UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJune 30, 20182021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number:001-38323

ADIAL PHARMACEUTICALS, INC.

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)

1180 Seminole Trail, Suite 495
          Charlottesville VA 22902

(434) 422-9800

(Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of principal executive offices) (Zip Code)the Act:

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☐☒  No ☒ Registrant became subject to such filing requirements on July 26, 2018.☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes☐  No☒

Number of shares of common stock outstanding as of September 6, 2018August 12, 2021 was 6,556,249.20,298,156.

ADIAL PHARMACEUTICALS, INC.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” ‘‘targets,“targets,” “projects,” “contemplates,” ‘‘believes,“believes,” “seeks,” “goals,” “estimates,” ‘‘predicts,“predicts,” ‘‘potential”“potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item lA. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.10-Q and those risks identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2021 (“2020 Form 10-K”). Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “Adial,” the “Company,” “we,” “us” and “our” refer to Adial Pharmaceuticals, Inc.

FORM 10-Q

TABLE OF CONTENTS

PART I—I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Unaudited Financial Statements.Statements

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT SHAREHOLDERS’ EQUITY

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ADIAL PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1 — DESCRIPTION OF BUSINESS

Adial Pharmaceuticals, Inc. (the “Company” or “Adial”) was converted from a limited liability company formed under the name ADial Pharmaceuticals, LLC, formed on November 23, 2010 in the Commonwealth of Virginia to a corporation and reincorporated in Delaware on October 1, 2017 from ADial Pharmaceuticals, LLC, which was formed on November 23, 2010 in the Commonwealth of Virginia.2017. Adial is presently engaged in the development of medications for the treatment of addictions and related disorders.

The Company is planning to commencehas commenced its first Phase 3 clinical trial of its lead compound AD04 (“AD04”) for the treatment of alcohol use disorder as the necessary funding becomes available (Note 2).disorder. Both the U.S. Food and Drug Administration (“FDA”) and the European Medicines Authority (“EMA”) have indicated they will accept heavy-drinking-based endpoints as a basis for approval for the treatment of alcohol use disorder rather than the previously required abstinence-based endpoints. Key patents have been issued in the United States, the European Union, and other jurisdictions for which the Company has exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist. Due to its mechanism of action, AD04 has the potential to be used for the treatment of other addictive disorders, such as opioid use disorder, obesity, smoking, and other drug addiction.addictions.

The Company’s wholly owned subsidiary, Purnovate, Inc., was acquired on January 26, 2021, having been formed as Purnovate, LLC in December of 2019. Purnovate is a 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.

2 — LIQUIDITY AND OTHER UNCERTAINTIES

The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred losses each year since inception and has experienced negative cash flows from operations in each year since inception and has an accumulated deficit of approximately $40.8 million as of June 30, 2021. Based on the current development plans for AD04 in both the U.S. and international markets and other operating requirements, the Company believes that the existing cash and equivalents are sufficient to fund operations, including the Company’s ongoing trial of its lead compound AD04 as well as a number of additional, discretionary research and development projects, for at least the next twelve months following the filing of these unaudited condensed financial statements and through the third quarter of 2022.

Due to the COVID-19 pandemic, during the first three quarters of 2020, the Company experienced delays in certain countries in obtaining regulatory approval required to commence the trial in such countries, resulting in significantly slowed trial enrollment (see Other Uncertainties below). Enrollment has since improved, though enrollment in higher cost sites in Scandinavia have recovered more quickly than in lower cost sites in Central and Eastern Europe. The Company presently projects completion of its Phase 3 clinical trial in the first quarter of 2022. There continues to be uncertainties regarding the potential impact of COVID-19 on our clinical trial and the associated cash projections. While the Company’s current estimates include the overhead costs necessary to support operations during the remaining trial period and other costs increases associated with conducting trial activities impacted by the pandemic, additional delays and cost increases could add to those estimates.

2

The Company’s cash on hand at the filing date is estimated to be sufficient to fund operations to achieve database lock. In addition, the Company has an active equity purchase agreement (See Note 10) with Keystone Capital, LLC, which allows the sale of up to $15 million of securities, which amount, if fully accessible, would be sufficient to fund the Company’s operations for an additional period if completion of the trial is delayed or if costs increase. Under this equity purchase agreement, $3.85 million has already been raised as of this filing. However, there can be no guarantee that the Company will meet the conditions to use the equity line and, without access to this equity line and/or additional funding, which may not be available on acceptable terms or at all, in which case significant delays or cost increases may result in material disruption to the Company’s operations. Moreover, a trial delay or cost increase may be of greater magnitude than can be offset by the funds available through the equity line. In either of these cases the Company would be required to delay, scale back or eliminate some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial statements.

The Company’s continued operations will depend on its ability to raise additional capital through various potential sources, such as equity and/or debt financings, grant funding, strategic relationships, or out-licensing in order to complete its subsequent clinical trial requirements for its lead compound, AD04. Management is actively pursuing financing and other strategic plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all. Without additional funding, the Company would be required to delay, scale back or eliminate some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial statements.

Other Uncertainties

Generally, the industry in which the Company operates subjects the Company to a number of other risks and uncertainties that can affect its operating results and financial condition. Such factors include, but are not limited to: the timing, costs and results of clinical trials and other development activities versus expectations; the ability to obtain regulatory approval to market product candidates; the ability to manufacture products successfully; competition from products sold or being developed by other companies; the price of, and demand for, Company products once approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.

The Company also faces the ongoing risk that the coronavirus pandemic may further slow, for an unforeseeable period, the conduct of the Company’s trial. The effects of the ongoing coronavirus pandemic may also increase non-trial costs such as insurance premiums, increase the demand for and cost of capital, increase loss of work time from key personnel, and negatively impact our key clinical trial vendors and supplier of our active pharmaceutical ingredient. The full extent to which the COVID-19 pandemic impacts the clinical development of AD04, the Company’s suppliers and other commercial partners, will depend on future developments that are still highly uncertain and cannot be predicted with confidence at this time, all of which could have a material adverse effect on our business, financial condition, and results of operations.

3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principals of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inGAAP as determined by the United States of AmericaFinancial Accounting Standards Board (“GAAP”FASB”) Accounting Standards Codification (“ASC”) for interim financial information. Accordingly, they do not include all of the information and with the instructionsfootnotes required by GAAP for Form 10-Q and Article 8 of Regulation S-X.complete financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting ofwhich include only normal recurring adjustments considered necessary for athe fair presentationstatement of such interim results.the balances and results of operations for the periods presented. The interim operating results are not necessarily indicative of results that may be expected for any subsequent period. These unaudited condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017,2020, included in the Rule 424(b)(4) ProspectusAnnual Report on Form 10-K filed on July 30, 2018.

Liquidity and Uncertainties

March 22, 2021. The Company’s management has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt as to their ability to continue as a going concern for at least one year after theunaudited condensed consolidated financial statements are issued. The Company continues to be inrepresent the pre-revenue development stage and is in the processconsolidation of planning and executing a Phase 3 clinical trial. As of June 30, 2018, the Company had an accumulated deficit of approximately $2.6 million (net of reclassification ofand its accumulated deficit prior to reincorporation of approximately $10.7 million to Additional paidsubsidiary in capital on reincorporation), and has incurred net losses of approximately $2.2 million and $443,000 for the six months ended June 30, 2018 and fiscal year ended December 31, 2017, respectively, as well as annual losses since inception. Subsequent to quarter end the Company raised $6.3 millionconformity with GAAP. All intercompany transactions have been eliminated in an initial public offering (IPO), net of offering expenses. As of the financial statement issuance, the Company has cash on hand of approximately $5.0 million after repayment of obligations triggered by the IPO and other operating expenses. Based on the current development plans for AD04 in both the U.S. and foreign markets and the Company’s other operating requirements, the existing cash at the financial statement issue date will be sufficient to fund operations for at least the next twelve months following that date. However, it is not expected that the existing cash at the financial statement issue date will be sufficient to complete the planned Phase 3 clinical trial of AD04.consolidation.

The Company’s ability to complete its ongoing research and development efforts and the planned Phase 3 clinical trial will depend on its ability to raise additional capital through equity and/or debt financings, strategic relationships, or out-licensing of its products. As the Company continues its research and development effort, it will pursue financing beyond the IPO. There are no assurances that such financings or strategic relationships will be available or, if available, successful. Without additional funding, management would be required to delay, scale back or eliminate some or all of its research and development which would likely have a material adverse effect on the Company.

Generally, the Company’s operations are also subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s product candidates; the ability to obtain regulatory approval to market the Company’s products; the ability to manufacture the Company’s products successfully; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, Company products; ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products; as well as the aforementioned ability to raise capital during its development stage.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to but not limited to, share based compensation, derivativedisclosure of contingent liabilities fair value measurements, intangible assets useful life, and contingent liabilities. The Company bases its estimates on historical experience and other market specific assumptions that it believes to be reasonable underat the circumstances. Accounting estimates used indate of the preparation of these financial statements, may change as new events occur, as more experience is acquired, or as additional information is obtained.and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant items subject to such estimates and assumptions include the valuation of stock-based compensation, accruals associated with third party providers supporting clinical trials, estimated fair values of long-lived assets used to record impairment charges related to intangible assets, acquired in-process research and development (“IPR&D”) and goodwill, allocation of purchase price in business acquisitions, measurement of contingent liabilities, and income tax asset realization. In particular, the recognition of clinical trial costs is dependent on our own judgement, as well as the judgment of our contractors and subcontractors in their reporting of information to us.

Basic and Diluted Earnings (Loss) per Share

Basic and diluted earnings (loss) per share are computed based on the weighted-average outstanding shares of common stock, which are all voting shares. For purposes of these statements, the conversion of units into common shares associated with the reorganization of ADial Pharmaceuticals, LLC into Adial Pharmaceuticals, Inc (see Note 8) on October 1, 2017 has been retroactively reflected for all periods presented.

Diluted net loss per share includes the potential dilutiveis computed giving effect to all proportional shares of common stock, including stock options and warrants to the extent dilutive. Basic net loss per share was the same as diluted net loss per share for the three and six months ended June 30, 2021 and 2020 as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.

The total potentially dilutive common shares that were excluded for the three and six month periods ended June 30, 2021, and 2020 were as follows: 

Fair Value Measurements

FASB ASC 820, Fair Value Measurement, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

The fair value of cash and cash equivalents, prepaid and other current assets, accounts payable and accrued liabilities approximate their carrying value due to their short-term maturities. The lease liability are presented at their carrying value, which based on borrowing rates currently available to the Company for leases with similar terms, approximate their fair values.

Non-financial assets, such as if such securitiesR&D supplies, IPR&D, and goodwill, are accounted for at fair value on a nonrecurring basis.

Acquisition-Related Contingent Consideration

In connection with the Purnovate business combination, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. The Company determines the fair value of these obligations using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. As of June 30, 2021, the resulting probability-weighted cash flows were converteddiscounted using a weighted average cost of capital of 43% for regulatory and sales-based milestones.

Business Combinations

The Company accounts for its business combinations under the provisions of Accounting Standards Codification (“ASC”) Topic 805-10, Business Combinations (“ASC 805-10”), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. For transactions that are business combinations, the Company evaluates the existence of goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. A fair value measurement is determined as the price the Company would receive to sell an asset or exercisedpay to transfer a liability in an orderly transaction between market participants at the measurement date. In the context of purchase accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The estimated fair values reflected in the purchase accounting are subject to management’s judgment.

Contingent Consideration

The Company records contingent consideration resulting from a business combination at fair value on the acquisition date. On a quarterly basis, the Company revalues these obligations and record increases or decreases in their fair value as an adjustment to operating expenses. Changes to contingent consideration obligations can result from adjustments to discount rates, accretion of the liability due to the passage of time, changes in our estimates of the likelihood or timing of achieving development or commercial milestones, changes in the probability of certain clinical events or changes in the assumed probability associated with regulatory approval.

Intangible Assets

Intangible assets generally consist of patents, purchased technology, acquired IPR&D and other intangibles. Intangible assets with definite lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment.

Intangible assets related to acquired IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a potential impairment. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.

Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. The Company is organized in one reporting unit and evaluates the goodwill for the Company as a whole. The Company reviews goodwill for impairment on a reporting unit basis annually during the period, whenfourth quarter of each year and whenever events or changes in circumstances indicate the effectcarrying value of goodwill might not be recoverable. Under the authoritative guidance issued by the FASB, the Company has the option to first assess the qualitative factors to determine whether it is dilutive. Common stock equivalents include  outstanding warrants and options which are included undermore likely than not that the “treasury stock method” when dilutive and common stock to be issued upon the assumed conversion of outstanding convertible notes, which are included under the “if converted method” when dilutive. Warrants to purchase approximately 782,555 common shares, shares to be issued upon exercise of 174,282 options outstanding, and 162,500 shares to be issued on voluntary conversionfair value of the June 2018 Senior Note were all excluded fromreporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If the computationCompany determines that it is more likely than not that the fair value of diluted earnings (loss) per sharea reporting unit is less than its carrying amount, then the goodwill impairment test is performed. The goodwill impairment test requires the Company to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, then no impairment is recognized. If the carrying amount recorded exceeds the fair value calculated, then an impairment charge is recognized for the difference. The judgments made in determining the projected cash flows used to estimate the fair value can materially impact the Company’s financial condition and results of operations. There was no impairment of goodwill for the six months ended June 30, 20182021.

Leases

The Company determines if an arrangement is a lease at inception and 2017, because their effect on the loss per sharelease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.

As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on a third-party analysis, which is anti-dilutive.updated periodically. The incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.

The Company recently completed an IPOelected the package of 1,464,000 units consisting ofpractical expedients included in this guidance, which allows us (i) to not reassess whether any expired or existing contracts contain leases; (ii) to not reassess the lease classification for any expired or existing leases; (iii) to account for a share of common stocklease and non-lease component as a warrantsingle component for both its real estate and non-real estate leases; and (iv) to purchase a share of common stocknot reassess the initial direct costs for $6.25 (“Units”), at an offering price of $5 per unit was completed after quarter end. Existing agreements required the issuance of additional units, warrants to purchase units (“Unit Warrants”),existing leases.

Amortization and warrants to purchase shares of common stock (“Warrants”) upon the IPO being consummated. The total number of common shares and share equivalents issuedinterest expense related to suchlease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded amortization pattern resulting in higher single lease expense in earlier periods.

The Company’s lease agreements outstanding at July 31, 2018,do not contain any material residual value guarantees or material restrictive covenants. In addition, the date ofCompany does not have any finance leases, any material sublease arrangements or any material leases where the closing ofCompany is considered the IPO, were as follows:lessor.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At times, the Company’s cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation. There were no accounts that exceeded federally insured limits at June 30, 2018 or December 31, 2017.

Intangible Assets

Intangible assets consist primarily of the trademarks and copyrights. The trademarks and copyrights are being amortized using the straight-line method based on an estimated useful life of 20 years.

Impairment of Long-Lived Assets

The Company’s long-lived assets (consisting of the trademarks) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by that asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Research and Development

Research and development costs are charged to expense as incurred. Researchincurred and developmentinclude supplies and other direct trial expenses include, but are not limitedsuch as fees due to employee-related expenses including salaries, benefits and stock based compensation ofcontract research and development personnel, fees associated withorganizations, consultants supporting ourwhich support the Company’s research and development endeavors, expenses incurred under agreements withthe acquisition of technology rights without an alternative use, and compensation and benefits of clinical research and development personnel. Certain research and development costs, in particular fees to contract research organizations and costs associated(“CROs”), are structured with pre-clinical activities. These costsmilestone payments due on the occurrence of certain key events. Where such milestone payments are charged to operations as incurred as research and development expense.

Embedded Derivative Liability — Convertible Notes

The Company had convertible notes outstanding at June 30, 2018 and December 31, 2017 with a default payment provision (a default provision that requires payment of three times the outstanding principal amount plus accrued interest). The Company determined that the default provision is an embedded component that qualifies as a derivative which should be bifurcated from the convertible notes and separately accounted for in accordance withFASB ASC 815, “Derivatives and Hedging”. ASC 815 – 15 – 25 – 42 establishes criteria to determine whether puts are closely and clearly related to a debt host should the debt contain a substantial premium or default provision (one that is greater than 10%those earned through the provision of such services, the principal resulting from puts that require payoff for more than 110% of principal amount outstanding). The embedded derivative was recorded at fair value on the date of issuance and marked-to-market at each balance sheet date with the change in the fair valueCompany recognizes a prepaid asset which is recorded as income or expense in the statement of operations (see Note 5).as services are incurred.

Stock-Based Compensation

Equity-Based Compensation

The Company issued equity options to certain employees. Prior to reincorporation, these options were for the purchase of Class A equity units. All options for the purchase of shares of Class A units outstanding at the time of reincorporation were converted to options for the purchase of shares of common stock, in the same proportion as that used to convert Class A units to shares of common stock (see Note 8). Options are accounted for under FASB ASC 718 “Compensation — Stock Compensation” (“ASC 718”).

The Company measures the cost of option awards based on the grant date fair value of the awards. That cost is recognized on a straight-line basis over the period during which the employeeawardee was required to provide service in exchange for the entire award. The fair value of options is calculated using the Black-Scholes option pricing model, based on key assumptions such as the fair valueexpected volatility of shares ofthe Company’s common stock, or Class A units, expected volatility,the risk-free rate of return, and expected term.term of the options. The Company’s estimates of these assumptions are primarily based on third-party valuations, historical data, peer company data, government data, and the judgment of management regarding future trends.

The Company accounts for equity-based compensationCommon shares issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50 “Equity – Based Payments to Non-employees”. The non-cash charge to operations for non-employee awards with time based vesting provisions isare valued based on the fair value of the awards re-measured each reporting period and amortized to expense overCompany’s common shares as determined by the remaining vesting period.

Income Taxes

The Company was reorganized asmarket closing price of a C corporation in 2017. Prior to reorganization, for federal and state income tax purposes,share of our common stock on the Company was a limited liability company treated as a partnership, in which income tax liabilities and/or benefits were passed through to the Company’s unitholders. As such, the Company did not directly pay federal and state income taxes and recognition was not given to federal and state income taxes for the operationsdate of the Company priorcommitment to reorganization.make the issuance.

Income Taxes

Effective on completion of the LLC conversion on October 1, 2017, the

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition and measurement are reflected in the period in which the change in judgment occurs. Interest and penalties related to unrecognized tax benefits are included in income tax expense. The Company has generally recorded a full valuation allowance for its tax carryforwards, reflecting the judgment of Company management that they are more likely than not to expire unused.

4 — ACQUISITION

Purnovate, Inc. Acquisition – Related Party

On January 26, 2021 the Company completed its business acquisition of 100% of the equity interests of Purnovate, Inc. (“Purnovate”), pursuant to the Equity Purchase Agreement, dated December 7, 2020, as amended. Mr. Stilley, Adial’s CEO, owned 28.73% of the membership interests in Purnovate and, therefore, the acquisition of Purnovate is considered a related party transaction. The acquisition of Purnovate included an in-place workforce comprised of four employees, ongoing research and development projects and pending patents, certain net working capital assets and an assumed operating lease for laboratory and office space (“Assumed Lease”).

Purnovate began occupying the premises of the Assumed Lease in January, 2020 and, as a term of its lease, gained access and use to a significant library of chemical compounds and certain laboratory equipment had been abandoned by the prior tenant. On January 19, 2021, Purnovate, modified and agreed to amend the lease agreement with the landlord (a third party) of the Assumed Lease, which transferred legal title to Purnovate for all assets on the premises of the Assumed Lease while simultaneously extending its term. The Company concluded that the Purnovate Lease Amendment was completed for the benefit of the Company and therefore the acquisition of the assets were considered a separate transaction and apart from the acquisition of Purnovate in accordance with ASC 805-10-25-21.

The purchase price of Purnovate consisted of cash consideration of $350,000 (excludes an $350,000 initial working capital loan to Purnovate, which assumed by Adial at acquisition through its ownership of Purnovate, Purnovate’s liability and Adial’s asset being eliminated in consolidation), the issuance 699,980 shares of Adial common stock ($2.34 at date of closing, less a discount of 35% for a discount for lack of marketability related to the restrictions on the stock-based consideration) and contingent consideration for (i) certain development milestones in an aggregate amount of up to $2,100,000 for the first time any product or compound has achieved the relevant milestone within forty five (45) days after such occurrence (ii) milestones in an aggregate amount of up to $20,000,000 for each compound commercialized, and (iii) royalties of 3.0% of Net Sales (as defined in the Purchase Agreement). The equity consideration has been placed into escrow to secure certain indemnification and other obligations of Purnovate and the Members and will be released, subject to certain terms.

The Company utilized a relative fair value approach to allocate the fair value of the assets acquired in connection with the Purnovate Lease Amendment and the fair value of Purnovate’s business to the purchase price of Purnovate. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques.

The estimated fair value of the acquired IPR&D was determined using a method which reflects the present value of the operating cash flows generated by this asset after taking into account the cost to realize the revenue, and an appropriate discount rate to reflect the time value and risk associated with the invested capital. These assets are subject to impairment testing until completion or abandonment of each project.

Fair Value

The estimated fair value of Financial Instrumentsthe acquired research and Fair Value Measurementsdevelopment supplies (library of chemical compounds and certain laboratory equipment) was determined by discounting the replacement cost of the supplies for probability of use and salvage value if unused. Book value was determined by assigning a portion of the value of consideration paid to the supplies according to the relative fair value of the supplies compared to the fair value of Purnovate’s business. The Company believes that the book value of the supplies is materially lower than their replacement cost, and that therefore the research and development expenses reported as the supplies are utilized is likely be less than the costs defrayed by their acquisition.

Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income.

FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements

In connection with the business acquisition, the Company incurred acquisition costs of approximately $46,000 that were recognized in selling, general and Disclosures,” requires disclosureadministrative expense.

The table below sets forth the allocation of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value,Purnovate Net Acquired Assets and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reportedthe corresponding line item in the Company’s consolidated balance sheets for current liabilities, convertible notes, Senior Notes, Senior Secured Bridge Notes, and Subordinated Notes are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.

The three levels of valuation hierarchy are defined as follows:

Recent Accounting Pronouncements

Leases— In February 2016, the FASB issued ASU 2016-02 which amends existing lease accounting guidance, and requires recognition of most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in ASU 2016-02. The Company is currently evaluating the potential impact of the adoption of this accounting pronouncement to its financial statements.

Earnings per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging — In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815)," which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. The Company early adopted ASU 2017-11 at the beginning of the second quarter of 2018; there was no effect on the financial statements at the time of adoption.

Fair Value— In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 amends the FASB Accounting Standards Codification (“ASC”) to expand the scope of FASB ASC Topic 718, Compensation-Stock Compensation, to include accounting for share-based payment transactions for acquiring goods and services from non-employees. The amendments in ASU 2018-07 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

3 — SENIOR SECURED NOTES

Senior Secured Bridge Note

Effective May 1, 2017, the Company entered into a senior secured bridge note financing with a third party investment fund (the “Senior Holder”) for the principal sum of $287,500 (the “Senior Secured Bridge Note”) of which $250,000 was received as proceeds and $37,500 was recorded as original issue discount. The interest on the principal amount was at the rate of two percent per annum. The maturity date at issue was November 1, 2017, at which time the principal and accrued and unpaid interest and other fees herein, was due and payable. The Senior Secured Bridge Note was secured by all the assets held by the Company.

The Senior Holder had the right to require repayment of 115% of the outstanding principal amount plus interest upon the Company receiving proceeds of $250,000 or more from the sale of its equity (or equivalent securities) or the issuance of debt. The Senior Holder was also entitled to receive warrants, which amounts were based on the above principal sum of $287,500 divided by the equity price sold to investors in the contemplated IPO, as defined with the exercise price equal to the offering price. There were also commitment shares, as defined in the agreement, that were due to the Senior Holder in the amount of $29,000 to be paid on consummation of the contemplated IPO. In the event of default, the full principal amount of $287,500 plus accrued interest would be immediately due and payable; in addition, $25,000 would be due and payable to the Senior Holder for every calendar month the Senior Secured Bridge Note was in default until full payment were made. Because the default provisions required payment of significant penalties in the case of a default event (greater than 10% of the principal), the default provision was determined to be a derivative instrument. Refer to Note 6 for derivative liability disclosure.

On October 23, 2017, the Company amended the Senior Secured Bridge Note. Pursuant to the amendment, the Holder agreed to accept on the Maturity Date, which was extended to December 4, 2017, payment by the Company the sum of $349,900 in full and complete satisfaction of the principal sum of the Senior Secured Bridge Note and all accrued and unpaid interest thereon. The amendment was accounted for as debt extinguishment, and the remaining debt discount was written off and recorded as interest expense.

On November 20, 2017, the Senior Secured Bridge Note was further amended, extending the maturity date to February 5, 2018, the Senior Holder agreeing to accept $375,000 in full and complete satisfaction of the principal sum of the Senior Secured Bridge Note and all accrued and unpaid interest thereon. The amendment was accounted for as debt modification, and the new debt discount was added to the remaining unamortized debt discountsheet at the date of the amendment.acquisition.

On February 22, 2018, the Company executed an agreement to settle in full the outstanding Senior Bridge Note. Under the terms of this agreement, the Company paid $150,000 cash at time of execution of the settlement and is to pay an additional cash payment of $100,000 at the earlier of the Next Financing or at the same time and in equal amount (up to a maximum of $100,000) as payments are made to MVA under the senior secured note held by MVA (see below). Failure to make the payment in full at the time of the Next Financing or of payments to MVA will render the settlement agreement null and void. In addition, at such time as the Company completes the Next Financing, the Company agreed to issue (i) warrants to purchase a number of shares of the Company’s common stock equal to $325,000 divided by the price per share of the Next Financing; and (ii) a number of shares of the Company’s common stock equal to $50,000 divided by the price per unit of the Next Financing. The warrants are to have an exercise price equal to the price per share of the Next Financing and a term of two years. The remaining debt discount of $23,363 was amortized to interest expense through February 5, 2018. As a result of this settlement, classified as a troubled debt restructuring, the Company deferred any extinguishment gain recognition as such settlement agreement is null and void if remaining agreed payments which are contingent upon a financing are not made.

On July 31, 2018, on completion of the IPO and as required under the terms of the settlement agreement, the Company made a cash payment of $100,000 and issued shares of stock and warrants to the Senior Holder, as a result of which the Company’s obligations under the settlement agreement were fully satisfied (see Note 11).

Senior Secured Notes (Related Parties $470,000)

On February 22, 2018 and March 1, 2018, the Company entered Security Purchase Agreements to issue Secured Notes (the “Secured Notes”) to a number of Company directors and a consultant in the aggregate principal amount of $510,000. The Secured Notes rank pari passu with respect to seniority to one another, senior to all other debt, and secured against all assets of the Company. The Secured Notes matured on July 1, 2018 and bore 18% interest, payable at maturity or at the time of the Company’s next equity or debt, including, without limitation, an IPO or a change of control of us. In the event of default, the outstanding principal and accrued interest will become due and payable, and the interest rate was to increase to 24.99%. Additionally, the Company has the option to extend the due date of the Secured Notes upon payment of the extension fee of 25% of the principal amount for extension to the fifth month anniversary of the issue date, payment of an additional 35% of the principal amount for extension to the sixth month anniversary of the issue date, and payment of an additional 35% of the principal amount for extension to the seventh month anniversary of the issue date.

Additionally, upon the consummation by the Company of any debt or equity financing in the amount of $2 million or more (the “Next Financing”), the Company agreed to issue holders of the Secured Notes (i) warrants to purchase the securities offered in the Next Financing, such aggregate number of securities to be equal to 400% of the aggregate principal amount of the Secured Notes divided by the price per security of the Next Financing; and (ii) an aggregate number of the securities offered equal to 400% of the of the aggregate principal amount of the Secured Notes divided by the price per security of the Next Financing Secured Notes. The warrants to be issued are to have an exercise price equal to the price per security of the Next Financing and a term of five years. The Secured Notes were issued for $100,000 in debt exchanged for subordinated notes, with the remaining amount of cash proceeds received.

In the offering as contemplated by the Company as of June 30, 2018, the securities offered were to be a unit that consists of a share of common stock and a warrant to purchase a share of common stock at 125% of the offering price of the unit. Holders of the Secured Notes, therefor, were to be issued units and warrants to purchase units in the numbers described above.

On June 8, 2018, the Secured Notes were amended, extending the maturity date to August 1, 2018. In addition to the extension of term, the extension fees were changed as follows: the extension fee for extension to the fifth month anniversary of the issue date was eliminated, the fee for extension to the sixth month anniversary of the issue date was made 99.4% of the principal amount, and the fee for extension to the seventh month anniversary of the issue date was made an additional 46.3% of the principal amount.

At June 30, 2018The Company’s unaudited condensed consolidated financial statements for the balance of the Secured Notes was $510,000. For thethree and six months ended June 30, 2018, interest expense on2021 include the Secured Notes was $30,255.

results of operations of Purnovate since January 26, 2021 during which period Purnovate contributed net losses of approximately $25,000 and $107,000, respectively. On July 31, 2018, uponan unaudited pro forma basis, the consummationrevenues and net income of the IPOCompany assuming the acquisition had occurred on January 1, 2020, are shown below. The unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition occurred on January 1, 2020, nor is the financial information indicative of the results of future operations. Since Purnovate’s contribution to the Company’s loss for the three months ended June 30, 2021 is included in the actual results, a pro forma is not presented here.

5 – NOTE PAYABLE

Note Payable – Paycheck Protection Program Loan

In connection with the acquisition of Purnovate (See Note 4), the Company assumed $29,088 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the Coronavirus Aid, Relief, and as requiredEconomic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). Under the terms of the Secured Notes,PPP Note and the principal andPPP Loan, interest outstanding of the Secured Notes was paid in full and shares of stock and warrants were issued the to the holders, as a result of which the obligation of the Company with respect to Senior Secured Notes were fully satisfied (see Note 11).

Senior Note

On June 3, 2018, the Company entered into a Security Purchase Agreement pursuant to which it issued a senior secured note in the principal amount of $325,000 to one accredited institutional investor (the “June 2018 Senior Note”). The June 2018 Senior Note ranked pari passu with respect to seniority as to payment with the $510,000 in outstanding other Secured Notes issued by the Company in February and March 2018, senior as to payment as to all other outstanding debt and is secured by a lien on substantially all of the Company’s assets. (With the payment in full of the other Senior Notes on July 31, 2018, the June 2018 Senior Note is senior as to payment with respect to all remaining debt.) The June 2018 Senior Note was issued at an original issue discount of 15.4%, or $50,000, does not bear interest and is payable on March 5, 2019 or upon an earlier event of default, including, without limitation, a change of control of the Company.

The June 2018 Senior Note is convertible into shares of our common stock at a conversion price of $2.00 per share, subject to adjustment for certain dilutive issuances. Additionally, in the event of the consummation by the Company of a Dilutive Financing (defined as any debt or equity financing in the amount of $2,000,000 or more, at a price of less than $4.00 per share of common stock), the Company has agreed to reduce the conversion price then in effect to a price equal to 50% of the per share price of the common stock issued in the Dilutive Financing. The Company also issued to the investor a warrant to purchase 300,000 shares of our common stock exercisable at $3.75 per share which will be exercisable for a term of five years. The warrant further provides that in the event our next financing of $2,000,000 or more includes the issuance of more than one warrant with each share of common stock sold in such next financing, then, the number of shares of common stock issuable under the warrant will be equal to 300,000 multiplied by the number of warrants sold with the common stock in the next offering. As a result, if the next financing were to include two warrants issued for each share issued, then the number warrant shares would be adjusted to be 600,000. Any such adjustment would not change the warrant exercise price. The lender has agreed to be subject to the underwriter’s six month lockup, post-IPO. At the time of the issuance of the note, the Company discounted the principal by $222,950 for the relative value of the warrants issued and $52,050 for the relative value of the beneficial conversion feature, for total additional paid in capital of $275,000, which was the entire cash value of the Note at issuance.

At June 30, 2018 the balance of the June 2018 Secured Note was $28,676, net of discounts of $296,324. For the six months ended June 30, 2018, amortization of discounts on the June 2018 Secured Note was $28,676.

Upon closing of the IPO on July 31, 2018, which was the next financing under the warrant issued pursuant to the Senior Note, the number of warrant shares issuable under the warrant became fixed at 300,000.

4 — SUBORDINATED NOTES — RELATED PARTIES

On November 20, 2017, the Company entered into subordinated notes (the “Subordinated Notes”), subordinate to the Senior Secured Bridge Note, with certain insiders, including Directors and a Consultant, (the “Subordinated Holders”) in the aggregate principal amount of $115,000, of which $100,000 was received as proceeds and $15,000 was recorded as original issue discount. In the event of default, the full principal amount of $115,000 plus accrued interest would be immediately due and payable to the Subordinated Holder; in addition, interest on the outstanding principal at the rate of 1% per annum, and accruedthere is a deferment period until installment payments of principal and interest would increase to 15% and $25,000 would be due and payable to Subordinated Holder for every calendar month the note is in default until full payment were made. Because the default provisions required payment of significant penalties in the case of a default event (greater than 10%are due. The term of the principal),PPP Note was two years. In April of 2021, the default provisionPPP Loan was determined to be a derivative instrument. (Refer to Note 8forgiven in accordance with the terms established for derivative liability disclosure.) In addition,such loans under the CARES Act, on repayment, the Subordinated Holders were to receive warrants for purchase of the Company’s common stock in the amount of the principal and at an exercise price per share equal to 100% of the IPO price. The warrants are to provide for a cashless exercise and are to be exercisable six months from issue date.

On February 22, 2018 the Subordinated Holders settled these notes for newly issued Secured Notes in the principal amount of $100,000, in full and complete satisfaction of the all obligations, including the principal sum of the notes, all accrued and unpaid interest thereon, and warrant issuances. As a result of this settlement,which forgiveness the Company realized arecognized an gain of $12,241.

For the six months ended June 30, 2018, interest expense on the note was $435 and amortization of debt discount was $8,287.

$29,088, classified as other income.

6 — GOODWILL

5 — CONVERTIBLE NOTES

In September and December, 2016,The Company recorded goodwill in connection with the Company issued convertible notes (the “2016 Convertible Notes”) with an outstanding unsecured principal amountacquisition of $235,000 to its members, including Directors and Officers.Purnovate. The principal and interest is due in 2029, and the 2016 Convertible Notes bear interest at a rate of 15% per annum.

The 2016 Convertible Notes were to automatically convert to common stockchanges in the event the Company issued and sold either common or preferred stock of $2,000,000 or more, excluding thecarrying value of the conversion of these notes. The conversion price would be either one third the price offered during the financing round that triggers the conversion, or the price obtained by dividing $2,000,000 by the Company’s fully-diluted capitalization at the time of the financing round that triggers the conversion (the “Conversion Cap Price”), whichever were lower. In the event that the Company or its assets were acquired prior to the closing of a financing round of $2,000,000 or more, the outstanding principal and accrued interest of the notes were to automatically convert to the same instruments offered in the financing round. The conversion would be equal to the Conversion Cap Price at the time of the event. Upon maturity of the Convertible Notes, the holder might elect to convert the Convertible Notes into common stock as if a sale of the Company had occurred on the maturity date. A default was defined as non-payment, default in a covenant of the Convertible Notes, bankruptcy or involuntary petition for bankruptcy against the Company. In addition, repayment of the Convertible Notes due to an event of default, as defined in the convertible promissory note agreement, required an accelerated payment of three times the outstanding principal and accrued interest. These default payment provisions were determined to be a derivative instrument. Refer to Note 6.

Convertible notes, held by Directors and Officers of the Company, totaled $132,854 in principal at June 30, 2018 and December 31, 2017.

The interest expense on these notes was $22,525 and $39,325goodwill for the six months ended June 30, 2018 and year ended December 31, 2017, respectively.2021 are as noted in the table below:

7 — ACCRUED EXPENSES

On July 31, 2018, as a result

Accrued expenses consist of the completion of the IPO and as required under the terms of the convertible notes, the outstanding principal and accrued interest was converted at the Conversion Cap Price to 700,854 Units. These units were issued to the note holders, fully satisfying the Company’s obligations with respect to the convertible notes (see Note 11).following:

6 — DERIVATIVE LIABILITY

The Senior Secured Notes, Subordinated Notes, and the Convertible Notes included default provisions that required payment of significant penalties in the case of a default event (greater than 10% of the principal). These default payment provisions were determined to be derivative instruments, and derivative liabilities were recognized.

The probability of a liquidity event and consequent repayment of the issuance of the Senior Secured Notes and Subordinated Notes the time their issuance was sufficiently high that the resulting derivative liabilities were immaterial. The Company used the Monte-Carlo valuation model to determine the fair value of the derivative liability, using the following key assumptions for the six months ended June 30, 2018 and year ended December 31, 2017.

The change in the fair value of the derivative liability for the six months ended June 30, 2018 and 2017 was not significant and therefore no gain or loss was recognized for the three or six months ended June 30, 2018 or 2017. (See Note 11 for extinguishment of debt and related derivative liabilities after June 30, 2018.)

78 — RELATED PARTY TRANSACTIONS

In January 2011, the Company entered into an exclusive, worldwide license agreement with The University of Virginia Patent Foundation d/b/a the University of Virginia Licensing and Ventures Group (the “UVA LVG”) for rights to make, use or sell licensed products in the United States based upon patents and patent applications made and held by UVA LVG (the “UVA LVG License”). The Company is required to pay compensation to the UVA LVG, as described Note 9. A certain percentage of these payments by the Company to the UVA LVG may then be distributed to the Company’s former Chairman of the Board who currently serves as the Company’s Chief Medical Officer in his capacity as inventor of the patents by the UVA LVG in accordance with UVA LVG policies.their policies at the time.

On January 29, 2018,September 21, 2020, the Company enteredconcluded a Medical Translations services agreement with Medico-Trans Company, LLC (“MTC”), a company under the controlprivate placement of the Chairman of the Board, whereby MTC agreed to perform $67,304 in medical translation services, to be paid on occurrence of a qualified financing of $2,000,000 or more; or, in the event that a qualified financing had not taken place by February 10, 2018, for installment payments of $22,000 on February 10, 2018, $22,000 on March 10, 2018, and the remaining balance on April 10, 2018, and to issue to MTC on consummation of a qualified financing a number of357,143 unregistered shares of common stock equalat an above market price of $1.40 per share with Bespoke Growth Partners, Inc. (“Bespoke”). Bespoke is controlled by Mark Peikin, who serves as the Company’s non-executive Chief Development Officer (and who is neither an executive officer nor director of the Company). Net proceeds of the offering was $500,000.

On December 7, 2020, the Company entered into an Equity Purchase Agreement with Purnovate, LLC to $201,911 dividedpurchase all of the outstanding membership interests of Purnovate from the members of Purnovate (the “Members”), such that after the acquisition, Purnovate would be a wholly owned subsidiary of Adial. The Company’s Chief Executive Officer and board member, William B. Stilley, and another Adial board member, James W. Newman, were, directly or indirectly, members of Purnovate. Messrs. Stilley and Newman agreed to sell their membership interests on the same terms as the other Members, except that Mr. Stilley is subject to a two (2) year lock up with respect to the sale and transfer of the stock consideration that he receives so long as his employment has not been terminated by the Company without cause prior to the end of such period. Mr. Stilley owned approximately 28.7% of the membership interest of Purnovate and Mr. Newman controlled two entities that, together, own less than 1% of the membership interests of Purnovate. As a result of the foregoing, the Company formed a Special Committee of independent members of its Board of Directors to review and negotiate the acquisition terms.

On January 26, 2021 the acquisition was consummated, and Messrs. Stilley and Newman sold all of their membership interests in Purnovate to the Company (see Note 4).

On March 11, 2021, the Company entered into Securities Purchase Agreements (the “SPAs”) with each of Bespoke, three entities controlled by James W. Newman, Jr., a member of the Company’s Board of Directors (“Newman”), and Keystone Capital Partners, LLC (“Keystone”), pursuant to which: (i) Bespoke agreed to purchase an aggregate of 336,667 shares of the Company’s common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $1,010,001; (ii) Newman agreed to purchase an aggregate of 30,000 shares of the qualified financing.Company’s common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $90,000; and (iii) Keystone agreed to purchase an aggregate of 333,334 shares of the Company’s common stock at a purchase price of $3.00 per share for aggregate gross proceeds of $1,000,002. In the six months ended June 30, 2018,2021, the Company made $53,000 in payments to MTC,issued 700,001 shares of common stock for total proceeds of $2,100,003.

In connection with $15,540 balance and accrued interest remaining. Of these payments, $36,000 were in cash, and the remaining $17,000 payment was converted toSPAs, the principal balance of a Senior Note (see Note 3).

On January 29, 2018, William B. Stilley made a payment of $21,000 to Kilburn & Strode, a patent firm, on behalfCompany entered into Registration Rights Agreements (“RRAs”), dated March 11, 2021, with each of the Company for expenses relating to validation of Adial patents, and for which he submitted an expense report. On March 1, 2018 the expense report payable was converted to the principal balance of a Senior Note (see Note 3).

On February 22, 2018, the Company executed a Backstop Commitment Agreement (“BCA”) with MVA 151 Investors LLC (“MVA”), a company controlled by Company Director Kevin Schuyler, pursuant to which MVA agreedthe Company was obligated to guaranteefile a registration statement (the “Registration Statement”) with the purchase of upU.S. Securities and Exchange Commission (the “SEC”) within thirty (30) days following the date upon which the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and use all commercially reasonable efforts to $242,000 (“have the Backstop Amount”)Registration Statement declared effective by the SEC within thirty (30) days after the Registration Statement is filed (or, in the principal amountevent of Secured Notes then offered for subscription and unsubscribed on March 1, 2018 (the “Backstop Commitment”). In consideration of this backstop commitment, at such time as the Company completes the Next Financing, the Company agreed to issue MVA (i) warrants to purchase a number of shares of the Company’s common stock equal to 150% of the Backstop Amount divided“full review” by the price per share ofSEC, within sixty (60) days after the Next FinancingRegistration Statement is filed). A registration statement on Form S-3 was filed with the SEC on April 20, 2021 and (ii) a number of units of Company common stock equal to 50% of the Backstop Amount divided by the price per share of the Next Financing. The warrants are to have an exercise price equal to the price per share of the Next Financing and a term of five years. On March 1, MVA invested $92,000 in Secured Notes as a result of the BCA, this amount being the $242,000 backstop amount less $150,000 in additional subscriptions received between February 22, 2018 and March 1, 2018. This investment fully satisfied the Backstop Commitment and left MVA with no further associated obligation to invest.declared effective on May 26, 2021.

See Notes 3, 4, 5, 7 and 9Note 10 for related party debt transactionsvendor, consulting, and lease agreements, Note 4 for Advance to Seller, and Note 11 for an additional related party transactions entered into after June 30, 2018.Securities Purchase agreement.

9 — SHAREHOLDERS’ EQUITY

Common Stock Issuances

8 — STOCKHOLDERS’ DEFICIT

Corporate Conversion/Reincorporation

On October 1, 2017, ADial Pharmaceuticals, LLC converted from a Virginia limited liability company to a Virginia corporation, APL Conversion Corp. On October 11, 2017, APL Conversion Corp. was merged into Adial Pharmaceuticals, Inc., a Delaware corporation. The Certificate of Incorporation of Adial Pharmaceuticals, Inc. authorizes the issuance of fifty million (50,000,000) shares of common stock and five million (5,000,000) shares of preferred stock. No shares of preferred stock have been issued or designated by Adial Pharmaceuticals, Inc. Three million, two hundred sixty-eight thousand five (3,268,005)January 26, 2021, 669,980 unregistered shares of common stock were issued to the former equity unit holdersshareholders of ADial Pharmaceuticals, LLC followingPurnovate, Inc., including William B. Stilley, the limited liability company’s conversion toCompany’s CEO and entities controlled by James Newman, a Virginia corporation and subsequent reincorporation by mergerDirector, in Delaware in the following ratios and total amounts:

Options and warrants for theconsideration of purchase of unitsPurnovate, Inc., at a total cost of ADial Pharmaceuticals, LLC were converted to options and warrants$1,060,150 (See Note 4.)

On February 8, 2021, option to purchase shares of APL Conversion Corp. in the conversion and Adial Pharmaceuticals, Inc. assumed the options and warrants in the merger. Options for purchase of 937,000 Class A units, warrants for purchase of 723,916 Class A units, and warrants for purchase of 1,870,469 Class B units were converted to options and warrants exercisable for an aggregate of six hundred fifty-six thousand eight hundred thirty-seven (656,837)10,000 shares of common stock of Adial Pharmaceuticals, Inc. and were assumed in proportion to the number of shares to be issued to former unit holders of the class of units underlying the option or warrant, with theat an exercise price of $1.45 per share was exercised for total proceeds of $14,500.

On February 25, 2021, previously registered warrants to purchase 712,500 shares at an exercise fee of $2.00 per share were exercised for a total of $1,425,000.

During the newlythree and six months ended June 30, 2021, the Company issued options or warrants being divided by the same ratio.

For financial reporting purposes, this merger transaction was recorded as a reorganization of ADial Pharmaceuticals, LLC which has adopted the capital structure432,849 and now operates under the name of Adial Pharmaceuticals, Inc. Accordingly, all references to the former member’s initial capital contribution in ADial Pharmaceuticals, LLC been retroactively adjusted to reflect the equivalent number of Adial Pharmaceuticals, Inc.1,440,145 shares of common stock. Additionally, upon completionstock under the Keystone equity purchase agreement for total proceeds of $1,000,000 and $3,350,000, respectively.

During the conversion, the Company calculated a net adjustment to deferred income tax asset, which was deemed immaterial, and reclassified $10.7 million from accumulated deficit to additional paid in capital.

Equity Issuances/Repurchases

On April 1, 2018,six months ended June 30, 2021, the Company issued 292,309700,001 shares of common stock for total proceeds of $2,100,003 under a securities purchase agreement.

During the six months ended June 30, 2021, the Company issued 450,000 shares of common stock to consultants for services rendered and to employees at a total cost of $1,125,900.

2017 Equity Incentive Plan

On October 9, 2017, the Company officers andadopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”); which became effective on July 31, 2018. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2017 Equity Incentive Plan was 1,750,000 shares. On September 1, 2020, by a director in compensation for termination, by mutual agreementvote of the Performance Bonus Plan.shareholders, the number of shares issuable under the 2017 Equity Incentive Plan was increased to 5,500,000. At June 30, 2021, the timeCompany had issued 1,259,438 shares and had outstanding 3,531,180 options to purchase shares of this issuance,our common stock under the company recognized an equity-based compensation expense2017 Equity Incentive Plan, as well as 139,686 options to purchase shares of $1,461,545 (See Note 9).common stock that were issued before the 2017 Equity Incentive Plan was adopted.

Stock Options

The following table provides the activity in stock optionsoption activity for the six months ended June 30, 2018.2021:

At June 30, 2018,2021, the numbers of vested options were 53,046.

At June, 2018, the exercise price of the options was above the fair value of shares of common stock, so intrinsic value totals of the outstanding options were $0.$1,534,168.

The totalCompany used the Black Scholes valuation model to determine the fair value of the options granted in 2017 was $842,221, andissued, using the total value of option granted in 2018 was $0. following key assumptions for the six months ended June 30, 2021:

During the six months ended June 30, 2018 and 2017, total equity-based compensation expense from the2021, 1,012,000 options issued was $139,090 and $60,818, respectively.to purchase shares of common stock were granted at a fair value of $2,428,907, an approximate weighted average fair value of $2.41 per option, to be amortized over a service a weighted average period of three years. As of June 30, 2018, $567,2412021, $3,806,495 in furtherunrecognized compensation expense resulting from issued options remained towill be recognized.recognized over a weighted average remaining service period of 1.51 years.

The following is a summarycomponents of Warrants outstanding:

There were no warrants issued, exercised or expiredstock-based compensation expense included in the Company’s Statements of Operations for the six months ended June 30, 20182021 and 2017. In2020 are as follows:

Stock Warrants

The following table provides the activity in warrants for the respective periods.

This table includes warrants to purchase 91,705 shares of common stock issued to consultants, including the 20,100 shares of common stock issued during the six months ended June 30, 2018, 300,0002021, with a total fair value of $140,254 at time of issue, calculated using the Black Scholes model assuming an underlying security values of ranging between $1.30 and $2.03, volatility rate ranging between 103.8% and 109.64%, a risk-free rate of 0.49%, and an expected term of 5.75 years. In the three and six months ended June 30, 2021, the Company recognized $42,698 and $77,159 in expense associated with these warrants, were issued, no warrants were exercised or expired. Warrants were issued on July 31, 2018 in connectionrespectively, with the IPO, see Notes 2 and 11.$10,406 remaining to be recognized at June 30, 2021.

910 — COMMITMENTS AND CONTINGENCIES

License with University of Virginia Patent Foundation

In January 2011, the Company entered into an exclusive, worldwide license agreement with (the “UVAthe University of Virginia Patent Foundation, dba UVA Licensing and Ventures Group (“UVA LVG”) for rights to make, use or sell licensed products in the United States based upon the ten separate patents and patent applications made and held by UVA LVG.

As consideration for the rights granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty based on net sales of products covered by the patent-related rights. More specifically, the Company paid UVA LVG a license issue fee and is obligated to pay UVA LVG (i) annual minimum royalties of $40,000 commencing in 2017; (ii) a $20,000 milestone payments upon dosing the first patient under a Phase 3 human clinical trial of a licensed product, $155,000 upon the earlier of the completion of a Phase 3 trial of a licensed product, partnering of a licensed product, or sale of the Company, $275,000 upon acceptance of an NDA by the FDA, and $1,000,000 upon approval for sale of AD04 in the U.S., Europe or Japan; as well as (iii) royalties equal to a 2% and 1% of net sales of licensed products in countries in which a valid patent exists or does not exist, respectively, with royalties paid quarterly. In the event of a sublicense to a third party, the Company is obligated to pay royalties to UVA LVG equal to a percentage of what the Company would have been required to pay to UVA LVG had it sold the products under sublicense ourselves. In addition, the Company is required to pay to UVA LVG 15% of any non-royalty sublicensing income.

The license agreement may be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to make any milestone, the most immediate being initiating Phase 3 clinical trials by December 31, 2018, makingfailure to make required payments, or the failure to exercise diligence to bring licensed products to market. In the event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination. The Company is required to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by December 31, 2024 and commencing commercialization of an FDA approved product by December 31, 2025. If the Company were to fail to use commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.

The term of the license continues until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration, abandonment or invalidation will continue in perpetuity on a royalty-free, fully-paidfully paid basis.

The Company executed an amendment, dated December 14, 2017, toDuring the license agreement. This amendment changed the dates by whichthree and six months ended June 30, 2021 and 2020, the Company using commercially reasonable efforts, wasrecognized $10,000 and $20,000 minimum license royalty expenses under this agreement, respectively.

Clinical Research Organization (CRO)

On October 31, 2018, the Company entered into a master services agreement (“MSA”) with Crown CRO Oy (“Crown”) for contract clinical research and consulting services. The MSA has a term of five years, automatically renewed for two-year periods, unless either party gives written notice of a decision not to achieverenew the goalsagreement six months prior to automatic renewal. The MSA or a service agreement under it may be terminated by the Company, without penalty, on fourteen days written notice for scientific, administrative, or financial reasons, or if the purpose of submitting a New Drug Application to the FDAstudy becomes obsolete. In the event that the MSA or Service Order are terminated, Crown’s actual costs up the date of termination will be payable by the Company, but any unrealized milestones would not be owed.

On November 16, 2018, the Company and Crown entered into Service Agreement 1 under the MSA for a licensed product to December 31, 2024 (from December 31, 2023) and commencing commercialization24 week, multi-centered, randomized, double-blind, placebo-controlled, parallel-group, Phase 3 clinical study of an FDA approved product by December 31, 2025 (from December 31, 2024). Ifthe Company’s lead compound, AD04. On June 28, 2019, the Company wereand Crown executed a change order to failService Agreement 1 increasing Crown’s fee from $3,507,995 (€2,958,835 converted to use commercially reasonable effortdollars at the Euro/US Dollar exchange rate of 1.1856 as of June 30, 2021) to $3,757,042 (€3,168,895) and failrescheduling future milestone payments as shown below.

On November 21, 2018, the Company made the initial prepayment under the agreement of $505,960, after exchange to meet either goal,US dollars at the licensor would haverate then prevailing. The fees are to be paid as milestones are reached on the rightfollowing schedule. On September 30, 2019, the Company received an invoice for the 10% milestone payment associated with the first submission of a trial application to terminatea national regulatory authority and recorded a prepaid expense of $294,124. On February 1, 2020, the license.first site initiation visit (“SIV”) of a study site had been completed and the second milestone of €269,938, was recognized as a prepaid expense of $299,496. On February 27, 2020, the first potential patient for the study had been screened and the third milestone payment of €269,938 was recognized as a prepaid expense of $297,013. On June 15, 2020, 50% of sites had been initiated and a fourth milestone payment of €269,938 was recognized as a prepaid expense of $302,843. On October 20, 2020, 100% of sites had been initiated and a fifth milestone $319,310 was paid. On November 10, 2020, 30% of patients had been enrolled and a sixth milestone payment of $319,013 was paid. Finally, on March 24, 2021, 60% of patients had been rolled and a seventh milestone payment of $318,905 was made.

At June 30, 2018,2021, the remaining future milestone payments are shown in the table below, converted to dollars from euros at the exchange rate then prevailing.

During the six months ended June 30, 2021, the Company recognized $938,632 in direct expenses associated with the Service Agreement 1, classified as R&D expense, including amortization of milestone payments and change order fees immediately recognized as expenses. On December 31, 2020 there was accrued R&D expense of $53,065 related to such direct expenses under this agreement, and on June 30, 2021 the Company had an accrued $60,000expense liability of $581,700.

Service Agreement 1 also estimated approximately $2.6 million (€2.2 million) in minimum royalties,pass-through costs, mostly fees to clinical investigators and sites, which are billed as incurred and the total contingent upon individual site rate and enrollment rates. Based on current enrollment rates and the various active clinical sites, the Company has increased its total estimated future site costs to a total of approximately $3.0 million, an estimate that could increase or decrease based on changes to individual site enrollment rates. During the three and six months ended June 30, 2021, the Company recognized $979,096 and $1,552,152 in costs associated with fees to investigators and sites, respectively.

Lease Commitments – Purnovate lease

The Company has one operating lease which $40,000 were due,consists of office space with a remaining lease term of approximately five years.

Leases with an initial term of twelve months or less are not recorded on the balance sheet, and $38,246the Company does not separate lease and non-lease components of contracts. The Company’s lease agreement does not provide for patent reimbursements underdetermination of the termsinterest rate implicit in the lease. Therefore, the Company used a benchmark approach to derive an appropriate incremental borrowing rate. The Company’s incremental borrowing rate is the rate of this license,interest that the lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived an incremental borrowing rate, which was used to discount its lease liabilities. The Company used an estimated incremental borrowing rate of 9% on January 26, 2021 for its lease contract.

The Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any finance leases, any sublease arrangements or any leases where the Company is considered the lessor.

The components of lease expense, which are included in accounts payablegeneral and accrued liabilities.administrative expense, based on the underlying use of the ROU asset, were as follows: