Azora Therapeutics, Inc. (DE) 10-Q/A for FY2026 Q2
Azora Therapeutics, Inc. (DE) (AZR)
About this 10-Q/A
Azora Therapeutics, Inc. (DE) filed this 10-Q/A on October 21, 2026, covering the quarter ended June 30, 2026 (FY2026 Q2).
Adial acquired Azora Therapeutics, received approximately $24.3 million net in initial financing proceeds, and targets AT177 IND and Phase 1a initiation in first half of 2027; recurring losses raise substantial doubt about its going concern. AI summary
Headline figures
Quarter ended June 30, 2026, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $51.99M
- compared with a net loss of $1.96M a year earlier
- Diluted EPS
- -$11.25
- compared with -$4.61 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
For the quarterly period ended
or
For the transition period from ___________ to ___________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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I.R.S. Employer Identification No. |
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| Address of Principal Executive Offices | Zip Code |
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 the Act:
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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.
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
| Large accelerated filer | ☐ | 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 is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
Number of shares of common stock outstanding as of August 12, 2026 was
Explanatory Note
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 to obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects costs and objectives of management for future acquisitions, and expected changes to our business, results of operations, management team and board of directors in connection with our recent acquisition of Azora Therapeutics, Inc. 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 II, Item lA. “Risk Factors” and elsewhere in this Quarterly Report on Form 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, 2025 filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2026 (“2025 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
i
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Unaudited Financial Statements
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
| June 30, 2026 |
December 31, 2025 |
|||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Intangible assets, net | ||||||||
| Equity method investment | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Total Current Liabilities | ||||||||
| Milestone warrant rights liability | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and contingencies – see Note 10 | ||||||||
| Series A convertible preferred stock, $ | ||||||||
| Stockholders’ (Deficit) Equity | ||||||||
| Preferred Stock, | ||||||||
| Common Stock, | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ (Deficit) Equity | ( | ) | ||||||
| Total Liabilities, Temporary Equity and Stockholders’ (Deficit) Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development expenses | $ | $ | $ | $ | ||||||||||||
| General and administrative expenses | ||||||||||||||||
| Acquired in-process research and development | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Change in fair value of milestone warrant rights liability | ||||||||||||||||
| Financing expense related to milestone warrant rights liability | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of Azora Therapeutics convertible promissory notes | ( | ) | ( | ) | ||||||||||||
| Loss on equity method investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ( | ) | ||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF TEMPORARY EQUITY
AND STOCKHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(In thousands, except share amounts)
| Temporary Equity | Stockholders’ Equity (Deficit) |
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| Series A Convertible Preferred Stock |
Common Stock | Additional Paid In |
Accumulated | Total Stockholders’ (Deficit) |
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| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, January 1, 2026 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Equity-based compensation - stock option expense | — | |||||||||||||||||||||||||||
| Equity-based compensation – restricted stock | — | |||||||||||||||||||||||||||
| Shares issued from abeyance | — | |||||||||||||||||||||||||||
| Net proceeds from sale of common stock | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2026 | — | ( | ) | |||||||||||||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||||||||||
| Equity-based compensation – restricted stock | — | |||||||||||||||||||||||||||
| Issuance of pre-funded warrants in connection with the private placement transaction | — | |||||||||||||||||||||||||||
| Issuance of Series A convertible preferred stock in connection with the acquisition of Azora Therapeutics | ||||||||||||||||||||||||||||
| Issuance of common stock in connection with the acquisition of Azora Therapeutics | — | |||||||||||||||||||||||||||
| Fair value of assumed options that relates to the pre-combination service period | — | — | ||||||||||||||||||||||||||
| Net proceeds from sale of common stock | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2026 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common Stock | Additional Paid In |
Accumulated | Total Stockholders’ |
|||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, January 1, 2025 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Equity-based compensation - stock option expense | — | |||||||||||||||||||
| Equity-based compensation - stock issuances to a vendor and vesting to employee | ||||||||||||||||||||
| Net proceeds from sale of common stock | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2025 | ( | ) | ||||||||||||||||||
| Equity-based compensation – stock option expense | — | |||||||||||||||||||
| Equity-based compensation – stock issuances to a vendor and vesting to employee | — | |||||||||||||||||||
| Net proceeds from sale of common stock | ||||||||||||||||||||
| Exercise of warrants, net of expenses | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2025 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ADIAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| For the Six Months Ended June 30, |
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| 2026 | 2025 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Equity-based compensation | ||||||||
| Change in fair value of milestone warrant rights liability | ( | ) | ||||||
| Financing expense related to milestone warrant rights liability | ||||||||
| Loss on extinguishment of Azora Therapeutics convertible promissory notes | ||||||||
| Acquired in process research and development | ||||||||
| Change in value of equity method investment | ||||||||
| Change in fair value contingent consideration | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accounts payable, related party | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash receipt from contingent consideration | ||||||||
| Net cash assumed in the acquisition of Azora Therapeutics | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from sale of common stock | ||||||||
| Proceeds from the private placement issuance of pre-funded warrants | ||||||||
| Issuance costs from the private placement issuance of pre-funded warrants | ( | ) | ||||||
| Proceeds from warrant exercise, net of expenses | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of noncash financing information: | ||||||||
| Fair value of Series A convertible preferred stock issued for the acquisition of Azora Therapeutics | $ | |||||||
| Net liabilities acquired in the acquisition of Azora Therapeutics | $ | |||||||
| Issuance costs from the private placement issuance of pre-funded warrants included in accounts payable | $ | |||||||
| Extinguishment of the Azora Therapeutics convertible promissory notes to pre-funded warrants | $ | |||||||
| Transaction costs for the acquisition of Azora Therapeutics in accounts payable and accrued liabilities | $ | |||||||
| Right to purchase Milestone warrants in association with the private placement issuance of the pre-funded warrants | $ | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ADIAL PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Adial Pharmaceuticals, Inc. (“Adial” or the “Company”) was converted, from a limited liability company formed on November 23, 2010 in the Commonwealth of Virginia under the name Adial Pharmaceuticals, LLC, to a corporation and reincorporated in Delaware on
The Merger brought Azora’s lead investigational candidate, AT177, into Adial’s pipeline. Adial has historically focused on developing medications for the treatment or prevention of addictions and related disorders. Following the Merger, the Company’s focus has shifted and its lead program is now Azora’s lead asset, AT177, a proprietary, fully-synthetic, oral, colon-targeted AhR agonist in development for the treatment of ulcerative colitis.
2 — GOING CONCERN AND OTHER UNCERTAINTIES
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 expects to continue to incur losses based on the current development plans for AT177 and AD04 in both the U.S. and international markets and other operating requirements.
The Company will need additional financing to support its continuing operations and pursue its current strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. The Company may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. The inability to raise capital as and when needed would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy
Shares of the Company’s Series A Non-Voting Convertible Preferred Stock, par value $
The Company’s ability to satisfy these potential cash settlement obligations is not entirely within its control, as it is contingent on, among other things, the Company’s ability to obtain stockholder approval of the conversion of the shares of Series A Preferred Stock into common stock and to deliver shares of common stock upon conversion of shares of Series A Preferred Stock within the timeframes required by the Certificate of Designation. If the Company is unable to obtain stockholder approval in a timely manner, or is otherwise unable to timely deliver shares of common stock upon conversion, holders who submit conversion notices after the applicable trigger date could require the Company to make significant cash payments that could substantially reduce the Company’s available cash resources. After evaluating the conditions described above in the aggregate and assuming the cash settlement obligations related to the Series A Preferred Stock are triggered, the Company has concluded that there is substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern within the twelve months after the date that these unaudited condensed consolidated financial statements are issued, which contemplates it will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
5
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, reimbursement of, and demand for, Company products once approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.
3 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires Company management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of these financial statements and the reported amounts of expenses during the reporting period. Actual results might differ from these estimates.
Significant items subject to such estimates and assumptions include accruals associated with third party providers supporting clinical trials, milestone warrant rights liabilities, and income tax asset realization.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP, as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2025, included in the Annual Report on Form 10-K for the year ended December 31, 2025, filed with the Securities and Exchange Commission on March 5, 2026 (the “2025 Form 10-K”).
The accompanying unaudited interim condensed consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiary, Azora Therapeutics, LLC, as of June 30, 2026. All significant intercompany transactions have been eliminated.
Reverse Stock Split
On February 5, 2026, the Company effected a reverse stock split of the outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of
6
Basic and Diluted Loss per Share
Basic and diluted loss per share are computed based on the weighted-average outstanding shares of common stock, pre-funded warrants are included in basic loss per share as the exercise price is de-minus. Diluted net loss per share is computed giving effect to all proportional shares of common stock, including stock options, restricted stock, preferred stock 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, 2026 and 2025, 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 months periods ended June 30, 2026 and 2025 were as follows:
| Potentially Dilutive Common Shares Outstanding June 30, | ||||||||
| 2026 | 2025 | |||||||
| Warrants to purchase common shares | ||||||||
| Common Shares issuable on exercise of options | ||||||||
| Series A Preferred Stock | ||||||||
| Unvested restricted stock | ||||||||
| Total potentially dilutive Common Shares excluded | ||||||||
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 (the “FDIC”). At June 30, 2026, the Company exceeded FDIC insurance limits in its insured bank accounts by approximately $
Equity Method Investments
The Company utilizes the equity method to account for investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial decisions of the investee. The Company’s only equity method investment is in Adovate LLC (“Adovate”).
Equity method investments are measured at cost minus impairment, if any, plus or minus the Company’s proportionate share of the equity method investee’s operating income or loss and plus or minus the Company’s proportionate share of dilution to buyers of newly issued equity. The proportionate share of the income or loss from equity method investments is recognized on a one quarter lag.
Currently, the Company is not obligated to make additional capital contributions for its equity method investments and therefore only records losses up to the amount of its total investment, inclusive of any other investments in and loans to the investee, which are not accounted for as equity method investments.
7
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:
| ● | Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs). |
| ● | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially). |
| ● | Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available). |
The fair value of cash and cash equivalents and accounts payable approximate their carrying value due to their short-term maturities.
Research and Development
Research and development costs are charged to expense as incurred and include supplies and other direct trial expenses such as fees due to contract research organizations, consultants which support the Company’s research and development endeavors, the 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 (“CROs”), are structured with milestone payments due on the occurrence of certain key events. Where such milestone payments are greater than those earned through the provision of such services, the Company recognizes a prepaid asset which is recorded as expense; where fees earned are greater than milestone payments, an accrued expense liability is recorded as expense. Assets that are acquired in an asset acquisition for use in research and development activities that have an alternative future use are capitalized as in process research and development (“IPR&D”). Acquired IPR&D that has no alternative future use as of the acquisition date is recognized as research and development expense as of the acquisition date.
Stock-Based Compensation
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 awardee 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 expected volatility of the Company’s common stock, the risk-free rate of return, and expected term of the options. The Company’s estimates of these assumptions are primarily based on historical data, peer company data, government data, and the judgment of management regarding future trends.
Shares of common stock issued are valued based on the fair value of the Company’s common stock as determined by the market closing price of a share of the Company’s common stock on the date of the commitment to make the issuance.
Segment Information
The Company operates as
8
Milestone warrant rights liability
The Company accounts for its milestone warrant rights issued in connection with its Financing and Azora Note Exchange, as defined in Note 4, based upon the characteristics and provisions of the instrument. Milestone warrant rights that have been determined to be classified as liabilities are recorded on the balance sheet as a long-term liability at their fair value on the date of issuance and remeasured to fair value at each reporting period, with the changes in fair value recognized as gain or loss in the unaudited consolidated statements of operations. The Company adjusted the liability for changes in the fair value of these milestone warrant rights until the earlier of the exercise or expiration of these rights, or until such time as the milestone warrant rights are no longer considered a liability.
Variable Interest Entities
For entities that are variable interest entities (“VIEs”), as defined in ASC 810, the Company consolidates the entity if it is the primary beneficiary. The Company is the primary beneficiary of a VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company reassesses its VIE determinations and primary beneficiary conclusions on an ongoing basis, including upon the occurrence of a reconsideration event. When the Company consolidates a VIE that does not meet the definition of a business, it recognizes a gain or loss for the difference between the sum of (1) the fair value of consideration paid, (2) the fair value of any noncontrolling interests and (3) the reported amount of any previously held interest and the net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805.
Convertible Preferred Stock
The Company has classified its convertible preferred stock as temporary equity in the accompanying balance sheets due to cash settlement provisions that are outside of the control of the Company. Subsequent adjustments of the carrying values to the settlement values will be made only when it becomes probable that such a change in control event will occur. The Company did not accrete the carrying values of the convertible preferred stock to the settlement values as settlement is contingent on shareholder approval which is outside of the control of the Company.
Recent Accounting Pronouncements
In November 2024, the FASB issued Accounting Standards Update ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This update would require a public entity to disclose information about purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion for each income statement line item that contains those expenses. The amendments in this update are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption of the amendments is permitted for annual financial statements that have not yet been issued. The Company is in the process of evaluating the impact of this new guidance on its unaudited condensed consolidated financial statements.
In December 2025, the FASB issued (ASU) 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. The update is intended to improve the organization and navigability of interim reporting guidance in Accounting Standards Codification (ASC) Topic 270, compile all required interim disclosures into a centralized list, and establish an overarching disclosure principle requiring entities to disclose any events or changes occurring since the end of the most recent annual reporting period that have a material impact on the entity. The standard is effective for the Company for interim reporting periods within fiscal years beginning after December 15, 2027, with early adoption permitted in any interim period for which financial statements have not yet been issued. The amendments should be applied on a prospective basis. The Company is in the process of evaluating the impact of this new guidance on its unaudited condensed consolidated financial statements.
In May 2025, the FASB issued ASU 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity. The ASU requires an entity involved in an acquisition transaction effected primarily by the exchange of equity interests, in which the legal acquiree is a VIE that meets the definition of a business, to consider the factors in ASC 805-10-55-12 through 55-15 in determining the accounting acquirer, rather than presuming the primary beneficiary is the acquirer. Early adoption is permitted. The ASU is effective for annual reporting periods beginning after December 15, 2026, including interim periods within those years, and is applied prospectively to acquisition transactions occurring after the initial adoption date. ASU 2025-03 must be applied prospectively to any business combination that occurs after the initial adoption date, and early adoption is permitted in an interim or annual period for which financial statements have not yet been issued. As the Company does not currently have any transactions contemplated within the scope of ASU 2025-03, the adoption of this standard is not expected to have a material impact on its financial statements and related disclosures.
9
4 — ACQUISITION OF AZORA AND PIPE ISSUANCE
On June 11, 2026, the Company acquired Azora, in accordance with the terms of the Merger Agreement, by and among Adial, First Merger Sub, Adial Second Merger Sub and Azora. Pursuant to the Merger Agreement, First Merger Sub merged with and into Azora, with Azora surviving as a wholly owned subsidiary of Adial (the “First Merger”).
Immediately following the First Merger, in the Second Merger, Azora merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of Adial and the Second Merger Sub changing its name to “Azora Therapeutics, LLC”. At closing of the Merger, Adial issued to former Azora stockholders
On June 11, 2026, in connection with and as a condition to closing of the Merger, Adial entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “PIPE Investors”), pursuant to which Adial issued and sold to the PIPE Investors, in a private placement transaction, at the initial closing on June 12, 2026 (the “Initial PIPE Closing”) pre-funded warrants (the “Initial Closing Pre-Funded Warrants”) to purchase up to an aggregate of
Pursuant to the terms of the Merger Agreement, upon the closing of the Merger, Adial agreed to guarantee the payment of $
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Subject to the receipt of stockholder approval of the conversion of the shares of Series A Preferred Stock issued in the Merger into shares of Adial’s common stock, each share of Series A Preferred Stock will automatically convert into
Under the Certificate of Designation, Series A Preferred Stock and the common stock issuable upon conversion (the “Locked Shares”) are subject to transfer restrictions releasing in three equal tranches: 180 days after the Initial PIPE Closing; 180 days after stockholder approval of the Transaction Stockholder Matters (as defined below); and upon the Company’s issuance of the milestone event notice, at which point all remaining restrictions lapse. Certain Company officers and directors have also signed support agreements, and certain legacy Azora officers, directors, and Series A Preferred Stock holders have signed separate 180-day lock-up agreements. The following are collectively referred to as the Transaction Stockholder Matters requiring stockholder approval: (i) the conversion of the shares of Series A Preferred Stock into shares of common stock, (ii) the exercise of the options to purchase Azora stock that were assumed in the Merger, (iii) the exercise of the Initial Closing Pre-Funded Warrants by the holders thereof, (iv) the exercise of the Milestone Warrants by the holders thereof, (v) the amendment of our certificate of incorporation to increase the number of shares of common stock authorized for issuance thereunder to
The cash settlement price is the closing price on the last trading day before the receipt of a Series A Preferred Stock holder’s conversion notice; based on the $
As a result of the Merger, Financing and Azora Note Exchange (collectively, the “Transactions”), equityholders of Adial immediately prior to the Merger owned approximately
Upon the closing of the Merger on June 11, 2026, the Company evaluated its relationship with Azora under ASC 810, and determined that Azora is a VIE in which the Company holds a variable interest. This determination, and the Company’s related conclusion that it is Azora’s primary beneficiary (discussed below) based on power and economics under ASC 810, did not depend on, and would not change based on, the outcome or timing of the required stockholder vote or the resulting conversion of the Series A Preferred Stock into voting common stock. As Azora was the acquiree and was determined to be a VIE, other qualitative factors under ASC 805 were not applicable to the analysis. Azora is a development-stage company that has not generated revenue and has historically depended on external financing, including debt and equity investment, to fund its research and development activities. Because Azora’s equity investment at risk was not sufficient to permit it to finance its activities without additional subordinated financial support, the Company determined that Azora meets the definition of a VIE under ASC 810. As a result, Azora is evaluated for consolidation under the VIE model, rather than the voting interest model. Under the VIE model, the party that consolidates Azora is the primary beneficiary, the party with both (i) the power to direct the activities of Azora that most significantly affect its economic performance and (ii) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to Azora, regardless of whether that party holds a majority of Azora’s outstanding voting equity interests. Accordingly, the Company determined that Adial has both the power and economics necessary to be the primary beneficiary of Azora, and, accordingly, consolidates Azora in its unaudited condensed consolidated financial statements in accordance with ASC 810-10-25 as the accounting acquirer effective as of the date of the closing of the Merger.
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Because Azora does not meet the definition of a business under ASC 805, the Company measured the assets acquired and liabilities assumed upon initial consolidation as required by ASC 810-10-30-4 for the initial consolidation of a VIE that is not a business. Under this guidance, the identifiable assets acquired and liabilities assumed were recognized and measured at fair value in accordance with the recognition and measurement principles of ASC 805-20; no goodwill was recognized, as goodwill recognition is prohibited when consolidating a VIE that is not a business. Fair value of the identifiable net assets acquired, and accordingly no gain or loss was recognized under ASC 810-10-30-4. Acquired IPR&D that has no alternative future use was expensed immediately upon consolidation.
The estimated fair value of the consideration transferred of $
| Assumed options | $ | |||
| Common stock issued | ||||
| Series A preferred stock issued | ||||
| Total consideration transferred | $ |
The fair value of the consideration transferred was measured using the price per pre-funded warrant the investors paid as part of the Financing. The Assumed Options reflects the portion of the acquisition date fair-value based measure that relates to the pre-combination service period.
The following table summarizes the allocation of the estimated fair value of the consideration transferred to the net assets acquired by the Company (in thousands):
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Prepaid expenses | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accounts payable and accrued liabilities | ||||
| Compensation and employee benefits liabilities | ||||
| Convertible promissory notes | ||||
| Total liabilities assumed | ||||
| Net liabilities acquired | $ | ( | ) | |
| In process research and development | ||||
| Total consideration transferred | $ | |||
5 — FAIR VALUE MEASUREMENTS
The Company issued milestone warrant rights as part of Financing and Azora Note Exchange described in Note 4. Milestone is referred as either specified clinical development milestones, including the Company’s announcement that the first patient has been dosed in a Phase 1 clinical trial of AT177 (or IND for AT177 going into effect per 21 C.F.R. 312.40(b)) or a specific market milestone, the achievement of a volume-weighted average stock price equal to or greater than
Because the number of shares underlying the Milestone Warrants to be issued varies based on the number of investors who wish to participate, such that the underlying number of shares is not indexed solely to the Company’s own stock, the Milestone Warrants are classified as financial liabilities under ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. The liability is recorded at fair value upon issuance and remeasured at fair value at each reporting date, with changes in fair value recognized in Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operation
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The fair value of the Milestone warrant rights liability was estimated using a Monte Carlo simulation model (a Level 3 fair value measurement). A Monte Carlo model was selected because the Milestone warrant rights liability issuance and exercise depends on path-dependent variables, including:
| ● | Projected timing and probability of achieving clinical development milestones. |
| ● | Simulated future stock price paths under a geometric Brownian motion framework over the remaining contractual term. |
| ● | Equity volatility and risk-free interest rates across simulated economic paths. |
In each simulation path, if the stock price or clinical trigger conditions are satisfied prior to expiration, the mean present value is calculated and discounted back to the measurement date using a risk-adjusted discount rate reflecting the execution and market risk of the underlying milestones along with a probability percentage of the milestone event. Consistent with the option-like nature of the participation right, the simulation assumes a rational market participant would retain the right through the contractual decision date and would elect to purchase the basket of instruments only if the simulated value exceeds the required purchase price at that time. If the simulated value of the basket is less than the purchase price, the right is assumed to expire unexercised.
The following table summarizes the key quantitative inputs utilized in the Monte Carlo simulation to estimate the fair value of the Milestone warrant rights liability as of June 11, 2026, June 30, 2026 and December 31, 2025:
| Valuation Input | As of June 11, 2026 | As of June 30, 2026 | As of December 31, 2025 | |||||||||
| Underlying Stock Price (1) | $ | |||||||||||
| Exercise Price | $ | |||||||||||
| Expected Volatility | % | % | ||||||||||
| Risk-Free Interest Rate | % | % | ||||||||||
| Expected Term (Years) | ||||||||||||
| Probability of Milestone Achievement | % | % | ||||||||||
| Expected Dividend Yield | % | % | ||||||||||
| (1) |
| ● | Expected Volatility: Derived from the historical volatility of comparable publicly traded peer companies over a period consistent with the expected remaining term. |
| ● | Probability of Milestone Achievement: Reflects management’s best estimate based on clinical trial progress, regulatory interactions, and historical industry success rates. An increase in the probability of milestone achievement or underlying stock price significantly increases the fair value of the warrant liability. The likelihood of obtaining stockholder approval does not affect the assumed probability of milestone achievement. In estimating the probability of Milestone Achievement, the Company considered, among other factors, (1) that the clinical development milestone is satisfied upon an IND for AT177 going into effect per 21 C.F.R. 312.40(b) or the dosing of the first patient in a Phase 1 clinical trial, rather than upon any clinical result; (2) the status of the AT177 IND-enabling program as of the measurement dates, including completion of a GLP toxicology study in rats, and (3) receipt of pre-IND feedback from the FDA and the current status of the 28-day GLP minipig study. |
The following table presents the changes in the fair value of the Level 3 Milestone warrant rights liability for the six months ended June 30, 2026 and 2025 (in thousands):
| Milestone Warrant rights Liability Reconciliation | 2026 | 2025 | ||||||
| Balance at Beginning of Period | $ | |||||||
| Initial fair value of Milestone warrant rights issued | ||||||||
| Change in fair value recognized in other income (expenses) | ( | ) | ||||||
| Warrants exercised / settled during the period | ||||||||
| Balance at End of Period | $ | |||||||
As of December 31, 2025, there were no financial assets and liabilities measured at fair value. During the three and six months ended June 30, 2026 and 2025, there were no transfers between levels.
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6 — EQUITY METHOD INVESTMENTS
The Company held a weighted average of
Activity recorded for the Company’s equity method investment in Adovate during the six months ended June 30, 2026 is summarized in the following table (in thousands):
| Equity investment carrying amount at January 1, 2026 | $ | |||
| Portion of operating losses recognized | ( | ) | ||
| Share of dilution to new investors | ||||
| Equity investment carrying amount at March 31, 2026 | ||||
| Portion of operating losses recognized | ( | ) | ||
| Equity investment carrying amount at June 30, 2026 | $ |
At June 30, 2026, the Company’s maximum exposure to loss through its equity method investment is limited to the value of its equity.
Consideration for the sale of the assets of Purnovate, Inc. to Adovate also included contingent payments based on the occurrence of certain milestone events and a contingent royalty on future sales. The Company recognized $
7 — ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
| June 30, 2026 | December 31, 2025 | |||||||
| Employee compensation | $ | $ | | |||||
| Minimum license royalties | ||||||||
| Pre-clinical and manufacturing expenses | ||||||||
| Legal and consulting expense | ||||||||
| Other | ||||||||
| Total accrued expenses | $ | $ | ||||||
As of June 30, 2026, included in employee compensation was an accrual of approximately $
8 — Convertible Preferred stock
In conjunction with the Merger Agreement, on June 11, 2026, the Board adopted the Certificate of Designation, which authorized the issuance of
Under the terms of the Merger Agreement, the Company issued to the former stockholders of Azora an aggregate of
Following stockholder approval of the conversion of the shares of Series A Preferred Stock into shares of Company common stock, each share of Series A Preferred Stock will automatically convert into
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The holders of Series A Preferred Stock have the following rights, preferences and privileges:
Ranking
The Series A Preferred Stock ranks pari passu with the common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
Voting Rights
Except as otherwise required by the General Corporation Law of the State of Delaware, holders of the Series A Preferred Stock shall have no voting rights; provided, however, as long as any shares of Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the majority of outstanding shares of Series A Preferred Stock (i) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock, (ii) issue further shares of Series A Preferred Stock or increase or decrease the number of authorized shares of Series A Preferred Stock, (iii) prior to receipt of stockholder approval of the conversion of the shares of Series A Preferred Stock, consummate either a merger or consolidation or other business combination in which stockholders of the Company do not hold at least a majority of the voting power, (iv) prior to receipt of stockholder approval of the conversion of the shares of Series A Preferred Stock, authorize or issue any class or series of stock that has powers, preferences or rights that are senior to those of the Series A Preferred Stock, or (v) amend, waive or modify the Merger Agreement in any manner that would be reasonably likely to prevent, impede or materially delay the stockholder approval or conversion of Series A Preferred Stock.
Dividends
Holders of outstanding shares of Series A Preferred Stock are entitled to receive dividends on shares of Series A Preferred Stock, on an as-if-converted to common stock basis, equal to and in the same form and manner as dividends paid on shares of common stock.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Series A Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series A Preferred Stock were fully converted to common stock and amounts shall be paid pari passu with all holders of Common Stock, plus an additional amount equal to any dividends declared on but unpaid to such shares.
Cash Settlement
The Series A Preferred Stock does not have redemption rights. However, if (i) the Company fails to obtain shareholder approval within six months of the initial issuance of Series A Preferred Stock or (ii) the Company fails to timely deliver to the holder shares of common stock upon conversion of shares of the Series A Preferred stock by such holder, shares of Series A Preferred Stock become eligible for cash settlement at the option of the holder for a fair value equal to the closing price of the Company’s common stock on the last trading day prior to the date that the notice for cash settlement is delivered from the holder to the Company.
Conversion
Each share of Series A Preferred Stock shall automatically convert at a conversion ratio of
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9 — STOCKHOLDERS’ EQUITY
On August 1, 2025, the Company’s stockholders approved, and the Company filed with the Secretary of State of the State of Delaware, an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of the Company’s common stock, from
During the six months ended June 30, 2026, the Company issued
During the six months ended June 30, 2026, the Company issued
Standby Equity Purchase Agreement
On December 13, 2024, the existing Equity Purchase Agreement that the Company entered into with Alumni Capital, LP (“Alumni”), dated May 31, 2023, was cancelled by mutual agreement. Simultaneously, the Company and Alumni entered into a new Equity Purchase Agreement (the “New SEPA”) on substantially the same terms, but with an initial right to sell Alumni up to $
At-the-market Offering Agreement
On August 1, 2025, the Company, entered into a sales agreement (the “ATM”) with A.G.P./Alliance Global Partners (“AGP”) providing for the sale by the Company of its shares of common stock, from time to time, through the ATM, with certain limitations on the amount of common stock that may be offered and sold by the Company. The aggregate market value of the shares of common stock eligible for sale under the ATM prospectus supplement filed in connection with the ATM was $
2017 Equity Incentive Plan
On October 9, 2017, the Company adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”); which became effective on July 31, 2018. Under the 2017 Equity Incentive Plan, the Company may grant equity-based awards to individuals who are employees, officers, directors, or consultants of the Company. Options issued under the Plan will generally expire ten years from the date of grant and vest over a three-year period.
On August 1, 2025, the Company’s stockholders approved an amendment to the Company’s 2017 Equity Incentive Plan to increase the number of shares of common stock authorized for grant under the plan from
Assumed Options from Acquisition of Azora
On June 11, 2026, in connection with the Acquisition of Azora, the Company assumed all outstanding and unexercised stock options to purchase Azora stock, resulting in the option holders having the right to purchase an aggregate of
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Inducement Grants
The Company granted inducement non-statutory stock options to purchase an aggregate of
Stock Options
The following table provides the stock option activity for the three and six months ended June 30, 2026:
| Total Options Outstanding | Weighted Average Remaining Term (Years) | Weighted Average Exercise Price | ||||||||||
| Outstanding January 1, 2026 | $ | |||||||||||
| Forfeited | — | |||||||||||
| Granted | — | |||||||||||
| Outstanding March 31, 2026 | $ | |||||||||||
| Forfeited | ( | ) | — | |||||||||
| Granted | — | |||||||||||
| Outstanding June 30, 2026 | ||||||||||||
| Outstanding June 30, 2026, vested and exercisable | $ | |||||||||||
At June 30, 2026, the total intrinsic value of the outstanding options was $
The Company used the Black Scholes valuation model to determine the fair value of the options issued and assumed in the acquisition of Azora, using the following key assumptions for the six months ended June 30, 2026 and 2025:
| June 30, 2026 | June 30, 2025 | |||||||
| Fair Value per Share | $ | $ | ||||||
| Expected Term | ||||||||
| Expected Dividend | $ | $ | ||||||
| Expected Volatility | % | % | ||||||
| Risk free rate | % | % | ||||||
As of June 30, 2026, there was $
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The components of stock-based compensation expense included in the Company’s Unaudited Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2026 and 2025 are as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Research and development options expense | $ | $ | $ | $ | ||||||||||||
| Total research and development expenses | ||||||||||||||||
| General and administrative options expense | ||||||||||||||||
| Restricted stock expense | ||||||||||||||||
| Total general and administrative expenses | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
Restricted Stock
The Company has granted restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) with service-based and performance vesting conditions.
The following is a summary of the RSUs which were granted outside of the 2017 Equity Incentive Plan as inducement grants, during the three and six months ended June 30, 2026:
| Restricted Stock | Weighted Average Grant Date Fair Value | |||||||
| Unvested at January 1, 2026 | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Granted | ||||||||
| Unvested at March 31, 2026 | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Granted | $ | |||||||
| Unvested at June 30, 2026 | $ | |||||||
On June 11, 2026, the Company granted
On April 7, 2026, the Company issued an aggregate of
As of June 30, 2026, unrecognized stock-based compensation expense associated with the RSUs and RSAs was $
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Common Stock Warrants
The following table provides the activity for common stock warrants for the three and six months ended June 30, 2026:
| Total Warrants | Weighted Average Remaining Term (Years) | Weighted Average Exercise Price | Average Intrinsic Value | |||||||||||||
| Outstanding January 1, 2026 | | $ | $ | | ||||||||||||
| Issued | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Outstanding March 31, 2026 | ||||||||||||||||
| Issued | — | — | — | |||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | — | — | — | |||||||||||||
| Outstanding June 30, 2026 | $ | $ | ||||||||||||||
Pre-Funded Warrants
The Following table provides the activity for pre-funded warrants for the three and six months ended June 30, 2026:
| Total Warrants | Weighted Average Exercise Price | |||||||
| Outstanding January 1, 2026 | $ | |||||||
| Issued | ||||||||
| Exercised | ||||||||
| Outstanding March 31, 2026 | ||||||||
| Issued | ||||||||
| Forfeited | ||||||||
| Exercised | ||||||||
| Outstanding June 30, 2026 | $ | |||||||
The pre-funded warrants were issued in accordance with the private placement transaction and conversion of Azora’s convertible notes, and have no expiration date, see Note 4 for further information.
10 — COMMITMENTS AND CONTINGENCIES
License with University of Virginia Patent Foundation
In January 2011, the Company entered into an exclusive, worldwide license agreement with the 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.
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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, failure 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 March 31, 2028 and commencing commercialization of an FDA approved product by March 31, 2029. 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 paid basis.
During the three months ended June 30, 2026 and 2025, the Company recognized a $
Litigation
The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of June 30, 2026, the Company did not have any pending legal actions.
11 — SEGMENT REPORTING
The Company has
Significant segment expenses, as provided to the CODM, are presented below:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Segment research and development expenses | $ | $ | $ | $ | ||||||||||||
| Segment general and administrative expenses | ||||||||||||||||
| Acquired in-process research and development | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Change in fair value of milestone warrant rights liability | ||||||||||||||||
| Financing expense related to milestone warrant rights liability | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of Azora Therapeutics convertible promissory notes | ( | ) | ( | ) | ||||||||||||
| Loss on equity method investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ( | ) | ||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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12 — SUBSEQUENT EVENTS
Purchase Agreement and Exchange Agreement Amendments
On September 16, 2026, the Company entered into an Amendment No. 2 to Securities Purchase Agreement (the “Purchase Agreement Amendment”) with certain PIPE Investors, constituting holders of the Majority of Interest (as defined in the Purchase Agreement), pursuant to which the Purchase Agreement was amended to (i) remove the provision reducing each PIPE Investors’ right to purchase Milestone Warrants by the percentage of its Initial Closing Pre-Funded Warrants that it exercised (the “Penalty Provision”) and to (ii) add a provision prohibiting the PIPE Investor from offering for sale, selling, assigning, transferring, pledging or otherwise disposing of certain of the shares of common stock issuable upon exercise of the Initial Closing Pre-Funded Warrants for the lock-up period specified in the Purchase Agreement Amendment, subject to certain exceptions.
On September 16, 2026 and September 30, 2026, the Company also entered into an Amendment No. 1 to Note Exchange Agreements (the “Note Agreement Amendment” and together with the Purchase Agreement Amendment, the “Amendments”) with the Former Azora Noteholders, pursuant to which the Note Exchange Agreements were amended to (i) remove the Penalty Provision and to (ii) add a provision prohibiting the Former Azora Noteholders from offering for sale, selling, assigning, transferring, pledging or otherwise disposing of certain of the shares of common stock issuable upon exercise of the Initial Closing Pre-Funded Warrants for the lock-up period specified in the Note Agreement Amendment, subject to certain exceptions.
As a result of the Amendments, the Milestone Warrant rights now meet the definition of equity classified under the accounting guidance, and as such the Milestone Warrant rights are no longer liability classified.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the notes presented herein included in this Amendment No. 1 to Form 10-Q and the audited consolidated financial statements and the other information set forth in the Annual Report on Form 10-K for the year ended December 31, 2025 that we filed with the SEC on March 5, 2026 (the “2025 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 2025 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”).
On February 5, 2026, we effected a one-for-twenty-five reverse stock split (the “Reverse Stock Split”) of our authorized, issued and outstanding common stock. Unless otherwise noted, all references to share amounts in this Amendment No. 1 to Form 10-Q reflect the Reverse Stock Split.
Overview
We are a clinical-stage biopharmaceutical company focused on developing treatments for serious inflammatory diseases, and the development of therapeutics for the treatment or prevention of addiction and related disorders. On June 11, 2026, we completed our previously announced acquisition of Azora Therapeutics, Inc. (“Azora”), a biopharmaceutical company developing treatments for serious inflammatory diseases, pursuant to an Agreement and Plan of Merger, dated June 11, 2026 (the “Merger Agreement”), by and among Adial, Adial Merger Sub, Inc. (“First Merger Sub”), Adial Second Merger Sub, LLC (“Second Merger Sub”) and Azora. Pursuant to the Merger Agreement, First Merger Sub merged with and into Azora, with Azora surviving as a wholly owned subsidiary of Adial (the “First Merger”). Immediately following the First Merger, Azora merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of Adial and the Second Merger Sub changing its name to “Azora Therapeutics, LLC” (the “Second Merger” and, together with the First Merger, the “Merger”). On June 12, 2026 we received approximately $24.3 million in net proceeds from the initial closing of a private placement financing from a group of institutional investors, with potential additional closings, the funding of which is at the option of the investors. The Merger brought Azora’s lead investigational candidate, AT177, into our pipeline. For additional information regarding the terms of the Merger and the concurrent financing, see Note 4 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Azora has historically focused on developing aryl hydrocarbon receptor (“AhR”) agonists to treat autoimmune diseases including ulcerative colitis. Following the Merger, our focus has shifted to the treatment of serious inflammatory diseases and our lead program is AT177, which is being studied for the treatment of ulcerative colitis (“UC”). AT177 is a fully synthetic, patented, oral AhR agonist designed to restore mucosal immune homeostasis at the site of disease with minimal systemic exposure. Its active ingredient is a prodrug of indirubin, which we believe is one of the most potent AhR agonists within indigo naturalis, a botanical extract that has been evaluated in clinical studies in patients with UC but has not been approved by the U.S. Food and Drug Administration (the “FDA”) or any comparable foreign regulatory authority for the treatment of UC. AT177’s colon-targeted formulation is designed to deliver AhR engagement to the colonic mucosa while limiting systemic AhR exposure. In preclinical studies, AT177 demonstrated local colonic AhR activation with limited systemic exposure. AT177 is currently in IND-enabling studies, with an investigational new drug (“IND”) submission planned for the first half of 2027, initiation of a Phase 1a single- and multiple-ascending-dose (“SAD/MAD”) clinical trial planned to commence in the first half of 2027, followed by a Phase 1b proof-of-concept study in UC patients, in each case subject to the appropriate regulatory agency allowing the studies to proceed.
Prior to the Merger, we were primarily focused on the development of AD04, a genetically targeted, serotonin-3 receptor antagonist, therapeutic agent for the treatment of Alcohol Use Disorder (“AUD”) in heavy drinking patients. Historically, we have devoted the vast majority of our resources to development efforts relating to AD04, including preparation for and conducting clinical trials, providing general and administrative support for these operations and protecting our intellectual property.
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We currently do not have any products approved for sale and we have not generated any significant revenue since our inception. From our inception through the date of this Quarterly Report on Form 10-Q, we have funded our operations primarily through the private and public placements of debt, equity securities, and an equity line.
In the event the cash settlement obligations related to the Series A Preferred Stock are triggered, our current cash and cash equivalents 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.
We have incurred net losses in each year since our inception, including net losses of approximately $54.0 million, inclusive of the one-time acquired in process research and development write off of $46.2 million, and $8.0 million for the six months ended June 30, 2026 and year ended December 31, 2025, respectively. We had accumulated deficits of approximately $144.0 million and $90 million as of June 30, 2026 and December 31, 2025, respectively. All of our operating losses in the six months ended June 30, 2026 resulted from costs incurred in operations, including costs in connection with our continuing research and development programs and from general and administrative costs associated with our operations.
We will not generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for AT177 or AD04, which we expect will take a number of years and is subject to significant uncertainty.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop AT 177 and AD04.
Recent Developments
Acquisition of Azora
On June 11, 2026, we acquired Azora in accordance with the terms of the Merger Agreement. Pursuant to the Merger Agreement, Azora became a wholly owned subsidiary of the Company.
At closing of the Merger, we issued to former Azora stockholders 437,421 shares of our common stock and 12,930.601 shares of Series A Non-Voting Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”). Each share of Series A Preferred Stock is convertible into 1,000 shares of our common stock, subject to the terms and limitations set forth in the applicable certificate of designation and related transaction documents, including without limitation the receipt of approval of our stockholders of the conversion thereof. Azora outstanding options to purchase Azora common stock were converted into options to purchase an aggregate of 1,177,782 shares of our common stock.
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On June 11, 2026, in connection with, and as a condition to closing of, the Merger, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “PIPE Investors”), pursuant to which we issued and sold to the PIPE Investors, in a private placement transaction, at the initial closing on June 12, 2026 (the “Initial PIPE Closing”), pre-funded warrants (the “Initial Closing Pre-Funded Warrants”) to purchase up to an aggregate of 9,749,345 shares of common stock, at a price of $2.7489 per Initial Closing Pre-Funded Warrant, for an aggregate purchase price of $26.8 million. In addition, we agreed to issue and sell to the PIPE Investors, at one or more subsequent closings at the option of each PIPE Investor (each, a “Milestone Closing”), pre-funded warrants (“Milestone Pre-Funded Warrants”) to purchase up to an aggregate of 9,749,345 shares of common stock and incentive warrants (“Milestone Incentive Warrants” and, together with the Milestone Pre-Funded Warrants, the “Milestone Warrants”) to purchase up to an aggregate of 9,749,345 shares of common stock, at a combined purchase price equal to $2.7489 per Milestone Warrants, for an aggregate purchase price of up to $26.8 million; provided, however, that a PIPE Investor’s right to purchase Milestone Warrants would be decreased by the percentage of their Initial Closing Pre-Funded Warrants that they exercised (the “PIPE Warrant Penalty Provision”). The issuance and sale of Initial Closing Pre-Funded Warrants and Milestone Warrants pursuant to the Purchase Agreement are collectively referred to as the “Financing.”
Pursuant to the terms of the Merger Agreement, upon the closing of the Merger, we agreed to guarantee the payment of $5.5 million in principal amount of certain amended and restated convertible promissory notes issued by Azora (the “Azora Notes”) to certain individuals (collectively, the “Former Azora Noteholders”). The $5.6 million fair value of the principal and accrued interest of the Azora Notes is represented as “Convertible promissory notes” in the table of net assets acquired by the Company and included in Note 4. On June 11, 2026, we entered into exchange agreements (the “Exchange Agreements”) with the Former Azora Noteholders to extinguish the payment guaranty and retire the Azora Notes in exchange for the issuance to the Former Azora Noteholders of Initial Closing Pre-Funded Warrants to purchase an aggregate of 2,031,603 shares of common stock (the “Azora Note Exchange”). As a result of the Azora Note Exchange, all such Azora Notes have been deemed to be repaid in full and all outstanding obligations thereunder have been extinguished. Pursuant to the Exchange Agreements, the Former Azora Noteholders are also entitled to participate in Milestone Closings to purchase Milestone Pre-Funded Warrants to purchase up to an aggregate of 2,031,603 shares of common stock and Milestone Incentive Warrants to purchase up to an aggregate of 2,031,603 shares of common stock, at a combined price of $2.7489, on substantially the same terms as the PIPE Investors under the Purchase Agreement, for an aggregate purchase price of up to $5.6 million; provided, however, that a Former Azora Noteholder’s right to purchase Milestone Warrants would be decreased by the percentage of their Initial Closing Pre-Funded Warrants that they exercised (the “Noteholder Warrant Penalty Provision”, and together with the PIPE Warrant Penalty Provision, the “Penalty Provision”). We accounted for the Azora Note Exchange as a debt extinguishment and an extinguishment loss of $6.1 million was recognized based upon the difference between the reacquisition price of $11.7 million and the net carrying amount of the Azora Notes of $5.6 million, which reflects the fair value of the principal and accrued interest of the Azora Notes. The reacquisition price of $11.7 million is equal to the fair value of the Initial Closing Pre-Funded Warrants to purchase an aggregate of 2,031,603 shares of Adial’s common stock of $6.1 million and the liability classified rights with an aggregate fair value of $5.6 million to participate in Milestone Closings to purchase Milestone Pre-Funded Warrants to purchase up to an aggregate of 2,031,603 shares of Adial’s common stock and Milestone Incentive Warrants having an exercise price of $2.7489 per share to purchase up to an aggregate of 2,031,603 shares of Adial’s common stock issued upon the Azora Note Exchange and the net carrying amount is equal to the principal and accrued interest amount of the Azora Notes.
The Azora Note Exchange, together with the Merger and the Financing, are referred to as the “Transactions.”
Purchase Agreement and Exchange Agreement Amendments
On September 16, 2026, the Company entered into an Amendment No. 2 to Securities Purchase Agreement (the “Purchase Agreement Amendment”) with certain PIPE Investors, constituting holders of the Majority of Interest (as defined in the Purchase Agreement), pursuant to which the Purchase Agreement was amended to (i) remove the PIPE Warrant Penalty Provision and to (ii) add a provision prohibiting the PIPE Investor from offering for sale, selling, assigning, transferring, pledging or otherwise disposing of certain of the shares of common stock issuable upon exercise of the Initial Closing Pre-Funded Warrants for the lock-up period specified in the Purchase Agreement Amendment, subject to certain exceptions.
On September 16, 2026 and September 30, 2026, the Company also entered into an Amendment No. 1 to Note Exchange Agreements (the “Note Agreement Amendment” and together with the Purchase Agreement Amendment, the “Amendments”) with the Former Azora Noteholders, pursuant to which the Note Exchange Agreements were amended to (i) remove the Noteholder Warrant Penalty Provision and to (ii) add a provision prohibiting the Former Azora Noteholders from offering for sale, selling, assigning, transferring, pledging or otherwise disposing of certain of the shares of common stock issuable upon exercise of the Initial Closing Pre-Funded Warrants for the lock-up period specified in the Note Agreement Amendment, subject to certain exceptions.
As a result of the Amendments, the Milestone Warrant rights now meet the definition of equity classified under the accounting guidance.
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Our Product Candidates
Azora is developing colon-targeted AhR agonists for the treatment of inflammatory bowel disease (“IBD”). Azora was originally incorporated as Meya Pharmaceuticals and later renamed and co-founded by Matthew Davidson, Ph.D., Julie Saiki, Ph.D., and Johan Andreasson Ph.D., and was spun out of Stanford University’s translational medicine SPARK program. In connection with the Merger, Dr. Davidson, Azora’s co-founder and former Chief Executive Officer, was appointed as our Chief Development Officer and as a member of our Board of Directors, Dr. Saiki was appointed Executive Vice President of Strategy, and Wendy Young, Ph.D., formerly Senior Vice President of Small Molecule Drug Discovery at Genentech, was appointed to our Board of Directors as an independent director upon closing of the Merger.
AhR is a ligand-activated transcription factor involved in regulating immune responses and epithelial barrier function, and we believe it represents an attractive therapeutic target across a range of inflammatory diseases. In the gastrointestinal tract, AhR signaling helps regulate mucosal immunity and intestinal barrier integrity, and reduced AhR expression has been reported in the inflamed intestinal mucosa of patients with inflammatory bowel disease. In clinical studies, including a randomized, placebo-controlled trial conducted in Japan, indigo naturalis, a traditional herbal preparation containing the AhR ligands indigo and indirubin, was associated with clinical responses in patients with UC. However, indigo naturalis use has also been associated with serious adverse events, including pulmonary arterial hypertension. In addition, as a botanical extract, indigo naturalis is subject to limitations such as variability in composition and potency.
Our core scientific thesis is that delivering potent AhR agonism locally to the colon, while minimizing systemic exposure, may enable us to achieve the clinical activity of AhR activation observed in these clinical studies while reducing the risk of the systemic adverse effects observed with prior AhR agonists.
AT177, our lead product candidate, is a fully synthetic, orally administered prodrug designed to release indirubin, which we believe to be one of the most potent AhR agonists in indigo naturalis, in the colon. We believe AT177 has the potential to be a differentiated treatment for UC. We have completed a GLP toxicology study in rats, received pre-IND feedback from the FDA, and are conducting IND-enabling studies. Subject to the appropriate regulatory agencies allowing our studies to proceed, we intend to advance AT177 into a Phase 1a SAD/MAD study followed by a Phase 1b proof-of-concept (“PoC”) study in patients with UC, with an initial proof-of-concept readout anticipated in first half of 2028.
In addition to AT177, our pipeline includes AD04, our legacy investigational product candidate for the treatment of AUD, which is described under “Legacy Program — AD04,” below.
Our Pipeline
Figure: Our pipeline — AT177 in UC (lead) and AT177 in Crohn’s disease. Source: Company materials.
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Corporate Strategy
Our mission is to improve the lives of patients suffering from serious inflammatory diseases by developing differentiated therapies that restore immune balance at the site of disease. Our strategy to achieve this goal centers on the following development priorities:
| ● | Advance AT177 through IND-enabling studies and into the clinic. We intend to complete our ongoing IND-enabling program and initiate a Phase 1a SAD/MAD study, with an IND submission and Phase 1a initiation targeted for the first half of 2027, subject to the appropriate regulatory agencies allowing our studies to proceed. |
| ● | Establish clinical proof of concept in UC. We plan to conduct a Phase 1b proof-of-concept study of AT177 in patients with UC, subject to the appropriate regulatory agencies allowing our studies to proceed, with an initial readout anticipated in the first half of 2028. |
| ● | Expand AT177 into additional indications or combinations. We believe a successful proof of concept in UC may support expansion of AT177 into Crohn’s disease and other immune-mediated conditions, and that AT177’s mechanism is orthogonal to and potentially combinable with existing UC therapies. |
| ● | Evaluate options for our legacy AD04 program. We continue to evaluate strategic and development options for AD04 for the treatment of alcohol use disorder in genetically defined patient populations. |
Ulcerative Colitis and the Case for Colon-Targeted AhR Agonism
Disease Overview and Unmet Need
UC is a chronic inflammatory bowel disease characterized by inflammation and ulceration of the colonic mucosa. Symptoms include rectal bleeding, urgency, diarrhea and abdominal pain and can severely impact quality of life. Ulcerative colitis arises from a dysregulated immune response, with immunologic, epithelial barrier and environmental factors all contributing to disease initiation and progression. It is estimated that UC and Crohn’s disease impacts more than 5.0 million patients worldwide and growing.
In the United States, approximately 1.25 million patients were treated for UC in 2020, representing an estimated U.S. total addressable market of approximately $8.4 billion in 2023 and growing. Despite meaningful therapeutic advances over the last decade, including more than 15 approved therapies across multiple classes, UC continues to impose a substantial burden of illness, with clinical remission at induction rates generally below 30% and durable mucosal healing remaining a central unmet clinical priority.
Despite the availability of multiple classes of approved therapies, UC remains an area of substantial unmet need. Existing therapies are limited by:
| ● | A therapeutic ceiling that generally does not exceed approximately 30% clinical remission at induction or approximately 40% at maintenance; |
| ● | Secondary loss of response, with approximately 50% of patients who achieve an initial benefit losing response over time; |
| ● | Approximately 10% of patients failing all available therapies and ultimately requiring colectomy; and |
| ● | Systemic immunosuppression associated with many approved agents, which can increase the risk of serious infection and malignancy. |
As a result, there remains a significant need for an oral therapy that achieves high, durable rates of remission with a favorable safety profile. We designed AT177 with the goal of addressing these limitations.
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The Aryl Hydrocarbon Receptor (AhR) Is a Master Regulator of Gut Health
The AhR is a ligand-activated transcription factor expressed in immune cells and intestinal epithelial cells that regulates both immune function and epithelial barrier integrity. Polymorphisms in AhR have been associated with increased risk of UC. AhR agonism has been shown to reduce pro-inflammatory cytokines, including IL-17a, IL-6 and TNFα, to increase the anti-inflammatory and tissue-protective cytokines IL-10 and IL-22 and regulatory T cells (Tregs), and to increase expression of tight junction proteins. AT177 is currently being researched for its ability to restore barrier function locally, which may help end the cycle whereby additional bacteria, antigens and inflammatory triggers can enter the body via a disrupted mucosal barrier and further exacerbate the ongoing immune response. Although further research is needed, we believe that AT177 may have the potential to be used in combination with existing targeted drugs for UC, given its orthogonal mechanism.
Systemically available AhR agonists have been evaluated in clinical studies in UC and other inflammatory diseases, and we believe the results of those studies support AhR as a target for further investigation in UC. Although the approved AhR agonist tapinarof is approved for the treatment of psoriasis and atopic dermatitis, no AhR agonist has been approved by the FDA for the treatment of UC. Systemic AhR signaling has been associated with potential safety risks, including headaches, cardiovascular adverse events, and systemic immunosuppression that may increase risk of malignancy. These observations informed our strategy of delivering potent AhR agonism locally in the colon while minimizing systemic exposure.
Figure: The AhR gut immune and epithelial barrier function. Source: Company materials.
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Clinical Studies of Indigo Naturalis in Ulcerative Colitis
Indigo naturalis, a botanical extract used historically in traditional medicine practices in East Asia, has been evaluated in several clinical studies in patients with UC, which are described below. Indigo naturalis has not been approved by the FDA or any comparable foreign regulatory authority for the treatment of UC. Our co-founder, Dr. Julie Saiki, conducted an open-label Phase 1b study of indigo naturalis in refractory UC patients at Stanford University (Saiki et al., BMJ Open Gastroenterology, 2021; n=11), of whom 9 of 11 had failed anti-TNF therapy and 5 of 11 had been recommended for colectomy. Eligible patients were 13 to 75 years old with biopsy-confirmed UC and a total Mayo score of 3 to 12, a Mayo endoscopic subscore of at least 1 and a Physician’s Global Assessment subscore of at least 1, and were refractory or intolerant to 5-aminosalicylic acid; patients 17 years or younger were also required to be refractory or intolerant to corticosteroids, small-molecule immunomodulators and biologics, or to be corticosteroid-dependent. Patients with Crohn’s disease or indeterminate colitis, a change in therapy within two weeks before baseline, or use of immunomodulators or tobacco, were excluded. In this study, indigo naturalis was associated with increased colonic AhR target engagement (~12,000-fold mean increase in colonic AhR activity). This study was not powered for statistical significance. No patient discontinued treatment due to an adverse event although one patient had two serious adverse events judged to be unrelated to study drug. Clinical response was defined as a decrease in the total Mayo score of at least 30% and 3 points with an accompanying decrease in the rectal bleeding subscore, clinical remission as a Mayo score below 3 with no individual subscore above 1, and mucosal healing as a Mayo endoscopic subscore of 0 or 1. We believe the results of this study support further investigation of the AhR mechanism in UC.
Indigo naturalis has been evaluated in additional clinical studies in UC. In a randomized, double-blind, placebo-controlled trial (Naganuma et al., Gastroenterology, 2018; n=86) which included UC patients with a Mayo score of 6 or more and sigmoidoscopy subscore of at least 2, indigo naturalis demonstrated up to approximately 50% placebo-adjusted clinical remission (defined as a Mayo score of ≤2 and no subscores >1) at Week 8, with benefit observed in both biologic-experienced and biologic-naïve patients (Naganuma et al., J Gastroenterol, 2019). The study was designed with 80% power to detect a difference in clinical response (defined as a 3-point decrease in Mayo score and a decrease of at least 30% from baseline, with a decrease of at least 1 point on rectal bleeding subscore or absolute rectal bleeding score of 0-1) between the highest-dose (2.0 g/d) and placebo, using a two-sided alpha of 0.05. There was a significant dose-dependent linear trend for the primary endpoint, proportion of patients in clinical response at week 8 (Cochran-Armitage trend test P<.0001 compared with placebo). No serious adverse events were observed, although mild liver dysfunction was observed in 10 patients who received indigo naturalis. This study was stopped early due to a report of a patient using indigo naturalis outside of clinical study developing pulmonary arterial hypertension. In a longer-term open label maintenance study (Matsuno et al., 2022; n=33) in patients with moderate to severe active UC with a clinical activity index (CAI) ≥8 and Mayo endoscopic subscore (MES) ≥2, clinical remission (defined as a clinical activity index or CAI score of ≤4) was reported in approximately 73% of patients at one year. Seven severe adverse events were reported in 4 patients, which included acute colitis (3), infectious colitis (1), intussusception (1), appendicitis (1), and portal vein thrombosis (1). This open label study was not powered for statistical significance. Indigo naturalis is an uncontrolled botanical mixture that is not FDA-approved and carries potential systemic safety liabilities, limiting its utility as a therapy.
Figure: Summary of results from clinical studies of indigo naturalis in ulcerative colitis. Source: Company materials
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We Believe AhR Activity in UC Is Driven Locally
Preclinical and clinical evidence supports our thesis that the activity of AhR agonism in UC is driven by local activation in the colonic epithelium, rather than by systemic exposure. In a chronic murine colitis model, selective deletion of AhR in intestinal epithelial cells eliminated most of the benefit of AhR agonism, supporting that colonic epithelial AhR signaling is critical to efficacy. In addition, tapinarof (Vtama®), a topically-applied AhR agonist approved for psoriasis and atopic dermatitis, achieves its therapeutic effect with minimal systemic exposure. Consistent with these findings, Azora’s fully-owned, topical indirubin program, AT193, was evaluated in psoriasis patients with no quantifiable systemic exposure in a Phase 1b study conducted in Australia and sponsored by Azora Therapeutics Australia Pty Ltd. Although the program is not in active development, we believe the clinical data support the hypothesis that local activation alone may be sufficient for clinical activity in another autoimmune disease. Together, these data support our belief that local AhR activation may be sufficient to drive clinical benefit.
AT177 — Our Lead Product Candidate
Composition and Mechanism of Action
AT177 is a fully-synthetic, colon-targeted, small-molecule prodrug designed to recapitulate the clinical activity observed with indigo naturalis while minimizing systemic exposure. AT177 converts in the colonic lumen to indirubin, which we believe to be one of the most potent AhR agonists in indigo naturalis, in the colon. Conversion to indirubin occurs via hydrolysis across a range of physiological pHs expected in healthy and UC colons and does not rely on microbial activity or expression of enzymes which may be disrupted in UC patients. By liberating indirubin directly at the site of disease, AT177 is designed with the intention to maximize local AhR activation in the colonic epithelium while limiting systemic exposure.
Figure: AT177 converts into indirubin, the active moiety in indigo naturalis. Source: Company materials.
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Differentiated Product Profile
We believe that AT177 has a differentiated clinical profile compared with approved therapies and other AhR candidates in development:
| ● | Active moiety with prior clinical experience. AT177’s active moiety, indirubin, is the AhR agonist that we believe is primarily responsible for the clinical activity observed with indigo naturalis in UC. Obefazimod, which we believe acts at least in part as a medium-potency AhR agonist, has been evaluated in Phase 3 trials in UC. |
| ● | Designed for ulcerative colitis. AT177 is an oral, colon-targeted agent designed to maximize local AhR activation at the site of disease while minimizing systemic exposure, with the goal of improving efficacy and limiting systemic toxicities. |
| ● | Endogenous active moiety. Indirubin is an endogenous molecule produced by colonic bacteria in healthy individuals. |
| ● | Non-immunosuppressive, combinable mechanism. AT177 is designed to restore mucosal immune homeostasis and epithelial barrier function locally rather than broadly suppressing the immune system, which we believe may make it combinable with existing mechanisms for UC while potentially avoiding certain risks associated with systemic immunosuppression. |
| ● | Greater colonic AhR activation than indirubin in a head-to-head preclinical study. While preclinical studies have limited value in predicting the safety and effectiveness of a drug, in a head-to-head preclinical study in the DSS murine colitis model, oral AT177 achieved approximately 8-fold greater colonic AhR signaling than a molar-equivalent amount of indirubin, as measured by induction of the AhR regulated gene CYP1A1 (n = 5 per group; p = 0.0156). |
| ● | Long-dated intellectual property. AT177 is protected by granted composition-of-matter patents extending to 2042, with additional pending applications for colon-targeted AhR agonist formulations and methods of use. |
| ● | Market-expansion optionality. AT177 is designed to be combinable with other UC mechanisms, and a successful proof of concept in UC may support development in Crohn’s disease. |
Preclinical Evidence
While preclinical studies have limited value in predicting the safety and effectiveness of a drug, in a dextran sodium sulfate (“DSS”) murine colitis model, in a head-to-head comparison, oral AT177 produced greater in vivo colonic AhR activity than indirubin, achieving approximately 8-fold greater local colonic AhR signaling than a molar-equivalent amount of indirubin. In a trinitrobenzene sulfonic acid (“TNBS”) murine colitis model, animals treated with oral AT177 had lower disease activity scores than vehicle-treated animals (p< 0.0001 at day 5 and day 6), and histology showed greater preservation of colonic crypt architecture and epithelial integrity and less inflammatory infiltrate in the lamina propria than in vehicle-treated animals. Results in animal models may not be predictive of results in humans.
In mini pig animal studies, oral AT177 resulted in indirubin concentrations above the AhR EC50 across the colon and into the rectum, with low plasma exposure (below the quantification limit).
We believe these preclinical data, together with the clinical evidence supporting the AhR mechanism from indigo naturalis studies and the shared active moiety, reduce certain development risks for AT177. However, substantial development risks remain, including risks related to safety, efficacy, manufacturing, and regulatory approval.
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Competitive Positioning Among AhR Agonists
We believe that AT177’s profile is differentiated from other AhR agonists in development because it is designed to deliver a highly potent AhR agonist locally to the colon, is rapidly metabolized and potentially has a pharmacokinetic/pharmacodynamic (“PK/PD”) profile we believe to be appropriate for UC with limited systemic exposure in preclinical studies. Its active moiety, indirubin, has been evaluated in patients as a component of indigo naturalis and is an endogenously produced molecule.
We are aware of several other parties developing drugs with AhR activity in inflammatory bowel disease, including Abivax, Equillium and Dr. Falk Pharma (in partnership with AllianThera Biopharma).
Abivax is developing obefazimod, an orally administered, medium-potency systemic AhR agonist that induces upregulation of MiR-124. Obefazimod has reported approximately 16.4% placebo-adjusted clinical remission at Week 8 at a 50 mg dose in its Phase 3 ABTECT program. Based on published data, we believe obefazimod’s PK/PD profile may not achieve optimal colonic AhR activation, with near-undetectable levels of obefazimod and its metabolite reported in rectal biopsies in a Phase 1 study (data from https://clinicaltrials.gov/study/NCT02990325 accessed on June 3, 2026).
Equillium is developing EQ504, a preclinical-stage AhR modulator that it acquired through its 2024 acquisition of Ariagen, Inc. We believe a key distinction between AT177 and EQ504 is that AT177’s active moiety, indirubin, has been evaluated in patients with UC as a component of indigo naturalis, whereas EQ504’s active moiety has not, to our knowledge, been evaluated in patients. Further the systemic exposure due to EQ504 administration is unknown.
Dr. Falk is developing ATB102, an early clinical-stage orally administered AhR/Nrf2 agonist which appears to be based on the tapinarof scaffold. ATB102 appears to be a medium potency AhR agonist with reduced systemic exposure relative to tapinarof.
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Figure: AT177 was rationally designed to have the right profile for ulcerative colitis. Source: Company materials.
Clinical Development Plan
Our near-term development priorities are focused on advancing AT177 efficiently through IND-enabling studies into Phase 1a safety and pharmacology studies, followed by a Phase 1b proof-of-concept trial in patients with UC. As of the date of this Quarterly Report on Form 10-Q, we have scaled drug substance, demonstrated in vivo activity in animal models, achieved target PK/PD in large animals, and completed GLP toxicology studies in rats. We have received pre-IND feedback from the FDA and are conducting IND-enabling studies in line with FDA guidance. Our proposed IND enabling package will include phase-appropriate toxicology studies in a rodent and non-rodent species, genotoxicity studies, safety pharmacology studies, adsorption, distribution, metabolism and excretion (“ADME”) studies, transporter studies, phototoxicity studies, pharmacology studies, and AhR binding studies. We plan to file an IND for AT177 in the first half of 2027 and, subject to the appropriate regulatory agencies allowing us to proceed, to initiate a Phase 1a SAD/MAD study followed by a Phase 1b proof-of-concept study in UC patients, with an initial proof-of-concept readout anticipated in the first half of 2028.
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Figure: Financing positions AT177 through IND-enabling studies and into clinical proof of concept in UC. Timelines shown are estimates, are not guaranteed and are subject to change based on numerous factors, including the successful and timely completion of preclinical studies and clinical trials, the appropriate regulatory agencies allowing studies to proceed, regulatory feedback, manufacturing and the availability of funding. Source: Company materials.
Chemistry, Manufacturing and Controls
AT177 is manufactured from commercially available, fully-synthetic starting materials using a proprietary, highly scalable synthetic route. We have completed kilogram-scale feasibility batches and have observed drug-substance stability of greater than 18 months at room temperature. We have initiated the development of U.S.-based current Good Manufacturing Practice (“cGMP”) manufacturing with a long-term development partner. The drug product is a colon-targeted oral formulation that uses only excipients found in FDA-approved drugs and is designed to provide a highly targeted colonic release profile, which has been supported by large-animal studies. We believe AT177’s CMC package is well-positioned to support clinical advancement.
Potential Future Indications
We believe our colon-targeted AhR agonist holds promise across a broader range of immune-mediated conditions, including other inflammatory bowel diseases. A proof of concept in ulcerative colitis may, if successful, support development of AT177 in Crohn’s disease, and we are researching whether AT177’s mechanism is orthogonal to, and potentially combinable with, approved UC therapies. We also intend to explore additional, undisclosed platform opportunities as the AT177 program advances.
Legacy Program — AD04
Prior to the Merger, we were a clinical-stage pharmaceutical company focused on the treatment and prevention of addiction and related disorders. Our legacy investigational product candidate, AD04, was being developed as a potential therapy for alcohol use disorder, or AUD. AD04 was previously evaluated in the Phase 3 ONWARD trial for the treatment of AUD in patients with specific target genotypes identified through a companion genetic diagnostic test. See Part I, Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2025, for additional information regarding our legacy AD04 program and additional information about our business prior to the Merger.
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Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on intellectual property. While we believe our differentiated, colon-targeted AhR agonist approach provides a competitive advantage, we face competition from many sources, including pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions.
The UC market in particular has become an increasingly competitive space. There are now multiple classes of approved therapies — including anti-TNF agents, anti-integrin antibodies, IL-12/23 and IL-23 inhibitors, JAK inhibitors and S1P receptor modulators — as well as numerous product candidates in clinical development. There are also several competitive AhR-directed approaches including obefazimod (Abivax), EQ504 (Equillium), ATB102 (Dr. Falk Pharma in partnership with AllianThera).
Intellectual Property
We seek to protect proprietary technology, inventions and improvements that are commercially important to the development of our business by seeking, maintaining and defending patent rights, and leveraging trade secrets, know-how and regulatory exclusivities where available.
We solely own intellectual property rights covering AT177 on a worldwide, royalty-free basis. Azora was spun out of Stanford University’s SPARK translational research program after a clinical study of indigo naturalis was conducted at Stanford, Stanford granted Azora exclusive rights to use clinical data with indigo naturalis for regulatory, development and intellectual property purposes. This data has been published in Saiki et al., 2021. Stanford has not granted any license relating to indirubin or AT177, and we do not believe that any such license is required. No Stanford resources were used in the development of the inventions claimed in Azora’s patents, and No inventors of Azora’s patents were affiliated with Stanford at the time such patents were filed. Our granted composition-of-matter patent directed to AT177 extends to 2042. We are also pursuing patent protection for our colon-targeted AhR agonist formulations and methods of preventing or mitigating side effects (headaches, GI, PAH) and enhancing the efficacy of AhR agonists. The following table summarizes our key issued patents directed to AT177:
| Patent No. | Type | Status | Expires | |||
| US Patent No. 11,834,412 JP 7660263 |
Composition-of-Matter | Granted (U.S., JP) | 2042 | |||
| US Patent No. 12,516,022 | Methods | Granted (U.S.) | 2042 |
GI = gastrointestinal; PAH = pulmonary arterial hypertension. Patent expiration dates shown do not include any patent term extension or adjustment that may be available.
As of July 27, 2026, our patent estate related to AT177 and our broader patent families (four) are described below:
| ● | Composition-of-matter — indirubin prodrugs. This patent family includes claims directed to indirubin prodrugs, including AT177, and is issued in the United States and Japan (U.S. Patent No. 11,834,412 and Japanese Patent No. 7660263), with claims estimated to expire in 2042, absent any patent term adjustment or extension. Applications in this patent family are also pending in Australia, Canada, China, Europe, Mexico, Hong Kong and the United States. |
| ● | Methods of use in inflammatory disease. This same patent family also includes claims directed to the use of our active pharmaceutical compounds to treat inflammatory diseases, including ulcerative colitis, pouchitis and Crohn’s disease, and is issued in the United States (U.S. Patent No. 12,516,022), with claims estimated to expire in 2042. |
| ● | Colon-targeted formulations. Our second patent family includes pending claims directed to colon-targeted formulations of AhR agonists (US-2025-0255820-A1), which, if granted, are expected to expire in 2040. We believe this family has the potential to provide broad intellectual property covering colon-targeted AhR agonists. |
| ● | Methods to improve the therapeutic profile of AhR agonists. Our third patent family includes pending claims directed to methods of reducing possible side effects of AhR agonists, including headaches, gastrointestinal effects and pulmonary arterial hypertension (US-2025-0195469), which, if granted, are expected to expire in 2042. |
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AT177 is not a botanical substance. AT177 is a fully synthetic novel prodrug of indirubin that does not occur in nature. The composition-of-matter claims covering AT177 have already been granted by the USPTO. We do not intend to patent any botanical substances.
We hold these rights outright and are not subject to any third-party license, royalty or milestone obligations with respect to AT177. In addition to patent protection, we rely on trade secrets, know-how and continuing technological innovation to protect our technology. We intend to seek patent term extension under the Hatch-Waxman Act for one or more patents covering AT177 following any marketing approval, where available.
Manufacturing
We do not own or operate, and currently have no plans to establish, manufacturing facilities for the production of AT177. We rely, and expect to continue to rely, on third-party contract manufacturing organizations (“CMOs”) for our raw materials, drug substance and drug product needs for preclinical research and clinical supply, and expect to do so for any future commercial supply. AT177 is manufactured from commercially available, fully-synthetic starting materials using a proprietary, highly scalable synthetic route.
Sales and Marketing
Given our current stage of development, we have not yet established commercial organization or distribution capabilities. If AT177 or any other product candidate receives marketing approval from the FDA, we expect to manage sales, marketing, patient access and distribution through internal resources, third-party relationships, or collaboration with one or more pharmaceutical companies to enhance our commercial capabilities.
Key Factors Impacting the Comparability of Results
The historical results of operations for the periods presented may not be comparable, either to each other or to our future results of operations, for the reasons described below:
Acquisition of Azora
On June 11, 2026, we completed the acquisition of Azora. As a result of this transaction, Azora became a wholly owned subsidiary of ours, and our business shifted from the development of AD04 for the treatment of AUD in heavy drinking patients to being primarily focused on the development of AT177 for the treatment of UC.
We have been determined to be the accounting acquirer, and accordingly, the financial statements for periods prior to the Merger reflect only the historical results of our legacy AUD focused business. The results of operations of Azora have been included in our consolidated financial statements beginning on the date of the Merger, June 11, 2026.
As a result, the results of operations for the three and six months ended June 30, 2026 include (i) our legacy AUD focused operations for the full period and (ii) the results of Azora for the period from June 11, 2026 through June 30, 2026. Accordingly, the results for the current period are not directly comparable to prior periods.
In addition, the Merger resulted in significant changes to our financial position, including the recognition of substantial in process research and development expense. We also incurred transaction-related costs and integration-related expenses in connection with the Merger, which impacted operating results for the current period.
Following the Merger, we operate with a different product candidate, cost structure, capital requirements, and personnel. As a result of these changes, period-to-period comparisons of our historical results may not be indicative of future performance.
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Results of operations for the three months ended June 30, 2026 and 2025
The following table sets forth the components of our statements of operations in dollars for the periods presented (in thousands):
| For the Three Months Ended June 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | $ | 440 | $ | 732 | $ | (292 | ) | |||||
| General and administrative expenses | 5,400 | 1,150 | 4,250 | |||||||||
| Acquired in-process research and development | 46,185 | — | 46,185 | |||||||||
| Total Operating Expenses | 52,025 | 1,882 | 50,143 | |||||||||
| Loss From Operations | (52,025 | ) | (1,882 | ) | (50,143 | ) | ||||||
| Change in fair value of milestone warrant rights liability | 8,280 | — | 8,280 | |||||||||
| Financing expense related to milestone warrant rights liability | (2,067 | ) | — | (2,067 | ) | |||||||
| Loss on extinguishment of Azora Therapeutics convertible promissory notes | (6,054 | ) | — | (6,054 | ) | |||||||
| Change in value of equity method investment | (181 | ) | (99 | ) | (82 | ) | ||||||
| Other income (expense) | — | (1 | ) | 1 | ||||||||
| Interest income | 58 | 24 | 34 | |||||||||
| Total other income (expenses) | 36 | (76 | ) | 112 | ||||||||
| Net loss | $ | (51,989 | ) | $ | (1,958 | ) | $ | 50,031 | ||||
Research and development (“R&D”) expenses
The following table sets forth our research and development expenses in dollars for the periods presented (in thousands):
| Three Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | ||||||||||||
| AD04 | $ | 38 | $ | 322 | $ | (284 | ) | |||||
| AT177 | 103 | – | 103 | |||||||||
| CMC (1) | 69 | 326 | (257 | ) | ||||||||
| Other personnel and unallocated (2) | 230 | 84 | 146 | |||||||||
| Total research and development expense | $ | 440 | $ | 732 | $ | (292 | ) | |||||
| (1) | Costs related to production and testing for CMC activities are not allocated on a program-by-program basis and mainly related to our AD04 product candidate. |
| (2) | Costs (primarily personnel) are related to all research and development programs and are not allocated on a program-by-program basis. |
Research and development expenses decreased by approximately $292,000 (40%) to $440,000 during the three months ended June 30, 2026 compared to $732,000 for the three months ended June 30, 2025. The decrease was mainly due to decreased CMC and decreased research and development activity as the Company was engaged in merger discussions in the three months ended June 30, 2026 as compared to the same period in 2025.
General and administrative expenses (“G&A”) expenses
General and administrative expenses increased by approximately $4,250,000 (370%) to $5,400,000 during the three months ended June 30, 2026 compared to $1,150,000 for the three months ended June 30, 2025. The increase was mainly due to merger related cost associated with the acquisition of Azora and bonus and severance expenses incurred in the three months ended June 30, 2026 as compared to the same period in 2025.
Acquired In-Process Research and Development Expense
Acquired in-process research and development expense was $46.2 million for the three months ended June 30, 2026, with no comparable expense in the prior year period. The charge was recognized in connection with the acquisition of Azora in June 2026 and represents the fair value of acquired IPR&D assets that had no alternative future use as of the acquisition date. See Note 4 to our unaudited condensed consolidated financial statement included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the Merger.
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Change in Value of Equity Method Investment
The expense recognized to the change in the value of our equity method investment in Adovate, LLC (“Adovate”) increased by approximately $82,000 in the three months ended June 30, 2026 compared to the three months ended June 30, 2025. This increase 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.
Total Other income (expenses)
Total other income (expense), was $36,000 for the three months ended June 30, 2026, compared to ($76,000) for the same period in 2025. The change was primarily driven by a ($6.1) million non-cash loss on extinguishment of promissory notes, recognized in connection with the acquisition with Azora when we exchanged outstanding promissory notes for pre-funded warrants to purchase our common stock, ($2.1) million financing costs, offset by $8.3 million change in the fair value of our milestone warrant rights.
Total other income, excluding losses from the equity method investment, change in fair value of milestone warrant rights liability and financing costs, loss on extinguishment of promissory notes, increased by approximately $35,000 in the three months ended June 30, 2026 compared to the three months ended June 30, 2025.
Results of operations for the six months ended June 30, 2026 and 2025
The following table sets forth the components of our statements of operations in dollars for the periods presented (in thousands):
| For the Six Months Ended June 30, | Change | |||||||||||
| 2026 | 2025 | (Decrease) | ||||||||||
| Research and development expenses | $ | 873 | $ | 1,479 | $ | (606 | ) | |||||
| General and administrative expenses | 6,969 | 2,671 | 4,298 | |||||||||
| Acquired in-process research and development | 46,185 | — | 46,185 | |||||||||
| Total Operating Expenses | 54,027 | 4,150 | 49,877 | |||||||||
| Loss From Operations | (54,027 | ) | (4,150 | ) | (49,877 | ) | ||||||
| Change in fair value of milestone warrant rights liability | 8,280 | — | 8,280 | |||||||||
| Financing expense related to milestone warrant rights liability | (2,067 | ) | — | (2,067 | ) | |||||||
| Loss on extinguishment of Azora Therapeutics convertible promissory notes | (6,054 | ) | — | (6,054 | ) | |||||||
| Change in value of equity method investment | (249 | ) | (262 | ) | 13 | |||||||
| Other income (expenses) | — | 165 | (165 | ) | ||||||||
| Interest income | 105 | 59 | 46 | |||||||||
| Total other income (expenses) | 15 | (38 | ) | 53 | ||||||||
| Net loss | $ | (54,012 | ) | $ | (4,188 | ) | $ | (49,824 | ) | |||
Research and development (“R&D”) expenses
The following table sets forth our research and development expenses in dollars for the periods presented (in thousands):
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | ||||||||||||
| AD04 | $ | 215 | $ | 695 | $ | (480 | ) | |||||
| AT177 | 103 | – | 103 | |||||||||
| CMC (1) | 240 | 615 | (375 | ) | ||||||||
| Other personnel and unallocated (2) | 315 | 169 | 146 | |||||||||
| Total research and development expense | $ | 873 | $ | 1,479 | $ | (606 | ) | |||||
| (1) | Costs related to production and testing for CMC activities are not allocated on a program-by-program basis and mainly related to our AD04 product candidate. |
| (2) | Costs (primarily personnel) are related to all research and development programs and are not allocated on a program-by-program basis. |
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Research and development expenses decreased by approximately $606,000 (41%) to $873,000 during the six months ended June 30, 2026 compared to $1,479,000 for the six months ended June 30, 2025. The decrease was mainly due to decreased CMC and decreased research and development activity as the Company was engaged in merger discussions in the six months ended June 30, 2026 as compared to the same period in 2025.
General and administrative expenses (“G&A”) expenses
General and administrative expenses increased by approximately $4,298,000 (161%) to $6,969,000 during the six months ended June 30, 2026 compared to $2,671,000 for the six months ended June 30, 2025. The increase was mainly due to merger related cost associated with the acquisition of Azora, private placement costs that were expensed and bonus and severance expenses incurred in the six months ended June 30, 2026 as compared to the same period in 2025.
Acquired In-Process Research and Development Expense
Acquired in-process research and development expense was $46.2 million for the six months ended June 30, 2026, with no comparable expense in the prior year period. The charge was recognized in connection with the acquisition of Azora in June 2026 and represents the fair value of acquired IPR&D assets that had no alternative future use as of the acquisition date. See Note 4 to our unaudited condensed consolidated financial statement included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the Merger.
Change in Value of Equity Method Investment
The expense recognized to the change in the value of our equity method investment in Adovate, LLC (“Adovate”) decreased by approximately $13,000 in the six months ended June 30, 2026 compared to the six months ended June 30, 2025. 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.
Total Other income (expenses)
Total other income (expense), was $15,000 for the three months ended June 30, 2026, compared to ($38,000) for the same period in 2025. The change was primarily driven by a ($6.1) million non-cash loss on extinguishment of promissory notes, recognized in connection with the acquisition with Azora when we exchanged outstanding promissory notes for pre-funded warrants to purchase our common stock, ($2.1) million financing costs, offset by $8.3 million change in the fair value of our milestone warrant rights liability.
Total other income, excluding losses from the equity method investment, change in fair value of milestone warrant rights liability and financing costs, loss on extinguishment of promissory notes, decreased by approximately $119,000 in the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This decrease was mainly due to a milestone gain of approximately $150,000 that was recognized in the six months ended June 30, 2025 which did not occur during the six months ended June 30, 2026.
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Liquidity and Capital Resources at June 30, 2026
On June 11, 2026, we completed the acquisition of Azora and determined that the Company is the accounting acquirer. Accordingly, periods prior to the acquisition reflect the historical financial statements of the Company, and the results of Azora are included beginning on the acquisition date. As a result, the liquidity and capital resources information for the six months ended June 30, 2026 is not directly comparable to the prior-year period.
We have incurred significant operating losses and negative cash flows from operations since inception and had an accumulated deficit of approximately $144.0 million as of June 30, 2026. We expect to continue to incur net losses for the foreseeable future as we continue to invest in the development of AT177 for the treatment of UC and maintain our legacy operations in a reduced capacity. We currently do not have enough funding to complete our planned clinical trials for AT177 and accordingly, will not continue development of AD04 unless we receive additional capital from a partner or collaboration earmarked for the development of AD04.
As of June 30, 2026, we had cash and cash equivalents of approximately $28.7 million. The Certificate of Designation of Preferences, Rights and Limitations of the Series A Non-Voting Convertible Preferred Stock (the “Certificate of Designation”) provides that if, at any time following the earlier of (i) stockholder approval of the conversion of the Series A Preferred Stock into shares of our common stock or (ii) December 11, 2026, we fail to timely deliver shares of common stock to a converting holder in accordance with the terms of the Certificate of Designation, such holder may require us to pay cash in an amount equal to the fair value of the undelivered shares. The cash settlement price is the closing price on the last trading day before the Company’s receipt of a stockholder’s conversion notice; based on the $4.01 closing price on September 30, 2026, settling all 12,930,601 shares of common stock issuable upon conversion of the Series A Preferred Stock would cost approximately $51.9 million. If stockholder approval of the conversion of the Series A Preferred Stock has not yet been obtained, the cash settlement right will first become available on December 11, 2026 (six months after issuance), provided that the exercise of such right will be only at a holder’s election. The Company’s cash reserves as of September 30, 2026 were approximately $22.0 million, which would not be sufficient to fund a full settlement, and we expect that we would seek to raise alternative debt or equity financing to do so. The Company may be unable to raise additional funds when needed on favorable terms or at all. The Company believes holders of the Company’s common stock are aware of the Company’s cash position, the expected shortfall should the Company be forced to cash settle the Series A Preferred Stock and the unlikelihood that the Company would be able to raise sufficient capital to finance full cash settlement of the Series A Preferred Stock. The Company believes each of these factors positively influence the likelihood that holders of the Company’s common stock will support approval of the proposal to allow for the conversion of the Series A Preferred Stock at the Company’s reconvened 2026 Annual Meeting of Stockholders, when held.
Our ability to execute our longer-term business plan will depend on a number of factors, including the pace and cost of our IND-enabling and clinical development activities, the timing of regulatory interactions, and our ability to manage operating costs. We may seek to raise additional capital through public or private equity offerings, debt financings, or strategic partnerships to support future growth initiatives. However, there can be no assurance that such financing will be available on acceptable terms, or at all.
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 compounds, 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 sales agreement (the “ATM”) that we entered into with A.G.P./Alliance Global Partners ( “AGP”) on August 1, 2025 providing for the sale by us of our shares of common stock, from time to time, through the ATM, with certain limitations on the amount of common stock that may be offered and sold by us, private placements, use of our equity line, as well as other equity financings and warrant exercises.
For the six months ended June 30, 2026, we sold 725,684 shares of common stock through the AGP ATM, for net proceeds of approximately $1.2 million after expenses. Additionally, we sold Initial Closing Pre-Funded Warrants to purchase an aggregate of 9,749,345 shares of common stock to the PIPE Investors, for net proceeds of approximately $24.3 million, after deducting placement agent fees and the payment of other offering expenses associated with the Financing that were payable by us.
We will require additional financing as we continue to execute our overall business strategy which is to complete IND-enabling studies, with an IND submission planned for the first half of 2027. We intend to advance AT177 into a Phase 1a SAD/MAD study followed by a Phase 1b PoC study in patients with UC, in each case subject to the appropriate regulatory authorities allowing our planned studies to proceed, with an initial proof-of-concept readout anticipated in first half of 2028. We do not believe our current cash will be sufficient to allow us to commence the planned Phase 1b study or any additional studies for AD04. However, we do believe that the additional $32.4 million that we could receive upon purchase of the Milestone Warrants by the PIPE Investors and Former Azora Noteholders, if such persons exercise their right to purchase the Milestone Warrants, would be sufficient to allow us to complete the planned Phase 1b study of AT177. We have no right to compel the purchase of any Milestone Warrants, and we are not relying on any commitment to do so. The PIPE Investors and Former Azora Noteholders are not obligated to purchase any Milestone Warrants, and no assurances can be provided that they will exercise their right to do so.
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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 through the sale of the Milestone Warrants, equity and/or debt financings, grant funding, strategic collaborations and strategic relationships in order to complete our subsequent clinical trial requirements for AT177. At this time, we have no committed sources of funding. The sale and issuance of the Milestone Warrants and the receipt of cash proceeds from such issuance is not guaranteed and is in the discretion of the PIPE Investors and Former Azora Noteholders. Our ability to sell shares under the AGP ATM is restricted by certain SEC rules, and our ability to sell shares under the purchase agreement, dated December 13, 2024, that we entered into with Alumni Capital LP (“Alumni”) is restricted by the terms of such agreement and certain Nasdaq rules. Without additional funding or securing a strategic collaboration, we will be required to delay, scale back or eliminate some or all of our research and development programs including our planned Phase 1b trial, which would likely have a material adverse effect on us and our consolidated financial statements. We expect that any further development of AD04 will only be commenced if we receive grant funding, or enter into strategic collaborations and strategic relationships.
There can be no assurance that we will be successful in pursuing any strategic alternative or that, if pursued, we will be able to consummate a strategic alternative on attractive terms or at all or that it would lead to increased stockholder value.
If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. These factors raise substantial doubt about our ability to continue as a going concern in the event the cash settlement obligations related to the Series A Preferred Stock are triggered.
Cash flows
| For the Six Months Ended June 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Provided by (used in) | ||||||||
| Operating activities | $ | (7,975 | ) | $ | (3,335 | ) | ||
| Investing activities | 5,282 | 150 | ||||||
| Financing activities | 25,524 | 5,349 | ||||||
| Net increase in cash and cash equivalents | $ | 22,831 | $ | 2,164 | ||||
Net cash used in operating activities
Net cash used in operating activities increased by approximately $4.6 million in the six months ended June 30, 2026 compared to the six months ended June 30, 2025. The primary driver was merger related cost associated with the acquisition of Azora, private placement costs that were expensed and bonus and severance expenses, which mainly attributed to this increase for the six months ended June 30, 2026 as compared to the six months ended June 30, 2025.
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Net cash provided by investing activities
Net cash provided by investing activities increased by approximately $5.1 million in the six months ended June 30, 2026 compared to the six months ended June 30, 2025. This primary driver was due to the net cash received in the acquisition of Azora partially offset by recognition of a milestone payment received from Adovate of $150,000 in 2025 which did not occur in 2026 in the same period.
Net cash provided by financing activities
Net cash provided by financing activities increased by approximately $20.2 million in the six months ended June 30, 2026 compared to the six months ended June 30, 2025. During the six months ended June 30, 2026, the primary driver was our Financing in conjunction with the acquisition of Azora as compared to a Warrant Inducement transaction and sales of our common stock under a best efforts offering completed during the six months ended June 30, 2025.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3 to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Critical Accounting Estimates
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
During the three and six months ended June 30, 2026, we acquired in-process research and development, which was expensed, and we recorded a milestone warrant rights liability in connection with the Merger. For the milestone warrant rights liability, our best estimate is based on clinical trial progress, regulatory interactions, and historical industry success rates. An increase in the probability of milestone achievement or underlying stock price significantly increases the fair value of the milestone warrant rights liability.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) or Rule 15d-15(b) promulgated by the SEC under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.
During the preparation of our financial statements for the second quarter of 2026, management identified a material weakness in internal control over financial reporting related to the accounting and financial reporting of the non-routine, complex transactions associated with the Merger, Financing, and Azora Note Exchange (collectively, the “Transaction”). This material weakness did not affect any previously issued financial statements. The June 30, 2026 unaudited condensed consolidated financial statements included in this Form 10-Q appropriately reflect the accounting for the Transaction, and no prior-period financial statements were impacted.
Due to the material weakness in internal control over financial reporting as described above, our Chief Executive Officer and our Chief Financial Officer concluded that based on their evaluation of our disclosure controls and procedures, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.
Notwithstanding the material weakness described above, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that unaudited condensed consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented in this Quarterly Report on Form 10-Q.
Remediation Plan for Existing Material Weakness
Management will take steps to remediate the weakness described above. Management will engage third-party accounting consulting firms to assist us in the review of our application and accounting for complex financial instruments.
Changes in Internal Control
On June 11, 2026, we completed our acquisition of Azora, as further described in Note 4 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. In connection with the acquisition, we have begun the process of integrating Azora’s financial processes, systems, and personnel into our system of internal control over financial reporting. We expect this integration to continue through the remainder of 2026 and to result in changes to our internal control over financial reporting. Other than as described above, there has been no change in our internal control over financial reporting during the three months ended June 30, 2026 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors.
Investing in our securities involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our 2025 Form 10-K. Except as disclosed below, there have been no material changes from the risk factors disclosed in our 2025 Form 10-K.
We have incurred losses from our operations every year and quarter since our inception and anticipate that we will continue to incur losses from our operations in the future.
We are a clinical stage biotechnology pharmaceutical company that is focused on developing treatments for serious inflammatory diseases, and the development of therapeutics for the treatment or prevention of addiction related disorders. We have a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. To date, we have not generated positive cash flow from operations, revenues, or profitable operations, nor do we expect to in the foreseeable future. As of June 30, 2026, we had an accumulated deficit of approximately $144.0 million and during the three months ended June 30, 2026, we incurred a net loss of $52.0 million.
Our current cash and cash equivalents 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 and are only anticipated to be sufficient to fund our needs into the second half of 2027, based our current projections and current commitments. Implementation of our full development plans would exhaust our cash on hand more quickly. Therefore, despite the funding we have recently received, we will need to engage in additional fundraising in the near term as we carry out our development plans. We do not have any fixed commitments of financing and there can be no assurance that we will be able to meet the conditions for continued sales pursuant to the AGP ATM. In addition, there is no assurance that funds could be raised before we have expended our current cash on hand on acceptable terms to continue our operations and AT177 or AD04 development projects. We are actively pursuing financing, but can provide no assurances that such financing will be available on acceptable terms, or at all.
We expect our research and development expenses to increase as we continue our clinical development program in the US. Even if we succeed in commercializing our product candidate or any future product candidates, we expect that the commercialization of our product will not begin until 2028 or later, we will continue to incur substantial research and development and other expenditures, including potentially developing additional product candidates and will continue to incur substantial losses and negative operating cash flow. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
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Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern on Form 10-K as do our notes to condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Our consolidated unaudited financial statements as of June 30, 2026 have been prepared assuming we will continue as a going concern. During the three months ended June 30, 2026, we incurred a net loss of $52.0 million and used $8.0 million of cash in operations. During the year ended December 31, 2025, we incurred a net loss of $8.0 million and used cash in operations of $6.5 million. Losses have principally occurred as a result of the research and development efforts coupled with no operating revenue. The notes to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q state that, in the event the cash settlement obligations related to the Series A Preferred Stock are triggered, we do not believe that the existing cash and cash equivalents are sufficient to fund operations for the next twelve months following the filing of this Quarterly Report on Form 10-Q and our significant accumulated deficit, recurring losses, and needs to raise additional funds to sustain its operations raise substantial doubt about our ability to continue as a going concern. In addition, the report of our independent registered public accounting firm included in the 2025 Form 10-K contains an explanatory paragraph that our accumulated deficit, incurred recurring losses and need to raise additional funds to sustain our operations has raised substantial doubt about our ability to continue as a going concern. During 2026, the Company received net proceeds of approximately $27.6 million from equity issuances. However, the Company will require additional capital to continue operations and development of AT177 and AD04.
Even if we succeed in commercializing our product candidate or any future product candidates, we expect that the commercialization of our product will not begin until 2028 or later, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates and will continue to incur substantial losses and negative operating cash flow.
We could lose our listing on the Nasdaq Capital Market if our stockholders’ equity does not meet Nasdaq requirements or if we do not comply with other Nasdaq requirements, including if we do not receive conditional approval from Nasdaq of our Initial Listing Application prior to our receipt of stockholder approval of the conversion of shares of our Series A Preferred Stock. The loss of our Nasdaq listing would likely have an adverse effect on the liquidity and market price of our common stock.
Pursuant to the Nasdaq continued listing rules, we are currently required to maintain stockholders’ equity in excess of $2.5 million. Our stockholders’ equity as of June 30, 2026, as reported in this Quarterly Report on Form 10-Q, does not meet Nasdaq rules for continued listing of our stock on the Nasdaq Capital Market, LLC (“Nasdaq”). On August 18, 2026, we received a deficiency notice to this effect from Nasdaq, and on October 2, 2026, we submitted a plan to Nasdaq for regaining compliance.. Additionally, Nasdaq Listing Rule 5110 requires that the Company submit, and Nasdaq approve, a Nasdaq Listing Application prior to the approval by our stockholders of a change of control pursuant to Nasdaq Listing Rule 5635(b). We currently expect that the receipt of stockholder approval of the conversion of our shares of Series A Preferred Stock, together with certain other expected changes to our management team and board of directors and other factors, will result in a change of control under Nasdaq rules.
We currently believe that we will exceed the $2.5 million stockholder’s equity continued listing requirement at such time that we receive stockholder approval of the conversion of our Series A Preferred Stock and that we will be able to take the necessary actions to obtain conditional approval of our Initial Listing Application from Nasdaq prior to our reconvened 2026 Annual Meeting of Stockholders; however, no assurances can be provided that we will satisfy such requirements or be able to obtain the conditional approval of our Initial Listing Application from Nasdaq prior to our reconvened 2026 Annual Meeting of Stockholders.
A delisting of our Common Stock would have an adverse effect on the liquidity and market price of our Common Stock and on our ability to raise additional capital in the public markets. In the event of a delisting from the Nasdaq Capital Market, our common stock would likely be traded in the over-the-counter inter-dealer quotation system, more commonly known as the OTC. OTC transactions involve risks in addition to those associated with transactions in securities traded on the securities exchanges, such as the Nasdaq Capital Market, or exchange-listed stocks. Many OTC stocks trade less frequently and in smaller volumes than exchange-listed stocks. Accordingly, our common stock would likely be less liquid than it would be otherwise. Also, the prices of OTC stocks are often more volatile than exchange-listed stocks. Additionally, many institutional investors are prohibited from investing in OTC stocks, and it might be more challenging to raise capital when needed.
We have identified a material weakness in our internal controls, and we cannot provide assurances that this weakness will be effectively remediated or that additional material weaknesses will not occur in the future
If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a- 15(f) under the Exchange Act. During the preparation of our financial statements for the second quarter of 2026, management identified a material weakness in internal control over financial reporting related to the accounting and financial reporting of the non-routine, complex transactions associated with the Transaction. While we plan to take remedial action to address the material weakness, we cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective. If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report our financial results, detect or prevent fraud, or file our periodic reports in a timely manner, which may, among other adverse consequences, cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. In addition, a material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Although management believes that the material weakness will be remediated in the near future there can be no assurance that the deficiencies will be remediated at such time or that the internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
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Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans and outstanding warrants, or conversions of shares of our Series A Preferred Stock could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock. Additionally, in connection with the Merger, we issued 12,930.601 shares of Series A Preferred stock to the former stockholders of Azora, which are convertible into an aggregate of 12,930,601 shares of our common stock. Subject to certain beneficial ownership limitations, the outstanding shares of our Series A Preferred Stock will automatically convert into shares of our common stock upon stockholder approval of such conversions, which we intend to seek at our reconvened 2026 Annual Meeting of Stockholders. Pursuant to our 2017 equity incentive plan, which became effective on the business day prior to the public trading date of our common stock, our management is authorized to grant equity awards to our employees, officers, directors and consultants.
At June 30, 2026, we had outstanding (i) warrants to purchase 1,240,076 shares of common stock outstanding with a weighted average exercise price of $18.79, (ii) options to purchase 1,646,685 shares of common stock at a weighted average exercise price of $4.56 per share, (iii) 557,248 restricted stock units, and (iv) shares of Series A Preferred Stock convertible into an aggregate of 12,930,601 shares of our common stock. The issuance of the shares of common stock underlying the options. warrants and Series A Convertible Preferred Stock will have a dilutive effect on the percentage ownership held by holders of our common stock.
Pursuant to the terms of the Merger Agreement, the Purchase Agreement and the Exchange Agreements, we are required to recommend that our stockholders approve the conversion of all outstanding shares of our Series A Preferred Stock into shares of our common stock, the exercise of all of the Assumed Options, the exercise of all of the Initial Closing Pre-Funded Warrants and the exercise of all of the Milestone Warrants. We cannot guarantee that our stockholders will approve these matters, and if they fail to do so we may be required to settle certain shares of our Series A Preferred Stock in cash and continue to solicit our stockholders, which could be time-consuming and costly and adversely affect our financial condition.
Under the terms of the Merger Agreement, the Purchase Agreement and the Exchange Agreements, as promptly as practicable following the date of the Merger Agreement, we are required to call and hold a meeting of our stockholders to obtain the requisite approval from our stockholders, in accordance with Nasdaq Stock Market Rules, for, among other things: (i) the conversion of the shares of our Series A Preferred Stock into shares of common stock, (ii) the exercise of the Assumed Options by the holders thereof, (iii) the exercise of the Initial Closing Pre-Funded Warrants by the holders thereof, (iv) the exercise of the Milestone Warrants by the holders thereof, (v) the amendment of our certificate of incorporation to increase the number of shares of common stock authorized for issuance thereunder to 500,000,000 shares, (vi) the adoption of a new 2026 Equity Incentive Plan and (vii) the adoption of a new 2026 Employee Stock Purchase Plan (collectively, the “Transaction Stockholder Matters”). If we fail to have enough shares present in person or by proxy to constitute a quorum, fail to obtain the required vote on the Transaction Stockholder Matters and/or the Nasdaq Listing Application is not approved, we will be required to further adjourn the 2026 Annual Meeting of Stockholders one or more times for up to 30 days per adjournment. If stockholder approval of the Transaction Stockholder Matters or approval of the Nasdaq Listing Application are still not obtained following such adjournment(s), we will be obligated to continue soliciting stockholder approval at subsequent annual or special meetings of our stockholders, held at intervals of no more than six months, until such approvals are obtained, which would be time consuming and costly.
There can be no assurance that our stockholders will approve the Transaction Stockholder Matters.
Additionally, if the conversion of the shares of our Series A Preferred Stock into shares of our common stock is not approved by the date that is six months following the initial issuance date of the Series A Preferred Stock, the holders of the Series A Preferred Stock would be entitled to require us to settle the shares of our common stock underlying the Series A Preferred Stock for cash at a price per share equal to the fair value of our common stock at such time as described in the Certificate of Designation. If we are forced to cash settle a significant amount of the shares of our common stock underlying the Series A Preferred Stock, it could materially affect our results of operations, business and financial condition.
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Failure to obtain approval of the Nasdaq Listing Application could materially affect our results of operations, business and financial condition.
Pursuant to the Merger Agreement, in order to permit the waiver of the beneficial ownership limitations applicable to the Series A Preferred Stock and take other actions following the consummation of the Merger, which would constitute a “change of control” under Nasdaq Listing Rule 5110(a), we are required to use our reasonable best efforts to file the Nasdaq Listing Application. The Nasdaq Listing Application must be conditionally approved prior to the date of our stockholder meeting to approve the Transaction Stockholder Matters. If we fail to meet the Nasdaq listing requirements and Nasdaq does not approve the Nasdaq Listing Application, we will be required to adjourn our stockholder meeting to approve the Transaction Stockholder Matters one or more times for up to 30 days per adjournment, continue to use our reasonable best efforts to obtain approval of the Nasdaq Listing Application and to continue soliciting stockholder approval of the Transaction Stockholder Matters at subsequent annual or special meetings of our stockholders, held at intervals of no more than six months, until such approval and the approval of the Transaction Stockholder Matters are obtained, which would be time consuming and costly. Additionally, if the conversion of the shares of our Series A Preferred Stock into shares of common stock is not approved by the date that is six months following the initial issuance date of the Series A Preferred Stock, the holders of the Series A Preferred Stock would be entitled to require us to settle their shares of Series A Preferred Stock for cash at a price per share equal to the fair value of the Series A Preferred Stock at such time as described in the Certificate of Designation. If we are forced to cash settle a significant amount of the shares of our common stock underlying the Series A Preferred Stock, it could materially affect our results of operations, business and financial condition. We cannot assure you that we will be able to meet Nasdaq’s initial listing standards. Furthermore, if we fail to obtain approval of the Nasdaq Listing Application, we may be unable to execute on our plans for the Company following the Merger, which could materially affect our results of operations, business and financial condition.
If certain proposals are not approved by stockholders at the reconvened 2026 Annual Meeting of Stockholders, certain securities will remain outstanding and unconverted, which could adversely affect the Company and our stockholders.
Under the terms of the Merger Agreement, we are obligated to obtain stockholder approval for the conversion of all outstanding shares of Series A Preferred Stock issued in the Merger into shares of our common stock, as required by the Nasdaq Listing Rules. Under the terms of the Purchase Agreement and Exchange Agreements, we are obligated to obtain stockholder approval for the exercise of all outstanding issued or issuable Initial Closing Pre-Funded Warrants and the Milestone Warrants as required by the Nasdaq Listing Rules. We are seeking such approval at the reconvened 2026 Annual Meeting of Stockholders. If our stockholders do not approve the conversion of the Series A Preferred Stock, the Series A Preferred Stock will remain outstanding and unconvertable, and we are obligated to seek such approval at one or more subsequent stockholders meetings until such approval is obtained, which would result in additional cost and delay. If our stockholders do not approve the exercise of the Initial Closing Pre-Funded Warrants, the Initial Closing Pre-Funded Warrants will remain outstanding and not exercisable, and we are obligated to seek such approval at one or more subsequent stockholders meetings until such approval is obtained. If our stockholders do not approve the exercise of the Milestone Warrants, any Milestone Pre-Funded Warrants and/or Milestone Incentive Warrants issued, if any, will not be exercisable and we will be obligated to seek such approval at subsequent stockholders meetings, resulting in additional cost and delay and we do not believe the PIPE Investors or Azora Noteholders will seek to acquire any Milestone Warrants until stockholder approval of their exercise is obtained. If the conversion of the Series A Preferred Stock is approved, the conversion of all such Series A Preferred Stock will result in the issuance of a maximum of 12,930,601 shares of our common stock, causing dilution to existing holders of our common stock and an increase in the number of shares eligible for resale in the public market. If the exercise of the Initial Closing Pre-Funded Warrant Proposal is approved, the exercise of all such Initial Closing Pre-Funded Warrants issuable will result in the issuance of a maximum of 11,780,948 shares of our common stock, causing dilution to existing holders of our common stock and an increase in the number of shares eligible for resale in the public market. If the issuance and exercise of the Milestone Warrants is approved, the exercise of all such Milestone Pre-Funded Warrants and Milestone Incentive Warrants will result in the issuance of a maximum of 23,561,896 shares of our common stock, causing dilution to existing holders of our common stock and an increase in the number of shares eligible for resale in the public market. We also have a contractual obligation under the Merger Agreement and RRA to register all shares of common stock issuable upon exercise of the Initial Closing Pre-Funded Warrants for resale within 80 days of the closing of the Financing and to file, within 30 days after a Milestone Registration Trigger Date a registration statement registering for resale the common stock issuable upon exercise of the Milestone Warrants that have not yet been registered.
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The market price of our common stock after the Merger may be affected by factors different from those that historically affected the market price of our common stock.
The business of Azora differs from that of our legacy ADO4 business in important respects, and, accordingly, our results of operations after the Merger, as well as the market price of our common stock, may be affected by factors different from those that historically affected the results of operations of the Company. Additionally, the market price of our common stock may fluctuate significantly following the Merger. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, our common stock, regardless of our actual operating performance.
We may fail to realize the anticipated benefits of the Merger.
The Company believes that there are significant benefits that may be realized by the Merger. However, the efforts to realize these benefits will be a complex process and may disrupt our existing operations if not implemented in a timely and efficient manner. The full benefits of the Merger may not be realized as expected or may not be achieved within the anticipated time frame, or at all. Failure to achieve the anticipated benefits of the Merger could adversely affect our business, operating results or financial condition and cause the combined business to not perform as expected.
Specifically, the following issues, among others, must be addressed to realize the anticipated benefits of the Merger:
| ● | combining certain of the companies’ financial, reporting and corporate functions; |
| ● | expanding our number of employees primarily those involved in research and development; |
| ● | consolidating the companies’ administrative and information technology infrastructure; |
| ● | implementing and maintaining requisite internal controls over financial reporting and disclosure controls and procedures; and |
| ● | maintaining continued compliance with the Nasdaq Listing Rules, including compliance with Nasdaq corporate governance requirements. |
Potential litigation against us could result in substantial costs and divert management’s attention.
Securities class action lawsuits and derivative lawsuits are often brought against public companies in connection with merger transactions. Even if such lawsuits are unsuccessful, defending against them can result in substantial costs and divert management’s attention.
Stockholders of the Company may file lawsuits against the Company and/or directors and officers of the Company in connection with the Merger. Potential lawsuits could result in significant costs to the Company, including any costs associated with the indemnification of directors and officers. There can be no assurance that any of the defendants will be successful in the outcome of any potential lawsuits.
The expected dilution caused by the issuance of our securities in connection with the Transactions may adversely affect the market price of our common stock.
The expected dilution caused by the issuance of new shares of our common stock in connection with the conversion of the Series A Preferred Stock issued to former Azora stockholders, and the issuance of common stock upon the exercise of the Assumed Options, the Initial Closing Pre-Funded Warrants, the Milestone Warrants either alone or in combination with any negative impact on the market price of our common stock following the release of lock-up restrictions entered by the respective directors, officers and certain stockholders of Azora and the Company in connection with the Merger, may result in fluctuations in the market price of our common stock, including a stock price decrease.
If we are unable to obtain stockholder approval of the conversion of the Series A Preferred Stock into shares of common stock, we may be required to make a significant cash settlement that exceeds our cash reserves.
Subject to the receipt of stockholder approval of the conversion of the Series A Preferred Stock, each share of Series A Preferred Stock will automatically convert into 1,000 shares of common stock, subject to certain beneficial ownership limitations and the number of shares of common stock authorized under our certificate of incorporation, as amended (“Certificate of Incorporation”), which we would be obligated to use reasonable best efforts to increase if insufficient (potentially requiring a further stockholder vote). Each holder of Series A Preferred Stock may also elect to convert earlier, subject to the same limitations, solely to effect the cash settlement described below, beginning six months after the Series A Preferred Stock’s initial issuance date if stockholder approval of the conversion of the Series A Preferred Stock has not yet been obtained. If at any time after the earlier of (i) stockholder approval of the conversion of the shares of Series A Preferred Stock or (ii) six (6) months after the issuance of the Series A Preferred Stock, we fail to timely deliver shares issuable upon a conversion of the Series A Preferred Stock to a holder thereof (other than as a result of a stockholder’s own beneficial ownership limitation), the affected stockholder may require cash settlement of the shares of Series A Preferred Stock subject to such conversion at the fair value of the undelivered shares.
The cash settlement price is the closing price on the last trading day before the Company’s receipt of a holder’s conversion notice; based on the $4.01 closing price on September 30, 2026, settling all 12,930,601 shares of common stock issuable upon conversion of the Series A Preferred Stock would cost approximately $51.9 million. If stockholder approval of the conversion of the Series A Preferred Stock has not yet been obtained, the cash settlement right will first become available on December 11, 2026 (six months after issuance), provided that the exercise of such right will only be at the election of a holder of Series A Preferred Stock. Our cash reserves as of September 30, 2026 were approximately $22.0 million, which would not be sufficient to fund a full settlement, and we expect that we would seek to raise alternative debt or equity financing to do so. We may be unable to raise additional funds when needed on favorable terms or at all.
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Risks Related to the Business of Azora
Azora is a pre-clinical stage company with a limited operating history and its lead product candidate, AT177, has not yet been tested in human clinical trials. There is no assurance that AT177 will successfully advance through clinical development or receive regulatory approval.
Azora was founded in 2019 and is a pre-clinical stage biopharmaceutical company. Azora’s lead product candidate, AT177, a colon-targeted AhR agonist being developed for the treatment of ulcerative colitis, has not yet been tested in human clinical trials. We expect to file an IND for AT177 and initiate a Phase 1a SAD/MAD study in the first half of 2027, with a proof-of-concept readout in UC patients expected in the first half of 2028. There can be no assurance that the IND will be accepted by the FDA or that AT177 will demonstrate safety or efficacy in clinical trials. Drug development is inherently uncertain, and pre-clinical results may not be predictive of clinical outcomes. Even if clinical trials are initiated, there is a significant risk that AT177 could fail at any stage due to safety concerns, lack of efficacy, manufacturing difficulties or other factors, which would have a material adverse effect on our business, financial condition and results of operations.
Substantially all of the value of the assets acquired in the Merger is concentrated in Azora’s colon-targeted AhR program. If this program fails, we may not be able to recover the value attributed to Azora in the Merger.
We have determined that substantially all (greater than 90%) of the fair value of the assets acquired in the Merger is concentrated in a single asset — Azora’s colon-targeted AhR program. Accordingly, the Merger was treated as an asset acquisition for accounting purposes. Because the acquired value is concentrated in a single program, any failure or material setback in the development of AT177 or other product candidates arising from the AhR program would disproportionately impact the combined company and could result in a significant loss of the value attributed to Azora in the Merger. Unlike a diversified pharmaceutical company with multiple product candidates across various stages of development, our post-Acquisition business is substantially dependent on the success of this single program.
We will require substantial additional capital to fund the clinical development of AT177, and our failure to obtain sufficient funding on acceptable terms could force us to delay, reduce or eliminate our development programs.
The clinical development of AT177 through Phase 1 studies, proof-of-concept studies, and any subsequent pivotal trials required for regulatory approval will require substantial capital. While the Financing provides initial capital for our operations, including aggregate gross proceeds of approximately $26.8 million from the Initial Closing Pre-Funded Warrants, the receipt of additional proceeds from the Milestone Pre-Funded Warrants and Milestone Incentive Warrants is contingent upon the achievement of specified milestone events and the election of the PIPE Investors and Azora Noteholders to participate in Milestone Closings, which is at their option. There is no assurance that such milestone events will be achieved or that the PIPE Investors or Azora Noteholders will elect to purchase Milestone Warrants. We may need to raise additional capital through equity or debt financings, collaborations, licensing arrangements or other sources, which may not be available on favorable terms, or at all. If we are unable to raise additional capital when needed, we may be required to delay, reduce or eliminate our clinical development programs.
The market for the treatment of UC is highly competitive, and AT177 may not be able to compete effectively with existing and future therapies.
The UC therapeutic market, which management has estimated to be approximately $7.5 billion to $10.8 billion, is highly competitive and includes a number of approved therapies, including anti-TNF biologics, anti-integrin therapies, JAK inhibitors, sphingosine 1-phosphate receptor modulators, and IL-23 inhibitors, as well as numerous product candidates in clinical development by companies with greater financial and development resources than ours. AT177’s novel mechanism of action targeting the AhR in the colon is unproven in clinical settings, and there can be no assurance that this approach will prove superior to, or even comparable with, existing or future therapies. Many of our potential competitors have substantially greater financial, technical, human and other resources than we do, more extensive experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products, and established relationships with physicians and patient communities. If we are unable to differentiate AT177 from existing and future competitive therapies, our business and prospects would be materially adversely affected.
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Our intellectual property protection for the AhR program may be insufficient to protect our competitive position, and we may be unable to prevent third parties from using our technology or developing competing products.
We rely on patent protection, trade secrets and other intellectual property rights to protect the AhR program, including composition-of-matter patent protection through 2042. However, patents provide only limited protection and may not adequately cover our product candidates or prevent competitors from designing around our patents. Patent applications may not result in issued patents, and issued patents may be challenged, narrowed, invalidated or circumvented. Moreover, the patent landscape in the pharmaceutical industry is highly complex, and third parties may hold patent rights that could prevent us from developing or commercializing AT177. There can be no assurance that our intellectual property position will be sufficient to provide meaningful commercial protection for AT177 or any other product candidate arising from the AhR program, and any inability to adequately protect our intellectual property could materially adversely affect our competitive position, business and financial condition.
We are dependent on the continued services of key personnel, including Dr. Matthew Davidson, who is critical to the advancement of the Azora AhR program, and the loss of such personnel could materially harm our business.
The successful development of the Azora AhR program is substantially dependent on the expertise and continued contributions of key scientific and management personnel, including Matthew Davidson, Ph.D., our Chief Development Officer and a co-founder of Azora, who invented and developed the first FDA-approved drug for the skin disease molluscum contagiosum during his prior role as CEO and founder of Verrica Pharmaceuticals, Inc. Dr. Davidson’s scientific expertise and institutional knowledge of the AhR program are critical to advancing AT177 through clinical development. The loss of Dr. Davidson or other key personnel could significantly delay or impair our ability to advance the AhR program. Competition for qualified personnel in the biopharmaceutical industry is intense, and we may not be able to attract or retain qualified scientists and other key personnel on acceptable terms, which could materially adversely affect our business and prospects.
We may encounter difficulties in managing the integration of Azora’s research and development operations and in scaling our organization to support clinical-stage development activities.
Following the Merger, we must integrate the research and development operations of Azora and significantly expand its organizational capabilities to support clinical-stage development activities, including, among other things, combining financial, reporting and corporate functions, expanding the number of employees primarily involved in research and development, consolidating administrative and information technology infrastructure, and implementing and maintaining requisite internal controls over financial reporting and disclosure controls and procedures. Prior to the Merger our development activities were focused on its legacy AD04 program, which is at a different stage and involves a different therapeutic area than Azora’s AhR program. The need to pivot our operational focus, combined with the challenges inherent in integrating a newly acquired pre-clinical program, may divert management attention from clinical development activities and increase operating costs. Any failure to successfully manage this transition could delay the development timeline for AT177 and adversely affect our business, financial condition and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities
We did not sell any equity securities during the three months ended June 30, 2026 in transactions that were not registered under the Securities Act other than as disclosed in our filings with the SEC.
(b) Use of Proceeds
Not applicable.
(c) Issuer Purchases of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Arrangements
During the three months ended June 30, 2026, no director or officer of the Company
Termination of Chief Operating Officer
In accordance with disclosures included in that Current Report on Form 8-K filed by the Company with the SEC on June 11, 2026 (the “Prior 8-K”), the employment of Tony Goodman, our Chief Operating Officer, was terminated effective August 11, 2026. In connection therewith, on August 11, 2026, the Company and Mr. Goodman entered into a release (the “Goodman Release”), pursuant to which the Company agreed to pay Mr. Goodman the severance benefits owed to him under his amended and restated employment agreement in exchange for a general release and waiver of claims by Mr. Goodman. Severance amounts that will be paid to Mr. Goodman includes: (i) the annual bonus earned by the Mr. Goodman for the immediately prior fiscal year to the extent unpaid, as if no such termination had occurred; (ii) Mr. Goodman’s annual bonus target for the 2026 fiscal year, prorated based on the number of days elapsed in the fiscal year through the termination date, payable in a cash lump sum on the first payroll date after the effective date of the Goodman Release (with all revocation periods having expired unexercised); and (iii) a lump sum payment equal to Mr. Goodman’s annual base salary ($312,000), plus the higher of his target annual bonus opportunity and the annual bonus paid to him with respect to the 2025 fiscal year, to be paid in cash on the first payroll date after the effective date of the Goodman Release (with all revocation periods having expired unexercised) and in all events no later than 70 days after such termination, (iv) a payment equal to 12 times the monthly COBRA premium for him and his eligible dependents, payable in either a lump sum or in installments over 12 months, at Mr. Goodman’s election; and (v) immediate and full accelerated vesting of all outstanding equity awards received by Mr. Goodman from the Company, with any performance-based awards deemed earned at not less than target performance and any outstanding stock options or stock appreciation rights remaining exercisable until the expiration date of the grant award.
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The foregoing description of the Goodman Release does not purport to be complete and is qualified by reference to the full text of the Goodman Release, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.12 and incorporated herein by reference.
Amendment of Purchase Agreement
As previously disclosed in the Prior 8-K, subject to certain exceptions, the Purchase Agreement prohibits the Company from issuing, without prior consent from the holders of the majority of the then outstanding Initial Closing Pre-Funded Warrants, shares of common stock or common stock equivalents during the period commencing as of the Initial Closing Date until the date that is ten business days following the later of (i) the Milestone Funding Period Expiration (as defined in the Pre-Funded Warrant) (or, if earlier, the date on which all PIPE Investors have (x) closed their Milestone Closing or (y) have lost their right to participate in a Milestone Closing) and (ii) provided that a resale registration statement covering the shares of common stock underlying the Initial Closing Pre-funded Warrants is effective, the Shareholder Approval Date (as defined in the Form of Pre-funded Warrant), at a price per share of common stock that is less than $4.25 (the “Minimum Issuance Price”), On August 12, 2026, the Company and certain of the PIPE Investors, constituting holders of a majority of the outstanding Initial Closing Pre-Funded Warrants, entered into an Amendment No. 1 to Securities Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which the Purchase Agreement was amended to decrease the Minimum Issuance Price from $4.25 to $4.00.
The foregoing description of the Purchase Agreement Amendment does not purport to be complete and is qualified by reference to the full text of the Purchase Agreement Amendment, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.13 and incorporated herein by reference.
Item 6. Exhibits
The exhibit index set forth below is incorporated by reference in response to this Item 6.
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| * | Filed herewith |
| # | Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report. |
| + | Certain schedules and attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to provide, on a supplemental basis, a copy of any omitted schedules and attachments to the Securities and Exchange Commission or its staff upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No.1 to the report to be signed on its behalf by the undersigned thereunto duly authorized.
| ADIAL PHARMACEUTICALS, INC. | ||
| By: | /s/ Cary J. Claiborne | |
| Name: | Cary J. Claiborne | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |
Dated: October 20, 2026
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Exhibit 31.3
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cary J. Claiborne, certify that:
| 1. | I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q of Adial Pharmaceuticals, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 20, 2026 | By: | /s/ Cary J. Claiborne |
| Cary J. Claiborne | ||
| President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.4
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Vinay Shah, certify that:
| 1. | I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q of Adial Pharmaceuticals, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 20, 2026 | By: | /s/ Vinay Shah |
| Vinay Shah | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 32.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to Quarterly Report of Adial Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q for the period ended June 30, 2026, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cary J. Claiborne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| Date: October 20, 2026 | By: | /s/ Cary J. Claiborne |
| Name: | Cary J. Claiborne | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) |
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.4
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to Quarterly Report of Adial Pharmaceuticals, Inc. (the “Registrant”) on Form 10-Q for the period ended June 30, 2026, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vinay Shah, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| Date: October 20, 2026 | By: | /s/ Vinay Shah |
| Name: | Vinay Shah | |
| Title: | Chief Financial Officer (Principal Financial Officer) |
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.