ADIL US Equity☆

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2021

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 Name of Registrant as Specified in Its Charter)

1180 Seminole Trail, Suite 495

Charlottesville, Virginia22901

(Address of Principal Executive Offices) (Zip Code)

(434)422-9800

(Registrant’s telephone number, including

area code)

Securities registered pursuant to Section 12(b)

of the Act:

Title of each class Trading Symbols Name of each exchange on which registered

Common Stock, par value $0.001 per share ADIL The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a

well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒

Indicate by check mark if the registrant is not

required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒

Indicate by check mark whether the issuer: (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 ☐

Indicate by check mark whether the registrant

has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405

of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐

Indicate by check mark whether the registrant

is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☒

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 has filed a report on

and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of

the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant

is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☒

The aggregate market value of the voting and non-voting

common equity held by non-affiliates of the registrant, based on the closing price of a share of the registrant’s common stock on

June 30, 2021 (the last business day of the registrant’s mostly recently completed second fiscal quarter) as reported by the Nasdaq

Capital Market on such date was $40,504,498. This calculation does not reflect a determination that certain persons are affiliates of

the registrant for any other purpose.

As of March 23, 2022, the issuer had 23,718,962

shares of common stock outstanding.

Documents incorporated by reference: None

FORM 10-K

TABLE OF CONTENTS

Page

PART I 1

Item 1. Business 4

Item 1A. Risk Factors 49

Item 1B. Unresolved Staff Comments 85

Item 2. Properties 85

Item 3. Legal Proceedings 85

Item 4. Mine Safety Disclosures 85

Item 6. [Reserved] 88

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 99

Item 8. Consolidated Financial Statements and Supplementary Data F-1

Item 9A. Controls and Procedures 100

Item 9B. Other Information 101

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 101

Item 10. Directors, Executive Officers and Corporate Governance 101

Item 11. Executive Compensation 108

Item 14. Principal Accountant Fees and Services 120

Item 15. Exhibits and Financial Statement Schedules 121

i

PART I

ADIAL PHARMACEUTICALS, INC.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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 initiatives, 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,” “projects,” “contemplates,” “believes,” “seeks,” “goals,”

“estimates,” “predicts,” “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 I, Item lA. “Risk Factors” and

elsewhere in this Annual Report on 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 Annual Report on Form 10-K, “Adial,”

the “Company,” “we,” “us” and “our” refer to Adial Pharmaceuticals, Inc.

Summary Risk Factors

Our business

faces significant risks and uncertainties of which investors should be aware before making a decision to invest in our common stock. If

any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely

affected. The following is a summary of the more significant risks relating to the Company. A more detailed description of our

risk factors set forth under the caption “Risk Factors” in Item 1A in Part I of this Annual Report on Form 10-K.

Risks Relating to Our Company

● We have identified weaknesses in our internal controls.

1

● We have limited experience as a company conducting clinical trials.

● Our success will be dependent upon adoption of our products by physicians.

Risks Relating to Purnovate, Inc. (“Purnovate”)

Risks Relating to Our Business and Industry

● AD04 and any future product candidates may cause undesirable side effects.

2

● Certain of our officers may have a conflict of interest.

Risks Related to Our Securities and Investing

in Our Securities

● Future sales of securities could result in additional dilution.

● There is no established market for the warrants.

3

PART I

Item 1. Business

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).

Alcohol Use Disorder and AD04

AUD is characterized by an urge to consume

alcohol and an inability to control the levels of consumption. We have completed the clinical phase of the landmark

ONWARDTM pivotal Phase 3 clinical trial using AD04 for the potential treatment of AUD in subjects with certain

target genotypes. As of this filing, all 302 patients included in the trial had completed dosing and follow up visits and the final

monitoring and close-out activities are underway (a total of 303 patients were recruited and then randomized in the trial, however, one subject never initiated

treatment and has been excluded from enrollment numbers and will not be included in the full analysis data set or efficacy analysis for

the trial). ONWARD trial data is expected to be unblinded and analyzed in the second quarter

of 2022. We believe our approach is unique in that it targets the serotonin system and individualizes the treatment of AUD, through

the use of genetic screening (i.e., a companion diagnostic genetic biomarker). We have created an investigational companion

diagnostic biomarker test for the genetic screening of patients with certain biomarkers that, as reported in the American Journal

of Psychiatry (Johnson, et. al. 2011 & 2013), we believe will benefit from treatment with AD04. Our strategy is to integrate

the pre-treatment genetic screening into AD04’s label to create a patient-specific treatment in one integrated therapeutic

offering. Our goal is to develop a genetically targeted, effective and safe product candidate to treat AUD by reducing or

eliminating the patients’ consumption of alcohol.

We have a worldwide, exclusive license from the

University of Virginia Patent Foundation (d.b.a the Licensing & Venture Group) (“UVA LVG”), which is the licensing arm

of the University of Virginia, to commercialize our investigational drug candidate, AD04, subject to Food and Drug Administration (“FDA”)

approval of the product, based upon three separate patent application families, with patents issued in over 40 jurisdictions, including

three issued patents in the U.S. Our investigational agent has been used in several investigator-sponsored trials and we possess or have

rights to use toxicology, pharmacokinetic and other preclinical and clinical data that support our landmark ONWARD pivotal Phase 3 clinical

trial. Our therapeutic agent was the product candidate used in a University of Virginia investigator sponsored Phase 2b clinical trial

of 283 patients. In this Phase 2b clinical trial, ultra-low dose ondansetron, the active pharmaceutical agent in AD04, showed a statistically

significant difference between ondansetron and placebo for both the primary endpoint and secondary endpoint, which were reduction in severity

of drinking measured in drinks per drinking day (1.71 drinks/drinking day; p=0.0042), and reduction in frequency of drinking measured

in days of abstinence/no drinking (11.56%; p=0.0352), respectively. Additionally, and importantly, the Phase 2b results showed a significant

decrease in the percentage of heavy drinking days (11.08%; p=0.0445) with a “heavy drinking day” defined as a day with four

(4) or more alcoholic drinks for women or five (5) or more alcoholic drinks for men consumed in the same day.

The active pharmaceutical agent in AD04, our lead

investigational new drug product, is ondansetron, which is also the active ingredient in Zofran®, which was granted FDA

approval in 1991 for nausea and vomiting post-operatively and after chemotherapy or radiation treatment and is now commercially available

in generic form. In studies of Zofran®, conducted as part of its FDA review process, ondansetron was given acutely at dosages

up to almost 100 times the dosage expected to be formulated in AD04 with the highest doses of Zofran® given intravenously

(“i.v.”), which results in approximately 160% of the exposure level as oral dosing. Even at high doses given i.v. the studies

found that ondansetron is well-tolerated and results in few adverse side effects at the currently marketed doses, which reach more than

80 times the AD04 dose and are given i.v. The formulation dosage of ondansetron used in our drug candidate (and expected to be used by

us in our Phase 3 clinical trials) has the potential advantage that it contains a much lower concentration of ondansetron than the generic

formulation/dosage that has been used in prior clinical trials, is dosed orally, and is available with use of a companion diagnostic genetic

biomarker. Our development plan for AD04 is designed to demonstrate both the efficacy of AD04 in the genetically targeted population and

the safety of ondansetron when administered chronically at the AD04 dosage. However, to the best of our knowledge, no comprehensive clinical

study has been performed to date that has evaluated the safety profile of ondansetron at any dosage for long-term use as anticipated in

our ongoing and planned clinical trials.

4

According to the National Institute of Alcohol

Abuse and Alcoholism (the “NIAAA”) and the Journal of the American Medical Association (“JAMA”), in the United

States alone, approximately 35 million people each year have AUD (such number is based upon the 2012 data provided in Grant et. al. the

JAMA 2015 publication and has been adjusted to reflect a compound annual growth rate of 1.13%, which is the growth rate reported by U.S.

Census Bureau for the general adult population from 2012-2017), resulting in significant health, social and financial costs with excessive

alcohol use being the third leading cause of preventable death and is responsible for 31% of driving fatalities in the United States (NIAAA

Alcohol Facts & Statistics). AUD contributes to over 200 different diseases and 10% of children live with a person that has an alcohol

problem. According to the American Society of Clinical Oncologists, 5-6% of new cancers and cancer deaths globally are directly attributable

to alcohol. And, The Lancet published that alcohol is the leading cause of death in people ages 15-49 globally. The Centers for

Disease Control (the “CDC”) has reported that AUD costs the U.S. economy about $250 billion annually, with heavy drinking

accounting for greater than 75% of the social and health related costs. Despite this, according to the article in the JAMA 2015 publication,

only 7.7% of patients (i.e., approximately 2.7 million people) with AUD are estimated to have been treated in any way and only 3.6% by

a physician (i.e., approximately 1.3 million people). In addition, according to the JAMA 2017 publication, the problem in the United States

appears to be growing with almost a 50% increase in AUD prevalence between 2002 and 2013.

AUD is characterized by an urge to consume alcohol

and an inability to control the levels of consumption. Until the publication of the fifth revision of the Diagnostic and Statistical

Manual of Mental Disorders in 2013 (the “DSM-5”), AUD was broken into “alcohol dependence” and “alcohol

abuse”. More broadly, overdrinking due to the inability to moderate drinking is called alcohol addiction and is often called “alcoholism”,

sometimes pejoratively.

Since ondansetron is already manufactured for

generic sale, the active ingredient for AD04 is readily available from several manufacturers, and we have contracted with a U.S. manufacturer

to acquire ondansetron at a cost expected to be under $0.01 per dose. Clinical trial material (“CTM”) has already been manufactured

for the ONWARD Phase 3 trial. The CTM has demonstrated good stability after four years with the stability studies to date.

We have also developed the manufacturing process

at a third-party vendor to produce tablets at what we expect will serve for commercial scale production (i.e., greater than 1 million

tablets per batch), also at a cost expected to be less than $0.01 per dose. A proprietary packaging process has been developed, which

appears to extend the stability of the drug product. Packaging costs are expected to be less than $0.05 per dose. We do not have a written

commitment for supply of either the tablets or the packaging and believe that alternative suppliers are available to whom we can transfer

the processes that have been developed.

Methods for the companion diagnostic genetic test

have been developed as a blood test, and we established the test with a third-party vendor capable of supporting our clinical program.

Additionally, we have built validation and possible approval of the companion diagnostic into the Phase 3 program, including that we plan

to store blood samples for all patients in the event additional genetic testing is required by regulatory authorities.

COVID-19 Impact

Recruitment of patients in the ONWARD Phase 3

trial was slower than anticipated due to COVID-19 related governmental lockdowns in countries in which we were conducting the ONWARD Phase

3 trial. However, we have now completed the trial. Our corporate offices were open and operating without pause throughout the pandemic.

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

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

5

Disease Targets and Markets for AD04

Limitations of Current AUD Therapies

Today the most common treatments for AUD are directed

at achieving abstinence and typical treatments include psychological and social interventions. Most therapies actually require abstinence

prior to initiating therapy. Abstinence requires dramatic lifestyle changes often with serious work and social consequences. Frequently,

patients cannot attend family and social events in order to ensure compliance with abstinence, and patients often must suffer from the

stigma of having been labelled an alcoholic. Significant side effects of current pharmacologic therapies include mental side effects such

as psychiatric disorders and depressive symptoms and physical side effects such as nausea, dizziness, vomiting, abdominal pain, and hepatoxicity.

In fact, according to peer reviewed studies referenced in The Sober Truth: Debunking the Bad Science Behind 12-Step Programs and the

Rehab Industry, L. Dodes and Z. Dodes, 2014 by Dr. Lance Dodes, the former Director of the substance abuse treatment unit of Harvard’s

McLean Hospital, 90% or more of patients that use current therapy solutions, such as Alcoholics Anonymous, do not achieve long-term abstinence.

There are four drugs approved by the FDA and marketed

in the United States for the treatment of alcohol addiction, Antabuse® (disulfram) Vivitrol® (naltrexone),

Revia® (naltrexone) and Campral® (acomprosate) and one drug, Selincro® (nalmefene) is

marketed outside of the United States. All of the approved drugs, other than Selincro®, require abstinence prior to commencing

treatment with the drug, and all five drugs are known to have significant side effects.

Antabuse® was approved for the

treatment of alcohol dependence more than 50 years ago, making it the oldest such drug on the market. It works by interfering with the

body’s ability to process alcohol. Its method of action and purpose is to cause patients that drink alcohol while taking Antabuse® to experience numerous and extremely unpleasant adverse effects, including, among others, flushing, nausea, and palpitations,

with the goal that patients will continue the medication but refrain from drinking in order to avoid these effects.

Naltrexone, which can be taken as a once-daily

pill (Revia®) or in an approved once-monthly injectable form (Vivitrol® ) that requires a doctor to administer

is often associated with gastrointestinal complaints and has been reported to cause liver damage when given at certain high doses. As

a result, it carries an FDA boxed warning, a special emphasized warning, for this side effect.

Campral®, taken by mouth three

times daily, acts on chemical messenger systems in the brain.

Selincro® has not been approved

for sale in the United States.

Our Proposed Solution

Our goal with AD04 is to develop an effective

and safe product to treat AUD that does not require abstinence as part of the treatment and does not have the negative side effects of

the current drugs on the market. Our product candidate, AD04, is designed for genotype positive patients who desire to control their drinking

but cannot or do not want to completely abstain from drinking. By removing the difficulties associated with abstinence and the side effects

associated with the other current products on the market, we believe that we may be able to remove barriers to patient adoption that inhibit

adoption of current therapies and can attract a greater portion of the many millions of patients with AUD that remain untreated. Unlike

other therapies, our investigational product, AD04, uses a novel mode of action for treating AUD that involves genetic screening with

a companion diagnostic genetic test prior to treatment and is designed to reduce cravings for alcohol to effectively curb alcohol intake,

without the requirement of abstinence prior to or during treatment. Our product candidate is intended to be easy to use since it is administered

orally, currently on a twice daily basis and with a once-a-day tablet planned as part of the product’s life cycle management. To

date, clinical testing of AD04 has shown it to have a positive safety and tolerability profile with side effects similar to placebo.

The companion diagnostic genetic test to be used to identify patients

that are most likely to benefit from treatment with AD04 may potentially enhance the likelihood of a successful outcome for those undergoing

treatment. Additionally, it may provide doctors with the opportunity to have a non-threatening conversation about alcohol with their patients

and may provide the patient an acceptable path to help them determine if they might be a candidate for help with their alcohol use. If

the test results are positive, they would have a science-based rationale for their treatment, which reduces some of the stigma patients

might otherwise endure, and potentially allows them to be treated in the confidence of their doctor with an oral tablet.

6

Strengths and Competitive Advantages

Large Market Opportunity for an Effective

Solution

In the United States alone, approximately 35 million

people each year have AUD. Based on data from the Phase 2b trial of AD04 and our analysis of publicly available genetic databases, we

preliminarily estimate that about one in three patients with AUD in the U.S. will have the genetic markers to indicate possible treatment

with AD04. At this time, we are not aware of any oral pharmaceutical treatment approved in the U.S. that addresses the needs of patients

who desire to control their drinking but cannot or do not want to abstain from drinking. The current abstinence-based treatments have

limitations. The limited side effects expected for our investigational new drug, based on clinical data so far, are also believed to be

an important factor in the expected rapid uptake of AD04 in the market. Our approach, if approved by FDA, may allow for social drinking

to continue and is aimed at reducing the dangerous, heavy drinking. This would allow patients to live the life they want without the stigma

associated with complete abstention and currently endured by those seeking help for their excessive drinking. Assuming that one-third

of AUD patients are genotype positive for treatment with AD04 and a $255 price for a one month supply of the drug (assumed pricing based

on an average of prices published by Blue Cross Blue Shield in June 2017 for tier-3 oral, on-patent, chronic maintenance drugs, discounted

by 16.6%, to reflect the average difference between retail and wholesale pricing for branded drugs as reported by drugs.com), the total

potential market for AD04 would be approximately $36 billion in the United States alone.

Beyond the United States, alcohol consumption

worldwide is a serious health issue. The 2014 Global Status Report on Alcohol and Health published by the World Health Organization (the

“WHO”) states that 5.9% of all deaths (about 3.3 million per year) and 5.1% of disease worldwide are attributable to alcohol

consumption. Europe consumes over 25% of the total alcohol consumed worldwide despite only having 14.7% of the world’s population.

The WHO estimates that about 55 million people in Europe have AUD and, within Europe, Eastern Europe has a particularly acute problem

with Russia estimated to have about 21 million people with AUD. The WHO further estimates that 17.4% of adult Russians and 31% of adult

Russian males have AUD, and the Organization for Economic Cooperation and Development data indicates that 30% of all deaths in Russia

are alcohol related as reported by Quartz Media.

Companion Genetic Bio-Marker Aimed at Identifying

Patients Most Likely to Respond To Treatment, Potentially Results in Increased Use of AD04

We believe our drug is unique in that it is designed

to reduce heavy drinking in individuals with certain genotypes. We are pursuing a strategy that aims to integrate pre-treatment screening

with the companion diagnostic genetic test into the drug label, essentially combining the test and treatment into one integrated therapeutic

offering that has combined intellectual property protections. This companion diagnostic testing approach may be a useful genetic screening

tool to predict those most likely to respond to the drug and to have minimal side effects. Based on the clinical experience to date and

publicly available databases, we believe the genetic prevalence of genotype positive people is about 33% of the population in the United

States. We previously believed the prevalence in Scandinavia and in certain areas of Central and Eastern Europe may be greater than 50%,

but our experience in the ONWARD Phase 3 clinical trial indicates the prevalence in this area to also be about 33%. The FDA has agreed

that the Phase 3 trials of AD04 can proceed only enrolling patients that are genotype positive, which greatly reduces the cost, time and

risk relative to a trial that also enrolled patients that are genotype negative for treatment with AD04. We are conducting our current

landmark ONWARD pivotal Phase 3 clinical trial in counties in Scandinavia and Central and Eastern Europe, including Finland, Sweden, Latvia,

Poland, Bulgaria, and Croatia. We expect to use the ONWARD trial as a pivotal Phase 3 trial to serve as a basis for approval in both the

United States and Europe.

We believe that the companion diagnostic genetic

test enables physicians to more easily have an initial conversation with their patients about alcohol use and, for the patient, provides

a less threatening and obtrusive first step toward treatment because the conversation will include the topic of genetic testing and not

be solely about behavior. Patients that then test positive against the AD04 genetic panel would be expected to be more likely to then

receive a prescription for AD04 (based on an external quantitative market study of 156 primary care physicians and psychiatrists that

was conducted by Ipsos-Insight LLC, who we commissioned, and that concluded a majority of genetically targeted patients currently receiving

pharmacologic treatment would be switched to a drug with the characteristics expected for AD04).

7

Prior Work of Universities and our Ability

to Leverage Relationships Creates Cost Efficiencies

We have a worldwide, exclusive license to intellectual

property developed at the University of Virginia by our Chief Medical Officer, Dr. Bankole A. Johnson, who was Chairman of the Department

of Psychiatry & Neurobehavioral Sciences at the University of Virginia (and prior to that the Chief of the Division of Alcohol and

Drug Addiction at the University of Texas) and was Chair, Department of Psychiatry and Director of the Brain Science Research Consortium

Unit at the University of Maryland. Dr. Johnson has spent almost three decades researching the underlying subject matter. Significant

portions of the supporting research were also funded under grants from the National Institute of Health to the University of Virginia

and the University of Texas. On July 5, 2019, we entered into a Master Services Agreement and statement of work with Psychological Education

Publishing Company (“PEPCO”), a company owned by Dr. Johnson, that is engaged in the business of administering a behavioral

therapy program, Brief Behavioral Compliance Enhancement Treatment, for our Phase 3 clinical trial using AD04, for the treatment of AUD.

By leveraging the prior work of universities and

their researchers, including their pre-clinical studies and accumulated data, we believe we have developed a significant drug development

opportunity. Because of the licensing approach taken to secure intellectual property, including, without limitation, patents and rights

to clinical trial data, and our collaborations with the University of Virginia, we, historically have not had to incur the significant

costs that would normally be required to develop therapeutic treatments to the point of being ready to commence a Phase 3 clinical trial,

which often amount to tens of millions of dollars or more. In fact, based upon current information, and depending on what the regulatory

authorities may require to secure marketing authorization, we estimate that we will require approximately $10.7 million for the current

Phase 3 clinical trial (not including company overhead) and an additional $30 million or more of additional capital to complete our second

Phase 3 program (which includes $20 million for a confirmatory Phase 3 trial and any necessary Phase 1 clinical trials and other development

expenses and does not include the additional cost of a possible third Phase 3 clinical trial) as currently contemplated in order to achieve

regulatory approval for the use of AD04 to treat AUD in the United States and Europe. We have already used approximately $8.9 million

in funds derived from our initial public offering and subsequent financings and warrant exercises to fund trial activities. We anticipate

that the approximate $2.1 million needed to complete the initial Phase 3 clinical trial to the point of releasing data and the completion

of follow-up activities will be fully funded from our cash on hand. We anticipate, with our expected rate of expenditure, including Purnovate

related research and development projects and Company overhead, to have exhausted our funds on hand by the end of April 2023. Additional

funding will be needed to fund an additional Phase 3 trial of AD04, if necessary, as well as Purnovate research and development projects

and Company overhead. There is no assurance that such funds could be raised in time to complete the trial on acceptable terms.

The NIAAA has provided and continues to provide

technical assistance and advice to us, and we have applied for an NIAAA Research Resource Award, which if granted would provide financial

support for our Phase 3 clinical trial. Although there can be no assurance that we will be selected by the NIAAA to receive funding, since

we are not aware of any pharmaceutical company planning Phase 3 pivotal trials to serve as a basis for marketing approval for products

for the treatment of AUD, we believe AD04 would be a competitive candidate. Currently, much of the funding expected for grants such as

those for which we have applied has been diverted to COVID-19-related grants, and we are not certain if and when funding for grants such

as ours will be available.

8

Known, Well-Tested Agent Has Shown Favorable Results in Non-AUD

Uses

Ondansetron, the principal active pharmaceutical

agent in AD04 has been approved by the FDA to treat nausea and vomiting but is administered at much higher doses than we intend to use

and has shown limited side effects even at the higher dosages currently on the market. However, it has not been approved in our anticipated

dosage or for our anticipated uses and treatment period. Consequently, we expect to submit a new drug application, pursuant to section

505(b)(2) of the Federal Food, Drug, and Cosmetic Act, for U.S. marketing authorization. Section 505(b)(2) of the Federal Food, Drug,

and Cosmetic Act allows the FDA to rely, for approval of an NDA, on data not developed by the applicant. Such an NDA contains full reports

of investigations of safety and effectiveness, but where at least some of the information required for approval comes from studies not

conducted by or for the applicant and for which the applicant has not obtained a right of reference. Such applications permit approval

of applications other than those for duplicate products and permits reliance for such approvals on literature or an FDA finding of safety

and/or effectiveness for an approved drug product. A Phase 2b University of Virginia investigator sponsored clinical trial of AD04 for

the treatment of AUD showed promising results and no overt safety concerns (there were no statistically significant serious adverse events

reported). Not only did the trial show no statistically significant, serious adverse side effects, but both of the pre-specified endpoints,

reduction in severity of drinking measured in drinks per day of drinking day and reduction in frequency of drinking measured in days of

abstinence, were met with statistical significance as shown in the graph below:

Phase 2b Clinical Trial Results– Analysis

of Primary and Secondary Efficacy Endpoints for Target Genotypes

A 12-week, randomized, two-center, parallel-group,

double-blind, placebo-controlled, two-arm (four cell) clinical trial of oral ondansetron (n=283) conducted by University of Virginia

Our Substantial Proprietary Estate and Protection from Competition

We currently hold a worldwide, exclusive license

to three (3) patent families that provide us with the ability to exclude potential competitors from practicing the claimed inventions,

such as the use of ondansetron to treat any of the four (4) specified genotypes for AUD. Our licensed patent estate is expected to provide

us patent protection through 2032 plus possible extensions. Ondansetron, the active ingredient in AD04, has never been approved in a low

dosage near the AD04 dose of 0.33mg per tablet, and we believe our licensed patents will protect AD04 from any competitor that attempts

to bring to market an ondansetron dose at or near the AD04 dose for treatment of patients having one or more of the four target genotypes.

We believe use of the currently marketed doses

“off-label” will not be significant due to (i) the lack of demonstrated efficacy at currently marketed doses, (ii) potential

safety concerns if the currently marketed doses are used chronically as is expected to be necessary for treating AUD, and (iii) cutting

the smallest currently marketed dose into the 12 pieces that would be necessary to achieve the AD04 dose is deemed by us to be impractical

and likely to result in inaccurate dosing.

Companion Genetic Bio-Marker Aimed at Identifying

Patients Most Likely to Respond To Treatment, Potentially Results in Increased Use of AD04

We believe our drug is unique in that it is

designed to treat individuals with certain genotypes. We are pursuing a strategy that aims to integrate pre-treatment screening with

the companion diagnostic genetic test into the drug label, essentially combining the test and treatment into one integrated

therapeutic offering that has combined intellectual property protections. This companion diagnostic testing approach may be a useful

genetic screening tool to predict those most likely to respond to the drug and to have minimal side effects. Based on the clinical

experience to date and publicly available databases, we believe the genetic prevalence of genotype positive people is about 33% of

the population in the United. We previously believed the prevalence in Scandinavia and in certain areas of Central and Eastern

Europe may be greater than 50%, but our experience in the ONWARD Phase 3 clinical trial indicates the prevalence in this area to

also be about 33%. The FDA has agreed that the Phase 3 trials of AD04 can proceed only enrolling patients that are genotype

positive, which greatly reduces, the cost, time and risk relative to a trial that also enrolled patients that are genotype negative

for treatment with AD04. The FDA has indicated that any approval based on a trial only in genotype positive patients would result in

labeling restricted to treating genotype positive patients.

We believe that the companion diagnostic genetic

test enables physicians to more easily have an initial conversation with their patients about alcohol use and, for the patient, provides

a less threatening and obtrusive first step toward treatment because the conversation will include the topic of genetic testing and not

be solely about behavior. Patients that then test positive against the AD04 genetic panel would be expected to be more likely to then

receive a prescription for AD04.

9

Experienced Leadership

Our management, advisors and board of directors

have extensive experience in pharmaceutical development, the clinical trial and regulatory approval processes, drug commercialization,

financing capital-intensive projects, and developing new markets for pharmaceutical agents. Members of our team have previously worked

in senior management and senior officer positions, or led significant research initiatives at Gensia, Clinical Data, Shire, Viagene, New

River Pharmaceuticals, Collateral Therapeutics, Indivior, Krystal Biotech, Sucampo Pharmaceuticals, Osiris Therapeutics, Adenosine Therapeutics,

and the University of Virginia and University of Maryland in a broad range of therapeutic areas. Our management and board members have

particular expertise in the science and development of addiction related drugs and bringing new drugs to the market.

Our Strategy for AD04 and Addiction Related

Diseases and Disorders

We develop pharmaceutical treatments for addictions

and addictive disorders and related diseases and disorders. Our business strategy is to advance AD04, our lead investigational drug candidate,

toward regulatory approval for alcohol addiction in the United States, the European Union, and then eventually other territories. We subsequently

plan to develop label expansions into other indications (e.g., opioid use disorder, other drug addictions, obesity, smoking cessation,

eating disorders and anxiety). Additionally, we are inventing and developing novel therapeutic agents at our chemistry facilities and

seeking to acquire addiction related assets, particularly those expected to be synergistic with AD04 once it is marketed, if it is approved.

Our goals in executing this strategy are to keep

capital requirements to a minimum, expedite product development, gain access to clinical research and manufacturing expertise that will

advance product development, approval and eventual market uptake of our product, and rely on a well-defined and carefully executed intellectual

property strategy in order to position our products with long-term, defensible, competitive advantages. Execution of this strategy may

include seeking grant funding and funding from partners and collaborators when available on terms we believe to be favorable to us, and

on which there is no guarantee will be available. In collaboration with our CRO, we have been and are working to adapt the implementation

of our strategy in response to the ongoing coronavirus pandemic.

Our near-term strategy includes:

10

The clinical development plan for AD04 can be

described as a two-stage development strategy in which we expend limited resources to achieve the significant value inflection point of

Phase 3 data in our primary indication of AUD. With a successful trial and the risk reduction associated with that success, we would then

be ready to conduct the final trials to seek approval in the U.S. and Europe as shown below:

AD04 — Two-Stage Clinical Development Strategy — Conduct

the Phase 3 clinical trials sequentially

11

Assuming approval of AD04, we plan to execute a two-stage commercialization

plan. With psychiatrists and addiction specialists treating a majority of the current AUD patients today and with psychiatrists most likely

to be familiar with the mechanism of action of AD04, we believe that a relatively small psychiatry-targeted, specialty sales force could

successfully sell AD04 into the market. This plan creates the opportunity for us to develop into a commercial enterprise with an initial

niche-market sales force at a relatively low cost for market entry. It also expands the universe of potential acquirers of our company

or AD04 to smaller and mid-size pharmaceutical companies. Once success is shown in the niche market and the thought leaders and early

adopters are prescribing AD04, market adoption risk will have been greatly reduced and we would expect to be able to sell or partner with

a large pharmaceutical partner to develop AD04 as a blockbuster product. This commercialization plan is shown below:

AD04 — Two-Stage Commercialization Strategy

— Initial launch with a specialty sales force to build the market, then partner or sell to a large pharmaceutical partner to capture

market share and optimize the market

Ondansetron History and Foundation for Treating

AUD

Ondansetron is a 5-HT3 receptor antagonist. Preclinical

and pharmacobehavioral studies suggest that blockade of serotonin-3 receptors will influence the dopamine reward system activated by alcohol,

decreasing dopamine release and attenuating craving for alcohol (Dawes, MA et al., 2005b; Johnson, BA et al., 2002; Lovinger, DM, 1999a).

Early clinical studies found that the efficacy of ondansetron is limited to certain subgroups of the alcohol-dependent population and

suggested the differential effect could be predicted based on age of onset of alcoholism, an indistinct concept likely confounded by genetic,

regional and ethnic differences (Johnson, BA et al., 2000; Kranzler, HR et al., 2003). Recent research suggests the variable effect may

be predictable based on molecular mechanism of ondansetron action and individual subject genotype of key genes in the serotonin system

(Enoch, MA et al., 2010; Johnson, BA et al., 2011; Kenna, GA et al., 2009).

We are pursuing development of ondansetron in

the alcohol-dependent population. Clinical studies will initially focus on the use of a low dose, oral tablet (0.33 mg administered twice

daily) to reduce alcohol consumption in subjects with genotypes that have been correlated with a responsive to treatment with ondansetron.

Ondansetron was first approved by the FDA in 1991

as a solution for injection. Subsequent approvals were obtained for oral tablets in dosage forms and an oral solution. It is marketed

as Zofran® and is also available in generic formulations, and it has been used widely for the approved indications –

prevention of nausea and vomiting associated with certain cancer chemotherapies and radiotherapies and for the prevention of postoperative

nausea or vomiting — at adult doses of 8–24 mg/day with manageable side effects.

Ondansetron has been administered to dogs‚

rats‚ and mice as part of a preclinical toxicology program which included single-dose acute‚ repeated-dose studies. Ondansetron

was not mutagenic in the standard battery of microbial tests for mutagenicity and no carcinogenic effects were seen in 2-year studies

in rats and mice with oral ondansetron doses up to 10 and 30 mg/kg/day, respectively. In studies of rats and rabbits there was no evidence

of reproductive toxicity seen on fertility, early embryonic development, perinatal/postnatal development or fetal development of the F2

generation. Based on these studies, as well as over 20 years of human use in clinical trials and the post-marketing environment, ondansetron

is considered to be a well-tolerated drug with a generally mild safety profile.

Ondansetron, by blocking the 5-HT3 receptor, is

known to affect dopaminergic signaling in the brain; and the scientific rational for use of a 5-HT3 antagonist in the treatment of alcohol

dependence is well established (Johnson, BA, 2004). Briefly, studies suggest that: the rewarding effects of alcohol involve activation

of the 5-HT3 receptors leading to release of dopamine within the mesolimbic system of the brain (McBride, WJ et al., 2004). Thus, by blocking

activation of the 5-HT3 receptor, ondansetron may reduce the ethanol-stimulated release of dopamine leading to reduced feelings of pleasure

or reward and consequently, reduced consumption (Carboni, E et al., 1989; Costall, B et al., 1987; Hagan, RM et al., 1990; Imperato, A

and Angelucci, L, 1989; Lovinger, DM, 1999b; McBride, WJ et al., 2004; Minabe, Y et al., 1991; Rasmussen, K et al., 1991; Wozniak, KM

et al., 1990; Yoshimoto, K et al., 1996).

12

Preclinical studies have demonstrated that alcohol

stimulates the release of both serotonin (5-hydroxytryptamine or 5-HT) and dopamine within the cortio-mesolimbic system (Campbell, AD

et al., 1996; Campbell, AD and McBride, WJ, 1995; Di Chiara, G and Imperato, A, 1988; Imperato, A and Angelucci, L, 1989; Yoshimoto, K

et al., 1992; Yoshimoto, K et al., 1996; Zazpe, A et al., 1994). Other studies have shown that alcohol potentiates the effects of 5-HT

at the 5-HT3 receptor, leading to augmented release of dopamine, and that ondansetron and the selective antagonists of the 5-HT3 receptor

inhibit dopaminergic firing and release of dopamine in response to alcohol and serotonin (Costall, B et al., 1987; Lovinger, DM, 1991;

Minabe, Y et al., 1991; Rasmussen, K et al., 1991; Yoshimoto, K et al., 1996; Zazpe, A et al., 1994; Zhou, Q et al., 1998). Finally, numerous

in vivo studies in rats and mice have shown that ondansetron and other selective antagonist of the 5-HT3 receptor reduce volitional intake

of alcohol in models selectively bred for alcohol preference (Fadda, F et al., 1991; Hodge, CW et al., 1993; McBride, WJ and Li, TK, 1998;

Meert, TF, 1993; Tomkins, DM et al., 1995).

The aforementioned nonclinical studies have shown

that 5-HT3 and dopamine interactions in the cortico-mesolimbic system appear to mediate many of the reinforcing effects of alcohol. Collectively

the available nonclinical studies suggest that, by inhibiting the 5-HT3 receptor and reducing the release of dopamine in the cortico-mesolimbic

area, ondansetron can interfere with the dopamine reward system activated by alcohol and lead to reduced alcohol intake (Barnes, NM and

Sharp, T, 1999; Dawes, MA et al., 2005b; Johnson, BA et al., 1993; Johnson, BA and Cowen, PJ, 1993; Lovinger, DM, 1991,

1999a; Swift, RM et al., 1996; Tomkins, DM et al., 1995).

Five clinical studies have been conducted that

demonstrate ondansetron is a promising treatment for alcohol-dependent individuals (Johnson, BA et al., 2011; Johnson, BA et

al., 2000; Kenna, GA et al., 2009; Kranzler, HR et al., 2003; Sellers, EM et al., 1994). Several important findings

in these studies guide the design of future clinical studies, including:

13

The below table summarizes the five clinical studies

demonstrating ondansetron is a promising treatment for alcohol-dependent individuals

Study type (Reference) Number of Subjects Dosing (Duration) Summary Results

Additional detail with respect to four of the

clinical studies referenced in the chart above is provided below with the fifth being the Phase 2b clinical trial upon which we are basing

the development of AD04 and which is described more fully in the following section titled “Phase 2b Investigator Initiated Clinical

Trial of AD04 for Alcohol Use Disorder Conducted by the University of Virginia.”

A Dose-Ranging, Placebo-Controlled, 6-Week

Study of Ondansetron in Alcoholic-Dependent Subjects

In 1994, Sellers et al. reported on the

effects of administration of 0.25 mg bid ondansetron (N=23), 2 mg bid ondansetron (N=25), or placebo (N=23) for 6 weeks in alcohol-dependent

males (Sellers, EM et al., 1994). Endpoints included change in drinks per drinking day (“DDD”) and proportion of responders,

where a responder was defined as a subject with a Reliable Change score > 1.96, representing an improvement of at least 2 standard

deviations. The Reliable Change score was calculated as the difference between pre- and post-test DDD divided by the standard error. Analyses

were conducted comparing pre-treatment with the Week 6 visit, representing the end-of-study medication administration, and pre-treatment

with the Week 7 visit, after completion of a 1-week follow-up period.

In the 71 subjects who completed the study, the

on-treatment changes in DDD were approximately -1.9 (0.25 mg bid), -1.2 (2 mg bid), and -1.3 (placebo), with neither ondansetron effect

being statistically different from the placebo effect. The corresponding changes from pre-treatment to Week 7 (after 6 weeks of treatment

and a 1-week follow-up) were approximately -2.7 (0.25 mg bid), -1.1 (2 mg bid), and -1.6 (placebo), with the difference between low-dose

ondansetron and placebo approaching statistical significance (p=0.06). By Week 6, nearly twice as many subjects on low-dose ondansetron

compared with those on either high-dose ondansetron or placebo showed significant improvement according to the Reliable Change score.

Lower baseline drinking and higher level of education were significant predictors of reduction in drinking while on treatment.

14

A Dose-Ranging, Placebo-Controlled, 11-Week

Study of Ondansetron in Alcoholic-Dependent Subjects

In 2000, Johnson et al. reported on the

co-administration of weekly cognitive behavioral therapy and either placebo or ondansetron at doses of 1, 4, and 16 μg/kg bid for

11 weeks (after a 1-week, single-blind, placebo lead-in) in 321 alcohol-dependent subjects (Johnson, BA et al., 2000). Endpoints

included drinks per day, DDD, percentage of days abstinent (“PDA”), total days abstinent, and plasma carbohydrate deficient

transferrin (CDT) level, an objective measure of drinking. Analyses were conducted comparing each dose group with placebo, with drinking

response variables analyzed as means of data collected from Weeks 3 through 12.

The table below sets forth treatment results.

Ondansetron treatment at doses of 1, 4, and 16 μg/kg bid resulted in statistically significant reductions in DDD and drinks per

day compared with placebo for EOA (age of onset ≤25 years). The maximum clinical effect was observed at the middle dose (4 μg/kg

bid), though the differences between doses were not statistically significant. At 4 μg/kg bid (but not at 1 or 16 μg/kg bid),

significant improvements in days and PDA were also achieved. LOA (age of onset ≥26 years) did not benefit from ondansetron treatment

at any dose studied.

Treatment Effect Size in EOA Subjects and Statistical

Comparison to Placebo Effect

Variable 1 μg/kg bid 4 μg/kg bid 16 μg/kg bid

The findings in this study support the earlier

evidence that the dose-response effect of ondansetron in reduction of alcohol consumption is not linear. Of the doses used in this study,

only 4 μg/kg (0.28 mg for a 70 kg person) bid exhibited clinically and statistically meaningful improvements in all efficacy endpoints.

This study also suggested that ondansetron may be an appropriate therapy for EOA, but not LOA.

An Open-Label, 8-Week Study Comparing Ondansetron

Effect in Early-Onset and Late-Onset Alcoholic Subjects

In 2003, Kranzler et al. reported on the

co-administration of weekly cognitive behavioral therapy and ondansetron at 4 μg/kg bid for 8 weeks to 40 alcohol-dependent subjects

(Kranzler, HR et al., 2003). The subjects were evenly divided between early-onset alcoholism (EOA; age of onset of the disorder

<25 years) and late-onset alcoholism (LOA; age of onset of the disorder ≥25 years). Endpoints included drinks per day, DDD, PDA,

Drinker Inventory of Consequences (DrInC) score, and percentage of heavy-drinking days, where heavy drinking was defined as ≥5 drinks

in a day for a male subject or ≥4 drinks in a day for a female subject. Analyses were conducted comparing pre-treatment with 8-week

values within onset category (EOA or LOA) and comparing treatment effects between categories.

The table below sets forth treatment results.

All efficacy parameters improved significantly on treatment in both groups. EOA subjects reported significantly greater improvements in

drinks per day, DDD, and DrInC score than LOA subjects. These findings, as noted earlier by Johnson et al., suggest that ondansetron

shows promise for treatment of EOA by improving drinking outcomes.

Results of Study Comparing Effects of Ondansetron in EOA versus

LOA

EOA LOA EOA v LOA

change mean (SD) p-value change mean (SD) p-value p-value

15

A 3-Period Study of Ondansetron Effect and

Sertraline Effect in Subgroups of Alcoholics Constructed Based on Genotypes of the Serotonin Transporter Gene

Constructed Based on Genotypes of the Serotonin

Transporter Gene

In 2009, Kenna et al. reported on a placebo-controlled

cross-over study in which 21 alcohol-dependent subjects received 0.5 mg/day ondansetron or 200 mg/day sertraline for 3 weeks, placebo

for 3 weeks and the alternative active medication for 3 weeks (Kenna, GA et al., 2009). An alcohol self-administration experiment

was conducted at the end of each treatment period. The primary endpoint was DDD during the final week of each treatment period.

During the first 3-week treatment period, ondansetron-treated

subjects carrying L/L genotype (n = 3), compared to the L/S and S/S carriers (n = 4), had a significantly fewer DDD (3.66 vs. 8.40, p

= 0.02). Within L/S and S/S group, there was no significant effect of ondansetron. A pronounced order effect confounded analyses after

the third 3-week treatment period.

Our clinical development program is designed to

demonstrate the safety and efficacy of ondansetron in the alcohol-dependent population in low dosages for long periods of time, while

targeting genotypes that have been shown to benefit from ondansetron treatment. Ultimately, this development program aims to establish

a scientific link between the biology of alcohol addiction and the therapeutic mechanism of ondansetron action, permitting genetically-based

prediction of ondansetron effectiveness.

Phase 2b Investigator Initiated Clinical Trial of AD04 for Alcohol

Use Disorder Conducted by the University of Virginia

In various studies, it has been shown that alcohol

dependent individuals with the LL genotype of the 5’-HTT and the TT genotype in the 3’-UTR LL and TT genotype have lower B-CIT

neuronal binding to 5-HTT. It is hypothesized that individuals with the LL or TT genotype, 5-HTT gene expression is suppressed by increased

alcohol consumption, and therefore, ondansetron, which causes 5-HTT gene expression would have the greatest effect upon individuals that

possess both the LL genotype of the 5’-HTT and the TT genotype in the 3’-UTR. A subsequent Phase 2b study (N = 283), conducted

by the University of Virginia for which we have acquired rights to the data, showed that a prospectively identified subgroup of alcohol-dependent

individuals with these specific polymorphisms of the serotonin transporter protein responded therapeutically to ondansetron administration

(Johnson, BA et al., 2011). Further analysis of this same data set against 18 additional polymorphisms located on the genes for the A

and B subunits of the serotonin 5-HT3 receptor revealed polymorphisms that were also associated with a therapeutic response to ondansetron.

Collectively, the genotypes from the two aforementioned analyses comprise the genotypes selected for testing in Phase 3 trials for AD04.

The current ONWARD Phase 3 study is testing ondansetron’s efficacy compared with placebo based on its ability to decrease the frequency

and amount of heavy drinking among alcohol dependent individuals with the selected genotypes.

Phase 2b Clinical Trial Study Design

The Phase 2b clinical trial conducted by the University

of Virginia was a 283-patient, 12-week, randomized, two-center, parallel-group, placebo-controlled study. Following a 1 week placebo run

in (single-blind), alcohol-dependent subjects were randomized to receive either 4 μg/kg ondansetron or placebo, orally, twice daily

(double-blind) for 11 additional weeks. In addition to study treatment, all subjects received weekly, standardized, manual-driven, cognitive

behavioral therapy.