects, particularly its non-opioid pain project, and booked a portion of its replacement value as an asset. However, subsequent research projects have resulted in next-generation compounds with superior properties and for which the chemical library is unlikely to be useful. As a result of the library having been rendered obsolete, the Company determined the asset to be wholly impaired and recognized a one-time, non-cash charge of the previously recognized book value.

Change in Fair Value of Contingent Consideration

For the year ended December 31, 2021 the change in fair value of contingent consideration liability associated with the Purnovate business combination was an expense of approximately $282,000. The change in the fair value of contingent consideration will fluctuate based on the timing of recognition of changes in the probability of achieving contingent milestones, the expected timing of milestone payments in connection with previous acquisitions and the discount rates used to calculate fair value. For the year ended December 31, 2021, the expense on changes in the fair value of contingent consideration reflected changes in the expected timing of achieving contingent milestone payments and the interest component of contingent consideration related to the passage of time.

Other income (expenses)

Excluding the change in fair value of the contingent consideration, total other income increased by approximately $18,000 (51%) in the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was due largely to the substantial declines in returns available through the global money markets in which the Company invests its working capital, but which were more than offset by the gain realized on forgiveness of our PPP loan.

Income Tax Benefit

Benefit from deferred taxes increased by approximately $94,000 in the year ended December 31, 2021 compared to the year ended December 31, 2020. The benefit from deferred taxes was entirely the result of taxes deferred through the purchase of Purnovate, an event which took place in the year ended December 31, 2021.

Liquidity and Capital Resources

Overview

Our principal liquidity needs have historically been working capital, R&D, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we develop and eventually commercialize our compound, if approved. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate and as we further develop product candidates acquired from Purnovate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, private placements and our equity line, as well as other equity financings and the issuance of debt securities prior to that. On July 31, 2018, we closed our initial public offering.

During the year ended December 31, 2021, our primary sources of funding were private placement financings, proceeds of shares sold pursuant to our equity line with Keystone and proceeds from the exercise of warrants.

On February 8, 2021, option to purchase 10,000 shares of common stock at an exercise price of $1.45 per share was exercised for total proceeds of $14,500.

. . .

Mar 28, 2022

COMTEX_404902917/2041/2022-03-28T16:42:43

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