ADIAL PHARMACEUTICALS, INC.

Previous wording

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited consolidated financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2024 that we filed with the SEC on March 4, 2025 (the “2024 Form 10-K”). ln addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties including, but not limited to, those set forth below under “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of the 2024 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission (“SEC”).

Current wording

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the notes presented herein included in this Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2024 that we filed with the SEC on March 4, 2025 (the “2024 Form 10-K”). ln addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties including, but not limited to, those set forth below under “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of the 2024 Form 10-K. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission (“SEC”).

Previous wording

Our current cash and cash equivalents, including the cash received from the warrant inducement that closed on May 5, 2025, are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based on our current commitments and development plans. We have incurred recurring losses and need to raise additional funds to sustain our operations. These factors raise substantial doubt about our ability to continue as a going concern.

Current wording

Our current cash and cash equivalents, including the cash received from the warrant inducement transaction in May 2025 and equity issuance in June 2025, are not expected to be sufficient to fund operations for the twelve months from the date of filing this Quarterly Report on Form 10-Q, based on our current commitments and development plans. We have incurred recurring losses and need to raise additional funds to sustain our operations. These factors raise substantial doubt about our ability to continue as a going concern.

Previous wording

We have incurred net losses in each year since our inception, including net losses of approximately $2.2 million and $13.2 million for the three months ended March 31, 2025 and year ended December 31, 2024, respectively. We had accumulated deficits of approximately $84.2 million and $82 million as of March 31, 2025 and December 31, 2024, respectively. All of our operating losses in the three months ended March 31, 2025 resulted from costs incurred in continuing operations, including costs in connection with our continuing research and development programs and from general and administrative costs associated with our operations.

Current wording

We have incurred net losses in each year since our inception, including net losses of approximately $4.2 million and $13.2 million for the six months ended June 30, 2025 and year ended December 31, 2024, respectively. We had accumulated deficits of approximately $86.2 million and $82 million as of June 30, 2025 and December 31, 2024, respectively. All of our operating losses in the three months ended June 30, 2025 resulted from costs incurred in continuing operations, including costs in connection with our continuing research and development programs and from general and administrative costs associated with our operations.

Previous wording

On Feb 4, 2025, we received a positive response from the U.S. Food and Drug Administration (“FDA”) on it’s proposed in-vitro bridging strategy for AD04. At the April 2023 Type C meeting with the FDA, they reaffirmed the acceptance of the heavy-drinking-day based endpoints as a basis for approval for the treatment of Alcohol Use Disorder rather than the previously required abstinence-based endpoints. As a result, we are preparing for the next FDA interaction to confirm the Phase 3 clinical plan in the United States. In January of 2025, the FDA also released a Qualification Statement accepting another surrogate endpoint for Alcohol Use Disorder (AUD). The newly released Qualification Statement by Center for Drug Evaluation and Research (CDER), states the acceptance of the 2-level reduction of the World Health Organization (WHO) risk drinking levels of alcohol consumption as an efficacy endpoint in pivotal clinical trials with adults diagnosed with (AUD). We have also been issued key patents in the United States, the European Union, and other jurisdictions for which we have 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 addictions.

Current wording

On February 25, 2025, we received a positive response from the U.S. Food and Drug Administration (“FDA”) on our proposed in-vitro bridging strategy for AD04. At our April 2023 Type C meeting with the FDA, the FDA reaffirmed the acceptance of the heavy-drinking-day based endpoints as a basis for approval for the treatment of Alcohol Use Disorder rather than the previously required abstinence-based endpoints. As a result, we are preparing for the next FDA interaction to confirm the Phase 3 clinical plan in the United States. In January of 2025, the FDA also released a Qualification Statement accepting another surrogate endpoint for Alcohol Use Disorder (AUD). The newly released Qualification Statement by Center for Drug Evaluation and Research (CDER), states the acceptance of the 2-level reduction of the World Health Organization (WHO) risk drinking levels of alcohol consumption as an efficacy endpoint in pivotal clinical trials with adults diagnosed with (AUD). We have also been issued key patents in the United States, the European Union, and other jurisdictions for which we have exclusive license rights. The active ingredient in AD04 is ondansetron, a serotonin-3 antagonist. Due to its mechanism of action, we believe AD04 has the potential to be used for the treatment of other addictive disorders, such as Opioid Use Disorder, obesity, smoking, and other drug addictions.

Previous wording

On May 1, 2025, we announced patent number 12,274,692 was issued on April 15, 2025 by the United States Patent and Trademark Office covering the administration of AD04, our investigational drug, as a precision medicine approach for patients with specific genetic markers. The patent claims a method of treating addiction by administering a therapeutically effective amount of AD04 to patients with serotonin-related gene variations, including specific genotypes of HTR3A, HTR3B, and SLC6A4, such as the LL genotype of 5-HTTLPR in combination with variations in rs1150226, rs17614942, and rs1176713.

Current wording

On May 1, 2025, we announced that patent number 12,274,692 was issued on April 15, 2025 by the United States Patent and Trademark Office covering the administration of AD04, our investigational drug, as a precision medicine approach for patients with specific genetic markers. The patent claims a method of treating addiction by administering a therapeutically effective amount of AD04 to patients with serotonin-related gene variations, including specific genotypes of HTR3A, HTR3B, and SLC6A4, such as the LL genotype of 5-HTTLPR in combination with variations in rs1150226, rs17614942, and rs1176713.

Previous wording

On May 2, 2025, we entered into a warrant inducement agreement (the “Inducement Agreement”) with an existing healthcare-focused institutional investor of ours for the immediate exercise of existing Series B Warrants to purchase 1,418,440 shares of our common stock and Series C Warrants, and together with the Series B Warrants (the "Existing Warrants") to purchase 2,300,000 shares of our common stock at a reduced exercise price of $0.74 for net proceeds of approximately $2.35 million, before deducting legal fees and other transaction expenses. In consideration for the immediate exercise in full of the Existing Warrants, the investor received, in a private placement, new unregistered (i) Series B-1 warrants to purchase up to 2,482,270 shares of common stock(the "Series B-1 Warrants"), and (ii) Series C-1 Warrants to purchase up to 4,025,000 shares of common stock (the "Series C-1 Warrants"), and together with the Series B-1 Warrants the "New Warrants"). The New Warrants have an exercise price of $0.74 and will be exercisable upon stockholder approval. The Series B-1 Warrants expire five years from the date of such approval and the Series C-1 Warrants will expire eighteen months from the date of such approval. The warrant inducement transaction closed on May 5, 2025. We expect to use the net proceeds from these transactions for working capital and other general corporate purposes.

Current wording

On May 2, 2025, we entered into a warrant inducement agreement (the “May 2025 Inducement Agreement”) with an existing healthcare-focused institutional investor of ours (the “Holder”) for the immediate exercise of existing Series B Warrants to purchase 1,418,440 shares of our common stock and Series C Warrants, and together with the Series B Warrants (the "Existing Warrants") to purchase 2,300,000 shares of our common stock at a reduced exercise price of $0.74 for net proceeds of approximately $2.2 million. In consideration for the immediate exercise in full of the Existing Warrants, the investor received, in a private placement, new unregistered (i) Series B-1 warrants to purchase up to 2,482,270 shares of common stock(the "Series B-1 Warrants"), and (ii) Series C-1 Warrants to purchase up to 4,025,000 shares of common stock (the "Series C-1 Warrants"), and together with the Series B-1 Warrants the "May 2025 Warrants"). Upon issuance the May 2025 Warrants had an exercise price of $0.74 and were exercisable upon stockholder approval, which approval was obtained on August 1, 2025. The Series B-1 Warrants expire five years from the date of such approval and the Series C-1 Warrants will expire eighteen months from the date of such approval. The warrant inducement transaction closed on May 5, 2025.

Previous wording

The expense recognized to the change in the value of our equity method investment in Adovate, LLC decreased by approximately $27,000 in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This slight decrease is due to variations in the loss recognized related to our equity investment, with changes to the value of our Adovate equity recognized on a three month lag.

Current wording

The expense recognized to the change in the value of our equity method investment in Adovate, LLC decreased by approximately $123,000 in the three months ended June 30, 2025 compared to the three months ended June 30, 2024. This decrease is due to variations in the loss recognized related to our equity investment which includes a lower equity share, with changes to the value of our Adovate equity recognized on a three month lag.

Previous wording

Research and development expenses increased by approximately $293,000 (65%) during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The key drivers of the increase were increased chemistry, manufacturing, and controls (CMC) expenses to develop clinical supplies for the upcoming program and consulting expenses as we continue to progress and advance AD04 to a Phase 3 trial.

Current wording

Research and development expenses increased by approximately $12,000 (1%) in the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The slight increase was primarily driven by increased chemistry, manufacturing, and controls (CMC) expenses to develop clinical supplies for the upcoming program to advance AD04 to a Phase 3 trial, offset by lower clinical activity expense.

Previous wording

General and administrative expenses increased by approximately $129,000 (9%) during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This modest increase was mainly due to higher compensation and consulting.

Current wording

General and administrative expenses increased by approximately $6,000 in the six months ended June 30, 2025, compared to the six months ended June 30, 2024. This slight increase was mainly due to higher compensation, offset by reduction in consulting expense.

Previous wording

Total other income, excluding losses from the equity method investment and inducement expense from the March 2024 warrant inducement transaction, increased by approximately $179,000 in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This increase was mainly due to the recognition of a milestone payment received from Adovate of $150,000 along with an increase in interest income that resulted from a higher cash balance held in the period.

Current wording

Total other income, excluding losses from the equity method investment and inducement expense, increased by $151,000 (203%) in the six months ended June 30, 2025 compared to the six months ended June 30, 2024. This increase was due to the recognition of a milestone payment received from Adovate of $150,000 during the six months ended June 30, 2025.

Previous wording

Our principal liquidity needs have historically been working capital, R&D costs including clinical trials, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we engage in clinical trials and develop and eventually commercialize our compound, if approved by regulatory authorities. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, sales pursuant to the At the Market Offering Agreement, dated April 18, 2024, that we entered into with H.C. Wainwright & Co., LLC (the “ ATM Agreement”), private placements, use of our equity line, as well as other equity financings, warrant exercises, and the issuance of debt securities.

Current wording

Our principal liquidity needs have historically been working capital, R&D costs including clinical trials, patent costs and personnel costs. We expect these needs to continue to increase in the near term as we engage in clinical trials and develop and eventually commercialize our compound, if approved by regulatory authorities. Over the next several years, we expect to increase our R&D expenses as we undergo clinical trials to demonstrate the safety and efficacy of our lead product candidate. To date, we have funded our operations primarily with the proceeds from our initial and secondary public offerings, sales pursuant to the At the Market Offering Agreement, dated April 18, 2024, that we entered into with H.C. Wainwright & Co., LLC (the “HCW ATM Agreement”), private placements, use of our equity line, as well as other equity financings, warrant exercises, and the issuance of debt securities.

Previous wording

During the year ended December 31, 2024, our primary sources of funding were the exercise of previously issued warrants and the use of our ATM Agreement and the March 2024 warrant inducement described below.

Current wording

During the year ended December 31, 2024, our primary sources of funding were the exercise of previously issued warrants and the use of our HCW ATM Agreement and the March 2024 warrant inducement described below.

Previous wording

On March 1, 2024, we entered into the Inducement Agreement pursuant to which the Holder of the Existing Warrants exercised for cash the Existing Warrants to purchase up to approximately 1,150,000 shares of common stock, at an exercise price of $2.82 per share. The transactions contemplated by the Inducement Agreement closed on March 6, 2024 and we received aggregate gross proceeds of approximately $3.5 million, before deducting placement agent fees and other expenses payable by us. Net proceeds of this transaction were approximately $3.1 million.

Current wording

On March 1, 2024, we entered into an inducement agreement (the “March 2024 Inducement Agreement”) pursuant to which the holder of certain existing warrants exercised for cash warrants to purchase up to approximately 1,150,000 shares of common stock, at an exercise price of $2.82 per share. The transactions contemplated by the March 2024 Inducement Agreement closed on March 6, 2024 and we received aggregate gross proceeds of approximately $3.5 million, before deducting placement agent fees and other expenses payable by us. Net proceeds of this transaction were approximately $3.1 million.

Previous wording

In the year ended December 31, 2024, we sold 2,348,520 shares of common stock through our ATM Agreement, for net proceeds of approximately $4 million after placement fees and expenses.

Current wording

In the year ended December 31, 2024, we sold 2,348,520 shares of common stock through the HCW ATM Agreement, for net proceeds of approximately $4 million after placement fees and expenses.

Previous wording

On May 2, 2025, we entered into the Inducement Agreement with an existing healthcare-focused institutional investor of ours for the immediate exercise of existing the Series B Warrants to purchase 1,418,440 shares of our common stock and the Series C Warrants, and together with the Series B Warrants to purchase 2,300,000 shares of our common stock at a reduced exercise price of $0.74 for net proceeds of approximately $2.35 million, before deducting legal fees and other transaction expenses.

Current wording

On May 2, 2025, we entered into the May 2025 Inducement Agreement with the Holder providing for the immediate exercise of existing the Series B Warrants to purchase 1,418,440 shares of our common stock and the Series C Warrants, and together with the Series B Warrants to purchase 2,300,000 shares of our common stock at a reduced exercise price of $0.74 for net proceeds of approximately $2.2 million.

Previous wording

At March 31, 2025, we had cash and cash equivalents of $2.4 million. As of May 12, 2025, we had cash and cash equivalents of approximately $3.9 million. We have completed a Phase 1 pharmacokinetic study of AD04 with a total cost of approximately $1.4 million, which has been fully paid. In addition, we plan to begin a Phase III study of AD04 in the second half of 2025, to complete production of sufficient drug product to carry out the study, and to begin the process of revalidation for our companion diagnostic to be included in our Phase III study. We have signed a contract with a vendor for approximately $2.3 million, which is cancellable by either party, to produce sufficient drug product to carry out the study, validate the manufacturing process, and manufacture registration batches for commercial usage. Our cash on hand and cash equivalents, including the cash proceeds of the warrant inducement that closed on May 5, 2025 is sufficient to fund our operations and meet our existing commitments into the fourth quarter of 2025, based on our current commitments. We have incurred recurring losses and need to raise additional funds to sustain our operations. These factors raise substantial doubt about our ability to continue as a going concern.

Current wording

At June 30, 2025, we had cash and cash equivalents of $5.9 million. We completed a Phase 1 pharmacokinetic study of AD04 in 2024 with a total cost of approximately $1.4 million. We plan to begin a Phase III study of AD04 in the second half of 2025, assuming availability of adequate funding, conclusion of ongoing discussions with regulatory authorities and finalization of the trial design, availability of sufficient drug product to carry out the study, and completion of the revalidation process for our companion diagnostic to be included in our Phase III study. We have signed a contract with a vendor for approximately $2.3 million, which is cancellable by either party, to produce sufficient drug product to carry out the study, validate the manufacturing process, and manufacture registration batches for commercial usage. Our cash on hand and cash equivalents, including the cash proceeds from the financing closed on June 18, 2025 and the warrant inducement that closed on May 5, 2025, is sufficient to fund our operations and meet our existing commitments into the second quarter of 2026, based on our current commitments. We have incurred recurring losses and need to raise additional funds to sustain our operations. These factors raise substantial doubt about our ability to continue as a going concern.

Previous wording

We will require additional financing as we continue to execute our overall business strategy, including two additional Phase 3 trials for AD04 that are currently expected to require $8-12 million each in direct expenses, and up to $5 million in additional other development expenses. These estimates may change based on upcoming discussions with regulatory authorities and final trial designs. Our liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and industry factors. Our continued operations will depend on our 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 AD04. At this time, we have no committed sources of funding and our ability to use our ATM Agreement is restricted by certain SEC rules and our ability to use our equity line is restricted by certain Nasdaq rules. 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, we will be required to delay, scale back or eliminate some or all of our research and development programs, which would likely have a material adverse effect on us and our financial statements.

Current wording

We will require additional financing as we continue to execute our overall business strategy, including two additional Phase 3 trials for AD04 that are currently expected to require $8-12 million each in direct expenses, and up to $5 million in additional other development expenses. These estimates may change based on ongoing discussions with regulatory authorities and final trial designs. Our liquidity may be negatively impacted as a result of research and development cost increases in addition to general economic and industry factors. Our continued operations will depend on our 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 AD04. At this time, we have no committed sources of funding and our ability to use our ATM Agreement is restricted by certain SEC rules and our ability to use our equity line is restricted by certain Nasdaq rules. 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, we will be required to delay, scale back or eliminate some or all of our research and development programs, which would likely have a material adverse effect on us and our financial statements.

Previous wording

Net cash used in operating activities decreased by approximately $41,000 in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The primary drivers of the decrease were higher accounts payable and accrued expenses as compared to the prior period.

Current wording

Net cash used in operating activities decreased by approximately $439,000 in the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The primary driver was a decrease in the net loss during the six months ended June 30, 2025 as compared to the six months ended June 30, 2024, excluding the inducement expense.

Previous wording

Net cash provided by investing activities increased by approximately $150,000 in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This increase was due to the recognition of a milestone payment received from Adovate of $150,000.

Current wording

Net cash provided by investing activities increased by approximately $150,000 in the six months ended June 30, 2025 compared to the six months ended June 30, 2024. This increase was due to the recognition of a milestone payment received from Adovate of $150,000.